Managerial Economics
Essay by RicardoCastro • March 11, 2017 • Essay • 2,731 Words (11 Pages) • 1,187 Views
Final Assignment
Ricardo Castro | Shanghai EMBA 2018 September 10, 2016
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Part A – Short Answers
- The government introduces a minimum price for a packet of cigarettes. Explain the impact on supply and demand in the short run.
The role of government is to minimize market distortions. Providing all other factors remain unchanged (i.e.: no substitutes), in the short run demand and supply will both increase due to the minimum price introduction. When supply meets demand then there is market equilibrium, and market equilibrium is the most efficient allocation as there is no pressure for change. Definition adapted from class discussions.
- Explain under what conditions oligopolistic market structures lead to higher productive and allocative efficiency and more choice for consumers compared to monopoly.
In an Oligopolistic market the single biggest driving factor is the commoditization of the product (e.g. oil and gas, Food Industry). Firms can chose to collude (e.g. OPEC, Airlines), or can chose to differentiate the commodity and compete in factors other than price (e.g. location, speed of delivery, accessibility, quality of product, etc. Oligopolistic market structures focus highly on productive and allocative efficiencies, where the outputs with the optimal combination of inputs, produce maximum output for the minimum cost in order for outputs to meet the preference and social welfare of the consumers. In Monopolistic markets, firms are price setters, there is no entry from other firms due to high costs or other obstructions so there are no substitutes. Always set the price higher looking after the firm’s own benefit and not always of the consumer’s welfare (with exception of those regulated by the government), by setting prices greater than their marginal costs. Definitions adapted from class discussions.
Allocative efficiency occurs when consumers pay a market price that reflects the private marginal cost of production. The condition for allocative efficiency for a firm is to produce an output where marginal cost, MC, just equals price, P.[pic 2] | Productive efficiency occurs when a firm is combining resources in such a way as to produce a given output at the lowest possible average total cost. Costs will be minimized at the lowest point on a firm's short run average total cost curve. This also means that ATC = MC, because MC always cuts ATC at the lowest point on the ATC curve.[pic 3] |
Retrieved from http://www.economicsonline.co.uk/Business_economics/Efficiency.html |
- Explain the three different ways in which governments can control prices and output in natural monopolies.
Natural Monopoly is when one firm dominates and can produce the total output of the market at lower cost than two or more firms (e.g. gas, utilities, cable TV, etc.).
Government can control prices and outputs via: granting a license, monopoly rights, or patents
License / Barriers to Entry ◦ Making it difficult for new firms to obtain a license to operate or by explicitly granting a monopoly right to one firm, thereby excluding other firms. ◦ By auctioning a monopoly to a private firm, a government can capture the future value of monopoly earnings. | Monopoly Right When just one firm is the cheapest way to produce any given output level, governments often grant monopoly rights to public utilities of water, gas, electric power, or mail delivery. | Patents A patent is an exclusive right granted to the inventor of a new and useful product, process, substance, or design for a specified length of time. The length of a patent varies across countries, although it is now 20 years in the United States. |
[pic 4] A Natural monopoly has the same strictly declining average cost curve | In some industries, because of the wide range of output over which economies of scale are experienced, it sometimes makes the most sense for only one firm to participate. Such markets are called “natural monopolies”[pic 5] | |
Definitions from class material. Right hand chart and definition retrieved from http://welkerswikinomics.com/blog/2013/03/04/monopoly-prices-to-regulate-or-not-to-regulate-that-is-the-question/ |
- Explain how firms profit maximize including how they set output and price.
Profit maximization is the process by which a firm determines the price and output level that returns the greatest profit in the short run or long run. Retrieved and adapted from https://en.wikipedia.org/wiki/Profit_maximization and right hand chart taken from class material.[pic 6]
A firm uses a technology or production process to transform inputs (e.g. Capital, labor, materials) or factors of production into outputs (e.g. service, end products). We set output at where marginal revenues = marginal costs (MR = MC).[pic 7]
Below are two examples we saw in class, Competitive Firms and Monopolistic Firms
Competitive firms maximizes profit where its marginal revenues and marginal costs are equal (MC = MR). A firm has a horizontal demand so MR = p. A profit maximizing competitive firm produces the amount of output, q, at which p = MC(q). | Monopoly firms maximizes profit where its marginal revenues and marginal costs are equal (MC = MR). Can adjust its price or quantity to maximize profit. Setting price or quantity are equivalent for a monopoly, and by setting either one the other variable is determined by the downward sloping market of the demand curve. A monopoly’s profit is maximized in the elastic portion of the demand curve, and it never operates in the inelastic portion of its demand curve. |
[pic 8] | [pic 9] |
Definitions and charts from class material |
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