...complete it after completing your course work for Units 6 through 10. Answer each question clearly and concisely. 1. In perfect competition, one result of the model was that there were no economic profits in the long run. In a monopoly, the firm typically earns a positive economic profit. Why is there this difference? The lack of barriers to entry will allow competitors to enter the market unil economic profit is zero. These firms are price takers, and they cannot affect prices because their demand curve is horizontal. (4 marks) 2. Assume that a single firm in a pure competitive industry has a fixed cost of $6500 and variable costs as indicated in the table below. a. Calculate the TC, AFC, AVC, ATC, and MC columns for this firm. (5 marks) Total Output | TVC | TC | AFC | AVC | ATC | MC | 00 | 0 | | | | | | 600 | 70,000 | | | | | | 1000 | 76000 | | | | | | 1400 | 81000 | | | | | | 1800 | 87000 | | | | | | 2200 | 90000 | | | | | | 2600 | 93000 | | | | | | 2800 | 96000 | | | | | | 3000 | 100000 | | | | | | 3100 | 110000 | | | | | | b. Explain the concepts of economies and diseconomies of scale, and describe the underlying reasons why both occur. (4 marks) 3. At its current level of production, a profit-maximizing firm in a competitive market receives $12.50 for each unit it produces, and it faces...
Words: 1571 - Pages: 7
...free Revision Guide. If you find this revision guide useful, the author would appreciate a donation which you can make via www.economicshelp.org/blog/donate It is not permissible to copy this guide for others. It is only freely available from www.economicshelp.org/ You are welcome to leave feedback and ask further questions on Economics at: www.economicshelp.org/blog Richard Tejvan Pettinger 29 Campbell Road mail@richardpettinger.com www.economicshelp.org 2 AQA Edexcel OCR • • • • • • • • • • • • • • • • • • Unit 5 Unit 4 Unit 4388 Costs Law of Diminishing Returns Economies and Diseconomies of Scale Production Decisions The Objectives of Firms Efficiency Competitive Markets Oligopoly Contestable Markets Monopoly Competition Policy Price discrimination The Labour Market Poverty and Alleviation of Poverty Market Failure Cost Benefit Analysis Privatisation Regulation of Privatised Industries www.economicshelp.org 3 Costs • • • • • • • • Fixed Costs: Variable Costs: Total Costs: Marginal Cost: Sunk Costs: These are fixed costs that do not vary with output. E.g. cost of building a factory These are costs that do vary with output E.g. electricity, raw materials Fixed + variable costs This is the cost of producing an extra unit These are costs that are not recoverable e.g. advertising = = = TC / Q VC / Q FC / Q Average Total Cost (ATC) Average Variable Cost (AVC) Average Foxed Costs (AFC) The Law Of Diminishing Marginal Returns • • • Total Product (TP)...
Words: 6402 - Pages: 26
...CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY R.KANAKARAJU 215112019 A.GOUTHAM SAI 215112020 B.R.PRADHEEP 215112027 M.PRABHAKAR 215112058 K.ADITHYA 215112063 NAGENDRA 215112069 MARKET POWERS: MONOPOLIST AND MANOPSONIST Markets comprises of products or services, buyers and sellers. Where as in a perfectly competitive market there will be a reasonably good number of buyers and sellers of the products or services. So the possibility of influencing the market by a single seller or buyer is nil. Depending upon the supply and demand prices will be determined. Market price and demand is the deciding factor of the companies to estimate how much to produce and sell, in consumers view it is a deciding factor how much to buy. In contrary to the case which was discussed above, if the market is not a perfectly competitive market then the situations of monopoly and monopsony arise. Monopoly market is the one which has only one seller but so many buyers. Monopsony market is the one which has only one buyer and so many sellers. Monopolist is the sole producer of a product, in market demand curve, price is determined by the quantity which is offered by the monopolist to sell, the quantity of produce sold by monopolist is low and the price is high, it happens because his products has full demand and he wants to take full advantage in this situation. Normally if the price is high, only a few buyers which have the potential to buy those...
Words: 11499 - Pages: 46
...products of different firms or different brands produced by same firm • Implies that a firm can raise price without losing all demand • Example: o Frozen orange juice o Bottle water o Cola o Ready-to-eat breakfast cereal o Automobiles Two Issues • How is the # of products/brands/firms determined? Is it the correct #? • How do firms that produce differentiated products compete Monopolistic Competition • Chamberlain (1933) o Idea: Firms have same markets power but make zero profits o Face downward sloping demand curve o Free entry drives profits to zero o Representative consumer: views all brands as equally good substitutes for each other (symmetric) o With differentiated products implies preference for variety Undifferentiated Products • Cournot model w/ fixed costs and free entry • Entry implies zero profits • P = AC • # of firms determined by how many required to drive price down for AC • As fixed cost declines more firms enter and price approaches MC • Graphical Example, cost functions o Welfare: to get efficient outcome, need to subsidize one firm and force to charge MC o Tradeoff: more firms drive price down, but increases expenditure on fixed costs o Best thing you can do without subsidizing firms, is to restrict entry • Behavior of firms still to produce here MR= MC • Residual demand is more complicated • Algebraic examples • Equilibrium (cournot?) under monopolistic competition has two problems o Price not equal to MC o Number of brands...
Words: 5314 - Pages: 22
...ECON545 Week 1 Suggested Answers to Questions and Problems NOTE: Please pay particular attention to the way that answers are stated, because these are the kinds of statements that will be looked for in the quizzes and final exam. In general, all answers need to be supported with appropriate reasoning. CHAPTER 3 Chapter 3 Question 8 8. See the figure above. A change in demand is a shift in the entire demand curve and is caused by a change in one or more of the determinants. In contrast, a change in quantity demanded is a movement along an existing demand curve caused by a change in price. This distinction is important. Say, for example, you want to distinguish between rising sales at existing prices due to an expanded advertising program, on the one hand, and rising sales due to a sale or a reduction in price, on the other hand. A change in supply shifts the curve and is caused by a change in one or more of the determinants. A change in quantity supplied is caused by a change in price. Chapter 3 Question 11 11a. You would probably increase the prices of existing inventory of surfboards. You would be expecting a shortage in the short run, and wholesale prices of foam blanks would probably rise in the future. In fact, most retail outlets increased the price of their boards from $100 to $300. 11b. First, in the very near term, surfboard prices will rise, and the stock of polyurethane boards will fall. Over time, other companies will supply alter-native blanks that use alternative...
Words: 1994 - Pages: 8
...1. What are the characteristics of a perfectly competitive market? What are the implications for accounting profit in a perfectly competitive market? What about economic profit? Perfectly competitive markets are characterized by low sunk costs, perfect information, no entry or exit costs, no search costs, identical products and an infinite numbers of sellers. In a perfectly competitive market there are many firms and many buyers, all of which are price takers, meaning they have no control over prices. As price takers, firms face a highly (perfectly) elastic demand curve, meaning that they can only change revenue by changing the quantity produced. Firms in a perfectly competitive market will produce where MR = MC. Since firms are price takers, MR = Price. As a result, when marginal cost is equal to marginal revenue, it is also equal to price. If firms are realizing positive economic profits, other firms with similar cost structures will have an incentive to enter the market: one competitive firm’s economic profits indicate that production of that good is more profitable than any other available allocation of resources, causing other firms to invest. Once new firms enter the market, there is an increase in the MARKET, or AGGREGATE supply which will change the price that individual firms face, causing a reduction in the price. Firms will enter until economic profits are zero, at which point the intersection of the price and the marginal cost intersects the minimum of...
Words: 2756 - Pages: 12
...CHAPTER 7
THEORY OF FIRMS AND MARKET STRUCTURE I : PERFECT COMPETITION AND MONOPOLY
PREPARED BY : SITI NORDIYANA ISAHAK
THEORY OF FIRM
• FIRM – an organization/ institution that combines all resources for the production of goods and services. • INDUSTRY – a group of firm that produces or sells similar product in the same market. E.g : manufacturing industry such as textile, soaps, foods, servicing industry and so on. • Firm’s objective – maximize profit – attain production efficiency whereby cost is minimized TOTAL PROFIT = TR – TC if TR >TC → Profit (+ve) if TR
Words: 3732 - Pages: 15
...average variable cost is increasing (decreasing), then the last unit produced is adding more (less) to total variable cost than the previous units did, on average. Therefore, marginal cost is above (below) average variable cost. In fact, the point where marginal cost exceeds average variable cost is also the point where average variable cost starts to rise. 11. How does a change in the price of one input change the firm’s long-run expansion path? The expansion path describes the combination of inputs that the firm chooses to minimize cost for every output level. This combination depends on the ratio of input prices: if the price of one input changes, the price ratio also changes. For example, if the price of an input increases, less of the input can be purchased for the same total cost, and the intercept of the isocost line on that input’s axis moves closer to the origin. Also, the slope of the isocost line, the price ratio, changes. As the price ratio changes, the firm substitutes away from the now more expensive input toward the cheaper input. Thus, the expansion path bends toward the axis of the now cheaper input. EXERCISES 7. The cost of flying a passenger plane from point A to point B is $50,000. The airline flies this route four times per day at 7am, 10am, 1pm, and 4pm. The first and last flights are filled to capacity with 240 people. The second and third flights are only half full. Find the average cost per passenger for each flight. Suppose the airline hires...
Words: 1746 - Pages: 7
...in demand due to the large amount of buyers and sellers in the market. Because of the large numbers of buyers and sellers selling the same product. This market is perfectly competitive. 2) In assignment 1, it was also stated that the market structure competitive and that the equilibrium price was to be determined by setting QD equal to QS. In a perfectly competitive market there are a large number of buyers and sellers. The products sold in this market are perfectly homogeneous. Examples of perfect competition are vegetable market, agricultural market, market for cereals etc. The main characteristics of perfect competition are: a) Large number of buyers and sellers b) Homogeneous product c) No entry barriers d) No transaction cost e) Perfect information A firm under perfect competition cannot affect the market price. They act as mere price takers. They take market price as given and sell any amount of quantity as per its capacity at that price. If a firm increases its price, consumers will then buy the product from another firm. Therefore a perfect competitive firm always sets its price equal to its MC. Suppose in the short run the firm is earning a supernormal profit. As a result, other firms will get attracted and will enter the industry. This will increase the industry output and market price will fall. This process will till the entire supernormal profit is exhausted and each firm ends up earning normal profits only. Therefore price will fall...
Words: 1386 - Pages: 6
...1. Determining changes in equilibrium price and quantity for a perfectly competitive industry given changes in demand and/or supply (Ch. 2, p. 60-65; Class Notes) A. Graphical analysis given demand and supply curves a) While there is increased awareness of Vitamin C available from orange juice, a hard, freezing winter occurs in most of the orange producing areas. Demand increases while supply decreases. b) While the technology used for tobacco production is improving, there is increased awareness of the health effects of smoking. Supply increases while demand decreases. c) While there is increased awareness of Vitamin C available from orange juice, highly favorable weather conditions occur in orange producing areas for most the crop season. Both demand and supply increase. d) While there is increased awareness of the health effects of smoking, severe drought occurs in tobacco producing areas for most of the crop season. Both demand and supply decrease. 2. Determining the cross-price elasticity of demand between two goods (Ch. 3; p. 85-88, Class Notes) A. Arc cross-price elasticity, given discrete changes in price and quantity demanded Exy = [(Qndx - Qodx)/{(Qndx + Qodx)/2}] / [(Pny - Poy)/{( Pny + Poy)/2}] = [(Qndx - Qodx)/(Qndx + Qodx)] / [(Pny - Poy)/( Pny + Poy)] where, Qndx and Qodx are new and original quantities of good X demanded, and Pny and Poy are...
Words: 1447 - Pages: 6
... 357 – 380 1 2 3 Market Structure Perfect Competition Monopolistic Competition Oligopoly Duopoly Cartel Monopoly 10 Market Structure Perfect Competition Sell Side • • Perfect Competition • Duopoly • Monopoly • Example One large seller controls market – Telstra in 1990 2 Sellers – Broome Camel Tours, AMD & Intel , Qantas & Ansett Imperfect Competition Buy Side • Monopsony (monopsonist) • Duopsony (duopsonist) • Example Where large buyer controls the market 2 buyers of product • • Oligopoly • More than two • Oligopsony sellers – (oligopsonist) University Education, Car manufacturers, Banks, Fast Food • Several large buyers control the market – i.e. Fast Food industry controls the meat market • Monopolistic Competition ‐ sell side • Small to Medium sized businesses 11 Types of Markets: Perfect and Imperfect Perfect Competition has the following distinguishing characteristics: • • • • Many Buyers & Many Sellers Products are Homogeneous Perfect knowledge of competitors activities ‐ i.e. symmetrical knowledge Firms are Price Takers not Price Maker • • • • Freedom of Entry and Freedom to Exit All PC firms face the same costs Price = Demand = AR= MR. Firms make an economic profit Or an economic loss • No barriers to entry Examples: The spot market for crude oil & spot market for Henry Hub natural gas. Both markets tend to approximate perfect competitive behaviour...
Words: 2410 - Pages: 10
...Manager and the Firm SUMMARY OF QUESTIONS BY STUDYLEARNING OBJECTIVE AND BLOOM’S TAXONOMY |Item | |1. | |126. | |81. |4 |C | | | | Item |Type |Item |Type |Item |Type |Item |Type |Item |Type |Item |Type | |1 |TF |12 |TF |20 |TF |22 |TF |23 |TF |25 |TF | |2 |TF |13 |TF |21 |TF |3358 |MC |24 |TF |4873 |MC | |3 |TF |14 |TF |2954 |MC |3459 |MC |3560 |MC |4974 |MC | |4 |TF |15 |TF |3055 |MC |81 |ESS |3661 |MC |5075 |MC | |5 |TF |16 |TF |3156 |MC | | |3762 |MC |5176 |MC | |6 |TF |17 |TF |3257 |MC | | |3863 |MC |5277 |MC | |7 |TF |18 |TF | | | | |3964 |MC |5378 |MC | |8 |TF |19 |TF | | | | |4065 |MC |5479 |MC | |9 |TF |1742 |MC | | | | |4166 |MC |5580 |MC | |10 |TF |1843 |MC | | | | |4267 |MC |83 |ESS | |11 |TF |1944 |MC | | | | |4368 |MC | | | |126 |MC |2045 |MC | | | | |4469 |MC | | | |27 |MC |2146 |MC | | | | |4570 |MC | | | |328 |MC |2247 |MC | | | | |4671 |MC | | | |429 |MC |2348 |MC | | | | |4772 |MC | | | |530 |MC |2449 |MC | | | | |82 |ESS | | | |631 |MC |2550 |MC | | | | | | | | | |732 |MC |2651 |MC | | | | | | | | | |833 |MC |2752 |MC | | | | | | | | | |934 |MC |2853 |MC | | | | | | | | | |1035 |MC | | | | | |...
Words: 4190 - Pages: 17
...of the following is true under monopoly? A. Profits are always positive B. P > MC C. P = MR D. All of the above are true for monopoly Answer: B 2. In a competitive industry with identical firms, long run equilibrium is characterized by A. P = AC B. P = MC C. MR = MC D. All of the statements associated with this question are correct Answer: D 3. Which of the following is true? A. A monopolist produces on the inelastic portion of its demand B. A monopolist always earns an economic profit C. The more inelastic the demand, the closer marginal revenue is to price D. In the short run a monopoly will shutdown if P < AVC Answer: D 4. Which of the following is true under monopoly? A. Profits are always positive B. P > minimum of ATC C. P = MR D. None of the statements associated with this question are correct Answer: B 5. In the long-run, monopolistically competitive firms: A. Charge prices equal to marginal cost B. Have excess capacity C. Produce at the minimum of average total cost D. Have excess capacity and produce at the minimum of average total cost Answer: B 6. If a monopolistically competitive firm's marginal cost increases, then in order to maximize profits the firm will A. Reduce output and increase price B. Increase output and decrease price C. Increase both output and price D. Reduce both output and price Answer: 7. Which of the following market structures would you expect to yield the greatest product variety? A. Monopoly B...
Words: 2116 - Pages: 9
...The Department of Marketing Mc Donald’s Marketing Strategies in the U.S Topic: McDonald’s Marketing Strategies in the US Introduction………………………………………………………………………………3 Chapter One: Fast Food Industry Analysis 1.1 Rivalry Among Existing Firms……………………………………………………….4 1.2 Threat of New Entrants………………………………………………………………5 1.3 Bargaining Power of Buyers…………………………………………………………6 1.4 Bargaining Power of Suppliers………………………………………………………7 1.5 Threat of Substitute Product or Services…………………………………………….7-8 Chapter Two: Marketing Mix of McDonald’s in the U.S 2.1 Product……………………………………………………………………………..8-9 2.2 Price…………………………………………………………………………………9 2.3 Place………………………………………………………………………………..10 2.4 Promotion…………………………………………………………………………..10-11 Conclusion: Final Recommendations……………………………………………………………….12 Appendix………………………………………………………………………………13-15 Bibliography…………………………………………………………………………...16 2 Introduction There are many fast food restaurants in America presently; among them is Mc Donald’s, currently one of the most successful fast food restaurants in America. Mc Donald’s originally started out as a small restaurant that focused on burgers, fries and beverages. It was owned by two brothers Dick and Mac Mc Donald. Ray Kroc came along and saw their business and put forward an idea to establish Mc Donald’s as a bigger company by establishing them all over America. Mr. Kroc would later go on to modify the restaurant and buy out the brother’s...
Words: 2700 - Pages: 11
...ECONOMICS 2 REVISION MODULE 1: MARKETS IN ACTION MARKET EFFICIENCY * Market is efficient when social surplus (CS & PS) is maximised * Raising Production MC > MB: costs society more to produce than its value to us * Reducing Production MC < MB: society surplus not maximised * Efficient (Optimal) Allocation MC = MB: social surplus is at max PRICE ELASTICITY * Elastic: greater than 1 * Perfectly elastic: equal to infinity (horizontal line) * Inelastic: less than 1 * Perfectly inelastic: equal to 0 (vertical) * More steeper = more inelastic GOVERNMENT INTERVENTION * Tax: Direct & Indirect, Producer + Consumer surplus will not sum up to total surplus because there is government intervention (part of society) * Whichever is less elastic -> carries more burden * Price ceiling: legally established max price seller can charge * Set below equilibrium * Results in excess demand (or shortage) * Price floor: legally established min price seller can be paid * Above the equilibrium * Results in excess supply (or surplus) * Floor set above equilibrium will cause quantity demanded to fall -> less of g/s available MODULE 2: MODELLING CONSUMER BEHAVIOUR MARGINAL UTILITY * Marginal Utility: the change in total utility derived from consuming one more unit of a good * Law of diminishing marginal utility: as more and more of a good is consumed, it’s marginal utility...
Words: 2490 - Pages: 10
