Course name: Business Economics
Course code: BUECO5903
Assignment detail: Individual assignment
Lecturer’s name: Susil Ratnasekara
Campus providers: ATMC Melbourne
Student name: Kavita Rajan
Student id numbers: 30351722
Phone no. 0424057425
Email -id: [email protected] date:2nd september2018,11:55 pm
Submitted on: 2nd august 2018
TABLE OF CONTENTS:
Impact of external costs and external benefits on resource allocation
Goods and services become a public or private goods and services
Examples of public and private goods and services
Difference between monopolistically competitive firm and a perfectly competitive firm in the allocation of resources.
Perfectly competitive firm and monopolist firm differ in their allocative efficiencies.
Individual firm and the industry differ in their short -run perfectly competitive resource allocation.
Long run perfectly competitive equilibrium for the firm.
Long run supply of a constant cost and industry for both the individual firm and industry.
Long run supply of an increasing cost industry for both the individual firm and industry.
Long run supply of decreasing cost industry for the both individual firm and industry.
Change in equilibrium price and quantity due to rice in price of magarine.
A rise in the demand for yoghurt.
A rise in the price of bread.
A rise in the demand for bread.
An expected rise in the price of butter in the near future.
A tax on butter production.
The invention of new, but expensive process.
Scarcity forces individuals and society to incur opportunity costs.
Car free because the winner pays zero dollars for it.
Production possibility frontier bowed outwards.
Impact of external costs and external benefits on resource allocation:
The impact of external costs and external benefits will have an impact on resource allocation. An external cost, i.e. a negative externality, is not taken into account, so there is more production, at a higher price, resulting in an over-allocation of resources. An external benefit, a positive externality, will result in an under-allocation of resources.
(b) An item or administration that is given without benefit to all individuals from a general public, either by the legislature or by a private individual or association. open merchandise (Economics) administrations, for example, national protection, law implementation, and street assembling, that are for the advantage of, and accessible to, all individuals from people in general (Tutors globe,2015).
(1) A privately engineering and material research laboratory undertaking contractual research on weapons development is a private good. The nature of the organisation being a private entity which charges a fee.
(11) The quaranteen service; Public
Pure public service since it can be collectively consumed and its non- excludability making it available to every citizen.
(111) A toll road originally financed through government debt Semi Public Fee is charged for usage therefore does not satisfy the non -excludability criteria, however was financed through the government.
(1v) Courses offered by a fee charging privately owned teaching institution that receives some government funding Semi Public Price charged indicates not accessible to everyone however receives government funding offering a reduced rate to the students(Pettinger,2017)
(v)Contact lenses is private goods. Because people have to pay for it.
Monopolistically competitive firm and a perfectly competitive firm differ in the allocation of resources: In a perfectly competitive market, each firm produces at a quantity where price is set equal to marginal cost, both in the short run and in the long run. This outcome is why perfect competition displays allocative efficiency: the social benefits of additional production, as measured by the marginal benefit, which is the same as the price, equal the marginal costs to society of that production. In a monopolistically competitive market, the rule for maximizing profit is to set MR = MC—and price is higher than marginal revenue, not equal to it because the demand curve is downward sloping. When P ; MC, which is the outcome in a monopolistically competitive market, the benefits to society of providing additional quantity, as measured by the price that people are willing to pay, exceed the marginal costs to society of producing those units. A monopolistically competitive firm does not produce more, which means that society loses the net benefit of those extra units. This is the same argument we made about monopoly, but in this case to a lesser degree.
(b)- The differences between competitive firm and monopoly firm are as follows:
1. Firms are price taker and output adjuster:
In a competitive market the number of buyers and sellers are large. The price is determined by the industry keeping in view the aggregate demand and aggregate supply. The firms are price taker.
In perfect competition Price = MC; in monopoly P ; MC. Under perfect competition the individual firm’s output is a small part of the total output. Therefore, if he wants to sell more he must reduce the price.
Difference as regards elasticity:
The supply curve of a firm under perfect competition is perfectly elastic.
The average revenue curve of the individual firm under perfect competition is therefore a straight line parallel to the X-axis. But the monopolist is the sole-producer.
4. Slow in production:
Economists are of this opinion that the monopolists are likely to be inefficient and slow in producing technological changes as compare to perfect competition.
5. Monopoly price is higher than Perfect Competitive Price:
Under Perfect Competition, price equals marginal cost, while under Monopoly price exceeds marginal cost.
6. Monopoly output is lower than Perfect Competitive Output:
The Monopoly output may be higher than the competitive output in the case of a commodity having a steeply decreasing cost curve and a highly elastic demand
7. Difference as regards the slope of Marginal Cost Curve:
Under perfect competition in the long-run, equilibrium is possible when the marginal cost is rising at the point of equilibrium. But under Monopoly there may be equilibrium whatever may be the shape of the marginal cost curve.
8. The profits earned by both the market are different:
Under Perfect Competition, the firm in the long-run makes normal profit. Under Monopoly, the firm gets super-natural profits.
increase production if marginal cost is less than marginal revenue (added revenue per additional unit of output);
decrease production if marginal cost is greater than marginal revenue
continue producing if average variable cost is less than price per unit, even if average total cost is greater than price.
shut down if average variable cost is greater than price at each level of outputs
In this diagram, Fig. 24.2(a) relates to a firm and 24.2(b) gives the supply curve of the industry. First look at the Fig. 24.2(a), which relates to a single firm. Along the axis OX are represented the output supplied and along OY the prices. SMC curve is the short-run marginal cost curve.
(d) Long run equilibrium: The two sets of diagrams below will help to show that in the long run, all firms in a perfectly competitive market earn only normal profit.
In the diagrams above, the initial price is P1, due to the fact that the initial demand and supply curves, D1 and S1, cross at point C. This given price means that each firm’s demand curve is D1. MC = MR occurs at point A. AR ; AC, so each firm is making super normal profits. But what will happen as we move towards the long run? Remember that there are no barriers to entry or exit in a perfectly competitive market. This means that new firms will be attracted, in quite large numbers, into the market. This will increase market supply, shifting the supply curve to the right.
Question-6(a) Supply Curve of a Constant Cost Industry:
If the supply of factors of production is perfectly elastic i.e., they can be had in as much quantity as the firms desire without effecting the prevailing market price. The long run supply curve of the firms will be a horizontal straight tine parallel to the X-axis. For instance, if the paper doll industry expands its output, an increase in demand for paper will have no perceptible effect on the market price of the paper.
In the constant cost industry, it has been assumed, that the price of inputs do not change as the size of industry varies. The minimum average total cost of the firm remains constant as is explained in the diagram below:
Price = MC = Minimum Average Cost
Supply Curve of the Increasing Cost Industry:
For the increasing cost competitive industry, the factor prices rise with the expansion in its production. Due to appreciable increase in demand for the scare factors, their prices go up. The unit cost of production of all the firms in the industry tends to rise. So is also the case with minimum average cost which rises at a higher level than before. The supply curve thus slants upward from left to right or we say the slope of the curve is positive. This is illustrated with the help of diagrams.
In the figure 15.11(a) it is shown that when the demand for a commodity increases, more firms come in industry. To attract more units of the factors, the firms pay higher prices for them. The cost curves of the firms, move up. The minimum average cost of the firm equals marginal cost equals price at point F. The firm in the long run is in equilibrium at point F and produce the best level of output OT.
(c) Supply Curve of a Decreasing Cost Industry:
If the price of one or more than one input falls with the expansion of industry, the industry is said to be a decreasing cost industry. For instance, if technological improvements in production take place and the long run economies outweigh the long run diseconomies, then industry will be subject to decreasing cost or increasing return. The MC, MR and minimum AC will shift downward from the original position. The entire long run supply curve will slant downward from left to right or it has negative slope. This is illustrated below with the help of the curves.
In the Fig. (15.12) the firm is in equilibrium at point K in the long run because at point K, MR = MC = Price = Minimum AC. It will produce OT output at price ON. The total supply by all the firms (supply of industry) producing the commodity at price ON will be OH. If the demand for the product increases, the existing firms will expand their sizes and the new firms will enter the industry/Due to technological developments and the economies of large scale production, the MC, AC, and price fall. At the lower price OP, the firm is in equilibrium at point F. Here MC = AC = Price. The supply of a firm increases from OT to OH at a decreasing cost. The supply of the industry at lower price OP increases from OH to OK. The long run equilibrium supply curve slopes downward from left to right.
Price rises, quantity rises (demand shifts to the right: butter and margarine are substitutes).
Price falls, quantity rises (supply shifts to the right: butter and yoghurt are in joint supply).
Price falls, quantity falls (demand shifts to the left: bread and butter are complementary goods).
(d) Price rises, quantity rises (demand shifts to the right: bread and butter are complementary goods).
(e) Price rises, quantity rises or falls depending on relative sizes of the shifts in demand and supply (demand shifts to the right as people buy now before the price rises; supply shifts to the left as producers hold back stocks until the price does rise).
(f) Price rises, quantity falls (supply shifts to the left).
(g) Price rises, quantity rises or falls depending on the relative size of the shifts in demand and supply (demand shifts to the right as more health-conscious people start buying butter; supply shifts to the left as a result of the increased cost of production).
(a) Scarcity means that there is a finite amount of a good available, individuals and society can only use these scarce resources to produce a fixed amount of good. An example of this are: If there is a lack of gas, its price increases and people buy charcoal instead b If there is a limited stock of rice, consumers will just buy bread or noodles for its substitute.
(b)The free car is not really free, every consumer who buys the chocolate bar contributes to the fund that will be used to produce the car that will be given away to the lucky consumer. The car is just a form of advertisement but there may be hidden charges.
(c)The production possibility curves a hypothetical representation of the amount of two different goods that can be obtained by shifting resources from the production of one, to the production of the other. The graph is bowed outwards due to a basic concept used in economics – the principle of increasing cost.
Suman. S (n .d) https://www.economicsdiscussion.netTutors globe(2015) http://www.tutorsglobe.com/getanswer/public-goods-and-service-9024077.aspxPettinger,t.(2017) https://www.economicshelp.org/blog/2104/economics/private-public-and-free-goods-defined/Economiconline(2018) http://www.economicsonline.co.uk/Business_economics/Perfect_competition.htmlState of the uk economy(2018) https://www.tutor2u.net/economics/reference/perfect-competition-economic-efficiencyhttps://www.economicshelp.org/microessays/markets/monopoly-diagram/