Microeconomics Issues - Essay Example

When the firm's average total cost curve lies above its marginal revenue curve at the profit-maximizing level of output, the firm is experiencing losses and will have to consider whether to shut down its operations. The decisions taken by a firm in such situations are termed Short-run shut-down decisions. The short-run equilibrium of a firm can be derived based on the total revenue and total cost and marginal revenue and marginal cost and marginal revenue and marginal cost.  As firms are price-takers, each firm in an industry tries to maximize its profit by adjusting the output to a level where Marginal Cost (MC) =Marginal Revenue (MR). Profit is the difference between the total revenue obtained from sales and the total cost incurred by the firm.

In the long run, the decisions taken would be only exit decisions. Exit decisions are decisions taken by a firm to leave the market. They are not called Shut-down decisions.  Shut-down is only in the short run. Long-run equilibrium plays a crucial role in deciding the existence of the firm. In the long run, there are enough periods for the firm to cover its losses and earn normal profits. This is because in the long run, all inputs are variable and the firm can have the most profitable level of output, i.e. the profit maximization level of output.

In recent years, the business travel market has seen tremendous change concerning the airline industry. Changes in demand for leisure travel include more short-term breaks and more independent holidays where passengers book flights, cars and accommodation by themselves. The reason for the decline in business class travel is the supply led to high business fares which stretched the so-called “inelastic business class segment” and also the expansion of low-cost airlines.

Price Discrimination can be defined as the method of charging different prices for essentially the same good to different buyers. There are three types of Price discrimination. They are, first, second and third-degree discrimination.

First-degree discrimination – This is the most extreme form of discrimination in which each consumer is charged the maximum price he would be willing to pay for each unit consumed. This kind of discrimination can be noticed in the healthcare industry where doctors charge different fees from different patients.

Second-degree price discrimination – This is a more practical form of price discrimination. Here firms charge a different price for each set of units sold. Different prices are charged for different blocks or portions of consumption. This kind of price discrimination is followed in the power and telecom industry. The reason behind this is the prices are based on the quantities of output purchased by individual consumers. By doing so, the firms can profit as the quantities used or consumed vary from individual to individual and hence if there is a high consumption by a particular consumer, there is a chance for the firm to earn more profits.

Third-degree price discrimination – This is the most common form of price discrimination. Consumers or markets are segmented based on their price elasticity of demand.  Often, third-degree price discrimination occurs in markets that are geographically separated. For example, books published by American publishers are sold in other countries at a lower price than in the US. Buyers in other countries have greater elasticity of demand than US buyers. At the same time, the high shipping costs make it unprofitable for firms to buy in foreign countries and resell in the United States.

Whenever we travel, is it a train or a flight, it is noticed that adults are charged a different price for the ticket and children are charged a different price. Another similar price discrimination in the same context is that rails have rail cards entitling them to discounts; others do not. It is cheaper for people who book in advance. This kind of discrimination comes under first-degree price discrimination.

Perfect competition is a kind of market structure where all goods are homogeneous and all firms are price takers. While firms in a monopolistic market are price dictators, in perfect competition they are price takers. The demand curve for a market based on perfect competition is a horizontal straight line, while in monopoly the same slopes downwards from left to right. Perfect competition is believed to be efficient when compared to monopoly because there are constant returns to scale. Also, in the case of perfect competition, an increase in output is equal to an increase in input.

Government authorities sometimes control or set prices in the market. They impose a price ceiling on certain products and services which is the maximum price that can be legally charged for that product or service. A price ceiling is effective if it is set below the price that would otherwise emerge as the market equilibrium price. For example, in India, the prices of petrol are set by the government. The prices of petrol are not supposed to go beyond the price that is set by the government. This kind of price regulation can help prevent the petroleum markets from reaching equilibrium in cases when the rents are set below the market equilibrium rates. Read More