Economics: Principles and Applications - Essay Example

? Macro and Micro Economics Question B: Consider a perfectly competitive market in long-run equilibrium where all firms operate under the same cost conditions. Suppose a new technology becomes available which reduces marginal production costs. Explain graphically and verbally what happens to the market in the short run and in the new long-run equilibrium if factor prices and demand are assumed to remain the same as before. Hint: You have to use two parallel diagrams, one for an individual (representative) firm and one for the industry. (70 marks) Market is a place where buyers and sellers meet each other for fulfilling needs and generating profits. The form of market is of great importance in business and economics as it is responsible for defining its overall characteristics including the numbers and categories of suppliers, the variable or identical nature of the products offered by different firms operating in the same or different industries, is the market exhaustive enough or it allows the entry of some new competitor and most importantly the nature of the competition; is it a perfect competition or not? The major decisions of different firms revolve around these basic features which lead to the analysis of offering price and the number of inventory to be produced (McEachern, 2011). As far as perfectly competitive market is concerned then it has the following features: There is relatively quite a small number of sellers and buyers as compared to the needs of the customers and the overall market size. In this situation one firm has a very low effect over the market price and trends. As a result not a single firm can practice complete control over the cost and price ratios. The perfectly competitive market deals in identical products i.e. all the firms in the market sale the same product with minor or negligible variations. The customer choices are therefore independent of the quality of the product and other characteristics of the products excluding the price factor. The market forces such as demand and supply work freely to decide the equilibrium price and equilibrium quantity, in addition to this the government policies affect the price and quantity ratios through taxes and subsidiaries. There is a free entry for all the firms in the market. They can leave or enter the market in any geographical location without facing any obstacles in their way. They can also apply whatever factors of production they want to with whatever variations and manipulations. The market offers complete and comprehendible information about the products and services. Therefore the firms are aware of the quality and characteristics of their products which leads them towards better performance. It is an ideal market to work in as it ensures the profits and flexibility of operations. In addition to free will related to entrance and exit hence giving numerous advantages to the consumers and sellers both (Dodd & Hasek, 1952). Now let’s consider the example of Rice market where the competition is perfect in nature. All the firms operating in this particular market are having the same costing conditions which are expected to remain at the equilibrium stage in the long run as well. The Automation Technology has become available to few of the firms in the market. This technology is pretty much useful for the production and packaging purposes as it lowers the marginal cost per unit and therefore contributes in increasing the profit margin of the seller without the need of increasing the price of the commodity rather decreasing the cost of the product. The usage of the Automation Technology will have some short run and long run effects over the rice market whereas the factor prices and the demand of the product remain same. This will disturb the equilibrium state of the perfect competition. Application of some new technology is always beneficial for both the industry and the individual firms operating in the market as it is more effective and efficient than the previous one. It strongly contributes to the economic growth and GDP of the country. It facilitates the production of goods and services with a decreased cost. This finally leads to better profits and more investment opportunities. We have examples from the past that how the application of new and advanced technologies leads the country towards a more stable economy. Similarly in this case also the individual firms using the latest technology of automation will enjoy profits at the constant factor prices and demand but since it is a perfectly competitive market therefore these profits cannot be sustained for longer. At some point the technology will become ordinary and a part of regular use throughout the industry then the profits of the individual firms will become static. They would not go into losses at that point but at the same time there would not be maximum profits any more. The change in the long run and short is analyzed by PPF. The Production Possibility Frontier (PPF) changes mainly because of two reasons (Mankiw, 2011): With the introduction of some new technology in to the market. For instance in this case the technology is Automation. Due to the increase in the factor resources such as the increased number of workers and employees, better training and increased motivation level will result in better output. If the capital equipment increases in number then also we can see the change in production possibility frontier. The market will face the following changes: In Short-Run There will be an increase in supply, when the cost of a commodity decreases it ultimately gives rise to more supply. As a result the particular firm will sell the product with more than the market price hence generating more profits as compared to the average market. While on the other hand the whole industry faces a shift of the supply curve towards right side. In Long Run The average cost will equal the marginal cost therefore the individual firm will no more enjoy the profits. The industrial supply curve will shift downward and the price rate will again fall down to the previous level. The graphs below are showing the impact of technological changes on the individual firms and the market as a whole in the short run and the new long run. Figure 1 shows that due to the use of new technology the individual firms are making more profits as the marginal cost is reduced and the prices are increased. The area between 1 and 2 on the y-axis depicts the increased profits in the short run for the individual firms. Figure 2 is showing the impact of the new technology on the overall industry in the long run. It represents that as soon as the technology will become common to every firm or for most of the firms in the market then the PPF curve will shift downward pulling the prices and profits to their previous positions. References McEachern, William A. (2011). Economics: A Contemporary Introduction: An introduction to Perfect Competition. Cengage Learning. Dodd, James Harvey & Hasek, Carl William. (1952). Economics: Principles and Applications: Features of a Perfectively Competitive Market. Goodwill Trading Co., Inc. Mankiw, N. Gregory. (2011). Principles of Economics: The Production Possibility Frontier. Cengage Learning. 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