Developing Business Information System Solutions - Essay Example

On the other hand in the market, Allocative Efficiency would be reached when the quantity demanded by the consumers equal the quantity supplied by the producer at a market price of Pm. It may be noted that this price is equal to the price at which the individual firm is supplying (Pindyck and Rubinfeld, 2001, p. 424). Here the quantity Q1 is the total quantity supplied by all the identical firms in the market producing homogeneous products. Due to technological progress all the firms modify their production process and may be supplying at a lower cost.

Hence any firm that operates in this market has to keep up with the technological progress in order to meet the consumer demand and restrain from being driven out of the market due to competition. This phenomenon is Dynamic Efficiency that is achieved because all the firms continuously upgrade their technology of production. Answer 2 a) In a monopolistically competitive market there are a large number of producers each producing a differentiated product and the price and quantity produced is decided by the producers (price makers) entirely based on the cost of production.

The demand curve faced by the firm in such a market is downward sloping because the firms can change its price independently. Now in the short run, equilibrium will be reached at a point where MR=MC i.e. at the price P1 the firm will supply the quantity q1 and the cost that will be incurred where the average cost curve cuts the line aq1 i.e. at the price p2. Therefore, the firm earns a super normal profit of p1p2ba which is depicted by the shaded area (Boyes and Melvin, 2012, p.168). In the long run, new firms enter in to the market.

This makes the demand curve more elastic. Thus the price of the individuals firms come down eventually. This process continues till the point where all the firms only earn normal profits. At the point E equilibrium is achieved where the AC curve is tangent to the AR=D curve. The price at which the firm supplies is P* and the quantity is q*. Only normal profits are earned in the long run. b) Both in the long run and in the short run, efficiency is not achieved in monopolistic competition. Most firms produce with excess capacity in such a market i.e. output at which profit is maximised is less than the minimum AC output and hence productive efficiency is not achieved.

Again the firm charges a P that is greater than MC as the demand curve faced is downward sloping. Hence Allocative Efficiency is not achieved. Answer 3 In a situation of a natural monopoly a particular firm operating in the market has such a cost advantage over the other firms that it is able to provide goods at a price that is much lower than what the other firms are offering. This drives the other firms out of the competition and the single firm remains with the monopolistic control of the market.

A situation of natural monopoly is shown above. A monopolist would optimise at the point where MR=MC and would thus charge a very high price of Pm where market demand would be met. Now the perfectly competitive firm would reach equilibrium at the point where P=AR=MC. When the government fixes a price at Pfr, the monopolist is forced to charge a lower price and the firm breaks even at the point where ATC=AR. So if there was no regulation, the monopolist would produce much less and have more producers’ surplus (Hicks, 1939, p. 129). In this case the amount is much less.

Answer 4 a) Externality is a situation in which the