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Assessment - Essay Example

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Microeconomics Answer 1. Perfect competition is a market structure in which there are infinite firms and infinite number of buyers. Firms are price takers since they have a small market share. In this market, firms enjoy normal profit and price is equal to average revenue…
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Download file to see previous pages... No single agent in this economy might be better off without making another agent worse off. This leads to the achievement of allocative efficiency (MC=AR). It is known as “Pareto optimum allocation of resources” (Klein, 2007). Productive efficiency: In the long run, in a perfectly competitive market structure, the output is produced at the lowest level of average total cost. This phenomenon is known as productive efficiency (MC=ATC). The firms that incur high unit cost are inefficient and are not fit to stay in business in the long run. The forces of competition would not allow them to charge high price. Thus, they would be forced to quit industry in the long run. Dynamic efficiency: One important assumption in the competitive market structure is that all producers in the industry produce homogeneous products. Homogeneity of the products ensure that the products are similar in features and attributes and any single firm would not have the facility to make any innovation such that it would make the products of the firm to differentiated from the products of the other firms. This creates dynamic efficiency. No single firm would be able to enjoy competitive advantage over the others or enjoy any degree of monopoly power. Figure 1: Efficiency in perfect competition (Source: Author’s creation) Answer 2. ...
Short Run Equilibrium In the short run, equilibrium is achieved at the point at which marginal revenue equals marginal cost. As long as value of marginal revenue (MR) exceeds value of marginal cost (MC), producer would expand output since profit level rises with rise in output (MR>MC, i.e., difference between MR and MC is positive). When marginal revenue is smaller than marginal cost, the producer would reduce output until the two values equate. Thus, in short run, profit maximizing price and output firm is determined at the position where MR equals MC. In short run, firms might earn super normal profit if average cost is less than average revenue, or conversely, they might incur a loss if the average cost is greater than average revenue. Figure 2: Short run equilibrium under monopolistic competitive market structure (Source: Author’s Creation) Long Run Equilibrium In long run, there are scopes of entry of new firms into the industry. Therefore, supernormal profit is erased in the long run. As new firms enter into the industry, demand faced by each firm decreases and Average revenue (AR) curve shifts leftwards. Consequently, supernormal profit falls. Firms would produce at the level at which marginal revenue equals marginal cost and price is determined by the interaction between average revenue and average cost. All firms earn normal profit in the long run. Some firms that incur loss in the short run would leave the industry in the long run and the remaining firms would earn normal profits. Figure 3: Long run equilibrium under monopolistic competitive market structure (Source: Author’s Creation) In case of monopolistic competition, in the long run, firms operate at the zero profit condition, which ensures that price ...Download file to see next pagesRead More
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