The Change in Technology in World Environments - Assignment Example

If the government decides to maintain the price at p1 by purchasing excess supply, there will be a problem in case there will be a rise in supply due to better-than-predictable yields of wheat at harvest time. This will cause the supply of wheat to shift out to the Supply of wheat 2 as shown in the graph putting downward pressure on the free market equilibrium price. The policy will become costly because the government will be forced to implement the same policy of buying up the surplus of wheat to prevent prices from falling.

Moreover, policy 2 is more costly than policy 1 when the government faces a problem in dealing with the excess wheat it bought. The policy is costly because if the government opts to purchase the wheat, it sells it to developing countries at rock-bottom prices. The government can also sell the surplus to farmers by feeding animals or offering it at a reduced price to those in need of it, in other countries. However, the policy of paying the farmers the supply price is more costly than that of buying the surplus because the price paid to farmers is inevitably higher than the price received from the sale of the surplus.

1f) both Policies will produce equal net economic benefit because the cost associated with both policies affects society directly, and is subtracted from the producer and consumer surplus. From the graph, the net economic benefit is shown by the triangle Q1P1QE.

QUESTION 2
a) In real-world environments, firms are not identical because technology changes continually and diverse firms have different histories. The technology change will cause the firm to reduce the cost of production, and in turn, causes a downshift in each firm’s marginal cost curve. Meanwhile, the short-run supply curve which is the total of the firm’s marginal cost curves will shift downwards. According to Lipsey and Chrystal (2007, 146), the firms produce economic profits and output at which price equals marginal cost. In perfect competition, the marginal cost curve is greater and stiffer than the average cost curve. Meanwhile, there will be no new entrants attracted to the industry because the average cost-minimizing output is greater. In the short run, the entry of new firms shifts the supply curve to the right. Each firm old and new will cover its total cost by producing at a minimum point on its average total cost curve.

b) The long-run equilibrium of a competitive firm occurs when firms are earning zero profits. The price increases because the firms start experiencing a lower cost of production as a result of changes in technology. In the long run, profit will not persist in an industry with freedom of entry. There will be a possibility that new firms will enter the industry that will increase output and reduce the price until all profit is eliminated. Lipsey and Chrystal (2007, 142) indicate that all benefits of lower costs ie perfectly competitive firms will be transferred to customers in higher output, and lower prices in a long run. Thus, these will cause firms to leave the industry until those remaining can handle all their costs. Read More