Major Issues in Microeconomics - Essay Example

Microeconomics Assignment Number May 9, Faculty Microeconomics Assignment PART A: (20 Marks) (1000 words) Q1. (5 marks) a) The negative externality associated with Coal –seam gas mining is the high social and health cost it imposes on the people. Coal-seam mining affects the water table and subsequently the agriculture and with associated health costs. b) Sometimes, market outcome differs from the result that the society considers optimal and efficient. Market failure may occur when there is a negative externality that imposes an external cost on the society. The efficient level of coal gas mining for the society is lower than the market quantity. In effect, the marginal social cost and the marginal private costs imposed by the externality will result into a dead weight loss. This is illustrated by the diagram below. c) In order to achieve a socially efficient level of coal gas mining, policies that promote the underground water system understanding, interconnectivity and the gas extraction and processing life cycle should be adopted. Secondly, policies that demand absolute scientific knowledge of the industry and its potential impacts on the society matter. These to enable a comparison of efficient coal power generation and the societal efficient production requirements to minimize the adverse effects on the society. Q2. (5 marks) a). The key most barrier to entry that would help to establish and keep Monsanto’s market power in the United States seed market is the patenting of the Monsanto seeds that prevents farmers from stocking other seed companies. The high cost of entry into the seed industry as a result of the high prices charged by Monsanto is another significant barrier to entry. New companies would find it very expensive to incur high entry costs that may be risky given the established Monsanto Company. The policies and the high prices are the significant barriers to the entry of other companies into the industry. b). If the United States Department of Justice investigations resulted in the cancellation of the Monsanto patents as an anticompetitive practice in the seed industry, a number of resultant effects would be experienced. Firstly, the level of competition in the US seed industry will most likely increase as more seed companies will be able to venture into the industry with reduced barriers to entry. The farmers will have a choice between varieties of the seed companies for their seed markets. Secondly, the supply of seeds is likely to increase with increased number of seed companies into the industry. As a result, the prices of seeds in the market will be driven down by the increased supply, and this would reduce the costs incurred by the farmers and the consumers. On the other hand, Monsanto will most likely lose through the reduced prices. The monopolistic characteristic of the US seed market will be replaced by a perfectly competitive market. c). If the US government introduced legislation that provides for lower levels of protection for the intellectual property in the seed industry, Monsantos incentives to produce new seeds would be adversely affected through the effects of such legislation on its patents. The imposition of such legislation would affect the registration and commercialization of new corn and soybean seeds in the US seed industry. The ability of Monsanto to protect their seed inventories would be reduced. The incentive for the research and development of new seed varieties will decrease for the Monsanto Company. The economic efficiency of the company to produce new seeds would decline with the increased efficiency of new entrants to register and commercialize their new varieties. It will not be prudent to produce new seed varieties in the prevailing condition of reduced protection since the returns from such new developments would be highly uncertain. Q3. (6 marks) a). With the advent of the online Grocer in 2014, the fixed costs and the marginal costs are likely to differ from the traditional grocery store and the online supply of groceries among the consumers. The fixed costs for the regular grocery store are most likely to be higher than those of the online supply of groceries. Online suppliers have the opportunity to rely on few centralised .locations from where the customers can make the purchase. Others like Instant and Google Shopping Express have the opportunity to deliver foods from existing supermarkets thus reducing the costs significantly. The transportation costs per unit of groceries purchased at the online grocery supply are expected to decline with quantity. b). i) perfectly competitive firms will produce profit-maximizing quantities of output that equate the marginal revenues and the marginal costs. Because perfectly competitive markets face perfectly elastic demand curves, resources will be efficiently allocated to compare the marginal costs to price in the short run. The output of the firm in the short-run declines. Firms produce outputs that maximize the economic profits. The ability of the firms to adjust to various factors in the short term is lower compared to the long run conditions. The equilibrium conditions in the short run are distorted since the costs are high in the short run than in the long run. The diagram below illustrates the effects of entry of online grocery suppliers. ii). The introduction of the online groceries will have impacts on the firms’ cost, profits and supply in the long run. The firms will be able to adjust the several input factors affecting their costs and supply. With the introduction of the online grocery stores, many firms will invade the market in the long run. The firms output will increase diminishingly until the maximum level of output is achieved. The supply will be lower in the long run, and some firms may close down due to loss of profits. The equilibrium, in the end, is achieved where price is equal to the marginal cost. On the contrary, the equilibrium in the short run, the marginal cost incurred by the firm is above the price. In the end, every firm in the market will earn an average profit. The effects, in the long run, are illustrated in the graph below. Q.4 (4 marks) a). The introduction of the robotic manufacturing electronic firms is likely to have an impact on the fixed costs and the marginal costs. The fixed costs of acquiring the advanced robots are likely to be higher than the cost of labour. The additional maintenance cost of the robots in the manufacture of the electronic products is likely to increase the marginal cost incurred per every additional unit of output produced. b). The average total cost of production in the automated manufacturing method is expected to decline with output. In the use of manual labour, the total average cost increases with output. The increase in the minimum wage is likely to increase the total average costs incurred by the manufacturers in the production of sufficient output. In making a choice between these two alternative production methods, a profit-maximizing firm should consider the effects of the difference between the total average costs of both methods in the long run to establish the actual profits of both options. If the average total cost is less than the price per unit, the firm makes a positive economic profit. That method that produces the highest benefit of a price difference between the average total costs should be adopted. The graph below illustrates the average total cost relationship with output. PART B: CASE STUDY (10 marks) Topic Economic Concept/ Theory Application What caused the recent strength of the Australian Dollar? Perfect competition, Demand/Supply and monetary policies. The market for the AUD is an archetypal perfectly competitive market with many traders who have the freedom of entry and exit. The Asian-fuelled commodity price boom is responsible for the sustenance of the strength of the AUD. The expansionary economic policies in other countries have weakened their respective currencies relative to the AUD. For example, the US Dollar’s increased supply. The widening the interest rate between Australia and the rest of the world is responsible for the strength of AUD. The demand for the AUD surged relative to other currencies, and the higher interest rate provide a great incentive for capital flow. Why would 7-Eleven offer cheap Coffee? Theory of market power: Production costs, incentives and surplus The fixed cost of producing coffee in 7-Eleven is lower compared to that in coffee bars. It can purchase the production machines at a discounted price in large volumes reducing the total fixed costs incurred. In terms of variable costs, 7-Eleven uses instant coffee cheaper than the coffee beans used in coffee bars. 7-Eleven gives people an incentive to buy by charging lower prices. The lower prices increase the consumer surplus. Why do governments propose environmental levy schemes for plastic shopping bags? Externality The use of plastic bags imposes serious environmental problems to the society due to pollution when disposing of them. There is a negative externality in consumption leading to market failure when the cost of consumption is greater than the value to others excluding the buyers. The benefit brought by using plastic to the society is less than to an individual. The cost of disposal of the government increases and it may cause hygienic problems in the public areas resulted in littering. The benefit accruing to the individual is only the convenience enjoyed during the shopping. The environmental levy schemes would increase the price for plastic bags and hence reduce their demand. That way, the negative externalities would be reduced. References Besanko, D., Braeutigam, R., & Gibbs, M. (2011). Microeconomics. Hoboken, NJ: John Wiley. Varian, H. (2010). Intermediate microeconomics. New York: W.W. Norton & Co. Read More