Business Microeconomics Issues - Assignment Example

Name Tutor Course Date Business Microeconomics Question 1 In economics, allocative efficiency is the optimum allocation of scare resources in accordance with the demand patterns of the customers. At allocative efficiency, AR=MC. Productive efficiency occurs when an organization operates at a minimum ATC and it produces a maximum output per input during the production process (Mas-Colell, 9). Dynamic efficiency takes place when new products, techniques and processes increase the economic growth over a period of time. The dynamic efficiency in most cases is dependent on RD investments. In a perfect competition, there is a perfect knowledge, no differentiation of goods and other factors that affect the market. The productive as well as allocative efficiency can be achieved in a perfect competition. This is considering that the goods and services are produced at the lowest cost possible. The firms with higher unit costs cannot survive in the market as the competitive forces drives down the prices. In a perfect competitive market, there is a production of the right combination of goods due to the perfect knowledge of firms and consumers also have the right confluence of market signals. Under such conditions, allocative efficiency can be achieved. The consumer and producer are also maximized in the competitive market leading to allocative efficiency. Perfect competition and economic efficiency, Source, Dynamic efficiency on the other hand may be difficult to achieve under perfect competitive market. This is because the perfect knowledge of the other firms by the consumers in the market and the other competitors. Under such conditions any new innovation can easily be copied and hence resulting to the loss of the competitive edge. However, dynamic efficiency can be achieved in a competitive market when the firms make profits in the long run leading to the investment in research and development (Mas-Colell, 11). The innovations can be good for the society as it may have a lot of benefits to the consumers in the long run. In order for the firms to be more competitive, research and development has to be carried out on a large scale which also leads to the development of new products and hence increasing the competitiveness of the firms. Question 2 In the long run, the firms in both the perfect competitive market and monopolistic markets earn zero economic profits. This is because the economic profit is not guaranteed for any firm operating in either market. Various factors determine the ability of a firm to earn economic profits and it applies to all the firms. When P=ATC in a perfect competitive market the profit of a firm becomes zero and the same applies to the monopolistic market when P≥ATC (Dhingra & John. 23). For a perfect competitive market, the firm is producing the quantity when ATC is at its minimum point. In the case of a monopolistic market, the firm is not producing the quantity where ATC is at its minimum point. However, the perfect competition is more efficient than the monopolistic competition. The perfect competitive market is more efficient as compared to the monopolistic markets even in the long run when the markets earn zero economic profits. At the minimum point of ATC curve, monopolistic firm does not produce and hence decreasing its efficiency. Perfect competitive market, Source, However, in a perfect competitive market, the firms are forced to produce. This is an indication that the firms that are operating in a perfect competitive market can still produce even when it is earning zero economic profits. At this point the firms that are operating at a perfect competitive market continue to produce given quantities in order to reduce costs which may lead to profitability. Allocative efficiency can be attained when P=MC and at this point the firms that are operating in a perfect competitive market continue to produce. It is also at this point that the economic profit may be zero for the firms. However, a monopolistic fire cannot continue to produce when P=MC (Dhingra & John. 27). This is because it will be producing too little at a higher cost. The firms in the perfect competitive markets have least market powers and this contributes to the most efficient outcomes. However, a firm in a monopolistic market has the most market power and this result to the least efficient outcome. The competitive markets therefore yield efficient outcomes while the monopolies yield inefficient outcomes. Monopolistic market, Source, . Question 3 A natural monopoly occurs in the industry where a single firm can produce an output to be supplied in the market per unit cost as compared to two or more organizations. Examples of industries that cam have natural monopoly includes telephone industry, water supply and electricity (Barbier, 16). The fixed cost structure for the industry is quite high and this makes it difficult for any new entry. The organization that operates as a natural monopoly can set the process or a regulatory authority can set the prices. It is however necessary for a regulatory authority to regulate the prices. The price regulation by a regulatory authority enables the firm to meet the needs of the customers at an efficient cost. The regulatory authority should set the prices in order to ensure that the economic welfare is maximized leading to profitability at the organization. This is therefore beneficial to the organization as it will be able to make profits while meeting the needs of the customers. Regulation of a monopoly, Source, Regulation of the prices is important in ensuring that the firm does not exploit the consumers in the market. This is considering that natural monopoly may contribute to the exploitation of the consumers. Price setting by the regulatory body usually considers the return on invested capital that the firm has earned. This plays an essential role in ensuring the firm to obtain reasonable profit on capital investment. The firm is able to obtain profits through the process as the regulator has to consider various factors including the costs and conditions in the market (Barbier, 24). The economic problems are usually taken into account by the regulator and hence ensuring that the firm does not make losses. The demand might be low or high in certain periods and so is the cost of production. Regulation enables the firm to make profits regardless of the economic situation. This is also beneficial to the consumers as it avoids exploitation when the company does not incur much production costs. Regulation can therefore caution the organization against the fluctuations in the market. Question 4 An oligopoly is a market that is mainly comprised of a small number of sellers with its own market structure. The situation of the oligopoly can be equated to the game theory and a situation of a prisoner’s dilemma. Each firm is able to know about the actions of the other due to the low number of sellers. According to the game theory, the decision of one of the firms in the Market influences the decision of the other firms and vice versa (Nagurney & Dong, 201). This means that if one of the firms increases or decreases its prices, the other firms will be affected and it will be easy to know the firm that has taken the action. The response of the other firms in the market is therefore a factor that should be considered by any of the firms in the market. Non-price competition is therefore one of the characteristics of oligopoly as the firms tend to compete on other aspects a part from the price due to the consequence that can be described by the game theory. The concepts of non price competition include the advertisements, loyalty schemes and product differentiation. The firms have to make decisions with regards to pricing and quantity so as to ensure that the other firms are not affected by their decisions. In the event that all the firms decide to produce too much, it may be faced with difficulties as the prices may drop below the average total cost which has negative impacts on the profitability of the firms. Restricting the quantity in relation the marginal cost and the marginal revenue, the profits can be maximized (Nagurney & Dong, 210). This puts the firms under the prisoner’s dilemma scenario. The non-price competition is therefore an important aspect of oligopoly. Question 5 The strengthening of the US dollar is one of the factors that contribute to the plummeting of the prices of oil. In the recent past, the dollar has been strengthening which has led to the falling of prices of commodities including oil. The global process of commodities including oil is usually quoted in terms of the dollar. The price of oil may continue to plummet for a long period of time as long as the dollar continues to strengthen. The OPEC countries which are the major producer of oil in the country have been producing high quantities of oil in the market (Baffes, et al, 12). The countries have also refused to stop lowering their production which has impacted negatively on the production of oil. The United States of America has also invested in the huge production of shale oil which was not carried out in the past. The increase in the production of oil by the OPEC countries as well as the USA has led to an increase in the quantity of oil in the market. According to the law of demand and supply, the prices go down when there is an excess supply in at the market. The prices of oil have therefore dropped as each of the oil producing country is competing at the market. Other countries that produce oil such as Russia have also maintained eirt production and hence increasing the amount of oil available at the market. Politically, the OPEC Countries and the USA has colluded in order to put more pressure on Russia whose economy is dependent on the oil industry (Benes, et al, 212). However the drop in the process is more of economic issue as opposed to the political reasons. References Mas-Colell, Andreu, ed. Noncooperative approaches to the theory of perfect competition. Academic Press, 2014. Dhingra, Swati, and John Morrow. The impact of integration on productivity and welfare distortions under monopolistic competition. No. 088. FIW, 2012. Barbier, Edward B. Economics, natural-resource scarcity and development: conventional and alternative views. Routledge, 2013. Nagurney, Anna, and Dong Li. "A dynamic network oligopoly model with transportation costs, product differentiation, and quality competition." Computational Economics 44.2 (2014): 201-229. Baffes, John, et al. "The great plunge in oil prices: Causes, consequences, and policy responses." World Bank Policy Research Note 15.01 (2015). Benes, Jaromir, et al. "The future of oil: Geology versus technology." International Journal of Forecasting 31.1 (2015): 207-221. Read More