Assignment in Microeconomics - Essay Example

? Microeconomics assignment: Explain the factors that bring about a shift in the demand curve for an MP3 player. Use a diagram to illustrate your answer. Price The price of the mp3 player is the crucial most vital determinant that affects demand. The demand curve plots the combination of both the quantity and the price of a commodity. A slight shift in the price, results in a shift along the demand curve price. A slight change in the price would certainly result to a shift of the demand curve. Technically speaking, a shift along the demand curve can be termed as a shift in the quantity demanded. Moreover, a shift in other variables with price as an exception would cause a shift in the whole of the demand curve. The shift in the whole demand curve can be attained to be a shift in demand. Income Certain changes or alterations in income may mean increases or decreases in demand. A commodity whose demand tends to rise with a corresponding rise in income can be called a normal commodity. A commodity whose demand falls with a corresponding increase in income can be called an inferior commodity. This means that increases in income would tend to increase the demand for the mp3 player in the market. This is hence true since this is economically measures by economic experts in the economic field. Prices of other commodities Slight alterations or changes in the pricing of other commodities may result to a rise or fall in demand. A commodity that results to a rise in demand for another commodity when its price tends to increase can be called a substitute commodity. A commodity that brings about a fall in demand for another commodity when its price tends to rise can be referred to as a complementary commodity. This ultimately means that, an increase in the price of the mp3 player of another manufacturer or brand, may result to a corresponding rise in the demand of the original mp3 player in question, since it may be used as a substitute for the other commodity. Even if, one takes the case of beverage giants in the name of Coke and Pepsi, one realizes that an increase in the price of Pepsi would result in the rise, in demand of Coke. This is solely because these two products can be considered to be substitutes. . Number of buyers in the market A rise in the number of buyers, both potential and current buyers, would result to a rise in the demand for the mp3 player. Demand can be mainly based on the rise of population in that area. Future pricing actions A rise in the anticipated future prices of a commodity would certainly tend to cause a rise in the current demand. A fall in the anticipated future prices of a commodity would certainly decrease the future price. So a firm must highly be considered its future pricing of the mp3 player in question. Consumer tastes and preferences Shifting of the demand curve may also arise due to changes in the consumer tastes and preferences. If the consumers’ taste changes and starts liking more of the mp3 player, there would be a consistent rise in the quantity demanded. Derived quality Shift in the demand curve can be as a result of changes in the quality derived from the mp3 player by the consumer. If commodities produced are of a higher quality than the rival commodity, then this would bring a rightward shift of the demand curve (Heigy 1945, p.453). 2. The demand and supply schedules for wheat in a free market are as follows: Price per tonne (?) 120 160 200 240 280 320 360 400 Tonnes demanded per week 725 700 675 650 600 550 500 425 Tonnes supplied per week 225 300 400 500 600 750 1000 1300 I. Draw and briefly comment the demand and supply curves on the following diagram II. Define what is the equilibrium price and state what the equilibrium price is from your graph ? The equilibrium price is 280. The equilibrium price from my graph is 260. III. Suppose the government fixes a maximum price of ?200 per tonne. What will be the effect? Suppose the government fixes a price ceiling of 200 per tonne, it would result to certain effects. First, a disequilibrium would arise since lower prices in accordance to the law of demand, would result to higher levels of quantity demanded, and a corresponding lower levels of quantity in supply owing to lower prices in accordance to the law of supply, ceteris paribus. By this, the businesses would be making lower profit margins as compared to what the public demands. IV. Suppose that supply now increases by 150 tonnes at all prices. Enter the new figures. Price per tonne (?) 120 160 200 240 280 320 360 400 Tonnes demanded per week 725 700 675 650 600 550 500 425 (Old) Tonnes supplied per week 225 300 400 500 600 750 1000 1300 (New) Tonnes supplied per week 375 450 550 650 750 900 1150 1450 V. How much will price change from the original equilibrium (assuming that the government no longer fixes a maximum price)? How much more would be sold? It must be noted that the new prices would be equivalent to the corresponding percentage rate of change of commoditys supplied. This would be in accordance with the law of supply which states that, at ceteris paribus, an increase in price would result to a proportionate increase in the quantity supplied. Therefore, the rate of change when calculated is 25 per cent. This would increase the price of quantity in supply to 350. This means that the price would increase by only 70. Moreover, an estimated output of 150 more than the original would hence be sold in the market. VI. State and comment on the change in price. The rise in price brought about by an increase in commodity supplied also affects the quantity demanded. The law of demand states that an increase in price would result to lower levels of commodity demanded in the market, provided all other factors would be kept constant. This ultimately means that the quantity demanded would drop by a corresponding 150 of the same increase in the quantity supplied. Despite the change in price indicating to be positive in terms of the commodity anticipated to be in the market, it also has a negative effect on the consumers’ demand in the market. Higher prices of the commodity in supply would discourage consumers to reduce on their consumer spending habits, and hence saving more on their personal disposable income. This would hence turn to low profit margins to the firm unless they would change and review their pricing policies. VII. State and comment on the change in quantity. The change in quantity is both in two ways. It both affects the quantity in supply and not forgetting the quantity in demand. The quantity in supply would rise by 150 while the quantity in demand would fall by 150 from the original equilibrium level of quantity. A change in quantity supplied can be a change in the exact amount of a commodity that sellers or a firm are able and willing to sell in the market. This change in the supply of this quantity can be caused or brought about by changes in the supply price. This can normally be shown by a movement along a supply curve. Nonetheless, the certain way to initiate an alteration, in the output, in supply, is with the change in the pricing of a commodity (Wright 1905, p.23). 3. Assume that the short run cost and demand data, given in the table below, confront a monopolistic competitor selling a given product, engaged in a given amount of product promotion. Compute the marginal cost and marginal revenue of each unit of output and enter these figures in the table. Total Marginal Quantity Marginal Output cost cost demanded Price   revenue   0 ?25 0 ?60 1 40 ?____15_ 1 55 ?___-5__ 2 45 _5____ 2 50 ___45__ 3 55 __10___ 3 45 ___35__ 4 70 ___15__ 4 40 ___25__ 5 90 ___20__ 5 35 ___15__ 6 115 ___25__ 6 30 ___5__ 7 145 ___30__ 7 25 ___-5__ 8 180 __35___ 8 20 ____-15_ 9 220 __40___ 9 15 ___-25__ 10 265 _45____ 10 10 ____-35_ I. At what output level and at what price will the firm produce in the short run? What will be the total profit? Where average cost equals total cost divided by output=265/10=26.5. It averagely intersects the marginal cost curve where the total cost is 115 and output being 6 and price being 30. Total profit= Total revenue x Total cost= 180-115=65 II. What will happen to demand, price, and profit in the long run? In the long run, the demand, price, and profit would all be affected. The demand for the product would have to fall. Consequently, the profit and price would also fall. The reason is that the firm would be experiencing extremely high expenses in terms of increased marginal costs, and corresponding lower marginal revenue, as more and more of the output, becomes sold. Hence, to avoid this, the firm must come up with workable policies that would aid in putting the firm in a profitable position so as to minimize on the losses that would be anticipated. Moreover, in case of supernormal profits, in the firm, this would result in the ability of this market structure being able to pull new entrants into the market. This would certainly result in shifting the demand curve for an already existing firm towards the left side. These new entrants would continue till only normal profit can be available. At this juncture, firms can be said to have attained their long run equilibrium position. Furthermore, the firm can be seen to benefit most when it is in the short run situation. The firm would try to remain in this position by being innovative and carrying out more of differentiation of their products, and also adding other new and attractive attributes in the product packaging and quality so as to appeal to a larger segment of their buyers or what would be rather termed as consumers. Nevertheless, the existing of the firms of ,monopolistic competitive firms, tries to explain the survival of firms dimmed to be smaller in the modern economies. Since this would determine their levels of profitability in the long run (Danson 1991, p.19). 4. What are the basic characteristics of oligopoly? How does oligopoly compare with the other market structures? The definition of the term oligopoly is that it is a market which can mainly be dominated by a few sellers or producers or manufacturers, who have control in the market. It is a firm where there is an enormous level of concentration of the market. Nonetheless, an oligopoly can be best defined by the behavior of firms in the market rather than saying or contemplating on their market structure. The term concentration ratio in this case, tries to measure the prior extent to which a certain market or industry can be dominated by a few firms who can be termed as leaders. Furthermore, an oligopoly does exist when the best five companies or firms in the market can account for greater than sixty per cent of the overall market demand or sales. Characteristics or features of an oligopoly market structure It would be said that indeed, there is no theory of the method showing how firms can determine output and prices in the oligopoly market structure. In the case where price wars may result, oligopolists would tend to produce and price more as a perfectly competitive firm. Sometimes it would be seen that they act as pure monopoly but nonetheless it has its distinct traits that make it unique in the market (Philips 1978, p.56). 1. Branding of products. A firm in the market can be entailed to sell a product which can be differentiated in all attributes. This enables the firms to have an upper hand as compared to others in terms of commanding the market. 2. Barriers that limit entry of a firm. Certain crucial barriers and constraints can impede firms to make an entry into the prevailing market. This can be done so as to prevent dilution in the existing competition, in the long run position, hence it does tend to keep in balance the supernormal profits for the leading firms. Moreover, it is perfectly possible for numerous smaller entrants to operate on the edge of an oligopoly market. Nevertheless, none of them is enormous enough to have any crucial effect or impact on the prevailing market prices and quantity in supply in an economy. 3. Interdependency factor in the process of decision-making. This means that the firms must incorporate into account, some possible reactions of their competitors, or other rival firms to any slight changes in pricing, and output, and other nonrelated strategies used by those firms. In perfect competition and the case of monopoly, the producers may not take into consideration a competitor’s response when fixing his or her price and quantity. 4. Nonprice competitive strategies by firms. The process of infusing non-price competition is a workable trait of the competitive tactics which the oligopolistic firms tend to employ. Examples of this include, extension of warranties for credit facilities, and for the consumers, free installation and free deliveries of the commodity in question, longer or extended opening hours by the firm, so as to cater for people working at all times of the day and night, normally seen in numerous petrol stations, and most of the supermarkets in uptown areas of a country, product differentiation or what would be termed as branding, heavy expenditure on advertising, and marketing campaigns of the product, offering of after sales services to customers, and expanding into other new markets and not forgetting to diversify the range of products. Comparing oligopolies When taken into consideration, the monopolistic competition tends to differ from a monopoly market in that they tend to make no long run profit margins. It is true that monopolistic firms tend to act and coordinate independently when in the mix of an oligopoly. This is because they take into consideration of actions of one another. Moreover, it is evident that prices of an oligopolistic firm may decline between the competitive price and the price set in the monopolistic firm. Nevertheless, a contestable theory of market of the oligopoly tends to judge a firm’s competitiveness more by virtue of its performance and the constraints of entry into the market by its market structure. Take the case of the cartel models which exist in the situation of an oligopoly. They mainly concentrate on the market structures. It is evident from this case, that certain industries can be classified or categorized by its economic activity when based in the North American system of classification. This says that industrial structures would be measures by virtue of their concentration ratios and indices of Herfindahl. A concentration ratio is the total sum of the market shares of the dominant firms in an industry. While Herfindahl index is the total summation of the squares of the shares of the market of all firms in that industry (Philips 1978, p.56). It is vital to grasp that perfect competition market structure does comprise of numerous firms and sellers in the market, while the monopoly can be comprised of only a sole seller of a product in the market. The differences of the perfect competition market plus the monopoly market structure can be based on factors which include the ease of entry and exit, kind of commodities in sale, the kind of firm, the profit level in the short run and the long run position. When explained in details mainly in graphical form, one realises that indeed they are numerous differences when comparing these market structures with the oligopoly market structure. As much as one wants to deny, the oligopoly market is far way sophisticated. It uses the game theory unlike other market structures. It uses advanced strategies such as Cournot, Stackelberg and Bertrand. In the case of a monopoly, its features entails the aspect of a sole seller and many buyers, harsh barriers to entry into the market, existence of government patent rights, advanced location and copyright of resources available by the sole owner preventing entry of new entrants, information can be imperfect, the seller is the sole price setter, the profits are equivalent to both the marginal revenue and the marginal cost. But if one takes the case of an oligopoly, there is what can be termed as price discrimination, price wars and collusion. Sometimes in the oligopolistic case, government intervention measures may suddenly be taken into prior consideration on matters concerning price fixation. Thus, one realises emergence of things such as price ceilings and price floors in the case where competition is extremely tough and one firm dominates the other few firms in an unfair way. By this the oligopoly can thus be seen as extremely dynamic entity in the market structure forms. Even though a firm needs enormous amounts of starting capital to start the business, it actually takes a lot of confidence in the side of the management of the firma which would make the sales of the company be a success in the long run position, and hence result to increased levels of profits realised in the long run. Thus, the management must input each crucial measure to see the company succeed overall in extremely position whether financially or economically. Bibliography Heigy, M., 1945, Elementary economics, Nairobi: Philips Publishers. Philips, A. M. , 1978, Market structures in economics, London: Oxford Publishers. Wright, P., 1905, The dynamics of market forces in economics, Manchester: Crimson Enterprises. Danson, P., 1991, Introduction to economics. Durban: Soweto Press. Read More