Market Structures And Resource Allocation - Essay: Questions And Answers.

1.(a) Illustrate and explain using diagrams how a single seller within the market can maintain an inefficient allocation of resources; 

(b) Are there any advantages to a single market seller and how do they compare to its perceived disadvantages. 

2.(a) .What market structure is used to benchmark allocative efficiency and why do we use it? Illustrate and explain using a diagram 

(b) Why and how do monopolistically competitive firms fail to achieve allocative efficiency? Illustrate and explain using a diagram.

3.(a) Assuming a constant wage rate, illustrate and explain using a diagram, how a firm's marginal costs of production are at a minimum when its marginal product is at a maximum;

(b) Illustrate and explain using a diagram how a firm's long-run average cost curve comes into existence from a multi-plant operation; 

(c) Identify and describe the significance of the various portions of this diagram.

4.(a) .You are examining and reporting on the market performance of a very small number of firms that arc known to often collude in setting output prices and quantities. Illustrate and explain using a diagram what affect this behaviour is most likely to have on the allocation of factors of production. 

(b) What will happen if one of these fins  cheats on the others in some way? Illustrate and explain using a diagram. 

5.(a)  Illustrate and explain using diagrams, the difference between long run supply in a constant cost individual firm  and industry and an increasing cost firm and industry. 

6. Illustrate and explain using diagrams, two (2) market mechanisms that are used for controlling pollution as an externality. 

7.(a) Explain whether you agree or disagree with the following statement and why: 

"Regardless of whether the short run or the long run is being considered, a firm should continue to operate as long as its price is greater than its average variable cost". 

(b) Explain why you agree or disagree with the following statement:.

1. Inefficient allocation of resources in a single market seller

1.a.Inefficient allocation of resources: 

The market in which there is only one seller and numbers of buyers is called monopoly market. The monopoly of the seller in market makes the seller charging higher from the customers for its products or services. There is no substitute product available in the market against the seller enjoying monopoly in the market. The seller charges premium price for its products and services from the customers (Epifani and Gancia, 2011). But at the same time, monopoly in the market leads the misallocation of the resources available with seller. The price in the perfect competition is equal to the LMC=LAC (AR=MR). But in the case of monopoly market, the price in industry is greater than LMC=MR. It can be understood by the following diagram:

The minimum point of the curve is L that is in the right side corner of the equilibrium point of the curve.  This shows that the firm is below the level of optimum size. This means the monopoly firm is not able to produce as what capacity it has (IE, 2017). Until the monopoly firm has excess capacity, there is no effective allocation of the resources in monopoly firms. Therefore, we can say that monopoly cause misallocation of resources and dead weight loss.

b: Advantage and disadvantage of monopoly:

There are various advantage and disadvantage of monopoly:

The prices of products and services are stable in the monopoly market structure, as there is only on seller in the market. Apart from this, monopoly status provides the seller with economic of scale as there is large customer based but the seller is single only (IE, 2017).  The firms in monopoly market invest in research and development for ensuring customer surplus and satisfaction.

The main disadvantage of monopoly market is that the seller charges higher price from the customers for the products or services. Apart from this, price discrimination is also a disadvantage of the monopoly where firms charge different price from different consumers or different market (IE, 2017). Monopoly structure leads firm to produce low quality product.

2.What market structure is used to benchmark allocative efficiently and why do we use it? Illustrate and explain using a diagram.

Allocative efficiently is an optimal point of production where MC is equal to MR for the individual firm or company. The optimal point is the point where price of goods and services is equal to marginal cost that is known as point of allocative efficiency (Hirschey, 2016). Along with this, allocative efficiency can be achieved in perfect competition. In other words, allocative efficiency is a way in which scarce resources are used to meet the individuals need in the Pareto-optimal way or taking into consumer’s preferences accounts. Therefore, perfect competition market structure is used to benchmark allocative efficiently. It is because the conditions of the perfect competition proven that a market reach an equilibrium in which quantity demanded and quantity supplied for the product and services are equal at the current price (Lee and Johnson, 2015). The condition where MC=MR then the equilibrium will be Pareto-optimal in which any business firm can be develop better off through exchange. Along with this, the firms can be made better off through making another firm worse off. This can be better understood by the following diagram:

2. Market benchmarks for allocative efficiency

From the above diagram, it can be said that the optimal point is the point where the marginal revue and marginal cost curves are intersecting. It means MR=MC. This indicates the allocative efficiency of the firms. This shows the capability of the firm in optimum allocation of the resources towards increasing the profit of firm. The above diagram is showing the benchmark at point where marginal revenue is intersecting marginal cost.

Why and how do monopolistically competitive firms fail to achieve allocative efficiency? Illustrate and explain using a diagram

Monopolistically competitive firms fail to achieve allocative efficiency because monopolistically competitive firms supply the goods and services below their capacity. Along with this, monopolistically competitive firms determine or set the price of goods and services higher than the marginal costs (Nikaido, 2015). Therefore, monopolistically competitive firms fail to achieve allocative efficiency effectively that leads to decrease in the economic surplus.  This can be understood by the following diagram:

From the above diagram, it can be interpreted that the price level of the goods and services the company is higher than the marginal cost, which leads the loss to company. The average cost of the products or services is higher than the average revenue that indicates the allocative inefficiency of firms.

5.Difference between long run supply in a constant cost individual firm and industry and increasing cost firm and industry: 

The constant cost industry is the industry in which the external economies and diseconomies are equal or balanced. The expansion and contraction in the constant cost industry does not cause variation in the level of cost (McEachern, 2011). Many of the firms enter into the industry while many of the firms leave the industry but cost curve remain at same level.

The above diagram depicts that at the point p of the price where the individual firm does not earn any profit. This means numbers of firms are there in industry adjust to the demand. As the demand level is expanded, the supply level remains same. Therefore, any increase and decrease in the demand may not affect the price level in constant cost industry.

When the industry expands according to the increased demand, external economies and diseconomies occurs in the industry. The increasing demand causes economies, which lead to reduction in cost of production (McEachern, 2011). Thereby, the LAC curve tends to be downward

From the above diagram, it is clear that the in case of increasing cost industry, the increased demand cause change in price level that is accepted by all the firms in industry. This increases the profit of companies in the industry which attracts new firms to enter in the industry and LAC and LMC curve shifts upward (McEachern, 2011). Therefore, it can be said that increasing cost industry may cause change in long run supply curve and price level of products or services. The industry will expand but at the same time it will reduce the profitability and create the diseconomies for individual firm.

3. Long run supply in constant and increasing cost industries

6.Market mechanism for controlling pollution

The pollution is a serious problem for any economy. Therefore, there are different market based mechanism or policies for controlling the pollution such as taxes, subsidy, cap and trade program, baseline and credit program, renewable electricity standard, fee bates, café standards, and other for controlling gases emissions (CCES, 2015).

The most basic tool that is used by the government for controlling the pollution in economy is tax rate. The tax rate determines the price per unit of the pollution emitting form the factories. The tax on the pollution is an additional cost measure for the gas producing firms and factoring generating large amount of pollution (Martin et al, 2014). The company can pay the less tax by reducing the pollution and emission.

From the above diagram, it is well clear that Cap and Trade program plays vital role in controlling the pollution or emission in economy. As shown in diagram, when the Cap is held at Cap 1 then the pollution is on p point. At the same time, when the cap is determined at Cap 2 point then the pollution reduces and comes at P1 point. Therefore, the allowance limit in the cap determines the quantity of pollution in economy.  When the regulatory authority reduces the emission allowance limit then the companies has to meet the standard or cap, which causes reduction in emission or pollution.

7.a.I am agreeing with this statement that the firm should continue to operate in the market. I am agree with this statement because the there is positive difference between price level of the firm and its variable cost. This indicates that firm is in good condition and enjoying profits in the industry. The average variable cost of any firm is derived by dividing the total variable cost by the number of units produced (Boyes, 2011). At the same time, price level is the prices of goods and services. If the P< AVC it means firms is not in the condition of earnings economic profit but earning normal profit that may leads it to continue in the market. This condition is favorable to the company or firm that is why it should continue and try to improve its profitability.

b.I am agreeing with this statement. Because when the marginal cost equal marginal revenue, there is zero profit to the company. It is because the marginal revenue from additional products sold and the marginal cost on the production of products are equal means there is not additional benefit here (Rifkin, 2014). It means there is zero profit to company. This can be better understood by the following given diagram:

The above diagram is showing that where the marginal cost and marginal revenue intersect, that is the point where the company earns zero profit. Similarly in the case of when the total revenue and total cost are equal, the profit is zero, I am agreeing that when the total revenue and total cost of the firm are equal then there is no profit and no loss to the company (Png, 2013).

The above diagram is showing that when the total revenue equal total cost of the company, it generates zero profit to the company. It is because the when the total sales revenue of the company equals to the total cost of production or cost of goods sold then it shows zero difference (Png, 2013). The cost and income are equal means there is no profit or no loss.

References:

Png, I. (2013). Managerial economics. UK: Routledge.

Rifkin, J. (2014). The zero marginal cost society: The internet of things, the collaborative commons, and the eclipse of capitalism. USA: Palgrave Macmillan.

Boyes, W. (2011). Managerial economics: Markets and the firm. USA: Cengage Learning.

CCES (2015) Market mechanism: understating the options. Retrieved from https://www.c2es.org/publications/market-mechanisms-understanding-options 

Martin, R., De Preux, L. B., & Wagner, U. J. (2014). The impact of a carbon tax on manufacturing: Evidence from microdata. Journal of Public Economics, 117, 1-14.

McEachern, W. A. (2011). Economics: A contemporary introduction. USA: Cengage Learning.

Nikaido, H. (2015). Monopolistic Competition and Effective Demand.(PSME-6). USA: Princeton University Press.

Hirschey, M. (2016). Managerial economics. USA: Cengage Learning.

Lee, C. Y., & Johnson, A. L. (2015). Measuring efficiency in imperfectly competitive markets: An example of rational inefficiency. Journal of Optimization Theory and Applications, 164(2), 702-722.

IE, (2017) Monopoly market structure. Retrieved from https://www.intelligenteconomist.com/monopoly-market-structure/ 

Epifani, P., & Gancia, G. (2011). Trade, markup heterogeneity and misallocations. Journal of International Economics, 83(1), 1-13.