Principles Economics Pearson Higher Sloman

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A monopoly that is different from perfectly competitive firms is able to influence the price of good and are able to generate positive economic profit. A perfectly competitive firm faces a single market price that is represented by the horizontal demand or marginal revenue curve. As a monopoly consists of the market to itself, it faces the downward sloping market demand curve (Taussig, 2013). An important consequence in the present case is that typically a monopoly chooses higher price and lower quantity of output than a price a taking company.

For instance the market demand in 2199 for plutonium engine is Q=30-2. This represents that when the price is one, the market demand will be 28 plutonium engines, simultaneously when the price is two the market demand for plutonium engine will be 26 and so on. As evident that all the firms maximize profit by setting marginal cost equivalent to the marginal revenue. Graphically, the company can find the monopoly price output and profit by examining the demand, marginal cost and marginal revenue curves. Therefore, Future Unlimited Corporations can set the output at the level where the marginal cost is equal to the marginal revenue. Price is however, determined by the demand for the plutonium engine when the quantity is produced. As the monopoly’s marginal revenue is always underneath the demand curve and the price will be always above the marginal cost at equilibrium, which ultimately provides the firm with an economic profit (Sloman et al., 2016). Therefore, monopolies can influence the price of a good by altering the level of output that ultimately allows them to make an economic profit.

Figure 1: Figure illustrating Monopoly Pricing

(Source: Taussig, 2013)

For example, electricity Supply Company a large part of cost is required for investment. This creates a barrier to entry since it reduces the possibility of new entrants into the industry irrespective of the earnings of the company. Therefore, such kind of monopolies can influence the price of the electricity supply by altering the level of output that ultimately allows them to make an economic profit.

Future unlimited corporation constitutes of the entire industry in monopoly. Hence, there is no such requirement for any kind of separate analysis of equilibrium of organization and industry in case of the monopoly. The main objective of the monopolist is to generate maximum profit as of the producer in the perfect competition. Different from the perfect competition, the equilibrium under the monopoly can be attained at the point where the profit is maximum. Therefore, to undertake the decision of price and output Future Unlimited Corporation will go for producing additional units of output as long as the marginal revenue of the company is greater than the Marginal cost to earn maximum profit.

Figure 2: Figure illustrating monopoly equilibrium

(Source: Sloman et al., 2013)

Tariff and import quota

Tariff and quota both are protectionists’ measure devised by the government of a nation to prevent free trade. These measures aimed at restricting the flow of foreign goods in the nation either through increasing its price or through restricting quantity of imported goods. To increase the price of import a tax is imposed on the imported goods. In order to consume that good consumer has to pay a price inclusive of the tax rate (Case et al., 2014). This is known as tariff. On the other hand in times of quantity restriction amount of imported goods are strictly restricted. The fixed amount is called quota.

Tariff and quota both create distortion in terms of reducing consumer surplus as compared to free trade. Still tariff is more preferable than quota. In tariff foreign goods can enter in the nation as before as there is no entry restriction. Consumers are in a position to consume the good by paying a high price. On the other hand in times of quota there is no scope to consume the good beyond the fixed amount. Moreover, tariff generates additional revenue for the government. Government can then spend this additional revenue for the well being of consumer. While in quota there is no such possibility of revenue generation.

The impacts of tariff and import quota are described in the following diagrams

Figure 3: Figure showing effect of tariff

(Source: Case et al., 2014)

In figure 3, it is shown that imposition of tariff rise the price from P world to P tariff. Tax revenues generated is clearly visible from the diagram

Figure 4: effect of import quota

(Source: Stiglitz et al., 2013)

Imposition of quota restricts import quantity to Q2Q3. As a result, price increase but there is no areas of government revenues. There is only distortion from this policy.

For example, in 2011 U.S government had taken policy of imposing tariff on imported goods. With tariff government attained tariff revenue of amount $28.6 billion. The revenue would not be generated if government there adapted the policy of import quota.

Opportunity Cost

The opportunity cost of gloves is lower in Russia as ¼ < 4. On the other hand opportunity cost of Hats is lower in Panama as ½ < 2. Two countries should engage in trade if they have opportunity cost in two different items. Then, trade is beneficial for both the nation. Here, Russia has a comparative advantage in producing gloves as it has to sacrifice only ½ units of hats to produce one unit of hat as compared to 4 units of hat in Panama. Similar is the case for Panama while considering Hats production. Thus, it is beneficial for the countries to engage in free trade and in free trade Russia should export gloves and import hats while Panama should export hats and import gloves.

Example: In the following table production possibilities of textile and Books in UK and India are presented

From the table opportunity cost of textiles in UK is ¼ while in India it is 4/3. The opportunity cost is lower in UK. Thus, UK has a comparative advantage in UK. On the other hand, opportunity cost of books in India is 3/2 and in UK, it is 4. Thus, opportunity cost is lower in India in production of book.  Thus, India has comparative advantage in Book. In free trade situation, India exports book while UK exports textiles,

Reference List:

Case, K. E., Fair, R. C., & Oster, S. (2014). Principles of economics. Pearson Higher Ed.

Sloman, J., Norris, K., & Garrett, D. (2013). Principles of economics. Pearson Higher Education AU.

Stiglitz, J. E., Walsh, C. E., Gow, J., Guest, R., Richmond, W., & Tani, M. (2013). Principles of economics. John Wiley & Sons.

Taussig, F. W. (2013). Principles of economics (Vol. 2). Cosimo, Inc..