Scribd
Upload
42 views5 pages

Economic

The document discusses three key concepts: 1) Diminishing returns, which states that adding more of a variable input to a fixed input will eventually result in decreasing marginal returns. 2) The marginal cost curve of a firm, which represents its supply curve. The rising portion of the MC curve indicates the firm's willingness to supply output at different price levels. 3) Four different market structures - perfect competition, monopoly, monopolistic competition, and oligopoly - and how they differ in terms of factors like market power, production levels, and prices.

Uploaded by

Ghulam Awais Saeed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
42 views5 pages

Economic

The document discusses three key concepts: 1) Diminishing returns, which states that adding more of a variable input to a fixed input will eventually result in decreasing marginal returns. 2) The marginal cost curve of a firm, which represents its supply curve. The rising portion of the MC curve indicates the firm's willingness to supply output at different price levels. 3) Four different market structures - perfect competition, monopoly, monopolistic competition, and oligopoly - and how they differ in terms of factors like market power, production levels, and prices.

Uploaded by

Ghulam Awais Saeed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 5

Q1a.

Diminishing returns, also known as the law of diminishing


marginal returns, is an economic concept that states that as additional
units of a variable input are added to a fixed input, the marginal
product of the variable input will eventually decrease. In simpler terms,
it means that after a certain point, the increase in output resulting
from adding more units of a specific input will start to diminish.

b. Yes, the table indicates a situation of diminishing returns. In the


table, as more units of labor are employed, the total output initially
increases (from 0 to 5), then increases at a decreasing rate (from 5 to
9), and finally reaches a point where it starts to increase at an even
slower rate (from 9 to 12, 14, and 15). This pattern suggests that the
additional units of labor are becoming less and less productive as
more of them are added, which is consistent with the concept of
diminishing returns.

Q5.
The marginal cost (MC) of a firm is the additional cost incurred by the
firm for producing one more unit of output. It represents the change
in total cost resulting from a change in output. The supply curve of a
firm, on the other hand, represents the relationship between the price
of a good and the quantity of that good the firm is willing and able to
produce and sell.

Graphically, the MC curve is typically upward-sloping, reflecting the


fact that as production increases, the firm incurs additional costs. The
theoretical reason behind this is the law of diminishing returns, which
states that as more units of a variable input (such as labor) are added
to a fixed input (such as capital), the additional output from each
additional unit of the variable input will eventually decrease. This leads
to higher costs per unit of output, resulting in the rising portion of the
MC curve.

To understand why the rising portion of the MC curve represents the


supply curve of a firm, we need to consider the profit-maximizing
behavior of the firm. The firm will continue to produce and sell output
as long as the price of the good is equal to or greater than the MC of
production. This is because producing an additional unit at a cost
lower than or equal to the price will contribute positively to the firm's
profits.

Thus, the rising portion of the MC curve represents the range of


output levels where the firm is willing to supply the good at a given
price. If the price is higher than the MC, the firm will produce and sell
more, resulting in an upward movement along the supply curve.
Conversely, if the price is lower than the MC, the firm will reduce
production or even shut down, leading to a decrease in supply.

In summary, the MC curve of a firm represents the supply curve


because it shows the relationship between the cost of production and
the quantity of output the firm is willing to supply at different prices.
The rising portion of the MC curve reflects the profit-maximizing
behavior of the firm and indicates the quantity of output the firm is
willing to supply at a given price.

Q6;
Perfectly Competitive Market Structure: In a perfectly competitive
market structure, there are numerous small firms that produce
homogeneous products. Key characteristics include ease of entry and
exit, perfect information, and no market power. Each firm is a price
taker, meaning it has no influence on the market price and must
accept it as given. In this market structure, total production is
determined by the aggregate supply of all firms in the industry. In the
long run, firms can only earn normal profits, resulting in an efficient
allocation of resources.

Monopoly: In a monopoly, there is a single firm that controls the entire


market. The firm has significant market power, allowing it to influence
the price. The firm can restrict output to increase prices and maximize
profits. As a result, total production is generally lower compared to
other market structures. The monopolistic firm charges a higher price
due to its market dominance and lack of close substitutes. Efficiency is
reduced in a monopoly due to higher prices and lower output levels.
The demand curve for a monopoly is downward sloping, indicating
less elasticity compared to perfectly competitive markets.

Monopolistic Competition: Monopolistic competition is characterized


by many firms selling differentiated products. Each firm has a degree
of market power, allowing it to have some influence over the price.
Total production varies across firms, but it is generally higher
compared to a monopoly. Prices in monopolistic competition tend to
be higher than in perfect competition but lower than in a monopoly.
Efficiency is reduced due to product differentiation and excess
capacity. The demand curve is relatively elastic but still downward
sloping, showing a moderate level of market power.

Oligopoly: Oligopoly consists of a few large firms dominating the


market. These firms have significant market power and can influence
prices. Total production in an oligopoly can vary, depending on the
strategic behavior of the firms involved. Prices can be high due to
limited competition and the potential for collusion. Efficiency may be
compromised due to barriers to entry, interdependence among firms,
and potential collusion. The shape of the demand curve depends on
the behavior of the firms, which can range from relatively elastic to
relatively inelastic.
Q4a. Based on the price elasticity of shoes being 0.7, a value less than
1, it suggests that shoes are inelastic goods, meaning a price cut may
not necessarily lead to a significant increase in revenue. Inelastic
goods have relatively low responsiveness to price changes. Therefore,
reducing prices may not result in a proportional increase in sales, and
it could potentially lead to a decrease in revenue if the price reduction
is not offset by a substantial increase in sales volume. The decision to
cut prices should consider other factors such as production costs,
competitors' pricing, and the overall market demand.

b. With an income elasticity of 0.9, a positive value greater than 1, it


indicates that shoes are income elastic goods. Therefore, a 10 percent
increase in incomes would be expected to result in a 9 percent
increase in the total quantity of shoes sold in the United States. This
suggests that as people's incomes rise, their demand for shoes is likely
to increase at a relatively higher rate, reflecting the income elasticity
coefficient.

Regarding the sales lost by the University Book Store (UBS) due to the
competition from the new bookstore offering a 20 percent lower price,
the cross-price elasticity of 1.5 indicates that UBS's sales would
decrease by approximately 30 percent (1.5 multiplied by the 20
percent price difference).

Q5a. If each firm cuts back on its labor force, the marginal product of
labor will decrease for all three firms. In the case of Firm A, which is
experiencing increasing returns, reducing the labor force will result in a
smaller workforce relative to the level of production, leading to a
decrease in productivity per worker. For Firm B, which is experiencing
diminishing returns, reducing the labor force will alleviate the
overcrowding of workers and improve productivity to some extent, but
the overall impact on the marginal product of labor will still be
negative. Firm C, which is already experiencing negative returns,
cutting back on the labor force will likely worsen the situation, as there
may not be enough workers to efficiently carry out production,
resulting in a further decline in marginal product.

b. If each firm adds to its labor force, the marginal product of labor will
initially increase and then eventually decrease for all three firms. When
additional workers are hired, the initial increase in the labor force leads
to a greater division of labor, specialization, and improved
coordination, resulting in a higher marginal product of labor. However,
as the labor force continues to grow, diminishing returns set in. The
new workers may experience diminishing marginal productivity due to
reduced access to resources, limited space, or coordination issues.
Therefore, while the marginal product of labor initially increases with
the addition of workers, it eventually starts to decline as the benefits
from specialization and coordination diminish

You might also like