Economics: Micro

andMacro Theory
and
Application
J5AX 48

Class: Management
Major:
Tutor: SuRongjia
Student: Li Jiayi
Date: 2025.5.13
 Statement of Original Work

I have read the Code of Student Conduct and Academic

Responsibility as described in the Student Handbook of

Sichuan University. I declare that the materials contained

in this thesis are my own work. Where the works of others

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(such as books, articles, or non-book materials in the form

of video and audio recordings, electronic publications, and

the internet) due acknowledgements according to

appropriate academic conventions have been given. I also

hereby declare that the materials contained in this thesis

have not been published before or presented for another

program or degree in any university. In addition, I took

reasonable care to ensure that the work is original, and, to

the best of my knowledge, does not breach copyright law,

and has not been taken from other sources except where

such work has been cited and acknowledged within the

text.

Name:
Date:
 Content

Q1: Explain the impact the law of diminishing marginal returns has
on both marginal cost and average total
cost........................................................................P1

Q2: With the aid of a diagram explain the long run average cost
curve and the influences upon
it.......................................................................................................P
2

Q3: Explain the concept of profit maximization where marginal cost

equals marginal
revenue...............................................................................................
........P3

Q4: Making references to the UK energy market for electricity and

gas: (a) Describe the characteristics of oligopoly. (b) With referance
to the theory of oligopoly explain the price and output behaviour of
the large UK energy
firms....................................................................................................
........................P4

Q5: Explain why firms cannot make supemornal/abnormal profits in

the long run in a perfectly competitive market. Your response should
make reference to the characteristics of a perfectly competitive
market and contain one or more diagrams to support your
explanation.....................................................................P5

Q6: There are many alternative theories to profit maximization,

explain one such
theory...................................................................................................
.......................P7

A List of

Reference.............................................................................

....P8
Question 1:Explain the impact of the principle of diminishing
marginal returns on the average total cost and marginal
cost.
(1) Define of DMR: As the marginal product grows with the input, each time an input
is added, the increased income will decreases (Mankiw, 2012).
(2) Explanation: When the number of workers hired is smaller, they can easily use the
equipment, but when the number of hired workers increases, they will use on device
for more than one person, and the workers’ workplaces will become crowded, and as
the number of workers increases, the additional contribution of each new worker to
the total output will become less and less (Mankiw, 2012).
(3) Define of ATC:
Average total cost, total cost divided by the cost per unit of product for the number of
outputs(Mankiw, 2012).
(4) Define of MC:
Marginal cost, the rise in the total cost because the supererogatory units of production,
the marginal cost take into account the last product(Mankiw, 2012).
(5) Describe MC shape and the impact of DMR on it: Without the effective use of
fixed inputs, companies will increase the number of workers in order to be able to use
resources efficiently and improve productivity. Firms increase their variable inputs at
the same time as they increase their fixed inputs, which leads to an increase in
marginal returns. When the marginal benefits increases, the average cost decreases
initially. But sa more and more variable inputs increase, resources from fixed inputs
are overused. In addition, the number of workers, which in turn reduces the
contribution to total output, reduces the marginal output, and ultimately leads to an
increase in average costs. Initially, the marginal increase in production had an effect
on production, but after that the marginal gains were slowly decreasing. The MC
decreases and then increases as the yield increases, and a U-shaped curve is formed
(Mankiw, 2012).
(6) Describe ATC shape and the impact of DMR on it: At the beginning of production,
the marginal benefit incrreases, and the efficiency also increases, resulting in a
relatively low variable cost with more output, and then the marginal cost reflects the
cost of producing the next unit, due to the increase in the marginal benefit, the
efficiency of the enterprise will be more effective, the ATC reflects the fixed cost and
the variable cost, MC is less than ATC, and the average cost will decrease every time
one unit of output is added. The MC curve intersects the ATC curve at the lowest
point, and the intersection of the two curves represents the lowest point of the ATC.
With the continuous occurrence of production, the marginal return is constantly
decreasing, MC increases, and over time, MC is greater than ATC, and each increase
of one unit will promote ATC to rise, and finally form an ATC curve (Mankiw, 2012).

Question 2: With the aids of a diagram explain the influence

sand the long term average cost curve upon it.

1
(1) Short run that is as long as one factor of production remains
unchanged, it is fixed. Long run means that all factors of production
are variable.
(2)

The LAC is created by the lowest points n all SRAC curves. Known as
the “envelope” as it includes all SRAC curves.
(3) When a company grows, it will shift from one SRAC curve to
another larger scale of production. Reduces costs due to
economices of scale. This is due to higher production level allow
specialization among workers, which allow every last workers to
become better at a particular assignment. Bulk disecounts from
suppliers. Share operations from other similar firms. When a firm
reaches optimalize minimum point on LRAC cost reduction stops.
Further growth leads to diseconomices of scale. This is because in
the case of economies of scale, organizations may arise due to
inherent coordination issues within it. The local labor supply is
constrained by large-scale production, which ultimately leads to
higher labor costs, and at the same time, average costs also
increase. And demand of raw materials are rise. What’s more the
land expansion become lack, and the transport cost also rise
(Mankiw,2012).

Question 3: Explain the concept of profit maximization

where marginal cost equals marginal revenue.
(1) The condition for the company to maximize profits is that MR is
equal to MC (Mankiw, 2012).
(2) Assuming that MR is less than MC , the firm should drop its
output. Provided that MR is greater than MC, the firm should rise its
output. At the profit-maximization level of output, MR and MC are
exactly equal (Mankiw, 2012).
(3)

2
(4) Due to a competitive company is a price taker, its MR equals the
market price. For any given price, the competitive company’s profit-
maximizing quantitty of output is found by looking at the interestion
of the price with the MC curve (Mankiw, 2012).
(5) A monopoly maximizea profit by choosing the quantity at which
MR equals MC (point A). It then uses the demand curve to find the
price that will attract consumers to buy that quantity (point B)
(Mankiw, 2012).

(6) In a short period of time,

in yhe monopolistic
competitive market, each enterprise is similar to the monopoly in
many ways, because its products are unique and different from
other enterprises, so it will have a downward demand curve.
Therefore, monopolistic competitive enterprises follow the principle
of profit maximization of monopolies, that is, they choosen an
output level whose MR is equal to the MC, and use their demand
curves to determine the selling price that can be sold at that output
level. In a long-term equilibrium state, when a firm is profitable, new
company will have an inspire enter the market (Mankiw, 2012).

3
 (7) O
n

account of the oligopoly market is dominated by a few companies,

the decision to maximize profits will be influenced by other
competitors, and the decision will be more complicated
(Mankiw,2012).

Question 4: Making references to the UK energy market

(electricity and gas): Describe the feature of oligopoly. With
referance to the theory of oligopoly explain the output
behaviour and price of the big UK energy firms.
(1) Define of oligopoly:
An oligopoly is a market structure in which a little firms control the
market, limit output or fix price, and no one firm can prevent other
firms from influencing the market (Inestopedia Team, 2024).
(2) Non-price Competition: The first is to attract customers, the
second is through non-price factors, and the third is to improve
quality, create a brand, and differentiate products. High Entry
Barriers: With huge start-up capital, legal constraints, and
economies of scale, it is often difficult for new business to enter the
market. Economies of Scale: Which leads to an increase in
production when the average cost is lower.
(2)

4
Company encount a kinkend demand curve. At P greater than
market price, demand is elastic. When P rise it lead to significant
loss of market share, at the same time less than market price,
demand is inelastic. However, P drop will lead rivals to cut prices
too, and little or no gain in sales, no fierce price competition, price
becomes sticky, firms rely on non-price competition.
(3) Cost-push price increases cause companies to be "forced" to
raise prices en masse. And the cost of switching is high, and there
will be no immediate response. Ofgem adjusts the price cap every
six months, and the price cap adjustment results in price increases.
"Price leadership" in an oligopoly market.

Question 5: Explain why company cannot make

abnormal/supemornalprofits in the long term in a perfectly
competitive market.
(1) There are many parties to the market, and in the meantime, the
goods offered by the sellers are almost the same. Both parties in a
competitive market have to learn to accept the price determined by
the market, and the rights that are not offered are always forced to
accept, so they are called price takers. Additionally, companies will
be more free to enter and exit the market(Mankiw, 2012).
(2) Normal Profits: Reflect the oppotunity cost of using reasources in
a business. Are included in the ATC. If P is equal to ATC, then the
firm is making normal profits. This is the minimum profits required
to keep a company in the industry. Supernormal Profits: When P is
greater than ATC. The firm is making supernormal profits. Which are
profits above the normal profit (Mankiw, 2012).
(3) Perfectly competitively company can freely exit or enter the
market. Provided that there are already companies in the market
that are profitable, then other new companies will be more
motivated to enter the market.This enter will amplify a plethora of

5
firms, increse the quantity of the good supplied, and prices and
profits have been reduced.On the contrary, assuming that
enterprises in the market are suffering from marketing losses, So
other existing companies in the market saw this situation and chose
to exit the market. The lots of companies in the market has
decreased due to their withdrawal. The supply of goods has been
reduced, and at the same time, price and profits have been forced
to rise. At end of this entry and exitprocess, firms that remain in the
market must be making zero economic ptofit in the long-term
equilibrium(Mankiw, 2012).
(4) In the short term when demand increase from D 1 to D2. The
equilibrium goes from point A to point B, price rises from P 1 to P2,
and the quantity sold in the market increase from Q 1 to Q2. Because
price now exceeds ATC, firm make profits, which over taime
encourage new firms to enter the market. This entry shifits the
short-run supply curve to the right from S 1 to S2, as view in panel (c).
Price has returned to P1 but the quantity sold has increased to Q 3.
Profits are again zero, price is
back to the minimum of ATC, so perfectly competitively firms not
gain supernormal profits in the long term (Mankiw, 2012).

Question 6: There are a lot of alternative theory to profit

max, explain one such theory.
Satisficing behavior theory:

6
(1) The behavioral satisfaction theory was developed by Nobel
laureate Herbert A. Simon in 1956. It refers to individuals who are
satisfied with the lowest standards of acceptable solutions, but do
not strive for optimal solutions.The main goal of a company is not to
maximize profits, but to make a satisfying or satisfying profit.
Constraints: Its time is limited, decisions need to be completed
within a certain period of time, the information is incomplete, it is
difficult to obtain all the information, and the cognition has
limitations. Its optimal solution is smaller than its satisfactory
solution, and it has always been good enough that there is no
optimal choice.
(2) Application: It is used in many areas, such as the decision-
making process of an organization that involves intelligently
collecting facts and values and making plans, and public policy and
government can provide a lots of options in policy make (Daniel,
2019).
(3) Advantage: It can improve the efficiency of the use of time and
resources, and can save time, so it should be able to accept the
minimum standard, so there is no need to choose from a large
amount of information.
(4) Disadvantage: Scholars have different definitions of satisfying
this concept, and there is a lack of uniformity (Yourarticlelibrary,
2025).

A List of Reference

7
Inestopedia Team (2024) Oligopoly: Meaning and Characteristics in a
Market. Available at:
https://www.investopedia.com/terms/o/oligopoly.asp(Accessed:
7.5.2025)

Mankiw,N.G.(2012). Principles of economics (6 th ed.). Mason, OH:

South- Western Cengage Learning.

Yourarticlelibrary (2025) Simon’s Satisficing Theory (with Criticisms)

Behavioural Theories. Available at:

https://www.yourarticlelibrary.com/economics/simons-satisficing-
theory-with-criticisms-behavioural-theories/28984 (Accessed:
8.5.2025)