微观经济学outcome1

Economic 1: Micro and Macro Theory and Application

I. Introduction:

II. Body:

Q1. The mobile phone market is believed to be an oligopoly- what are two characteristics of this market structure?

Oligopoly means that there are only a few sellers of a particular commodity. There are quite a number of oligopolies in the UK. E.g. banking, supermarkets, detergent production etc.

Characteristics ：

1．High degree of industrial concentrations

2．Goods or services may be very similar

Q2 Illustrate with an appropriate diagram and describe the price and output behavior that may be seen in an oligopolistic market structure.

An oligopoly can reach the scale economic and down the cost which the market needs. It is a market dominated by a few producers, each of which has control over the market. It is an industry where there is a high level of market concentration. Assuming that firms are attempting to maintain a high level of profits and their market share it may be the case that:

A) The competitors will not follow a price increase by one company. At prices higher than P1 demand is elastic. Rising prices will likely cause loss of market shares. It can also lead to a fall in the total revenue of the firm.

B) The competitors prefer to meet a price fall follow other firms to avoid loss of market share. At prices lower than P1 however the fear is that cutting prices will force rivals to follow suit and there will be little gain in the way of additional sales. Cutting prices when demand is inelastic also leads to a fall in total revenue with little or no effect on market share. If so, the relative price change is much smaller and demand would be inelastic in respect of the price change.

The kink in the demand curve at price P and output Q means that there is a discontinuity in the firm's marginal revenue curve.

Q3. Choose another market structure and suggest two characteristic of this market structure

Another market structure is Perfect Competition.

Perfect competition is a competitive system in which a large number of firms produce a homogenous product for a large number of buyers. They are price-takers and sell as much of the product as possible at the market price Characteristics:

1.Freedom of entry and exit to the market for both buyers and sellers

2.It must be possible to buy or sell any amount of the commodity at the market

price.

Q4. For your chosen market structure and with the aid of an appropriate diagram describe the price and output behavior in it.

Assumptions behind a Perfectly Competitive Market

As we all know, each individual firm is assumed to be a price taker. Also, consumers are well-know the prices all sellers in the market charge. They may not prefer to buy a same product in a higher price. Because of the characteristics of this form of market no one can gain an advantage and firm can sell their goods up to point at which they have maximized their profit.

From the short run view of the company, we can see the explanation of the diagram as follow:

Price P1 is the market price. Because the market price is constant for each unit sold, the AR curve also becomes the Marginal Revenue curve. If AR= MR, Price A firm maximizes profits when marginal revenue = marginal cost

The profit-maximizing output is Q1. The firm sells Q1 at price P1. Because the ruling market price P1 is greater than average total cost.

Q5. What two roles would profit have played in attracting Richard Branson to the mobile telephone market?

1. Profit is the reward to entrepreneurs

2. Profit is the incentive that encourages them to take risks

3. Profit is a signal to enter a market

Q6. Analyze two other alternatives to profit maximization as a goal of the firm Companies should consider other factors as follow:

1. Satisfying Behaviors

It is based on the fact that achieving specific targets with regard to sale, profit and market share will result in “satisfied behaviors” by those who own and those who run firms.

2. Individual motives:

Human beings are complex and may have conflicting motives, both as individuals and in combination as formal or informal groups. One growing area in most countries is the environmental or “green” aspect. Boardroo m battles are frequently identified in Financial Papers or Magazines. They may end up in sackings, resignations or votes on issues, which may have considerable effect on how a firm operates.

Q7. Discuss what influences the shape of the total cost, average cost and marginal cost curves in the short run in a firm.

Total cost is the sum of fixed and variable costs. If nothing is being produced then fixed costs will be total cost. As production commences and variable costs rise so

will Total Cost. Total cost is a upward trend.

The diagram above shows the effect of marginal cost on average total cost. The marginal cost curve always cuts the average cost curve at its lowest point, like Q1. When MC ＜ATC, ATC falls. When MC ＞ATC, the ATC will be increasing.

In the short run, economists define this as that period of time during which at least one of the factors of production is fixed in supply. As long as one of the production factors remains fixed in supply, a firm will only be able to increase output with a falling cost over a limited range of outputs. This is the Law of Diminishing Returns. This occurs because the factor, which is fixed, will reach a maximum output and can not be increased. Adding to the other factors will not increase output but will reduce productivity because effectively more resources will be used to produce either the same quantity or a very small increase.

III. Conclusion:

IV. References: