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Economics Final Project

Answer 1:

According to the economists, budget and indifference curves indicate how a consumer would

evaluate the superior value of one product over another. Budget curve indicates a relationship

between two or more products relative to opportunity costs at the consumer’s disposal. This

describes the value of each product relative to another shown on the other axis. In the figure

shown, it can be noted that a customer perceives the Quantity Y for product Y to be identical in

economic value as Quantity X for product X. This indicates a tradeoff between the two products

that are available to the end consumers. However, the key assumption in this case is that the

price and values of goods are changing constantly changing.

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The indifference curve consists of a series of curves representing bundled goods for which the

end consumer is different. A consumer is assumed to be happy to buy any combination of the

products X and Y on the curve. The combination can be termed as a basket of goods having

products with the same utility value.

Marginal Rate of substitution (MRS) is a term in economics that is used to describe the amount

of a product that a customer is willing to consumer relative to a newer product that is fulfills the

need equally. MRS is the slope of the indifference curve and it can be related to the slope of the

indifference line. In the budget line, the slope indicates the relative price of a product on the x

axis in terms of y axis and can be termed as Px/Py. In the following Figure, point A indicates that

MRS < Px/Py. At this time, the customer will consume more of product Y relative to X. At Point

B, MRS = Px/Py. This is the point B is the one where the Utility value of both the products

maximizes. This is also the point where the budget line and the indifference curves are tangent

indicating that the slopes are equal.

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The combination of the indifference curve and the budget line is also known as the budget

constraint.

Answer 2:

Deriving the Demand Curve:

In the Figure below, there are three budget constraints. Notice that as the price of the product X

falls, the consumer tends to buy more of product X. This graph is sufficient to derive the demand

curve. A downward sloping demand curve indicates that as the price of good X decreases, the

customer will be motivated to buy the larger quantities of product thus dictating the budget curve

towards the right.

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Answer 3:

Profit maximization is a process through which, a firm uses a combination of price, input and

output to maximize its profit. In a perfect competition, the profit is maximized when Marginal

Revenue becomes equal to the Marginal Cost. Marginal cost can be described as the ratio of the

change in cost relative to the quantity produced. In a monopolistic environment, the marginal

revenue of the produce is high at low production levels while keeping in view the upward
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sloping cost curve. Hence, the firm can maximize profit by increasing output during this stage.

However, at larger production levels, the costs of production are high, the firm can maximize its

profit by reducing the amount of goods produced.

Answer 5:

The point where marginal cost becomes equal to the marginal revenue can be termed as the

largest net benefit value that is available to the firm for a product. Any additional revenue will

reduce the net benefit available to the firm because of the costs tend to increase at a rate that is

much higher than at the equilibrium point or before it. The point where MB = MC is the largest

Net Benefit available for a given product. Notice that the maximum economic value in the graph

below can be determined by calculating the farthest distance from the Total Revenue and Cost

Curves.
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Answer 6:

The Supply curve shows a relationship between the quantity that a firm is willing to supply in the

market, and the market price. There is a need to know the optimal quantity supplied for each

market price. The best-case scenario for the firm is to supply the number of units that would

allow the firm to not only recover the variable costs but also the fixed costs.
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In the figure above, point P0 is the point where the variable cost equals the price of the product.

This is the shut down point, as the firm can maximize its profits by not producing anything . As

the price increases, the firm increases the quantity supplied. The variable costs increase with

time. There comes a point where the variable costs start to decline due to the economies of scale.

This is indicated as point D in the figure above. Point D is the one where the firm will not only

be able to recover its variable costs but also a portion of its fixed costs.
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Answer 7:

Perfect competition implies no information asymmetry amongst the manufacturing firms and the

consumers. Hence, they can make rational decisions to maximize their respective self-interest.

No single firm has any influence or authority over the market price or conditions. The

Government cannot intervene to forcefully change the market dynamics except only to maximize

the market competitiveness. In a perfect competition, a single firm takes its price from the

industry. The marginal cost initially decreases due to the economies of scale but then starts to

increase as the need of expansion arises when the firm is working at 100% capacity utilization.

The price of the product is the point where the demand of the product equals the supply. It is

mandatory for every firm to charge their product at this price and not deviate from it for self

interest or any other reason. The graph shows that the firms in perfectly competitive market

scenario can earn profits as long as the revenues remain greater than the costs. This is due to the

fact that at the start, there are lesser firms in the competitive market that tend to have a

competitive advantage by being more cost efficient by using the economies of scale. Due this

reason, the firms earn super normal profits, and other firms get encouraged to join the

competitive market. As more firms join the market, the supply of the product increase (moves

towards the right) which leads to a reduction in price of the product. When the price drops to the

point where the super-normal profit becomes zero. This is the point where firm earns normal

profit that is sufficient to keep maintain the costs. If the price falls further, the firm shall not be

able to cope with the losses and leave the market.

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Answer 8:

In the monopoly structure, a single firm is a price maker. The graph shows a demand curve with

a downward slope. The firm makes a produce that has unique characteristics relative to other

products in the market and can serve the entire market on its own. The firm can charge a higher

or lower price at its own will. The industrial price, however, can become a benchmark for the

firm. The firm has a tendency to reduce the price of the product to the point L and not let any

new firm enter the market. In contrast, a natural monopoly will have a marginal cost that is

constant or declining, and an average total cost that drops as the quantity of output increases.
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The economic rationale of the firm in a monopoly structure is the same as the one operating in a

perfect competition. However, in a monopoly, the firm can change the price for its benefit. If the

production gets reduced due to some reason, the firm can charge a higher price. By the

assumptions of increasing marginal costs, exogenous inputs' prices, and control concentrated on

a single agent or entrepreneur, the optimal decision is to equate the marginal cost and marginal

revenue of production.

Answer 9

Monopoly and perfect competition are completely different structures although the economic

rationale of the firms operating in both might be the same since firms in both have to face the

cost and production restraints and maximize their profit. The Barriers to entry in a perfect

competition are none relative to monopoly structure where there are higher barriers to entry. In a
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perfect Competition, there are many suppliers and consumers relative to a monopoly structure

where there is only a single supplier and many consumers.

The decision to exit the market is based on the same rationale. The key difference is that in a

perfectly competitive market, price is set based on the marginal cost so that the profit earned is

zero. In a monopoly, price is set above a marginal cost and firm can earn a positive profit. The

firm can also reduce the price if it wants to put a restraint in the barriers of entry.

However, there are several key distinctions. In a perfectly competitive market, price equals

marginal cost and firms earn an economic profit of zero. In a monopoly, the price is set above

marginal cost and the firm earns a positive economic profit. Perfect competition produces an

equilibrium in which the price and quantity of a good is economically efficient. Monopolies

produce an equilibrium at which the price of a good is higher, and the quantity lower, than is

economically efficient. For this reason, governments often seek to regulate monopolies and

encourage increased competition.