ECO 201 Project Template

Memo
To: My Business Partner
From:
Date: 03/26/2021
Re: Microeconomics Simulations

Introduction

This memorandum report identifies and explains key microeconomic principles using a set of simulation games. The outcome of these games illustrate how
microeconomic principles can be applied within real-life situations to help us make better business decisions. This report is a summary of the simulations I played
and their results, which include the key takeaways and their significance, for your review and reference. It is divided into the following sections:

1. Comparative Advantage
2. Competitive Markets and Externalities
3. Production, Entry, and Exit
4. Market Structures
5. Conclusions
6. References
Comparative Advantage
 These simulations show how individuals evaluate opportunity cost by comparing trade with no trade. As seen, I was able to produce more combos with
trade. This is because I could trade with someone who was better at producing burgers than I was, so in this case I would produce more fries and trade my
surplus of fries for burgers to come out with more combos in the end. A production possibility frontier model helps see what would work best for the business
and to make the best decisions on what and how much to produce. This is because a PPF shows various combinations of the amounts of two goods which can be
produced showing all the possible options of outputs, making it a great tool for businesses to implement in their decisions.
 Comparative advantage occurs when a business can produce a particular good or service at a lower opportunity cost than others. This would impact a
firm’s decision when trading because it would look at who can produce what cheaper than them. Why would they make a part of their product or service when
someone else can produce it for a fraction of the cost. A businesses decision could change its PPF. This is because it can shift due to changes in the number of
products available, advancements in technology or even changes in labor cost.

Competitive Markets and Externalities

[Replace this area with the Supply and Demand chart.]

Figure 2.1 (Cannot find)

It is thought that if a market is left alone it will by itself reach and settle at equilibrium. Governments policies can intervene with supply and demand
equilibrium. There are three common ways, price ceilings and floors. As well as taxes. Price ceilings and floors are what they sound like, if a government sets a
price ceiling the product or service cannot exceed that point, if a price floor is set that becomes the minimum price. This can cause issues because equilibrium
can fall above or below these set prices and cause disruptions with the supply and demand either on the seller’s side or the consumers. Then there are taxes.
Taxes can become a burden on both supplier and consumer equally or one can have a heavier burden.

The four determinants of price elasticity demand are availability of close substitutes, necessities or luxuries, definition of the market and time horizon. If
a product has close substitutes it will be more elastic do to the fact that there are more products out there to choose from. Necessities are more inelastic
because it’s something that someone will always need to buy while luxuries are more elastic. This is because if people have less income, they'll still buy the
necessities and cut back on the luxuries. What market it is in also influences a products elasticity. A wide or broad market will be more elastic while a narrow
market will be more inelastic meaning if the product falls in a large category there is more substitutes while a narrow market would have less. Finally, the time
horizon, goods will be more elastic over a longer period rather than a short time. This is because over time people will make changes in their life to accommodate
prices that may rise to help offset that increase.

Price elasticity is the changes in the price for goods and the demand for those goods relate. When demand is price inelastic, total revenue moves in the
direction of a price change. When demand is unit price elastic, total revenue does not change in response to a price change. When demand is price elastic, total
revenue moves in the direction of a quantity change. As can be seen in the simulation the price is elastic. It gradually moved up but there higher the production
cost become the sold price slowly started getting lesser meaning it was getting closer to equilibrium.

Policy market interventions can cause consumer or producer surpluses. For example, if a price ceiling is set above a free-market equilibrium price and it
reaches that. Producers would have a surplus; this is because consumers would either buy less due to the price increase or find substitutes. While if a price
ceiling is set below equilibrium there would be a consumer surplus. Producers would then be making less profit for the more they produce causing them to lower
production and make the product less available, while the demand is still there from consumers.
 Production, Entry, and Exit

Figure 3.1

When it comes to an owner deciding to enter a market, they look at the cost of operation and the potential profit. If marginal costs and fixed costs would
cause a very small profit or even losses a business would not want to enter the market. For example, from the simulation I knew how much it would cost me to
even drive that day and if I knew that it was not worth operating, I would skip that day. As you can see, I drove every day but the first day I lost profit and should
have decided to not drive.

Marginal costs are also something that needs to be watched and helps set the price. Usually, the more you produce the higher marginal costs becomes. A
business owner wants to find the amount to produce with marginal costs the results in the most profit. Total profit is maximized where marginal revenue equals
marginal cost. As you can see in the graph below.
 In the short run fixed costs do not affect much since a business will not be able to expand that much in size and could only add or remove people from its
current operation. Being truly fixed in the short run. Though, in the long run fixed can become variable. Over time a business can expand or reduce its size,
opening more locations or closing some. So, if my shovel company wants to produce more shovels in the short run it can only add more people, this would
increase my marginal cost and I would start making less profit. In the long run I could open a new factory that more people could effectively work in, producing
more and keeping marginal costs close to where they were before.

Market Structures

Market Number of Type of Price Price Freedom of Short-run Long-run Industry Examples
Structure Firms Product Sold Taker? Formula Entry? Profit? Profit?
Perfect Infinite Identical Yes P=MC Yes Yes No Agriculture
Competition Foreign exchange markets
Monopolistic Many Differentiated No P>MC Yes Yes Yes Restaurants
Competition Video Game
Clothing
Monopolies One Unique No P>MC No Yes Yes Railways
Some Social media platforms
Oligopolies Few dominant firms
Differentiated or Identical
No P>MC No Yes Yes steel manufacturing
oil
 Table 4.1

Inefficiencies from a monopolies stem from the fact that only one entity has control of a product or resource. This means there is no competition for
them, and they can charge more. Since a monopoly may charge prices above marginal cost not all consumers value it at that price and choose not to buy, making
the quantity produced and sold below the socially efficient level. This can be seen as deadweight loss.

A monopolistic competition is like a monopoly but there are other products like it just not exact and do differ to a degree. Such as video game companies,
they all produce video games, but they are all different in a way. Monopolistic competition still follows a monopolist’s rule to make the most profit, they produce
the quantity at which marginal revenue equals marginal cost and then uses its demand curve to find the price at which it can sell that quantity. This also can
create deadweight loss.

An oligopolistic market has a small group of sellers. A key feature would be tension between cooperation and self-interest. They are best off when they
act together as monopolies. Although, since oligopolies act in their own self-interest it is hard for groups to keep working together. Most would like to maximize
profits and might break deals to produce a certain number of products with others then decide to produce more to increase profits. Working together to set
price and production restrictions can be a criminal act, which furthers difficulties with corporations past the prisoner’s dilemma.

The four market structures make profits in different ways. The most different being perfect competition. In this market is the price taker and has many
competing firms with identical profits. Do to this they make profit when price equals marginal cost. If a firm wants to charge more the consumer will simply
decide to buy from another firm. The best way to tell the difference between a firm in an oligopolistic market from one in a monopolistic competitive market is to
look at the number of firms in the market. An oligopolistic market has a small number of firms that can control the market. While in a monopolistic market there
is a larger number of firms that have similar products. Due to them not having identical products they can set their prices more freely. While a monopoly is the
sole produce of a product and sets the price where it feels it is most profitable.
Conclusions
Microeconomics is very important to understand how businesses in different markets operate and decide how and what to sell. The Ten Principles of Economics
lays the groundwork for understanding of what economics is all about. Learning how profit related to fixed costs and marginal costs give a basic understanding on
how to make a business profitable and weather to enter or exit a market. While understanding the different markets really opens your eyes to all economics has
to offer. I think the most import thing to keep in mind from microeconomics when it comes to your run of the mill business is to remember what people are
willing to pay. If your prices are to high consumers will simply go elsewhere if you charge to little you will not make profit and must exit the market permanently.
Though, learning about marketing and name brand vs generic was interesting. They are basically the same product, but name brands can have higher prices.
Microeconomics showed me why this is. Since consumers see the advertisements as an investment for the name brands and they are willing to put millions of
dollars into them as a sign that they will be consistent with the product and have a better quality. Overall microeconomics was a interesting course and I can truly
say I have learned a lot more than I expected that I can bring into my daily life.

References

Mankiw, N. G. (2021). Principles of microeconomics (#9 edition). Cengage.

White, M. (n.d.). Oligopoly examples, meaning and characteristics. Retrieved April 15, 2021, from https://examples.yourdictionary.com/oligopoly-examples.html

Monopolistic competition: Economics Online: Economics Online. Economics Online | Economics Online. (2020, February 9).
https://www.economicsonline.co.uk/Business_economics/Monopolistic_competition.html.