Question

Why do we, as consumers, prefer the prices found in competitive markets? How are the prices in perfectly competitive markets determined? Explain,

Which of the four market structures that we covered is most profitable for the firm? Is this the best market structure for consumers? Why or why not? Explain.

We've made a pretty big deal about the differences between fixed and variable costs. Why does variable cost change as output changes? From your perspective as a manager, why is this important? Explain.

Answer 1

Prices in perfectly competitive markets are determined by purely supply and demand. There are no transaction costs. Consumers prefer the prices found in competitive markets because it maximized consumer satisfaction. The price in a competitive market equals the consumer's marginal utility, and it also equals the marginal cost of the good. Overall consumer satisfaction is maximized because goods are distributed among consumers according to their demand and utility.

The monopoly market structure is most profitable for the firm. This is not the best market structure for consumers. This is because the price is not determined purely by supply and demand. There is a deadweight loss (loss to society) which is a loss to both consumers and producers.

Variable costs are direct costs that vary directly and proportionately with the level of output. For example, raw material and direct labour. They are not incurred if there is no output. From a manager's perspective, variable costs are important to determine the contribution per unit of output, marginal cost of output and the break even level of output. It is also important for pricing decisions.