Question

Answer the following. Justify your answer. (Can you please solve this simply or on paper simply? Thank you!)

a) What are the 4 features of perfect competition? Using these features, is the market for table salt perfect competition (or close to perfect competition)? Explain each point.

b) What 4 outcomes will a binding minimum wage have, and what 1 outcome has 2 possibilities.

c) Describe economies of scope and economies of experience. Use a house builder as an example.

d) When is a perfectly competitive firm in the short run? What 3 outcomes can a firm face in the short run, and what would be each result moving into the long run?

e) Why are economic profits of zero not a bad thing?

Answer 1

a.  4 features of perfect competition are:

The first condition is that the number of buyers and sellers must be so large that none of them individually is in a position to influence the price and output of the industry as a whole.

Each firm should produce and sell a homogeneous product so that no buyer has any preference for the product of any individual seller over others.

The firm should be free to enter or leave the firm.

Buyers and sellers must possess complete knowledge about the prices at which goods are being bought and sold.

Hence, market for table salt is close to perfect competition because the product is homogeneous, since the buyers and sellers are large for table salt, hence, no impact on price. the firms earn normal profit, hence no entry or exit, and all Buyers and sellers have complete knowledge.

b. 2 major outcomes of binding minimun wage are:

1 The Labour Market due to the minimum wage has an equilibrium wage. Equilibirium wage is a point where the demand and supply lines on the minimum wage graph intersect.

2 Labour market is inefficient due to minimum wage because a deadweight loss is present. This occurs because of a decrease in both the workers surplus and the company's surplus.

c. Economies of scope is an economic theory stating that the average total cost of production decreases as a result of increasing the number of different goods produced.

economies of experience is like experience curve. It shows with experience, productivity increases.

House builder - When we hire builder for a house, we all look for experienced builder. The longer a builder works, the more productive he/she is in that domain. This is economies of experience, because of the productivity enhancement an experienced peron brings to work. When he builds number of different houses, his average total cost of production decreases, because his fixed cost spreads across avrious projects, hence, economies of scope also exist.

d. A perfectly competitive firm is in short-run equilibrium when marginal revenue is same as marginal cost and price is same as marginal revenue because the price is fixed and constant.

Outcome 1: when P < ATC : Loss

Outcome 2: when P = AVC: indifferent between shutdown and produciton

Outcome 3: when P > ATC: Profit

In the long run, P = ATC and there is no profit no loss situation because firms who were in loss exit the industry whereas those earning profit who entered remain at zero profit.

e. A business will earn normal profit when its economic profit are zero, i.e. “zero economic profit.” Normal profit occurs at the point at which the resources available to the firm are being efficiently used and could not be put to better use elsewhere. It is often considered the minimum amount of earnings needed in order to justify an enterprise. that's why economic profits of zero not a bad thing. It does not mean that the company is not earning any money . It is simply a measure of how well resources are being used relative to all possible options.