Question

a) Explain how to derive the short-term supply curve in a market there perfectly
competition prevails!
b) How can an increased salary of those who work with production be shown with the help of
cost and supply curves?
c) Explain the claim that a fully competitive market (where no external effects
occurs) both maximizes the efficiency of production and maximizes it
socio-economic welfare!
d) Discuss how Systembolaget's monopoly(systemsbolag is a monopoly compnay for selling alcohol) affects the socio-economic
efficiency!

Answer 1

a)Perfect Competetion Market is a hypothetical  market situation where a large number of buyers and sellers are buying or selling a large number of homogeneous product and all have a perfect knowledge about the market situation.Buyers and sellers are free to enter in this type of a market.In this market situation price is determined by the change in demand and supply.

Short run is a period where firm cannot change its fixed variable factors like machinery and building etc to increase production.`In perfect competetion market,under short run firm will produce untill MR(Change in total revenue from additional unit of output sold)=MC(change in total cost to produce an additional unit of output).At maximum profit or equilibrium MR=MC.Equilibrium price=average revenue=marginal revenue.

In perfective competetion market OM output is produced at OP price. At equilibrium(at pointA) MR curve and MCcurve cut each other giving equilibrium out put,OM at equilibrium price OP.With rise in price to OP1 out pu change into OM1

Here short run supply curve is that portion of MC curve which is above the minimum point of average variable cost curve.Demand curve is the horizontal line =price

b)

At the existing wage rate w0,labour supply is q0.When salary of labourers rasised from wo to w1 demand for labourers shifted from D0D0 toD1D1 but their supply remains the same.It happens mainly in the case of skilled labourers

c)In perfect competetion market price =MC of production.

Marginal cost is not the cost for firm ,it is just a social cost for producing it.In,perfect competetion market when price =MC profit is maximum.It means that cost is fixed at a socially benefitful amount.

d)Systembolag is a monopoly company for selling alcohol.Monopoly is a market situation where a single seller selling a product.Since there is no substitutes monopolist faces no competition.He fixes price, so known as price maker.A monopolist can earn maximum profit.Because he is the single seller in the market for that product.It affects socio economic efficiency in such a way that accumulation of money happens in hand of single owner.existence of too much monopolists increase financial disparity among people.