Analyze Short run & Long Equilibrium Run of a firm under Monopoly? How output & Price are determined by a monopoly firm

 Short-run equilibrium

Producers in monopolistically competitive markets, as well as all market types, are profit maximizes. This means they will produce at the quantity for which their Marginal Benefit is maximized; a.k.a. where Marginal Cost equals their Marginal Revenue (MC=MR). If you draw a vertical line from the intersection point down to the x-axis, that is the market quantity. To find the price, you must extend the vertical line up to the Demand curve because Demand relates market price to quantity, not the Marginal Cost curve. Then draw a horizontal line to the y-axis and that is the market price. These two values represent the short-run equilibrium for a monopolistically competitive market.

 

 Long Run Equilibrium:

Since producers are profit maximizes, they will produce the quantity where MC=MR (same procedure as for the short-run equilibrium). In a monopolistically competitive market there are low barriers to entry so it is easy for other firms to come in and steal economic profit from the firms currently in the market. To counteract this, producers in the market will produce at a quantity that yields zero economic profit, because why would you join this market if there's no supernormal profit? This means the quantity the firm produces will be both where MC=MR and Price (the Demand curve) intersects the Average Total Cost curve. If you draw a vertical line up from the market quantity, it will go through both of these points. The price is again found by drawing a horizontal line to the y-axis.

PRICE AND OUTPUT DETERMINATION UNDER MONOPOLY

The object of the monopolist is to earn maximum profit. The monopolist will charge such a price which will give him the maximum profit. He always compares marginal revenue with cost at its output rate. The profit of firm is maximum when its MR = MC and Marginal cost curve cuts the marginal revenue curve from below. The MR curve in negatively sloped and it also lies below the AR curve at all levels of output, except the first unit. The monopolist controls the whole market and no new firm can enter into the market so the distinction between a long run and short run is not necessary. The price and output determination can be explained by the following diagram. :

EXPLANATION: - In this diagram AR curve is higher than the MR curve. The MC curve cuts the MR curve at a point E. Equilibrium occurs at a point E, where MR = MC. So the best level of output for the monopolist firm is OF.

As regards the determination of price monopolist fixes the price OP because the total revenue of the firm will be maximum at the equilibrium output OF.

The cost of the firm will be = OSEF

the revenue of the firm will be = OPKF

How Equilibrium Price & Output are determined by a firm under perfect competition

  The price and output decisions for profit-maximizing firms under conditions of perfect competition, monopolistic competition, and oligopoly vary according to each market structure. All firms maximize profits at the price and output level where marginal revenue (MR) = marginal cost (MC), but under different market structures, firms have different demand curves and therefore different revenue structures. Depending on the market structure, profit-maximizing firms make different price and output decisions, and these decisions have different social implications.

Perfectly Competitive Market Structure:      

In a perfectly competitive market, firms can't control prices because goods have perfect substitutes, there are a very large number of sellers (and buyers), and firms can easily enter and exit the market. Instead, prices are determined collectively by market supply and demand. The demand curve, then, is perfectly elastic and average revenue (AR) = MR = price (P). Although firms in perfectly competitive markets can’t control prices, they can control their level of output, which they set at the profit-maximizing level of MR = MC. Because P is equal to MR, P is also equal to MC at the profit-maximizing level. As a result, perfectly competitive markets are characterized by pure al locative efficiency – the cost to society for producing another unit is exactly equal to what society pays for that unit. Resources are allocated to allow the maximum possible net benefit, and consumers can get more goods at lower prices than under any other market structure. 

The equilibrium is the point where economic forces are balanced and there are no external influences. The equilibrium is the condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers.

A perfectly competitive market has many distinguishing factors. A market in perfect competition has many people who are willing and able to buy a product as well as a many buyers who are willing and able to produce the products. The products the firms supply are exactly the same. Another distinguishing characteristic in a perfectly competitive market is that there are low entry and exit barriers to the market, and it is relatively

 

Under prefect competition how equilibrium price and output are determined this are given below ------

 

Large number of buyers and sellers:  It is assumed that in pure competition market there should be

a large number of buyers and sellers. If it is so, the output of any single firm is only a small proportion of the total output and each consumer buys small part of the total. Hence no individual purchaser can influence the market price by varying his own demand and no single firm is in the position to affect

the market price by varying its own output.

 

Homogenous product:  The commodity produced by all firms should be identical in pure competition. Thus the commodity produced by different firms are perfect substitutes. Hence the buyers are indifferent as to the firm from which they purchase.

 

Perfect competition is wider term than pure competition. Besides the two conditions of pure competition mentioned above several other conditions must be fulfilled to make it a perfect competition.

 

Free entry and exit:  There should be no restrictions legal or other on the firms to entry and exit the industry. In this situation all the firms can earn only normal profit. Because if the profit is more than the normal, new firms will enter and extra profit will be reduced and if the profit is less than normal, some firms will leave the industry raising the profits for the remaining firms. Hence the firms can earn normal profit in long run.

 

Perfect knowledge: Another assumption of perfect competition is that the purchasers and sellers should have perfect knowledge about costs, price and quality. Due to this fact neither the seller can charge more than the ruling price nor the purchaser are willing to pay more.

 

Free mobility of the resources: The mobility of resources is essential to the firms in order to adjust their supply to demand. If the demand exceeds supply additional factors of production move into the industry and vice versa.

Differences between Perfectly Competitive market & monopoly Market.a

 Answer: The Difference between Perfectly Competitive market & monopoly Market are given Below:

Perfectly Competitive market	Monopoly Market
1. Perfectly Competitive market is the market in which there is a large number of buyers and sellers. The goods sold in this market are identical. A single price prevails in the market	1.  Monopoly is a type of imperfect market. The number of sellers is one but the number of buyers is many. A monopolist is a price-maker. In fact monopoly is the opposite of perfect competition.
2. The average revenue (price) curve under perfect competition is a horizontal straight line parallel to OX-axis	2. The average revenue curve under monopoly slopes downward and its corresponding marginal revenue curve lie below the average revenue curve
3.under perfect competition price equals marginal cost at the equilibrium output	3. under monopoly equilibrium price is greater than marginal cost
4. Under perfect competition marginal revenue is the same as average revenue at all levels of output	4. Under monopoly both the AR and MR curve slope downward and MR curve lies below AR curve. Thus average revenue is greater than marginal revenue at all levels of output
5. A competitive firm makes only normal profit in the long run	5. monopolist can make super normal profits even in the long run
6. a competitive firm earns only normal profit	6. monopoly firm continues earning supernormal profits
7. A perfectly competitive Market Cannot discriminate prices for his product.	7.  A monopolist can discriminate prices for his product.
8.  a competitive firm cannot change different prices from different buyers .	8. Elastic ties of demand are different in different markets.

Discuss the instruments of monetary policy. How monetary policy can be used to control inflation

 The statutory liquidity requirement (SLR), as a monetary policy instrument, has experienced infrequent changes in Bangladesh. Past evidence shows that reduction in SLR produced positive impact on bank credit and investment especially prior to the 1990s. In recent times, changes in SLR and cash reserve requirement (CRR) helped to reduce inflation to some extent in some years. Since the 1990s, Bangladesh Bank has used open market operations (OMOs), more frequently rather than changes in the Bank Rate and SLR as instruments of monetary policy in line with its market oriented approach. In this context, it should be noted that lately Bangladesh depends mostly on the money market as the channel for monetary transmission rather than changes in reserve requirements. The CRR and SLR for scheduled banks are used only in situations of drastic imbalance resulting from major shocks. The effectiveness of SLR in bringing about desired outcomes, however, depends on appropriate adjustments of other indirect monetary policy instruments such as repo and reverse repo rates. 

Repo Rate: The repo rate also known as Repurchase Agreement is the rate at which the banks borrow from the Central Bank. It becomes typical for the banks to borrow from the central bank if there is an increase in the repo rate. Generally used to control the amount of money in the market, repo rate is usally a short-term measure which is used for short-term loans.

Reverse Repo: The Federal Open Market Committee adds reserves to the banking system and withdraws them after a specified period of time. So, reverse repo drains reserves initially and adds them back later. Hence, it can be used as a tool for stabilizing interest rates with the Federal Reserve using it in the past to adjust the Federal funds rate to match the target rate.

Monetary policy can be used to control inflation: The primary job of the Federal Reserve is to control inflation while avoiding a recession. It does this with monetary policy. To control inflation, the Fed must use contractionary monetary policy to slow economic growth. If the GDP growth rate is more than the ideal of 2-3%, excess demand can generate inflation by driving up prices for too few goods.

The Fed can slow this growth by tightening the money supply, which is the total amount of credit allowed into the market. The Fed's action reduces the liquidity in the financial system, making it becomes more expensive to get loans. This slows economic growth and demand, which puts downward pressure on prices.

What is Inflation and why does it occur

 Inflation: In terms of economics, inflation can simply be defined as an elevation in the general price levels of services and goods in the economy over a particular period of time. Whenever the price level increases it causes depletion in the buying capacity of the currency, so inflation can also be defined as erosion in the purchasing power of money i.e. a loss of the real value of money in an internal medium of the exchange. One most common measure of price inflation is inflation rate. Inflation rate can be calculated as the yearly percentage change in the general price index (Consumer Price Index to be used most commonly) over time.

Reasons of inflation: Situation of inflation can occur at any time, and its occurrence depends upon a number of reasons. No specific cause is responsible for the occurrence of inflation. But some proposed reasons of the inflation are mentioned below-

1. If the production cost of various services and goods increases then naturally the prices of the final products would also increase. This leads into the situation of inflation.

2. Inflation occurs when industries and business houses increase the total prices of their services and goods in order to amplify their profit margins. This category of inflation is called as “administered price inflation” or “pricing power inflation”. This type of inflation is tedious to tackle because various industries and business houses have the complete authority/power of pricing their services and goods.

3. A situation of inflation occurs when a specific section of a mass industry increases the prices of its services and goods, because this step of a particular section of a mass industry will produce considerable effects on various other sections of industry also. For example- increase in the price of crude oil will spontaneously cause increase in the train fares and airfares.

4. A special category of inflation known as “Fiscal inflation” occurs, because of excessive spending of the government. Fiscal inflation was first observed in United Sates of America at the time of President Mr. Lydon Baines Johnson.

5. One another type of inflation is known as hyperinflation. Hyperinflation occurs during or after a heavy war. This inflation is also popular with the name of galloping inflation.

6. Another severe type of inflation is known as stagflation. It occurs in an economy which faces economic stagnation and high unemployment rate.

So we can say that inflation has some serious consequences on the economy as a whole. So the government should make some strict policies to curb inflation and thus help the country to have a stable economy

Define production function. Show with the help of a diagram the relationship among ‘total product (TP)’, ‘marginal product (MP)’, and ‘average product (AP)’.

 Total product (TP)

Total product is the amount of output produced from land with given number of laborers employed.

Average Product (AP_L)

The average product of labor (AP_L) is total product (TP) divided by the number of laborers employed AP_L = TP_L/L

Marginal product (MP_L)

The marginal product of labor (MP_L) is the change in the total product due to a change in labor. MP_L = ΔTP/ΔL

In our example in table 1, there are increasing returns to labor for the first three units of labor employed. The law of diminishing returns sets in with addition of the fourth worker. Both the average and the marginal products increase at first and then decline. The marginal product declines faster than the average product. When 8 men are employed, total product is at a maximum. The marginal product of the 9^th laborer is negative.

Thus,If MP > 0, TP will be increasing as L increases

1.      If MP = 0, TP will be constant as L increases

2.      IF MP < 0, TP will be falling as L increases.

Graphical presentation of the law of diminishing retu

Table 2: Properties of total product, marginal product and average product curves during the three stages of production

Total Product	Marginal Product	Average Product
Stage I (Increases at an increasing rate)	Increases	Increases
Stage I (Increases at a diminishing rate)	Reaches a maximum and begins to diminish	Continues to increase
Stage II (Continues to increase at a diminishing rate)	Continues to diminish	Reches maximum and begins to diminish
Stage II (Reaches maximum)	Becomes zero	Continues to diminish
Stage III (Diminishes)	Becomes negative	Continues to diminish but must always be greater than zero

What is meant by production function? Describe a production indifference curve and its properties. Use diagram in your answer

production function,  in economics, equation that expresses the relationship between the quantities of productive factors (such as labour and capital) used and the amount of product obtained. It states the amount of product that can be obtained from every combination of factors, assuming that the most efficient available methods of production are used.

It can be expressed in algebraical form as under: _{x =f (a}l_{, a}z_{,                              a}n₎

This equation tells us the quantity of the product X which can be produced by the given quantities of inputs (lands labour, capital) that are used in the process of production. Here, it may be noted that production function shows only the maximum amount of outpLit which can be produced from given inputs. It is because production function includes only efficient production process.

 A production indifference curve and its properties:

(1) Indifference Curves are Negatively Sloped:

The indifference curves must slope down from left to right. This means that an indifference curve is negatively sloped. 

In fig. 3.4 the two combinations of commodity cooking oil and commodity wheat is shown by the points a and b on the same indifference curve. The consumer is indifferent towards points a and b as they represent equal level of satisfaction. 

(2) Higher Indifference Curve Represents Higher Level:

A higher indifference curve that lies above and to the right of another indifference curve represents a higher level of satisfaction and combination on a lower indifference curve yields a lower satisfaction. 

In this diagram (3.5) there are three indifference curves, IC¹, IC² and IC³ which represents different levels of satisfaction. The indifference curve IC³ shows greater amount of satisfaction and it contains more of both goods than IC² and IC¹ (IC³ > IC² > IC¹).

(3) Indifference Curve are Convex to the Origin:

This is an important property of indifference curves. They are convex to the origin (bowed inward). This is equivalent to saying that as the consumer substitutes commodity X for commodity Y, the marginal rate of substitution diminishes of X for Y along an indifference curve.

 

(4) Indifference Curve Cannot Intersect Each Other:

Given the definition of indifference curve and the assumptions behind it, the indifference curves cannot intersect each other. It is because at the point of tangency, the higher curve will give as much as of the two commodities as is given by the lower indifference curve. This is absurd and impossible.

In fig 3.7, two indifference curves are showing cutting each other at point B. The combinations represented by points B and F given equal satisfaction to the consumer because both lie on the same indifference curve IC₂. Similarly the combinations shows by points B and E on indifference curve IC₁ give equal satisfaction top the consumer.

(5) Indifference Curves do not Touch the Horizontal or Vertical Axis:

One of the basic assumptions of indifference curves is that the consumer purchases combinations of different commodities. He is not supposed to purchase only one commodity. In that case indifference curve will touch one axis. This violates the basic assumption of indifference curves.