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Essay Example in Economics

3 pages
592 words
Harvey Mudd College
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What is the difference between a market structure and a characteristic of market structure?

A market structure is a composition of small and large firms in an economy with unique features on price setting and competition. There are four types of market structures namely, oligopoly, perfect competition, monopoly and imperfect competition. Characteristics of market structure, on the other hand, represents particular market elements specific to a market structure, this ranges from many firms, entry barriers, product standardization, market share, and pricing.

How can purely competitive firms use the total-revenue-total-cost approach to maximize profits or minimize losses in the short run?

In the short run, profit maximization occurs when the total costs are minimized. In this case, the total revenue is compared to the total cost. When the total costs exceed total revenue, then it leads to losses. In this case, a firm produces more units, reducing the average fixed costs. Since resources are limited, the law of diminishing marginal returns raises the total cost and total revenue leading to a loss. In fact, increasing production under limited resources becomes expensive.

What are the main characteristics of the four basic market models?

Number of firms present in the economy. For instance, a monopoly has a single company while perfect competition has many large and small size firms.

Type of product whether differentiated or standardized.

Conditions of entry which determine the easiness to establish a firm and control competition. Freedom to enter into the market increases the number of firms as a well as competition.

Control over price. For example, monopolies are price makers, and consumers are price takers.

What are the barriers to entry that shield pure monopolies from the competition?

Price cutting

Economies of scale which depends on the size of the firm.

Control and ownership of crucial resources and production techniques. For example, a firm might have superiority in technological production.

Legal barriers such as licensing, patent and copyright

Strategic barriers such as predatory pricing

What are the economic effects of monopoly?

Resource allocation inefficiency

Production inefficiency

Lack of competition due to blocked market entry.

High prices on products

Why are monopolistic competitors only earning a normal profit in the long run?

In the short-run, there is a high number of new entrants due to super-normal profit. However, the further entrants over an extended period reduce the benefits to a normal share. In this case, there is a state of equilibrium between the average costs and an average revenue of producing a product.

Part 2

What are primary phases of the business cycle?

Expansion: characterized by high growth, high consumer confidence, increasing prices and low unemployment.

Peak: It is a turning point in the business cycle characterized by high production, high sales, and high profits. Demand falls due to high prices.

Contraction: economic inefficiency arises stagnating the economic activities hence a prevalence of low prices and high unemployment. There are minimum production activities, weak demand, low-interest rates, deflation and fall in marginal efficiency of capital.

Trough: it is a recovery stage from contraction marked with increased investment and production, credit expansion and rise in employment.

How does inflation affect the economy's level of real output?

Real output increases when the consumers anticipate a rise in future prices. In the short run, the consumer demand is high forcing business to increase output. Additionally, hyperinflation leads to a wage-price problem. The rising wages comes as a result of high prices this leads to budget deficits and inefficiencies in resource allocation. More so, inflation leads to market and price instability characterized by high-interest rates.


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