ECO 201 Microeconomic Final Project PDF

Preview

Summary

Microeconomics-memorandum report...

Description

ECO 201 Project Template Memo To: My Business Partner From: Date: 2/25/2021 Re: Microeconomics Simulations

Introduction This memorandum report identifies and explains key microeconomic principles using a set of simulation games. The outcome of these games illustrate how microeconomic principles can be applied within real-life situations to help us make better business decisions. This report is a summary of the simulations I played and their results, which include the key takeaways and their significance, for your review and reference. It is divided into the following sections:

1.Comparative Advantage 2.Competitive Markets and Externalities 3.Production, Entry, and Exit 4.Market Structures (including the Price Discrimination and Cournot simulations) 5.Conclusions 6.References

Comparative Advantage Figure 1.1

Figure 1.2

How does this simulation demonstrate how individuals evaluate opportunity costs to make business decisions? Use the Production Decisions graph from the simulation as a reference to explain what role the production-possibility frontier (PPF) has in the decision-making process. The opportunity cost of any business decision fundamentally compares intangible and tangible consequence for two or more possibilities. This cost is defined by “what must be given up to obtain

an item” (Mankiw, 2020). Refer to Figure 1.1 & 1.2 above, the results show a comparison of two items-burgers & fries and the number of items produced. The graph results indicate how

many more fries could have been made if not for the time devoted to making one more burger. Looking at the opportunity cost could be useful in evaluating the production of any type of product. This would identify what must be given up when the decision to produce another product is made. This gives some distinction between having comparative and absolute advantage (Mankiw, 2021).

Comparative advantage is when a good can be produced at a lower cost in terms of other goods and absolute advantage is when it takes fewer resources to produce a product. Reviewing this data may be helpful for any business. Weighing opportunity costs can assist a business in making the best possible decision. If for instance, a business determines that the cost is greater than what business gains from its initial decision, that business can change strategies and pursue the alternative (Cox, C., 2021). The production possibilities frontier (PPF) is a curve illustrating “the combinations output that the economy can possibly produce given the available factors of production and the available production technology (Mankiw, 2020)” This indicates that one good or service may increase only when the production of the other good decreases. This tool can be used to determine which product will produce the highest output given the resources and time allotted (Mankiw, 2021). As a business owner evaluating opportunity cost and comparative advantage will aid in the success of a business. If we refer again to the simulation, the production of fries to burgers, the results clearly indicated that the additional time spent making a burger took time way from producing more fries, but in this case, it was at the best interest of the business to give up that time to produce another burger because both products are popular items and served together (Mankiw, 2021).

Explain how comparative advantage impacts a firm’s decision to engage in trade. Would a business’s decision to trade cause a change to its PPF? Provide specific reasoning to support your claims. Comparative Advantage is defined by “the ability to produce a good at a lower opportunity cost than another producer” (Mankiw, 2020). Companies will engage in trade based on need and what might take them less man hours to produce. Comparative Advantage gives the company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins (Mankiw, 2020). For example, if a diner serves desserts and weighs the options to making the desserts in house or outsource. The diner would need to decide if the time and cost of making the items on site outweighs outsourcing the items to a bakery.

Does it benefit the diner to use their resources to make these items or is it better to pay another business to make the items because it might cost less or require less time to purchase these items from an outside source. Most food items served at diners and fast-food restaurants are a product of goods that are purchased premade to save time on preparing and serving. The opportunity cost of making fresh deserts would be the time spent and the added cost of ingrediency not to mention paying someone to make these specialized items on sight. If the diner decided to make the items

on site, the diner would have a higher opportunity cost with the desserts and the comparative advantage would go to the production of the food which would have a lower opportunity cost (Mankiw, 2021).

The possibility frontier plays a role in business decisions, it can be used to show the best possible output for two goods or services, showing both inefficiency and efficiencies of production. Many decisions in a business can cause a change in the PPF. Everything within the production possibility frontier (PPF) represents a combination of outputs that is possible with current resources. In the case of a business, the PPF shows the limits of what can be done with the existing workforce, equipment, and funds (Mankiw, 2021). If a business decides to expand, it will need more resources. Once those limitations are lifted, the capacity of the company grows. That growth causes the PPF to shift outward, indicating that more production patterns are now possible. On the other hand, if something happens to change business operations, the PPF would shift inward. That would indicate that some combinations of goods that were made available are no longer an option (Mankiw, 2021). A business may decide to trade because a product can be produced with more efficiency elsewhere this may be due to resources and/or skill. Based on this, if two businesses decide to trade both could consume at a level, they could not produce for themselves. Even though they can only maximize their production by producing at a point on their frontier, they can consume at a point outside of their production frontier only if they trade casing a change in PPF (Mankiw, 2021). .

Competitive Markets and Externalities

Figure 2.1

Figure 2.2

What do policy interventions have on the supply and demand equilibrium for a product impact? Provide specific examples from the simulation to illustrate. The equilibrium price is the price that ensures all sellers who are willing to sell, and all buyers who are willing to buy will get what they want. This means that supply is exactly equal to demand. However, if the government intervenes with price control either price floor or price ceiling this can affect the curve. As we saw in the simulations- with and without policy, the permit fee that was imposed for ownership of a robot dog caused a decrease in the seller’s price, which in turn caused an increase in the consumer’s price. If the government increases a tax on a good the supply curve

will shift to the left, raising consumer prices and lowering seller prices. An increase in tax does not affect the demand curve, nor does it make supply or demand more elastic (Mankiw, 2021).

A price floor is used to control limits on how low a price can be charged for a product or service. These are usually set by the government and are used to protect the producer of a good or service. Minimum wage is an example of price floor, the government established a price to ensure that employees “suppliers” are paid enough to meet basic needs and employers “consumers” to understand that they cannot pay less than the established price. This prevents the price from falling below a certain level. If the price floor is set above the equilibrium price, quantity supplied will surpass quantity demanded which will result in a surplus (Mankiw, 2020). What are the determinants of price elasticity of demand? Identify at least three examples. Based on the outcome of the simulation, explain how price elasticity can impact pricing decisions and total revenue of the firm.

The more substitutes a good has the more elastic demand tends to be, this would be a determinant of price elasticity of demand. The amount of time following a price change either in the short and long term would also be considered a determinant. The short term would be inelastic, and a price increase may be tolerated in the short term, but in the long term it would be elastic because consumers would be more responsive to the price over time. Another determinant is whether the product is a luxury or

necessity. Also known as a need or want, a need is something that is necessary to survive, for example water is necessary for survival. A want is the desire to have something that is not necessary for survival (Mankiw, 2021).

A price elasticity of demand is a measurement of how the quantity demanded responds to the change in a good’s price (Mankiw, 2021). The higher the price elasticity the more aware consumers are of the change in price. An increase in demand would result in an increase in production which may result in an increase in price. As we evaluate price elasticity in our business decisions, let us consider the results of the simulation above. For example, if we consider oranges as elastic as the price increases, the total units sold decreased, this in turn would affect the total revenue. The number of substitutes a product may have and what might prevent consumers from buying elsewhere would need to be considered. The more substitutes that are offered, the more opportunity to buy elsewhere so the market price would be impacted by these factors. Looking at the results, I would consider keeping the price competitive, the low or competitive price would invite more volume and increase profit without raising the price of the goods (Mankiw, 2021) . Based on the results of the simulation, can policy market interventions cause consumer or producer surplus? Explain why using specific reasoning. When prices are regulated by government laws instead of letting market forces determine prices, it is known as price control. These interventions such as a price floor can be used to control limits on how low a price can be charged for a product or service. These are usually set by the government and are used to protect the producer of a good or service. For a price floor to be binding, it must be above the equilibrium price. At the higher price, the quantity demanded will decrease and the quantity supplied will increase, this will result in a market surplus. Minimum wage is an example of price floor, the government established a price to ensure that employees “suppliers” are paid enough to meet basic needs and employers “consumers” understand that they cannot pay less than the established price. This prevents the price from falling below a certain level. If the price floor is set above the equilibrium price, quantity supplied will outweigh quantity demanded resulting in an excess supply or surplus (Mankiw, 2020).

Price ceilings are also a policy market intervention set by the government, meant to control maximum prices for goods and services. For a price ceiling to be binding it must be below the equilibrium price. When a price ceiling is set below the equilibrium price, the quantity demanded will increase and the quantity supplied will decrease, this will result in a market shortage. Rent control is an example of price ceiling. These are price limits placed on a type of housing (i.e. apartments, condos, etc.) this is to prevent landlords from radically increasing rent. Taxi fares is another example, in large cities like New York City there are maximum limits on fares to prevent (Mankiw, 2021).

Production, Entry, and Exit

Figure 3.1

Analyze a business owner’s decision making regarding whether to enter a market. For example, what factors determined the driver’s entry and exit into the market in the simulation? Use economic models to support your analysis.

As we evaluate the idea of owning a business, let us consider a perfectly competitive industry in the long run, we learned that new businesses enter the market if that industry is making a profit while existing businesses will exit if they are experiencing a loss. As a possible salon owner, if there is an opportunity to make a profit, I would enter the market to produce a service, once the profitability ceases, that would indicate that it is time to exit the market. If we refer to the article “The whole economic story told in one chart” the services sector accounts for two-thirds of the economy while the manufacturing sector accounts for only 12%, indicating that services sector is five time larger (Udland, 2015).

This article is telling of the increase of businesses entering the services sector of the market. Although, it does not mention long term success of running a service business it offers some insight on the increase of businesses in the market. This is however telling of the possibility of profit within that market. It may also make a potential owner ponder if the increase in entries, indicates a good or bad time to enter the services sector of the market (Udland, 2015). If we look at the simulations and the decision that needed to be made for the driver, to drive or not drive. The driver had to consider the number of drivers on any given day and the number of hours a day to drive. When entering the market “driving” and exit “not driving” that decision influenced the driver’s profit (Udland, 2015).

How does a business owner applying the concept of marginal costs decide how much to produce? For example, how did the driver determine how many hours to drive each day? Use economic models to explain.

Marginal costs affect both the profit and production of a business. As a possible owner in the service industry, I would evaluate marginal costs by looking at the total cost associated to provide one service. This is taking into consideration the number of people and the total cost including supplies. For instance, if one employee is producing one more service the marginal coast would remain low. If we consider a business with multiple employees producing more services and if those employees are sharing workspace the conditions could become crowded as production increases. This could cause a hold up on production as employees have to wait for the use of this equipment (Mankiw, 2021).

This scenario would increase the marginal cost for producing another service. As a possible business owner, I would consider it good business sense to look at keeping marginal costs low while producing more. This could be in the short term, in the long term there could be the addition of space or equipment to prevent over-crowding which could slow down production. It is a sound decision for a business owner to evaluate marginal costs to keep costs down and production growing (Mankiw, 2021). As we witnessed in the simulation, the drivers on duty or in the market had to decide how many hours a day to drive, this decision was based on how many drivers were in the market. The more drivers that were on duty or in the market the less of an opportunity there was for profit, as the hours increased the profit deceased. Looking at marginal cost, initially when the driver increased output, total costs start to increase at a diminishing rate. When output “time” increased so did marginal cost which indicating when it was time to stop driving or leave the market (Mankiw, 2021).

How does the impact of fixed costs change production decisions in the short run and in the long run? Use the average-total-cost (ATC) model included in the module reading chapters to demonstrate this impact. Fixed costs are costs that do not vary based on production. These are costs that exist regardless of production. If we use Ford the vehicle maker as an example, the factory used fixed cost in the short run by adding employees to boost production. This would be when a business uses existing space and equipment, adding additional employees as fixed costs in the short term to increase production. Businesses use fixed costs as rent or the water bill which indicate costs that are fixed regardless of production. This limits the short-term changes in production but in the long term it could be increasing space, employees and equipment to increase production. As mentioned in our readings, there is no single answer to the question of how long it takes for a business to get to long term (Mankiw, 2021).

Market Structures Market Structure Perfect Competition Monopolistic Competition

Number of Firms

Type of Product Sold

Price Taker?

Price Formula

Freedom of Entry?

Short-run Profit?

Long-run Profit?

Industry Examples ure, Internet related & Foreign Exchange Industries ants, Hotels, Consumer Services Industry-such as Hairdressers

Market Structure Monopolies

Number of Firms

Type of Product Sold

Price Taker?

Price Formula

Freedom of Entry?

Short-run Profit?

Long-run Profit?

Industry Examples Gas, Utilities, Steel & Tobacco Industies bile, Wireless providers, Airline Industries

Oligopolies Table 4.1

Explain what market inefficiencies derive from monopolies and monopolistic competition.

A monopoly is a single supplier that controls the entire supply of a product without a close substitute. This creates a rigid demand curve, which means demand for the product remains relatively stable no matter what the price. Microsoft, for instance, has been considered a monopoly because of its domination of the operating systems market. Dominating a market can cause supply to be restricted which in turn can cause prices to stay high and lead to limit supply and scarcity. An inefficiency in this market is that marginal price is lower than Market price. The high prices can cause customers to evaluate the benefit of paying for that product or service and the decision not to buy. This would affect output resulting in a surplus of goods (Mankiw, 2021).

Monopolistic competition and monopolies have the same inefficiency calling for prices above the marginal cost, always working in excess. Another type of inefficiency is the number of firms entering into the market. The more products in the market and firms to supply the products, the more adverse effect it can have on those already in the market. Companies profit from others leaving the market, less competition means more profitability (Mankiw, 2021).

How do firms in an oligopolistic market set their prices? Use specific examples from the simulations or from the textbook to support your claims.

Firms in an oligopolies market set their price, they are price setters rather than price takers. Firms within this market set prices collectively in a cartel or under the leadership of one firm, rather than taking the price from the market. Profit margins are thus higher than they would be in a more competitive market. Oligopolies benefit from price-fixing, setting collectively, or under the direction of one firm, rather than counting on the free market to decide pricing (Hall, 2019). As we saw in the simulations as the quantity increased indicating the entry of more firms in the market, the market price decreased. The entry of more sellers effected the market price across all sellers. This confirming that in oligopolistic markets because there are only a small number of firms, each firm must act strategically. Reacting to what other firms are doing within that market A firm in an oligopolistic market must consider its own impact on price when making production decisions....