ECO 201 Project Template Tracy PDF

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ECO 201 Project Template

Memo To: My Business Partner From: Tracy Gonzales Date: 04/24/21 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. 2. 3. 4. 5. 6.

Comparative Advantage Competitive Markets and Externalities Production, Entry, and Exit Market Structures (including the Price Discrimination and Cournot simulations) Conclusions References

Comparative Advantage [ Comparative Advantage Graph of both scenarios

Figure 1.1 Comparative advantages with trade

Production and No Trade graph.] Figure 1.2 This simulation demonstrates the difference in using trade and not using trade. In this simulation I found that trade was advantageous if it is done correctly. Having a partner that specialize in something your business does not specialize in can work in you favor, but sometimes it could hurt depending on

having a reliable partner to trade with. Production possibility frontier (PPF) is what is used to determine optimal trade to make the most profit. This gives the evaluator the ability to find the optimal trade that is profitable for both parties. Comparative advantage can impact a firm’s decision to engage in trade when they are not making adequate amounts of their product or they are not making a sizable enough profit. Engaging in trade can take some of the stress out of both businesses if one is so much better at their product, they are trading. Depending on the situation, for example how much of said product is being sold, then some companies should use trade to boost their company and profits. PPF is a tool used to figure out if trade is needed or not. A change to trade would cause change to PPF values and what the company needs to look at.

Competitive Markets and Externalities

[Replace

this area with the Supply and Demand chart.] Figure 2.1

[Replace this area with the Outcomes by Market table.] Figure 2.2 without policy

With policy The government can help with supply and demand equilibrium. The method used by the government is taxing goods. Taxing goods can have a positive or negative result on both buyer and seller. The example used in the textbook is the price of ice cream. There are two organizations. One group says the price is too high and the other says it is too low. One group wants the government to regulate a legal maximum which is a price ceiling. The other group wants to impose a legal minimum which is a price floor. If the price ceiling is imposed at a higher price that what it is now then there is no effect on the price or quantity. If the price ceiling is lower than the equilibrium the amount of demanded exceeds the amount supplies causing a shortage. With the price floor there are two possibilities. If the price is below the equilibrium, then the price floor has no effect. If the price floor is above the equilibrium, then there is more supply than demand. In the simulations the one without policy had more nuisance costs and a higher cost than the one with. There are five determinates of price elasticity. (Amadeo, 2020). The price of the goods. The income of the buyer. Prices of similar products and alternatives to products. What customer preferences are. Consumer's expectations. Belief if products prices will rise. These factors have a big impact on how the product is viewed. When I completed the simulation, I found that when I was setting prices to high no wanted them, so then I set prices to a few cents within the bids. In the simulation I found my prices to be inelastic because there are not many substitutes for oranges. Firms decide prices based on possible substitutes, if there are many on the market, they are forced to charge what others do if they want to charge more, they must have something unique about their product.

“Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.” (Mankiw, 2021). Buyer willingness measure how much the buyer values the good for sale. “Producer surplus is the amount a seller is paid minus his cost of production. Producer surplus measures the benefits sellers receive form participating in a market.” (Mankiw, 2021). The book uses the example of tickets and scalpers. The government does not regulate scalpers because prices made by scalpers are what people are willing to pay. The more scalpers that are selling tickets the less the tickets will cost. I mentioned government intervention in the section about taxes and the ice cream scenario. I believed based on policy intervention both consumer and producer surplus can occur. This can occur by there either being too much product being made and not being sold or not making enough.

Production, Entry, and Exit

Figure 3-1

The factors in determining the drivers exit and entry into the business would be competition, being able to find people willing to work those hours, and profit which is total revenue minus cost. When deciding to exit the market some determining factors that are crucial are marginal cost analysis. Adding another vehicle did not seem advantage so what does that say about growth, because in any business growth is important.

The amount of drivers was decided by the amount of hours and vehicles that maximized profit. The profit is based on data so they can predict future profits. One problem could be getting people to drive those long hours. Fixed costs in short-run do would not have much affect because the company already has these cost set. Fixed costs do not change with increase/decrease in units of production. (Fixed and Variable Costs - Overview, Examples, Applications,2020). In the short run fixed they may not make a very big profit because of startup costs, and in the long run the production gets less expensive because the company is built its customers and is profiting and if they are not, they should exit the market. ATC = TC/Q which is average total cost equals total cost divide quantity. This is the total cost divided by the quantity of output. (Mankiw, 2021).

Market Structures [Complete the table by selecting the appropriate response from the drop-down select menu within each cell, except for the final column in which you will enter your text-based response.] Market Structure Perfect Competition Monopolistic Competition Monopolies

Number of Firms

Type of Product Sold

Price Taker?

Price Formula

Freedom of Entry?

Short-run Profit?

Long-run Profit?

Industry Examples ure, foreign exchange, and internet businesses. d, shoes, and, hotels. ft, windows, and natural gas. dustry and Commercial airlines.

Oligopolies Table 4.1

According to the text a monopoly is a "sole seller of its product and if its product does not have any close substitutes." (Mankiw, 2021). Some inefficiencies are that in a monopoly there are high barriers so there is little room for competition. Also, in a monopoly the firms choose the price also because there is not competition. An example according to the textbook is Microsoft. They have a government patent that no one else can sell their product. The reason they will not charge excessive prices is because the buyers will find alternatives or turn to fraudulent methods. An example of a monopolistic competition is the fast-food industry. For example, Burger King and McDonalds; one has a Big Mac and one has The Whopper. Both burgers are popular and have their own customer following. One inefficiency is that they follow a monopolist rule for profit, which is "it chooses to produce the quantity at which the marginal revenue equals marginal cost and then uses it demand curve to find the price at which it can sell the quantity." (Mankiw, 2021). Another inefficiency is the fact that when one firm enters, they may make a large profit in the beginning and other firms may lose money.

A key feature of oligopolies is it is a small group of sellers that must agree on the quantity the produce in order to make a profit. They usually produce a small amount and charge above marginal costs. They sometimes double cross each other in order to make a larger profit. Prices in an oligopoly are set by firms or cartels. An example is OPEC which is the largest producers of Iran and Iraq. They agree to produce less, but they have to keep their word for this to work. In a monopolistic competitive market, there are many competitors with similar products. Let's use the Big Mac and the Whopper. The prices on one may be dropped enough to cause someone to switch at the time. If prices go back up then the person who switched to go back to what they liked most. In an oligopoly there are few firms and they make the prices if they can cooperate and not get greedy. The four different markets are perfect competition, monopolistic competition, monopoly, and oligopoly. In a perfect competition profitability is determined by making a product and selling for more than they produced it. In a monopolistic competition the profit is determined when Marginal revenue equals marginal cost. Monopoly profit is determined by what people will pay; they will put the price up as high as they want until they realize people are not buying. Oligopoly set their prices; there are a few manufacturers of the product and they decide the price as long as they stick to their agreement, they make a nice profit.

Conclusions Microeconomics plays a big role on any business starting decisions. The different types of businesses I have learned about has taught that all business actions should be thoroughly researched. A business person should understand the type of business they are entering before they even put anything into it. Is there a good market out there at this time? Is this business idea fizzling or getting bigger? How much is the startup costs? And can you handle the short-run? At this point in time marijuana was legalized for recreational use in Arizona. This might be a good business idea. Researching regulations and start-up money would be the first things to look into.

References Mankiw, N. G. (2021). Principles of microeconomics (#9 edition). Cengage. Amadeo, K. (2020, April 21). 5 Determinants of Demand With Examples and Formula. Retrieved March 19, 2021, from https://www.thebalance.com/fivedeterminants-of-demand-with-examples-and-formula-3305706...