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# Demand and marginal revenue

Describe the demand and marginal revenue curves faced by a firm in a purely competitive market. Are they different from those faced by a firm in oligopolistic competition? If so, why?

Introduction

1. Long run real interest rates in economics depend on market forces in a free market economy. However, in financial accounting the prevailing market rates are taken as the current market rates as well as the applicable interest rate for the foreseeable future. All the calculations in financial accounting are forecasted based on the prevailing market rates. For example, if the financial year ended when the interest rates were very high then all the calculations will reflect the same but in economics the periods of high interest rates and inflation are spaced by periods of interest rates in the long run.

2. The rate chargeable per household was a flat rate and the quantities of garbage disposed were not significant as the cost basically remained the same with or without more garbage. But the introduction of garbage chargeable per bag or pickup has introduced some incentives to reduce the quantities of garbage disposed. The price elasticity on garbage collection demand is very high. A small increase in garbage collection prices results in high reduction of garbage quantities that need collection to reduce the overall cost of collection (Robert, 2008).

3. Elasticity reflects the sensitivity of a single variable to the general changes in a relative variable (Layton & Robinson, 2011). There are four types of elasticity of demand.

P                                                                           P

D

D

Q                                                                                         Q

Elastic Demand                                                                   Unitary Elastic

P                                                             P                                                  P

D                                                    D

D

Q                                                Q                                         Q

Perfectly Inelastic                               Inelastic                               Perfectly elastic

Any elasticity that’s greater than one is elastic and any elasticity that’s less than one is inelastic. Price elasticity of demand measures the responsiveness of price to demand and where the coefficients of price elasticities are -1.2 from the previous -0.8 shows that the prices are at price inelastic range (at low prices). The consumers generally are not influenced by the change in prices and it may be related to availability of substitutes or the proportion of consumer’s budget that’s spent is not flexible (Zelenyuk, 2013).

4. Yes. The optimization of production by products and reduction of wastes is one of the methods of improving efficiency in a production plant. Where wastes worth over \$100,000 have been reduced to a relative waste of \$7000 means that the company is saving over \$97,000 worth of waste.

5. Optimal allocation of resource is achieved when there is efficient allocation of resources. Allocation of resources is only optimal when no member of society is better off than the other and the allocation is fair and equal (Sullivan & Sheffrin, 2003).

6. The marginal costs in the short run equals the variable costs and the revenue costs at the breakeven levels where the firm gains no profit nor makes no loss (Samuelson & Marks, 2003).

7. In a perfect market the products are homogenous and the products are similar, the market structure is perfect and the prices are determined by the perfectly competitive market forces of supply and demand (Varian, 2006). The market determines the prices, the profits and even the output to be produced. Product differentiation through research and branding does not apply hence there is little incentive to carry out any research and development activities. The firms in the market are basically price takers and no firm can influence the market prices (Melvin & Boyes, 2002).

For research and development to take effect, the products in the market must be distinguishable and the buyers must be able to differentiate the products which must not be identical to the others in the market (McConnell, Bruce & Flynn, 2012).

8. In a perfect market where P > ATC, the profits would be maximized at MR = MC.

(P = Price, ATC= Average Total Cost, MR = Marginal Revenue and MC = Marginal Cost)

P < ATC

MC

Maximum Loss

ATC

AVC                                     MR

MC = MR

P > ATC

MC

MR = MC                                                                       MR

Profit                                           ATC

AVC

The marginal revenue firms in oligopolistic markets are different as the market is not perfect.

9. The pricing depends on the product differentiation between different suppliers. The pricing policy is psychological and it largely depends on the consumer’s perception of the hardcover or paper back’s book price. The positioning of the book will depend on the publishers approach may be as a low-cost price leader or a high quality brand which would fetch higher prices in the market (Kotler et al, 2012)

10. Where the government collects the emission fee presumably to control the emission of toxic gases to the atmosphere and when an injury occurs due the emissions, the person responsible pays for the resulting injuries is biased. The government should also be charged alongside for negligence as it should have taken reasonable measures to ensure that no emissions would result in an injury to any person. The victims and the respondents would finally be left wondering why the government should be allowed to continue collecting the emission fees when it actually provides no service to merit the emission fee payments. The government by virtue of collecting the emission fees has a duty of care to the victims just as much as the people or companies responsible for polluting the environment just as in the case of Haynes v Harwood.

References

Haynes v Harwood (1935) 1 KB 146, CA

Kotler, P., Keller, K. L., Brady, M., Goodman, M. & Hansen, T. (2012) Marketing Management. 2nd edition. Essex: Pearson Education Limited.

Layton, A. & Robinson, T. (2011) Economics for Today, Cengage Learning Australia Ply Ltd.

McConnell, C., Bruce, s. and Flynn, S. (2012) Economics: Principles, problems and policies, 19th Ed, McGraw-Hill/Irwin; New York.

Melvin & Boyes (2002). Microeconomics, 5th ed. Houghton Mifflin.

Samuelson, W and Marks, S. (2003) Managerial Economics 4th ed. page 35. Wiley

Sullivan, A. & Sheffrin, S.M. (2003) Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p.111.

Varian, H.R (2006) Intermediate Microeconomics, Seventh Edition, W.W Norton & Company: London

Zelenyuk, V. (2013) A scale elasticity measure for directional distance function and its dual: Theory and DEA estimation, European Journal of Operational Research 228:3 pp 592 – 600.

Robert, F. (2008). Microeconomics and Behavior (7th ed.). McGraw-Hill