Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Managerial Economics 2016-17 Topic 11 Answers Basic Concepts 1. Producer and Consumer Surplus in the Market Equilibrium Price Supply Consumer Surplus Producer Surplus Demand Quantity An allocation of resources is (economically) efficient if it maximises the sum of producer and consumer surpluses. 2. The invisible hand of the market place refers to the atomistic and selfinterested actions of market participants which result, by means of market exchange, in economically efficient production, exchange and consumption activities. 3. ‘Market failure’ refers to the inability of the system of private enterprise to achieve allocative efficiency across the economy. Allocative efficiency occurs when no one person can be made better off without making someone else worse off. In such a situation, the marginal net benefit or return to society on all scarce resources in every use is the same. Private markets are not perfectly efficient since many goods and services involve jointness and technological constraints in production (externalities, natural monopolies) and consumption (public goods). The system of private property rights cannot ensure the provision of goods if producers cannot recover their cost and make a normal profit or when consumers pay for the provision of a good or a service but are prevented from consuming it. However, imperfect markets may still be superior to some non-market alternatives (e.g., equally imperfect public regulation). 4. The Effect of a Negative Externality in Production Price Social Cost Supply (private cost) Demand Qs Qm Quantity Qs - social equilibrium Qm – market equilibrium 5. It is possible to internalise some externalities without government intervention. We do it all the time by being considerate, benevolent or smart. There are also more complex private arrangements (e.g. restrictive covenants or agreements) whereby individuals agree to follow some code of behaviour that ensures a reasonable outcome for all parties to an agreement. 6. A public good has two salient characteristics. First, it is non-excludable. This means it is consumed collectively i.e., once provided, no one can be prevented from sharing in the consumption of it. Second, it is non-rival. This means that additional users or consumers do not diminish the amount available to existing users/consumers. Example: wireless broadcasting. Pure public goods cannot be provided through the private market as suppliers would not be able to use the price mechanism to recover costs. Every one would free ride. But some goods that have a strong ‘public’ content may be provided commercially. Example: commercial television, where the cost is recovered through advertising. 7. See 6 above. 8. A merit good is a good deemed by the government to be intrinsically desirable for people who would not otherwise buy it, e.g., national defence for pacifists. 9. Example, advertising. Producers may compete on quality as well as price in which case they have a vested interest in providing information on the product specification and quality attributes. Consumers may pay agents to search for and analyse information for them (e.g., good food guides). 10. Natural monopolies occur when a sole supplier in a particular market provides the product at a lower cost than would two or more sellers. This is because the cost structure is such that the unit cost of supply/production decreases as output increases throughout the output range within existing market demand. Example, electricity transmission, cable networks, railway tracks. 11. Governments regulate and often prohibit mergers between large firms because they do not want markets to be dominated by large monopolistic suppliers, especially those who may set barriers to entry. 12. For example, you may come to some agreement by bargaining (trading) or by paying compensation to the ‘injured party.’ As long as the cost of ‘transacting’ an agreement is not excessive, you should be able to come to some understanding between you. Otherwise one of you would have to leave or you could resort to less economic means of exchange such as violence. 13. See Section 9.6 above. 14. Suppose that the natural monopolist’s marginal cost, MC, is below its average cost, as shown below. If price, P = MC, it would make losses and would have to leave the industry or, alternatively, the government would have to pay it a subsidy. Also, by making P=MC, there is no incentive to innovate to reduce cost. Price, Cost Demand Unit loss Price 15. Average Cost Marginal Cost Quantity A positive consequence: the combined (post-merger) firm may reduce its unit cost as it may achieve larger volumes of output. Also, it may be in a stronger position to innovate and engage in a global competition. A negative consequence: the post-merger firm may dominate the market and take advantage of its monopoly power.