Essays on Effect of Own-Price Elasticity of Demand Assignment

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The paper "Effect of Own-Price Elasticity of Demand" is a wonderful example of an assignment on macro and macroeconomics. Using a market defined by: QD = 50 ‒ P, and QS = ‒10 + 2P At equilibrium, quantity demanded equals quantity supplied, i.e. QD = QS Thus 50 – P = -10 + 2P 60 = 3P P = 20 With a price of 20, quantity demanded/supplied is 30 units Effects of a market transitioning from perfectly competitive to a monopoly The market structure determines the pricing and profits gained by firms. Similarly, higher prices and profits for firms result from a concentration of the market.

Large numbers of firms compete on the finite market in a pure competition market structure and in the course of developing the market, profit-making possibilities diminish as the equilibrium state the firms’ profits equals to zero. Their profit being the ‘ normal’ profit derived from the supply function computed from the firms’ opportunity costs. On the other side a monopolist in his market dominance gains greater positive profit by further increasing the price to relatively high levels. However, there are situations known as ‘ industrial regimes’ which cause a monopolist to behave like firms competing in a pure market, and also prompt competitive firms to adopt monopolists’ strategies in pursuit of positive profit. Figure 1 How monopoly reduces economic welfare The effect of a market transitioning from perfectly competitive to a monopoly results in a loss of economic welfare; in form of consumer and producer surpluses.

The difference between the maximum price a consumer is willing to pay and the actual price expected by the producer is considered the consumer surplus. In a competitive market, all the consumers in the market enjoy the consumer surplus, as shown by the triangular area P1EA in figure 1(a), above.

A fall in the price (from P1 to Po) increases consumer surplus, despite decreasing producer surplus, in turn increasing consumer welfare. Conversely, increases in prices reduce consumer surplus and consequently lowering consumer welfare.

References

Kwasnicki W., Kwasnicka H. Market, Innovation, Competition. An Evolutionary Model of Industrial Dynamics, Journal of Economic Behavior and Organization, vol. 19, 1992, pp. 343-68.

Nelson Richard R., Winter Sidney, An Evolutionary Theory of Economic Change, Harvard University Press, Cambridge, MA, p. 1982.

Trajtenberg, M., Economic Analysis of Product Innovation: The Case of CT Scanners, Harvard University Press, Cambridge, MA, 1990.

Waterson, M., Economic Theory of tke Industry, Cambridge University Press, 1984.

Winter, S, Schumpeterian competition in alternative technological regimes, Journal of Economic Behavior and Organization, vol. 5, 1984, pp. 287-320.

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