Diminishing Marginal Returns and Decreasing Economies of Scale, the Oligopoly Market Structure - Assignment Example

1. There exist some differences between diminishing marginal returns and decreasing economies of scale. Diminishing marginal return is a phase when the business increases one input of production by keeping the others inputs the same the marginal product decreases. On the other hand decreasing economies of scale states that when the business multiplies their factor of production by using double the same inputs output increases but less than double to input. Apart from this basic difference another difference which exist is that in case of diminishing marginal return one factor on input is changed whereas in case of decreasing economies of scale all the factors of production varies (Farmer, 2009). This has been highlighted through the diagram and example provided below An example will further help to understand the differences that exist. Suppose a firm uses 1 labour and 1 capital and is able to produce around 50 units. Now multiplying the labour to 2 but keeping the capital constant it is seen that the output reached 90. This shows that the output has increased but the marginal product has decreased. In case of decreasing economies of scale both the factor of production i.e. labour and capital is doubled to 2. This shows that the total output increases to 95 but hasn’t grown by 50 as both the capital and labour has been multiplied. Thus, the difference between diminishing economies of scale and diminishing marginal returns is clearly visible resulting in different outputs due to change in inputs. 2. The oligopoly market structure provides an opportunity to the few players present in the market to be able to earn abnormal profits. This is the situation which is completely evident in case of the jeans industry where there are two players and they don’t look towards competing with each other directly. This has made both the player in the jeans industry to decide the price they are willing to charge to their individual customers and while doing so it has been ensured that both of them don’t indulge in a price war which will result in reduction of prices and make the consumer gain and they will loose their share of profit (Litman, 2005). The graph for the demand and price in the oligopolistic jeans market is as under The above diagram highlights the demand curve in the oligopolistic jeans market. It is evident from the graph that the curve above the kink demonstrates a section where the player is able to charge a higher price. This is primarily due to the goodwill and brand image of the products. This makes the other player look towards charging a lower price and at no situation look towards increasing prices unless the main player looks towards a strategy where they start to reduce price to gain a bigger chunk of the market share. Similarly the price charged by the other players is as The other player who is not the market leader has a demand curve which is below the kink. Since, the player is small in comparison to the market leader it follows the foot step of the leader but instead of charging high prices charge lower prices so that a particular segment of the customers can be attracted towards the brand. The player in this segment gives less importance to price and looks towards not indulging in a price war. Despite the different demand curve for both the player in the industry there exist some degree of competition. This degree of competition intensifies when the major player resorts into a price war. Cutting down the prices makes the lower segment of the customer look towards the branded product which has an impact on the sale of companies whose products are not branded. They have to further look towards reducing the prices thus resulting in competition but are largely limited and are very low. 3. a. There is no industry which is completely working under the perfect competition model because of the imperfections that the market has. Since, it is not possible for all company to have all the market information which has relevance on the decision making so there exist some degree of imperfection. There could be situations where it might appear that in some situation characteristics of perfect competition market is better displayed but it is short lived as the imperfections in the market results in creating a gap which makes it difficult to have a perfectly competitive market structure (Louviere, 2008). 3. b. The short run perfect equilibrium for an individual firm is as The above graph shows that individual firms in the short run are able to earn abnormal profits. This is primarily due to the fact that complete information regarding the company is not present to all players in the market. This creates imperfections and provides an opportunity to earn abnormal profits but for a short duration The short run perfect equilibrium for the industry is as Equilibrium exist even in the short run where certain individual firms are able to make abnormal profits primarily due to the fact that some companies have more information in comparison to the other. This results in one benefitting at the cost of other. The situation equalizes when the industry is considered which thereby appears as if the industry is in equilibrium 3. c. The long run perfectly competitive equilibrium for the firm is as The above graph highlights that in the long run the individual firms are unable to make abnormal profits. This is primarily due to the fact that all players have relevant information about the market and any changes on the part of one player will be reflected in the strategy of another which thereby makes the firm to earn normal profits only. 4. a. One of the characteristics of monopolistic firms is that they are able to earn high profits which are up and above the normal profits. Since, the inelastic demand curve doesn’t provide to maximize their profits as it is not the profit maximizing point firms working under monopolistic competition will look to refrain from it. This has been highlighted in the graph below The above chart shows that the profit maximizing point for the monopolistic competitive market is when the marginal revenue equals marginal cost. Since, the inelastic region of the curve doesn’t provides an opportunity to ensure that marginal revenue equals marginal cost which will make the players to stay away from this production point (Bernstein, 2004). This will result in a situation where players don’t produce in this region. 4. b. i. At a point where the marginal revenue is greater than the marginal cost the firms working under the monopolistic competition will look towards increasing output. This is based on the premise that increasing output will help the player earn more revenue and the profits will also increase. This will continue till the point marginal revenue equals marginal cost. 4. b. ii. At a point where the marginal cost is greater than the marginal revenue the firms working under the monopolistic competition will look towards decreasing output. This is based on the premise that decreasing output will help the player reduce their marginal cost. This will continue till the point marginal revenue equals marginal cost as it will be their profit maximizing point. 5. a . One of the major factors which have contributed towards the growth of Australia has been the widespread reforms which the country has witnessed. The reforms have been made in such a manner that it has strengthened the overall work culture and has supported the growth opportunities that the country has. One of the major contribution and changes in reform which has helped Australia can be seen in case of government run organizations. It has been witnessed that partially or wholly owned government agencies have been privatized with the motive of ensuring better corporate structure so that the organization can be run in an efficient manner (Borland, 2001) This changes can be seen in the direction of Australian Post where the reforms has strengthened the overall work culture and provided the required professionalism through which the same organization is able to deliver better results (Borland, 2001). This changes in the reforms has helped in better development of the corporate policies and ensured that the business is able to deliver superior results 5. b. The reforms has helped to improve the working of the public sector enterprise as seen in case of Australian post. The changes through reforms has provided the professionalism which they were previously lacking. It has also ensured that the business is guided by better strategies which has helped to increase the profits and has contributed towards the growth and well being of Australia through different directions. References Borland, J. (2001). Micro Economic Refors in Australia: An Introduction. Department of Economics, University of Melbourne. Retrieved on September 12, 2012 from http://www.economics.unimelb.edu.au/staff/jib/documents/micref.pdf Bernstein, W.J. (2004). The Birth of Plenty: How the Prosperity of the Modern World was Created. McGraw-Hill Farmer, R. E. A. (2009) The Macroeconomics of Self-Fulfilling Prophecies, 2nd edn, Cambridge, MA:MIT Press. Litman, T. (2005). Transportation elasticities: How prices and other factors affect travel behavior. Victoria, Canada: Victoria Transport Policy Institute. Louviere, J. (2008). Analyzing decision making: Metric conjoint analysis. Newbury Park, CA: SAGE Publications Read More