Microeconomics

Microeconomics

Introduction

This paper is based on the questions regarding the economics theories.

Diminishing Marginal Returns

In the below graph, in order to increase the productivity, the number of labor have to be increase but up to certain limit the increased in labor will increase the productivity; as productivity on the other hand is also linked directly with the availability of resources. Therefore, at certain point, despite of increasing labor force, the outcome will start to decrease, and this single unit decrease in the outcome is the diminishing marginal return.

Decreasing Economies Of Scale

With the increase in per unit production, the average cost of production decreases, this is known as economies of scale. However, the production cost decreases with the increase in output, but still with the extensive production requires additional cost like the shipping cost, which increases the production cost with the additional cost of shipping. This increase in production cost with the increase in output is known as economies of scale.

For example, Company “A” produces 2 units with accumulates average cost of 5 per unit. As the demand is increasing, the company is now producing 8 units. But the capacity to ship product from one place to another is only 4 units. So up to 4 units of production, the company observes the economies of scale as the shipping cost is same for 2 units as well as for 4 units. But, with the additional production of single unit requires additional shipping cost, which will results in decreasing of economies of scale.

Oligopoly Market

In this question the Jeans industry is oligopoly and the product they are selling us distinctive. In the oligopoly market, the firms believes that their rival will not follow their increase in price but definitely follow the price cut. Following is the graph curve of demand in oligopoly which will be better illustrated using the example.

Let's suppose two firms are running in the oligopoly market, where graph showing P is the price and Q is the outcome. According to the scenario, if the rival in the oligopoly market is not following the increase in market by one firm, then it means that the demand is elastic and with the increase in price, the demand of the product will decrease, resulting in decreasing of the profits.

However, if one firm decreases their product price, the rival will follow the price; therefore, demand will be inelastic. This will results in decreasing of the profit.

This graph also explaining the same that with the increase in price, the demand will decrease but the decrease in prices, the rivals will also decrease the price, so demand will not change.

Perfect Competition

The situation of perfect competition and is often described as an idyllic, devoid of economic reality. Following assumptions are rarely made; and many economists have sought to go beyond the pure and perfect competition, by relaxing some assumptions (imperfect information, existence of several awards, and small number of agents on the market). Specifically emphasizing the disadvantages of perfect competition, at the ...