Essay About Minimum Price And Market Distortions

Managerial Economics
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Final AssignmentRicardo Castro | Shanghai EMBA 2018                                        September 10, 2016____________________________________________________________________________Part A – Short AnswersThe government introduces a minimum price for a packet of cigarettes. Explain the impact on supply and demand in the short run.The role of government is to minimize market distortions. Providing all other factors remain unchanged (i.e.: no substitutes), in the short run demand and supply will both increase due to the minimum price introduction. When supply meets demand then there is market equilibrium, and market equilibrium is the most efficient allocation as there is no pressure for change. Definition adapted from class discussions.Explain under what conditions oligopolistic market structures lead to higher productive and allocative efficiency and more choice for consumers compared to monopoly. In an Oligopolistic market the single biggest driving factor is the commoditization of the product (e.g. oil and gas, Food Industry). Firms can chose to collude (e.g. OPEC, Airlines), or can chose to differentiate the commodity and compete in factors other than price (e.g. location, speed of delivery, accessibility, quality of product, etc. Oligopolistic market structures focus highly on productive and allocative efficiencies, where the outputs with the optimal combination of inputs, produce maximum output for the minimum cost in order for outputs to meet the preference and social welfare of the consumers. In Monopolistic markets, firms are price setters, there is no entry from other firms due to high costs or other obstructions so there are no substitutes. Always set the price higher looking after the firm’s own benefit and not always of the consumer’s welfare (with exception of those regulated by the government), by setting prices greater than their marginal costs. Definitions adapted from class discussions. Allocative efficiency occurs when consumers pay a market price that reflects the private marginal cost of production. The condition for allocative efficiency for a firm is to produce an output where marginal cost, MC, just equals price, P.[pic 2]Productive efficiency occurs when a firm is combining resources in such a way as to produce a given output at the lowest possible average total cost. Costs will be minimized at the lowest point on a firms short run average total cost curve. This also means that ATC = MC, because MC always cuts ATC at the lowest point on the ATC curve.[pic 3]Retrieved from