Econ: Economics and Supply Curve Essay

(5 points) Upward sloping supply curves imply that some firms would still produce the product if the price were lower. Does this imply that some firms in such an industry must be making economic profits? Explain. (Note: you might want to read pp. 256-259 of the textbook for help in answering this question.)

Any change that lowers the quantity that buyers wish to purchase at any given price shifts the demand curve to the left.

Since a monopoly is the only seller of a good in the market, the demand curve is the market demand curve. Therefore a monopoly has a downward sloping demand curve, in contrast to the horizontal sloping demand curve of a firm in a competitive market (Mankiw, 2014). Monopolies aim to find the profit-maximizing price for its product. If a firm is initially producing at a low level of output, marginal revenue exceeds marginal costs (Mankiw, 2014). Every time production increases by one unit, the marginal revenue increases again and is greater than marginal costs (Mankiw, 2014). Therefore

The relationship between aggregate demand and the price level normally is a negative relationship, which creates a downward-sloping aggregate demand curve.

In order to determine price, the monopolist utilizes the inverse demand curve, also known as the average revenue curve. This curve reflects the price the provider would need to charge to produce demand at a particular level. Thus, the average revenue curve dictates what price the next unit can be sold at, while the marginal revenue curve reflects how much additional revenue is received for selling the next unit (Schwartz, 2010).

In short run, the aggregate supply curve will go upward because there are two main reasons due to which quantity supplied increases with the increase in price.

Perfect competition is a type of market structre where there is highest level of competition. In perfect competition the firms are offering homogeneous product. Every firm believe that it can sell any amount of output it wishes at the prevailing market price. Because of homogenous product and large number of firms, no individual firm is in a position to effect the price of the product and therefore the demand curve for the firm under perfect competition is a horizontal straight line.

The theory of pure competition is a theory that is built on four assumptions: (1.)There are many sellers and many buyers, none of which is large in relation to total sales or purchases. (2.) Each firm produces and sells a homogeneous product. (3.) Buyers and sellers have all relevant information about prices, product quality, sources of supply, and so forth. (4.) Firms have easy entry and exit.

In a perfectly competitive market it is assumed that owing to presence of manybuyers and many sellers selling homogeneous products,the actions of any singlebuyer or seller has a negligible impact on the market price of product. However in reality this situation is seldom realized. Most of the time individual sellershave some degree of control over the price of their outputs. This condition is referredas imperfect competition.

The vertical axis is the price level. The horizontal axis is output or income. The short-run aggregate supply curve is downward sloping with slope equal to (1/a) while the long-run aggregate supply curve is vertical with no slope. The reason that the short-term aggregate supply curve is upward sloping is a bit more complex.

Pure competition involves number of companies or firms manufacturing similar or identical goods. In such pure competition the firms have no control over the prices. These companies are often termed as "Price Takers". The pricing strategy is no in hands of the company it is determined by market forces. The firms operating in a pure competition manufacture standardized products which do not offer them a chance to differentiate their products on the basis of some unique feature of the product. The firms also do not spend on advertising their products because of the standardized nature of the products the firms manufacture.

Alternatively, maybe a firm operates in a market where it has a large share but competes against small producers possessing a small market share. In effect, the dominant firm has to split the market demand with these small firms, each producing an identical product to the dominant firm and act as perfect competitors, taking the market price as given by the dominant firm and choosing a level of output

Perfect competition is the concept that for a given product or service, there are multiple providers that provide a similar product or service. No one company can truly control the market because there are multiple competitors creating the same product for the same price (Samuelson & Marks, 2012). Price cannot be determined by a single company, the overall supply and demand for a product determines the price. In perfect competition perfectly elastic demand exists across competitors. This means that a firm cannot decide to raise prices indiscriminately because their customers will abandon them for their competitors. This also means that every competing firm in the market is a price taker. A price taker has such a small role in the supply and demand of a product that they must accept the price determined by the market. The competitors must sell the product for relatively the same price. Inversely the consumer must accept the price of the product because

a) In a perfect competitive market, the sole determinant of pricing is the market demand and the supply curves. A demand curve refers to the total amount that consumers will pay for their products. The supply curve is the total amount that the producers can actually make to supply to the company at the price they can afford or are willing to pay. Another factor in a perfect competitive market structure is the equilibrium price which is basically when the supply of the market meets the market demand of the consumers. Anther unique feature of a perfect competition market is that it is a price taker. In essence, this means that the company doesn’t have any influence on the price. Again, this can only be caused through a market that has a large number of firms with identical products. (Samuelson and Marks, 2010).

Give two reasons why the long-run industry supply curve may slope upward. Use an example to demonstrate your