Economics Questions and Answers on Resources and Profit

economic science oral sexs and Answers on preferences and ProfitAssignment incertitudes point 1The removal of im corrections in the commercialize leads to an ontogeny in qualification in the allocation of resources. Discuss whether you agree with this view (25 marks) forefront 2Explain what is meant by normal and atypical lucre and when such(prenominal) meshing might occur (12 marks)Discuss the three reasons as to why deal indigence m maviny, according to the liquidity preference theory (13 marks)Table of circumscribe (Jump to)Question 1A. Allocative readiness and suddenly rivalrous MarketB. Allocative Efficiency and MonopolyQuestion 2 (a)A. Perfect CompetitionB. MonopolyC. Monopolistic CompetitionQuestion 2 (b)A. Transaction fountainB. Precautionary reasonC. Speculative MotiveReferencingList of Figures (Jump to)Figure 1 Pure Competition atomic number 62 mutual savings bank CurvesFigure 2 Consumer exorbitance Producer SurplusFigure 3 The footling scat and dogged counting in perfect oppositionFigure 4 The short run and long run monopoly grocery storeFigure 5 The short run and long run noncompetitive rivalryFigure 6 specie engage Curves (liquidity preference theory)Question 1The removal of imperfections in the market place leads to an increase in cogency in the allocation of resources. Discuss whether you agree with this view (25 marks)A. Allocative Efficiency and Perfectly Competitive MarketAllocative Efficiency occurs when it is not possible to reallocate resources in order to choose any(prenominal)one better off without making at least another person worse off. It arises whereMarginal Social court (MSC) = Marginal Social Benefit (MSB).The MSC refers either extra speak to to association of producing one more(prenominal) unit of output. The integrity of diminishing returns implies that MSC give be upward sloping. On the other hand, the MSB is any extra well-being to society of producing one more unit of output. The law of diminishing borderline utility implies that MSB leave be downwardlys sloping.For example If the 20th unit of output is produced, then it costs the society $10, but yields a benefit of $20. Thus, the societys welf ar increases by $10 (i.e. MSB MSC). Since MSB is greater than MSC, mass is better off. On the contrary, it is not in the societys engrossingness to produce the fortieth unit.In perfect competition, both consumer supererogatory and producer b atomic number 18(a) is maximised (as illustrated by figure 1), where the price is equal to the marginal cost. The consumer surplus is the sum total utmost benefit enjoyed by all consumers buying the product. For instance, a consumer paying $20 for a product whose market price is $15 thus enjoying the benefit of $5 ($20 $15 = $5).Producer surplus is the difference among the market price the producer receives and the marginal cost of producing this unit.Demand curves time the maximum price that consumers ar pu ll up stakesing to pay for a condition quantity of a good. Hence, the film curve is a measure of marginal benefit (or marginal utility) to the consumer. Therefore, in absence of externalities, MSB = D = P. In perfectly competitive market, the supply curve is a measure of the marginal cost in the persistence. In the absence of externalities, MSC = S = MC.Therefore, an high-octane allocation of resources under perfect competition happens when price equals to marginal cost, i.e. P = MC, in the short and long run.B. Allocative Efficiency and MonopolyMonopoly market structure is one of the major sources of market imperfections. A monopoly is having one firm producing and selling a product with the existence of barriers to entry. A monopolist is a price taker. The monopolist kitty set the price or the output, but not both. They finish even earn abnormal profits at the expense of efficiency and welf be of consumer and society.Since price is higher than marginal cost, this will lead to a loss of allocative efficiency and a failure of the market. In fact, the monopolist is extracting a price from consumer that is higher than the cost of resources required. Thus, at price Pm, the monopolist is charging a higher price and restricting output to Qm, whereby capturing a portion of the consumer surplus. infra monopoly, in that location is a portion (triangle ABC) where both the consumer surplus and producer surplus are recovered. This is known as deadweight loss.Figure 2 Consumer Surplus Producer SurplusImperfections in the market leads to misallocation and underutilisation of resources and reduction in consumer surplus since price is greater than marginal cost, i.e. P MC.But imperfections in market do have some benefits such asMonopolist are supplying products on a very large scale, thus they whitethorn be in a better place to exploit increase returns to scale leading to a fall in average total costs of production. This reduction in costs will lead to an increase in monopoly profits, but some gains in productive efficiency may pass onto consumer in the form of lower prices.Earning abnormal profits in the long run may lead to faster rate of technical organic evolution thereby reducing costs and producing of better quality.Supernormal profits may be used to invest in research and development programmes that have the potential to bring dynamic efficiency gains to consumers in the markets.Question 2 (a)Explain what is meant by normal and abnormal profit and when such profits might occur? (12 marks)Normal profit is the minimum level of profit that a company needs to remain competitive in the market. If firms in an industry are making normal profit, then there is no reasons for them to leave or for other firms to join the industry. Normal profit occurs when revenue equals cost.Abnormal profit (or super normal profit) is profit in excess of normal profit. If firms in an industry are making abnormal profit, then there is a reason for other firms to join the industry if they can. Abnormal profit occurs when the revenue is greater than the costs.A. Perfect CompetitionIn the short run, firms can make abnormal profits or losses, whereas they can moreover make normal profits in the long run, as illustrated belowFigure 3 The short run and long run in perfect competitionB. MonopolyMonopolies can earn abnormal profits in the short run and in the long run out-of-pocket to the existence of punishing barriers to entry.Figure 4 The short run and long run monopoly marketC. Monopolistic CompetitionMonopolistic competition involves some sellers with differentiated products, e.g. shoe producers or restaurants. In the short run, firms can make abnormal profit whereas in the long run, other firms will be attracted by the abnormal profits causing firms demand to fall until only normal profits are made.Figure 5 The short run and long run monopolistic competitionAs a conclusion, if firms are making abnormal profits, other firms will be attract ed by such profit, and will try to enter that particular market to reap some of that profits. As a result, firms in perfectly competitive market and monopolistic competitive market will enjoy normal profit with the ledger entry of new firms in the long run. On the other hand, firms in monopoly market will enjoy abnormal profits both in the short run and in the long run due to the existence of strong barriers to entry.Question 2 (b)Discuss the three reasons as to why people demand bills, according to the liquidity preference theory (13 marks)According to Keynes liquid state alternative theory, people demand moneyand hold their wealth in pecuniary form because of the following three main reasonsA. Transaction Motivecasual transactions are performed by both individuals and firms. An individual person holds silver in order to admit his/her daily expenditures. Business holds silver to meet its current needs such as payments of raw materials, etcTherefore, we can conjecture that m oney needed by consumers, businessmen and others, is known as the demand for money for transactions motive. This demand depends upon the followingSize of the income If income is high, more will be available for daily transactions and frailness versa.Time cattle ranch between receipts of income If a person gets his pay daily, he/she will demand less specie and vice versa.Spending habit If a person is spent a lot, he/she will do more transactions and thus will demand more money.B. Precautionary MotivePrecautionary motive for holding money refers to the desire to hold cash for un fancyn contingencies such as illness, accidents, unemployment, etc Business keeps cash reserve to safety their future. This type of demand for liquidity is called demand for precautionary motive. This demand depends upon many another(prenominal) factorsSize of the income If a person earns a high income, he/she will demand more money for safeguarding his future.Nature of the person Some persons are optimis tic, i.e. they anticipate less of future risk and danger, and hence they will demand less money for precautionary motive. On the other hand, pessimistic persons foresee dangers, calamities, and emergencies in the future, and hence, they want to have more cash with them.Farsightedness They are persons who can proper guess of the future, and thus they will keep more money (in cash) with then in case of more emergencies expectation and vice versa.C. Speculative MotiveThe speculative motive relates to the desire to hold cash and take advantage of future changes in the rate of interest or bond prices. For instance, if the price of bond is expected to rise, meaning the rate of interest is expected to fall, then people will buy bonds and sell later(prenominal) when the price rises, and vice versa.According to Keynes, the higher the rate of interest, the lower the speculative demand for money and vice versa.Figure 6 specie Demand Curves (liquidity preference theory)Keynes hold that the t ransaction and precautionary motives are completely interest inelastic, whereas the speculative demand for money is a smooth curve which slopes downward from left to right, as illustrated in above figure.ReferencesGILLESPIE, A (2001) Advanced economic science through Diagrams. 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