13/12/2012 § Leave a comment
11/12/2012 § Leave a comment
#1. 25 marks.
a) Using a suitable diagram, explain the difference between short-run equilibrium and long-run equilibrium in perfect competition.
In the short run, firms are allowed to make supernormal or abnormal profits and can get away with it. However, when their price is greater than the cost it takes to make the product (hence, their revenue is quite large, giving them a big profit), the message the market will be getting is that more than enough of the product is needed, therefore the market will adjust itself so that the firms’ production costs will equal the price (P = MC). In the meantime, a perfectly competitive firm will find that its costs and revenue will look like the graph below. Of course, in the immediate short run (like, as soon as the firm starts its business), the costs will be much higher since the firm needs to start off the business and overcome the barriers of entry first. However, the rest of the short run involves abnormal profit wherein the firm can produce at an output where the price is greater than the cost, earning them supernormal profit.
The long run has to do with what happened during the short run. The abnormal profit gained in the short run will have attracted other firms to the market, and because the barriers of entry are so little (it’s so easy to start a business in a perfect competition), many more firms will be able to produce the same product. This will increase the supply of that product, lowering the equilibrium price in the process. The lower price brings the firm’s MR down, and the new point where MC = MR (the optimal level of production) has a lower quantity of production. Now, normal profits are the only profits being made. Therefore, the main difference is that in the short run, abnormal profits can be made while in the long run, only normal profits will be made because of the entry of new firms in the market.
b) To what extent is the perfectly competitive market likely to exist in the real world?
Perfectly competitive markets are not likely to exist in the real world. This is because these are the markets in which there is an incredibly large amount of firms competing with one another, they all produce the same product, or the same type of product, and there are essentially no barriers of entry or exit. Some of the markets that do exist and are perfectly competitive include low-tech manufactured goods, low-skilled labour, specific agricultural commodities, and basically any market where lots and lots of firms are producing practically the same thing. These conditions are not common in the real world, but the ones that do exist display how competition affects the efficiency of a firm in both the short run and the long run.
01/12/2012 § Leave a comment
We’re coming across the final biology blogpost (or as Christina and I so lovingly call them – blosts) of the year! Afterwards, we’ll be having a test on Thursday so let’s get this post over with and start studying, please.
Our point of focus today is the vital relationship between the structure and function of organelles. A perfect example of this relationship can be found within mitochondria. The power house. We (should) know by now that the mitochondria is the structure that produces ATP for the cell, and it has the metabolism and system to do so, but a lot of it has to do with it’s structure.
We covered mitochondria briefly in a past post but now we’ll do so with more detail. Mitochondria has two membranes: the inner and outer membrane. Between these two is a narrow space that is filled with protons by chemiosmosis, a condition needed for ATP synthase to produce ATP. The inner membrane creates invaginations called cristae that has an increased surface area needed to situate electron transport chains and ATP synthase for ATP synthesis. Within the cristae is the matrix, which contains 70S ribosomes, enzymes, and a naked loop of DNA.
01/12/2012 § Leave a comment
The graph above shows the abnormal profit of an imperfectly competitive firm (so of a monopoly, monopolistic competition, or an oligopoly, but not a perfect competition). At Price C, the marginal revenue intersects marginal cost at a point lower then the average total costs. This means that the firm is earning a revenue and profit that is covering all the necessary costs. All revenue above that point (up until the average revenue, of course) is more than enough to cover for the costs, which makes it abnormal profit.
The shut down price is the average variable cost (AVC) and marginal cost (MC) equal each other. At this point, not all of the total costs are being covered but the important variables (i.e. rent, electricity, your own labour pay, etc.) are being covered, therefore there is no reason to shut down the company quite yet above this point. Below this point, the important variables are not being covered, therefore it would be time to shut down that firm and do something else with your life. The break-even price is the point at which average total cost (ATC) and marginal cost (MC) equal each other. At this point, all costs are equal, even the price of the additional unit of output, and after this point, the costs (marginal and average) start to increase again. This is therefore the point where the costs are at the best level for the firm.
In the short run, the main factor of production that can be changed is labour, among other things. The firm starts off with a high cost because it takes money to start any firm and proportionally, the costs outweigh what little profit they have at the beginning. Gradually, the costs diminish as the firm produces more output and additional factors of production to their output. These are economies of scale and are advantageous for the firm. At the bottom of the blue curve (Long Run Average Total Costs), the costs are at their lowest and the minimum efficient scale is obviously the point where the firm is at minimum efficiency – meaning that it is efficient but it can be more efficient. As the firm continues to produce more output, the law of diminishing marginal returns applies and the costs start to increase again. These are diseconomies of scale and are disadvantageous for the firm.
The above graph displays a kinked demand curve that can be used to explain collusions (when firms raise their prices together to increase their revenue – and FYI governments don’t like that) and price discrimination (where firms offer many different services to attract different groups of consumers). At higher prices (above the stable price), demand will become elastic because consumers will react by choosing between cheaper and more expensive firms that sell the same product (think: airplane tickets). When the price decreases from the stable point, demand is inelastic because, in collusion, cheaper prices won’t matter when all the firms selling the same product are selling at the same, low prices. This means that the point at which the price is stable (indicated by the green box) is the best point for the firms.