WK III: See attached | Economics

See attached WKIIIEssay.docx WK III Essay This 3-to-5-page essay measures your mastery of ULOs 1.1, 1.2, 2.1, 6.1, 6.2 and 7.1. Elasticity Assignment objective: Unit I introduced the benefits of markets to improving outcomes for producers and consumers. Unit II examined the role of costs and prices in decision-making. For this assignment, you will answer a series of questions in the form of an essay.  Length: Your submission is required to be at least 3 pages in length and not more than 5 pages, not counting the title page and references page. References: A minimum of 3 peer-reviewed sources are required, any additional resources used are required to be scholarly/academic in nature and found in the CSU Online Library. APA Style is required for citations and references. Definitions: Scholarly journals are sometimes called academic journals. The terms are often used interchangeably to describe the same type of publication. These types of publications are published by universities, academic institutions, professional associations, and commercial enterprises and are compiled by scholars, academics, and other subject authorities. Details: In your paper, include the following: 1. Introduction 2. Research elasticity information for two particular goods: one with an elastic demand and one with an inelastic demand. Using elasticity information you gather, predict changes in demand. The United States Department of Agriculture website has a good resource to help with this. 3. Describe how marginal analysis, by avoiding sunk costs, leads to better pricing decisions. 4. Explain the importance of opportunity costs to decision-making and how opportunity costs lead to trade. 5. Evaluate how better business decisions can benefit not just the producer but the consumer and society as a whole. In your evaluation, contrast the deontology and consequentialism approaches to ethics. 6. Conclusion UnitIIIStudyGuide.pdf ECO 6301, Economics for Managers 1 Course Learning Outcomes for Unit III At the end of this unit, you should be able to: 1. Evaluate the ethical outcomes of free market outcomes using supply and demand models. 1.3 Compare and contrast the effect perfect competition and monopoly have on total welfare. 3. Analyze how price and output influence profit maximization under different market structures. 3.1 Compare and contrast the market outcomes for perfect competition, monopoly, oligopoly, and monopolistic competition. Required Unit Resources Chapter 8: Understanding Markets and Industry Changes (ULO 3.1) Chapter 9: Market Structure and Long-Run Equilibrium (ULO 3.1) Chapter 10: Strategy: The Quest to Keep Profit from Eroding (ULO 1.3) Article: Price Caps, Oligopoly, and Entry (ULO 3.1) Unit Lesson Unit Material (ULO 2.1) This unit’s material focuses on different types of market structures and how firms in those markets seek profit. Before getting into market structures, we will discuss a bit about markets in general. All markets are affected by supply and demand. The type of market structure in question will primarily affect how supply behaves, but important information for firms comes from demand. This unit’s material focuses on different types of market structures and how firms in those markets seek profit. Before getting into market structures, we will discuss a bit about markets in general. All markets are affected by supply and demand. The type of market structure in question will primarily affect how supply behaves, but important information for firms comes from demand. Supply and Demand In a market, supply and demand come together to determine the equilibrium price and quantity. When demand increases, price and quantity increase. When supply increases price decreases and quantity increases. UNIT III STUDY GUIDE Market Structures and Profit ECO 6301, Economics for Managers 2 UNIT x STUDY GUIDE Title Factors Affecting Demand There are several factors that can cause demand to change. Economists group these reasons into five main factors: Businesses need to know not just these factors but how these factors affect the industry of their business. Changes in income, for example, do not affect all businesses the same. Economists categorize goods as normal goods, which are goods whose demand increases as income increases, and inferior goods, which are goods whose demand increases as income decreases. An example of a normal good would be eating out. The more income a person has, the more likely they are to eat at restaurants rather than prepare meals at home. Candy, possibly surprisingly, is an inferior good. When people experience lower incomes, they cannot afford as much entertainment as before, so candy offers an inexpensive pleasure. Changes in the price of related goods is another factor that can have different effects based on specific circumstances. Some goods are related in consumption. These are called complements. Peanut butter and jelly are an example of complements. If the price of a complement decreases (say, peanut butter), then the demand for the good in question (say, jelly) will go up. After all, if you are buying more peanut butter, you are going to need more jelly to go with it. Substitutes are goods that compete in consumption. Coke and Dr Pepper, for example, are substitutes. If the price of Coke goes down, consumers are more likely to buy Coke, and, thus, less likely to buy Dr Pepper. So if the price of a substitute good decreases, the demand for the good in question goes down. Most of the remaining factors work as might be expected. If the number of demands increases, demand for a particular good will increase. Imagine sitting in a waiting room as your oil gets changed. There is a vending machine there. You might be tempted to get something. If another person walks into the waiting room, they will also be tempted to get something. As more and more people enter the waiting room, the likelihood that somebody will purchase from the vending machine increases. Most likely, multiple people will make a purchase from the vending machine. In other words, demand will increase. Add in tastes and preferences. If a particular product becomes popular (perhaps because of positive press, perhaps the product is seasonal, perhaps the product has experienced a change in quality), then more people are likely to want the product. In other words, demand increases. Finally, look at expectations. Expectations might be a little confusing. The important thing to remember is that when looking at the effects of changes in demand, the time frame is immediate. That is, the expectation is for some time in the future, but the analysis is what happens to demand right now. So, if consumers expect prices to increase in the future, they will want to buy more before prices rise. That is, demand will increase. ECO 6301, Economics for Managers 3 UNIT x STUDY GUIDE Title Factors Affecting Supply There are also factors that can affect supply (as opposed to demand). Most of these factors are pretty straight forward. As the price of inputs increase, costs to the producers go up, so naturally the supply will decrease. For example, if the price of oranges goes up, the supply of orange juice will decrease. If the price of a similarly produced product increases, then the supply of the good in question will decrease. For example, if looking at the supply of vanilla ice cream and the price of chocolate ice cream increases, then the supply of vanilla ice cream will decrease as the resources used to make vanilla ice cream will be shifted over to make more chocolate ice cream to take advantage of the higher price. As with demand, the number of suppliers matters to supply. The more suppliers there are, the more production there is. This is fairly simple and straightforward. Technology is also an important factor for supply. An improvement in technology that makes production easier and cheaper will lead to an increase in the supply. It is unlikely that a firm would actually adopt new technology unless it had the express purpose of making production easier or cheaper. For example, self- checkout kiosks at grocery stores or fast food restaurants are technology that make the production process (or service delivery process) cheaper for companies. They do require an upfront investment in technology, but the payoff is lower operating costs in the future. Finally, expectations are important for supply and the same caution that applied to expectations with demand apply here. Firms respond now to expectations about the future. Another important note is that while it can often be easy to think of supply as production, it is better defined as what producers bring to market. So, if producers expect a price decrease in the future, they will want to rush to market what they can to take advantage of the relatively higher price. That is, the expectation of a future price decrease will result in an increase in supply right now. To learn how to draw a supply and demand graph in Microsoft Word, view the video How to Graph in Word. You can access closed-captioning once you access the video. Market Structure As mentioned in the beginning of the lesson, underlying the supply curve is the market structure. Economists differentiate market structures (identified by name later in the course) based on three characteristics. Those three characteristics are: • the number of sellers in a market (The number of buyers matters too, but that does not change among these four market structures.); • the homogeneity of production (This means how different the production is from one producer to the next; another way to think about this is whether you can identify the producer based on the product.); and • the existence, or not, of barriers to entry (also phrased free entry and exit). At one extreme of the market structures is perfect competition. Perfect competition is characterized by: • lots of sellers, • selling identical products, and • no barriers to entry (free entry and exit). At the other extreme of market structures is monopoly. Monopoly is characterized by: • one producer—and only one (If it is even two producers, it is a different market structure.), • selling a product that is unique in the market such that there are no close substitutes, and • impossible for competitors to enter. As you can see from the characteristics, monopoly is the opposite of perfect competition. These differences lead to some important outcomes for the different markets. ECO 6301, Economics for Managers 4 UNIT x STUDY GUIDE Title Since there are many producers producing exactly the same thing, perfectly competitive firms do not have any influence on the overall market. They are very much a “drop in the bucket” relative to the market. Perfectly competitive firms must accept whatever the market price is. Monopolies, on the other hand, are the only supplier in their market, so their decisions have a big influence on the market outcome. Monopolists cannot exactly set their price; they must be mindful of their consumers. When deciding what price to set, monopolists have to balance the revenue they would gain from raising their prices with the revenue they would lose by selling a lower quantity (and vice versa if they are considering a price decrease). Without barriers to entry, if a firm can make excessive profits (known as economic profit), then other firms will enter the market, taking some of that profit away. Monopolies are protected by barriers to entry, so if they can earn large economic profits, there will not be any competition to come along and take those profits away. Perfectly competitive markets are the most efficient. They must be. If a firm is not as efficient as possible, it will be run out of the market. Monopolies do not need to be efficient since they are protected by barriers to entry. Monopolists, just like every firm, want to maximize profits. Maximizing profit for a monopolist, however, means not producing as much as they could so that they can charge a higher price. In between these extremes are monopolistic competition and oligopoly. Monopolistic competition is a lot like perfect competition, except that rather than producing identical products, the firms produce slightly different products. The difference might be slight, and they might even be just perceived, but they matter, at least somewhat, to the consumer. Think about hair stylists and barbers, for example. Some people have certain people they like to cut their hair. Some people do not care but might still base their purchasing decision on proximity or availability. These differentiations introduce a slight amount of pricing power into the market. The differentiations also give rise to the need for firms to advertise what it is about their product that sets them apart from competitors. Differentiation can also be a feature of oligopolies. Oligopolies are a lot like monopolies except there are some firms, not one, in the market. Think of it this way, if you can name the firms that account for a strong majority of the market share off the top of your head, the industry is an oligopoly. Oil/Gas companies, airlines, and automobile companies are examples of oligopoly markets. The barriers to entry are high but not insurmountable. This feature leads to strategic behavior between the firms as the action of one firm affects the outcomes of other firms in the market. Strategic behavior will be an important topic explored in future units. Reference Reynolds, S. S., & Rietzke, D. (2018). Price caps, oligopoly, and entry. Economic Theory, 66(3), 707–745. https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direc t=true&db=bsu&AN=132338488&site=ehost-live&scope=site