INTERNATIONALISATION, INFORMATION FLOWS AND NETWORKING IN RURAL AND REGIONAL FIRMS: IMPLICATIONS FOR REGIONAL DEVELOPMENT 1 Microeconomics Assignment Semester 1, 2019 Business Economics BUECO5903...

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Answer To: INTERNATIONALISATION, INFORMATION FLOWS AND NETWORKING IN RURAL AND REGIONAL FIRMS: IMPLICATIONS FOR...

Dr. Smita answered on May 02 2021
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Micro Economics
Micro Economics
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01-May-19
Question1 Single Seller: Monopoly
(a) Monopoly and allocative efficiency:
The market structure where a single seller operates is known as Monopoly and a producer is known as a monopolist. A
monopolist has always been criticized on the grounds that they have control over the market and has the power to exploit the consumers.
A monopolist decides to produce at a point where MR=MC but charges a price at market demand curve or average revenues. The monopolist earns supernormal profits leaving no room for allocative efficiency in the market.
(b) Advantages to the single seller market:
Single seller markets or monopolies have excess funds because of their supernormal profits. These excess funds earned by a monopolist can be invested in other areas so as to increase production and operational capabilities:
· Monopoly avoids duplication and hence wastage of resources.
· A monopoly enjoys economics of scale as it is the only supplier of product or service in the market. The benefits can be passed on to the consumers.
· Due to the fact that monopolies make lot of profits, it can be used for research and development and to maintain their status as a monopoly.
· Monopolies may use price discrimination which benefits the economically weaker sections of the society. For example, Indian railways provide discounts to students travelling through its network.
· Monopolies can afford to invest in latest technology and machinery in order to be efficient and to avoid competition.
Disadvantages of Monopolies: The disadvantages of monopolistic structures are well known since ages. They are:
1. Poor level of service.
2. No consumer sovereignty.
3. Consumers may be charged high prices for the low quality of goods and services.
4. Lack of competition may lead to low quality and outdated goods and services.
Question.2
(a) Market Structure used as a benchmark for allocative efficiency: Perfect Competition
Solution: Perfectly competitive market structure is considered as the benchmark for allocative efficiency. Perfectly competitive markets work on the principle of marginality. The producer decides to produce at the point where MR=MC i.e. when marginal revenue equates marginal cost.
This is because the price that consumers are willing to pay is equivalent to the marginal utility that they get. Therefore the optimal distribution is achieved when the marginal utility of the good equals the marginal cost. There are no deadweight losses in the perfectly competitive markets.
(b) Monopolistic firms fail to achieve allocative efficiency:
Monopolistic competitive producers always work on the principle of earning profits and charge a price higher than its marginal cost. Therefore these market structures cannot...
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