Sample Essay on Economics

Economics

Part A

  1. Futures Unlimited Corporation is a single-price monopoly corporation that has a government license thereby effectively creating a market barrier to other corporations that might want to do the same. The company is a single-price monopoly since it charges the same price for every unit it sells and does not discriminate among the different buyers or among different units that are bought by a buyer. The government license serves as a high barrier entry to prevent other companies from competing with Futures Unlimited Corporation. The corporation therefore does not end up operating at its minimum average total cost curve but rather operates above it. The company selects a higher price for a reduced quantity of output thereby ensuring that a smaller amount is available at a greater price. Per unit profit increases but then lesser units are sold and this has a negative effect on the overall profitability of the business. Furthermore, there is the issue of rent seeking since there is an economic profit available and other corporations might want to come into the business and leave the monopoly to only earn a normal profit. The firm therefore continues to part with rent seeking costs to retain government license and this increases its fixed costs, total fixed costs, and the average total cost. These have an effect of shrinking consumer surplus, snowballing deadweight loss, and can consume the entire economic profit.
  2. Futures Unlimited Corporation is a single-price monopoly that utilizes its power in the market to make output and price decisions in a way that ensures it can achieve more profit as opposed to what it would achieve if operating in a perfect competitive market. The corporation’s price, profit, and output can be established by examining the marginal revenues, marginal cost, and demand curves. The firm has to set its output at the place where marginal cost is equal to marginal revenue. The quantity that needs to be produced is found at where the marginal revenue curve and marginal cost curve intersect. The price at which this amount is sold at can be determined at where the demand curve intersects with that quantity that is being produced. The marginal revenue of a monopoly is always below the demand curve thus the price of the quantity produced will always be above marginal cost at equilibrium and this provides Future unlimited Corporation with an economic profit. This effectively causes an economic inefficiency because the monopoly creates prices that are higher and output that is lower. The monopoly essentially does not achieve productive efficiency, allocative efficiency meaning that people do not enjoy the product because it is has a higher price, and those who purchase it enjoy less consumer surplus.

Part B

  1. Consumers do not necessarily benefit from a tariff and import quota because both are restrictions that effectively reduce the quantity of imports, raises domestic prices of goods, decreases the welfare of domestic consumers, increases the welfare of domestic producers and causes a deadweight loss. A tariff is a tax that is enforced on imported goods and services and is utilized to constrain trade as they increase the prices of the imported services and goods thereby making them more expensive to consumers. Governments often impose tariffs in a bid to raise more revenue or even protect the domestic industries against foreign competition that often has cheaper foreign good that consumers purchase as opposed to local ones that are more expensive. Tariffs upsurge the prices of imported goods and they do not implore on the domestic producer to reduce prices since there is no increased competition therefore consumers are left to pay the higher prices thereby a reduction of their well-being and consumer surplus. A quota on the other hand restricts trade by limiting the quantity of goods and services that are exported or imported during particular times. Quotas are often utilized in international trade to regulate volumes of trade between countries since it effectively reduces imports hence increasing domestic production. When the quantity being imported of a good is restricted then the price of those good increases and consumers are then encouraged to purchase more of domestic goods that are made cheaper by the imposition of the quota. The consumers have to part with more revenue that they originally intended and are left worse off than they would be if at all the quota was not imposed. Tariffs are often preferred to quotas since quotas are susceptible to corruption and smuggling that have an effect of increasing the prices of goods thereby leaving the consumer worse off in terms of welfare and not necessarily bring in more revenue to the government.
  Russia Panama
Gloves 20 180
Hats 80 90

 

  1. An opportunity cost is the benefit forgone when one decides to produce a certain commodity over another. The opportunity cost of producing gloves in Russia is 80 units of Hats and the opportunity cost of producing hats is 20 units of gloves. The opportunity cost of manufacturing gloves in Panama is 90 units of hats and the opportunity cost of making hats in Panama is 180 units of gloves.
  2. If the countries can, they should trade because both countries have different comparative advantages in the production of both gloves and hats. Panama needs to solely focus on producing gloves since it has a lower opportunity cost of producing gloves as compared to Russia as it only gives up 90/180=1/2 units of hats to produce one extra unit of gloves as compared to Panama that has to give up 80/20=4 units of hats. Russia needs to solely focus on producing hats since it only gives up 20/80=1/4 units of gloves to produce one extra unit of hats as compared to Panama which has to give up 180/90=2 units of gloves. If they do that, they achieve a higher possibility frontier of quantities they would never have achieved with the resources they have.