Q1. During the initial days of Covid-19 pandemic

Posted: March 12th, 2023

Microeconomics – Economics Assignment Help
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Assignment Task

Microeconomics Assignment

Q1. During the initial days of Covid-19 pandemic, we have all witnessed massive shortage of hand sanitizers and masks. The few that were available in the market were exorbitantly priced. Soon, many more companies started producing these items and in a few months’ time, these items were available in plenty again, and prices came down.

Using the concepts learnt during the course, explain this phenomenon of high price (with few firms) in the short run and low price (with more firms) in the long run. Use an appropriate diagram to support your answer. Assume that the market for hand sanitizers and masks are perfectly competitive.

Explain how in short run in a competitive market, supernormal profits are possible, but it gets wiped out in the long run when more firms enter into the market attracted by the profit (free entry). The student is expected to explain how in the long run each remaining firm in the market earn a normal profit.
Draw the perfect competition long run adjustment diagram.

Q-2 Let’s assumes you are planning to buy a new laptop. Explain the demand determinants. Which of the demand determinant will have higher weightage and why?

Question 3. Assume a company (e.g. Car Trade) which is dealing with sale purchase of used cars are making huge profits. Higher profits may attract entry of new firms into the food delivery industry. Explain what could be the impact of entry on the firms and the industry as a whole.

Average cost of rendering the delivery service for the existing players
Price/commissions that they charge from their customers
Profitably
How would the break-even point impacted due to entry of new firms?

This Economics Assignment

Q1. During the initial days of Covid-19 pandemic, the demand for hand sanitizers and masks increased significantly. However, due to limited supply and few firms producing these items, the market price for these items went up. In the short run, the market for hand sanitizers and masks was in a state of disequilibrium, with demand exceeding supply. As a result, the price went up, and the few firms that were producing these items earned supernormal profits, as shown in the diagram below:

[INSERT DIAGRAM OF SHORT-RUN PERFECTLY COMPETITIVE MARKET]

In the long run, new firms entered the market, attracted by the high profits. As a result, the supply of hand sanitizers and masks increased, shifting the supply curve to the right. With more firms producing these items, the market became more competitive, and the price went down, as shown in the diagram below:

[INSERT DIAGRAM OF LONG-RUN PERFECTLY COMPETITIVE MARKET]

In the long run, each remaining firm in the market earned a normal profit, where total revenue equals total cost, including the opportunity cost of capital. Thus, in the long run, there were no supernormal profits, and the market was in a state of equilibrium.

Q2. The demand determinants for a laptop include:

Price: The higher the price of the laptop, the lower the quantity demanded, ceteris paribus.
Income: The higher the income of consumers, the higher the quantity demanded, ceteris paribus.
Availability of substitutes: The more substitutes available for the laptop, the lower the quantity demanded, ceteris paribus.
Consumer preferences: The more desirable the features and design of the laptop, the higher the quantity demanded, ceteris paribus.
Advertising: The more advertising for the laptop, the higher the quantity demanded, ceteris paribus.
Of these determinants, price typically has the highest weightage because it directly affects the affordability of the laptop for consumers. If the price of a laptop is too high, consumers may opt for a cheaper substitute or postpone their purchase altogether. However, the weightage of each determinant may vary depending on the specific market conditions and consumer preferences.

Q3. If new firms enter the market for used car sales, the impact on the firms and the industry as a whole could be as follows:

Average cost of rendering the delivery service for existing players: With more firms in the market, there may be more competition to provide delivery services, which could reduce the average cost of rendering these services for existing players.
Price/commissions that they charge from their customers: With more firms in the market, there may be more competition to attract customers, which could lead to lower prices or commissions for existing players.
Profitability: With more firms in the market, there may be more competition to earn profits, which could reduce the profitability of existing players.
Break-even point: With more firms in the market, the break-even point for existing players could be impacted, as they may need to lower prices or commissions to remain competitive.
Overall, the entry of new firms could increase competition in the market, which could benefit consumers through lower prices and better services. However, it could also lead to reduced profits for existing players and potentially drive some out of the market if they are unable to compete effectively.