Term 2, Assignment

SAGAR S

BUSINESS ECONOMICS
Case 1 - Increase in tuition fee in
state university
Percentage change in price= (3750-3000)/(3000)
= 0.25*100
= 25%
Given, Elasticity of enrollment at state university is -1.5
-- x/25% = -1.5
x = -1.5 * 25%
x = -0.375
Consider, x= (10000-m)/(10000)
-0.375= (10000-m)/(10000)
-3750=10000-m - m=6250
This implies there is a loss of extra 6250 students.
Since the factor is -1.5 is less than 1 , it is inelastic
There would be more effect on student demands due to the increase in price.
Case 2 - Forey, Inc.,

 Forey is now in a Perfect Competition market

 This market has the following charaterictics
 All firms in this market state sell an homogenous and identical
products
 All firms are price takers - they cannot influence the market price
of their product, they cannot sell their product at any higher price
 Market share has no influence on price
 There is perfect information and both the buyer and consumer
strive to make profit
 No entry / exit from market
Case 2 - Forey, Inc.,

Benefit in Short run -

 Profits or Losses depend only on the number of units sold – on sales.
 They aim to make highest profit, or atleast lowest losses.
 There is no monopoly pricing power.
 There is market equilibrium
 This is a consumer oriented market and sellers cannot displease the
consumer because consumer will quickly shift from one seller to
another,
 Consumer get standardized product irrespective of the place of
purchase of product
 No externalities, that is no external costs or benefits to third parties not
involved in the transaction.
Case 2 - Forey, Inc.,

Profit in Long run –

 In the long run, perfectly competitive firms will react to profits

by increasing production.
 They will respond to losses by reducing production or exiting
the market.
 Ultimately, a long-run equilibrium will be attained when no
new firms want to enter the market and existing firms do not
want to leave the market since economic profits have been
driven down to zero.
Case 3 - Kerala Electricity Board

The CEO of the company claims that because all profits are given
back to the citizens, it makes economic sense to charge monopoly
price. Do you agree with the CEO ?
No
Monopoly pricing leads to –
 High Prices (set above marginal pricing)
 Asymmetric information – the monopolist may know more than
the consumer and can exploit this knowledge to its own
advantage.
 Late implementation, poor service and no consumer
dissatisfaction
Case 3 - Kerala Electricity Board
If the gains of the producers from monopoly power could be redistributed to consumer,
would the social cost of monopoly power be eliminated?
No
 The result of having a monopolistic market as opposed to a competitive market is
restricted output and a higher price.
 Monopoly creates a social cost, called a deadweight loss, because some consumers who
would be willing to pay for the product up to its marginal cost , are not served.
 An important difference between monopoly and perfect competition is that, under per-
fect competition allocation of resources is optimum and therefore social welfare is
maximum, whereas under monopoly resources are misallocated causing loss of social
welfare.
 When a product is produced and sold under conditions of monopoly, the monopolist
gains at the expense of consumers, for they have to pay a price higher than marginal cost
of production. This results in loss of consumers’ welfare.
Case 3 - Kerala Electricity Board

What are the important measures you suggest to control

monopoly power?
 Bring the monopoly to public power - Nationalism
 Prohibiting Mergers
 Setting up Price controllers or monitors
 Setting up many smaller units to break monopoly
 Allow more new entrants to re build competition