ECONOMICS (ECO 415)

Assignment 2

QAMA 2 (202041)

PREPARED BY: SHERIL AIDA BINTI SULAINAN/2015727623

PREPARED FOR: Dr NURHANI BINTI HJ ABA IBRAHIM

SUBMISSION DATE: 8/12/2020

 Assignment 2

Dec 2016

Part B Question 1B

The type of price control that can be implemented by the government to ensure that customers
can buy goods and services at affordable prices is fixing price as maximum price or known as
price ceiling. The maximum price or price ceiling set by government is the legal price which is
set below the equilibrium price to prevent producers from raising the price above it. Maximum
price is implemented to protect consumers, usually during food shortages to ensure low cost
food for the poor. Usually, government set a maximum price on essential commodities such as
chicken, fish, cooking oil, rice, sugar and others. This was meant to prevent the practice of
setting unfair prices that would harm consumers and the society as a whole. Maximum price is
also implemented on rent controls to ensure affordable accommodation for low income groups.
This maximum price is set below the equilibrium price which means that the sellers cannot sell
goods and services higher than the maximum price.

For the measure to be effective, the ceiling price must be below that of the equilibrium price.
The ceiling price is binding and causes the equilibrium quantity to change – quantity demanded
increases while quantity supplied decreases. It causes a quantity shortage of the amount Qd –
Qs. In addition, a deadweight loss is created from the price ceiling.
A price ceiling is said to be ineffective if it does not change the choices of market participants.
As illustrated above, an ineffective (price) ceiling is created when the ceiling price is above the
equilibrium price. Since the ceiling price is above the equilibrium price, natural equilibrium still
holds, no quantity shortages are created, and no deadweight loss is created.
 Assignment 2

Jan 2018

Part B Question 2A

PRODUCTION STAGES:

The three stages of production are characterized by the slopes, shapes, and interrelationships
of the total, marginal, and average product curves. The first stage is characterized by a positive
slope of the average product curve, ending at the intersection between the average product and
marginal product curves; the second stage by continues up to the point in which the marginal
product becomes negative, at the peak of the total product curve; and the third stage exists over
the range of in which the total product curve is negatively sloped. In Stage I, average product is
positive and increasing. In Stage II, marginal product is positive, but decreasing. And in Stage
III, total product is decreasing.

Short-run production by a firm typically encounters three distinct stages as a larger amounts of

a variable input (especially labor) are added to a fixed input (such as capital). The first stage
results from increasing average product. The second stage sets it at the peak of average
product, experiencing a wide range of decreasing marginal returns, and the law of diminishing
marginal returns. The third stage is then characterized by negative marginal returns and.
Three Product Curves

Three Stages

The three stages of short-run production are readily seen with the three product curves--total
product, average product, and marginal product. A set of product curves is presented in the
exhibit to the right. The variable input in this example is labor.

The top panel contains the total product curve (TP). It generally rises, reaches a peak, then
falls. The bottom panel contains the marginal product curve (MP) and the average product
curve (AP). Both curves rise a bit for small quantities of the variable input labor, then decline.
Marginal product eventually turns negative, but average product remains positive.

The three short-run production stages are conveniently labeled I, II, and III, and are separated
by vertical lines extending through both panels.
Stage I

Short-run production Stage I arises due to increasing average product. As more of the variable
input is added to the fixed input, the marginal product of the variable input increases. Most
importantly, marginal product is greater than average product, which causes average product to
increase. This is directly illustrated by the slope of the average product curve.

Consider these observations about the shapes and slopes of the three product curves in Stage
I.

 The total product curve has a positive slope.

 Marginal product is greater than average product. Marginal product initially increases,
the decreases until it is equal to average product at the end of Stage I.

 Average product is positive and the average product curve has a positive slope.
Stage II

In Stage II, short-run production is characterized by decreasing, but positive marginal returns.
As more of the variable input is added to the fixed input, the marginal product of the variable
input decreases. Most important of all, Stage II is driven by the law of diminishing marginal
returns.

The three product curves reveal the following patterns in Stage II.

 The total product curve has a decreasing positive slope. In other words, the slope
becomes flatter with each additional unit of variable input.

 Marginal product is positive and the marginal product curve has a negative slope. The
marginal product curve intersects the horizontal quantity axis at the end of Stage II.

 Average product is positive and the average product curve has a negative slope. The
average product curve is at its a peak at the onset of Stage II. At this peak, average
product is equal to marginal product.
Stage III

The onset of Stage III results due to negative marginal returns. In this stage of short-run
production, the law of diminishing marginal returns causes marginal product to decrease so
much that it becomes negative.

Stage III production is most obvious for the marginal product curve, but is also indicated by the
total product curve.

 The total product curve has a negative slope. It has passed its peak and is heading
down.

 Marginal product is negative and the marginal product curve has a negative slope. The
marginal product curve has intersected the horizontal axis and is moving down.

 Average product remains positive but the average product curve has a negative slope.
Economic Production

These three distinct stages of short-run production are not equally important. Stage I, and with
largely increasing marginal returns, is a great place to visit, but most firms move through it
quickly. Because each variable input is increasingly more productive, firms employ as many as
they can, as quickly as they can. Stage III, with negative marginal returns, is not particularly
attractive to firms. Production is less than it would be in Stage II, but the cost of production is
greater due to the employment of the variable input. Not a lot of benefits are to be had with
Stage III.

Stage II, with decreasing but positive marginal returns, provides a range of production that is
suitable to most every firm. Although marginal product declines, additional employment of the
variable input does add to total production. Even though production cost rises with additional
employment, there are benefits to be gained from extra production. The trick is to balance the
extra cost with the extra production.

As a matter of fact, because Stage II tends to be the choice of firms for short-run production, it is
often referred to as the "economic region." Firms quickly move from Stage I to Stage II, and do
all they can to avoid moving into Stage III. Firms can comfortably, and profitably, produce
forever and ever in Stage II.

Reference:

Choo, T. H. (2017). Fundamentals Of Economics. Selangor, Malaysia: Oxford University Press.