Academic Task Number: 2

Course Code: ECO001

Registration id: 12311948
Name: Lin Htet Oo@Larry

Question one:
When only one input is increased, create a schedule for the marginal product to increase
production. Show the Law of Variable Proportion’s phases.

 The Law of Variable Proportions is an economic concept that explains the relationship
between inputs and outputs in the production process. It is also known as the Law of
Diminishing Marginal Returns. According to this law, if one input is increased while
keeping other inputs constant, the marginal product of that input will eventually
decrease.
The three phases of the Law of Variable Proportions are:

Increasing Marginal Returns:

During this phase, as the quantity of a variable input is increased while other inputs are held
constant, the marginal product of that input rises.
This is typically the initial stage of production, where the additional input enhances overall
productivity.
The factors of production work efficiently together, and specialization may lead to increased
output.

Diminishing Marginal Returns:

In this phase, as more units of the variable input are added while keeping other inputs constant,
the marginal product begins to diminish.
The law suggests that there is an optimal combination of inputs, and as you move beyond that
point, the efficiency of the additional input decreases.
This phase is characterized by diminishing returns per additional unit of the variable input.

Negative Marginal Returns:

If the input of the variable factor continues to increase beyond the point of diminishing returns,
the marginal product eventually becomes negative.
In this phase, the additional input starts to reduce the overall output, and the production
process becomes inefficient.
This situation is generally impractical and unsustainable in the long run.
Schedule for the Marginal Product:

Units of variable Total Product Average Product Marginal Product

input
1 4 4 4
2 10 5 6
3 21 7 11
4 40 10 19
5 55 11 15
6 60 10 5
7 63 9 3
8 64 8 1
9 63 7 -1

In this example, as the units of labor increase, the total product initially increases at an
increasing rate (Phase 1), then at a decreasing rate (Phase 2), and eventually starts to decline
(Phase 3). The marginal product column shows the additional output produced by each
additional unit of labor.
Question 2:
In terms of elasticity, how would you describe the demand curve, for a single firm in a perfectly
competitive market?
In a perfectly competitive market, each firm is a price taker, meaning it takes the market price as
given and has no influence on it. In such a market structure, the demand curve for a single firm
is perfectly elastic.
The key characteristics of a perfectly elastic demand curve for a single firm in a perfectly
competitive market are:

Perfect Elasticity:
 The demand curve facing an individual firm is horizontal, or perfectly elastic.
 The firm can sell any quantity of its output at the prevailing market price.

Price Taker:
 The firm has no control over the market price; it simply accepts the market-determined
price as given.
 The individual firm can sell any quantity of output at the market price but cannot sell at
a higher price.

Constant Revenue per Unit:

 Since the firm can sell any quantity at the market price, marginal revenue is equal to the
market price.
 Marginal revenue is constant and equal to the market price.

Elasticity Coefficient Equals Infinity:

 The price elasticity of demand for the firm's output is perfectly elastic, which means the
elasticity coefficient is equal to infinity.
In graphical terms, the demand curve for a perfectly competitive firm is a horizontal line at the
market price. This reflects the fact that the firm can sell any quantity it wishes at the prevailing
market price.

Question 3:
Find three examples of kinked demand curves that can help you understand their theoretical
basis by taking a look around you.
Kinked demand curves are a theoretical concept used to explain price rigidity and uncertainty in
oligopolistic markets. The kinked demand curve model suggests that if a firm raises its price,
other firms will not follow suit, leading to a significant decrease in quantity demanded for its
product. However, if the firm lowers its price, other firms will likely match the decrease,
resulting in only a minor increase in quantity demanded. Here are three examples to help you
understand the theoretical basis of kinked demand curves:
1. Airline Industry:
 Consider the airline industry where major carriers often closely monitor and
respond to each other's pricing strategies.
 If one airline raises its ticket prices, other airlines may not necessarily follow suit
immediately, as passengers may opt for lower-priced alternatives.
 However, if one airline decides to lower its prices, competitors are likely to
quickly match the decrease to remain competitive, resulting in a limited increase
in the quantity of tickets sold.
2. Smartphones:
 In the smartphone market, major players closely observe each other's pricing
and product release strategies.
 If one leading smartphone manufacturer raises the price of its flagship device,
other competitors may not necessarily follow suit immediately, as consumers
might opt for alternative brands or models.
 However, if one company decides to lower the price of its flagship device,
competitors might quickly match the decrease to maintain market share,
resulting in a relatively small increase in the quantity demanded for that specific
model.
3. Soft Drink Industry:

 In the soft drink industry, major companies like Coca-Cola and Pepsi closely
monitor each other's pricing strategies.
 If one company decides to increase the price of its flagship beverage, the other
may not immediately follow suit to avoid losing market share.
 However, if one company decides to lower its prices, competitors are likely to
quickly match the decrease, resulting in only a marginal increase in the quantity
demanded for that particular brand.
Question 4:
Make a distinction between monopolistic competition and perfect competition in terms of how
demand curves of business behave.
 1. Perfect Competition:
 Nature of the Market: In perfect competition, there are many buyers and sellers,
and each firm produces a homogeneous (identical) product.
 Degree of Market Power: Individual firms in perfect competition are price takers.
They have no control over the market price and must accept the prevailing
market price for their product.
 Demand Curve: The demand curve facing a perfectly competitive firm is perfectly
elastic. This means that the firm can sell any quantity of output at the market
price, and it has no influence on the price level.
 Marginal Revenue: Marginal revenue for a perfectly competitive firm is equal to
the market price. As such, the marginal revenue curve is also a horizontal line at
the market price.
2. Monopolistic Competition:
 Nature of the Market: Monopolistic competition is characterized by a large
number of sellers producing differentiated products. Each firm has some degree
of control over the price of its product due to product differentiation.
 Degree of Market Power: Firms in monopolistic competition have a limited
degree of market power. They can differentiate their products through branding,
advertising, or other means, allowing them to have some influence over the price
they charge.
 Demand Curve: The demand curve for a monopolistically competitive firm is
downward-sloping, reflecting the fact that the firm can sell more output by
lowering the price but at the expense of a lower price.
 Marginal Revenue: The marginal revenue curve for a monopolistic competitor is
downward-sloping and lies below its demand curve. This is because, in order to
sell more units, the firm must lower the price, resulting in a decrease in revenue
per unit sold.
In summary, the key distinction lies in the nature of the market structure and the degree of
market power. Perfectly competitive firms are price takers with perfectly elastic demand curves,
while monopolistically competitive firms have some control over the price due to product
differentiation, resulting in a downward-sloping demand curve.

Question 5:
Why is a firm’s demand curve more elastic in monopolistic competition than it is in monopoly?
Illustrate.
In monopolistic competition, a firm's demand curve is generally more elastic compared to a
monopoly. This is primarily due to differences in the degree of product differentiation and the
availability of substitutes in the two market structures.
1. Monopolistic Competition:
 Product Differentiation: Firms in monopolistic competition produce
differentiated products. Each firm offers a product that is distinct from those of
its competitors in terms of branding, features, or quality.
 Substitutability: Because products are differentiated, consumers have more
substitutes available. If one firm raises its price or decreases the quality of its
product, consumers can easily switch to a similar product offered by another
firm.
 Elastic Demand: The availability of substitutes makes the demand for a firm's
product more elastic. Consumers are responsive to changes in price or quality,
and the firm cannot significantly raise its price without losing customers to
competitors.
2. Monopoly:
 Single Seller: In a monopoly, there is only one seller or producer in the market.
The monopolist is the sole provider of a product or service without close
substitutes.
 Lack of Substitutes: Since there are no close substitutes, consumers have limited
options. They must either purchase the monopolist's product or go without.
 Inelastic Demand: The demand for a monopolist's product is relatively inelastic
because consumers have fewer alternatives. The monopolist has more pricing
power, and consumers are less responsive to changes in price because they lack
readily available substitutes.
Question 6:
How determines the U-shape of a long run average cost curve? Explain.
The U-shape of a long-run average cost (LRAC) curve is primarily determined by economies and
diseconomies of scale experienced by a firm as it adjusts its scale of production over the long
run. The long run is a period during which a firm can adjust all of its inputs, including capital and
labor.
Here's how economies and diseconomies of scale contribute to the U-shape of the LRAC curve:
1. Economies of Scale:
 In the initial stages of production expansion, a firm often experiences economies
of scale. These occur when increasing the scale of production leads to a
proportionately larger increase in output, resulting in lower average costs.
 Economies of scale can arise due to various factors, such as specialization, better
utilization of resources, bulk purchasing discounts, and improved efficiency in
production processes.
 As the firm grows, it benefits from spreading its fixed costs (like machinery,
research, and development) over a larger quantity of output, leading to lower
average costs.
2. Constant Returns to Scale:
 At a certain point, the firm may reach a scale of production where it experiences
constant returns to scale. This means that increasing the quantity of output has a
proportional effect on average costs.
 Constant returns to scale can occur when the benefits of economies of scale are
offset by factors such as increased complexity in managing larger operations or
diminishing marginal returns to inputs.
3. Diseconomies of Scale:
 If the firm continues to expand production beyond the point of constant returns
to scale, it may encounter diseconomies of scale. Diseconomies of scale occur
when the firm's average costs start to rise as a result of inefficiencies associated
with larger scale operations.
 Factors contributing to diseconomies of scale can include communication
problems, increased bureaucracy, coordination challenges, and difficulty in
managing a larger workforce.