Business Economics Sole Supplier in Imdustry

Question: Describe about the Business Economics for Sole Supplier in Imdustry. Answer: Introduction: A monopolist is the sole supplier of the product in the industry. It regulates price. It either decides price or output. There is no supply curve in such kind of a market structure. It is in hands of the sole supplier to regulate how much output it wants to produce and sell it in the market. However, pricing of such products are guided by the fundamental MR-MC rule. That is, price is settled at a point where MR is maximal. Profit maximization is at that level of output where MR is equal to MC. Thus, corresponding price is the equilibrium price and corresponding output is the equilibrium quantity (Parkin,2013). Analysis: a). A seller would charge lower prices of its product only when he is aware that the price elasticity of the demand of its product is very high. In this case, the seller is very much aware of the fact that any downward movement in the price is very much likely to have a positive effect on the quantity demand. Moreover, due to the given downward sloping nature of the demand curve, it will be able to send more at a lower price and vice versa. It would continue to produce upto a point where MR=MC. Below diagram (left side) depicts the same scenario where the elasticity of demand is very high. A seller charges lower price and offers greater quantity. b). A monopolists seller would increase the price of its product when that there is no availability of any close substitute for the product it sells . This makes the demand for its product to be greatly inelastic. Hence, there will be a smaller reduction in the demand of the product on the account of the increase in the price. (Mankiw, 2007). Below diagram (right side) depicts the same scenario where the elasticity of demand is very low. A seller charges higher price and offers lesser quantity. Conclusion: Thus, price elasticity of demand plays a vital role in determining how much price or quantity would be offered to the buyer. Question 2). Introduction: ` A theory of comparative advantage states that there will be an overall rise in the economic welfare if both countries engage themselves in trade by trading and specializing in that commodity whose opportunity cost is low. Analysis: A statement that a country would flourish without trade is completely false. A country in isolation would be producing both goods- efficient as well as inefficient ones. However, if such country engages in trade, specializes in producing efficient commodity and imports a good where the cost of producing is relatively high, then it would produce more output and earn extra income. For example, France, in isolation would produce 29 units of both goods and China would produce 25 units of both goods. After entering into trade and specializing in the efficient commodity where the opportunity cost is low, both countries would produce more (Parkin,2013). For example, consider the following table where the opportunity cost for producing 1 unit of mobilephones is 1.9 units for France. For China, the opportunity cost for producing 1 unit of mobile phones is 1.08 units. Thus, China has comparative advantage in producing mobile phones because it has lower opportunity cost. France has comparative advantage in producing cheese due to lower opportunity cost. Mobile phones Cheese France 10 19 China 12 13 Total 22 32 Conclusion: Hence, because of the existence of the constant returns to scale, both countries specialize (France in cheese and China in Mobile phones) in producing a product which increases after specialization. That is, China will be producing 24 units of wine instead of total 22 units of production and France will now produce 38 units of cheese instead of 32 total units (Mankiw, 2007). References: Mankiw , G 2007,Economics: Principles and Applications, 4th edition South Western, Cengage Learning India Private Limited. Parkin, M 2013,Microeconomics, 11thedition, Prentice Hall.