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Economic Concepts Application Assignment

Economic Concepts Application Assignment

Abstract

This is a question and answer-based paper, which seeks to explore different economic aspects and concepts. It is a four-question paper with each question discussing a different economic aspect. The first question examines the suitability of a perfectly competitive market as the model of predicting how markets work in the real world. It is found that the model of a perfectly competitive market lacks the aspect of competition and its only theoretical. As such, it cannot be used as a determinant of how markets operate in the real world. The second question investigates the value of measuring profit in decision-making. The findings show that profit measurement helps firms in making decisions, and as such, its values cannot be ignored. The third question prefers monopoly business to a perfectly competitive market since from the manager’s perspective, the former ahs more benefits than the latter. The fourth question discusses the phenomenon of diminishing marginal productivity and concludes that it can only occur in the short-run but not in the long-run since, in the latter, all factors are variable, unlike in the former.

Q1. Few markets in the real world have the characteristics of a perfectly competitive market. Does that mean that the predictions of the model of perfect competition are not very useful in predicting how markets in the real world work? Discuss. (5 Marks).

The neoclassical economic approach argues that perfect competition market existence is defined by six factors: homogeneity of the product, price-takers, small market share, buyers’ awareness of the products and prices, and there is freedom of entry and exit (Thampapillai, 2010). From the Neoclassical point of view, this is a theoretical market, and if it happened to exist, it would lead to the best economic results for both society and consumers (Nomidis, 2015). It is assumed that all real markets cannot be accommodated in a perfectly competitive market because it is just a theoretical model (O’Sullivan, Sheffrin, & Perez, 2014). This explains why it is difficult to find many markets with perfectly competitive market features in the real world. The features of perfect competition have also been found to be obstacles for the outside players (Thampapillai, 2010). For example, it is difficult for all firms to sell identical products, and there is no real market without barriers to entry.┬á These obstacles disqualify the perfect market playing a key economic role like predicting how the real markets in the real world work.

Several studies and economic scholars have criticized the perfect competition market as being built on an unrealistic model that cannot be used to produce any relevant insight. For example, Hayek (1958), as quoted by Stamate & Mu┼četescu (2011), disputed the effectiveness of the perfect market in determining how markets work in the real-world on the grounds that it has no perfect trait to be called competitive. In critiquing the perfect competition model, Hayek (2016) states that the model has no single element of competitiveness, and it has reduced sellers and buyers to price takers. As such, it cannot be relied upon in the market operation decisions. According to Stamate & Mu┼četescu (2011), for the perfect competition market to be valid, it must contain the knowledge of economic aspects about the past, present, and future. The perfect competition market lacks an uncertainty, and as such, it cannot be used as a predictor of how the market works in the real world (Ostroy & Makowski, 2011). The second group of critics, as presented by Stamate & Mu┼četescu (2011), argue that the perfect competition market does not even portray a theoretical outcome. For example, ┬áStamate & Mu┼četescu (2011) asserts that innovation and development can only be pursued by the firm that experiences economic profits. As such, perfect competition is rendered ineffective in predicting the operations of the market in the real world since, in the long run, it has been proved to make zero economic profits.

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Q2. ‘Profit is the maximum value a company can distribute during the year and still expect to be worth as much at the end of the year as it was at the beginning.’ Discuss this statement, and comment on its value in measuring profit for decision-making. (5 Marks).

According to Rajasekaran & Lalitha (2011), the above definition of profit stresses the need to compare business’s net worth at the beginning and the end of the year and determine whether it is well off. The need to maintain the net worth of business both at the start and end of the year brings in the importance of profit measurement in decision-making. Widarti, Subiyanto, & Pramajaya (2018) asserts that profit when measured in terms of positive cash flow it is associated with financial performance success and valuable business. This means the value of business tends to increase when it makes profits. Business that suffer losses are seen as a failure, and they are perceived to be struggling to survive. Profit is an important element for the organization since it is the primary goal while the company operates (Vahid, Dehghanpou, & Nasirizadeh, 2013). No company will survive without making profits since the revenue must exceed expenses for the firm to continue operating, and as such, measuring a firm’s profitability both in the short run and in the long run is fundamental for critical evaluation of the organization.

The value of measuring profit is recognized when making important decisions such as improving management efficiency, economic allocation of resources to retain or increase the net worth of the company, and improving the future performance of the firm (Widarti, Subiyanto, & Pramajaya, 2018). For example, high profits are associated with efficiency in management, while losses are linked with ineffective management. With increasing net worth, the firm can reinvest profit in the areas that have proved to be more profitable. Regarding future performance, the firm can use the behavioral characteristics of profit to predict future earnings an operations (Vahid, Dehghanpou, & Nasirizadeh, 2013). The measurement of profit has also proved helpful to major stakeholders, such as creditors and investors. The management also uses profit while making expense decisions. For example, if the net worth at the end of the year is lower compared to the beginning of the year, the management will decide on how to reduce costs.

Q3. As a manager, would you prefer your business to be in a monopoly position or a perfectly competitive market? Why? Support your views with examples. (5 Marks)

Q4.Why is it that, in the short-run, after a certain number of workers has been hired, output increases by less and less with each additional worker hired? Illustrate your answer with an example. Would there be any circumstances under which this phenomenon would not occur? (5 Marks)

Note: For all your answers support your views/opinions with at least two to three scholarly references, and a word count of 400-500 words for each answer.

References

Hayek, F. A. (2016). Foreword to “The Meaning of Competition.” Econ Journal Watch, 13(2), 359ÔÇô372.

Jael, P. (2019). Does Marginal Productivity Mean Anything in Real Economic Life? Munich: MPRA.

Nomidis, D. (2015). A Reconsideration of the Theory of Perfect Competition. SSRN, 1-24.

Ostroy, J. M., & Makowski, L. (2011). Perfect Competition and the Creativity of the Market. Journal of Economic Literature, 39(2), 479-535. doi:10.1257/jel.39.2.479

O’Sullivan, A., Sheffrin, S., & Perez, S. (2014). Survey of Economics: Principles, Applications, and Tools, 6th Edition. Upper Saddle River, NJ: Pearson Education.

Rajasekaran, V., & Lalitha, R. (2011). Financial Accounting. Delhi: Pearson Education. Retrieved from https://books.google.co.ke/books?id=qP3XNPoLO7wC&pg=PA498&lpg=PA498&dq=%27Profit+is+the+maximum+value+a+company+can+distribute+during+the+year+and+still+expect+to+be+worth+as+much+at+the+end+of+the+year+as+it+was+at+the+beginning&source=bl&ots=eH1_B3xqI-&

Stamate, A., & Mu┼četescu, R. (2011). A Short Critique of Perfect Competition Model from the Perspective of the Austrian School of Economics. Romanian Economic and Business Review, 6(4), 112-122.

Thampapillai, D. J. (2010). Perfect Competition and Sustainability ÔÇô A Brief Note. International Journal of Social Economics, 37(5), 384-390.

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