Microeconomics Principles and Policy Learning

Question: Discuss about the Microeconomics for Principles and Policy Learning. Answer: Introduction: In the perfectly competitive type market structure, there are a large number of buyers and sellers. All of the consumers as well as the producers have a clear idea regarding the prices of the products. The products are perfectly substitutes to each other. As opined by Baumol Blinder (2015), it can be mentioned that factor prices can be determined in the market under the forces of supply and demand. The differentiation lies in the determinants of supply and demand of the productive resources. The factors can be classified into four categories such as land, labor, capital, entrepreneurship. On the other hand, long run is assumed to be a phase, which is sufficiently long to allow the changes to be made in the number of firms in the industry. In the long run, an rise in demand will meet not only by the expansion of existing firms but also by the entry of new firms in the industry. According to Iossa Martimort (2015), the price of the factors under long run, the marginal revenue is equal to the average cost curve. The reason can be described, as an industry will be at equilibrium if all the firms in the market are making normal profits. Therefore, it can be inferred that the firms under long run will make normal profit if average revenue and average cost of the firms are equal. In addition, the entry of new firms in the perfectly competitive market under long run, the market supply curve will shift to the outward. From the above figure it can be observed that the market demand curve is remaining same. On the other hand, higher market supply will decrease the equilibrium market price where the price of the factors is equal to the long run average cost. In this point, each of the firm will make only normal profitability. In addition, it can be mentioned that there is no further opportunity for the movement of firms in and out of the market. Therefore, the long run market equilibrium will be occurred. Moreover, from the above figure it can be observed that the entry of new firms will shift the market supply curve from MS1 to MS2. As a result, the factor price will be declined from P1 to P2. Price ceilings are equivalent to the imposition of Taxation on the producers, which can reduce the producer surplus. Since the surpluses are converted to the customers, they are treated as subsidies. On the other hand, Rader (2014) mentioned that price floors are equivalent to the taxation on the customers. It can also reduce the consumer surplus and then transfer it to the others. In this context, it can be mentioned that price ceiling and price floors are similar as both create distortions from the equilibrium of market. As a result, the situation like dead weight loss will arise in the market. According to Klein (2014), price ceiling refers the legal maximum price level for a particular goods and services, whereas price floor refers the legal minimum price. Moreover, price ceiling generates if the legal price is lower than the market equilibrium price. It does not have any impact on the quantity supplied. Similarly, price floors formulate excess supply in the market when the equil ibrium market price is lower than the legal price. Although, price ceiling and price floor is equivalent in case of the imposition of taxation on the consumers, Angula Thomas (2014) cited that both are different from each other. In case of price ceiling, government set the price below the price level of the market equilibrium. In addition, price ceiling is an implicit tax, which imposes on the producers. On the other hand, implicit subsidy is imposed on the consumers in case of price ceiling. In case of price floor, the government of a country usually set the price above the level of market equilibrium price. Moreover, it can be mentioned that under-price floors, tax is imposed on the consumers and producers are subsidized. In this point, price ceiling is different from price floors. On the other hand, Baumol Blinder (2015) added, price floor is able to transfer the consumer surplus to the producers. References Angula, M., Thomas, B. (2014). Principles of microeconomics. Baumol, W. J., Blinder, A. S. (2015).Microeconomics: Principles and policy. Cengage Learning. Iossa, E., Martimort, D. (2015). The simple microeconomics of public?private partnerships.Journal of Public Economic Theory,17(1), 4-48. Klein, P. G. (2014). Information, Incentives, and Organization: The Microeconomics of Central Banking. InThe Fed at One Hundred(pp. 149-161). Springer International Publishing. Rader, T. (2014).Theory of microeconomics. Academic Press.