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      1)

  Last week’s chapter focused on how changes in one industry affected other industries (Froeb, 2018). We learned different concepts such as economies of scale, economies of scope, and how different changes in one industry could drive changes in another industry. We also delved into the ability of capital and labor to move between two industries which implied that the prices and profits of one industry are related to prices and profits in another.

            In this week’s chapter, the first concept that interested me was the relationship between different industries in being competitive with one another. To understand this concept, I first learned about the idea of perfectly competitive industries. This can only be the case when firms produce a product with very close substitutes and elastic demand, firms have many rivals and no cost advantages, and finally, the industry has no entry or exit barriers. An example explains the forces well in the textbook. If in a competitive industry demand increases for a single product, then the price for that product will increase. At higher prices, the different firms in that industry will earn above-average profits, but then with time, capacity will increase, or new entrants will provide the same product which will increase the supply and reach what we call the long-run equilibrium (Froeb, 2018).

            Another interesting concept was the indifference principle. This concept is described as follows: in long-term equilibrium, assets such as labor and capital (which have high mobility) will be indifferent to where it is used and will make the same profit no matter where it goes (Froeb, 2018). In my understanding, the things that are attractive like cities, for example, will, in the long run, bring more people, which will increase the housing prices while decreasing other places down. This will create in the long-run equilibrium between the two cities and make people indifferent regarding moving there.

 

Q: Snack food vendors and beer distributors earn some monopoly profits in their local markets but see them slowly erode from various new substitutes. When California voted on legalizing marijuana, which side would you think that California beer distributors were on? What about snack food vendors? Why?

 

            Snack food and beers developed new products over time that were innovative and created a monopoly environment for the initial stages, which can be months or years for some products in the market. Over time, companies developed more and more competing products and substitutes which eroded their demand. A good example of this is the legalization of marijuana in an environment where alcohol is a recreational substance commonly used with beer being one of its main players. The California beer distributors would act against the legalization of marijuana because marijuana can be seen as a substitute for beer, which would decrease the demand for a beer when a substitute like marijuana enters the market.

            On the other hand, snacks have a complement quality of marijuana. Both can be enjoyed simultaneously, which would increase the demand for a snack if marijuana was legalized. Somewhat similarly to the scenario of alcoholic drinks and peanuts at a bar.

 

Reference

Froeb, L., McCann, B., Shor, M. & Ward, M. (2018). Managerial economics: a problem-solving approach. Boston, MA: Cengage Learning.

2) From the current week’s readings, the most important concept that I consider very important and worth understanding is about the competitive firms. I have understood that a competitive firm cannot affect price i.e. they produce products that are close substitutes and result in high elastic demand, they have many competitors, they have no entry or exit barriers and no cost advantage. It is understood that competitive firms have a control over what they produce i.e. they choose how much to produce and can sell at a competitive price. It indicates that marginal revenue is equal to the competitive firm’s price, we understand that if price (P) is greater than marginal cost (MC) then the firm produces more, if the price (P) is less than the marginal revenue (MR), then the firms produce less. I have learnt that a competitive firm has a positive and a negative profit in the short run i.e. when the positive profit is greater than the average cost (P>AC), then it leads to entry that decreases the price and the profit of the firm. When the negative profit is less than the average cost (P<AC), then it leads to exit that increases the price and the profit of the firm. It is also understood that on a long run, the competitive firms will earn only the average rate of return. When profit is equal to the average cost, it is understood as the economic profit is zero.

Snack food vendors and beer distributors earn some monopoly profits in their local markets but see them slowly erode from various new substitutes. When California voted on legalizing marijuana, which side would you think that California beer distributors were on? What about snack food vendors? Why?

It is a common sight that snack food vendors and beer distributors earn monopoly profits in their local markets because of the demand both the products have and the purchase frequency that increases the production or quantity of the products. It can be observed that these monopoly products tend to decline when new substitutes enter the market and stand as a great substitute that fulfills the needs of people. It is important for the companies to analyze the markets and the products that competitors come up with to offer better substitutes so that they can plan their production and plan effective ways to control cost and increase profits. What we can understand from the current scenario is that snacks stand as a compliment to marijuana, whereas beer stands as a substitute. Here the beer distributors will object and go against the legalization of marijuana. I can say that the beer distributors stood against the policy and legalization of marijuana as most people would start taking it or show more interest in buying it, this makes the monopoly profits of beer distributors decline in the market. The snack food vendors will support the marijuana because in either cases its monopoly profits are not going to be affected. In fact, consumption of marijuana will increase the demand for snacks and increase the sales of snacks and benefits snacks vendors. Therefore, in the current scenario, beer distributors will be at loss and the snacks vendors will be at great benefit with the legalization of marijuana.

 

Reference:

Froeb, L. M., & McCann, B. T. (2018). Managerial Economics: A Problem Solving Approach, 5E. Cengage Learninig.