Posted: February 2nd, 2015

Microeconomic Analysis

Paper, Order, or Assignment Requirements

 

ECON545: Project 1—Microeconomic Analysis

 

The following is a list of the specific required information, research, graphs, and math to be included in each answer regardless of the scenario chosen.

 

Situation A

 

Jenny, your niece, is a smart high-school student who wants to make intelligent choices for her future. Hearing of your course in business economics, she has e-mailed you asking for advice on whether to become a doctor and on the best location to practice it. She recognizes the high costs of tuition and the years of study involved in becoming a doctor. She wants to evaluate if that career choice is an optimal decision for her, so she has asked you for advice.

 

Having read the piece “Fewer Physicians Move, a Sign of Career Caution” on page 20 of the textbook, you recognize the significance of such a career decision for Jenny. You decide to educate yourself about the market for physicians in terms of supply and demand, elasticity, costs of production, pricing, and economic or normal profit or loss. You want to provide Jenny with the most informed advice possible.

 

 

Situation B

 

Your neighbor Cindy wants to start a contracting business for installing solar panels. She has heard of the cost savings that households and businesses can make each year by installing solar panels on their roofs. Cindy has also heard of government incentives for installing solar panels. Being concerned about the environment and wishing to reduce pollution, Cindy thinks installing solar panels also serves a good social purpose. But she does not want to risk her life savings on a venture that might not succeed or become profitable enough. After hearing from you about taking this course in business economics, she decides to ask you for advice.

 

At first you are hesitant to give investment advice. Then you read the piece “US boosts ‘game-changer’ solar technology in bid for global market share” on page 374 of the textbook. You realize there are more pieces to the decision than Cindy is considering. You decide to research the market in terms of supply and demand, elasticity, costs of production, pricing, and economic or normal profit or loss. You want to provide Cindy with the most informed advice possible.

 

 

Situation C

 

Cousin Edgar is always thinking of the next business idea. This time, he plans to invest in buying two gas stations. He reckons American consumers have come to accept the high gasoline prices, and estimates world prices for gasoline to increase even further with high demand from India and China. Besides, Cousin Edgar thinks he will make a good profit on the sale of convenience items at each station. But before buying the gas stations, he decides to ask for your advice because you are taking this course in business economics.

 

You happened to read the piece “$4-a-Gallon Gas Fueling Fears for Recovery” on page 196 of the textbook. Being skeptical of Cousin Edgar’s optimism on the profitability of selling gasoline and convenience items, you decide to research the market in terms of supply and demand, elasticity, costs of production, pricing, and normal or economic profit or loss. You want to provide Cousin Edgar with the most informed advice possible.

 

 

Situation D

 

After hearing of you taking this course in business economics, Uncle Dan has e-mailed you asking for advice on his 100-acre corn farm. He mentioned how, after 30 years of growing corn, he wishes to leave that commodity’s market and enter a more profitable market instead. He is thinking of planting some organic crop. But he is not sure which crop would be most profitable. He already knows that going organic requires changing some of his practices to qualify for the certification. Therefore he wants to know how much it costs to become a certified organic farmer, and which crop would be best suited for him to grow given his current equipment.

 

Luckily before you can find time to answer Uncle Dan’s e-mail, you read the piece on organic farming in the United Kingdom on page 422 of the textbook. Recognizing the costs and risks for Uncle Dan in making the switch, you decide to research the market in terms of supply and demand, elasticity, production costs, pricing, and economic or normal profit or loss. You decide to educate yourself about organic farming so that you can provide Uncle Dan with the most informed advice possible.

 

 

More Guidelines for ECON 545 Project 1

 

1. Introduction to Project 1
2. Briefly describe why you are doing the analysis – summarize your chosen scenario.
3. Describe the industry generally that the potential company would compete.
4. What is the category of competition / market – Monopoly, Monopolistic Competition, Oligopoly, Pure Competition? Why – what are the characteristics of the industry that led you to your decision?
5. What are the potential impacts of the specific category of competition on the potential decision to start a company in that type of competitive market – e.g, why is it tough to start a new firm in an oligopolistic industry? Why is it relatively easier to start a new firm in a monopolistically competitive or purely competitive market?
6. Is the market local, regional, global – why?
7. What kind of demand curve do firms in your industry face generally? Why? Remember, in perfect competition, (agriculture), the demand curve is perfectly elastic (D=P=MR), for other forms of competition, P=D>MR and there is a downward sloping demand curve.
8. What kinds of cost structures do the firms face – e.g., high fixed cost, high variable cost? Why is this important? Is a farm high fixed or variable; is a solar panel high fixed or variable; how about a gas station? Also, think shut down vs. operating at a loss and how that relates to AVC and price.

 

2. Industry Demand Determinants – identify industry-specific demand determinants for the following determinants. If you use charts and graphs, explain and source each one you use. Do not just stick a graph in your paper w/ no explanation. Here are some considerations:
3. Change in tastes and preferences – specifically what are these and how do they affect your product? Will they increase or decrease demand? Why?
4. Changes in the prices of substitutes or complements. What are substitutes and complements for your products – What are likely changes in their prices & why? What effect will that have on the demand for your product?
5. How is the demand for your product affected by income? Will it be used by high income purchases, middle class, etc.? How will that affect potential demand?
6. What are the future expectations for your product? How will this affect demand?
7. Summary of future demand – what is the overall effect of the determinants of demand for your product? Will they increase or decrease future demand?
8. Assuming supply remains constant, what will the overall effects on P & Q be resulting from your estimates of future industry demand on your firm?

 

3. Price elasticity of demand
4. Provide some overall observations on the price elasticity of demand for your product. Be sure to consider what affects elasticity – time period involved, availability of substitutes. What is elasticity in short and long run? What is the effect of price elasticity of demand on revenues? How is this important for your industry and firm?
5. Construct a graph of demand for your product. Make one up if you have top. Make sure P and Q are clearly explained. For example, with solar panels is P = $/Watt? Is Q = numbers of solar panels produced by the firm panels in hundreds, thousands? For agriculture – Is P = $/Bushel & Q = hundreds or thousands of bushels? For gas stations is P=$/gal and is Q in hundreds, thousands, etc. of gallons?
6. Based on your demand graph, use the mid-point formula to determine elasticity. The point here is not an exact, accurate calculation of elasticity. Instead, it is to show me you k now how to use the mid-point formula. Google the price elasticity for your product and see what you get. You might be able to “back into” a graph if you know the elasticity.

 

4. Industry Supply Determinants – identify industry-specific supply determinants for the following determinants. If you use charts and graphs, explain and source each one you use. Do not just stick a graph in your paper w/ no explanation. Here are some considerations.
5. Change in cost of raw materials – what are the “raw materials” for your products? List some of them. Are their prices likely to change in the future? Why or why not? What effect will this have on supply?
6. Change in technology – How technology-dependent is your firm? If very dependent – explain why and what the effect on supply will be. If not, explain why and what the effect on supply will be.
7. Government taxes or subsidies. Is your industry subject to taxes (e.g., gas taxes)? Or subsidies (solar panels or agriculture). How likely are the taxes or subsidies to change? What will be the likely effect on supply?
8. Change in number of suppliers – are new suppliers likely to enter the market?   Why or why not? What will be the likely effect on supply?
9. Summary of future supply – what is the overall effect of the determinants of supply for your industry and product? Will they increase or decrease future Supply? How will this affect your firm?

 

5. Profit Maximization / Cost of Production Analysis. This one is a little tricky, but really not that difficult, if you understand what you are doing. Once again, I am not so much concerned that you give me exact numbers or 100% real-world correct charts and graphs. Instead, I want you to demonstrate that you understand the profit maximization rule (Produce at the Q where MR > or = MC) and can construct approximate curves reflecting the relationship between P, MR, D, ATC, AVC and MC. You can use the MR = MC spreadsheet I sent you to generate the schedules that support the graphs. Otherwise you can draw or paste relevant graphs, as long as you label them correctly and explain them.
6. Draw me a Total product and Marginal product curve for you firm, label the Y axis in output and the X axis in Labor and explain the importance of not hiring workers beyond the point where MP starts declining.
7. Draw me a graph showing the relationship between P, MR, D, ATC, AVC and MC for the firm and show me where profit is maximized (or loss is minimized). Explain under what circumstances, in the short run, you might operate at a loss or shut down. You may want to construct your graph so that the firm is losing money – that would make your recommendation easier to justify, wouldn’t it?
8. Explain to me the difference in the short run and long run in economics
9. If your firm is in perfect competition, explain why you operate in the long run where P=MR=Min ATC=MR and why this produces allocative and productive efficiency.
10. If your firm is NOT in perfect competition, explain why it produces at higher price and lower Q than in perfect competition.

 

6. Price elasticity of supply
7. What factors affect price elasticity of supply, in general? To what degree do they specifically affect your industry / firm?
8. Construct a supply curve, label P1, Q1, P2 and Q2 and calculate price elasticity of supply.
9. Explain to me why the supply curve for a company is the MC curve above the min point on the AVC curve. The answer is that in the short run, a company will produce at any point where P>AVC. Explain to me why, please.

 

7. Recommendations: Your recommendations should include, but not be limited to, considerations of the following
8. Cost of entry – is it high or low
9. Factors affecting future industry demand – will demand increase in the future? Why or why not?
10. Factors facing future supply – will supply increase in the future? Why or why not?
11. What is the result of the interaction of industry demand and supply trends? Remember, if both supply and demand shift, you have to know the relative magnitude and direction of the both shifts if you want to predict the direction of both P and Q.
12. Give me a solid recommendation.

If you answer these bullets, you will do very well on the project. Do not wait till I send the results of my first review of your paper to start making corrections to your first draft. We will discuss Tuesday nite, but don’t wait till then to start reworking your paper.