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Concepts In Economics
Revision: the marginal concept
Date : 21/04/2022
1. Evaluate the extent to which the marginal concept is useful
to economic agents in decision making Analysis: The
decisions of consumers can be analysed
in terms of marginal utility. Analysis in connection with private sector producers, according to the neo-classical theory of
the firm, rests on their motivation to produce at a level of output where
marginal cost equals marginal revenue, profit maximise. Although as
regards non-profit, welfare-maximising public
sector producers, it may be marginal cost and average revenue where allocative
efficiency is achieved (where the sum of consumer surplus and producer surplus is
maximised). Monopsonist employers
are able to exploit their market power (best real-world UK examples are perhaps
in the public sector, such as the NHS) by employing workers up to the point
where the marginal cost of an extra worker is equal to the worker s marginal
revenue product. Governments,
through their intervention in free markets seek to produce outcome where
there is an optimal level of output and MSC = MSB. [This relatively brief
analysis section can of course be developed with causal links extended,
supported where appropriate by numerical examples diagrams]. Counter-analysis: Consumers, like all agents, do not necessarily
behave rationally therefore do not necessarily make decisions at the
margin. In other words, they do not adhere to the equi-marginal principle
maximise their satisfaction (utility) by consuming to the point where the ratio
of marginal utilities, say, from two goods, is equal to the ratio of their
prices (support this analysis with equation). Their consumption, for example,
may be related to a charitable donation (paying for something they don t
necessarily want) or they may buy more of some goods than would otherwise be
dictated by rational economic behaviour, perhaps because they were enticed by
special offers. With firms, only in long-run
perfect competition can it be
assumed for sure that economic efficiency (both productive where AC are
minimised allocative where MC=AR) is achieved, otherwise, both productive
allocative efficiency are not achieved in imperfect market structures,
both in the SR LR. Profit
maximisers in imperfect markets are not motivated to be allocative efficient (
so do not produce at the output level where they engage in marginal cost
pricing). Also, there are alternative maximising objectives to profit
maximisation such as revenue maximisation (MR=0) sales maximisation
(AC=AR). In the real world, firms
are unlikely to know at what level of output their MC=MR, so rule of thumb
approaches to generating profit are more likely, where the firm estimates its
unit costs, adds a margin for profit which it thinks is appropriate, given the
level of risk, arrives at a selling price. Firms may sell products at or below MC (some economists say AC)
engage in limit pricing (a strategic barrier to entry), or move towards it
engage in predatory pricing (deemed anti-competitive and therefore
illegal in modern industrialised economies like the UK) in an effort to destroy
the market share of a rival force it out of business. Firms may profit satisfice rather than
maximise, although with a profit-oriented output level close to MC=MR, or they
may have a growth-oriented level of output closer to AC=AR. If the
labour market were perfectly competitive, the equilibrium wage rate and
employment level would both be higher than in a situation where there is a
monopsonist employer (see class notes for diagram etc.). In addition, the entry
of a trade un ion to the industry which sets a minimum wage above that where the
monopsonist employs at MC = MRP, will kink the supply curve of labour and
produce a discontinuity in the marginal cost curve for labour (see notes for
diagram etc.). Government failure
means that the economic and social welfare of citizens (via an optimal level of
output) may not necessarily be achieved and indeed the outcome may even result
in a greater misallocation of resources than was achieved under free market
conditions. In addition, a COBA approach to CBA may not give adequate attention
to the external costs and benefits of a project, resulting in a misallocation
of resources and inaccurate calculations of social costs and benefits which
then leads to an inaccurate benefit-cost ratio from which to base an investment
decision on. [NB,
other areas for consideration in evaluating the marginal concept include (in
relation to macroeconomics or the themed paper), the government and the marginal rate of tax (e.g. relate to the laffer
curve, employment and poverty trap) and the marginal propensity to consume /
save (e.g. in relation to changes in the progressive taxation structure and
monetary policy to influence AD). To what extent will changes in income tax and
interest rates influence consumption, investment and the strength of sterling?].
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