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Table of contents
Executive Summary ------------------------------------------------------------------------------------- 2

Acknowledgement -------------------------------------------------------------------------------------- 3

Introduction ---------------------------------------------------------------------------------------------- 4

Question 4 ------------------------------------------------------------------------------------------------ 5

Content of question 4 ----------------------------------------------------------------------------------- 6

Question 5 ------------------------------------------------------------------------------------------------ 8

Content of question 5 ----------------------------------------------------------------------------------- 9

Question 7 ----------------------------------------------------------------------------------------------- 12

Content of question 7 ---------------------------------------------------------------------------------- 13

Conclusion ---------------------------------------------------------------------------------------------- 15

References ----------------------------------------------------------------------------------------------- 16
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Executive Summary
Microeconomics studies individual economic units in detail such as household, a
firm and a government. Microeconomics is like looking through a microscope, which focuses
into small units and provides an outline for choices and decision making of individual,
business and public.(resources from Principles of economics) Through this assignment, a
general idea about microeconomics will be introduced as well as the appropriateness of
microeconomics theory in each business activities.
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Acknowledgement
I have taken efforts in this project. However, it would not have been possible
without the kind support and help of many individuals and organizations. I would like to
extend my sincere thanks to all of them.

First at all, I would like to acknowledge the advice and guidance of Mr.Alex. He
gave me moral support and guided me in different matters regarding the assignment. He had
been very kind and patient while suggesting me the outlines of this project and correcting my
doubts. I thank him for her overall supports. Without his encouragement and guidance this
project would not have materialized.

I also thank to my classmates for their manual support, strength, and for everything.
I appreciate their constant support and help.

Last but not the least I would like to thank my family members, especially my
parent for supporting and encouraging me to pursue this assignment. Without their
encouragement, I would not have finished this assignment.
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Introduction
What is microeconomics?

Microeconomics analyses the market behaviour of individual consumers, firms and

government. It also attempts to understand the decision-making process of firms and
households. On the other part, microeconomics also focuses on patterns of supply and
demand. It also concern about the determination of factor prices and output price in
individual markets. In addition, microeconomics also can be defined as the economic
efficiency which involves efficiency in production, efficiency in distribution and overall
efficiency.
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Question 4
Discuss and evaluate the proposition
that perfect competition is more
efficient market structure than
monopoly.
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Content of question 4

In perfect competition, there are many sellers selling homogenous product. But in monopoly
market, there is only one seller who sells products that have no close substitutes. Besides that,
perfect competitive firms are price takers while a monopolist is price maker. There has free
entry and exit in the perfect competitive firm compare with there are many restrict for firms
to entry in monopoly market. A perfect competitive firm faces a horizontal demand curve
which is perfectly elastic, whereas a monopolist firm faces a downward sloping demand
curve.

Furthermore, a perfectly competitive firm earns a normal profit in the long-run as there are
free entry and exit into the industry. On the contrary, a monopolist firm earn an extraordinary
reward since there are various barriers to entry for new entrants.

On the other part, the price charged in monopoly market is always higher than price charged
in perfect competitive market. But the equilibrium quantity in monopoly market is lower than
in perfect competitive market. In addition, a perfectly competitive firm will be more efficient
than a monopoly when a perfectly competitive firm produce at the lowest point of the
minimum average cost. Besides that, the product will be standardized and the firms price
will equal to MC. However, the monopolist has resources to enjoy economics of scale and it
will not operate at the minimum point of ATC curve.
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The comparison between a perfect competition and a monopoly can be explained by Figure
1.0.

Figure 1.0

Equilibrium for Perfect Competition

Normal Profit
AR = MR = MC = AC

Equilibrium for Monopoly

Supernormal profit AR > AC

In Figure 1.0, the AR curve is the demand curve and it intersects AC = MC at Pc. Pc and Dc
are the price and quantity of a perfectly competitive market. The rule of MR = MC applies
because in perfect competition AR is equal to MR. The price of a perfect competitive firm is
equal to the long-run average cost and the marginal cost. In a monopoly, the equilibrium
output and prise are and respectively. In a monopoly, MR lies below AR (the demand
curve).

From Figure 1.0, it is clear that the price will be higher in a monopoly and the output lower as
when compared to a firm in perfect competition. Figure 1.0 also shows that the firm in perfect
competition earns normal profit while the monopolist earns supernormal profit in long run. In
terms of production efficiency, perfect competition is more efficient because it produces at a
minimum point of the average cost. (resources from Principles of Economics, Oxford
University Press, 2010)
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Question 5
Explain the meaning and significance
of externalities, how they arise and to
what extent they can be corrected by
government intervention.
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Content of question 5
Externalities can be defined as a cost or benefit arising from any activity which does not
accrue to the person or organization carrying on the activity. It was sometimes called
spillovers and neighborhood effects. It also exists when the action or any decision of
individual or organization that impose a cost or give a benefit on other parties. Besides that, it
will become inefficient decisions when decision makers fail to consider social costs and
benefits. The presence if externalities is a significant phenomenon in modern life.
Furthermore, the study of externalities is a major concern of environmental economics.

For examples, it is important that the people who make economic decisions are those who are
affected by those decisions. In results, a transaction between a supplier and a consumer for a
product needs only to affect the supplier and consumer involved. As long as this is the case,
then both sides will act only so long as both feel that they will benefit from any action all is
well in the market. However, a problem could clearly arise if someone else, not party to the
economic decision, is affected by that decision. This is the economic concept known as
externality. An externality is said to arise if a third party(someone not directly involved) is
affected by the decisions and actions of others. By the way, externalities can be divided into
two parts, which is positive externalities and negative externalities.(resources from Principles
of economics, Global Edition, Pearson Education Limited, 2012)

Positive externalities will be exists when the social benefits of a decision may exceed the
private benefits. For example, if you make a decision to go to the doctor to be inoculated
against a particular disease, then clearly you receive the private benefit of not catching that
inoculated. However, you may not be the only one to benefit. The fact that you do not get the
disease has some possible benefit to all others with whom you come into contact, who will
now not catch the disease from you. (resources from Economics AS Level and A Level,
University of Cambridge International Examinations, 2008)

Negative externalities will be exists when these private and social costs are the same. All of
the costs of an action accrue to the decision maker and there are no further costs also will
result to negative externalities. For examples, if you make a decision to take a journey in your
car, you consider the costs of the petrol and the time taken. However, you do not consider the
further costs that you may be imposing on others in terms of your contribution to road
congestion, to environmental damage and to possible car accidents. In this situation, a
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negative externalities will be exists. (resources from Economics AS Level and A Level,
University of Cambridge International Examinations, 2008)

In order to overcome the problem of externalities, government has carry out four ways to
overcome the problem, which is:

Setting standards and regulation

Setting financial intervention taxes
Setting financial intervention subsidies
Maximum price controls and price stabilisation

Government usually use regulation to overcome market failures that caused by externalities.
Let us consider the case of an electricity company that pollutes the surrounding countryside.
The government might intervene by setting standards which restrict the amount of pollution
that can be legally dumped. The government would then need to regulate and inspect the
company to make sure several ways, for example by imposing large fines on any company
that contravenes the law.

Financial intervention can be take form of taxes and subsidies in the case of externalities. A
tax would normally be imposed on the individual or form that causes the externality. If this
happens then economists say that external costs are internalised.

Based on Figure 2.0, the government intervenes in this market and imposes a tax which is
equal to the marginal external cost. This tax is added to the cost of producing the product and
thus the supply curve 2 is also equal to the MPC plus tax. Besides that, the price at which
the product is sold has increased from 1 to 2 . This is less than the tax applied by the
government. The producer has accepted a cut in the price received from 1 to 3 . The
producer has borne the burden of part of the tax. The total tax paid is equal to the area
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2 3 , of which the consumers share of the burden is 2 1 and the producers share is
1 3 .

Let us evaluate the form of subsidies through a graph. If the government subsidies production
of this product then the supply curve moves to the right from 1, which equals MPC, to 2 ,
which equals MPC minus the subsidy. As expect, there is considerable, debate over which is
the best method of government intervention when externalities are present in a market. If we
accept the argument that education provides external benefits, then one solution would be to
provide a subsidy to education. Student still have to pay towards their education in the form
of a fee, which can be represented by 3 . The government provides the difference between
2 and 3 by providing a subsidy.

The last method use by government intervention is maximum price controls and price
stabilisation. Government impose maximum price controls in markets and how in agricultural
markets price stabilisation policies can be applied. Maximum price controls are only valid in
markets where the maximum price that is imposed is below the normal equilibrium price as
determined in a free market. Government use legislation to enforce maximum prices for:

Staple foodstuffs, such as bread, rice and cooking oil.

Rents in certain types of housing.
Services provided by utilities, such as water, gas and electricity companies.
Transport fares where a subsidy is being paid.

Price stabilisation policies, especially in agricultural markets, are designed to lessen the
effects of unplanned fluctuations in supply. Although theoretically simple in terms of their
economic logic, such policies are often criticised as they do not promote efficiency and tend
to protect farmers from the full force of competition in world markets. (resources from
Economics AS Level and A Level, University of Cambridge International Examinations, 2008)
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Question 7
Outline the economic argument
against monopoly. Is there anything
which can be said in favour of firms
which have monopoly power?
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Content of question 8
Monopoly is a made up of the word mono, which means single and poly which means
sellers. Monopoly means existence of a single seller in the market producing that has no
substitutes. There are some characteristics of monopoly market.

Monopoly exists when there is only one seller of a product. Monopoly firm is the only firm in
the industry selling a product which has no close substitution. Monopoly market is the place
where the monopoly firm operates. So, basically there is no difference between a firm and an
industry in monopoly as there is only one seller. The monopolist is a firm as well as an
industry in itself.

Besides that, there should not be any close substitutes for the product sold by a monopolist. If
there are any substitutes, then the monopolist cannot charge a price according to his/her
desire. In other words, a monopoly cannot exist if there is any competition or any substitute
products. Examples of products in monopoly market are electricity, water, cable television,
local telephone services, the only place we can go to is Telekom Malaysia(TM Berhad). An
example is water supply by Jabatan Bekalan Air or the Watereworks Department where water
has no substitute. In other words, a monopoly cannot exist if there is a competition or any
substitute product.

In a perfect competition, no single firm can influence the price and this called a price taker.
The monopolist is a price taker since there is only one seller or one producer and it has the
power to control the price in the market.

In a monopoly market, there are strict barriers to the entry of new firm. Barriers to entry are
natural or legal restrictions that restrict the entry of new firms into the industry. A monopolist
faces no competition because of barriers of entry.

Furthermore, advertising in monopoly market depends on the product sold. If the products are
luxury goods such as imported car, then the monopoly needs some advertisement to inform
the consumers on the goods. Local public utilities such as water, electricity and home phone
services do not need advertisement by the monopolist since the consumers know from where
to obtain the products.
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The barriers to entry falls into two categories:

Natural monopoly
Legal monopoly

Natural monopoly can be defined as one firm can produce at a lower cost compared to what
two or more firms could produce. In the other words, one single firm can meet the entire
demand with lower price charged than more firms. These kinds of monopoly normally exist
in the utilities such as water supply, local phone services, garbage collection and postal
services. It does not arise because of government action.

Legal monopoly can be also referred to as government-created monopoly. Government

creates monopolies to prevent firms from entering into a market. This can be done through
difficulty in obtaining license to operate in the market or providing patent and copyrights to a
monopoly firm.

In many countries, government grants monopoly rights to private companies to operate public
utilities such as railway services, water supply, postal services, cable TV services and others.
Government franchise grants exclusive rights to a firm to sell certain goods and services in a
certain area. For example, the government had given the right to install cable television
system to ASTRO in Malaysia.

A patent is an exclusive right to the production of an innovative product. Patents are given to
the firms or individuals for their discoveries and invention. The owner of the patent has a
monopoly power over the invented product. However, the patent is valid for a limited time
period, it normally takes about 20 years and after that, the monopoly power over the product
will expire.

In addition, a copyright is an exclusive right given to the author if a book, composer of a

music or producer of a movie or artistic work. If anyone plagiarism without permission from
the copyright owner, then owner has the right to sue the person.

A monopoly status can also be maintained through control over the supply of raw material in
which a firm can own a bigger portion of natural resources, such as: DeBeers, a company in
South Africa which control more than 80% of the worlds production of raw diamonds. In
this case, the entry of rivals becomes impossible.
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Conclusion
Based on our assignment, we understand that the theory and knowledge of microeconomics.
we gained a lot of benefits through we learnt microeconomics, it let us more understand the
state of economy. As a conclusion, we should be clear about the important of
microeconomics.
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References

Harvard Referencing Guide

Books

Karl E.Case, Ray C.Fair, Sharon M.Oster. Tenth edition (2012). Principles of
Economics.
Bamford,C & Brunskill,K . (2002). As Level and A Level Economics. Cambridge
University Press.
Deviga Vengedasalam. (2008). Microeconomics. Oxford University Press 2008
Deviga Vengedasalam, Karunagaran Madhavan (2010). Principles of Economics.
Oxford Fajar Sdn.Bhd.

World wide web page

http://www.businessdictionary.com/definition/externalities.html
http://www.investorwords.com/3112/monopoly.html
http://www.investopedia.com/terms/m/microeconomics.asp
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The End