Microeconomics Test 3

Essay #3 Characteristics of Perfect Competition

Perfect competition is a market structure with many well-informed sellers and buyers of an identical product and no barriers entering or leaving an industry. There are so many firms that no one firm can influence price. The perfect competitor has a perfectly elastic or horizontal demand curve. In the short run, perfect competitors will make a profit or take a loss. In the long run, they will break even. Two more important characteristics of a perfect competition are perfect mobility and perfect knowledge.

Essay #1 consumer behavior

Consumers make choices in ways that maximize the degree of satisfaction they gain from activities. Consumers effect the utility of a product by how much they are willing to pay for it. As you consume more of a product or service, marginal utility declines because the satisfaction is not as good as the first one, such as the consumption of hamburgers. A consumer surplus is the difference between what you would have been willing to pay for something and what you actually pay. Price gougers cannot be blamed because we are willing to pay the price for a good or service.

Essay #2 Law of Diminishing Returns

Law of Diminishing Returns Defined The law of diminishing returns, also referred to as the law of diminishing marginal returns, states that in a production process, as one input variable is increased, there will be a point at which the marginal per unit output will start to decrease, holding all other factors constant. In other words, keeping all other factors constant, the additional output gained by another one unit increase of the input variable will eventually be smaller than the additional output gained by the previous increase in input variable. At that point, the diminishing marginal returns take effect. A Farmer Example of Diminishing Returns Consider a corn farmer with one acre of land. In addition to land, other factors include quantity of seeds, fertilizer, water, and labor. Assume the farmer has already decided how much seed, water, and labor he will be using this season. He is still deciding on how much fertilizer to use. As he increases the amount of fertilizer, the output of corn will increase. It may also reach a point where the output actually begins to decrease since too much fertilizer can become poisonous. The law of diminishing returns states that there will be a point where the additional output of corn gained from one additional unit of fertilizer will be smaller than the additional output of corn from the previous increase in fertilizer. This table shows the output of corn per unit of fertilizer: