ECON102 Principles of Macroeconomics

Answer 1

The market for vitamins is a perfect competitive market. There are many sellers who sell vitamins in the US market and there are numerous buyers as well.  Market of vitamins does not have much differentiated products to sell, they sells similar or identical products. The vitamin industry places no restrictions on entrance or departure; businesses can quickly enter and exit in the short term. An rise in demand induces economic benefits in the short term and facilitates entry in the long run in a perfectly free market in long-term equilibrium; In the short term, a drop in demand causes economic losses (negative economic profits), but in the long run, it encourages certain firms to leave the industry.

Businesses who are operating in a perfectly open environment receive little economic income in the long term. Vitamin industry is one of those industries who deal with the perfect competition. The long-run equilibrium point in a perfectly free economy is where the demand curve (AR=MR) intersects the marginal cost (MC) curve and the average cost (AC) curve's minimum point. The part of a perfectly competitive firm's marginal cost curve that sits above the median of the average variable cost curve is called the supply curve.

In the initial stage, from the Graph1, in market equilibrium the amount that the sellers will produce will be Q1 and the price will be P1.

Answer 2

In the US market, when the federal government has been imposed an insurance premium on the USA citizen who has been regularly intake vitamins. It is part of their health care reform program. As substantial insurance has been imposed the demand for vitamins in the USA market has been increased instantly. According to the demand law, the price of vitamins has been increased due to relatively higher demand in the USA market. The situation of the vitamin market is explained by the help of the following diagram.

As the demand increases from D to D1, the price of Vitamin has been increased from P to P1 within the Vitamin market. As a result, the vitamin market operates at a higher price and a higher quantity of output Q1. Market equilibrium shifts from E to E1.

The impact of this insurance premium on a particular competitive firm is described by the following diagram.

In the above figure, it has been observed that as the individual firm has been charged a relatively higher price thus the firms earn supernormal profit. As a price p1, p1>SAC. Here, p1abp is the amount of supernormal profit.

Answer 3

It has been mentioned by the given scenario of the US market that there are many small vitamin manufacturers within the market. However, the government of the USA market has been imposed a substantial insurance premium on the US consumers. Therefore, the demand for daily vitamin consumers would be increased which has a direct short-run direct impact. As the demand increased for vitamins, the short-run market price for the firm has also been increased for vitamins which have been already discussed in the previous section of this paper. However, the scenario in the long-run is quite different from the short-run situation.

Due to a relatively higher price gained by the vitamin manufacturing companies, many new firms have been trying to enter the market in the long-run. It has been a very common scenario that a perfectly competitive market does not have such kinds of market barriers in order to enter or exit from the market. Thus, in the long-run, many new firms enter the market. As a result of it, the market supply of their product has been increased in the long-run. The long-run market situation of the vitamin industry has been described by the following diagram.

As the number of new entrances increased in the market, thus the market supply curve has been increased from S to S1. As a result, the demand and supply mechanism pushes the market price P to P1. Market equilibrium shifts from E to E1.

This impact definitely would change the price and profit condition of the perfectly competitive firms. In the long-run, a typical firm’s market situation has been described by the following diagram.

In the above situation, when the price lowers from p to p2, thus the individual firm fixes at the situation when p = AVCmin which implies a normal profit. However, in the previous situation p>AVC min when it earns a supernormal profit. Thus, the short situation of supernormal profit earned by the vitamin firms is not-stable at all.

Answer 4

In the previous part of the paper there was a discussion about the vitamin market in order to explain how it will react to ta policy. Government of USA has imposed a substantial insurance premium on US consumer and in response to that in short run the demand has increased. However, in the Long run the price will increase. Now to avoid this price increment in the industry of Vitamin the Government has introduced a licencing scheme. Now the seller with the licence can only be able to sell the vitamins. The total availability of the number of licences is also limited. This will prevent the free entry into the market, additionally, the seller who does not have licences with them have to leave the market, which will lower to total supply of the market. Hence, the supply curve will shift again.

The amount of supply decrement is ambiguous. However, the decrease in the supply will cause a rise of price in the vitamins. The supply curve will move from S to S1 and the equilibrium will occur at E. The price will rise from P to P1 and the total quantity supplied will decrease from Q to Q1.

References 

Annual, May, and Financial regulations Sept. "Policy and procedures document control." Annual review of (2022).

Azevedo, Eduardo M., and Daniel Gottlieb. "Perfect competition in markets with adverse selection." Econometrica 85, no. 1 (2017): 67-105. (Azevedo, 2017)

Bukvareva, E., D. Zamolodchikov, G. Kraev, K. Grunewald, and A. Narykov. "Supplied, demanded and consumed ecosystem services: Prospects for national assessment in Russia." Ecological Indicators 78 (2017): 351-360.

Di Bucchianico, Stefano. "The Impact of Financialization on the Rate of Profit." Review of Political Economy (2020): 1-24.

Geltner, David, Anil Kumar, and Alex Van de Minne. "Is there Super-normal Profit in Real Estate Development?." University of Connecticut School of Business Research Paper 19-14 (2020).

Gupta, Rangan, Amine Lahiani, Chi-Chuan Lee, and Chien-Chiang Lee. "Asymmetric dynamics of insurance premium: the impacts of output and economic policy uncertainty." Empirical Economics 57, no. 6 (2019): 1959-1978.

Gupta, Rangan, Amine Lahiani, Chi-Chuan Lee, and Chien-Chiang Lee. "Asymmetric dynamics of insurance premium: the impacts of output and economic policy uncertainty." Empirical Economics 57, no. 6 (2019): 1959-1978.

Sharma, S. P. "Unit-1 Perfect competition: firm and industry equilibrium." Indira Gandhi National Open University, New Delhi, 2020. (Sharma, 2020)

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