The following features measure a business firm’s market power: 1. Geographic dim

Question

The following features measure a business firm’s market power:

1. Geographic dimensions of its market

2. Number of firms in the market

3. Relative size and influence of the firms in the market

4. Size and kind of constraints or limitations a firm must overcome to enter the market

5. The customers’ access to substitutes for the firm’s goods or services.

Your assignment is to prepare a report in which you:

Give a brief description of your firm

Describe the type of economic market in which your firm operates

Discuss the problems inherent within this specific economic market

Explain the pricing and production policies given the specific economic market

Indicate the direction that price and production decisions should take

State any conclusions based on the above

Explanation / Answer

My firm is a plastic bag producing firm and is located in United States. It uses plastic pellets as inputs and produces plastic bags as the output. It is a part of the large industry in an economy and face competition from similar firms in the industry.

It has the following characterstics:

There are numerous problems faced by my firm, namely:

Prices are set equal to the marginal cost of the firm as any deviation from the market price which is equal to the marginal cost will lead to a loss in customer base due to the presence of perfect substitutes.

Production poilcy is such that the firm will produce to a level where marginal cost equates to marginal revenue which will equate to the market price.

With the increasing awareness of the toxic nature of the plastic the price trend of the plastic bags is going to fall with people switching to a better alternative (paper or cloth bags). With the fall in the prices there will be a fall in supply which will in turn lead to a fall in production.

Conclusion

My firm will be facing a huge competition in the coming time period, not only from within the industry but also from outside the industry in this free market economy. Either the market power should increase with the firm so as to encourage innovation which can lead to producing better kind of plastic bags which are non-toxic or the plastic bag industry will be at threat of shutdown.

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