Economics

Name

Institution

Question 1

There are primarily two differences between monopolistic competition and perfect competition. In the case of the former, the number of firms involved in the competition is not infinite as would be the case in perfect competition, although the number may be quite large. Secondly, the product typically sold by each individual firm is slightly different to the others in the market (not homogenous), hence raising the possibility of advertising taking placer to highlight the slight differences in the product characteristics. A good example of a monopolistic competition is the hotel industry, where a majority of the players within the market do not really have control over the pricing and offer similar but slightly different products and services.

Question 2

Pricing strategies typically entail the use of strategies affecting pricing to compete; such as for instance lowering prices in order to maintain or improve market share. A good example is that of Starbucks during the economic downturn in 2009, whereby Starbucks reduced its prices on low end drinks such as lattes and coffee to compete with Dunkin Donuts and McDonald’s who had introduced cheaper low end drinks to take over some of Starbucks market share. This was then followed by an upward adjustment of the high end products. Non pricing strategies however include the strengthening of the brand, for instance in the case of Apple, whereby customers gladly pay more to belong to the Apple family.

Question 4

In economics, scarcity simply refers to the problem of unlimited human needs vis a vis limited resources. Considering that our resources are always limited when compared to our needs or wants, it is a must that one makes a choice over what to satisfy and what not to. In order to make an effective choice, one must carry out a cost benefit analysis, central to which is economics. A good grasp and utilization of economics makes such choices easier and cost effective to make. For instance, when choosing between traveling by rail or by road, where road costs $ 20 more but saves 30 minutes. One may choose road simply because the 30 minutes saved are worth more than 20 dollars.

Question 5

Shortage occurs when the quantity demanded exceeds the quantity supplied, while surplus occurs when the quantity supplied exceeds the quantity demanded. As such, when the consumers of a particular product exceed the number of products available (consumer surplus) a shortage is said to exist. On the other hand, when the products exceed the consumption, a surplus is said to exist. For example, when the food produces is less than what is consumed by the population, a shortage is said to occur, while when the food produced is more than can be consumed, it is said to be in surplus.

Question 6

Determinants of supply are usually number of sellers, cost of production, technology, future expectations and the pricing of a product. For instance, if a product is expected to rise in price in future, suppliers will opt to hoard the product and wait for the price to rise, hence reducing the amount in supply. Similarly, price and future expectations usually affect demand, in addition to other factors such as income, number of buyers and the price of complements and substitutes. Price is primarily affected by the demand and supply of the product.