ECO 201 Project Template
Memo
To: My Business Partner
From: Alexandra Rivera
Date: 1/29/2023
Re: Microeconomics Simulations
Introduction
This memorandum report identifies and explains key microeconomic principles using a set of simulation games. The outcome of these games illustrate how microeconomic principles can be applied within real-life situations to help us make better business decisions. This report is a summary of the simulations I played and their results, which include the key takeaways and their significance, for your review and reference. It is divided into the following sections:
Competitive Markets and Externalities
Market Structures (including the Price Discrimination and Cournot simulations)
Comparative Advantage
How does this simulation demonstrate how individuals evaluate opportunity costs to make business decisions?
When we consider whether to use or not to trade when producing our product, there are many different factors to evaluate. If we do not use trade in making the products, all the time and effort will fall onto us. This is not necessarily a bad thing, since we will be busy making everything rather than just specializing in a particular item. On the other hand, if we trade and bring in a sub-company or someone that specializes in something else, we would like to make them a partner, and they can continue to make what they are good at and vice-versa. We can get more products out the door and split the cost, but since there is more product for the consumers, the profit margins will still be more than well on our side.
Use the Production Decisions graph from the simulation as a reference to explain what role the production-possibility frontier (PPF) has in the decision-making process.
A Production Possibilities Frontier (PPF) is a graphical representation of the various mixes of output that an economy can produce- Mankiw, N. G. (2021) A PPF model can help a business decide whether to specialize or trade by presenting the opportunity costs of producing one good, in comparison to the opportunity costs of sacrificing the production of another.
Explain how comparative advantage impacts a firm’s decision to engage in trade. Would a business’s decision to trade cause a change to its PPF? Provide specific reasoning to support your claims.
Comparative advantage impacts a firm’s decision to engage in trade by allowing them to produce goods and services at a lower cost than its competitors. Comparative advantage is a concept in economics that states that a country or business can gain an advantage by producing and supplying goods and services at a lower opportunity cost than its competitors. As a result, a company can make more money by creating and selling specific goods or services than its competitors. As a result, a firm with a comparative advantage in a particular interest or service can trade and export its product to other markets while importing goods or services from other countries in which it does not have an advantage.
A business’s decision to trade can cause a change to its PPF. PPF stands for production possibility frontier and shows the maximum output of two goods or services an economy can produce with its available resources and technology. When a business decides to trade, it can increase its production beyond the current PPF. This is because the company can now access resources, technology, and goods or services that it may not have had access to before. By engaging in trade, businesses can gain access to new resources, technology, and goods or services that can help them increase their production and move their PPF outward.
Competitive Markets and Externalities
What impact do policy interventions have on the supply and demand equilibrium for a product? Provide specific examples from the simulation to illustrate.
What are the determinants of price elasticity of demand? Identify at least three examples. Based on the outcome of the simulation, explain how price elasticity can impact pricing decisions and total revenue of the firm.
Based on the results of the simulation, can policy market interventions cause consumer or producer surplus? Explain why using specific reasoning.
Analyze a business owner’s decision making regarding whether to enter a market. For example, what factors determined the driver’s market entry and exit in the simulation? Use economic models to support your analysis.
How does a business owner applying the concept of marginal costs decide how much to produce? For example, how did the driver determine how many hours to drive each day? Use economic models to explain.
How does the impact of fixed costs change production decisions in the short run and in the long run? Use the average-total-cost (ATC) model included in the module reading chapters to demonstrate this impact.
Market Structures
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Market Structure |
Number of Firms |
Type of Product Sold |
Price Taker? |
Price Formula |
Freedom of Entry? |
Short-run Profit? |
Long-run Profit? |
Industry Examples |
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Perfect Competition |
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[Insert two to three example industries that meet the criteria of the market structure.] |
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Monopolistic Competition |
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[Insert two to three example industries that meet the criteria of the market structure.] |
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Monopolies |
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[Insert two to three example industries that meet the criteria of the market structure.] |
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Oligopolies |
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[Insert two to three example industries that meet the criteria of the market structure.] |
Table 4.1
Explain what market inefficiencies derive from monopolies and monopolistic competition. Use examples from the textbook to support your claims.
How do firms in an oligopolistic market set their prices? Use specific examples from the simulations or from the textbook to support your claims.
Explain how firms that compete in the four different market structures determine profitability. Use specific examples from the simulations or the textbook to support your claims.
Conclusions
Conclusions: Draw your overall conclusions about the relevance and significance of microeconomics. How will microeconomics principles impact your business decisions moving forward? Provide recommendations to your business partner for your future business venture.
References
Mankiw, N. G. (2021). Principles of microeconomics (#9 edition). Cengage.