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Important information about economic theory

1. When advertising expenditure is increased, which of the aggregate and average (cost and revenue) curves shift their positions? Explain the direction of the shift. As an industry moves from being a monopoly to a monopolistically competitive one (due to the entry of new competitors as the monopoly's patents expire, for example), what happens to the elasticity of the demand curve facing the firm? Why?

2. What is the service or product supplied by your firm? If there are more than one, pick one. What is the market structure for the market in which your firm supplies this product? Why? What does economic theory tell you about the short-run and long-run economic profits for a firm operating in this market structure?Do you observe that for your firm? Why or why not?

3. In the presence of excess capacity, firms sometimes launch new brands in an effort to increase their profits. Why would a monopolist not launch a new brand? Why do you think that launching a new brand is often done in monopolistic competition? Has your firm launched a new brand (provided a slightly differentiated service) in an effort to increase profits? Should it do/have done so? Why or why not?

4. Why is it that firms can earn profits in the long run in monopoly and oligopoly but not in monopolistic competition and perfect competition? What can firms do in monopolistic competition or perfect competition to make the short run last as long as possible since they can only make profits in the short run? Have you observed any firms employ such tactics? Can you give some examples?

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Economic Theory

1. An increase in the advertisement expenditure will result in an increase in the sales at a higher rate. If the organization increases its advertising expenditures, its sales will increase at a higher rate than the rate of increase in advertising expenditures. Aggregate curve would shift, if advertising expenditure is increased. The direction of the shift in curve would be upward.
The demand curve of the firm will become more elastic when an industry moves from being a monopoly to a monopolistically competitive one. This is because when a firm enters monopolistic competition, there is a decrease in the profits. There are a number of firms in the monopolistic competition market, so even if there is a slight change in the price, there will be a significant change in the demand. (Siddiqui, 1998)
2. The product supplied by the firm is a music video. The firm supplies this music video in a market having an oligopoly structure. In this structure, there are few sellers or competitors. In this market structure, the industries are interdependent on each other. In fact, no firm is able to survive in an independent manner. In this market structure, the firm has to take into account the price being charged by the others. It analyzes the reaction curve of the other firms and in this way, the firm is interdependent. It even charges a higher price on entering into the agreement and there is no pricing policy under oligopoly because of the kinked shape of demand curve, which is a broken one. Thus, price rigidity and price war are the common features of oligopoly market.
In order to enter in the industry, the firm required a huge amount of capital. Due to a big investment, it is very difficult to exit from the industry (Kazmi, 2002). Moreover, as the firm operates in a differentiated oligopoly, it has patented its music video in order to produce & market it exclusively. This prevents other firms from producing the music video. Hence, the firm operates in an oligopoly market structure.

According to the economic theory, as the new firms cannot straightway enter this market structure, the oligopoly firms will earn ...

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