Questions & Answers: Economics - Microeconomics

Review the factors of production.
Every good and service requires certain resources, or inputs. These inputs are referred to as factors of production. Every good and service requires four factors of production:
· Labor
· Land
· Capital
· Entrepreneurship
These factors can be fixed or variable and can produce fixed or variable costs. Examples of fixed costs include land and equipment. Variable costs include labor. The total of fixed and variable costs makes up the costs of production.


Define microeconomics and review some examples of what microeconomics studies.
While economics generally studies how resources are allocated, microeconomics focuses on economic factors such as the way consumers behave, how income is distributed, and output and input markets. Studies are limited to the industry or firm level, rather than an entire country or society.
Among the elements studied in microeconomics are factors of production, costs of production, and factor income. These factors determine production decisions of individual firms, based on resources and costs.

Explain the four kinds of market structures in an output market.
Perfect competition—all existing firms sell an identical product. The firms are not able to control the final price. In addition, there is nothing that makes it difficult to become involved in or leave the industry. Anything that would prevent entering or leaving an industry is called a barrier to entry. An example of this market structure is agriculture.
Monopoly—a single seller controls the product and its price. Barriers to entry, such as prohibitively high fixed cost structures, prevent other sellers from entering the market.
Monopolistic competition—a number of firms sell similar products, but they are not identical, such as different brands of clothes or food. Barriers to entry are low.
Oligopoly—only a few firms control the production and distribution of products, such as automobiles. Barriers to entry are high, preventing large numbers of firms from entering the market.

Review the factor income of each factor of production.
Factors of production all have an associated factor income. Factors that earn income include:
· Labor—earns wages
· Capital—earns interest
· Land—earns rent
· Entrepreneurs—earn profit
Each factor’s income is determined by its contribution. In a market economy, this income is not guaranteed to be equal. How scarce the factor is and the weight of its contribution to the overall production process determines the final factor income.

Review government actions that were done to control businesses.
The US government has passed several acts to regulate businesses, including:
· Sherman Antitrust Act (1890)—this prohibited trusts, monopolies, and any other situations that eliminated competition.
· Clayton Antitrust Act (1914)—this prohibited price discrimination.
· Robinson-Patman Act (1936)—this strengthened provisions of the Clayton Antitrust Act, requiring businesses to offer the same pricing on products to any customer.
The government has taken other actions to protect competition and requirements for public disclosure. The Securities and Exchange Commission (SEC) makes companies that provide public stock also provide financial reports on a regular basis. Banks have more rules and requirements because of their kind of business. So, banks have to provide other types of information to the government.

Review the four types of monopolies.
There are four types of monopolies.
· Natural monopoly—a single supplier has a distinct advantage over the others.
· Geographic monopoly—only one business offers the product in a certain area.
· Technological monopoly—a single company controls the technology necessary to supply the product.
· Government monopoly—a government agency is the only provider of a specific good or service.