Microeconomics QA

Microeconomics QA

Part 1: Short Answer Questions

Question 1: Interrelation between Production and Cost

Production is the process of combining various resources. On the other hand, cost entails the worth of the resources used in production. In economics, the short run and long run are two significant contexts which are put into consideration. In the short run, at least one factor of production is fixed. In this case, the production firms will have fixed and variable costs. Whereas fixed costs are incurred even when the production is zero, variable costs oscillate depending on the units produced. However, in the long run, firms only deal with variable costs where every cost incurred is determined by the level of production. Production firms need to note the relationship between production and cost for them to determine the optimal points of production. For example, maximal levels of production for most firms is when the average cost equals the marginal cost of production.

Question 3: OPEC as a Cartel

Organization for Oil Producing Countries (OPEC) is an example of an economic entity working as a cartel in fixing oil prices across the world. The OPEC controls the production and supply of oil to the market and as a result, prices are affected. Particularly, the success of OPEC as a cartel was seen in the 1970s especially the 1973 oil embargo. In this respect, twelve members of the OPEC consented to the embargo of not selling oil to the United States of America (USA). Nonetheless, the power of OPEC to operate as a cartel seems to have drastically decreased as a result of increasing oil supply form countries that are non-members. For example, the USA’s and Russia’s oil production has peaked in the last two years. Consequently, even if OPEC members were to cut supplies, non-member producers will avail enough oil in the market.

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