THE MICRO CHALLENGES
1. Industrial Organization: The Market Models
There are 8 industries with 100 firms each in the basic simulation. Each firm is the same size. Normally, the automatic adjustment included in the simulation will determine industry decisions on investment, capacity utilization and pricing. The profit and loss calculation is for an individual average or representative firm.
The standard market models of economic thought are :
The manipulation of supply and demand, price controls and income distribution examples involve microeconomic concepts.
See micro examples provided in the menu section titled "Single Variable Examples". Inputs may need to be altered due to differences between Scarcity and Strategy I and II
The extreme cases of economic modeling are pure competition ( where individual firms have no control over price) and monopoly ( where individual firms have complete control over price but must fear political reaction to their pricing policies).
To show a monopoly situation, merely allow one person to control the production and pricing decisions of all the firms of one industry.
Scenario: You are The Nasty Monopolist
Start the simulation, push the advance button to get to year one, and push the show chart button so the chart is visible. In year one your lawyers close the big deal that gives you virtual control of the transportation industry. The lawyers say they can maneuver and delay legal efforts to undermine your predominance for 5 years. You have that long to get rich.
You are living in a free market society so they are all against you. If the industry profits are large, many small new firms will enter the transportation industry each year, Moreover, the Congress is debating that communistic anti-trust bill.
Your nephew has a degree in economics. He says you have basically two choices (1) raise prices in year one to $225 - nobody can stop that and it’s not so high that the anti-trust bill would pass or (2) to restrict output to 60% capacity utilization in year one and supply shortages will cause market forces to raise prices for you. We could tell the press that “financial and operational problems following the merger reduced output temporarily”. Yeah, sounds good. Still, there is a third way you cleverly think of yourself - raise prices to $225 and lower capacity use to something less obvious, 70% in year one.
Operate the simulation to see which strategy will make you the most profit. First, just advance the simulation to year 5 without changing anything. This would have happened without your big industry buy out and merger. . To see the cumulative profit over the 5 years , click on the arrow of the drop-down box in the middle on the right of the main screen. Left click on P/L cumulative to see the total profit accumulate. Write down the industry cumulative profit beside the No monopoly category below.
Now let’s try the three alternatives:
Alternative 1 - Click the button to “return to year zero”. Push the advance button once to get to year one. Enter a price of $225 in the set price column (this price will not change yearly) by typing it in on the transportation row. Advance the simulation to year 5. Check the P/L cumulative to see the result. Write down the industry cumulative profit beside Alternative 1 .
Alternative two - Press return to year zero and enter the 60% in capacity utilization for transportation on year one. This 60% statistic will change automatically - let it. Advance the simulation to year 5. Again, check the P/L cumulative on year 5 and write it down below.
Alternative three - Press the return to year zero button and enter a 70% capacity utilization on year one and then enter a $225 price in the SET price column. Run the simulation and check the P/L cumulative as above. Write it down.
Let your greedy little heart decide that the risks are unimportant - decide which plan will make the most money.
a. No monopoly ________
b. Alternative 1 _________
c. Alternative 2 _________
d. Alternative 3 _________
STANDARD RUN of preprogrammed values to year 10 yields an EPS of 86.6 thus there is a real GDP index of 141.4, a misery index of 156.8. There is a real per capita wage of 38.6 and an unskilled wage of 23.2. The inventory backlog (shortage) in agriculture is –2760 in year 10.
Issues for simulation runs
Immigration. Push the reset to zero button. Add 2000 unskilled workers (about a 10% increase) by typing in the number 24000 into the box for the supply of unskilled workers found in the labor section. Push the next year button to run the simulation to year 10. We allowed 2000 unskilled workers into the system – what were the results on (1) real per capita wages and (2) wages of the entire group of unskilled persons. Write these below and compare to the standard run above.
Standard Run: real per capita wages: Unskilled wages:
Immigration run: real per capita wages: Unskilled wages:
Ceiling Price in agriculture. Push the reset to zero button. Check the ceiling price box and write in a price of 115 in the row for agriculture. Run to year 10 and write below the inventory backorder (shortage) in agriculture. Compare to the standard run shortage above. Standard Run shortage: -2760 Ceiling price shortage:
Output Restrictions in Energy. Reset to zero. Climate change legislation includes a 15% reduction in energy capacity, so we must write into the simulation an 85 (to replace 100) in the number of firms box in the energy row. After writing in 85, check the lock (lk) button next to “energy”. Now we can debate the legislation with some statistics. Run to year 10.
Standard Run: 86.6 real per capita wage: 38.6 Misery index: 156.8
Output restrictions run: real per capita wage: Misery index:
Note: Society must obviously change energy using technology quickly to avoid the above result. That will be both expensive and difficult.
Union organization raises middle class wages. Reset to zero. Replace the moderately skilled wage of 40 with 50, as strikes and labor disruptions have forced employers to pay higher wages. Will society be better off? Run to year 10. Compare the Economic Proficiency Score (EPS) in the standard run above with the EPS for this situation.
Standard EPS = 86.6 real per capita wage: 38.6
Union organization run EPS = real per capita wage:
Support Price in agriculture. Push the reset to zero button. Make sure that medium skilled wages are 40 not the 50 we wrote in for the Union organization scenario. Click on the support price button to show a check (located in the price controls area). The column where prices usually appear should read “support prices”. Insert 110 as the support price for agriculture in year zero. Run to year 10. Standard Run : Inventory -2760 10year cumulative profit : 12,823 (on list box) Support price run: Inventory 10 year cumulative profit:
Note: Support prices are to be used as a micro example only – they will give misleading and incorrect macro results (too high) because taxes and government budgets are not programmed to adjust for this spending program
6. Minimum wage set at 24. This will cause a 20% increase in the standard wage of 20.
.Reset to zero. Clear any price in the support price column – then click off the check mark on support prices. If the price controls line is green, you did not clear the price support number and will get the wrong answers in this example. Run to year ten. Note the fascinating results below.
Standard Run- Unskilled wages: 23.2 Real per capita wage: 38.6 Misery index: 156.8
Minimum wage- Unskilled wages Real per capita wage: Misery index: