Question

Chapter 5 Question: What are examples of fixed costs and variable costs for a pizza shop? Chapter 6 Question: Adam Smith in The Wealth of Nations asserted that the pursuit of self.in terest by competitive firms promoted the interests of society. What did he mean by this? Chapter 7 Question: What circumstances might cause a monopolist to charge less than the profit-maximizing price?

Answer 1

As per rules and time constraint, only one question is allowed. However, I am answering first two questions. Kindly ask other question separately.

1) Fixed cost are fixed and do not depend upon the level of output. It includes cost of building, machinery, equipment etc.

Variable cost are costs that depend upon the level of output. It changes with change in output. It includes cost of raw materials, salaries etc.

For a pizza shop÷

Fixed cost = cost of building, cost of furniture, cost of oven and other machinery, air conditioners etc

Variable cost = cost of input like cheese, pizza base etc, salary of workers, electricity etc.

2) "It is not from the benevolence of butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest".

Adam Smith, father of modern economics contended that pursuit of self interest benefits all. By that he meant that when firms in a competitive market makes a decision, following their self interests, it brings positive benefits to the society. Self interest and competition drive the supply and demand and brings market to equilibrium. It also brings innovation.

He called this pursuant of self interest and competition as invisible hand that guides the market towards betterment of society.