The Market Structure of an Oligopoly - Essay Example

Economic Assignment Name: University: Course: Lecturer: Date: Assignment part 1 1. In my opinion, the market structure in this case is an oligopoly. In an oligopoly, individuals might collude so as to impact the quantity of output, hence determine the prices that are charged on products. Based on the sources, there is more than one producer; hence it cannot be a monopoly. Secondly, the cartels cannot be in a perfectly competitive market because they cannot influence price since there are many other suppliers who would come in to fill in the gap in supply in the economy. At the same time, the products in the market are mainly egg and chicken which are always similar in all ways. This means that it is impossible to differentiate the companies as is the case with monopolistic competition. It is in an oligopoly where a few suppliers are in market selling similar products, and have to collude to set prices. The act of reducing supply in order to influence the prices charged is a feature of an oligopolistic market. Since there are a few suppliers, it is not possible to fill in the gap in the market when a shortage is suddenly created as is in the case. All these features are very similar to those of an oligopoly. 2. The above curve summarizes the situation in a perfectly competitive market. The observations are that at equilibrium, average total cost, marginal revenue and marginal costs are all equal. This means that the firms in the industry are only making economic profits, and not supernormal profits. These are the profits that can help the firms in the industry meet their costs of production and not more than that. At such a situation, the firms lack motivation to enter in the industry because they are not likely to make reasonable profits. Additionally, the firms in the industry can meet their expenses hence have no reason to leave the industry. This is why the industry remains stable at point Q where the price is P. at this this equilibrium point, ATC=MR=P=MC. Any firm that has greater ATC leave the market since it would be making losses. This creates an equilibrium situation where the stakeholders in the industry are comfortable with the prevailing conditions. 3. The reason why the suppliers decided to kill hens and destroy eggs is that they needed to cause a sudden decline in supply of the products in the industry. A sudden decline in supply cannot be compensated by supply in the market because the assumption is that the market is an oligopoly, where the number of suppliers is a few. At reduced supply, the sellers would get the power to sell their products to the highest bidder. They would therefore get the maximum price from the customers. Since the costs of keeping the few chicks are low, the final profits are very high. The following figure is the summary of what happens. B A The equilibrium reduces from point A to point B when hens and eggs are destroyed. The results are that the price is higher than would have been and the quantity supplied is less than would have been. This leads to exploitation of customers since they pay more than they would have paid if the destruction was not done. Assignment part 2 1. In the year 2012, the aggregate demand in Italy was declining because of the continued recession. This was also accompanied by a decline in supply of goods and services in the economy. One can say that the country is in the contraction stage of the business cycle. During this stage, the demand for goods and services decrease significantly. The business cycle stage can be summarized in the following graph, showing a decrease in demand in the economy. Price Quantity The arrow in the graph shows the movement of the demand curve to the left, showing a decline in demand for products and services in the economy. In order to cope with the situation, the investors have to close down their investments, reduce employees and hence cut down on the output in the economy. 2. If the government decided to cut on government expenditure, the flow of money in the economy would reduce, and this would mean a decline in the demand in the economy. The move would also increase the interest rates such that investments would reduce in the economy. Reduced investments would also mean a decline in the output in the economy. This means a slower economic growth. Italy should adapt an expansionary fiscal policy, where taxes are reduced and this makes products cheaper for customers and leaves more income in the hands of the citizens who can then demand for goods and services. A rise in demand for goods and services entice investors to make more investments. Additionally, increase in government expenditure employ people hence avail more money in the economy. The results are increased demand. Higher demand requires the investors to produce more goods and services to meet the demand gap. This has the effect of requiring more workers to serve in the investments. The increased employment leads to increased supply of goods and services in the economy. The following is the summary of the demand when the government engages in an expansionary fiscal policy. Price Quantity The graph shows a shift in demand to the right, and this raises quantity supplied as well as prices in the economy. The higher prices induce investment in the economy hence growth. 3. The unemployment rate in January 2012 was 8.9% and it increased to 11.2% in December 2012. This was deterioration in performance of the economy. The labor participation rate was 49.88% and the rate increased to 66.02% in December 2012. This means that the rise in unemployment rate in the year was partly as a result of the increase in participation rate. However, the most important thing to note is that the unemployment rate increased in the year 2012, and within a span of 12 months. This means that Italian government has a duty to ensure that the unemployment problem is well addressed. References Gerson, P. R., & International Monetary Fund. (1998). The impact of fiscal policy variables on output growth. Washington, D.C.: International Monetary Fund, Fiscal Affairs Dept. Lipsey, R. G., & Harbury, C. D. (1994). First principles of economics. Oxford: Oxford University Press. Mariger, R. P. (1986). Consumption behavior and the effects of government fiscal policies. Cambridge, Mass: Harvard University Press. Read More