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Market Model Patterns of Change Instructions - Essay Example

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The petroleum industry is believed to be the back bone of the economy because it is the foremost source of energy of many countries. The shortage of petroleum in the world can prevent the economy from expanding to meet the individual’s expectations…
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Market Model Patterns of Change Instructions
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Market Model Patterns of Change Instructions

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The production of petroleum by the industry especially, in USA has introduced a large distributor to the total petroleum in the global economy. Meanwhile, it is a non-renewable energy substance that can be extracted from the world after a certain period and converted into usable fuel. Therefore, the price of the petroleum is obtained by the demand –supply mechanism around the world economy, and slight shortage of petroleum can affect its demand and supply of other possible industries in the market. According to Galbraith (2001), when the monopoly power is practiced by an industry at a moment in time, and the degree of monopoly fluctuates, the industry specific product price will also change. In case, the pattern of change through time can be the indicator of comparison and disparity in economic performance in the petroleum industry. The petroleum was an example of monopolies to be affected in anti-trust action by the US government, and resulted into development of smaller companies. The industry expanded by increasing sales and undertaking major acquisitions, and after buying competitive industries in the market, the industries shut down those believed to be inefficient and kept the most powerful. The industry has involved in the discriminatory practices in order to have monopoly power over pipe lines. It also applied unfair practices of cutting local prices at the point where the competitors were severely affected. Technological changes bring the pattern changes in the firm because it is much simple to outsource both service and manufacturing to distributors in other countries. The increased competition promotes the pressure of industry to attain lower units’ costs as a means of maintaining market share. Finally, the nature of the industry trade patterns has undergone importance changes in order to have permission to issue licenses and permits in distributive trade market. Short-Run and Long-Run Behaviors of Monopoly An industry with monopoly market model is considered to have price setting power, and it will strive to earn high levels of profit (Galbraith, 2001). However, the industry is limited by the position of its demand curve that means monopoly cannot set price that clients cannot afford. Petroleum Industry is the sole supplier in an industry, and it takes market demand curve as its own demand curve. Therefore, it faces a downward sloping average revenues (AR) curve with a marginal revenue (MR) curve twice the gradient of AR (McEachern, 2011). In the monopoly, there is optimum firm determined by long run profit maximization in relation to the market. According to McEachern (2011) the short run average total cost curve is tangent to the horizontal, and long run average cost curve is always at its minimum point. In the short run, if the demand for the petroleum products is high, the industry will increase the price and the quantity of the products. The industry can achieve this by increasing output by employing more labor and raw materials, but cannot change the fixed plant. According to McEachern (2011) the long run industry curve is horizontal because when demand increases, raising prices and profits for monopoly industry. As a result, there is an increase in supply prices, pushing prices back down to original in the level in the long run, so that the profits are zero. Therefore, the shifting demand and supply curves trace out a horizontal long run industry supply curve. Areas for the Industry That Could Lead To Transaction Costs There are various transaction costs that the petroleum ...Download file to see next pagesRead More
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