Economics Theory Applications - Research Paper Example

Economics Theory Applications It is worth noting that just like economies that have developed time so are the economic theories. Even though the word “economy” may be old, modern economic thought dates back in time to the 1600s and 1700s when the world economies began their transformations from the agrarian to industrial societies (Samuelson, 1986, 2). Economic theories are of two types and these are microeconomic and macroeconomic theories. Microeconomics is defined as a social science that functions to resolve the problem of allocation of limited resources in a way that should meet the human wants that are normally unlimited. According to Mandal (2007, 97) this problem can only be determined based on price mechanisms that has been known to use forces of supply and demand that characterize different products. This is because price mechanism is used to refer to the mechanism that uses prices of products as a signal to both the buyers as well as sellers in any market as to what the market has in store for them, and what trend to follow. This is what forms the core of microeconomic theory where demand, supply and quality prices have a significant role to play. This paper explores the Malaysian market by focusing on Astro satellite TV monopoly to determine the problems that Malaysian satellite television’s market is facing and attempt to solve the problem using microeconomics theory. Microeconomics theory This theory stipulates that demand is the willingness and the ability for a consumer to buy a particular product within a specified period of time. Therefore, if all other factors are held constant, it follows that as prices of goods increases the demand decreases proportionately (Tsoulfidis, 2009, 30). This means that demand and price are inversely proportional. A lower demand of goods means a reduced amount of quantity purchased by consumers. The amount of goods consumers buy at higher prices decrease because as the prices go up, so is the opportunity cost of buying that good or service. People will therefore tend to buy inexpensive goods or services, and avoid buying that product that will force them to forego certain goods or services that are of more value to the consumer. This theory is applied mainly in a monopolistic market where it is only one supplier of goods and services with many consumers that exist, eliminating the case of competition (Ghai and Gupta, 2002, 2). What is Monopoly? Monopoly is a situation characterized by the existence of a single producer in a market who is in control and not with any close competition whatsoever of supplying a particular product. This means that the elasticity of demand tends to reduce to almost zero. A company enjoying monopoly has some benefits such as the ability to be innovative with the development of its product and the domination of the demands of the customers (Kirzner, 1997, 65). This is, in addition to, setting its own price standards, orderliness and predictability. The constraints that happen to be either legal or natural protecting the monopoly of the firm from its competitor often generate the blockade to entry to the monopoly market. To make the best use of the profit, monopolist should generate at an output that the marginal cost is equal to marginal revenue. However, the biggest problem of monopoly market is that monopolist is a price maker rather than those price takers in a competitive market (Dwivedi, 2002, 38). This is because the monopoly firm will only continue enjoying maximum profits so long as entry of other firms into the market is blocked. This may either be naturally or artificially. Therefore, the firm will continue to produce, and even function at a loss on condition that the losses the firm makes do not in any way exceed its fixed costs (Ghai and Gupta, 2002, 3). This means that the firm will only close when the losses are in excess of the fixed costs of the company. With this advantage, monopoly will charge at the price which is in excess of the marginal price and marginal income, for whatever the cost, the consumers will be forced to buy their packages because of the absence of any other close competitor of the business. This higher set price will cause the dead-weight loss of customer surplus and then cause inefficiency of the market. Astro in Malaysia: Government protected monopoly Astro Holdings SdnBhd (AMH / ASTRO) is a company in Malaysia which provides the satellite television service to homes in Malaysia, and it deals with pay TV, radio, content and digital. It was launched in year 1996, and now Astro has grown to have almost three millions of subscribers, which equals to the fifty-percent penetration of Television in Malaysian homes. Astro provides almost 150 channels in four different languages in the entire Malaysia. During the year 1996, Malaysian government authorized Astros exclusive license for satellite broadcast in Malaysia. A few months ago this exclusive license got to be extended from year 2013 to year 2017, and this seems to be a great privilege for the firm. During this additional period of time, Astro will hold the power to be the sole source of satellite television service in Malaysia market. This mean for the next five years, the satellite television market in Malaysia will be protected, and this translates into prohibition for entry of other similar suppliers into the market. However, Astro monopoly has generated a number of problems in Malaysian satellite television market, and this has caused the inefficiency of the market. Barrier to entry: Why does it matter? As stated earlier, Astro holds the exclusive license to provide the satellite television transmission service in Malaysia. Since Astro has obtained the license from Malaysian government, Astro is not a natural Monopoly. Under the non-competitor situation, Astro has used the advantage of monopoly power to set the price higher than the marginal cost and marginal revenue. Astro charges its customers a minimum price of RM40. The customer is compulsory to subscribe a foundation package, which is “Family Package” before purchasing any channels or programs they are interested in viewing at the comfort of their homes. The “Family Package” contains 29 channels, including six free of charge channels provided by Malaysia department of communication. The barrier of entry to the market has caused the lack of competition to force Astro to charge the price equals to the marginal price and marginal income. This has led to the dead weight loss of consumer surplus. This only means that it is the company that is enjoying the benefits of artificial monopoly at the expense of consumers. Therefore, this only matters to the firm which is making exorbitant profits while consumers suffer from the high prices set for the purchase of packages. Demand curve of Astro The demand curve of Astro will be the market demand curve because Astro is the monopoly of the market. The degree of monopoly power of Astro is all dependent on the elasticity of the market. Astro has increased the price for some packages around two to eight percent during year 2009. However, the data shows that the subscriber of the Astro has also increased from 2.6 million to 2.9 million from year 2009 to year 2010. Here, it is assumed that the demand curve of Astro will be inelastic. In any market, there is normally a down sloping of the industry’s demand curve, and this is resultant of the law of demand. This is because Astro is a monopolist firm and this means that the marginal revenue is not its price, for it changes consistently with the output, and it is normally below its price. Therefore, the monopolist must lower the prices so that they can sell more units (Nicholson and Snyder, 2011, 5). Figure one show the demand curve of Astro. The curve AR is the aggregate demand of the market and it is also the demand curve of the market. To maximize the profit, Astro will produce at the quantity Q that marginal cost is equals to marginal revenue. However, the monopoly power provides Astro the ability to charge the price which is higher than the marginal cost, thus Astro will charge a price at P1. Comparing to the competitive market which charge the price at P2 and the price is equals to marginal price and marginal proceeds, the Astro monopoly power has caused the loss of consumer surplus on area as well as the dead weight loss. A diagram showing a monopoly demand curve. Adapted from Ghai and Gupta. Microeconomics Theory and Applications .New Delhi. Sarup & Sons, 2002. Print. MR= Marginal revenue D= Demand curve which is also the average revenue. 6= Prices at p1 8=Prices at P2 When Price is not equals to value This means that the firm is not getting value of its services, and it is more likely that the output will change. This will in turn have an effect on the supply because the demand will decrease. It is worth noting that the total returns curve reaches its crest at the same quantity at which the marginal income curve crosses the x axis of the demand arc, and the complete value of the price elasticity of demand is one (Nicholson and Snyder, 2011, 80). The arc measures the receptiveness of the buyer linking any two points on a demand arc. Therefore, any percent in the drop of price results in a rise in the measure of service or product demanded, a value that is equal to price elasticity. When the price is lowered there is a subsequent reduction in revenue that emanates from the selling of all units at a reduced price. However, there is a gain in revenue because the quantity that is demanded is higher as compared to other times (Dwivedi, 2002, 39). Therefore, a greater price elasticity going above one with the total returns rule substantiates that a drop in the worth of product subsequently leads to an increase in the total revenue. However, Astro firm has gone around this by supplying to a percentage of its consumers the Chinese with NHK channel. This is referred to by the firm as the imperfect package or an under dynasty package. This is because Astro has forced the Chinese in Malaysia to purchase this channel that has zero value to them. However, this is not entirely free, for to get NHK channel, they have to purchase the family package which is composed of four channels that are normally provided for free by normal TV. Moreover, a customer is not allowed to purchase the family package only because it has to be in association with sports package that is also purchased with mini package. Solution to Astro monopoly The disadvantage that normally characterizes a monopolistic economy is normally on the side of consumers. This is because lack of competition leads to the firm enjoying the monopoly to decide on its own prices. Some of the monopolies get to be broken down by an open market; this is the only natural known way to break the monopoly (Mandal, 2007, 80). Besides, the governments can chose to chip in and either converts it into monopoly environments that is publicly owned or fragment it forcibly. However, this cannot apply in this situation where it is the same government that granted the monopoly to the firm. Therefore, the contract that was signed between the government and the firm holds back the government from acting in this manner. In this situation, there is no perfect solution to the monopoly the firm is enjoying. For instance price discrimination may form part of the solution, but it is less of perfection. For example if the company gives discounts which translates into cheaper prices because of higher quantities bought, it will result into a high consumer surplus which is good thing for the company. However, it is bound to fail if the company does not identify the price points at which specific consumers can have the prices reduced further to enable increased purchase of units. This is because the willingness of a consumer to continue purchasing decreases with purchase of more goods .A problem can also arise when several customers come together to buy a larger bundle and share the units in the bundle thus saving money on the customers side(Spiegel, 1997, 20).. However, this can only apply when the customers’ absolute value does not exceed one, for in such a situation, it is very easy to increase the prices of packages. However this may be tricky, for the firm will be forced to know what every consumer is willing to pay which can only happen in theory and not in practice (Dwivedi, 2002, 35). Nationalizing Astro would not work too because market for satellite TV is not that difficult to obscure entry of other firms. For example in a case where media controls the government, there will sprout political issues protesting against freedom of speech. Therefore, the only solution remaining is to break the market share, and this will function to at least eliminate unreasonable packages. Conclusion In the real world getting a near perfect competition is next to impossible meaning that some circumstances force societies to tolerate these monopolies. These monopolies may either be natural or due to man doing which is the case of Astro whose monopoly has been legalized, and is being protected by the government. However, it is noteworthy that competition has for a long time formed part of man’s life. This is why the public is always on the lookout for any degree of competition that is reasonable. This is because it makes them feel secure in regard to the working of its markets. Works cited Dwivedi. Microeconomics: Theory and Applications. New Delhi, Pearson Education India, 2002. Print. Ghai and Gupta. Microeconomics Theory and Applications. New Delhi. Sarup & Sons, 2002. Print. Kirzner, Isfraedl. Entrepreneurial discovery and the competitive market process: An Austrian approach. Journal okf economic literature. 1997, Vol 35 PP 60-85. Print. Mandal, Krishna. Microeconomic Theory. Ahmedabad, Gujarat. Atlantic Publishers & Dist, 2007. Print. Nicholson, Walter and Snyder, Christopher. Microeconomic Theory: Basic Principles and Extensions. Stamford, Cengage Learning, 2011. Print. Samuelson, Garry. Microeconomic Theory. New York. Springer, 1986. Print. Spiegel, Yossi. Second degree discrimination. Retrieved on 26th April, 2012. From Tsoulfidis, Lefteris. The rise and fall of monopolistic competition revolution.International review of economics. 2009, Vol. 56, No. 1 PP 29-45. Print. Read More