Politics in Economics - Assignment Example

Politics In economics Outline the characteristics and behaviour of firms in perfect competition. Competition always brings the best as well as the worst in organizations. That is, if an organization faces competition or gets involved competition, it will optimize its performance to beat its competitors, thereby strengthening its position even further or could under perform and that would spell doom for the organization. “…competition de-selects weak organizations and stimulates organizational learning, which in turn further increases the intensity of competition and so further strengthens survivors in an ongoing dynamic of reciprocal causality” (Job Functions). So, the behaviour of firms in competition could border on both sides, optimization of performance or under-performance. But, on the favourable side, competitions mainly bring out the best in organization, as they will strive to perform the best. Competition brings in more and more quality at the end of the management practices with regards to the organization’s products as well as more sales in the form of its varied stance on focusing towards the customers rather than the product itself. Organizations in competitive race will first try to study its competitors’ strengths and weaknesses. So, the first behaviour that will be exhibited by organizations during competition with others, is the analysis of the existing market and importantly the power or influence of the competitors. Then, after doing the analysis, the organizations will set goals and formulate strategies which will give the departments and workers a blueprint to follow. After setting its ‘house’ in order, organizations will continue to fine-tune their functioning based on the performance of its competitors, thereby achieving success Why is the perfectly competitive model seen as useful for economists today? To withstand pressure and competition is the hallmark of any successful and long lasting organization, business, company or enterprise, whichever term we might quote it as. While the organizations functions as part of competition both its positive as well as negative attributes will be exhibited. That is, the successful as well as failed strategies will come into the open for discussion and this where the economists come into the picture. “The continuous interaction of institutions and organizations in the economic setting of scarcity and hence competition, is the key to institutional change.” (North). When the organization changes positively and succeeds over its competitors, the strategies it formulated and adopted for that success will become a kind of perfect competitive model, for others to appreciate and also evaluate. The perfect or successful competitive model that evolves, when an organization succeeds over its competitors, will be discussed and evaluated by the economists as well. When the economists make the evaluation, they will provide crucial interpretations about that model, which will help be in finding the loopholes of the model or on the positive side, will help in optimizing the model further. Competition forces organizations continually to invest in skills and knowledge to survive. The kinds of skills and knowledge individuals and their organizations acquire will shape evolving perceptions about opportunities and hence choices that will incrementally alter institutions as well other points of view. (North). The changing market structure might call for changing strategies and lines of action that would all target the competitors with whom the clutter is being broken in the environs of the marketplace. So, perfect competitive model will provide the economists perfect opportunity to come with both positive as well as negative interpretations. When, if ever, may the existence of monopoly by justified? In any walk of life, there will be traces of Monopoly in some form or other, importantly in business environments. That is, in business environments, organizations through positive means or negative means will try to reach a most dominant position, pushing back its fellow competitors. After reaching that dominant position, they will try to strengthen that position and become a monopoly, but this time by also suppressing its competitors. “Generally monopoly is viewed as person getting hold of market by implementing unfair means such as providing the service at much low cost than other service providers and causing the competitor to bear heavy financial loss. This result in removing opponent’s existence from market and the monopolist again raises his service price to recover the losses” (Ambekar, 2005). Organizations while trying to reach the monopoly status, will most times follow the ‘suppressing path’. So, there are no times, the monopoly can ever be justified, it needs competition for itself and also for the customer. Any organization should not exist like an ‘island’ without any one around. They have to be in the midst of something among the competitors, changing the fortunes of itself as well as the customers in the positive direction. But, like an island, if an organization functions monopolisitically, it will first affect the customers. That is, if an organization driving away the competitors sells a product or a service, it will try to unfairly leverage its business by setting a high price. As the customer will not have any opportunity to look for any options, they have to endure the monopolistic policies of the organizations. Also, the monopolistic organizations will also not learn or grow, affecting its performance. A monopolistic firm that will become the sole seller in its market and because of that status, it is the sole producer in its market and it also faces a downward sloping demand curve for its production. (Mankiw and Taylor 2006). So, Monopoly is becoming an extinct concept, due to the rise in competition and competitors. It is the competition, which brings the best out of any organization. Source: Greg Mankiw Blog (2008) Evaluate different ways in which the problems posed by monopoly may be reduced. Problems caused by monopoly can be eliminated or even reduced only by overseeing authorities. That role can only be played by governments, its laws and the law protecting authorities. As discussed earlier, monopoly is not a welcoming phenomenon and the important issue is the customers or the competitors cannot take any major steps to control the monopolistic behaviour of certain companies. That is, when they are not able to come up with competitive products or services and importantly when they are suppressed from functioning normally, Governments has to come into the picture and take appropriate actions. Most countries have anti-monopoly legislation to control the creation and abuse of monopolies and regulators empowered to enforce these laws. This has been fairly successful at stopping some types of abuses (such as the formation of cartels or the buy-out of competition) and trying to reduce most of the problems associated with the monopolies. (Money Terms). In UK, anti-monopoly regime is built as part of the Competition Act 1998, which indirectly reduces chances of monopoly by prohibiting any anti-competitive agreements and abuses of dominant market position between companies. “This legislation ­ now the Competition Act 1998 ­ prohibits cartels and other anti-competitive agreements. It also prohibits abuses of dominant market position.” (Archive of Official Documents 2001). With the European Commission also coming up with far-reaching reforms to strengthen the effectiveness of anti-monopolist policies, the organizations can be punished through fines to total bans. It does this by imposing fine and registering the case to be against law, thereby putting lots of restriction on companies which exhibit monopolistic leanings. (Ambekar, 2005). If demand for the product of an imperfectly competitive industry increases, what happens to the price of the product, the output of the industry and the profits of the within the industry? When an organization indulges in monopolistic activities and importantly increases the price of its product or services, the customer will be the one who will be the most affected. That is, when an organization accentuates its position and becomes an monopoly, it will surely want to take advantage of that position. Most time, it will take advantage of that position by indulging in negative activities like increasing the fee. That is, when organizations reaches a situation, where the customer has no other products or services to buy apart from the organization’s product, it could increase the price of the product or service and the customer has to buy for that price, as they will not have any other option. This will surely elevate the prices of the products or services and the customer will face the brunt of the problem. From the industry perspective, the competitors will face losses and that would also affect the livelihood of many people. So, the profits will reach only the monopolistic organization, without equal distribution. “In models with imperfect information by buyers, monopoly in the product market, or monopolistic competition with differentiated products, a firm’s profits vary differentiably.” (Mankiw and Romer 1991). This will not be favourable for the whole industry along with the customers. This can be countered only if the competitors, small companies and new entrants are able to increase their bargaining power by offering products at lower prices than the monopolistic company. Any organization entering a new market will always go for a lower price for its product or services, to get an initial opening. If the initial opening translates into substantial sales, the bargaining power of the organizations can also be increased further. So, the main strategy used by the competitors, new entrants as well as existing companies is to increase their bargaining power by offering products and services at a cheaper rate. This threat of substitute products will surely affect the fortunes of monopolistic company, both market wise and also economically. That is, as the new entrants offer substitute products at cheaper rates, the company indulging in monopoly will be surely forced to lower or discount its own prices than its competitors in the external environment. These substitute products will also cause a downward pressure on prices, which in turn will lead to more favourable distribution of the profits and will aid in the growth of the industry in value terms. Importantly, when viewed from the perspective of customers, this intense competition and the introduction of new products will increase their bargaining power in the environment. That is, as competitors and new entrants come up with their many products, it gives the customers a wider choice to select from, that too at a lower price. So, even though, fellow organizations will face tough situations when Monopolistic organizations increase the price of their products or services, the organization can counter it by adopting certain positive strategies. By lowering its prices, the negative effects can be neutralized somewhat. Assuming that a monopolist and a competitive firm have the same costs, the welfare loss under monopoly is shown by a deadweight loss of consumer and producer surplus compared to the competitive price and output. This is shown in the diagram below. Source: Revision Guru How may the existence of barriers to entry affect the outcome? Organizations or firms cannot remain “static”. They has to keep on moving breaking ‘boundaries’ both geographically as well as economically, to actualize the opportunities and emerge successful. That is, with every firms wanting to expand their geographical reach and make an imprint in various markets, there will be enough opportunities for it, to initiate an entry into a foreign market. To initiate and actualize the entry, firms have to set targets and formulate various strategies according to the situation prevailing in those foreign markets. While formulating the strategies, the organizations’ leader and the management team will firstly look at the factors that may aid them to make a successful entry. After analyzing the positive factors, the firms will or should have to analyze the barriers that may impede its entry. As every foreign market or country will have different political, social, economic conditions as well as different customers, competitors, prospective employees, etc, etc, there will be many barriers, which will block the firms’ success. Because of these barriers, organizations will have to spend all their resources from financial to mental resources for their entry alone. So, after they make an entry, they have to put in extra efforts to establish their industries or unit or store, etc, spending more financial resources. The other affect, the barriers will have on the entering organization is that they will have to give certain commitment. That is, to actualize the entry the organizations will have give certain commitments to the country like recruiting locals, paying the taxes, etc. Even though, these affects will not have very negative fallout, it could affect the organizations in the long run. So, existence of barriers will surely affect the organization in their functioning. References Ambekar, Y, 2005, What does Market Monopoly mean? accessed on December 1, 2008 http://www.buzzle.com/editorials/1-13-2005-64198.asp Archive of Official Documents, 2001, The UK And European Framework, accessed on December 1, 2008 http://www.archive.official-documents.co.uk/document/cm52/5233/523305.htm Job Functions, The Red Queen: History-Dependent Competition Among Organizations, accessed on December 1, 2008 http://jobfunctions.bnet.com/abstract.aspx?docid=163119 Mankiw, G N and Romer, D, 1991, New Keynesian Economics, MIT Press. Mankiw, G. N and Taylor, 2006, Microeconomics. Cengage Learning Business Press Mankiw, G, 2008, Competition is good for consumers, accessed on December 1, 2008 http://gregmankiw.blogspot.com/2008/07/competition-is-good-for-consumers.html Money Terms, Monopoly, accessed on December 1, 2008 http://moneyterms.co.uk/monopoly/ Revision Guru, Economic Efficiency, accessed on December 1, 2008 www.revisionguru.co.uk/.../unit4/comparing2.gif Read More