Imperfect Markets - Oligopoly and Monopoly - Assignment Example

3 Short Essays Submitted By: XXXX Number: XXXX XXXX of XXXX Number of words: (2225 Excluding Bibliography) Question 1: The majority of markets fall under the realm of imperfect competition, namely monopolistic, oligopoly and monopoly. Compare any two of them by referring to their assumptions, market conditions and strategies and give a few examples. Answer: (584 words) Oligopoly: Oligopoly is a market structure where the market consists of a few firms. This is mainly to allow for the barriers to be erected and so that there is a barrier for entry of new firms and competition. The various products that are provided by firms in this type of markets are either differentiated or undifferentiated. There are two major factors that differentiate the oligopoly markets from other market types. Firstly, in the oligopoly markets, there is a strong barrier for entrance into the market. Here in these markets, the barriers for entry into the markets are varied and the various industries might have different levels of entry barriers. Secondly, these markets have a few companies and hence the companies require taking account of each other and the companies are mutually dependent on one another. This means that the companies will be affected by the decisions made by the other firms in the markets. Monopoly: Monopoly is a market structure where there is only one firm in the markets. The products that are produced in these markets are unique and there is not easy entry into the markets. There are a few key features that are related to the monopoly markets. These markets have products that are differentiated and have a strong level of brand loyalty. The firms of these markets have complete control over the price of the firms and the prices cannot affect the demand for the products. The table below provides a clear and structured difference among the two types of markets. Comparison of Imperfect Competition Type of market Oligopoly Monopoly Number of Firms Few One Nature of Product Differentiated or Undifferentiated Unique Freedom of Entry Restricted Almost completely Blocked or Restricted Implications on Demand Curve Downward Sloping, Mostly inelastic dependent on the reaction of competition to change in prices Downward Sloping, More inelasticity than Oligopoly and the price is controlled by the firm Examples Cars, Cement Local Water Company, Drug Company Table 1: Comparison of Imperfect Markets: Oligopoly & Monopoly (Sloman and Sutcliffe, 2000) The different competitions in the market affect the consumers in a number of ways. Every market has a structure very different from the other and the affects on the consumer are varied. In the assumptions that are mentioned above, it is clear how the market functions. In the case of monopoly, there is only one firm in the market. This makes the firms price makers. In this type of market the consumers do not have a wide variety to choose from hence they require accepting whatever is available in the market. This type of market structure is not very beneficial to consumers since the choice of products is not available and the customers need to pay whatever is set by the firm since the market consists of just one firm. Also here the monopolistic company can produce lower outputs at higher prices. However in the case of an oligopoly market, the market has a few companies. The products in these markets can be differentiated as well as undifferentiated (Anderson, 2005). This gives the consumers of a few of the companies a choice. Examples of companies that fall into this market are cement companies, car companies, electrical appliances companies. Here the consumers have a choice and the prices are set by each firm (Corchon, 2001). In these markets the oligopolistic differentiates their products and the quality of products can be very different for each firm. Here the consumers do not have complete knowledge of the industry. Question 2: (351 words) The UK consumer price index rose to 5.2% in September 2008, one of the fastest rates for the UK’s annual inflation in several years while the UK’s economy shrank for the first time in 16 years by 0.5% in quarter 3, 2008. A I) Why has inflation been increasing in the UK over the past year? (136 Words) According to a number of experts and analysts, the UK inflation has been on a rise majorly due to the high cost of food, oil and energy (The Money Stop, 2008). It has been noted that the non alcoholic beverages, vegetables and the food had prices that fell a lot over the year and this in turn led to a steep drop in the CPI of the country. Annual Inflation Rates - 12 Month Percentage Change (National Statistics, 2009) Other major reasons for the drop in the CPI were mainly due to the rise in the prices for the travel industry. The prices of fuel, transportation costs, air fares and many more led the country into a mode of recession with a high level of inflation after a solid 16 years of constant and unstoppable growth. II) Why is a high rate of inflation undesirable? (215 Words) Inflation is undesirable for any company as it has a number of serious effects and the economic as well as social aspects of the country. Inflation can affect the income distribution within a country and can lead to random redistribution of the real income. In times of inflation the levels of income of the people does not rise and there is a major disadvantage to the people as the income remains the same however the prices of goods and services increase to a great extent. Also the inflation in the country would lead to increased spending and encourage higher borrowings at the rate of the savings of the people. Inflation also leads to issues like high levels of debts and the lack of higher incomes leads to the individuals having greater issues in buying the basic necessities for living as the individuals lose the purchasing power of the individuals. The higher the inflation rate within the country the more difficult it would make the life of the citizens of the country. With inflation rate of 5.2 % the UK is facing high inflation and this seems to be at the highest point over the last three years. This can be clearly seen in the chart below (National Statistics – Economy, 2008). Unemployment Rate (Big Picture, 2008) B) What are the factors that have slowed down economic growth in the UK? (213 Words) The recession that the country has faced is the first in the past 16 years. This decline has had a strong effect on the banking system of the country as well. There has been a collapse in the current time and to top it all, was the Northern Rock crisis which hit the country which only helped increase the slowdown of the country and also caused a huge crash in the banking systems. The main factors that have been noted as firstly, the bank crisis in the country, which has brought about a complete change in the country and has to a great extent almost crashed the banking sector of the country. Also, the cost of goods has also affected the country’s performance to a great extent. Also the governor of Bank of England also highlighted that the price of the pound fell to an all time low of $1.620 since 2003. This also to a great extent indicted the slow down and this also led to making the country a lesser attractive place for investments. Also, the country’s borrowings in terms of the short terms loans is also noted to be very high. A mixture of all these factors has been a cause of the country on the whole (BBC News, 2008). Question 3: (916 Words) Discuss the benefits of trade and specialization and the reasons why some countries impose restrictions or barriers to international trade. Wherever possible, use examples to illustrate your answers. Countries trade with one another for earning higher gains. It is also seen that it is better to specialise in a particular set of goods rather than trying to be self sufficient and trying to do everything. There are a number of benefits of trade and specialisation is many. Countries also specialise and in the case of countries, they produce more than the required amount of goods. To analyses which goods the countries should specialise in and which they should export, it is essential to use the comparative advantages. This is basically when the country has a comparative advantage over the other countries, in terms of the production at lower opportunity costs (Nellis & Parker, 2006). In short the comparative advantage and the difference in the opportunity costs is the basis for the specialised products and trades. However it is also important to understand the absolute advantage. That is when a country has an absolute advantage over another in the production of goods if it is possible for it to produce the good with lesser resources than the other countries (Sloman and Sutcliffe, 2000). Major reasons for gains from trade are many. Firstly, it allows for decrease in the costs, i.e. although the countries might have to pay the same amounts in the initial comparative cost differences, it will still benefit as there is a possibility of economies opf scale and this will increase the trade. When a country has economies of scale, then the comparative advantage also increases and the comparative cost sees a steep decline. Also trade can gain if there is a difference in the demand within the country (Nellis & Parker, 2006). If the comparative cost difference and there are no economies of scale, there is a high level of chance for the countries to both gain out of the trade and be a complete benefit for the trade. Also, with the imports and exports, there are high chances that the local conditions of the country will also improve and there will be higher levels of competition in the domestic monopolies and oligopolies, which ill thereby increase the efficiency of the country on the whole (Sloman and Sutcliffe, 2000). The imports will not only improve the relations with other countries, however will also stimulate the research and development of the local markets and this will help for the local markets to adopt newer researches and develop their products with newer technologies to meet up to the competition from the imports (Nellis & Parker, 2006). Also, with the economies across the world developing and growing, there has been a growth for the exports which will be noted. Also if the exports have high income elasticity then the likeliness of the demand for the trade growth is very high. This is majorly as it would provide for a stimulus for growth and exporting to other countries. Again this will also lead to high levels of improvements in the local markets as well and will lead to a situation where there is a growth of competition among the players in the markets (Sloman and Sutcliffe, 2000). Last but not the least, the non economic advantage of the trade is also very high. The trading between countries could lead to betterment of the social, cultural, political situation among the countries, which in turn will lead to better links and better relations between the countries in focus (Sloman and Sutcliffe, 2000). Most countries generally trade based on ratios, i.e. they trade the specialised goods with the other country in various proportions. Take for instance, if to countries plan to exchange the goods and trade with one another, and one of the countries is a developed country while the other country is a less developed country, then it is seen that in most cases both the countries benefit from the trade and it brings about profits for both the countries, in terms of both their own local markets as well as the international markets (Evans, 1991 & Nellis & Parker, 2006). Reasons for Restrictions on International Trade: There has always been some sort of restrictions imposed on foreign countries conducting trade in the local markets. Though the level of restriction varies from one country to another, the motives behind these restrictions are fairly the same. The most important motive on imposing restrictions is to protect the local industries, so that there is sufficient demand for the local products. The main object here is to weaken foreign competition, so that the home producers are supported. Restrictions are mostly in the form of taxes or other forms of customs and duties, so that additional cost is included in the products of overseas manufacturers. This will force the foreign competitors to price the items at a higher level than the home producers, thus weakening their market share. Such additional taxes imposed on foreign commodities are collectively termed as ‘protective tariff’, as they protect the local industries (Ely and Wicker, 2007). Another most common reason for imposing restrictions is to raise revenue from International trade within the country. Duties and taxes imposed on imports and exports serve as a source of revenue for the Government and in many cases, these imports and exports contribute to a significant amount of GDP (Sawyer and Sprinkle, 2006). Another argument for restrictions on foreign trade is that the protective tariff promotes nationalism and brings unity among the citizens. By encouraging domestic trade, a sense of belonging to the country is increased, which in turn, promotes nationalism. 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(2007), Restrictions on International Trade, Accessed on 5 May 2009, Available at http://chestofbooks.com/finance/economics/Elementary-Principles-of-Economics/II-Restrictions-on-International-Trade.html National Statistics, (2009), Inflation, 21 April 2009, Accessed on 1st May 2009, Retrieved from http://www.statistics.gov.uk/cci/nugget.asp?id=19 Nellis, J.G., & Parker, D., (2006), Principles of Business Economics, 2nd Edition, Financial Times Management Sawyer, W. C. and Sprinkle, R. L. (2006), International Economics, Second Edition, Perason Education, New Jersey Sloman, J. and Sutcliffe, M. (2000), Economics for Business, 3rd Edition, Prentice Hall, Essex The Money Stop, (2008), Sixteen year high for inflation in UK, 6th November 2008, Accessed on 2nd May 2009, retrieved from http://www.themoneystop.co.uk/112008/sixteen-year-high-for-inflation-in-uk.html Read More