Economics for Business - Assignment Example

Economics for Business: Individual portfolio Table of Contents Answer to Question Number 3 Answer to Question Number 2 5 Answer to Question Number 3 7 References 9 Kesavan, K. R., Selwyn, S. T. & Elanchezhian, C. (2005) Engineering Economics and Financial Accounting. New Delhi, India: Laxmi Publications. 9 Answer to Question Number 1 1. The above illustration is that of an oligopolistic market structure, which is characterized by the following features or assumptions – Concentration of a few powerful sellers in the market. Barriers to entry into the market, created by the first-movers for the new players. Interdependence in decision making – producers cannot make their independent production decision since all of them are significant market players, capable of distorting the revenue margins of the rest. Product differentiation, i.e., none of the producers produce homogeneous goods – they are bound to vary either in terms of quality or brand (virtual differentiation). Price stickiness and advertisement, i.e., sellers do not prefer to compete on the basis of price since most of their products are only virtually differentiated from each other. A price competition in such cases could lead to ruinous results, which is why sellers go for advertisement as the driving force to attract consumers. Collusive activities are common since they increase the market power of one group in comparison to the other players. Producers cannot forecast their respective demand curves over time, since market conditions are largely dependent on the collective action of all players. 2. The Office of Fair Trading and the Competition Commission bared three prime facts which outline the characteristic features of an oligopolistic market structure. They are – There had been a high concentration in the grocery market over the past few years, implying that the big supermarkets discourage the new players from entering the market. Given that the business is a highly lucrative one in terms of profitability, there are rather lean chances of potential entrants to remain at bay. Such a situation could arise only if they are subjected to high initial costs, thus barring them from entering the market. Secondly, there had been no significant reports about a price cut in the grocery products, meaning that the market lacks effective price competition. Thirdly, implementing such barriers to entry had not been possible for a single productive unit. Unless there is collusion between the active players, none of the individual firms would have made an initiative to protect the collective market interests rather than their individual ones. Moreover, given that all of them are rivals, an unethical activity by one of them would have created a chaotic situation in the market. Thus, there are high chances of a closely-knitted relationship between the large supermarket chains and their suppliers in the market. 3. There are a two probable ways through which the supermarkets can bond together in a tacit collusion with one another. They are – The first choice is that of an open collusion where the participating firms are bound with each another through a written agreement. However, such an agreement will involve many legal barriers discouraging such activities. This is because collusion among the producers creates a monopolistic impact in the market, which is rather unlikely for the government of any nation to approve, since they leave the consumers worse off in almost every respect. The second option is to go for a secret collusion where the producers do not involve themselves in any explicit formalities. There is only an oral agreement which the participants are supposed to adhere to. The participants are linked up to serve their own interests but if any one of them fails to abide by the rules, interests of all of them are hampered. Though high prospects of making profit underlie a betrayal, there are provisions for punishing the disloyal party. This is the probable measure that the players are assumed to have taken up, given the concerns of the Commission about a growing market concentration (Kesavan, Selwyn & Elanchezhian, 2005). Answer to Question Number 2 a) The primary factor which resulted to an economic downturn in UK was the financial crisis being faced by the US economy by 2008. The financial authorities in UK were scared to find out the big financial houses of USA tumbling down in the face of the subprime crisis, which was the consequence of an overt supply of loans in the economy. UK, in its move to avert the possibilities of facing such consequences, pulled a rein to the net market supply of loans. Moreover, there were also economy wide declarations by many British banks about their investments in the US subprime mortgage securities, which exposed them to potential threats of facing financial crisis since US financial institutions were no longer capable of maintaining a regular flow of interest payments. Due to fall in liquidity in the economy, there was a shortfall in gross productive activities as well, shoving the nation to the path of recession by 2009. b) Economists in UK, despite the nation contracting by 4.9% in the year 2009, maintained their stance about the nation’s underlying robustness. They believed in the strong fundamentals of the nation and publicized their views among the media. But the national financial institutions did not surrender to such insistence from the governing body and preferred to keep themselves protected through restricting their supply of loans, which was the main reason behind recession. Thus, it is essential to increase the quantity of money supply in the nation rather than constricting it – this supply could be increased either through government stimulus packages or through insisting the banks to continue with their normal loan advancement process (Pritchard, 2009). Answer to Question Number 3 a) There are a large number of benefits or advantages to free trade or even trade. The first and foremost one of them is cost efficiency. When the nations are aware of non-existence of trade barriers in case of other nations, they automatically focus their attention to the production of commodities which could be produced rather cheaply within domestic premises. Given a similar mindset of all nations, there is bound to be cost efficiency in production process. Secondly, since the nations are free to choose the commodity to produce, they can make optimal use of scarce resources of production too. Chances of optimal resource use are enhanced since there are no restrictions in factor mobilization across boundaries. Thirdly, the consumers too are benefitted given that relaxations of trade barriers can inspire the entry of substitute goods in their respective nations; sometimes, the seemingly substitute products evolve out as better alternatives in terms of price or quality quotients. Given that they are subjected to a wider basket of commodities, the consumers can now choose from a wide range of products thus increasing their marginal utility levels as well. Theory of Comparative Advantage suggests that a nation must focus on the production of commodities which could be produced in a relatively cheaper way in their nation than its counterpart. For instance, if there are two nations, A and B and two goods, X and Y, then unavailability of necessary resources will always lead to the following relation between the two – PAX/ PAY > PBX/ PBY PAX/ PBX > PAY/ PBY Thus, it is revealed that A can produce X in a relatively cheaper way than B as B can produce Y. Theory of Comparative Advantage suggests that efficiency could be restored if A concentrates on the production of X and B focuses on Y, under such circumstances. b) Despite such advantages underlying the approval of free trade or rather uplifting the trade barriers, many nations prefer to keep out the entry of substitute goods originated in other nations. This might be because the parent nations want to give their niche domestic industries a chance which, they believe, are in a rather primitive stage to participate in international market. The governing body which believes in the capabilities of their domestic industries provides them a chance to grow themselves up so as to beat their international rivals. Such measures are taken up mostly by developing nations, still lingering in their preliminary stage. Though such markets make up for a comparatively large proportion of the total global market, many-a-time, various products are restricted from entry into such nations through the imposition of barriers such as trade tariffs and quotas. However, it might not be possible to ban them altogether due to the presence of international standards in these respects. A good example could be cited in this respect about the imposition of import tariffs on the entry of Chinese tyres within US premises, since the former are believed to hamper the growth of similar industries in the latter. Similarly, governments in US and Euro region have granted farm subsidies to make their agricultural products cheaper compared to those being imported and hence boost up their domestic agricultural production. The second example is not a case of a direct trade barrier, but only an indirect one through which the national administration might protect its weaker sectors. References Kesavan, K. R., Selwyn, S. T. & Elanchezhian, C. (2005) Engineering Economics and Financial Accounting. New Delhi, India: Laxmi Publications. Pritchard, J. (2009) “United Kingdom: the politics of government survival” [Online]. Available at (Accessed: May 10, 2010). Read More