Economic principles - Essay Example

Economic Principles Industry A with 20 Firms and 30% Concentration Ratio (a) The of the industry with 20 firms and concentration ratio of 30% ismonopolistic competition. (b) Primarily the industry is characterized by a reasonably huge number of sellers dealing with closely substitute products. Thus, product differentiation is another characteristic of the industry. Differentiation can both be tangible as well as intangible. Tangible differentiation is initiated through raw materials and features among others, whereas intangible differentiation can be created through advertisements and trade marking among others.

Hence, advertising along with propaganda are the other important characteristics of the industry. The demand curve within this market depicts substantial elastic movement. For the new firms, entry into the market is comparatively easier than other forms of market or industry. Sales in this market is dependent upon the efforts that firms put for increasing sales and to a considerable extent, prosperity of the firms in terms of high sales is dependent upon non-price competition such as with discounts, rebates, and after-sales services among others (Webster, 2003). (c) With the increase in demand of the product that pushed up the prices, the attractiveness within the industry will increase.

As a result of this, many firms will enter the industry which will ultimately increase supply of the product and in the long run the prices will fall, forcing the firms to earn zero economic profit. This will lead towards readjustment of the plant size of the firms within the industry. Adjustment in the long run would be thus composed of re-evaluation of the firms’ production within the industry. In the long run, each firm will strive to produce that quantity which equates the marginal revenue with marginal cost, both in the short run as well as in the long run. (d) The long run adjustment will lead towards decrease in the concentration ratio.

Industry B with 20 firms and 80% Concentration Ratio (a) The name of the industry with 20 firms and concentration ratio of 80% is oligopoly. (b) There are mainly three important characteristics of the oligopoly market. The foremost feature is that in the industry, very few firms exist. The few firms within this industry are comparatively larger than the entire market size. Second characteristic is that the firms either manufacture identical products or differentiated products. This characteristic depicts the fact that there are two varieties of the oligopolistic market.

The third characteristic of the market is that it has enormous barriers to entry for new firms. This is the core characteristic that makes oligopoly different from monopolistic competition (Kuenne, 1992). (c) Oligopoly industry has high concentration ratio because in this industry the operating firms experience higher competition from their rivals as opposed to the previous case of monopolistic competition. The power of manipulating prices within the market is concentrated upon very few large firms.

The sales of the firms are also near about equal and this leads to high concentration within the industry. (d) It is possible for the small firms to enter into the oligopolistic market and earn profit initially. This can be achieved through keeping a close watch upon the activities that are performed by the large firms. For avoiding the risk of deteriorating in the highly competitive market, the small firms can form collusion. For instance, a number of small firms can develop cartel and frame strategies of acting against the big profit-earning firms (Case & Fair, 2008).

References Case, K. E. & Fair, R. C. (2008). Principles of Macroeconomics. (7th ed.). USA: Prentice Hall. Kuenne, R. E. (1992). The Economics of Oligopolistic Competition: Price and Nonprice Rivalry: Collected Papers of Robert E. Kuenne; Advances in Theoretical and Applied Economics. (Illustrated). United Kingdom: Basil Blackwell. Webster, T. J. (2003). Managerial Economics: Theory and Practice. (Illustrated). United Kingdom: Emerald Group Publishing.