Price Determination and Perfect Market Competition - Case Study Example

Running Header: Price Determination and Perfect Market Competition Student’s Name: Instructor’s Name: Institution: Course Code: Date of Submission: 1 (a) Emergency of black market In the past view decades, black market has been and remained a big challenge for many business especially those that are engaged in manufacturing activities. Black market has affected many economic sectors through duplication of goods by unregistered or illegalized companies. The intention of the black market is practiced by certain individuals either from the inside or externally with the aim of making quick profits. This is because goods are produced and smuggled into the market even though they are not original or do have the original brand (Ayers and Collinge 2005). As an example is in the electronic industry whereby different electronic goods are produced and sold with certain brand names like Sony even though they do not belong to the company. To sort out the problem has been difficult because of the advancement in technology which has allowed easy duplication of seals which look similar to the original ones. Refer to appendix 1. At the market place black market also comes into existence as a result of market dominance or monopolistic competition where one company fully controls and enjoys the benefits within an industry. In a monopolistic environment, it is very possible for a company to make abnormal profits. This is what motivates individuals to engage in black market deals in order to make quick profits from their deals (Ayers and Collinge 2005). (b) Gain to the ticket touts and loss to the even organizers Ticket touting in an event affects two main economic factors namely price and demand. Let’s take the example of big sport event like UEFA Cup Final. In an event like this one, the organizers may plan to produce approximately 60,000 tickets for the fans. In this case touting may take two forms. one, the touts may decide to buy more than one ticket in order to resale to the funs at much higher price, or duplicate the tickets and produce their own tickets which look similar to the original ones and then sell them direct to the fans. Ticket touting in major events like sporting activities, presentations by renowned musicians or in concert theatres is very common (Case and Fair 2004). The best case of ticket touting is the one that involved a Blackburn fan buying Manchester united tickets in 2008 (Sam, 2009). What happened is that Suhail Patel who was discovered to be a Blackburn fan was found engaging in ticket touting. Registration under different membership names is the format that he used to get access into many tickets from the Manchester united club. The ticket tout had managed to raise £14,000 from his black market activities (Sam, 2009). The false names that Suhail had used include Dick Bowel, Mr. Sinatra, Mr. Gravy and Mrs. Rhubab. The effect of this black market to organizers is that it reduced the demand for the tickets and consequently low revenue generated from the sales. This sometimes means that it is possible for the organizers to fail to break-even. On the other hand, the touts involved in this case manage to get abnormal profits since they increase the price of the tickets once the demand goes up. Diagram 1 below shows how change in demand will result into the increase in the price of tickets and consequently making of quick profits. Diagram 1: Change in ticket price with increase in demand Incase the touts engage in duplicating the tickets; the organizers are likely to make losses following decreased demand for the tickets as shown in the diagram 2 below. The losses are associated with decreased demand and reduction of ticket prices in order to attract the fans (O’Sullivan and Sheffrin 2003). This is because more tickets will be in the market than anticipated by the organizers. (c) Market regulation First and foremost there is need for the organizers to go public and use any media that can be available to educate the public to be very cautious when buying tickets (Mankiw 2004). This is to make sure that incase they notice any unusual or suspicious behavior of selling tickets to report it to the authorities. In addition, the organizers need to let the fans know that do not change the prices of the tickets once the event is about to start or even during the event itself and incase they experience the scenario then that is the act of ticket touting (Mankiw 2004). On the other hand, there is need to go electronic where the fans can apply for the tickets online and then access unique codes which can be used as gate passes. This way fans can access the venues by only pressing on the codes at the entry points. Finally, there is need to press for policy enactment which will ensure that event organizers are protected from any loss that occurs from touting. This include fines and compensation of losses incurred. This way the touts will be scared. PART 2 ‘Chilli supply may run out very soon’ 2(a) According to the demand and supply model, supply and demand, is two interrelated economic parameters. The change in one factor affects the other and does the price of the commodity in question. Let’s consider the diagram below which shows how demand and supply are connected and how they affect price change. Let us assume that the price of Chilli in January was £0.35 and this happens where the demand equals supply. The quantity demanded is 250. Diagram 3: Graph showing how demand and supply relates Based on the graph above, if the price of Chilli goes up then the quantity demanded will go down and does the quantity supplied as demonstrated in the diagram below. Diagram 4: The Graph showing what will happen to the demand and supply of Chilli if the price goes up When the price of Chilli goes and when it’s not at equilibrium, then it will mean that demand will go down as the supply goes up. This means that it can only be sustained for only a shorter period of time before it comes down again. This is because when supply is more than the demand, the suppliers are expected to reduce their prices in order to attract more demand for Chilli. (b) If the price ceiling is put on the red chill, then it will mean that incase the demand for the product goes, the price change will online occur until it reaches the maximum. From this point it will be inelastic irrespective of how the demand of Chilli goes up. At this point supply and quantity demanded of chilli can continue increasing but will not affect the price. On the other hand, the supply of chilli may be affected if the cost of producing chilli is more than the “ceiling price”. According to the star, if the price of red chilli is maintained at RM8 per kg, good amount of chillies will be spoilt. This means that there is a possibility that customers are likely to get losses from their crops. This is after the star had noted that the cost of producing chilli was surpassing the retailing price (Krugman and Wells 2005). The foreign markets like Thailand and Indonesia are also perceived to be concerned about the local markets and therefore will not give priority to chilli from outside the country. In simple terms, losses are eminent incase ceiling and prices are set and the producers who are likely to suffer more are the local producers. (c) The price of the chillies is expected to be inelastic following the setting of the ceiling price for chilli by the government. This means that even if the cost of production or the demand of chill changes, the price will remain unchanged at RM8 per kg. This is to mean that once the price of chilli has been set no single factor can influence it unless the demand goes down resulting to price decrease below the ceiling. On the other hand, if the government decides to remove the ceiling, then it means that price will of chilli can easily exceed the current set price of RM8 per kg. This means that in the short-term the government and farmers are likely to enjoy increased revenues. The farmers are expected to bring into the market to get good prices from the increased demand, while, the government is likely to boost its revenues generated in form of taxes from the lucrative business (Hall and Lieberman 2005). However, as supply continues to increase, there is a possibility that it will exceed the market demand and will definitely lead to adjustment into the supply and demand model. The price after awhile will have to be reduced in order to attract more customers in order to match the supply. However, this is not sustainable in terms of revenues as traders will again experience low returns from their sales and so does the government. This is because the government will expect to generate lesser revenue as opposed the past since it’s possible that the market will adjust itself. There is a possibility that price can go as low as below the previously set ceiling. As a matter of fact, after the removal of the ceiling, the prices will never remain inelastic as it will always be affected by demand and supply. For example according to the star, change in production seasons will continue to be witnessed. During the high season the market for chilli is likely to be flooded and thus the price will go down since the quantity supplied will exceed demand. Meaning that price will always readjust itself to fit into the prevailing market conditions. (d) The impact of higher price on a single chilli producer is that there will be no any impact. This is because in a pure or perfect market competition, there is no single individual who can influence the market alone. This is because in a pure market competition it’s assumed that there are numerous small producers and buyers. In other words no single decision by an individual will affect the market. Even if one producer decides to charge higher price for chilling he may go unnoticed because there are other several sellers and buyers of the same product (Baumol and Blinder 2005). In a perfect market competition, no single player can control the price movements. Incase, one individual seller decides to increase its price, the buyers are always aware of the trends in the market and they no where exactly they can get the best price offer. However, incase it is found that the firms in the industry are making abnormal profits from charging extremely high prices for products then some other forces will start playing. In the production of chill for example if its discovered that one firm is making high profits from high prices, then other firms are likely to follow suit. This means that more and more firms will enter into the industry and in order to generate more revenues from the good prices. This will cause the ruling down of the market price. Once more and more firms enter, the price of chilli will come down until it equals the long-run average cost (Gwartney et al 2006). At this point the price equilibrium will be attained in the industry whereby each firm will be selling at same prices and making normal profits. However, for this to happen, everything has to remain constant. In other words, it will mean that no incentive that was used to shift the movement of firms in and out of the industry. If this is the case then long-run equilibrium will have been attained. Diagram below demonstrates this scenario. The factors that have been taken into account are that no barrier for firms that want to exit or enter and that it’s the high profits that attract the new firms to enter the industry and that prices adjusted freely until they normal prices and profits were attained. Diagram 5: Long-run equilibrium attainment To have at the points in the diagram, it has been assumed that there was no change in market demand and that it remained the same throughout. The graphs also indicated the outwards move of firms from the industry as a result of the stiff competition that exists in the market. This is incase the new competitors are suppliers and sellers of homogeneous goods. It is also assumed that it’s the effect of increased supply of chilli that will force the prices to forge downwards and consequently resulting into expansion along the product demand curve. For the seller now the price is “take” and that lower price has been attained and consequently leading into normal profits by all producers. References Ayers, R & Collinge, R 2005, Microeconomics: Explore and Apply, Upper Saddle River, Pearson Prentice Hall. Baumol, W & Blinder, A 2005, Microeconomics: Principles and Policy, 9th ed. Mason, OH., Thomson South-Western. Case, K & Fair, C 2004, Principles of Microeconomics, 7th ed. Upper Saddle River, NJ, Pearson Prentice Hall. Gwartney, J., Stroup, R., Sobel, R & Macpherson, D 2006, Microeconomics: Private and Public Choice, 11th ed. Mason, OH, Thomson South-Western. Hall, R. & Lieberman, M. (2005). Microeconomics: Principles and Applications, 3rd ed. Mason, OH: Thomson South-Western. Krugman, P. & Wells, R 2005, Microeconomics, New York, Worth Publishers. Mankiw, N 2004, Principles of Microeconomics, 3rd ed. Mason, OH., Thomson South-Western. O’Sullivan, A & Sheffrin, S 2003, Microeconomics: Principles and Tools. Upper Saddle River, NJ., Prentice Hall. Sam, C 2009, £14k ‘Mr Manchester United’ ticket tout from Blackburn jailed, viewed 2 March 2012 from, http://www.lancashiretelegraph.co.uk/news/blackburn/4660551.__14k__Mr_Manchester _United__ticket_tout_from_Blackburn_jailed/ Appendixes Picture 1: Smuggled electronic goods Read More