Monopolistic and Monopoly Competition, Advantages and Disadvantages - Essay Example

Economists prefer the use of economic profits to accounting profits. When a firm is making economic profits, other firms will find the markets competitive hence mass entry into the market. This causes the supply curve to shift to the right, which results in a drop in the prices hence profits, are canceled. The firm will in the end exhibit normal profits as an outcome of perfect competition (Aspers, 2011).

(c) Characteristics of both monopolistic and monopoly competition, their advantages and disadvantages

Characteristics of monopolistic competition are; there exist a large number of buyers and sellers, they exhibit price differentiation, free entry and exit of firms, and high selling costs are incurred. Monopoly on the other hand exhibits characteristics such as the existence of only one firm in the market; they are price takers since they are the only producers. They have the advantage of controlling the whole market and therefore dictate the prices. The only disadvantage is that they are constrained by their demand curves. The monopolistic case has several advantages; the most peculiar is that it can command a large market base. The market is disadvantaged in that stiff competition may threaten its operations in the market (Aspers, 2011).

The deflationary gap happens when the actual output (Y) is below the natural output (Yn); this is as shown in the figure above. To correct the deflationary gap expansionary fiscal policy has to be used. The government does this through increasing government spending; alongside this, the government taxation has to be reduced. The result of employing the expansionary fiscal policy acts to shift the aggregate demand curve to coincide with the natural output and therefore real GDP is increased. The deflationary gap is caused when investment spending goes down hence it is simply solved when the government increases its investment spending such as spending on infrastructure (Buti, 2003).

(b) How fiscal and monetary used to address the deflationary gap affects the balance of payment

Fiscal policy tools used such as increased taxation will make the costs of local goods to be expensive. When the local goods become expensive balance shifts from favoring importation. When imports are more than exports, there is an unfavorable balance of payment, which is harmful to the economy. In addition, monetary policies to correct the deflationary gap are that aimed at increasing the money supply, which leads to an increase in prices. An increase in prices causes local goods to be equally expensive leading to increased importation hence an unfavorable balance of payment. Such negative impacts on the balance of payment occur when the economy is at the helm of growth (Buti, 2003).

6. (a) Reasons for holding money

There are three major reasons for holding money; transaction motive, precautionary motive, and speculative motive. For transaction motives, money is held to undertake daily transactions mostly on basics. Money is also held to handle any future unfortunate occurrences anticipated in the future. Speculators are investors who anticipate that assets will be attractive shortly and hence hold money to take advantage of such (Dobeck, MF & Elliott, 2007).

(b) How the change in liquidity requirements of the banks affects the money multiplier
The money multiplier affects the money creation process through lending by commercial banks. If the bank's money requirement increases, the value of the money multiplier has to go up. This will also prompt banks to increase their loans so that they can create more money to satisfy their requirements (Dobeck, MF & Elliott, 2007).

(c) Policy of quantitative easing
The policy of quantitative easing is an unconventional monetary policy that is employed by central banks of countries to stimulate economies when conventional policies fail. The central bank does this by selling financial assets to inject a given amount of money into the economy. Quantitative easing is conducted by central banks through the purchase of assets from commercial banks and private sector businesses with money that is created electronically (Dobeck, MF & Elliott, 2007). Read More