Answer of question 1 1.1 What is monopoly? Monopoly is a market with only one seller and no close substitutes for that seller’s product. Monopolies arise because of barriers to entry that inhibits other companies from entering the market and exerting competitive pressure on the monopolist..
.1.2 Characteristics of monopoly The four key of characteristics of monopoly are Single supplier, unique product, Barriers to Entry and Exit, and Specialized Information.
1.2.1 Single Supplier The substance of monopoly is a market controlled by a single seller. The most important aspect of being a single seller is that the monopoly seller is the market. The market demand for a good is the demand for the output produced by the monopoly.
1.2.2 Unique Product A monopoly become a single-seller status is because the product is unique and can’t find the close substitute and there are no close substitutes available for.
1.2.3 Barriers to Entry and Exit In a monopoly market there is strong barrier on the entry of new firms. Monopolist doesn’t have competition. As there is one firm no other rival producers can enter the market of the same product.
1.2.4 Specialized Information The company preserves whole control over the market by using special information. This information may give the company the benefit of special production techniques. The specialized information may come from the form of legal tips regarding trademarks, copyrights and patents.
1.3 Diagram Monopolies can maintain super-normal profits in the long run. As with all firms, profits are maximized when MC = MR. In general, the level of profit depends upon the degree of competition in the market, which for a pure monopoly is zero. At profit maximization, MC = MR, and output is Q and price P. Given that price (AR) is above ATC at Q, supernormal profits are possible (area PABC). With no close substitutes, the monopolist can derive super-normal profits, area PABC. A monopolist with no substitutes would be able to derive the greatest monopoly power.
1.4 Conclusion of question 1 In the conclusion, monopolies have advantages and disadvantages.
2.0 Introduction of question 2 There are four types of market structures, which are perfect competition, monopolistic competition, oligopoly and monopoly.
Answer of question 2 2.1 Perfect competition Perfect competition has large numbers of both buyers and sellers. The goods produced by all sellers are identical, and there exist no legal, social or technological barriers to entering or leaving the industry. Example for the investment industry, finance industry.
2.2 Features/characteristics of perfect competition The four key characteristics of perfect competition are large number of small firms, identical goods, perfect resource mobility and perfect knowledge.
2.2.1 Large Number of Small Firms A perfectly competitive market or industry contains a large number of small firms, each of which is relatively small compared to the overall size of the market. 2.2.2 Identical Goods
Each firm in a perfectly competitive market sells an identical product. Every perfect competition firm produces a good that is a perfect substitute for the output of every other firm in the market. 2.2.3 Perfect Resource Mobility
Perfect competition firms are free to enter and exit an industry. They are not restricted by government rules and regulations, start-up cost, or other barriers to entry.
2.2.4 Perfect Knowledge In perfect competition, buyers are completely aware of sellers’ prices, such that one firm cannot sell its good at a higher price than other firms. Each seller also has complete information about the prices charged by other sellers so they do not inadvertently charge less than the going market price.
2.3 Monopolistic competition Monopolistic competition is the market with many sellers, but fewer than in the perfect competition. The classic example is restaurant industry, like pizza hut, domino pizza.
2.4 Features /characteristics of monopolistic competition The four key characteristics of monopolistic competition are large number of small firms, product differentiations, resource mobility and Extensive Knowledge.
2.4.1 Large Number of Small Firms A monopolistic competition industry contains a large number of small firms, each of which is relatively small compared to the overall size of the market.
2.4.2 Product differentiation Product differentiation is responsible for giving each monopolistically competitive a little bit of a monopoly, and hence a negatively-sloped demand curve..
2.4.3 Resource Mobility Monopolistically competitive firms are free to enter and exit an industry but they are relatively unrestricted by government rules and regulations, start-up cost, or other substantial barriers to entry.
2.4.4 Extensive Knowledge In monopolistic competition, buyers do not know everything, but they have relatively complete information about alternative prices.
2.5 Oligopoly Oligopoly consists of only a few sellers that may be producing either standardized or differentiated goods, with a focus on product and brand differentiation as in the monopolistic competition. Example for computer industry, mobile phone industry.
2.6 Features/characteristics of oligopoly The three most important characteristics of oligopoly are small number of large firms, economies of scale and barriers to Entry
2.6.1 Small Number of Large Firms Oligopoly is an industry dominated by a small number of large firms, each of which is relatively large compared to the overall size of the market.
2.6.2 Economies of Scale Large companies controlling a significant portion of the market will experience what is known as economies of scale. An economy of scale has to do with a firm’s ability to negotiate lower costs due to the size of the company.
2.6.3 Barriers to Entry Many of barriers of entry that companies in oligopoly markets may employ. A barrier to entry is a natural element that exists in the market that makes it difficult for new companies to be competitive.
2.7 Monopoly Thus monopoly means single seller. Monopoly is a firm of market organization for a commodity in which there is only one single seller of the commodity. Example Tenaga Nasional sdn.bhd.
2.8 Features/characteristics of monopoly The four key of characteristics of monopoly are Single supplier, unique product, Barriers to Entry and Exit, and Specialized Information.
2.8.1 Single supplier Monopoly is a form of imperfect market structure where there is only one seller of a product. The characteristic feature of single seller eliminates the distinction between the firm and the industry. A monopolist firm is itself ‘the industry.
2.8.2 Unique product A monopoly become a single-seller status is because the product is unique and can’t find the close substitute and there are no close substitutes available for.
2.8.3 Barriers to Entry and Exit In a monopoly market there is strong barrier on the entry of new firms. Monopolist doesn’t have competition. As there is one firm no other rival producers can enter the market of the same product.
2.8.4 Specialized Information The company preserves whole control over the market by using special information. This information may give the company the benefit of special production techniques.
2.9 Conclusion of question 2 In the market, there have 4 types of model which are perfect competition, monopolistic competition, oligopoly and monopoly.
The Paradox Of The Thrift Economics Essay
The theory of paradox of thrift is the idea that saving instead of spending can cause or deepen a recession. According to John Maynard Keynes, consumer spending is beneficial because one person’s expenditure is another person’s income. Therefore, an increase in savings would mean that businesses lose out on revenue and have to lay off employees who are then unable to save. As a result, increase in individual savings would reduce the total saving rate. On the other hand, some economists argue that, savings can be beneficial to an economy. If the society decides to save in a bank, the banks would loan that money to firms and who in return will invest into capital, producing a positive multiplier effect. It just depends which phase of the economic cycle the economy is operating. During low demand market conditions like at the moment, saving is beneficial for the one who saves, but of little use to the overall economy, this is known as the fallacy of compositions.
In the Paradox of Thrift, household and producers reduce their expenditure in anticipation of a future recession. It is referred as “paradox” because its behavior which seems beneficial is actually detrimental to the economy. It’s beneficial for the individual who decides to save, but the society as a whole experiences economics problems. Assume there was an exogenous increase in planned savings due to future expectations of the UK economy. This means that the autonomous savings will increase; hence the saving function will have parallel shift upwards. A rise in the thriftiness will lead to a reduction in national income (Y1 to Y2), consequently savings will decrease from B to A. Furthermore, due to the shift, S>I which implies that Y>AD, therefore there will excess supply of goods. The result will be paradoxical because an increase in saving will eventually translate reduction in national income.C:UsersPawanjeetDropboxPhotos20121209_172334.jpg
The lower consumption will discourage firms from investing, if investment falls, the J line will shift downwards. There will be further multiplied fall in national income. Due to the negative speculation of the economy, let’s assume that the marginal propensity to withdraw is now 0.75 and marginal propensity to consumption (domestic goods) is also 0.25. Consider that the initial investment falls from 100 to 50 (million) in the economy. Therefore, as firms reduce investment, workers will be made redundant. These workers will have no spending money, therefore causing other business to experience a decline in customers. When wages will be received, 0.75 would be withdrawn and only 0.25 will be spent on domestic goods. The reduction in consumption would generate further losses for firms, generating 12.5 million incomes for firms from the initial 50 million. When this is received by households in term wages, 0.75 will be withdrawn and 0.25 will be spent. There will be further decrease in national income by a further 3.125 million. Therefore each time we go round, national income will decrease due to the multiplier. As a result, the economy will contract and firms will experience hefty losses in revenue, resulting in several closure. According, to the consumption function, as income decreases so do savings, therefore more savings will lead to ultimately and paradoxically less savings.C:UsersPawanjeetDropboxPhotos20121208_182123.jpg
The theory behind the paradox of thrift has been widely criticised. Firstly, it’s a theory and subjective, therefore it’s not a stated fact. Secondly, given the example above, the paradoxical result may not occur if an increase in savings will lead to simultaneous increase in planned investment. Consequently, both the investment and the saving function will shift upwards; therefore national income will not be affected. Furthermore, when the multiplier becomes smaller due to higher marginal propensity to save, the IS Curve will shift from IS to IS1. This will influence aggregate demand to shift leftwards; hence there will be a reduction in prices. As price decrease, this will shift the LM curve to the right, forming a new equilibrium. Consequently, we will have lower interest rates and prices. Therefore, when interest rates fall this will influence firms to invest and when prices decrease this will trigger a rise in demand again, so the theory of the paradox of thrift is contradictory.
Economist argues that saving can translate to investment, therefore in a recession, saving can be beneficial. Savings will allow these investments to be financed without problem of interest rates or inflation. Suppose an individual decides to save £10,000 in a saving account. Consequently, the bank would lend money to a firm who would spend it to expand or to the government by purchasing treasuries. When the fund is given to firm, they will invest into capital that would boost total output. Therefore, theoretically, an increase in savings will allow a higher growth in potential GDP, especially if the investment is in new technologies.
During 1950s, Americans put away more than 9% of their income. Their savings translated into stocks and bonds and formed a pool of capital investment. They experienced a golden era of productivity and growth, leading towards the 1990s boom. Although this changed, in the mid-1980’s, this is because credit become easily accessible, therefore people were not saving for future consumption, because they could use to borrowing. By the late 2000s, the savings rate plunged to less than 1%. *
Theoretically, using the GDP equation (closed economy) we derive that saving=investment
Y=C I G (1)
I=Y-C-G (Rearrange to make I the subject)
S (private) = amount produced (Y) transfer payment from the government (TR) – consumption (C) – Taxes (T)
S (public) = T-G-TR
Total saving in the economy will be s (public) s (private) = T-G-TR Y TR-C-T=S
Therefore, total saving in the economy =Y-G-C
Sub into equation (1)
S=C I G-G-C
This shows that the total amount of savings in the economy is equal to investment
Source: Gfk nop 2012
In the Wall Street Journal, the writer states “savings would translate into more investment and faster growth.” This view has been supported in the work by Fazzari (2007). On the contrary, what will happen if the firm does not invest into capital? What will happen when banks do not give loans to firms? The statement that saving=investment is contradictory. It does not necessarily mean that every pound saved will be invested. Investment does not only depend on household savings; it could be animal spirit, business confidence, aggregate demand and cooperation tax that could influence investment. Therefore it’s only an assumption and not a stated fact. Furthermore, higher savings would mean there would be less consumer expenditure, therefore aggregate demand for goods and services would weaken, hence investment into capital goods could occur only in the long run. Moreover, during low market demand conditions like the current one, firms may not want to invest, if there is not demand for credit, the banks have no place to lend the money. In the UK economy, consumer confidence decreased to -31 in March and it’s to further reduce to due to planned austerity. Therefore investments are unlikely, regardless of any increase in savings.
Furthermore, during boom in the economy cycle, where inflation is inevitable, increased savings can help. C:UsersPawanjeetDropboxPhotos20121212_140639.jpg
Consider an overheated economy; where there is little spare capacity in the economy, therefore an increase in aggregate demand will lead to subsequently only to an increase in prices. The government will try to depress aggregate demand and economic activity. In other words, the government will try to encourage savings to hamper consumption in the short run. Consequently, this will lead aggregate demand to have a parallel shifts inwards, reducing prices levels from p1 to p2. Reduced inflation provides certainty towards consumers and businesses, who will be able to make long term plans due to certainty that there would less chance of their money losing its purchasing power. On the contrary, there will be a cost of reducing inflation as it will impact upon low income earners, decline in economic growth and will result in higher unemployment.
As shown from the macro perspective, an increase in saving for the economy as a whole may lower aggregate demand and initially reduces output, income and probably investment. So would savings be ever desirable? Yes, during an overheated economy, increases in savings can help reduce consumption, which would therefore reduce prices levels. Furthermore, as some argue, increases in savings may likely to influence investment levels. It just depends which phase of the economic cycle the economy is operating. During low demand market conditions like at the moment, saving are beneficial for the one who saves, but of little use to the overall economy.