Discuss the benefits of trade and specialisation and the reasons why some countries impose restrictions or barriers to international trade. Wherever possible, use examples to illustrate your answers

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Question 1 - The majority of markets fall under the realm of imperfect competition, namely monopolistic, oligopoly and monopoly. Compare any two of them by referring to their assumptions, market conditions and strategies and give a few examples.

Question 2 - The UK consumer price index rose to 5.2% in September 2008, one of the fastest rates for the UK’s annual inflation in several years while the UK’s economy shrank for the first time in 16 years by 0.5% in quarter 3, 2008.

A I) Why has inflation been increasing in the UK over the past year?

    II) Why is a high rate of inflation undesirable?

B) What are the factors that have slowed down economic growth in the UK?

Question 3 - Discuss the benefits of trade and specialisation and the reasons why some countries impose restrictions or barriers to international trade. Wherever possible, use examples to illustrate your answers.

Question 1 –

        Monopolistic competition is a relatively competitive market. It involves a large number of fairly small firms competing against each other. As a result each firm has a fairly small share of the whole market; and because of this, Sloman and Sitcliffe (2004) state that ‘a firms actions are unlikely to affect its rivals to any great extent.’ This assumption is known as the independence of firms. Where businesses make decisions without really worrying about how their competitors will react. Within monopolistic competition firms can enter the market without any barriers to entry, such as economies of scale and ownership of, or control over key factors of production. These firms produce or supply a service which is relatively different from its rivals within the market; their products are differentiated, examples include builders and restaurants. As a result, firms can have some control over price, for example, a burger can be bought for 99 pence at a MacDonald’s take away, whereas in some restaurants they can cost between 7 and 10 pounds. Even though the firms have some control over price they are still known as price-takers. Their demand curve would be downward sloping but relatively elastic.

        A monopoly is where there is just one firm in the market supplying the whole of the markets output. Freedom of entry to the market is restricted or completely blocked. Barriers to entry include economies of scale; where there are economies of scale to such an extent for one firm that its costs keep on falling it is possible that the market may not be able to support a new firm, this is known as a natural monopoly. Other barriers to entry can include mergers and takeovers, where the monopolist has such power that it can put in a takeover bid new entrants to the market, or a monopolist can have ownership of, or control over key factors of production, in this case the monopolist can deny any access of these factors of production to potential competitors. The business will be selling a unique product; examples include local water companies and many prescription drugs. The implications for the demand curve for the firm would be downward sloping and more inelastic than oligopoly; also the firm has considerable control over price, monopolists are known as price-setters.

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        Monopolistic competition is much more beneficial to the consumer, because unlike a monopoly where the monopolist can limit supply and in theory charge any price they like under perfect competition there is a lot of choice and the price of the firms products will have much more of an affect on the demand. And some firms within monopolistic competition must keep the price of goods competitive in order to stay in business. Choice is likely to stay high for the consumer due to the freedom of entry for new firms in the market.

Word count: 485

Question 2a ...

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