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 –
In September 2008 the rate of inflation in the UK hit 5.2%, a sixteen year high; inflation has now dropped to a rate of 4.1% that is still well above the Bank of England’s inflation target, which is 2.0%. Inflation rose over the past year mainly due to price increases for food, energy and oil, the annual rate of inflation for energy and other household bills reached 15%, the highest since 1989 (BBC news and Bank of England). A trigger for the rising food prices could have been down to the rise in price of oil. As oil prices rose to high levels last year there will have been more demand for alternative fuels, such as bio fuel, and as bio fuel is made from crops high in sugar or vegetable oil the demand for these crops will go up, pushing the price up.
A high rate of inflation is undesirable because if the inflation rate raises it means that the same amount of money buys you less products or services; this is if people’s wages do not increase by the same amount as inflation increases. For example, if the rate of inflation is higher than the current bank rate then it is worth buying what you can now rather then saving your money in a bank because your money will be worth more now.
A high rate of inflation can cause uncertainty and instability within an economy. When inflation is high on average it usually tends to be more unstable and unpredictable. This makes it harder for business to plan effectively for future change and can have an adverse affect on business confidence. High inflation can also cause a countries balance of payments to worsen because its exports become less competitive in world markets, whilst at the same time imports can become relatively cheaper than goods produced in the home country.
Question 2b –
The slowdown in economic growth in the UK has been caused by the rising energy prices and falling house prices. Consumers are being forced to cut back on spending because they have less disposable income. In the third quarter of 2008 household expenditure fell by 0.2% (statistic.gov.uk). The fall in the GDP in quarter three of 2008 is also down to a decline in the output of certain industries within the UK. The output of production industries, mainly the manufacturing industry, fell by 1.4% in this quarter and by 0.9% in the previous quarter (statistics.gov.uk). There was also a decline in the service industry of 0.5%, in particular the distribution and business service sectors (statistics.gov.uk).
I believe that speculation also plays a part in the decline of the economy. When industries realise that times are becoming harder their confidence can go down and there is generally less investment as a whole. Speculation can also play a part in the foreign exchange market because if people believe that a currencies exchange rate will fall further then the demand for that currency will continue to fall, causing the currency to become weaker against others.
Word count: 511
Question 3 –
International trade is defined as the exchange of goods and/or services between countries. Trade and specialisation are beneficial to countries taking part in international trade and are also beneficial within a single nation. Without specialisation or international trade a country would have to be fully sell-sufficient, it would have to supply itself with all food, building material and medication for the entire population, for example. Therefore, if a country lacks even the right climate for growing bananas it must use international trade to supply them within the country. With specialisation a country or business can benefit from economies of scale because it will be able to exploit the resources or assets which are available to them and concentrate production solely on what it is good at. David Ricardo’s theory of comparative advantage states that ‘countries will benefit by concentrating on the production of those goods in which they have a relative advantage, i.e. those goods that can be produced at a lower opportunity cost’. For example, country A can produce either 2 kilos of rice or 1 meter of cloth and country B can produce either 4 kilos of rice and 8 meters of cloth. In this case in country A the opportunity cost of producing rice is ½ and in country B is 2, therefore country A has a comparative advantage in producing rice. For producing cloth country B has the comparative advantage because the opportunity cost for producing cloth is ½, whereas in country A the opportunity cost is 2. In conclusion this means that both countries will benefit through international trade with each other.
A country or business will not be the only things that can benefit from trade and specialisation, consumers benefit as well. When a business specialises it benefits from economies of scale, as a result the cost per unit of output goes down, therefore they can charge a lower price to the consumer. International trade will benefit the consumer because through international trade there is more choice of products and services; this can also create greater competition within certain markets which could also benefit the consumer. When a country is importing goods it can be a trigger for firms in that country to become more efficient so that imports do not drive out the home made goods.
If countries choose to they can limit or block international trade. A country can impose tariffs on imports, and if the demand for the product is elastic then the amount imported will go down, however if the demand is inelastic the government will raise more revenue. This is just one example of a barrier to trade, however there are many which countries can impose to limit trade. One of the main reasons for imposing barriers to trade is protection, countries do not want their domestic industries damaged too much by foreign alternatives because they are cheaper or better quality. In developing countries especially it would make sense to impose barriers to trade from countries with more advanced economies in order to protect their industries because it is likely to be much less efficient and may not yet be benefiting from economies of scale. In a small country, barriers to trade may be put in place in order to prevent a foreign firm from monopolising the market; because if a foreign firm establishes itself to such an extent then it could force domestic producers out of business and begin to charge much higher prices for its products than what people were paying before. In developed countries barriers to trade may be put in place in order to protect a declining industry, for example in the UK tariffs or quotas on foreign cars could be put in place in order to save the car manufacturing industry from pressure from cheaper foreign alternatives. If a country allowed an industry to collapse very quickly then there would be a sharp increase in unemployment; however because the home industry is protected the consumer loses out due to the fact that there will be less choice and they may have to pay more for the product. Sloman and Sutcliffe (2004) describe dumping as ‘where exports are sold at prices below marginal cost – often as a result of government subsidy.’ This practice by governments should be counteracted by imposing tariffs on subsidised products so that the domestic market of the importer is not damaged too much. A country can impose barriers to trade in order to protect the consumers in that country, for example it may enforce strict legal regulations in order to ensure that imported products are safe to use.
A country can also impose barriers to trade if it wants to improve its balance of payment, especially if it has a trade deficit.
Word count: 802
Bibliography –
John Sloman and Mark Sutcliffe (2004). Economics for Business. 3rd ed. Prentice Hall.
John Sloman (2007). Essentials of Economics. 4th ed. Prentice Hall.
David Begg (2006). Foundations of Economics. 3rd ed. McGraw-Hill.
David Begg, Stanley Fischer and Rudiger Dornbusch (2005). Economics. 8th ed. McGraw-Hill.
References –
John Sloman and Mark Sutcliffe (2004). Economics for Business. 3rd ed. Prentice Hall.