Is the existence of a monopoly against The public interest?
Intro to Economic Analysis essay 2 Spring Term Alastair Snook Is the existence of a monopoly against The public interest? Using diagrams explain the conditions under which this might be true and also the conditions under which this may not be true. A monopoly is defined as the sole supplier of a good or service with no close substitutes in a given price range. A pure monopoly will therefore have a 100% market share i.e. the firm is the industry. They exist and can only remain as monopolies if there are high barriers to entry to the industry. In the case of a natural monopoly, economies of scale are so large that any new entrant would find it impossible to match the costs and prices of the established firm in the industry. Other barriers to entry include legal barriers such as patents, natural cost advantages such as ownership of all key sites in the industry, marketing barriers such as advertising, and restrictive practises designed to force any competition to leave the market. In this market structure it is also assumed profits are maximised and there is consumer rationality. Traditionally monopoly is thought to be a potentially harmful market structure with unwelcome consequences for the consumer and the economy. Competition has always therefore been seen to be desirable. It could be said therefore to be against the public interest. However there are
Supermarkets in UK - An oligopily
Introduction to super markets The "normal" way to buy food has changed dramatically over the last half century, with the small independent shops such as butchers, greengrocers, fishmongers and bakers which dominated the High Street in the 1950s disappearing and being replaced by the ubiquitous supermarket. Today, 60% of British shoppers purchase most of their groceries in one weekly shop. The growth of the sector over the last fifty years has been remarkable. In 1950 the multiple supermarkets represented just 20% of the food retail market. By 1961 this had risen to 27%; by 1971 to 44%. As the trend continued, a generation has grown up relying on the convenience and choice of supermarket food. Of course some independent retailers went out of business, but the consumer is king - and consumers felt that the price was worth paying. But the price tag got higher. Between 1997 and 2002 more than 13,000 specialist stores around the UK - including newsagents, Post Offices, grocers, bakers, butchers - closed, unable to cope with the competition from the multiples. A recent study by the Institute of Grocery Distribution revealed that 2,157 independent shops went out of business or became part of a larger company in 2004, compared with a previous annual average of around 300 a year. Traffic congestion rocketed as more large stores were constructed out of town. Tales abounded of the
Explain and illustrate the roles played by profit in allocating scarce resources within the economy over time.
(a) Explain and illustrate the roles played by profit in allocating scarce resources within the economy over time. [10m] Profit being a form of return from risk-taking and entrepreneurship, plays a significant role in allocating limited factors of production (land, capital, entrepreneur, labour) in the economy over time. It acts as a signaling mechanism in the free market system and funds capital investment so as to generate more returns in the future. Furthermore, it serve as an indicator to producers on what and how much to produce, how to produce and for whom to produce. This allows them to allocate scarce resources effectively and hence, maximize profits. Traditionally, the objective of every firm is to maximize their profit. This can be done by producing at the output level where marginal revenue=marginal cost (MR=MC). At this point, the additional revenue that a firm would earn by selling one more unit of good would be equivalent to the additional cost required to produce it. Hence, firms would allocate their resources to increase output till this point as reflected in the diagram A. As shown in Diagram A, producing at output level, Q1 would result in a profit earned reflected by the blue border box. However, the firm is not producing at the optimal output level of Q2 which generate the highest
Outline the argument for and against smoking ban
Outline the main argument for and against creating a smoking ban in public areas. Is it good overall - justify your view Smoking is a de-merit good. This means that it is over-provided in a free market economy. The price mechanism has allocated too many resources than is socially desirable. Smoking is over consumed, as shown in the diagram below: The MSC (marginal social cost) and the MPC (marginal private cost) are not the same. They diverge. This is because society experiences a different cost from the good being consumed than the individual. The demand side is the same hence why MSB = MPB. The individual is happy when MPB = MPC, (10 a day). Therefore they consume where the red and green lines meet. Here their MPC = MSB so they are happy. Society is happy when MSB = MSC. So they want people to consume where the pink lines meets the green line. MSB = MSC (5 a day). Below 5 a day both the MSC and MPC are below MPB and MSB. So both society and the individual wants to consume the good. Above 10 a day the MSC and the MPC are above the MSB and the MPB so neither the individual or society wants more than 10 cigarettes a day. However in between 5 and 10 cigarettes a day, the MSC is above the MSB so society does not want to have that many cigarettes. The MPB is still above the MPC so the individual does want to have 6 to 10 cigarettes but society does not want them to. It can
Discuss the strengths and weaknesses of demand-side policies (fiscal and monetary policy)
Discuss the strengths and weaknesses of demand-side policies (fiscal and monetary policy) [18] Demand-side policies are a government's attempts to influence the level of growth of aggregate demand and hence the levels of employment, real GDP, inflation, growth and balance of payments position. A government will do this by using fiscal and monetary policies. Fiscal policies involve the use of government spending, taxation and borrowing to influence both the pattern of economic activity and also the level and growth of aggregate demand, output and employment. Monetary policies involve the use of interest rates to control the level and rate of growth of aggregate demand in the economy. Different types of demand-side policies can be used depending on the position of inflation in an economy. Reflationary demand-side policies seek to increase aggregate demand and raise the level of planned expenditure at or near the level of potential GDP. Deflationary demand-side policies decrease aggregate demand in the event of aggregate demand running ahead of aggregate supply and posing inflationary risks or leading to an unsustainable deficit on the balance of payments. An example of when reflationary demand-side policies would be used is when aggregate demand is too low, so for instance when taxes are high and interest rates are high. The policies that would be used in order to shift
Discuss the merits of road pricing (25)
Discuss the merits of road pricing (25) 4 L1. Road Pricing - a direct charge for the use of road space Negative externality - these exists where social costs of an activity is greater than the private cost, congestion is an example of a negative externality L2. For example, The London Congestion Charge - a flat rate indirect tax levied on all vehicles entering a designated charging zone between 7 am & 6 pm, Monday-Friday. It was introduced in Feb 2003 at the rate of £5 per day. It was ? to £8 per day in July 2005. In Feb 2007, the charging zone was doubled in size to cover a substantial zone in London. This is an example of hypothecation (a situation where revenue from tax is directly allocated to some other purpose) as most of the new revenue has been used to improve bus services Another example of road pricing is in Singapore you must buy a car permit for 10 years, which costs up to £75,000. L3. Road Pricing is beneficial to an economy as it is a way of internalising the external costs of congestion and makes the polluter pay. The fact that the 'polluter' now has to pay for the negative externalities exerted by the congestion they cause, means that they will be less likely to use their cars as often, to avoid the charge, or use alternative (more economical) means of transport such as the train or tube, or they may simply think twice about using their car if
A free market is an economic system where the prices of goods and services are determined by unrestricted competition between privately owned businesses.
A free market is an economic system where the prices of goods and services are determined by unrestricted competition between privately owned businesses. Scarce resources are allocated through the price mechanism where consumer demand and preference and the supply decisions of businesses come together to determine equilibrium prices. The limitations of a free market are set by the business cycle and include: Failure to provide public and merit goods, inequality of income, negative externalities, monopoly power abuse and fluctuations in economic activity. All these limitations contribute to market failure. Public goods cannot be provided in a free market economy because these goods have to provide publicly, and have to be non-excludable. An example of a public good would be a park, where a business would not be able to charge a usage fee to those who use it, as it is non-excludable. A privately owned business firm would not be benefitted by providing public goods, as they would not receive sufficient funding to continuously provide public goods. There is also a problem with merit goods like healthcare and education, which tend to be under provided in a free market. Unlike public goods, merit goods are excludable. With merit goods such as healthcare, only those with sufficient income would be able to access the service and those who have insufficient income would not be able
Explain how the equilibrium level of output is determined in perfect competition. Both for the whole market and one firm within the market
Explain how the equilibrium level of output is determined in perfect competition. Both for the whole market and one firm within the market: The equilibrium is the point where economic forces are balanced and there are no external influences. The equilibrium is the condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. Perfect competition describes a market in which no buyer or seller has market power. Such markets are usually allocatively and productively efficient. In general a perfectly competitive market is characterized by the fact that no single firm has influence on the price of the product it sells. A perfectly competitive market has many distinguishing factors. A market in perfect competition has many people who are willing and able to buy a product as well as a many buyers who are willing and able to produce the products. The products the firms supply are exactly the same. Another distinguishing characteristic in a perfectly competitive market is that there are low entry and exit barriers to the market, and it is relatively easy for a firm to enter or exit the market. There is also perfect information for the consumers and producers. Most importantly, in a perfectly competitive market, the firms aim to maximize profits, firms aim
Income and Price Elasticity of Demand
A guide for income elasticity of demand Income elasticity of demand measures the relationship between a change in quantity demanded and a change in income The formula IED = % Change in Quantity Demanded % Change in Income Levels The numbers If IED is LESS than 1 it is income INELASTIC. If IED is GREATER than 1 it is income ELASTIC. Higher the IED the more responsive demand is to a change in income. Lower the IED the less responsive demand is to a change in income. Plus or Minus Significance NEGATIVE - = INFERIOR GOOD POSITIVE + = NORMAL GOOD Inferior Good Inferior goods are when demand for a product falls, income levels rise. Normal Good Normal goods are when demand for a product rises, income levels rise. Necessities and luxuries are normal goods. Examples of necessity would be toilet roll. Examples of luxury goods are expensive cars and designer clothes. Between 0 and +1 is a normal necessity. Greater than +1 is a superior/luxury good. Example In this current climate people income decreased and started to buy more inferior goods. E.g. Before the recession people would have bought Andrex toilet roll, however in the recession they would have bought supermarkets own brand toilet roll which would be a lot cheaper. Usefulness Using the IED formula a business can work out the change in quantity demand if the income level changes. This way they can
The effect of Trade Unions on causing Labour Market Failure Today
Comment on The effect of trade unions on causing labour market failure today Labour Market Failure (LMF) occurs when the market forces of demand and supply do not results in an efficient allocation of labour resources. A major cause of LMF is the abuse of trade union. However as the market changes, this cause of LMF is losing significance. Trane Unions are organisations which act on behalf of workers to gain better rights and benefits through collective bargaining, they are attractive to workers as the bargaining power of a union is always more powerful than that of an individual. Trade union have, for many years been a major cause of LMF and to an extent, still are.since their inception, trade unions main aim has been to increase wage rate for workers. Whilst this is a great benefit for union memebers, it can cause signifigant market failure. The below diagram shows, that the new wage rate my cause market failure through unemployment. As the market forces of supply and demand settle on a wage rate of W1, the presense of a union increasing the rate to W2 will cause LMF by causing employment to drop from L1 to L3 This is despite their being L2 amount of labour supplied, the gap between potential labour force and the actual employment rate means there are unused resources. And thus the market is not efficient, meaning LMF. This effect is still present today. As the gov't
