Monopoly, Monopoly Structure, Monopolistic Behavior, Profit Maximization, Oligopolies, Monopolistic Competition, Production differentiation

    Monopoly

I.       Monopoly Structure

Market Power is when “a company [has the] ability to manipulate price by influencing an item's supply, demand or both. A company with market power would be able to affect price to its benefit. Firms with market power are said to be "price makers" as they are able to set the price for an item while maintaining market share.

Generally, market power refers to the amount of influence that a firm has on the industry in which it operates.”[1]

Market demand is the total quantities of good or service people are willing and able to buy at alternative prices in a given time period; the sum of individual demands.

Monopoly = industry

Monopolies arise when:

1.      No Close Substitute

a.      If a good has a close substitute, even though only one firm produces it, that firm effectively faces competition from the producer of substitutes.

2.      Barriers to Entry

a.       Barrier to entry – It’s a natural or legal constraint that protects a firm from competitors.

b.      Patent is a government grant of exclusive ownership of an innovation.

When we are faced with a monopoly, the firms demand is equal to the market demand for that given product

 Price vs. marginal revenue

Marginal revenue is the change in total revenue that results from a one-unit increase in quantity sold.

 Therefore the MR is equal to change in total revenue.

Q₁ = 1  P₁ = 10            TR₁ = 10

Q₂ = 2  P₂ = 9              TR₂ = 18                      MR = 8

This process continues and when the MR stops increasing it means that we have derived the price at which a firm obtains maximum TR.

MR = 0

The marginal revenue curve lies below the demand curve at every point but the first.  The MR is less than P because when the P is lowered to sell one more unit two opposing forces affect TR:

1.      The lower P results in revenue loss.

2.      The increase in Q sold results in a revenue gain.

 

II.     Monopolistic Behavior

 A monopolist is a price setter not a price taker.  A Price setter “[establishes] the price of a product or service, rather than allowing it to be determined naturally through free market forces.  A monopoly does this by first establishing its profit maximizing quantity.” [2]

 Profit Maximization

Profit maximization rule stats that one will produce at the rate of output where marginal revenue is equal to marginal cost

MR = MC

Monopolists do not use P = MC, only perfectly competitive markets use it.  This is what monopolists do.

Production Decision

Production decision is the selection of the short run rate of output (with existing plant and equipment).

A monopoly finds its Q _m by making MR = MC.  Then using this Q _m it goes to the demand curve and obtains the P _m.

 The monopoly price

Below is how we determine price and quantity supplied in a monopoly:

·         The intersection of the MR = MC curves establishes the profit maximizing rate of output.

·         The demand curve tells is the highest price consumers are willing to pay for that specific quantity of output.

·         Only one price is compatible with the profit-maximizing rate of output.

 Monopoly profit

They are higher than competitive market.

 III.    Barrier to entry

 Threat to entry

·         All they have to do is increase quantity and price will drop.

·         This will reduce the profits available in the market giving an economic discouragement.

Barriers to entry are obstacles that make it difficult or impossible for would be producers to enter a particular market.

·         Patent is a government grant of exclusive ownership of an innovation.

·         Copyright is an exclusive right granted to the author or composer.

Other entry barriers

There are two types of barrier to entry:

Natural monopoly – It’s a monopoly that arises when technology for producing a G or S enables one firm to meet the entire market demand at a lower price than two or more firms could.

Legal monopoly – It’s a market in which competition and entry are restricted by the concentration of ownership of a natural resource or by the granting of a public franchise, government license patent, or copyright.

·         Legal Harassment – Some companies will harass smaller companies by suing them.  This makes the cost of entrance higher (think Russia on everything and Apple computers’ OS system).

·         Exclusive licensing – Some companies will not allow for compatibility on the factors of production.  As with legal harassment, this makes the cost of entrance higher and prices of the product artificially high (think AT&T with the iPhone)

·         Bundled Products – Some companies force consumers to purchase complementary products (the largest offender that I can think of was Microsoft and their internet explorer).

·         Public Franchise is an exclusive right granted by the government to a firm so they can supply G or S (think USPS).

·         Government license controls entry into particular occupations, profession, and industries (Think commercial driver’s license, and emission or tag agencies).

 

IV.    Comparative Outcomes

Competition vs. Monopolies

Perfectly competitive	Monopoly
Higher prices signal the need for more supply	Higher prices signal the need for more supply
Higher profits attracts new suppliers	Barriers to entry are erected to exclude potential competition
P = MC	MR = MC
More efficient	Less efficient
Lower prices	Higher prices
Higher quantities	Lower quantities

 

Near Monopolies

Duopoly – It is a market with only two players (or firms)

Oligopolies

The characteristics of Oligopolies are:

1.      Small Number of Firms – An oligopoly consists of a small number of firms.  Each firm has a large share of the market, the firms are independent, and they face temptation to collude.

2.      Interdependence – With a small number of firms in the market, each firm’s actions influence the profits of the other firms.

a.       Example: if i^th player reduces his prices, all other players in the market will loose market share to him. This occurs if we assume the competitors do not change their prices as well.

3.      Temptation to Collude – When a small number of firms share a market, the can increase their profits by forming a cartel and acting like a monopoly.

Cartel – It is a group of firms acting together to limit output; it raises prices and increase economic profit.

4.      Barriers to Entry – Either natural or legal barriers to entry can create oligopoly.

How many firms are in the market depends on how many firms it takes to supply the demand for the given good.

A legal oligopoly arises when a legal barrier to entry protects the small number of firms in a market. 

When barriers to entry create an oligopoly, firms cam make an economic profit in the LR without fear of triggering the entry of additional firms.

 Monopolistic Competition

The characteristics of Monopolistic Competition are:

1.      Large Number of Firms – The presence of a large number of firms has three implications for the firms in the industries:

2.      Small Market Share – While each firm can influence the price of its own product, it has little power to influence the MKT P.

3.      No Market Dominance – Each firm is sensitive to the avg. MKT P, but it does not pay attention to any one individual competitor.  Since they are all relatively small not one firm can dictate the market.

4.      Collusion Impossible – Firms try to profit from illegal agreements with other firms to fix prices and not undercut each other, and this is impossible due to the share number of players in the market.

5.      Product Differentiation – This implies that the product has close substitutes, but not a perfect substitute.

Production differentiation – It’s making a product that is slightly different for the products of competing firms.

6.      Competing on Quality, Price and Marketing – Product differentiation enables a firm to compete with other firms in three areas:

a.      Quality – the quality of a product is the physical attributes that make it different from the products of the others. It runs on a spectrum between high and low.

b.      Price – because of product differentiation, a firm in monopolistic competition faces a downward-sloping demand curve.  So like a monopoly, the firm can set both its P and Q.  But there is a tradeoff between P and quality.

c.       Marketing – because of product differentiation, a firm in monopolistic competition must market its product. 

 What Gets Produced

Marginal cost pricing rule – It is the offer of goods at prices equal to their MC.

The marginal cost pricing rule is efficient, but it leaves the natural monopoly incurring an economic loss; therefore, it is seldom used.

 Average cost pricing rule – It is a price rule for a natural monopoly that sets the price equal to average cost and enables the firm to cover its costs and earn a normal profit.

 V.      Any Redeeming Qualities?

The main reason why monopoly exists is that it has the potential advantages over a competitive alternative.  These advantages arise from:

 Research and development

Invention leads to a wave of innovation as new knowledge is applied to the production process.  If a firm invents in something that obtains a patent, the monopoly will hold monopoly power for a period of time. 

This does not imply that productivity will grow.

 Economies of Scale

Economies of scale can lead to natural monopoly.

Economies of scale – A condition in which, when a firm increases its plant size and labor employed by the same percentage, its output increase by a larger percentage and its average total cost decreases.

Where significant economies of scale exist, it would be wasteful not to have a monopoly.  Usually they exist where the cost of providing a G or S is cheaper at higher quantities produced.

 Contestable Market

Contestable market is an imperfect competitive industry subject to potential entry if prices or profits increase.

 How contestable a market is dependant on entry barriers and not structure.

·         If entry is insurmountable competitors will be locked out of the market.

Sunk Costs

 Sunk costs are costs which, once committed, cannot be recovered. Sunk costs arise because some activities require specialized assets that cannot readily be diverted to other uses. Second-hand markets for such assets are therefore limited. Sunk costs are always fixed costs, but not all fixed costs are sunk. Examples of sunk costs are investments in equipment which can only produce a specific product, the development of products for specific customers, advertising expenditures and R&D expenditures. In general, these are firm-specific assets. The absence of sunk costs is critical for the existence of contestable markets. When sunk costs are present, firms face a barrier to exit. Free and costless exit is necessary for contestability. Sunk costs also lead to barriers to entry. Their existence increases an incumbents’ commitment to the market and may signal a willingness to respond aggressively to entry.

Nostro and Vostro account- Short Notes

 Nostro and Vostro account normally uses in the foreign exchange transactions of the banks or during currency settlement.

Nostro Account means the overseas account which is held by the domestic bank in the foreign bank or with the own foreign branch of the bank. For example the account held by Bangladesh Bank with bank of America in New York is a Nostro account of the Bangladesh Bank. Vostro Account means the account which is held by a foreign bank with a local bank, so if bank of America maintains an account with Bangladesh Bank it will be a vostro account for Bangladesh Bank. It is a great point that the account which is Nostro for one bank is Vostro for another so when Bangladesh Bank opens a Nostro account with Bank of America, it is a Vostro account for them and vice versa.

Population is both an asset and liability/ A big population: asset or liability

 ECONOMIES suffer from frequent economic and financial crises regardless of the fact that the country is developed, developing or underdeveloped. But the causes however, of such unstable conditions may be different for different countries. In economic terms, we regard these problems as the result of imbalances in demand and supply.

In the recent years, Pakistan has been witnessing acute food shortages that has pushed up the prices of commodities like wheat, sugar, rice, pulses, making it difficult for people to get the basic necessities. As the population is growing fast in many countries, the same amount of food produced for years is no longer sufficient. This results in shortage of supply and prices increase. But is the population growth the only reason for such food crises? Will population reduction solve all such problems? Let's take a look at other possibilities before coming to a conclusion.

Studies suggest that the developed countries benefit from nearly 80 per cent of all of the world's recourses and only 20 per cent is left for the poor countries. Developing nations like China, India, Brazil, and Pakistan are among the most densely populated countries and they have more mouths to feed. If the available wealth (both financial and natural) is channelised fairly to all the countries inclusive of the third world, there would be no scarcity, at least of basic provisions. The problem is not “numbers”, rather “resources”. If a country has resources, it can manage to serve more people and work for their welfare.

There are instances where lesser number of inhabitants is a dilemma. Countries like Canada, Australia and Libya are the examples where smaller population is a handicap. Many developing countries face scarcity of labour, both of skilled and unskilled manpower.

When a few areas are urbanised, all industries, plants and other institutions concentrate in these areas. The whole rural-urban migration trend depicts the same picture, where people from small cities and villages move to big industrial areas for work, business and studies often leaving fewer people taking care of farming and the underdeveloped areas. The major problem of resource scarcity is over-concentration of population in few areas; whereas resources may remain available in regions where there is shortage of people.

There are many examples where big population is considered a desirable phenomenon for developing nations. For big manufacturing firms all over the globe, deficiency of cheap labour is one of the major issues. If a country has more labour force it can be availed by initiating different vocational training programmes. This will not only make these peopled skilled and productive but will also help them earn a good standard of living.

China has trained its manpower by efficiently utilising it and made it available for business firms as cheap and productive labour force. The giant multinationals have their plants and manufacturing industries in China. India is another major example; big foreign companies have their call centres operating in India just because India has large, cheap and skilled labour force.

Pakistan stands fifth in the list of world's most populous countries. The majority of its population lives in rural areas, they are uneducated. The low income group considers children as the only source for financial support. Birth control programmes initiated by different governments did not control the growing population. The only way possible to counter over-population is to provide abundant resources and opportunities to people to be productive..

The distribution of population among different regions of the country requires that people do not remain concentrated in one area while leaving others unutilised in productive pursuits.

The proper utilisation of cheap labour can be done through planning and skill development so that the dependency ratio in households can be decreased and standards of living improved.

Iso-Product Curve Definitions, Properties, Iso-Quant Curve: Definitions, Properties

 Iso-Product Curve/Iso-Quant Curve:

From the above schedule iso-product curve can be drawn with the help of a diagram. An. equal product curve represents all those combinations of two inputs which are capable of producing the same level of output. The Fig. 1 shows the various combinations of labour and capital which give the same amount of output. A, B, C, D and E.

Iso-Product Map or Equal Product Map:

An Iso-product map shows a set of iso-product curves. They are just like contour lines which show the different levels of output. A higher iso-product curve represents a higher level of output. In Fig. 2 we have family iso-product curves, each representing a particular level of output.

 The iso-product map looks like the indifference of consumer behaviour analysis. Each indifference curve represents particular level of satisfaction which cannot be quantified. A higher indifference curve represents a higher level of satisfaction but we cannot say by how much the satisfaction is more or less. Satisfaction or utility cannot be measured.

An iso-product curve, on the other hand, represents a particular level of output. The level of output being a physical magnitude is measurable. We can therefore know the distance between two equal product curves. While indifference curves are labeled as IC1, IC2, IC3, etc., the iso-product curves are labelled by the units of output they represent -100 meters, 200 meters, 300 meters of cloth and so on.

 

Properties of Iso-Product Curves:

The properties of Iso-product curves are summarized below:

1. Iso-Product Curves Slope Downward from Left to Right:

They slope downward because MTRS of labour for capital diminishes. When we increase labour, we have to decrease capital to produce a given level of output.

 The downward sloping iso-product curve can be explained with the help of the following figure:

 

The Fig. 3 shows that when the amount of labour is increased from OL to OL1, the amount of capital has to be decreased from OK to OK1, The iso-product curve (IQ) is falling as shown in the figure.

The possibilities of horizontal, vertical, upward sloping curves can be ruled out with the help of the following figure.

 

(i) The figure (A) shows that the amounts of both the factors of production are increased- labour from L to Li and capital from K to K1. When the amounts of both factors increase, the output must increase. Hence the IQ curve cannot slope upward from left to right.

(ii) The figure (B) shows that the amount of labour is kept constant while the amount of capital is increased. The amount of capital is increased from K to K1. Then the output must increase. So IQ curve cannot be a vertical straight line.

(iii) The figure (C) shows a horizontal curve. If it is horizontal the quantity of labour increases, although the quantity of capital remains constant. When the amount of capital is increased, the level of output must increase. Thus, an IQ curve cannot be a horizontal line.

2. Isoquants are Convex to the Origin:

Like indifference curves, isoquants are convex to the origin. In order to understand this fact, we have to understand the concept of diminishing marginal rate of technical substitution (MRTS), because convexity of an isoquant implies that the MRTS diminishes along the isoquant. The marginal rate of technical substitution between L and K is defined as the quantity of K which can be given up in exchange for an additional unit of L. It can also be defined as the slope of an isoquant.

It can be expressed as:

MRTSLK = – ∆K/∆L = dK/ dL

Where ∆K is the change in capital and AL is the change in labour.

Equation (1) states that for an increase in the use of labour, fewer units of capital will be used. In other words, a declining MRTS refers to the falling marginal product of labour in relation to capital. To put it differently, as more units of labour are used, and as certain units of capital are given up, the marginal productivity of labour in relation to capital will decline.

 

This fact can be explained in Fig. 5. As we move from point A to B, from B to C and from C to D along an isoquant, the marginal rate of technical substitution (MRTS) of capital for labour diminishes. Every time labour units are increasing by an equal amount (AL) but the corresponding decrease in the units of capital (AK) decreases.

Thus it may be observed that due to falling MRTS, the isoquant is always convex to the origin.

 

3. Two Iso-Product Curves Never Cut Each Other:

As two indifference curves cannot cut each other, two iso-product curves cannot cut each other. In Fig. 6, two Iso-product curves intersect each other. Both curves IQ1 and IQ2 represent two levels of output. But they intersect each other at point A. Then combination A = B and combination A= C. Therefore B must be equal to C. This is absurd. B and C lie on two different iso-product curves. Therefore two curves which represent two levels of output cannot intersect each other.

4. Higher Iso-Product Curves Represent Higher Level of Output:

A higher iso-product curve represents a higher level of output as shown in the figure 7 given below:

In the Fig. 7, units of labour have been taken on OX axis while on OY, units of capital. IQ1 represents an output level of 100 units whereas IQ2 represents 200 units of output.

5. Isoquants Need Not be parallel to Each Other:

It so happens because the rate of substitution in different isoquant schedules need not be necessarily equal. Usually they are found different and, therefore, isoquants may not be parallel as shown in Fig. 8. We may note that the isoquants Iq1 and Iq2 are parallel but the isoquants Iq3 and Iq4 are not parallel to each other.

6. No Isoquant can Touch Either Axis:

If an isoquant touches X-axis, it would mean that the product is being produced with the help of labour alone without using capital at all. These logical absurdities for OL units of labour alone are unable to produce anything. Similarly, OC units of capital alone cannot produce anything without the use of labour. Therefore as seen in figure 9, IQ and IQ1 cannot be isoquants.

7. Each Isoquant is Oval-Shaped.

It means that at some point it begins to recede from each axis. This shape is a consequence of the fact that if a producer uses more of capital or more of labour or more of both than is necessary, the total product will eventually decline. The firm will produce only in those segments of the isoquants which are convex to the origin and lie between the ridge lines. This is the economic region of production. In Figure 10, oval shaped isoquants are shown.

Curves OA and OB are the ridge lines and in between them only feasible units of capital and labour can be employed to produce 100, 200, 300 and 400 units of the product. For example, OT units of labour and ST units of the capital can produce 100 units of the product, but the same output can be obtained by using the same quantity of labour T and less quantity of capital VT.

Thus only an unwise entrepreneur will produce in the dotted region of the iso-quant 100. The dotted segments of an isoquant are the waste- bearing segments. They form the uneconomic regions of production. In the up dotted portion, more capital and in the lower dotted portion more labour than necessary is employed. Hence GH, JK, LM, and NP segments of the elliptical curves are the isoquants.

Explain why the knowledge of statistics is indispensable for modern economic analysis?

 i) Relationship between sociology and economics: Sociology and Economics as social sciences have close relations. Relationship between the two is so close that one is often treated as the branch of the other, because society is greatly influenced by economic factors, and economic processes are largely determined by the environment of the society.

Economics deals with the economic activities of man. It deals with production, consumption and distribution of wealth. The economic factors play a vital role in the very aspect of our social life. Total development of individual depends very much on economic factors. Without economic conditions, the study of society is quite impossible. All the social problems are directly connected with the economic conditions of the people. That is why Marshall defines Economics as "on one side the study of wealth and on the other and more important side a part of the study of man."

In the same way Economics is influenced by Sociology. Without the social background the study of Economics is quite impossible.

ii) Relationship between statistics and economics: Statistics and Economics have close relations. Relationship between the two is so close that one is often treated as the branch of the other, because statistics is greatly influenced by data and information. Economics would be dependent on those data.

Economics deals with the economic activities of man. It deals with production, consumption and distribution of wealth, where production is directly related to statistics. Without economic conditions, the study of statistics is quite impossible.

iii) Relationship between political science and economics: Political science and economics are social sciences. Political science is the study of politics in theory and practice, while economics is the study of how resources are produced, allocated, and distributed. As well as dealing with subjects that often relate to one another in everyday life, the two are commonly seen as sister subjects in academic terms.

A variety of topics related to politics are addressed by political science. This includes differing political philosophies about how society should operate. It also includes the way political systems work to produce laws and government.

Economics deals with two main areas. Microeconomics is the study of how individual consumers and businesses make production, purchasing, investment, and saving choices. Macroeconomics looks at how an entire economy works and the way policies can affect the combined effects of microeconomic decisions. It can be argued that economics is a social science rather than a pure science, because it is based around resolving an irresolvable dilemma: how to meet people's unlimited wants with limited resources.

What factors according to you influence the country’s economic growth?

 There are mainly two types of determinants (factors) which influence the economic development of a country.

a) Economic Factors in Economic Development:

i) Capital Formation: The strategic role of capital in raising the level of production has traditionally been acknowledged in economics.

ii) Natural Resources: The principal factor affecting the development of an economy is the natural resources. Among the natural resources, the land area and the quality of the soil, forest wealth, good river system, minerals and oil-resources, good and bracing climate, etc., are included. For economic growth, the existence of natural resources in abundance is essential.

iii) Marketable Surplus of Agriculture: Increase in agricultural production accompanied by a rise in productivity is important from the point of view of the development of a country. But what is more important is that the marketable surplus of agriculture increases.

v) Conditions in Foreign Trade: Foreign trade has proved to be beneficial to countries which have been able to set-up industries in a relatively short period. These countries sooner or later captured international markets for their industrial products. Therefore, a developing country should not only try to become self-reliant in capital equipment as well as other industrial products as early as possible, but it should also attempt to push the development of its industries to such a high level that in course of time manufactured goods replace the primary products as the country’s principal exports 

vi) Economic System: The economic system and the historical setting of a country also decide the development prospects to a great extent. There was a time when a country could have a laissez faire economy and yet face no difficulty in making economic progress. In today’s entirely different world situation, a country would find it difficult to grow along the England’s path of development.

b) Non-Economic Factors in Economic Development:

i) Human Resources: Human resources are an important factor in economic development. Man provides labour power for production and if in a country labour is efficient and skilled, its capacity to contribute to growth will decidedly be high.

ii) Technical Know-How and General Education: It has never been, doubted that the level of technical know-how has a direct bearing on the pace of development. As the scientific and technological knowledge advances, man discovers more and more sophisticated techniques of production which steadily raise the productivity level.

iii) Political Freedom: Political freedom is necessary for economic development.

iv) Social Organization: Mass participation in development programs is a pre-condition for accelerating the growth process. However, people show interest in the development activity only when they feel that the fruits of growth will be fairly distributed.

v) Corruption: Corruption is rampant in developing countries at various levels and it operates as a negative factor in their growth process. Until and unless these countries root-out corruption in their administrative system, it is most natural that the capitalists, traders and other powerful economic classes will continue to exploit national resources in their personal interests.

vi) Desire to Develop: Development activity is not a mechanical process. The pace of economic growth in any country depends to a great extent on people’s desire to develop.

What should be the goals of monetary police in developing country

 Monetary policy aims and methods have changed over time. Both in developed and developing economies, monetary policies seek to maintain price stability by sustained stable output growth in the face of internal and external shocks that are faced from time to time. In developed economies with production factors at or close to full employment, monetary policies are formulated typically with the output gap (difference between the actual and the longer run potential output) in view; the policy stance is eased to provide stimulus at times of slowdown when actual output lags the longer run potential, and the stance is tightened to slow things down when the economy overheats with actual output running ahead of the sustainable longer run potential. Diagnosing and treating asset price bubbles symptomatic of overheating are major issues of current debate in monetary policy.

For developing economies like Bangladesh with significant underemployment/under exploitation of production factors, stimulating higher growth is imperative for rapid reduction and eventual elimination of endemic poverty, and is therefore an overriding priority. The stimulus provided by monetary policies in accommodating the growth aspirations must not however over step towards macroeconomic imbalance destabilizing and jeopardizing future growth; and the pursuit of monetary policies comprise the continual balancing act of supporting the highest sustainable output growth while adjusting smoothly to internal and external shocks that the economy encounter from time to time. The primary objective of the Monetary Policy of Bangladesh is to outline the formulation and implementation of monetary policy of the Bangladesh Bank (BB), and to convey its assessment of the recent and the expected monetary and inflation developments to the stakeholders and the public at large The Bangladesh Bank Order of 1972 outlines the main objectives of monetary policy in Bangladesh, which comprises—

a) To achieve the price stability

b) To regulate currency and reserves

c) To promote and maintain a high level of production, employment and real income, and economic growth, since independence BB operated under a variety of pegged exchange rate systems amid capital controls

d) To manage the monetary and credit system

e) To maintain the par value of domestic currency

f) To promote growth and development of the country's productive resources in the best national interest Although the long term focus of monetary policy in Bangladesh is on growth with stability, the short term objectives are determined