Entries Tagged 'markets' ↓

Readers Question: How do markets and the price system help the economic sectors to solve the problem of scarcity ? cite examples of good and not-so-good solutions to the economic problem (scarcity)

Diagram of Fall In Supply

Scarcity in a Free Market

If there is scarcity of a good the supply will be falling. This scarcity causes the price to rise. In a free market this rising price acts as a signal and therefore demand for the good falls. Also the higher price of the good provides incentives for firms to:

• Look for alternative sources of the good e.g. new supplies of oil from antarctic
• Look for alternatives e.g. solar panel cars

Therefore, in a free market there are incentives for the market mechanims to deal with the issue of scarcity.

However, the market can also have market failure. For example, firms may not think about the future until it is too late. Therefore, when the good becomes really scarce there might not be any alternative that has been developed.

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Readers Question: if all firms in a monopolistic competitive industry were to merge would that firm produce as many differnt brands or just one brand?

Interesting question. I think it is an open ended question with many different possibilities. One approach is to think how firms in different industries may behave if they did merge. Bearing in mind the model of monopolistic competition doesn’t always stand up to scrutiny too well in the real world.

A monopolistic competitive industry has the following features:

• Many Firms
• Freedom of entry and exit
• Produce differentiated Products. Therefore firms have inelastic demand, they are price makers because the good is highly differentiated
• Make Normal Profits in the Long Run, but could make supernormal profits in the short term
• Are allocatively and productively inefficient.

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Q. Use economics and political theory to explain why the fire and rescue service should be provided by the state. I dont want the answer….I just don’t understand what this means.

This revolves around a fundamental debate in economics - How much should the government intervene in the economy.

Ideally, goods and services would be provided in a free market, without requiring any government intervention. Market provision is considered superior because there is less bureaucracy and more incentives for firms to be efficient.

However, there are some goods and services which will be underprovided in a free market. (some goods may not be provided at all). This is considered a type of market failure and therefore for several reasons people argue the government should step in and provide it. Continue reading →

Readers Question Could you explain the above diagram.

The above diagram shows a fundamental aspect of economics - supply and demand.

The supply of petroleum is the quantity produced and sold on to the open market. The initial price of petrol is at P0 where Supply equals demand. Continue reading →

Interesting article here, which claims that printer ink is the equivalent of $8,000 per gallon, which makes petrol look cheap.

• Printer Ink is expensive - $8,000 per gallon.

1. Printers are sold Cheaply, this market is very competitive. On selling printers the profit margins are very low. Therefore, the firms need to make money in other areas.
2. Ink provides a way to get an improved profit margin. Once you have a printer, the firm has a captive audience - you will be reluctant to buy a new printer just because the ink is expensive.
3. Vertical Restraints - Big printing companies like Hewlett Packard, allegedly, have been preventing other 3rd party firms from selling ink. This is essential to maintain their monopoly power. To prevent other firms selling ink cheaply big printer firms can
   • Technology - electronic chips make it difficult for other firms to provide replacements.
   • Deals with Big Shops. It has been alleged that Hewlett Packard have been paying Staples to stop selling alternatives. Staples gets a bonus from Hewlett Packard, and Hewlett Packard can sell their cartridges at a high price.

Tips for Buying Printers

I like this article because recently I bought a Hewlett Packard printer for £50. I then realised a set of ink cartridges was over £20. Furthermore, they made the cartridges very small. And, there was no option to buy alternative cartridges.

Choose a printer where you are able to get cheap ink as well.

• Does Microsoft have too much Monopoly power ?
• Monopoly power in Electronic Markets 

(a)A perfectly competitive firm uses one variable and one fixed factor of production to make a single product. The price of the fixed factor rises by 10%, the price of the variable factor by 5% and the price of the good by 5%. In the new situation will the firm produce more, less or the same amount as it did before? Show your reasoning.

In long Run equilibrium, firms in perfect competition

• Produce where MR=MC. This is the level of profit maximisation
• Make Normal Profit AR=ATC Continue reading →

Cadbury’s the manufacturer of Dairy Milk, have warned that the price of chocolate is expected to rise next year by 5-6%. The main reason for this is an increase in the cost of raw materials such as cocoa, milk and oil.

Cocoa is one of the world’s largest traded commodity. It’s rise in price has mirrored many other commodities that have also seen rises in price. The reason for the rising price of cocoa is due to:

• Lower than expected supply from countries such as Ghana.
• Growing Demand, including demand from emerging economies such as China.
• Strong demand from domestic markets like the UK and US.

Yesterday, also came news that factory gate inflation had rise to 4.5% (link) This is the highest rate of factory inflation since 1991. This makes the prospect of future interest rate cuts less likely.

Both Nestle (maker of Kit Kat) and Cadbury’s (relaunching Wispa) have reported strong growth recently. Suggesting that rising prices may do little to effect demand. (Demand for chocolate is traditionally very price inelastic)

Related:

Fat Tax: Why we should tax unhealthy foods 

What does the abuse of market power have to do with monopolies, mergers and cartel-type activities

Market Power occurs when a firm has a significant share of the market - say greater than 25% of the market. When a firm has a large share of the market it can act in a way that is said to be an abuse of market power. Abuse of market power includes:

• Setting higher prices
• Offering less choice
• Restricting competition.
• Inefficient allocation of resources.

These abuses of market power can occur in various situations.

• Monopoly - firms has more than 25% of market share - easier to increase prices.
• Mergers - When 2 firms join together to form one. This usually results in an increase in market power which can lead to outcomes such as higher prices.
• Cartels - When firms agree to restrict output and set higher prices. Effectively they are acting as if there was one monopoly in the industry.

• Monopoly
• Does Microsoft have too much Monopoly power?
• UK Mergers

Readers Question: What effect it will have (on electricity market) if there is an introduction of subsidies to consumers who install green energy sources eg solar panels?

If there is a subsidy to green energy sources it will shift supply (of solar panels) to the right and therefore reduce the price of solar panels. The effect will be a slight reduction in demand for conventional electricity sources as some people now get energy from solar panels

However, even with a subsidy solar panels would be an expensive investment. Generally consumers are unwilling to invest money now, if it requires several years to make a return. Therefore, demand for solar panels is quite inelastic. In the short term there will only be a very small reduction in demand for conventional electricity.

A more effective way to increase renewable energy sources  would be government regulation to require new houses to be fitted solar panels.

Readers Question: Using data and your economic knowledge assess the case for and against a government completely banning the sale and consumption of cigarettes. AQA (15)

1. Cigarettes are a demerit good. People underestimate the costs of smoking, e.g. lower life expectancy It has been suggested that the true cost of a packet of cigarettes is over $200. Therefore, the government is justified to try and stop people consuming goods which harm them.

2. Cigarettes have negative externalities on the rest of society. For example, it creates health problems of passive smoking. This leads to over consumption and is another justification for banning smoking.

3. In the data it suggests that increasing tax on cigarettes by 200% has only caused a 8.3 % fall in demand. Therefore,  it suggests taxing is ineffective and therefore the government should consider banning it completely.

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