1. Monopoly Market and Barriers to Entry
1.1Monopoly Market
Monopoly is a market situation in which there is a single seller selling the product or service and there are no close substitutes and there are restrictions to the entry of competitors in the market.
1.2Barriers to Entry
The barriers to entry guard the one firm from the entry of another competitor in the market. Three main barriers to entry in the monopoly market are legal barriers, natural barriers and ownership barriers.
1.2.1Legal Barriers
The entry of competitors is restricted with the legal requirements of the grant of public franchise, license, patent and copyrights. When the limited right for the supply of product or service is given to the firm, it is known as public franchise. License is provided to the professionals such as doctors, lawyers which restricts the entry of individuals is this field. The other legal barriers include patents which are exclusively granted to the inventor of product or service, and copyrights, which are exclusively granted for the artistic, musical and other works (econ.iastate.edu).
1.2.2Ownership Barriers/p>
Ownership barriers exist when a particular resource is required to produce the particular product or service and owner of that resource has monopoly power. For example, the entire production of raw diamonds in the world is controlled by DeBeers (Boal, 2010:2).
1.2.2Natural Barriers/p>
Natural barriers exist when one firm manages the demand with the lesser price of output as compared to the other firms, it leads to the economies of scale and act as a barrier to entry for the other firms. Electric power generation, natural gas distribution is the example of natural monopoly.
2. Complementary Products
The complementary products are the products where the sale of one good directly influences the demand of another product. Also the demand schedules are related to each other. The examples of complementary goods include bread and butter, printers and toner, pencil and eraser, car and petrol etc.
2.1Bread And Butter
If there is price of butter rises, then the consumers will purchase less butter. And, with the less butter, the need of bread will lessen. The price rise of butter will lead to decrease in demand of butter as well as bread, since both are the complementary goods (ecosystemvaluation.org).
2.2Car And Petrol
If the price of car goes down, there will be increased demand for cars in the market. With the enlarged demand for cars, the demand for petrol will automatically shoot up. At the same time, if the petrol prices are decreased, the public will depart for using the petrol with more comfort. This will lead to greater demand of petrol which will result in higher demand of the cars. The car and petrol are the perfect complements.
2.3Printers And Toners
The lesser demand for the printers will lead to the decreased demand for the toner cartridges. And the increased sales of printers in the market will elevate the demand and sales of toners in the market. Also the prices and demand of toners affect the demand of printers. Sometimes, the prices of low-end printers are not more than the prices of replacement cartridges (livingeconomics.org).
3. How Market Mechanism Operates to Determine the Prices and Factors Affecting it
3.1 Market Mechanism
Market Mechanism can be described as the means where demand and supply forces determine the prices and quantities of the given product or service which is offered for sale in the market (businessdictionary.com). The market determines the price of the product and price determines the demand and supply quantity.
3.2 How Market Mechanism Operates to Determine the Prices
Price is the inducement for both consumers as well as producers. If the prices are high, it encourages the producers to produce more and supply the same in the market for profits. But high prices create lesser demand by the consumers. But, if the prices are low, the lesser quantity is produced by the producers and consumers demand more. The prices are determined at the equilibrium point of the demand and supply (kr.mnsu.edu).
3.3Factors affecting the determination of prices (lilt.ilstu.edu).
3.3.1Demand
The prices are determined by the demand in the market. The factors affecting demand of the product includes the income changes of the consumers, prices of other goods which are substitutes and complementary, consumer tastes and preferences and the future prices and incomes of the consumer.
3.3.2Supply
The prices are determined by the supply forces in the market. The factors affecting supply of the product includes the input prices paid by the firms to attain the factors of production which constitutes wages of labour, rent for the land and equipment, the technological advancements which helps in lowering the production cost of the product, rising prices of other goods, and the expectations of the producers regarding prices.
4. Difference between Various Market Structures and their Impact on Decisions made by Individual Firms and Effect on Consumers
4.1Market Structures
The market structure includes the number of firms in the market, the nature of costs, extent of product differentiation, the composition of buyers etc. There are basically four types of market structures which include perfect competition, monopoly, monopolistic competition and oligopoly.
4.2Impact on Decisions Made by Individual Firms and Effect on Consumers
The various market structures effect the pricing, output and other decisions of the firms in the market. If the degree on competition is high in the market, the firm has less ability to influence the price in the market. The firm will change its policies and procedures accordingly for the production and its output. For example, the decisions of the firms are different in case of Fast Moving Consumer Goods Sector with the large firms as compared to the Airline Industry with lesser number of firms. Also the firm decisions are affected by the economic environment in which it is operating (egyankosh.ac.in).
The various styles, types and brands in the market offer the customers with better choice. This affects the behaviour of the consumers. Also, the pricing decisions of firms in the market affect the consumers buying decisions. If the competition in the market is low, then the consumers will pay the prices fixed by the firm.
5.Cartels are seen as not being in the public interest. Explain this statement
A cartel generally refers to a few business houses from one industry or even a few countries forming up a team to dominate the market, especially for pricing power. A cartel comes up as a formal agreement and cartels operate by manipulating the supply of a product together with marketing activities. A good example of a cartel is (OPEC), Organisation of Petroleum Exporting Countries.
So, a cartel is very close to a monopoly, however is slightly weaker than monopoly. Cartels are not legal in many countries, but can be very strong in their operations. Back in mid 2000s when the US congress tried to penalise OPEC, their efforts failed as it was later thought that any attempt to penalise them would affect the US economy. (Cartel, Investopedia.com)
Cartels are often accused of price fixing and they can have the following negative effects:
5.1 Higher prices- Members of a cartel can raise the price of their product easily and this leads to reduced elasticity of demand and can create problems for other members in the same industry.
5.2 Transparency loss- Members of a cartel are very protective of their information and will make all attempts to hide information from public.
5.3 Reduced output- A good example of this is OPEC. This is done in an effort to manipulate the price.
5.4 Forming of territories- Members of a cartel can have an agreement among themselves to form territories.
A good example of cartelisation was in 2011 when European Commission imposed a fine of 500m Euros on 11 European power equipment companies led by Siemens. The argument was that Siemens formed up carved up the market between 1988 and 2004 and ABB escaped the fine because it chose to be the whistle blower. (Cartels. Economicsonline.co.uk)
6.Externalities are often cited as a product of economic decisions. List and describe 2 negative and 2 positive externalities.
An externality can be defined as something which does not affect the producer of a good or service monetarily, but it does affect the standard of living of the society in general. A positive externality is one that benefits the society, but does not help the producer make profits. Whereas a negative externality is one that does not cost the producer anything, but has a negative effect on the society.
Examples of positive externalities:
6.1 Environmental clean up and research- This benefits the society, but does not help the producer to make profits.
6.2 Research and technological developments- Similarly in a new research breakthrough the company responsible for it does not benefit much.
Examples of negative externalities:
6.3 Pollution- The company that creates pollution loses nothing, but the society loses due to it and ends up paying a big price. This should always be seen in the light of economic costs. For example if a patient who gets sick due to the pollution created by a company, who is responsible for it and who will bear the cost of his treatment? The companies should look at that cost and then decide whether production is profitable.
6.4 Loud parties- This is another good example because for involved in the party, its fun, but for people trying to sleep next door, it could be a calamity. (Externality. Thinkquest.org)
Reference
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http://www.economicsonline.co.uk/Business_economics/Cartels.html
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http://library.thinkquest.org/26026/Economics/externality.html
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http://www.investopedia.com/terms/c/cartel.asp#axzz2BubxbTCB
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