Market Structure and Competition

Monopolies

In a monopoly, one company has a much larger market share than any other company. In fact, its share is so big that other companies cannot really compete. When there is a monopoly the normal laws of supply and demand don’t always work. Monopolies come in different kinds, but a pure monopoly is when only one company in the market providing a particular product or service. This situation, in fact, is the exact opposite of perfect competition. Some pure monopolies occur naturally. This happens when a company manages to create an economy of scale. An economy of scale is when variable costs of production increase more slowly than increases of supply. Unfortunately, it is not easy to achieve. Economies of scale are possible for companies which need a lot of money to set up but much less money to run. A telephone company is a good example. It has to spend a lot of money laying cables, but running the system doesn’t cost so much.

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Market Structure and Competition

When economists talk about market structure they mean the way companies compete with each other in a particular market. Let’s take the market for pizzas, for example. There may be many thousands of small companies, all trying to win a share of the pizza market, or there may be one huge company that supplies all the pizzas. These are two very different market structures, but there are many other possible structures. Market structure is important because it affects price. In some market structures companies have more control over price In other market structures consumers have more control over price. You can think of a market structure as a kind of scale. At one end of the scale is perfect competition and in the other end is pure monopoly. In a market with perfect competition, there are many companies supplying the same good or service, but none of them are able to control the price.

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The Planned Economy

In many ways the planned economy is a direct opposite to the market economy. In the market economy the forces of supply and demand decide everything: what is produced, how much is produced, the methods of production and the price. In the planned economy, all of this is decided by the government. In every way that the market economy is free, the planned economy is controlled. Unfortunately, no economic system is perfect. If there was a perfect system, economists wouldn’t have anything to argue about. Market economics have their strength but they have their problems too. Planned economics try to provide solution to these problems. For example, the free market supplies the things that people want. However what people want and what they need are not always the same. Fast food is always in demand, but it is bad for us. In a planned economy, the government could decide to stop fast food restaurants operating in the market.

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The Mixed Economy

Most economists would say that there are no examples in the world today of a completely free market or a completely controlled economy. Instead, every country operates the mixture of the two systems. Even in the freest economies, like the USA, there is some government control; even in the strictest planned economy there is some free enterprise. Economies mix government control and free market values in different ways. One way is to let private owned businesses to exist alongside state run industries. The economy becomes divided between the state sector and the private sector. The state sector often includes industries that the government thinks are important and need protection from the risks of the free market. These could include transport, hospitals, schools and the postal service. The state sector can also include large industries that are important for a country’s economic health, such as oil, steel or agriculture.

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Costs of a Company

Companies have to spend money in order to make money. The money they spend to manufacture their goods or provide their services are called costs. Costs are important. Any company that doesn’t keep track of costs will soon be in trouble. And there are many different kinds of costs to keep track of such as fixed costs and variable costs. Fixed costs are costs that don’t change. They are costs that the company has to pay, for example, each month, or each year. The value of fixed costs will not rise or fall in the short time. Examples include the rent the company pays, the interest they have to pay each month on any loans and the salaries they have to pay for permanent employees. The good news about fixed costs is that they don’t change with increases in production. Variable costs, however, change with the size of production. Examples of variable costs are the raw materials needed for production, the costs of electricity and so on.

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Monopolies

The world of business is a jungle and there are aggressive ways to create a monopoly. One of these is by making takeovers. This means that a more powerful company buys a smaller one in the same industry. Takeovers happen vertically or horizontally. In a vertical takeover a company buys companies that supply it with material or services. For example, a publishing company might buy a printing business. In a horizontal takeover a company buys its competitors. The competitors then become part of the first company. The other way a monopoly occurs is when the government makes it happen. This is called a legal monopoly, but not because other monopolies are illegal. It is called a legal monopoly because it is created by law. The government may decide that a competitive market is not good for a certain industry. In this case it can make one company the only legal supplier. Sometimes, it provides the service itself.

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Deregulation

The state sector industries use money that the government collects in taxes. Often, they do not need to compete with other companies because no other company is allowed to provide the same product or service. However, many countries have recently started a process called deregulation. Deregulation means freeing up the economy to allow private business to compete with state-run industries. The state sector should then run more efficiently in order to compete in the free market and because it now has less government protection. Deregulation of services like telecommunications, transport and banking has happened in many countries in recent years. People have generally accepted these changes. However, generally the public is less happy when the government start talking about deregulation in education and health service. Many people feel that profit motivation would harm these services rather than improve them.

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Market Structure and Competition

A market structure with perfect competition when none of the company is able to control prices is difficult to exist. First of all there must be many companies competing. Each company has its own small share in the market. If one company has a much larger share than any other, it can affect price, and perfect competition will not longer exist. Secondly, products or services from different companies must be the same. This doesn’t mean that everything in the market has to be identical, but they have to be perfect substitutes. In other words, one company’s product must satisfy the same need as another company’s. Imagine a company produces a television that also makes tea. Its product is different from everyone else’s. If it chooses to raise the price of its TVs, customers may still want to buy them because of this difference. Thirdly companies and customers must have perfect and complete information about the products and prices on the market and that this information is correct.

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The Labour Market

In many ways the relationship between employers and workers is similar to the relationship between consumers and producers: workers offer a service, employers buy that service at a price they can afford (the wages they pay). As you can see, it is a kind of market. In economies, it is called the labour market. In any market for products and services, consumers try to get the maximum utility, or satisfaction, from their purchase. This is the same in the labour market. The companies want from their purchase of labour increased output. Output is how much of the product or service the company produces. If there is an increase in demand for their product, they will need to increase output. One way to do this is to take on more staff. Another is to ask staff they already have to work more hours. In both cases, the company is buying more labour. Just like any other market, the labour market obeys the laws of supply and demand. The demand is the empoyers’ need for labour. Supply is the labour workers provide.

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The Factors of Production

The factors of production are the starting point of all economies. No economy can exist without them. The most basic of the factors is land. When economists talk about land, however, they don’t just mean space to build on or fields to grow crops. Land means everything that nature provides and we can use for production. The land factor includes raw materials like coal, metals, oil and timber. It also includes things like water, fish and salt. So, also it means illogical, land also means the sea. The second factor is labour. Raw materials will just stay in the ground unless people dig them out and do something with them. Similarly, factory machines will sit doing nothing without people to operate them. Labour can mean the physical effort such as lifting, digging or building. This is called manual work. Labour also includes mental work like thinking, writing, communicating and designing. The third factor is capital. Capital includes buildings such as factories for production and warehouses for storage. It also includes the tools and equipment.

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Division of Labour

The division of labour isn’t a new idea. Even very early societies have some form of labour specialization. For example, in some societies men were hunters and gatherers of food while women were responsible for child rearing. However, as societies became industrialized, the division of labour increased. Factories became the main means of production, and each factory worker became responsible for smaller and smaller stages in the process. As factory worker gets more and more experience at doing their particular task, they get better and better at it. This should improve the quality of their work. With smaller task to do, workers can do things automatically, without thinking about them. This will speed up their productivity, and speed up the whole production process. Finally small tasks are easier to learn. As the division of labour increases, the amount of time needed to train each worker decreases. All of this means a more efficient and productive workforce.

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Surplus

The market price is the price that sellers are happy to take and consumers are happy to pay. It is a compromise. Some sellers will think that market price is not a good enough reward for their efforts. They will continue to sell at a higher price. However, there will be some people who are more than happy with the market price. They expected to pay a higher price, but found that the market price is actually lower. These people feel that by paying the market price, they have got a bargain. In the jargon of economies they have got consumer surplus. Consumers surplus is the difference between the price consumers are prepared to pay and the price they really do pay. Consumers aren’t the only ones who enjoy surplus. There is producer surplus too. Remember the law of supply says supply rises as price rises. This is because smaller amounts cost less to produce than larger amounts. For this reason, producers would have been happy to sell some of their output below market price.

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Price Discrimination

The market price for a product is like a signpost for companies. It shows them more or less what people are prepared to pay. Nevertheless, companies can set their prices just above or just below the market price if they want. They can even choose to ignore the market price completely. In the real world of business setting prices involves skills, guesswork and risk-taking. Companies have lots of pricing tricks which help to increase profits. One of these tricks is price discrimination. First degree price discrimination is when almost every consumer pays a different price for the same product. Second degree price discrimination involves changing price according to how much of the product is sold. For example, if a customer buys three pencils, he pays one euro per pencil. If he buys 300 pencils, he pays only 75 cents per pencil. The third degree price discrimination is when certain types of customers are charged with different prices. For example, pensions and students often get discounts on public transport.

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Welfare economics

Economics isn’t only about profit, losses and utility. It’s about society. Economic ideas and theories often seem to be issues that are far removed from people’s everyday lives. Welfare economics, however, tries to correct this. It looks at how economic policies affect society, families and the individual. One of the big issues in welfare economics is equity. Equity means fairness, and welfare economists are interested in measuring how fair our economic system are. One way they do this is to look at how income and wealth are distributed among the population. Welfare economists also investigate the effects of government policy on equity. Government’s main weapon to fight inequity is taxation. Welfare economists try to find out how taxation affects vertical equity and horizontal equity. Vertical equity means that people with more income will pay more than those with less income. Horizontal equity means that people with the same income will pay the same amount of tax.