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    DIPLOMA IN ESTATE AGENCY COURSE (PART |) SUBJECT: PRINCIPLES OF ECONOMICS Past Year Question & Answers 2001 — 2012 Topic 9 & 10 MARKET STRUCTURES mane staucrunes 'b) What is meant by the ‘kinked’ demand curve ofan eligopoly market? (6 marks) ‘There ore many buyers in the market. 2. the products sold can he homogenous, In the case of pure aligopaly or diferentcted as in the case of Imperfect oligopoly. 3. Barriers to entry exist but they are not as restive as in monopoly. 4. One very distinctive characteristics of oligopoly Is INTERDEPENDENCY, The pricing and output policy of one frm is dependent onthe pricing and oulput policies of other fms. 5, There ore several waysin which price can be determined: 0} Price Leadership - Le. cmong petroleum companies, PETRONAS isthe leader and the other fers wil folow suit 1b] Dominant Firm - : Metrojayais the dominant major etal stores here €} Collusion - this refers to an agreement (formal and informal) omeng tne producers to decide the price and output level. Both of which are fied, Ths & sometimes called facil agreement, 0} Cartel ~ Le: OPEC, whereby the exganizction fas the minimum ond Taximum pice 50 03 fo avoid unnecesserr competion, 4 The olgopolstic fim is foced with kinked demand cure. The AR or demand cue o the olgopolist i Said to be kinked. Refer Figure 2 Foue9 The Kinked Demand Curve + Thisis becouse al price P, the olgopolst wil sella output @ ‘Tolated & Researched Tor Ramscoll Academy ———~—~S~S~*~S ga Ta mac stavcruns 1+ Above price P, the demand is elastic, + Rai fims will not match the increase ir price becouse the fallin quantity demanded willbe greater than the increase in price, + Atprices below P or point A, the demand wilinelatic. + Any tedtction in the price of the oligopoist wil be matched by reductions by otRer ims. Le. Me Price reduction FEIKUNAS Nas faxen val lead 10 $0, Shel, Caltex etc, reducing thet prices comespondingly. 1+ Hence, the demand is inelastic ‘+ The fail in price wil be accompanied by only a slight increase in the ‘quantity demandes. 7. The Kirked demand cuve wil lead 10 price rig. This explcins why price i: Lusvallyremeins unchanged for along period of iene See Figure 10 Price Rigitty + Recnuse of the Unusual AR curve, the MR curve willbe a discontinuous line ‘and even though MC may increase or decrease, Le MC or MCI. MC fs sil equal fo MR at he some level of output ‘Colaied'Researched'orRamacoH Academy ———~—~—~S~S~*«S ag DE Neus oF economies sore 9410 2) Monopoly Is defined as a market structure where there is only one firm in the indusity. Discuss how the firm may achieve the position. (8 marks) There ls only one single seller but two types of monopoly [NATURAL HONOPOLY ~INB. PRIVATE MONOPOLY - ASTRO ‘The element/ factor of Barriers to Eniry are identified as one of tha main contibutor to the single seller morkat structure. BARRIERS TO ENTRY ~ refs 10 restition imposed by the existing fms in the industry in blocking the enty of new val fms. |. These restictions pace the entrants et o cost dliodvoniage (eo high cox) ‘elolve fo extabined fr, 2, "Cut Threat” Competition ‘+ The monopole! will undercut prices $0 thatthe val fm will nt be able 10 compete at al ‘+ Now fims cannot lower prices as t wil be running oto loss & Bétence of Patent and Copyright ‘+ Through legilation whereby the fights of the producer have to be protected, |e, book publehers ond fecord producers. They would have. tne rights to produce these goods + Infingement of the low is on offence, examples tke Microsott and other sofware producers 4. Control of Marketing Channels ‘+ Ifthe monopolist contro the dsrbution agents, then the rival fms would have cificulies in tying to reach the consumers, Le. newspaper vendors condretoiers, ‘5. Granting of Special Licence and Fronchise 1 Special prvieges are granted to cerloin firs to camry out certain Cclivties, <2 Bemas, in the past the Fost India Company [during the Bish Rule) ‘Tolcied Researched or Ramacol Academy Page Sofa ANCIPLES OF ECONOMICS tones 410 masxersravcruRes + Another example, are given axclusve legal privilege tke some fs in Saban ore given soe rigs for deforestation. 6. Economies of Seale ‘+ For some industis, there is room for the production of one single frm conly. Examples: such as TNB, Telekom Malaysia, ond LT, + tf number of rival fems provide these services, there wil unnecessary ‘wastage and dupicaion. High intial Cast + To set up a large fim. a substantial amount of money is needed and ‘nol mary producers o people have that kind of money, “+ Diffcuty to borrow such large sum from banks, because of high rks invowved 8, Legal Prohibition + In some counties. competition is not allowed and thé is sat By the ‘government through cerfain set of reguotion, such os PEIRONAS: Cariga. 9. Ownership of Cortain Raw Materials +The monopotst may own all the deposils of some mineral resources or contol af or pat of the country's or regions mineral depos, + Example such as: DeBeers of South affica ~ owns a large portion of ‘diamond deposts 10. Climate Consions + Certain climatic conditions favour certain types of agrcutral products and not others 1+ Thi leads fo monopolistic power e.g. Matoysic for palm oll ond rubber, Ghana for Cocoa, rex for coffee 11. Government intervention |= Marketing board with the help of the government coud be the sole seller of @ particulor product ike FAMA (Federal Acricutural Marketing Authoriy) In Malays. ‘Callaied & RarearchedTorRamacoH Academy ———S~S~S~*« GT INCI OF ECONONCS ) Explain the important characteristics ofthe following market structures: 1) Perfect Competition (4 marks) ‘Choractertics 1) Many buyers in market, but they cannot control prices. ‘Prices is xed in the market through the forces of demand and supply, ie. buyers ond sees acting in concert ‘+No materhow much has been purchased, price ls always constant. uyers are sold fo be price takers. 2} Many seller in the market, they foo cannot contol prices. + They ore also price takers. + The sellers are usvelly «mall ems. + Price is determined ot RM 10 [refer gute 1) where goods will be bought. f the seller offers a lower price, then he wil incur @ loss f he sells at higher price, there wil be no demand + Sellers are powerless in determining prices but he can set the ‘avantly he wants to sl, 3) The goods are homogenous and not diferentiated. They are identical ‘+The consumer cannot cifferentiate whether the goods comes trom producer A, Bor C. + There no advertising in this market 4) There must 26 fee entry fo and exit rom the market. “+ Ifthe indushy is making profits, then new firms will enter the market, + tits making a loss, some frm wil leave the market. No reskicton | imposed. 1) Monopolistic Competition (amaris) ‘Choractesties 1. There are many buyers. >. There are many sellers but nol as many perfect competition. 3. Products are differentiated either physically or psychologically or both, such (5 brand names lke Fab, Breeze, and Perl ‘Colialed Researched forRamacon Academy ——=—=S—S~S~*«S OTE m sorer210 wassersreucruees There ls ease of enky and ext, but not as easy as in perfect competition. Non-price compellion lke adverisements, soles promotions, free is, services rendered, packaging, pice leadership, and collusion (agreement) exist No perfect knowledge is assumed, (One producer can lower his price without affecting other fms. oligopoly (4 marks) |, Oligos ie @ greek word meaning few. Therefore OUGOPOLY means few sellers. For example, petroleum companies in Malaysia. namely, PETRONAS, Shell BHP, ESSO, ef. 2. There are many buyers inthe market. 3. The products sold can be homogenous, in the case of pure oligopoly or There are many sallrs but not as many perfect compatitons. > Products ore ciferentiated either physically or psychelogically or both, such as brand names ke Fab, Breeze, and Perl © There is ease of ently ond exit, but nol as eay as in perfect competition. © Nomprice competion ke advertisement, soles promotions, tree sits serviced rendered, packaging, price leadership, end collsion [ogreement) exs, ‘Called & Researched fr RomcoH Academy Page Tiered INCU OF EcoNOMICS tone 9210 ancy srverunes No perfect knowledge is assumed. 15 One producer con lower his price without affecting athor fms, 'b) Explain how monopoly fms can be controlled using: (10 Marks) 1 Profittax Profit Tax wal be imposed as once on total proft earned. Hence i's what we oll cal ‘Lump Sum’. As a resuit of lump sum tax imposed the total average cost wil increase as compared 10 eater postion form [AC 10 ACI. But MC will emain the sare. The producers wil sit produce the same quantity of production at GO with @ price charged at FO. However the total profit ecmed by monopoly fir wil reduce from COPOAC to CIPIAB, The prof fx will be fuly absorbed by Monopoly fim. aid ve ae ‘Cole Researched Tor RamscoAcadony ~*~ RT INCILS OF ECONOMES tone 9410 maser steucTunes IL Production Tax Production tox mean the tax imposed on each unit produced. Tis wil cause the AC to move along with the MC from AC to ACI and MC fo MCI, paral! with the ‘amount of unit tax chorge. This wil couse the Monosoly fim fo change to @ new equillxium trom A to E, the ‘output wal reduce fom G0 to Gil ond the price charged wil increase from PO to Pl. Total profit earned wilreduced trom COPOAB fo CIPIEF ‘Colsied& Researched tor Ramacon Academy Page Holt ©) Describe the main features of oligopoly market. (10 Marks) cuasacteisnes |. Oligos isa greek word meaning few. Trorefere OLIGOPOLY means few slles For example, petoleum companies In Malaysia, namely, PETRONAS, Shell BHP, E550, et. 2. There are many buyers inthe market. 3. The products sold can be homogenous, in the case of pure oligopoly or Lferentated asin the caze of imperfect oligopoly. 4. Borers fo entry exist but they are not as restive asin monopoly. 5,.One very distinctive characteristics of oligopoly Is INTERDEPENDENCY, The pilcing and output policy of one frm is dependent onthe pricing and output polices of other fms. a 'b) What ore the advantages and disadvantages of monopolistic competition ‘maiket as compared to perfect competition market? (VO Marks) ADVANTAGES AND DISADVANTAGES OF MONOPOUSTIC COMPETITION ADVANTAGES 1. There are many buyers. 2. There axe many sellers but not as many perfect competitions. 3. Products are diferentiated either physically or prychologically or bol, such ‘8 brand names tke Fab, Breeze, and Pers 4. Tete ease of enty and ext, but not as easy as in perfect competition. 5. Non-price competition Ike advertisement, sales promotions, tree git, serviced rendered, packaging, price leadership, and collusion (agreement) ext. 15, No pettect knowledge is assumed. 7. Dne producer can lower his price without affecting other rma ‘Colaied tResearched'terRamaceH Academy ——~—~S~S~S~S*«S ONT runcirus oF economies Tone 10 manxersaucrunes icing ond Output Policies 1. Uke the monopolst the monopolsticaly competitive fim can only contol price or quantity or but not both. This explains why both the AR and MR ‘curves are downward slopping- $28 figue Ia) Figwe 1(0) | bh Figure 10)- fevenve Cuvves of Monepoiticaly Compelive Fem | 2. The AR or demand curve of the monopolisiealy competitive frm fs fay ‘lastc tke figure 1(b) and not perfectly elastic Is because of the brand substtutes, Le. the various brand names for watches ike Casio, Seiko, Rolex, tc 3, However, he reason why the demand curve It only fally elatic and not perfectly elastic s because presence of brand loyalty. Despile an increase in ‘he price of the good, there will be some customers who will main loyal to the product, Le. even though the price of coke have increased substantially, they wil st be loyal Coke cinkers who wal continwe to buy. Page Boh DISADVANTAGES 6} The brand name may not be established yet. + Sica new fim, i wil have dificuty competing with other ‘established fim. + Intensive advertising would be necessary to popularize new products + 11s hoped thet the firm would be able fo soll its products ‘extensively in both domestic and Internaional markets In the future. 1) Not sited workers ‘+The workers may not be skiled due fo insufficient vocational traning However, Is hoped workers wil gain skils in the future. + Moreover, with time and greater specialization, productivity wil Increase. ‘+ This would lead fo increasing returns to scale and decreasing cost. ) Lack Research & Development (RED) + There black of R&D + With R&D, the fim wil be able fo Impreve is techniques of production and innovate its existing products. + This wit increase soles and reduce cout PERFORMANCE OF PERFECT COMPETITION ezirs |. In perfect competion, the market mechaniem brings about optimal allocation ‘of rezources in the long run. 2. The perfectly compeitive fms enjoy allocative effciency because the price ‘charged is equal fo the marginal cost of the product (see figure 8). Consumer ‘welfare is maximized. The frm practices marginal cost pricing. Coated é Researched ke Ramical Academy /INCIES OF ECONOMICS rone 9810 Manversmucrunes AllocotiveEfceney in Perfect Competion cosy sevemae _ /anbcotiveEficency (Pomc) Bui 3, I provided the largest possible degree of economic efficiency as no single fem ‘can contol price. 4. Each fim's compelted fo operate at the ‘optimum scale of production, ae Each fim is compelled fo operate atthe me optimum scale of production, ct maximum economic efficiency a where optimum is equal fo equilrivm Fi =ma=P Ota nsec figure? ‘Output 5. This b because the perfectly competitive firm. In the long run, produces a the ‘minimum point of the AC. itis also ot equillxium output. Tere is no wasteful ‘excess capacly. 5. I eliminates sales promotion effort and expenditure becaute the product Is homogenous. 7. Producers do not have fo spend money on advertising and other forms of sales ‘promotion. Producers cannot contol prices. ‘Coliaied Researched for Ramacol Academy Page Horas |. There is horaly any research and development (R&D). becouse products ore homagenous, innovation wl not moke any improvement fo the techniave of production because reduction in eae! would bring about an equivalent reduction in prices 2, This’ due fo the assumption thal enly normal pris can be earned. 3. leads fo instability of income and price. 4, Perfect competition works bes in equilbrium contions 5, If dsequifofum occurs, this wil bring about fluctuations in price and income asin the agricultural ctor. Above nomal proft obtained by monopoly firms results in other fms trying to participate in that actvily. However entry into that industry Is dificult, Explain, (20 Marks) 1) SUPERNORMAL PROFITS ~ Refer Figure 6(a) con) Supernormal Profs Figure 6(a) ‘ a ‘et ‘+ Supernormal profits also known as economic or excess profits, are ‘earned when MRIs equals MC and AR is greater than AC. + With reference to figure 6(a) - ABEF (grey area) are the profits earned 4atprice OA and equilibrium output is at 0. Paget ofa inci oF Economies rome 9410 manger seucrunes 2) NORMAL PROFITS - Refer figure 6(b) ‘Nowa Profits Figure (0) + Normal profits are earned when MR equals NC and AR equals AC. ‘+ In figure 6(b) prico is at OB and the equilibrium output is 0@. 3, SUBNORMAL PROFITS - Figure 6(¢) ‘svbnormal Profits Figure ae) ‘+ Subnormal profits of minimization of losses occur when MR equals MC and AC is greater than AR. + In this instance, the firm is earning less than normal profits, refer figure (0) ‘Coteied& Researched'erRamacol Academy ———~S~S~*« ga 4, SUPERNORMAL PROFITS UNDER CONTANTS CONDITIONS ~ Refer Figure 7(a) ow. ‘Constant Cos Condition MN + Maur 710) + Supernormal Profits under constant conditions Le. when AC equals MC ‘+ Inthis instance, MC equals MR and AR is greater than AC. 5. _ SUPERNORMAL PROFITS UNDER DECREASING COST CONDITIONS = Figure 7(o) Decreasing Cos! Conlon = Figure 70) AR is greater ‘+ Supernormal profits under decreasing cost condition, than AC and MR is equal to MC + However, AC Is greater thant MC Colaied Researched for Ramco Academy Page a0 a4 CONCLUSION 1) In both the long run and short run, the monopolistic frm will be eaming supemormal profits because there is NO COMPETITION and most importantly, because of the assumptions of balers fo enty. 2 I Important to note that the QPTIMUM POINT (minimum of AC) Ie not the ‘same asthe equilbvium point (MC equals MR) 3, The fim & producing ot @ point of excess copaciy, Le. less than optimum level. This means thal the firm is not ulliing ts rerourees to copaciy. It & diferent ftom perfect competion where the optimum & equal 10 the equitviom. It is not tive that the fem wil be eoming supemormal profis ol the time Sometimes, it could be eaming normal of even subnotma: profs, ie, i itis inatfcint 5} Another point fo note Is tht the PRICE CHARGED (AR). is greater than the MC of the product and hence there I a loss of consumer welare becaure MC biicing isnot practised in the case of monopolist BARRIERS TO ENTRY 1) This tefers fo resriction Imposed by the existing fms inthe Industy in blocking the enty of new val tems. 21 These restrictions place the entrants at a cost disadvantage (too high cos!) telative fo established fms, 31 “Cur Throat” Competition ‘+ The monopolist will undercut prices so tha the rival frm wil not be able fo compete a all ‘+ New fims cannot lower prices as it will be running ata loss 4) Eulstence of Patent and Copytight + Through legislation whereby the rlghls of the producers have to be protected, le. book publishers and record producers. ney would have The rights o produce these goods. ‘+ Infingement of the law is an offence, example like Mizrozoft and other software producers 5} Control of Marketing Channels ‘+ Ifthe monopoist controls the dlskibution agents, then the rival fms would have dificult in trying fo reach the consumers, Le. newspaper vendors ‘and reais ‘Tolaied& Researched for Ramaco# Academy Seema bnuncuss oF tconomies tone 9410 maser smucruns 6} Granting of Special cence and Franchise + Special privileges ore granted to certain fims to cany out certain ‘cts, 0.9, Bernas, in the past the Fast India Company [duting the Bish Rule} + Another example, are given exclusive legal privllege, ike some fms Io Sabah are given sole rights for deforestation. 7) Economies of Seale + For some industes, there is room forthe prodlction of one single frm ‘only. Examples: such as TNB, Telokom Malaysia. LT. + ta numberof rival frms provide these service, there will unnecessary wattage and duplication 8) High intial Cost + To set up a large fim, @ substantial amount of money is needed and not many producers or people have that kind ef money. + ificully fo borrow such large some from banks, because of high risks involved Legal Prohitition + Some counties. competion Is not allowed and this Is set by the ‘government through cerlain set of regulafon, such os Pelronas Carigat. 10] Owrership of Certain Raw Materials ‘+ The monopolist may own ail the deposits of some mineral resources or Conta! allo pat of the counity or region's mineral depos ‘+ Example such at: DeBeers of South Alica ~ ewns a large portion of diamond deposits 1ctiate Conettons + Certain climatic conitons favour certain ype of egricual products + Tfeads fo monopoitic power e9.Malaysiater palm ol and ber, Ghana for Cocoa, Motor coles 12\Governmentitevention + Marketing boat wth th help of he government, could be the sole seller of @ particular product ike FAMA (Federal Agricuitural Marketing ‘Authorty) in Malaysia ‘Tolaiedt Researched ter Ramacal Academy Page sofa imcints of tconomies toner. masxersreucrunes ©) Should firms practicing price discrimination policy be eradicated? Why? (10 Marks) PRICE DISCRIMINATION ice discrimination con be defined os c practice where the seller charges diferent trices ta diferent consumers in cifevant mavkels fr mii acne ane were examples: 1) Professional Services: such os doctors lawyers and tuto 2) Ulity Charges: the charges forthe usage of water ond eleetticty are usualy lower foresidential usage than for industrial purposes. 3} Telephone services: for trunk cols ond overseas call, rates are usially cheaper at right ‘yet of Diserimination Fist Degree Price Discrimination ‘+The individuals chorged @ higher price because of consumer sUpLS ho is wiling to poy forthe produc rather than be without it The price paid by the consumer is OD but the price which i the monopalit Cchargedis between OD and O8. Tiss cole FIRST DEGREE DISCRIMINATION 1) Second Degree Price Discrimination In terms of quantity discount, Le. diferent pices for citferent blocks, e.g. one for BM 4 tree for RM 10, itor Ramacel Academy ——~—S~SC« Sa 2) Third Degree Price Discrimination Cchezging diferent prices in different markets which con be separated siher geographically or conceptual, students vs. adulls, lamate vs. male [haircut serves] Practical Reasons 1). For he procluese. this is one way of increasing his soles to maximize hs profits. If he practices single price policy, he isnot faking advantage of the cifferent ‘lasts in diferent markets 2) ‘On humanitarian grounds, he should charge his poorer customers lower prices than those he charges hs richer customers. 3) The monopolist may have his own personal reasons for practising price

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