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17 Nov

Posted at 14:05h in Uncategorized by

Just like firms in any other market structure, the oligopolist produces at quantity where MR=MC to maximise profits. But, the MR curve corresponding to the kinked demand curve is discontinuous at output OQ1 and this discontinuity is represented by the vertical gap. Consequently, there is no single point of intersection between the MR and MC curves. This means that an oligopoly’s costs must change considerably before it is forced to alter its output or price i.e. producers will remain status quo if costs vary between MC1 and  MC3. Thus, if the initial marginal cost curve is assumed to be at MC1, then a rise in costs to MC2 or even MC3 would result in no change in price and output i.e. prices remain rigid.

Limitations

The kinked demand model has its limitations though. Price rigidity may also be due to other factors, besides the explanation provided by the model. The kinked demand curve helps to explain why oligopoly prices are stable even without collusion among firms. But, it does not explain how the existing price OP1 is arrived at. However, price increases do occur as they did during the inflationary periods of 1970s and early 1980s in the advanced economies. Similarly, the retail petrol stations have recently been hiking pump prices in response to escalating oil prices.

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17 Nov

Posted at 13:54h in Uncategorized by

PES measures the degree of responsiveness of the quantity supplied for a good to a change in the price of the good itself, ceteris paribus

PES for manufactured goods such as computers, clothing and books is generally higher than price elasticity of supply for agricultural goods such as grains, corn and cotton, due to:

Availability of Stock

Firms with larger availability of stocks are more able to respond to price changes. Hence, supply of durable goods such as computers, clothing and books is more price elastic than the supply of perishable goods. This is because perishable goods (e.g. agricultural goods) cannot be stored for long periods of time. Given an increase in price of vegetables, producers cannot increase the quantity of vegetables supplied to the markets easily as they are unable to draw from their stocks / inventories.

The larger the availability of stocks, the larger the increase in quantity supplied that firms will be able to bring into the market, accounting for the larger PES value.

Time Period

Firms can better respond to price changes by altering their quantity supplied if a longer time period was allowed.

e.g. agricultural goods have long gestation period –> producers have lesser ability to respond quickly to price changes.

 

Existence of Spare Capacity

Firms may have the capacity to increase production when existing capacity is not fully utilised.

Should the firms be already operating close to full capacity, it will be difficult for them to increase quantity supplied in response to a price rise. Therefore, the greater the spare capacity, the higher is the PES and the more price elastic the supply.

 

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12 Nov

Posted at 21:45h in Uncategorized by

A private good is one that has the characteristics of both rivalry and excludability. Since it is rival, the consumption by one would deprive the consumption by another. For instance, when a vacancy in the school is filled up, there is one place less for potential applicants, as the same place cannot be offered to someone else. Moreover, since the good is excludable, it is not prohibitively costly to confine the benefits to a selected group of people. Using the same example, a person who is not willing to pay or who does not meet the minimum grade requirement can easily be excluded from attending the school.

On the other hand, a public good is one that has the characteristics of non-rivalry and non-excludability. Examples of such goods are national defence and flood control. Non-rivalry in consumption means the consumption by one person need not diminish the quantity consumed by anyone else given the level of production. Consider the example of national defence, once an armed force is built, the same amount of protection to the citizens will not be reduced when there are new citizens. Non-excludability means it is impossible, or prohibitively costly to confine the benefits of the good once produced to selected persons. Using the same example, it is not possible to confine the benefits of protection from missile attack from people living even within miles away.

A private good is different from a public good based on the rivalry and excludability in consumption. As a public good is non-rival, this implies that marginal cost of serving an additional user is zero. The non-excludability of public good implies that free-rider problem will arise. Thus, a public good must be provided by the government. However, a private good can be provided by private enterprises as well as the government.

12 Nov

Posted at 21:29h in Uncategorized by

A private good fulfills the characteristics of rivalry and excludability. Rivalry in consumption means that consumption of a good by an individual will reduce the availability and the amount for consumption by other individuals. Excludability in consumption means that consumption of a good can be excluded if the individual does not pay.

An example of a private good is a can of drink. If a can of drink is consumed by one, someone else is deprived of the same can of drink and will not be able to quench his thirst. This shows that the consumption of the can of drink is rival. At the same time, the can of drink is excludable. This means that consumers who do not pay for the can of drink will not be able to enjoy it. In reality, there are countless examples of private goods and services such as computers, cars, food & beverages, haircutting services and tour services.

12 Nov

Posted at 21:23h in Uncategorized by

Why is economic growth important to an economy?

The greatest benefit of economic growth is a rise in the living standards. This is provided economic growth exceeds population growth, real GDP per capita will rise  a higher level of consumption of goods and services.

Rapid economic growth rate makes it easier to redistribute income to the poor (lower income group). When there is economic growth  income rises, the government can redistribute income from the upper income group to the lower income group without the need to raise tax rates, i.e. without penalising the
high income earners  the rich pays more taxes. In addition, economic growth  firms’ profit level rises  pays more corporate tax  a positive effect on government finances  boosting tax revenues and providing the government with extra funds to spent on programmes to alleviate poverty and close the income gap between the rich and poor.

 

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