Perfect Competition

Assumptions of Perfect Competition

The most competitive market structure is pure or perfect competition, which is as competitive as possible.  As previously mentioned, market structures are models that summarize how certain markets are organized and behave.  For each market structure we have a set of assumptions or characteristics that tell us what kind of industries the model will explain.  Only industries that meet the assumptions will behave in the way the model predicts.  The assumptions of perfect competition are:

Many buyers and sellers:  There are so many buyers and sellers in perfect competition that no one of them has any influence whatsoever on the market.  The number of consumers and producers is so great that any one of them is like a cup of water in the ocean – their presence or absence makes no difference at all to the market.

Identical or homogenous product:  Every producer in the market makes exactly the same product – consumers are not able to distinguish between the output of one firm and the output of another.  There are no labels, brands or any other distinguishing features used to make a product look distinct.

Excellent information:  Both buyers and sellers in this market have good information about the product, especially the fact that there are many other producers all making the same product.

Relatively free entry and exit:  Firms are able to move resources in and out of this market relatively easily with little expense.  This makes firms especially quick to respond to changing consumer demand.

As you would expect from this list, there are few markets that come close to fitting these assumptions.  The most common example used for perfect competition is agriculture.  While agriculture does not fit these assumptions perfectly, it comes closer to perfect competition than to any other market structure. 

In the major commodity markets, there are so many producers that any one producer has no effect on the market.  If you are one producer of hard red winter wheat out of thousands, it does not affect market supply or price if you produce more or less this year.  You are so insignificant to the market that you cannot even set your own price, but have the price set for you in the market – perfectly competitive firms are price takers, their only choice is to take the market price and sell, or leave it and sell nothing.

In the major commodity markets the product is identical from producer to producer – there is no difference in the hard red winter wheat of Farmer Smith in Nebraska and Farmer Jones in South Dakota.  If consumers were presented with a bucket of each, they could not tell any difference.

In the major commodity markets, all the buyers know that the product is identical, they know what current prices are, and they know how to grade the product.  If the going price of hard red winter wheat were $3 a bushel, a farmer who tried to set his/her price at $3.01 a bushel would sell no wheat.  All the buyers know they can get all the wheat they want at $3.  Producers have no power over the market price.

In the major commodity markets there is relatively free entry and exit, stress on the word relatively.  While it is expensive to enter and exit farming in general, it is relatively inexpensive to move from one agricultural market to another related one.  For example, areas suitable to growing corn are generally also very suitable to grow soybeans.  Similar equipment is used to plant, cultivate and harvest corn and soybeans.  If corn prices have been low, corn farmers could easily switch to growing soybeans the next year.

In recent years we have seen a growing deviation from the perfect competition pattern in agriculture in that the buyers of agricultural crops are consolidating in some markets.  For example, there are a limited number of meat processors that handle pork and poultry reducing the competition on the buying side of the market.  In time, we may have to adjust our interpretation of at least some of the agricultural markets, but for the moment the best fit still appears to be perfect competition.

In general, the pattern for this market is a very large number of small powerless producers making absolutely the same product in a market where they have no influence on price.  Competition is so great that individual firms have no alternative but to operate efficiently in order to survive.  

Monopoly

Monopoly 

At&t is a telecommunication company proven to monopolize the western countries. They are strong because they are enforced by the government. However, they have many competitors such as T-Mobile which they accused of increasing competition or in other words; Barriers to Entry. Deutsch Telekom sold off T-Mobile which is because they did not have many spectrum to meet demand. The company was sold to At&t at a price of $39 billion for the fourth largest telecommunication company in United States. They bought the company to expand their cell towers to support the 4G LTE network. This shows that At&t have market power. 

Microsoft operation have been seen through the whole world as the biggest software monopoly. They used tactics such as vendor-lock in, hostile take overs and FUD (Fear, Uncertainty and Doubt) to suffocate their competitors. However hardware vendors such as Dell, HP, Toshiba and Asus does not put their products to the market unless the Microsoft software is pre-installed. This situation is related to a term in economy which is collusion.

The myth of Natural Monopoly 

It's been said that natural monopolies are utilities that have been granted government franchise. 

"Put simply, a natural monopoly is said to occur when production technology, such as relatively high fixed costs, causes long-run average total costs to decline as output expands. In such industries, the theory goes, a single producer will eventually be able to produce at a lower cost than any two other producers, thereby creating a "natural" monopoly. Higher prices will result if more than one producer supplies the market."


Furthermore, competitions or competitors will cause inconvenience to the society. For example if the other company wants to do a same project on the same place with the government franchise, it will create duplication and confusion for the society. Thus creating impossibility for competitors to trade their companies in the market and compete with the "natural monopolies"


Monopoly can be referred to this graph

Why is the Supply and Demand of the Apple App Store is always fluctuating?

             

           As we all noticed, almost everyone wants an iPhone, iPad, MacBooks and so much more from 

the most popular machinery in the world that is Apple. These desires to have an Apple product has 

increased over the years and it began to be a trend of owning an Apple product. In the first 2 weeks of 

the new iPhone 5 launched in Singapore, it has been sold out. Thus, this shows us that the demand of 

this product is very high. So, what happens when there are a lot of people owning an Apple product but 

there isn’t enough application to satisfy each and every of them?

The Apple team has produced a marketplace called the App Store, this App Store provides the customer with interesting application that can be used in the phone. These applications consists of organizers, diaries and so many other useful stuff. With so many people in the world is in possession of the Apple products, there are not much choice in the app store. This is why there is a lot of complains saying that the App Store is expensive.

Consequently, the supply of the applications is low and the demand is high. Therefore, the Law of Demand can support this statement. The Law of Demand states that when the price of the product increases the quantity demanded will eventually decrease, an inverse relationship. Ergo, the demand of the App Store has decreases.

As the decreasing rate escalates over time, the applications in the App Store are growing. These applications gets more and more to supply millions of people, because of this the competition between the applications will drive the price down. The reasons given in the article is one of the causes of why the prices and the demands of the Apple App Store is always high at first and goes down later.

Even so, Apple had faced some difficulties during early August as their sales were dropping. This was what worried Steve Jobs. In addition to that Mr Jobs tries to segment the market properly according to the big consumers and so on. By doing so, Mr Jobs did a promotion that is called "Holiday  Sales". Unfortunately, he failed to segment the market properly. Thereby, the steps to price discrimination had failed. 

Steve Jobs evidently decreases the price of the Apple Product to attract more customers as shown in the graph.

The fluctuating of the App store.

Eurozone economy at risk

            

The euro-zone; is officially known as the Euro area, is an economic union of 17 countries. The 17 countries use the euro as their currency. Over 3 years, the euro area has faced a downfall in the economy. Although once the Euro area is one of the leading countries in the world, but they are now facing difficulties. China has now beaten them as the most economically stable.

In the current situation, the euro area is facing a terrible unemployment rate. The unemployment rate is holding a record for the worst in the euro area history. The graph below shows the heightened rate of the unemployment;

The unemployment of these 17 nations has increased 11.3% in July according to the European union's statistics. The trouble does not end there for the Eurozone, there are more mess occurred that is the Inflation rate is also escalating. Inflation, a persistent fall of value of the currency and a rise in the price level had set the eurozone into a crazy frenzy. The inflation is mostly driven by energy and food prices. With the unemployment rate increasing, the inflation rate is also increasing! This situation is known as Stagflation. Stagflation is rising the prices of goods while unemployment is prevailing and this will cause the national income of the country to be stagnant. 

               Europe's biggest engineering company SIE has made a decision to cut 500 job cuts ending of August. The Chief Executive Officer Peter Loescher is lowing the profit target. The stagflation of the eurozone had made so many losses over the years that the Europeans are having a lot of debts.  The unemployment in this situation is called the structural unemployment. This is because Cyclical unemployment are demand deficient unemployment. It is affected by the economy recession and the deficiency of demand. The Euro area is trying their best to prepare themselves for the worst and also trying to work as a team to solve this problem. There are some issues about Greece circulating that the country owes so much money that it probably will be kicked out of the country. I wish for the best in their countries and for my country too. 

               

        

Market Equilibrium

MARKET EQUILIBRIUM

What is Market Equilibrium ?

 QS=QD, is a situation in which the current market price, quantity supplied equals quantity demanded.

there is no likelihood that the price will increase or decrease when the market reaches its equilibrium. 

There are 4 things you have to know about Market Equilibrium : 

1. Equilibrium price and quantity

2. Shortage

When a market receives excess demand it will experience shortage. Excess demand is when the consumers are demanding more than the producers are willing to produce. To avoid this situation, an increase in the price will put an end to the shortage as it will reach an equilibrium in the market. 

3. Surplus

Surplus happens when the market produces more than the consumers are willing to buy. To avoid this situation, a decrease in price is the only way to sell the excess products. 

4. Government Intervention and price regulation :

a. Price Ceiling : a law imposed by the government that makes it illegal to charge the price higher       than  the price they imposed. Price ceiling are set below equilibrium price.

b. Price floor : a law imposed by the government that makes it illegal to sell a product lower than the price imposed. Price floor are set below the equilibrium price. 

Now that you are briefed about the Market Equilibrium, I will apply these 4 situation to an article about an Oil Market using my own opinion. 

"Oil Market is fragile, says think tank" is an article that i have found on the internet about oil markets in the world which is suffering from lack of equilibrium in the market.

The article states :

"European demand is dead and flat and will remain so for some time," Drollas said. At current growth forecasts for Europe of roughly around 1 percent oil demand in the region was likely to remain feeble. 

From what I have read from the web, European countries are trying to lessen their usage of oil by using alternative ways. This will result in low of demand from European countries which will affect the equilibrium of the oil market. Surplus will eventually happen to the European countries. 

On China, Drollas cautioned against misinterpreting Chinese oil imports. "At this moment, it is not clear how much of the oil bought by China is going into stocks and filling up new facilities," including new pipeline networks and refining capacity. "China buying more oil is not the same as China consuming more oil."

This situation is well applied to the concept of shortage whereby the market produces less than the consumer's intake. 

Crude oil prices rose to more than $78 per barrel in New York Tuesday in anticipation of a weekly U.S. inventory report.

New York is facing a situation in what we called increase in the price according to the economics definition. Why is New York facing this situation? Because the supply of oil in New York are facing shortage and to make the market stable, they increase the price. 

"With no widely available alternative, consumers in the transport sector are willing to pay far higher fuel prices than their counterparts in the static sectors, helping to maintain the price of oil," CGES said

In my opinion, Government should implore a price ceiling for this situation because some people with low income could not afford what other people could afford. 

Written by, Namira