Market Economy Impacts and Alternatives

(a)   Is there a practical alternative to the market economy?

Yes, there is other alternative to market economy namely centrally planned market economy. Market economy refers to an economic system whereby prices and economic decisions of goods and services are guided by interaction of people and business. Demand and supply forces dictate what price an item will be sold at. The government does not intervene to regulate economic practices in such markets unless they become exploitative to consumer of goods. On contrary, centrally planned market is where government or state has control over economic decisions. In this market government regulates activities by establishing by-laws and policies to protect consumer from exploitation by sellers in market (Hulgård, 2011). Example of centrally planned market is monopoly which is characterized by fewer sellers of product. When economic decision are left to interaction of buyers and business, consumers can be over priced since there are no alternative place to get services. To avoid that, Government intervenes to regulate economic decisions by establishing ceiling prices.

(b) Explain the expected effect on price and quantity in the market owing circumstances.

 (i) When consumer incomes rise

Demand and supply forces in economy determine market equilibrium. Demand and price are inversely related such that when demand increases, price decreases. As a result of such trends, buyers and sellers need to understand underlying market trends to know when to buy and sell goods for them to get profit. For instance, when consumer incomes rise, the prices of goods may increase. High incomes result in high consumer purchasing power to buy goods at higher prices (Mankiw & Taylor, 2014). In addition, due to the increased ability to buy, the quantity demanded may increase leading to increased supplies. In the case of inferior goods, the rise in consumer incomes leads to a decline in quantity purchased. Therefore, high consumer incomes make people buy goods and services without any pinch.

Price        p2

Price             p2

 

                p1

          D1                 D2

                                                             q1             q2

Quantity demanded

Technical improvements reduce production costs. Production cost refers to total cost incurred in transforming raw material into one unit of production. Technical improvements enhance the effective and efficient use of resources. When production cost is high, prices for goods tend to increase. To create competitive advantage, managers have to establish strategies which will reduce production cost to enable them sell product at cheaper price. High production cost implies that the organization will operate under limited goods and this reduces the supply of the good in the market. As result, the company will not achieve its objective of maximizing profit.

 

 D

Price            

                  S

                   S1

                        D

 

              Q          Q1

The price of fixed-line calls falls sharply. When the price falls, the demand increases leading to a high supply of the product (Ruttan & Thirtle, 2014). For instance, low prices will make consumers to afford lines and thus make them buy more.  High demands reduce prices in the long run as almost all people will have the same device.

 

           D

    

   P1

    P2

 

        Q1  Q2

(c) Explain why the income elasticity of demand for food tends to be low in rich countries.

Income elasticity of demand refers to the degree of responsiveness for the quantity of good demanded to a specific change in real income of consumers keeping other factors constant (Friedman, 2017).  Income elasticity of demand for foods tends to be low in rich countries due to fact that developed countries have high incomes to cater for food. Necessity goods do not change with changes in incomes and thus regardless of the level of income, consumers are capable to purchase in rich countries. Developing countries are characterized by low incomes and poverty in most regions. This implies that a high proportion of income is used to purchase food. As result, increase in real income of consumer will make them buy special diets making the income elasticity to be high (Wetzstein, 2013).

Graph explaining why the income elasticity of demand for food tends to be low in rich countries.

(Source: economichelp.org, 2017)

According to Engels law, Families in poor regions tends to spend a larger percentage of income on foods compared with families in rich nations. This is because rich nations are interested in luxurious goods due to their stable incomes. Demand for superior goods is expected to have high-income elasticity in rich countries (Johnson, 2017). For instance demand for wine and spirits. Most luxurious goods are not basic since people can stay without consumption. They are used to set class and a sense of belonging to a particular group of people. For instance, low brand wines are consumed by low-income people while strong quality wines are taken by rich prestigious people. When income rises, these groups will tend to upgrade their beverage by taking the most expensive ones. Sports cars are also used for luxurious and therefore consumers will tend to purchase them depending on their level of income (Luo & Song, 2012).

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Consumer durables such as audio-visual equipment are generally purchased by high-income people. Most poor people cannot afford them and thus their demand will remain relatively low. People with huge incomes are stable and they need to actualize with life. Self-esteem is important to them and thus buying such equipment will bring contentment in their life. As result, income increase will make them consume more (Mankiw & Taylor, 2014).

 Graph illustrating Income elasticity for luxurious goods.

  (Source: Economicshelp.org, 2016)

Finally, leisure facilities will also attract high demand in rich countries. Exercising and Gym facilities will attract more demand since most rich people are associated with heavy weight and thus high need to maintain their body shape. Increased income will make the participants enjoy luxurious services more than before.

(d) What types of entry barriers do you think are important in practice?

Entry barriers refer to factors which hinder or make it difficult for small firms to enter in the market. Such barriers are ejected directly or directly. The most important barriers include:

Economies of scale:  refers to cost advantage which firm poses due to its ability to produce more goods at lower prices than competitors. This leads to fall of marginal and variable cost of producing unit of product on long run. Economies of scale are achieved when firm specialize in production of goods in which they comparable advantage over the rest firms. It can be also acquired through competent workers who embrace innovation and creativity to improve efficiencies in organization. Economies of scale make it hard for new firms to match their prices and thus eliminating small business from entering the markets (Geroski & Jacquemin, 2013).

Brand loyalty: A strong brand is a technique embraced by the most organization for marketing and competitiveness. Customers tend to purchase mostly goods which they have encountered and tasted over the past period (Ackermann, 2012). For example, Coca-Cola brand has established its royalty globally and thus dislodging such company is not easy. When brand stands to provide quality and satisfaction to customers; it’s hard for them to switch to new brands. As result, brand royalty serves as threat to new entrant business in market.

Vertical integration: This occurs when a firm has control of distribution and supply chain network. Through control, entities can set restrictive policies such as setting high prices to discouraged new entrants in the market. For example, most of Oil Company’s keeps petroleum prices very high to prevent new retailers. This high price makes retailers not to earn a profit making them quit from the market (Zhu, Wittmann & Peng, 2012). Other companies dominate by locking distribution and supply chain making it hard for new firms to get raw materials.

Existing legislation and patent rights: To restrict new entrants in the market, the government can pass restrictive, complicated and bottleneck policies which require entities to comply before commencing a transaction. This can take the form of high taxations or lengthy procedures thus discouraging new firms in the market. Patent rights are exclusive rights granted to individuals or companies to solely carry out the transaction (Aidis, Estrin & Mickiewicz, 2012). For instance, a company can be given the sole right to produce certain goods for a decade. This implies that no other firm can produce such goods even if it has the capacity to do so.

How existences of economies of scale affect the degree of competitiveness in a market?Economies of scale affect the competitiveness of business in markets. For instance, it establishes an unfair ground for competition since some entities will have a certain advantage. Cost reduction is one area where business can create competitiveness. Economies of scales allow some business to produce goods at a relatively lower cost than others thus affecting pricing decisions. This makes such firms to thrive on where other businesses are quitting (Johnson, 2017). Technological advancement is another source of economies scale. This makes firms to become innovative and creative leading to high efficiency in production. As result, it keeps certain firm to be more competitive than rest due to knowledge and competent staff.

2. Introduction of competition will stimulate firms to find ways of reducing costs and of providing a better (cheaper) service.

 Market structures refer to a total number of businesses in the market, their share and extent of competition in those businesses. Competition is a crucial aspect which cannot be overlooked in business. This is because human needs are many but resources for satisfying them are limited. As a result, firms have to compete to ensure they provide required services at certain cost. The major objective to operate a successful business is to earn a profit. In this process, resources are deployed to generate profits and thus businesses have to allocate resources strategically to ensure maximum benefits are achieved (Balassa, 2013). In some business models, competition is steep while in others, they serve as a monopoly. Monopoly markets exist where there is no competition from the outside. The business operates solely in the market and thus they can control the flow of goods and services. To prevent customer exploitation, the government has to intervene and regulate prices in monopoly markets. Monopolies are characterized by:

High barriers to entry – Most monopolies are established by the government to provide services to citizens. As result, high barriers are established to protect competition from outside business. For instance, monopolies provide electricity, gas or petroleum products. Complicated and lengthy procedures are mostly used to protect monopolies from new entrants.

Single seller – Due to high barriers, most monopolies serve as single sellers in the market. This makes them offer services without competitors. As result, monopolizes have high bargaining power since customers have no alternative rather than purchasing.

Price maker – Monopolies determine the prices of goods and services they offer. Forces of demand and supply in such markets do not affect pricing criteria. To avoid exploitation, governments have to establish ceiling and floor prices through oversight committees.

Price discrimination – Monopolies survive by establishing different market segments and allocate prices according to customer’s income behaviours. Price discriminations help to balance the gap between low and high medium income customers (Etro, 2015).

Monopoly offers poor services due to lack of competition. Introducing competition in market makes management to improve processes and operations leading to provision of better and cheap services. This entails embracing creativity to upgrade, customize and upgrade products with aim of adding extra value as well as minimizing cost of product.

As a result of high barriers to entry in monopolistic markets; many managers have taken stringent policies to exploit customers. Monopolies have been providing poor services to customers since they are the sole provider of service. This entails giving low-quality goods which do not comply with existing standards. When there is no competition in the market, entities become less aggressive in innovation and creativeness. This makes them stay in the old way of doing things which becomes boring to customers (Etro, 2015).

As technology advances, firms are obliged to take advantage of it and add value to existing products. For instance, to cut transportation cost, an entity can create an application whereby users can buy electricity by the click of buttons. Lack of competition makes such entities to stagnate and thus provide low services to customers. To eliminate this trait, the government has advocated for introducing competition in monopolies. This makes it possible for private companies to offer similar services. High competition makes firms to become innovative and creative. This is achieved by application of modern technology, recruitment of competent staff as well as understanding customer needs (Waldman & Jensen, 2016). As result, firms will try to strategize on the most effective means which will enable them to offer quality services at lower cost. Competition makes companies be responsible for their practice since a little mistake will make customers switch to competitors. Introduction of competition in markets creates substitute goods and thus customers have high bargaining power to select and purchase quality goods from competitors depending on the price charged (Waldman & Jensen, 2016).

In addition, Competition in markets ensures resources are widely available. For instance, suppliers of materials are more and substitute goods are more. This enables customers to have voice pertaining to services they receive from sellers thus determining which business to succeed and which to fail. In environment of competitions, firms with poor and low quality goods are eliminated while with quality products thrive competition. Most monopolies also have poor customer care service. Since customers don’t have alternative place to get services, they have to comply with such poor customer relations. Introducing competition opens platform where customers becomes sovereign and thus business have to listen to their grievances and respond effectively. Good customer experience establishes interactive platform where customers can express their complains and what needs to be improved in certain product (Etro, 2015). Through that, businesses are able to improve product value leading to better services which are affordable to customers.

 Introducing competition in monopolies helps to reduce cost. Monopolies set prices depending on goals and objectives to be achieved. This implies that when high profits are expected, they tend to set high prices. Customers are exploited in between since there is no alternative place to get the same services. Introducing competition in markets enables customers to benchmark against other business and thus enabling them to make a wise decision. Competition makes the organization to standardize prices in order to remain in the market. For example, when a competitor is selling the product at $4, to win customer you can sell it at $ 3.7. Price reduction helps to reduce overall cost thus making customers afford goods sold at the marketplace (Czarnitzki, Etro & Kraft, 2014). In addition, the government has to reduce taxes for firms to compete adequately. Low taxes help to reduce production and operational cost and thus enabling the business to set low prices to goods and services. In addition, competition will help management to embrace technical improvements and efficiency to enable them to produce goods and services at lower cost. This in the long run will make customers purchase goods and services which are convenient, quality and affordable rates by comparing prices from one company to another.

In conclusion, competition is crucial in the market since it makes business leaders be more innovative, creative and responsible for the daily transaction. Creativity and innovation improve efficiencies and thus leading to a reduction in production cost. As result, firms are able to offer quality services to customers at affordable prices.

References

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