Market Structure
In simple terms, market structure refers to the classification of the various types of markets, based on their unique features on how they allocate prices of a given product in the market. The aspect is primarily classified into two, which include perfect and imperfect market.
Oligopoly
Refers to a type of market structure where there are few sellers in a given economy with many buyers for the commodity. With oligopoly, the sellers have an influence on the commodity price in the market and can significantly affect competition. An example of a company to indicate the above case is the mobile telephony in Kenya that has few operators and includes Safaricom, Orange, and Airtel.
Perfect competition
The above market structure does not exist in real life situation and is hypothetical hence it is used for comparison purposes. Some of the characteristics that indicate the above market structure include free entry and exit, many buyers and sellers, the sale of similar products and perfect flow of information on market trend (Kim, 2015). An example of a market that indicates the above type of market includes the fish market where sellers have similar products to offer to their esteemed consumers.
Monopoly
This includes a market that is often dominated by a single seller who has control over price and supply of the commodity into the market (Feenstra, 2016). The above market structure is further characterized by barriers to entry and exit due to the high cost of starting the business. For example, Kenya power is the sole distributor of electricity in Kenya and is notorious as it has no competitors in the market to make it lower its prices in the market.
Monopolistic Competition
The above type of market structure merges the characteristics of both perfect competition and monopolists. This can be evidenced by the existence of many buyers and sellers, no barriers to entry and exist, and sellers have no control over the price of the commodities (Feenstra, 2016). An example in place to illustrate the above type of market structure includes companies involved in the sale of soft drinks. Many companies are involved in the above type of business, and each has its differentiated products with close substitutes in the market.
Opportunity cost
The concept refers to the value of a foregone alternative when another aspect is chosen instead. An Opportunity cost applies in real life situations especially in cases that involve tradeoff amid two or more options. The cost is economically expressed as the relative costs of chosen alternative over another in decision making, which is often referred as the next-best alternative (Levinthal & Wu, 2010). The concept as aforementioned mostly applies in making business decisions and most scholars consider it as overlooked costs in most cases. For example, a student who goes to college for four years will define the cost of college education by including the tuition fee, books, and accommodation. However, if the same person could not have gone to school, he/she could be somewhere working and would earn wages during the four-year period. Moreover, the person would have obtained job experience of four years or engaged in other activities that he/she omitted so as to commit his/her time to studies. The concept (opportunity cost) plays a significant role in any economy as evaluation of the same helps in the optimal utilization of scarce resources. Managers have to evaluate production possibility based on the number of existing alternatives with consideration of the required capital and relative benefits among other aspects.
Equilibrium
Equilibrium is a Latin word meaning the state of balance, and it is applied in economics to express a state when the level of demand is equal to supply. The point indicates optimal allocation of resources as there is no waste in such a case as some goods demanded equals that supplied. At the above level, everyone (suppliers and consumers) is satisfied and can maximize their utility based on the fact that they do not compromise others (Truong & Luc, 2015).
Figure1: Copyright 2003 by Reem Heakal
As evidenced by the above chart, the equilibrium state is achieved at the intersection of supply and demand which is point Q*. At the above point, there is no inefficient allocation of resources and equilibrium of both price and quantity of goods is achieved. For example, assuming that a bread vendor supplies a market with fifteen loaves of bread in a day, and only fifteen customers can purchase the loaves on that particular day. Fifteen will, therefore, be the optimal quantity as there was no extra supply to the market, neither was the supply insufficient. The concept is applied in business and other areas of life in effective planning on quantity to produce based on market demand.
Externalities
Externalities are also known as spillovers and indicate the different benefits or costs of a given product that influence people in the external market of the product, otherwise known as third parties. Concerning a positive externality, the particular product or activity has a beneficial impact on the other people, otherwise referred to as a social benefit to third parties (Adler & Volta, 2016). For example, an individual who decides to walk to work helps reduce pollution and traffic congestion in the towns, an aspect that benefits others in the town. Another example of positive externality applies in case a person digs a borehole that serves many people in the community other than his/her family. With positive externality, the social benefit realized from an activity is more than private interest, therefore, impacting well to the community.
Figure 2: EconomicsHelp (2015). Positive Externalities
The above diagram indicates an example of positive externality in society, where Q1 represent consumption rate in a free market at the point of equilibrium where DD=SS. However, because there is a positive externality in such a society, the consumption rate is considered as inefficient as the social cost is less than the social benefit indicating under consumption. For the community to achieve efficiency in consumption, they ought to consume at Q2 where the social cost equals social benefit impacted by externality. Other forms of positive externality in a society include provision of public goods such as roads and gardens (Adler & Volta, 2016).
In most projects, externalities are referred to as market failures in an economy and an example of a negative externality include the extended costs that consumers have to pay for consuming a particular product. For example, if a person consumes a lot of fast food with an intention of getting full but in the end gets sick, the negative impact of the product is thus referred as a negative externality. Another example of negative externality is the pollution that is experienced from a factory located in an area resulting to health hazards and other complications.
Climate Change
Climate is defined as the average weather patterns in a given place and it plays a significant role in influencing economies and culture of people in any given society. Various research studies have proofed that climate change is occurring, and humans play a major role in contributing to the same. Some of the attributes that are renowned to contribute to climate change include greenhouse gas emissions that lead to global warming. In the recent past, scientists have proofed cases of climate change which has been confirmed by increased cases of global warming and change in rainfall pattern in different parts of the world. An example of an occurrence that explains climate change in our society is the increased temperatures from 2000-2010, a decade that is understand to have experienced the highest temperatures over the past 2000 years (Mishra, 2016). Climate change has many consequences on the natural ecosystem which include rise in sea level, melting snows, and drought encroachment among other impacts. It is worth appreciating that individuals in every society should understand the adverse effects of climate change and how the same can be managed over time.
Price elasticity
It is a measure that indicates existing relation amid a change in the quantity of goods demanded in a particular market with response to price change. The concept (Price elasticity) is obtained by dividing the percentage change in the amount of goods required in the market over the percentage change in price. In case of a small change in price that is followed by a large change in the quantity of goods demanded, the product is thus said to be elastic (Gordon et al., 2013). Example of such products includes petrol or other expensive products which are not simple to come across. However, for the case of products that experience huge price change but a small change in quantity demanded, the situation is referred to as inelastic. The concept of price elasticity is applicable in the real life situation especially in the field of commerce. It helps in effective decision making in organizations while analyzing different economic problems hence it is an important managerial tool. The concept is usually used in making pricing decisions and in the formulation of various government policies as will be stipulated for example when planning taxes. For example, while taxing, products with elastic demand will attract less tax as high taxes will lead to reduced revenue for the government. However, products with inelastic demand such as vehicles attract high taxes. Therefore, every government has to take account of the nature of price elasticity demand before they actually implement any price control regulation.
Demand
The law of demand holds that when all other things are held constant, the higher the price of a commodity, it will attract less demand in the market and the inverse is true. With increase in price, people will tend to purchase substitute products instead (McShane & American Enterprise Institute for
Figure 3: Demand Curve. Copyright 2003 by Reem Heakal
Assuming that all things are kept constant, and the market equilibrium price is held at Q2, and the price at P2, with an increase in price, the quantity of goods purchased will decrease to Q1. However, with a reduction in price to P3, the amount of goods purchased will increase to Q3. Therefore, it is evident that price and amount of goods purchased express an inverse relation whatsoever. However, different aspects influence the price of a commodity which includes the cost of a substitute product, the income level of the consumers, expectations among others. For example, users of Apple products will continue purchasing the products at a higher price because of their unique features in the market.
Gross Domestic Product (GDP)
GDP is a simple term that represents the monetary value of all merchandise produced within a given country generally within a year period. The concept incorporates consumption, total investments and value of exports fewer imports. The concept plays a significant role as it is a real indicator of the health status of a country’s economy. Its value can be obtained by either using income or the expenditure approach as may be required (Pesliakaitė, 2015). High GDP signals well-being of a country’s economic development and upward or downward movement of the concept has a significant impact on people. For example, countries with low GDP means low unemployment levels for the people and reduced living standards. The concept is applicable in real situations as people use it to decide on whether to invest in a given country or not. There are various reasons why GDP matters in any society as will be mentioned shortly. As aforementioned, it is an indicator of the economic well-being of any country and growing GDP indicates an improvement of a given economy. The above situation is confirmed by increased productivity, less unemployment and increased income for the people. The concept helps stakeholders understand if a country is likely to experience recession of expansion or in the future.
Short run and long run cost curve
Short-run, as will be used in the above study, indicates a period when a firm can vary the different factors of production which include labor and raw materials. During this time, only variable factors can be changed while others remain fixed such as land, capital, and production equipment. A firm that wants to increase or decrease production during this period will, therefore, alter the variable factors only. Therefore, during the above period, only the costs of the variable factors can be varied while others remain constant.
Short-run cost curves (SAC) are applicable in the daily production activities of firms as it helps in the effective adjustment of company’s output concerning demand (Dressler, 2016). However, with a change in the level of production, it leads to a change in the scale of production, a feature that leads to drawing of different SAC as illustrated in the diagram below.
Figure 4: Short-run cost curve. Copyright 2014 by Seth Tushar
However, in the long-run, all factors of production can be varied, and no aspect is held constant. Firms that wish to enhance production will thus increase the size of the company or invest more on other factors such as land and production equipment. It, therefore, means that all costs of production can be varied in the above stage of production in the different companies. With long-run average cost (LAC), it indicates a combination of different SAC indicating the varied scales of operation and every firm will seek to produce at the lowest cost possible (Dressler, 2016). The two curves (short-run and long-run), helps companies understand the point of production when they will experience the lowest production cost.
Figure 5: Long-run cost curve. Copyright 2014 by Seth Tushar
Inflation
The concept can be defined in simple as a consistent rise in the price of goods in a given market that significantly decreases the purchasing power of people. Different theories are used to explain the concept which includes the demand-pull theory that states that with an increase in price, demand is likely to exceed supply leading to inflation (Özkan &Yazgan, 2015). The second theory that explains the above concept is the cost-push theory that asserts that companies can create inflation by creating an intentional shortage in supply and increasing prices of their merchandise so as to cause inflation. An example of the above situation is typical in oil companies as the cartels often create a shortage to cause inflation in a country as one way to realize more profit. Inflation matter in the development of any economy in different ways as it influences the various financial decisions made in any economy. Some of the significant areas that are affected by inflation in any economy include corporate performance, security analysis and application of the monetary policy to manage the situation. The 2008 great recession is an example of inflation experience that was experienced after the burst of the Unites States’ housing but later spread to different parts of the world.
Business cycle
The concept refers to the consistent fluctuations in growth, production levels, and varied economic activities in a given country. Business cycle reflects the upward and downward movement of a country’s GDP, which indicates the period of expansion and recession in any country. The concept is defined by four major phases which include the following;
Recession – during the above period, there is reduced economic activities in a country which are evidenced by decreased sales, purchases, production and increased cases of unemployment. It is the worst period for everyone (both business parties and their customers) and in the event of the worst case; it is referred to as depression, for example, the one that was experienced in the U.S in 1930 (Romer, 1993).
Recovery – this is the recovery stage in the business cycle, and it indicates the recovery of the industry to better financial footing.
Growth – during the above stage of the business cycle, companies experienced significant growth and is characterized by enhanced consumer confidence and better economic performance and the economy operates almost at full capacity.
Decline – during the above phase; the economy starts experiencing a contraction, and this include creased productivity in businesses and low purchase of the business merchandise.
The above concept has a significant role in the determination of growth prospects of an economy as it helps analysts to identify the different factors that influence economic growth in a given country. With adequate understanding of the above concepts, companies, and various governments can devise effective measures to help guide their respective businesses or governments from periods of recession or depression.
Figure 6: Business cycle. Copyright 2006 by Schmidt Marty
Different forms of trade
Trade is the exchange of commodities among various groups of people with a common medium of exchange. The purpose of trade is to help move goods from the producers to the final consumers through wholesalers or retailers (Bramati et al., 2015). The concept plays a significant role in any society as it helps meet the incessant demands of people in the community. Furthermore, the idea helps enhance the standard of living of people in any society whatsoever. The two common forms of trade include domestic which is often conducted within national boundaries of a country, and international trade operates beyond the borders of a country. However, for the case of internal trade, it can be conducted on a national scale of regionalized within specific regions of a country. For example, if a firm produces loaves in a state which are only sold in a given town only, then that is a domestic form of trade.
Foreign trade otherwise referred to as international trade involves trading activities between different countries, a constant that has gained popularity with globalization. For example, Apple is US based company that participates in the sale of smartphones in various parts of the world. The above type of trade is thus regarded as international trade as the movement of goods is not restricted within boundaries of a given country (Barot, 2015).
Government tax
This refers to the amount of cash deducted from a person’s taxable income as government revenue used in facilitating the different government expenditure attributes. Various governments across the world use taxation as a means of encouraging or discouraging certain behaviors in an economy (Felis, 2014). The concept can thus be defined as the approach used by governments to extract money from its citizens or corporations to help finance government projects. Different countries use varied methods in assessing taxes for example, in China, the government used to impose taxes as a percentage unit of grain produced. Governments have a role to play which is to protect people and their wealth, a condition that they can achieve through meeting their expenses. However, for them to respond their expenses, they need to generate revenue which is obtained through taxation of people and different corporates in a given country. For example, the Federal Government facilitates various projects such as the Medicare plan and other education programs which are facilitated from the revenue collected from taxes.
Circular Model
Circular model is a simple concept in economics that helps indicate the functioning of an economy. The concept helps describe how resources, money and market merchandise flows in a particular economy for it to survive as the movement plays an essential role. Stagnation in any part of the model; for example, if people stop spending on the particular goods due to lack of money, it will lead to stagnation of the flow which has adverse effects on an economy. Two of the major characters that influence the operation of the model include households and firms and both plays varied roles in an economy (George et al., 2016).
Households in the models represent consumers who purchase the different goods or services offered by the firms in an economy. The household plays a significant role as they influence the productivity of the firms, and are mandated with a role of meeting the consumer demand in the market. Households can offer inputs, labor or even monetary gains to facilitate companies in the production process. On the other hand, the firms have a role to play in meeting the demand level of the market through efficient production of goods. For example, for a circular flow model to be complete, the household provides firms with the different factors of production and capital while the company offers consumers with goods. In return, the company generates revenue through the income it obtains from the individual consumers of the products in the market.
Figure 7: Circular model. Copyright 2010 by Buck John
Consumption
It is a thought in economics and plays a significant role in an economy as it helps identify the growth rate and success of an economy+. Through consumption, producing companies can upsurge their production to cater for market demand. Although the concept has attracted diverse definition from different scholars, it indicates the extent of purchase that is experienced in a given market. In economics, the concept is used to determine the extent of economic growth that is encountered in a particular country by evaluating consumer behavior in the market. Different theories seek to explain the concept in the market setting and include the Keynesian theory (Robert, 2007). The scholar argues that the current real income is the most influential aspect that affects consumption level in the short run. In a nutshell, the theory holds that people spend based on the amount of their income, a basis that is echoed by different studies. Consumption level of an individual is however influenced by various factors such as the inflation rate, taxes, extent of saving and consumer confidence of an individual.
The concept of consumption applies in both microeconomics and macroeconomics for two main reasons as will be explained shortly. Aggregate consumption has a significant influence on the extent of saving in an economy which feeds the financial system. Moreover, the concept takes the largest share of GDP of any single country, an aspect that makes policy makers to make an informed decision on the size of their government expenditure to enhance economic development.
References
Adler, N., & Volta, N. (2016). Accounting for externalities and disposability: A directional economic environmental distance function. European Journal of Operational Research, 250(1), 314-327.
Barot, G. C. (2015). Fundamental Concept of International Trade. CLEAR International Journal of Research In Management, Sciences & Technology, 5(10), 1-5.
Bramati, M., Gaggero, A., & Solomon, E. (2015). International Trade and Domestic Competition: Evidence from Belgium. Review of Industrial Organization, 46(4), 383-399.
Buck, J. (2010). Economic perspectives. Retrieved June 4, 2016, from http://econperspectives.blogspot.co.ke/2008/04/circular-flow-diagram.html
EconomicsHelp (2015. Positive Externalities. Retrieved June 4, 2016, from http://www.economicshelp.org/micro-economic-essays/marketfailure/positive-externality/
Dressler, S. (2016). A long-run, short-run, and politico-economic analysis of the welfare costs of inflation. Journal of Macroeconomics, 47(Part B), 255-269.
Feenstra, R. C. (2016). Gains from Trade under Monopolistic Competition. Pacific Economic Review, 21(1), 35-44.
Felis, P. (2014). Theoretical Concepts of Property Tax, an Essential Source of Local Government Revenue in Europe. Management Theory & Studies for Rural Business & Infrastructure Development, 36(4), 802-809.
George, D. A., Lin, B. C., & Chen, Y. (2015). A circular economy model of economic growth. Environmental Modeling and Software, 60.
Gordon, B. R., Goldfarb, A., & Yang, L. (2013). Does Price Elasticity Vary with Economic Growth? A Cross-Category Analysis. Journal of Marketing Research (JMR), 50(1), 4-23.
Heakal, B (2003). Economics basics: Supply and demand. Retrieved from http://www.investopedia.com/university/economics/economics3.asp
Kare, M., &Stjepanović, S. (2016). Measuring Business Cycles: A Review. Contemporary Economics, 10(1), 83-94.
Kim, W. (2015).Reference quality-based competitive market structure for innovation driven markets. International Journal of Research in Marketing, 32(Marketing & Innovation), 284-296.
Levinthal, D. A., & Wu, B. (2010). Opportunity costs and non-scale free capabilities: profit maximization, corporate scope, and profit margins. Strategic Management Journal, 31(7), 780-801.
McShane, M. Q., & American Enterprise Institute for Public Policy, R. (2015).Balancing the Equation.Supply and Demand in Tomorrow's School Choice Marketplaces. American Enterprise Institute for Public Policy Research.
Mishra, K. (2016). The Devolution of Organizational Climate Change Responses: A Case Study of Australian Electricity Sector. Amity Global Business Review, 1140-53.
Özkan, H., &Yazgan, M. (2015). Is forecasting inflation easier under inflation targeting?. Empirical Economics, 48(2), 609-626.
Pesliakaitė, J. (2015). The Impact of GDP Structure on the Stability of Okun's Law In Lithuania. Monetary Studies (Bank of Lithuania), 19(2), 88-94
Robert Alphonso Taft, (2007). Food prices, production and consumption. 77p.
Romer, C. D. (1993). The nation in depression. The Journal of Economic Perspectives, 7(2), 19-39.
Seth, T. (2014). Significance of short-run and long-run cost curves in economics. Retrieved June 4, 2016, from Cost Curves, http://www.economicsdiscussion.net/cost-curves/significance-of-short-run-and-long-run-cost-curves-in-economics/1623
Schmidt, M. (2016). What is the business cyhcle? Retrieved June 4, 2016, from https://www.business-case-analysis.com/business-cycle.html
Truong, T., & Luc, D. (2015). Equilibrium in multi-criteria supply and demand networks with capacity constraints. Mathematical Methods of Operations Research, 81(1), 83-107.
