E-Book: Success in Microeconomics - A Concise Companion to Core Concepts

Hi my dear readers, 

Hope my post finds you well. Kindly allow me to introduce "Success in Microeconomics - A Concise Companion to Core Concepts", a useful resource I have written that explains core theories and concepts in microeconomics in a clear-cut, simple manner, that is easy to master and effective in addressing a variety of microeconomic issues and questions.

In other words, I introduce my effective, simple, powerful guide to Microeconomics, to assist you in your journey towards success in economics. 

As I said in my previous post here on this site, many economics students want high quality economics notes and explanations in key arguments or main points, rather than long verbose academic explanations, with running pages of yet more masses of information, additional case studies, and many more pages of academic appendices and annexes.

In fact, many lecture notes write a mass of academic information rather than focusing on the important theories and concepts needed for educational success - and depth of understanding in economics is as important as breadth, if not more important in examinations.

What would be a useful and relevant economics guide, that had important theories and useful concepts in the subject?

That provision of a useful and relevant economics guide was the fundamental basis of Success in Macroeconomics (kindly see my previous post on Macroeconomics), which would be useful for economics students preparing for the H1/H2 / A level Economics examination. Thank you for your kind support if you have taken up this excellent opportunity.

This e-book on Microeconomics would be useful for students preparing for the A level Economics examination (H1, and H2 Economics, likewise) as well.

What are the secrets to success in Microeconomics?

What are the secrets? What will you learn in this effective, clear-cut, and relevantly concise guide to the most important microeconomic theories and concepts?

(1) Clear, concise definitions to important microeconomic theories and useful concepts, like the central problem of economics, and the price mechanism of demand and supply with elasticities; 

(2) Simply effective step-by-step arguments and methods to construct a convincing economic case, either for or against any economic position, on a range of microeconomic questions on a variety of economic topics or theoretical academic areas

(3) Many common market failures (and how to explain them carefully to score the highest marks possible) and how governments may or may not respond in some policy-problem cases (and how to explain them carefully)

(4) The most useful and powerful economics diagrams that economics students can use in their economics essays, with clear-cut, step-by-step explanations to effectively analyse economic questions, along with simple yet effective tables and figures for easy memorisation

(5) Useful, relevant, theoretical knowledge for crafting strong economic analysis on a variety of relevant contemporary microeconomic issues 

Most importantly, my e-book can be used as a set of simple yet clear-cut economics notes for easy memorisation, for success in economics examinations, giving economics students an edge over others who have to wade through a mass of information and make sense of a bewildering array of information and red herrings.

With concise yet incisive economic arguments, with fundamental microeconomic theories and concepts, this book can be used for time-effective and cost-effective examination preparation, helping economics students prepare for examinations for high achievement in academic success.

Furthermore, this useful microeconomics e-book can also be used as an excellent complementary companion for supplementary reading, because it focuses on microeconomic issues and useful concepts.

I have kindly contributed this e-book to Sallyforth Enterprise, a social enterprise which strongly supports social enterprises, volunteerism, and charity, donating part of all proceeds to charity. Most of the beneficiaries are underprivileged in less developed communities, women, and widows. I always think win-win, and this is win-win indeed!

Thank you very much for your kind, invaluable support.

In Success in Microeconomics, you will be receiving in this e-book:

Pages of Success in Microeconomics:
80 pages including cover pages
Chapters of Success in Microeconomics:
27 chapters
Edition of Success in Microeconomics:
1st Edition
Details of Success in Microeconomics:
Full colour e-book; high resolution tables, figures, diagrams; pictorial and digitally drawn economics diagrams wherever relevant

Do get your copy right now, if you want to learn about success in microeconomics.

Thank you very much for reading and thank you for your kind support!

JC Economics Essays - Our popular, useful, and relevant economics website is mainly about H1, H2, H3 Economics, A level Economics, & economics essays in general, and beyond A level economics essays, this economics site is even for undergraduate and masters level essays (on a variety of interrelated topics such as economics, economic history, and economic development). Thank you very much for reading, and cheers! 

Explain how the degree of market dominance affects the amount of profits earned by a firm. [10]

This paper explains how the degree of market dominance, which results from the level of barriers to entry in an industry, will affect the amount of profits earned by a firm, which is assumed to be a profit-maximising entity.

First, it has to be observed that a firm with market dominance will have a downward sloping demand curve. The higher the market dominance a firm has, the higher its price setting ability, and this results in a more price inelastic demand curve. The higher the ability of the firm to increase total revenue (TR, which is equal to P x Q), since an increase in price would lead to a less than proportionate fall in its quantity demanded, the more likely this would in turn indicate more profits for the firm, assuming no change in the total cost (TC). Market dominance and price setting ability arise because of the presence of barriers to entry.

What are barriers to entry? Barriers to entry refer to any man-made or natural barriers which are strong enough to prevent new rival firms from competing on an equal basis with the existing firms. A perfectly competitive and monopolistically competitive market structure both have no and low barriers to entry and exit respectively. Thus, a perfectly competitive firm possesses no market dominance and a monopolistically competitive firm possesses low market dominance. There are substantial barriers to entry and exit in an oligopolistic market and for a monopoly it has the highest level of barriers to entry and exit. Thus, an oligopoly and monopoly possess a high degree of market dominance. Due to the varying degrees of barriers to entry, the different market structures will see a different impact on the amount of profits earned in the long run. The amount of profits can take the form of supernormal profits (TR>TC), normal profits (TR=TC) or subnormal profits (TR<TC). In a perfectly competitive market, there are no barriers to entry. This implies that firms are free to enter and exit the market.

Explain using diagrams, how the PC firm eventually makes normal profits

In contrast, should a perfectly competitive firm be earning subnormal profits initially, this will cause some firms to leave the industry and decrease the market supply. This will in turn increase the market price and diminish the magnitude of subnormal profits. Firms will continue to leave the industry until the remaining firms earn normal profits in the long run.

Similarly, in a monopolistically competitive market, there are low barriers to entry in reality.

Explain using diagrams, how the MC firm eventually makes normal profits

In contrast, a monopoly faces high barriers to entry. If the monopolist is making supernormal profit initially, new firms cannot easily enter the market even when there are supernormal profits to be made. There will be no change to the firm’s demand and it can continue to retain its supernormal profits. Likewise for a firm in an oligopolistic market, it also faces considerable barriers to entry. As it is difficult for firms to enter or exit easily, an oligopolistic firm’s supernormal profits will not be whittled away and can continue to retain its supernormal profits in the long run.

In conclusion, the higher the degree of market dominance as a result of higher barriers to entry, the higher the degree of profits earned by the firm in question, which usually means ultimately that oligopolies and monopolies earn supernormal profits while perfectly competitive and monopolistic firms earn normal profits. 

JC Economics Essays - This economics essay was contributed by a student from a certain Junior College in Singapore. It was not written under timed examination conditions, but is supposed to reflect the best possible answer given by a candidate to the economics question about the degree of market dominance and how it affects a firm's profitability. Special thanks to S for his contribution to this economics blog. 

What comments would an economics tutor make about this essay response? First, take note that this is a purely theoretical question. Many times, candidates have to determine if the question is asking a purely theoretical question (usually the small part questions of CSQ or the 10 mark questions are about theory), or if the real world context is required. Often, the larger essay questions require application of economics to the context, or real world examples. In this case, this economics question seems to be a pure theory question testing if students understand the concepts of market structure, market dominance, barriers to entry, and the type of profits. While this essay is excellently crafted, perhaps there could be a more efficient way of writing it? While the material is sound and accessible to A level students, could there be a more parsimonious way of writing this paper, given that it is only 10 marks? Are there alternative approaches to answering this economics question? On the other hand, the level of detail is excellent and this paper deserves a very high grade for its targeted yet detailed response. Think about how you would approach this essay. Thanks for reading and cheers!

“A monopolistic firm has market power whereas a perfectly competitive firm has no market power. Perfect competition is, therefore, clearly preferable to monopoly, say economists. Discuss this statement. [25]

Monopoly is a firm which is the only seller of a unique product which has no close substitutes. In a market of perfect competition, the level of competition is very high, and each firm is a small entity, a price taker. There are four assumptions for a monopoly to exist: there is only one seller but many buyers, high barriers to entry (both natural and artificial), a highly differentiated product such that it is difficult or impractical to copy the product, and imperfect information. There are four main assumptions for a perfectly competitive market, which are: there are many sellers and buyers, low barriers to entry, homogenous product and perfect information. This essay attempts to explain the reasons for the high market power of a monopoly, low market power for a perfectly competitive firm, and the limitations of monopoly and the choice between a monopoly and a perfectly competitive market. 

Yes, it is true that monopoly has very high barriers to entry while a perfectly competitive market has very low barriers to entry. Barriers to entry refer to the reasons which deter potential entrants from entering the market. There are two types of barriers, which are natural barriers and artificial barriers. Monopoly often has high barriers due to various reasons. Firstly, when there is very high economies of scale of the existing monopoly firm, the starting cost of potential entrants will be very high as a result, and this is often because of high fixed costs, such as massive initial capital outlay followed by declining LRAC. 

Secondly, when there is limited and small market size, localized monopoly might arguably be present because the demand from the consumers is very low due to say a small population, which cannot support more suppliers. For example, there will be only one hairdressing shop in a small town because of its small population. 

Thirdly, when there are network economies, it is very hard for potential entrants to enter the market because of existing networks among users. For instance, after Facebook, it is difficult to have any more of the same type of online social network websites because users have built up broad network on Facebook already. 

These are main natural barriers. There are also artificial barriers to entry set up by governments and the existing firms as well. For example, patents, licenses, and regulations restrict potential entrants from entering. Existing will have limit pricing and predatory pricing to deter potential entrants from entering. Firms also can control retailers and suppliers to prevent potential firms. For example, deBeers controls the diamond resources of the world and can restrict diamond production. Therefore, a monopoly has very high barriers to entry to limit the number of existing firms to a very low number, i.e. one firm. The monopoly has very significant market share hence strong market power to control the price while a perfectly competitive firm has many competitors in the market and therefore their market share is insignificant as a result of this very low market power. Hence, a perfectly competitive firm is a price taker, whereas a monopoly can set output and accept a price, or set the price and accept the resulting output. 

[Insert diagram on PC Industry and PC firm]

The perfectly competitive firm takes the price from the intersection of market demand and supply. To maximize profit, the firm will produce at MC = MR at price P. In the long run, a perfectly competitive firm will gain normal profits when LRAC = P at minimum efficient scale (MES). 

Therefore, a perfectly competitive firm is productive efficient because it always produces along LRAC curve and every firm in the industry tries to produce at MES for maximized profits and minimized costs for survival. A perfectly competitive firm is also allocative efficient because P = AC. It gains maximum social welfare. 

A perfectly competitive firm is also equitable because it gains normal profits in the long run. There are therefore good and solid reasons for the preference of a perfectly competitive firm than a monopoly. A monopoly is productive inefficient , allocative inefficient, and inequitable as explained below. 

[Insert diagram on Monopoly Firm showing Supernormal profit and Deadweight loss]

A monopoly is productive inefficient because the firm has great market power and it can be X-inefficient, which means that it does not act energetically to curb its costs, for instance costs from lobbying for government intervention. It can produce above the LRAC curve due to overpaying for workers, building ostentatious buildings, or unnecessary perks. 

A monopoly is allocative inefficient because of the deadweight loss resulting from monopoly power. At the profit maximizing point, MC = MR, and P > AC. Hence, there is a positive welfare to be achieved by promoting perfectly competitive firms.

A monopoly is not equitable to consumers because of its supernormal profits gained in the long run. 

However, a monopoly can be preferred to a perfectly competitive firm because it is dynamic efficient. It has the willingness and ability to innovate and create to do research and development (R&D) and to improve its product variety through product proliferation. This is because of its supernormal profits in the long run, leading to its ability to conduct R&D. It also aims to utilise product proliferation to fill the product gap, and thereby prevent potential entrants from finding a niche to exploit in its market that it dominates. A perfectly competitive firm is also not willing to innovate because of perfect information in its market, so other firms can easily copy from it, so a monopoly does have some strengths. 

[Insert diagram to compare PC firm and Monopoly]

A monopoly firm usually restricts output and set high price at maximized profit level, while a perfectly competitive firm has lower price and more output at the intersection point of its demand and supply. At this point in time, a perfectly competitive firm is preferred to a monopoly. However, in the long run, when a monopoly grows and exploits its economies of scale, it moves its (LR)MC curve downwards. It can then produce more output at a lower price. At this time, a monopoly is preferred to a perfectly competitive firm due to its dynamic efficiency. 

In conclusion, it is not always preferable to have a perfect competition than a monopoly. Ostensibly there are many good points that perfectly competitive firms have, such as productive efficiency and allocative efficiency, among other ideal points, whereas monopoly does appear or seem not ideal, due to its lack of productive and allocative efficiency. However, a monopoly has more dynamic efficiency than a perfectly competitive firm and has the potential to have lower prices than a perfectly competitive firm. In addition, a perfectly competitive market is ideal but does not exist in the real world. Hence, monopoly is sometimes preferable to a perfectly competitive firm. 

JC Economics Essays - H2 Economics essay on monopoly and perfect competition. Normally I would give detailed comments for essays and make some commentary or remarks on how good the essay is, or how it can be further improved by identifying particular points, arguments, or even sometimes, rarely, mistakes. Sometimes, I even ask difficult thinking questions about how the essay can be improved. However, for this particular essay done under timed examination conditions, I rather like its style and content, and so instead of giving my comments I will let you do most of the thinking: one simple question is - what can you learn from this economics essay? Thanks for reading and cheers. 

"Oligopoly is the most appropriate economic model of market structures that can best explain the behavior of companies in Singapore." Discuss. [25]

There are four models of market structure, namely, perfect competition, monopolistic competition, oligopoly and monopoly. In a perfect competition market, many sellers sell a homogeneous product to many buyers. In a monopolistic competitive market, many sellers sell slightly differentiated products to many buyers. A monopoly refers to a market which has only one seller of a unique product without close substitutes. An oligopoly is a firm that has several rivals, selling either a differentiated or homogeneous product, and with high barriers to entry. Firms of different industries belong to different market structures because of their different products and conditions, and different market structures have different assumptions. This essay attempts to explain the behavior of firms in Singapore according to different market structures and conclude whether oligopoly is the most appropriate model of market structure to explain the behavior of firms in Singapore.

As oligopolistic firms are always rivals to each other and have significant market share in which they jostle and engage other rivals, there will be non-price and price competitions among the few firms in an oligopolistic market. It can be argued that non-price competition includes engagement in research and development and advertising. In the long run, oligopolistic firms usually gain supernormal profits hence they have the ability and the willingness to innovate and differentiate their products from the rest further more.

Oligopolistic firms also involve in advertising. Advertising increases the demand for a product and makes it more price elastic. This enables a firm to charge higher prices but yet sell more output, thus raising its total revenue. A firm decides to advertise if it believes that the additional revenue earned will exceed the advertising expenditure incurred, thereby raising profits. Oligopolistic firms often advertise and innovate to compete effectively for survival. 

Advertising can be seen as either being informative or persuasive in nature. Informative advertising informs the consumers about the characteristics of the product while persuasive advertising aims to create brand awareness and loyalty by creating a certain image of the company of the type of consumers that the product is targeted at. Oligopolistic firms usually implement persuasive advertising. They tend to engage in more costly forms of advertisements, like having celebrity endorsements, placing large and prominent advertisements on billboards, newspapers, popular magazines and websites and advertising frequently on television. This is because they have very large output to spread out such high advertising costs unlike monopolistic competitive firms, which have considerably lower levels of output. In Singapore, firms which are oligopolistic also set up many advertisements to attract consumers and create loyalty. For example, famous brands that operate in Singapore such as L’OREAL, VISA or Ricola, always have advertisements showing before movies in the cinema. These advertisements are usually very costly due to the fact that every audience has to watch them and the advertising effects are great.

There is also price competition between oligopolistic firms, which can often be observed in reality in Singapore. Anti-competitive pricing, for example, limit pricing or predatory pricing manage to deter the entrance of potential firms or undercut existing rivals in oligopolistic markets. In addition, the high possibility of price wars also raises barriers to entry. Therefore, only few large firms remains in several industry groups in Singapore. For instance, the fast food industry, Mcdonalds , KFC and Subways are the oligopolies. 

However, there are alternative models of market structure to explain the behavior of firms in Singapore. For instance, monopolistic competition, which has four assumptions. There are large number of buyers and sellers, low barriers to entry, differentiated products and imperfect information. As individual firm’s action has no impact on its competitors and it is thus able to make independent price and output decisions. Monopolistic competitive firms, such as restaurants (Ding Tai Fung) in Singapore, hair salons (Kimage) in Singapore, and so on, sell differentiated products. This means that the products sold by one firm are similar but not identical to those sold by its competitors. Product differentiation can be real or imaginary. Due to product differentiation, a monopolistic competitive firm has some degree of market power. A monopolistic competitive firm is able to charge more than its competitors without necessarily losing all its customers because there are some customers who would still prefer its products as it better suits their preferences. 

In the long run, monopolistic competitive firms gain normal profits due to free or low barriers to entry or leaving of the market. Hence they have much lower willingness and ability to do research and development or advertise compared with oligopolistic firms. The price competition among monopolistic competitive firms is very low. They set prices independently of other firms. There is no reason to undercut competitors or engage in price wars as impact on other firms is insignificant. In Singapore, many firms are monopolistic competitive firms. For example, all the food stalls in the food courts in Singapore are monopolistic competitive firms, just as are hawker food stalls in Singapore. This is because they sell differentiated food from each other and they set their own prices. To open a small food store is not difficult or expensive. There are many food stores in Singapore and many people having their meals at these stores.

In Singapore, the national train company SMRT can be treated as a monopoly in train service industry because it takes a large proportion of the routes. A monopoly of train service, there is no price competition because SMRT is the price setter. If people want to take the train, they generally have to choose SMRT without any close substitutes. The high startup costs and running costs deter other companies from entering the train market. Hence there is no need for SMRT to use predatory pricing or limit pricing. In the long run, a monopoly gains supernormal profits. Hence, it has the ability to innovate and do research and development although it has no need to do so. SMRT can do that for increasing profits but not for survival. However, it has to in Singapore because if it cannot provide better and safer services, the government may choose to change it to other firms. 

In conclusion, oligopoly, monopolistic competition and monopoly can be used as models of market structure to explain the behavior of firms in Singapore, while clearly the idealistic model of perfect competition is always not present in the real world. In my opinion, among the three economic models, oligopoly may not be the most appropriate model because there are more small firms present in Singapore, which are monopolistic competitive firms. Different industries have different conditions hence firms may behave differently. People cannot predict that one model of market structure can explain everything. To conclude, oligopoly is an important and quite appropriate model of market structures only in some contexts and for some firms in Singapore, but not all.

JC Economics Essays - H2, H3 economics essays - tutor's comments: The essay answer addressed the requirements of the question quite well, but in an actual economics essay examination there should be appropriate, relevant, and useful economic diagrams. This is important - diagrams are important in economics and should be used whenever appropriate. What economics diagrams could have been used here? Note that when it comes to "A" levels or even undergraduate economics, economic concepts and ideas can be expressed in words, diagrams, or mathematics (which some say is a language). Therefore, for economics essays it is best to be fluent in words and diagrams/ graphs/ picture representations (for economic pictures, think of the "circular flow of income"). Also, think of the usual questions posed: how could this economics essay have been better written? Perhaps it could have benefited from more relevant and real world examples, or perhaps the examples could have been better explained in the context of the economic models? Having said that, this economics essay was answered under examination conditions, and is therefore quite high quality, well crafted, and well thought out with the required depth and range of economic ideas and concepts given a time constraint. Time management is very important in dealing with economics questions. What else do you notice about this economics essay answer? How would yours be similar, and how would yours be different? Special thanks to the contributors. 

Explain how a monopolistic firm and a perfectly competitive firm make their pricing and output decisions in relation to the differences in the barriers to entry to their respective industry. [10]

This essay topic is on market structures, and in particular barriers to entry with respect to monopolies and perfectly competitive firms. What are barriers to entry? Barriers to entry refers to reasons that deter and prevents new firms from entering a market. They could be further categorized specifically into artificial barriers to entry and natural barriers to entry. What are monopolies and perfectly competitive firms? Monopolies refer to firms in markets with only one seller selling a uniquely differentiated product that have no close substitutes while perfectly competitive firms are those in markets that consist of large number of buyers and sellers selling homogeneous products. 

In order to explain the difference in pricing and output decisions between a monopoly and a perfectly competitive firm, a comparison between the characteristics of both firms need to be made. This Economics essay therefore talks about the various assumptions a monopoly and a perfectly competitive firm, before moving on to explain diagrammatically the difference in their pricing and output decisions.

        

Monopolies assumes the characteristics of high barriers to entry, uniquely differentiated product with no close substitutes, one seller or a dominant firm in a market and generally imperfect information. On the other hand, perfectly competitive firms assume characteristics of low or almost no barriers to entry, homogeneous products, large number of buyers and sellers, and perfect information.

           

The following diagrams will move on to explain the pricing decisions of a monopolistic firm and a perfectly competitive firm respectively.

[Insert diagram of a monopolistic firm]

           

Due to the high barriers to entry, a monopolistic firm is a price setter and thus is able to secure the profit maximization (or loss minimization) point at MC = MR, to earn supernormal profits.

[Insert diagram of a perfectly competitive firm]

           

On the other hand, the low barriers to entry means that a competitive firm is a price taker as it accepts the price pre-determined by the intersection of the market demand and supply curves.

Therefore, because it accepts the market price, it produces at an output level at MC = MR, and controls only its output level to vary its profits.

           

The high barriers to entry allows monopolistic firms to set their prices as it is unlikely that there will be an entry of new firms to reduce the market power and hence pricing influence of that monopolists. However, perfectly competitive firms are unable to do that since the low barriers to entry means that new firms could easily enter the market, diluting each firms’ market power, thus all firms have small market power, resulting in them being price takers.

In conclusion, barriers to entry are a significant assumption that affects the pricing decisions of monopolistic and perfectly competitive firms, although the other assumptions also play an important role.

JC Economics Essays - H2 A level Economics style, model, sample economics materials - tutor's comments: This economics essay is written in a simple, lucid, clear, short, and direct manner which addresses the economics question posed at the start. This makes this essay answer easy to follow and clear, direct, and easy to mark for the examiner, which are all plus points for this model paper. There is very good use of diagrams to illustrate ideas and points. While a bit short, the conclusion is simple, easy, and direct. The conclusion in this case can be short because this is not a 13, 15 or 25 mark essay question, which would require a longer, more evaluative, and higher value added response as a conclusion. The question is: how can you improve on this economics essay, to make it more of a model economics answer? At the same time, there are other essay styles to write this economics essay, some of which use more words and approach this question from a slightly different angle to answer the question equally well. What do you think? Thanks for reading and cheers. 

Explain, with relevant economic theory, how the pricing and output decisions between a monopoly firm and a perfectly competitive firm differ because of their differences in barriers to entry. [10]

This paper explains how the pricing and output decisions of a monopoly and a perfectly competitive firm differ due to the differences in the nature of their barriers to entry. What is a monopoly? A monopoly is a market where there is only one seller of a uniquely differentiated product with no close substitutes. What is a perfectly competitive firm? A perfectly competitive firm is one where there are many buyers and sellers of one homogeneous product. What are barriers to entry? Barriers to entry are obstacles or barriers that deter new firms from entering the market. There are two main types of barriers, artificial (man-made barriers) and natural (such as huge economies of scale)

After having defined the various concepts, this essay seeks to first state the assumptions of each firm before illustrating with a diagram how each firm's pricing decision is made. It would then show how differences in barriers to entry affect this important pricing decision of a monopoly and perfectly competitive firm.

[Insert an economics diagram on Monopoly]

The assumptions of a monopoly are high barriers to entry which deters firms from entering, highly differentiated product with no close substitutes and a situation where there are many buyers but only one seller who dominate the market. For a monopoly, the profit maximizing point is where MC = MR. This shows how pricing decision is made for a monopoly which aims to maximize profits.

[Insert economics diagram on a Perfectly Competitive firm]

On the other hand, the assumptions of a perfectly competitive firm are low or no barriers to entry, a homogeneous product, many buyers and sellers in the market, as well as perfect information. The profit maximising point for this firm is also where MC = MR. This also shows how the pricing decision is made for a perfectly competitive firm, and it is different from a monopolist's decision because the price is lower and the equilibrium output is higher - that is, P is lower, the Q is higher, compared to a monopoly.

In conclusion, when considering barriers to entry, having established how the pricing decision is made by both a monopoly and a perfectly competitive firm, this distinction helps to explain how the differences in these barriers to entry affect their pricing decisions. It is evident that with high barriers to entry, in the case of a monopoly, the monopoly is a price setter since firms are deterred and prevented from entering the market easily. Conversely, with low barriers to entry, which is in the case of a perfectly competitive firm, such a firm is a price taker since new firms can enter the market very easily, explaining why the firm follows the price set in the market. 

JC Economics Essays – H2 A levels – Economics tutor’s comments: This A level economics essay answers the question of barriers to entry and market structure directly, but a lot more thought is required.

What are the main strengths of this economics essay? Think about it. What are the main weaknesses of this economics essay? Think about this question also. The main good thing about this essay that makes it useful in learning economics is that it addresses the question directly, through the use of relevant, clear cut diagrams. Economics diagrams are very important to answering a question, and there should be a well developed paragraph assisting the economics diagram to do its job well.

However, perhaps this economics paper could be better developed with real life examples and other illustrations that could show the theory. While the question asks for the "relevant economic theory", and this essay has done precisely that, this economics essay could be helped further by developing the paragraphs with some real life examples. How else could this essay have been improved? Think of how you could help to make this a better essay than it already is.

Special thanks and cheers to model students SS, AG, and JC for their kind yet invaluable contributions. Special thanks to SS for his editing and vetting of this sample essay to make it even better than it was originally. Thank you for reading, and cheers. 

Explain how the pricing decision between a monopoly firm and a perfectly competitive firm differs because of differences in the levels of barriers to entry. [10]

A monopoly refers to a market where there is only one seller of one product that has no close substitutes. In perfect competition, there are many sellers and buyers selling one homogeneous product. A monopoly is a price setter while firms in perfect competition are price takers. A monopoly is a price setter while firms in perfect competition are price takers. A monopoly exists because barriers to entry are very high, whereas a perfectly competitive firm exists because barriers to entry are very low or even non existent. In this Economics essay, I will explain the reasons for high and low barriers to entry for a monopoly and firms in perfect competition respectively, and how the price decision will thus differ between the two market structures.

A monopoly exists because barriers to entry are so high such that new firms are totally deterred from entering the market, and therefore there is only one dominant or major firm in the market. There are two types of barriers to entry: natural barriers and artificial barriers to entry. Natural barriers refer to inherent characteristics of the market which deter the entry of firms into a market. For example, the monopoly of diamond market, De Beers controlled more than 98% of the diamond resources last time and was able to deter any other firms from entering the market. Localised monopoly also has very high barriers to entry due to the fact that limited population does not demand so many firms for one good or service. Hence, in a small town, one firm is enough to fulfill the demand. For example, hairdressing shops can be considered localised monopolies.

Artificial barriers refer to deliberate actions taken by governments of firms to deter entry into a market. Governments may sell licenses to firms which want to enter a market in very high prices. For example, setting up one casino is very hard in most of the countries because governments will consider the negative externalities of opening a casino. Existing firms will set their prices lower than entering prices to deter new firms from entering the market. 

In perfect competition, barriers to entry are low so it is relatively easy for new firms to enter the market to produce. Therefore, so many small firms with each having an insignificant market share are present in perfect competition. Each firm’s market share is negligible due to the low barriers to entry and exit. Changes in a single firm’s output will not have effect on the market’s total supply and hence the market price.

Hence, as price takers, firms in perfect competition will take the price attained from intersection of demand and supply of the whole market. 

[Insert diagram for the Industry (Market)]

[Insert diagram for the Firm]

As shown in the diagrams above, the price decision in a perfect competition is taken by all the small firms at P0. P0 is the same as PE which is the intersection equilibrium price of demand curve D and supply curve S in the industry. 

If the industry has only one firm which is monopoly, it can decide the price as it wants due to the fact that there is no other firm to hinder its great market power. 

[Insert diagram on monopoly]

As shown in the diagram above, the price is determined when maximum profits can be generated. i.e. at the point where MC = MR. 

In conclusion, a monopoly firm and a perfectly competitive firm differs in terms of pricing because the barriers to entry confer market power (or the lack thereof), which leads to price setting ability or a price taking result. 

JC Economics Essays (H2 'A' Level Standard Economics Essay, part (a)): Economics tutor's comments - There are many important essay writing lessons that students can learn from this economics essay on monopoly, perfect competition, and profit maximisation. What is good, and what is bad, about the essay introduction? Was the introduction clear, addressing the topic, and defining key terms and concepts needed? What is good about the economic analysis in this particular paper, in the body of the essay? Did the analysis address the requirements of the economics question? What is good or less good about the writing style and approach taken in this economics essay? Is the essay well written? To a large extent, this is an excellently crafted essay, well written and clear, but there are some ways in which it could have been further developed and made even better - what are those ways? How would you do essay editing for this paper, if you were the economics tutor? How would you apply more of the economics knowledge, insights and analysis to make this paper more developed? Also, how would you mark this economics essay, if you were the examiner? Thanks for reading and cheers. Special thanks to contributions from students. 

How is price determination related to the different roles of prices in a competitive free market? [10]

In a competitive free market, the equilibrium market price is determined by the intersection of the market demand and supply curves. Prices play four different and important roles in the market, namely signaling, allocating, rationing and providing incentives. After establishing how price is determined and identifying the different roles of prices, this essay seeks to first explain a perfectly competitive market before explaining in detail how the equilibrium price is determined with the aid of a diagram. Thereafter, the different roles of prices will be further elaborated before analyzing the relationship between that and price determination.

How are prices determined? To begin with, a perfectly competitive market is one where there are low barriers to entry, a homogeneous product being transacted between many buyers and sellers and perfect information regarding product prices. The key outcome of such a market is that neither individual buyers or sellers have the ability to influence prices, thus both parties are price takers. The equilibrium market price (PE), which buyers and sellers are equally satisfied with, is thus determined by the intersection of the market demand and supply curves.

[Insert diagram on equilibrium market price and quantity]

As depicted in the diagram, if the price is above PE at $10, the quantity supplied is 100 units while the quantity demanded is 50 units. There is a surplus of 50 units and to clear the excess supply, producers will lower their prices. As the price falls, the quantity demanded rises while the quantity supplied falls, reducing the surplus. The surplus is totally eliminated when the price falls to PE. Likewise, if the price is below PE at $5, the quantity supplied is 50 units while the quantity demanded is 100 units. There is a shortage of 50 units and producers will raise their prices. As the price rises, the quantity demanded falls while the quantity supplied increases. The shortage is totally removed when the price rises to PE.

Moving to the different roles of prices, the first is a signaling function. With a change in consumers’ tastes and preferences, an increase in demand for a good would increase the price of it. Producers would follow these price signals to produce accordingly, with more when the demand of the good is rising and with less when the demand of the good is falling. 

The second is the allocative function of prices. Following an increase in demand and subsequent increase in price for a good is an increase in profit. Hence, producers would channel scarce resources from less profitable to more profitable industries. 

The third is a rationing function of prices. When there are shortages, consumers would bid up the price of the good. Consumers with higher effective demand would get to purchase the good, in turn allowing goods in shortage to be rationed. 

Finally, prices function as incentives for consumers and producers to maximize welfare. For the consumers, when prices fall, they have the incentive to buy more to increase welfare. For the producers, when prices rise, they would have the incentive to sell more to increase profits and welfare. 

Looking at the relationship between price determination and different roles of prices, the signaling role is a movement along the supply curve whereas the rationing role is a movement along the demand curve. The incentivizing role is a movement along both the supply and demand curves while the allocative role needs diagrams of two different markets in order to be illustrated.

JC Economics Essays - H1 H2 H3 A Levels Economics, adapted question (part (a)): economics tutor's comments: Students sometimes do not do enough revision for the role of prices in a free market because they take it for granted, but a moment's reflection should inform students about the complexities of studying economics. What are the roles of prices? How are these related to the supply and demand diagram? (Remember that diagrams are very important in Economics.) Supply and demand economics questions are not limited to just factors affecting demand and supply, and elasticities. In this particular economics essay, there does not seem to be an essay conclusion, but having said that the essay's introduction was fairly well written - what makes for a good conclusion, and what makes for a good essay introduction? Special thanks to contributions by some motivated, hardworking, and generous students who share their skills, services, and materials. Just for interest: Milton Friedman's "pencil" concept on the free market can be found on YouTube. Do watch it just for interest about understanding the intuition behind the economics concept of the free, competitive, unfettered market.

Discuss, using examples from the United Kingdom, whether high levels of research and innovation are best achieved in competitive compared to monopolistic markets. (25 marks)

This Economics paper argues that high levels of research and innovation are best achieved in monopolistic markets, compared to competitive markets, because dynamic efficiency is best achieved when companies have the willingness and ability to conduct costly research and development (R & D).

First, what is dynamic efficiency? Dynamic efficiency means that companies can invest in education, research, innovation, and other creative processes that help them increase their efficiency over time, and in the long run will help them earn supernormal profits above opportunity costs and explicit costs. Competitive markets are markets with low barriers to entry, and can be idealised using the model of perfect competition.

What is perfect competition? Perfect competition is the market structure where there are many buyers and sellers of a single homogeneous product with perfect substitutes, low barriers to entry, suggesting that they earn normal profits in the long run, and where there is perfect information.

This is in contrast with monopoly, which in theory is a firm that sells a product with few close substitutes, with high barriers to entry, and which thus earns supernormal profits in the long run.

It can be argued that competition might not lead to research and development. Taking perfect competition to benchmark competitive firms in the UK, because they earn normal profits in the long run, they have neither the incentive nor the willingness to invest in research and innovation. For instance, small shops along the streets of London, especially monopolistic competitive firms, will not engage in research. 

However, having said that, if these firms are able to borrow from capital markets or get funding, or perhaps even due to external events causing temporary supernormal profits due to changes in demand and supply, they could have the willingness to invest in innovation so that they can because more “monopolistic”, when they produce a highly differentiated product.

It can be argued that monopolistic markets have firms that earn supernormal profit, because of their high barriers to entry. They therefore have both the ability and willingness to innovate to keep their monopolistic position. First, they have the ability because they earn supernormal profits, and can allocate massive funds to R&D. Second, they have the willingness because if they are in monopolistic markets that could potentially be contested by more efficient firms that could displace them to take over their market, they need to innovate to maintain their long term dynamic efficiency. 

For instance, Rolls Royce which manufacturers engines and aeroplane systems is a dynamic company probably because it has incentive and ability to innovate. BAE Systems plc is also another such company, and in fact both Rolls Royce and BAE are multinational companies, companies that span international borders with their unique product chains that require high levels of research and development. In fact, it can be said that some monopolies are monopolies because they have developed a product that is unique, differentiated, and wanted by consumers.

However, having said that, on the other hand contestable markets are usually perfectly competitive or competitive in nature, and as such competitive markets could help dynamic efficiency better in that respect. Thus competition might also lead to research and innovation, but the level could be lower than that of monopolies that have incentive and ability to do research and innovation.

Also, there are problems with monopolies. It can be argued that monopolies sometimes have x-inefficiency, where they do not act energetically to curb costs, and they could therefore become slothful and inefficient firms. This is because they may preserve their position through the use of patents, laws, legislation, and other legal means that have nothing to do with their level of technology or the sophistication of their product.

In the final analysis, this paper argued that high levels of research and innovation are best achieved in monopolistic markets, compared to competitive markets, because dynamic efficiency is best achieved when companies have the willingness and ability to conduct costly research and development, even though there are indeed some limitations to monopolies such as x-inefficiency. Competitive markets may have the incentive to conduct some research, but their levels are lower, and most of the time they neither have willingness nor ability due to the lack of barriers to entry which ensure supernormal profit. 

JC Economics Essays (H2, H3 A levels): Economics Tutor's Comments - This Economics paper on research and development and comparison of monopolistic and competitive firms was crafted under model examination conditions and has a few good points that one can learn from, but also some problematic areas, such as simplistic analysis and lack of many other relevant examples from UK manufacturing or service industries. Do think: if you were an Economics tutor, what advice would you give this student to help him make the Economics essay better? Perhaps you could focus on an area of improvement, such as the structure or organisation of this essay. Think of how this Economics paper could be made better. Thanks for reading and cheers!

Discuss, with relevant examples, whether oligopoly is the most appropriate market structure that can explain the behaviour of firms in Singapore. [25]

Discuss, with relevant contextual examples, whether oligopoly is the most appropriate market structure that can explain the behaviour of firms in Singapore. [25]

Introduction - market structure, oligopolies and monopolistic competitive firms

Firms’ behaviours can be explained by the market structures they exist in, where the conditions and situations are the number of buyers and sellers in the market, the type of goods they produce be they homogeneous or differentiated, the barriers to entry that make it easy or difficult for individual firms to enter or exit the industry, and the strategic interactions between different rival firms. These conditions and situations would determine the behaviour of various types of firms in different industries in Singapore. 

In Singapore, it can be argued that the huge, large firms that dominate the economy are largely big manufacturing and service industries, and global Multi-National Corporations/ Multi National Companies (MNCs) that export products overseas. The small size of Singapore’s markets allows just a few firms to dominate and hence it would seem that prima facie oligopoly is the most appropriate structure that can explain the behaviour of firms in Singapore. 

This Economics paper therefore argues that many firms in Singapore are large companies, often exhibiting high barriers to entry and often large economies of scale, and are strategically interdependent on their rivals’ actions, and thus the oligopoly market structure is arguably the most appropriate model for explaining their behaviour. 

However, on the other hand, it can also be argued that monopolistic competition can also describe and explain the behaviour of smaller firms in Singapore, given that there are many smaller firms in Singapore.

Oligopoly can be applied to Singapore’s context

First, there are significant barriers to entry for most large firms in Singapore, which are possibly driven by economies of scale (EOS). As the pure forms of market structures, such as perfect competition and monopoly, do not adequately explain the behaviour of firms in real life, let alone Singapore firms, it has to be argued instead that oligopoly’s features go a long way to describe the behaviour of firms. For example, in the telecommunications industry, starting up requires a lot of capital, and thus this creates a major barrier to entry for most entrants because of the huge fixed, and often sunk, costs required, and thus it is no surprise that Singtel, M1, and Starhub are oligopolistic in nature. 

[Economics tutor's note: For advanced A level students or H3 students or undergraduate students who want to learn more Economics, see Oliver Williamson for more Economics materials on asset specificity. On a related note, for transaction costs: Ronald Coase might be interesting to read about too, on this topic.] 

Other barriers to entry may not be based on EOS, which is a natural kind of barrier; other barriers may be man-made artificial barriers such as laws and regulations, such as those regulating SMRT and SBS – hence, the high barriers to entry that are characteristic of oligopolies are present in many large Singapore firms.

Secondly, oligopolistic markets are also characterised by non-price competition, using aggressive branding to differentiate their goods, with firms being mutually interdependent, which results in their need to monitor their rivals’ actions and devise counter-responses. Strategic interaction, which means responding to rivals’ actions by devising counter-responses, is a particular characteristic of oligopoly not found in other market structures. 

There are many good examples to illustrate this feature. Take the example of the market for Singapore breakfast toast and coffee; the market in Singapore has major firms selling toast, coffee, and tea, alongside a variety of Singaporean foods. These products are differentiated because the meals are tweaked to match unique styles and there are a few other cafes selling similar yet differentiated goods. The market is largely a mix of firms competing with barriers to entry in terms of the cost of branding. There is price leadership in this particular market, with prices of drinks set similarly, and with smaller cafes usually taking their cues for pricing from the bigger chain cafes mentioned.

In major markets such as banking, supermarkets, and telecommunications, non-price competition is easy to spot from differentiated services offered; often a new service or promotion becomes widespread after it is first started by a dominant player in the market, demonstrating once again that the firms are strategically interdependent. Oligopolies have strategic, game-theoretic interactions because they face rivals and not competitors. Because of Singapore’s small market size, most of these markets are dominated by just a few major players, and as such they have to take into account their rivals’ actions. 

In banking, for example, there are the giant firms DBS and UOB, while the Singapore telecommunications industry also features a few giants, Singtel, Starhub, and M1. Whenever DBS comes up with a new form of priviledged banking, UOB must come up with some similar programme too. Singtel, Starhub, and M1 often have advertising campaigns and fund major events such as Formula One (F1), and offer exciting promotions to attract customers to their cable channels.

Monopolistic competition can be applied to Singapore’s context

On the other hand, monopolistic competition can also explain many of the other types of firms in the Singapore economy. Many small firms in Singapore operate in a monopolistic competitive market, characterised by many buyers and sellers, rather differentiated products, and generally low barriers to entry. For instance, hawker fare in hawker centers, restaurants offering Chinese food, and neighbourhood convenience stores (the famous "mama shops") are good examples; namely the point is that firms that are small, with limited market power, and which provide slightly differentiated goods and services are monopolistic competitive. Each has limited pricing power because there are many of them sharing the same market, and barriers to entry are low, thus ensuring these firms earn normal economic profit in the long run, because the presence of supernormal profit would entice others into the market and compete away the profits due to the low barriers to entry. Hence, the monopolistic competition model thus goes a long way in explaining the many different small shops in Singapore’s economy.

Conclusions

While there are many market structures, such as perfect competition, monopolistic competition, oligopoly, and monopoly, primarily monopolistic competition and oligopoly are relevant, given Singapore’s context. Perfect competition and monopoly in their pure forms often cannot be seen in the real world due to their ideal nature. In conclusion, the oligopoly model is one of the most appropriate models that could explain the behaviour of large firms in Singapore, as huge firms dominate major sectors in Singapore's small and open economy. Yet, clearly the smaller firms in Singapore can be explained using the monopolistic competitive market structure. Perhaps it takes more than one market structure to adequately characterise firms’ behaviour in any economy, and not just Singapore’s. However, given that Singapore is a small economy, and most major firms located in Singapore are large, so as to reap massive EOS, even with the presence of many firms engaged in monopolistic competition, oligopoly still seems to be the model most appropriate in describing the behaviours of firms in Singapore. 

JC Economics Essays: Tutor's Comments - This Economics essay on market structure, about oligopoly and monopolistic competition, is rather well argued, interesting, and relevant. The Economics materials presented are based on real life examples from the relevant context, and the English language is fluent and clear. The student presents material that is clear, easy to read, and in a logical, coherent fashion that would impress tutors. The conclusion is evaluative and a judgement is properly made. Overall, it is definitely possible to succeed in writing good Economics essays if students learn how to write such essays under examination conditions, and exhibit these good attributes. However, of course it has to be said that the proper Economics diagrams and the relevant explanations of both oligopolies and monopolistic competitive firms are required for the best grades. Also, at some junctures, this Economics essay seems a bit repetitive, redundant, tautological, and perhaps even convoluted, but overall this issue seems more of a language or writing issue rather than problems with Economics knowledge and content. Do reflect on it and think through the comments; thanks for reading!

Explain the possible alternative aims of firms. [25]

According to economic theory, firms are supposed to be profit maximising entities, where MC = MR. However, in real life, this does not seem to be always the case. Explain the possible alternative aims of firms. [25]

According to economic theory, firms are supposed to be profit-maximising entities, producing output where their marginal cost of production equals to marginal revenue (MC = MR). However, in real life, this does not seem to be always the case. This paper explains some of the possible alternative aims of firms: profit satisficing, sales maximisation, and growth maximisation. This is due to the central idea that firms may want to maximise profits, but either they do not know how to due to imperfect information, or they do not want to due to alternative goals and aims. This paper does not discuss those areas of analysis but instead focuses on a few alternative possible aims.

Alternative Aims of Firms: Profit Satisficing

One alternative aim of firms is profit satisficing. In many firms, there is separation of ownership and control. Those who own the company (the shareholders) often do not get involved in the day-to-day running of the company. This is a problem because although the owners may want to maximise profits, the managers, who run the company, have much less incentive to maximise profits because they do not get the same rewards as the shareholders do. Therefore, managers may create a minimum level of profit to keep the shareholders happy, but then maximise other objectives relevant to them such as enjoying work, maximising prestige, and other private goals. This is the problem of separation between ownership and manager and can possibly be overcome, to some extent, by giving mangers share options and performance-related pay to align their incentives, although in some industries it is difficult to measure performance.

Alternative Aims of Firms: Sales Maximisation

Sales maximisation is another possible goal and occurs when the firm sells as much as possible without making a loss, rather than maximising profits. Firms often seek to increase their market share by increasing their sales even if it means less profit. This could occur for various reasons. First, increased market share increases monopoly power and may enable the firm to put up prices and make more profit in the long run. Secondly, managers prefer to work for bigger companies as it leads to greater prestige and higher salaries. Thirdly, increasing market share may force rivals out of business; for example, supermarkets have lead to the demise of many local shops. Some firms may actually engage in “predatory pricing” which involves making a loss to force a rival out of business. As long as their costs are covered, firms may reduce their prices to drive their rivals out of the market.

Alternative Aims of Firms: Growth Maximisation

Another possible aim of a firm other than profit maximisation might be growth maximisation. This is the idea of expansion and growth, and is similar to sales maximisation and may involve mergers and takeovers. A merger is a union of two companies, and can be hostile or friendly. A takeover is an acquisition of another company by a firm. First, similar to sales maximisation, increased market share increases monopoly power and may enable the firm to put up prices and make more profit in the long run. Secondly, managers prefer to work for bigger companies as it leads to greater prestige and higher salaries. Thirdly, increasing market share may force rivals out of business; for example, supermarkets have lead to the demise of many local shops. Some firms may actually engage in “predatory pricing” which involves making a loss to force a rival out of business. As long as their costs are covered, firms may reduce their prices to drive their rivals out of the market.

Conclusions

In conclusion, while firms are supposed to be profit-maximising entities according to theory, producing where their marginal cost of production equals to marginal revenue, in real life, this does not seem to be always the case. This paper explained profit satisficing, sales maximisation, and growth maximisation as possible alternative aims of firms in the real world. However, in the long run, profit maximisation of theory should be the long term aim of firms, because if they do not maximise profits in the long run, they will find themselves outcompeted by firms that have followed a more rational pattern of behaviour, and in the competitive marketplace, “only the fittest survive”.

JC Economics Essays – Tutor's Commentary: Right off the bat, there are a few things missing from this particular "alternative aims of the firm" essay, which you should know and write about: the diagram of the Baumol model could be included. Furthermore, the standard Economics perfect competition diagram could also be added too. Let’s do an intellectual exercise here: think about how your Economics tutors in school would judge this Economics essay. What were its strengths and weaknesses, and why do you think those parts of the essay were strengths or weaknesses? If you were this student’s Econs tutor, how would you suggest advice so that you could make the student improve on his or her writing skills, and answering techniques? Be sure to ask critical and thinking questions; and always draw an Economics diagram (or two diagrams or more, if the need arises)! Thanks for reading and cheers.