ECO 105 2ECO 105 ECONOMICS ASSIGNMENT Question One Primarily, market power pertains to the ability of a firm to change the price of itscommodities within a given market. Thus, the higher the market power, the greater the capabilityof a firm to manipulate the market price of its goods and services (Reynolds, 2005). Ordinarily,monopolies have a high market and, thus, can influence the price of their commodities. It is,however, imperative to note that the level of market power between monopolies may differsignificantly (Reynolds, 2005). For instance, supposing there are two monopolies, one supplieswater services and the other provides landline phone connections. The monopoly that supplieswater has a higher market power than the firm that provides phone connections. Predominantly, one can attribute this to the differences in the degree of elasticity ofdemand for the two commodities. Typically, the elasticity of demand for water is relativelyinelastic. Mainly, this is because the commodity is a basic need. Therefore, any changes in theprice of water will bring about a small decline in the demand for that product. On the other hand,the elasticity of demand for landline phones is relatively elastic since the product is a luxurygood. Thus, a slight increase in the price of phone connection would result in a significantdecrease in the quantity demand of that product (Khan, n.d.).In this regard, one can argue that themonopoly that provides water has a higher market power than the phone connection firm since itcan change its prices without necessarily reducing the demand for its goods.
ECO 105 3Price elasticity of demand for water Price P2inelastic PED P1 Q2 Q1Quantity DemandedSource: (Khan, n.d.).Price elasticity of demand for landline phone connection Price P2 P1Q2Q1 Quantity DemandedSource: (Khan, n.d.).
ECO 105 4Question TwoIt is worth noting that KFC, MacDonald’s and Hungry Jack are all restaurants thatoperate in one market or industry. Typically, the restaurant industry has a large number ofbusinesses who offer slightly differentiated services and goods. For this reason, one may arguethat the market structure of MacDonald’s, KFC and Hungry Jack is predominantly amonopolistic competition market structure. One may argue this from the point of view that thethree firms operate in an industry that has a large number of sellers, who offer the same kind ofproducts, but the products are slightly differentiated and possess an element of uniqueness, andall sellers are competing for the same customers. Today, the products offered by the three firmsare differentiated in terms of quality, location and style. The differentiation of the product causesconsumers to perceive that the goods of one company are of a higher quality than the others. Typically, each company has the power to make independent pricing decision about thequantity of output and the price of the product based on its market. There is also free of entry andexit into the restaurant market. As a result, there is stiff competition in the industry and firmsengage iin advertising to attract consumers to their businesses (Economics Online, n.d.).Consequently, these firms make excess economic profits over the short term period. However, inthe long run, companies make normal profits due to the fact that the low barriers to entry allowother firms to enter the market, leading to an increase in competition, thereby gradually eatingaway the profits back to normal profits as illustrated below.
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