Business Economics Assignment: Market Structures and Economic Flows

This Business Economics assignment explores the characteristics of oligopoly markets, including strategic interdependence and barriers to entry, with an analysis of how firms utilize game theory and the cartel theory to maximize profits. It also examines the circular flow of income, detailing the flow of money between households and firms, and the impact of injections and withdrawals on the economy. Furthermore, the assignment discusses the significance of the circular flow model in economic policy-making, highlighting how governments use it to maintain economic stability through the management of money supply, inflation, and other key economic indicators. The solution includes a diagram illustrating the cartel structure of oligopoly firms and a bibliography of relevant academic sources.

Running head: BUSINESS ECONOMICS
BUSINESS ECONOMICS
Name of student:
Name of University:
Author’s Note:

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Table of Contents
Answer to Question: 1.....................................................................................................................2
Answer to Question: 2.....................................................................................................................4
Bibliography....................................................................................................................................6

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Answer to Question: 1
Oligopoly market
An oligopoly market is a market structure which comprise of small number of large firms
who dominate the market for an infinite number of buyers. The market power remains highly
concentrated due to the availability of few large firms who provide either similar or
differentiated products. The products either have a qualitative difference or by brand value and
advertising. These small number of firms depend upon each other to dominate the market and
prohibit small firms from entering into the market.
Characteristics of oligopoly market:
 Strategy of interdependence- When there are few firms in the market, the decision taken
by one firm has an effect on the performance of other firms with respect to revenue and
market domination. As a result, these firms operate by taking into account the
performance of other firms and whether to compete with rival firms.
 Barriers to entry- The firms in this market are comparatively bigger and does not allow
small firms to enter into the industry and dominate the market
Application of game theory in firm’s strategy
Firms in oligopoly market follow the model of game theory where each firms choses the
strategy that gives them the maximum profit. Firms in Oligopoly market observe the actions
taken by other forms and implement strategic planning which enables to estimate the responses
other firms.
Cartel theory of oligopolistic firms

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The cartel theory is a model which is used to understand the operations of firms in oligopoly
market by taking only two firms. Firms sells or produces products that is perishable and perfect
substitute of one another with many buyers. Each firm has complete information about the
market demand for the product with varying cost curves.
Figure 1: Diagram for the cartel structure of oligopoly firms
Collusion or cartel theory helps to attain bigger profits. The rival firms work together by
setting a higher price and reducing the competitiveness of the market. In perfectly competitive

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market, price will be at Pc and Q. This is because there are infinite number of buyers and sellers
in the industry who cannot dominate the market and charge a higher price.
In oligopoly market structure, there are only firms and consumers need to buy the goods
which enables the firms to influence the market. Under collusion theory, firms restrict the output
at Q2 which raises the price to P2 from its initial state. This is how firms get super normal profits
by acting together. If one firm raises price, people will buy from the remaining firms and no one
will earn super normal profits. The cartel theory is applied by biggest retailers who has a greater
market domain by the provision of goods and services.
Answer to Question: 2
Circular flow of income in the economy
The circular flow of income is a neoclassical economic model that helps to understand
the flow of money in the economy from household to firms and back to the households. People
buy goods and services. The money pad goes to the firm which is used to pay wages, buy inputs
and save the profit amount. The wages become the earnings of households which is again used to
buy goods. This is how money flows in the economy and helps to maintain a stable economic
state.
Injection and withdrawals effects in an economic environment
Injection and withdrawal affects the flow of income in understanding the circular flow of
income. Injection is the process of increasing the money supply in the economy and boost the
financial structure. Withdrawal is the process of taking money from the economy by process of
saving, increasing tax and value of imports. When economic performance slows down and
money goes down, government lowers the interest rate. As a result, money supply goes up in the

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economy and aggregate expenditure increases and enhance the economic growth. When
expenditure becomes too high, inflation occurs and so people save more money. Government
raises tax amount considerably.
Significance of circular flow in policy making
The circular flow helps to understand the economic performance and enables economists
to identify the policies that needs to be implemented. Government balances the money supply
which helps to maintain a stable economic state with respect to inflation, recession, business
development, growth, output, currency value, net export and aggregate level of GDP. It helps to
estimate the effects of inflows and leakages and thereby implementing appropriate policy that
will boost economic performance.

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Bibliography
Arenoe, B., van der Rest, J.P.I. and Kattuman, P., 2015. Game theoretic pricing models in hotel
revenue management: An equilibrium choice-based conjoint analysis approach. Tourism
Management, 51, pp.96-102.
Bocken, N.M., De Pauw, I., Bakker, C. and van der Grinten, B., 2016. Product design and
business model strategies for a circular economy. Journal of Industrial and Production
Engineering, 33(5), pp.308-320.
Chassang, S. and Ortner, J., 2019. Collusion in auctions with constrained bids: Theory and
evidence from public procurement. Journal of Political Economy, 127(5), pp.2269-2300.
Haraguchi, J. and Matsumura, T., 2016. Cournot–Bertrand comparison in a mixed
oligopoly. Journal of Economics, 117(2), pp.117-136.
Lambertini, L. and Tampieri, A., 2015. Incentives, performance and desirability of socially
responsible firms in a Cournot oligopoly. Economic Modelling, 50, pp.40-48.
Yang, D. and Morgans, A.S., 2016. A semi-analytical model for the acoustic impedance of finite
length circular holes with mean flow. Journal of Sound and Vibration, 384, pp.294-311.