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Explain why the level of profits differs between market structures
Explain why the level of profits differs between market structures
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Introduction
In the present business world, the assumption is that firms would like to maximize profits, but in the real life maximizing profit has a great impact on the society and the economy (Wigley 1996). Industries fall under different market structures. There are four types of market structure; perfect competition, monopoly, monopolistic, and oligopoly. The main factors that influence a market structure are; the number of buyers and sellers, the degree of product differentiation, the knowledge of buyers and sellers regarding a commodity and the strengths of barriers to entry and exit. Different industries have different market structures leading to a different in the level of profits (Anderton 2008). A firm can realize normal or abnormal profits depending on its type of marketing structure.
Definition of terms
Level of profit-A representation of the amount of cash acquired by a certain industry above the cost of production
Market structure-A description of the key factors determining the degree of competition in a market
Normal profit-The minimum level of profit that a firm requires to achieve in order to keep factors of production in their present use in the long run
Abnormal profit-Any profit, a firm, achieves in excess of the normal profit.
Discussion
Market structures
Perfect competition
A perfect competition marketing structure is made up of several firms producing similar products and sold at the same market price. Perfect market structure is rarely found. Industries under the perfect competition market include the stock market (Begg 2009). For example in United Kingdom 2011, the Competition Commission made the Payment Protection Insurance a monopoly firm.
Profit maximization in a perfect competition market structure
Firms in this industry must assume profit maximization, and any profit made by a firm belongs to the owner. In the short run, a firm under the perfect competition structure has fixed resources and only maximizes profits by adjusting its outputs. Firms only produce when the difference between total revenue and total cost is greater than zero. On the other hand, the fixed cost must be less than the loss. If the firm’s loss exceeds its fixed cost, it is banned from producing and must shutdown in the short run. When a firm shuts down, its losses equal its fixed costs (Begg 2009).
Monopoly market structure
On this market structure, a single firm is the only producer of a product or services and there exist no close substitutes. Examples of monopoly market structures are the professional sports leagues and public utilities.
Profit maximization in monopoly market structure
The Marginal Revenue (MR) = Marginal Cost (MC) (MR=MC) rule gives the profit maximization output of a monopoly firm. Monopolists do not change the highest price possible, but maximizes profit where Total Revenue (TC) minus Total Cost (TC) is the greatest. The profit level depends on the amount sold and also the price. Monopolist can change the price of a commodity in order to increase the profit output level (Wigley 1996).
Comparing and analyzing the characteristics of Monopoly and Perfect Competition
Homogenous product versus unique product
Firms under the perfect competition market structure sells homogeneous products. The market structure composes of a large number of small firms selling identical products. A monopoly market structure offers unique products, and there are very few substitutes. As a result of offering a unique product, the monopoly market structure charges higher prices while producing less while the perfect competition offers low prices and high production output. Figure 1 shows demand curve for a firm under the perfect competition in the short-run. The increase in price of products in perfectly competing firm leads to decreased demand. The blue flat line shows that D=AR=MR, meaning demand (D) equals average revenue (AR) that equals marginal revenue (MR). In the short run, profits are greater than zero in a perfect competition (Wigley 1996).
Figure 2 shows the demand curve for a firm in monopoly market structure in short-run. From the graph, an increase in demand has no effect on the quantity demanded. Since the firm sells unique products, customers will always demand the product irrespective of the quantity and price. As shown on the graph, profits equal zero (profits=0). The green section shows profit while the pink section indicates the dead weight loss (DWL).
Figure 1: demand curve for a perfect competition
Figure 2: Demand curve for a monopoly market structure
Many firm sellers versus only one firm seller
A perfect competition market structure composes of many firms with many sellers while a monopoly market structure is composed on one firm/ one seller. Sellers in a perfect competition are many that one seller’s decision has no impact on the market price. In the monopoly market, the price is higher than the marginal cost of production giving suppliers freedom to influence the price (Gillespie 2007). This can be shown in the curve labeled MC on figure 2.
Free entry & exit and barrier entry
Firms in a perfectly competitive market have no barriers to entry or exit, a firm can freely enter or exit an industry based on its market perceptions and level of profit. As seen in figure 3, at the long-run, free entry of firms to the industry affects the profits of only one particular company. At this level, price, marginal revenue, and average revenue are equal (P=MR=AR). On the other hand, a monopoly market structure has barriers to entry and exit. Firms under this industry have limited movements in and out of the industry (Gillespie 2007).
Figure 3: demand curve for a perfectly competitive market in long-run (barriers to entry)
Price taker and choosing own price
Firms in a perfect completion market structure pick prices decided by various firms while monopoly firms chose their own prices. In a perfectly competitive market structure, the price is optimal meaning a shift in the price has a significant benefit on one firm. The price of the product of service in a perfectly competitive market equals the marginal cost of manufacturing the particular good or service. A single seller in a monopoly structure makes decision regarding the price and the amount to produce because there are no substitutes.
The difference between normal and abnormal profits in perfect competition and monopoly
Perfect competition market structure
In case the four characteristics of a perfect competition market are met, the firm is referred to as being in a perfect competition. A firm in this market structure might find it possible to make abnormal profits in the short-run. As shown in figure 5 below, the point where the firm’s price (Average Revenue) goes beyond its Average Cost forms a situation where it can make abnormal profits. The MC cuts the AC in the lowest point where MC=MR. A firm experiences profit maximization at any point above that.
Figure 4: abnormal profit for a perfect competitive firm
On the other hand, the period of making abnormal profits for a firm in the perfect competitive market is limited to free knowledge of information, factors of production and lack of barriers to entry that can attract new industries to the market. Entry of new firms pushes the supply curve to the right (Sloman 2006). Figure 4 shows that a shift of supply curve to the right pushes prices down leading to low revenue. A change in output of an individual firm has no effect on the market price. The firm then makes normal profits in the long-run when more than one firm leaves or enters the competition.
Figure 5: Changes in supply curve due to entry of a firm in a competitive market
Monopoly response to abnormal profits
As similar to a perfect competitive market, the monopoly also maximizes profits in the short run. Since a monopoly is the sole supplier to the market, its demand curve is similar to that of the market. Abnormal profits occur where MC=MR as shown in figure 6.
Figure 6: response to abnormal profit in a monopolist
On the other hand, monopoly firms experience loss at the long run, but continue operating because they always make normal profits as opposed to perfect competitive firms who cannot run at a loss in the long run. Most monopoly firms experience a break-even in the long run. The price goes beyond marginal cost during the long run, a clear indication that consumer’s value additional units. Average costs in a monopoly might be higher than in a perfect competition because a firm in perfect competition incurs advertising costs in order to attract more customers than competitors. In addition, consumers have choices from many categories, types, brands, and different quality products (Sloman 2006).
Analysis of price discrimination to increase abnormal profits under monopoly conditions
Technology in the form of the internet has given firms the capability to gather and store information on the past market behavior of consumers and make use of this information to set different prices. Technology enables monopolists gather more information on prevailing market prices for products in different countries and decide their prices appropriately. Price discrimination refers to selling of goods or services at many different prices independent of the cost differences (Gillespie 2007). The following conditions must be fulfilled for price discrimination to occur:
A firm must identify different market segments (example, domestic users and industrial users)
Different segments should have varying price elastic demands (PEDs)
Every market should be separated from another by time, location or nature
Firms must be monopoly
Figure 7 shows curves for price discrimination using elastic and inelastic curves. Assuming the marginal cost (MC) to be constant in all markets, it then will be equal average total cost (ATC). Under this condition, profit maximization occurs where MC = MR. When markets are separated, the price and output is represented by P and Q in the inelastic curve and P1 and P2 in the elastic curve. In separate markets, profits are only realized in shaded areas on both curves. A monopolist achieves price discrimination when the profit realized from separating a sub-market exceeds the profit for combining them. Firms benefit from price discrimination if the profit achieved from separating the markets is greater than from that achieved from combining the markets. In the inelastic market, consumers pay high prices for products while those in the elastic market pay lower prices (Economics Online 2013).
Figure 7: Price discrimination using elastic and inelastic curve
Natural monopoly and government monopoly
A natural monopoly is a monopoly market structure in the industry involving the least long-run average cost of production while concentrating in a single firm. Natural monopoly market situation provides the largest supplier in the market and enjoys high cost advantages. On the other hand, a government monopoly (public monopoly) involves government agencies and corporations as the sole provider of specific products or services and there is no competition. This monopoly is created by the government where a private individual or company gets tender from the government (Agarwala 2009, p. 148).
How government policies could be used to change monopoly into perfect competition
The government should introduce policies that ensure the monopoly structure change into the perfect competition. The government should create no barriers to entry or exit in the monopoly structure so that any potential firm has the freedom to enter the market. Additionally, the government should be the only body setting prices all firms in a monopoly market structure in order to ensure every firm markets its products and create a competition.
Some monopolistic firms can be inefficient if converted to perfect competition. For example, the U.S. Postal Services cannot perform in the perfect competition industry. Introduction of close substitutes in this industry would lead to many competitors who have quality marketing skills. Good examples of losses that this firm can make include losing its revenues in intensive advertisements and promotions.
Conclusion
The above discussion clearly shows why the level of profits differs between market structures. Two types of market structures have been discussed and their characteristics analyzed. From the analysis, there is open evidence that monopoly firms will continue experiencing high profit levels compared to firms in the perfect competition. A monopolist can change the price of a commodity in order to increase the profit output level while a perfect competitor must sell products at the determined price. On the other hand, even though monopoly market structure can offer advantages to customers, such as like lower prices, because of the economies of scale this type of market structure is not recommended. Firms under the monopoly structure sell their products at higher prices but produce low efficient products due to lack of competition (Doyle, Peter and Stern 2006).
List of references
AGARWALA, S. K. (2009). Principles of economics. New Delhi, Excel Books.
ANDERTON, A. G. (2008). A level economics for AQA (4th Edition). Harlow, Longman.
BEGG, D. (2009). Foundations of economics. London, McGraw-Hill Education.
DOYLE, PETER AND STERN, PHILLIP. (2006). Marketing management and strategy
(4th Ed). Prentice Hall, Pearson Education Ltd
ECONOMICS ONLINE. (12 May 2013). Price Discrimination. Economics Online. Retrieved 01
Mar. 2014 from:
http://www.economicsonline.co.uk/Business_economics/Price_discrimination.html
GILLESPIE, A. (2007). Foundations of economics. Oxford, Oxford University Press.
SLOMAN, J. (2006). Economics. (6th Edition). New York, NY
WIGLEY, J. (1996). Introductory Economics (6th Edition), G. F. Stanlake and S. G.
Grant. Economics and Business Education : the Quarterly Journal of the Economics Association. 4, 40.
Do I have a Soul
Do I have a Soul?
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Do I have a soul?
The question of whether or not human beings have a soul is a controversial question between various disciplines of study. Science and religion have conflicted in answering the question. Religions provide solutions to the questions by arguing that human beings have a soul that gives them life. On the other hand, science explains phenomenon using facts and has not found a basis to explain what a soul is and whether it exists. The beliefs that different religions hold argue that the soul counts as the essence of a living organism, including a human being. They argue that the death of a person exemplifies the removal of the soul from the body of a human being, leading to an end to their life. This is going to argue that human beings have the soul and that the soul is the very essence of existence of human beings.
A soul can be referred to as the spiritual essence of human beings. It has been agreeable that human beings have a mind, which they use to think, and a physical body, which they use for physical work. The centre of controversy has been the spiritual aspect. While some individuals find it hard to believe that human beings have a soul, it is difficult sometimes t make them understand since the soul is not a physical object. Rather, it is an aspect of living that human beings cannot ignore since the early times. It is important for the people who have found it hard to believe a soul exists to think of how people experience emotions. It is also very paramount to consider why people feel satisfied when they worship the being that they believe. The other question that these people should ask themselves is the part of the body that is excited by worship. While people agree that there is a gain in satisfaction when people worship their being, they have refused to accept that the soul exists. If the soul may not exist, there would be no connection between a human being and the supernatural. Every form of existence requires order for easy functioning. Since human beings are the most complex of all organisms, they must function under a force that is greater than them. This force exists in the form of the world of the spirits. A connection between human beings and these forces is achieved through the soul, or the spiritual aspects of human beings.
Human beings cannot gain satisfaction by just interacting physically. They control the whole of the creation in the world. They too have controlled other human beings. Humans thus require an outside means for their control. The only way communication can happen to human beings through this external means is through the soul. The force that is beyond the physical body of human beings cannot interact with the physical. It only interacts with the spiritual aspect. This spiritual aspect is what constitutes the soul.
Human beings also experience a feeling that there is more that exists in them than just the physical body and the mind. This evident through the many questions human beings ask concerning when a soul gets into the body of human beings. Some of the postulations that have been put forward to explain this have made human beings to believe more that the soul exists. For example, many religions relate a soul to life. They argue that life begins at conception, and this is the when the soul comes into a human being. They also argue that the soul leaves when life comes to an end, which is the time when a human being dies. When an individual dies, the physical body remains intact. The mind can be likened with the brain tissues which remain intact. However, a person no longer exists, because part of him has departed. The part that has departed is the soul. This acts to prove that the soul exists and that human beings have a soul.
An argument posed about the way people use their first person can be used to explain that people believe in the existence of a soul and that human beings have a soul. This is amazing because even people who claim a soul does not exist use this language, showing clearly that their physical body is different from the essence of the spirit. For example, when people are talking, they usually say: “This is my body”. When this sentence is analyzed, it shows the difference between owner of the body, and the body. If there is no aspect existing separately, people wouldn’t refer to “my body” while referring to themselves. The reference to the body appears to have been made by a separate person from the body, probably the soul. Considering this with an object, people usually say, “This is my car” when referring to their car. It shows two separate things: the owner, and the car. In the first sentence where the person says, “this is my body”, it clearly shows the existence of an “inner person”, who is invisible, and this translates to be the soul.
The concerns and worries that bother human beings are confirmations that there is more to a human being than just the observable physical body and the mind. For example, any people tend to fear darkness. The mind and the physical body cannot fear, since they provide solutions for challenges. Another example is when people watch some movies, and they experience some fears. The fears appear to come from some external force as a result of watching a movie. These two scenarios point to the existence of extra force in a human being, which influences their lives. This is the essence of the soul.
In conclusion, this essay has argued that human beings have a soul. It has considered that an inner, invisible aspect of a human being exists, and this is what departs when people die. The essay has also considered communication with the spiritual realms, and the connection becomes possible only through the soul. It has also considered the essence of the first person pronunciations and concludes that human beings have a soul.
Do I believe most CEO’s in the US companies are overpaid versus how they perform
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Do I believe most CEO’s in the US companies are overpaid versus how they perform?
I am very disappointed by the fact that CEO’s make between 350 to 1000 times the average salary of an employee. I find the idea of paying CEO’s very huge amounts of salary very repulsive since their performance does not coincide with their humongous salaries they acquire. The idea in my opinion breaks the principles that America was founded upon .The guideline of ensuring domestic tranquility and promoting general liberty I believe is also hugely violated. I believe most CEO’s are overpaid in the USA this is a result of selfish and corrupt corporate deals. The saddest thing is that while the average worker receives almost nothing the CEO’s receives bonuses, enormous wages and are under an umbrella clause.
A survey conducted by the business week indicated that in 1980 a CEO In a major corporation earned about 42 times more than the average worker. Surprisingly enough the figure by 1980 had escalated to up to 85 times. In 2000 the figure was an imaginable reaching up to 531 times. Recently the aspect of pay for performance has started being critically analyzed by corporations. The move aims at binding compensation with financial success of a company. Most CEO’s presume that their talent is the cause of the marvelous appreciation of the value of a company which is not the case.
In my opinion CEO’s are overpaid and the move has very little effect on the CEO’s performance. The salary has no quantifiable result on the performance of the company they head. The only measurable impact that is evident is the ever increasing gap between the workers who are depend upon to provide result and the so called CEO’s. Management professionals should intervene to handle the situation and bring equity on matters of compensation for both sides. Respect and trust can still be salvaged between the individual contributors and the upper management. I predict that if an immediate action is not taken then resultant motivation and worker motivation will plummet.
The human resource department on the other hand fights back and defends the escalating pay packages belonging to the senior executives. The department explains that the move is intended to compensate and avoid the risk of an outsider CEO being brought in to handle an operation that is in jeopardy. An outside CEO according to the department could bring a lot of chaos to the organization. Paying the current CEO’s high salaries is just to them. I tend to agree with the fact that new CEO’s lay off older team members and bring in their new members who they presume to be more reliable. Their aim is to bring in new ideas new energy and new blood but the move has multiple ripple effects. The biggest effect is on the erosion of the successor bench power.
The move opens doors for more trouble where the new team needs approximately one year to develop a strategic plan and another year to confirm if it will work. Rapid results will be expected especially from huge shareholders such as pension funds therefore a further move to fire older second tier managers and recruit new ones. Therefore the department or board will hold on to the CEO they hired to avoid all these problems as long as they trust the individual. Due to fear of losing the individual they cave in to the demands the CEO makes such as a demand for a humongous salary.
To avoid a situation where the salary of a CEO’s is almost unreasonable when compared with that of an average worker the board should aim at promoting internal candidates as a tactic to handle the situation. The salary of a newly promoted senior executive is more likely to be realistic than that of a newly brought in CEO’s from a different company. I believe the board should also avoid treating the CEO’s as a savior or a supreme being but should focus on developing and learning the individual’s performance curve. The move is essential for corporate survival. I am sure the promotion of internal candidates is the ultimate solution to the problem of overpayment. Internal candidates will appreciate the figure or amount of salary that the board will offer no matter the wage since a promotion is an automatic indication that an individual’s work is being appreciated. Their overall performance too as I also noted seemed to take an upward trend since they had to prove they are fit for the task.
The issue of wage imbalance I believe is therefore a detrimental to the welfare of the society and progress. Over paying CEO’s is no longer just since their performance and results do not match with their huge salaries. Technologists, nurses, cooks, doctors, teachers and other professionals who are hard -working ensure the human race progresses well every day. I also believe CEO’s deserve a higher salary than these professions but not a by a figure that is disproportionate. A difference that is not only demoralizing but also repulsive to the rest of the majority of the populace should not be allowed. There is therefore need to share the wealth accumulated across the board for real progress to be noted.
Works cited
Marianne, Bertrand. “CEOs,” Annual Review of Economics. London: University of London Press, 2009. Print.
Stendhal, Mullainathan, “Agents with and without Principals,” .New York: American Economic Review Expert Press, 2008. Print
Steven, Neil “Are US CEOs Overpaid?” Academy of Management Perspectives. Washington: Government printing office, 2010. Print.
Joshua, Rauh “Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?” New York: Rockport Publishers, 2011. Print.