Monopoly and Oligopoly

1.0  Define and explain Monopoly and Oligopoly. 

Monopoly is a market situation in which a single enterprise or company controls much of the market niche by virtually being the owner of all or nearly all source of products or services in the market. In a monopolistic market setup, the monopoly’s products are unique and without any close substitutes. The firm is able to control the market price. For other market players the entry to monopolized industry is, thus, blocked by this price control. Usually, such a firm does not advertise to compete but rather in a form of public relations.

This kind of market setup is usually characterized by absence of meaningful competition with similar companies. As such the sole market player usually sets the market price for those products or services at his own discretion. This may lead to exorbitant prices in the market of goods or services, which quality may at times not match the pricing; hence, the market is usually flooded with inferior products. Depending on the market size, these monopolies may continue to amass even more monopolistic powers as the company grows, usually at the expense of the consumers. This power comes as a result of the ability of the firm to set the prices on its products itself.

On the other hand, an Oligopoly is a market structure in which only few sellers offer similar or identical products. Usually, any of the sellers can have a large impact on the profits of all other sellers. This market structure is usually characterized by a small number of firms which must act strategically to remain relevant in their market niche.  This kind of market structure is usually kept at equilibrium by the intrinsic interests of each firm to profit and take over the others, there comes the need for the firms to co-operate. Since these are two antagonistic needs for such a structure, eventually each market seller driven by self-interest to sell its products at a price above their marginal level starts acting like a monopoly.

Importantly, the ability of the firm to survive in such kind of a market is based on its swift capabilities to adapt from time to time with changes made by their counterparts. The need for each firm to maximize its profits in such a market structure ensures that an oligopolistic market remains disjointed and without the firms cooperation.

2.0  Effects of Monopoly and Oligopoly on the Competitive Market and the Consequences of Each.

As earlier noted, there is little or no competition at all in a monopolistic market structure, since there is only one seller, who sets prices at what the products to be sold. These monopolistic powers may at times force other sellers out of the market. Such exits by firms means even more market control by the monopoly making it very hard for other sellers to enter in the market. Unless if one with high selling potential and marketing strategy is able to offset the monopoly.

However, oligopoly market structure presents an interesting scenario, where the sellers or businesses in such a market treat each other with suspicion being driven by intrinsic self interests; an urge appears to make profits in a niche with other similar products of its competitors. Since there is a sufficient number of sellers and buyers in this market structure, the ability to survive usually lies in the ability of the firms to continuously increase their products’ quality while maintaining the prices low, just above the marginal price. This competition ensures that the buyers get quality products at relatively cheaper prices while each of the sellers is able to get just enough payment for the factors of production. The demand and supply curve in such a market are usually at equilibrium, intersecting at a minimum supply price, Po. At this price, the market is usually at its optimum efficiency.

3.0  Price Elasticity of Demand.

Elasticity is the units-free measure of the responsiveness of quantity demanded by the consumers or those supplied by the producers to one of its determinants. Price elasticity of demand is the measure of how much the quantity of a product demanded by the consumers responds to a change in the price of that good. Usually, this demand may either be elastic or inelastic. Elastic demand occurs when the demanded quantity responds substantially to the price change of the product, while demand is inelastic if the quantity of products demands slightly to change the product’s price. To calculate the price elasticity of a demand, the ratio of the percentage rate of change of demand to percentage change in price is taken and this ratio is negative, the final elasticity is taken to be positive, while the negative sign is assumed. This negativity is due to the fact that the demand decreases when the price increases, it is rather the law of demand and supply. 

Price Elasticity of Demand= (% Change in Quantity demanded)/ (% Change in Price)

Conversely, price elasticity of supply is the measure of how much quantity of a product supply changes with respect to a change in price.  Arguing from this definition, it is thus notable that the value of elasticity of supply ispositive, due to the fact that quantity supplied increases with an increasing product’s price and vice versa-law of supply and demand. This elasticity can be calculated by finding the percentage ratio of percentage change in quantity supplied to the percentage change in price.

3.1  Factors affecting Magnitude of Price Elasticity of Demand.

Magnitude of price elasticity of demand is usually affected by the close availability of other substitutes in the market. This therefore implies that the more the number of similar products in the market that can act as substitutes for a particular product, then the higher the  price elasticity of demand for that product. The demand for a commodity would turn out to be very elastic if there were other commodities that could be used instead. A small increase in the commodity’s price will induce consumers to use its immediate substitutes. For instance, when the cost of cooking gas goes high, consumers may opt to use firewood or charcoal as substitutes for the same purposes almost immediately.

Similarly, the proportion of a consumers income spent on a particular good translates to a higher price elasticity of demand for that particular product.  Generally, the demand for very costly and very cheap goods is elastic.

The time period also affects the magnitude of the price elasticity of the demand for a particular product. Insofar, the longer the time period of the change in price of a particular product is, the more elastic is the demand. For instance, if there is a change in the price of petrol, the consumers will not immediately respond to the changes until over a given period of time when the demand starts to fall continuously.

Interestingly, our habits and the nature of the commodities also affect the magnitude of the price elasticity of demand for these commodities. For instance, the change in price of a commodity usually considered as a luxury is elastic while the demand of necessities with changing prices is inelastic. This is because people will always demand for certain goods which are essential to life forgetting their luxuries, if they appear to be costly.

3.2  Factors affecting Magnitude Price Elasticity of Supply.

We have seen that price elasticity of a demand is affected by myriads of determinants, so as the price elasticity of supply. However, factors affecting these demand and supply elasticity vary, but  they are found on the same approaches only in different perspectives, the former being that of the buyer while the latter being that of the producer or the seller.

Availability of extra production capacity is one of the factors that determine how a producer is going to caution himself from overwhelming demand. If there is plenty of spare capacity, then a business is able to increase its output without increasing the cost of production and a consequential marginal price and therefore supply will be elastic in response to a change in a demand.

Similarly, availability of stocks of already manufactured finished products also determines the magnitude of the price elasticity of supply. If stocks of raw materials and finished products are at a high level, then a producer/seller is able to respond to a change in a commodity’s demand quickly and effectively by supplying the surplus stocks into the market without necessarily changing the commodities’ price, hence the supply will be elastic.

Additionally, the time period involved in the production process affects the magnitude of price elasticity of supply, where supply is rendered more price elastic the longer period of time, that a firm has to adjust to improve its production levels.

Insofar, the ease of factor of production substitution is a key determinant to the magnitude of price elasticity of supply. This is the case where a producer of one commodity is able to swiftly shift his production from one commodity to another so as to suite the high market demands. The ability to shift effectively determines the extent of elasticity of supply of such commodities in escalated demand.

4.0  Roles and Functions of the Federal Reserve.

The Federal Reserve System is the is the United State’s Central bank that was founded by the Congress in 1913.Its mandate was to provide the nation with a more safe, flexible and stable financial and monetary system . The financial bit of the mandate is usually handled by the Federal Reserve Bank.

The paramount duties of the Federal Reserve System relate primarily to the maintenance of a stable monetary and credit conditions favorable to sound business activity in all fields, be it in the industrial sector, the agricultural sector and commercial sector. Among the duties mandated to the system are helping other banks by lending them money, securing reserve requirements, open-market operations, setting up discount rates, buying and selling the country’s debt instruments and policy formulation and overseeing.

In a nutshell, each Federal Reserve Bank acts as a bankers' bank. The situation with member banks reserve accounts is very similar to the bank depositor’s checking account. These member banks can easily deposit in their reserve accounts or withdraw money from the reserve for different purposes, especially to receive or exchange currency and to pay out checks drawn upon them. This way the Federal Reserve System is able to ensure the stability of the country’s monetary and credit conditions.

Through its board membership, the Federal Reserve formulates monetary policies to ensure stability and reliability of the country’s financial conditions. This is especially important for the growing economy, which may encourage fraudulence if the entire system is not put on check by an external overseeing body.

Similarly, it facilitates the availability of sufficient financial strength in all sectors of the economies hence ensuring sustainability of the economy. This way, there is no sector that can collapse in expense of the others.

Insofar, through the Federal Reserve Bank, the financial structure of the United States is well regulated thus ensuring equitable resource distribution and bolstering continuous development. This involves formulation of consumer protection laws, reviewing bank compliance with the regulations and investigating complaints from the public about state member banks’ inconsistencies in complying with the regulations.

5.0  Powers of the Federal Reserve System

This body has the power to offer discounts to projects in commercial, agricultural and industrial sectors as a step towards empowering these sectors. This is done through its board members, who are mandated by the law to offer discounts to papers they deem worth it.

This system, through the Federal Bank, also receives deposits and collections from its member banks for safe keeping. This ensures that the country’s financial viability is not compromised in any way.

It has the powers to instigate the buying and selling of United State’s debt instruments such as treasury bonds, notes and bills. This ensures that there is accountability during this process hence reducing corruption and misappropriation of public resources.

This system, through its board members, has the powers to offer discounts to individuals, and startup companies and other organizations to enable them stabilize in the current volatile economy. This provision is however left to those unusual and exigent circumstances that come to the board members for considerations. In such cases, the members are supposed to vote and it requires more than five of them to be in favor of such a consideration.

The Federal Reserve System has powers to supervise over other banks for compliancy, irregularities and general financial ethics. To this effect, it has upon it powers to incur relevant disciplinary measures to non-complying members. This is particularly important so as to increase compliance and ethics in not only the banking sector but also the entire financial sector of the United States.

6.0  Who Does It Report To?

The Federal Reserve reports to a Board appointed by the Congress. The Board thereafter reports to the congress through its chairmanship.

7.0  Limits of Its Powers and Jurisdiction of its Mandate.

Although the Federal Reserve has powers, inexistence of boundaries to these powers may lender it being misused for selfish motives. As such, this body is confined to some boundaries. However, its boundaries lies in the power of democracy where any decision to be made is not made by an individual but rather by the board through a vote casting litigation procedure. The law requires that more than five of the board members must vote for any action before it is put into effect. Similarly, the body lies under the United State’s constitution hence any of its actions must be confined within the provisions of the constitution.

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