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Explainwhypricestendtobestableinoligopolisticmarkets.

Anoligopolyisamarketstructureinwhichafewlargefirms,eachwithahighdegreeofmarket
sharedominatetheindustry.Pricestabilityexistsinoligopolisticmarketseitherbecausefirms
colludeandfixpricestoeliminatecompetition,orduetothekinkeddemandcurveofthe
noncollusiveoligopoly.

Firmsinoligopolisticmarketsmostlytendtobemutuallyinterdependent.Thismeansthatdueto
thesmallnumberoffirmspresent,decisions
takenbyonefirmaffecttheotherfirmsintheindustry,hencetheydependononeanother.If
onefirmchangesitsbehaviour,theothersfollowsuit.Firmsarekeenlyawareoftheactionsof
theirrivals.

Anoncollusiveoligopolyexistswherefirmsintheindustryactstrategicallybycompeting
independently,takingintoaccountthepossibleactionsofrivalfirms.Thekinkeddemandcurve
modelexplainsthepricestability,asfirmsdonotfixorcoordinateprices.

Ascanbeseeninthediagram,oligopolisticfirmsareprofitmaximising,asshownbytheshaded
area.FirmsproduceatQ1andsellatP1.Duetotheassumptionsofmutualinterdependence,
andasymmetricinformation,thereisakinkinthedemandcurve.

Iftherearethreefirmsinamarketandoneofthemconsidersapricechange,beforechanging
itsprice,itwillanalyseandpredictastohowtheothertwofirmswillreact.Ifthefirmdecidesto
increaseitsprice,theotherfirmswillcontinuetosellatP1,notfollowingthatfirm.Insteadmore
customerswillchoosetobuyfromthefirmswiththelowerprice.Andhencethefirmthat
increasesthepricewilllosemarketshare.ThisisbecausethedemandcurvebeyondpointP1
isrelativelyelastic.Thissuggeststhatevenasmallincreaseinpricewilldecreasethequantity
sold,hencepricesarerarelyincreased.

Ontheotherhand,ifonefirmdecidestodecreasetheprice,otherfirmswillfollowsuit.Theywill
alsodecreasetheirpricesbecause,ifnot,thefirmwiththelowestpricewillgetthemarketshare
oftheothertwofirms,makingtheothersworseoff.However,ifallfirmsreduceprices,the
demandcurvebelowP1isinelastic,implyingthatevenalargepricedecreasewillonlyresultin
asmallincreaseinquantitysold.Therefore,itisbeneficialforallfirmstokeeppricesstable.

Collusiveoligopoliesalsohavestablepricesbecause,thefewlargefirmsdominatingthe
market,cometogetherandfixprices,formallyorinformally.Thisallowsallthefirmstobenefit,
astheyreabletochargehighpricesandbecomeprofitmaximisers,atthesametimeproduce
lessandeliminateallformsofcompetition.

AnexampleofanoligopolisticmarketisSingaporestaxiindustry.Sixlargefirmsdominatethe
market.Thepricestendtobeverystableasmostfirmschargesimilarfareprices.Anyprice
changesinitiatedbythemarketleader,allotherfirmstendtofollowsuit.Thisisalsovisiblein
thesmartphoneindustry,wherefirmslikeAppleandSamsungchargesimilarpricesfortheir
smartphones.

Oligopolistsoftenpossesstoomuchmonopolypower.Evaluatewhether
governmentsshouldinterveneinoligopolisticmarkets.

Oligopolieshaveafewlargefirmswhichdominatetheindustry.Oftentimesoligopoliespossess
monopolypowerwhichiswhenallfirmscometogether,thatistheycollude,hencebehaving
likeonelargefirm.Whenfirmsengageinanticompetitivebehaviour,governmentsshould
intervene,asthiscouldharmthirdpartiessuchasconsumers.

Mainlyacollusiveoligopolyisonethatbehaveslikeamonopoly.Whenfirmscometogetherand
fixprices,theyeliminatecompetition.Oncecompetitioniseliminatedallfirmscanenjoyhigh
profits,makingthemallprofitmaximisers.Quotasonquantitieseachfirmsellsisalsoset.

Ascanbeseenfromthediagram,tomaximiseprofits,firmswillsellatthepointwhereMC=
MR,whichisQpmandchargethepricePpm.Ascanbeseen,thequantityislesserthanmarket
equilibriumandpriceishigherthanequilibrium.Averagecostsarelow,henceprofitcanbe
earned,asshownintheshadedarea.Theprofitsareequallysharedamongstcolludingfirms,
andquantityissplitamongstfirms.Inthecaseofcollusion,governmentsmustintervene.

Firstly,whenoligopolistsarebehavingasmonopolies,consumersarethefirstonestobe
exploited.Consumersloseoutthemostbecausetheyenduphavingtobearhighprices,

especiallyiftherearenosubstitutes.Furthermore,consumersurplusdeclinesgreatly.Itrather
becomespartoftheproducersurplus.Thiscreatesinequalityanddisparityinthedistributionof
income.Inaddition,whenfirmsbehavelikemonopolies,theybecomeallocativelyand
productivelyinefficient.Inpursuitofhigherprofits,firmchargehigherpricesandrestrictoutput.
AlsotheylackincentivetoproduceatthelowestpointofAC.Alsoduetohighbarriersofentry,
itisverydifficultfornewfirmstoenterthemarkets.Hence,itiscrucialforgovernmentstotake
actioninordertopreventexploitation.

Whenfirmsexploitmarketpowerandactagainstpublicinterest,governmentsthroughpolicies
canbreakmonopolypower.Forexampleagovernmentcanstopthemergeroftwolargefirms,
ifthemergewillnotbebeneficialforthepublic.Also,inmostcountriesgovernmentshavemade
theformationofcartelsillegal,soanyformofcollusionthatoccursismerelysecretive.
Furthermore,governmentscanintroducepricecontrols,bysettingmaximumprices.Thisisto
preventfirmsfromcharginghighpricestoconsumers.Inaddition,governmentsoftenchooseto
supportsmallerfirms,forexamplebygivingthemgrantsandsubsidies.

However,therearedrawbacksofthegovernmentinterveninginthemarkets.Firstlymonopoly
powers,sinceareprofitmaximisers,haveaccesstolargeamountsoffinancialresources.They
areabletoinvestinresearchanddevelopmentprojects,andtheyareabletogeneratenew
ideasandproducts.Furthermore,oligopolisticfirmstendtoenjoyhugeeconomiesofscaleas
theyoperateonalargescale.

Inconclusion,itdependsoneachindustry.

Explainhowbusinessspendingonresearchanddevelopmentand
governmentexpenditureoninfrastructuremightshiftthelongrunaggregate
supplycurve.

Aggregatesupplyistheamountofrealnationaloutputthatfirmsarewillingandabletoproduce
ateachpricelevel.Accordingtothenewclassicalmodel,thelongrunaggregatesupplyis
verticalatthefullemploymentlevelofoutput.theLRASisindependentofthepricelevel,asthis
representsthemaximumlevelofnationaloutputoftheeconomypertimeperiod.Thequantity
andqualityofnaturalresources(factorsofproduction)affecttheLRAS.

Researchanddevelopmentiswhenfirmsspendinimprovingtheirproductsorservices.Or
wheninvestmentsaremadetoimprovetechnologyasmeansofincreasingproductivecapacity.
Infrastructureareessentialservicessuchasroads,buildings,powersuppliesetcthatare
importantforincreasingefficiencyofeconomicactivity.Theseareprovidedbythegovernment.

InvestinginR&Dandinfrastructurearecrucialtoacountryseconomy.Theyfostereconomic
growth.Theimprovementinthequantityandqualityofthefactorsofproductionincreasesthe
productivecapacityoftheeconomy.Sustainableeconomicgrowthonlyoccurswhenthereisa
shiftintheLRAScurve.

Ascanbeseeninthediagram,ashiftintheLRAScurvesuggeststhateconomicgrowthhas
beenachieved.Thisgrowthissustainableastheeconomyisnowcapableofproducingmore
outputthanbefore.

Firmsspendonresearchanddevelopmentandthisimprovesthequalityofphysicalcapitalsuch
asmachineries.Longterminvestmentsindevelopingnewtechnologiesimprovework
processesandenhanceefficiency,increasingtheproductivecapacity.Withmorefasterand
efficienttechnologyfirmsareabletoproducelargerquantitiesofoutput,whichresultsinthe
shiftoftheLRAS.Forexample,R&Dhaveallowedfortheautomationinthecarindustry,vastly
improvingtheproductionofcars.Wirelesstechnologieshaveallowedcommunicationand
operationstoimproveattheworkplace.Innovationhaveledtothedevelopmentofproducts
suchassmartphonesandtablets.LargefirmslikeAppleandSamsungspendenormous
amountsinR&Dtoimprovetheirproductsandthetechnologiestheyuse.

Inaddition,infrastructureisthebasicsupportsystemoftheeconomyandhencegovernments
investinimprovingthequalityastoincreaseefficiencyofthesystem.Investmentisakey
componentofaggregatedemandaswell,andhenceanincreaseinADwillboosteconomic
growthintheshortrun.InvestmentsinthelongrunwillshifttheLRAScurvetotherightand
attractforeigndirectinvestment,helpingtheeconomytoflourishevenmore.Governments
spendonimprovingtransportationsystems,fromroadstorailwaystations,telecommunications,
electricitygridsandsewagesystems,allasmeansoffosteringeconomicgrowth.

Evaluatetheeffectivenessofinterventionistsupplysidepoliciestoachieve
economicgrowth.

Supplysidepoliciesaregovernmentstrategiesaimedatboostingtheproductivecapacityofthe
economybyincreasingthequalityandquantityoffactorsofproduction.ByimprovingtheFOPs
longtermeconomicgrowthcanbeachieved,withashiftintheLRAScurveasshowninthe
diagram.Interventionistpoliciesaredeliberateattemptsbythegovernmenttodealwithmarket
imperfectionsintheeconomy.Theyfocusonfourareas:investmentinhumancapital,
investmentintechnology,investmentininfrastructureandindustrialpolicies.

Humancapitalreferstotheknowledge,skillsandexpertiseoftheworkforce.Animportantpart
oftheinterventionistpolicyhasbeentoincreasehumancapitalandspendoneducationand
trainingtoraisetheskills,mobilityandproductivityofthelabourforce.Educationhasapositive
externalityandseveralbenefits.Itincreasestheemployabilityoftheworkforce.Lessindividuals
remainunemployedandhenceitalsoincreasesthesizeoftheworkforce.Trainingisbeneficial
asthelabouracquiresmoreskillsandhenceproductivitygoesup,increasethequantityof
outputproduced.Furthermore,improvedcommunicationcanreducefrictionalunemploymentin
theeconomy.Whilebetterhealthoftheworkersdecreasesabsenteeismandimproves
productivity.TheincreaseinADinshortandrunandshiftintheLRASsuggeststhathuman
capitalimprovestheproductivecapacityoftheeconomyandisvitalforthegrowthand
development.

Longterminvestmentsindevelopingnewtechnologies,throughR&Dimproveworkprocesses
andenhanceefficiency,increasingtheproductivecapacity.Withmorefasterandefficient
technologyfirmsareabletoproducelargerquantitiesofoutput,whichresultsintheshiftofthe
LRAS.Infrastructureisthebasicsupportsystemoftheeconomyandhencegovernmentsinvest
inimprovingthequalityastoincreaseefficiencyofthesystem.

Industrialpoliciesarethosethattargetspecifickeyindustriestopromoteeconomicgrowth.For
exampletaxallowancescanbeusedtoprotectdomesticinfantindustriesfromlargerforeign
rivals.Taxcutsaretargetedatstrategicindustriestohelprevivethem.Acombinationoftax
breaksandsubsidiesoncommercialloanscancreateincentivesforfirmstolocateintheless
prosperousarea,whichhelpstoreduceunemploymentandfosterlongtermeconomicgrowth.

Therearehenceseveralbenefitsofgovernmentsusinginterventionistpoliciestofoster
economicgrowth.Supplysidepoliciesaremuchmoreeffectiveinpromotinggrowththan
demandsidepolicies.Thisisbecause,theyaimonachievinglongtermeconomicgrowth,which
comesfromanincreaseinproductivecapacityandashiftoftheLRAScurve.Demandside
policiesfosteronlyshortrungrowthastheymerelygobeyondproductivecapacityandreturnto
theLRAScurvelateron.Supplysidepoliciesalsohelpkeepinflationlevelslow.Anincreasein
theproductivepotentialoftheeconomyhelpstopreventtherisingofgeneralpricelevels
beyondcontrol.Unemploymentalsoremainslow,becausewhenthegovernmentspendsin
strengtheninghumancapital,theworkforcebecomesmuchmoreefficientandproductive.This
increasesnationaloutputinthelongrunasthelabourforceismoreemployable.Inaddition,
whennationaloutputincrease,itcanhelpacountryimproveitsbalanceofpayments.When
thereisinvestmentintechnology,humancapitalandinfrastructure,outputincreases,making
exportsmorecompetitive.

However,therearealsoseveraldrawbacksofsupplysidepolicies,especiallyinterventionist
policies.Thereareproblemsthatcanoccurwithgovernmentintervention.Theinterveningof
governmentsmayleadtoinefficienciesandmisallocationofresources.Alsoitreliesheavilyon
governmentspendingandthisisespeciallyaproblemwithincompetentandcorrupt
governments,hencethatwaymarketbasedpoliciesareperhapsmoreefficient.Thebiggest
drawbackofsupplysidepoliciesisthetimelag.Thetimesupplysidepoliciestaketoreapthe
benefitsisverylong.E.Gitcouldtakeanentiredecadeforanationtoenjoythebenefitsof
improvededucationandtraining,infrastructureetc.Also,itiscriticizedthatinversitionistsupply
sidepoliciesdonotnecessarilyimproveequityinthedistributionofincome,rathertheeconomic
growthcancreatemoredisparitiesinincomedistribution.

Inconclusion,Ibelievetheadvantagesofinterventionistsupplysidepoliciesoutweighits
drawbacks.Countrieswithnoncorruptgovernmentscanbenefithugelyfromthesepolicies,as
thisisthemosteffectivewaytoachievelongtermeconomicgrowth.Singaporeisoneexample
ofanationthathasbenefitedimmensely.Thegovernmentaimstoachieveeconomicgrowth
throughuseofinterventionistsupplysidepoliciesandhasbeeneffective.