The Market System (ch. 21-24)

An oligopoly is a market dominated by a few large firms. Here are some of the main features of an oligopoly:

  • few firms
  • larger firms dominate
  • different products
    • they may be the same product, but the products will have significant differences
  • barriers to entry
  • collusion - informal agreements between firms to restrict competition
  • non-price competition
    • things such as branding and promotions
  • price competition
    • firms are afraid of price wars - where one firm in the industry reduces price to force others to do the same
    • firms have interdependence (where the actions of one country of a large firm have a direct effect on others)

Advantages of an oligopoly for consumers:

  • choice
  • quality
  • economies of scale
  • innovation
  • price wars
    • resulting in cheaper prices

Disadvantages of oligopoly for consumers:

  • cartels - where a group of firms or countries join together and agree on pricing or output levels in the market
  • no competition
    • due to the temptation of firms to collude

The price of labour is the wage rate, which is the amount of money paid to workers for their services over a period of time. Value-added products or services have an increased value because work has been done on them, they have been combined with other products and so on; this increase in value to the buyer is what the buyer pays for. Here are the factors affecting the demand for labour:

  • demand for the product
    • demand for labour is derived demand
    • derived demand is demand that arises because there is demand for another good
  • availability of substitutes
    • machines can substitute humans
  • productivity of labour
  • other employment costs:
    • national insurance contributions
    • recruitment costs
    • pension costs
    • training
    • maternity pay

The supply curve for labour slopes upwards because wages and the quantity of labour supplied are proportional. Here are the factors affecting the supply of labour:

  • population size
  • migration
  • age distribution of the population
  • retirement age
  • school leaving age
  • female participation
  • skills and qualification
  • labour mobility - the ease with which workers can move geographically and occupationally between jobs

The wage rate in a labour market is determined by the interaction of the supply and demand for labour. An equilibrium wage is determined where the supply and demand for labour are equal. Because demand for labour is derived demand, then a fall in demand for a product results in less demand for labour. The supply of labour is also quite volatile, due to population growth and adjustments to retirement age.

Trade unions are organisations representing people working in a particular industry or profession that protects their rights. Their aims are to:

  1. negotiate pay and working conditions
  2. provide legal protection for workers
  3. pressure governments to pass legislation improving workers’ rights
  4. provide financial benefits (ie strike pay) when necessary

Some things that governments have done to reduce the power of trade unions include banning secondary picketing (workers in one workforce striking in one group at a particular location to support striking workers in a different workplace) and banning closed shops (companies where all workers must belong to a particular trade union). In most cases, when trade unions force wages up, there will be more unemployment because a firm has to pay higher wages, resulting in it having less money, thus meaning that they have to either scale back hiring or make some workers redundant. Here are methods of avoiding job losses:

  • rising labour productivity
  • employers passing on wage increases to customers (ie price increases)
  • profit margins reduced

Without government intervention (where the government becomes involved in a situation in order to help deal with a problem), some businesses may neglect the needs of some stakeholders (ie environmental damage, low wages, overcharged customers). The government wants to negate any negative impacts of economic activity, such as when there are negative externalities.

Governments want to promote competition and prevent anti-competitive practices (attempts by firms to prevent or restrict competition). To do this, they could:

  • encourage the growth of small firms
  • lower barriers to entry
  • introduce anti-competitive legislation
    • eliminate practices which reduce competition
    • promote and sustain competition in markets
    • protect interests of consumers
    • ensure freedom of trade

Governments also want to limit monopoly power so that consumers are not exploited, and protect consumer interests. Some things which a firm may do which go AGAINST consumer interests include:

  • increasing prices to higher levels than they would be in competitive markets
  • price fixing - where a number of firms agree to fix the price of a [product to avoid price competition
  • restricting consumer choice by market sharing
  • raising barriers to entry

Here are the fair trade issues covered by government legislation:

  • prices
  • information about products
  • trading and age restrictions
  • customer payment methods
  • consumer rights
  • promotion of products
  • product quality
  • product safety

Furthermore, the government might ensure that markets remain competitive by controlling mergers and takeovers, by using certain conditions or by blocking a deal completely.

One way in which a government will intervene in the labour market is by setting a minimum wage. This is the minimum amount per hour that most workers are legally entitled to be paid. Here are the reasons for minimum wage:

  • benefitting disadvantaged workers
  • workers on low incomes can claim welfare benefits from the state
  • higher wages motivate workers
  • employers might ask workers to increase productivity (investing in training etc), benefits consumers

However, in theory, setting a minimum wage could result in job losses as, on a demand and supply chart, there is a movement leftwards of the number of workers in employment with a rise in the minimum wage. In practice, however, there have been many studies that minimum wages do not, in fact, reduce the level of employment, and actually, in eh long run, it is positive for the economy and for the low-wage labour market performed much better than it did beforehand.