Comprehensive Notes – Market Structure, Government Roles & Fiscal Policy

Market Structure

  • Definition of Market Structure
    • Key characteristics defining an industry: number/size of firms, intensity of price & non-price competition, nature of entry barriers.
    • Two extreme forms: highly competitive markets ↔ monopoly.

Barriers to Entry

  • Obstacles preventing/limiting new entrants.
  • Examples:
    • Intellectual-property rights (patents, trademarks, copyrights)
    • Large advertising budgets & strong branding of incumbents
    • Economies of scale of existing firms
    • Legal constraints (licences, professional qualifications)
    • Ownership of essential resources
    • High set-up / sunk costs.

Competitive Markets

  • Real-world illustration: wet markets in Hong Kong, Singapore, S-Korea, Taiwan, Macau.
  • Key Traits
    • Many small firms → no single firm has market power.
    • Firms are price takers – price set by market forces; can only sell at PmarketP_{market}.
    • Products may be homogeneous (e.g. bananas) → competition mainly via price; OR differentiated (branding, colour, design, slogans).
    • Information symmetry: buyers & sellers easily compare price/quality.
    • Profit margins relatively low because of rivalry & ease of entry.
    • High competition ➔ benefits to consumers: better quality, wider choice, higher output, more competitive prices.

Monopoly

  • Definition – single seller dominates market; controls supply & can influence price; extreme form: pure monopoly (only supplier).
  • Examples: Coca-Cola (soft drinks), YKK (zips), Mabuchi (micro-motors), U.S. Postal Service, Federal Reserve.
  • Key Traits
    • Single supplier, few/no close substitutes.
    • Price maker – sets P > P_{competitive} by controlling output.
    • Imperfect knowledge (trade secrets, advertising).
    • High barriers to entry (scale, IP, advertising, legal).
    • Must still consider demand curve – cannot set price arbitrarily high (elasticity constraint).
  • Case Examples of Pricing Power: $1 250 astronaut Coke, $2.7 m Bugatti Chiron, $302 500 diamond Barbie, $165 000 gold BBQ, $25 000 gold-flake sundae.
Advantages
  1. Economies of scale → potential for lower ACAC, higher output.
  2. R&D funding → innovation (Apple’s iPhone/iPad).
  3. Can eliminate "wasteful" duplication (natural monopolies: postal service, water pipes).
Disadvantages
  1. Allocative inefficiency: restrict output / raise price.
  2. Inelastic demand exploited → high prices.
  3. Persistent barriers stunt competition & consumer choice.
  4. Imperfect knowledge hinders rational choice (e.g. telco tariffs, bank loans).
  5. Complacency / low innovation if profit secured.
  6. Possible need for government intervention (antitrust, fines e.g. Visa & MasterCard $7.25 bn).

Role of Government

  • Ultimate aim: improve general welfare.
  • Finances public expenditure via taxation.

Levels

  1. Local – rubbish collection, street lighting, parks, libraries, schools, hospitals.
  2. National – chooses & implements macroeconomic policy tools:
    • Fiscal (tax/spend)
    • Monetary (interest rate, money supply)
    • Supply-side (min wage, competition law)
    • Environmental measures (e.g. Paris Agreement).
  3. International – trade negotiations, treaties, membership of trading blocs (EU), setting tariffs/quotas on non-members.
Global Agreements & Goals
  • Paris Agreement 2016 – 197 countries, limit warming to 1.5 °C.
  • UN Sustainable Development Goals 2015–30 – 17 goals (end poverty, protect planet, ensure prosperity).

Macroeconomic Aims of Government

  1. Economic growth – sustained increase in real GDP; PPC shifts right.
    • \text{Growth %} = \frac{GDP{t} - GDP{t-1}}{GDP_{t-1}} \times 100
  2. Full employment / low unemployment – Unemp rate=UnemployedLabour force×100\text{Unemp rate}=\frac{\text{Unemployed}}{\text{Labour force}}\times100.
  3. Stable prices / low inflation – CPI measures weighted basket; inflation = %ΔCPI.
  4. Balance-of-payments (BoP) stability – avoid persistent current-account deficit.
  5. Redistribution of income & wealth – progressive tax, benefits, subsidies.
Conflicts Between Aims
  • Growth vs inflation; full employment vs BoP; full employment vs inflation, etc.

Fiscal Policy & Taxation

Government Budget

  • Balance=Revenue−Expenditure\text{Balance} = \text{Revenue} - \text{Expenditure}
    • Balanced, Deficit, Surplus.
  • Main revenue: taxes; main outlays: welfare, health, education, defence, infrastructure.

Reasons for Government Spending

  • Provide public/merit goods, correct market failure, redistribute income, stimulate growth.

Reasons for Taxation

  • Fund spending, influence behaviour (excise on demerit goods, carbon tax), protect domestic firms (tariffs), redistribute income.

Tax Classifications

  • Direct vs Indirect
    • Direct: income tax, corporation tax, capital gains, inheritance.
    • Indirect: VAT/GST, excise duties, tariffs.
  • Progressive – ↑ % rate as income rises.
  • Proportional – constant % rate.
  • Regressive – ↓ % rate as income rises.

Principles of Taxation (Canons)

  • Equity, Economy, Convenience, Certainty, Efficiency, Flexibility.

Impacts of Taxation

  • Prices & quantities (supply shift), growth (disincentives vs infrastructure funding), inflation, business location, social behaviour (sin taxes, plastic bag levy HK), avoidance vs evasion, redistribution.

Fiscal Policy Stances

  • Expansionary: ↑G and/or ↓T → GDP↑, jobs↑, deficit likely in short run.
  • Contractionary: ↓G and/or ↑T → curb inflation, BoP deficit, or unsustainable debt.
Links to Macroeconomic Aims
  • Growth (capital spending, tax cuts), Employment (labour incentives, start-up subsidies), Inflation (demand-management), BoP (export subsidies), Redistribution (progressive taxes, benefits).