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\Task 1:

3.1 compare the competitive and imperfect market structures

Imperfect competition

Market structure is where the firms that operate in a market have a lot of control over the good or 

service they produce. This will happen when the numbers of firms that produce that good or 

supply a certain services are very few in the market. Imperfect competition market structure is

the most common type of market structure in the market. We can illustrate imperfect

competition by an example in the energy sector. If there is only one gas station in your 

geographical area and you cannot afford to go and buy fuel from the neighboring gas station

 because of its distance and costs. Then your local gas station will price its commodity above the

 prevailing market prices because there is no competition from other firm. The consumers do not

have any choice but to purchase from this station at the inflated prices. The gas station has

therefore created an imperfect market.

There are four types of imperfect markets:- Monopoly only one seller! - "ligopoly few sellers of goods! - Monopolistic competition

many sellers with highly differentiated product! - Monopsony only one buyer of a product!

Competitive market structure

The level of competition in a market can be described on a spectrum from purely monopolistic#

in which a single company is the sole producer of a particular good or service# to purelycompetitive# in which a sufficient number of firms are of relatively e$ual si%e such that no one

company can influence the market in any way. Most small businesses will# almost by definition#

 be unable to exert any significant influence on the market. If a market is comprised almost

exclusively of such small businesses# it will exhibit the characteristics of a competitive market

structure.

Many Buyers and Sellers

& fundamental characteristic of competitive markets is the presence of numerous buyers and

sellers in the market. The greater number of buyers and sellers that exist# the less bargaining

 power buyers and sellers have. 'or example# if one seller of wheat attempts to increase its profits by raising the price of its wheat# the buyers in the market will simply buy wheat from one of the

numerous competitors.

e! if "ny Barriers to #$it or #ntry

(arriers to entry or exit are market or industry conditions that make it difficult to enter or leave

an industry. &n example of a barrier to exit would be the difficulty a railroad company would

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have leaving the railroad industry. The amount of money tied up in railroad tracks and other 

e$uipment that is not easily utili%ed in other industries creates the difficulty. & barrier to entry

might be a limited number of li$uor licenses in a particular city. "ne reason for so many

competitors in competitive markets is that competitive markets have very few# if any# barriers to

entry or exit

Homogeneous Produ!s

"ne reason sellers have very low bargaining power in a competitive market is that the products

or services in such markets are homogeneous. In other words# one product is almost the same as

another. )ommodities such as wheat# corn and oil are often used as examples of homogeneous

 products. "nce products start to become more differentiated# the market becomes less

competitive.

M"rg#n"$ %os! E&u"$s M"rg#n"$ Re'enue

The marginal cost of a product is the cost of producing one extra unit of that product. *imilarly#the marginal revenue of a product is the revenue generated from selling one extra unit. Marginal

cost tends to increase as production increases# while marginal revenue decreases as production

increases. )ompanies in a competitive market tend to operate at the point at which marginal cost

e$uals marginal revenue# or where they break even on the last unit produced

Imperfection and Inefficiency

Imperfectly competitive market structures are notable because they do not efficiently allocate

resources. They are inefficient because they have market control. Monopolistically and

monopsonistically! competitive firms have a modest degree of market control and oligopolistic

and oligopsonistic! firms have significant market control

http:++smallbusiness.chron.com+characteristics-competitive-markets-structure-,,.html

http:++www.amosweb.com+cgi-bin+awb/nav.pl0s1wpd2c1dsp2k1imperfect3competition

3.3 evaluate the different approaches that air%us has adopted to tar&et ne! market

se&ments

there are different types of target new market segments

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Market 'enetration

& marketing strategy used by firms to attract customers to a new product or service. 4enetration

 pricing is the practice of offering a low price for a new product or service during its initial

offering in order to attract customers away from competitors. The reasoning behind thismarketing strategy is that customers will buy and become aware of the new product due to its

lower price in the marketplace relative to rivals.

Market (evelopment

& market development strategy targets non-buying customers in currently targeted segments. It

also targets new customers in new segments. Market development strategy entails expanding the

 potential market through new users or new uses. 5ew users can be defined as: new geographic

segments# new demographic segments# new institutional segments or new psychographic

segments. &nother way is to expand sales through new uses for the product .& marketingmanager has to think about the following $uestions before implementing a market development

strategy: Is it profitable0 Will it re$uire the introduction of new or modified products .the

customer and channel well enough researched and understood. The marketing manager uses

these four groups to give more focus to the market segment decision: existing

customers# competitor customers# non-buying in current segments# new segments.

'roduct (evelopment

6eveloping new products or modifying existing products so they appear new# and offering those

 products to current or new markets is the definition of product development strategy. There is

nothing simple about the process. It re$uires keen attention to competitors and customer needsnow and in the future# the ability to finance prototypes and manufacturing processes# and a

creative marketing and communications plan. There are several subsets of product development

strategy.

(iversification

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7isk management techni$ue that mixes a wide variety of investments within a portfolio.The

rationale behind this techni$ue contends that a portfolio of different kinds of investments will# on

average# yield higher returns and pose a lower risk than any individual investment found within

the portfolio. 6iversification strives to smooth out unsystematic risk events in a portfolio so that

the positive performance of some investments will neutrali%e the negative performance of others.Therefore# the benefits of diversification will hold only if the securities in the portfolio are not

 perfectly correlated.

www.investopedia.com+terms+p+penetration-pricing.

www.wikipedia.org+wiki+Market development

smallbusiness.chron.com 8 &dvertising 2 Marketing 8 4roduct *trategies

www.investopedia.com+terms+d+diversification. 

Task )

3.) e$plain ho! or&ani*ations chan&e their output and pricin& policies as an

or&ani*ation moves more to!ards perfect competition.

Many sellers

9ach of whom produce a low percentage of market output and cannot influence the

 prevailing market price.

Many individual %uyers

 5one has any control over the market price

'erfect freedom of entry and e$it from the industry

'irms face no sunk costs and entry and exit from the market is feasible in the long run. Thisassumption means that all firms in a perfectly competitive market make normal  profits in

the long run.

+omo&eneous products

There supplied to the markets that are perfect substitutes. This leads to each firms beingprice takers; with a perfectly elastic demand curve for their product.

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'erfect kno!led&e

)onsumers have all readily available information about prices and products from

competing suppliers and can access this at %ero cost < in other words# there are fewtransactions costs involved in searching for the re$uired information about prices. =ikewise

sellers have perfect knowledge about their competitors.

'erfectly mo%ile factors of production

=and# labor and capital can be switched in response to changing market conditions# prices

and incentives.

,o e$ternalities

&rising from production and consumption.

'rice and output in the short run under perfect competition

• In the short run# the interaction between demand and supply determines the -market-

clearing; price. & price 4> is established and output ?> is produced. This price is taken

 by each firm. The average revenue curve is their individual demand curve.

• *ince the market price is constant for each unit sold# the &7 curve also becomes the

marginal revenue curve M7! for a firm in perfect competition.

• 'or the firm# the profit maximi%ing output is at ?, where M)1M7. This output generates

a total revenue 4> x ?,!. *ince total revenue exceeds total cost# the firm in our example

is making abnormal economic! profits.

• This is not necessarily the case for all firms in the industry since it depends on the

 position of their short run cost curves. *ome firms may be experiencing sub-normal

 profits if average costs exceed the price < and total costs will be greater than total

revenue.

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The adustment to the lon&/run e0uili%rium in perfect competition

• If most firms are making a%normal profits in the short run# this encourages the entry of 

ne! firms into the industry

• This will cause an outward shift in market supply forcing down the price

• The increase in supply will eventually reduce the price until price lon& run avera&e

cost. &t this point# each firm in the industry is making normal profit.

• "ther things remaining the same# there is no further incentive for movement of firms in

and out of the industry and a long-run e$uilibrium has been established. This is shown in

the next diagram.

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We are assuming in the diagram above that there has been no shift in market demand.

• The effect of increased supply is to force down the price and cause an expansion along

the market demand curve.

• (ut for each supplier# the price they take; is now lower and it is this that drives down

the level of profit made towards normal profit e$uilibrium.

In an exam $uestion you may be asked to trace and analy%e what might happen if 

• There !as a chan&e in market demand e.g. arising from changes in the relative prices

of substitute products or complements.!

• There !as a cost/reducin& innovation affecting all firms in the market or an external

shock that increases the variable costs of all producers.

"dam Smith on Competition The natural price or the price of free competition ... is thelowest which can be taken. @ItA is the lowest which the sellers can commonly afford to take#

and at the same time continue their business.; *ource: &dam *mith# the Wealth of 5ations

>BBC!# (ook I# )hapter DII

Characteristics of competitive markets

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The common characteristics of markets that are considered to be competitive; are:

• 2o!er price

(ecause of many competing firms.The cross-price elasticity of demand for one product

will be high suggesting that consumers are prepared to switch their demand to the mostcompetitively priced products in the marketplace.

• 2o! %arriers to entry

The entry of new firms provides competition and ensures prices are kept low in the long

run.

• 2o!er total profits

&nd profit margins than in markets which dominated by a few firms.

• reater entrepreneurial activity

The &ustrian school of economics argues that competition is a process. 'or competitionto be improved and sustained there needs to be a genuine desire on behalf of 

entrepreneurs to innovate and to invent to drive markets forward and create what  Eoseph

*chumpeter  called the gales of creative destruction;.

• #conomic efficiency

)ompetition will ensure that firms move towards productive efficiency. The threat of competition should lead to a faster rate of technological diffusion# as firms have to be

responsive to the changing needs of consumers. This is known as dynamic efficiency.

"uthor: Feoff 7iley  2ast updated: Sunday 23 September, 2012

http:++tutor,u.net+economics+revision-notes+a,-micro-perfect-competition.html

4.1 e$plain the nature of factors that !ould contri%ute more to the positive

movement in the &ross domestic product of an economy.

+5M", C"'IT"2

&ll of the skills# talents# education# and abilities that human workers possess---and the

value that they bring to the marketplace 9xamples: computer# reading# writing# math #skills#talents in music# sports# acting# ability to follow directions# ability to serve as group leader 

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2 cooperate with group members a countryGs =iteracy 7ate impacts Human )apital--the

 percent of the population over > that can read 5ations that invest in the health# education#

2 training of their people will have a more valuable workforce that produces more goods 2services. 4eople that have training are more likely to contribute to technological advances#

which leads to finding better uses of natural resources 2 producing more goods

C"'IT"2 66(S

&ll of the goods that are produced in the country and then used to make other goods 2

services 9xamples: tools# e$uipment# factories# technology# computers# lumber#

machinery# etc. What is some capital goods used in our classroom. The more )apital

Foods a country have the more goods 2 services they are able to produce Money is 5"T

a capital good# but rather a medium of exchange.

,"T57"2 7#S657S#S

&ll of the things found in or on the earthJ gifts of nature; &ll resources are limited9xamples: land# water# sun# plants# time# air# minerals# oil# etc. )ountries that have a lot of 

natural resources are able to use them to produce goods 2 services cheaper than a

country that has to import natural resources

#,T7#'7#,#57S+I'

9ntrepreneurs have two characteristics that make them different from the rest of the labor 

force innovative have creative ideas! risk taker use limited resources in an innovative

way in hopes that people will buy the product!

• It can be several things:

• *tarting your own business

• Inventing something new

• )hanging the way something was previously done so that it works better 

9ntrepreneurship creates Kobs and lessens unemployment. 9ncourages people to take

risks# and in doing so# theyGve created better healthcare# education# 2 welfare programs

The more entrepreneurs a country has# the higher the countryGs F64 will beL

+o! is #conomic ro!th Measured

9conomic growth in a country is measured by the countryGs Fross 6omestic 4roduct

F64! in one year F64 1 the total amount of final goods and services produced in one

year within a country

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4.) discuss and evaluate the impacts of the a%ove mentioned factors and the e$tent to

!hich they have an impact.

The basic 49*T analysis includes four factors:

'olitical factors are basically to what degree the government intervenes in the economy.

*pecifically# political factors include areas such as tax policy# labor law# environmental

law# trade restrictions# tariffs# and political stability. 4olitical factors may also include goods

and services which the government wants to provide or be provided merit goods! and those

that the government does not want to be provided demerit goods or merit bads! .

'urthermore# governments have great influence on the health# education#

and infrastructure of a nation.

#conomic factors include economic growth# interest rates# exchange rates and the inflationrate. These factors have maKor impacts on how businesses operate and make decisions. 'or 

example# interest rates affect a firms cost of capital and therefore to what extent a business

grows and expands. 9xchange rates affect the costs of exporting goods and the supply and

 price of imported goods in an economy.

Social factors include the cultural aspects and include health consciousness# population

growth rate# age distribution# career attitudes and emphasis on safety. Trends in social factors

affect the demand for a companys products and how that company operates. 'or example# an

aging population may imply a smaller and less-willing workforce thus increasing the cost of 

labor!. 'urthermore# companies may change various management strategies to adapt to thesesocial trends such as recruiting older workers!.

Technolo&ical factors include technological aspects such as 726 activity# automation#

technology incentives and the rate of technological change. They can determine  barriers to

entry# minimum efficient production level and influence outsourcing decisions. 'urthermore#

technological shifts can affect costs# $uality# and lead to innovation.

9xpanding the analysis to 49*T=9 or 49*T9= adds:

2e&al factors include discrimination law# consumer law# antitrust law# employment law#

and health and safety law. These factors can affect how a company operates# its costs# and

the demand for its products.

#nvironmental factors include ecological and environmental aspects such as weather#

climate# and climate change# which may especially affect industries such as tourism# farming#

and insurance. 'urthermore# growing awareness of the potential impacts of climate change is

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affecting how companies operate and the products they offer# both creating new markets and

diminishing or destroying existing ones.

"ther factors for the various offshoots include:

(emo&raphic factors include gender# age# ethnicity# knowledge of languages# disabilities#

mobility# home ownership# employment status# religious belief or practice# and income level.

7e&ulatory factors include acts of parliament and associated regulations# international and

national standards# local government by-laws# and mechanisms to monitor and ensure

compliance with these.

wikipedia.org+wiki+49*T analysis

4.3 evaluate the impact of #uropean 5nion on the functionin& of the or&ani*ations in

58.

"ur national government as well as the 9uropean Nnion plays a big part in influencing

 business activity today:

o through taxation and spending

o through laws# directives and regulations

o through encouraging business activity through subsidies and support

o  by providing advice and support for business

#mployment policy: It is instrumental for a small amount of unemployment to be present in

the economy# so that Kobs are created for people. Hence# The NO Fovernment has put down

some ground-rules to curb unemployment to this safety level. The Fovernment helps those

unemployed to identify Kobs# and has workshops throughout the country for identifying their 

re$uirement. The Fovernment has also introduced a policy called 5ew 6eal;# which aims at

offering unemployed youths training programmers# and providing them with experience in

Fovernment funded programmers.

Commerce 'olicy: Fovernment identifies certain industries that are instrumental to the

economy and provides them with subsidies. *ubsidies are a freehold provided by

Fovernment# for an industry that produces consumer necessities# like &griculture# "il# and

other such necessities. The Fovernment allows the companies to sell the product for less than

Marginal cost of manufacturing+processing the product# and in turn# provides these firms with

cash incentives. This promotes the product in the view of the public# hence# is favorable to

the business. "n the other hand# companies also levy additional taxes for industries that are

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 potentially harmful to the society. 'or example# the )igarette industry is levied a huge

amount of taxes to prevent sales of )igarettes to the public# due to the knowledge that these

 products do not benefit the society.

Inflation policy: The Fovernment# along with the )entral (ank sees to the fact that price

appreciation in a country is in a smooth fashion. This is done with the help of monetary policies. 9xpansionary Monetary policies help in adding li$uidity in the financial markets#

which gives rise to inflation. This is used when the market has been in a recession# with

stagnating inflation rates. "n the contrary# )entral banks could use recessionary monetary

 policies that would reduce the money supply in the Market. This would also reduce Inflation.

This is done in cases where market has grown more than the sustainable growth rate. &nother 

way is to change the (orrowing rates Interest 7ates! in the markets. If (orrowing rates are

sufficiently high# there would be shortage of money in the market# which would reduce the

level of inflation# and vice versa. The Fovernment will try to bring the inflation levels to that

which is sustainable in the long run. Inflation is very important for the (usinesses# because

revenues have a very high co-relation with inflation rates. &lso# businesses need to constantly borrow funds from the public. Interest 7ate changes would have a pronounced effect on their 

investments.

#ducation and trainin& policy: Fovernment has been giving a lot of importance to

9ducation in the Nnited Oingdom. These include free education# and inclusion of diverse

subKects in the curriculum. This indirectly helps businesses# because# as a result of improved

education# a highly skilled workforce is developed. This helps in increasing the efficiency of 

the business.

Ta$ation policy: The Fovernment sets corporate tax rates for (usinesses# so that they paytheir taxes. This way# a 'irm can make its contribution towards the society. &s a result#

Fovernment uses these receipts for 9conomic growth and 6evelopment. 4aying taxes help

these businesses to streamline their processes# as a result of more efficient infrastructure and

management. The taxes paid also assist in supporting backward countries# so that overall

demand of their products is not only restrained to NO# but includes exports to these nations

too.

International policy: The Fovernment has a strong hand in building relationships with other 

countries. & strong relationship promotes exchange of goods between the two countries and

improves bi-lateral relationships. The Fovernment can also impose heavy excise tariffs to

discourage imports# which could potentially reduce revenues of inland companies.

  Establishing the 'rules of the game':  M"n o !2e $"3s o !2#s oun!r 2"'e

4een #n e5#s!ene or " $ong !#me. O!2ers "re mu2 ne3er. Ne3 $eg#s$"!#on "n

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4e m"de "! " Euro6e"n Un#on7 n"!#on"$ or $o"$ $e'e$. T2ese $"3s se! ou! 2o3

6eo6$e "n "nd s2ou$d 4e2"'e !o3"rds one "no!2er7 "nd 6"r!#u$"r$7 2o3 4us#ness

s2ou$d 4e ondu!ed. T2e "re 'er #m6or!"n! #n se!!#ng 8!2e ru$es o !2e g"me.

http:++www.essay.uk.com+business-environments+government-and-eu-influences.phpPix%%,srWDC7cM

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