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This coursework discusses how the economic theory in relation to two topics, one microeconomic and one macroeconomic. The work discusses first, for microeconomics, oligopoly. Second, for macroeconomics, inflation.
Oligopoly is defined as competition between a few sellers (Myers, 2022). Features of this include that the good(s) firms sell may be similar, meaning that consumers might not be too concerned which provider they purchase the good from. There may be barriers to entry – things that prevent new firms from entering the market, meaning that there is limited new competition. There is also non-price competition, in other words firms compete by any means other than by cutting price.
One important feature of oligopoly is that firms may be interdependent, meaning that what one firm does may affect other firms (Gillespie, 2011). This could be important, for example influencing firms when they are deciding what price to charge for their good or service. Firms have a kinked demand curve (Figure 1). This is because they believe that changing price will mean either they will lose customers or will face retaliation from other firms in the industry. Consequently, firms tend to keep their price at or near the going market rate.
Figure 1 The kinked demand curve (Mankiw and Taylor, 2017, p.306)
Firms in this type of market often engage in collusion – including rigging prices – and in the construction industry this often takes the form of cover pricing by contractors (Myers, 2022). Cover pricing is where firms collude to create the impression of competition but in fact the client is paying an artificially high price (Myers, 2022). Clearly this is an unacceptable situation as the competitive element of tendering has been eliminated to the disadvantage of the client.
One outcome of these factors is that oligopoly firms may be able to make super-normal profit in the long run. This is because they are exploiting their dominant market position, and so is regarded as negative; the government recognises that this type of anti-competitive behaviour is ‘bad’ for the UK economy, and so has the CMA to promote competition for the benefit of firms and consumers (Competition and Markets Authority, 2023).
Competition and Markets Authority, 2023. What we do. [online] Available at: <https://www.gov.uk/government/organisations/competition-and-markets-authority> [Accessed 23 January 2023].
Gillespie, A., 2011. Foundations of economics. Oxford: Oxford University Press.
Mankiw, G.N. and Taylor, M.P., 2017. Economics. 4th ed. Andover: Cengage Learning. Available through: Anglia Ruskin University Library website <http://libweb.anglia.ac.uk> [Accessed 10 February 2020].
Myers, D., 2022. Construction economics. A new approach. Abingdon:Routledge.
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