A Perfect Competition

The Fresh Fish Market - A Perfect Competition

Fresh fish, it is something that we're accustomed to here in Malaysia. Fish in Malaysia is one of our staples for protein, either cooked in our favourite sweet and sour sauce, steamed with ginger and oyster sauce or made into otak-otak, it is something that always seems to be around when we think of food.

However, if you look at it from an economic point of view, the fresh fish market is one of the oldest perfect competitions in our country. It is not only a market, but also a tradition and a lifestyle for many fishermen who have had the skills for catching fish passed down for generations.

Being in a perfect competition, there is a very large amount of fishmongers in Malaysia, and all of them are selling the same thing, fish .

The fresh fish market is a very open market, as long as you have fish to sell, you're set. All you have to do is rent a stall at a local market and you can start your business. However, pricing is important when you're selling fresh fish. However, sellers must conform to the market price as they are price takers and  have no market power, so if you overcharge for your fish, you'll probably run out of business very soon.

The supply of fish is not something you tend to worry about, after all, the sea is always there, so there will always be fish, right? Well, when you really think about it, many factors can affect the supply in the fresh fish market. For example, the weather. During the heavy rain season in Malaysia, fish supply is heavily reduced, as fishermen cannot go out to sea to catch the fish. At that point, the demand would surpass the supply, and the price of fish would increase. This will result in a shortage of fish in Malaysia.

Another example is Chinese New Year. This year during the festivities, the supply of fresh fish was drastically reduced at wet markets in the cities and as the majority of Chinese wholesalers were on their Chinese New Year Holiday. Tenggiri fish were being sold between RM26 and RM27 per kilogram , Sardines between RM5-RM9, Tuna fish between RM6-RM7 and prawns between RM19-RM26 per kg depending on size. These prices are RM1-RM1.50 above their market equilibrium prices, but people still bought them.

The laws of demand and supply dictates that when prices increase, demand will decrease. But in this case, demand did not decrease. This is because, being a festive season, this was a special case. During Chinese New Year, Chinese families have family dinners and banquets where fish is usually served, and during that time of celebration, they omitted the increment in the prices for fish. This goes to show that many factors are able to influence a perfect competition and we can't just follow the generic rules of demand and supply when  we analyze the market.

Producers in the fresh fish market earn normal profit. At this point, the fresh fish sellers are putting all their resources to the best use, working at full efficiency.  The overall goal of the fishmongers is to maximize their economic profit while minimizing their costs.

Characteristics Of Monopoly Markets

A monopoly market usually means you have one firm which has no rivals and supplies to the whole market.

A perfectly competitive market will have these four characteristics:

1. Sellers are price takers
2. Buyers are price takers
3. Sellers do not engage in strategic behaviour
4. Firms can enter and exit the market freely.

In a monopoly situation the second and third ones will still hold. Here are the characteristics of a monopoly market:

Sellers are price makers – as there is only one seller in the market, it can influence the market price by its own production decisions. If the market demand curve is downward sloping then the monopoly firm faces the same demand curve, the price falls as the amount of output sold rises. So the firm can increase the market price by selling less.

Buyers are price takers – each buyer is sufficiently small in relation to the overall market that they can’t influence the market price by the amount they consume.

Sellers do not engage in strategic behaviour – when a firm makes its own output decisions, it does not take into consideration the response of other firms – because there aren’t any.

No new firms can enter the market – the monopoly firm faces no threat of entry from potential rivals. When you have a market that has only one firm producing, but the firm is producing at a lower price than you would expect it to, this could suggest that it is fearful of rivals entering and so is trying to deter entry through keeping the price down. Sometimes you will have a situation where there appears to be only one firm in the market, but it is not really a monopoly – the threat of entry will erode its market power.

In order for these four characteristics to be present, you will usually need to have:

A large number of buyers but only one seller – so that the first two assumptions hold

Goods that are not substitutable – if a firm produces goods that consumers can easily switch away from in favour of alternative goods in a different market, then it doesn’t have monopoly power because it is effectively competing with the firms in that other market.

Buyers must have full information – buyers have to be aware of the price and the characteristics of the monopolist’s product in order to make decisions of whether to buy it at the asking price

Effective barriers to entry – these could be legal (requiring a licence to enter) or because of control of key inputs, you can easily have a monopoly railway company because if it controls the rail network, nobody is likely to build a new railway to compete

P/S : Go to this link to read full article :)

https://mnmeconomics.wordpress.com/2011/08/14/monopoly-market/

Consumer Surplus And Producer Surplus

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The central bank, in its annual report 2016, said the performance of the current account would continue to be influenced by global and domestic developments in the near term

PETALING JAYA: Bank Negara expects the current account (CA) surplus to narrow in the years ahead, with the CA to register a surplus of between 1% and 2% of gross national income (GNI) this year.

The central bank, in its annual report 2016, said the performance of the current account would continue to be influenced by global and domestic developments in the near term.

“Malaysia’s export performance is projected to improve, in line with higher global demand and commodity prices.

“This should also support higher incomes for export-oriented firms and Malaysia’s outward foreign direct investment, particularly those in the commodity-related sectors.

“Investments are expected to continue to be channelled towards productive sectors,” it said.

While large-scale and more complex investment activities would contribute to raising demand for foreign goods and services, it noted that these investments would raise productive capacity and boost efficiency.

“These short-term trade-offs may be necessary to place Malaysia on a solid footing to tap on the opportunities in a fast-changing global environment,” it said.

It said the country’s current account performance could be broadly characterised by two distinct periods over the past 20 years.

It said the first period encompassed the years following the Asian financial crisis (AFC), when the CA surplus rose and peaked at 17.6% of GNI in 2008, supported by a widening trade surplus amid sustained deficits in the services and income accounts.

“During this period, Malaysia’s exports registered robust growth, supported by strong global demand and rising commodity prices. Conversely, import growth was more moderate, on account of subdued investment activity after the AFC,” it said.

The second period was following the global financial crisis of 2008, when the CA surplus began to narrow.

Export growth slowed due to persisting weakness in global demand and a sharp decline in commodity prices. Demand for imported goods, however, improved, supported by stronger domestic demand.

The current account surplus then settled at 2.1% of GNI in 2016.

Bank Negara noted that Malaysia’s current account movement has been influenced by three major global and domestic developments in recent years.

First, it said, was the prolonged period of slow growth in the global economy and the uneven growth momentum across the advanced and emerging market economies.

More recently, advanced economies have begun to recover gradually, while growth in the emerging market economies has moderated.

“Second, global commodity prices have declined sharply, with a low prospect for prices to return to their previous levels.

“Third, investment in the Malaysian economy, particularly by the private sector, has continued to expand,” it said.

These factors point to the five key developments in Malaysia’s current account balance since 2008 – a declining goods surplus, lower travel surplus, higher payments to foreign service providers, sustained large income deficit (foreign direct investment-direct investment abroad) and the surge in foreign worker remittances.

The last microeconomics concept is the consumer surplus, producer surplus and deadweight loss. Consumer surplus happens whenever a price paid by consumers is less than the price that a consumers willing to pay. (Economics online, 2015) It is calculated by multiplying every unit of quantity with its price, the total will be the consumer surplus. In the same way, producer surplus happens when price received from the market is more than the minimum price they are willing to receive in order to continue supplying. (Economics online, 2015) The minimum price they are willing to receive is actually their cost, a producer will at least need a minimum price that is able cover their production cost. Similarly, it is calculated by multiplying every unit of quantity with its price, the total obtained will be the producer surplus. Summing these two figure up will get a total surplus. 

   
Coming to this part, deadweight loss has to be mentioned. Deadweight loss is a cost to society including consumers and producers caused by market inefficiency. (Investopedia, 2015) In other words, this specific cost refers to a virtual burden that is to be borne by the consumers and the producers. It will not directly affect us but it will decrease the benefit we could have gained. The economists are always trying to maximise the total surplus in order to reach market efficiency so that deadweight loss can be minimised in the market. As a result, if the market does not maximise its total surplus, deadweight loss appears. Normally, market efficiency is unachievable.

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Conclusion

   Using the three microeconomics concepts I have explained, it is clearer to understand the reason for this effect. Elasticity, market equilibrium, consumer surplus, producer surplus and deadweight loss, these are the most common things that an individual will most probably need to know. After understanding this, we will be able to explain others.

The Production Function

In economics, a production function relates physical output of a production process to physical inputs or factors of production. It is a mathematical function that relates the maximum amount of output that can be obtained from a given number of inputs – generally capital and labor. The production function, therefore, describes a boundary or frontier representing the limit of output obtainable from each feasible combination of inputs.

Firms use the production function to determine how much output they should produce given the price of a good, and what combination of inputs they should use to produce given the price of capital and labor. When firms are deciding how much to produce they typically find that at high levels of production, their marginal costs begin increasing. This is also known as diminishing returns to scale – increasing the quantity of inputs creates a less-than-proportional increase in the quantity of output. If it weren’t for diminishing returns to scale, supply could expand without limits without increasing the price of a good.

Factory Production: Manufacturing companies use their production function to determine the optimal combination of labor and capital to produce a certain amount of output.

Increasing marginal costs can be identified using the production function. If a firm has a production function Q=F(K,L) (that is, the quantity of output (Q) is some function of capital (K) and labor (L)), then if 2Q<F(2K,2L), the production function has increasing marginal costs and diminishing returns to scale. Similarly, if 2Q>F(2K,2L), there are increasing returns to scale, and if 2Q=F(2K,2L), there are constant returns to scale.

Examples of Common Production Functions

One very simple example of a production function might be Q=K+L, where Q is the quantity of output, K is the amount of capital, and L is the amount of labor used in production. This production function says that a firm can produce one unit of output for every unit of capital or labor it employs. From this production function we can see that this industry has constant returns to scale – that is, the amount of output will increase proportionally to any increase in the amount of inputs.

Another common production function is the Cobb-Douglas production function. One example of this type of function is Q=K0.5L0.5. This describes a firm that requires the least total number of inputs when the combination of inputs is relatively equal. For example, the firm could produce 25 units of output by using 25 units of capital and 25 of labor, or it could produce the same 25 units of output with 125 units of labor and only one unit of capital.

Finally, the Leontief production function applies to situations in which inputs must be used in fixed proportions; starting from those proportions, if usage of one input is increased without another being increased, output will not change. This production function is given by Q=Min(K,L). For example, a firm with five employees will produce five units of output as long as it has at least five units of capital.

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Scarcity and Choice

In this article we will discuss about Scarcity and Choice as Economic Problems. After reading this article you will learn about: 
1. The Problem of Scarcity 

2. The Problem of Choice.

The Problem of Scarcity:

We live in a world of scarcity. People want and need variety of goods and services. This applies equally to the poor and the rich people. It implies that human wants are unlimited but the means to fulfil them are limited. At any one time, only a limited amount of goods and services can be produced. This is because the existing supplies of resources are extremely inadequate. These resources are land, labour, capital and entrepreneurship.

These factors of production or inputs are used in producing goods and services that are called economic goods which have a piece. These facts explain scarcity as the principal problem of every society and suggest the Law of Scarcity, The law states that human wants are virtually unlimited and the resources available to satisfy these wants are limited.

The Problem of Choice:

Since are live in a world of scarcity, a society can produce only a small portion of goods and services that its people want. Therefore, scarcity of resources gives rise to the fundamental economic problem of choice. As a society cannot produce enough goods and services to satisfy all the wants of its people, it has to make choices.

A decision to produce one good requires a decision to produce less of some other good. So choice involves sacrifice. Thus every society is faced with the basic problem of deciding what it is willing to sacrifice to produce the goods it wants the most.

For instance, the more roads a country decided to construct the fever resources will there be for building schools. So the problem of choice arises when there are alternative ways of producing other goods. The sacrifice of the alternative (school buildings) in the production of a good (roads) is called the opportunity cost.

There are a number of problems that can arise from choices that are made by people, whether they are individuals, firms or government. Choices or alternatives (or opportunity cost) are illustrated in terms of a production possibility curve.

A production possibility curve shows all possible combinations of two goods that a society can produce within a specified time period whose resources are fully and efficiently employed.

PP₁ is the production possibility curve in Fig. 1 which shows the problem of choice between two goods X and Y in a country. Good X is measured on the horizontal axis and Good Y on the vertical axis. PP cue shows all combinations of X and Y good that can be produced by the country with all its resources fully and efficiently employed.

If the country chooses to produces more of X good, it would have to sacrifice the production of some quantity of Y good. The sacrifice of some quantity of Y good is the opportunity cost of producing some extra quantity of good X.

The PP₁ curve is downward sloping because to produce more of good X involves producing less of Y good in a fully employed economy. Moving from point В to D on the PP_{ curve means that for producing XX, more quantity of good X, YY quantity of good Y has to be sacrificed.

Both point’s В and D represent efficient use of country’s resources. Point R which is inside the bounder of PP curve implies inefficient use of resources. Point К which is outside the boundary of PP_X curve is an unattainable combination because the country does not possess sufficient resources to produce two combination of X and Y goods.

PRODUCTION FUNCTION IN THE SHORT RUN

The short run production production assumes there is at least one fixed factor input

Production Functions

• The production function relates the quantity of factor inputs used by a business to the amount of output that result.

We use three measures of production and productivity:

Total product (total output). In manufacturing industries such as motor vehicles, it is straightforward to measure how much output is being produced. In service or knowledge industries, where output is less “tangible" it is harder to measure productivity.

Average product measures output per-worker-employed or output-per-unit of capital.

Marginal product is the change in output from increasing the number of workers used by one person, or by adding one more machine to the production process in the short run.

The length of time required for the long run varies from sector to sector. In the nuclear power industry for example, it can take many years to commission new nuclear power plant and capacity. This is something the UK government has to consider as it reviews our future sources of energy.

Short Run Production Function

• The short run is a time period where at least one factor of production is in fixed supply
• A business has chosen its scale of production and sticks with this in the short run
• We assume that the quantity of plant and machinery is fixed and that production can be altered by changing variable inputs such as labour, raw materials and energy

Diminishing Returns

• In the short run, the law of diminishing returns states that as more units of a variable input are added to fixed amounts of land and capital, the change in total output willfirst rise and then fall
• Diminishing returns to labour occurs when marginal product of labour starts to fall. This means that total output will be increasing at a decreas
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• https://www.tutor2u.net/economics/reference/production-function-in-the-short-run