Английский язык экономика. Учебно-методическое пособие по научно-техническому переводу, аннотированию и реферированию

Why market structures differ

We now develop a general theory of how the economic factors of demand and cost interact to determine the likely structure of each industry. The car industry is not an oligopoly one day and perfectly competitive the next. It is long-run influences that induce different market structures. In the long run one firm can hire another’s workers and learn its technical secrets. In the long run, all firms or potential entrants to an industry essentially have similar cost curves.

Monopolistic competition

The theory of monopolistic competition envisages a large number of quite small firms, each ignoring any impact of its own decisions on the behaviour of other firms. There is free entry and exit from the industry in the long run. In these respects, the industry resembles perfect competition. What distinguishes monopolistic competition is that each firm faces a downward-sloping demand curve in its own little niche of the industry.

Different firms’ products are only limited substitutes. An example is the location of corner grocers. A lower price attracts some customers from other shops, but each shop has some local customers for whom local convenience matters more than a few pence on the price of a jar of coffee. Monopolistically competitive industries exhibit product differentiation. For corner grocers, differentiation is based on location. In other cases, it reflects brand loyalty or personal relationships. A particular restaurant or hairdresser can charge a slightly different price from other producers in the industry without losing all its customers.

Monopolistic competition requires not merely product differentiation, but also few economies of scale. Hence there are many small producers, ignoring their interdependence with their rivals. Many examples of monopolistic competition are service industries.

Each firm produces where its marginal cost equals marginal revenue. If firms make profits, new firms enter the industry. That is the competitive part of monopolistic competition. As a result of entry, the downward-slop- ing demand curve of each individual firm shifts to the left. For a given market demand curve, the market share of each firm falls. With lower demand but unchanged cost curves, each firm makes lower profits. Entry stops when enough firms have entered to bid profits down to zero for the marginal firm.

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Figure 4 shows long-run equilibrium once there is no further incentive for entry or exit. Each individual firm’s demand curve DD has shifted enough to the left to just be tangent to its LAC curve at the output q* the firm is producing. Hence, it makes zero economic profits. Price P* equals average cost. For a perfectly competitive firm, its horizontal demand curve would be tangent to LAC at the minimum point on the average cost curve. In contrast, the tangency for a monopolistic competitor lies to the left of this, with both demand and LAC sloping down. The firm chooses output such that marginal revenue equals long-run marginal cost. That is the monopolistic part of monopolistic competition.

Notice two things about the firm’s long-run equilibrium. First, the firm is not producing at the lowest point on its average cost curve. It could reduce average costs by further expansion. However, its marginal revenue would be so low that this is unprofitable.

Fig. 4. Tangency equilibrium in monopolistic competition

Second, the firm has some monopoly power because of the special feature of its particular brand or location. Price exceeds marginal cost. Hence, firms are usually eager for new customers prepared to buy more output at the existing price. It explains why we are a race of eager sellers and coy buyers. It is purchasing agents who get Christmas presents from sales reps, not the other way round.

Oligopoly and interdependence

Under perfect competition or monopolistic competition, there are so many firms in the industry that no single firm need worry about the effect

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of its own actions on rival firms. The essence of an oligopoly is the need for each firm to consider how its actions affect the decisions of its relatively few rivals. The output decision of each firm depends on its guess about how its rivals will react. We begin with basic tension between competition and collusion in such situations.

Collusion is an explicit or implicit agreement between existing firms to avoid competition.

Initially, for simplicity, we ignore entry and exit, studying only the behaviour of existing firms.

The profi ts from collusion

The existing firms maximise their joint profits if they behave like a multi-plant monopolist. A sole decision-maker would organise industry output to maximise total profits. By colluding to behave like a monopolist, oligopolists maximise their total profit. There is then a backstage deal to divide up these profits between individual firms.

Having cut back industry output to the point at which MC = MR < P, each firm then faces a marginal profit (P – MC) if it can expand a little more. Provided its partners continue to restrict output, each individual firm now wants to break the agreement and expand!

Oligopolists are torn between the desire to collude, thus maximising joint profits, and the desire to compete, in the hope of increasing market share and profits at the expense of rivals. Yet if all firms compete, joint profits are low and no firm does very well.

Cartels

Collusion between firms is easiest when formal agreements are legal. Such cartels were common in the late nineteenth century. They agreed market shares and prices in many industries. Such practices are now outlawed in Europe, the US and many other countries. However, secret deals in smoke-filled rooms are not unknown even today.

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Exercise 1. Suggest the Russian equivalents for the words and word-combinations given below.

Benchmark, handful, constituent firm, downward-sloping demand curve, imperfectly, competitive firm, relevant market, domestic producer, product differentiation, interdependence, zero economic profits, long-run equilibrium, unprofitable, multi-plant monopolist.

Exercise 2. Find in the text antonyms for the following words.

Ally, relaxation, upward, to clear, shared, explicit, to discourage, seller, to contract, instability.

Exercise 3. The table shows how words are formed around the word monopoly.

Use these words in the suitable blanks in the sentences below.

1.The State Post Office is a giant ... corporation.

2.The company eventually ... the entire cigarette industry.

3.A university education shouldn’t be the ... of the rich.

4.... is a person who has a monopoly.

3.... of the travel industry by the market leaders Thomson and Airtours

is considered to be unfair practices.

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Exercise 4. Increase your vocabulary.

commercial / trade monopoly – торговая монополия; complete monopoly – полная монополия;

consolidated / shared monopoly – групповая монополия; government / public monopoly – государственная монополия; land monopoly – монополия на землю;

new-product monopoly – монополия на новый продукт;

privately owned regulated monopoly – частная монополия, регулируемая государством;

public consumption monopoly – государственная монополия, регулирующая потребление некоторых товаров (напр. алкогольных напитков);

single-firm monopoly – монополия одной фирмы.

Make some sentences of your own with the above expressions. Exercise 5. Describe the graph given in Fig. 4.

Exercise 6. Do the written translation of the passage.

“The theory of monopolistic competition ... in the industry without losing all its customers”.

Exercise 7. Review questions.

1.An industry faces the demand curve:

a)As a monopoly, with MC = 3, what price and output are chosen?

b)Now suppose there are two firms, each with MC = AC = 3. What price and output maximize joint profits if they collude?

c)Why do the two firms have to agree on the output each produces? Why might each firm be tempted to cheat?

2.Why are these statements wrong?

a)Competitive firms should collude to restrict output and drive up the

price.

b)Firms wouldn’t advertise unless it increased sales.

Exercise 8. Look through the text once more, find key-words in it and write an abstract of the text using the key-words.

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Part 2. An insight into how economics applies to the real world

Assignments

1.Comment on the following.

Encyclopaedia Britannica used to dominate the market, charging 1300 pounds for its 32-volume set of books. Then Microsoft produced Encarta, an encyclopaedia on CD-ROM, for under 50 pounds. How do you think Britannica responded to this combination of entry and technical change?

Write a composition to express your opinion in about 25–30 sentences. 2. Discuss in your group.

Vehicle repairers sometimes suggested that mechanics should be licensed so that repairs are done only by qualified people.

a)Evaluate the arguments for and against licensing car mechanics.

b)Are the arguments the same for licensing doctors?

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UNIT 4

Part 1. Text. The Labour Market

In winning a tournament, Tiger Woods earns more in a weekend than a professor earns in a year. Students studying economics can expect to earn more than students studying philosophy. An unskilled worker in the EU earns more than an unskilled worker in India. Each of these outcomes reflects the supply and demand for that particular type of labour.

The demand for labour

By a single fi rm, in the long run

A firm’s demand for inputs depends on the technology it faces, the price of each input and the demand for its output. Technology and input prices determine its costs. Demand determines the revenue from sales. The chosen output equates marginal cost and marginal revenue. In so doing, it determines the inputs that the firm demands.

In the long run, a firm can adjust its inputs and the technique it uses to produce output. If the wage rises, the firm substitutes away from labour towards capital that is now relatively cheaper than before. Mechanised farming economises on costly workers in the UK. However, with cheap abundant labour but scarce and expensive capital, Indian farmers use la- bour-intensive techniques.

At a given output, a higher wage makes a firm demand less labour and more of its other inputs. However, by raising the cost of making output, a higher wage also reduces the firm’s chosen output level. This reduces the firm’s demand for all inputs. In the long run, both effects reduce the quantity of labour demanded when the wage rises.

The effect of a higher wage on the demand for other inputs is ambiguous. The demand for capital rises as firms substitute away from labour, but lower output reduces the demand for capital input.

Similarly, a higher price of capital reduces the demand for capital. Firms substitute away from capital, and lower output also reduces the demand for capital. However, if the substitution effect is strong, the demand for labour may rise, despite lower output.

In the short run

In the short run, the firm has some fixed inputs. Suppose only labour input can be varied.

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The marginal product of labour MPL is the extra physical output when a worker is added, holding other inputs constant.

Beyond some point, the diminishing marginal productivity of labour sets in. With existing machines fully utilised, there is less and less for each new worker to do, and the marginal product of labour falls. However, profits depend on revenue, not just on physical output.

The marginal revenue product of labour MRPL is the change in sales revenue when an extra worker’s output is sold.

Thus, MRPL is the marginal benefit of hiring an extra worker. If the firm is perfectly competitive, it can sell more output without affecting its output price. MRPL is then simply MPL multiplied by the output price.

Fig. 5. A firm’s demand for labour

Fig. 5 shows the marginal revenue product of labour for a competitive firm. It slopes down because of diminishing marginal productivity. The wage is the marginal cost of hiring another worker. The firm expands workers until the marginal cost of another worker equals the marginal benefit. At a wage W0, the firm hires N0 workers. At a wage W1, the firm hires N1 workers.

Thus, MRPL is the demand curve for labour for a competitive firm, showing how many workers it hires at each wage. Moving down this schedule shows how desired hiring rises as the wage falls.

This theory is easily amended when the firm has monopoly power in its output market (a down-sloping demand curve for its product) or monopso-

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ny power in its input markets (an upward-sloping supply curve for inputs because the firm’s large scale affects the price of inputs).

A monopsonist must raise the wage to attract extra labour.

The marginal cost of an extra worker exceeds the wage paid to that worker: if all workers must get the same wage, extra hiring also bids up the wage paid to the existing labour force.

Similarly, for a firm with monopoly power in its output market, the MRPL schedule is no longer the marginal product of labour multiplied by the output price. To sell extra output, facing a down-sloping demand curve the firm must cut its output price, even on existing output. To calculate the marginal revenue product of labour, it finds the marginal product of labour MPL then calculates the change in total revenue when it sells the extra output.

Fig. 6. Monopoly and monopsony power

Fig. 6 shows the schedules MRPL1 and MRPL2 for two firms with the same technology. Both schedules reflect diminishing marginal productivity – a property of technology – but MRPL2 is steeper because an imperfectly competitive firm must also cut its price to sell more output. The marginal benefit of another worker is lower on MRPL2 than on MRPL1.

Similarly, although W0 is the marginal cost of labour for a competitive firm taking the wage as given, a monopsonist faces a marginal cost of labour MCL in Figure 6.

Profit is maximised when the marginal revenue from an extra worker equals its marginal cost. Otherwise, the firm’s hiring is inappropriate. A

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firm that is a price-taker in both its output and input markets hires L1 workers in Figure 6. A firm with market power in its output market hires L3 workers. A firm with market power in hiring labour input hires L2 workers. And a firm with market power in both markets hires L4 workers.

Changes in a fi rm’s demand for labour

A higher wage moves a firm along its MRPL schedule, reducing the quantity of labour demanded. However, a rise in the output price raises the marginal benefit of labour and shifts the entire MRPL schedule upwards, raising its demand for labour.

For a given output price, two other things raise a firm’s demand for labour. Technical progress makes labour more productive and raises its marginal benefit. So does a greater quantity of other inputs with which labour can work. When a firm gets more capital, this raises the demand for labour by shifting the MRPL schedule up. At any wage, the firm hires more workers than before. For the special case of a perfect competition, a firm hires labour until W = MRPL = (P x MPL). Hence, the marginal product of labour MPL equals the real wage W/P. If nominal wages and output prices both double, real wages and employment are unaffected. Nothing real has changed.

Demand for labour by an industry

Since all firms in the industry face the same wage as each other, you might think that we simply horizontally add each firm’s labour demand schedule to get the industry demand schedule. This is nearly correct but not quite. At a lower wage, each firm wants to hire more labour. This expands industry output, bidding down the output price. Even a competitive industry must cut its price to induce people to buy its higher total output.

This fall in the output price shifts to the left each individual firm’s demand curve for labour. The marginal benefit of a worker is lower. We thus conclude that the industry demand curve for labour, relating the wage and the quantity of labour demand, is steeper than the horizontal sum of firms’ individual labour demand curves.

Although each firm takes its output price as given, the entire industry bids down its output price when lower wages induce it to expand hiring and output. At industry level, this reduces the sensitivity of labour demand to the wage. Indeed, the more inelastic is the demand for the industry’s output, the more inelastic will be the industry’s demand for labour, be-

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