Monopoly, Oligopoly, and Macroeconomics: Key Concepts

Posted on Dec 19, 2024 in Economy

Monopoly: Understanding Single-Seller Markets

A monopoly market is one in which a single firm or producer of a particular good or service is the only supplier of it. Whenever we refer to a monopoly, we are talking about monopoly supply. As there is only one bidder in the market, the offeror controls the demand. The demand function it faces is the market demand. A monopoly is stronger when there are fewer substitute goods for the monopoly product. The monopoly of the market determines the price and will only be willing to offer the amount of product or service that the applicants are willing to consume at that price.

Causes of Monopolies

• Control of a Natural Resource by One Company: The company operates exclusively in that sector, preventing all kinds of competition. Examples include mining, oil, and water.
• State Administrative Concession: This is a legal monopoly, where a state agency or a dependent individual is granted the exclusive exploitation of a public service or some natural resource. Examples include concessions for the management of public services such as highways, tobacco, and water. In the economic area, the EU requires that member states gradually remove all sorts of fiscal monopolies to facilitate competition in the European Single Market.
• Exclusive Use of Technological Innovations: Many companies are investigating new ways of producing new technologies. It is not easy when one company has used other techniques that others do not. When a company achieves a unique production system on the market, it is necessary to patent it, enrolling it in a special register to guarantee exclusivity. If other companies are interested in using this system, they must be approved by the patent holder. Examples include computer operating systems and commercial internet access.
• Realization of Strong Economies of Scale: These occur when a large company can lower its unit costs because it can produce in large quantities. When a large company can make large orders for raw materials, it manages to obtain large discounts. The price at which their products can be offered on the market can drive out smaller competitors.

Oligopoly: Market Control by a Few

A market is an oligopoly when a small number of suppliers (companies) have enough power to influence the market price. There are a number of plaintiffs who are consumers or domestic economies.

Features of Oligopolies

• The actions in the market of each firm affect the rest of the competitors.
• The product is homogeneous but can be differentiated by price and quantity.
• Brands are conditioned by the actions of all the oligopolists.
• Competitors in an oligopoly usually agree among themselves on agreements or covenants that tend to share the market.

Collusion: This means agreeing against third parties. In these agreements, all rivals in the market make explicit, implicit, or tacit agreements that allow them to have mutual information on their reactions, behaviors, or decisions, harming the consumer. All this limits competition from other companies and is usually illegal and persecuted by law. Examples include trusts, cartels, and some holding companies.

Monopolistic Competition: Many Sellers, Differentiated Products

Monopolistic competition is characterized by the existence of a considerable number of bidders and a large number of applicants. Each supplier tries to influence the price and quantity of the goods offered. The product or service is fully differentiated, perhaps by brand or quality. The market is segmented, and firms try to offer products targeted to the population, for example by age, sex, income levels, and especially price.

Macroeconomic Variables: Understanding the Big Picture

In macroeconomics, we work with aggregate magnitudes that reflect the overall performance of the economy rather than individual subjects. These variables are difficult to quantify and are used as reliable approximations of reality. They include national income, national product, interest rate, employment, price level, consumption, savings, and investment. Macroeconomics uses approximations of reality to reflect the overall performance of the economy.

Economic Models: Simplifying Complex Relationships

Economic models are simplified representations of the relationships between economic variables. A model does not capture the full complexity of reality, but it has to approach it reliably. There are two types of models: structural models that are stable in the short term and short-term models that are dynamic.

• Structural Models: These models do not change in the short term. They affect economic sectors, population, and markets.
• Short-Term Models: These models are dynamic. They affect real situations and monetary situations that vary in the short term. Types include dual-sector (2 sectors), tri-sector (3 sectors), and four-sector (real).

Keynesian Economics: Consumption, Savings, and Investment

Consumption and Saving

Keynes considered that the income of families and businesses is used for savings or consumption. Y = C + S. Keynes proposed that consumption depends on income, i.e., C = f(Y). Classical economists made savings dependent on the interest rate. But Keynes prioritizes consumption over saving and sees that what is not consumed is saved, so S = f(Y).

Marginal Propensity to Consume (MPC): This is the increase in consumption resulting from increased income. Keynes assumes that everything that is not consumed is saved, so the marginal propensity to save (MPS) plus MPC equals 1. Factors influencing consumption include household wealth, the interest rate (if the interest rate increases, savings increase and consumption decreases), the distribution of income, demographic variables, and psychological variables such as customs and values.

Therefore: C = Co + MPC • Y

Investment and the Multiplier Effect

Investment is the expenditure of enterprises on productive assets or capital. Families and the government also invest. Investment channels the savings of households and firms. There are three types of investment: inventory (capital), production equipment (fixed capital), and housing and infrastructure (capital assets). Investment depends on unstable factors, the main one being income. In a two-sector closed economy (firms and households), total expenditure, i.e., aggregate demand, consists of consumption plus investment. Equilibrium income verifies that Y = C + I. Income equals consumption plus savings. Therefore, we can say that S = I; all savings are channeled into productive investment, so all income is spent on consumer goods or capital goods.

Multiplier Effect: This is the effect where an increase in investment leads to an even higher increase in income. This effect is greater the higher the marginal propensity to consume.

Macroeconomics: Priority Issues

These are the issues of greatest concern to most countries and citizens, and consequently, the priority area of attention for government actions.

• Growth: The growth of goods produced is a key issue in the economy. Growth creates jobs, improves the living standards of the population, collects more taxes, and therefore, the state is more likely to deliver better public services. This is measured by GDP.
• Employment: Unemployment is the main problem for a country, both for the people who suffer and for society, as they cease to receive their input, which leads to a waste of resources.
• Inflation: In some economies, commodity prices multiply in a year, leading to an overall imbalance in the economy and costs to individuals and social groups who suffer the consequences.
• Public Deficit: When the state’s expenses exceed its income, there is an imbalance in public finances, or a deficit, that must be addressed.
• External Deficit: When a country buys more from other countries than it sells, there is an imbalance that must be financed with foreign borrowing.
• Income Redistribution and Poverty Reduction: Improving the above problems can lead to poverty reduction. When the economy grows, there are more goods, and there may be more for all, and differences can be corrected, but this is not always the case.

The Circular Flow of Income

The circular flow of income is a model that describes the flows of revenue generated between the various operators. It is based on:

Simplified Two-Sector Economy

This represents a simplified model of the economy where only two sectors are considered: households or families, who are the owners of production factors offered to businesses and who buy goods and services for consumption, and companies, which produce goods and services sold in the market and use the factors of production, paying rents, salaries, interest, and benefits. These two sectors produce two streams or flows:

• Real Flow: Businesses acquire the factors of production from families, and households acquire goods and services from businesses.
• Cash Flows: Businesses pay families or households for the production factors that have been used. Payments made by companies become income for households, which in turn is used to pay companies for goods and services they buy on the market.

Economies with Public and External Sectors

The model should take into account that a proportion of income, wages, interest, and profits earned by households is not used for consumption but is saved. In the Keynesian model of the circular flow of income, there are three concepts to consider:

• The supply of goods and services from companies, which represents the output of the economy (aggregate supply).
• The demand for goods and services by households, which is equal to the cost of the economy (aggregate demand).
• The rents paid by enterprises as compensation for productive factors, which is equal to the income of the economy.

Aggregate Demand: The cost of the economy; the demand for all goods and services.

Aggregate Supply: The goods and services offered by family businesses.

Demand (expense) leads to supply (production), which leads to the payment of factors (income), which in turn creates income (expenditure), and spending stimulates production, which in turn is paid to production factors or remunerated, and this allows for expense. This is a repetitive cycle.

The Keynesian Model: Focus on Aggregate Demand

The Keynesian model focuses on the study of aggregate demand (trying to reach equilibrium between supply and demand), which is the expense of the economy. Keynes believes that this variable is the most influential on the other two (income and production) in solving economic problems. It is based on the idea that the economy involves four sectors that require goods and services:

• The consumer sector (households) spends on consumer goods.
• The production sector (companies) spends on investment goods (machinery).
• The public sector (state) spends on consumer goods and investment goods.
• The external sector (foreign countries) buys (imports) and sells (exports).

The functions that explain the behavior of the model are consumption (spending on goods and services), savings (income not consumed), and investment (costs of companies in capital goods). The objective is to determine the equilibrium income. In the Keynesian model, the conduct of three magnitudes is considered: aggregate demand (spending, consumption), aggregate supply (all products), and income (remuneration of productive factors). For Keynes and his model, what matters is aggregate demand. He explains the operation of aggregate demand through three functions: consumption, savings, and investment.

Income Distribution: Criteria and Measures

The level of total income available is the most important factor influencing consumer spending and the growth of an economy. Thus, consumer spending is usually higher the more equitable the distribution of income in an economy. The equitable distribution of income is achieved if the economy grows when it increases the welfare of individuals and thus improves the standard of living. Thus, national income increases faster than the population.

Sources of Economic Growth

• New production techniques
• Increased productivity and infrastructure factors
• Technological innovations to create new products

Distribution Criteria

• Functional Distribution: A way to show the difference in income received by owners of productive factors according to their function in society. This usually shows the share of national income earned by workers, landowners, and capital owners.
• Geographical-Spatial Distribution: Attempts to measure income differences between inhabitants of different regions, which can be in the form of countries or regions.
• Sectoral Distribution: Shows the difference between the income received by different sectors (primary, secondary, tertiary).
• Personal Distribution: Measures the distribution of personal disposable income among individuals.

The Lorenz Curve: Visualizing Income Distribution

The Lorenz Curve is a graphic way of showing the distribution of income in a population. It relates the cumulative percentage of the population to the cumulative percentage of income that this population receives. The horizontal axis represents the population ordered so that lower-income percentiles are on the left and the highest income on the right. The vertical axis represents income. The wider the curve, the more unequal the income. If it is a straight line, the income distribution is equitable. The closer the Lorenz curve is to the diagonal, the more equitable the income distribution in that country. The surface area that lies between the curve and the diagonal is called the concentration area. The greater this area, the more wealth is concentrated; the smaller the area of concentration, the more equitable the income distribution of the country represented.

The Gini Index: Measuring Wealth Concentration

The Gini Index measures the concentration of wealth. The closer the Gini index is to 1, the higher the concentration of wealth. The closer it is to 0, the more equitable the distribution of income in that country.