Eco401 Final Term Latest Past Papers 2025
Limit Pricing
When a company has already
established itself in the market, it typically learns over time how to
efficiently run its operations. These established firms develop valuable
insights and cost-saving practices, which give them a competitive edge. In
contrast, new firms trying to enter the market often face higher costs because
they lack experience and need to spend more on setup, marketing, and learning
the business environment.
A monopolist is fully aware of
this dynamic and uses it to their advantage by setting prices low enough to
discourage new entrants. Since they know their own costs are much lower, they
can afford to undercut potential rivals without harming their own profitability.
This practice, known as limit pricing, helps the monopolist maintain dominance
by raising the barriers to entry for newcomers.
Price Discrimination
Price discrimination happens when
a seller sets varying prices for the same item or service, depending on who the
customer is. This can happen in various forms, from simple student or senior
discounts to more complex strategies based on location, purchase history, or
demand elasticity. In order to price discriminate, a firm must have some degree
of market power meaning they’re not in a perfectly competitive market where
everyone sells at the same price. The ability to tailor prices to individual
customer segments can boost profits and improve resource allocation, as firms
can capture more consumer surplus. In practice, we see this in industries like
airlines, which charge different fares for the same seat depending on when and
how a ticket is booked.
Monopolistic Competition
Monopolistic competition is a
market structure characterized by many buyers and sellers, just like in perfect
competition. But in monopolistic competition, products aren’t exactly the same;
they have unique traits that set them apart, like brand identity, quality
differences, or special features. This product differentiation means that while
firms are still price takers to a degree, they also have some control over the
prices they charge Unlike in perfect competition, firms in monopolistic
competition compete on factors other than price, such as advertising and brand
loyalty.
In the short run, firms in this
type of market can earn profits. But over time, new firms are drawn in by these
profits, increasing competition and driving profits down until firms break even
in the long run. Essentially, monopolistic competition combines the competitive
nature of perfect competition with the product variety that consumers often
prefer.
Oligopoly
An oligopoly is another
interesting market structure. It sits between monopoly and perfect competition,
featuring only a handful of firms (usually between 2 to 20) that control the
market. Because of the small number of players, there are significant barriers
to entry, such as high startup costs, brand loyalty, or complex regulations.
Firms in an oligopoly may fiercely compete with each other, leading to prices
similar to those in competitive markets. However, there is also a chance that
these firms might choose to cooperate, especially if doing so could maximize
their collective profits.
Collusive Oligopoly
When firms in an oligopoly decide
to cooperate and act like a single entity, we have a collusive oligopoly or
cartel. In these situations, companies might agree on how much to produce, set
prices together, or decide how much to spend on advertising. For example, the
Organization of the Petroleum Exporting Countries (OPEC) is a classic example
of a collusive oligopoly, as it manages oil production levels to influence
global oil prices. Collusion can be explicit formal agreements or implicit,
where firms simply observe and mimic each other’s behavior without direct
communication. When firms have unequal sizes or different cost structures,
production quotas can be adjusted based on each firm's marginal cost to ensure
a fair and efficient allocation.
Non-Collusive Oligopoly
On the flip side, in a
non-collusive oligopoly, firms do not cooperate. Here, competition is fierce
because each firm is trying to maximize its own share of the market. While they
understand that any move they make will be closely watched and possibly matched
by rivals, they still prefer to go it alone. This situation can be unstable
because the temptation to cheat is high. If one firm sees a chance to increase
its profits by cutting prices or producing more, others are likely to do the
same, leading to overproduction and falling prices. As a result, even though
firms might prefer to collude, intense rivalry keeps them from doing so.
Merit Goods
A merit good is one that society
or the government believes people should consume more of, regardless of
individual willingness to pay. These goods generate benefits not just for the
individual consumer but also for society as a whole. For instance, education
and healthcare are considered merit goods because they create positive
externalities—benefits that spill over to others. When the government
identifies these positive effects, it often steps in with subsidies or
incentives to encourage greater consumption. Providing scholarships to students
and making healthcare more affordable are both policies aimed at encouraging
the use of merit goods.
Experience Goods
Experience goods are unique
because their true value can’t be assessed until they’re consumed. For example,
the quality of an online course or a piece of software isn’t fully understood
until a user tries it out. To address this uncertainty, companies often offer
free trials or sample versions to let consumers “experience” the product before
buying it. This trial process helps build trust and lowers the perceived risk
for the consumer. It’s a common practice in digital services such as
subscription software or online learning platforms where users can test the
product’s effectiveness or user-friendliness before committing to a purchase.
Classical Economics
Classical economics, developed by
thinkers like Adam Smith, David Ricardo, and John Stuart Mill, was the first
major school of economic thought. It laid the groundwork for modern economics
by focusing on how individual decisions in markets shape the broader economy. Classical
economists were convinced that when markets operate without interference, they
naturally reach a balance and use resources in the most efficient way. They saw
economic growth as driven by factors like capital accumulation, labor
productivity, and innovation. While classical economists mainly focused on
microeconomic interactions, they also acknowledged that broader economic
outcomes often stem from the cumulative actions of individuals and firms.
Conclusion
To sum up, these concepts
highlight how different market structures and goods shape economic
decision-making. Limit pricing and price discrimination demonstrate how firms
can maximize profits by understanding market dynamics and consumer behavior.
Monopolistic competition and oligopoly showcase how competition and cooperation
influence prices and production in real-world markets. Merit goods and
experience goods reveal how consumption decisions can be influenced by factors
beyond simple price and quantity. Lastly, the foundational ideas of classical
economics provide a framework for understanding how markets evolve and how
economic welfare can be enhanced. Understanding these ideas is essential for
navigating today’s complex economic environment whether as a business
professional, policymaker, or informed citizen.
Eco401 Final Term Latest Past Papers 2025, eco401 final term notes
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