Esprit Rock

College of Science

College of Science, Technology & Applied Arts of Trinidad & Tobago
DIVISION: Management & Entrepreneurship
CRN:24429 SEMESTER:2017/18
Table of Contents
With the use of examples explain the key differences between a tax and a subsidy……. Page 2
With the use of diagrams, differentiate between a binding and non-binding price ceiling and floor……………………………………………………………………………………… Page 5
List and explain three (3) examples of mechanisms used by the government to intervene in the market……………………………………………………………………………………. Page 8
Explain the Long Run Average Cost curve, how does it depict the concept of economies of scale………………………………………………………………………………………. Page 9
What is meant by the term price discrimination in the monopoly market? What conditions must be present for price discrimination to take place…………………………………………. Page 13
Please explain the following terms: non-price competition, collusion, non-collusion and price leadership…………………………………………………………………………………. Page 18
Explain the different ways in which economic growth and development can be measured.…………………………………………………………………………………. Page 21Citations…………………………………………………………………………………… Page 23
With the use of examples explain the key differences between a tax and a subsidy. As indicated by, Taxes and subsidies are terms that are regularly used in financial aspects that have a cosmically tremendous effect on the nation’s economy, exchange, engenderment, and amplification. Duties and endowments are consummate absolute opposites of each other; charges are a cost and an appropriation in an inflow. Expenses are expected to frighten certain exercises, to develop nearby residential enterprises, and one of the significant types of administration wage. Appropriations are given to encourage certain exercises, improve amplification and diminish cost levels.

Right off the bat, charges are fiscal tolls forced on an individual or company by the administration. Henceforth, charges are not compensated eagerly and are not thought to be ‘blessings’ to the administration; rather a duty is an obligatory commitment forced on the individual/enterprise. In this way, neglecting to pay assessments can bring about the making of administrative move.
Duties are there in our customary lives despite the fact that they pass by various titles, for example, toll, obligation, extract, custom, and so on. One of the finest method to distinguish costs that are charges is to comprehend which of the day by day installments we make are imposed by the nation’s administration. Expenses are collected by governments for a few purposes, for example, building up a country’s foundation, security, improvement by and large, subsidizing open administrations, law requirement, pay for open utilities, paying off of national obligation and the general administration of a nation’s legislature. There are charges, for example, wage impose, capital additions assess, corporate expense, legacy assess, property impose, VAT, deals impose, and so on.
Secondly, also states that “Subsidies are benefits that the administration will offer to corporations and individuals and can be in the form of a cash inflow, or a tax reduction”. A subvention is given to decrease the drain on the individual or the corporation, and subventions are generally considered to be valuable to businesses and individuals as it cuts costs and expands business productivity. There are quite a few types of subsidies such as grants, direct payments, tax holidays/concessions, in-kind subsidies, cross subsidies, credit subsidies, derivative subsides, government subsidies, etc.

Furthermore, subsidies are also treated as a trade barrier since it results in lower costs of production thereby making locally produced goods more competitive than imports. Subsidies can, however, result in market inadequacies and can result in monetary costs as a subsidy can artificially and unfairly change the economic market. the use of diagrams, differentiate between a binding and non-binding price ceiling and floor
Binding and Non-Binding Price Ceilings and Floors
Stated by, “Price Floors and Price Ceilings are Price Controls, examples of government intervention in the free market which changes the market equilibrium. They each have reasons for using them, but there are large efficiency losses with both”.

Price Floors are the lowest prices set by the government for certain commodities and services that it knows are being sold in a biased market with too low of a price and thus their producers deserve some assistance. Price floors are only an issue when they are set above the equilibrium price, since they have no effect if they are set below market clearing price.
Furthermore, only when the price floors are set above the market price, then there is a likelihood that there will be an oversupply or a surplus. When this occurs, manufacturers who can’t foresee trouble ahead will produce the larger quantity where the new price intersects their supply curve. Unbeknownst to them, consumers won’t buy that many goods at the higher price and so those goods will go unsold.

Besides, there will be economic harm done even if suppliers can look ahead and visually perceive that there isn’t ample demand and cut back on engenderment in replication. There is still deadweight loss associated with this reduction in quantity, reflected in the loss of consumer and engenderer surplus at lower calibers of engenderment. Engenderers can gain because of this policy, but only if their supply curve is relatively elastic and consequently they have no net loss. Consumers will lose with this kind of regulation, as some people are priced out of the market and others must pay a higher price than afore.

As well as there are numerous strategies of the regime for setting a price floor and dealing with its repercussions. They can set a simple price floor, utilize a price support, or set engenderment quotas. Price fortifies sets a minimum price just like as afore, but here the regime buys up any excess supply. This is even more inefficient and costly for the regime and society than the regime directly subsidizing the affected firms. Engenderment quotas artificially raise the price by restricting engenderment utilizing either mandated quotas or giving businesses incentives to reduce their engenderment.
According to, “Price Ceilings are maximum prices set by the government for goods and services that they believe are being sold at too high of a price and thus consumers need some help purchasing them. Price ceilings only become a problem when they are set below the market equilibrium-price”.Having the price ceiling set below the market price, there will be excess demand or a supply shortage. Manufacturers won’t produce as much at the lower price, as well as while consumers will request more because the goods are cheaper. Demand will surpass supply, so there will be a lot of individuals who want to buy at this lower price but still can’t. But, if the demand curve is relatively elastic, then the net effect to consumer surplus will be positive. Producers are truly harmed, as their surplus is doubly hit with a reduction in the number of firms willing to take that lower price, and those who remain in the market must take a lower price.

Therefore, states “the resulting shortage of goods can lead to consumers having to queue up in line to get the good, government rationing, and even the development of a black market dealing with the scarce goods. This is what occurred with the energy crisis in America during the 1970s, when cars had to line up on the street to just get some government rationed amount of gasoline”.
List and explain three (3) examples of mechanisms used by the government to intervene in the market.

Firstly, all industries are required by law to pay taxes on their revenue. This is the main way in which a régime intercedes in corporate. In exchange for these levies, both businesses and individuals are supplied with various publicly owned commodities such as roads, utilities, police and fire protection and other civic advantages. Business taxes are based on the amount of profit that a business takes in. However, the complexity of tax laws allows large businesses to take advantage of myriad tax breaks and tax-law modifications.

Secondly, most of the taxes that are garnished from businesses by the government are then returned to businesses in the form of subsidies. Subsidies are given to businesses based on several factors, including the importance of the service the business provides to society at large, economic threats to the business and various aspects of international trade and protectionism. Some examples of industries that frequently receive government subsidies are the airline industry in the form of tax free jet fuel, and the agriculture industry in the form of farmer payouts designed to prevent food producers from going out of business.

Law Enforcement
Thirdly, a Régime sometimes intervenes quite forcefully in businesses that are engaging in illegal activity. These businesses that don’t pay taxes or skirt health regulations and or are working in legal fields in an illegal manner. In both instance, government intercedes to apply its laws and maintain a legal economic infrastructure.

Explain the Long Run Average Cost curve, how does it depict the concept of economies of scale?
According to, “Long-run average cost is the per unit cost incurred by a firm in production when all inputs are variable. It is the per unit cost that results as a firm increases in the scale of operations by not only adding more workers to a given factory but also by building a larger factory”.

Not the Short Run
Over the long haul (run), when all contributions under the control of the firm are variable, there is no settled cost and, in this way, no normal settled cost. Thusly, there is no compelling reason to recognize normal aggregate cost and normal variable cost. Over the long haul, normal cost is simply normal cost.
With no settled contributions to the long run, expanding and diminishing minimal returns, and particularly the law of lessening negligible returns, are not significant to long-run normal cost. There are, notwithstanding, two comparative impacts, economies of scale (or expanding comes back to scale) and diseconomies of scale (or diminishing comes back to scale).

The Short Run: In the short run, normal aggregate cost diminishes because of expanding minor returns and increments because of diminishing negligible returns and the law of decreasing peripheral returns. This triggers changes in peripheral cost and along these lines normal cost (variable and aggregate).

The Long Run: Over the long haul, there are no settled information sources. All things considered, negligible returns and particularly the law of lessening minor returns don’t work and don’t manage generation and cost. Rather long-run normal cost is influenced by expanding and diminishing comes back to scale, which converts into economies of scale and diseconomies of scale.

Scale Economies
Long-run average cost is guided by scale economies and returns to scale.

Economies of Scale: For relatively small levels of production, a firm tends to experience economies of scale and increasing returns to scale. These results because an increase in the scale of operations (a proportional increase in all inputs under the control of the firm) causes a decrease in average cost.

Diseconomies of Scale: For relatively large levels of production, a firm tends to experience diseconomies of scale and decreasing returns to scale. These results because an increase in the scale of operations causes an increase in average cost.

A U-shaped Curve
Long-Run Average Cost Curve

Scale economies and returns to scale generally produce a U-shaped long-run average cost curve, such as the one displayed to the right. For relatively small quantities of output, the curve is negatively sloped. Then for large quantities, the curve is positively sloped.

While the shape of the long-run average cost curve looks surprisingly like that of a short-run average cost curve, the underlying forces are different. This U-shape is NOT the result of increasing, then decreasing marginal returns that surface in the short run when a variable input is added to a fixed input.

The negatively-sloped portion of this long-run average cost curve reflects economies of scale and increasing returns to scale. The positively-sloped portion reflects diseconomies of scale or decreasing returns to scale.

Minimum Efficient Scale
The long-run average cost curve is extremely important to the long-run production efficiency of a firm. The main point of interest is the minimum of the long-run average cost curve, achieved at 300 in the exhibit. The quantity of output that achieves this minimum is termed the minimum efficient scale (MES). This level of production achieves the lowest possible average cost in the long run.

It is not possible to produce this good in such a way that reduces the opportunity cost of foregone production, of giving up any less value from other production, than is achieved at the MES.

Two More Curves
Long-run cost is reflected by three curves. In addition to the long-run average cost curve, there is the long-run total cost curve and the long-run marginal cost curve. Each has a similar interpretation in the long run as the short run.

Long-run Total Cost: This curve graphically illustrates the relation between long-run total cost, which is the total opportunity cost incurred by all of the factors of production used in the long run by a firm to produce a good or service, and the level of production.

Long-run Marginal Cost: This curve graphically illustrates the relation between long-run marginal cost, which is the change in the long-run total cost of producing a good or service resulting from a change in the quantity of output produced, and the level of production. It is also the slope of the long-run total cost curve.

What is meant by the term price discrimination in the monopoly market? What conditions must be present for price discrimination to take place.

In monopoly, there is a single seller of a product called monopolist. The monopolist has control over pricing, demand, and supply decisions, thus, sets prices in a way, so that maximum profit can be earned. The monopolist often charges different prices from different consumers for the same product. This practice of charging different prices for identical product is called price discrimination.

Types of Price Discrimination
Price discrimination is a common pricing strategy’ used by a monopolist having discretionary pricing power. This strategy is practiced by the monopolist to gain market advantage or to capture market position.

The different types of price discrimination (as shown in Figure-13) are explained as follows:
Refers to price discrimination when different prices are charged from different individuals. The different prices are charged according to the level of income of consumers as well as their willingness to purchase a product. For example, a doctor charges different fees from poor and rich patients.

Refers to price discrimination when the monopolist charges different prices at different places for the same product. This type of discrimination is also called dumping.

On the basis of use
Occurs when different prices are charged according to the use of a product. For instance, an electricity supply board charges lower rates for domestic consumption of electricity and higher rates for commercial consumption.

Degrees of Price Discrimination
Price discrimination has become widespread in almost every market. In economic jargon, price discrimination is also called monopoly price discrimination or yield management. The degree of price discrimination vanes in different markets.

Figure-14 shows the degrees of price discrimination:
These three degrees of price discrimination (as shown in Figure-14) are explained as follows:
Degrees of Price Discrimination
First-degree Price Discrimination
Refers to a price discrimination in which a monopolist charges the maximum price that each buyer is willing to pay. This is also known as perfect price discrimination as it involves maximum exploitation of consumers. In this, consumers fail to enjoy any consumer surplus. First degree is practiced by lawyers and doctors.

Second-degree Price Discrimination
Refers to a price discrimination in which buyers are divided into different groups and different prices are charged from these groups depending upon what they are willing to pay. Railways and airlines practice this type of price discrimination.

Third-degree Price Discrimination
Refers to a price discrimination in which the monopolist divides the entire market into submarkets and different prices are charged in each submarket. Therefore, third-degree price discrimination is also termed as market segmentation.

In this type of price discrimination, the monopolist is required to segment market in a manner, so that products sold in one market cannot be resold in another market. Moreover, he/she should identify the price elasticity of demand of different submarkets. The groups are divided according to age, sex, and location. For instance, railways charge lower fares from senior citizens. Students get discount in cinemas, museums, and historical monuments.

Necessary Conditions for Price Discrimination:
Price discrimination implies charging different prices for identical goods.

It is possible under the following conditions:
Existence of Monopoly
Implies that a supplier can discriminate prices only when there is monopoly. The degree of the price discrimination depends upon the degree of monopoly in the market.

Separate Market
Implies that there must be two or more markets that can be easily separated for discriminating prices. The buyer of one market cannot move to another market and goods sold in one market cannot be resold in another market.

No Contact between Buyers
Refers to one of the most important conditions for price discrimination. A supplier can discriminate prices if there is no contact between buyers of different markets. If buyers in one market come to know that prices charged in another market are lower, they will prefer to buy it in other market and sell in own market. The monopolists should be able to separate markets and avoid reselling in these markets.

Different Elasticity of Demand
Implies that the elasticity of demand in the markets should differ from each other. In markets with high elasticity of demand, low price will be charged, whereas in markets with low elasticity of demand, high prices will be charged. Price discrimination fails in case of markets having same elasticity- of demand.

Advantages and Disadvantages of Price Discrimination
A monopolist practices price discrimination to gain profits. However, it acts as a loss for the consumers.

Following are some of the advantages of price discrimination
Helps organizations to earn revenue and stabilize the business
Facilitates the expansion plans of organizations as more revenue is generated
Benefits customers, such as senior citizens and students, by providing them discounts
Despite advantages, there are certain disadvantages of price discrimination.

Some of the disadvantages of price discrimination as follows:
Leads to losses as some consumers end up paying higher prices
Involves administration costs for separating markets.

Please explain the following terms: non-price competition, collusion, non-collusion and price leadership.

Non-price competition
Competition between companies that involves something other than lower prices. That is, rather than advertising the lowest price for a product, a company may advertise that is has the best quality, the most convenience, or even the best branding. Nonprice competition is especially important where competition is stiff, and companies cannot afford to charge much less than they already do. Companies producing cigarettes, over-the-counter medications, and food products spend large sums on nonprice competition.

Collusion is a non-competitive clandestine or sometimes illegal agreement between rivals that attempts to disrupt the market’s equilibrium. Collusion involves people or companies that would typically compete but who conspire to gain an unfair market advantage. The parties may collectively choose to restrict the supply of a good or agree to increase its price to maximize profits. In financial markets, collusion can take many forms. Groups may collude by sharing private information allowing them to benefit from insider knowledge. Traders participating in accommodation trading, where securities are exchanged at non-competitive prices, are involved in collusion. Colluding traders might share private information regarding upcoming takeovers and benefit from insider trading. Price rigging also involves the collusion of sellers who inflate the price of an asset to realize higher profits. There have been several high-profile cases that involved prominent investment banks colluding on currency and commodity market prices. Collusion may occur in several ways but typically produces the same result – one party, often consumers, being disadvantaged in some manner. One of the most common forms of collusion is price fixing. This occurs when there is a small number of companies in the marketplace, commonly referred to as an oligopoly, essentially offering the same product, and an agreement is made to collaborate and set a minimum price.

One of the imperative highlights of oligopoly showcase is value inflexibility. Furthermore, to clarify the value inflexibility in this market, traditional request bend isn’t utilized. Using a non-ordinary request bend to speak to non-deceitful oligopoly (i.e., where merchants contend with their opponents) was best clarified by Paul Sweezy in 1939. Sweezy utilizes wrinkled request bend to portray value unbending nature in oligopoly showcase structure.
The crimp in the request bend comes from the unbalanced behavioral example of venders. On the off chance that a vender builds the cost of his item, the opponent dealers won’t tail him with the goal that the primary merchant loses a lot of offers. At the end of the day, each cost increment will go unnoticed by rivals.
Then again, in the event that one firm lessens the cost of its item different firms will take after the principal firm, so they should not lose clients. At the end of the day, each cost will be coordinated by an equal value cut. Therefore, the advantage of value cut by the primary firm will be insignificant. Because of this behavioral example, the request bend will be wrinkled at the decision advertise cost.

Assume, the overarching cost of an oligopoly item in the market is QE or OP of Fig. 5.19. In the event that one vender builds the cost above OP, equal merchants will keep the costs of their items at OP. Because of high cost charged by the firm, purchasers will move to results of different dealers who have kept their costs at the old level. Therefore, offers of the principal merchant will drop significantly.

That is the reason request bend in this zone (dE) is generally versatile. Then again, if a merchant diminishes the cost of his item beneath QE, others will tail him with the goal that interest for their items does not decay. Along these lines, request bend in this area (i.e., ED) is moderately inelastic. This behavioral example hence clarifies why costs are unyielding in the oligopoly showcase — regardless of whether request and costs change.

Price Leadership
Value administration is the point at which a main firm in its segment decides the cost of merchandise or administrations. This can leave the pioneer’s adversaries with minimal decision yet to take after its lead and match the costs on the off chance that they are to clutch their piece of the pie. On the other hand, contenders may likewise bring down their costs in the expectation of picking up piece of the pie. The effects of value administration are clearer in merchandise or administrations that offer little separation starting with one maker then onto the next. Value initiative is additionally evident where customer request levels make a cost chose by the market pioneer feasible since purchasers are drawn from contending items. There are three essential classes of value administration: barometric, deceitful and predominant firm.

Explain the different ways in which economic growth and development can be measured.

Financial development is an expansion in the limit of an economy to deliver merchandise and enterprises, contrasted from one period with another. It can be estimated in ostensible or genuine terms, the last of which is balanced for expansion. Generally, total monetary development is estimated as far as gross national item (GNP) or total national output (GDP), albeit elective measurements are now and then utilized. After some time, be that as it may, a few financial analysts have featured confinements and inclinations in GDP computation. Associations, for example, the Bureau of Labor Statistics (BLS) and the Organization for Economic Co-task and Development (OECD) additionally keep relative profitability measurements to check financial potential. Some recommend estimating monetary development through increments in the way of life, in spite of the fact that this can be precarious to evaluate.

Gross Domestic Product
Gross domestic product is the logical extension of measuring economic growth in terms of monetary expenditures. If a statistician wants to understand the productive output of the steel industry, for example, he needs only to track the dollar value of all of the steel that entered the market during a specific period. Combine the outputs of all industries, measured in terms of dollars spent or invested, and you get total production. At least that was the theory. Unfortunately, the tautology that expenditures equal sold-production does not actually measure relative productivity. The productive capacity of an economy does not grow because more dollars move around, an economy becomes more productive because resources are used more efficiently. In other words, economic growth needs to somehow measure the relationship between total resource inputs and total economic outputs.

Gross National Product
Net national item (GNP) is a gauge of aggregate estimation of all the last items and administrations delivered in a given period by the methods for creation claimed by a nation’s inhabitants. GNP is ordinarily computed by taking the total of individual utilization consumptions, private residential venture, government use, net fares, and any salary earned by occupants from abroad speculations, short pay earned inside the household economy by outside inhabitants. Net fares speak to the contrast between what a nation trades short any imports of merchandise and ventures.

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