Alternative market structures

 

I. Read the text. Some parts of the text have been taken out. These extracts are listed below. Complete each gap with the appropriate extract. One sentence does not belong in any of the gaps.

a) The collective conduct of all the firms in the industry will affect the whole industry’s performance.

b) Some industries tend more to the competitive extreme, and thus their performance corresponds to some extend to perfect competition.

c) The price they face is that determined by the interaction of demand and supply in the whole market.

d) The market structure under which a firm operates will determine its behaviour.

e) Each firm is so small relative to the whole industry that it has no power to influence price.

It is traditional to divide industries into categories according to the degree of competition that exists between the firms within the industry. There are four such categories.

At one extreme is perfect competition, where there are very many firms competing. ___ (1) It is a price taker. At the other extreme is monopoly, where there is just one firm in the industry, and hence no competition from within the industry. In the middle comes monopolistic competition, where there are quite a lot of firms competing and where there is freedom for new firms to enter the industry, and oligopoly, where there are only a few firms and where entry for new firms is restricted.

___ (2) Firms under perfect competition will behave quite differently from firms that are monopolists, which will behave differently again from firms under oligopoly and monopolistic competition.

This behaviour (or “conduct”) will in turn affect the firm’s performance: its prices, profits, efficiency, etc. In many cases it will also affect other firms’ performance: their prices, profits, efficiency, etc. ___ (3)

Economists thus see a causal chain running from market structure to the performance of that industry.

Structure à Conduct à Performance

First, we shall look at the two extreme market structures: perfect competition and monopoly. Then we shall turn to look at the two intermediate cases of monopolistic competition and oligopoly.

These two intermediate cases are sometimes referred to collectively as imperfect competition. The vast majority of firms in the real world operate under imperfect competition. It is still worth studying the two extreme cases, however, because they provide the framework within which to understand the real world.

___ (4) Other industries tend more to the other extreme: for example, when there is one dominant firm and a few much smaller firms. In such cases, their performance corresponds more to monopoly.

II. For each question 1-4, mark one for the answer you choose.

1. Perfect competition is a market structure

A. where each firm produces a differentiated product.

B. where there is freedom of entry to the industry.

C. in which there are a few firms.

2. Monopoly is a market structure

A. where a unique product is produced.

B. where the firm is a price taker.

C. where there are no restrictions to the entry of new firms.

3. Monopolistic competition is a market structure

A. where there are a few firms.

B. where each firm produces a homogeneous product.

C. where each firm has some control over its price.

4. Oligopoly is a market structure

A. where there are a lot of firms.

B. where there are no barriers to the entry of new firms.

C. where firms produce either an undifferentiated product or a differentiated one.

 

FREE-MARKET MEDICINE IN RUSSIA

economics monopolies inflation

Is the Patient Recovering?

I. Read the text. Some parts of the text have been taken out. These extracts are listed below. Complete each gap with the appropriate extract. One sentence does not belong in any of the gaps.

a) No longer will the state guarantee employment and a moderate standard of living for all.

b) Many commentators began to wonder whether the economy could escape the slide into “hyperinflation” when money would become virtually worthless.

c) With the virtual abandonment of price controls, prices soared and by the end of 1992 inflation had reached a massive 1354 per cent.

d) Consumer choice decreased, too.

e) Such an impressive reduction in inflation was due largely to government successfully capping its spending.

1. Reforming the old Soviet Union was never going to be easy. To replace central planning with free-markets and enterprise would involve a radical transformation of economic life. But following the rise to power of Boris Yeltsin in Russia in 1991, this is just what was attempted. The following policies were adopted in early 1992:

– Price controls on 90 per cent of items were abolished. But with shortages of most goods, it was hardly surprising that prices rose dramatically.

– Business was given easier access to foreign exchange, and foreign companies were encouraged to invest in Russia.

– The largest privatisation programme in the world was launched. In many of the new private companies, workers were to become the principal shareholders.

These reforms represented a massive shock to the old system. ___ (1) These huge price increases led to falling demand, but the disruption to the economy also led to falling supply. In 1992 output fell by nearly 20 per cent and the purchasing power of wages fell by 40 per cent.

2. The government’s budget deficit (the excess of government spending over government tax receipts) rose from 1.5 per cent of national income in the first quarter of 1992 to 15 per cent by the final quarter. Perhaps most significantly, the money supply rose nearly 600 per cent between January and October. ___ (2)

3. Critics argued that the costs of reform were intolerably high. The Russian economy, inherently weak and resistant to change, was unprepared for the radical nature of the policy and as such the reform programme could not be sustained. They highlighted the following weaknesses inherited from the old system:

– Many Russian companies are virtual monopoly producers. If they run into trouble, as many have done, this leads to huge shortages throughout the economy.

– Industry, being used to taking orders from above, has been slow to adapt to economic change and the rigours of the marketplace. Much of it is highly inefficient and wasteful, making a poor use of very scarce resources. Estimates suggest that in 1992 Russia used 15 times as much steel and 6 times as much energy as the USA per unit of national output.

– With the freeing of prices, many firms in a monopoly position simply raised prices and reduced output. That way they could increase profits but with less effort.

Supporters of reform recognised these weaknesses, but maintained that they only strengthened the arguments for changing the old system. In addition, they argued that the reform package of 1991/2 did not go far enough. Price controls on certain goods remained. Price markups in state shops were limited to 25 per cent, oil prices were controlled and imports were subject to a 20 per cent tariff (customs duty).

4. Some supporters of reform argued that an economic slump was the medicine required to drive the old sickness out of the system. It would force inefficient producers out of the market, and the competition for survival would lead to greater productivity and ultimately to long-term prosperity.

5. Four years on, it appeared that the supporters of reform may have been right in their judgements. The Russian economy seemed to have turned the corner. By mid-1996, annual inflation had fallen to 80 per cent. ___ (3) The government’s budget deficit was now well within the limits agreed with the International Monetary Fund. The rouble, after a disastrous collapse in 1994, seemed to have stabilised on the foreign exchange market. Output, however, was still falling. In 1995 output fell by 4 per cent. Nevertheless forecasters were predicting growth of upwards of 4 per cent for 1997 onwards.

6. Critics of reform, even in the light of such real gains, still point to the hardship experienced by many Russians. Official unemployment stands at around 8 per cent, with an estimated additional 6 per cent hidden unemployment. In a fifth of all Russian regions, unemployment is over 30 per cent, and in a few over 50 per cent. Those in work have not fared much better. The average real wage fell by some 37 per cent between 1994 and 1996. Many Russians today are faced with severe hardship.

7. Some, the “New Russians”, have become very wealthy-some legitimately, but some through criminal activities (the rise of the Russian Mafia has been a disturbing development). The rise of the wealthy further serves to highlight the growing divide between rich and poor.

8. The old certainties have gone. ___ (4) Today’s market system in Russia is one where the strong gain and the weak lose.

II. Look at statements 1-3. In each statement, which phrase or sentence is correct?

1. Imports were subject to a 20 per cent tariff.

A. Prices were controlled.

B. Government set up a 20 per cent tariff.

C. Customs duty was 20 per cent.

2. In a fifth of all Russian regions, unemployment is over 30 per cent.

A. In every fifth region unemployment is 30 per cent.

B. In 20 per cent of all Russian regions unemployment rate exceeded 30 per cent.

C. In a few Russian regions unemployment grew up to 50 per cent.

3. Foreign companies were encouraged to invest in Russia.

A. Many new private companies stimulated investment.

B. Business was given easier access to foreign exchange.

C. The special policy was adopted in early 1992.

III. For each question 1-4, mark one for the answer you choose.

1. It was hardly surprising that prices rose dramatically because

A. 90 per cent of items price were abolished.

B. the purchasing power of wages fell.

C. economy was short of most goods.

2. Price mark-ups in state shops

A. could not exceed 25 per cent.

B. was limited to 20 per cent.

C. equaled 25 per cent.

3. In “hyperinflation” money

A. would be practically worthless.

B. supply would rise dramatically.

C. is inherently weak for the radical nature of the policy.

4. Some of the “New Russians” have become very wealthy –

A. with the rise of the Russian Mafia.

B. either legally or illegally.

C. to highlight the growing divide between rich and poor.

IV. Match each of these statements with one of the paragraphs numbered 1-8.

 

A. Free-market economy is a medication for central planning system
B. Introduction of reform policies and their effects
C. Counter-arguments against the transformation programme
D. The turning point in the economic disaster

 

V. Are sentences below “Right” or “Wrong”? If there is not enough information to answer, choose “Doesn’t say”.

1. Critics of reform ignored its real gains.

A. Right          B. Wrong        C. Doesn’t say

2. The government’s budget deficit rose by 13.5 per cent of national income throughout 1992.

A. Right          B. Wrong        C. Doesn’t say

3. Critics argued that the cost of reform was too high because of the negative comparison with USA national output of steel and energy.

A. Right          B. Wrong        C. Doesn’t say

4. IMF agreed with the government’s budget deficit.

A. Right          B. Wrong        C. Doesn’t say

5. Reform supporters strengthened the arguments by requiring to abolish the rest of price controls and enforce competitive producers.

A. Right          B. Wrong        C. Doesn’t say

VI. Complete the following table:

A. President at power in 1991

B. Inflation rate in mid-1996

C. Predicted growth for 1997 onwards

D. Average real wage between 1994 and 1996

E. Maximum inflation rate/when

F. Unofficial unemployment rate

VII. The mistakes in the sentences below have been underlined. Write the corrections in the spaces provided.

1. In 1995 out put had fallen by 4 per cent.

2. In many of the new private companies, principal workers became a shareholders.

3. Four years on, the Russian economy seemed to have being turning the corner.

4. Critics of reform, though in the light of such real gains, still point to the hardship.

5. Such an impressive reduction in inflation was of largely government successfully capped its spending.

1. _____________________________________________

2. _____________________________________________

3. _____________________________________________

4. _____________________________________________

5. _____________________________________________

 

SHOULD HEALTH CARE PROVISION BE LEFT TO THE MARKET?

 

1. When you go shopping you may well pay a visit to the chemist and buy a bottle of paracetamol, some sticking plasters or a tube of ointment. These health-care products are being sold through the market system in much the same way as other everyday goods and services such as food, household items and petrol.

But many health-care services and products are not allocated through the market in this way. In the UK, the National Health Service provides free hospital treatment, a free general practitioner service and free prescriptions for certain categories of people (such as pensioners and children). Their marginal cost to the patient is thus zero. Of course, these services use resources and they thus have to be paid for out of taxes. In this sense they are not free. (Have you heard the famous saying “There’s no such thing as a free lunch”?)

But why are these services not sold directly to the patient, thereby saving the taxpayer money? Why is considered that certain types of health care should be provided free, whereas food should not? After all, they could both be considered as basic necessities of life.

The advocates of free health-care provision argue that there are a number of fundamental objections to relying on a market system of allocation of health care, many of which do not apply in the case of food, clothing, etc. So what are the reasons why a free market would fail to provide the optimum amount of health care?

2. There is a problem connected with the distribution of income. Because income is unevenly distributed, some people will be able to afford better treatment than others, and the poorest people may not be able to afford treatment at all. On the grounds of equity, therefore, it is argued that health care should be provided free – at least for poor people.

The concept of equity that is usually applied to health care is that of treatment according to medical need rather than according to the ability to pay.

3. If you were suddenly taken ill and required a major operation, or maybe even several, it could be very expensive indeed for you if you had to pay. On the other hand, you may go through life requiring very little if any medical treatment. In other words, there is great uncertainty about your future medical needs. As a result it would be very difficult to plan your finances and budget for possible future medical expenses if you had to pay for treatment. Medical insurance is a possible solution to this problem, but there is still a problem of equity. Would the chronically sick or very old be able to obtain cover, and if so, would the premiums be very high? Would the poor be able to afford the premiums? Also would insurance cover be comprehensive?

4. There is also the problem of externalities. If you are cured of an infectious disease, for example, it is not just you who benefits but also others, since you will not infect them. Also your family and friends benefit from seeing you well; and if you have a job you will be able to get back to work, thus reducing the disruption there. These external benefits of health care could be quite large.

If the sick have to pay the cost of their treatment, they may decide not to be treated – especially if they are poor. They may not take into account the effect that their illness has on other people. The market, by equating private benefits and costs, would produce too little health care.

5. Markets only function well to serve consumer wishes if the consumer has the information to make informed decisions. If you are to buy the right things, you must know what you want and whether the goods you buy meet these wants. In practice, consumers do have pretty good knowledge about the things they buy. For example, when you go to the supermarket you will already have tried most of the items you that buy, and will therefore know how much you like them. Even with new products, provided they are the sort you buy more than once, you can learn from any mistakes.

In the case of health care, “consumers” (i.e. patients) may have very poor knowledge. If you have a pain in your chest, it may be simple muscular strain, or it may be a symptom of heart disease. You rely on the doctor (the supplier of the treatment) to give you the information: to diagnose your condition. Two problems could arise here if there were a market system of allocation health care.

The first is that unscrupulous doctors might advise more expensive treatment than is necessary, or drugs companies might persuade you to buy a more expensive branded product rather than an identical cheaper version.

The second is that patients suffering from the early stages of a serious disease might not consult their doctor until the symptoms become acute, by which time it might be too late to treat the disease, or very expensive to do so. With a free health service, however, there is likely to be an earlier diagnosis of serious conditions. On the other hand, some patients might consult their doctors over trivial complaints.

6. If doctors and hospitals operated in the free market as profit maximisers, it is possible that they would collude to fix standard prices for treatment, so as to protect their incomes.

Even if doctors did compete openly, it is unlikely that consumers would have the information to enable them to “shop around” for the best value. Doctor A may charge less than doctor B, but is the quality of service the same? Simple bedside manner – the thing that may most influence a patient’s choice – may be a poor indicator of the doctor’s skill and judgment.

7. To argue that the market system will fail to provide an optimal allocation of health-care resources does not in itself prove that free provision is the best alternative. In the USA there is much more reliance on private medical insurance. Only the very poor get free treatment.

Alternatively, the government may simply subsidise the provision of health care, so as to make it cheaper rather than free. This is the case with prescriptions and dental treatment in the UK, where many people have to pay part of the cost of treatment. Also the government can regulate the behaviour of the providers of health care, so as to prevent exploitation of the patient. Thus only people with certain qualifications are allowed to operate as doctors, nurses, pharmacists, etc.

I. Match each of these statements with one of the parts numbered 1-7:

 

A. Health care generates a number of benefits external to the patient.
B. There are alternative policies open to a government to tackle market failings.
C. It is difficult for people to predict their future medical needs.
D. Patients might be at a disadvantage because of their ignorance.
E. It is unlikely that competition would drive down prices charged by doctors and hospitals.
F. People may not be able to afford treatment.
G. It is important to make a distinction between health care and other products and services allocated through the market.

 

II. Say whether the following sentences are “Right” or “Wrong”. If there is not enough information to answer, choose “Doesn’t say”.

1. The National Health Service provides free medicines for everyone.

A. Right          B. Wrong        C. Doesn’t say

2. Health insurance could solve the problem of planning future medical expenses.

A. Right          B. Wrong        C. Doesn’t say

3. The market would fail to produce sufficient health care by equating public benefits and costs.

A. Right          B. Wrong        C. Doesn’t say

4. With a free health service, more people would consult their doctor at the early stages of a disease.

A. Right          B. Wrong        C. Doesn’t say

5. The US government subsidises the provision of health care.

A. Right          B. Wrong        C. Doesn’t say

III. For each question 1-5, mark one for the answer you choose.

1. The concept of equity applied to health care implies

A. treatment according to the ability to pay.

B. treatment according to social status.

C. treatment according to medical need.

2. The problem with medical insurance is that

A. the poor might not be able to obtain cover.

B. the premiums might be too high for the poor.

C. it might make it difficult for people to plan their budget.

3. If there were a market system of allocating health care,

A. doctors and drugs companies would probably take advantage of patient ignorance.

B. patients would be better informed.

C. patients would be more willing to buy expensive branded products.

4. In the free market

A. doctors’ fees would be reduced by competition.

B. doctors might charge standard prices for treatment.

C. price would be an indicator of the doctor’s skill.

5. According to the writer, a free health service

A. is sure to provide an optimal allocation of health-care resources.

B. should be restricted to the very poor.

C. is not necessarily the best alternative.

CAN THE MARKET PROVIDE ADEQUATE PROTECTION FOR THE ENVIRONMENT?

 

___ (1)

In recent years people have become acutely aware of the damage being done to the environment pollution. But if the tipping of chemicals and sewage into the rivers and seas and the spewing of toxic gases into the atmosphere cause so much damage, why does it continue? If we all suffer from these activities, both consumers and producers alike, then why will a pure market system not deal with the problem? After all, a market should respond to people’s interests.

___ (2)

The reason is that the costs of pollution are largely external costs. They are borne by society at large and only very slightly (if at all) by the polluter. If, for example, 10 000 people suffer from the smoke from a factory (including the factory owner) then that owner will only bear approximately 1/10 000 of the suffering. That personal cost may be quite insignificant when the owner is deciding whether the factory is profitable. And if the owner lives far away, the personal cost of the pollution will be zero.

Thus the social costs of polluting activities exceed the private costs. If people behave selfishly and only take into account the effect their actions have on themselves, there will be an overproduction of polluting activities.

Thus it is argued that governments must intervene to prevent or regulate pollution, or alternatively to tax the polluting activities or subsidise measures to reduce the pollution.

___ (3)

But if people are purely selfish, why do they buy “green” products? Why do they buy, for, example, “ozone-friendly” aerosols? After all, the amount of damage done to the ozone layer from their own personal use of “non-friendly” aerosols would be absolutely minute. The answer is that many people have a social conscience. They do sometimes take into account the effect their actions have on other people. They are not totally selfish. They like to do their own little bit, however small, towards protecting the environment.

Nevertheless to rely on people’s consciences may be a very unsatisfactory method of controlling pollution. In a market environment where people are all the time being encouraged to consume more and more goods and where materialism is the religion of the age, there would have to be a massive shift towards “green thinking” if the market were to be a sufficient answer to the problem of pollution.

___ (4)

Certain types of environment problem may get high priority in the media, like acid rain, the greenhouse effect, damage to the ozone layer and brain damage to children from leaded petrol. However, the sheer range of polluting activities makes reliance on people’s awareness of the problems and their social consciences far too arbitrary.

I. Which text reports on these items?

A. Media priority of the environmental problems.

B. Costs of pollution.

C. A market response to the environmental problem.

D. People’s selfishness and social responsibility.

II. For each question 1-4, mark one for the answer you choose.

1. A market system should deal with the problem of pollution because

A. consumers suffer from producers’ activities.

B. people have become acutely aware of the problem.

C. it should react to people’s interests.

2. The costs of pollution

A. are mostly suffered by society.

B. are borne by the polluter.

C. are personal costs of the factory owner.

3. People buy “green” products and “ozone-friendly” aerosols because

A. they are totally selfish.

B. they are aware of the damage they do to the ozone layer from their personal use of “non-friendly” goods.

C. being socially responsible they take into consideration the possible impact of their actions on other people.

4. A very unsuitable way of controlling pollution could be

A. encouraging people to buy more and more goods.

B. organizing “green thinking” propaganda.

C. relying on people’s being socially conscious.

III. The mistakes in the sentences below have been underlined. Write the corrections in the spaces provided.

1. Recently people became aware of the damage being done to the environment by pollution.

2. Personal costs may be quite insignificantly when the owner is deciding whether the factory is profitable.

3. People take into account the effect their actions have to themselves.

4. They like to do their own little bit, otherwise small, towards protecting the environment.

5. To rely on people’s conscious may be a very unsatisfactory method of controlling pollution.

1. _____________________________________________

2. _____________________________________________

3. _____________________________________________

4. _____________________________________________

5. _____________________________________________

Strategic trade theory

 

An argument for protection?

I. Read the text. Some parts of the text have been taken out. These extracts are listed below. Complete each gap with the appropriate extract. One sentence does not belong in any of the gaps.

a) Governments frequently adopt trade protection because it is an easy option politically.

b) These policies include quotas, exchange controls, import licensing, export taxes, tariffs.

c) Infra-industry occurs because of scale economies and consumer demand for diversity.

d) Reasons for restricting trade that have some validity in a world context include some arguments.

e) Although international trade can benefit the world as a whole, some countries will lose out until the gainers compensate the losers.

1. Lester Thurow is Dean of the Sloan School of management at the Massachusetts Institute of Technology (MIT). He is also one of the USA’s best-known and most articulate advocates of “managed trade”.

2. Thurow (and others) have been worried by the growing penetration of US markets by imports from Japan, Europe and many developing countries. Their response is to call for a carefully worked-out strategy of protection for US industries. ___ (1)

The strategic trade theory that they support argues that the real world is complex. It is wrong, they claim, to rely on free trade and existing comparative advantage. Particular industries will require particular policies of protection or promotion tailored to their particular needs: ___ (2)

3. Some industries will require protection against unfair competition from abroad – not just to protect the industries themselves, but also to protect the consumer from the oligopolistic power that the foreign companies will gain if they succeed in driving the domestic producers out of business.

· Other industries will need special support in the form of subsidies to enable them to modernize and compete effectively with imports.

· New industries may require protection to enable them to get established – to achieve economics of scale and build a comparative advantage.

· If a particular foreign country protects or promotes its own industries, it may be desirable to retaliate in order to persuade the country to change its mind.

4. Thurow claims that Japan has been following a policy of managed trade for years – and look how successful it has been!

5. But, despite the enthusiasm of the strategic trade theorists, their views have come in for concerted criticism from economic liberals. If the USA is protected from cheap Japanese imports, they claim, all that will be achieved is a huge increase in consumer prices. The car, steel, telecommunications and electrical goods industries might find their profits bolstered, but this is hardly likely to encourage them to be more efficient.

6. Another criticism of managed trade is the difficulty of identifying just which industries need protection, and how much and for how long. Governments do not have perfect knowledge. What is more, the political lobbyists from various interested groups are likely to use all sorts of tactics – legal and illegal – to persuade the government to look favourably on them. In the face of such pressure will the government remain “objective”? No, say the liberals. ___ (3)

7. So how do the strategic trade theorists reply? If it works for Japan, they say, it can work for the USA. What is needed is a change in attitudes. ___ (4) Rather than industry looking on the government as either an enemy to be outwitted or a potential benefactor to be wooed, and government looking on industry as a source of votes or tax revenues, both sides should try to develop a partnership – a partnership from which the whole country can gain.

8. But whether sensible, constructive managed trade is possible in the US democratic system, or the UK for that matter, is a highly debatable point. “Sensible” managed trade, say the liberals, is just pie in the sky.

II. For each statement 1-3, mark one for the answer you choose.

1. Managed trade relies on:

A. free market.

B. existing comparative advantage.

C. government intervention.

2. Industries might find their profit bolstered because:

A. They are protected from export.

B. They are protected from importation of cheap goods.

C. They are very efficient.

3. The liberals are convinced that sensible constructive managed trade is:

A. possible in the US democratic system.

B. possible in the UK.

C. hardly possible.

III. Are sentences below “right” or “wrong”? If there is not enough information to answer, choose “Doesn’t say”.

1. Advocates of managed trade claim that governments may intervene in trade.

A. Right          B. Wrong        C. Doesn’t say

2. Economic liberals argue that free trade may allow the importation of harmful goods.

A. Right          B. Wrong        C. Doesn’t say

3. Supporters of managed trade insist on legal and administrative barriers.

A. Right          B. Wrong        C. Doesn’t say

4. Critics of free trade don’t believe in sensible, constructive managed trade.

A. Right          B. Wrong        C. Doesn’t say

5. The argument for restricting trade is the danger of the establishment of a foreign-based monopoly.

A. Right          B. Wrong        C. Doesn’t say

IV. Match each of these statements with one of the paragraphs numbered 1-8.

A. Although there are many circumstances in which international trade can make countries better off, international trade can also carry costs.

B. Countries may also promote their own industries by subsidies.

C. The government can’t remain objective in the face of political lobbyists.

D. Managed trade is a debating point.

CONCENTRATION RATIOS

 

Measuring the degree of competition

We can get some indication of how competitive a market is by observing the number of firms: the more the firms, the more competitive the market would seem to be. However, this does not tell us anything about how concentrated the market might be. There may be many firms (suggesting a situation of perfect competition or monopolistic competition), but the largest two firms might produce 95 per cent of total output. This would make these two firms more like oligopolists.

Thus even though a large number of producers may make the market seem highly competitive, this could be deceiving. Another approach, therefore, to measuring the degree of competition is to focus on the level of concentration of firms.

The simplest measure of industrial concentration involves adding together the market share of the largest so many firms: e.g. the largest three or the largest five. This would give what is known as the “3-firm” or “5-firm concentration ratio”.

The table (Fig. 1) shows the 5-firm concentration ratios of selected industries in the UK. As you can see, there is an enormous variation in the degree of concentration from one industry to another.

One of the main reasons for this is difference in the percentage of total industry output at which economies of scale are exhausted. If this occurs at a low level of output, there will be room for several firms in the industry which are all benefiting from the maximum economies of scale.

Differences in the economies of scale are not the only cause of differences in concentration. The degree of concentration will also depend on the barriers to entry of other firms into the industry and on various factors such as transport costs and historical accident. It will also depend on how varied the products are within any one industrial category. For example, in categories as large as “clothing” and “toys and sports goods” there is room for many firms, each producing a specialized range of products. Within each sub-category, e.g. tennis racquets, there may be relatively few firms producing.

So is the degree of concentration a good guide to the degree of competitiveness of the industry? The answer is that it is some guide, but on its own it can be misleading. In particular it ignores the degree of competition from abroad, and from other areas within the country. Thus the five largest UK motor vehicle manufacturers may produce 82.9 per cent of UK vehicle output, but these manufacturers face considerable competition from imported cars and lorries. On the other hand, the five largest water suppliers may account for only 49.7 per cent of UK output, but within their own regions of the country they have a monopoly.

 

Figure 1

Industry	5-firm concentration ratio
Tobacco products	99.5
Iron and steel	95.3
Asbestos goods	89.8
Motor vehicles and engines	82.9
Cement, lime and plaster	77.7
Grain milling	62.3
Water supply	49.7
Footwear	48.2
Bread, biscuits, etc.	47.0
Carpets	21.8
Clothing	20.7
Bolts, nuts and springs	11.4
Processing of plastics	8.8

 

I. Are the sentences below “Right” or “Wrong”? If there is not enough information to answer, choose “Doesn’t say”.

1. The more the firms, the more concentrated the market is.

A. Right          B. Wrong        C. Doesn’t say

2. The simplest measure of industrial concentration involves summing up the market share of the largest companies existing on the market.

A. Right          B. Wrong        C. Doesn’t say

3. The degree of concentration only varies from one industry to another because of the differences in the extent of economies of scale.

A. Right          B. Wrong        C. Doesn’t say

4. In such categories as “clothing” and “toys and sports goods” there is not much room for many firms.

A. Right          B. Wrong        C. Doesn’t say

5. The degree of concentration on its own can’t reflect the situation in the market.

A. Right          B. Wrong        C. Doesn’t say

II. For each question, mark one for the answer you choose.

1. We can get some indication of how competitive a market is by

A. observing the number of firms.

B. analyzing activities of the companies in the market.

C. measuring the degree of competition.

2. The degree of concentration doesn’t depend on

A. barriers to entry of other firms into the industry.

B. transport costs.

C. history of the company.

3. Within each industrial sub-category

A. the number of companies increases.

B. there may be fewer companies producing similar goods.

C. there is enough space for many companies.

III. In most of the lines below there is one extra word. It is either grammatically incorrect or doesn’t fit in with the sense of the text. Some lines, however, are correct. If there is an extra word, write it out in CAPITAL LETTERS.

00 So is the degree of firm concentration a good guide to

01 the degree of competitiveness of the industry? The

02 answer is that it is some guide, but on its own it can be

03 misleading. In some particular it ignores the degree of competition

04 from abroad, and from others areas within the

05 country. Thus the five largest UK motor car vehicle manufacturers

06 may have produce 82.9 per cent of UK vehicle output,

07 but these manufacturers may face much considerable competition

08 from imported cars and lorries. On the other hand, the

09 five largest water suppliers may to account for only 49.7

10 per cent of UK production output, but with their own regions of the

11 country they should have a monopoly.

 

COMPETITIVE ADVANTAGE AND THE SMALL FIRM SECTOR

 

The fact that many small businesses do survive, and some manage to grow, suggests that they must have some edge over their larger rivals. The following have been found to be the key competitive advantages that small firms might hold.

___ (1)

Small firms are more able to respond to changes in market conditions and to meet customer requirements effectively. For example, they may be able to develop or adapt products for specific needs. Small firms may also be able to make decisions quickly, avoiding the bureaucratic and formal decision-making processes that typify many larger companies.

Quality of service. Small firms are more able to deal with customers in a personal manner and offer a more effective after-sales service.

Production efficiency and low overhead costs. Small firms can avoid some of the diseconomies of scale that beset large companies. A small firm can benefit from: management that avoids waste; good labour relations; the employment of a skilled and motivated workforce; lower accommodation costs.

Product development. As we have seen, many small businesses operate in niche markers, offering specialist goods or services. The distinctiveness of such products gives the small firm a crucial advantage over its larger rivals. A successful small business strategy, therefore, would be to produce products that are clearly differentiated from those of large firms in the market, thereby avoiding head-on competition – competition which the small firm would probably not be able to survive.

___ (2)

Small businesses, especially those located in high-technology markets, are frequently product or process innovators. Such businesses, usually through entrepreneurial vision, manage successfully to match such innovations to changing market needs. Many small businesses are, in this respect, path breakers or market leaders.

Small businesses do, however, suffer from a number of significant limitations.

Problems facing small businesses

The following points have been found to hinder the success of small firms.

___ (3)

Small firms face many problems in selling and marketing their products, especially overseas. Small firms are perceived by their customers to be less stable and reliable than their larger rivals. This lack of credibility is likely to hinder their ability to trade. This is a particular problem for “new” small firms which have not had long enough to establish a sound reputation.

Funding R&D. Given the specialist nature of many small firms, their long-run survival may depend upon developing new products and processes in order to keep pace with changing market needs. Such developments may require significant R&D investment. However, the ability of small firms to attract finance is limited, as many of them have virtually no collateral and they are frequently perceived by banks as a highly risky investment.

___ (4)

A crucial element in ensuring that small businesses not only survive but grow is the quality of management. If key management skills, such as being able to market a product effectively, are limited, then this will limit the success of the business.

___ (5)

Small firms will have fewer opportunities and scope to gain economies of scale, and hence their costs are likely to be somewhat higher than their larger rivals. This will obviously limit their ability to compete on price.

I. Match each of these headlines with one of the texts above.

A. Innovation                    _______________

B. Management skills        _______________

C. Flexibility                     _______________

D. Economies of scale       _______________

E. Selling and marketing   _______________

II. Look at statements 1-3. In each statement, which phrase or sentence is correct?

1. Small firms must have some edge over their larger rivals.

A. Small firms are far ahead of their large rivals.

B. Small firms have to be better than their large rivals to compete with them.

C. All small firms will soon fail.

2. Small firms are perceived by their customers to be less stable and reliable than their larger rivals.

A. Small firms are less reliable than their large rivals.

B. Small firms can’t find their customers.

C. Customers think that small firms are less reliable than their large rivals.

3. This lack of credibility is likely to hinder their ability to trade.

A. Customers’ faith in small firms is low which limits their sales.

B. Customers of small firms are lucky.

C. Customers will stop small firms from getting credits.

III. Are sentences below “Right” or “Wrong”? If there is not enough information to answer, choose “Doesn’t say”.

1. Small firms offer better maintenance support.

A. Right          B. Wrong        C. Doesn’t say

2. A small firm can benefit from lower prices.

A. Right          B. Wrong        C. Doesn’t say

3. Small firms have less problems selling abroad.

A. Right          B. Wrong        C. Doesn’t say

4. Small firms are unable to get credits in the bank.

A. Right          B. Wrong        C. Doesn’t say

 

GROWTH THROUGH DIVERSIFICATION

 

I. Read the text. Some parts of the text have been taken out. These extracts are listed below. Complete each gap with the appropriate extract. One sentence does not belong in any of the gaps.

a) There are three principal factors which might encourage a business to diversify.

b) Alternatively, the business might be in a market where demand is stagnant or declining.

c) Such products need not cover similar activities.

d) As a result, control over market share is becoming even more crucial.

e) Diversification therefore enables the business to spread risk.

Diversification is the process whereby a firm shifts from being a single-product to a multiproduct producer. ___ (1) We can in fact identity four directions in which diversification might he undertaken:

· Using the existing technological base and market area.

· Using the existing technological base and new market area.

· Using a new technological base and existing market area.

· Using a new technological base and new market area.

Categorising the strategies in this way would suggest that the direction of diversification is largely dependent upon both the nature of technology and the market opportunities open to the firm. But the ability to capitalise on these features depends on the experience, skills and market knowledge of the managers of the business. In general, diversification is likely to occur in areas where the business can use and adapt existing technology and knowledge to its advantage.

The diversification of Amstrad, the personal computer manufacturer, into the mobile telephone market is a good example of where a business’s current technology and market knowledge are being applied to a distinct new product.

Why diversification?

___ (2)

Stability. So long as a business produces a single product in a single market, it is vulnerable to changes in that market’s conditions. If a farmer produces nothing but potatoes, and the potato harvest fails, the farmer is ruined. If however, the farmer produces a whole range of vegetable products, or even diversifies into livestock, then he or she is less subject to the forces of nature and the unpredictability of the market. ___ (3)

Maintaining profitability. Businesses might also be encouraged to diversify if they wish to protect existing profit levels. It may be that the market in which a business is currently located is saturated and that current profitability is perceived to be at a maximum. ___ (4) In such cases the business is likely to see a greater return on its investment by diversifying into new product ranges located in dynamic expanding markets.

Growth. If the current market is saturated, stagnant or in decline, diversification might be the only avenue open to the business if it wishes to maintain a high growth performance. In other words, it is not only the level of profits that may be limited in the current market, but also the growth of sales.

II. The mistakes in the sentences below have been underlined. Correct them.

1. Diversification is the process whereby a firm shifts to being a single-producer.

2. Although a business produces a single product in a single market, it depends on that market.

3. Diversification enable the business to spread risk.

4. Businesses might also have encouraged to spread risk.

5. In other words, it is not only the current markets that may be limited in the level of profits, but also the growth of sales.

1.                                                                       

2.                                                                  

3.                                                                       

4.                                                                       

5.                                                                       

 

THE FIRM AS A LEGAL ENTITY

 

The legal structure of the firm is likely to have a significant impact on its conduct, and subsequent performance, within the market place. There are several types of firm, each with a distinct legal status.

___ (1)

This is where the business is owned by just one person. Usually such businesses are small, with only a few employees. Retailing, building and farming are typical areas to find sole proprietorships. Such businesses are easy to set up and may require only a relatively small initial capital investment. They may well flourish if the owner is highly committed to the business, and they can be very flexible to changing market conditions. They suffer two main disadvantages, however:

· Limited scope for expansion. Finance is limited to what the owner can raise personally. Also there is a limit to the size of an organisation that one person can effectively control.

· Unlimited liability. The owner is personally liable for any losses that the business might make. It could result in the owner’s house, car and other assets being seized to pay off any outstanding debts.

___ (2)

This is where two or more people own the business. In most partnerships there is a legal limit of 20 partners. Partnerships are common in the same fields as sole-proprietorships. They are also common in the professions: solicitors, accountants, surveyors, etc. With more owners, there is more scope for expansion. More finance can be raised and the partners can each specialise in one aspect of the business.

Partners, however, still have unlimited liability. This problem could be very serious. The mistakes of one partner could jeopardise the personal assets of all the other partners.

Where large amounts of capital are required and/or when the risks of business failure are relatively high, partnerships are not an appropriate form of organisation. In such cases it is best to form a company (or “joint-stock company” to give it its full title).

___ (3)

A company is legally separate from its owners. This means that it can enter into contracts and own property. Any debts are its debts, not the owners.

Each owner has a share in the company. The size of their share holdings will vary from one shareholder to another and will depend on the amount they invest. Each shareholder will receive his or her share of the company’s distributed profit. The payments to shareholders are called “dividends”.

The owners have only limited liability. This means that, if the company goes bankrupt, the owners will lose the amount of money they have invested in the company, but no more. Their personal assets cannot be seized. This has the advantage of encouraging people to become shareholders, and indeed large companies may have thousands of shareholders – some with very small holdings and others, including institutional shareholders such as pension funds, with very large holdings. Without the protection of limited liability, many of these investors would never put their money into any company that involved even the slightest risk.

Shareholders often take no part in the running of the firm. They may elect a board of directors which decides broad issues of company policy. The board of directors in turn appoints managers who make the day-to-day decisions. There are two types of companies: public and private.

Public limited companies. Don’t be confused by the title. A public limited company is still a private enterprise: it is not a nationalised industry. It is “public” because it can offer new shares publicly: by issuing a prospectus, it can invite the public to subscribe to a new share issue. In addition, many public limited companies are quoted on the Stock Exchange. This means that existing shareholders can sell some or all of their shares on the Stock Exchange. The prices of these shares will be determined by demand and supply. A public limited company must hold an annual shareholders’ meeting.

Private limited companies. Private limited companies cannot offer their shares publicly. Shares have to be sold privately. This makes it more difficult for private limited companies to raise finance, and consequently they tend to be smaller than public companies. They are, however, easier to set up than public companies.

___ (4)

It is common, especially in large civil engineering projects that involve very high risks, for many firms to work together as a consortium. The Channel Tunnel and Thames Barrier are products of this form of business organisation. Within the consortium one firm may act as the managing contractor, while the other members may provide specialist services. Alternatively, management may be more equally shared.

I. Match each of these headlines with one of the texts above.

A. Consortia of firms                  ________________

B. The sole proprietor                ________________

C. The partnership                     ________________

D. Companies                             ________________

II. Which text reports on these items?

A. Personal liability for all losses ________________

B. Company’s distributed profit          ________________

C. High risk projects                   ________________

D. Jeopardy of personal assets            ________________

III. In most of the lines below there is one extra word. It is either grammatically incorrect or does not fit in with the sense of the text. Some lines, however, are correct. If there is an extra word in the line, write out the extra word in CAPITAL LETTERS.

00 Co-operatives. These are of two types.

01 Consumer co-operatives. These, like the old high street Co-ops, are

02 officially owned by the consumers. Consumers in a fact play no part in

03 the running of these co-ops. They are run by various professional

04 the managers.

05 Producer co-operatives. These are firms that are owned by their workers,

06 who share in the firm’s profit according to some agreed formula. They are

07 sometimes formed by people in the same trade coming together: in

08 example, producers of handicraft goods. At an other times they are formed

09 by workers buying out their factory from the owners; this is most likely if

10 it is due to close, with a resultant loss of jobs. Producer co-operatives,

11 although still relatively few in number, have grown in recent years.

IV. Choose the best answer to complete each gap in the text.

Public corporations

These are state-owned enterprises such as the BBC, the Bank of England and nationalised industries.

They have a legal identity separate ___ (1) the government. The corporation is run ___ (2) a board, but the members of the board are ___ (3) by the relevant government minister. The boards have to act within various ___ (4) of reference laid down by Act of Parliament. Profits of public corporations that are not reinvested accrue to the ___ (5). Since 1980 many public corporations have been “privatised”: that is, they have been sold directly to other firms in the ___ (6) sector (such as Austin Rover to British Aerospace) or to the general public through a public issue of shares (such as British Gas).

1. a) in	b) from	c) away	d) out of
2. a) with	b) that	c) those	d) by
3. a) appointed	b) managed	c) controlled	d) run
4. a) terms	b) conditions	c) items	d) notes
5. a) Central Bank	b) Foreign Office	c) Treasury	d) Cabinet
6. a) industry	b) commerce	c) private	d) manufacturing

SHOULD CENTRAL BANK BE INDEPENDENT OF GOVERNMENT?

 

I. Read the text. Some parts of the text have been taken out. These extracts are listed below. Complete each gap with the appropriate extract. One sentence does not belong in any of the gaps.

a) An independent central bank is free from political manipulation.

b) But the Bundesbank was concerned to dampen the inflationary pressures caused by German reunification.

c) The advocates of independence frequently cite the experience of Germany.

d) Technology provides both opportunities and threats to the banking community.

e) But with an independent central bank committed to monetary stability, it may be difficult for the government to achieve such economic policy goals.

In recent years there has been much discussion among both economists and politicians as to whether the Bank of England should be independent. ___ (1). The Bundesbank, Germany’s central bank, is fiercely independent, and is credited with being instrumental in Germany’s economic success. The Bundesbank’s philosophy is simple: Monetary and price stability are of overriding importance in the pursuit of growth. Inflation should be tightly controlled at all times.

The arguments in favour of an independent central bank are strong.

– ___ (2) It can devote itself to attaining long-run economic goals, rather than to helping politicians achieve short-run success in time for the next election.

– Independence may strengthen the credibility of monetary policy. This may then play an important part in shaping expectations: workers may put in moderate wage demands and businesses may be more willing to invest.

– An independent central bank has a clear legal status and set of responsibilities. It is the “protector of the currency” and as such it is not subordinate to government. This is important given the political nature of economic policy making in both a domestic and an international context. The Bundesbank’s policy concerning the ERM (European Monetary System) is a good example. In 1992, international pressure mounted on Germany to cut interest rates as other ERM members faced a deeping recession. ___ (3). It stuck firmly to its statutory obligations and refused to cut interest rates, except when the domestic economy allowed.

The statistics show that the greater the independence of a country’s central bank, the lower and more stable is its rate of inflation. If this is the goal of economic policy, it seems that more rather than less independence is desirable.

One of the major arguments against having an independent central bank is that it makes it more difficult to integrate monetary management into wider economic objectives. On some occasions it may be desirable to accept a higher rate of inflation – if this were the consequence of a growth stimulus aimed at reducing unemployment. ___ (4).

II. Are sentences below “Right” or “Wrong”? If there is not enough information to answer, choose “Doesn’t say”.

1. Monetary policy does not influence the economic growth.

A. Right          B. Wrong        C. Doesn’t say

2. The trustworthiness of monetary policy often depends on the level of independence of a central bank.

A. Right          B. Wrong        C. Doesn’t say

3. Monetarists believe that controlling money is the only essential function of governments.

A. Right          B. Wrong        C. Doesn’t say

4. An independent bank should have a clearly set of objectives defined by the government.

A. Right          B. Wrong        C. Doesn’t say

5. T