The Effect of Market Power on Demand and Supply
Order ID |
53563633773 |
Type |
Essay |
Writer Level |
Masters |
Style |
APA |
Sources/References |
4 |
Perfect Number of Pages to Order |
5-10 Pages |
Description/Paper Instructions
The Effect of Market Power on Demand and Supply
Market power refers to the ability of a firm or group of firms to influence the price and quantity of a good or service in the market. When a firm has market power, it can raise the price of its product and reduce the quantity supplied, leading to a reduction in consumer surplus and an increase in producer surplus.
The effect of market power on demand and supply can be explained using the concepts of elasticity and market structure. Elasticity refers to the responsiveness of demand or supply to changes in price. Market structure refers to the number and size of firms in a market and the degree of competition among them.
In a perfectly competitive market, where there are many small firms producing identical products, no firm has market power. Each firm is a price taker and has to accept the market price as given. In such a market, the demand curve faced by each firm is perfectly elastic, meaning that it can sell as much as it wants at the market price.
However, in a market with a single dominant firm or a small group of firms that collude to restrict output and raise prices, the market is characterized by a high degree of market power. The dominant firm or group of firms can act as a price setter, raising prices and reducing output to maximize profits.
When a dominant firm raises its price, the demand for its product becomes less elastic, as consumers have fewer substitutes to choose from. This means that a small increase in price leads to a relatively smaller decrease in quantity demanded. As a result, the dominant firm can increase its revenue and profit by raising the price.
In addition, the dominant firm may reduce the quantity supplied to the market to raise the price further. This reduces consumer surplus, which is the difference between the maximum price consumers are willing to pay for a product and the actual price they pay. The reduction in consumer surplus is a loss to society as a whole, as some consumers may be priced out of the market altogether.
The impact of market power on supply is also significant. When a dominant firm reduces the quantity supplied to the market, it reduces the availability of the product to consumers. This can create a situation of excess demand, where consumers are willing to pay more for the product than the market price. In such a situation, some consumers may be unable to purchase the product, leading to a loss of welfare.
Moreover, a dominant firm may use its market power to prevent entry by potential competitors. This can occur through various means, such as exclusive contracts with suppliers, predatory pricing, or strategic barriers to entry. By preventing entry, the dominant firm can maintain its market power and continue to earn high profits. However, this reduces the degree of competition in the market, leading to higher prices and reduced output in the long run.
In conclusion, market power can have significant effects on demand and supply. In a market with a dominant firm or group of firms, the firm(s) can act as a price setter and reduce output, leading to higher prices and reduced consumer surplus. Moreover, the firm(s) may use its market power to prevent entry by potential competitors, reducing the degree of competition and leading to higher prices and reduced output in the long run. It is therefore important for policymakers to monitor and regulate markets with high degrees of market power to ensure that consumers are not exploited and that competition is preserved.
The Effect of Market Power on Demand and Supply
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Content (worth a maximum of 50% of the total points) |
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30 points out of 50: The essay illustrates a rudimentary understanding of the relevant material by mentioning but not full explaining the relevant content; identifying some of the key concepts/ideas though failing to fully or accurately explain many of them; using terminology, though sometimes inaccurately or inappropriately; and/or incorporating some key claims/points but failing to explain the reasoning behind them or doing so inaccurately. Elements of the required response may also be lacking. |
40 points out of 50: The essay illustrates solid understanding of the relevant material by correctly addressing most of the relevant content; identifying and explaining most of the key concepts/ideas; using correct terminology; explaining the reasoning behind most of the key points/claims; and/or where necessary or useful, substantiating some points with accurate examples. The answer is complete. |
50 points: The essay illustrates exemplary understanding of the relevant material by thoroughly and correctly addressing the relevant content; identifying and explaining all of the key concepts/ideas; using correct terminology explaining the reasoning behind key points/claims and substantiating, as necessary/useful, points with several accurate and illuminating examples. No aspects of the required answer are missing. |
Use of Sources (worth a maximum of 20% of the total points). |
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5 out 20 points: Sources are seldom cited to support statements and/or format of citations are not recognizable as APA 6th Edition format. There are major errors in the formation of the references and citations. And/or there is a major reliance on highly questionable. The Student fails to provide an adequate synthesis of research collected for the paper. |
10 out 20 points: References to scholarly sources are occasionally given; many statements seem unsubstantiated. Frequent errors in APA 6th Edition format, leaving the reader confused about the source of the information. There are significant errors of the formation in the references and citations. And/or there is a significant use of highly questionable sources. |
15 out 20 points: Credible Scholarly sources are used effectively support claims and are, for the most part, clear and fairly represented. APA 6th Edition is used with only a few minor errors. There are minor errors in reference and/or citations. And/or there is some use of questionable sources. |
20 points: Credible scholarly sources are used to give compelling evidence to support claims and are clearly and fairly represented. APA 6th Edition format is used accurately and consistently. The student uses above the maximum required references in the development of the assignment. |
Grammar (worth maximum of 20% of total points) |
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7 points out of 10: Research paper presents an above-average use of formatting skills. The paper has slight errors within the paper. This can include small errors or omissions with the cover page, abstract, page number, and headers. There could be also slight formatting issues with the document spacing or the font Additionally the paper might slightly exceed or undershoot the specific number of required written pages for the assignment. |
10 points: Student provides a high-caliber, formatted paper. This includes an APA 6th edition cover page, abstract, page number, headers and is double spaced in 12’ Times Roman Font. Additionally, the paper conforms to the specific number of required written pages and neither goes over or under the specified length of the paper. |
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