Principle of Microeconomics Course PDF

PRINCIPLE OF MICROECONOMICS COURSE The course ‘Principle of Microeconomics’ aims to give you an understanding of the techniques in administering and managing business organizations with necessary skills. COURSE OBJECTIVES The objectives of the course are to: 1. Explain in detail microeconomics as a branch of Economics. 2. Examine the foundations of microeconomics. 3. Analyse the basic microeconomic theory. 4. Examine critically the concept of market structure in abstraction and in real life situation. 5. Critically examine privatization and commercialization in Nigeria. In addition, each unit also has specific objectives and Self-Assessment Exercise. The units’ objectives are also included at the beginning of a unit; you should read them before you start working through the unit. You may want to refer to them during your study of the unit to check on your progress. You should always look at the unit objectives after completing a unit, in this way, you can be sure that you have done what is required of the unit. The contents are to the emergence of business administration; problems of households, business firms and government in the business world, the economic systems and social change. The basics of business policy formulation and implementation process by individuals, firms and government in business administration. MODULE 1: INTRODUCTION TO THE CONTEX OF MICROECONOMICS Unit 1: Introducing Economics Unit 2: Basic Tools in Economic Analysis Unit 3: Microeconomics Unit 4: Microeconomics and Choice Unit 5: Economic Systems and Organisation MODULE 2: FOUNDATIONS OF MICROECONOMICS Unit 6: Theory of Demand Unit 7: Theory of Supply Unit 8: Elasticity 1 MODULE 3: INTRODUCTION TO MICROECONOMIC THEORY Unit 9: The Theory of Consumer Behaviour Unit 10: Theory of Cost MODULE 4: MARKET STRUCTURE Unit 11: Perfect Competition Unit 12: Monopoly Unit 13: Monopolistic Competition Unit 14: Oligopoly Unit 15: Pricing and employment of Resources Unit 16: Privatisation and Commercialisation in Nigeria Principles of Microeconomics is designed to give you some knowledge which would help you understand the basic fundamentals, principles and objectives of microeconomics as applied to individuals, business firms and government. After going through this course, the knowledge gained could be applied in the execution of managerial duties and to contribute to the development of scholarly thoughts in business/ industrial sector management. REFERENCES/FURTHER READING Here are some references for further reading that can assist you. At the end of each unit, you will see a list of references related to the topic treated. Abe I.O., (2000), Intermediate Economics, Mipon Biz. Centre, Lagos John, Sloman and Alison Wride, (2009), Economics, Seventh Edition, Rotolito Lombarda, Italy. Paul, A. Samuelson and William, D. Nordhaus (2005), Economics; Eighteenth Edition; Published Mcgraw-Hill International Edition. Paul, R Krugman and Maurice Obsfeld (2009), International Economics Theory and Policy: Elm St. Publishing Services; 8th Edition. Wale, O. and kunle, W., (2002), Introduction to Microeconomics and Application of Differentials Calculus to Economics, Leo Prints Nigeria Ltd. 2 COURSE CONTENTS MODULE 1: INTRODUCTION TO THE CONTEXT OF ECONOMICS Unit 1: Introduction to Economics Unit 2: Basic Tools in Economics Analysis Unit 3: Microeconomics Unit 4: Microeconomics and Choice Unit 5: Economics System and Organisation MODULE 2: FUNNDATIONS OF ECONOMICS Unit 6: Theory of Demand Unit 7: Theory of Supply Unit 8: Elasticity MODULE 3: THE CONTEXT TO MICROECONOMIC THEORY Unit 9: Theory of Consumer Behaviour Unit 10: Theory of Cost MODULE 4: MARKET STRUCTURE Unit 11: Perfect Competition Unit 12: Monopoly Unit 13: Monopolistic Competition Unit 14: Oligopoly Unit 15: Pricing and Employment of Resources Unit 16: The Theory of Contestable Markets Unit 17: Privatization and Commercialization in Nigeria Unit 18: Return to Scale 3 MODULE ONE UNIT 1: INTRODUCTION TO ECONOMICS Table of Contents 1.0 Introduction 2.0 Objectives 3.0 Main Context 3.1.1 Nature and Scope of Economics 3.1.2 Scarcity as an Economic Problem 3.1.3 Meaning of Economics 3.1.4 Traditional Branches of Economics 3.1.5 Another way of Looking of Economics 4.0 Conclusion 5.0 Summary 6.0 Tutor Marked Assignment 7.0 Further Readings/References 1.0 INTRODUCTION Economics as a field of knowledge is as important as life. In facts, it affects our daily lives. Local, national and international economic issues are discussed daily-issues of prices, interest rate changes, unemployment, and economic recessions among other vital issues. The human race is continually faced with economic problems and difficulties in making reasonably economic decisions. Economic problems of scarcity and choice are constantly manifesting in every sphere of human endeavour. In this chapter, we will attempt to give insight into the subject of Economics. The problem of scarcity, meaning of Economics as well as its main branches will also be discussed. 2. 0 OBJECTIVES At the end of this unit, you should be able to: 1. Explain the nature and scope of Economics. 2. Explain Scarcity as an economic problem. 3. Define Economics. 4. Enumerate and explain the basic branches of Economics. 4 3.0 MAIN CONTEXT 3.1 NATURE AND SCOPE OF ECONOMICS When the word ‘economics’ is mentioned, people’s thought are directed towards money. They think economics is all about money. To an extent, this is true as money is a tool that serves some purposes. The scope of economics however goes beyond money. Economics is concerned about production of goods and services as well as consumption of goods and services. Production is the transformation of inputs into outputs by firms in order to earn profit. Consumption on the other hand is the act of using goods and services: labour, land, raw-materials and capital. It is the truth that consumption of goods and services increases more than production and this situation creates a central economics problem of scarcity. From this one problem emerges other economic problems. Scarcity refers to excess of human wants over what can actually be produced to fulfill these wants (Abe, 2000). 3.2 SCARCITIES AS AN ECONOMIC PROBLEM Naturally human beings want more of every good thing. For example, everybody, poor or wealthy, wants more money. The very important point to note here is that human wants are unlimited yet the means of satisfying them are limited. Limited amount of goods and services can be produced because productive recourses are limited. These resources include human resources (labour), natural resources (land, raw materials) and manufacture resources (capital). The limited productive resources and unlimited human wants is the sole reason for the existences of the problem of scarcity. 3.3 MEANING OF ECONOMICS Economics as a field of study has been variously explained and defined. According to Alfred Marshall, “Economics is a study of mankind in the ordinary business of life”. It involves all human activities that lead to satisfaction. Adam Smith defined economics as the,” Nature and causes of wealth of nations,” whereby it “Proposes to enrich both the people and the sovereign”. Mill, explained economics as “Nature of wealth and lands which govern its production, distribution and exchange”. Lord Robbins (1932), states in one of his book titled “Nature and Significance of Economics Science,” defines economics as “The science which studies human behaviour as a relationship between ends and scare means which have alternative uses”. Economics as a social science is broadly concerned with efficient allocation of scare resources among the various economic agents- household, individuals, business firm, 5 government, etc. The problem of scarcity is however central to the study of economics. Other areas of interest include; opportunity cost, choice, satisfaction and maximization. 3.4 TRADITIONAL BRANCHES OF ECONOMICS Economics is a branch of knowledge that is traditionally divided into two main branches; macroeconomics and microeconomics, where ‘macro’ means big and ‘micro’ means small. Macroeconomics or income theory concentrates on the study of economy is a whole that is economics aggregates. It takes care of variables such as overall level of prices, output, and employment in the economy, total national income, total population, interest rates, aggregate demand and supply among others. It deals with important issues as they relate to inflation, stagnation, international trade, economic growth and development. Microeconomics on the other hand studies the actions of individual units of the economy. These individual units are household, business firms and the government. It studies the relationships between these units in determining the pattern of production and distribution of goods and services. In summaryof the above, both macroeconomics and microeconomics are interrelated, interdependent and thus, complement each other (Abe, 2000). 3.5 ANOTHER WAY OF LOOKING AT ECONOMICS Economics is mainly concerned with consumption and production of goods and services. Another wayof stating the above is that economics is concerned with demand and supply of goods and services. In fact, demand and supply are the nucleus of economics. Demand relates to wants while supply relates to available resources to meet the wants. Potential demand for goods and services exceeds potential supply goods and services are limited, this situation still brings about the central economic problem-scarcity. 4.0 CONCLUSION From the forgoing discussion on introduction to economics, we have seen in this unit that, economics seeks to answer various questions as they relate to human behaviour. It seeks to reduce the impact or effects of the problem of scarcity on human lives by ensuring efficient allocation of resources. To this end, it should be noted that the study of economics is essential to understanding the world around us. Economics helps us in making rational economic decisions. Additionally, the study of economics helps 6 in ensuring optimum allocation of scare resources in order to meet or satisfy the ever increasing human wants. 5.0 SUMMARY The foregoing discussions, we can categorically say the following as summary from this unit: The study of economics centres on scarcity of resources, opportunity cost, and choice, and satisfaction maximization. Economics as a branch of knowledge has been variously explained. One of the definitions sees economics as a science which studies human behaviour as a relationship between ends and Scare which have an alternative uses. Economics is traditionally divided into two main branches, macroeconomics and microeconomics. Macroeconomics deals with aggregate variables such as overall employment level, output, economic growth and development, overall level of prices, etc. Microeconomics is a branch of economics which focuses on the actions of the individual agents in the economy. It studies the action of households, individuals and the government. The concept of demand and supply can also be used in explaining what economics is all about. 6.0 TUTOR MARKED ASSIGNMENT Could production and consumption take place without money? Give reasons for supporting or opposing this question. 7.0 FURTHER READINGS/REFERENCES Abe I.O., (2000), Intermediate Economics, Mipon Biz. Centre, Lagos John, Sloman and Alison Wride, (2009), Economics, Seventh Edition, Rotolito Lombarda, Italy. Paul, A. Samuelson and William, D. Nordhaus (2005), Economics; Eighteenth Edition; Published Mcgraw-Hill International Edition. Paul, R Krugman and Maurice Obsfeld (2009), International Economics Theory and Policy: Elm St. Publishing Services; 8th Edition. Wale, O. and kunle, W., (2002), Introduction to Microeconomics and Application of Differentials Calculus to Economics, Leo Prints Nigeria Ltd. 7 UNIT 2: BASIC TOOLS IN ECONOMIC ANALYSIS TABLE OF CONTENT 1.0 Introduction 2.0 Objectives 3.0 Main Content: 3.1.1 Variables 3.1.2 Ceteris Paribus 3.1.3 Functions 3.1.4 Equations 3.1.5 Identities 3.1.6 Graphs and Diagram 3.1.7 Lines and Curves 3.1.8 Slope 4.0 Conclusion 5.0 Summary 6.0 Tutor Marked Assignment 7.0 Further Readings/References 1.0 INTRODUCTION In the last section you had an idea amount what introduction to economics is all about. This unit takes you a step further into the concept of basic tools in economics analysis. In this unit, t he focus is on economics theories are built on some assumptions, hypothesis or facts. These theories are formulated to explain different situations or phenomenon. They try to establish and critically examine the type of relationship that exists between two or more variables. In the course of formulation of economics theories, several tools are used by experts. At the centre of the tools of economic analysis is Mathematics. Mathematics is a major tool of economic analysis in modern times. It is often seen as the second language for every student of economics. Geometry, a very important branch of Mathematics helps in pictorial presentation of economics behaviours: Graphs and diagrams help in providing explanation to relationship between or among variables; this facilitates easy assimilation of economics 8 concepts. In modern times, Calculus, Matrix, Algebra and Derivatives are used as basic economic tools to explain difficult and complicated topics (concepts) of economic theories and models. The use of Mathematics as an economic tool guarantees precision and accuracy. In this unit, we will get acquainted with terms such as Variables, Ceteris Paribus, Functions, Equations, Identifies, Graphs, Diagrams, Lines, Curves, Slope, and Limits and so on. These are the basic tools of economic analysis. 2.0 OBJECTIVES At the end of this unit, you should be able to explain the following: (a) Basic tools of economic analysis: (b) Variables, Ceteris, Paribus, Functions, Equations, Identities, (c) Graph, Diagrams, Lines, Curves, Slope, Limits, (d) Derivatives and Time Series. 3.0 MAIN CONTEXT 3.1 VARIABLES Various variables are used in economic analysis. A variable refers to an important thing which magnitude can change. It assumes different values at different times or places. The importance of variables in economic theories and models cannot be overstressed. The basic variables that are used in Economics include; income, expenditure, savings, interest, profit, investment, consumption, imports, exports, and cost. Every variable has a unique symbol. There exists two type of variables-endogenous and exogenous. An endogenous variable is that variable that is explained within a theory. An exogenous variable on the other hand is determined by factors outside the theory. It is also influenced by endogenous variables. 3.2 CETERIS PARIBUS The phrase ‘Ceteris Paribus’ is of Latin origin. It means “all other things remaining the same” or “all relevant factors being equal”. In Economics, this phrase is often used to assume that all other factors remain the same, while explaining or analyzing the relationship that exists between any two variables. The Ceteris Paribus assumptions are made because of complexities that exist in real life situation. It is important to make such assumptions for the sake of convenience. It should also be noted that without the assumption, it will be difficult for us to reach an agreement on economic relations, sequences and 9 conclusions. In fact, a number of variables interact simultaneously at a given time. For example, in explaining the relationship between demand and price, there are, without doubt, other factors that influence demand other than price. In painting a clearer picture about the relationship, the concept of Ceteris Paribus is employed in order to eliminate the interrupting influences of other variables by assuming them to remain constant. The assumption of Ceteris Paribus thus eliminates the influence of other factors which may get in the way of establishing a scientific statement regarding the behaviour of economic variables. 3.3 FUNCTIONS A function is a mathematical expression of the relationship between two or more economic variables. Technically, a function is used to analyze and symbolizes a relationship between variables. A function explains the link between the dependent and independent variable by clearly explaining how the value of one variable can be found by specifying the value of other variable. For example, the relationship between quantity demanded of a commodity and the price of the commodity can be expressed functionally as: D = f (P) where D = Quantity demanded and P = Price. Functions are classified into two, namely; explicit function and implicit function. For explicit function, the value of one variable depends on the other in a definite form. While implicit function is one in which the variables are interdependent. 3.4 EQUATIONS The functional relationship between economics variables can be expressed verbally. Equation results, when the verbal expressions are translated into algebraic form. The term equation is a statement of equality of two expression or variables. The two expression of an equation are called the sides of the equation. The sides are left hand side (LHS) and right hand side (RHS). Equations are used to calculate the value of an unknown variable. An equation depicts the relationship between the dependent and independent variables. Each equation is a concise statement of a particular relation. An example of economic equation is the consumption function; C = a+bc. Here, the value of a (autonomous consumption) is positive while the value of b (induced consumption) is o TR. Point C with output OQ2 is the break-even point. At this point TC intercepts TR, i.e TC =TR. Neither profit nor loss is cured by the firm at this point. Region DG describes the maximum profit obtained by the firm. At output OQ, the firm’s loss is maximum and equals BF; at zero output, loss incurred equals fixed cost Oa. At CD the firm has the greatest profit margin when compared to other regions between C and E and consequently, profit is maximized at output Q3. 3.5 MARGINAL REVENUE (MR) and MARGINAL COST (MC) APPROACH TO SHORT RUN EQUILIBRIUM OF THE FIRM. Using the MR and MC approach in determining a firm’s equilibrium, a firm is in equilibrium where the MC curve cuts the MR curve from below. Since the Average Revenue (AR) and marginal Revenue (MR) curves represent the price line, a firms equilibrium output is produced where MC = MR. MC AC AR P =AR =MR AC Source: Wale and Kunle, (2002Q )2 87 From the above diagram, the firm will maximum profit where MC = MR, at an output Qe. It should be noted however that marginal revenue will equal price since the price is not affected by the firms output. If the average (AC) curve dips below the average revenue (AR) curve, the firm will earn supernormal profit. The vertical difference between AR and AC at Qe indicate the supernormal profit. The firm earn less where the AC curve has above the MR line. If MC < MR; the firm needs to expand output to maximize total profit but needs to cut production at the point where MC>MR. It is important to note that firm can only continue production if its average cost is covered and should close down where it can beno longer cover its average cost (AVC). 3.6 LONG –RUN EQUILIBRIUM OF THE FIRM The long man is the period of time that is long enough for new firms to enter the industry. During this period all factors of production are variables and there are no fixed costs. Excess profits made by firms are wiped off and firms make normal profits. If firms are making excess profits, new firms are attracted in5to the industry. Also, if established firms can make excess profit by expanding the scale of productions they will do so, since all factors of production are variables. Omn the other hand, if firms make losses, they will leave the industry. All firms produce at the minimum point of their long run average cost (AC) curve which is tangent to the demand curve defined by the market price. (SC) MC (SC) AC LRAC P D At E, LRAC =(SR) AC = (SR) MC =MR =AR Source: Wale and Kunle, (2002) Q2 Q From the above diagram, in the long run, LMC = P= LRAC = MR. Where LMC is Long run marginal cost and LRAC is long run average cost. Notice that LMC cuts MR from below. Equilibrium occurs at point E where P=MR=AR=LMC=LAC at its lowest point. Qe is the optimum output. 88 3.7 SHORT-RUN EQUILIBRIUM OF THE INDUSTRY Short run equilibrium of an industry occurs when its total output remains steady such that there is no tendency to expand or contract its output. Firms with supernormal profit in the short run will expand their output while those incur losses will leave the industry. The adjustment continues until equilibrium of the industry is reached. At this point all forms will earn a normal profit in the industry, that is, short run marginal revenue, (MR) equals average revenue (AR) EQUALS SHORT RUN AVERAGE COST (SAC). SMC = MR=AR=SAC. Pe Qe Quantity Source: Wale and Kunle, (2002) From the figure above, the industry achieves equilibrium at point E where its demand cured DD, intercepts its supply curves SS. At point E, Equilibrium price is Pe and Qe is the equilibrium quantity. The equilibrium of the industry in the short run is reached at the minimum of their SAC curve. 3.8 LONG –RUN EQUILIBRIUM OF THE INDUSTRY In the long run, equilibrium is achieved when all firms in an industry earn normal profits. In the long run, there is no incentive for new firms to enter it. Existing firms in the industry is in the long run, eachof the firms in the industry is also in long run equilibrium. 89 LMC SMC Price Pe Price LAC Qe Quantity Source: Wale and Kunle, (2002) The equilibrium price is Pe and equilibrium quantity Qe. At equilibrium price, all the firms in the industry are in the long run. They produce at least possible cost and earn normal profit. At equilibrium LMC – SMC=SAC=P=MR 4.0 CONCLUSION To conclude this unit, it is important to state that perfect competition as a market structure has a number of features that benefit the society. Besides the fact that price equals marginal cost (P=MC), perfect competition is a case of ‘survival of the fitest’. The high level of competition that exists in the market will make a inefficient forms to leave the industry, since they will not be able to make even the normal profit. Also, long-run equilibrium firms to leave the industry, since they will not be able to make even the normal profit. Also, long-run equilibrium is at the bottom of the firm’s long- AC curve. This means that, for any given technology, the firm, in the long-run will produce at the least cost –output. Furthermore, long-run output is at the least cost and the firm making only normal profit keeps prices at a minimum. 5.0 SUMMARY Perfect competition exists when there are many firms, none of which is large; where there is freedom of entry into the industry. Where all firms produce an identical product and where all firms are price taker. The necessary conditions for (assumptions) for the existence of perfect competition are: complete freedom of entry and exit, a homogenous product, perfect knowledge of the market, large number of sellers (firms) and buyers and sameness of price. 90 Supernormal profits can be made by firm in the industry in the short-run because there is no enough time for new forms to enter the industry. These supernormal profits are however wiped out in the long –run by the entry of new forms. Short –run equilibrium occurs at the point where price equals marginal cost (P=MC) and at this output, the firm will be maximizing profit. The long-run equilibrium on the other hand occurs where the market price is equal to firm’s long-run average cost. Under perfect competition, the optimum output is at the point where P=MC and firms will produce at this point. 6.0 TUTOR MARKET ASSIGNMENT Perfect competition is not without some short falls. Writ on some of the shortfalls associated with this market structure. 7.0 Further Reading /References Abe I.O., (2000), Intermediate Economics, Mipon Biz. Centre, Lagos John, Sloman and Alison Wride, (2009), Economics, Seventh Edition, Rotolito Lombarda, Italy. Paul, A. Samuelson and William, D. Nordhaus (2005), Economics; Eighteenth Edition; Published Mcgraw-Hill International Edition. Paul, R Krugman and Maurice Obsfeld (2009), International Economics Theory and Policy: Elm St. Publishing Services; 8th Edition. Wale, O. and kunle, W., (2002), Introduction to Microeconomics and Application of Differentials Calculus to Economics, Leo Prints Nigeria Ltd. 91 UNIT 12: MONOPOLY Table of Content 1.0 Introduction 2.0 Objectives 3.0 Main Content 3.1 Definition of Monopoly 3.2 Feature of Monopoly 3.3 Type of Monopoly 3.4 Equilibrium Price and Output of a Monopolist 3.5 Advantages of Monopoly 4.0 Conclusion 5.0 Summary 6.0 Tutor Marked Assignment 7.0 Further Readings/References 1.0 INTRODUTION In the last unit you had an idea amount what perfect competition is all about. This unit will takes you a step further into the concept of monopoly. In this unit, the focus is on monopoly. At the other extreme of perfection competition is monopoly. Unlike under perfect competition where there are very many firm competing, here is only one firm within the industry. But whether an industry can be classified as a monopoly is not always clear to extent however, the classification could be done the amount of monopoly power a firm has and this depend largely on how close the substitutes produced by rival industries are to the product of the firm. This unit an attempt is made to; define monopoly, examine its features, discuss its types, examine price and output of a monopolist and also consider its advantages and disadvantages. 2.0 OBJECTIVES At the end this unit, you should be able to: (1) define a monopoly (2) Identify the features of a monopoly. (3) Analyst equilibrium price and output of a monopolist. (4) Identify some advantages and disadvantages of a monopoly. 92 3.0 MAIN CONTENT 3.1 DEFINITION OF MONOPOLY A market structure where there exists only one firm in the industry is monopoly. the extent of classifying an industry as a monopoly is a function of how the industry is define for example a pharmaceutical company may have a monopoly of a certain drug or raw material for producing a particular drug but there may be alternative drug for treating the same illness the monopoly drug can treat. the extent of clarifying an industry as a monopoly therefore depends on the amount of monopoly power it has and this is also dependent on the closeness of substitutes produced by rival industries, for example the monopoly power enjoyed by Nigeria postal service (NIPOST ) has been Limited as a result of swift competition communication from phone , faxes and email. 3.1 FEATURES OF MONOPOLY i There must be barriers to entry a firm is to maintain Its monopoly position. Although there exists entry barrier under oligopoly but in the case of monopoly the prevent the entry of new firms. ii There is only one seller in the industry this. The single seller has total control over the supply of the commodity iii There are no close substitute for the products iv All form of competition are restricted. V The demand curve of a monopolist is downward slopping the implication of this is that the monopolist can sell more at lower price and vice versa. 3.2 TYPES OF MONOPOLY i Legal Of Monopoly : A firm may be protected by patents on essential processes, by copyright statutory regulation of government etc, such a firm is legally protected.examples of monopolies protected by pharmaceutical companies (e.g. anti-AIDS drug ) micro soft’s widows operating system etc ii Joint Monopoly Monopoly position can also be acquired through mergers and takeover. The monopolist can put in a takeover bid for any new entrant. The threat of taker over may discourage new firm planning to come into the industry. Also monopoly position ca-n be acquired through amalgamation, cartels, syndicates, etc. iii Natural Monopoly 93 If a firm has natural advantage , say it governs the supply of vital input it can deny accesses to these inputs it potential rivals natural monopoly can also result as a result of natural advantages’ like good location abundant mineral resources or absolute control of exploration of certain major natural resources iv Public Monopoly Often times especially in socialist countries, government own, control and manage certain productive activities and private firms are denied access to such productive activities, such a situation is termed public monopoly. Public monopoly is manly welfare and service oriented. v Technological Monopoly This types of monopoly exists as a result of economics of larger scale, of capital good innovation and modern structural adjustment new production method among other this is common in engineering industry, automobile industry, etc, vi other types of monopoly include perfect monopoly imperfect monopoly private monopoly , simple monopoly discriminating monopoly. 3.3 EQUILIBRIUM PRICE AND OUTPUT OF A MONOPOLIST Demand under monopoly will be relatively inelastic at each price compared to other market will structures, this is because there is only one firm in the industry the firms demand curve is also the industry demand curve. The monopolist is a price marker. it can price and consumers can act in two ways to this: buy the commodity at the higher price since there are no alternative firm producing thesame commodity in the industry or decide to go without the good. The monopolist is however constrained by its demand curve because less quantity will be demanded at higher price. Like firm in other market structure, a monopolist is at equilibrium where MR=MC MC AC AR AC AR 0 Qm Q 94 Source: Wale and Kunle, (2002) From the above diagram, the monopolist profit is maximized where MR=MC. the shade portion in the figure shows the super normal profit obtained by the monopolist. its profit will tend to be larger the less elastic the demand curve is since other firm are restricted from entering the industry , the super normal profit will not be wiped off in the long run. Only difference however between short-run and long-run equilibrium is that in the long run the firm will produce where MR=long –run MC 3.4 ADVANTAGES OF MONOPOLY Despite several arguments against monopoly, some advantages abound in favor of this marker structure. (i) Innovation and New Products: The expectation of super normal profits may encourage the emergence of new monopolies producing new producing new products with new innovation. (ii) Competition For Corporate control :There is no doubt above that fact that a monopoly does not face any form of competitions in the goods market, but it may face financial markets competition.A monopoly, with low capital base, poor management and that is run inefficiently may be subject to a takeover bid from another company. This threat may bring about efficiency and improved management in the running of the monopoly in other to avoid being taken over. (iii) Economies of Scale: some advantage enjoyed by the monopoly like having larger plant, standardized and centralized administration and avoidance of unnecessary duplication may help monopoly to achieve economies of scale DISADVANTAGES OF MONOPOLY Argument against monopoly are enumerated and explained below: (i) Income Inequality : the high profit made by monopolist leads to the concentration of wealth in the hands of few individuals bring about unequal distribution of income the impact of this problem however depends on the size of the monopoly and degree of its power (ii) Higher Cost Curves: there exist possibilities of higher cost curves due to absence of competition. Unlike a firm in the long run under perfect competition which has to use best t echniques and practices in order to survive industry, the monopolist sheltered by barriers to entry, can still make exorbitant profits even without the use of efficient known techniques. (iii) Higher Price and Lower Output In the longer run freedom of entry eliminates super normal profit and forces firm to produce at the bottom of them LRAC curve under perfect completion.this is not the case under monopoly. The monopolist enjoys super normal profit since.the monopolist is forced to operate at the bottom of the AC 95 curve therefore, all things being equal, long-run prices will tend to increase and output lower under monopoly. 4.0 CONCLUSION Monopoly as a market structure has unique features, advantages and disadvantaged. Economic however in recent year have developed the theory of contestable markets. According to them what is crucial in determining price and output is not whether an industry there is the real threat of competition. If a monopoly is the raw materials relevant to its production then it will be able to make super normal profits with no fear of competition. If on the other hand, another firm could take over fro m it with littler difficulty then it will behave much more like a competitive firm. 5.0 SUMMARY A market structure where is only one firm in the industry is called monopoly.For a monopoly to be protected from competition barriers to entry of new firms are usually necessary. Such protection could take the form of economies of scale, control over supplies of input or over outlets, patents or copyright, etc. A monopolist just as other firm maximizes profit where MC=MR but will Probably be at a higher price relative to marginal cost of other firms due to the less elastics nature of its demand at any given price 6.0 TUTOR MARKED ASSIGNMENT (a) Write a short note on ‘monopoly price discrimination (b) What are the assumptions about rivals’ behavior under non-collusive oligopoly? 7.0 FURTHER READINGS/REFERENCES Abe I.O., (2000), Intermediate Economics, Mipon Biz. Centre, Lagos John, Sloman and Alison Wride, (2009), Economics, Seventh Edition, Rotolito Lombarda, Italy. Paul, A. Samuelson and William, D. Nordhaus (2005), Economics; Eighteenth Edition; Published Mcgraw-Hill International Edition. Paul, R Krugman and Maurice Obsfeld (2009), International Economics Theory and Policy: Elm St. Publishing Services; 8th Edition. Wale, O. and kunle, W., (2002), Introduction to Microeconomics and Application of Differentials Calculus to Economics, Leo Prints Nigeria Ltd. 96 UNIT 13: MONOPOLISTIC COMPETITION TABLE OF CONTENT 1.0 Introduction 2.0 Objectives 3.0 Main Content 3.1 Definition of Monopolistic Competition 3.2 Features of Monopolistic Competition 3.3 Short-Run Equilibrium of Monopolistic Competition 3.4 Long-Run Equilibrium of Monopolistic Of Monopolistic Competition 3.5 Limitations to the Model of Monopolistic Competition 4.0 Conclusion 5.0 Summary 6.0 Tutor Marked Assignment 7.0 Further Readings/References 1.0 INTRODUTION In the last unit you had an idea amount what monopoly is all about. This unit will takes you a step further into the concept of monopolistic competition. In this unit, the focus is on monopolistic competition. We said earlier that industries can be grouped based on the degree of competition thatexists between the firms within the industry. Between perfect competition and pure monopoly lies imperfect competition which has two face monopolistic competitions and Oligopoly In practice, very few markets can be classified as perfectly competitive or as a pure monopoly. The vast majority of firm does compete with other firms and they often do this aggressively, but even with this they are not price takers: they do have some degree of market power. Most markets therefore lies between perfect competition and pure monopoly. they combine the feature of both perfect competition and pure monopoly and there by exist as imperfect competition this unit seeks to analyses in detail, the mining of monopolist competition which is a form of imperfect competition, its features, short–run and long–run equilibrium and limitation to the model of monopolistic competition. 97 2.0 OBJECTIVES At the end this unit, you should be able to: i. Define monopolistic competition ii State and explain the features (assumption ) of monopolistic iii Explain equilibrium of the firm under monopolistic Competition (iv) Write a short note on limitation to the model of monopolistic competition. 3.0 MAIN CONTENT 3.1 DEFINITION OF MONOPOLISTIC COMPETITION Monopolistic competition is a market structure, as with perfect completion, there are many firms and freedom of entry into the industry, but where each firm produces a differentiated product and thus has some control over its price. Monopolistic competition is in between the extreme cases of perfect competition and monopoly. Monopoly is a market structure where there is only one firm in the industry. (Note that this is the economic definition of a pure monopoly). Monopolistic competition can best be understand as a situation where there are a lot of firms competing, but where each firm does nevertheless have some degree of market power: each firm has some choice over what price to change for its products. The theory of monopolistic completion was developed in the 1930s by the American economist Edward Chamberlin. FEATURES OF MONOPOLSTIC COMPETITION (i). A LARGE OF FIRMS: There are quit a large number of unlikely to affect it rivals as it has an insignificant control over the market. This means that when a firm makes decisions, it does not need to worry about how its rivals react. This is referred to assumption of independence. (ii) THERE IS FREEDOM OF ENTRY AND EXIT: This means that there is freedom of entry new firms if the firm wants to set up in business in the market. Existing firms are also free to leave the market. 98 (iii) PRODUCT DIFFERENTIATION: Each firm products or services are some way different from those of its rivals. This allows the firm to raise the price of the product or service it produces without losing all it customers. A situation where a firm faces a downward-sloping demand curve. (iv) PROFIT MAXIMIZATION: The ultimate goal of the firm is to maximize profit. (v) ADVERTISEMENT: Sales promotion in inform of advertisement and other propaganda can be adopted in marketing and distribution of product as a way of differentiating it from other products. 3.2 SHOR – RUN EQUILIBRIUM OF MONOPOLISTIC COMPETITION Like other market structures, profit are maximized at the output where MC= MR. In monopolistic competition, the price quantity equilibrium is achieved just like the monopolist, except that the AR and MR curves will be more elastic. Its sales are limited and defined by price of the products, nature of d the product, marketing and advertisement strategy. MC AC Pe S AR=D AC T o MR Qe Q Source: Wale and Kunle, (2002) How much profit the firm will make in the short run is a function of the strength of demand: the position and elasticity of the demand curve. The further to the right the demand curve is relative to the average cost curve, and the less elastic the demand curve is, the greater will be the firm’s short run profit. It is possible for the monopolistically competitive firm to make supernormal profit in the short run. The shaded area shows this i.e. Rectangle Pe S T A C. The equilibrium output is Qe and price Pe. The firm will continue to produce as long as its AVC is covered. The Equilibrium price and output is determined at a point where the short run MC equals MR. since cost differs in the short run, a firm with lower unit costs will be earning only normal profit, because firm is able to cover just the AVC, incurs losses. 99 3.3 LONG –RUN EQUILIBRIUM OF MONOPOLISTIC COMPETITION When firms are earning supernormal profit, new firms are attracted to the industry in the long run. The entry of new firms into the industry will reduce the patronage enjoy by older firms as the new firms will take some of the customers away from establishment firms. The demand for the established firms will therefore fall. Their demand curve (AR) will shift to the left, and will continue doing so as long as supernormal profits remain and thus firms continue entering. LRMC Price Pe O LRAC AR =D MR Source: Wale and Kunle, (2002) From the above diagram the firm’s demand curve settles at D, where it is tangential to the firm’s LRAC curve. Output will be Qe: where AR =LRAC. Since the number of firms has increased because of the entry of new firms, abnormal profits cannot be earned by any firm. 3.4 LIMITATIONS TO THE MODEL OF MONOPOLISTIC COMPETITION There are many problems in applying the model of monopolistic competition in real world situation. Some of these problems are: (i) IMPERFECT INFORMATION: New firms may be unaware that established firms are making supernormal profits it is also possible for them to underestimate the demand for the particular product they are considering selling. (ii) DIFFERENTIATED PRODUCTS: The facts that the firms produce different products makes it difficult if not impossible to derive the demand curve for the whole industry. Consequently, the analysis is limited to firm level. (iii) NON- PRICE COMPETION: The firms concentrate on price and output decisions. Practically, the profit – maximizing firm under monopolistic competition also has to decide the exact variety of product 100 to produce and how much to spend on advertising it. This will make the firm to take part in non price competition. 4.0 CONCLUSION Monopolistic competition is a type imperfect competition. It is often argued that it leads to less efficient allocation of resources than perfect competition therefore, it may however, consumer may gain more from a greater diversity of products. When compared with monopolies, a monopolistic competitive form any have less economies of scale and conduct less research and development but may keep prices lower than under monopoly. 5.0 SUMMARY Monopolistic competition was a theory developed by in the 1930s by the American economics Edward Chamberlin. It is a market structure in which there is free entry to the industry and having a large number of firms operating independently of each other but where each firm has some market power because it produces a differentiated product or services. Supernatural profits are made in the short –run but profits go down to the normal level in the long run as a result of new firms entering the industry. The long run equilibrium of the firm occurs where the demands curve is tangential to the long-run average cost curve (LRAC). The application of the model of monopolistic competition in real world situation is constrained by a number of factors. New forms may be unaware that established firms in the industry are making supernormal profits as a result of imperfect information. It is difficult if not impossible to derive the demand curve for the whole industry as a result of differentiated products sold by the firms. The firm also concentrates on price and output decisions. 6.0 TUTOR MARKED ASSIGNMENT (a) How would you explain the concept of non-price competition, and what are its elements? (b) With relevance examples differentiate between the short and long-run equilibrium of monopolistic competition. 7.0 FURTHER READING/REFERENCES Abe I.O., (2000), Intermediate Economics, Mipon Biz. Centre, Lagos John, Sloman and Alison Wride, (2009), Economics, Seventh Edition, Rotolito Lombarda, Italy. Paul, A. Samuelson and William, D. Nordhaus (2005), Economics; Eighteenth Edition; Published Mcgraw-Hill International Edition. 101 Paul, R Krugman and Maurice Obsfeld (2009), International Economics Theory and Policy: Elm St. Publishing Services; 8th Edition. Wale, O. and kunle, W., (2002), Introduction to Microeconomics and Application of Differentials Calculus to Economics, Leo Prints Nigeria Ltd. 102 UNIT: 14 OLIGOPOLY TABLE OF CONTENT 1.0 Introduction 2.0 Objectives 3.0 Main Content 3.1 Meaning of Oligopoly 3.2 Features of Oligopoly 3.3 Collusive Oligopoly 3.4 Industry Equilibrium under Collusive Oligopoly 3.4 Non–Collusive Oligopoly 3.5 Pricing and Output under Oligopoly 4.0 Conclusion 5.0 Summary 6.0 Tutor Market Assignment 7.0 Further Readings/References 1.0 INTRODUCTION In the last unit you had an idea amount what monopolistic competition is all about. This unit will takes you a step further into the concept of oligopoly. In this unit, the focus is on oligopoly. The second formof imperfect competition is Oligopoly. Under Oligopoly, there will be only a few fir ms competing most of the famous companies, such as Coca-Cola, Nike, Ford, and Nintendo. In this unit, we will examine the meaning of Oligopoly, its basic features, collusion and competition on between Oligopolists and pricing and output under Oligopoly. 2.0 OBJECTIVES At the end of this unit, student should be able to: (i) Define Oligopoly (ii) State and explain the features of Oligopoly (iii) Discuss industry equilibrium under collusive Oligopoly (iv) Write a brief note on non- conclusive Oligopoly has higher costs than perfect competition. 103 3.0 MAIN CONTEXT 3.1 MEANING OF OLIGOPOLY Oligopoly exists when there are only a few seller of the commodity. The firms share a large proportion of the industry between them. If there are only two sellers a situation called duopoly, is created. When homogeneous products (e.g. cars, soft drinks, electricity etc.) it is often referred to as differentiated oligopoly. 3.1 FEATURES OF OLIGOPOLY Despite the differences between oligopolies, two important features distinguish oligopoly from other market structures these features are: (i) INTERDEPENDENCE: each firm under oligopoly knows that the decision of its rivals may affect it positively or negatively.this means that they are mutually depended. For example,.if a fir m changes the price or specification of its product, or the amount spent on advertising the sales of its rivals will be affected. The rival may than respond by changing their price, specification or advertising. (ii) BARRIERS TO ENTRY: unlike prefect competition and monopolistic competition there are various barriers to the entry of new firms under oligopoly. These are similar to those under monopolythe magnitude of the barriers however, are not the from industry to industry. In some uses entry is relatively easy, whereas in other it is virtually impossible. (iii) Other features are advertisement, competition and lack of uniformity. There is also no unique pattern of pricing behavior. Sometimes firms collude (collusive oligopoly) and at other times they do not, (non-collusive oligopoly) 3.2 COLLUSIVE OLIGOPOLY Collusive oligopoly exists when oligopolists formally or informally agree to limit competition between themselves. The major purpose of doing this is to maximize their profits and to negotiate among themselves so as to share the market. They may set output quotes, fix price, limit product promotion or development, or agree not to work against each other’s interest’s ore markets. 3.3 INDUSTRY EQUILIBRIUM UNDER COLLSIVE OLIGOPOLY Firm under collusive oligopoly may set output quotas, fix prices, limit product promotion, etc: this reduces the degree or level of uncertainty they face. A formal form of collusive oligopoly is a CARTEL. A cartel is an annunciation of independent firm writing an industry. A cartel follows common pricing policies relating to prices output sales, and profit maximization and distribution of good. This makes profit maximization possible especially if the cartel acts like a 104 monopoly i.e.; if the members behave as if they were a single firm. The profit maximization situation of a collusive oligopoly is (cartel) illustrated in the figure below: Price Industry D=AR Pe Industry D=AR Industry MR Qe Q Source: Wale and Kunle, (2002) From the above graph, total market demand curve is shown with the corresponding market MR curve. The horizontal total of the MC curves of individual firm in the cartel give the cartels MC curve. Profit are maximized at Qe where =MR. at that point , the cartel must set price Pe and having agreed on a uniform price i.e. a cartel price the member may then compete against each larger share of Qe. 3.4 NON- COLLSIVE OLIGOPPOLY Firm under non-collusive oligopoly have no agreement between themselves formal I informal or tacit. (Tacit) collusion: where oligopolists take care not to engage in price cutting excessive advertising or other form of competition). Even through oligopolists night not colluded, it is very important to take account of rivals’ likely behavior when deciding their own strategy. Non-collusive oligopoly is built on the following assumptions. (a) Rivals set a produce a given quantity (the cournot model ) (b) Rivals set a particular price. (Bertrand model ) (c) Kinked demand. 3.5 PRICING AND OUTPUT UNDER DUOPOLY Duopoly is an oligopoly where there are just two firms in the industry. The two firms are assumed to be producing an identical product: for examples two telecommunication companies covering the whole country. It is maximizing output of each firm is determined on the firm that other firm is holding its own output constant. The two firms are completely independent and there exist no agreement between them. 105 4.0 CONCLUSION From the foregoing discussion, we can categorically say that; Oligopolistic exist interdependently which makes them colludes with each other. On other hand, they may be tempted to compete with their rivals to gain a larger share of industry profits for themselves. Existing interdependently (collusion), whether formal or tacit is more likely when firms trust each other and can easily identify with each other. A number of factors facilitate collusion. The presence of only very small number of firms that know each other, market stability, the existence of a dominant firm, products similarity and absence of measures by the government to curb collusion are some of these factors. 5.0 SUMMARY Oligopoly describes a market structure where there are just few firms in the industry with barriers to the entry of new firms. Collusion is favored when oligopolists seek to maximize joint but unflavored when they want the biggest share of industry profit and thus compete among themselves. Collusion can be open or tacit. A formal from of collusive oligopoly is a cartel. A cartel is an association of with an cartel. A cartel is an association of independent firms with a firm with an industry.a cartel follows common policies and aims to act as monopoly. It can set price and leave the members to compete for market share or it can using quotas. Under collusive oligopoly profit is maximized where MC =MR Duopoly is a form of oligopoly whereby there are only two firms in the Industry. 6.0 TUTOR MARKED ASSIGNMENT What are the assumptions about rivals’ behavior under non-collusive oligopoly? 7.0 FURTHER READING/REFERENCES Abe I.O., (2000), Intermediate Economics, Mipon Biz. Centre, Lagos John, Sloman and Alison Wride, (2009), Economics, Seventh Edition, Rotolito Lombarda, Italy. Paul, A. Samuelson and William, D. Nordhaus (2005), Economics; Eighteenth Edition; Published Mcgraw-Hill International Edition. Paul, R Krugman and Maurice Obsfeld (2009), International Economics Theory and Policy: Elm St. Publishing Services; 8th Edition. Wale, O. and kunle, W., (2002), Introduction to Microeconomics and Application of Differentials Calculus to Economics, Leo Prints Nigeria Ltd. 106 UNIT 15: PRICING AND EMPOYMENTOF RESOURCES Table of Content 1.0 Introduction 2.0 Objectives 3.0 Main Content 3.1 Types of Factors of Production 3.2 Pricing of Factors of Production 3.3 Theories of Wages 3.4 Demand for Labour 3.5 Supply of Labour 3.6 The elasticity of the Market Supply of Labour 3.7 Determination of Wage Rate 3.8 Minimum Wage 3.9 Pricing of Factors of Production: RENT 3.10 Determination of Rent 3.11 Concept of Quasi-Rent 3.12 Pricing of Factors of Production- Interest 3.13 Variation in Interest Rates 3.14 Modern Theory of Interest 3.15 Determination of the Rate of Interest 4.0 Conclusion 5.0 Summary 6.0 Tutor Marked Assignment 7.0 Further Readings/References 1.0 INTRODUCTION In the last unit you had an idea amount what oligopoly is all about. This unit will takes you a step further into the concept of pricing and employment of resources. In this unit, the focus is on pricing and employment of resources. Scarcity is a major problem facing humanity today. Naturally, every human wants every good thing of life. Fundamentally they seek to satisfy the basic needs-food, clothing and shelter. In an attempt to satisfy their needs, they are constrained by the problem of scarcity which arises because of the fact that human wants are numerous but the resources to satisfy the wants are limited. This unit explains in detail the pricing of these resources. Light is shed on types of factors of production, reward for them and relevant theories relating to these factors (resources) are also considered. 2.0 OBJECTIVES At the end of this unit, you should be able to: 107 i. Discuss the types of employment resources in relation to their pricing (reward) ii. Explain the elasticity of market supply of labour. iii. Write a short note about modern theory of interest iv. Give reasons for interest rate variation. In the last unit you had an idea amount what economic systems and organization is all about. This unit will takes you a step further into the concept of theory of demand. In this unit, the focus is on 3.0 MAIN CONTENT 3.1 TYPES OF EMPLOYMENT RESOURCES Employment resources or factors of production as they are often called are of three broad types: (a) Human Resources: This refers to labour. Labour means all human effort employed in the production of goods and services. Labour could be unskilled, semi-skilled or skilled. Labour is demanded for productivity. (b) Natural Resources: This includes land and raw materials. The world’s land area is limited so are raw materials. (c) Manufactured Resources Capital: Capital refers to all man-made productive assets. Capital consists of factories, machines, transportation and equipment. 3.2 PRICING OF FACTORS OF PRODUCTION: WAGES Labour is all forms of human input, both physical and mental directed into production of goods and services. This human effort is rewarded with wages. Wages are payment for services of labour. Wages could take the form of commission and salaries. Money wages or nominal wages relate to the amount of money received by a worker for services rendered in production of goods and services. Real wage on the other hand include benefits and comforts received by workers in terms of goods and services for services rendered. 3.3 THEORIES OF WAGES A. The Subsistence Theory of Wages This theory was formulated by the physiocratic school of French Economists in the Eighteenth century. It was later developed by a German Economists, “Iron Law of Wages”. This theory sees labour power as a commodity which price depends on its cost of production. The minimum subsistence expenses 108 required to support the worker’s welfare in other to guarantee and sustain the continuous supply of labour is its cost of production. B. Standard of Living Theory According to this theory, wages tend to equal workers’ the standard of living in the long-run. This is because workers strive to maintain a particular level of living (standard of living) with no inclination of increasing or decreasing it. C. The Wage Fund Theory This theory accredited J.S. Mill states that wages are function of the proportion between population and capital. The amount paid as wages according to this theory is a function of the amount of capital which is set apart by owners of business (entrepreneurs) for the direct purchase of labour services and secondly, on population D. The Marginal Productivity Theory The basic assumption of this traditional ‘neoclassical’ theory is that firms aim at maximizing profits. This theory states that the demand for a factor depends on its marginal revenue product. E. The Residual Claimant Theory This theory maintains that wages is the difference between whole product and rent, interest and profits. F. The Modern Theory of Wages This theory assumes that there is absence of trade unions; consequently, the wage rate is determined by demand for labour and supply of labour. 3.4 DEMANDS FOR LABOUR Just as goods and services are demanded for consumption the same way, labour is demanded for the production of goods and services. An expected increase in production of goods and services will bring about a rise in demand for labour and vice-versa. However, elasticity of demand for labour which depends on the elasticity of demand for the goods being produced, the ease of substituting labour for other factors and vice-versa, the elasticity of supply of substitute and complementary factors, wages as a proportion of total costs, and the time period involved. The cheaper and better the substitutes for labour, the more the elastic demand for labour. The demand for labour depends on a worker’s marginal revenue product. This is the extra revenue that a firm will gain from the output of an extra worker. This revenue diminishes in the long-run as a result of employment of extra labour. 109 3.5 SUPPLY OF LABOUR Supply of labour refers to the number of workers that would offer themselves for employment at each possible wage rate and the quantity of labour supplied. Supply of labour can be viewed from three angles namely: the supply of hours by an individual worker, the supply of workers to an individual employer and the total market supply of a given category of labour. The supply of labour is determined or influenced by the following factors: i. The cost of the job or non-wage benefits like working conditions, social security, and bonus, housing facility and promotion opportunities. ii. The wage rate iii. The wages and non-wage benefits in alternative jobs. iv. Cultural tendencies like religion, age and sex distribution, mobility of labour and population growth. v. The number of qualified people. Of course if the job is unskilled then a large number of people will be ‘qualified’. 3.6 THE ELASTICITY OF THE MARKET SUPPLY OF LABOUR Elasticity of market supply of labour describes the responsiveness of supply to a change in the wage rate. The elasticity of the market supply of labour depends on the difficulties and cost of changing jobs and also the time period under consideration. The willingness and ability of labour to move to another job (mobility of labour), whether in a different location (geographical mobility) or in a different industry (occupational mobility). There will be high rate of labour mobility and also high rate of elasticity of supply of labour when there are other alternative jobs in the same location requiring similar skills and also when people have good information about these jobs. 3.7 DETERMINATION OF WAGE RATE In an industry, wage rates and employment are determined by the interaction of the demand and supply of labour. The higher the wage paid for a certain type of job, the more workers are encouraged to offer themselves for that job. This results into an upward sloping supply curve of labour. On the other hand, the higher the wage that employers have to pay, the less labour they will want to employ, thus the demand curve of labour is downwards sloping from left to right. Wage Rate W1 We D2 W2 D1 E1 Ee E2 Number Of Workers 110 Source: Wale and Kunle, (2002) The above figure depicts the determination of wage rate using demand and supply analysis. E e workers are employed at We wage rate. As wage increases more workers want to do the job and firms will have to cut down employment. A decrease in the wage rate paid by employers will bring about in the reduction of workers willing to do the job, as a result, employers will offer higher wage to attract workers thereby forcing the wage rate to We. 3.8 MINIMUM WAGE Minimum wage refers to the lowest wage permitted by law or agreement. It is the standard rate which a trade union or labour union collectively bargain to achieve. The benefits of minimum wage cannot be overstressed. It brings about increase in demand for goods and services which on turn stimulates employment, output and national income. It removes labour exploitation, brings about industrial efficiency, redistribution of income, increases the productive capacity of the industry and most importantly reduces poverty. 3.8.1 WEAKNESS OF MINIMUM WAGE i. Minimum wage, though a tool for relieving poverty, affects mainly the employed. One of the main causes of poverty is unemployment. Clearly, the unemployed will not benefit from a minimum wage. ii. Minimum wage may not be the way out when there is a large number of dependants in a family. A worker may be paid above the minimum rate and yet the family could still be very poor. The above weakness of minimum wage however merely suggests that a minimum wage rate cannot be the main answer to poverty and must be considered in conjunction with benefits. 3.9 PRICING OF FACTORS OF PRODUCTION: RENT The income earned by land owners is the rent charged to the users of the land. In a broader sense, rent is the payment received by owners of all kinds of private property that is leased for a fixed sum. In economics, rent according to Marshall, is a surplus, the income derived from the ownership of land and other free gifts of nature. Economics rent refers to return or earning accrued to a factor of production in excess of the minimum amount necessary to keep it in its present use. Rent, like the reward for other factors of production is determined by demand and supply. The inelastic supply nature of land is what 111 differentiates land from other factors of production. Land is not mobile and its total supply in an area is fixed. In another sense, since land can be improved its supply is not totally inelastic. 3.10 DETERMINATION OF RENT Demand and supply analysis can be used in determining rent. Assuming perfect competition, homogenous product and quality of land, the demand for land depends on its marginal revenue product (MRP). A firm will pay rent that equals its marginal revenue productivity of land which decreases as more land is used as a result of the law of diminishing returns. The demand curve slopes downward from left to right, this because more land would be rented and used at lower rates and vice-versa, other things being equal. To an individual, the supply of land is perfectly elastic but less than perfectly elastic for an industry. From an industry perspective, rent determination, using demand and supply analysis is explained as follows: S Pric R2 D2 R1 DW D1 Q1 Qe Q2 Units of Land Source: Wale and Kunle, (2002) The above figure shows the determination of rent in an industry using the demand and supply analysis. In this figure R1 wage is paid for Q1 units of land. If demand increases to D, rent will rise to Re and Qe land will be supplied by with the drawing QeQ 2 land from some other use. The reverse will happen if the demand falls to D. 3.11 THE CONCEPT OF QUASI-RENT Quasi-rent refers to income resulting from machines and other man-made appliances. Quasi rent raises when the demand for man-made goods and services rises and vice-versa. 3.12 PRICING OF FACTORS OF PRODUCTION: INTEREST 112 The income earned by owners of capital resources is interest. Capital refers to the machinery; tools and buildings humans use to produce goods and services. Some common examples of capital include hammers, forklifts, conveyer belts, computers and delivery vans. Capital differs based on the worker and the type of work being done. The neo-classical economists viewed interest as the price for the use of loanable funds. Keynes considered interest as payment for the use of money while modern economists see interest in terms of productivity, savings, liquidity preference and money. 3.13 VARIATION IN INTEREST RATES Interest rate varies from person to person and from place to place. There are many factors which cause variations in interest rate. Differences in gross interest, nature of security, credit worthiness of the borrower, period of loan, amount of loan. Differences in the productivity and market imperfections are some of the cause of variations in the rate of interest. 3.14 MODERN THEORY OF INTEREST This is referred to as “the neo-keynesian synthesis”. It provides a determinate theory of interest. It successfully combines all the four factors savings, liquidity preference, investment and the quality of money into a well integrated theory. The Modern Theory of Interest is what is being designated as’ IS-LM Curves Model’. Hickshansen’s IS-LM curves model seeks to explain a case of joint determination of equilibrium rate of interest ‘r’ and equilibrium level of income’s’. This theory is designed to explain the joint determination of equilibrium rate of interest r and equilibrium level of income y by the interaction of the commodity market and money market. Since IS curve and LM curve indicate equilibrium in the money market respectively, so as the interaction of IS curve and LM curve shows the simultaneous equilibrium rate of interest r and the equilibrium level of national income y. 3.15 DETERMINATION OF THE RATE OF INTEREST The IS-LM analysis relates income level and the rate of interest. The intersection of IS and LM curves depicts or determines the rate of interest. IS LM Interest Rate B D R E R A C R2 Y1 Y Y2 income 113 Source: Wale and Kunle, (2002) From the above diagram, interest rate is determined at point E where the LM intersects the IS. At this point interest rate R corresponds with income level Y. income level Y and intersect rate R both bring about a simultaneous equilibrium in the real market and money market. This general equilibrium persists for a short-time. At Y level of income, the rate of interest in the real market is Y1B and it is Y1A in the money market. When Y1B is greater than Y1A, an investor will borrow at a lower rate from the money market and invest the borrowed fund at a higher rate in the capital market. 4.0 CONCLUSION Economics is concerned with production and consumption of goods and services. In production of goods and services resources (land, labour and capital) are employed by entrepreneurs (producers). These resources when used in production are rewarded. We attempted to discuss the reward accord to each of these resources in this unit. 5.0 SUMMARY At the heart of Economics is the problem of scarcity. Given that there is limited supply of resources of production (land, labour and capital), it is impossible to satisfy all human wants. This is because potential demand exceeds potential supply. Labour refers to all forms of human input, both physical and mental, used in current production. Its price is called wages. Land and raw materials are inputs into production that are provided by nature. The price of land is called rent. Capital means all inputs into production that have been produced. Its reward is interest. Labour is demand for the production of goods and service supply of labour refers to the number of workers that would offer themselves for employment at each possible wage rate. Differences in gross interest, nature of security, credit worthiness of the borrower, period of loan, amount of loan and market imperfections are some of the factors causing variation in interest rate. 6.0 TUTOR MARKED ASSIGNMENT Explain the following: 1. Substitution effect of a rise in wage rates 2. Income effect of a rise in wage rates 3. Economic rent 114 7.0 FURTHER REDING/REFERENCES. Abe I.O., (2000), Intermediate Economics, Mipon Biz. Centre, Lagos John, Sloman and Alison Wride, (2009), Economics, Seventh Edition, Rotolito Lombarda, Italy. Paul, A. Samuelson and William, D. Nordhaus (2005), Economics; Eighteenth Edition; Published Mcgraw-Hill International Edition. Paul, R Krugman and Maurice Obsfeld (2009), International Economics Theory and Policy: Elm St. Publishing Services; 8th Edition. Wale, O. and kunle, W., (2002), Introduction to Microeconomics and Application of Differentials Calculus to Economics, Leo Prints Nigeria Ltd. 115 UNIT 16: THE THEORY OF CONTESTABLE MARKETS Table of Content 1.0 Introduction 2.0 Objectives 3.0 Main Content 3.1 Potential Competition or Monopoly 3.2 Perfectly contestable Markets 3.3 Contestable markets and Natural monopolies 3.4 Evaluation of the Theory 4.0 Conclusion 4.0 Summary 6.0 Tutor Marked Assignment 7.0 Further Readings/References 1.0 INTRODUCTION In the last unit you had an idea amount what pricing and employment of Resources is all about. This unit will takes you a step further into the concept the theory of contestable markets. In this unit, the focus is theory of contestable markets. We shall be examines how a firm behaves in order to maximize profit depends largely on the amount of competition it faces. A firm in an environment that is highly competitive will act differently from a firm that faces little or no competition. A firm facing fierce competition from many other firms will be forced to keep its prices down and be more efficient. On the other hand if a firm faces little or no competition, it will have considerable control over price which may make the buyers to pay more. In this unit, we consider a newly developed market structure-contestable markets. 2.0 OBJECTIVES At the end of this unit, you should be able to: i) Explain the theory of contestable markets. ii) Explain the concept of perfectly contestable markets. iii) Examine contestable markets and natural monopolies. 3.0 POTENTIAL COMPETITION OR MONOPOLY? Economists, in recent years have developed a theory of contestable markets. The fundamental premise on which the theory is built is that in determining price and output, what is important is not whether an industry is a monopoly or competitive but whether there is a real threat of competition. Conversely, a monopoly will behave like a competitive firm if another firm can take over from it with little difficulty. For a competitive firm, the threat of competition is similar to that of monopoly. 116 3.1 PERFECTLY CONTESTABLE MARKETS A market is said to be perfectly contestable, when the cost of entry and exit by potential rival is zero and when such entry could be done rapidly. The situation will create a smooth entry for new firms to enter the market immediately it is clear that existing firms can make supernormal profits and also become more efficient. It’s becoming more efficient is made possible by taking the advantage of any economies of scale and any new technology. If a firm failed to do these, potential competition will become actual competition as new firms will enter the industry. 3.2 CONTESTABLE MARKETS AND NATURAL MONOPOLIES The existence or absence of, of sunk costs(costs that cannot be recouped (e.g. by transferring assets to other uses) and economies of scale are the two most important determinants of contestability. On the basis of these two criteria, natural monopolies are the least contestable markets. A natural monopoly is usually so large relative to the market that there is only room for one such firm in the industry. If a new firm comes into the market, then one or other of the two firms will not survive the competition. The market is simply not big enough for both of them. If however, there are no entries or exits costs, new firms will be perfectly will to come into the industry even though there is only room for one firm, provided they believe that they are more efficient than the established firm. Knowing this, the established firm will be forced to become more efficient and operate in such a manner to make only normal profit. 3.3 EVALUATION OF THE THEORY The theory of contestable markets is often seen as an alternative to the traditional, neo-classical theory of the firm. Perfectly contestable markets can deliver the theoretical benefits of perfect competition, but without the need for a large number of firms. It is improvements on simple monopoly theories, which merely focuses on the existing structure of the industry and make no allowance for potential competition: no allowance for the size of the barriers to entry and the costs of exit. The theory is however criticized on the ground that it does not take sufficient account of the possible reactions of the established firm. 4.0 CONCLUSION The theory of contestable markets helps in painting a clearer picture of the importance of entry barriers in determining how a monopoly behaves. The size of the barriers has therefore become the focus of attention of many politicians and academics when considering anti-monopoly policy. 5.0 SUMMARY A real threat of competition may be as important as actual competition in the determination of a firm’s price and output strategy. A contestable market is that having the following features: - At least one potential rival with the same cost structure. - Potential entrants evaluate the profitability of entry at the incumbent firm’s price. - There are no barriers to entry and exit and there is possibility of hit- and- run entry. 117 The lower the cost of entry or exit becomes, the higher the threat of competition. If the cost of entry and exit are zero, the market is said to be perfectly contestable. When this happens, an existing monopolist will be forced to keep its profits down to the normal level in order to prevent or resist the entry of new firms. The entry of contestable markets provides an alternative to the traditional neo-classical theory of firm. Perfectly contestable markets provide a more realistic analysis and can help deliver the theoretical benefits of perfect competition. 6.0 TUTOR MARKED ASSIGNMENT Think of any three examples of monopolies in Nigeria and consider how contestable their markets are. 7.0 FURTHER READINGS Abe I.O., (2000), Intermediate Economics, Mipon Biz. Centre, Lagos John, Sloman and Alison Wride, (2009), Economics, Seventh Edition, Rotolito Lombarda, Italy. Paul, A. Samuelson and William, D. Nordhaus (2005), Economics; Eighteenth Edition; Published Mcgraw-Hill International Edition. Paul, R Krugman and Maurice Obsfeld (2009), International Economics Theory and Policy: Elm St. Publishing Services; 8th Edition. Wale, O. and kunle, W., (2002), Introduction to Microeconomics and Application of Differentials Calculus to Economics, Leo Prints Nigeria Ltd. 118 UNIT 17: PRIVATIZATION AND COMMERCIAZATION IN NIGERIA Table of Content 1.0 Introduction 2.0 Objectives 3.0 Main Content 3.1 The Meaning of Privatization 3.2 Forms of Privatization 3.3 Arguments for Privatization 3.4 Potential Problem with Privatization 3.5 The Meaning of Commercialization 3.6 Types of Commercialization 3.7 Advantages of Commercialization 3.8 Disadvantages of Commercialization 3.9 Privatization and Commercialization in Nigeria 4.0 Conclusion 5.0 Summary 6.0 Tutor-Marked Assignment 7.0 Further Reading/References 1.0 INTRODUCTION In the last unit you had an idea amount what pricing and employment of resources is all about. This unit will takes you a step further into the concept of privatization and commercial. In this unit, the focus is on privatization and commercial. In this unit an attempt is made to look at privatization and the extent to which privatized industries should be regulated in order to prevent them from abusing the market power the concept of commercialization will be considered. 2.0 OBJECTIVES: At the end of this unit, you should be able to do the following: i Define (a)privatization; (b) commercialization. ii list and explain the benefit and demerits of privatization iii list and explain the advantages and disadvantages of privatization. Iv write short but detected not on privatization and commercialization in Nigeria 3.0 MAIN CONTENT 3.1 PRIVATISATION AND COMMERCIALISATION 119 THE MENING OF PRIVATISATION Privatization primary, is the process of transferring owner shop of business, enterprise, agency , public service or public property from a public sector ( a government)to the private sector , either to a business that operates for a profit or to a non-profit organization. It may also mean government outsourcing of service or functions to private firms, for example, revenue collection, law enforcement, and prison management. In other word it is the shifting of services previously undertaken by the public sector into the private sector. 3.1.1 FORMS OF PRIVATISATION There are four main method of privatization viz: share issue privatization (SIP), Asset sale privatization selling an entire organization (or part of it ) to a strategic investor, usually by auction or by using the freehand model, voucher privatization – distributing share of ownership to all citizens , usually for free or at a very low price and privatization from below - start-up of new private businesses in formally socialist countries. the method or choice of sale is influenced by the capital market, political and firm- specific factor.SIPs are more likely to be used when capital markets are less developed and there is lower income in equality. Share issue can help broaden and deeper domestic capital markets, booting liquidity and economic growth. Voucher privatization has mainly occurred in the transition economics of central Eastern Europe, such as Russia, Poland and Czech Republic and Slovakia. Additionally, privatization from below is important types of economic growth in transition of economics. 3.1.2 ARGUMENTS FOR PRTIVATSATION (a) GREATER COMPTITION: privatization creates room for increased competition in the good market. The splitting of an industry into competing parts may drive cost and price down. There will also exist greater competition for finance. The fact that a privatized company has finance investment through the market: it must issue share or borrow from financial I institution will make the concepts with other companies and thus be seen as capable of using these funds profitably. (b) ACCONTABILTY TO SHARE HOLDERS: shareholders put their money into a company in order to make profit. It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the firm could be subject to a takeover. A state owned firm does not have these types of pressure and so it is easier for them to be inefficient. (c) REDUCED POLITICAL/GOVERNMENT IN TERFERENCE: state owned firms are sometimes mismanaged or managed inefficiently for political benefits is argued that government make poor economic managers. They are often motivated by political pressures rather than sound economics and 120 business sense. Nationalized industries may also be frequently required to adjust their targets for political reasons. Privatization frees the company from these constraints and allows it to make rational economic decision and plan future investments with great certainty. (d) IMPROVED EFFICIENCY: A private firm is mainly interested in marking profit and it is more likely to cut costs and be efficient also the firm is accountable to its share holders and thus efficiency will be the way to go in order to will the support of the shareholders. (e) Other advantages of privatization are; it is a source of revenue for the government as money is made from the sale of nationalized industries. It also allows for re-distribution of wealth and income. Additionally, resources wastages are reduced or completely eliminated, thrift is encouraged and industry owner of the company is encouraged and industry ownership of the company is encouraged. 3.3 POTENTIAL PROBLEMS WITH PRIVTISATION i NATURAL MONOPOLY: privatization can bring about natural monopoly. A natural monopoly occurs when the most efficient number of firm in an industry is one. A good examples of natural monopolies are the national electricity grids the national gas pipe network and the network of railway lines. The more insensitively the electricity and gas grids are used, however the lower their cost will become per unit of fuel supplied. The same argument is true for the other two grids. Consequently, in these cases privatization would just create a private monopoly which might seek to set higher prices which exploit consumers therefore it is better to have a public monopoly rather than a private monopoly which can exploit the consumer. ii PROBLEMS OF INEQUALITY : Privatization creates problem of externalities and inequality such concentrating wealth in the hand of few individuals. In Nigeria for example, the poverty rate is alarming and so not many people can afford the resource to purchase the share and manly financial institution were not prepared to give loans to industry to buy the share the outcome of this is the concentration of wealth made perhaps by the exploitations of masses by those few individuals who could afford the resources to purchase resources. iii CAPITAL FLIGHT :this could surface as foreigners may buy majority of shares. Profits made by these foreigners may not be reinvested into the economics to generate more employment. iv REGUCATORY PROBIEM: privatization crates private monopolies any lapses in the aspect of the government may lead to abuse of monopoly power by such private companies therefore , there is still the need for government regulation other short falls of privatization include:; oppression and victimization of the masses, retrenchment and unemployment , fragmentation of industries and abuse of public interest. 121 3.4 The Meaning of Commercialization Decree No.25 of 1998 on privatization and commercialization of defines commercialization as the reorganization of enterprises wholly and partially owned by the federal government in which such commercial enterprises shall operate as profit –making commercial ventures and without subvention from the federal government. , Therefore, simply put, commercialization is the process of running previously publicly owned and managed enterprises in such a guarantee. The maximization of profit commercialization is the redirection of publicly welfare providing ventures into a profit marking venture. 3.5 Types of Commercialization The following are types of commercialization; they are (a) FULL COMMERCIALISATION This is a types of commercialization in which the enterprises so designated will be expected to operate basically commercially for the main purpose of making profit and also be able to raise funds from the capital market without government interference such enterprises are expected to use private sector procedures in the running of their businesses. (b) PARTIAL COMMERCILISATION Under this arrangement, enterprises so designated will be expected to generate enough revenue to cover their operating expenditures. The government may consider giving them capita grants to finance their capitals projects. In the two types of commercialization no divestment of the federals government sharing will be involved, and subject to the general regulatory power of the federal government. 3.6 ADVANTANGES OF COMMECIALIZATION Many arguments favor commercialization. Apart from that the commercialized enterprises are expected to be profitably, efficiency is also guaranteed.there is also optimum utilization of resources in term of opportunity cost. Government also stand the change of saving subvention or subsides given to such enterprises when they were publicly managed besides all these, it bring about improved quality of goods and services. 3.7 DISDVANTAGES OF COMMERCIALISATION Arguments against commercialization are: i For partial commercialization, efficiency may not be guaranteed since the government will still be in control of such enterprises. 122 ii The poor in the society will be affected by a rise in price, charges , tariffs or rates ` of such commercialization enterprises since profit is their main focus. iii Full commercialization that is void of government control may bring about poor service delivery and other attendant social problem 3.8 PRIVATISATION AND COMMERCIALISATION IN NIGERIA A structural adjustment programmer (SAP) came into existence in Nigeria on 26 th September 1986 under General Ibrahim Babangida administration. Privatization and commercialization was major component of SAP. Before the structural adjustments programmer (SAP) made privatization and commercialization a component of its conditionality, two committees on the evaluation of the operations of public enterprises were institution in 1980s. While Onosode commission’s report of 1982, during Shagari administration recommended the commercialization of public enterprises the report of Atlakin’s committee of 1984 recommended the privatization of public enterprises, Oninode (1988). This development was quire to the degree of enormity of government investment in public enterprise with the resultant disheartening yields. With this, the policy of privatization and commercialization was made an issue of importance in 1986 budgets speech, consequently, the government introduces the policy on July 27TH, 1988 with the promulgation of the privatization and commercialization was set up. The methods adopted by the technical committee on privatization and commercialization (TCPC) include: Public offer of share of affected enterprises. Private placement of shares of affected enterprises. The sale of assets of affected enterprises where such enterprises cannot be sold either by public offer or private placement. 4.0 CONCLUSION The failure of nationalized industries in addressing the problem of market failure resulted into the privatization and commercialization of such industries. By the mid 1970s, it became in creakingly clear that nationalized industries (state–owned industries that produce goods and services that are sold in the market unrest. A change of policy was however introduced from the early 1980s when conservative government under Margaret that char and the john major engaged in an extensive programmer of ‘privatization’ with their effort, other countries have followed similar programmer of privatization and today privatization and commercialization have become a worldwide phenomenon. 5.0 SUMMARY 123 Privatization simply refers to the process of shifting services formerly undertaken by public sector into the private sector in order for efficiency to be achieved. Commercialization is the redirection of publicly owned welfare providing ventures into profit marking venture. Privatization has a lot of advantages. They include: greater competition, not only the good market but in the market for finance and for corporate control; reduced government interference; and raising revenue to finance tax cuts. Arguments against privatization include: the firm are likely to have monopoly power because their grids are natural monopolies; it makes overall planning and co-ordination of the transport and power sector more difficult. Commercialization raises government revenue, savings and savings and brings about improvement in quality of goods and services. The economics arguments against privatization include, inefficiency, rise in prices, charges, tariffs or rates and poor service delivery Privatization and communalization were major components of the structural Adjustment programmer (SAP) 6.0 TUTOR MARKED ASSIGNMENT Write short note on the relative benefits to consumers of the following: (a) Privatizing a nationalized industry, and (b) Keeping it in the public sector but introducing competition. 7.0 FURTHER READINGS Abe I.O., (2000), Intermediate Economics, Mipon Biz. Centre, Lagos John, Sloman and Alison Wride, (2009), Economics, Seventh Edition, Rotolito Lombarda, Italy. Paul, A. Samuelson and William, D. Nordhaus (2005), Economics; Eighteenth Edition; Published Mcgraw-Hill International Edition. Paul, R Krugman and Maurice Obsfeld (2009), International Economics Theory and Policy: Elm St. Publishing Services; 8th Edition. Wale, O. and kunle, W., (2002), Introduction to Microeconomics and Application of Differentials Calculus to Economics, Leo Prints Nigeria Ltd. 124 UNIT 17: PRIVATIZATION AND COMMERCIAZATION IN NIGERIA Table of Content 4.0 Introduction 5.0 Objectives 6.0 Main Content 6.1 The Meaning of Privatization 6.2 Forms of Privatization 6.3 Arguments for Privatization 6.4 Potential Problem with Privatization 6.5 The Meaning of Commercialization 6.6 Types of Commercialization 6.7 Advantages of Commercialization 6.8 Disadvantages of Commercialization 6.9 Privatization and Commercialization in Nigeria 4.0 Conclusion 5.0 Summary 6.0 Tutor-Marked Assignment 7.0 Further Reading/References 1.0 INTRODUCTION In the last unit you had an idea amount what the theory of constable market is all about. This unit will takes you a step further into the concept of privatization and commercial. In this unit, the focus is on privatization and commercial. In this unit an attempt is made to look at privatization and the extent to which privatized industries should be regulated in order to prevent them from abusing the market power the concept of commercialization will be considered. 2.0 OBJECTIVES: At the end of this unit, you should be able to do the following: (a) Define privatization, and commercialization. (b) List and explain the benefit and demerits of privatization (c) List and explain the advantages and disadvantages of privatization. (d) Write short but detected not on privatization and commercialization in Nigeria 125 3.0 MAIN CONTENT 3.1 PRIVATISATION AND COMMERCIALISATION MEANING OF PRIVATISATION Privatization primary is the process of transferring owner shop of business, enterprise, agency, public service or public property from a public sector (a government) to the private sector, either to a business that operates for a profit or to a non-profit organization. It may also mean government outsourcing of service or functions to private firms, for example, revenue collection, law enforcement, and prison management. In other word it is the shifting of services previously undertaken by the public sector into the private sector. 3.2 FORMS OF PRIVATISATION There are four main method of privatization viz: share issue privatization (SIP), Asset sale privatization selling an entire organization (or part of it) to a strategic investor, usually by auction or by using the freehand model, voucher privatization–distributing share of ownership to all citizens , usually for free or at a very low price and privatization from below - start-up of new private businesses in formally socialist countries the method or choice of sale is influenced by the capital market, political and firm- specific factor SIPs are more likely to be used when capital markets are less developed and there is lower income in equality. Share issue can help broaden and deeper domestic capital markets, booting liquidity and economic growth. Voucher privatization has mainly occurred in the transition economics of central Eastern Europe, such as Russia, Poland and Czech Republic and Slovakia. Additionally, privatization from below is important types of economic growth in transition of economics. 3.3 ARGUMENTS FOR PRIVATISATION (a) GREATER COMPTITION: privatization creates room for increased competition in the good market. The splitting of an industry into competing parts may drive cost and price down. There will also exist greater competition for finance. The fact that a privatized company has finance investment through the market: it must issue share or borrow from financial I institution will make the concepts with other companies and thus be seen as capable of using these funds profitably. (b) ACCONTABILTY TO SHARE HOLDERS: shareholders put their money into a company in order to make profit. It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the firm could be subject to a takeover. A state owned firm does not have these types of pressure and so it is easier for them to be inefficient. 126 (c) REDUCED POLITICAL/GOVERNMENT IN TERFERENCE: state owned firms are sometimes mismanaged or managed inefficiently for political benefits is argued that government make poor economic managers. They are often motivated by political pressures rather than sound economics and business sense. Nationalized industries may also be frequently requir

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