Market Model Patterns of Change Instructions - Essay Example

? Market Model Patterns of Change Instructions Task Petroleum Industry and Pattern Changes The petroleum industry is believed tobe the back bone of the economy because it is the foremost source of energy of many countries. The shortage of petroleum in the world can prevent the economy from expanding to meet the individual’s expectations. In industry, crude petroleum is needed to be refined in the refineries to obtain various energy products such as, petrol, paraffin and natural gas. The production of petroleum by the industry especially, in USA has introduced a large distributor to the total petroleum in the global economy. Meanwhile, it is a non-renewable energy substance that can be extracted from the world after a certain period and converted into usable fuel. Therefore, the price of the petroleum is obtained by the demand –supply mechanism around the world economy, and slight shortage of petroleum can affect its demand and supply of other possible industries in the market. According to Galbraith (2001), when the monopoly power is practiced by an industry at a moment in time, and the degree of monopoly fluctuates, the industry specific product price will also change. In case, the pattern of change through time can be the indicator of comparison and disparity in economic performance in the petroleum industry. The petroleum was an example of monopolies to be affected in anti-trust action by the US government, and resulted into development of smaller companies. The industry expanded by increasing sales and undertaking major acquisitions, and after buying competitive industries in the market, the industries shut down those believed to be inefficient and kept the most powerful. The industry has involved in the discriminatory practices in order to have monopoly power over pipe lines. It also applied unfair practices of cutting local prices at the point where the competitors were severely affected. Technological changes bring the pattern changes in the firm because it is much simple to outsource both service and manufacturing to distributors in other countries. The increased competition promotes the pressure of industry to attain lower units’ costs as a means of maintaining market share. Finally, the nature of the industry trade patterns has undergone importance changes in order to have permission to issue licenses and permits in distributive trade market. Short-Run and Long-Run Behaviors of Monopoly An industry with monopoly market model is considered to have price setting power, and it will strive to earn high levels of profit (Galbraith, 2001). However, the industry is limited by the position of its demand curve that means monopoly cannot set price that clients cannot afford. Petroleum Industry is the sole supplier in an industry, and it takes market demand curve as its own demand curve. Therefore, it faces a downward sloping average revenues (AR) curve with a marginal revenue (MR) curve twice the gradient of AR (McEachern, 2011). In the monopoly, there is optimum firm determined by long run profit maximization in relation to the market. According to McEachern (2011) the short run average total cost curve is tangent to the horizontal, and long run average cost curve is always at its minimum point. In the short run, if the demand for the petroleum products is high, the industry will increase the price and the quantity of the products. The industry can achieve this by increasing output by employing more labor and raw materials, but cannot change the fixed plant. According to McEachern (2011) the long run industry curve is horizontal because when demand increases, raising prices and profits for monopoly industry. As a result, there is an increase in supply prices, pushing prices back down to original in the level in the long run, so that the profits are zero. Therefore, the shifting demand and supply curves trace out a horizontal long run industry supply curve. Areas for the Industry That Could Lead To Transaction Costs There are various transaction costs that the petroleum industry will incur in the market that impact the macroeconomic activities. The possible areas that could lead to transaction costs include market failure, technological changes and investment. In the case of market failures, this can lead to inefficiency of the industry and prevent social values from correcting market imperfections. Natural monopoly is an example of market failure where the firm produces given commodities at lower cost than any other competitive firm. The situation result when the costs are decreasing in the scale of an industry, and monopolist will raise its costs because it is interested in the maximization of profit. In the long run, using available production methods and technology can result into transaction costs from the raw materials, labor skills and plant size utilized. Once, the optimum combination of inputs is chosen to produce the desired level of output at limited cost, the technology becomes fixed in the short run. If the demand increases unexpectedly and the firm wishes to use the technology, it will increase the transaction costs like overtime labor and expedite the rush order delivery of products to meet its production goal. Meanwhile, investment will result into the transaction costs because when the demand persists, a larger fixed input investment in plant and equipment is warranted that will include imposed taxes and lower the interest rate. The larger fixed input investment will be associated with the short run average cost function, and variable investment will be associated with long run average cost function. The Behavior That Could Result From These Transactions cost The industry will aim to reduce the transaction cost at all means in order to maximize the profit and minimize the cost of productions. The industry will try to borrow income to invest in order to meet the increasing demand of consumers in the market. Meanwhile, the industry will try to use unfair practices like cutting local prices at the point where the competitors were severely affected in order to meet the higher cost of production. The industry will try to purchase the most competitive industry in the market so that it can have market power to maximize profit and minimize these transaction costs (Jones, 2004). The industry can use price discrimination strategy set the market price that will help to meet the transaction cost. Meanwhile, the industry can apply globalization strategy to deal with the reaction of industry towards transaction cost because it aims at homogenizing the markets where by all market become identical (Boyes, 2011). The Data Analysis and Managerial Decision years 2008 2009 2010 Revenues $196.99B $153.32B $192.44B Expenses $8.41B $9B $8.13B Modified from: http://www.marketwatch.com/investing/stock/bp/financials Since the profit maximization is the goal of the firm, managers should formulate rules to achieve it. Given the total revenue and total expenses, the profit is given by subtracting the expenses from the revenues. The slope of total revenue and cost is equal at the maximum profit point. If we try to add specific figure to total cost above or marginal cost it will be equal to total revenue or marginal cost at the profit point. Therefore, the manager should maximize profit if he or she has data about the industry’s revenue and costs functions, and mainly marginal cost and revenue curves (Boyes, 2011). Degree of Competitiveness and Productivity Measures The degree of competition in the petroleum industry determines whether there is potential to earn abnormal profits. The petroleum industry faces competition from the existing firms in the market, the threat of entry of new industry and the treat of substitute products. There other suppliers and substitutes of petroleum products that make the company has less bargaining power in the market. Meanwhile, there are easy entry of new industries in the market that influence the extent of competitiveness of the industry, and stiff competition from the existing firms like electric power. Jones (2004) indicates that there are various varieties of productivity measures, and the choice of them depends on the purpose of productivity measurement and availability of data. These include labor, capital and capital and labor that are examples of single factor productivity measures. These measures are not independent of each other, and they evolve with the help of the economic theory of production. References Boyes, W. (2011). Managerial Economics: Markets and the Firm. New York: CengageBrain Inc. Galbraith, K. (2001). Inequality and industrial change: a global view. New York: Cambridge University Press. Jones, T. (2004). Business economics and managerial decision making. United Kingdom: John Wiley and Sons Inc. McEachern, A. (2011). Economics: A Contemporary Introduction. New York: CengageBrain Inc. http://www.marketwatch.com/investing/stock/bp/financials Read More