Uncorking Strange Brew - Coursework Example

Task UNCORKING STRANGE BREW Introduction Ontario retailing system has fewer firms that produce alcoholic drinks than the rest of the regions of the western Canada. This has led to limited production, reduced consumer choices, high prices and reduced government revenue since the firms operates as monopolists in the market and creates inefficiencies so that they can make more profits. Hence increasing competition in the beer sector by licensing other firms is the only way to correct market inefficiencies and will help the economy as discussed below; Interdependence and gains from trade Interdependence is where there are mutual benefits between different sectors of the economy both locally and internationally. By increasing the number of firms that produces beer in the retailing, there is higher production, and as result they will seek market avenues in other countries. This will make the economy to have a comparative advantage and increases its trade with other countries (Marshall, 2013). This will increase government revenue through foreign exchange that will enable the state to undertake other economic development in other sectors. Production of the beer will be on large scale hence creating economies of scale. This translates into reduced average cost of producing beer in Ontario. This decreases market prices of beer and increasing the opportunity cost of consumption of the alcoholic drinks hence creating market efficiencies. Market forces of supply and demand Increasing the number of firms will lead to increase competition in the market and there will be increased supply into the sell. This will increase quantity supplied in the market while the market demand is still constant (Marshall, 2013). Holding demand constant and due to excess supply, market prices are reduced as a result of the new market equilibrium. This can be illustrated as shown in the diagram below; A graph showing increase in supply as a result of more firms being licensed to produce beer against the quantity demanded. Price S0 D0 S1 Shift in supply P1 old equilibrium P2 S0 S1 new equilibrium D0 Q1 Q2 Quantity supplied From the diagram P1 and Q1 represents the original market price and quantity respectively and intersection is the market equilibrium. D0D0 and S0S0 is the market demand and supply curve respectively. If competition is allowed by licensing other firms, production increases that shifts the supply curve from S0S0 to S1S1 while demand remains constant. This movement reduces prices from P1 to P2 and increases quantity from Q1 to Q2 and the new equilibrium as shown in the graph above. Hence consumers will benefit from the reduced prices as a result of more competition in the market. Elasticity and its application Elasticity is the degree of responsiveness of quantity demanded as result of a unit change in price of the product. Increasing competition in Ontario in the production of beer will reduce prices of the alcoholic drinks due to increased supply. This makes price elasticity of demand to be elastic ie, there is inverse relationship between quantity demanded and price of the product. As prices reduce more are demanded hence increasing revenue to the company. Hence firms can predict their revenue from the sales of the product. Through price elasticity, the government can also determine how much to generate from the sector to help in its development activities (Marshall, 2013). Supply, demand and government policies Due to increased supply of alcohol in the market, government policies will change since measures will be put in place to minimize the consumption of beer. For instance, government may increase taxes to minimize consumption and in the process raise more revenue. Increasing prices will slightly raise prices and will reduce consumption. This can be explained by the graph below; Price D1 S0 shift in supply P3 D0 shift in demand S1 P1 equilibrium P2 new equilibrium Q1 Q2 Q3 Quantity produced From the diagram, P1 and Q2 represent the original equilibrium before competition. After entry of other firms into the market, units produced increases leading to high supply into the market. This makes supply curve to shift from downwards towards the right from S2S0 to S1S1. Holding demand constant, prices decreases from P1 to P2. This will lead to increase in demand as a result of reduced prices making the demand curve to move upwards to the right from D0D0 to D1D1 and quantity produced from Q1 to Q2.As consumption increases due excess supply, say from Q2 to Q3, the government may increase taxes so that they regulate consumption and generate more revenue making the prices to increase from P2 to P3 reducing demand of the beer. However, since demand is inelastic in the consumption of alcohol, increased prices may not reduce the demand by a large amount. International trade By creating a competitive environment, firms will compete in output while prices are being determined by the forces of demand and supply. This will lead to excess supply into the market. This supply will excess alcoholic beverage into the economy. As the local market becomes concentrated, firms are forced to seek alternative market outside Canada to increase their market share leading to increased international trade. Through excess supply, the country has a comparative advantage over others. These will the state to acquire goods and services they lack by means of exchange increasing their international and bilateral ties. Monopolistic There are major two retailers in the province. The two firms are enjoying economies of scale in Ontario province and small firms in the industry finds it hard to compete them and unless government intervenes, there is monopoly in the production of the wines. The firms thus will create inefficiencies so as to maximize on their profits exploiting consumers. They can dictate prices and control the amounts they produce (Marshall, 2013). They produce what increases producer surplus and decrease consumer surplus. They charge prices where MR=MC which is an inefficient market condition. By limiting prices and charging high prices, they receive a lot of sales revenue leading to abnormal profits in the industry. This can be demonstrated in the diagram below; Price MC AC Monopoly price abnormal profits Competitive price AD= AR MR Q0 Q1 Quantity produced Since the two firms are the majority retailers in the province, they act as monopolies and create inefficiency in the market. They restrict output by producing Q1 instead of Q2 and charge high monopoly price as indicated in the graph above. This makes them to earn abnormal profits exploiting consumers. Hence there is need to create a competitive environment in the province so that each firm can just earn the normal profits. By allowing competition, output would increase and firms will not be competing in prices anymore (Marshall, 2013). Producing more will increase supply and reduce prices. Firms will thus charge competitive price where P=MC. Consumers will hence benefit from the reduced prices and increase their welfare. This increases the consumer surplus and reducing producer surplus. This makes the firms to earn just normal profits. A graph showing prices, costs and revenues if competition was allowed against quantity produced MC ATC Price, cost, revenue a b C d Demand= AR MR Q Quantity If competition was to be allowed in the province, firms would charge market prices where P=AR=MC which are market efficient. Consumers will hence get the value for their money as prices are reduced and consume more of the product. Firms on the other hand will only earn normal profits as represented by the area abcd. Externalities This involves the impact that is created to the user and producer of a good or a service. It involves maximizing on social benefits and minimizing on the social costs of production (Marshall, 2013). By creating competition, there will be both the positive and negative externalities in the society. Positive externality Many firms retailing in the wine industry, there will be competition among then. This will make them to produce high quality products so as to satisfy the consumers and make more sales. This makes the users to benefit more. By firms operating in a competitive market, all the social costs are taken into consideration hence reducing private returns while increasing social returns Negative externality Allowing firms to operate in competitive market, social costs are determined by market conditions. This will lead to inefficiencies as a result of underproduction in the economy Conclusion Market inefficiencies should not be left to the forces of market alone but the government must intervene to see that they are resolved. Competitive market leads to high production of quality goods that will increase the welfare of the consumers. Due to increased sales, the government finds other avenues of revenue collection to increase their development expenditure. Competition will also have a positive impact on the balance of trade since it increases the international trade through the comparative advantage. Thus licensing more retailers will improve the local’s lives and the country as a whole. Work cited Tulkens, Henry, and Parkash Chander. Public Goods, Environmental Externalities and Fiscal Competition: Selected Papers on Competition, Efficiency and Cooperation in Public Economics. New York: Springer, 2006. Internet resource. Marshall, Alfred. Principles of Economics. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan, 2013. Internet resource. Stackelberg, Heinrich , Damien Bazin, Lynn Urch, and Rowland Hill. Market Structure and Equilibrium. Berlin: Springer, 2011. Internet resource. Read More