Recent Economic Articles E-Portfolio

Table of Contents

  • Article “What do European stock markets prefer? Left or right governments?”
    – A brief summary
    – Concepts covered: Governments can sometimes improve market outcomes
    – Application of concepts in the article
  • Article: “Uncertainty shocks and policymakers’ behavior: Evidence from the subprime crisis era”
    – A brief summary
    – Concepts covered: Markets are usually a good way to organize economic activity
    – Application of concept in the article (Appropriate diagram)
  • Article: “Monopoly capital then and now”
    – A brief summary
    – Concepts covered: Monopoly
    – Application of concept in the article (Appropriate diagram)
  • Article: “Downstream and upstream oligopolies when retailer’s effort matters”
    – A brief summary
    – Concepts covered: Oligopoly
    – Application of concept in the article (Appropriate diagram)

Introduction

Microeconomics is primarily focused on the knowledge of the subject’s behavior and motivation characterized by economic unity of purpose. These subjects are namely households, businesses, and government agencies. The logical structure of microeconomics shows the logic of the subject matter, i.e. the mechanism of market pricing. The number of factors that determine the price of goods and sales in a particular market is huge. They are comprised of such aspects as production technology and consumer tastes, weather conditions and overall political climate in the country, tax policies and exchange rate of the national currency.

Almost every socio-economic event in one way or another is reflected on the market conditions, and therefore also on the price of a product or a service. However, each of these aspects forms a variety of pricing factors, which are known to affect the price and demand through an offer. Therefore, the demand and supply are two aggregate factors identifying a specific value of the price. At the same time, to analyze the process of price formation and its role, it is significant to find out what stands behind each of them from these market phenomena points of view.

Thus, this paper will focus on the analysis of the four most recent articles which cover some of the most interesting and paramount terms. These terms are caused by the necessity of deeper understanding due to the fact that they create a versatile conglomerate of interaction.

Managerial Finance 01/08/2015 Title: “What do European stock markets prefer? Left or right governments?” by A. Stoian & D. Tatu-Cornea.

The authors of the article believe that the legitimacy of power is currently provided by private actors mainly by market mechanisms of competition. However, determination through democratic and judicial procedures of the power functions spectrum may be delegated to private actors (and, consequently, provide the market competition). Hence, this is the responsibility of the state and government. The authors have a conviction that the government provides the constitutional framework within which the discussion regarding prosperity of the market is decisive. Hence, the authors accept that the government is able to impact the market outcomes.

The authors of research fairly mention that the government’s role in building market processes has remained significant throughout the period of market development. Also, the researchers mention that such a situation appeared when the direction and degree of state involvement in the formation of market environment began to be dominating. To prove this statement, Stoian and Tatu-Cornea (2015) provide their reader with the example: most clearly government’s dominance and control over the market outcomes in this context was showed in the middle of the 20th century. For five decades, starting with the Great Depression to the debt crisis of the 1980s, this period was characterized as a period of ‘developmentalism’. Also, the investigators prove the fact that government possesses the certain tools to impact the market outcomes.

Concerning the role of government in the market outcomes in Europe, the authors of the article state that these are the governments who are engaged in creating an environment for an economic growth in the state, refraining from a direct management. Government coordinates and builds the market processes in many ways. Herein, the authors critically evaluate the situation and show that a indispensable condition for government’s impact on the market’s outcomes in Europe are due to the present relations between the state and market agents’ embedded autonomy. This process involves a distancing of the government and apparatus of interest groups, forming networks, connections in the structure of the market. This requirement is regarded as a key to successful state intervention in the construction of the market processes and market outcomes. While an embeddedness allows the government to receive an information and mobilize the resources, autonomy, in its turn, guarantees the focus on the market development.

Thus, in the context of this thesis, the autonomy of the main characteristics of development is to build relationships with the members of state or social relations in a mode determined by the first party. Hence, governments should make their policies to sustain its market demand and supply and its infrastructure.

According to the authors of investigation, the government produces an impact on the outcomes of the market due to several reasons. The state apparatus is based on an extremely rigid hierarchically organized involvement and serves as a means of monitoring an implementation of public sentiment and government’s economic policy while ignoring the signals from the general public. Hence, when analyzing this situation of the European markets, Stoian and Tatu-Cornea (2015) indicate that the market policies are based on government’s needs. If those needs are not met or not satisfied, a proper functioning of the market is purely impossible. In other words, the authors of investigation devoted to the European markets and right and left governments, believe that the best option for the choice of government is to forecast its needs. This is due to the fact that governmental needs determine the way the market is expected to function. The mode of the market’s functioning, however, determines the market outcomes. Hence, it is possible to assume that the government and market outcomes are closely connected and interact in case of necessity.

Another significant point the authors are engaged in is the fact that markets are connected with the domestic resources. It means that national resources determine the domestic markets. The governments, in turn, shape the way the markets distribute the resources. In this regard, the authors of investigation fairly claim that the focus by itself on the preferential use of the resource and potential of domestic business does not carry a positive or negative charge, excluding the selected state routes output of the domestic economy to a qualitatively new level. However, the limitations of domestic market are obvious, especially for an orientation, innovations and motivation of large businesses and domestic business industries. They all are forced to issue high-tech products, which are fraught with significant cost of resources, levels or minimization of the eventual success.

On this subject, the authors state that a rational solution of the problem to ensure the domestic economy development appears to be some adjustment of both the government’s economic policy priorities, their consolidation, while maintaining certain features of each of them. The inevitable strengthening of the role of the state in the market outcomes may be the most effective in the final case of the power to motivate domestic businesses to shift towards the innovative products. Hence, the governments are to support the export-oriented industries that occupy a well-established position today in a particular way in the world market.

Journal of Economic Studies 08/20/2015 Title: “Uncertainty shocks and policymakers’ behavior: Evidence from the subprime crisis era” by M. Donadelli

The essential idea behind the article is that the market economy plays a major role in the profit system of economic indicators. The research represents the final financial result, which characterizes the production and business operations across the enterprises. In accordance with the author, it is the foundation of economic development of the enterprise. The profit growth creates a financial basis for the self-financing of the company, performing the extended reproduction. Due to it, the obligations to the budget, banks and other businesses are to be also fulfilled. Thus, the profit becomes essential to assess the operating and financial performance of the enterprise. As stated in by the authors, it is the estimate of its business activities and financial well-being. The activity of any business or markets entity income plays a major role in market economy; hence, it is the best way to activate the economy. Furthermore, it is one of the main sources of enterprise financing, its investment and innovation development, way of promoting workers, as well as the formation of a profitable part of the budgets on various levels.

One of the most significant points of the article under analysis is that at the expense of deductions from profits to the budget the bulk of financial country’s resources is formed. The unity of regional and local authorities and their growth to a large extent depend on the pace and activity of economic development of the country’s separate regions, enhancement of social wealth, and ultimately improvement of living standards of population. The activity of the economy under active markets is depicted by the authors as a difference between the sum of gains and losses derived from the various business transactions. That is why it characterizes the final financial result of enterprises. Hence, the author successfully makes an emphasis on the fact that the main measure of earnings used to evaluate the production and economic activity stands: the balance sheet profit, profit from the sale of products, gross profit, taxable income, and profits remaining at the disposal of the enterprise or net profit.

In addition to this, Donadelli (2015) has a strong conviction that since the bulk of the enterprise profits is obtained from the sale of products. Their amount has interacted with multiple factors: changes in the volume, range, quality, and product structure of sales, cost of separate products, level of prices, and efficient use of production resources.

Hence, the author proves this statement by illustrating it with an example. For instance, the firms tend to stabilize the prices, profitability, and market position. They try to avoid price reductions in order not to give a rise to the so-called ‘price wars.’ Thus, the company is not going to raise prices, because too high prices may attract new competitors from neighboring markets. Finally, the author firmly believes that the figure of the profits organically cannot be used as an objective criterion of a promising business.

Donadelli (2015) admits that the focus on profitability as a primary purpose inevitably creates a special management style that is concerned with a short-term success, which is ready to put the market’s long-term competitiveness on the arena of short-term profits. This approach helps create the activity of the markets and by this activate and sustain the economy. Herein, the investigator of the research fairly claims that the managers know how they can easily raise current income by reducing the cost for new products development, brand image support, and restrictions on investment. In fact, most of these programs to improve the profitability are nothing but a waste of the market’s assets. Instead of having to testify about the increased potential, a rapid progress in income often says more about undermining the market’s future development.

To prove the statements provided in the article, Donadelli (2015) produces a theory which states that activity of the market is an activity of economy. In management, the author depicts that there is a so-called organismic theory, according to which the market is compared to a living organism. Therein, for the market and its body, the main purpose is the activity generated in terms of survival and development. Thus, such market activity and its benefits are compared with the oxygen, which is necessary to maintain the vital activity of a living organism. However, a person does not make its production as a main goal of his/her activity (here, however, there is an unspoken assumption: oxygen is not a limited resource). It follows that the acquisition of profit maximization is not a goal but a condition for achieving the survival and development purposes.

Thus, Donadelli (2015) concludes that in present conditions the value of profits has increased and is perceived as a distribution object created in the field of material production, net income between enterprises and state, various branches of national economy and enterprises of one branch, between the sphere of material production and non-production sphere, between enterprises and workers. Since a profit is a difference between the volume of output and its cost, its size and growth rate depend on the same three primary factors of production, which affect the earnings through a system of indicators of industrial production and production costs.

Thus, an income plays a crucial role in stimulating a further improvement of production efficiency, and enhances the material incentives to achieve a high performance of the market. This is done to make it active and beneficial to activate the economy. The further strengthening of distribution and stimulating role of profit is due to the improvement of distribution mechanism .

Monthly Review 08/2016 Title: “Monopoly capital then and now” by P. Patnaik

In agreement with the author of investigation, the concept of monopoly represents a multifaceted phenomenon, and multidimensional nature of its contents can be characterized from the point of reproduction, structural, behavioral and institutional approaches. Monopoly may occur both in manufacturing and in the sphere of circulation and serves the production and market phenomenon. Special monopoly resistance gives the possession of a significant share of production assets. However, for the realization of the benefits of production monopoly it is necessary to solve the problem of marketing. Outside the treatment stage, the monopoly is not able to realize itself without an exchange unit.

Assessing the possibility of market monopolization based on the number of participants, the nature of manufactured goods gives an analysis of market structure. The formal definition implies that any monopoly is the only seller of the goods on the market. Herein, the author successfully mentions that some quantitative indicators are not enough for an objective assessment of monopolization availability. Significantly, such an analysis can be supplemented by the study of of market participants’ behavior. Thus, Patnaik (2016) claims that market participants’ behavior is a function of its economic strength. The behavior can be significant in the presence of competitors.

The economic power becomes a monopoly power of a company, when it is possible to set the price, imposing their conditions of counterparties, the possibility of subordination of environmental protection to their interests. Moreover, monopoly power provokes the actions of economic entities that violate the balance of market participants and creates the possibility of various forms of abuse.

According to Patnaik (2016), who fairly notes that the monopoly of various institutions is related to the existence of:

  • The creation and development of a system of antitrust law and regulatory authorities;
  • Formation of public associations to counter an abuse of monopolies and consumer protection;
  • The formation of informal institutions, allowing lobby the interests of monopolies in the public administration and to influence consumers to shape a public opinion through the media.

Thus, another essential point of the article is that the monopoly structures the institutional environment through the creation of specific elements of institutional infrastructure and provides the formation of independent state’s regulatory functions. Monopoly, as a consequence, is characterized by a multiplicity of sources of its occurrence,
multiplicity of purposes of its existence and tools to achieve them.

In view of this, the author of the investigation successfully notes that sources of monopoly are:

  • Technological features of the industry, causing the increasing returns to scale, give a rise to a monopoly. This phenomenon is defined as natural, as there is a situation in which the only company is able to provide an entire market demand for a product at a lower cost than two or more;
  • Possession of a rare resource (natural resources, unique means of labor, specialized knowledge, exceptional ability) is a basis of the resource monopoly, which is the most stable type of monopoly;
  • Concentration. The economy monopolization was a natural consequence of the large jump in the concentration of industrial production under the influence of scientific and technical progress.

Critically analyzing the issue in question, Patnaik (2016) develops an idea that monopoly is not impersonal.

Oppositely, it has its own subject which is the monopoly of the media, which aims at achieving specific economic goals. In the process of meeting its goals a monopoly interacts with the environment, which consists of a variety of suppliers: suppliers of resources, intermediaries, government agencies, and consumers. This connection is depicted at Figure 1.

Figure 1. Monopoly, demand and external agents.

The specifics of the monopoly subject relationship with the environment are due to the certain economic strength, which allows establishing a control over environmental factors in an effort to achieve these goals. Thus, the investigator believes that this economic power determines the ‘critical mass’ that promotes the conversion of conventional economic entity in the exclusive qualitative difference. It represents the ability to impose its own conditions of external agents.

Thus, the ability to monopolize is not only the prerogative of the large firm(s), and it suggests the possibility of becoming a monopoly and economic entities of small and medium sizes. However, the so-called ‘small monopolies’ may result from the differentiation of products and geographical location. The author concludes that the monopoly is not always a consequence of the financial control, the concentration and centralization of capital production, for a market system characterized by intensifying competition trends. These profound insights into the nature of monopoly depict the essence of monopoly in the research.

Journal of Economics 10/2015 Title: “Downstream and upstream oligopolies when retailer’s effort matters ” by F. Wirl.

The essential claim of the article is that oligopolists receive the economic benefits not only in the short- and in the long-term run. This is due to the existence of fairly significant barriers to entry into the industry, albeit it is not as difficult to overcome as it is in pure monopoly, but which still restricts the entry into the sector of new competitors. Consequently, the company agreeing to the existence of oligopolistic market is forced to restrict their consumption as well as pay a higher price for products of oligopolistic industry.

Most markets in modern economy are the markets of imperfect competition in which each producer is able to significantly affect the price of products. It is often: a high level of concentration of producers combined with a product differentiation (monopolistic competition, oligopoly), the presence of barriers to entry in the sector (monopoly, oligopoly) and the interaction between producers (oligopoly).

The most interesting for the study by Wirl (2015) is a type of market structures, due to a wide range of strategies for behavior of participants and non-trivial conclusions of an oligopoly. As a rule, the number of oligopolists is namely limited to a few firms, although in some cases, information transparency (which facilitates the coordination of businesses) can reach up to a couple of tens. Moreover, the size of each company should allow to significantly influence the situation on the market. The author of the investigation claims that the greatest degree of oligopoly is characterized by strategic interaction between the participants.

According to Wirl (2015), oligopoly is a market presence wherein a product is represented by very few large companies that control a serious part of production and marketing, and compete with each other. Each firm conducts an independent market policy, but it depends on the competition and must reckon with them. The goods implemented by the oligopolistic firms can be differentiated (such as cars, computers) as monopolistic competition, and can be standardized (steel, aluminum), as with a perfect competition. In any case, oligopolistic firm has a monopoly power that can affect the price of their products.

Usually, the oligopolistic markets are dominated by two to ten firms, which account for a half or more of total product sales. This makes the companies be dependent on each other. Admittedly, each firm in the industry realizes that change in the price or volume of production output will cause a reaction of its competitors, and should take this into account. In many cases oligopoly is protected by the barriers to entry similar to those that protect the monopoly. By the way, monopoly power and oligopoly’s profits in industries depend in part on how to interact with the company. If the interaction tends to cooperate and not to compete, firms can earn more by imposing significantly higher prices than those prevailing would be if this market was quite competitive. This is illustrated at the Fugure 2.

Figure 2. Oligopoly profits and cost.

According to the author, sometimes the company even comes in clear or conspiracy (cartel) and co-ordinate its prices and production volumes to maximize the joint profits. In other cases, oligopolistic firms compete aggressively with each other, unleashing the price wars, goals and losing a significant share of the profits. Thus, oligopoly is the predominant form of modern industry market. Oligopolistic industries are, for example, automotive industry, steel, aluminum, electrical equipment, and computers.

The main reason for the existence of oligopolies is the effect of the merger. The impetus for the merging firms may be:

  • achieve greater economies of scale;
  • strengthen its market power;
  • eliminate a competitor;
  • get the advantages of ‘big buyers.’

The features of oligopolists in the market behavior are determined by two trends that act in opposite directions. Herein, the author of the research states that, on the one hand, companies are interested in maximizing their profit total area through the conspiracy and joint action, as it allows realizing a monopoly power. On the other hand, each firm seeks to profit at the expense of its competitors, breaking an agreement under which a rivalry is considerably intensified.

In oligopolistic market an accurate forecast of choice for production volume is impossible, especially because of many options presented in oligopoly. The industry can be of 2 – 4 dominant firms (which is known as the ‘tight oligopoly’) and 10 – 20 (which is referred to as ‘soft oligopoly’). The mechanisms of interaction between the companies in such circumstances will be different. In addition, the total interdependence complicates the prediction of response competitor and prevents the calculation of demand and marginal revenue for the oligopolists. Hence, the claims of the author are solid and valid. The data represented in the article are important and helpful for further understanding of oligopoly.