Microeconomics Assignment

MICROECONOMICS by EW3620, EW3627 & EW3675

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Contents

Assignment

Section A ................................................................................................................................ 1

a) Types of Economics System ................................................................................................. 1

b) Costs and Benefits of Command Economy Changing to Free-market Economy ................. 9

c) Economic Problems Arise from Distribution of Free Goods and Services ......................... 14

Section B ............................................................................................................................... 18

Costs and Benefits of Introducing Minimum Wages ................................................................. 18

Section C ............................................................................................................................... 23

a) Types of Market Structure ................................................................................................. 23

b) Perfectly Competitive Industry Changing to Monopoly .................................................... 30

References ............................................................................................................................ 35


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Section A

Markets and governments have complementary roles in industrialisation. Markets are dealing

with the growing economic complexity that came with industrialisation. Then, governments

have to determine the types of economy.

a) Types of Economics System

Identify the types of economics system and explain the economic characteristics of each.

There are three types of economic system, which are free-market economic system, command

economic system and mixed economic system. The explanations are as follows.

i. Free-market Economic System

One of the characteristics of the free-market economic system is the ownership and

management of all the production tools and resources are by individuals. Free-market

economic system is not controlled and establish by the government. A free-market

economic system’s firm is able to decide the type of goods and services in the

marketplace. In a free-market economic system, individuals are free to choose their

own production of goods and services. Besides, the law of supply and demand governs

the free-market economic system.

The second characteristic of the free-market economic system is the individuals are

free to be investors. Individuals can come out with greater capital for the firm to

produce more products. It means that the consumers invest on the goods and services

the firm produces. In the free-market economic system, individuals are free to earn

profits. The maximisation of profit earning by individuals and the free-market economic


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system’s firm will satisfy the customer needs. There are high taxes charged due to the

lack of government control in this economic system.

The third characteristic of the free-market economic system is the individuals are free

to be entrepreneurs. There are competitions among the entrepreneurs for profit. For

example, individuals have a greater capital to have a potential to become

entrepreneurs in the free-market economic system. This is because the individuals are

the consumers, so they easily understand the needs and wants of the people. In a free-

market economic system, many entrepreneurs produce different quantity of the same

product with different prices. Hence, the consumers compare the prices and quality of

the goods and services.

The fourth characteristic of the free-market economic system is the firms are free to

set prices, which includes wages and salaries for the labours. The decrease in wages

will increase demand of labours, as the firms do not want to have high cost of

production. In a free-market economic system, companies can simply set the price for

labours’ wages such as at RM 4 per hours. The lower price of wages paid for labours,

the higher the opportunity for labours to work. The government will not be setting the

minimum wages for the firms, as they government is not involve in the free-market

economic system.

The fifth characteristic of the free-market economic system is individuals are free to

buy, earn, use and sell private property. The firms in free-market economic system are

doing business without excessive government regulation. For example, in the first half

years, a company use one paddy’s tractor to produce more output. If the company is

going to increase the units of the tractor to double its output, the company is able to

gain more profit in which the government does not control the company’s production.


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The sixth characteristic of the free-market economic system is the transmission of

information between buyers and sellers. It is important to share information between

buyers and sellers. Market research helps the business to collect the documents and

data about the needs and wants of the people. Through the given information by

buyers, sellers have a clear understanding concept on the customers’ needs. Sellers will

decide the product and the quantity of the goods and services that should be produce.

The firms in this economic system are going produce the goods and services that able

to fulfil the buyers’ needs by producing enough quantity of the goods and services to

satisfy the quantity demanded. In addition, the buyers’ demand will decide the market

price of goods and services.

The seventh characteristic of the free-market economic system is lack of public goods

and services. In the free-market economic system, there is no government

involvement, so there is no authority that controls the production of goods and

services. The lack of public goods production will affect the society. There are no

companies and individuals, which are going to produce the public goods and services in

large quantity and low price for the people, voluntarily. The example of the public

goods and services for public are roads, public hospitals and public schools. Therefore,

the people will face problems daily without the public goods and services in the free-

market economic system.


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ii. Command Economic System

The first characteristic of the command economic system is centralised decisions. The

government fully controls the command economic system. The central government

controls the whole business in making major decisions regarding the production and

distribution of goods and services. In addition, the government will set broad goals

passed down the hierarchy and eventually translated into production targets. In a

command economic system, the government controls all the scare resources and the

factors of production of the goods and services, which includes land, labour and

capital. The government will decide and make all the decisions of allocations of

resources for the firms that are under this economic system.

The second characteristic of the command economic system is the greater control by

leaders of the country. The government is the only leader in this economic system. In a

command economic system, the government has the authority to control all the

running process in the firm. The leader will solve most of the economic problems. For

example, the government will decide whether the alcohol drinks can be available or

not in the market. The government is the dictator, which is able to control the whole

process of the firms, which includes the output, input and price of product. The

government will decide what to produce and ensure that the firms maintain the

quality standards of the goods and services.

The third characteristic of the command economic system is environmental

degradation. Environmental degradation means that the government set the law to

protect the people. Theoretically, there is a low unemployment rate in command

economic system, as the government decides the job for the people who are capable

in the particular field they are involved. The government sets the law, causing the

ability to decrease the unemployment rate of the country. For example, government

gives an opportunity to the people to work in a particular department regarding on


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the research and development of goods and services. The unemployment rate of the

country will be low, as most people have a job in command economic system.

The fourth characteristic of the command economic system is high investment, high

and stable growth. The central government is fully responsible on the course of the

economy. The concept of command economic system is to ensure that the prices of

industrial products are available and are reasonable. The stable growths of the

country’s economy results in many investors decide to invest in this command

economic system. The command economic system’s growth is more stable compared

to the other economic system. Command economic system will never have sudden

depressions because the public own most of the resources and the state will make the

decision on the things to do with the scarce resources.

The fifth characteristic of the command economic system is the production targets are

set imprecisely. A central government plans either directly or indirectly setting the

output targets, incomes and prices. Sometimes, there are problems of shortages and

surpluses in the country. If the quantity demanded exceeds the quantity supplied,

there is a shortage. On the other hand, the quantity supplied is greater than quantity

demanded; there is a surplus. The command economic system exists in very few

countries such as North Korea. This economic system does not depend on the peoples’

needs or demand to produce the goods and services.

The sixth characteristic of the command economic system is lack of freedom for

society. The government fully controls this economic system. Thus, the government

instructs the department and the firms on the type and quantity of production of

goods and services. There is no freedom of selecting the best item out of the varieties,

as there is little variety of goods and services offered to the consumers. The

government has the authority to decide all the available good and services in the

market produced by estimating or assuming.


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The seventh characteristic of the command economic system is the slow response to

scarcity and consumers’ needs. The government will be solving all the basic economic

problems. In addition, consumers have no choice but to accept all the decision made

by the government. The government’s decision does not satisfy consumers’ needs, as

the government decide the type and quantity of goods and services by estimations

and assumptions. In addition, many different departments in the government are

responsible in making the estimations and assumptions of the goods and services.

Therefore, delays of production of the goods and services happen in this economic

system.


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iii. Mixed Economic System

The first characteristic of the mixed economic system is the public sectors and private

sectors have the authority to control the economy together. They work together

hand-in-hand to ensure the stable economic growth. In a mixed economic system, the

public sectors and private sectors produce their own product. People may go to into

business on their own accord and decide the type and quantity of goods and services

that they are willing to produce or sell. The government will solve the basic economic

problems. This economy has an active government support and direction.

The second characteristic of the mixed economic system is the government plays an

important role regarding the unemployment rate and inflation. The government is to

ensure low levels of unemployment rate and low levels of inflation in the country of

this economic system. The government sets the minimum wages and gives job

opportunity to the people. Through this, the government is able to help the people to

find a good job and reduce the unemployment rate of the country. In a mixed

economic system, the government is protecting its consumers.

The third characteristic of mixed economic system is the government sets all the laws,

rules and regulations for the people to follow, especially the companies. There are

various laws and regulations such as environmental regulation, labour regulation and

consumer regulation. The environmental regulation is for the sectors. It is to ensure

that the sectors do not cause pollution while producing the goods and services. In

addition, the consumer regulation protects the consumers’ rights, so the companies

selling goods and services are not exploiting them.

The fourth characteristic of the mixed economic system is the charging of taxes by the

government. Businesspersons need to find their own way to promote and sell their

own product, and they are not in control of the taxes. The government sets the tax to


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earn some income to provide the public goods and services. The government also

reduces the income inequality by imposing taxes. In addition, these taxes also reduce

the gap between poor citizens and rich citizens. The rich citizens are to be tax with

higher tax by government and the citizens are to be tax with lower tax by government.

The fifth characteristic of the mixed economic system is the government plays an

important role in resolving economic problems faced by society. All fundamental

economic problems will solve by the government. Moreover, both public and private

sectors will resolve more advance economic problems together by recruiting

professionals. The shortages and surpluses will not be happen in this economic system.

This is because the quantities supplied and quantities demanded of the goods and

services are similar. In addition, the government sets the price of some essential

products.

The sixth characteristic of the mixed economic system is the provision of public goods

and services by the government. This economic system, which has an active

government support, has most public goods and services provided for the consumers.

The government will provide the public goods and services for the people such as

public schools and general hospitals. The funding of these goods and services are from

the taxes collected. Therefore, the under privileged people can enjoy low expenses of

goods and services, which the government provide.

The seventh characteristic of the mixed economic system is the variety of goods and

services. Consumers have more freedom to choose the goods and services they want

to purchase, as there are public and private firms. The government provides the public

goods and services such as education, health, military defence and infrastructure to

society. The private and public sectors and the government produce goods and

services in the market at a reasonable price and quantity to avoid surpluses and

shortages.


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b) Costs and Benefits of Command Economy Changing to Free-market Economy

Discuss the costs and benefits if a country moves from command economy towards a free-

market economy.

Command economy is a form of economy, which a central government plans either directly or

indirectly, sets output targets, incomes and prices. The government solves the basic economic

problems. The citizens of the country will not have any choice but to accept all the decisions

made by the government. On the other hand, a free-market economy is an economy that

individuals and firms pursue their own self-interest without any central regulations and

direction. In this economy, there is a lack of government involvement. The citizens of the

country are influences and determine the types and quantity of goods and services available in

the market. Price markets or mechanisms answer all the demand and supply questions. If a

country moves from a command economy towards a free-market economy, there are cost and

benefits.

One of the benefits if a country moves from a command economy towards a free-market

economy is the government involve less in the production process. It is because in the

command economy, the government solves all the economics problems, set the price and the

quantity of the goods and services. Although there is less freedom, the government involves in

the production process to ensure there is no error occur in the process. However, in the free-

market economy, the demand and supply of goods and services determines the price and

quantity of goods and services in the market. Therefore, the government does not involve in

the production process or solve the economic problems. The entire private firm has their own

freedom to make the economic decision.

The second benefit if the changes of economic systems occur is there is an increase in variety of

goods and services in the market. This is because in command economy, the government has

the power to instruct the sellers to sell the selected goods and services in the market. Thus,


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there are fewer alternatives for the consumers to choose from causing the consumers to have

less freedom. However, the free-market economy produces goods and services according to

the consumer’s preference. Consequently, there is a wide variety of goods and services in the

market. This results more freedom in buying and selling of goods and services. The consumers

can choose the most suitable goods and services according to their own preferences. Therefore,

the increment in goods and services benefits the consumers.

The third benefit is resources for the goods and services are more efficiently used. This is

because in command economy, the government inefficiently meets the needs and wants of the

consumers in the society causing the occurrence of widespread shortages, surplus and

wastages of basic consumer goods and services. Since, in the free-market economy, the

consumers decide on the available goods and services in the market, the resources are more

efficiently used. The firms use the resources efficiently to reduce the cost of production and

maximise their own profit. In addition, the firms will produce the appropriate quantity of goods

and services to prevent the occurrence of shortages, surplus and wastages in the country.

The fourth benefit is the price of the goods and services are lower. The prices are lower

because the free-market economy sets the price according to the equilibrium price. The

equilibrium price is the price at which the quantity demanded by the consumers is equals to the

quantity supplied by the firms. However, in the command economy, there is no price system.

Hence, the price of the goods and services has no standard. The command economy offers the

prices without surveying the market equilibrium, so the government sets the price very high to

cover the cost of production and obtain maximum profit. In the free-market economy, there is

a standard price of goods and services. The occurrence of shortages, surplus and wastages of

goods and services do not happen, as the prices are reasonable.

The fifth benefit if a country moves from command economy towards a free-market economy is

the quicker in responds to the consumers’ needs and wants. In the command economy, the

officials usually determine the quantity of goods and services produced. They determine it by


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estimating or assuming. Thus, the goods and services maybe produced and delivered late to the

people, as there might be delay in arriving at decisions. In the free-market economy, the

consumers’ demand influence the quantity supplied by the firms. The decisions of the quantity

of goods and services will not have any delays, as the consumers’ choice is obvious through

surveys and each sale. Shortages, surplus and wastages will rarely occur, as the quantity

supplied of goods and services depends on the consumers’ demand. Consequently, the

responds to the consumers’ needs and wants is quicker in the free-market economy compared

to that of the responds in the command economy.

One of the costs if a country moves from a command economy towards a free-market economy

is the ignorance on the environment and social goals in free-market economy. This is because

the free-market economy, there is lack of government involvement. Consequently, there is no

central authority to protect the property rights. The government governs the command

economic system. Thus, the government solves all the basic social and environmental problems

faced by the country. The government will ensure that sufficient resources are devoted to the

public, and community. The firms will produce and provide the essential goods and services, as

the government instructs them. The example of the goods and services are public hospital,

public schools, and roads. These free goods and services are not available in the free-market

economy, as firms only offer profitable items. Hence, the citizens will not volunteer to solve the

social and environmental problems faced by the country.

The second cost is lack of public goods and services production. This is because, in command

economy, the government controls everything. Thus, there are production of public goods and

services. The public goods and services that the government provides help the consumers

obtain necessary goods and services. The goods and services are for life sustention of the

people. Some of the examples of the goods and services are public hospitals, public clinics,

public schools and roads. In addition, the firms who produce the public goods and services have

maximum profit, as the government pays the firms a portion of the cost of production. This

causes the price of the goods and services to lower down, so the consumers will not be burden


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by the high prices. However, in the free-market economy, the government does not involve in

the economy. The firms in this economy only produce profitable items, as the government does

not instruct them. Since the people of the free-market economy only produce profitable items,

there will be no production of public goods and services. Hence, the goods and services that

help to sustain life are not available.

The third cost is the growth of an unstable economy. This happens because the government in

the command economy involves itself in the economy. Thus, the country will not have a sudden

depression. It is because the government publicity owns most of the resources and the state

will decide the things to be done to the scare or limited resources. The government is capable

of shifting to different areas that requires the production resources quickly. Hence, the

investors will invest in the economy, as the government controls the economy causing the

country’s economy to be stable. However, in the free-market economy, the societies do not

know who is controller of the market. Thus, it is hard to come to decision when there is a need

of the production resources. In this free-market economy, there is nothing free and the firms

are not stable. This refers to the unstable economy in the country, as the market easily

influences the growth of a firm company. It is risky to invest in this condition of economy, so

investors will not invest. Without investors, it is hard to grow and expand the company in a

stable condition.

The fourth cost if a country moves from a command economy towards a free-market economy

is the increasing unemployment rate in the country. In the command economy, theoretically,

unemployment does not exist. It is because the government provides every potential worker

with a job. However, in reality, there are some unemployed citizens. The rate of the

unemployment is still lower compare to that of the free-market economy. This is because the

firms in the free-market economy only employ the workers that are productive, innovative and

profitable to the business. Hence, the citizens will have a hard time to get a job. The

competition to be employ is more vigorous compared to that of the command economy, as the

citizens have to depend on themselves to get a job. In addition, senior staffs and senior citizens


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find it harder to keep their jobs, as they have higher potential of being fire. This is because their

salary is higher than that of the juniors. In addition, senior citizens tend to be absent from work

due to their age and health.

The fifth cost if a country moves from a command economy towards a free-market economy is

the inequality of the social and economic ranking of the society. This refers to the wider gap

between the rich and the poor. Thus, the rich citizens will be richer and the poor citizens will be

poorer. In the command economy, the government controls the economy. Hence, theoretically,

there is no difference in the society either socially or economically. However, in reality, there is

still a small gap in between the rich and the poor. The command economy’s government just

ensure an equal distribution of income and wealth among the members of the society. On the

other hand, the government of the free-market economy is not involved. Hence, there is no

equal distribution of income and wealth. As the firms sell their product in a profitable way, only

the rich can afford it.


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c) Economic Problems Arise from Distribution of Free Goods and Services

What economic problems do you think might arise if all goods and services were provided free

to consumers by the state or government? Justify your answer.

There are problems that might arise if consumers were given free all goods and services. The

state government will cause some economic problems to the country if they provide all the

goods and services free to the consumers.

One of the economic problems that may arise is the inefficient allocation of resources. This

problem arises because the government inefficiently meet the needs and wants of the

consumers. This will happen, as the government is not aware of the consumers’ needs. The

government faces difficulty in calculating the needs of the society. In addition, there will be

difficulties in calculating the cost of production activities centrally. The inefficient creation and

delivery of products can cause widespread shortages, surplus and wastages of basic consumer

goods and services. Consequently, when it comes to minor day-to-day changes, the

government has a hard time cooping with them. This all happens, as there is a little focus on

consumer wants and needs. Therefore, the inefficiency of allocating resources will arise as an

economic problem.

The second economic problem is shortages, surplus and wastages. This economic problem will

arise, as the government is not aware of the basic needs and wants of the consumers.

Therefore, they will produce according to their own accord instead of the societies demand for

all the goods and services. This will cause shortages, surplus and wastages. Shortages will occur

as the supply of the goods and services that are use daily and essential are not in abundant

supply. The supply of the goods and services, which are less than the consumers’ demand

results the occurrence of shortages. However, the demand of the goods and services that is less

than the supply results in the occurrence of surplus. Surplus will occur when the goods and

services produced are not essential and are not of much necessity to the consumers. Since the


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government provide all the goods and services free to the consumers, the consumers will not

treasure or value them. It is because they do not know the cost of production of the goods and

services as the consumers do not work hard for them. Thus, they tend to waste the goods and

services provided. This will lead to the occurrence of wastages in the country.

The third economic problem that is the private firms will obtain less profit. This happens, as the

goods and services offered by the private firms are charged. Although the goods and services

offered by the firms are off better quality, the consumers will not consider it. It is because the

government bears all the cost of goods and services so the consumers will not think twice and

accept them. Goods and services that are free most likely to be preferred over the paid items.

In other words, consumers are not likely to be spending their property on helping the private

firms earn maximum profit. Thus, there is no opportunity for personal profit motives for any

private firms, as the government offers free goods and services to the consumers. Besides that,

the private firms will not have enough inputs for the factors of production. As most people

choose to be unemployed, the firms will not have enough labour. The lacking of labours

condition will result in problems to achieve successful production for the private firms.

Therefore, the private firms will not be progressing positively resulting bankruptcy of small

firms to larger firms.

The fourth economic problem that may arise is poor quality of goods and services. The quality is

poor because the government bears all the cost of the goods and services. By decreasing the

cost of production and increasing the quantity of the goods and services to reduce the

occurrence of shortages, the government will decide to lower the quality of the goods and

services. This happens, as the government needs to allocate money for other purposes like for

the future growth of the country. In addition, there are many consumers in the country, so the

goods and services produced must be in large quantities. Large quantities production requires

many inputs like capital, materials, land and labour. All the cost of producing the large quantity

of goods and services is very high. Therefore, the government reduces the cost by producing

poor quality goods and services. Some goods and services are produce by the private firms and


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sold to the government at a flat rate. This absence of profit motives acts as a deterrent to the

firm’s contribution causing the production of poor quality goods and services in large quantities.

Although the large quantities of goods and services solve the occurrence of shortages, the

neglecting act of the quality goods and services come to being causing the consumers to

demand more, the items provided might be spoilt.

The fifth economic problem that may arise if the government provide all the goods and services

to the consumers is the little variety of goods and services offered to the consumers. This refers

to the consumers do not have the freedom to select the best-suited item for themselves out of

the varieties. The consumers will not have freedom to consume the items they really want. This

is due to the insufficient alternatives of goods and services. The government has the authority

to decide all the available goods and services. Consequently, to save cost of production, the

government produces minimum one or two types of the same goods or services. This will lead

to diminished efforts and initiatives of producing new, upgraded, better and safer products. The

officials usually determine the goods and services produced. They determine it by estimating or

assuming. The goods and services maybe produced and delivered late to the people, as there

might be a delay in arriving at decisions. The workers of the production team will not be

motivated to work, as they only produce the same item all year round. There will be no

challenges faced throughout the working hours. This causes the employees to be uninterested

in their jobs. Since working is quite meaningless, the employees will be quitting their job and

get free goods and services from the government without any hard work. The lack of labours

contributes to the delay of production and delivery of goods and services to the consumers. In

addition, the minimising decision of the variety of goods and services by the government to

reduce the workload of a handful of labour.

The sixth economic problem is unemployment rate in the country will increase drastically. This

is because the consumers do not have to purchase all the goods and services they need with

their income. Since the income that they earned for the day-to-day purchasing activities is not

used, the consumers feel that there is no importance of work. The entrepreneurship that are


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off good qualities will also be lacked, as the entrepreneurs do not benefit from innovation or

product development as work is done for the goods and services of the society. As a result, the

entrepreneurs might join the members of society to obtain the free goods and services that

quickly lead to shortages instead of working hard to obtain it. Shortages will occur, as the

consumers’ demand is more than the supply that the government can produce and offer. In

addition, the members of society who are unemployed will not be receiving any payment from

labouring. This causes the National Income of the country to fall. Since there is no individual

that makes more money than another does, the members of society feel that hard work is not

important. The consumers will be unemployed and cause shortages, surplus and wastages of

goods and services in the country, as the government are not fulfilling the needs and wants of

the society.

The seventh economic problem is lack of competition and innovation of goods and services.

This problem occurs because of there is opportunity for personal profit motives for any private

firms, as the government offers free goods and services to the consumers. The producers do

not have to compete against each other, as the customer and debtor of the cost of goods and

services is the government only. The firms only need to compete against each other for the

business opportunity with the government and international businesses. The initiative and

creative ability of the individuals do not seem to be developing. It is because the government

decides all the quantity and quality of goods and services for the consumers. The cost of

production that the government quotes to the firms is usually low. Therefore, innovative ideas,

which are of a high cost, are not suitable. The nature of promoting and constantly upgrading

the existing products, or developing new technology, safer and better will be a rare scenario in

a firm that produce goods and services. This leads to limitations of individual motivation and

success. In addition, the goods and services produced must be useful to the consumers. Thus,

the creativity and innovation of producing new goods is mainly for the basic social needs.


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Section B

Costs and Benefits of Introducing Minimum Wages

Examine the economic costs and benefits of the introduction of a minimum wage in a

competitive firm.

Minimum wages defines as the lowest payment for labour that an employer pays to an

employee who works for him o her. The government sets the price floor for the wages. It stated

in contracts or governmental legislation. Although minimum wages is set, some employers can

alter a little or set their own laws. Minimum wages provide costs and benefits to the employees

and firms. There are two different point-of-views on this matter, which is from the firms’ point-

of-view and from the employees’ point-of-view.

a) The benefits of minimum wages.

The first benefit of minimum wages from the firms’ point-of-view is the increasing productivity

of the firm. This is because of the minimum wages increase the initiative for people to work

harder. Thus, this shows that higher wages can increase the labours’ productivity. Employees,

who receive more wages from the company, sacrifice more for the company. In addition, the

firms grow and expand quickly when the employees are productive due to the minimum wages.

The second benefit of minimum wages from the firms’ point-of-view is the easier way to

manage the business budgets. For some small company, if without a minimum wages, it can be

difficult to budget their finance. The owner of the company can expect the amount that he

should pay to his worker according to the minimum wages set by the government and can

create a new job based on budgeting information.

The third benefit of minimum wages from the firms’ point-of-view is common reference.

Minimum wages will make the hiring process become for those young or unskilled workers and


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employers. The employer does not have to go through the process of negotiating the wages

during interview with a new employee, as both parties already know or expect the payment of

work per hour.

The fourth benefit of minimum wages from the firms’ point-of-view is the employee will bring

benefits for the company. If a firm has already set the amount for minimum wages, people that

are qualified will apply and work for this organisation. This is because minimum wages ensures

the worker a fix amount of income, which is unaffected by other factors such as unstable

economy. These organisations will have more qualified workers who can lead the company to

the peak and earn more profit. It can also prevent any kind of employee abuse.

The first benefit of minimum wages from the employees’ point-of-view is the assurance of

minimum standard of living for every employee. Everyone needs money to sustain his or her

life as well as his or her families. It is clear that in the society; most of the workers are working

parents and adults, who have financial problems or sick family members. The existence of

minimum wages allow the labours to be sure of the payment that their firm will be paying them

and they will not be at the mercy of the employers, who are always thinking of exploiting them.

Moreover, this can also reduce the national poverty rate.

The second benefit of minimum wages from the employees’ point-of-view is the effect on the

employees’ productivity. The higher wages can increase workers initiative to work harder and

be more productive. When the workers are able to sustain their life as well as their families

with the wages, they will work harder for the employers causing the company to make a profit.

The minimum wages can increase the productivity rate, as the workers are more skilled day-by-

day with the motivation of the minimum wages.

The third benefit of minimum wages from the employees’ point-of-view is the elimination of

inefficient companies. When the company is not able to manufacture good qualified goods and

services at a competitive price, as the cost of production is high, then the employers might


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close down his company or try to reduce the amount of employees. However, it is difficult to

cut down on the number of employees that have no fault. Hence, the company might exploit

them to do more task. With this kind of employer that exploits the workers, as he cannot afford

to pay the minimum wages, it is better to leave or eliminate the company.

The fourth benefit of minimum wages from the employees’ point-of-view is the reduction of

unemployment rate in a country. The minimum wages have a positive effect on employment.

This is because the employees are willing to be more productive for the better of the company

with the motivation of the minimum wages. Therefore, the company will not fire them for

being unproductive. In addition, the wages minimum value increases according to the worker’s

ability. Thus, in order to secure the job and receive more wages, the employees work harder.

The fifth benefit of minimum wages from the employees’ point-of-view is the reduction of the

employees’ tax burden. This refers to the employees are able to purchase items that are

charged with government tax. This is because without the minimum wages, the employees

cannot afford to purchase their basic needs to sustain their life. There are provision of goods

and services to the unemployed or underpaid citizens, such as books, clothes and food. In

addition, the government provides the people with public services. Therefore, with minimum

wages, the need for public assistance and the tax burden on the community and states are

reducing.

b) The costs of minimum wages.

The first cost of minimum wages from the firms’ point-of-view is minimum wages can directly

interfere with business’ profits. Any companies, which are facing with losses, they usually would

like to cut down their expenses, especially on labours’ salaries. However, because of the fixed

minimum wages, the companies will not be able to do so. Companies may experience serious

breach of freedom due to this interference. In addition, some companies might decide to find

fault with the unproductive employees to get them fired.


21

The second cost of minimum wages from the firms’ point-of-view is the firm will have more

power to abuse the labours. Unchecked companies will abuse their power on the labour. This

refers to skilled and unskilled employees have the same amount of wages. This act of imbalance

payment by the companies is to reduce the cost of production and maximise their profits. The

employers would order the workers to do more task and get less the wages.

The third cost of minimum wages from the firms’ point-of-view is the difficulty in enforcement.

It will be difficult in enforcement when the minimum wages is fixed. If the minimum wages

fixed by the government is RM7.00 per hour, for those who are unemployed and low educated,

they might agree to work at the rate or lower than the rate. Nevertheless, for those who have

working experience and highly educated, they might be not agreeing with the rate, as it is low.

Therefore, it is difficult to fix the minimum wages, as different people have different opinion on

their wages.

The fourth cost of minimum wages from the firms’ point-of-view is disorganisations in business.

If there is no fix rate of the minimum wages on the national scale, but in sweated trades only,

then there will be flight of capital from former to the later. This will cause the whole business to

face a disorganisation situation.

The first cost of minimum wages from the employees’ point-of-view is minimum wages is not

enough for the employees to cover their expenses. If a worker works for 56 hours per week at

RM6.15 per hour, he will only make approximately RM1000 per month after taxes. Then, when

he add in the daily or monthly expenses that he need to pay for, for instance, food, car,

insurance, and rental. He would be spending more than he can earn and he might have many

creditors. Thus, how can he possibly survive with only around RM1000 minimum wages?

The second cost of minimum wages from the employees’ point-of-view is in the field of work,

young people will replace the middle-aged people. Many adults are trying their very best to

earn some income to support their families. Therefore, they need to work for the minimum


22

wages. If the government cancels the minimum wages, the employers will be able to hire the

younger people that only require a low wages and do not have problem on the aging of health.

In addition, younger people can do as good as or better than the adults can. Those young

people such as high school student, they only need the money to pay for their daily expenses.

As a result, those young people will replace those adults if there is a cancellation of minimum

wages.

The third cost of minimum wages from the employees’ point-of-view is the diminishing of

efficiency of the workers. If the government fixes the minimum wages for all the employees or

in a few industries, then the amount of the wages are usually at the maximum point. Hence, if a

worker who is very efficient and productive, he gets the same amount of wages as the worker

who is unproductive and inefficient in the company, it is very unfair. The fixed amount of the

wages given to the workers no matter how hard working they are, would decrease the

motivation of the employees to work even harder. Consequently, the hardworking workers will

reduce their efficiency because their hard work is a waste. They will rather decrease their

efficiency instead of be acknowledged for their hard work.

The fourth cost of minimum wages from the employees’ point-of-view is the difficulty of fixing

the minimum wages’ rate. It is very difficult for each country’s government to fix the minimum

wages’ rate, as different countries have different standard of living cost. If a country has a high

standard of living cost, then the minimum wages must higher than that of other countries. This

causes the employers to refuse to employ the labours but they substitute the labours with

machinery. This results in the increment of the rate of unemployment. If the minimum wages’

rate is too low, then it may not serve any purpose.


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Section C

a) Types of Market Structure

Discuss the characteristics for each types of market structure: Perfect Competitive Market

Structure, Monopoly Market Structure and Oligopoly Market Structure.

There are three types of market structure, which are perfect competitive market structure,

monopoly market structure and oligopoly market structure. The explanations are as follows.

i. Perfect Competitive Market Structure

One of the characteristics of the perfect competitive market structure is there is a

large number of small firms in which each of it is relatively compared to the overall

size of the market. In addition, if a firm stop producing or double its output, the

market is unaffected. This ensures that no single individual or company can exert

market control over price or quantity. If a firm decides to stop producing entirely or

double its output, the market is unaffected. The price does not change and there is no

distinguishable change in the quantity exchanged.

The second characteristic is identical or homogeneous goods. This refers to the

existence of one single product, which all the firms sold at a common price and the

quality of the goods and services being the exact the same. In addition, no

distinguishable features differentiate the goods and services. In other words, the

goods and services are perfect substitutes. Thus, the consumers do not really care

whom the seller is to purchase the product, as the price and quality are almost the

same. In addition, there are no firms, which can sell their products at a different price

than that of the other firms. If they do so, the consumers would immediately switch to

other goods that are perfect substitutes.


24

The third characteristic of the perfect competitive market structure is perfect

resources mobility. The perfectly competitive firms are free to enter and exit an

industry. Start-up cost, the government rules and regulations, or other barriers to

entry do not restrict them. There is nothing to prevent a perfectly competitive firm

from leaving an industry, as in the case for government-regulated public utilities. In

addition, every supplier has a relatively small market share due to the existence of a

single type of product sold by different suppliers. As much, any firm is free to enter

the market at his will, and exit when he wishes to do so. The absence of such barriers

does not affect the price, as there are always perfect substitutes for a producer who

enters or exits the market.

The fourth characteristic is perfect knowledge. In perfect competition, both the

producers and consumers are completely aware of the information about the

production process and its economics. Thus, everyone knows the market conditions

and this information causes the price to remain constant among all firms. Thus, one

firm cannot sell its good at a higher price than other firms can. In addition, every firm

also has complete information about the prices charged by other firms so they do not

inadvertently charge less than the going market price. Perfect knowledge also extends

to technology as all perfectly competitive firms have access to the same production

techniques. None of the firm can produce its output faster, better, or cheaper because

of special knowledge of information.

The fifth characteristic of the perfect competitive market structure is maximum profits.

This refers to the firms in this market structure aim for profit maximisation. In addition,

they are not concerned with consumer recognition and maximisation of the revenue.

The quantity of the goods and services sold by the firms determine the profit. When

the marginal cost, or the cost incurred by the production of a single unit of the good is

equal to the marginal revenue, that is the revenue attained from the sale of this single

unit of good, a producer will stop producing the product. This is a stage where the


25

profits are maximised, and losses are minimised. The profit is a component of the

entire cost structure, which, if not achieved, causes the supplier to exit the market.

The sixth characteristic is innumerable buyers and sellers. This means that the number

of buyers and sellers in the market are infinite. Since there is only one type good in the

market, no single buyer or a single seller can influence or determine the price of the

good. The market, as a whole, determines the price of the good. The price of the good

also depends on the total demand and requisite supply of the good in question.


26

ii. Monopoly Market Structure

The first characteristic of the monopoly market structure is price control. In monopoly

market structure, a single market controlling supply and demand, degree of price and

supply control exerted by the enterprise or the individual is greater. The absence of

competition spares the monopolising company from price pressure. Moreover, to

avoid the entry from new market participants, the company needs to regulate the set

of goods and services price within the paradigms of the Monopoly Theorem. To make

available limited goods and services at a higher price, monopoly has scope for

entrepreneurship. The price and production decisions of such firms target

maximisation of profit via predetermined quantity choice because it helps to cut even

on the marginal and revenue outcomes.

The second characteristic is predatory pricing. Prices will be at a low price that

benefits the consumers. When prices drop to meet scarce demand for the product,

these are short-term market gains. The suppliers and direct consumers benefit from

the monopolising company’s attempt to increase sale for business marketing. This

kind of pricing also helps the government to step in and address any unregulated

monopoly. The monopoly environment splits if the predatory pricing do not have an

efficient management.

The third characteristic of the monopoly market structure is price elasticity. This is due

to the economies of scale, which the monopoly is able to exploit more than a

competitive firm. As the monopoly is the sole provider of that good, whereas in a

competitive industry, the firms share the total output. It is not strange to see surplus

or a loss categorised as ‘dead-weight’ within a monopoly.

The fourth characteristic is lack of innovation and competition. This is because in a

monopoly market structure there is no need for competitions, so there is lack of


27

innovation to attract consumers. Monopolist best encourage the process of

innovation, as they can afford to take a long-term research and development

programmes. With one-product-shelf-life, marketing techniques and innovative

designing take a back seat. The lack of business competition or the absence of variable

goods and services shrinks the scope for ‘perfect competition’.

The fifth characteristic of the monopoly market structure is monopoly litigation. Lack

of competition does not remove consumer dissatisfaction. High market share results

in new competitors to the seller’s market and consumers defying increased prices. If

the monopoly firm is abusing market power via practices of exclusionary nature,

competition laws are design to pronounce a monopoly illegal. The law addresses

abusive conduct in the form of product tying, price discrimination, exploitative deals

and supply cuts.

The sixth characteristic is no substitute goods and services in monopoly market

structure. There is no close substitute as only a single seller has complete control over

the supply of the commodity. The demand for the goods and services are relatively

inelastic causing the absence of substitutes that enabling monopolies to extract

positive profits. The absences of substitutes of goods and services in the market cause

the firm not to leave the market.


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iii. Oligopoly Market Structure

The first characteristic of the oligopoly market structure is the existence of a few large

producers in oligopoly market. There are a handful of sellers that the actions of one

seller can influence the actions of the other sellers. Only a few limited companies

control a large proportion of a particular industry reduces the likelihood of one of the

members making unjustified price increases. The supplier will simply lose its share of

the limited market, as consumers will turn to the other providers for the identical

product at the lower rate. Although the profit margin of the other companies may be

slightly smaller, of course, they will benefit from the subsequent increase in demand.

The second characteristic is product differentiation. The goods and services may be

homogeneous or differentiated. Certain industries in an oligopolistic market

manufacture homogeneous goods and services, like in a perfect competition market,

while others manufacture differentiated products like in a monopolistic market. For

example, those of automobiles, tires, electronics and breakfast cereal, offer different

products and place an emphasis on non-price competition, such as advertising.

The third characteristic of the oligopoly market structure is interdependence.

Oligopolies are typically composed of a few large firms. Each firm is so large that its

actions affect market conditions. Therefore, the competing firms will be aware of a

firm’s market actions and will respond appropriately. For instance, an oligopoly

considering a price reduction may wish to estimate the likelihood that the competing

firms would also lower their prices and possibly trigger a ruinous price war. This high

degree of interdependence and need to be aware of what the other companies are

doing or might do is a contrast with the lack of interdependence in other market

structure.


29

The fourth characteristic is the barriers of entry and exit. In oligopoly market, barriers

to entry are high. The most important barriers are economies of scale, brand loyalty,

patents, access to expensive and complex technology, and strategic actions by

incumbent firms designed to discourage or destroy nascent firms. Other sources of

barriers to entry often result from the government regulations favouring the existing

firms making it difficult for new firms to enter the market.

The fifth characteristic of the oligopoly market structure is perfect knowledge.

Suppose the perfect knowledge vary but the knowledge of various economic actors is

selective generally described. Oligopolies have perfect knowledge of their own cost

and demand functions but their inter-firm information may be incomplete. Buyers

have only imperfect knowledge as to the cost, which is also the price of the goods and

services and products’ quality.

The sixth characteristic is the profit maximisation conditions. An oligopoly maximises

its profits by producing where marginal revenue equals marginal costs. The way that

the market is set up does not allow just any business participants to come into the

share of the power of the oligopoly. Therefore, the main company is able to drive its

own competition, yet it always wins the competition since it has goods and services on

both sides.


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b) Perfectly Competitive Industry Changing to Monopoly

Suppose that a perfectly competitive industry became a monopoly, what changes would you

expect to see in the price and the output of the industry’s good?

The pure monopoly industry is a type of market structure. It acts as a single firm, which supplies

all the output in the market. This market structure produces a unique good with a small number

of substitutes. The monopoly market structure has many different features.

One of its many features is that the monopoly industry is a single seller. This means that the

industry only compromised with a firm. Both the firm and industry are synonymous. The firm

dominates the whole industry by just producing a type of good. The firm supplies all the

demand of the consumers for that particular good.

The uniqueness of the good results the feature of no close substitutes exist in the market. The

substitute goods are goods that can be used to replace the good needed. However, in

monopoly market structure, these substitutes rarely exist or not likely to be very similar. Thus,

the firm will be producing every output itself to fulfil the consumers’ demand, as the good is

irreplaceable with close substitutes. Although there are no similar substitutes, some

monopolies dealing in luxuries still practise advertising. It is to persuade people to buy their

goods instead of other goods. As an example, persuading consumers to buy diamonds rather

than on vacations or houses.

The third feature is barriers to enter the industry exist. Some of the barriers are economic, legal

and technological. Some monopoly firms have the monopoly power that comes from

ownership of strategic raw materials. The raw materials might be for the product, patents or

licences given by the government. Where economies of scale mean low cost and efficient

production is only possible when production takes place at very high levels, they become a

barrier to entry. When the scale of output is sufficiently large, the firm’s long run average cost


31

curve will fall. This becomes a natural monopoly, which is an industry in which one firm has

decreasing average cost over the range of the market demand.

The fourth feature is the monopoly acts as the price maker. This is because the firm has the

market power and ability to influence the price in the whole market. In a monopoly market

structure, because of a single market entity controlling supply and demand, the degree of price

and supply control exerted by the firm is much greater. The absence of competing with other

firms in the industry spares the monopolising company from pressure of price.

Notwithstanding, to avoid the entry from new market participants, the firm regulates the set

good price within the paradigms of the Monopoly Theorem. The firm has scope for

entrepreneurship to make available limited goods at a higher price. The production decisions

and price of the firms target profit maximisation via predetermined choice of quantity.

Therefore, it helps to cut even on the marginal and revenue outcomes.

Whilst the profit maximisation condition remains marginal cost (MC) = marginal revenue (MR),

MR is not equals to the breakeven point for the competitive firm, which has price covers

average variable cost. The monopoly market structure has no supply curve. This is because the

relationship between price and quantity supplied which is unique does not exist. The amount

supplied and price of the good depends on the location of the demand and thus, the MR curve.

The monopolist does not equate MC to price causing price (P)> MR. There are possibilities for

different demand conditions to bring about the dissimilar profit maximising prices for the same

number of output.

The monopoly faces a downward sloping demand curve. The downward sloping is like firms

under all other forms of imperfect competition. The firm’s demand curve is also the same as

the demand curve of the monopoly industry. It is because the industry comprises a single firm.

Thus, as long as the monopoly’s demand is downward sloping, the MR curve will lie below the

demand curve or price at every point except the first point, as shown in Figure 1.


32

Faced with a downward sloping demand curve, the monopolist has to reduce the price to sell

more units such that MR < P (= average revenue (AR)) for every level of output except the first.

The price cut is not only for the extra unit but also for all units of output, which could otherwise

sell at a higher price. Thus, the additional unit sold will add to total revenue (TR) its price less

the sum of the price cuts taken on all prior amounts of output. (Low & Yew, 1997)

The perfectly competitive industry is another type of market structure. It has the characteristics

of large numbers of both buyers and sellers with the small sized firms. The firms are selling the

similar goods. In addition, they enjoy freedom in entry and exit and have perfect information on

prices, and have perfect knowledge of technology. The pure perfect competition market

structure has many different features.

The first feature of the perfect competitive market structure is that there are large numbers of

both buyers, who buy the goods and independent sellers, who all are offering their goods in a

highly organised market. The numbers of sellers and buyers are infinite in the market. Not a

single buyer or a single seller can influence or determine the price of the product, since there is

a sale of only one good in the market. The market as a whole determines the price. It depends

on the total demand and requisite supply of the industry’s good. In other words, if there is a

change in demand, the quantity supplied will change causing the occurrence of alteration the

industry’s good’s price.

The second feature is the goods offered by the perfectly competitive firms are identical. In

other words, the goods are standardised and homogeneous. The essential feature is not so

much that the goods are exactly, perfectly the similar, but that buyers are unable to discern any

difference. The goods produced and purchased, themselves are similar, but the consumers are

indifferent as to the seller from which sell the goods. In particular, the consumers cannot

differentiate which firm produces a given good. The price is also standardised. Therefore, there

is no inducement for non-price competition, which is competition based on differences in

product quality, sales promotion or advertising.


33

The third feature is the market consists of a large number of small firms in which each of it is

relatively small compared to the overall size of the industry. This is because the individual firms

produce only a small fraction of the total output in the market. The fraction produced exerts no

significant control over product price. Thus, there is no firm that can influence the total supply

and hence, the price and there is no market power enjoyed by any of the firms in this industry.

The firms can alter the quantity of goods they want to produce any time. The firms can sell as

much or as little as they want at the prevailing market price. The competitive producers are the

price taker who are unable to adjust the market price but are able to adjust to it.

The fourth feature is there are no barriers to entry and exit the industry. The sellers are free to

enter into and exit from the perfectly competitive market structure. This refers to the firms face

no significant legal, financial, technological or other obstacles when entering or exiting the

industry. The start-up cost, the government rules and regulations, or other barriers to entry and

exit do not restrict the firms. In addition, every firm has a relatively small market share due to

the existence of the production of one single type of good by different firms. Hence, any

supplier is free to enter the market at his or her will, and exit when he or she wishes to do so.

The absence of the barriers does not affect the prices of the goods. It is because, ideally, there

is always a substitute for a firm who enters or exits the industry.

The fifth feature is perfect information with respect to the market conditions of prices and

profits and other information of the goods in the market is freely available. In perfect

competition, the consumers are completely aware of prices of the goods. Hence, a producer

cannot sell the goods at a higher price than other producers can. Every firm also has complete

information about the prices charged by other firms so they do not inadvertently charge less

than the going market price. The perfect knowledge also extends to technology. All the

perfectly competitive firms have access to the same production techniques. Thus, no firm can

produce its output better, faster, or cheaper due to the special knowledge of information.

Furthermore, there are no distribution cost and transportation cost to distort the competition

among the firms.


34

Figure 1 shows the comparison of the profit maximisation of the monopoly with a profit

maximising firm in the perfect competitive market structure. Both of it faced with the same

costs, which is the same MC. The monopoly firm chargers a higher price than that of the firm in

the perfect competitive market structure for a smaller unit of output. It can be identified in

Figure 1 where Pm > Pc and Qm < Qc. It is because the monopoly has a downward sloping

demand curve symbolising its market power.

In summary, the expected changes that one can see when a perfect competitive industry

becomes a monopoly industry are many. One of the changes is the price of the industry’s good

will rise. The second expected change that one can see is the fall in amount of the output of the

industry’s good. Besides that, one can expect to see the rise in the average cost of production

and the marginal cost of production of the industry’s good.

Figure 1: Profit maximising for perfect competition and monopoly

Pc, Qc =Prefect competition equilibrium

Pm, Qm =Monopoly equilibrium

MR =Marginal revenue

AR =Average revenue

MC =Marginal cost

AC =Average cost


35

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