Pepitone reported that coffee futures had dropped due to favorable coffee-growing weather conditions (n.p.). Coffee lovers now enjoy 1.6%-6.0% cut prices on several popular brands including Maxwell House, Smucker, Folgers and Millstone. Interestingly, the prices for coffee products had increased for 10-20% several months ago. Smucker had increased prices for its coffee products for 10% in February and then an increase of 10% followed in May. Starbucks had upped the price for 17% for the package of coffee in the U.S. retail stores. In accordance with Wall Street Journal, key coffee producers were having the largest harvest of coffee beans in three latest years. In comparison to June 2010 when 8.02 million bags of coffee were exported globally, 8.76 million were exported in June 2011 worldwide (qtd. in Pepitone n.p.).
The law of demand and supply is an objective economic principle which establishes interdependence between market conjuncture and prices. On the assumption of all other conditions are equal, the lower the price for a commodity, the higher demand. On the contrary, the higher the price, the lower demand (Colander 110). Demand is influenced by several factors including weather conditions. In this example a reduction of prices for coffee is conditioned by a favorable weather for growing coffee beans. A preceding price rise was conditioned by a depletion of coffee beans supply of the last year. The prices decrease followed after the new harvest was gathered. As supply grew while demand remained unchanged, the prices declined. If the harvest was small, the price would rise relatively. Sometimes an artificial regulation of supply is used in order to retain the level of prices.
2. Elasticity of Demand and Supply
The growth of the prices for oil is the point of a great concern since Federal Reserve would have to purchase more assets. The experts of the National Association of Business Economics in Arlington estimated that the current price of $106 for a barrel is not a problem while the range of $120 was considered a manageable level and the price of $150 for a barrel would probably become a point of a serious concern (Isidore n.p.).
Elasticity of demand is a measure that reflects aggregate demand fluctuations which were triggered by the commodities price fluctuations. Thus, elasticity of demand is a measure of customers’ sensitivity to the price of commodities. Customers’ reaction on price fluctuations can be strong, weak or neutral. For example, elastic demand is demand that is formed under conditions when fluctuations of total demand exceed prices fluctuations reflected in percentage (Colander 134).
Elasticity of demand is a measure which reflects total supply fluctuations relatively to the price fluctuations. Elasticity of demand characterizes supply sensitivity to the price fluctuations (Colander 142).
In this example we could expect that the reaction for supply fluctuations would be neutral if the price remains on the level of $106 for a barrel, weak if the price would increase up to $120 for a barrel, and strong if the price would increase up to $150. As a whole, demand for oil resources could be called inelastic because oil is an energy source and is in a great need for industrial production while alternative resources are not widely used. If the price would substantially grow, the government is to subsidize the industrial production. Otherwise high oil prices would influence the value of the final product. This change could bring significant social consequences.
3. Perfect Competition
Lately, China has become one of the most developed countries of the world and its welfare is still growing. China exports a lot and the United States is one of the largest customers. It was the global largest exporter in 2009. The country succeeded in developing the biggest auto market in 2009 despite of being known as the producer of third rate garments not so long ago. In addition, China is the largest foreign holder of the U.S. debt. Some of the experts foresee G2 (U.S. and China) instead of G7 in the nearest future (La Monica n.p.).
Perfect competition is an idealized economic model when buyers and sellers cannot make an impact on the price but they could form it by generating demand and supply. This is a type of the market structure where buyers and sellers adapt to the balanced market conditions (Colander 242).
Perfect competition is characterized by several features, such as unlimited quantity of buyers and sellers, homogeneity and divisibility of the commodities, absence of barriers for admission or leaving the market, high mobility of factors of production, and equal admission to the information for all participants. The situation when an absence, non-compliance with one of these features or artificial removal of these features is called “unfair competition” (Colander 242).
Some of the developing countries (China, India) showed an increasing economic growth, thus becoming serious competitors for some of the developed countries in the world market. If there were no perfect competition in the world market, China would never become the largest exporter. As the world market tends to perfect competition, there were no barriers for China on the way to the global market and, as a result, to the country’s welfare. China accepted capitalism and succeeded in developing strong national economy.
Federal Trade Commission and the European Union inquired regarding Google’s practices. The main point of concern is that Google is dominating Internet searches and online advertising that makes the company a monopolist in this market. Google was accused in illegally abusing its power in the search market, thus the government officials began investigate the firm (Yang n. p.). Washington officials claim that the activity of the search company is drawn under the scope of the antitrust law. As Google has several branches (mapping, travel, and shopping) beyond its main search engine, the company promoted its own content in the Internet. This has become the main antitrust argument against Google. Google assured that users are free in their choice of a search engine and placing its own results higher than the results of other companies the company was trying to provide the customers with the information faster than its competitors (Yang n. p.).
Monopoly is the situation in the market where one firm is operating without substantial competition or providing services which do not have close substitutes (Colander 265). In the Google case the monopoly was suggested to be artificially created. Google used its privilege of the main provider of the search engine putting its advertisement in the best places. Such actions can be qualified as using company’s monopolistic right to achieve its goals which contradict antimonopoly law. Monopoly is prohibited in order to provide customers with the best quality commodities and freedom of choice. Antitrust law is designed to prohibit anti-competitive behavior and unfair business practices. The majority of the corporations attempt to create monopolies in order to provide them with super profits despite of antitrust legislation. The operational activity of some corporations, such as Monsanto, Phillips, Microsoft, Coca-Cola or Wal-Mart, possesses the signs of monopoly and is drawn under the scope of antitrust law.
5. Monopolistic Competition
At the present Nokia is the leader in the smartphone market. It competes several companies in this market, among them Apple, Google, Motorola, Samsung, and HTC. Citing Mr. Elop, Nokia Chief Executive, the introduction of two new smartphones (Lumia 800 and Lumia 710) is expected to be “a new dawn for Nokia” (Chapple and Goldman n.p.). This is the first smartphone having Windows Phone operating system (company’s own software). Smartphone market is a highly competitive market based on implementing innovations. Nokia is supposed to gain another competitive advantage due to the partnership with Microsoft. Nokia did not settle an issue of selling its new smartphones in the USA since the company’s presence in the USA was severely diminished for some time (Chapple and Goldman n.p.).
Monopolistic competition is the form of competition which is the closest to perfect competition market model. It is also the most difficult structure to study. The majority of the world companies can be called monopolistically competitive (Colander 283).
Most of the features of perfect competition go very well with the monopolistic competition. Monopolistic competition is characterized by the following features: every firm possesses certain power over its products on the condition of the products differentiation, i.e. increase or decrease of the price despite of competitors’ activity. This power is limited by the presence of a large quantity of firms producing the same product and by a significant freedom of the market admission of other firms (Colander 289).
There are several main competitors in the smartphone market which constantly introducing new products to gain a larger market share. Entering the smartphone market with new product is a response to the issuance of iPhone4S produced by Apple.
Approximately 90% percent of the U.S. rail freight is controlled by four railway companies (CSX, Norfolk Southern, Union Pacific, and Burlington Northern Santa Fe). Besides, the four giant are shielded by an essential advantage: an exemption from antitrust laws. Many large companies having built their supply chain around rail complain that CSX exploits its monopolistic status constantly increasing prices for its services. Prices declining since 1980 had suddenly begun grow. In accordance with data provided by Scott Group (analyst at freight research), the annual growth of prices was about 6% in comparison with truck (1% per year) and air (2% per year) freight (Kimes n. p.).
Oligopoly is the type of the market structure which is characterized with the presence of imperfect competition where a certain number of firms are dominating and competing each other. Oligopolistic market consists of several buyers which are sensitive to each other marketing and pricing policy. Relatively small number of participants can be explained by the fact that other candidates experience difficulties entering oligopolistic market. A firm-participant of oligopoly could be both a price-maker of a price-taker. Contemporary capitalism is considered oligopolistic (Colander 295).
Oligopoly helps overprice the services as the new entrants are uncompetitive. It gives the possibility to set and regulate the prices for goods and services inside oligopoly thus making super profits. Surprisingly, antitrust laws do not consider oligopoly as monopoly disregarding strong evidence of monopolistic features. An excessive protectionism contradicts with the main principles of fair competition. Despite of 20 attorneys have protested the railroad exemptions, the exemptions were blasted as “naked economic protectionism” by the American Bar Association’s Section in 2008. It is obvious that antitrust law need to be revised in accordance with the latest changes in the industry.
Chapple, Irene & Goldman, David. “Nokia unveils first Windows smartphones.” Economics in the News. CNNMoney, 26 Oct. 2011. Web. 27 November 2011.
Colander, David. Microeconomics. 5th ed. New York: The McGraw Hill Companies Inc, 2004. Print.
Isidore, Chris. “Fed's Lockhart: Oil shock could lead to QE3.” Economics in the News. CNNMoney, 7 March 2011. Web. 27 November 2011.
Kimes, Mina. “Railroads: Cartel or free market success story?” Economics in the News. CNNMoney, 13 Sept. 2011. Web. 27 November 2011.
La Monica, Paul R. “China: Too Big to Ignore.” Economics in the News. CNNMoney, 11 Jan. 2010. Web. 27 November 2011.
Pepitone, Julianne. “Good news, coffee lovers: Your buzz is getting cheaper.” Economics in the News. CNNMoney, 24 Aug. 2011. Web. 27 November 2011.
Yang, Jia Lynn. “Google faces antitrust glare on Capitol Hill.” Economics in the News. CNNMoney, 21 Sept. 2011. Web. 27 November 2011.