To receive full credit for each question, your answers must be at minimum 15 sen

Question

To receive full credit for each question, your answers must be at minimum 15 sentences long, it must answer every part of the question, it must include economic concepts that were taught in class and where necessary provide real world examples and empirical data. You must also explain your conclusions. Let me repeat, an answer that only states a conclusion and does not explain how you got to that conclusion will be marked down. Your answers must be in your own words. Do not plagiarize. You may work in groups, use the textbook, your notes, lecture notes posted on blackboard, the internet, articles and books, or other sources that you might find useful. However, if you are using an idea by someone else, you must cite her or him in the exam and add a reference page although you are not required to cite.

Question — What is the Structure/Organization of Our Economy?

Perfect (Pure) Price Competition and No Economic Power Or Oligopoly and Economic Power

What is a perfect (pure) price competition model and what are its assumptions? Explain in detail how the price competition model is supposed to work, its process and the outcome (this includes many components relating to the quality of goods, the type of ‘playing field’ that production and price competition takes place on, consumer sovereignty, etc.). Does this model hold logically and empirically? Explain.
From the heterodox perspective, how does an oligopolistic competitive market work in the real world? Include the assumptions behind this perspective. Does this model hold logically and empirically? Explain. Why does the prevalence and dominance of positive feedbacks support an oligopoly structure over a perfect (pure) price competitive structure (include readings)? Why is it that oligopolistic firms do not compete over price and find it advantageous to collude and fix prices (a recent case involved Procter & Gamble and Unilever, 2011)? Note here that fixing prices is the exact opposite of a perfect price competition model.

What is the ‘logic’ of the production system (i.e., M-C-M’ or C-M-C’) from the orthodox and heterodox perspectives and what does this have to do with the structure/organization of our economy? Explain the difference between these two logics. Given the logic of each, what drives the economy forward (i.e. gets it moving) from these perspectives, supply or demand? Explain the process of both.

Explanation / Answer

Perfect price competition model:

This is also known as the market of perfect competition where there are large numbers of sellers and buyers, free entry and exit, and have identical products.

There are five assumptions in this model:

1. Price taker: Since there are many buyers, the purchasing decision of any of them has no impact on the prevailing price of product in the market. They have to accept that prevailing price. Therefore, the buyers are price taker.

2. Sellers are price taker too, since they also don’t have any impact on the market prevailing price.

3. Identical products: In this market the products are identical or homogeneous. It means all sellers are producing the same products like wheat market, edible oil market, etc.

4. Free entry and exit: There is no restriction on entry and exit of sellers and buyers in the market.

5. Perfect information: It is assumed that sellers and buyers have perfect information of the market.

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