Monopolistically Competitive Markets and Gains From Trade Essay

As a result, this contributes to concentration of the buyers industry. Besides this, the buyers have high switching cost in this industry. As a result, the industry is more profitable when the buyers have low bargaining power which means the buyers are unable to affect the setting of prices in the industry.

There is no doubt that increasing in international trade is supporting the economic growth across the world, raising incomes and creating jobs. However, international trade can also some create economic obstacles, such as the international context and the market policy and regulations of each country, and consequently it can be said that the effects would have positive and negative sides, and it is useful to mention all of them and to take them into consideration.

Monopoly is a single firm that controls the market of a given product. In a monopoly there is an absence of competition, which results in high prices and inferior products. Because there is an absence of competition and the firm has total domination of the market, the demand curve in the entire market for the good is equal to the demand for the individual firm’s output. A key characteristic of a monopoly is the individual’s firm downward sloping demand that shows that the firm has some market power. Market power is the ability to control price without losing market share. A monopoly’s profit maximization is achieved when marginal cost equals marginal revenue.

The country can maximize their wealth by putting the resources in the most competitive industries. Government created comparative advantage rather than free trade because now easier moves the production processes and the machines into countries that can produce more goods (Yeager & Tuereck, 1984). However, many countries now move to new trade theory suggests the ability firms to limit the number of competitors associated with economic scale (reduction of costs with a large scale of output) (Krugman, 1992). The comparative advantage occurs when two-way trade in identical products, it will useful where economic scale is important, but it will create problem with this model. As a result, government must intervene in international trade for protection to domestic firms (Krugman, 1990)

Countries are enabled by free international trade to specialise or to focus in the production of the goods in which they have a comparative advantage. Specialisation countries can take the benefit of efficiencies generated from increased output and economies of trade. The size of the firm’s market are increased by the international trade which results in lower average costs and increasing in productivity, as it ultimately leads to increase in production.

Since David Smith introduced the theory of the free market force known as the invisible hand in The Wealth of Nations, the argument for free trade was levied against the argument for protectionism. Smith believed that by providing people the freedom to produce and trade as they please, with limited government interference, enlightened self-interest would provide prosperity for all (Smith, 1937.) In Scotland, quality grapes had to be grown in hothouses, while grapes in France did not, which provided France a comparative advantage. Heating Scottish grapes made them more expensive than French grapes. But Scotland did have an abundance of wool which could be traded for grapes. Tariffs on French grapes would cost the Scottish consumer more as well as introduce inefficiency. Countries can enjoy higher levels of consumption if they produce the goods that they are relatively efficient at producing and import to goods that they are relatively inefficient at producing (Inside, 1994.) Specialization in activities that provide a comparative advantage is beneficial when a country produces what it produces best, keeping some for consumption and trading the rest. Even though protectionism advocates believe it is necessary to protect national security, save jobs, and help strategic infant industries, the

The model of monopolistic competition describes a common market structure in which firms have many competitors, but each one sells a slightly different product. If there was no differentiation, the competition would turn into perfect competition. In effect, monopolistic competition is something of a hybrid between perfect competition and monopoly. Comparable to perfect competition, monopolistic competition contains a large number of extremely competitive firms. However, comparable to monopoly, each firm has market control and faces a negatively-sloped demand curve. Monopolistic competition as a market structure was first

Market structure is best described as the authoritative and different parts of a business sector. A perfect competition industry framework is one that involves various little venders and purchasers while a monopolistic competition relates to an industry foundation that has attributes of rivalry and imposing business model. A pure monopoly model industry base contains a solitary maker or supplier of an item or an administration that has no nearby substitutes while Oligopoly is an industry framework that is commanded by a set number of firms that capacity autonomously of each other.

Monopolistic competition in the market structure has many businesses selling similar but none identical products with free entry into the industry businesses are competing against each other. The businesses in this industry have some control over the prices they charge but with none of the company’s being big enough to make a difference to the prices over the whole industry. Businesses must find themselves quickly in the market to know if they are going to profit or loose from their investment. Advantages for monopolistic competition in the market are with no entry barriers disadvantages for monopolistic competition it because they have some power over the market they can rise or lower their prices.

Free trade is something that WTO encourages globally and insists that no government interference should take place in international trade and that this will be followed by specialisation and an increase in countries welfare. Countries however want a competitive advantage and to obtain this interference takes place in the form of restrictions. Most highly competitive countries are well-off economically, has respectable infrastructure, high levels of education and technology, steady political and social status and strong international positioning. Restrictions are set in motion for several reasons, all of them follow.

In a matter of three years, ranging from 1839 to 1842, China and Britain go head to head in all out battle for the use of drugs, and a favorable balance of trade. This certain drug is called Opium. Opium has a very addictive ingredient in it that China was very observant about at their time. China was so observant that their emperor decided to expose the Western Countries, and China decided to ban all use of Opium in their country. Although a problem arose, Britain needed a favorable amount of trade, and China at the time had most of Britain's silver that Britain was looking to grasp out of China’s own jaws. The following events took place during the Qing Dynasty.

In this type of market structure there are many buyers and sellers, and the organization can easily enter and exit the market. Instead prices are determined by market supply and demand. Also, in this type of market, businesses can’t control prices hence the output of the business is controlled deeply in a frame to make profit. Last but not least, in the perfect competition market, consumers are expected to receive goods at a much lower price than in any other market

In other cases, the limited number of firms in the market is determined by a competitive interaction. This interaction can lead to non-competitive situations as firms adopt strategic behaviors that allow them to remain in the market to the detriment

Perfect competition brings out the idea of traditional trade theory and free trade is seemed the optimal policy. However the theory did not applied perfectly in the reality of international trade, which masses of intra-industry trade and trade between similar countries are under imperfect competition. (Brander, 1995) Therefore the idea of strategic trade policy arises. In this essay game theory and oligopoly theory are going to be used to illustrate the application of government intervention to support domestic firms. Moreover, the impact of government intervention in international trade under perfect competition will be outline for a comparison with that of imperfect competition, and an insight of to what extent the game theory and oligopoly theory support a greater degree of government intervention in international trade will be shown.

The international trade of goods across the world accounts for approximately 60% of the world Gross Domestic Product (The World Bank, 2014). A great proportion of goods transactions occur every second. The primary question is whether international trade benefits a country as an entirety, and, if so, why would a country implement protective trade policies to restrict particular exports? To address this question, this essay aims to explore the impact of trade on various economic stakeholders, including consumers, producers, labour and government and, furthermore, will compare models and theories with reality to ascertain the true winner/ loser in the international trade market.