Macrodynamics studies the evolution of the macroeconomy over time.

The macroeconomy is assumed to evolve from an initial state towards a steady state,
encountering exogenous
shocks as it does so. These shocks can be studied using comparative statics and
dynamics to come up with
policy proposals to help the economy deal with these shocks in the future.

• Consumer surplus is the difference between the total amount that consumers are willing
and able to pay for a good or service (indicated by the demand curve) and the total amount
that they actually pay (the market price).
• Producer surplus is the difference between what producers are willing and able to supply a
good for and the price they actually receive. The level of producer surplus is shown by the
area above the supply curve and below the market price.

• This is the difference between the price a consumer is willing to pay and the price he actually
pays.

• For example if you were willing to buy a computer game for £50, but can buy it for £15 in the
sales your consumer surplus is £35

• Consumer Surplus is therefore the difference between the Demand curve and the market
price

Producer Surplus
• This is the difference between the price a firm receives and the price it would be willing to sell
it at.

• Therefore it is the difference between the Supply curve and the market price

The benefit surplus received by a consumer or consumers in a market. The difference between
the maximum price a consumer is willing to pay for a product and the actual price.

• Consumers gain a greater total utility in dollar terms (total satisfaction)

*Utility Surplus arises because consumers pay the equilibrium price when they are willing to pay
more

*Before equilibrium, any additional product purchased would increase total utility (as the utility is
greater than the cost)

*Total consumer surplus=sum of individual consumer surplus

•
Producer Surplus:
• The benefit surplus received by producers in markets. The difference between the actual
price a producer receives and the minimum acceptable price.

There is a direct relationship between equilibrium price and the amount of producer surplus.
Household income is a measure commonly used by the United States government and
private institutions, that counts all the income of all residents over the age of 18 in
each household, including not only all wages and salaries, but such items as
unemployment insurance, disability MONETARY POLICY :
MONETARY POLICY Monetary policy refers to the credit control measures adopted by the central bank of a
country to influence the level of aggregate demand for goods and services or to influence the trends in certain
sectors of the economy. Monetary policy operates through varying the cost availability of credit. There variations
affect the demand for . And the supply of credit in the economy, and the nature of economic activities.

OBJECTIVE OR GOALS OF MONETARY POLICY :

OBJECTIVE OR GOALS OF MONETARY POLICY Full Employment:- one of the objectives of monetary policy is
attain full employment. It is not only because unemployment leads to wastage of potential output. But also
because of the loss of social standing and self- respect. It also breeds poverty.

Contd…… :
Contd…… Price stability :- Another objective of monetary policy is to stabilize the price level. Both , rising and
falling prices are bad as the bring unnecessary loss to some and undue advantage to others. They are
associated with business cycles. So a policy of price stability keeps the value of money stable, eliminates cyclical
fluctuations. Brings economic stability, helps in reducing inequalities of income and wealth, secures social justice
and promotes economic welfare

Contd… :
Contd… Economic growth :-monetary policy can be imposed to influence the rapid economic growth. Economic
growth is defined as “the process whereby the real per capita income of a country increases over a long period of
time “it is measured by the increase in the amount of goods and services produced in a country. A growing
economy produces more goods and services in each successive time period. Thus, growth occurs when an
economy’s thus, economic growth implies raising the standard of living of the people, and reducing inequalities of
inequalities of income distribution.

Contd….. :
Contd….. Balance of payments:- another objective of monetary policy since the 1950s has been to maintain
equilibrium in the balance of payments. It is also recognized that deficit in the balance of payments will retard the
attainment of other objectives. This is because a deficit in the balance of payment leads to a sizeable outflow of
gold,

Role of monetary policy in a developing economy :

Role of monetary policy in a developing economy Monetary policy plays an important role in increasing the
growth rate of the economy by influencing the cost and availability of credit by controlling inflation and
maintaining equilibrium in the balance of payments.

To control inflationary pressures :

To control inflationary pressures To control inflationary pressures, monetary policy requires the use of both
quantitative and qualitative methods of credit control. The open market operations are not successful in
controlling inflation in underdeveloped countries as the bill market is small and undeveloped.

Contd….. :
Contd….. The use of variable reserve ratio is more effective than open market operations and bank rate policy in
LDCs. Since the market for securities is very small, open market operations are not successful. but a rise or fall
in the variable reserve ratio by the central bank reduces or increases the cash available with the commercial
banks without affecting adversely the prices of securities.

To achieve price stability :

To achieve price stability Monetary policy is important for achieving price stability. It brings a proper adjustment
between the demand for and supply of money. An imbalance between the two will be reflected in the price level.
A shortage of money supply will hamper the growth while an excess will lead to inflation. As the economy
develops the demand for money increases due to the gradual monetization of the non-monetized sector, and the
increase in agricultural and industrial production. This will increase the demand for transactions and speculative
motives. So the money supply will have to be raised more than proportionate to the demand for money, to avoid
inflation.

To bridge BOP deficit :

To bridge BOP deficit Interest rate policy plays an important role in bridging the BOP deficit. Underdeveloped
countries develop serious balance of payments. To establish infrastructure like power, irrigation, transport etc…
and directly productive activities like iron and steel, chemical, electricals, fertilizers , etc, underdeveloped
countries have to import capital equipment, machinery, raw materials, spares and components thereby raising
their imports,
Interest rate policy :
Interest rate policy High interest rate in an underdeveloped country acts as an incentive to higher savings
develops banking habits and speeds up the monetization of the economy which are essential for capital
formation and economic growth. a high interest rate policy is anti inflationary in nature, for it discourages
borrowing and investment for speculative purpose, and in foreign currencies

To create banking and financial institution :

To create banking and financial institution One of the monetary policies in an underdeveloped country is to create
and develop banking and financial institution to mobilize and channelize saving for capital formation.
establishment of branch banking in rural areas and urban areas should be encouraged. It will help in monetizing
the non-monetised sector and encourage saving and investment for capital formation.

Debt management :
Debt management It is one of the important function of monetary policy in an under developed country it aims at
proper timing and issuing of government bonds, stabilizing their prices and minimizing the cost of servicing the
public debt. The primary aim of debt management is to create conditions in which public borrowing can increase
from year to year borrowing is essential in order to finance development program and to control the money
supply.

GDP or Gross Domestic Product is usually defined as the `the monetary value of the
all finished goods and services produced in a certain geographical area during a
certain time period'.

Of course, `a certain geographical area' refers to a country and `a certain time

period' more often than not refers to a financial year though GDP is also measured
for every quarter.

The financial year, in the case of India, refers from April to March (for example, April
2007 to March 2008), while in the US it is from January to December. In essence, it
is the size of the economy. One thing that should be remembered is that this GDP is
measured using market prices.

The three components that make up GDP are agriculture, industry, and services. For
example, if there are three items in agriculture, two in industry and 10 in services.
Now imagine, they all sold for Rs 10 each. Now add them all up and one would get
Rs 150.

That would be the GDP for the country. Of course, in the real world, there are
millions of goods and services. Another way of measuring GDP is through the
following equation: GDP = C + I + G + NX where `C' is personal consumption and
includes the expenditure of households on different items such as food and medical
expenses. `I' refers to investments in machinery, building new houses, buildings
etc.

It should be remembered that investment does not refer to investing in shares or

bonds. `G' is government spending and includes money spent on paying
government employees, as also investment expenditure by the government such as
on roads.

However, it does not include transfer payments such as retrials and subsidies. `NX'
means net exports and is simply exports less imports. Therefore, if imports are more
than exports, then `NX' would be negative and vice-versa.

GDP is the most important macroeconomic number but what one should really look
out for is the real GDP growth number. `Real', as opposed to nominal, means that it
is adjusted for inflation. The GDP growth number tells us about the strength of the
economy or how well it is performing.

It tells us whether an economy is growing from strength to strength or if it is

faltering. Of course, GDP growth rates never stay the same. Sometimes, they are
high, sometimes low, sometimes positive and sometimes negative.

There are many factors that affect GDP growth and they can be government policies,
people spending more or less, the level of investment. Of course, various factors
affect these factors.

For example, in India, the government has put in place some sensible policies to
help the economy.

Now people, outside India as well as inside, see the potential in the country and
start to invest more. Because of this people earn more money. They now spend this
money on buying clothes. The clothes manufacturer makes more clothes and she
pays her employees more. Those employees then spend their money on other
goods.

This build a whole virtuous cycle. One can actually now see the effect of this virtuous
cycle when one looks at the rate of growth of India's GDP. On the other hand if the
government had bad economic policies, the exact opposite of the above would have
happened.

If there is one factor that can make or break an economy, it is certainly how good or
bad the government economic policies are.

It doesn't take rocket science to figure this one out. Look at India, China, and Brazil
and one sees strong economic growth and then see countries such as Zimbabwe,
Venezuela and one can see the effects of poor economic policies.

It is from this government policy that things such as consumer confidence, investor
confidence and every other kind of confidence rise.

SUNIL RONGALA (The author is Economist, Murugappa Group. The views expressed
are personal. Send in your queries on economics to Whackonomics@gmail.com

Oligopoly is a market structure containing a small number of relatively large firms that
often produce slightly differentiated output and with significant barriers to entry.
Monopoly is a market structure containing a single firm that produces a good with no
close substitutes and with significant barriers to entry. While it might seem as though
the difference between oligopoly and monopoly is clear cut, such is not always the case.

A comparison between these two market structures is bound to be illuminating.

• One or Few: The primary difference between oligopoly and monopoly is that
monopoly contains a single seller, whereas oligopoly has two or more sellers.
Such a difference might seem to provide a clear separation. But not necessarily.
• Substitutes: In some cases, the difference between oligopoly and monopoly is
blurred by the closeness of substitutes. A monopoly produces a good with NO
close substitutes. An oligopoly firms produces a good with a small number of
relatively close substitutes.
 However, the oligopoly-monopoly difference is blurred if an oligopoly firm pursues
product differentiation to such an extent that it creates a product with no close
substitutes. As such, the oligopoly moves closer to monopoly. For example,
Microsoft was once one of several oligopoly software companies. However,
continued modification and enhancements of its software increasingly reduced the
degree of substitutability with other software, moving it closer to monopoly
status.

Alternatively, changes in the goods produced by other firms can make the good
produced by a monopoly good more of a substitute. As such, the monopoly firm
becomes more of an oligopoly. For example, AT&T once held a nationwide
monopoly on telephone services. Technological advances, such as cellular
telephones, allowed other firms to offer increasingly close substitutes, moving
AT&T to oligopoly status.
• Cooperation: The dividing line is also blurred between oligopoly and monopoly
due to cooperation and collusion. The small number of large firms in oligopoly
creates an opportunity and an incentive to cooperate rather than compete. Doing
so can effectively transform an oligopoly industry into a monopoly. The industry
might contain more than one firm, but those firms act as one.

The business world is full of words ending in -opoly. Many people know what monopoly means; it
was the basis for a popular board game and high-profile antitrust lawsuits, after all. Oligopoly is
another word that is common in business, though with which not quite as many people are
familiar. This article will explore some differences and similarities in monopolies and oligopolies,
as well as some of their benefits, considerations and examples.

Function

1. A monopoly, as many people know, is a market condition in which only one vendor
(usually a large corporation) is in play. There may be other somewhat similar
businesses, but a monopoly exists when only one business or individual can provide a
product or service. In an oligopoly, the product or service may be available from more
than one vendor or merchant, but only a few big players dominate the market and make
competition very difficult for new entries in the field.

Examples

2. Examples of monopolies are difficult to produce, as federal antitrust regulations

prohibit monopolistic market conditions in the United States. Regardless of legal issues,
though, monopolies do exist, primarily in the utilities market. Electricity, for example, is
generally available from only one "electric company" in any given market. Water and
cable television are equally exclusive. During the 1990s, Microsoft commanded such a
large portion of the computer operating system environment, and demonstrated such a
propensity to absorb upstart competitors, that it was believed to be a monopoly as well.

Examples of oligopolies are considerably more plentiful. The automotive industry, for
example, has many competitors but is dominated by General Motors, Ford, Chrysler,
Honda, and Toyota. Breakfast cereal is also such an excellent example of oligopoly that
it is often used in teaching the concept to Junior Achievement students; while the market
is open to many competitors, almost all breakfast cereal -- in the United States, at least
-- is manufactured by General Mills, Post or Kellogg.
 Similarities

3. While monopolies and oligopolies are representative of considerably different market

conditions, they do bear some important similarities. Consumers are at a distinct price
disadvantage in both conditions, as prices for products are dictated by a single company
in a monopoly environment and commanded by only a few select merchants in an
oligopoly condition. Selection is similarly limited as products are designed and offered by
a very limited consortium in both arrangements.

Differences

4. Despite their similarities, there are some distinct differences between monopolies
and oligopolies. While a monopoly does severely restrict consumer choices, oligopoly
conditions do allow for some competition among the major players. This competition can
even induce price wars, as has been demonstrated by fast-food giants, automotive
manufacturers and even cola companies. The most significant difference, however, is
that oligopolies are a common market condition while monopolies are forbidden under
federal regulations.

Considerations

5. Oligopolies and monopolies, for all their similarities and differences, both dictate a
considerable market disadvantage for consumers. In both environments, consumers
have little choice but to buy the products or services offered by the one or few
companies and complete the transaction at whatever price was set by the organization.
An ideal free market economy, the type commonly associated with capitalism, puts the
consumer in charge by eliminating the influence of major monopoly or oligopoly players.

Get a Widget for this title

Differences between pure monopoly and an

oligopoly
• Top Article

1 of 1
Write now Article Tools

by Nita Tyson

When one company in an industry has become so large and strong that it chokes out its
competition and ends up as the sole service provider in the industry, a monopoly has been
created. An oligopoly appears similar on the surface since there may be only two or three
service providers and little competition. When you look deeper, however, these two forms
come from radically different market conditions. Monopolies exist because the free market
has been choked out. Oligopolies exist only in a free market. In a monopoly, the sole provider
names its price, because no one is around to compete with them. In an oligopoly, the service
providers usually set up a friendly competition to try and increase demand for the product
type in general.
 The government tries to keep a close eye on monopolies, but it doesn't usually regulate
oligopolies as closely. After all, the purpose of the oligopoly is to keep the market flowing,
while the purpose of the monopoly is to choke the market out. It benefits the government to
allow oligopolies a little more freedom.

Many times, a monopoly will develop because one company gets bigger and bigger and can
offer many more advantages than smaller companies. The more small businesses the
monopoly drives out, the more cost advantage there is to dealing with the monopoly.
Eventually, the strongest company 'wins' and the consumer loses (in terms of choice). It is
important to note, however, that the reality is that the consumer really may have gotten better
service or better products from the larger company. Eventually the government breaks up the
monopoly, opening up choices. An example of this was in the break up of the Bell Telephone
systems many years ago, when the government broke up Ma Bell into a bunch of smaller
companies. The consumer may have had more companies to choose from, but they paid for
the choices in higher service fees and poor technical service. Clever readers are probably
thinking "Wal-Mart" at this point, and wondering if a monopoly will develop and if Wal-
Mart will put all the smaller chains out of business.

In an oligopoly, the companies compete and drive up each other's value. A good example of
this is the competition between Coke and Pepsi. In creating a friendly if somewhat artificial
competition, Coke and Pepsi drew attention to soda products and essentially opened the
market to smaller competitors. The price for sodas dropped and the variety increased
exponentially. Both companies and consumers "won" in this competition.

Monopolies can also develop as a result of governmental manipulation of the market. An

example of this is the United States Postal Service (USPS), which is technically a private
company chartered by the US Government to provide mail services. Only the USPS is legally
allowed to deliver the US Mail, and competitors such as FedEx and UPS can only technically
deliver packages

A simple circular flow model of the macroeconomy containing two sectors (business and
household) and two markets (product and factor) that illustrates the continuous
movement of the payments for goods and services between producers and consumers.
The payment flow between the two sectors and two markets is conveniently divided into
four segments representing consumption expenditures, gross domestic product, factor
payments, and national income. More advanced models containing additional flow
segments are two-sector, three-market circular flow; three-sector, three-market circular
flow; and four-sector, three-market circular flow.

The two-sector, two-market circular flow model is the simplest way to show the
inherent interrelationship between producers and consumers in the macroeconomy. It
illustrates that actions by producers necessarily affect consumers and that actions by
consumers necessarily affect producers. In particular, it illustrates that payments do not
vanish from the macroeconomy, but are merely passed along. It shows that the expense
of one sector is the revenue of another.

Two Sectors, Two Markets

The two macroeconomic sectors included in this model are:

 • Household Sector: This includes everyone, all people, seeking to satisfy
unlimited wants and needs. This sector is responsible for consumption
expenditures. It also owns all productive resources.
• Business Sector: This includes the institutions (especially proprietorships,
partnerships, and corporations) that undertake the task of combining resources
to produce goods and services. This sector does the production. It also buys
capital goods with investment expenditures.

The two macroeconomic markets in this basic version of the circular flow are:

• Product markets: This is the combination of all markets in the economy that
exchange final goods and services. It is the mechanism that exchanges gross
domestic product. The full name is aggregate product markets, which is also
shortened to the aggregate market. The Basic Circular Flow
• Resource markets: This is the
combination of all markets that exchange
the services of the economy's resources,
or factors of production--including,
labor, capital, land, and
entrepreneurship. Another name for
this is factor markets.

Circulating Around

This diagram presents the simple two-sector,

two-market circular flow. At the far left is the
household sector containing people seeking
consumption. At the far right is the business
sector that does the production. At the top is
the product markets that exchange final goods
and services. At the bottom is the resource
markets that exchange the services of the
scarce resources.

• Gross Domestic Product: Consider first the upper right-hand segment of the
circular flow between the product markets and the business sector. This is the
revenue received by the business sector for the production of goods and services,
what is officially termed gross domestic product (GDP). Click the [Production]
button to illustrate this flow.
• Factor Payments: Moving clockwise with the flow, the lower right hand segment
between the business sector and the factor markets is factor payments. These
are payments to the owners of labor, capital, land, and entrepreneurship for the
productive services they provide. Factor payments can be divided into specific
items depending on the resources involved, including wages, interest, rent, and
profit. Click the [Factor Payments] button to illustrate this flow.
• National Income: Continuing clockwise to the lower left hand segment between
the factor markets and the household sector is national income. Definitionally
speaking this is the income earned by the factors of production, which are owned
by the household sector. Click the [Income] button to illustrate this flow.
• Consumption Expenditures: The last segment of this flow, between the household
sector and the product markets in the upper left hand corner, is consumption
expenditures. These are expenditures made by the household sector for the
 purchase of gross domestic product. Click the [Consumption] button to illustrate
this flow.

Circulating Equality

Two points are worth emphasizing:

• First, the flow between sectors and markets circulates. Gross domestic product is
used for factor payments, which becomes national income, which is used for
consumption expenditures, which buys gross domestic product, which is used for
factor payments, which becomes national income, which is used for consumption,
which is... And on it goes.
• Second, all four segments in this two-sector, two-market circular flow circular
flow--gross domestic product, factor payments, national income, and
consumption--are equal. The revenue received from selling gross domestic
product is used for factor payments. The factor payments become national
income. The national income is used for consumption. This consumption is then
used to buy gross domestic product... And on it goes.

Other Models

This two-sector, two-market circular flow is a simple model of an exceedingly complex

economy. More realistic and more complex models are available. The other models are:

• Two Sectors, Three Markets: A second version of the circular flow model adds the
financial market',500,400)">financial markets to the basic model. This addition
illustrates how saving is diverted from the household sector to the business
sector to finance investment expenditures.
• Three Sectors, Three Markets: A third version of the model includes the
government sector. This model highlights the importance of taxes, which are
also diverted from household sector income and used to finance government
purchases.
• Four Sectors, Three Markets: The most comprehensive circular flow model
includes the foreign sector. Adding the foreign sector highlights the role of trade
with the rest of the world, especially exports and imports.