Question #1:

What do you understand by the monopoly and oligopoly markets? How do firms behave in
these two types of markets?

Answer:

Monopoly Market

It is a type of market where is only one seller selling his product with no close substitute and
strong barrier to entry.

For example:

 Railway
 Electricity
 Natural Gas
 Microsoft and Windows
Features of monopoly:

 One seller and large number of buyers

 No close substitute of the product
 Strong barrier to entry
 Price discrimination
 Price Maker firm
 Downward sloping demand curve

One seller and large number of buyers

In a monopoly market, usually, there is a single firm which produces or supplies a particular
product/ commodity. It is fair to say that such a firm constitutes the entire industry.

e.g Microsoft and Windows

No close substitute of the product

Usually, a monopolist sells a product which does not have any close substitutes e.g. electricity
have no close substitute.

Price Maker

Since there is only one firm selling the product, it becomes the price maker for the whole
industry. The consumers have to accept the price set by the firm as there are no other sellers or
close substitutes.

Barriers to entry

Barriers to entry discourage competitors from entering the market. These barriers include:
economies of scale that lead to natural monopoly, control of a physical resource legal restrictions
on competition by using patent, trademark and copyright protection. A natural monopoly arises
when economies of scale persist over a large enough range of output that if one firm supplies the
entire market, no other firm can enter without facing a cost disadvantage
Price discrimination

A monopolist can use his single selling power in any manner to realize maximum revenue. This
includes price discrimination.

e.g in railway they charge different prices from different class of passenger like if you travel
from point to A to B in economy class they charge Rs.80 but if you travel same distance in first
class you need to pay Rs.200 for this

Downward sloping demand curve

Usually, a monopolist sells a product which does not have any close substitutes. Therefore, the
cross elasticity of demand for such a product is either zero or very small. Also, the price
elasticity of demand for the monopolist product is less than one. Hence, in the monopoly market,
the monopolist faces a downward sloping demand curve.

Diagram Asad kindly made this diagram

Oligopoly markets

Oligopoly is a form of imperfect competition and is usually described as the competition among
a few. Hence, Oligopoly exists when there are two or more than two sellers in a market selling
homogeneous or differentiated products. A good example of an Oligopoly is the cold drinks
industry.

There are two types of oligopoly Collusive and Competitive.

Collusive

This occurs when few firms come to an understanding with respect to the price and output of the
products.

Non Collusive

This occurs when there is a lack of understanding between the firms and they invariable compete
with each other.

Features of Oligopoly:

 Few firms
 Interdependence
 Selling cost
 Barrier to entry
 Formation of cartel
 Non price competition
 Nature of product
Few Firms

There are only few firm operate in this market like Car Makers and Aero plan maker firms

Interdependence of firms
Companies will be affected by how other firms set price and output.

Selling Cost

It is a cost incurred to promote and market products to customers. Any expense that is associated
with selling a good or making a sale is considered a selling expense.

Barriers to entry

In an oligopoly, there must be some barriers to entry to enable firms to gain a significant market
share. These barriers to entry may include brand loyalty or economies of scale. However,
barriers to entry are less than monopoly.

Formation of Cartel

A cartel is an agreement among competing firms to collude in order to attain higher profits,
where the number of sellers is small and the products being traded are homogeneous. Cartel
members may agree on such matters are price fixing, total industry output, market share,
allocation of customers, establishment of common sales agencies, and the division of profits.

Non Price competition

In an oligopoly, firms often compete on non-price competition. This makes advertising and the
quality of the product is often important.

Nature of Products

In an oligopoly market there are two types of product one is homogeneous/perfect and second is
heterogeneous/ imperfect.

Demand Curve

In case of oligopoly market we can’t make demand curve because all firm are linked together so
who much increase/decrease in demand in the firm we can’t describe.

How do firm behave in Oligopoly Market

There is no certainty in how firms will compete in Oligopoly, it depends upon the objectives of
the firms, the contestability of the market and the nature of the product. Some oligopolies
compete on price others compete on the quality of the product.

Example of competition in Price and quality of the product

In Price

Pepsi Co. gain a large number of market share by launching a campaign named as #kis ny kaha
tha Pepsi 65 ki kr do.
Quality of the Product

Coffee market

This takeaway coffee at 99p is quite cheap suggesting a competitive oligopoly. However, for
many customers, the price of coffee is secondary to the quality and environment of the coffee
shop. Traditional coffee shops like Costa and Starbucks use more non-price competition to
attract customers as much as offering cheap prices.

In fact, there is a danger selling cheap coffee may indicate to consumers lower quality.

Question#2:

Discuss the trend of inflation in Pakistan during 2000-2019. The discussion should also
cover the causes and possible remedies of inflation. Do you see any Impact of Covid-19 on
reducing inflation in Pakistan in near future?

Answer

Inflation is a persistent change in the prices of goods and services in an economy over a period of
time. It is generally believed that persistently high inflation hurts economic growth and destroys
the value of local currency. It has a diverse effect on perceptions and expectation of different
segments of society and therefore has a differential impact on decision-making of different
economic agents. Historically, Pakistan economy has seen ups and down in inflationary trends
which shows in the below figure.
Pakistan Inflation rate in Tabular form

Year Inflation Rate %

2019 8.89
2018 5.08%
2017 4.09%
2016 3.77%
2015 2.53%
2014 7.19%
2013 7.69%
2012 9.68%
2011 11.92%
2010 13.88%
2009 13.65%
2008 20.29%
2007 7.60%
2006 7.92%
2005 9.06%
2004 7.44%
2003 2.91%
2002 3.29%
2001 3.15%
2000 4.37%
Causes and possible remedies of inflation

Pakistan is a developing country, Inflation is one of the major problems of this country and there
are different reasons for it In Pakistan the main reason of inflation is the increase in the prices of
regular items, such as wheat, sugar, ghee and other items. The government has totally failed to
control the prices of these items. Petrol price hikes is the second main cause. When oil prices are
increased it affects prices of its complementary goods too. Such as transportation fares, etc.
Thirdly, most of the industries are closed due to government policies creating unemployment.

One of the major factors that have contributed to the rise in the rate of inflation in 2018-19 is the
ongoing depreciation in the value of the rupee. Between March 2018 and March 2019, the value
of the national currency has gone down by 21 percent. Historically, on the average, a one percent
fall in the value of the rupee has meant a 0.35 percent rise in the overall Consumer Price Index
due to the increase in the landed cost of imported items. As such, due to this effect, the inflation
rate in March 2019 should be higher than March 2018 by 7 percentage points. The difference,
however, is actually just over 6 percentage points. This highlights the fact that the full impact of
the Rupee devaluation has not yet been fully transmitted into higher domestic prices. Also, the
increase in energy prices is having a cost push impact on the prices of a large number of items.
Further, the high rate of expansion in money supply, especially in currency in circulation of 16
percent, is leading also to demand-pull inflation. This has been caused by the printing of money
to finance the record level of borrowing by the Ministry of Finance from the State Bank of
Pakistan.

There is unfortunately the prospect that the process of depreciation of the Rupee will continue,
thereby sustaining a double-digit inflation for some time. As such, in the presence of growing
prices and rising unemployment, there is the likelihood that almost 4 million people could fall
below the poverty line in 2018-19 (Professor Emeritus at BNU and former Federal Minister).

Therefore, the Government must give high priority to social protection at this time of adversity.
First, there is need to raise the cash transfers to poor families by 10 percent or so under the BISP.
Second, the number of outlets of the Utility Stores Corporation must be increased substantially.

Do you see any Impact of Covid-19 on reducing inflation in Pakistan in near future?.

Yes! After raising the policy rate to 13.25% at the beginning of Fiscal Year 2020, the central
bank reduced it in 2 steps to 11.00% in March 2020 following the decline in global oil prices and
slow demand under COVID-19. Growth in private sector credit has slowed considerably.
Inflation is forecast to decelerate to 8.3% in Fiscal Year 2021 with the central bank expected to
take further policy action to both manage inflation and boost economic activity.

Conclusion:
https://www.statista.com/statistics/383760/inflation-rate-in-pakistan/