Assignment 2 Micro Economics Model Analysis Presented by: Ghulam Hassan L1F10BBAM0277 (18) Jameel Ahmed L1F10BBAM0286 (19) Rana Muzzammil L1F10BBAM2246 (35) Presented to: Prof. Fouzia Awan Micro Economics Model An Introduction: A modern economy has many different types of industries. However, an economic analysis of the different firms or industries within an economy is simplified by first segregating them into different models based on the amount of competition within the industry. Economists group industries into four distinct market structures: Pure Competition Monopoly Monopolistic Oligopoly These four market models are differ in several respects & identify how a market is made up in terms of: The number of firms in the industry The nature of the product produced The degree of monopoly power each firm has The degree to which the firm can influence price Profit levels Firms’ behaviour (pricing strategies, non-price competition, output levels) The extent of barriers to entry The impact on efficiency Characteristics of each Model Characteristics of each market model are in following table: Characteristics Pure Competition Monopolistic competition Many Firms but less than pure competition Differentiated Type of Product Standardized Products Products Some but within Control over Price None rather narrow limits Conditions of entry Very Easy Relatively easy Considerable as Non-price competition None advertising, Brand name etc… Retail, Trade, dresses, Examples Agriculture shoes etc… Numbers of Firms A very Large Number Characteristics Oligopoly Few Firms but more than Monopolistic Standardized OR Type of Product Differentiated Limited by mutual Control over Price interdependence Conditions of entry Significant obstacles Typically, a great deal, Non-price competition particularly with product differentiation Heavy products Examples industries like steal… Numbers of Firms Pure Monopoly Only One firm Unique (No close substitute) Considerable Block Mostly public relation advertising Local utilities Requirement for assignment Choose an industry of goods and services sector of Pakistan. Critically analyze the working structure of at least five firms of that industry (in case of perfect competition or monopolistic competition; three in case of oligopoly). Evaluate each firm with respect to the assumptions of micro economics model. Prove the industry full fill the characteristics of that model. Industry that we have select We have select Cement Industry to analyze this market model. At the time of independence in 1947, only one or two units were producing grey cement in the country. During the Ayub era (1958-68), the economy started to grow and the number of cement units increased to 9. During the following period of Zulfiqar Ali Bhutto all the industrial units, including cement industry, were nationalized. During the period of General Zia-ul- Haq, denationalization of industrial units boosted the investments. Thus, the number of cement units increased from 9 to 23 and finally 24. By now it has exceeded 10 million tons per annum as a result of establishment of new manufacturing facilities and expansion by existing units. There are total number of units are 23, from which 4 units are in the public sector while the remaining 19 units are owned by the private sector. Industry in the view of Model If we analyze the market model than we can easily say Cement Industry is Stand under Oligopoly Model. Let’s see a view of Oligopoly Model: to prove that the industry is stand on this model. Oligopoly Oligopoly means few sellers. In an oligopolistic market, each seller supplies a large portion of all the products sold in the marketplace. In addition, because the cost of starting a business in an oligopolistic industry is usually high, the number of firms entering it is low. As large firms supplying a sizable portion of a market, these companies have some control over the prices they charge. The main key to behaviour in an oligopoly is that companies must take into account what other companies will do. In perfect competition, firms are price-takers and can ignore other firms. In a monopoly, there is only one firm, and it does not take into account what competitors will do. Oligopolistic are torn between: 1. Cooperating to increase profits by obtaining the monopoly outcome, 2. Competing to try to gain an advantage over competitors The requirement of our assignment is critically analyze the working structure of that firm. And then evaluate each firm with respect to the assumptions of micro economics model. 1. Lucky Cement. Lucky Cement came into existence in 1996 with a daily production capacity of 4,200 tons per day, currently is an omnipotent cement plant of Pakistan, and rated amongst the few best plants in Asia. With production facilities in Pezu (Production capacity: 13,000 Tons per day) as well as in Karachi (Production capacity: 12,000 tons per day), it has the tendency to become the hub of cement production in Asia. Market share of Lucky cement is shown in this diagram: Now we evaluate the assumptions of Micro economics Market model. Numbers of Firms: As we know, that there are few firms of cement producing in Pakistan. Type of Product: Lucky cement basically produces two types of product. (1. Ordinary Portland cement 2. Sulphate Resistant Cement) and both are standardized product that produce all types of cement producing firms. Control over Price: Because Lucky cement have a great market share in Pakistan (see above chart) so it has control over price. Conditions of entry: For starting Cement producing business need a big investment. As lucky cement had invested US$ 800 Million so entry of new enterer is significant obstacles. Non-price competition: Non-price competition is particularly with product differentiation. So, this had proved that Lucky cement is stand under Oligopoly model because it had fulfilled all characteristics of this model. Like this firm is one of the few cement industries. That makes standardized OR differentiated products. This have a great share of market so have limited control over price and entry in this industry is very so, this had proven that LUCKY CEMENT is stand under Oligopoly Model. 2. D.G Khan Cement. D.G. Khan Cement Company Limited, a unit of Nishat group, is the cement manufacturing unit in Pakistan with a production capacity of 5,500 tons clinker per day. It has a countrywide distribution network and its products are preferred on projects of national repute both locally and internationally due to the unparalleled and consistent quality. It is list on all the Stock Exchanges of Pakistan. Market Share of D.G Khan can be seen at last page. Now we evaluate the assumptions of Micro economics Market model. Numbers of Firms: As we know, that there are few firms of cement producing in Pakistan. Type of Product: D.G Khan Cement also basically produces two types of product. (1. Ordinary Portland cement 2. Sulphate Resistant Cement) and both are standardized product that produce all types of cement producing firms. Control over Price: Because D.G Khan have not a great market share in Pakistan but a major player in cement industry (see above chart) so it has not control over price. But in his specialized products, firm has control over price. Conditions of entry: For starting Cement producing business need a big investment. So entry of new enterer is significant obstacles. Non-price competition: Non-price competition is particularly with product differentiation. So, this had proved that D.G khan cement is also stand under Oligopoly model because it had fulfilled all characteristics of this model. Like this firm is one of the few cement industries. That makes standardized OR differentiated products. This have a big share of market so have Limited control over price and entry in this industry is very so, this had proven that D,G KHAN CEMENT is stand under Oligopoly Model. 3. Fauji Cement. Fauji Cement Company has a strong and longstanding tradition of service, reliability, and quality that reaches back more than 13 years. Sponsored by Fauji Foundation the Company was incorporated in Rawalpindi in 1992. The cement plant operating in the Fauji Cement has an annual production capacity of 1.165 million tons of cement. The quality Portland cement produced at this plant is the best in the Country and is preferred in the construction of highways, bridges, commercial and industrial complexes. Market Share of Fauji Cement Company can be seen at last page. Now we evaluate the assumptions of Micro economics Market model. Numbers of Firms: As we know, that there are few firms of cement producing in Pakistan. Type of Product: Fauji Cement Company also basically produces only one product. Ordinary Portland cement and this is standardized product that produces all types of cement producing firms. Control over Price: Because Fauji Cement Company have not a great market share in Pakistan (see above chart) so it has not control over price. Conditions of entry: For starting Cement producing business need a big investment. So entry of new enterer is significant obstacles. Non-price competition: Non-price competition is particularly with product differentiation. So, this had proved that Fauji Cement Company is also stand under Oligopoly model because it had fulfilled all characteristics of this model. Like this firm is one of the few cement industries. That makes standardized OR differentiated products. This have a big share of market so have Limited control over price and entry in this industry is very so, this had proven that FAUJI CEMENT COMPANY is stand under Oligopoly Model. Last words Oligopolistic industries are characterized by the presence of few firms, each having a significant fraction of the market. Firms thus situated in engage in strategic behaviour and are mutually interdependent. The behaviour of any one firm directly affects, and is affected by, the actions of rivals. Products may be either virtually uniform or significantly differentiated. Various barriers to entry, including economics of scale and maintain oligopoly. This model had proved by Examples mentioned in this example include Lucky cement, D.G Khan Cement, Fauji Cement etc…