What is Capitalism and Socialism?

ECONOMIC SYSTEM

Each country operates under some economic system. Economists define an economic system “as the sum total of the devices by which the preference among alternative purposes economic activity is determined and by which individual activities are coordinated for the achievement of these purposes. The central problem of an economic system is the allocation of resources.”

Capitalism, in the broad sense, is a system of private in both producer and consumer goods, freedom of contract and competition, with limited government intervention in economic affairs. USA, UK, Germany follow Capitalistic system.

Socialism is a system of collectivization of means of production; there are no private profits, but incomes may differ according to individual skills and amount of work done; also personal property for consumption purposes is allowed. China, North Korea etc follow this type of system

It is clear that to a great extent economic system of a country determines its economic environment. Many countries like India try to adopt a middle path of the two system by taking some points of each.

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How does business firms influence the environment?

Individually, business firms can do little to change their economic environment. Collectively in a capitalist economy business firms can do a lot to make economic environment conducive to their activities.

Business firms now organize their associations through which they attempt to influence policies of the government.

In India, the Confederation of Indian Industry (CII), the Federation of Indian Chamber of Commerce and Industry (FICCI) and the Associated Chambers of Commerce and Industry of India (ASSOCHAM) are powerful organization of the business.

They exercise considerable influence on the government and thereby attempt to mould economic environment in their favour.

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Monopolistic Competition in the Long‐run

The difference between the short-run and the long-run in a monopolistically competitive market is that in the long-run new firms can enter the market, which is especially likely if firms are earning positive economic profits in the short-run. New firms will be attracted to these profit opportunities and will choose to enter the market in the long-run. In contrast to a monopolistic market, no barriers to entry exist in a monopolistically competitive market; hence, it is quite easy for new firms to enter the market in the long-run.  

Figure  -  1

The monopolistically competitive firm's long-run equilibrium situation is illustrated in Figure 1

The entry of new firms leads to an increase in the supply of differentiated products, which causes the firm's market demand curve to shift to the left. As entry into the market increases, the firm's demand curve will continue shifting to the left until it is just tangent to the average total cost curve at the profit maximizing level of output, as shown in Figure 1 . At this point, the firm's economic profits are zero, and there is no longer any incentive for new firms to enter the market. Thus, in the long-run, the competition brought about by the entry of new firms will cause each firm in a monopolistically competitive market to earn normal profits, just like a perfectly competitive firm.

Excess capacity. Unlike a perfectly competitive firm, a monopolistically competitive firm ends up choosing a level of output that is below its minimum efficient scale, labeled as point b in Figure 1 . When the firm produces below its minimum efficient scale, it is under-utilizing its available resources. In this situation, the firm is said to have excess capacity because it can easily accommodate an increase in production. This excess capacity is the major social cost of a monopolistically competitive market structure.

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Characteristics of Monopolistic Competition

Monopolistic Competition is characterised by :

1.             Relatively large number of sellers
2. Differentiated products
3. Easy entry and exit from the industry

Relatively Large Number of Sellers:

Small Market Shares: Each firm has a small percentage of the total monopolistic market and thus has only limited control over market price.

No Collusion: A relatively large number of firms will not combine to restrict outputs and set prices. With so many firms, collusion is almost impossible because it is too easy for one firm to cheat and charge the lower price.

Independent Action: Each firm is independent and can determine its pricing policy without considering its rivals. eg. A firm could moderately increase its sales by cutting its prices, but that would have no significant effect on its competitors sales.

Differentiated Products:

Product Attributes: product differentiation may entail physical or qualitative differences in the products themselves. Real differences in functional features, materials, design, and workmanship are the vital aspects of product differentiation.

Service: Service and the conditions surrounding the sale of a product are forms of non-price product differentiation too.

Location: Accessibility of stores that sell certain products or placement of products in stores eg. products at eye level would have an advantage over those that are not.

Brand Names and Packaging: Brand loyalty and packaging can affect demand.

ie. Apple's iPhone. It's pretty much the same as any other phone. It has touch screen capability, can surf the web, can listen to music, but the apple brand as well as advertising makes it a big hit on the market of cell phones.

Some Control over Price: Producers can charge extra for extra features, etc.

Generally, firms are "price makers" since each firm owns such a small percentage of the total market; if a firm changed the pirce of their product, there would not be much of an effect on the market.

The firms in monopolistic competition will DIFFERENTIATE their products and make them more appealing to the customers in order to maximize their profits.

 Easy Entry and Exit:

In the SHORT RUN, a firm may obtain economic profits or losses.

However, since there are little barriers from preventing companies to enter or leave the industry, in the long run, the firms will only obtain normal profits

Remember: entry eliminates profits; exit eliminates losses!

Advertising:

A unique feature of a monopolistic competitive market is that there are product differentiations.

Therefore, companies rely on advertising to flaunt their products and try to get consumers to buy their product over another.

Goal of product differentiation and advertising (non price competition) is to make price less of a factor in consumer purchases and make product differences a greater factor.

A successful advertisement would shift the firm's demand curve to the right and make demand more inelastic.

Some examples of non-price competition : 

• Store loyalty cards
• Banking and other financial services
• Home delivery systems
• Child services
• Extension of opening hours
• Internet shopping for customers
• Warranties

Monopolistic Competitive Industries:

Shoes - Nike, Addidas, Reebok

Jewelry  :  Asphalt Paving Signs

Bottled water ,

Ice cream  -  Breyers, Tom & Jerry

Mobile Phone- Nokia, Samsung, Sony Ericcson

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Macro Environment of Business

 Macro environment of a company refers to all those economic and non-economic factors which exercise their influence on the business activity in general and thus determine opportunities that a company may have to promote its business.

The role of macro environment from the point of view of the business may be both positive and negative. This implies that the larger forces in the company’s environment do not always provide wider space for business operations. They often put restraints on the business activities of the firm.

Macro environment of business can be broadly classified into

1. Economic Environment and
2. Non-Economic environment.

Since business is basically an economic activity, economic environment of business both domestic (national) and global is of strategic importance. In the national economic environment of the country, country’s economic system, macroeconomic scenario, phase of business cycle through which the economy is passing, organization of the financial system and economic policies of the government are the most important elements.

Economic system of the country determines the parameters of the business activity. Macroeconomic scenario refers to price situation, levels of saving and investment, fiscal, monetary and balance of payments situations and overall growth activity. These factors broadly determine the prospects of business activity.

Economic policies of the government, particularly the industrial, trade, fiscal and monetary policies shape the opportunities for business. However, at times, these policies are used by the governments to regulate the operations of business firms.

Now because of liberalization, from the point of view of the company’s business, global economic environment has become as much important as the national economic environment.

Business, despite the fact that it is an economic activity, is also influenced by its non economic environment. Political system, ideology of the government, legal framework, social system, cultural values, demographic factors, level of technological development and natural and physical environment of the country broadly constitute non-economic environment of business. In fact, all these non-economic elements are of great relevance to present day business. These factors not only determine for business but also, at times, have serious constraining effects

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