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Question 2 Case Study - Long-Run Adjustment in the U
Question 2 Case Study - Long-Run Adjustment in the U.S. Cotton Textile Industry In a study of U.S. industries between the world wars, Lloyd Reynolds found that the U.S. cotton textile industry was the one that came closed to being perfectly competitive. Cotton textiles were practically homogeneous, there were many buyers and sellers of cotton cloth, each was too small to affect its price, and entry into and exit from the industry was very easy. Reynolds found that the rate of return on investment in the cotton textile industry was about 6 percent in the South and 1 in percent in the North (because of higher costs for raw cotton and labour in the North), as contrasted to an average rate of return of 8 percent for all other manufacturing industries in the U.S. over the same period of time. Because of the lower returns, the perfectly competitive model would predict that firms would leave the textile industry in the long fur and enter other industries. The model would also predict that because returns were lower in the North than in the South, a greater contraction of the textile industry would take place in in the North than in South. Reynolds found that both of these predictions were borne home out by the facts. Capacity in the U.S. textile industry declined by more than 33 percent between 1925 and 1938 with the decline being larger in the North than in the South. Thus, textile firms, cotton farms, and firms using cloth did respond to these economic forces in their managerial decisions. Most U.S. textile firms were able remain in business after World War II only as a result of U.S. restrictions on cheaper textile imports and subsequently, as a result of the introduction of labour saving innovations that sharply cut their labour costs. But with the reduction in trade protection negotiated at the Uruguay Round (1986-1993) U.S. and European textile firms have come under renewed pressure, especially from China, which is expected to produce half the world textiles before the end of the decade. a) Briefly Analyse the different market structures. b) Why U.S. Cotton Textile Industry was considered to a perfectly competitive market? Explain.
Expert Solution
a, In economics, the market struture is used widely to explain the economics and other characteristics of the market. The study of market structure helps us to understand the economic environment of each business.
The study of market structure gives a vast knowledge of the following market conditions:
1. The commodities that are sold and the extent of its product differentation.
2. The ease and difficulty of entering and exiting the market.
3. The distribution of market share of largest firms
4. The number of companies already existed in the market
5.The number of buyers can be expected
6. Relationship between buyers and sellers
Basically there are four types of market structures.
i. Pure or Perfect Competition
This is a market structure in which a large number of small firms competing among themselves. Firms do not have the ability to influence market prices. There are no barriers for entering or exiting the market.
ii. Monopolistic Competition
Under Monopolistic competition, firms are selling similar, but highly diffrentaited products. There is easy entry and exit opportunities in monopolistic competition. Producers are freely enter the market when profits are attractive.
iii.Oligopoly
In oligopoly, there exists competition between few firms. They collaborate or compete against each other by using their collective market power to make more profit.
iv. Pure monopoly
In monopoly, there exists a single firm which dominates the wholle market. The firm has no substitutes. Entry or exist of other firms is blocked. It is common under monopoly that the firms increase the prices of their product and earn more profi.
b. Perfect competition is a market situation under which all firms sell almost identical project. They cannot influence the market price of their product. Market share does not make any difference in the price of the product.
Under perfect competition, there are many buyers and sellers, and the price of the product determines the supply and demand. The perfect competition is a market situation which is just opposit to the monopoly. Under perfect competition, if any business firm tries to make excess profits, it makes less demand of the product. This will also provide opportunities to other firms to enter the market and drive profits down.
In United States cotton isconsidered as the most important fibre product to make revenue. While cotton is widely used for making clothes, its prices began to fluctuate. The impat of the cotton industry in connection of the prices of raw materials, notonly affcted the industry alone, it affected the job opportuites of more than 250 million workers of developing countries globally. That means any adverse price movement will affect the economy in a large scale.
Hence the health of the industry had a considerable impact on the US economy, and the job opportnities of the people there. The gross domestic production (GDP) will also affect the fluctuation in price of cotton as a raw material. Hence cotton indstry in the United States was undergoing a market situation of perfect competition.b
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