Question

1. From society’s perspective, is it better for a market to be served by one firm - a price-setting monopoly, or by many small price-taking firms? Discuss.

2. Explain what monetary policy is, how it is implemented in Australia by the Reserve Bank of Australia, and what type of monetary policy you would recommend the RBA to implement at this point in time.

Answer 1

1)A price setting monopoly has total market control. It decides the price and level of supply. When there are many small price taking firms then no firm has major market control.

From society's perspective it is better for a market to be served by many small price taking firms . As when the market is served by one firm a monopoly then it has total control of the market and prices are generally high. Moreover the buyers do not have much. choice in such kind of setup. When there are many small firms serving the market then every firm has small market share. Prices here are decided according to supply and demand. Consumers have choice of selecting the firm they want to buy from. Hence from society's perspective, it is better for a market to be served by many small price taking firms.

2) The policy adopted by the monetory authority of a country to control interest rates or money supply to achieve price stability or to control inflation is the monetory policy. In Australia Reserve Bank has the responsibility of implementing the monetory policy and set interest rates in a way so as to achieve prosperity and stability of the currency. The Reserve Bank keeps the cash rate close to the target. It also helps other Banks in management of cash. Interest rates are used to influence aggregate demand , inflation and employment. The Reserve Bank sets the national official interest rate. At this point of time it is recommended to implement a monetory policy which achieves the full employment in Australia. The policy should also achieve Economic growth and stability of the currency. A sustainable growth in the economy should be aimed at. The inflation rate should remain low. The Accountability for the monetory policy should continue as monetory policy has a strong influence on the overall economy.