The Structure of Light Industry in Russia - Paper Example

In Russia, the light industry in Russia is mainly made up of cotton textiles that are produced at Ivanovo, Kostroma. The production also takes place in Volga and Oka rivers east of Moscow (Salnikov & Galimov, 2006). The food industry is also another branch in Russia with the production value estimated to be at 3.12 trillion. In this total, food production accounts for 2.952 trillion rubles and the manufacture of tobacco products accounting 164 billion rubles. Russia has the perfect competition market structure in the light and foodstuff industries segment. Ideally, in this industry, there are a large number of firms. Just a segment of light industry such as the textile industries have more than 700 firms. Currently, Russia largely depends on imports in this industry. This means that the remaining 30% of the products are supplied by local companies. Each of the producer companies in Russia supplies just a small segment of the total need of the market. These firms are mainly price takers as they do not set the price that they charge for the different products that they produce. The price is mainly set by the forces of supply and demand in the market. Most of the products in the industry are identical with no unique products at all. The firms in this sense produce goods that can be substituted by the other. Information regarding the performance of the industry and the factors that affect the performance is in the public domain hence the perfection in sharing of information (Baye & Beil, 2006). The market structure as set up in Russia has no existing barriers for entry and exit into the market. Companies and firms can easily get in and out of the market.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

Effect on the Price and Output Levels in Economic Welfare

Given that the market structure is perfectly competitive, the different firms operating in the light industry face a horizontal demand curve. This implies that the firms in this industry can only sell at the market price. Moreover, the firms are at liberty to sell as much as they require at the market price.

In regards to the output levels, the firms are in a position to maximize profits (Boldrin & Levine, 2008). The total revenue accrued by the firms in the light industry is got by subtracting total revenue from the total cost. In this market, at any level of output, the average revenue for the firms in the light and foodstuffs industry is same as the market price. This happens given that the total revenue is equal to the product of price and quantity. Additionally, the average revenue for the market is equal to the total revenue divided by the quantity (Besanko, Dranove, Shanley & Schaefer, 2009).

In this market structure, the clearing price in the short run is set by the interaction between demand and supply. The market clearing price is absorbed by each firm. Given that the market structure, in this case, is in perfect competition, the aggregate revenue is at the same time similar to marginal revenue. The firms maximize the profit when the MC=MR. The output, in this case, generate the revenue that is equivalent to the product P1 and quantity Q1.

Given that the firms are in perfect competition, they remain only with one main decision to make. The decision is the amount of quantity that they need to produce. This can be affirmed by writing the basic definition of profit in this manner:

Profit=Total revenueTotal cost = (Price) (Quantity produced) (Average cost) (Quantity produced)

Given that the firms in the light and foodstuffs industry have to accept the price for the output as set by the market demand and supply of the product, they have no choice on the prices charged. The determination is done already in the profit equation. This implies that the perfectly competitive firms can sell any amount of units at a given price set. This means that for the products, the firms in this industry face a perfectly elastic demand curve. This means that the buyers remain willing to purchase any number of units of output from the market price. Therefore, when the firms in these two industries chose a number of goods to produce, then the quantity together with the prices in the market for both the outputs and inputs will be the determinant of the total revenue, the total costs, and the profits levels.

Prices Set

The prices in this industry are determined by demand and supply. The clearing price in the short run is set by the interaction between demand and supply. The market clearing price is absorbed by each firm.

In this industry, there is usually price floors and price ceilings as dictated by the government. The price floors and ceilings are price controls that are known to be legal minimum or maximum for the various goods and services in the light and foodstuffs industries. The Russian government often does the price control in the bid to manage the economy through a direct intervention. The price ceiling, in this case, is the legal maximum price for a given good or service while the price floor, on the other hand, is the legal minimum price.

In the normal competitive market, the prices set results into a balance between supply and demand. Often when the Russian government introduces the price controls in the light and foodstuffs industries, there is an excess supply or excess demand gave that the legal price is normally different from the market price. In most cases, the government imposes the price controls owing to the fact that there is dissatisfaction in the market price.

The price ceiling and price floors affect the industries in different ways. Price ceiling results in shortage in instances where the legal price is below the market price (Kruse, Ozdemir & Thompson. 2005). Notably, the effect on the quantity supplied is absent especially in instances where the set price is above the equilibrium price set by the market. On the other hand, for the market ceiling that is below the market equilibrium price, there is shortage created that makes the consumers compete so much for the less supply in the market (Hill & Myatt, 2007). The supply, on the other hand, is constrained given that the suppliers do not get the required prices that would make them earn the requisite profit. Given that the supply is almost in the same proportion as the price, the price floor results into the creation of excess supply in instances where the legal price is indeed above the market price. The suppliers, in this case, are cornered and they remain at a point where they are more than willing to supply even more at the set price floor as compared to the needs of the market at the said price (McKenzie & Lee, 2006).

The price floors refer to the lowest legal price that can always be paid in a market for goods and services, the labor or even financial capital (Dufwenberg, Gneezy, Goeree & Nagel, 2007). One of the examples of a price floor is the minimum wages that are set for workers in the light and foodstuffs industries. The notion of setting the minimum wage is to ensure that the workers get at least a basic standard living. In Russia, the minimum wage for workers in the light and foodstuffs industry is set at a level just higher than the poverty line. Given that the cost of living progressively rises from time to time, the minimum wage is revised from one time.

The price floors are instrumental in the industry as they ensure that prices do not fall below a certain level. Often, the foodstuffs industry has got price supports from one time to another. Usually, the foodstuffs and their incomes do fluctuate so much. This implies that even if, on average, the incomes from the foodstuffs are adequate, at some point they get quite low. Having the price floors ensures that swings in place are prevented.

Often, in Russia, the price floors work in a way that the government gets into the market and buys some of the products in the market hence increasing the demand. An increase in demand ensure that the prices remain higher almost all the times.

The graphical representation depicts the price floor that ends up into a surplus. This is a common situation in the foodstuffs industries in Russia. In the graph, the intersection of demand, represented by D and the supply (S) is at the equilibrium point E0. Nonetheless, when the price floor is set at the point Pf, it holds the price above the point E0 and this ensures that there is no fall at the end. At the end, the price floor achieves a situation where a number of goods supplied is more than the quantity demanded Qd. The result is a surplus.

Interestingly, neither the price ceilings nor the price floors result in a change in demand or supply. The price controls at the end of the day only create a limitation as far as what is legally charged is concerned (Miller, 2010). The changes in price do not result in a change in demand or supply. The price ceilings and the price floors can result in having different choices of the amount demanded as the consumer moves along the demand curve. The price controls do not in any way move the demand curve. For the supply, the price controls cause a different choice of quantity supplied on the supply curve, however, they do not lead to a shift in the supply curve.

Notably, the price ceilings are preferred even in the light and foodstuffs industry given the higher number of consumers in the segment of the economy. The preference is because the price ceilings help to prevent the price from rising above a certain level. In instances where the price ceiling is put below the equilibrium price of the light and foodstuffs, the quantity that will be demanded will definitely be more than what is supplied (Hall & Lieberman, 2012). At the end, there will be too much demand or even shortages. On the other hand, the price floors ensure that the price does not get below a certain level. In the instance where the price floor is put way above the equilibrium price, a number of goods that are supplied will exceed the quantity demanded hence there will be excessive supply. Even though the price floors and ceilings are fixed in the light and foodstuffs industries, they mostly lead to unplanned consequences.

Consumers Change in Price

The behavior of consumers in regards to responsiveness in price change is measured through the price elasticity of demand given all the factors remain constant. Through the price elasticity of demand, the percentage change in quantity demanded in response to the one percent change in price is captured (Andreyeva, Long & Brownell, 2010).

In instances where the price elasticity of demand is one then the demand is said to be unit elastic, that is the change in demand is equal to the percent change in price. For the light and foodstuffs industry, the price elasticity of demand is often greater than one hence showing that the demand is perfectly elastic. For this industry, the demand is usually more elastic given that there are many close substitutes for the light materials manufactured and the foodstuffs. The consumers respond also as well given that the quantity demanded the goods also changes in response to the changes that are in the price (Andreyeva, Long & Brownell, 2010).

In this industry, collusion is likely to take place especially when the producers are conspiring to ensure increased prices. This is done mainly to ensure that open competition is limited given that the Russian market for the goods in this industry is perfectly competitive. Given that most of the goods in this industry are imported, there are chances that the local companies can conspire to have increased prices or reduced price hence result in unfair competition.

Trade Barriers

The light and foodstuffs industries in Russia are protected by trade barriers. The barriers in existence are both tariff and non-tariff barriers especially for the countries...