THE MARKET STRUCTURES AND COST THEORY AS A TOOL BY THE GOVERNMENT TO BUILD THE COUNTRY ECONOMY

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY

The interconnection in the characteristics of the nation’s market, such as the number and relative strength of buyers and sellers and degree of collusion among them, level and forms of competition, extent of product differentiation, and ease of entry into and exit from the market coupled with relevant cost theory has direct influence on the growth of the economy. However, the researcher is identifying market structures and cost theory as a tool by the government to build the country’s economy. Basic types of market structure include perfect competition where many buyers and sellers, none being able to influence prices and oligopoly with several large sellers who have some control over the prices. Others are monopoly with single seller and considerable control over supply and prices and finally monopsony with single buyer and considerable control over demand and prices.

A long line of scholarship posits a causal relationship between the market structure and economic growth. According to this view, well-developed market structures especially those imbued with rights that protect investors do promote the efficient allocation of capital to projects with high rates of return, in turn stimulating savings, investment, and economic growth. Evidence from both single-country and cross-country studies suggests that economies with more developed market structure begin to grow earlier, attain higher growth rates, and achieve higher levels of per capita income than countries with less developed market structures. These findings have prompted researchers to consider more carefully how the market structure affect real economic activity in the long run. For example, in an important study that exploits cross-country and cross-industry differences, Rajan and Zingales (1998) conclude that market structure development helps nations surmount financial and moral hazard and adverse selection problems and hence reduces the costs of external finance to the nations.

Many empirical studies have followed Rajan and Zingales (1998) in exploiting differences across space and time to identify a causal link between market structure and economic development, and recent research has focused on the mechanisms underlying this relationship. A well organi8zed structure are thought to improve resource allocation and fund projects with higher rates of return by efficiently matching the policies of the government and the will of the electorates and by monitoring the progress in economic growth (Kashyap et al., 2002).

The theory of costs analyses the behaviour of cost curves in the short run and the long run and arrives at the conclusion that both the short run and the long run curves are U-shaped but the long-run cost curves are flatter than the short-run cost curves. It involves a systematic approach to estimating the strengths and weaknesses of alternatives that satisfy transactions, activities or functional requirements for a business. It is a technique that is used to determine options that provide the best approach for the adoption and practice in terms of benefits in labor, time and cost savings etc. cost theory can also be adopted as systematic process for calculating and comparing benefits and costs of a project, decision or government policy. It is often used by governments and other organizations, such as private sector businesses, to appraise the desirability of a given policy. It is an analysis of the expected balance of benefits and costs, including an account of foregone alternatives and the status quo. The researcher is however of the opinion that cost theory will help predict whether the benefits of an economic policy outweigh its costs, and by how much relative to other alternatives.

1.2   STATEMENT OF THE PROBLEM

Economic growth can be related to increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product. An increase in growth caused by more efficient use of inputs (such as market structure, capital, population, or territory) is referred to as intensive growth. GDP growth caused only by increases in the amount of inputs available for use is called extensive growth. Generally, accurate application of cost theory and proper market structure identifies choices that increase welfare from a utilitarian perspective. An analyst using cost theory should recognize that perfect appraisal of all present and future costs and benefits is difficult, and while it can offer a well-educated estimate of the best alternative, perfection in terms of economic efficiency and social welfare are not guaranteed. The study examines the use of market structures and cost theory as a tool by the government to build the country’s economy.

1.3   OBJECTIVES OF THE STUDY

The following are the objectives of this study:

1. To examine the use of market structures and cost theory as a tool by the government to build the country’s economy.
2. To identify the various types of markets structures and their effect on economic growth.
3. To determine the effect of cost theory on economic growth.

1.4   RESEARCH QUESTIONS

1. How can market structures and cost theory be used as a tool by the government to build the country’s economy?
2. What are the various types of markets structures and their effect on economic growth?
3. What is the effect of cost theory on economic growth?

1.6   SIGNIFICANCE OF THE STUDY

The following are the significance of this study:

1. The outcome of this study will educate the government and policy makers in charge of the capital market regulation on how the market structure and the cost theory can be used as a tool for economic growth.
2. This research will also serve as a resource base to other scholars and researchers interested in carrying out further research in this field subsequently, if applied will go to an extent to provide new explanation to the topic

1.7   SCOPE/LIMITATIONS OF THE STUDY

This study on the use of market structures and cost theory as a tool by the government to build the country’s economy will cover all the basic types of market structure and cost theories and their influence on a nation’s economy.

LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

 Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

REFERENCES

Allen, Franklin, 1990. “The Market for Information  and the Origin of Financial Intermediaries.”  Journal of Financial Intermediation 1, 3-30.

Grossman, Richard S., 2007. (R)Evolution in Banking: The Development of Commercial Banking in the Industrialized World, 1800-2000. Unpublished manuscript, Wesleyan University.

Kashyap, Anil K., Raguram G. Rajan, and Jeremy C. Stein, 2002. “Banks as Liquidity Providers: An Explanation for the Co-existence of Lending and Deposit-Taking.” Journal of  Finance 57(1), 33-73.

Rajan, Raghuram G. and Luigi Zinagales, 1998. “Financial Dependence and Growth.”  American Economic Review 88(3), 559-86.