Table of Contents

Page #
Acknowledgement
. 3
Aims and
Objectives
.. 4
Section One:
nt!od"ction
. #
Section Two: $ite!at"!e
%eview.. &
Section T'!ee:
(et'odolog)
*
Section +o"!: S,eci-c Objective
One. ./
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Section +ive: S,eci-c Objective Two
. .3
Section Si0: S,eci-c Objective T'!ee
. .#
Section Seven: %ecommendations 1
Concl"sion. .2
A,,endices
3/
4ibliog!a,')
. 3&
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Acknowledgement
Firstly, I would like to thank God for giving me the strength and fortitude it
took to complete this project.
Secondly, I wish to express the deepest appreciation to my lecturer, Mr.
Simmons, for the guidance and hard work in the preparation of this project.
e gave me moral support and guided me in di!erent matters regarding the
topic. e had "een very patient while suggesting me the outlines of this
project and I#m thankful for his overall supports.
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$astly, I wish to thank my parents and my friends for their help,
encouragement and "lessings and I also extend my heartfelt thanks to my
well wishers.
Aims and Objectives
%he &ari" 'a"le 'ompany (&elcom) was chosen for this internal assessment
"ecause of the great contri"ution towards the *incentian society and
economy. In researching the operations at the &ari" 'a"le 'ompany, these
economic concepts were explored in an e!ort to assess, analyse and
evaluate that +rm.
%he aim of this Internal ,ssessment is-
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,n investigation of the e!ects on consumer surplus in a monopolistic
+rm.
%he objectives of this Internal ,ssessment are-
%o evaluate consumer surplus in the +rm.
%o determine the market structure of the +rm.
%o analyse the similarities and di!erences of the factor market in the
+rm.
T'esis Statement
./y esta"lishing what consumer pays in a monopoly +rm, the consumer#s
surplus is measured in the factor market.0
Section One: nt!od"ction
In St. *incent 1 the Grenadines (S*G) there is only one (2) 'a"le 'ompany
that exists. %he name of this 'a"le 'ompany is &ari" 'a"le (&elcom) which
esta"lished in 2334, founded "y &elly Glass as &elcom International $imited
with ac5uisition of ',%* license in St. *incent 1 the Grenadines (S*G),
trading as &ari" 'a"le. &ari" 'a"le (&elcom) is a monopoly6 this is "ecause it
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is the only provider of ca"le television in this economy. , topic was carefully
generated for this project as it is re5uired "y the 'ari""ean ,dvance
7ro+ciency 8xamination (',78) for my Internal ,ssessment, .,n
investigation of the e!ects on consumer surplus in a monopolistic +rm.0 %his
topic deals mainly with the e!ects on consumer surplus in the +rm along
with the market structure identi+ed along with the factor market.
Section 3: $ite!at"!e %eview
Section 2.1 - Consumer Surplus
(Marshall, 293:) Marshall de+ned consumer surplus as .the terms used in
economics to express the di!erence "etween how much a consumer paid for
a good or service and how much extra he would have "een willing to pay for
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that good or service.0 In other words, it is the di!erence of the willing;to;pay
price and the actual;paid price. %o calculate consumer surplus is the use of a
formula (,nticipated price minus ,ctual price e5ual Surplus)(Marshall,
239:)meaning if one knows the price a consumer is willing to pay for a
product or service then she may su"tract the actual purchase price from that
amount to calculate consumer surplus.
Section 2.2 Market Structure
Firms have to decide how much of output to sell and what price to charge for
each unit of the commodity (8dwin, 233<). (8dwin 233<)States .=%hese
decisions must "e in line with the +rms> o"jective of maximi?ing pro+ts, 7ro+t
e5ual 7rice multiply "y @uantity minus 'osts.0 %herefore, the market power
of a +rm depends on the total num"er of +rms selling the same good in the
market Athe market structure#.
Monopoly:
(%aylor, 2339)%aylor de+ned Monopoly as .that form of market where there is
only one +rm producing a particular product.0 /eing the sole supplier, the
monopoly +rm has the power to control prices and output to maximi?e its
pro+t. owever, Monopoly implies the a"sence of competition among +rms.
'onditions for a Monopoly to exist-
Single producer of a product or service.
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%here must "e no close su"stitutes for a product or service so that
there is no competition over market share.
Strong "arriers to the entry of new +rms into the industry.
Section 2.3 - Factor Markets
(Beardor!, <::2) Beardor! states factor markets as .the market for a factor
of production, such as la"or or capital, in which supply and demand interact
to determine the e5uili"rium price of the factor.0 %he factors of production
are land, la"or, capital, and entrepreneurship which each factor has its own
market. owever, the demand for factors is CderivedC from the +rm>s pro+t
maximi?ing production hence6 the supply of factors depends upon their
alternative uses.
Firms seek to maximi?e their pro+ts. %herefore, their decisions regarding how
much input to hire will "e e5ual to the level that maximi?es its pro+ts. 7ro+t
maximi?ing condition for input usage is MD7 E MD' (Do"ert, <::F). Ghile
MD' is the marginal resource cost or the change in total cost due to the
employment of an additional unit of an input, MD7 is the marginal revenue
product or the change in total revenue resulting from the employment of an
additional unit of an input. If MD7 H MD' then the +rm should hire more
la"orers "ut it should cut down the la"or force if MD7 I MD' (Do"ert, <::F).
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Section T'!ee: (et'odolog) 5m,lo)ed
Information for this project was gathered "y the use of primary and
secondary sources.
,s the primary data collection method6 an interview with the Manager, Mr.
&elly Glass, of &ari" 'a"le (&elcom) was "eing used.
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%he secondary source of research was the &ari" 'a"le#s we"site,
http-JJwww.kari"ca"le.com. %his we"site had some "asic information that
was collected such as-
Kear Founded
/usiness $ocation
7roducts 1 Services
'ore *alues 1 Goals
%easons fo! em,lo)ing t'ese met'ods:
,n interview was used to gather information a"out the operations at
&ari" 'a"le (&elcom).
%he we"site was simpler to use and more accessi"le providing
additional information which was essential after the interview.
Section +o"!: S,eci-c Objective One
%he term surplus is used in 8conomics (which is the social science that
studies the production, distri"ution, and consumption of goods and services)
for several related 5uantities. %he consumer surplus (sometimes called
consumer>s surplus or consumers> surplus) which is the amount that
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consumers "ene+t "y "eing a"le to purchase a product for a price that is less
than they would "e willing to pay.
,ccording to (George, 29L3;293M) the individual consumer surplus is the
di!erence "etween the maximum total price a consumer would "e willing to
pay or reservation price (Deservation price is the maximum price a "uyer is
willing to pay for a good or service6 or, conversely, the minimum price at
which a seller is willing to sell a good or service...) for the amount he "uys
and the actual total price.
e said .If someone is willing to pay more than the actual price, their "ene+t
in a transaction is how much they saved when they didn>t pay that price0.
For example, a person is willing to pay a tremendous amount for water since
he needs it to survive, however since there are competing suppliers of water
he is a"le to purchase it for less than he is willing to pay. %he di!erence
"etween the two prices is the consumer surplus.
,ccording to my +ndings, &ari" 'a"le (&elcom) is the only ca"le provider in
St *incent 1 %he Grenadines. %he consumer surpluses are the areas "etween
the demand curve and the price for ca"le television. My main +nding is that
consumers do not gain much from paying for 7remium Service at a +xed
price rate of NMF.MO per month. &ari" 'a"le su"scri"ers enjoy access to over
9: channels of 5uality picture and sound6 "ut "y applying for the ca"le
packages they o!er, .%he /ox0 which provides multiple di!erent customer
con+gura"le packages including 8ntertainment, Sports, Movies and Family
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packages. In addition, &ari" 'a"le deploys %he /ox through a fool proof
technology provided "y a digital set top converter. %he "ox incorporates
2::P signal encryption technology designed to o!er the tiered packages
only to &ari" 'a"les 'a"le %* system customers in St *incent 1 %he
Grenadines.
owever, when supply of a good expands, the price falls (assuming the
demand curve is downward sloping) and consumer surplus increases
(Marshall, 239:). %his "ene+ts two groups of people. 'onsumers who were
already willing to "uy at the initial price "ene+t from a price reduction6 also
they may "uy more and receive even more consumer surplus, and additional
consumers who were unwilling to "uy at the initial price "ut will "uy at the
new price and also receive some consumer surplus.
For example, the linear supply and demand curves for ca"le television. For
an initial supply curve S:, consumer surplus is the triangle a"ove the line
formed "y price 7: to the demand line ("ounded on the left "y the price axis
and on the top "y the demand line). If supply expands from S: to S2, the
consumers> surplus expands to the triangle a"ove 72 and "elow the demand
line (still "ounded "y the price axis). %he change in consumer>s surplus is
di!erence in area "etween the two triangles, and that is the consumer
welfare associated with expansion of supply.
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Some people were willing to pay the higher price 7:. Ghen the price is
reduced, their "ene+t is the area in the rectangle formed on the top "y 7:,
on the "ottom "y 72, on the left "y the price axis and on the right "y line
extending vertically upwards from @:.
%he second sets of "ene+ciaries are consumers who "uy more and new
consumers, those who will pay the new lower price (72) "ut not the higher
price (7:). %heir additional consumption makes up the di!erence "etween @2
and @:. %heir consumer surplus is the triangle "ounded on the left "y the
line extending vertically upwards from @:, on the right and top "y the
demand line, and on the "ottom "y the line extending hori?ontally to the
right from 72.
In conclusion, the consumer surplus for ca"le television is in St *incent 1 %he
Grenadines is determined "y what consumers# is willing pay at a giving price
for ca"le television. 'onsumers Surplus can "e high "ecause of the one ca"le
company that only provides a limited amount of channels and packages to
consumers in the *incentian economy.
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Section +ive: S,eci-c Objective Two
%here are many market structures in economics6 the ca"le company &ari"
'a"le (&elcom) is a Monopoly. , Monopoly exists when a speci+c individual or
an enterprise has suQcient control over a particular product or service to
determine signi+cantly the terms on which other individuals shall have
access to it. Monopolies are thus characteri?ed "y a lack of economic
competition for the good or service that they provide and a lack of via"le
su"stitute goods.
,ccording to (%aylor, 2339) , company with a monopoly does not undergo
price pressure from competitors, although it may face pricing pressure from
potential competition. If a company raises prices too high, then others may
enter the market if they are a"le to provide the same good, or a su"stitute,
at a lower price. %he idea that monopolies in markets with easy entry need
not "e regulated against is known as the Crevolution in monopoly theoryC.
, monopolist can extract only one premium, and getting into complementary
markets does not pay. %hat is, the total pro+ts a monopolist could earn if it
sought to leverage its monopoly in one market "y monopoli?ing a
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complementary market are e5ual to the extra pro+ts it could earn anyway "y
charging more for the monopoly product itself. owever, the one monopoly
pro+t theorem does not hold true if customers in the monopoly good are
stranded or poorly informed, or if the tied good has high +xed costs.
In my +ndings, &ari" 'a"le (&elcom) is a monopoly and it#s the only ca"le
provider in St *incent 1 %he Grenadines. It does not have any competitors in
providing ca"le television to consumers and does have any price pressure in
pricing their products and &ari" 'a"le is restricted from engaging in price
discrimination (Ghich is called +rst degree price discrimination, where all
customers are charged the same amount).
In conclusion, according to the standard model, in which a monopolist sets a
single price for all consumers, the monopolist will sell a lower 5uantity of
goods at a higher price than would +rms under 7erfect 'ompetition(7erfect
'ompetition this is where the perfect "eing a market in which there are
many small +rms, all producing homogeneous goods)( 8dwin, 233<.) "ecause
the monopolist ultimately forgoes transactions with consumers who value
the product or service more than its cost, monopoly pricing creates a
deadweight loss(Beadweight loss means a loss of economic eQciency that
can occur when e5uili"rium for a good or service is not 7areto optimal)
referring to potential gains that went neither to the monopolist or to
consumers. Given the presence of this deadweight loss, the com"ined
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surplus for the monopolist and consumers is necessarily less than the total
surplus o"tained "y consumers under perfect competition.
Section Si0: S,eci-c Objective T'!ee
Factor markets are markets used to exchange and allocate the services of
factor inputs and scarce resources among productive activities. %he
monopoly market structure ; a market dominated "y a seller "uyer. In which
case, &ari" 'a"le (&elcom) the only ca"le television provider in *incentian
economy.
,ccording to (Beardor!, <::2) the four factors of production la"or, capital,
land, and entrepreneurship are of the factor markets. %his are the four inputs
used in the production process in order to produce output, activities which
must ac5uire the services of these factor inputs, which they do through
factor markets.
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%he +rst one is $a"or6 this is where mental and physical e!orts of humans
(excluding entrepreneurial organi?ation) used for the production of goods
and services. $a"or includes "oth the physical e!ort of factory workers and
farmhands often associated with la"or, as well as the mental e!ort of
executives and supervisors.
%he second is 'apital6 this is the manufactured, arti+cial, or synthetic goods
used in the production of other goods, including machinery, e5uipment,
tools, "uildings, and vehicles. 'apital is the produced factor of production.
%his factor must "e produced using other factors of production, which means
that society is often faced with the choice "etween producing consumption
goods that satisfy wants and needs or capital goods that are used for future
production.
%he third is $and6 this is the naturally occurring materials of the planet that
are used for the production of goods and services, including the land itself6
the minerals and nutrients in the ground6 the water, wildlife, and vegetation
on the surface6 and the air a"ove. %he natural resources and materials of the
land "ecome the goods produced. Githout these materials of the land, there
is no production. 7roduction is, in fact, the "asic process of transforming
naturally occurring materials that provide little satisfaction in their natural
state, to goods and services that provide more satisfaction.
$astly is 8ntrepreneurship6 this is the special sort of human e!ort that takes
on the risk of "ringing la"or, capital, and land together to produce goods.
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8ntrepreneurship is the factor that organi?es the other three. Githout
someone to organi?e production, the other three factors do RS% produce. ,
key component of entrepreneurship is risk. %his resource takes the risk of
organi?ing production /8FSD8 anything is produced and with no guarantee
that production will "e successful.
,n economist (George, 29L3;293M) says when a +rm determines its pro+t;
maximi?ing demand for a factor6 it will always want to choose a 5uantity
such that the marginal revenue from hiring a little more of that factor just
e5uals the marginal cost of doing so. %his follows from the standard logic- if
the marginal revenue of some action didn>t e5ual the marginal cost of that
action, then it would pay for the +rm to change the action.
%his general rule takes various special depending on our assumptions a"out
the environment in which the +rm operates. For simplicity we will suppose
that there is only one factor of production and write the production function
as y E f (x). %he revenue that the +rm receives depends on its production of
output so we write D(y) E p(y) y, where p(y) is the inverse demand function.
My +ndings at &ari" 'a"le (&elcom) as a pro+t;maximi?ing +rm, it also hires
the 5uantity that e5uates marginal cost and marginal revenue in their supply
and marginal revenue (MD) curves.
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In conclusion, with &ari" 'a"le>s 7remium Service you get a wide selection of
popular network channels, plus a generous assortment of regional and
international programming and pro+t is maximi?ed in the +rm where
marginal revenue intersects the supply curve. ,lso, the demand curve that it
faces for selling la"or is the market demand curve.
Section Seven: %ecommendations
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Sn the information that was gathered in the interview and the comparison of
the results to the literature review, there are certain recommendations which
could "e made which could "e very "ene+cial to the *incentian economy.
%he present government of St. *incent and the Grenadines needs to
place some restrictions on the high prices that are charge within a
monopoly to reduce the cost incurred "y the *incentian consumers.
,lso, from my perspective I think there should "e a parental option for
adults could restrict certain channels from showing "ecause of rated D
movies to restrict from younger viewers like children to watch.
I also recommend that6 since there is only one ca"le television +rm
more option should "e availa"le to us su"scri"ers in St *incent 1 %he
Grenadines.
,nd +nally, the Government needs reduce the "arriers in introducing
new competitor in the market for ca"le television to help reduce the
prices St *incent 1 %he Grenadines only ca"le television 'ompany.
Conclusion
,fter researching, analysing and evaluating &ari" 'a"le (&elcom), the
conclusion is that "eing a monopoly can have e!ects on the consumers of St
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*incent 1 %he Grenadines and "eing the only provider of ca"le television the
company high prices can "e charged to consumers. Sn the other hand, the
monopoly company can "e 5uite "ene+cial to the manager "ecause of the
pro+ts "eing made. ,lso, su"scri"ers of the *incentian economy can "ene+t
from &ari" 'a"le "ecause they o!er extra products when you apply for .%he
/ox0 which includes 8ntertainment, Sports, Movies and Family packages that
can "e taken which consumers of St *incent 1 %he Grenadines can enjoy.
A,,endi0 6A7 8 nte!view 9"estions
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2) From your perspective, can you please give me a "rief overview on
your knowledge of 'onsumer SurplusT
<) ,re special rates o!ered "y your company to consumers in St *incent
1 %he GrenadinesT
L) Ghat is your understanding of a MonopolyT
F) Ghat are some factors faced in your company as a Monopoly +rm.
O) Bo you think that "eing a Monopoly has any negative e!ects on other
+rms in St. *incent and the GrenadinesT Give a reason for your answer.
4) Ghat are the "ene+ts of "eing a Monopoly in St *incent 1 %he
GrenadinesT
M) Bo you honestly think that in the Factor Market where your company
operates is "ene+cial to the *incentian economyT
9) Ghat are some pro"lems faced as a Monopoly company in St *incent 1
%he Grenadines.
A,,endi0 647 : Statement of +indings
Module 1: Consumer Surplus
Figure 2- 'onsumer Surplus in Bemand 'urve
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%he economic "ene+t to individuals, or consumer surplus, received from a
good will change if its price or 5uality changes. For example, if the price of a
good increases, "ut people#s willingness to pay remains the same, the
"ene+t received (maximum willingness to pay minus price) will "e less than
"efore. If the 5uality of a good increases, "ut price remains the same,
people#s willingness to pay may increase and thus the "ene+t received will
also increase.
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%he essence of so;called partial price discrimination is the strategy of
dividing the pool of potential customers into segments and then charging the
mem"ers of each su"group what they are a"le and willing to spend. For
example, on the simpli+ed assumptions em"odied in Figure <, the seed
supplier would charge the relatively wealthy andJor eQcient farmers
represented "y line :;U price p, charge the less wealthy farmers represented
"y line U;* price 5, charge farmers *;G price r, charge farmers G;V price s,
and charge farmers V;K price t. /y adopting this strategy, the supplier would
"e a"le to increase its pro+ts su"stantially. ('ontrast the si?e of ?one 2 in
Figure < with the si?e of ?one 2 in Figure 2, a"ove.) ,t the same time, the set
of farmers .priced out of the market0 would shrink. ('ontrast the si?e of
?one L in Figure < with the si?e of ?one L in Figure 2, a"ove.) /oth of these
e!ects represent improvements over monopoly pricing in the a"sence of
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Figure 2: Economic Impact of Partial Price Dicrimination
!
"uantit#
D
$
%arginal &ot
u ' ( #
Deadweight Loss
Consumer Surplus
Monopoly Profits
1
3
2
p
)
r

t
*
+
price discrimination. (Ghether price discrimination also has unaccepta"le
adverse side;e!ects, we will also consider "elow.)
Module 2: Market Structure
Figure L- Monopoly 7ro+ts and 'onsumer Surplus
ey:
,'E ,cual 'ost
M'E Marginal 'ost
MDE Marginal Devenue
,DE ,ctual Devenue
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/ecause monopoly producers are often supplying goods and services on a
very large scale, they may "e "etter placed to take advantage of economies
of scale ; leading to a fall in the average total costs of production. %hese
reductions in costs will lead to an increase in monopoly pro+ts "ut some of
the gains in productive eQciency might "e passed onto consumers in the
form of lower prices. %he e!ect of economies of scale is shown in the
diagram a"ove.
Module 3: Factor Market
&ari" 'a"le#s power over a particular factor can "e expected to "ehave like
any other monopoly. It will choose its output where the marginal revenue and
marginal cost curves intersect and charge a price taken from its demand
curve.
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Figure F- Monopoly Factor Supply
, monopoly supplier of a factor of production acts just as any other
monopoly +rm. ere, the monopoly faces the demand curve D and the
marginal revenue curve MR. Given the marginal cost curve MC, it maximi?es
pro+t "y supplying Q
m
and charging a price P
m
.
, monopoly supplier of a factor faces a demand curve that represents the
MRP of the factor. %his situation is illustrated in Figure 2F.22, .Monopoly
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Factor Supply0. %he +rm will charge a price P
m
e5ual to the MRP of the factor
and sell Q
m
units of the factor.
4ibliog!a,')
al D. *arian, Intermediate Micro; 8conomics, , Modern ,pproach,
<::O.
,lan *. Beardor!, <::2. Gorking 7apers FML, Desearch Seminar in
International 8conomics.
Do"ert G. Fogel, <::3. 2F34M, Rational /ureau of 8conomic Desearch,
Inc.
$eon %aylor, 2339. C%he environmental protection authority as a
monopoly,C 7u"lic 8conomics 392:::M, 8con G7,.
Marshall, ,lfred in *enn, 7rinciples of 8conomics, 'am"ridge University
7ress, 293:.
Mans+eld, 8dwin, 233<, 8conomics, Mth 8d.
R. Gregory Mankiw, 7rinciples of Microeconomics, F
th
8dition, <::4.
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