Help! I don't know anything about economics

[ninwa]

Can someone please explain this paragraph in simple terms for me (well, for my brother really, but I'd like to know too )?

Some of Galbraith's Ideas

Galbraith's main ideas focused around the influence of the market power of large corporations. He believed that this market power weakened the widely-accepted principle of consumer sovereignty, allowing corporations to be price makers, rather than price takers, allowing corporations with the strongest market power to increase the production of their goods beyond an efficient amount. He further believed that market power played a major role in inflation and argued that corporations and trade unions could only increase prices to the extent that their market power allowed them to. He argued that in situations of excessive market power, price controls effectively controlled inflation, but cautioned against using them in markets that were basically efficient such as agricultural goods and housing. He noted that price controls were much easier to enforce in industries with relatively few buyers and sellers. Galbraith's view of market power was not entirely negative; he also noted that the power of US firms played a part in the success of the US economy.

Too many economics terms for my stupid brain to comprehend D:

[schmalex]

Market power- The power of a firm to set a price above its costs without losing customers\revenue\profits or whatever. So basically, if a firm doensn't have much market power and it sets its price high nobody will buy it, because they can find the same product for a lower price elsewhere.
Consumer sovereignty- The idea that consumers determine what is produced and at what price. So what consumers buy determines what is produced and at what price. If they don't like something, they won't buy it and the firm will have to produce something the consumer does like.
Price makers, price takers - If firms are price takers they will have to accept the market price (think gold, oil, shares), if firms are price makers they have MARKET POWER and can set a price that will maximise revenue without losing too many customers.
Efficient markets- Markets that maximise total benefit to consumer and producer. These are generally markets that are highly competitive, and the price will be equal to the opportunity cost.
Price controls - When the government sets a maximum or minimum price

Does that help, or did you just want somebody to explain what it means? I actually can't be bothered working it out and explaining it, but that might help with the economics terms

[Fyrefly]

Basically, it's saying that consumers used to dictate prices but now companies do, and this is debilitating to the economy.

Like... a consumer simply wouldn't buy something if it was too expensive.
So in order to sell goods, companies had to meet the pricing expectations of consumers.
However, because companies are so powerful now, it's them with the power and not the consumers ("selling power" instead of "buying power").

I understand economics better when I have examples, so I shall endeavor to paint a colourful story XD (Okay... maybe black and white... not colourful... economics isn't *that* interesting)

In the good ol' days of the town marketplace, if one baker charged less for their bread than the other and the bread was of equal quality, you'd most likely wander over to the cheaper baker and buy your bread from him. Think now about Coles or Woolworths. If they charge $4 for a loaf of bread instead of $2.10, what are you gonna do? Unless there's an Aldi nearby, you're most likely gonna fork over the $4.

Think of this now as applying to all food, not just bread - what are you going to do? You need to eat, so you're highly likely to continue to buy food anyway, despite higher prices. Because Coles and Woolworths (and other companies in general) are so large-scale, they can dominate and manipulate the market in this way. Obviously, there are limitations to this "market power" - I've already mentioned competition as an example (Aldi).

It goes further than this too. Say that it costs Harry $1 to make a loaf of bread, and Fred $3 to make a loaf of bread. In an efficient market (the market in the good ol' days where you buy from the cheapest baker) where consumers will pay no more than $2.10 for a loaf of bread, it is quite clear that Fred is in a spot of trouble. Fred will go out of business because he charges too much because his costs are too high; everyone is buying bread from Harry. Fred is what we call an inefficient supplier - it would be better for the economy if Fred went off and did something else productive instead... perhaps he should go milk some cows.

Now, Coles and Woolworths say "we're going to charge $4 for our bread". Suddenly Fred (having time-travelled from "the good ol' days" to the 21st century) finds that he can supply bread and, unlike before, make a profit. Coles and Woolworths might pay him $3.10 for each loaf of bread (so he makes 10c on each loaf), and they sell it for $4 (so they make 90c on each loaf). However, this doesn't change the fact that Fred is inefficient and should be milking cows instead. A Fred who's producing bread is still an inefficiency that is detrimental to the economy. This is the first point being made - the way companies have captured market power is bad for the economy because Fred gets to make bread, Woolworths and Coles get to sell it at $4, and consumers have no choice but to buy it.

Inflation is the idea of rising prices - you could buy way more with $1 in 1940 than you can with $1 today ("Back in my day, when I was a young whippersnapper, you could buy a bag of lollies the size of my fist for only 5 cents!"). The next bit is simply saying that by companies such as Coles and Woolworths charging higher prices, they cause inflation. And thus, by introducing price controls in economies where companies have market power dominance, you can control inflation. Price controls are where like... the government says you're only allowed to charge $X for particular goods. Also, you shouldn't try to control the price in efficient economies  like the good ol' days marketplace scenario (this can cause a multitude of other economic problems that I won't delve into).

Lastly, he says that companies having dominance is not *all* bad, because US companies can head abroad to foreign countries, set up market power dominance there, make a huge profit => US economy benefits. However, it doesn't mention the other side to this coin - the US economy benefits, but the foreign country economies suffer.

[ninwa]

THANKS, BOTH OF YOU