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Topic: Managing the Different Market Structures

Problem 1.

a. Explain, how or why the commodity (say bottled water) market can be considered as a good example of perfect competitive market?

b. Also, explain why is the long run market supply curve horizontal in long run in this kind of market?

c. How does a competitive firm determine the quantity that maximizes profit?

d. When might a competitive firm shutdown in the short run and exit the market in the long run?

Moreover, explain why perfect competitive markets are regarded as the best market structure for the society?

Problem 2.

a. Explain, why could the Saudi Electricity market be said as a Monopoly Market?

b. What are the main barriers to entry in the electricity supply market and how Saudi Electricity Supply Company (SESC) got the status of Monopoly power?

c. Also explain why a monopoly firm (SESC for example) choose not to produce at its full capacity?

d. How does monopoly affect society’s well-being?

e. What is price discrimination and how it helps the firm and the consumers?


CASE STUDY

UNEMPLOYMENT: A PRESSING CHALLENGE TO ARAB COUNTRIES

(This case study is adopted from Principled of Economics, Arab World 3rd Edition. By Gregory Mankiw and Mohamed H. Rasgwan ISBN 978-1-4737-4950-4)

Learning outcomes

After reading this case study and completing the questions, students should be able to do the following:

· Discuss the unemployment situation in the Arab countries.

· Explain why resolving the unemployment situation in the Arab countries it is a daunting challenge.

· Outline some of the remedies which can be considered by relevant governments.

Events of the Arab Spring have underlined the importance to policy makers and the public at large of tackling unemployment especially among the youth. According to recent estimates, the rate of unemployment in the Arab world is close to 15% of the labor force, or nearly 17 million people. This high unemployment rate makes the Arab region one of the most blighted in the world. All Arab countries are affected, rich and poor alike, although it is much more serious in the latter. Also, the unemployment rates are much higher in the Arab countries that have political challenges or civil wars such as Iraq, Palestine’s West Bank and Gaza, and Somalia. The proportion of unemployment varies from less than 5% in the Arab Gulf states (United Arab Emirates, Bahrain, Qatar, and Kuwait) to more than 30% in the poorer Arab countries Djibouti and Mauritania (see Table 1 below).

The reasons for high unemployment rates in Arab countries are manifold. They can be summarised as follows:

1. Arab countries have a youthful population with a high percentage of women of child bearing age. This is reflected in a very rapid growth of population. Another factor is the rapidly increasing participation in the labor force with more women and younger people seeking employment. The reasons for an expanding labor force are somewhat contradictory. On the one hand, education and social liberalization encouraged more participation in the labor force. On the other hand, the rising aspirations and possibly the rising cost of living impel more people to join the labor force.

2. Failure of Gross Domestic Product (GDP) growth in Arab countries to generate equal expansion in employment opportunities. Since the oil boom of the early 1970’s, the Arab region realized very high rates of GDP growth. The bulk of this increase was due to better oil prices and improved terms of trade and less physical expansion in output. In addition, the oil sector employs a small percentage of the total labor force and can grow physically without much added employment. Other Arab countries that sought to diversify production through industrialization tended to concentrate on high capital intensive industries, such as cement, iron and steel, and petrochemicals.

3. An important factor contributing to unemployment in Arab countries is the rapid pace of urbanization. As cities were receiving more attention by national governments, a large migration away from the countryside ensued. In all Arab countries, population growth in urban centres was higher than the national average. As employment opportunities did not grow as fast, open unemployment began to appear.

4. In an age of free trade and globalization, Arab economies are beginning to feel the brunt of foreign competition especially in some old industries such as textiles, food industries, and pharmaceuticals. In theory, free trade should help increase the overall efficiency of the economy as factors of production move towards industries where comparative advantage exists. Thus free trade should lead to an improved employment situation in the medium term. However, in the short term there might be some frictional unemployment as workers take time to adjust and learn new professions.

5. Unemployment among the youth and university graduates poses the gravest challenge to policy makers. Statistics show that the illiterate and people with primary education seem to have less trouble finding jobs than high school diploma holders and university graduates. In some Arab countries, unemployment among university graduates exceeds 25%. This situation is a counter intuitive result as one would have assumed that the more people invest in education the higher the income they expect to get. The explanation could be in mismatching between the type of education seek obtained and the requirements of the labor market. In the Arab region there is a strong emphasis on literary, historical, and religious subjects, while the market may be looking for applied engineers, mechanics and banking executives. What seems to be needed is closer coordination between education programs and market needs.

6. In addition to the above mentioned structural reasons for a high unemployment rate, the International Financial Crisis in 2008 caused an additional increase in unemployment in the Arab countries. Export-related sectors including travel and tourism, as well as the garment industry were particularly affected.

Remedial policies:

One important remedy is to try to accelerate the rate of economic growth in Arab countries. Generally, more growth will ultimately mean more employment. Moreover, if growth is led by labor intensive industries, such as tourism, construction industries and textiles, a more immediate impact on employment is likely to follow.

Another remedial policy is to encourage small and medium enterprises (SMEs). According to many surveys, SMEs are responsible for almost 90% of the jobs in the non-oil sectors. Despite this very high employment contribution, SMEs seem to suffer most in terms of access to credit and general government support. This situation is changing though, with many Arab governments now making special lines of credit and generous tax incentives available to SMEs.

A third policy is to reduce frictional unemployment through retraining and providing subsidies to affected industries so they can adjust and change lines of production and/or relocate.

Finally, major modifications in the education policy of Arab countries towards a greater emphasis on vocational training and applied education should be considered. Many education planners emphasize the need for closer collaboration between governments and industry leaders to make university education better suited to serve industry and the economic needs of the society.

Until such policy changes are effected, unemployment will continue to be a major challenge to policy makers in Arab countries for years to come.

Table 1: Labor Force and Unemployment rates in Arab Countries

Country

Labor Force as percent of Population

% Growth of Labor

Unemployment Rate

Total Population

1995

2008

1995 – 2008

Average for Arab Countries

35

41.1

3.6

14.80%

Jordan

28.1

44.6

6.2

12.8

UAE

55.6

64.4

6.3

3.9

Bahrain

45.5

34.3

2.8

4

Tunis

25.1

30.6

2.6

14.7

Algeria

30.3

38.9

3.6

10.2

Djibouti

49.1

43.1

2.1

50

Saudi Arabia

34.9

32.1

4

5.4

Sudan

39.7

39.2

2.6

19.7

Syria

30.8

37.8

4.2

9.2

Somalia

34.9

50.4

3.9

34.7

Iraq

26

35.1

5.5

14.7

Oman

36.2

41.8

3.4

6.7

Palestine

21.5

Qatar

59.3

77

11.1

0.3

Kuwait

55.9

62.9

5

1.4

Lebanon

30.2

39.7

3.1

15

Libya

31.2

29.4

2.7

18.2

Egypt

37.9

47

3.9

9.4

Morocco

39.4

45.7

2.4

9.1

Mauritania

45.5

58.2

4.6

30

Yemen

29.9

23.5

3.7

15

Sources: Arab Monetary Fund Unified Arab Economic Report, Abu Dhabi, 2010, and Arab Labor Organization, Statistical Unit.

Discussion Points

Unemployment is a complex phenomenon caused by many social, economic, technical and political variables. The purpose of this Case Study is to underline special challenges facing policy makers in the Arab countries regarding this issue.

Questions:

1. Why do you think unemployment poses a much more serious challenge to Arab policy makers than in other regions?

2. Are the causes of unemployment in the Arab region mostly demographic?

3. Why do we consider development of SME’s a partial solution to the unemployment problem?

4. Why do you think that university graduates in Arab countries face a tougher time landing a job than other groups in society?

5. Why do you think educational policy changes and vocational training can help alleviate the unemployment problem?

Important note: draw the curves/graphs, where necessary and explain each and every step?