Answer 1
The government has several tools to control the market and the production of any particular commodity in the market. It can either impose taxes if it wants to reduce the quantity of commodity produced or impose a quota on the quantity of commodity produced (Schwager & Etzkorn, 2017). In this scenario it is seen that the government tries to control the consumption of alcohol by its consumers by imposing heavy excise tax. Now the way in which this imposition would influence the market depends on who has to bear the incidence of tax. It in turn depends on the elasticity of demand and supply of alcohol in the market. The following diagram can justify the scenario.
From the above diagram we can say that when the supply curve is steeper than the demand curve, the tax burden has to be borne by the supplier as shown in the left hand section of the diagram. On other hand, if the supply curve is flatter than the demand curve as shown in the right hand side, then the tax burden has to be borne by the consumer. Hence, the way in which the consumption is going to change after imposition of tax depends solely on the nature of the demand and supply within the economy.
The government can also impose a minimum price to restrict the consumption. It is obvious that the minimum price is going to be well above the market clearing price so that consumer finds it costly to buy the product (Cowen & Tabarrok, 2015). The actual effect of such a price bar is shown as follows by the diagram below:
From the diagram above it can be seen that E is the equilibrium level where the market gets cleared. Now the government imposed minimum price above equilibrium price Pe at Po. As a result the quantity demanded gets reduced from Qe to Qo. Then the economy sees an excess supply in the goods produced. Under normal circumstance if the producer gets more price they would have increased their supply. In this case bounded by the government price system, they face restriction and hence starts producing less. The supply curve shifts backward at SS1 and market gets cleared at the government dictated price level.
Hence from this situation it can be commented that imposing taxes has dual benefit. On one hand, it helps the government to earn revenue while on other hand the consumption and production decreases depending on tax bearer in the economy. But in case of price capping, though less quantity of alcohol is produced but ultimately market gets cleared and eventually it can be seen that people gets ready to pay higher prices. It not only benefits the producer by helping them earn more but also does not create the influence that it was suppose to do.
The exact impact of taxation in the alcohol demand and supply in Australian market can be used to justify the understanding of impact of taxation. It has been seen that the consumption of alcohol and its price has a negative relation. That is an increase in the price of alcohol via taxation would certainly reduce the consumption. Time series data from Australian Bureau of Statistics reveals that a simple 10 % increase in price of alcohol via taxation can decrease the average consumption by 6% within a span of 8 years. In contrary the increase in affordability that is reduction in price by the same percentage would increase the average per capita consumption within a span of 6 years. Hence, it can definitely be stated that taxation helps in reducing the alcohol consumption and thereby other associated costs within the Australian economy.
Answer 2
The long run scenario of the market operating under monopolistic competition has been shown by the diagram below:
In the diagram above, the minimum point of the LRAC curve is $200 where the manufacturer sells each table at this mentioned cost. It is known that the time period under which all the factors of production become variable is known as the long run. The monopolistic market supplier guided by their interest of profit maximization sells that quantity of product which is determined by the point where their long run MC and MR intersects. Under this scenario the firm is unable to achieve economic profit but it is going to sustain in the market as it can remain in its break-even point (Morrow & Dhingra, 2014). In the long run, the monopolist firm can charge more than $200 per table. It can be seen from the diagram above that the minimum point of LRAC is to the right of the point where the the MR and MC curve intersects and thus can be said that the firm can charge higher price. In fact of the firm charges at $200, then it has to produce more quantity than it actually does as shown by the red dotted line QI. But at this point the firm’s revenue is going to be less than their cost and hence they never operate at this point.
There is excess capacity in the market because in order to remain at the break-even point the firm has to produce the downward sloping portion of the LRAC and not at the minimum point (Nikaido, 2015). Hence, they are not going to operate at the socially demanded and optimum level.
Oligopolistic competition comes from the term Oligopoly. This is an amalgamation of two Greek terms namely ‘Oligos’ and Pollen. The initial one means ‘a few’ whereas the latter one means to sell. The basic notion of an oligopoly market is that a few sellers sell similar kinds of products (Baumol & Blinder, 2015). Oligopoly can be sub-divided into 2 parts, pure oligopoly with no product differentiation and the other one with product differentiation. The basic characteristics of this oligopolistic market are as follows:
Few Sellers: The name of the market itself suggests that the market has been characterized by scanty sellers. They dominate over the market and the pricing of the commodities sold.
Barriers: Rigidity is faced by the firms operating under oligopolistic market in their entry and exit. Usually any firm may exit the market but has to face barriers in different forms if they want to enter the market.
Interdependence: Due to the minimal number of sellers, each firm’s decision in the business affects the entire business. Hence it is usually observed that oligopolistic competition price is set by cartel.
Uniformity issues: The size of the firms often has uniformity issues. While some firms under this market may be gigantic in nature, other firms can be quiet small.
Competition and Price rigidity: As the number of firms selling the products is few, hence there remains intense level of competition amongst them to capture a large share of market and maximize the profit. On other hand, they are unable to change the price according to their wishes as it would be strictly restricted by the other players (Rios, McConnell & Brue, 2013).
2 B)
The Australian super market chain, pharmaceutical industry and banking system are three sectors showing oligopolistic market nature. The ways in which these sectors show oligopolistic nature are given as follows:
Australian super market chains: There are few supermarkets in Australia with several branches to cater to the majority of the residents with their needs for FMCG products. Coles, Woolsworth, Aldi are the big names in this regard. They always have the tendency to control the price and attract consumers by price slash which in turn makes the others slash down their prices too.
Pharmaceutical industry: The markets for pharmaceutical products are also oligopolistic in nature. This is due to the high cost associated with the entry. The existing power of the top notch companies also creates a barrier in the entry. Few globally acknowledged pharmaceutical brands exist like GSK, Pfizer, Sanofi-Avnetis Alphapharm exists in Australian economy and they rule in quoting the price of medicines and life saving generic drugs.
Banking System: The country’s financial side is controlled by four major institutions, namely, NAB, CBA, WBC and ANZ. They look after almost 90% of the economy’s total monetary transactions.
The market under which several firms co-exist in harmony by selling similar kinds of product is known as Monopolistic competition. The products sold under this market structure are never identical in spite of the fact that they are similar in nature. The main characteristics of this market structure are as follows:
Buyers & Sellers: There exist several producers or buyers in monopolistic competition. The number of consumers or buyers is innumerable as well. Each of the firms has some control over the price-output policy of the commodities sold by them (Bernanke, Antonovics & Frank, 2015).
Barriers within and out: No firm faces any barriers in getting inside or getting out of the business under the monopolistic market. Any firm decides to get into the market when they find the scope of gaining super-normal profit.
Knowledge: The market is characterised by the deficiency of knowledge. The consumers are not well aware of the products available or the existing substitutes in the market. Similarly the producers are also unaware of the exact taste of the consumers.
Mobility issues: The market has rigidity in mobility of the factors of production.
In Australian economy, the monopolistic market exists in case of restaurants, cereals and coffee industry. The ways in which these three things can be categorized under monopolistic market has been shown as follows:
Restaurants: Restaurants falls under monopolistic market because anyone who wants to open up a restaurant is never restricted from entering the market. The restaurants sell similar kinds of products that is food but they are not identical as each restaurant may sell different kinds of foods.
Cereals: There are several kinds of cereals available in the Australian market. The consumers have full liberty to choose the type of cereal they want to consume for breakfast. The producers are free to bring into any variety of cereals into the market to attract the consumer.
Coffee: Coffee is the beverage that can be taken either when hot or enjoyed in a cooler version. There are various kinds of coffee in the market and they can be sold after preparing them in numerous ways and hence there is difference in the products. At the same time there are many numbers of sellers in the market and they individually dictate the price of the commodity they offer to the consumers.
Duopoly is the scenario where two sellers serves or caters the entire consumer of the particular region. They have been bestowed with enormous power to control the price of the commodity sold and also to shape the demand of the consumers. It can be referred to as a simple form of oligopoly (Pigou, 2013). Natural duopoly exists when the cost of entering the market is large enough so that not more than two firm can sustain in the market. It can keep the third firm out of business as it would lead to decline in profit. The conditions for natural duopoly are as follows:
Existence of only two firms: When two firms has the power to control the entire market demand for a particular commodity it is said to be duopoly market. It may so happen that other firms exists but has no power to influence the price and quantity sold in the market.
Seller agreement: Both the the sellers under this market are independent in taking decisions. They are not into any kind of agreement regarding the price they charges or the quantity of output they produce.
Influence: Duopoly is formed when both the sellers are affected by the decisions taken up by its opponent even if they think that they do not influence their partner. Hence eventually it is seen that both the sellers anticipate the decision that its opponent would take and then make their decision accordingly.
The market demand curve of duopoly market structure has been given as follows:
In the above diagram the red coloured kinked line is the market demand curve under natural duopoly. It has been formed by the reaction function of the two firms as shown by the two intersecting blue lines.
The entry into the duopoly market by new firms has been kept at bay the the existing firms and even at times by the restrictions imposed by the government. Often it has been observed that the existing firms goes into collusion and decides upon the price of the commodity such that if they can maximize their profits (Mankiw, 2014). On other hand if any other firms triy to enter the market they are going to face a heavy loss and hence back off from entering. In addition it has been observed that due to high cost of establishment, the government of any nation often puts a price ceiling of quota on the quantity of output that are to be sold. By these things the entry of new firms gets restricted especially when the existing two firms have comparative advantage in production procedure.
References:
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.
Bernanke, B., Antonovics, K., & Frank, R. (2015). Principles of macroeconomics. McGraw-Hill Higher Education.
Cowen, T., & Tabarrok, A. (2015). Modern Principles of Microeconomics. Palgrave Macmillan.
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
Morrow, J., & Dhingra, S. (2014). Monopolistic competition and optimum product diversity under firm heterogeneity. Journal of Political Economy.
Nikaido, H. (2015). Monopolistic Competition and Effective Demand.(PSME-6). Princeton University Press.
Pigou, A. C. (2013). The economics of welfare. Palgrave Macmillan.
Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: Principles, problems, and policies. McGraw-Hill.
Schwager, J. D., & Etzkorn, M. (2017). Supply?Demand Analysis: Basic Economic Theory. A Complete Guide to the Futures Market: Technical Analysis and Trading Systems, Fundamental Analysis, Options, Spreads, and Trading Principles, 359-371.
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