Monopolistic Competition in the Australian Wine Industry
1. a) The Australian wine industry can be categorized under a monopolistic competitive market structure due to several reasons. Foremost, the firms that produce and sell wine are many in Australia. Each company produces wine that is differentiated especially based on brand type. The competition among the wine companies is also fierce and that is why the firms often engage in intensive advertising to woe new clients and maintain the existing ones. Moreover, there are no significant barriers to market entry and exit in Australian wine industry.
Monopolistically competitive versus perfect competition
There are no hurdles to market entry and exit under perfect competition market indicating that the corporations are free to enter and leave the industry at will. However, under monopolistic competition, there are some barriers to market entry and exit. Both allocative and productive efficiencies are attained in the perfectly competitive market but not in a monopolistic competitive market structure. Additionally, the commodities in the perfectly competitive market are perfect substitutes for each other. On the contrary, there are no perfect substitutes in the monopolistic competitive market industry. The products are exceedingly differentiated.
b. i) High costs of switching from bank to another create consumer inertia in Australian banking sector thus hindering competition. The high switching costs make the consumer reluctant to seek better products in other banks. The major banks have a cost advantage as there operating and funding costs are relatively lower than those of the rivals. Furthermore, the major financial institutions are said to be extremely horizontally and vertically integrated a situation that grants them economies of scale and hence advantages in the market.
ii) The economies of scale enjoyed by major banking institutions make it difficult for potential market entrants as the established banks have a cost advantage. Also, the high cost of bank switching deters market entry as it is hard for new entrants to secure clients.
c) The airlines often base their price discrimination at the time the ticket is acquired. Those travelers who buy the ticket in advance pay relatively lower charges. However, those who buy few hours to the departure pay higher rates as demand for tickets during this time is always higher.
Price discrimination is socially desirable as it takes into consideration the economic status of the clients. The wealthy consumers pay relatively high because their demand is inelastic and also they can comfortably afford the higher rates. For example, in hospitals, the doctors charge the wealthy patients more than the poor ones to guarantee that even poor people have access to medication.
2. a) Vaccinations bring positive externalities to the society. For instance, when a child is vaccinated, the other kids benefit since there is a reduced likelihood that they will contact a contagious infection. Therefore, the children will be healthy, attend school more frequently and learn more a situation that leads to better carriers, better pay as well as higher productive.
The under-consumption of vaccination due to lack of information on its importance or due financial issues, results in undersupply of the immunization in private market. The decisions of producers concerning production depend on their private benefits and costs and not the welfare of the society. They will, therefore, produce vaccine depending on the demand.
Lack of Competition in the Banking Services Market
ii) External benefit of vaccinations
MSC = Marginal Social Cost
MSB = Marginal Social Benefit
MPB = Marginal Private Benefit
For positive external to take place, the marginal social benefits must exceed the marginal private benefits. On the graph above, the consumption of vaccination in a free market will be at Qe where the private benefit equals the private cost. However, at this point, there is social inefficiency because the social benefit outweighs the social cost. When the government starts providing vaccination the consumption moves to Q1. Social efficiency is thus achieved since at this point the social benefit and social cost equal. The shaded portion of the graph above shows the external benefit of vaccinations.
iii) Public education can be important in informing the individuals about the benefits of vaccination. Therefore, the government can set aside resources to facilitate universal education. Additionally, the government can provide monetary incentives such as subsidizing the cost of immunization to make it affordable to many individuals and hence attractive.
The state can impose a corrective tax to make the producers and consumers incur the cost of polluting the environment. Tax is likely to lessen the consumption of a particular commodity and also avail funds for correcting the damage caused. For example, the money can be used for tree planting.
The government can formulate a legislation meant to limit the toxic substances generated by different firms. The control should be fully implemented and those companies found guilty of violating the law should be penalized.
The subsidies by the government can incentivize the producers and consumers to adopt cleaner energy sources like the solar power. Therefore, the leadership can avail subsidies to increase production and use of non-fossil energy to reduce pollution in the atmosphere.
3. a) i) In the recent years, Australia has encountered slight changes in the level of unemployment. For instance, the rate of unemployment was 6.1% at the end of 2015, dropped to 5.8% in 2016. In 2017 March the unemployment stood at 5.9%.
In December 2016, the Australian economy recorded a positive growth of 1.1% rebounding from the negative growth of 0.5% in the September quarter of 2016. The current annual expansion in the economy is 2.4%.
The rate of inflation in Australia is low. In 2015, the inflation rate was 1.5% and 1.4% in 2016. The current annual estimation of inflation rate is 2.1%.
ii) The Australian economy can be said to be in the expansion phase of the economic cycle. The economy has a low level of inflation, that is, 2.1%, expanded by 2.4% in 2016 and recorded low level of unemployment in 2016 than 2015.
b i) There is uncertainty as it is not possible to make a precise prediction of family actions after the pay rise. If the individuals choose to save, then it will be a withdrawal from the circular flow of income. If they decide to consume more, then it will be an injection to the circular flow of income.
ii) Firms’ expenditure on research is an injection to the circular flow of income. The research can lead to improved ways of doing business, increase productivity and the benefits passed to the purchasers through price reduction.
iii) An increase in tax-free threshold reduces the amount of taxes paid by individuals. Reduction in tax will indicate an increase in the real incomes of persons and hence growth in consumption. It is, therefore, an injection to the circular flow of income.
iv) It is an injection to the circular flow of income because the credit unions will have sufficient amount to provide more loans to members who will increase their consumption and investment.
v) Represents a growth in export incomes and hence an injection to the circular flow of income.
vi) This action means an increase in consumption and thus an injection to the circular flow of income.
4. a) Gross Domestic Product
GDP = C + I + G + (X-M)
C= 4900
I= 945
G= 275+120= 395
(X-M) = 590-475= 115
GDP = 4900+945+395+115 = 6355
Gross National Expenditure
GNI = C+I+G
GNI = 4900+945+395=6240
b) i) The gross domestic product does not consider the quality of the environment. The Gross Domestic Product could be high, and yet the environment is polluted. This measure does not consider those economic activities in the illegal markets as only legal markets are considered. Additionally, the GDP ignores the importance of leisure to a quality life.
ii) The indicators incorporated in the Human Development Index include the GDP per capita, education, and life expectancy. The GDP per capita is based on the Purchasing Power Parity of individuals in a country and tells about the standard of living of persons. Education is assessed based on the expected years of schooling and the mean years of learning. The life expectancy is appraised from the year of birth and provides insights to the health of the population.
The current HDI of Australia is 0.939 and is positioned second in the world. This ranking indicates that Australians are highly educated, have a long lifespan and that their GDP per capita is also higher.
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