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Managerial Economics Oz Assignment
When the organizations know about there in interdependency and understand the behavior of a market & strategy of “how could competitive firms and market help to find out the way to maintain their competency level to co-operate. The essence of this reading will provide deep discussion on oligopoly issues by confronting competitive scenario, especially in the market where collusion is relatively easy. It will include a competitive structure of Australian banking and financial scenario possessing key features of oligopoly market. This report will also discuss key features of different markets and differences between long-run equilibrium of perfect competition and monopolistic competition.
What are the differences between the long-run equilibrium of a perfectly competitive firm and the long-run equilibrium of amonopolisticallycompetitive firm? Compare the productive and allocate efficiency of monopolistic competition and perfect competition.
a. Key features of each market structure:
(1)A market can be taken as varieties of systems, product mechanism, institutions and social-economic relation whereby buyers and sellers engage in consideration. In the economic terms, a market is known as a process by which rates and prices of goods and services are determined. Market structure is basically categorized into two major categories, first in the discussion of Adam Smith's laissez-faire principle and second in the discussion of Karl Marx. Adam Smith had outlined the market structure operation in the non-existence of the dominant political-economic mechanism. On the other hand, Karl Marx had described the strategic market mechanism in the presence of a dominant economic control. Classification of market structure is depended on the significance of market and individual firm. Such classifications are being occurred in the whole market whether products and services are sold out in the particular market to be homogenous (Atkinson &Steiglitz, 2015).
Perfect competition market:
1. In the pure competition, there are a large number of sellers and buyers in the market. All firms are tending to sell the same and homogenous products. A consumer is not able to prefer the commodity of one seller over to other sellers.
2. Both buyers and sellers are price taker (accepter) in the market. Customers are aware of the nature of homogenous products and prices being charged by each supplier. Determination of prices are set or quoted by the suppliers are eventually known immediately and consumer prefers those products which are quoted at the lower price.
3. There is no barrier to entry and exit of other firms in the pure competition market. The mobility of services and products are normal in this structure. Entrants are totally free to mobilize with other desired firms. Firms are liable to sell their commodity and services whenever they get a chance to do so at higher price level (Atkinson &Steiglitz, 2015).
1. Pure monopoly market structure is the market concept where there is only one supplier and there is no substitute for products sell out by the supplier.
2. A firm is basically price maker or determiner as he is able to make the decision regarding setting prices.
3. Cross elasticity of demand is the major situation at the time of price determination between monopolistic markets would null or less enough due to neglected by another firm.
4. In the situation of monopoly structure, firmly is able to set his products prices at maximum level and reduce its losses. He charges the prices at the marginal revenue that would be equal to short-term marginal cost. In the case of the long run process, he incurs losses as situation demands and price exceeds at the level of variable cost.
5. In the long run, process firm minimizes his cost and maximizes his profits at an abnormal level when marginal cost equals marginal revenue.
6. Entry of other firms is basically banned due to consumers are ready to pay more than necessarily cost (Boundless managerial economics, 2017).
a. In the situation of monopolistic competition structure, there are many suppliers as buyers as it is the mixture of monopoly and perfect competition market.
b. The output and products of each supplier are different &small from each other due to actions taken by such firms are never affect them each other.
c. In the short run process, the monopolistic competitive firm is ready to maximize their profit where marginal cost and marginal profit equal.
d.The market equilibrium is based on the possible entry and exit of new firms in the long run scale. If there is any situation where entry would be banned, a company will produce their products where the marginal cost would be equal to marginal profit (Parliamentary business, 2017).
Quick recommendation to a basic market structure:
Firms’ entry barriers
No. of sellers
Buyers entry barriers
No. of buyers
(B) Explanation "how short run and long-run profit or losses might be raised in different markets:
1. Monopolistic competition:
monopolistic competition is the specific economic market mechanism model in which demand curve is generally elastic but not perfectly elastic because firms are aggressive to sell differentiated commodities and there is basically no any perfect substitute (Clark &Jumna, 2013).
2. Short run income and losses:
In the Monopolistic competition, the demand curve is basically downward sloped and marginal revenue would be less than the market rate so that monopolistic competitive firms tend to maximize their profits and reduce losses by manufacturing quantity of products where marginal revenue and cost would be equal as given in the below figure (this matter.com, 2017).
Figure: 1, Short run income and losses.
(Source: this matter.com)
D = Market demand
ATC = Average Total Cost
MR = Marginal Revenue
MC = marginal cost
In the other situation, if average total cost becomes higher than market price, then the market has to face big trouble due to losses. At this moment firms minimize it loses by producing much quantity equal to the marginal cost and revenue.
(Source: this matter.com)
Short run Loss = (ATC – Price) = Quantity
2. Long run equilibrium (normal profit):
In the case of long run, process firms tend to earn normal profit when the number of firms would be less than perfect competition firms. But if new entrants enter in the same industry, it reduces the profits. Firms will continue their business activity until they are being earned the normal profit (this matter.com, 2017).
Figure: 2, Long run equilibrium.
(Source: this matter.com)
As given in the above diagram when MC increases from MR, the firm would incur higher costs compared to additional revenue received. In this way firms increase it is revenue and profit by producing the only product when MR = MC.
II. Perfect competition market:
In the case of perfect competition, a firm maximizes its range of profits at the level of MR = MC. At the level of MC=MR, Firm will gain normal profit. When marginal cost would be less than marginal profit, a firm could gain more profits after producing less. If MC would be less, then the firm will increase its production level and gain maximum and abnormal profit (Parliamentary business, 2017).
Figure: 3, Perfect competition market.
(Source:Parliamentary business, 2017).
In the short run profit, this is the stage of AL locative efficiency. In which profit would be equal to Marginal Cost. If a firm would produce its product minimum to ATC it will gain Productive efficiency.
C. Differences between the long-run equilibrium of monopolistic competition and long-run equilibrium of perfect competition:
In the situation of monopolistic completion, firms are able to get profit in the short run process but in the long run scale; the pricing will like to get decreased in the quantity demanded. It would increase the firms’ needs to differentiate their goods to increase their profit in ATC. Declining in the demand and increase in the cost makes long-run average cost curve more tangent. This process will lead the firm to produce more surpluses in the long run (Clark &Juma, 2013).
Figure: 4, Monopolistic completion.
(Source: Boundless economics, 2017).
As given in the above diagram, the monopolistic competitive firm produces goods when long-run marginal cost curve (LRMC) intersects MRC.
Long run equilibrium of perfect competition:
In long run scale of pure competitions market, the loss-making firm's exit from the market and new firm rend to enter the market. Losses become the major key factor that establishes long-run equilibrium. New entrants will force the market to reduce the market price of the products and supply goes high. It will increase the level of cost and then all firms will achieve normal profit only.
Figure: 5, Long-run equilibrium of perfect competition
(Source: Boundless economics, 2017)
D. Compare the productive and allocative efficiency of monopolistic competition and perfect competition.
Monopolistic competition market
Perfect competition market
What are the characteristics of an oligopoly market? Choose an Australian industry that represents oligopoly. Justify your example by relating them to the characteristics of oligopoly market.
a) Discuss the key features of oligopoly:
1. Oligopoly market:
Oligopoly is the major form in the market structure which is dominated by few numbers of sellers. Small numbers of sellers and the larger number of collusion reduce the competition and raise the price of the products produced by firms. Each and every firm is aware of individuals' actions and decisions. The decisions and policies of each firm impact the decision of other firms (Marcus Padley, 2017).
2. Key features of Oligopoly market:
Oligopoly market and firms lead to rival and compete in order to loyalty, advertisements, and price or product differentiation instead of focusing on pricing strategy. Oligopoly firms basically adopt the same prices for their similar products. If prices are raised then firms find the best way of working together.
Barriers to entry in the market:
As it is known that there is a controlled competition in the market, there is no barrier for new entrants to make entry and exit from the oligopoly market. In the long run process, it creates some kinds of barriers to new entrants (Marcus Padley, 2017).
In the oligopoly market, each firm has a chance to stick it with their determine prices. If any firms try to make changes in the price, the rivalry firm will retaliate by making the higher deduction in their own products prices.
b) The financial and banking sector:
The Australian banking and financial sector are basically dominated by four big institutes who together cover around 85% of shares in the oligopoly market as home loan value. These firms are known as "Big Four"; National Australia Bank (NAB), Commonwealth Bank (CBA), Westpac (WBC) & Australia and New Zealand Banking Group (ANZ). These firms have kept five times of total properties of the remaining sectors in the same industries such as finance, mutual funds etc. all these banks are ranked in the top 50 safest banking sector (Adiktd, 2017).
Market structure of “Big Four”:
1. In the Australian finance and banking industry, there are huger barriers for new entrants to enter the market. This is actually due to stages of market power and position of “big four”.
2. It reduces the level of competition in the oligopoly market. Big four company comes in the top 21 financial sectors and trade and investment that make impossible for others to start competing with them (Adiktd, 2017).
3. These companies are technically classified as their level of competitiveness including large international financial and investment sector such as JP Morgan Chase, Citibank etc.
(Source: Adiktd, 2017).
c) Reliable data in the context of the financial and banking sector in the Australian oligopoly market (Big Four):
Financial and banking industry in Australia is the dominant players whose features include their large market shares, cartel styles communication, and high barriers for new entrants, sustainable earning streams and lower risks etc. banking prices go up the most in the oligopoly market. The banking industry has been 47.9% higher than another sector due to higher yielding and impervious to currency changes while the financial and banking sector has been fall 56 % in the global crisis.
The co-op has been found a placed position in the financial market. The major motives of financial sectors in the oligopoly market to draw the customers who do not like the ethical standards of conventional banking movements. The acquisition of network and financial behavioral activity has been made it more significant in Australian banking (Marcus Padley, 2017).
According to Australian relative graphic shelter, during a global financial crisis, 2008 the domestication of the economy four biggest firms has provided stability and sustainability from managerial economic downturns. As it is known that these banks are usually entrenched through domestic mortgages and collateral security has been proved to be catastrophic to the level of regional an international financial market (Marcus Padley, 2017).
How can Australia address the housing affordability crisis?
Housing affordability problems include:
1. Eventually high rates of houses.
2.Structural issues as well as cyclical.
3.Such problems get serious if structural problems would not be addressed.
4. Such problems get raised when people do not suffer from the affordability problem.
The reason for housing affordability crisis:
1. Increment in-house rates rapidly than household incomes.
2. Declining in the rates of house ownership.
3. Increment in average house cost proportion.
4. Worse housing projects
Figure 6: the increment in house prices in comparison to household income.
a. Demand-side factors affecting housing affordability:
Economic growth: the demand for housing has been decreased as declining in the income of the economy.as economic growth increase, income rises and people become able to spend more and demand will be increased. An increment in the income pushes demand for housing high and makes incomes more elastic so that individual could spend their budget on housing. Similarly to the recession, in the recession period incomes falls down, people even cannot afford to raise their demand for housing. Interest rates will become high and homeowners would have the huge amount of variables mortgages. For example, in Australia declining in demand of housing and increment in supply has created more pressure on uphold higher lending projects and global interest rates have also been increased (Mulliner, et. al., 2013).
The affordability of housing in Australian cities related to the past 34 years has been shown in the graph below.
Figure 7: middle-income house affordability.
(Source: Mulliner, et. al., 2013).
1. Geographical factors:
Mostly housing market and their demands are based on geographical factors. If international housing prices might be fallen then several areas prices such as Sidney etc. may still be raised. For example, such areas where houses near a hospital, market, and schools might be more preferable than other areas.
A shortage in supply is also the major reason for pushing up prices. Excess of supply causes a decline in demand for housing projects. For example, in the Sidney property boom in 2008, around estimated 700,000 were building were constructed which left the market with the oversupply of fundamental housing (Mulliner, et. al., 2013).
3. Higher rents:
An increment in the rents of Australian housing projects has increased the wants and needs of many buyers to buy a new house rather than giving rents. Increasing rents has made people unable to increase their household savings and their ability to save money have been reduced (Wet stein, 2017).
b. Explain the solutions that have been attempted or are proposed to address housing affordability.
The major issues of housing affordability in Australia are the mismatch between supply and demand. This reason has created many factors and elements that influence the housing affordability in Australia to the extent (Mulliner, et. al., 2013).
Followings are the steps which could be taken to resolve problems of housing affordability:
1. Changes should be under control which is being made in existing households and workers mobility from place to another. They should be provided a better opportunity by reducing their difficulties of buying dwellings.
2. Issues of Shortage of lands and plot should be sorted. For this construction company should adopt fringe development policy of a government.
3. Reduction in the houses costs, availability of plentiful lands are another solutions for increasing housing affordability (Bredenoord, et. al., 2013).
4. A government should pressurize the incremental tight renting market so that household could also be eased.
5. People should be encouraged to increase their savings in order to improvise the number of household deposits.
6. Reduction in the reliance of households upon to debt-to-finance and offering tax-free savings.
7. A government should make effective policies to make a market more equitable by lowering the median pricing status of housing.
8. A tax must be charged against equity on borrowings to levy on financial institutions (Wetzstein, 2017).
C. Explain the possible supply-side solutions to housing affordability.
The mismatch between demands and supply of housing affordability has been increased due to giving priority and growth of certain locations in Australia. The below-given diagram has shown the overall period of changes in the demand and supply of housing demands and supply. Between 1995&2005, houses prices had become doubled in the Australia duet with China break down and low interest rates. High mortgage availability and increment in the population are other reasons for imbalance between demands and supply (Birrell & McCloskey, 2016).
Figure 8: demand and supply house affordability.
(Source: Rohe, 2017)