Economics Essay: Market Power, Structures, Competition, Demand, Supply, Costs, Enrolments, Privatisation.

1. Suppose there are two monopolies. One monopoly supplies water and the other monopoly provide landline phone connections. Which company is likely to have greater market power and why? Explain using the concept of elasticity.

2. Identify and justify the market structure of KFC, MacDonald's and Hungry Jack. Explain using diagrams.

3. Critically discuss the level of competition faced by Charles Darwin University in Darwin vs the campus in Sydney. Explain using diagrams. 

4. Suppose fire emegency services are only provided by the government in Australia and there is no market for fire emergency services. Now assume that fire emergency services are not provided by the government anymore and are privatised. Show the demand and supply diagram of fire emergency after privatisation. Explain the price elasticity of demand for fire emergency services. Show with the aid of a diagram and explain your answer (Hint think of the factors that determine the price elasticity of demand for fire emergency services). 

5. Identify the main models of competition learnt in this unit Give a brief description of each model in no more than 100 words. Discuss the most realistic models of competition in Australia with examples. 

6. How will student enrolments be impacted at CDU if the pass mark at CDU was increased from 50% to 60% for all tertiary students? Explain using demand and supply diagram.

7. a. Explain the slope of marginal cost curve. How is marginal cost linked to opportunity cost?

b. Why is concept of marginal cost important in economics?

c. What is the marginal cost of adding an additional household on to the NBN network?

Q8. How best do you explain the success of supermarkets using the concepts learnt in this unit?

Market power between a water and landline phone supplier

1.Primarily, market power pertains to the ability of a firm to change the price of its commodities within a given market. Thus, the higher the market power, the greater the capability of a firm to manipulate the market price of its goods and services (Reynolds, 2005). Ordinarily, monopolies have a high market and, thus, can influence the price of their commodities. It is, however, imperative to note that the level of market power between monopolies may differ significantly (Reynolds, 2005). For instance, supposing there are two monopolies, one supplies water services and the other provides landline phone connections. The monopoly that supplies water has a higher market power than the firm that provides phone connections.

 Predominantly, one can attribute this to the differences in the degree of elasticity of demand for the two commodities. Typically, the elasticity of demand for water is relatively inelastic. Mainly, this is because the commodity is a basic need. Therefore, any changes in the price of water will bring about a small decline in the demand for that product. On the other hand, the elasticity of demand for landline phones is relatively elastic since the product is a luxury good. Thus, a slight increase in the price of phone connection would result in a significant decrease in the quantity demand of that product (Khan, n.d.).In this regard, one can argue that the monopoly that provides water has a higher market power than the phone connection firm since it can change its prices without necessarily reducing the demand for its goods.

2.It is worth noting that KFC, MacDonald’s and Hungry Jack are all restaurants that operate in one market or industry.  Typically, the restaurant industry has a large number of businesses who offer slightly differentiated services and goods.  For this reason, one may argue that the market structure of MacDonald’s, KFC and Hungry Jack is predominantly a monopolistic competition market structure. One may argue this from the point of view that the three firms operate in an industry that has a large number of sellers, who offer the same kind of products, but the products are slightly differentiated and possess an element of uniqueness, and all sellers are competing for the same customers. Today, the products offered by the three firms are differentiated in terms of quality, location and style. The differentiation of the product causes consumers to perceive that the goods of one company are of a higher quality than the others.

Typically, each company has the power to make independent pricing decision about the quantity of output and the price of the product based on its market. There is also free of entry and exit into the restaurant market. As a result, there is stiff competition in the industry and firms engage iin advertising to attract consumers to their businesses (Economics Online, n.d.). Consequently, these firms make excess economic profits over the short term period. However, in the long run, companies make normal profits due to the fact that the low barriers to entry allow other firms to enter the market, leading to an increase in competition, thereby gradually eating away the profits back to normal profits as illustrated below.

Market structure of KFC, MacDonald's, and Hungry Jack

3.By and large, the level of competition faced by the Charles Darwin University main campus in Darwin is higher than the level of competition in its Sydney campus. At the moment, the campus at Darwin serves students from the indigenous populace of the Australian Northern territory. As a result, it serves many students in its campus and externally. On the other hand, the campus at Sydney mainly serves international students. Given the voluminous nature of the indigenous and local population, the level of competition in Darwin is stiff as students compete for admission slots in the university. The demand for higher education in the region is also high given that CDU is one of the major universities in the region, unlike Sydney which hosts other prestigious universities.

4.At the moment, fire emergency services in the country are provided by the government. In the event that the government stops offering the service and privatizes it, the demand and supply of the service will change significantly. Typically, a fire emergency service is required on rare occasions. However, when the demand for it arises, the customer has to pay for the price set by the service provider. Therefore, given the nature of the commodity, its price elasticity of demand is relatively inelastic. In turn, this provides an opportunity for private firms offering the product to raise the price of the commodity without the fear of losing clients. In the same way, given the nature of the infrastructural fixed costs for providing the service, the price elasticity of supply is relatively inelastic. For this reason, a significant increase in the price of the service may result in a less than proportional increase in the quantity of the product supplied.

5.In economic theory, there are five models of competition. These models include perfect competition, monopolistic competition, monopoly and oligopoly.

 Basically, perfect competition refers to a market where the price and quantity of goods and services are determined by forces of demand and supply in the market. Thus, firms are price takers as the price of their product is determined in the market. Mainly, this form of competition arises where the number of sellers and buyers is large (Economics Online, n.d.). Firms offer a homogenous product and compete equally for consumers. There is also free entry and exit in the market. There are no barriers to the entry of firms in the market. Furthermore, the market is characterized by perfect information between sellers and buyers. As a result, the level of competition in the market is high and firms make normal profits.

A monopoly market structure is dominated by one seller. As a result, there exists no form of competition in the market. Also, the firm offers a unique product with no substitutes. In this case, the firm sets its own prices and determines the quantity of goods and services that it produces. As a result, the firm makes supernormal profits as they charge high prices for their products, higher than the cost of production. What is more, there are high barriers to entry and exit by firms. Today, monopolies are usually owned by the government to protect consumers from exploitation.

Level of competition faced by Charles Darwin University in Darwin versus Sydney

Fundamentally, this form of competition is a combination of both perfect competition and monopoly. It is a form of imperfect competition. In this market, there are many producers and buyers. Firms offer similar but differentiated products. However, buyers view that there are non-price variations among the goods sold by the sellers. Additionally, the market is characterized by few barriers to exit and entry into the market. Just like in monopoly, companies have the power to set their own prices since they offer differentiated products.

An oligopoly structure refers to a market where few large firms dominate the market. Mainly, it results due to collusion by large sellers in the market to gain a high market power and control prices. For this reason, firms have the ability to set prices for their goods and services. The products offered in this market may be differentiated or homogenous. Firms focus mainly on maximizing their profits and returns. Usually, they compete on non-price factors through mechanisms such as advertising, gift vouchers, and loyalty schemes.

In reality, perfect competition is rare to achieve. However, monopolistic market structures exist in real life in industries such as restaurants, and motor vehicle industries. In this case, the number of sellers is high but they offer differentiated products. As a result, they are able to set their own prices. Oligopolies are also realistic. The Australian supermarket industry is predominantly oligopolistic as few large firms (Coles and Woolworths) dominate the market.

6.An increase in the pass mark for enrollment at CDU will significantly affect student enrollments. Mainly, this can be attributed to the fact that less students will be able to reach the cut off marks set by the school. As a result, the demand for enrollment into the university would reduce significantly as students with low performance seek enrollment in other schools. It is worth pointing out that the supply of university education remains constant in this case. Thus, a reduction in the demand for education services at the university amidst a rigid supply of the service will put a downward pressure on the price of the service. For this reason, the school will be forced to reduce the fees charged for students who enroll into the school.

7.Ordinarily, the marginal cost curve slopes downwards first before sloping upwards. Mainly, this attributed to the concept of diminishing marginal returns of production. As the firm begins production, the quantity produced increases while the marginal cost reduces. Thus, the marginal cost falls due to more productivity and less cost per unit. This explains the downward sloping section of the MC curve. However, as production continues, the productivity reduces, the cost of production per unit rises and, thus, the marginal cost of production starts rising. This explains the upward sloping part of the MC curve.  

It is imperative to note that the MC curve is linked to the opportunity cost. Fundamentally, the opportunity cost of production refers to the cost of the best foregone alternative (Khan, n.d.). On the other hand, marginal cost refers to the adjustment in the total cost when an extra unit of output is manufactured. Thus, one may argue that it is the opportunity cost of manufacturing an additional unit of output. The relationship between MC and opportunity cost implies that if the profits are greater than the expenditure incurred in creating an additional unit, then the firm should produce an extra unit of the commodity.  In contrast, if the opportunity cost is greater than the profits, then the firm should not produce an extra unit of the product.

 The concept of marginal cost is important in economics because it helps firms to determine whether or not it is profitable for a firm to raise its level of production. More specifically, firms use this concept as a decision making and analysis tool to assist them maximize their profits. It helps in determining the optimal level of production for the firm, such that producing an additional unit does not result in extra costs for the firm.

The marginal cost of adding an additional household onto the NBN network is negligible. Mainly, this is because the firm has already invested in infrastructure such as cables and wiring in most cities in the country (The Guardian, 2017). Therefore, the company has an increasing marginal return as more households subscribe to its services. As such, it operates more effectively under large scale and, thus, the higher the number of households subscribing to the service, the lower their marginal cost of operation. In turn, this ensures that the marginal cost of providing the service to one more households is minimal. Hence, it is profitable for the firm to supply the service to additional house units.

8.The success of supermarkets in the country can best be explained using the concept of market structures. Predominantly, the supermarket industry in the country is dominated by oligopolistic firms. Few firms dominate the entire market, and collude to set high prices for their commodities. In most cases, these firms avoid price competition. Instead, they engage in non-price competition through strategies such as advertising, gift vouchers and loyalty schemes. On rare occasions, they engage in price undercutting schemes to attract new customers and maintain old ones. They also offer slightly differentiated goods and services, thereby creating the perception that their products are superior than that of their competitors. A combination of these factors has ensured the success of supermarkets in the country.

References

Economics Online. Monopolistic Competition. [Online] Economics Online. Available at: https://economicsonline.co.uk/Business_economics/Monopolistic_competition.html [Accessed 2 Sept 2017].

Economics Online. Perfect Competition. [Online] Economics Online. Available at: https://www.economicshelp.org/microessays/markets/perfect-competition/ [Accessed 2 Sept 2017].

Economics Online. Perfect Competition. [Online] Economics Online. Available at: https://www.economicshelp.org/microessays/markets/perfect-competition/ [Accessed 2 Sept 2017].

Georgia State University. Monopolistic Competition. [Online] Georgia State University. Available at: https://sites.google.com/site/referencematerialformarkets/monopolistic-competition [Accessed 2 Sept 2017].

Khan, S. Perfect inelasticity and perfect elasticity of demand. [Online] Khan Academy. Available at: https://www.khanacademy.org/economics-finance-domain/microeconomics/elasticity-tutorial [Accessed 2 Sept 2017].

Khan, S. Perfect inelasticity and perfect elasticity of demand. [Online] Khan Academy. Available at: https://www.khanacademy.org/economics-finance-domain/microeconomics/choices-opp-cost-tutorial/production-possibilities/v/opportunity-cost [Accessed 2 Sept 2017].

Reynolds, R. L. (2005). Firms with "Market Power". [Online] Boise State University. Available at: https://cobe.boisestate.edu/lreynol/WEB/PDF/short_13_Market_power.pdfl [Accessed 2 Sept 2017].

The Guardian (2017). NBN website reveals when network will be connected at your premises. [Online] The Guardian. Available at: https://www.theguardian.com/technology/2017/feb/27/nbn-website-reveals-when-network-will-be-connected-at-your-premises [Accessed 2 Sept 2017].

The Voice of Australian Universities (2017). Charles Darwin University. [Online] The Voice of Australian Universities. Available at: https://www.universitiesaustralia.edu.au/australias-universities/university-profiles/Charles-Darwin-University#.WasbejBRXIU [Accessed 2 Sept 2017].