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Q1. 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.
Q2. Identify and justify the market structure of KFC, MacDonald’s and Hungry Jack. Explain using diagrams. 
Q3. Critically discuss the level of competition faced by Charles Darwin University in Darwin vs the campus in Sydney.  Explain using diagrams. 
Q4. Suppose fire emergency 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.
Q5. 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. 
Q6. 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. 
Q7. 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 structure of KFC, MacDonald’s and Hungry Jack

A monopoly is that market condition where there is only one seller and many buyers. The seller, being the single supplier in the market, enjoys considerable market power and has the power to take pricing decisions and decisions regarding the amount of supply of his product or service.

In this scenario, there are two monopolies in an economy, one in the supplier of water and the other is the provider of landline connections. In spite of both the sellers being monopolists, the market power enjoyed by the sellers may be different, depending upon the nature of their products and the elasticity of demand for their products (Askar 2013).

Water being one of the daily necessities for survival, the demand for water supply is highly inelastic to changes in the price levels, as people will anyhow buy water, even if that requires curtailing on other costs. On the other hand, the demand for landline phone connections, though high, but is comparatively more elastic to changes in price levels. The reason behind this is that the product is not an absolute necessity and there are substitutes available, unlike water. This implies that the monopolist who supplies water enjoys more market power than the one who provides landline phone connections (Erikson 2014).

The fast food market, in an overall framework, though have many players, is dominated by several big players like those of KFC, Hungry Jack and McDonald’s. Depending upon the geographical locations and the tastes and preferences of the people, these players enjoy dominance over one another. But, in an overall basis, the market for fast food market shows an oligopolistic structure. An oligopolistic market has few sellers and many buyers, with each of the big sellers enjoying considerable market share (Sushko 2013). The situation can be shown with the help of the following diagram:

It can be seen from the above figure that the oligopolistic firm produce at the point where the marginal revenue of the firm is equal to the marginal cost of the firm. Here, the firm is produces Q0 amount of output, which is less than that of the perfectly competitive level and sells its products at P0 level of price, which again is higher than that of the perfectly competitive level. In the oligopolistic market, as is the case in the current scenario, the firms enjoy more than normal profits in the market (Rios, McConnell and Brue 2013).

The Charles Darwin University is one of the most reputed universities in Australia as well as in the entire world, with a huge base of students (both domestic and international) and faculty. Every year, the university attracts hundreds of overseas students from different parts of the world. The Charles Darwin University has its campus in Sydney as well as in Darwin city in Australia (Cdu.edu.au, 2017).

Sydney being one of the most populous cities in the country and one of the primary economic and commercially developed urban zones, is a city attracting large number of workers and students. The city has nearly 35 well-known universities and many other educational institutions. Being one of the Central Business Zones, the cost of living in the city is considerably higher than those in the suburbs of the country are. This in turn influences many of the students, especially the overseas ones, to shift to places where the cost of living is manageable. The city of Darwin, being not an Central Business Zone, has a comparatively lesser cost of living. It has lesser number of universities and the campus of Charles Darwin University in this city is one of the primary universities in this cities. Many students, especially international ones, prefer the campus in Darwin over Sydney, due to this difference in cost of living.

Level of competition faced by Charles Darwin University in Darwin vs the campus in Sydney

Thus, the campus of the CDU in Sydney, on one hand, faces stiff competition from the large number of other universities present in the cities and on the other hand experiences a less demand due to the higher costs of living (Cdu.edu.au, 2017). Due to the presence of many eminent universities, the market in Sydney becomes close to competitive market:

It is evident from the above figure that the CDU in Sydney operates in a competitive environment, with many competitors.

However, Darwin city, having less number of reputed universities, the CDU campus enjoys substantial market share due to its prefer ability and goodwill. The low cost of living of the city also attracts many students to migrate here, thereby creating a demand for the services provided by this campus (McLean 2012). Therefore, the CDU campus in Darwin enjoys a monopolistic kind of market power, or at the most an oligopolistic environment where it is the dominant player. This is shown as follows:

From the above figure, it is evident that the Darwin campus of the CDU faces much less competition than that of the campus situated in Sydney.

Fire emergency services fall in the category of the most essential services that are provided by the government of any country. The service, related to the safety of the residents of any place, requires substantial amount of training, huge amount of resources and machineries and investments in technological aspects. It is treated as one of the public services in any country. If however, this service is privatized in a country, it may lead to substantial change in the market (Rios, McConnell and Brue 2013).

Since the service requires substantial amount of resources to be invested, the initial fixed cost in this sector is very high and not many private firm is expected to have that much amount of resources. Therefore, the market automatically takes the structure of a natural monopoly, since only a few firm can venture in the sector. Encouraging competition may not be a good step here as this may lead to increase in the price of the services (Baumol and Blinder 2015).

In natural monopoly, the firm though incurs an huge fixed cost, but over time it starts enjoying economies of scale and it can provide the services at a much lower cost than any other competitor.

The demand of fire emergency services is perfectly price inelastic. This is because a change in price neither increases nor decreases this demand as the service is only demanded in case of any emergency. If such a situation arises, no matter what the price level is, people demand for this service as it is matter of their safety (Rubinstein 2012).

It is evident from the above diagram that the demand for emergency fire service does not depend on the price levels. Therefore, the price elasticity of demand of the concerned service is zero.

In the above discussions, different types of market structures have been put forward, differing on the basis of their nature, players, type of goods or services provided and market dynamics. The significant ones of these market structures are elaborated in the following section:

  1. a) Monopoly-A monopoly market is one of the extreme models of the competition. In this type of market structure, there is generally a single seller and many buyers. The product or the sold by the seller does not have any close substitute, thereby giving the seller the privilege of enjoying the whole of the market power. The monopolist seller is a price maker and not a price taker and as he enjoys the whole of the market power, he restricts the entry of any new competitor in the market (Hall and Lieberman 2012).
  2. b) Oligopoly-The oligopolistic market structure is  different from monopoly in the sense that in this case there are a few sellers (generally not more than twenty) and many buyers. The sellers being few in number, each of them enjoys substantial share of market power and works to maximize their individual profits. This often gives rise to a situation of price war in the oligopoly market and often the firms, in order to avoid price wars and subsequent losses, enter into collusive agreements. The products sold by the firms are of similar nature, varying in several aspects, at least in brand names.
  3. c) Competitive Market-The competitive market (Perfect competition being the hypothetical extreme scenario) is largely different from the above two variants of markets. In this type of markets, there are many buyers and many sellers, thereby distributing the market power uniformly among both the parties. Both the buyers and sellers are price takers and there is free entry and exit from the market. The goods sold by the sellers are close substitutes and in the long run the sellers are expected to earn only normal profit (Corchón 2013).
  4. d) Natural Monopoly –Though a close variant of the monopolistic market structure, the natural monopoly market differs from pure monopoly in several aspects. The natural monopoly arises in a market due to the presence of high fixed cost and succeeding increasing returns to scale. As not many firms can afford the high initial fixed cost, the market automatically takes the form of a monopoly. However, unlike pure monopoly, natural monopoly is preferred in many instances as it leads to a more efficient market that it would have been in the presence of other competitors (Hall and Lieberman 2012).

Demand and supply diagram of fire emergency after privatisation and its price elasticity of demand

In Australian economy, many of the above discussed market models and other models exist in different sectors. However, if compared and ranked, two of the above models can be seen to exist predominantly, the models being oligopoly and monopoly. The banking industry in Australia is a clear evidence of an oligopolistic structure, with four big players significantly dominating the industry. The similar oligopolistic pattern is also observed in housing industry. The mining sector of the country shows a monopolistic structure, with significant market power in hands of a single player (Richardson 2012).

Tertiary education being a luxury good, if the pass marks at CDU is increased from 50% to 60%, considerably lesser number of students will enroll in the university as many of them will prefer to look for enrollment in other universities or will opt for jobs or other vocational courses. This is because unlike primary or secondary education, tertiary education is not an absolute necessity. This can be shown with the help of the following diagram:

Tertiary education being a luxury good, the demand for it is highly elastic. Therefore, with an increase in the pass marks, lesser number of students will be interested and as a result the enrollments at CDU will be substantially impacted (Wiedmann and Hennigs 2012).

  1. a)The marginal cost curve, in general shows a negative slope initially and then starts showing a positive slope with increase in the production, as is shown in the following diagram:

The initial downward sloping MC signifies the efficiency increment with the increase in production. However, due to the presence of law of diminishing returns, the MC rises after a certain point of time as cost of production of one additional unit of output increases with more and more production (Shepherd 2015).

Opportunity cost may be defined as cost of foregoing next best alternatives when one alternative is chosen.  In this context, the marginal cost is related to this concept in the sense that it is nothing but the change in opportunity cost that occurs when one extra unit of a commodity is produced.

  1. b)The concept of marginal cost is of immense importance in the sense that the production decisions of any rational producer is based on the dynamics and changes of this variable as it shows the cost of producing one additional unit of output.
  2. c)The NBN network, being a huge enterprise and already enjoying increasing returns to scale, the marginal cost of adding one household to this network is negligible and almost equivalent to zero (Alizadeh 2013).

The success of the supermarkets in the global business scenario is highly attributed to the concepts of imperfect competition, marginal cost and increasing returns to scale. These supermarkets, being big players, enjoy substantial market power and mostly operate in oligopolistic or monopolistic environment. The initial high fixed cost of operating prevents many players to enter and therefore, after a certain point of time, these supermarkets start enjoying increasing returns to scale and their costs of production falls drastically. Due to this, they can provide goods and services to the customers at considerably low prices, thereby keeping away competitions and contributing to their success and long term business prospects (Carlino 2012).

References 

Alizadeh, T., 2013. Towards the socio-economic patterns of the national broadband network rollout in Australia. State of Australian Cities, Sydney. Accessed December, 31.

Askar, S.S., 2013. On complex dynamics of monopoly market. Economic Modelling, 31, pp.586-589.

Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.

Carlino, G.A., 2012. Economies of scale in manufacturing location: theory and measure (Vol. 12). Springer Science & Business Media.

Cdu.edu.au (2017). Charles Darwin University. [online] Cdu.edu.au. Available at: https://www.cdu.edu.au/ [Accessed 6 Sep. 2017].

Corchón, L.C., 2013. Theories of imperfectly competitive markets. Springer Science & Business Media.

Erikson, E., 2014. Introduction. Introductory Chapters.

Hall, R.E. and Lieberman, M., 2012. Microeconomics: Principles and applications. Cengage Learning.

McLean, I.W., 2012. Why Australia prospered: The shifting sources of economic growth. Princeton University Press.

Richardson, D., 2012. The rise and rise of the big banks.

Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.

Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.

Rubinstein, A., 2012. Lecture notes in microeconomic theory: the economic agent. Princeton University Press.

Shepherd, R.W., 2015. Theory of cost and production functions. Princeton University Press.

Sushko, I. ed., 2013. Oligopoly dynamics: Models and tools. Springer Science & Business Media.

Wiedmann, K.P. and Hennigs, N. eds., 2012. Luxury marketing: a challenge for theory and practice. Springer Science & Business Media.

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