1) Explain why the Australian wine industry may be regarded as an example of an industry that can be categorized a monopolistically competitive. How does this industry differ from a perfectly competitive industry?
2. ‘The parliamentary inquiry into the big major banks has claimed that their market dominance has significant adverse consequences for the economy and consumers and proposes a range of measures to encourage new entrants and to monitor competition in the sector.’
Source: AFR, 24 Nov 2016.
i. Why is there a lack of competition in the market for banking services in Australia?
ii. What barriers to entry might limit the amount of competition in this market?
3. Describe the method of price discrimination used by airlines. Is price discrimination ever socially desirable? Explain your answer with examples.
Several features make the Australian wine industry be categorized as a monopolistic competition market. For example, there are many firms involved in the production of wine and wines are differentiated based on brands. It is relatively easy for the wine companies to enter and leave the market as there are no significant hurdles to entry and exit. Wine companies often encounter fierce competition from each other, and that is why they undertake a lot of advertisements to woo and retain the customers. The wine businesses in Australia make use of channels like radio, newspaper, posters, and special promotion to advertise their brands to the consumers.
Monopolistic Competition versus Perfect Competition
Products in perfect competition market are perfect substitutes to each other whereas in monopolistic competition there are no perfect substitutes as the products are highly differentiated. In perfect competition market, firms have freedom of entry and exit indicating that there are no barriers to market entry and exit. However, in monopolistic competition market, there are a few obstacles to entry and exit. Moreover, there is perfect efficiency in the perfect competition industry, unlike monopolistic competition market where there are allocative and productive inefficiencies (Mankiw & Cosgrove, 2014). Prices in the perfectly competitive market are set by the forces of supply and demand unlike in monopolistic competition where individual firms determine the prices.
Lack of competition
The cost advantage is a significant factor that impedes competition in Australian banking services. The operating and funding expenses of the leading Australian banks are lower compared to the other competitors (Morandin & Smith, 2011). The major banks are exceedingly horizontally and vertically integrated, and hence they enjoy significant economies of scale.
Consumer inertia also limits competition in Australian banking sector. The costs associated with switching from one bank to another are relatively high. Therefore, the clients are reluctant to look for better-priced products from different banks. Moreover, there are high barriers to market entry thus limiting competition in this sector.
Barriers to entry
Soaring bank switching costs deter potential financial institutions from entering the market and a thus a barrier. Also, if government regulation pertaining the licensing of new banks are stringent, then it becomes difficult for new firms to enter the market. For example, to function as Authorized Deposit-Taking Institution (ADIs), businesses must get banking authorization from Australian Prudential Regulation Authority (APRA) (Morandin & Smith, 2011). After obtaining the license, the ADIs must abide by APRA’s prudential conditions. Moreover, economies scale avails advantage to the established firms thus barring potentials entrants.
Price discrimination based on the time the ticket is bought. If a traveler buys a ticket some months in advance, the price for the flight will be lower. As the date of travel approaches, the demand tends to increase, and hence the airlines raise the price of the ticket. In this scenario, the airlines try to separate the consumers into two categories, that is, those with inelastic demand and those with elastic demand (Vasigh, Fleming, & Tacker, 2016). The passengers with elastic demand are more sensitive to prices and therefore are likely to buy the ticket in advance.
Price discrimination is socially beneficial as it benefits the society. For example, when doctor charges a high fee for affluent patients and little for the poor it is reasonable as the poor may not afford the medication in the absence of price discrimination. This practice takes into account the welfare of different consumers.
Vaccinations come with positive externalities. Vaccinations result in improved immunity in the community because it lowers the possibility of everybody in the population being affected with a certain disease. Healthier children are known to attend school more regularly, fare well in school and thus learn more. As adults, they are likely to be more productive at work leading to a better pay and long lifespan.
Private market would undersupply vaccination since the producers make decisions based on their private benefits and costs rather than the welfare of the society. Individuals in the community may not consume vaccines maybe due to lack of information or poverty which means weak demand. As a result, the players in the private market will undersupply the vaccination.
External benefits of vaccination
Price of vaccine
Quantity of vaccine
The positive externality of vaccination indicates that the marginal social benefit outweighs the marginal private benefit. In a free market, the consumption of immunization would be at Qe where the private interest matches the private cost. However, at point A, social benefit exceeds the social cost and hence social inefficiency. The intervention of the government to provide vaccination leads to the achievement of social efficiency at point B where the social cost matches the social benefit. The external benefit of immunization is shown by the portion shaded yellow.
Monetary support for vaccination such as partial or full subsidies for vaccines can increase the number of persons taking children for immunization. Moreover, the government should put aside sufficient resources to cater for wide-scale education and communication campaigns about the benefits associated with treatments.
Regulation on toxic substances
The government can formulate a policy to limit pollutants that can be discharged to the atmosphere. Those companies found to be going against the regulation should be penalized or even their licenses revoked till they devise measures to regulate the toxic substances.
The government can introduce a tax on those companies that pollute the atmosphere to make them incur the social cost of pollution. The amount collected from the tax should be diverted to activities meant restore the quality of the environment such as tree planting (Frank, 2015).
Provision of subsidies
The government can also avail subsidies to the companies to encourage the development and generation of non-fossil fuels to a way of curbing pollution. With the adoption of renewable energy sources, the amount of contamination in the atmosphere can be reduced significantly (McTaggart, Findlay, & Parkin, 2015).
In September quarter of 2016, the Australian economy contracted by 0.5%. However, in December quarter 2016 the economy expanded by 1.1%. The overall expansion in the economy in 2016 was 2.4%(Australian Bureau of Statistics (ABS), 2017).
Australia is among countries in the world that are experiencing relatively low inflation rates. In 2015 and 2016 inflate rate stood at 1.5% and 1.4% respectively. Between December 2016 and March 2017, inflation rose by 0.5% and between March 2016 and March 2017 2.1% (Australian Bureau of Statistics (ABS), 2017).
There are slight fluctuations in the unemployment since 2015 and 2017. In 2015 the unemployment was 6.1%, 5.8% in 2016, 5.8% in 2017 February and 5.9% in 2017 March (Australian Bureau of Statistics (ABS), 2017).
The Australian economy is in the expansion phase of the business cycle. In 2016 the economy registered a positive economic growth of 2.4%. Inflation level is also relatively low, that is, 2.1%. Unemployment in 2015 was 6.1%, and it is currently at 5.9% indicating some growth in employment levels in the country.
There is uncertainty as we cannot precisely predict what the households will do with the pay increase. If the families decide to increase their consumption, then it would be an injection to the circular flow of income. However, if the households choose to save the amount received from pay rise and at the same time they will have to pay more taxes to the government, then it is a withdrawal from the circular flow of income.
Firm spending money on research is a form of investment that is likely to results in innovations improving the productivity of the enterprise. Thus it is an injection to the circular flow of income.
An increase in the tax-free threshold is an injection to the circular flow of income as this measure will reduce the amount of tax paid by eligible individuals. A reduction in the tax represents an increase in the real revenue, and thus people are likely to increase their consumption.
It is an injection to the circular flow of income as the credit unions will increase their affordable loans to individuals to carry out investments.
It is an injection as this represents an increase in export earnings.
It is an injection as the money goes back to the economy.
GPD using expenditure approach
GDP = C + I + G + (X-M), where
C= Household consumption = 4900
I= Gross private investment = 945
G= Government spending, 275+120= 395
(X-M) = net exports, 590-475= 115
GDP = 4900+945+395+115 = 6355
Gross National Expenditure
GNI = C+I+G, 4900+945+395=6240.
Gross Domestic Product measures only the output generated and sold in legal markets. Those activities that lack market transactions are not incorporated in the determination of GDP. The GDP does not take into account the quality of the environment in that a rise in GDP that not indicate that individuals have access to clean air, water, and other useful resources. Moreover, GDP ignores the contribution of leisure to the quality of life(Frank, 2015).
ii, Human Development Index (HDI) examines the average achievement of a country by taking into account health, literacy and a decent standard of living. The indicators used in HDI include educational level, life expectancy and GDP per capita. Education is appraised at two levels, that is, the mean years of learning and the projected years of schooling. Life expectancy depicts the health of individuals, and it is computed at the time of birth. GDP per capita shows the standards of living of the residents and is based on the purchasing power parity.
Human Development Index of Australia in 0.939 and is ranked second internationally (United Nations, 2017). This ranking demonstrates that the country has a relatively high lifespan, literacy levels are high, and the GDP per capita is also high.
Australian Bureau of Statistics (ABS). (2017, April 26). Consumer Price Index, Australia, Mar 2017. Retrieved May 2nd, 2017, from https://www.abs.gov.au/ausstats/[email protected]/mf/6401.0
Australian Bureau of Statistics (ABS). (2017, April 13). Labour Force, Australia, Mar 2017 . Retrieved May 2, 2017, from https://www.abs.gov.au/ausstats/[email protected]/0/F756C48F25016833CA25753E00135FD9?Opendocument
Australian Bureau of Statistics (ABS). (2017, March 1st). Australian National Accounts: National Income, Expenditure and Product, Dec 2016. Retrieved May 2nd, 2017, from https://www.abs.gov.au/ausstats/[email protected]/mf/5206.0
Frank, R. H. (2015). Microeconomics and behavior. New York, NY : McGraw-Hill Education.
Mankiw, N. G., & Cosgrove, S. (2014). Principles of microeconomics. Stamford, CT: Cengage Learning.
McTaggart, D., Findlay, C. C., & Parkin, M. (2015). Economics. Frenchs Forest, N.S.W: Pearson.
Morandin, N., & Smith, J. (2011). Australian Competition and Consumer Legislation 2011 (1st ed.). Sydney, NSW : CCH Australia.
United Nations. (2017). Human Development Indicators: Australia. Retrieved May 2, 2017, from https://hdr.undp.org/en/countries/profiles/AUS
Vasigh, B., Fleming, K., & Tacker, T. (2016). Introduction to Air Transport Economics: From Theory to Applications. London : Routledge, Taylor & Francis Group.