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Price And Market: Monopoly Market

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Question:

Discuss about the Price and Market for Monopoly Market.

 

Answer:

Introduction

The place where various goods & services are exchanged among different sellers & buyers is defined as the market place. The structure of a market is dependent on nature of product, customers & sellers. Therefore a market is identified on the basis of few special features. Few market structures include the perfectly competitive market, the monopoly market, the monopsony & the oligopoly market. Perfectly competitive market & the monopoly market are two extreme cases of the market structure (Winston, 2007). In Australia super markets contribute significantly in the overall growth of the economy. There are large numbers of retail supermarket in Australia. Coles & Woolworths are two supermarket giants in the Australian market.

Identification of the Market Place & Commodities Traded within the Market

Supermarket is defined as the market place where large numbers of food items, stationary goods as well as manufacturing products are traded under the same roof. This market provides large number of alternatives to customers in comparison to other small retailers. This market also provides the facility of choosing their products according to their own preferences. In Australia Woolworth & Cole are two largest super markets. These markets generally offer large numbers of grocery products & varieties of packaged foods, fresh vegetables to customers. Along with these products the organisation is also popular due to its stationary products & other electronic goods (Schotter, 2008). These stationary products & varieties of confectionary products are also quite popular among customers. In Woolworth & Cole also DVDs & large numbers of magazines are sold. These two super markets have been able to create wide customer base & capture wide market area.

Achieving Equilibrium in the Market

Market demand & supply are two crucial components of any market pace. Market equilibrium is defined as the point where the demand for & supply of various products are equal. Market demands & supply are dependent on various factors. In case of market demand different factors include the price of the product, income of people, tastes & preferences of people etc. On the other hand the supply of products is also dependent on the product price, the price of factors of production & technology associated with the production process. If any of these above mentioned factors which affect the supply & demand changes, it leads to the change in the Market demand & supply (Parkin and Bade, 2006). With the change in the demand & supply in the market, the equilibrium in the market gets disturbed. If the market diverges from the market equilibrium, then various market forces help the market in getting back to the equilibrium position. In case of super market also the same process helps in maintaining the equilibrium position in the market. If the demand for any product in the market increases, the price of the product automatically increases. Then customers in the market shifts to other substitute products to fulfil their demand. As a result the demand for the products decreases (Loertscher, 2008). To get back to the equilibrium position the price of the product declines & this results in the increase in the demand for the product. Similarly, in case of the decrease in supply of a product the price increases at the beginning. This discourages people to purchase this product. As a result the price of the product again returns back to the original position.

 

Market Type

To identify the market in which an organisation is operating requires the recognition of the types of customers, sellers & the nature of the products sold in the market. In case of Woolworth & Cole these two organisations have captured large market share in the Australia. 70% market share only by two organisations express that these two organisations are operating in an oligopoly market. Some important features of the oligopoly market are few sellers & large numbers of customers, price rigidity as well as entry & exit barrier. In case of Woolworth & Cole, these two organisations possess large market share & as a result other organisations are not in a position to compete with these companies (Nicholson and Snyder, 2014). Group behaviour is also present among these companies. Due to large market power the price rigidity is also present within the market.

Intervention of Government in the Market

In case of an oligopoly market the intervention of government plays an important role. In oligopoly market one of the important features is the collusion or cartel. Collusion is illegal in the sense that it acts as a hindrance to other organisations to operate in the market. The intervention of the government is impetrative in order to restrict this kind of activities in the market. Government of every country prefers healthy competition within the market. The collusion within the market affects the competition in the market. Therefore the government intervention is necessary in this market.

Tax Imposition on Saturated Food by the Government

Introduction

Externality is one of the important phenomenons in economics. Externality is defined as the consequence faced by third parties due to the activity performed by other individuals or industries. Externality can be of two types & these are the positive externality & negative externality. In case of positive externality, consequence faced by the third party is positive in nature & this is acceptable by individuals & at the same time for the economy (Lai and Lorne, 2006). On the other hand in case of the negative externality the consequence, in case of the third party is not acceptable, since it is harmful in nature. Here the impact of the imposition of tax by the government in case of the saturated food products has been explained. The externality leads to the market failure in the economy. Market failure is not desirable from the point of view of the economy & the government. In this situation the government intervention is of utmost importance. The overconsumption of those food products which are high level of saturated food causes negative externality in the economy. To reduce the overconsumption of these food products are essential & one of the essential tool is the tax imposition by the government.

Analysis of the Impact of Tax Imposition by the Government on Foods with Saturated Fat

Before analysing the impact of the tax imposition by the government it is important to identify the negative impact of the consumption of the saturated food products. In Australia people consume food products which possess high saturated fat. This is resulting in obesity among people in the country (Fine, 2016). Obesity is the root cause of most of the diseases. Excess obesity & disease is not desirable in the society & as a whole for the economy. Since obese people become unproductive for the economy, it also reduces the productivity of the whole economy. Since obesity is the prime reason behind other diseases, therefore it has also indirect impact on the economy. Those activities which reduce the productivity of the overall economy & at the same time impede the growth, leads to negative consequence for the health of the economy. Since obesity causes different diseases, therefore individuals have to spend large amount for their treatment & this is a cost from the point of view of the society. Another cost associated with the obesity is the low level of self esteem. People consuming foods containing high level of saturated fat are also affected by psychological conditions. All these factors affect the family members of the patient similarly. This is the responsibility of the government to tackle such situation (Chaloupka et al., 2010). One of the most important tools is the tax imposition. The analysis of the imposition of the tax on the overconsumption of foods containing saturated fat has been described below:

In case of the society the negative externality is not desirable. Two important concepts in this field are the marginal social cost & the marginal social benefit. Marginal cost & benefit are seen from the point of view of both the individual & the society. The marginal benefit of the individual is defined as the benefit accrued by the individual due to any activity performed by other individuals or industries. Similarly, the marginal cost of individual is the cost associated with any activity done by other individuals. The point, at which the marginal benefit is equal to the marginal social cost, is desired by the society. This has been depicted in the following diagram. Intersection of the Marginal benefit & the cost has been defined by the point Qp. If the society consumes at this level it will result in negative externality to the society. On the other hand at this point the marginal individual cost is equal to the marginal social cost. If people in the society consumes at the level, it will be increase the negative consequence over the economy (Gillingham & Sweeney, 2010). The price of the saturated food products at this point is depicted by Pp. Now it has to be seen from the above diagram the importance of the tax imposition by the government. It is essential to analyse whether the imposition of tax by the government will decline the consumption of food products which contain high level of saturated fat. If the government imposes tax on these food products, it will result in high level of marginal cost. As a consequence people have to pay more in order to purchase these food products. The imposition of tax leads to the shift in the MC curve. This will intersect the MB curve at a higher level. As a result the price of the food containing saturated fat will increase. Now the price has escalated to the level Ps. From the law of demand it is clear that if the price of any product increases the consumption of the product decreases. The impact of the tax imposition has been depicted in the following diagram. It can be noticed from the diagram that increase in the marginal cost has discouraged people to purchase food products from the level Qp. The new point of consumption is Qs, which is less than the point Qp. This is socially acceptable since at this point the negative externality has decreased.

[Source: Tucker, 2012] 

Therefore, it can be concluded that the tax imposition has helped the society by reducing the intensity of the negative externality. It is to be noted that the economy without the intervention of the government increases the negative externality & results in the market failure. Therefore, the government intervention is necessary in order to allocate the resources in an optimal manner. Before the intervention of the government, economy was suffering from dead weight loss (Tucker, 2012). At the point of equilibrium, where the marginal social benefit is equal to the marginal social cost, the dead weight loss has been eliminated. This has been depicted in the diagram.

Beside the policy of the tax imposition the other policy that government of the nation can adopt is the reduction of tax on those food items which are good for health of people of the economy. Healthy food items include variety of fruits, vegetables as well as foods which contain low level of saturated food. It has to be mentioned that the reduction of tax from these food items leads to the decline in the price of these food products (Stiglitz, 2010). It is the natural instinct of human being that they tend to purchase those products which are cheaper. If we compare the food products which contain high saturated fat & the fresh vegetables & other food items which contain less saturated fat, it is evident that the price of food containing less fat has decreased significantly. This will encourage people to eat those food products which are healthy in nature. it has been depicted in the following diagram. In the diagram the MC defines the marginal cost & MSC describes the marginal social cost. On the other hand the MB & MSB depicts the marginal benefit & the marginal social benefit. Before the taxation strategy the equilibrium point has been defined as the point where quantity is Qs. Now after the reduction of tax the marginal cost associated with the food products reduces. As a result the marginal cost shifts downward direction. The price will decrease from the price Pp. This will help in encouraging people to purchase these food products more. As a result the quantity will increase from the previous level of quantity demand (Weeden & Grusky, 2014). The marginal private benefit should be equal to the marginal social benefit in order to attain the social equilibrium. With the help of government intervention through the imposition of tax on food products containing saturated fat & reduction of tax from other food products which contain comparatively less fat, the negative externality could be reduced. Due to the negative externality the society suffers from deadweight loss. With the help of taxation strategy this deadweight loss could be eliminated.

[Source: Weeden & Grusky, 2014]

Conclusion

Market structure is one of the most important parts from the point of view of the economy. Since there are different kinds of structures in case of market, it is essential to identify the market structure in which an organisaition is operating. Various factors affect the demand & supply of a product in a market & the equilibrium position is determined with the help of the intersection of market demand & supply. The divergence from the equilibrium point results in the inefficient allocation of resources. The equilibrium point is returned back with the help of the demand & supply mechanism (Liski & Montero, 2006). From the above discussion it could be identified that both the Woolworth & Coles operate in the oligopoly market. Another important concept in the economic is the negative externality which is not desirable from the point of view of society as well as individuals. This leads to the market failure. Market failure is a serious issue in the economy. This can be avoided with the proper government strategies. These strategies include the tax related strategies. It can also be concluded that with the help of proper government strategy the overconsumption of food products which contain saturated food products beyond the acceptable level, can be reduced.

 

References

Chaloupka, F. J., Straif, K., & Leon, M. E. (2010). Effectiveness of tax and price policies in tobacco control. Tobacco Control, tc-2010.

Fine, B., 2016. Microeconomics. University of Chicago Press Economics Books.

Gillingham, K., & Sweeney, J. (2010). Market failure and the structure of externalities. Harnessing Renewable Energy in Electric Power Systems: Theory, Practice, 69-92.

Lai, L.W.C. and Lorne, F., 2006. The Coase Theorem and planning for sustainable development. Town Planning Review, 77(1), pp.41-73.

Liski, M., & Montero, J. P. (2006). Forward trading and collusion in oligopoly. Journal of Economic Theory, 131(1), 212-230.

Loertscher, S. (2008). Market making oligopoly. The Journal of Industrial Economics, 56(2), 263-289.

Mazzeo, M. J. (2002). Product choice and oligopoly market structure. RAND Journal of Economics, 221-242.

Nicholson, W. and Snyder, C., 2014. Intermediate microeconomics and its application. Nelson Education.

Parkin, M. and Bade, R., 2006. Principles of microeconomics. English Language Book Society, United Kingdom.

Schotter, A., 2008. Microeconomics: a modern approach. Cengage Learning.

Stiglitz, J. E. (2010). Government failure vs. market failure: Principles of regulation. Government and markets: Toward a new theory of regulation, 13-51.

Tucker, I. (2012). Microeconomics for today. Nelson Education.

Wang, L., Mazumdar, M., Bailey, M. D., & Valenzuela, J. (2007). Oligopoly models for market price of electricity under demand uncertainty and unit reliability. European Journal of Operational Research, 181(3), 1309-1321.

Weeden, K. A., & Grusky, D. B. (2014). Inequality and market failure. American Behavioral Scientist, 58(3), 473-491.

Winston, C., 2007. Government failure versus market failure: Microeconomics policy research and government performance. Brookings Institution Press.

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