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Variable Quality In Consumer Theory

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Question:

Discuss about the Variable Quality in Consumer Theory.
 
 

Answer:

Introduction:

Imposition of greater amount of excise tax leads to decrease in the overall demand, although this might exert little impact since demand for alcoholic products are very much inelastic. In itself, people addicted to alcoholic products might perhaps continue buying even at the time when product prices rises as there are hardly any substitute product (Baumol and Blinder 2015). Essentially, alcohol can be necessarily considered as a demerit product, therefore, people might perhaps underrate the specific costs of consumption of alcohol products. By itself, this implies that individuals consuming alcohol and are very much addicted to the definite product might possibly neglect the damage that this particular good causes to the health of the people. This is why it is important to stop the consumption of the good alcohol. Moreover, consumption of alcohol as along with different alcoholic goods has diverse negative externalities. For example, consumption of alcohol leads to rise in the overall crime rates, augmented accident rates, increased liver as well as heart diseases among many others. Therefore, it can be hereby mentioned that there is higher social cost than the private cost associated to consumption of alcohol. However, if the overall social cost associated to consumption of alcohol is higher than the present price, then the entire social efficiency can be increased essentially by convincing individuals to make payments for social cost in actual (Baumol and Blinder 2015).

According to the diagram presented below, initial demand is reflected by D1, preliminary supply is represented by S1. In this case, the equilibrium price as well as quantity is reflected by P1 and Q1 respectively. Nevertheless, imposition of excise tax leads to reduction of the supply and accordingly a shift of the particular supply curve S1 to a new position S2. In addition to this, the overall price also increases from the price level P1 to a new position P3 owing to implementation of the tax amount> in addition to this, the total quantity demanded for the good also declines from the level of Q1 to the new position Q3. Since, the demand for the product is very much inelastic, greater increase in the prices leads to relatively lower percentage of decline in quantity demanded for the particular good. Essentially, the diagram below replicates the fact that the implementation of the tax necessarily leads to overall shift in the supply curve from the level S1 to the new position S2 directing towards decrease in the overall demand for the good. However, this can be regarded as the socially efficient level or position that is at the equilibrium where the overall social marginal cost (SMC) is necessarily equal to the social marginal benefit (SMB) (Walras 2013). Another additional benefit or else advantage of raising the excise duty by respective government on alcohol products is that it leads to increased tax revenue.

In itself, this can make the government to make higher expenditure on essentially segments such as health care as well as for campaigns for encouraging people to refrain from alcohol and different alcohol based goods. Then, this can direct towards decreasing the overall tax rates for example, Value Added Tax (VAT). Subsequently, the unique argument for increasing the excise duty is necessarily founded on a normative judgement. This normative judgement essentially suggests that alcohol consumption is unhealthy for people and the corresponding government need to intervene for looking into the matter and take actions for reduction of the demand for the specific good. Nevertheless, there are arguments that can be put against the action of imposition of tax on alcohol or else alcohol based product. The arguments against action of imposition of tax by the government on alcoholic goods is that demand can be regarded to be inelastic for the good, thus, price increase for implementation of tax can lead to insignificant reduction in overall demand for the good (Walras 2013).

 

Effects of imposition of a minimum price on alcohol

Government uncertainly can recommend a minimum price for a specific unit of the good that is alcohol. Essentially, the scheme of imposition of minimum price is essentially intended at prevention of alcohol sale at low or else cheap rate by diverse supermarkets. However, the high price for the good alcohol can assist in depressing drinking. This can in turn aid in augmenting health conditions and compel individuals to make payments for the actual social cost of the good alcohol. Contrarily, there are other group of economists who are of the view that minimum price is necessarily unfair and further added that backsliding price can upset the entire living standards of different individuals living on low income (Tietenberg and Lewis 2016). However, overconsumption of goods such as alcohol can pave the way towards diverse social challenges that comprise of augmented occurrence of crime, amplified accidents rates, untimely deaths, liver as well as heart disorders along with mental difficulties and many others.

It can be presented using diagram below that essentially the social cost of necessarily the consumption of alcohol is higher than the entire private cost. Establishing a specific minimum price at a greater level that is at P2 influences individuals to make payments for social cost of alcohol consumption. However, this in turn can reduce the quantity of consumption from the level of Q1 to the new position Q2. Therefore, it can be said that greater minimum price established by respective government can be regarded to be a significant facet in managing higher cost of the consumption of alcohol. Subsequently, this might possibly dishearten people from particularly overconsumption (Tietenberg and Lewis 2016).

Analysis of the above diagram reveals the effects of establishment of minimum price for different alcohol products. Essentially, under normal circumstances, demand equals supply especially at equilibrium level of price that is in this case P1 and the equilibrium quantity that is Q1. Particularly, normal model for demand as well as supply suggests that a minimum price that is set over and above the equilibrium price lead to a surplus situation. In this case, surplus implies that supply is more than demand. Particularly for alcohol pricing, this cannot happen as demand and supply are very much inelastic. However, alcohol sellers might just raise the prices to the level P2 and this will be related to decrease in quantity demanded to Q1. This in turn can lead to significant decline in diverse alcohol related difficulties. Nonetheless, there are numerous ways to avert different problems associated to alcohol consumption, but establishment of minimum price at high level can certainly exert impact on the decrease in overall demand of the good. Nevertheless, this identified problem of alcohol consumption cannot be totally eradicated by way of establishment of higher minimum price since the demand for essentially alcohol based goods are very much inelastic. In itself, this implies that the change in price directs towards very small alteration in the overall percentage of demand since price is very much inelastic. However, this is because there are little or no substitute for the good that is alcohol and for the addicted people the consumption of this good can be regarded to be a necessity. Therefore, even though price increases, people addicted to the product might possibly keep on purchasing as well as consuming the product (Barreto 2013).

In a competitive partial equilibrium situation, overall burden of excise tax relies on elasticity of demand as well as supply. However, if demand for a specific taxed good or else service is elastic, and in addition to this, supply is relatively inelastic in nature, then burden of the specific excise tax is endured by sellers,  while purchasers stand the burden of specific tax on a particular good or else service having inelastic demand as well as elastic supply (Barreto 2013). Nevertheless, elasticity of demand as well as supply suggest equivalent allocation of excise tax loads between purchasers as well as sellers.

However, there are relative merits of imposition of excise duty rather than minimum price regulation. This is because increased tax on alcohol can lead to augmented tax revenue for the government. Again, this can assist and at the same time enable the government to expend money on development health care or increase expenditure on different campaigns that are targeted towards encouragement of people to stop alcohol consumption.

 


As rightly put forward by Barreto (2013), monopolistically competitive firm does not operate at the minimum average total cost (ATC) as they function with excess capacity.

Analysis of the above mentioned diagram reveals the fact that the manufacturer might lose if they manufacture more amount in a bid to achieve productive competency. However, in case if the marginal cost rises over and above the marginal revenue, then the corporation can incur higher cost and at the same time receive additional amount of revenue. However, this can be considered as the reason for which manufacturing firms might want to maximise profits by producing certain quantity where marginal revenue is essentially equal to the marginal cost and price charged is equal to $200.

As rightly indicated by Chan and Gillingham (2015), oligopolistic structure of a market can be considered to be totally different from other structures of market. Particularly, the nature as well as characteristics of the oligopolistic market are the following:

Features of interdependence:

Interdependence of different firms in the procedure of business decision making can be regarded one of the most important features of oligopolistic market structure. Firms are essentially interdependent as competition in this market is few and any alteration in price and product by the corporation can have influence on the overall fortune of the rivals. This in turn can retaliate by altering the price as well as output (Rios et al. 2013). Thus, under oligopoly, the firms considers market demand for diverse products and the reactions of other corporations in the entire industry. Thus, it can be hereby mentioned that there exists high interdependence of the corporations under particularly oligopoly.

The corporations operating under the oligopolistic market structure essentially employ different aggressive as well as defensive weapons for acquirement of higher share of the market pie and maximise the overall sales (Negishi 2014).  The firms therefore can incur cost for advertisement as well as other sales promotion. Therefore, advertising as well as cost of selling can play an important role in particularly the oligopolistic structure of the market.

As rightly put forward by Wadman (2016), a significant characteristics of oligopolistic market structure is that the evaluation of the group behaviour. However, in case of perfect competition, monopoly as well as monopolistic competition, corporations are supposed to behave in a manner that can help in maximization of profits. Therefore, essentially the profit maximizing behaviour of this part might not be feasible. In particular, corporations operating under oligopoly are interdependent since they operate in a specific group.

 

Components of monopoly:

As rightly indicated by Pigou (2013), there exists certain components of oligopoly under specifically the oligopolistic circumstances. Therefore, under essentially oligopoly with features of product differentiation, each and every corporation controls large fraction of the market by essentially manufacturing different differentiated goods.

In itself, under oligopoly there is exists price rigidity and the price essentially tend to be very rigid and the price cut by one firm is immediately retaliated by different rival corporations. This in turn might lead to price cut (Tietenberg and Lewis 2016).

Banks namely Westpac, National Australian Bank as well as commonwealth bank essentially form the oligopolistic market that in turn can ensure the overall stability of the entire system of banking in Australia. Again, different mobile networks namely, Tesltra, Vodafone and many others can be considered to be brands of well-known virtual operators and this corporations can be characterised as oligopolistic. Alterations in the overall price of different mobile network corporations can enable different rival corporations to change the strategies since cost is to some extent close to one another.

The striking nature and characteristics of essentially monopolistic competition are hereby stated below:

Large number of sellers: monopolistic competition can be characterised by particularly large number of sellers that are essentially selling different closely associated goods, though, the goods are not essentially homogeneous (Walras 2013).

Product differentiation: In this case, each firm remain in the position of exercising a particular degree of monopoly by means of product differentiation. The goods of the firms are very close but cannot be substituted by the goods of other firms (Anderson et al. 2016).

Sale price: The selling costs necessarily forms an essential part of the monopolistic competition. In this case, goods as well as services are necessarily differentiated and the differences can be understood from the cost of selling.

Entry and Exit: Yet another important characteristic of monopolistic competition is in itself, the freedom of entry or else exit from the industry during a specific period of time (Walras 2013).

Corporations such as Woolworths as well as Coles can be regarded as monopolistically competitive firm that is operating in the Australian economy. Again, the food retailers such as Cole as well as Woolworths Limited share approximately 60% of the overall market share among each other. In addition to this, the total revenue generated by the firm amounted to $75.9 in which Coles as well as Woolworths Limited shared particularly $30 and $51 billion respectively. Furthermore, BHP Billiton can be considered as a mining corporation that has large amount of the market share. This is also monopolistically competitive that generates a revenue of around $14.8 billion during the financial year 2016.

 


As rightly indicated by Cahuc et al. (2014), duopoly can be referred to as a structure or market where two different corporations possess control over the entire market. Essentially, specific conditions that are essential for the oligopoly firm are as follows:

  • Presence of only two different firms
  • Independence (Keller 2014)

Analysis of the above diagram reveals the fact that a firm operating under the duopoly market will necessarily produce quantity Q1 as at this level of production, the marginal revenue equalises with the marginal cost. The price charged will be equal to P1 that again can be regarded as the monopoly price. Essentially, this can help in maximization of profit (Keller 2014). However when another company that is company b enters a market, it might produce quantity Q2 level in a bid to maximise the overall revenue and charge greater price.

Analysis of the above figure reveals the fact that the firm produces at the level Q1 and necessarily the price level remains at P1. However, this signifies a perfect time for both the corporations and necessarily the joint production carried out by the firms reflects a monopoly output as well as monopoly price.

 

References

Anderson, D.R., Sweeney, D.J., Williams, T.A., Camm, J.D. and Cochran, J.J., 2016. Statistics for business & economics. Nelson Education.

Barreto, H., 2013. The Entrepreneur in Microeconomic Theory: Disappearance and Explanaition. Routledge.

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

Cahuc, P., Carcillo, S., Zylberberg, A. and McCuaig, W., 2014. Labor economics. MIT press.

Chan, N.W. and Gillingham, K., 2015. The microeconomic theory of the rebound effect and its welfare implications. Journal of the Association of Environmental and Resource Economists, 2(1), pp.133-159.

Keller, G., 2014. Statistics for management and economics. Nelson Education.

Negishi, T., 2014. History of economic theory (Vol. 26). Elsevier.

Pigou, A.C., 2013. The economics of welfare. Palgrave Macmillan.

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

Tietenberg, T.H. and Lewis, L., 2016. Environmental and natural resource economics. Routledge.

Wadman, W.M., 2016. Variable Quality in Consumer Theory: Towards a Dynamic Microeconomic Theory of the Consumer. Routledge.

Walras, L., 2013. Elements of pure economics. Routledge.

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