BUECO5903 Business Economics-Exercising Tax

a)Assume that in long-run equilibrium the minimum point of the LRAC curve for a table manufacturer tables in $200 per table. Under conditions of monopolistic competition, will the long-run price of a table be above $200, equal to $200 or less than $200. Explain your answer.

 

b) What are of the characteristics of an oligopolistic market Give three examples of industries with oligopolistic firms in Australia. Justify your examples by relating them to the characteristics of oligopolistic firms.

c) What are the characteristics of a monopolistically competitive market Give three examples of industries with monopolistically competitive firms in Australia. Justify your examples by relating them to the characteristics of monopolistically competitive firms.

d) Assume that two firms make up a natural duopoly. What are the conditions which may make this occur Sketch the market demand curve and cost curves that describe the situation in this market and that prevent other firms from entering.

The exercise of greater excise tax might lead to fall in demand, even though the effect is minimal due to the price inelasticity of products like alcohol. The people addicted towards alcohol would continue to buy the product by ignoring the high pricing structure of the same, since there are no replacements. This clearly signifies that these individuals would not pay adequate attention to their health, as alcohol might lead to serious damage, if consumed above the limit. This is the primary reason of curbing the individuals from overconsumption of alcohol (Anderson et al., 2014). 

Moreover, the use of excessive alcohol-based products has a variety of negative consequences as well. These consequences might take the form of rising crime rates and accidents, heart and liver problems and other issues. Thus, the social consumption cost related to alcohol is greater than explicit private cost. In such situation, attempt could be made to raise the overall social efficiency by compelling people to pay for the social cost (Carbone & Rivers, 2014).

The above figure states D1 implies the primary demand, whereas, D2 implies the primary supply. The price and quantity of equilibrium are P1 and Q1 respectively. However, the supply curve moves from S1 to S2 with the exercise of tax; thus, resulting in shortage of supply. On the other hand, there is a rise in price from P1 to P3 coupled with a fall in quantity from Q1 to Q3. Due to the inelastic nature of demand, higher price increase results in lesser fall in quantity. The shift of the supply curve could be treated as socially efficient position, since at the level of equilibrium, social marginal cost is identical to social marginal benefit (Fell & Kaffine, 2014).

One of the most significant advantages of raising excise duty is the increased amount of tax revenue for the government. With the help of such additional income, the government could invest money on healthcare along with launching campaigns to make the people aware of the negative consequences of alcohol. In addition, this would help in minimising the tax rates like Value Added Tax (VAT). However, there are widespread arguments against the exercise of higher tax on alcohol products because of inelastic demand. This denotes that the increase in prices of the product might lead to meagre fall in the product demand.

Effects of exercising minimum price on alcohol for the product consumption:

The government could propose a minimal price falteringly for a definite unit of alcohol. Such attempt is intended mainly to prevent the supermarkets from selling alcohol products at lower rates. The increase in price might compel people to incur actual social alcohol cost, which would discourage drinking and improve their health conditions. However, some economists have denigrated that such rise in price is unjustified, as it could have negative impact on the living standards of the lower income households (Fourcade & Khurana, 2013). On the other hand, excessive alcohol consumption might increase accidents, crime rates, liver problems, heart issues and psychological imbalances amongst the individuals.

According to the above-stated figure, it has been understood that the producer might incur loss, in case; it increases its production for achieving productive competency. When the marginal revenue falls below the marginal cost of $200, the organisation might need to spend additional amount for generating higher amount of revenue. This has been the main reason, in which the producer would increase its profit by manufacturing products at a level of quantity, where the marginal cost matches with the marginal revenue by charging price at $200.

The oligopoly market structure is different from the other market forms altogether. The major characteristics of this type of market are briefly discussed as follows:

Behaviour of the firms:

In the oligopoly market structure, the most significant aspect is the group behaviour of the firms in the industry. All the firms have a clear idea about the actions, which the other firms could undertake and the impact of such action on the group regardless of the group number (Ioannidis & Doucouliagos, 2013).

Interdependence:

One of the most significant features of the oligopoly market is the interdependence of the various firms associated with the process of decision-making. For example, it is assumed that a limited number of firms that are sizeable comprises of the industrial element. Now, a particular firm launches the advertising campaign on large scale or initiates a product for capturing the market. This move would compel or provoke the other firms to imitate an identical strategy. Hence, there is close dependence of the firms under this market structure.

Competition:

It has been observed that the number of sellers is limited in the oligopoly market. Hence, the action undertaken on the part of one seller generates an effect on the competitors. As a result, the sellers are compelled to observe closely the actions of their rivals for countering the same.

Advertisement:

A significant change in the organisational policy is highly probable to form an instantaneous effect on the other organisations operating under the oligopoly market structure. The oligopolistic organisations often use advertising as the most controlling form of instrument. Hence, an organisation falling under this market structure could undertake aggressive advertising move for capturing a greater portion of the market share (Kneževi? & Wach, 2014). 

Barriers to entry:

The barriers to entry or exit are absent, as the competition is keen in the oligopoly industry. However, limited number of barriers is present only in long-run, which restrict the organisations at the time of entering into the industry.

Westpac, Commonwealth Bank and National Australia Bank are some of the banks that form the oligopolistic market for assuring firmness in the banking system of Australia. Along with this, there are certain mobile networks like NBN Co, Vodafone Plc and Telstra that fall under the market structure of oligopoly in the telecommunications industry of Australia. Hence, if one telecommunication firm changes its pricing structure, the rival firms would be compelled to redesign their strategies due to similarity in their cost structure.

The main features of a monopolistically competitive market are depicted as follows:

Product differentiation:

Each organisation is in the place of imposing a certain extent of monopoly with the product differentiation strategy. The firms’ products are close; however, the chance of substitution is minimal.

Greater number of sellers:

Despite the fact that greater number of sellers are engaged in selling close products in this market structure; however, homogeneity is not present. The behaviour of the sellers is independent with the available market share and the control is limited for the individuals in the market.

Free entry or exit:

Another feature of monopolistic competition is the independence of the firms to enter or leave the industry at any time. This denotes the absence of abnormal profit or abnormal loss in the long-run.

Sale price:

As the products are differentiated, clear cut information is provided to the purchasers through variations in selling prices (Robison & Ritchie, 2016). 

The organisations such as Woolworths Limited and Coles are the monopolistic competitive organisations in the Australian market. These two organisations have market share of 60% jointly in the Australian food retail industry. BHP Billiton is a mining firm, which has occupied greater market share having overall revenue of $14.7 in 2016, being identified as monopolistically competitive.

The market where two organisations exercise major control over the same, are termed as duopoly. The necessary prerequisites of the duopoly market are described as follows:

• Existence of two organisations
• Independence

According to the above diagram, the firm entering the duopoly market would produce at Q1, since at this point, marginal cost matches with marginal revenue. This would help the organisation to charge price at P1 and this has been taken into account as the monopoly price. As a result, the profit would be maximised.  When the second firm makes its way into the market, the production level would be at Q2 for revenue maximisation along with charging greater price.

The above figure denotes that the production quantity is at Q1, while the price rises to P1. This denotes the right time for both the firms in terms of combined production for representing a monopoly output and charging monopoly prices. It is considered that the cost is nil and thus, the market would be distributed evenly between two firms, which restricts the entry of any other firm.

References:

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Fell, H., & Kaffine, D. T. (2014). Division of Economics and Business.

Fourcade, M., & Khurana, R. (2013). From social control to financial economics: The linked ecologies of economics and business in twentieth century America. Theory and Society, 42(2), 121-159.

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