ECON 7239 Economics for Management : Monopolistic Competition
1.Assume the government wishes to reduce alcohol consumption by considering a higher excise tax on alcohol products. Collect information on estimates for the price elasticity of demand for alcohol products. Based on these elasticity estimates illustrate using a demand/supply diagram(s) who bears the burden of the higher excise tax, consumers or producers.
I just want to make it clear that in 1, you must find a real price elasticity estimate of alcohol. You can’t estimate this nor use a hypothetical example. Also, other than 1, the rest of the answers are theoretical. You don’t need to do any research to collect the numbers. For instance, the tax and /or the minimum price on alcohol can be made up. You don’t need real numbers. So please go through these instructions.
As an alternative for reducing alcohol consumption assume the government is also considering the imposition of a minimum price on alcohol products. Using a demand/supply diagram illustrate the consequences of imposing a minimum price on alcohol for the consumption of alcohol products.
Provide comment on the relative merits of increasing excise taxes compared to imposing a minimum price on alcohol products for reducing alcohol consumption.
2.a) Assume that in long-run equilibrium the minimum point of the LRAC curve for a table manufacturer’s 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.
Answers:
Introduction
The assignment describes about the different markets in an industry that is monopolistic competition, oligopolistic competition, and duopoly competition. It describes the changes in demand of the product due to change in the price. These markets have different results due to change in the price (Hussain, 2010).
Price elasticity of alcoholic products
Price elasticity establishes a relationship between the price of a particular product and its respective demand. It determines a quantitative relationship between the price and demand of the product or services, by determining the percentage of changes in demand due to 1% change in the price (Arnold, 2008).
Price elasticity of demand can be calculated by determining the change in the demand due to change in the price of the product or service. It can be calculated by applying the given formula:
Bearing of burden of excise duty
Excise duty is a type of tax which is paid by the producers or manufacturers at the time of production. It is a type of indirect tax. Indirect taxes are those taxes whose burden can be shifted to another party. In case of excise duty, the tax are primarily paid by the producers or manufacturers, but are reimbursed by the consumers payment for the products or services (Boyes & Melvin, 2012).
The main reason behind imposing tax for the government is generation of revenues and reducing the supplies of that particular product or services in the market. In the given case study, the government has decided to increase the percentage of excise duty so to reduce the supplies of alcohol and related products in the market. The intention of the government to increase the percentage of excise duty is to reduce the demand in the market of alcoholic products (Free, 2010).
Due to increase in the percentages of excise duty, the producer or the manufacturer would be requiring to pay higher duty which will result into decrease in the margins of producers or manufacturers. Hence to make effective profits the producer or the manufacturer would be requiring increasing in the prices, which will reduce the demand of the alcoholic products according to price elasticity of the demand. Hence it is said that the final burden of excise duty is on consumers. Therefore it can be said that increase in excise duty would lead to decrease in the demand of alcohol products (Gottheil, 2014).
In case of price elasticity of demand, it has been analyzed that there are two types of demand, that is; elastic demand and inelastic demand. The products which are durable come in the category of elastic demand, while in case of addicted products such as liquor, alcohol, they have inelastic demand due to existence of addiction from the consumer side. Hence following is an example of change in demand of the alcohol by increasing the duty charged (Morgan, 2014).
For example the price of the alcohol product is $100, government has imposed 100% duty, which has raised price to 200$.
In case of applying the above example, it is said that due to addictiveness from the side of consumer, there are not much variation in the demand of the product. This is because of existence of inelastic demand that is change in price would not affect the demand of the product proportionately.
Figure 1: Demand curve
The price elasticity comes out to be (-) 0.2, if the price elasticity of demand is lesser than 1, this means that the demand is inelastic, due to which the demand would not reduce majorly by increasing the rates of excise duty.
Increment in the minimum price of alcohol products
The intention of government behind increasing in the minimum price is to prevent the health issues of the nation as a whole. According to the elasticity of demand theory, it is assumed that the consumer is rational, and he would purchase the cheap product. Hence according to this assumption, it is said that by increasing the minimum price of the alcoholic products, the final price of the product would raise, which will make less attractive for the consumers. However in case of alcohol, it comes in inelastic demand hence the decrease in demand would not be proportionately but will reduce to some extent (Sivagnanam, 2010).
Merits of increasing in the percentages of excise duty
It has been analyzed by the above observation that by increase in the minimum price of the alcoholic products, it would not lead to impact the production or manufacturing of alcoholic products. This will result into decrease in demand but increase in supply due to which, the price would be reduced or the products would be sold at cheaper rate in an unethical manner.
While in case of increase in the excise duty, it would lead to impact both that is the manufacturer or the producer and the consumer. By analyzing the above analysis over either increase in the excise duty or by increasing in the minimum price, the increase in the excise duty is preferable. The reason behind this is, increase in excise duty would lead to more generation of income of the government, while by increasing in the minimum price of the alcohol would not lead to any generation of extra income of the government. Besides this by increasing the rate of excise duty, the government can keep its eye on production and sale of such products in the market (Vogelsang, 2013).
Assume that in long-run equilibrium the minimum point of the LRAC curve for a table manufacturer’s 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 $200In case of long run production, all the factors of production are considered as variable. In case of long run, there is freedom to the companies to enter or to take exit from the market. In case of long run average cost, it is the representation of average total cost of the company. It represents the total cost of the company for producing the required quantity. Long run average cost is the sum total of all the short run average cost of the company.
Figure 2: Long run average cost
In case of monopolistic competition, the companies are price makers that are they can charge differentiated prices from their customers. In monopolistic market, the firms have free entry and exit, due to which probability of profit would attract the new firms, while probability of loss would lead to exit of firms from the market. This will neutralize the affect of profit or loss of the company.
By applying the above case in the given question, in case of initial period, the company can charge lower than the price of $200, because of existence of economies of scale and competitive advantage. But due to increase in the production, the margin cost would lead to increase due to which, long run average cost would be affected. This would result into increase in the long run average cost. Hence to meet the increase in the long run average cost, the firm is advised to increase the price above $200. Therefore it is said that in longer run, the table manufacturing company would be requiring increasing the price from $200 to meet the increase in the long run average cost.
Oligopolistic market characteristics
A market in which there are few number of sellers and large number of sellers, it would be called as oligopolistic market. In such market, there are a few numbers of sellers which are selling homogeneous products. The main characteristic of oligopolistic market is that there is a cut throat competition among the players. The cut throat competition leads to increase in the completion, whose benefit is taken by the customers. In this, the number of sellers are more than monopoly market but lesser than the monopolistic market.
In case of oligopolistic market the companies charges nearly same prices by deciding on the mutual basis. In such market there are restrictions on entry of new firms, the reason behind this is; the existing firm lays a dominant position in the market. Oligopoly market is of two types that is perfect oligopoly and imperfect oligopoly. If the existing players in the market are selling homogeneous products and services; it would be called as perfect oligopoly, while if the firms are trading heterogeneous product, it would be called as imperfect oligopoly. In case of perfect oligopoly the products which are traded require lesser innovation that is Zinc, Iron, Steel, and Copper etc. while in case of products which are traded in imperfect oligopoly are as: Detergents, Soaps, and Cosmetics etc (Chamberlin, 2015).
By applying the oligopoly market characteristics in Australian market, it has been found that wesfarmers and Woolworths come in the category of oligopoly market. The reason behind considering these companies into oligopoly market is, they both produce homogeneous products, and lays a dominant position in the market. besides this in case of operating system, the companies such as: Microsoft and IOS can be said as oligopolistic companies, the reason behind this is, these two posses a major portion of total market share providing homogeneous category of the products (Takahashi, Muromachi & Nakaoka, 2012).
Monopolistic market
A market is called as monopolistic market if it contains a large number of sellers and buyers. It lays freedom to the companies to enter or to exit from the market. The products and services as offered by the companies lays some difference, this leads to change in the prices charged by them. Due to existence of some differences, there is tough competition between the market players (Paulsen, 2013).
Monopolistic market characteristics
It has no barrier for the firms to enter or to exit from the market. The firms which are trading in the market are price makers. The advantage received by the firms due to charging different prices got neutralize in case of longer run, hence the companies in such market posses lower degree to the market power. as in case of short run, the profits is enjoyed by a small number of players, while in case of long run, it would attract more number of players in the market which lead to reduction in the profits enjoyed by the companies. Furthermore, it is assumed in the monopolistic market that all the information is known by the consumers and suppliers. To compete with the competition in this market, the firms need to do spend a lot of money in advertising so to make the customers know the key differences in the offerings of companies (Nikaido, 2015).
By applying the given case in monopolistic market, the firms which are considered as the major players are food industry, garments industry, consumer durables like television, smart phones, refrigerator etc. in case of food industry the players are Pizza hut, Donut king, Krispy kreme etc. while in case of smart phones, the company which are considered as monopolistic firms are as: ALDI, Telstra, Vodafone etc. these are considered as monopolistic companies because they provide same categories of the product having some differences (Markovits, 2014) .
Duopoly
Duopoly is a part of oligopoly. In case of oligopoly there are some sellers and lot of buyers while in case of duopoly there are only two sellers and large number of firms. Duopoly does not exist now days due to globalization, earlier it existed by a combination of public and private sector (Xu, Hajiyev, Nickel & Gen, 2016).
Duopoly market characteristics
Only two sellers are existed in this market, which has a dominant position over the market. This lays restriction in entry and exit of the firms. By applying the above characteristics in the Australian market, it has been observed that there is a close completion between the wesfarmers limited and Woolworth limited, these two companies has a dominant position over the market, which restricts other companies to enter in the market, however duopoly is considered as an imaginary market now days (Jong & Shepherd, 2013).
Demand and cost curve
The demand curve of firms in case of duopoly market is complex, the reason behind this is the demand not only affected by the own prices, but also changes in the other company. This results into, when a firm increases the price, the demand for the other company product increases and vice versa (Hirschey, 2008).
Figure 4: Cost curve
Conclusion
By analyzing the assignment it can be said, that different market has different presumption regarding the consumers and sellers in the market which leads to change in the result of applying changes. Out of the above market, the monopolistic market is found commonly due to variety of companies providing same kind of products with some minor differences.
References
Arnold, R, A,. (2008) Microeconomics, Cengage learning, USA
Boyes, W & Melvin, M,. (2012) Economics, Cengage learning, USA
Chamberlin, E, H,. (2015) International economic association monopoly and competition regulation, Springer, United Kingdom
Free, R, C,. (2010) 21st Century economics: A reference handbook, Volume 1, SAGE, India
Gottheil,. (2014) Study guide to Gottheil’s principles of economics, 7th, Cengage learning, USA
Hirschey, M,. (2008) Fundamentals of managerial economics, Cengage learning, USA
Hussain, T,. (2010) Engineering economics, Laxmi publications, India
Jong, H, W, D & Shepherd, W, G,. (2013) Mainstreams in industrial organisation, Springer science & Business media, United Kingdom
Markovits, R, S,. (2014) Economics and the interpretation and application of U.S. and E. U. Antitrust law, Springer science and business media, London
Morgan, K,. (2014) Price elasticity of demand for Mylan Laboratories, Pittsburg, GRIN Verlag, Germany
Nikaido, H,. (2015) Monopolistic competition and effective demand (PSME-6), Princeton university, London
Paulsen, M, B,. (2013) Higher education: handbook of theory and research, Volume 28, Springer science & Business media, United Kingdom
Sivagnanam,. (2010) Business economics, Tata McGraw hill education, India
Takahashi, A. Muromachi, Y & Nakaoka, H,. (2012) Recent advances in financial engineering 2011, World scientific, London
Vogelsang, I,. (2013) Public enterprise in monopolistic and oligopolistic enterprises, Taylor & Francis, Abingdon
Xu, J. Hajiyev, A. Nickel, S & Gen, M,. (2016) Proceedings of the tenth international conference on management science and engineering management, Springer, London
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