Econ8069 Business Economics For Alcohol Assessment Answers

Question 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.

 

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.

 

Question 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.
 
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.
 
Rationale
The questions address the following learning outcomes: 
Be able to apply demand and supply analysis to make a range of market related decisions
Be able to explain and defend why it is important to understand the structure of the market in which a firm operates
Be able to critically examine and demonstrate why it might be necessary for government to intervene in the production of goods and services and in the distribution of income

Introduction

The assignment has described about the merits and demerits of two alternatives for reducing the consumption of alcoholic products. The government has two alternatives to reduce the consumption that is, either the government can introduce minimum price, or by increasing the amount of excise duty on alcohol. For this, the assignment has made an elasticity of demand of alcoholic products (Wallop, 2010).

Question 1

Price elasticity of demand for alcohol products

Price elasticity is done to describe the relationship between the demand of the product and its respective price. It is the quantitative relationship between the demands of the product and its prices. It shows that how the demand changes in percentages due to change in the percentage in the price of its product (Tyers, 2014).

In the given case of alcohol consumption, the elasticity of demand can be estimated by the change in percentage of the demand of alcohol due to change in the price of alcohol. The government is planning to increase the percentages of excise duty to reduce the consumption of alcohol. Price elasticity of alcohol can be determined by:

Price elasticity of demand of alcohol =     % change in the demand of alcohol

% change in the price of alcohol  

Who bears the burden of higher excise tax, consumers or producers

Taxes are considered as one of the major source of generating revenue for the government. Tax as imposed by the government leads to reduction in the demand and supply in the market of a particular commodity on which the excess duty has been imposed. The government imposes excise duty on the producers just after the production of alcohol that is paid by the manufacturer or the producer of alcohol. After this, the duty charged by the government is added in the prices of the finished product. Hence it has been analyzed that imposing of taxation can lead to increase in the cost of producer as well as increase in the final price of the product which would be paid by the consumer. Therefore it is said that the burden of excise taxes is paid by the buyer. The major reason behind this is, excise duty comes in indirect tax that is the burden of this tax can be shifted to other person (Hussain, 2010).

In case of relationship between the elasticity of demand and taxes, it has been observed that the changes in tax rates lead to changes in demand of the alcohol. This can be interpreted by quoting an example:

The government has decided to impose excise duty on alcoholic products by 20%. It has been observed that the elasticity is of two types that is, elastic and inelastic demand. In  the given example elastic demand would be when the producers seems that the burden of taxes would be imposed on them, that is increase in the duty would lead to production of alcoholic products. While if it is presumed by the producer that the burden of taxes would be reimbursed by the consumer, it would least impact the producer, but lead to reduction in demand of such products by a huge extent. The reason behind this is, increase in the price of the products and services would lead to reduction in the demand.  In case of excise duty increase, for producers it would be inelastic demand but in case of consumers it would be elastic demand. Here elastic demand means that a small change in the price of alcoholic products would lead to major affect the demand of the alcoholic products.

This can be understood by quoting an example that is the government has imposed excise duty of 20%. The price of the alcohol was $100. This has lead to reduction in the demand of the alcohol by 50%.  

Here the price elasticity would be 20 %/(-) 50% that would be (–) 0.4. The interpretation of this is 1% increase in the excise duty would lead to 0.4% reduction in the demand of alcohol products.

Imposition of minimum price of alcohol products

It has been seen that the government impose minimum price on alcohol products to improve the health issues in the nation. It has been observed that higher minimum selling price will lead to demotivation among consumers, this will eventually decrease the demand (Baumol & Blinder, 2008).

By analyzing the relationship between the elasticity of demand and increase in the minimum selling price, it has been analyzed that changes in the minimum selling price leads to directly impact the producers. By increase in the minimum selling price would lead to increase in the producer surplus. Hence it is said that increase in the prices would lead to increase in the supply of the product from the point of view of the producers, but at the same time it would lead to reduction in the demand of the product from the consumer point of view (Jong & Shepherd, 2013).

 Merits of increasing excise taxes compare to imposing minimum price on alcohol products for reducing alcohol consumption

It has been observed that if the government will increase in the minimum selling price, it would lead to reduce the living standards of low income individuals. The increase in the minimum selling price is regressive in nature which majorly impacts the low income individual group the most. As it would lead to increase in the minimum selling price of the alcohol product, this would lead to generation of extra profits by the producers, this will lead to discouragement among the other industry providers. It has been analyzed that increase in the minimum selling price of alcohol would lead to increase in black marketing of sale of alcohol even at inflated prices. Apart from this, it has been analyzed that the consumers are not known the amount paid by them as excise duty; hence increase in such duty would not lead to negative impact to the image of government policies from the customer point of view (Mandal, 2007).

By analyzing the negative points of imposing the higher minimum prices on the product, the increase in the excise duty is preferred. The reason behind this, increase in excise duty would lead to generation of the income from the government point of view. It has been observed that the indirect burden of increase in the excise duty is on consumers; hence it would be least preferable to purchase such products. Besides this, the increase in taxes would lead to increase in the transparency level of the transactions. This would enable the government to keep a check on the trading of the harmful products. Hence by the analyzing the negative points of increase in the minimum selling price and increase in the percentages of excise duty, increase in the excise duty is being preferred (Jayaram & Kotwani, 2012).

Question 2

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

In case of long run average cost curve the curve is of U shape, the reason behind this, is achieving the economies of scale and competitive advantage in the production, this gives the company a cost advantage. But due to increase in the productivity, the marginal cost rises, due to which the long run average cost also rises (Geetika, 2011).

By applying the above scenario in the given case, it can be said that during the initial period of the production the company can keep its prices at $200, but in long run the price would be increased so to meet the increment in marginal cost.

Characteristics of an oligopolistic market

An oligopoly market consists of few number of sellers and large number of buyers. These small numbers of sellers are involved in selling homogeneous type of products. It is a combination of monopolistic competition and monopoly market. The reason behind this is, due to larger number of sellers as in case of monopoly market, and lesser than the number of sellers as in case of monopolistic market (Gottheil, 2014).

In case of oligopolistic market the sellers dominate the market on the basis of mutual concern that is the price charged by them is decided on the mutual basis, this creates a tough competition for the new entrants to enter in an oligopolistic market.  In case of oligopolistic market, the sellers have a choice to sell homogeneous product as well as heterogeneous product. If the sellers are indulged in selling homogeneous products; it is called as pure oligopoly or perfect oligopoly. The industries which are involved in pure oligopoly are as: copper, zinc, etc. while if the sellers are involved in selling differentiated products, it will be called as imperfect or differentiated oligopoly. The companies which are involved in differentiated oligopoly are as: television, refrigerator, soaps, detergents etc (Markovits, 2014).

In case of Australian markets, the companies which are engaged in oligopoly are as: wesfarmers and Woolworths limited.  In case of wesfarmers and Woolworths limited, they posses approximately 70-80% of the total market, which is a very high percentage to govern the market. While in case of operating systems, there is an oligopoly among apple, Google android, and windows. In case of music industry, the market is dominated by Sony, Warner, universal music group, EMI group. These industries come in oligopolistic market, the reason behind this is, these are the firms which posses’ major shares in the whole market, which enable them to dominate the market on the basis of price, charged and quantity provided (Arnold, 2008).

Monopolistically competitive market

Monopolistic market is a market which posses a large number of sellers and buyers. It is a market which lays a huge number of competitors, the products and services sold by these producer posses some difference. The main features of monopolistic market is the products and services as offered by the producer are similar, this creates competition between them, and make these products and services substitute of each other (Whitehead, 2014).

Characteristics of monopolistic market

In case of monopolistic market, it lays no barrier in entry and exit of firms, the reason behind this is; in this market, there is huge number of sellers that entry and exit of a single firm would not affect the rest of the firm.

The firms in this market are price makers; they have a low degree of market power. In short run the firms are able to earn economic profits, but in case of long run, the economic profit as earned by a small number of firms is distributed among other firms, which neutralizes the advantage of economic profits. In case of long run the demand becomes elastic that is change in price would make changes in demand of the product (McEachem, 2013).

The firms in this market, makes their independent decisions in relation to the price and quantity charged.  It is the assumption in case of this market that the market players and consumers posses all the information regarding the market.  The companies in case of monopolistic market have to do a lot of advertising; the reason behind this is, in this market there are a lot of market players, hence to make the customers know about the difference between the supplies of other players. Here products and services can be differed from other market players on the basis of packing, size, quality, price charged, quantity provided, brand name, trademark, design etc (Nikaido, 2015).  

 Majorly monopolistic competition arises in case of manufacturing industries such as, restaurants firms, hotels and café, toothpaste, shoes, TV sets, etc.  In case of smart phones company, there is monopolistic competition between the companies that are as: ALDI, TPG, Lebara mobile, Boost Mobile, DODO, Spintel, Telstra, Vodafone and many more. While in case of restaurants and café, there is a close competition among Baskin Robbins, bakers delight, Krispy kreme, Pancake parlour, Donut king, Gloria jean’s coffee, and etc. In case of cafe also there are lot of companies which are in competition to enjoy the market share like Ali baba, Dominoz pizza, KFC, Pizza hut, Subway, etc. in case of media companies in Australia it has been observed the sign of monopolistic competition among companies such as: George Patterson Y & R, Jungle, APN News and media limited, Becker entertainment, GWN 7, Prime media group, News corp Australia and many more.

The reason behind the existence of monopolistic competition is the companies in monopolistic market provide close substituted products and services, which creates a close competition among them. Besides this, there is a tough competition on the basis of the products and brands, shareholders and target markets held by the companies (Boyes & Melvin, 2012).

Natural duopoly

Duopoly is a market which is a form of oligopoly. The difference between oligopoly and duopoly is that in case of oligopoly there is little number of sellers while in case of duopoly there are only two companies or organizations. For the existence of duopoly in the market, the two firms must have a dominant control over the market.

Characteristics of duopoly

In case of duopoly there are only two sellers in the market, they possess a dominant position on all over the market. They are independent from the market changes due to control over the market. They prevent entry of new entrants in the market. This type of competition is very rare in competitive world; the reason behind this is due to interconnection between countries and foreign trade. This is called as an imaginary market. But due to the given question, the example of duopoly market in Australia, it can be between Woolworths and Coles limited, they possess a major part of the market providing same kind of products and services (Mishra, 2009).

Conclusion

Markets such as: oligopoly, duopoly and monopolistic market, it is said that every market has its own advantages as well as disadvantages. It has been analyzed that in case of monopolistic markets firms are able to charge different prices from their customer, but that will not be continued in long run, the reason behind this if there is profit, the new firms would enter in the market, and if the firm is arriving into losses, it would left the market. Besides this, in monopolistic competition, there are so huge number of sellers and buyers that entry and exit of a single firm would not affect the other players in the market.

References

Arnold, R, A,. (2008) Economics, Cengage learning, USA

Baumol, W & Blinder, A,. (2008) Economics: principles and policy, Cengage learning, USA

Boyes, W & Melvin, M,. (2012) Economics, Cengage learning, USA

Geetika,. (2011) Managerial economics, Tata Mc Graw Hill education, India

Gottheil,. (2014) Study guide to Gottheil’s principles of economics, 7^th, Cengage learning, USA

Hussain, T,. (2010) Engineering economics,  Laxmi publications, India

Jayaram, R & Kotwani, N, R,. (2012) Industrial economics and the telecommunication regulations, PHI learning pvt ltd, India

Jong, H, W, D & Shepherd, W, G,. (2013) Mainstreams in industrial organisation, Springer science & Business media, United Kingdom

Mandal, R, K,. (2007) Microeconomic theory, Atlantic publishers & Dist, India

Markovits, R, S,. (2014)  Economics and the interpretation and application of U.S. and E. U. Antitrust law,  Springer science and business media, London

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Mishra, R,. (2009) Engineering economics, Laxmi publications, India

Nikaido, H,. (2015) Monopolistic competition and effective demand (PSME-6), Princeton university, London

Tyers, R,. (2014) Service oligopolies and Australia’s economy-wide performance. Retrieved on 18^th April, 2017 from https://www.business.uwa.edu.au/__data/assets/pdf_file/0005/2585102/14-18-Service-Oligopolies-and-Australias-Economy-Wide-Performance.pdf

Wallop, H,. (2010) The telegraph, Manchester attempts to impose minimum price of alcohol. Retrieved on 17^th April, 2017 from https://www.telegraph.co.uk/news/health/news/7922579/Manchester-attempts-to-impose-minimum-price-of-alcohol.html

Whitehead, J,. (2014) Microeconomics: a global text, Routledge, United Kingdom