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Microeconomics Assessment

This paper provides the Differences Between The Long Run Equilibrium of a perfectly competitive firm and that of a monopolistically competitive firm on the basis of their key features such as the number of sellers, entry conditions and the type of the product. Besides that, this study also provides the short run and long run profit or loss of those markets by graphical representation. On the other hand, the allocative as well as the productive efficiency of the perfect competition and the monopolistic competition are also compared by this study.

1. Key Features of the Perfectly Competitive Firm and Monopolistic Competitive Firm         

            In the microeconomic theory, there are four types of market such as perfectly competitive, monopolistic, monopoly and lastly oligopoly. Tucker (2012) has mentioned in a study that in the perfectly competitive market, there are a large number of sellers who sell the homogenous product. Moreover, there exists no barrier for entering in the market. In this market, all the sellers are price takers since they do not have any control over the prices of the goods. As discussed by Mas-Colell (2014), this fact is clear that the buyers have full information about the market and the price is determined by the equilibrium position in the market. On the other hand, the monopolistic competitive market is the combination of the perfectly competitive market and monopoly. According to Nikaido (2015), in this market system, there are also many sellers who sell the differentiated product. There is a low barrier for entering in the market, and sometimes, the sellers can influence over the market prices. For example, the clothing shops and fast food restaurants are the monopolistic competitive market and the agriculture market is an example of the perfectly competitive firm (Koschker& M ........

hose markets by graphical representation. On the other hand, the allocative as well as the productive efficiency of the perfect competition and the monopolistic competition are also compared by this study.

1. Key Features of the Perfectly Competitive Firm and Monopolistic Competitive Firm         

            In the microeconomic theory, there are four types of market such as perfectly competitive, monopolistic, monopoly and lastly oligopoly. Tucker (2012) has mentioned in a study that in the perfectly competitive market, there are a large number of sellers who sell the homogenous product. Moreover, there exists no barrier for entering in the market. In this market, all the sellers are price takers since they do not have any control over the prices of the goods. As discussed by Mas-Colell (2014), this fact is clear that the buyers have full information about the market and the price is determined by the equilibrium position in the market. On the other hand, the monopolistic competitive market is the combination of the perfectly competitive market and monopoly. According to Nikaido (2015), in this market system, there are also many sellers who sell the differentiated product. There is a low barrier for entering in the market, and sometimes, the sellers can influence over the market prices. For example, the clothing shops and fast food restaurants are the monopolistic competitive market and the agriculture market is an example of the perfectly competitive firm (Koschker& Most, 2016).

2. Short Run and Long Run Profit or Loss

 This part of the study describes how the short run and long run equilibrium occur in the perfectly competitive with the help of figure 1 and 2 respectively. 

pc sr.PNG

Figure 1: Short Run Equilibrium of the Perfectly Competitive Firm

(Source:Carlton & Perloff, 2015)

pc lr.PNG

Figure 2: Long Run Equilibrium of the Perfectly Competitive Firm

(Source:Bertoletti & Etro, 2017)

Now, the short run and long run equilibrium of the monopolistic competitive firms are provided graphically by figure 3 and 4 respectively.

monopolistic competition short run profit ?? ??? ?????

Figure 3: Short Run Equilibrium of the Monopolistic Competitive Firm

(Source:Baumol & Blinder, 2015)

 

monopolistic competition long run profit ?? ??? ?????

Figure 4: Long Run Equilibrium of the Monopolistic Competitive Firm

(Source:Mankiw, 2015)

3. Description of the Process of Profit or Loss

            The equilibrium position in the perfectly competitive market occurs at that point where P = MC. The shaded area of figure 1 depicts the economic profit of this market. Moreover, in the long run, the producers manufacture goods up to that point where ATC = MC. In this market, only the normal profits are earned by the producers by selling goods. On the other hand, in the monopolistic competitive market, the demand curve (which is equivalent to the average revenue, AR) is downward sloping.  In the short run, the firm maximizes its profit or reduces its loss at that point where the marginal revenue (MR) curve intercepts marginal cost (MC) curve. In the figure 3, the shaded area shows the economic profit. In the long run, PL is the equilibrium price, and QL is the equilibrium quantity as shown in figure 4 (Carlton& Perloff, 2015).

4. Comparison of the Productive and Allocative Efficiencies

            In the perfectly competitive market, two types of efficiencies are found such as the productive efficiency and the allocative efficiency. Mankiw(2015) has mentioned that the productive efficiency occurs at that point where the firm can produce maximum output at the minimum cost. This point indicates that all the resources have been used efficiently, nothing is wasted. It is shown in figure 5.

perfect competition productive efficiency ?? ??? ?????

Figure 5: Productive and Allocative Efficiency in Perfectly Competitive Firm

(Source:Bertoletti & Etro, 2017)

 

From the figure 5, this fact is clear that productivity efficiency occurs where MC = AC and the allocative efficiency occurs where MC = AR. Finally, the firm maximizes its output where MR = MC that is marginal revenue = marginal cost. On the other side of the discussion, the productive and allocative efficiency of the monopolistically competitive market is shown with the help of figure 6 (Bertoletti & Etro, 2017).

monopolistic competition productive efficiency ?? ??? ?????

Figure 5: Productive and Allocative Efficiency in Perfectly Competitive Firm

(Source:Koschker & Most, 2016)

            In this market, productive efficiency occurs where price (P) = min average total cost (ATC) and allocative efficiency occurs at that point where price (P) = marginal cost (MC). If P > MC, that means the resources are under allocated and that is not allocatively efficient.  Besides that, if P < MC, that means the resources are over allocated (Koschker& Most, 2016). This efficiency is a very significant theory in this context, and all the firms want to maximize their profits by producing efficiently.

            This section of the study sums up the entire discussions of this paper. The first part of the analysis describes about the perfectly and monopolistic competitive markets graphically. Both the markets can gain profit or face loss in the short and long run also. The equilibrium positions of both the markets have been explained. The next part of the paper provides the comparison between the productive and allocative efficiency in these two types of markets. Efficiency means producing maximum amount of output by utilizing all the resources efficiently, without wasting.

 

 

Answer to Question B

            This part of the study presents the oligopoly market in the context of the Australian industry. The first part of the discussion presents the key features of the oligopoly market with the help of the graphical representation whereas the later part of the analysis would choose an industry from Australia which has the oligopoly market system. Finally, the last section of this paper provides real data in order to relate the theoretical concept with the actual situation.

1. Key Features of Oligopoly

            As per the discussions of Gregson et al., (2015), it can be mentioned that oligopoly represents a special type of market structure where there are a small number of firms in the market. To some extent, it is similar to the monopoly market, but the only difference is that there is a single seller in the monopoly market and the oligopoly market is dominated by two or three sellers (Black, 2017). The numbers of sellers are less, and they can have control over the market prices. According to the game theory, this can be mentioned that the decision of one seller can have the influence the decision of the other and therefore, each of the sellers of the oligopoly market is aware of the decisions taken by the others. Apart from that, there exist high barriers for entering in the market. Moreover, whenever a new producer enters in the market, he has to face tough competition from the existing manufacturers in this market system (Hasan et al., 2016). The structure of the oligopoly market is explained with the help of figure 7.

Capture 2.PNG

Figure 7: Oligopoly Market

(Source: Bauer, 2013)

            The above figure describes the structure of an oligopoly market in which price (P) is more than the marginal cost (MC). The objective of the producers is to maximize their profit by using the profit maximization conditions that is P > MC (Bauer, 2013). As per the discussions of Tucker (2012), this fact is clear that besides that, the producers or the sellers of this market are known as the price makers since the few sellers can change the prices of the products. Another characteristic of this market is that the producers can earn supernormal profit (which is more than the normal profit) in the long run (Tucker, 2012). Moreover, the product may be differentiated (which has no closer substitute) or homogenous (which has closer substitutes). These are the basic features of the oligopoly market. There are some renowned models of the oligopoly market such as the duopoly market (oligopoly with two sellers) of Cournot, duopoly market of Stackelberg and oligopoly of Bertrand which are explained with game theory (Brander & Spencer, 2015).

2. Brief Description of the Australian Industry

 This section of the study provides the brief description of the Australian oligopoly market. This study has selected the Australian airline's industry which is an example of the oligopoly market. According to the literature of Lariviere et al., (2015), this fact is clear that the significant airline's companies of Australia are Qantas, Virgin, Jet Star and Alliance Airlines. These airlines companies of the oligopoly market are mutually dependent on each other. Whisenant& Willenborg(2016) have discussed in a research paper that the main service which is being sold by the Australian airline companies is the transportation service to the consumers which, in turn also has a significant impact on trading with the other countries. Apart from that, the firms use some other strategies like price or the non-price factors in order to differentiate their products. Brander& Spencer (2015) have discussed in a study that a vital pricing factor which has been effectively used by the Australian airline's companies is the number of seats of the aeroplanes. If an aircraft has more number of seats, then it can carry more number of passengers in every flight which increases the profit of the companies.

Another significant factor which should be mentioned here is the fuel cost which determines the profit of those companies. As per the discussions of Hasan et al., (2016), it can be stated that among the non price factors, the most significant factor is the logo of the airline companies. Some of the airline's companies such as Qantas make their products distinct from the products of the other companies by logo embodiment. This company has added an image of kangaroo in their logo which is a significant symbol of Australia. Brander& Spencer(2015) have mentioned in a study that this procedure is very common in the oligopoly market which helps the customers to identify this firm easily. Among all the airline's companies of Australia, Qantas is the most successful as well as biggest company(Brander & Spencer, 2015). If these companies can mitigate wasting the resources, then they can increase their profits also by expanding market shares. The domestic airline market of Australia is mainly dominated by two companies such as Qantas and Virgin Blue. 

3. Data Analysis

 This part of the analysis describes the Australian airline's industry which is an oligopoly market with the reliable and actual data. Across to the recent report, Qantas is the leading brand of the domestic airline which has achieved almost 83.2% of the customer satisfaction followed by the Virgin Australia and Qantaslink (Roymorgan.com, 2017). These companies have captured 77.6% and 72.7% of the customer satisfaction respectively in the year 2017 (Roymorgan.com, 2017).

australian airlines qantas and virgin data ?? ??? ?????

Figure 8: Customer Satisfaction Level (2017)

(Source: Roymorgan.com, 2017)

 

            The above figure represents the domestic airline and domestic business airline customer satisfaction for the year 2017 (Roymorgan.com, 2017). In the domestic business airlines, the leading companies are Qantas, Virgin Australia and Jet star which has achieved 84.4%, 75.6% and 55.1% of the customer satisfaction respectively (Roymorgan.com, 2017). These data interpretation reveals the fact that the Australian airline is a perfect example of oligopoly market which has very few companies in the market.

 This part of the paper sums up the whole findings and analysis of this study. This study is based on the oligopoly market which is a particular type of market. The key features of the market have been described with the graphical presentation. In this market, the sellers are considered as the price makers since they have the control over the market prices. The next part of the paper has selected the airline's industry of Australia as an example of this oligopoly market which is dominated by some companies such as Qantas, Virgin Australia and Jet star. The brief description of this industry has been provided with actual data which are also reliable. 

 

 

Answer to Part C

Addressing Housing Affordability Crisis in Australia

1. Demand-side factors affecting Housing Affordability

 In Australia, the demand side factors that essentially affect the aspects of housing affordability are price, household incomes, job choice, household composition and the household consumption. 

  • Price of Housing: In Australia, with the increase of the price of particular quality of housing units, less is the demand for that housing by the households. The price of the housing change if changes are there in factors affecting demands for housing. The demand factors which influence the housing price essentially include preferences regarding size, interior quality, the number of baths and bedrooms, age of the home, utilities, and distance to the essential places or centres along with a quality of the local schools (Austin et al., 2014). Therefore if the burden of housing cost is increased, the household always tend to demand to house with less cost along with reducing the consumption of the other goods.

 

Figure 9: Increase in House Prices than the Household Incomes in Past 40 years

(Source: Austin et al., 2014)

  • The location and capital market: The location of the housing is critical while considering commute times. The location of a unit is one of the most critical factors in case of the affordability of housing in Australia (Worthington & Higgs, 2013). Along with this the aspect of the capital market is also essentially considered with due importance while examining the housing demands by the households in the country.
  • Increasing number of the households: In a country like Australia, like rest of the world, there is also increase in the number of the homes. One very significant factor has been the decrease of the household size with rapid growth in the population of the country. With the considerable increase in the population the lands or spaces for the houses to be built are becoming shorter, and thus within the limited capacity of land, a vast number of people is demanding their households (Baker et al., 2016). As the apparent result, the household sizes are decreasing. Hence with population increase, there is more demand for the household affordability
  • Increasing incomes of the households: With an increase in the per capita incomes of the households, there is a growing demand for the higher quality housing. Thus in case of Australia also the increase in per capita income of the households raises the needs of the increased housing units along with a more top quality of the housing (Birrell & McCloskey, 2016).

 

Figure 10: Worst outcomes for Lower Income Renters

(Source: Birrell & McCloskey, 2016)

  • Increased availability of the mortgage finance: With a decrease of the mortgage rate, a more significant incentive is found by the households for investing in the house purchasing because ownership of home becomes more affordable and thus less rental units are demanded.
  • Household consumptions: This aspect is essential as demands for housing greatly depends on the beneficiaries involved with the consumption of the entire area of the house. It also includes the critical factor of a composition of the houses. These are significant demand-side factors for housing affordability (Birrell & McCloskey, 2015).
  • A concentration of households: Higher household concentration is responsible for creating greater competition for limited housing numbers and in turn the housing price is increased and vice versa.

 

 

Figure 11: Growth Surge 2009-2015, Widening Supply Gap of Affordability

(Source:Birrell & McCloskey, 2015)

2. Solutions attempted or proposed

            In Australia for effective addressing of solutions of housing affordability, various planning, financing and institutional and tax reforms have been arranged by the government. The implemented solutions include,

  • Application of the new models of financing, delivery and ownership for facilitating  housing affordability along with broader remit than the public housing
  • More flexibility of the policies set in compared to the social housing in case of rent, social mix and tenure
  • New applications of housing policies that are innovation oriented. These include effective management and design of housing policies and wider economic & social outcomes for the tenants (Li, 2015)
  • Targeting 15 % affordable housing within the larger new developments in case of South Australia
  • Wider policy of NSW favouring Voluntary Planning Agreements or VPAs along with developing obligation related to the urban areas of Sydney
  • An announcement of the National Rental Affordability Scheme or NRAS in 2008. It includes taxpayer support by revenue rather than the capital contribution and offering of modest subsidy for expansion of the supply of the affordable rental housing (MacKillop, 2013).

Figure 12: The NRAS Scheme, fund development

(Source: MacKillop, 2013)

  • Securing the institutional financing of the rental housing and thereby encouraging more efficient as well as professionally managed rental sector
  • Initiatives for maximising the utility of the existing housing

 

3. Possible supply-side solutions for housing affordability

            For effective dealing with the possible supply-side solutions of housing affordability, several effective solutions might be tried. The responsible government might take steps for limiting the cost increase of lands. Much time must not be taken for releasing the new lands. The supply of the affordable private rental housing should be increased by the government. Also, the supply of the social housing is required to be increased. For successful supply-side solutions in case of housing affordability, it is necessary for the housing outcomes to go well outside the range of the housing policy (Wetzstein, 2017). Therefore it is important to introduce the statement of housing impact. Reduction of a scarcity of the desirable lands is also an important need. It will help the aspects of increasing supply of desirable lands along with decreasing tax incentives in case of owning the lands and increasing density. Also, the idea of increasing the housing availability for sheltering the households with low to moderate level of income will be very effective for finding the solution of housing affordability in Australia (Worthington & Higgs, 2013). This specific arrangement will increase rental housing that is supply affordable and help the marginal purchasers in staying their homes. All these are the possible supply-side solutions that might help the problems regarding housing affordability in Australia.

 

Figure 13: Financing of typical Affordable Housing Project

(Source:Worthington & Higgs, 2013)