Business Economics BUSINESS ECONOMICS

Running head: BUSINESS ECONOMICS
Business Economics
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1BUSINESS ECONOMICS
Table of Contents
Part 1: Market and Elasticities...................................................................................................2
Question 1.1 Market boundary and market structure of Aldi................................................2
Question 1.2 Critical evaluation of claims of the article and elasticity.................................2
Part 2: Market and Externalities.................................................................................................4
Question 2.1: Impact of drought on market outcome............................................................4
Question 2.2: Effect of government subsidy given to farmers...............................................6
Question 2.2 Effect of government subsidy given to consumers...........................................8
Part 3: Australia government budget and fiscal change.............................................................9
Question 3.1...........................................................................................................................9
Question 3.2.........................................................................................................................11
References................................................................................................................................14

2BUSINESS ECONOMICS
Part 1: Market and Elasticities
Question 1.1 Market boundary and market structure of Aldi
The German based company Aldi is currently operating in Australian supermarket
industry which is highly concentrated and fiercely competitive. The fast growth of Aldi since
2001 in Australia has a considerable effect on supermarket industry of Australia. The German
based competitors Aldi has faced intense competition from two existing giants Woolworths
and Coles. The discount operator Aldi largely influences shopping trend of Australian. The
private label products have become increasingly popular among Australians. The strong
growth of Aldi has increased concentration within the industry in the last five years. Aldi
currently holds 8.9 percent market share in Australia (retailworldmagazine.com.au 2018).
However, given the current tendency of Australians to switch to online grocery shopping, the
company needs to reaffirm its own value credentials.
Question 1.2 Critical evaluation of claims of the article and elasticity
“The conventional wisdom that grocery spending is largely immune from the
economic cycle – because it falls into the basket of necessity rather than discretionary
spending – has been thrown into doubt”;
Price elasticity of demand refers to an economic measure representing a change in
quantity demanded following a certain percentage change in price. analysis of price elasticity
of demand is important to evaluate changes in revenue due to a change in price and
associated demand. Income elasticity of demand measure changes in demand following a
change in income (Frank and Cartwright 2013). Income elasticity helps to determine effect on
demand during fluctuation in income. Different phases of business cycle or economic cycle
are associated with a change in income and corresponding change in demand. Now nature of
income elasticity depends on the type of product. For necessary items, demand is generally

3BUSINESS ECONOMICS
assumed to be income inelastic in nature, that is percentage change in demand is always less
than the corresponding percentage change in income. For luxury items, demand is income
elastic meaning small change in income can bring a large change in demand (Moulin 2014).
Demand for groceries that were generally fall in the category of necessary items were
previously assumed to be income inelastic. As demand adjusts by a relatively smaller
magnitude for a given change in income demand and hence revenue fluctuates relatively less
with business cycle fluctuation. As it falls in the category of necessity rather than
discretionary spending, expenditure on groceries immune from changes in economic cycle.
The traditional believe however now has been highly contested. With increase in cheaper
alternative people now are showing tendency to switch their spending to these alternative.
With changes in life style people now have focused on cut back their spending on groceries to
finance other living costs (Baumol and Blinder 2015). The Deloitte report has found that in
response to an increase in living expense one in three Australians cut back their spending on
groceries by either buying fewer groceries or switching to private level brands. Nearly 12
percent of Australians now prefer to buy fewer groceries to finance additional living cost.
These evidences suggest that spending on groceries are no longer immune from business
cycle due to change in life style and preferences.
“Entertainment subscription services is another area that is moving from luxury to
essential”;
Income elasticity of demand depends on nature of a good that is whether the good is a
necessary or a luxury. As people cannot adjust their demand for necessities even when
income changes, demand is relatively income inelastic (Cowell 2018). In case of luxury or
discretionary spending, demand changes significantly with change in income. Earlier
smartphones or entertainment services were come under discretionary spending of people.
People then preferred to watch shows on television. Introduction of different online