Microeconomics and Business Success

This solved assignment delves into the principles of microeconomics and their impact on business success, specifically focusing on supermarkets. It examines concepts like imperfect competition, marginal cost, and increasing returns to scale, explaining how these factors contribute to the dominance of large supermarket chains in the global market. The assignment analyzes real-world examples and provides detailed solutions to demonstrate the practical application of microeconomic theory.

Running head: PRINCIPLES OF ECONOMICS
Principles of Economics
Name of the Student
Name of the University
Author Note

1PRINCIPLES OF ECONOMICS
Table of Contents
Answer 1:.........................................................................................................................................2
Answer 2:.........................................................................................................................................2
Answer 3:.........................................................................................................................................4
Answer 4:.........................................................................................................................................6
Answer 5:.........................................................................................................................................9
Answer 6:.......................................................................................................................................11
Answer 7:.......................................................................................................................................12
Answer 8:.......................................................................................................................................13
References......................................................................................................................................14

2PRINCIPLES OF ECONOMICS
Answer 1:
A monopoly is that market condition where there is only one seller and many buyers. The
seller, being the single supplier in the market, enjoys considerable market power and has the
power to take pricing decisions and decisions regarding the amount of supply of his product or
service.
In this scenario, there are two monopolies in an economy, one in the supplier of water
and the other is the provider of landline connections. In spite of both the sellers being
monopolists, the market power enjoyed by the sellers may be different, depending upon the
nature of their products and the elasticity of demand for their products (Askar 2013).
Water being one of the daily necessities for survival, the demand for water supply is
highly inelastic to changes in the price levels, as people will anyhow buy water, even if that
requires curtailing on other costs. On the other hand, the demand for landline phone connections,
though high, but is comparatively more elastic to changes in price levels. The reason behind this
is that the product is not an absolute necessity and there are substitutes available, unlike water.
This implies that the monopolist who supplies water enjoys more market power than the one who
provides landline phone connections (Erikson 2014).
Answer 2:
The fast food market, in an overall framework, though have many players, is dominated
by several big players like those of KFC, Hungry Jack and McDonald’s. Depending upon the
geographical locations and the tastes and preferences of the people, these players enjoy

3PRINCIPLES OF ECONOMICS
dominance over one another. But, in an overall basis, the market for fast food market shows an
oligopolistic structure. An oligopolistic market has few sellers and many buyers, with each of the
big sellers enjoying considerable market share (Sushko 2013). The situation can be shown with
the help of the following diagram:
P
MC
P0
Profit AC
P1 Demand
0 Q0 Q
MR
Figure 1: Oligopoly Firm
(Source: As created by the author)
It can be seen from the above figure that the oligopolistic firm produce at the point where
the marginal revenue of the firm is equal to the marginal cost of the firm. Here, the firm is
produces Q0 amount of output, which is less than that of the perfectly competitive level and sells

4PRINCIPLES OF ECONOMICS
its products at P0 level of price, which again is higher than that of the perfectly competitive
level. In the oligopolistic market, as is the case in the current scenario, the firms enjoy more than
normal profits in the market (Rios, McConnell and Brue 2013).
Answer 3:
The Charles Darwin University is one of the most reputed universities in Australia as
well as in the entire world, with a huge base of students (both domestic and international) and
faculty. Every year, the university attracts hundreds of overseas students from different parts of
the world. The Charles Darwin University has its campus in Sydney as well as in Darwin city in
Australia (Cdu.edu.au, 2017).
Sydney being one of the most populous cities in the country and one of the primary
economic and commercially developed urban zones, is a city attracting large number of workers
and students. The city has nearly 35 well-known universities and many other educational
institutions. Being one of the Central Business Zones, the cost of living in the city is
considerably higher than those in the suburbs of the country are. This in turn influences many of
the students, especially the overseas ones, to shift to places where the cost of living is
manageable. The city of Darwin, being not an Central Business Zone, has a comparatively lesser
cost of living. It has lesser number of universities and the campus of Charles Darwin University
in this city is one of the primary universities in this cities. Many students, especially international
ones, prefer the campus in Darwin over Sydney, due to this difference in cost of living.
Thus, the campus of the CDU in Sydney, on one hand, faces stiff competition from the
large number of other universities present in the cities and on the other hand experiences a less

5PRINCIPLES OF ECONOMICS
demand due to the higher costs of living (Cdu.edu.au, 2017). Due to the presence of many
eminent universities, the market in Sydney becomes close to competitive market:
P
Supply
Po Eo
Demand
0 Qo Q
Figure 2: Competitive Market
(Source: As created by the author)
It is evident from the above figure that the CDU in Sydney operates in a competitive
environment, with many competitors.
However, Darwin city, having less number of reputed universities, the CDU campus
enjoys substantial market share due to its prefer ability and goodwill. The low cost of living of
the city also attracts many students to migrate here, thereby creating a demand for the services
provided by this campus (McLean 2012). Therefore, the CDU campus in Darwin enjoys a
monopolistic kind of market power, or at the most an oligopolistic environment where it is the
dominant player. This is shown as follows:

6PRINCIPLES OF ECONOMICS
P MC
Dead-weight Loss
Pm Profit AC
Demand
MR
0 Qm Q
Figure 3: Darwin Campus of CDU
(Source: As created by the author)
From the above figure, it is evident that the Darwin campus of the CDU faces much less
competition than that of the campus situated in Sydney.
Answer 4:
Fire emergency services fall in the category of the most essential services that are
provided by the government of any country. The service, related to the safety of the residents of
any place, requires substantial amount of training, huge amount of resources and machineries

7PRINCIPLES OF ECONOMICS
and investments in technological aspects. It is treated as one of the public services in any
country. If however, this service is privatized in a country, it may lead to substantial change in
the market (Rios, McConnell and Brue 2013).
Since the service requires substantial amount of resources to be invested, the initial fixed
cost in this sector is very high and not many private firm is expected to have that much amount
of resources. Therefore, the market automatically takes the structure of a natural monopoly, since
only a few firm can venture in the sector. Encouraging competition may not be a good step here
as this may lead to increase in the price of the services (Baumol and Blinder 2015).
P
ATC
Po
Demand
0 Qo Q
Figure 4: Natural Monopoly
(Source: As created by the author)

8PRINCIPLES OF ECONOMICS
In natural monopoly, the firm though incurs an huge fixed cost, but over time it starts
enjoying economies of scale and it can provide the services at a much lower cost than any other
competitor.
The demand of fire emergency services is perfectly price inelastic. This is because a
change in price neither increases nor decreases this demand as the service is only demanded in
case of any emergency. If such a situation arises, no matter what the price level is, people
demand for this service as it is matter of their safety (Rubinstein 2012).
P Inelastic Demand
P1
P0
0 Q0 Q
Figure 5: Inelastic demand curve
(Source: As created by the author)

9PRINCIPLES OF ECONOMICS
It is evident from the above diagram that the demand for emergency fire
service does not depend on the price levels. Therefore, the price elasticity of demand of the
concerned service is zero.
Answer 5:
In the above discussions, different types of market structures have been put
forward, differing on the basis of their nature, players, type of goods or services provided and
market dynamics. The significant ones of these market structures are elaborated in the following
section:
a) Monopoly- A monopoly market is one of the extreme models of the competition. In this type
of market structure, there is generally a single seller and many buyers. The product or the sold by
the seller does not have any close substitute, thereby giving the seller the privilege of enjoying
the whole of the market power. The monopolist seller is a price maker and not a price taker and
as he enjoys the whole of the market power, he restricts the entry of any new competitor in the
market (Hall and Lieberman 2012).
b) Oligopoly- The oligopolistic market structure is different from monopoly in the sense that in
this case there are a few sellers (generally not more than twenty) and many buyers. The sellers
being few in number, each of them enjoys substantial share of market power and works to
maximize their individual profits. This often gives rise to a situation of price war in the oligopoly
market and often the firms, in order to avoid price wars and subsequent losses, enter into
collusive agreements. The products sold by the firms are of similar nature, varying in several
aspects, at least in brand names.

10PRINCIPLES OF ECONOMICS
c) Competitive Market- The competitive market (Perfect competition being the hypothetical
extreme scenario) is largely different from the above two variants of markets. In this type of
markets, there are many buyers and many sellers, thereby distributing the market power
uniformly among both the parties. Both the buyers and sellers are price takers and there is free
entry and exit from the market. The goods sold by the sellers are close substitutes and in the long
run the sellers are expected to earn only normal profit (Corchón 2013).
d) Natural Monopoly – Though a close variant of the monopolistic market structure, the natural
monopoly market differs from pure monopoly in several aspects. The natural monopoly arises in
a market due to the presence of high fixed cost and succeeding increasing returns to scale. As not
many firms can afford the high initial fixed cost, the market automatically takes the form of a
monopoly. However, unlike pure monopoly, natural monopoly is preferred in many instances as
it leads to a more efficient market that it would have been in the presence of other competitors
(Hall and Lieberman 2012).
In Australian economy, many of the above discussed market models and
other models exist in different sectors. However, if compared and ranked, two of the above
models can be seen to exist predominantly, the models being oligopoly and monopoly. The
banking industry in Australia is a clear evidence of an oligopolistic structure, with four big
players significantly dominating the industry. The similar oligopolistic pattern is also observed in
housing industry. The mining sector of the country shows a monopolistic structure, with
significant market power in hands of a single player (Richardson 2012).

11PRINCIPLES OF ECONOMICS
Answer 6:
Tertiary education being a luxury good, if the pass marks at CDU is
increased from 50% to 60%, considerably lesser number of students will enroll in the university
as many of them will prefer to look for enrollment in other universities or will opt for jobs or
other vocational courses. This is because unlike primary or secondary education, tertiary
education is not an absolute necessity. This can be shown with the help of the following diagram:
P
P1
P2
Demand
0 Q1 Q2 Q
Figure 6: Luxury Good
(Source: As created by the author)
Tertiary education being a luxury good, the demand for it is highly elastic.
Therefore, with an increase in the pass marks, lesser number of students will be interested and as
a result the enrollments at CDU will be substantially impacted (Wiedmann and Hennigs 2012).

12PRINCIPLES OF ECONOMICS
Answer 7:
a) The marginal cost curve, in general shows a negative slope initially and then starts showing a
positive slope with increase in the production, as is shown in the following diagram:
MC MC
0 Q
Figure 7: Marginal cost curve
(Source: As created by the author)
The initial downward sloping MC signifies the efficiency increment with the
increase in production. However, due to the presence of law of diminishing returns, the MC rises
after a certain point of time as cost of production of one additional unit of output increases with
more and more production (Shepherd 2015).

13PRINCIPLES OF ECONOMICS
Opportunity cost may be defined as cost of foregoing next best alternatives when
one alternative is chosen. In this context, the marginal cost is related to this concept in the sense
that it is nothing but the change in opportunity cost that occurs when one extra unit of a
commodity is produced.
b) The concept of marginal cost is of immense importance in the sense that the production
decisions of any rational producer is based on the dynamics and changes of this variable as it
shows the cost of producing one additional unit of output.
c) The NBN network, being a huge enterprise and already enjoying increasing returns to scale,
the marginal cost of adding one household to this network is negligible and almost equivalent to
zero (Alizadeh 2013).
Answer 8:
The success of the supermarkets in the global business scenario is highly attributed
to the concepts of imperfect competition, marginal cost and increasing returns to scale. These
supermarkets, being big players, enjoy substantial market power and mostly operate in
oligopolistic or monopolistic environment. The initial high fixed cost of operating prevents many
players to enter and therefore, after a certain point of time, these supermarkets start enjoying
increasing returns to scale and their costs of production falls drastically. Due to this, they can
provide goods and services to the customers at considerably low prices, thereby keeping away
competitions and contributing to their success and long term business prospects (Carlino 2012).

14PRINCIPLES OF ECONOMICS
References
Alizadeh, T., 2013. Towards the socio-economic patterns of the national broadband network
rollout in Australia. State of Australian Cities, Sydney. Accessed December, 31.
Askar, S.S., 2013. On complex dynamics of monopoly market. Economic Modelling, 31, pp.586-
589.
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage
Learning.
Carlino, G.A., 2012. Economies of scale in manufacturing location: theory and measure (Vol.
12). Springer Science & Business Media.
Cdu.edu.au (2017). Charles Darwin University. [online] Cdu.edu.au. Available at:
http://www.cdu.edu.au/ [Accessed 6 Sep. 2017].
Corchón, L.C., 2013. Theories of imperfectly competitive markets. Springer Science & Business
Media.
Erikson, E., 2014. Introduction. Introductory Chapters.
Hall, R.E. and Lieberman, M., 2012. Microeconomics: Principles and applications. Cengage
Learning.
McLean, I.W., 2012. Why Australia prospered: The shifting sources of economic growth.
Princeton University Press.
Richardson, D., 2012. The rise and rise of the big banks.

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Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and
policies. McGraw-Hill.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and
policies. McGraw-Hill.
Rubinstein, A., 2012. Lecture notes in microeconomic theory: the economic agent. Princeton
University Press.
Shepherd, R.W., 2015. Theory of cost and production functions. Princeton University Press.
Sushko, I. ed., 2013. Oligopoly dynamics: Models and tools. Springer Science & Business
Media.
Wiedmann, K.P. and Hennigs, N. eds., 2012. Luxury marketing: a challenge for theory and
practice. Springer Science & Business Media.