Australian Banking and Housing Market Analysis

This assignment delves into the complex interplay between Australia's banking and housing sectors. It requires an analysis of various factors influencing these markets, including regulatory landscapes, competitive dynamics, and recent trends. Students need to evaluate the performance of Australian banks, explore issues related to financial stability and housing affordability, and consider the impact of government policies on both sectors.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author Note

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Table of Contents
Answer 1..........................................................................................................................................2
Differences in Characteristics......................................................................................................2
Equilibrium condition in perfect competition..............................................................................3
Equilibrium under monopolistically competitive market............................................................8
Allocative and Productive Efficiencies in the markets................................................................9
Answer 2........................................................................................................................................12
Oligopoly in the Australian Economy.......................................................................................13
Answer 3........................................................................................................................................17
Crisis of Housing Affordability in Australia.............................................................................17
References......................................................................................................................................20

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Answer 1
In terms of economics, market is defined to be a place of interaction of the demand and
the supply side players, where the price and quantity related decisions are taken by the same.
There exist different types of market in the global framework, depending upon the number of
players in the supply and demand side, the powers of the buyers and sellers in the market, the
nature of the goods and services dealt with in the concerned market and several other attributes
(Baumol & Blinder, 2015). Of the different forms of such markets, two of the popular and
widely discussed market structures are that of the perfectly competitive one and the
monopolistically competitive one. The assignment tries to discuss these two markets, taking into
account their long run equilibrium situations (Nicholson & Snyder, 2014).
The two above-discussed markets have significant differences in the key features, which
are discussed in the following sections of the assignment:
Differences in Characteristics
Types of product dealt in the market- In case of a perfectly competitive market, the
product sold and bought is perfectly homogenous in nature, which implies that the products sold
by the sellers are exactly similar in all aspects, including nature, taste, smell and others.
However, in case of a monopolistically competitive firm, the products dealt with are somewhat
differentiated, at least by the names of the brands (Hall & Lieberman, 2012).
Number of players in the market- In this aspect both the market types are similar as both the
number of buyers and sellers are high in two of these markets.

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Barriers to entry and exit- In perfectly competitive market, there are no entry and exit barriers
and player can enter or exit from the market without any cost. However, in case of
monopolistically competitive market, the barriers are very low but still existent.
Market power- In the perfectly competitive market, due to the presence of huge numbers of
buyers as well as sellers, neither the buyers nor the sellers has any extra market power and both
the parties are price takers. However, as the products sold and bought in the monopolistically
competitive market are differentiated to some extent, so the supply side players enjoy some
extent of market and price decisive power (Rader, 2014).
Keeping this into consideration, the equilibrium in a market, in terms of economics, can
be defined to be the condition of mutual agreement of the producers and the buyers, which is
reached by mutual interaction of both the parties in the market. The equilibrium of the market
also differs depending on the nature and type of markets, in short run as well as in the long run,
which are discussed in the following sections:
Equilibrium condition in perfect competition
In the perfectly competitive markets, the number of buyers as well as sellers being
numerous, the products being perfectly homogenous and the firms being price takers, the
demand curve existing in the market is perfectly elastic. The demand curve, like that of the
average revenue curve and also the marginal revenue curve, is parallel to the horizontal axis, at a
particular level of price prevailing in the market. The equilibrium, in such a market, occurs
where the marginal cost of producing one additional unit of output by the perfectly competitive
firm is equal to that of the marginal revenue earned by selling that additional unit of output
(Kolmar, 2017).

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Therefore, in the perfectly competitive framework, equilibrium occurs at a point, where,
MR=MC
However, in the perfectly competitive market, the marginal revenue is equal to the price
prevailing in the market, which indicates that,
P=MR=MC (Hall & Lieberman, 2012)
Keeping this into consideration, the short run equilibrium in the perfectly competitive
market, gives the firms the scopes to earn supernormal profit, subnormal profit (loss) or also
normal profit (no profit no loss situation), which depends on the position of the average cost
curve, marginal cost curve and the AR and MR curves, which are shown as follows:
Equilibrium in Short Run
a) Super-Normal Profit

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Figure 1: Supernormal Profit
(Source: As created by the author)
As is evident from the above diagram, as the AC curve lies below the AR curve,
therefore, the average revenue of the perfectly competitive firm is more than the average cost of
production of the same, which leads to super-normal profit for the firm (Boland, 2014).
b) Normal Profit (No profit no loss situation)
Figure 2: Normal Profit Situation
(Source: As created by the author)
In this case, the average cost and average revenue at the point of equilibrium being the
same, the firms are expected to earn normal profit in the short run.
c) Subnormal Profit (Loss)

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Figure 3: Subnormal Profit or Loss situation in the short run
(Source: As created by the author)
This situation of loss in the short run equilibrium in the perfectly competitive framework
occurs when the average cost of production is greater than the average revenue earned in the
equilibrium situation, which leads the firm to accrue loss in such a situation.
Thus, it can be asserted that in the short run, a perfectly competitive firm, in spite of
being in the equilibrium, can earn super normal profit, sub normal profit or even normal profit,
depending upon the nature of the cost and revenue curves (Chaney & Ossa, 2013).
Equilibrium in the Long Run
If in the short run, the firms in the perfectly competitive market earn super normal profit,
then more and more firms are attracted to the market, which decreases the profit level for each

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form to the normal profit situation. On the other hand, if sub normal profit occurs in the short run
equilibrium, then firms exit from the market, the entry and exit barriers being absent, thereby
bringing the profit level to the normal level. Thus, any other situation present in the short run
equilibrium apart from the normal profit one, will lead to interactions of the supply and demand
side dynamics, such that the equilibrium will ultimately occur at the point of normal profit,
which can be showed with the help of the following diagram:
Figure 4: Equilibrium in the long run in perfectly competitive market
(Source: As created by the author)
Thus, in case of the perfectly competitive firms, though in the short run equilibrium, there
are scopes of earning supernormal profit, normal profit or loss, however in the long run, the
firms only enjoy normal profit (Boland, 2014).

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Equilibrium under monopolistically competitive market
In this type of market, as each of the producers sell products which are different in some
aspect, each of the sellers enjoy some monopoly power and therefore face a downward sloping
demand curve. Like that of the perfectly competitive firms, the equilibrium in a monopolistically
competitive market occurs when the marginal cost of production of one additional unit of output
is equal to the marginal revenue earned by the same from that unit of output, that is where the
MR curve is equal to the MC curve (Zhelobodkov et al., 2012).
Equilibrium in the short run
Due to the presence of some amount of monopoly power in the hands of each of the
players in the monopolistically competitive market, the sellers enjoy super normal profit, in the
short run situations, which is shown in the following diagram:
Figure 5: Monopolistically competitive equilibrium (Short run)
(Source: As created by the author)

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The presence of supernormal profit in the short run, in this type of market structure,
clubbed with low entry and exit barriers, attracts other sellers to enter the market, which in the
long run decreases the profit level to the normal profit situation (Nikaido, 2015).
Equilibrium in the long run
As in the long run more and more sellers enter in the market, due to the presence of
supernormal profit, in the long run, the firms only earn normal profit which is shown as follows:
Figure 6: Monopolistically competitive equilibrium in the long run
(Source: As created by the author)
Allocative and Productive Efficiencies in the markets
There are several yardsticks of efficiencies in the market, based on which the feasibility
of operations in the markets are assessed. These are as follows:

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Allocative Efficiency- The allocative efficiency refers to the most optimal allocation of
resources and goods and services in the market, such that the welfare of all the players involved
are maximized (Holmes, Hsu & Lee, 2014).
Figure 7: Allocative Efficiency in general in market
(Source: Courses.byui.edu, 2018)
Productive Efficiency- The productive efficiency deals with the method which minimizes the
cost of production of the firms in the market.

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Figure 8: Productive efficiency in the market
(Source: Courses.byui.edu, 2018)
Perfectly competitive firms are productive efficient in the long run as MR=MC and also
are efficient in terms of allocative efficiency as the consumer as well as the producer surplus are
maximized in this type of market.
On the other hand, the monopolistically competitive firms in the short run keep prices at a
level higher than that of the marginal production cost, which implies that at least in the short run
the monopolistically competitive firms do not abide by productive efficiency norms. The firms,
in this market, also produce less than the maximum capacity to maintain high price, which also
indicates towards the absence of allocative efficiency in the monopolistically competitive market
(Färe, Grosskopf & Lovell, 2013).

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Answer 2
One of the most realistic and practical form of markets, in economic conceptual
framework, which has relevance to the economic world in the global scenario is the oligopolistic
market. This form of market has several unique features which are as follows:
 There are a huge number of buyers and only a handful of sellers (In general less than
twenty sellers) in an oligopolistic market.
 Each of the producers produce same type of commodities which are differentiated at least
by the names of the brands.
 The sellers enjoy significant share of market and price decisive power as the sellers are
few in number and there are many buyers in the market (Fudenberg & Tirole, 2013).
 The profitability of the sellers in the market are not only affected by their own strategies
and actions but also by the actions taken by the other players in the supply side of the
market. That is, the sellers experience mutual interdependence on one another in terms of
the strategies they take and the profit levels of the same.
 The oligopoly firms, in a competitive environment, often engage in price wars or form
collusion in order to avoid price wars to increase their scope of earning profit.
 As there are a few sellers in the market and each of them enjoy market power to some
extent, therefore, there remains high barriers of entry in the market, which are created by
these big supply side players themselves (Sushko, 2013).
Taking these into consideration, the presence of oligopolistic market structure in the real
economic scenario is examined, with reference to one of the most prominent and leading
economies in the contemporary global scenario that is the economy of Australia.

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Oligopoly in the Australian Economy
There are evidences of the presence of the oligopolistic market structure in many
industries in many economies of the world and the Australian economy is also not an exception
to this. The most unique feature of the oligopolistic market structure is that it is not as extreme
and hypothetical as that of perfectly competitive or monopolistic structures of the market. In
Australian economy, oligopoly is predominantly present in many of the prominent industries of
the country (Tyers, 2015).
The Australian economy has shown highly impressive development in many aspects and
has emerged as one of the leading and influential economies in the contemporary global
scenario. The huge and continuously expanding industrial and commercial growth of the country
has been one of the driving factors in the economic growth of the country. Of the most developed
industries in the domestic economy of the concerned country, one of the prominent ones is the
banking sector (Demirgüç-Kunt & Huizinga, 2013).
The banking industry has developed significantly in the country over the years and has
also emerged as one of the key facilitators of the economic and commercial prosperity in the
country. The banking industry of Australia not only operates domestically but has huge
operational base in the global banking and commercial framework. There are many players in the
demand side of this industry and also in the supply side (Beatty & Liao, 2014). However, in the
supply side, in spite of the presence of many players, the market is primarily dominated by four
big banks, thereby giving the banking industry an oligopolistic structure. The “Big Four” banks
in the country are mainly the Australia and New Zealand Banking Group, the Westpac, the
Australian National Bank and the Commonwealth Bank.

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Figure 9: Market share (Of operations) of the banks in Australia
(Source: Pwc.com.au, 2018)
As can be seen from the above figure, these four above mentioned banks dominate the
banking industry of the country significantly and are one of the primary reasons behind the
shadowing of the other banks and their low market share and profitability in the economy. These
banks, together enjoy nearly 80% of the market share of the domestic banking industry and also
enjoys a significant share of operations in the international economic and commercial scenario.
The above discussion and the empirical evidences suggest the presence of huge market
power in the hands of each of the big four banks in the economy of Australia, thereby making the
presence of oligopolistic trends even more prominent in the market. The big four banks also
shadow the other comparatively small supply side players and create considerable entry barriers,

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thereby asserting the oligopolistic features of the banking industry of the country. The big banks,
being only four in number, not only enjoy huge number of clientele in the country itself but also
have huge market shares in the international market too. Banking sector being one dealing with
the monetary and financial matters of their customers, are driven hugely by the goodwill and
brand loyalty factors on part of the customers. These four big players in the Australian banking
sector have been in operations for many years and have over the years gained significant trust
and goodwill in the market (Busetto, Codognato & Ghosal, 2013). People trust them with their
assets and each of the bank have sufficient brand loyal customers whose word of mouth bring
even more customers to them, thereby contributing to their long term sustainability and
expansion of domain of operations. This in turn creates even more hurdles for the small players
and the new supply side entrants in capturing a significant share of clientele in the market.
Another oligopolistic feature of the Australian banking industry is the presence of
significant mutual interdependence of the four big banks in the economy. Each of these banks
enjoying a big share of the market and having huge clientele, the profitability and long term
sustainability of each of these big four banks not only depend on the business strategies taken by
the bank itself but also on the strategies and decisions taken by the other three banks. This along
with the fact that the big four banks earn huge profits both in the long run as well as in the short
run, asserts the presence of oligopolistic characteristics in the banking industry in the economy
of the country (Fudenberg & Tirole, 2013).

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Figure 10: Kinked demand curve in Oligopoly market
(Source: As created by the author)
The presence of profit maximizing objectives and huge competition among the big four
banks in the country, leads to the presence of kinked demand curve in the market as price war is
highly evident in this particular oligopolistic market, which can be seen from the above figure.
This along with all the above discussed attributes indicates towards the presence of oligopoly in
the banking industry of Australia.

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Answer 3
Australia has over the years emerged as one of the leading economies in the international
scenario and has shown immensely impressive growth trends over the time. The economy of the
country has experienced consistent growth, in spite of several discrete fluctuations and the
country is now one of the most industrially and commercially active centers in the global
framework. This economic prosperity of the country has led to an increase in the population of
the same.
The population of Australia has increased consistently over the years, the increase being
especially high in the urban and commercially active areas like that of Melbourne and Sydney.
However, the land area of these cities remaining the same, the increase in the number of
residents has directly affected the affordability of housings in the country and has made housing
an issue of immense concern in Australia (Worthington, 2012).
Crisis of Housing Affordability in Australia
The housing sector of the country has experiences constantly increasing demand in the
last few decades which can be fully attributed to both the increased in the population of the
country and the tendency of investing in housing assets for the purpose of alternative asset
building by the residents as well as foreign investors. This in its turn has increased the problem
of affordability of housing in the country, especially in the economically active cities.
A significant share of the population of the country has to spend nearly 30% or more of
their gross income for the purpose of housing, the share increasing constantly. This affordability
crisis has hit the lower income sector of the country the most (Source: Rba.gov.au, 2017). The

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housing cost of the country has increased over the time which can be seen from the following
figure:
Figure 11: Housing cost (Australia) over the years
(Source: Worthington, 2012)
This issue may be attributed to the following demand side attributes:
a) The increase in the population has been the primary reason behind the continuously
increasing price of the houses. The population increase is not only attributed to the
increase within the domestic boundaries but also is due to the huge immigration of
workers and students from all the corners of the world.
b) Apart from being a place to dwell, housing is also viewed as residential investment,
which is another lucrative form of alternative investment and which has also created an
upward pressure on the demand side of the housing market.

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c) The banks and financial sectors have also facilitated the increase in the demand by
making credit acquiring easy.
d) The huge economy prosperity of the country has also led to the increase in the foreign
investment in the housing sector (Hsieh, Norman & Orsmond, 2012).
The problem can be to some extent solved with the help of the supply side dynamics:
The primary way of solving the problem of affordability crisis in the country is by
increasing the supply of housings on face of the increasing demand of the same. This in turn can
lead to a decrease in the price of the housings thereby withering out the issue of huge national
concern.
To facilitate the same the government of the country has already started limiting the
credit availability for the investors in the housing industry such that accommodations are not
hoarded and are available for all those who can buy, which includes the lower and the middle
income class people. The government has also induced the construction of budget housings for
this purpose, especially in the areas near the economically active zones (Gurran & Phibbs, 2013).
The connectivity between the cities and the suburbs should also be made robust so that people
willingly invest in buying houses in these regions which may contribute in solving the housing
affordability crisis in the country.

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References
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Learning.
Nicholson, W., & Snyder, C. M. (2014). Intermediate microeconomics and its application.
Cengage Learning.
Hall, R. E., & Lieberman, M. (2012). Microeconomics: Principles and applications. Cengage
Learning.
Rader, T. (2014). Theory of microeconomics. Academic Press.
Kolmar, M. (2017). Introduction. In Principles of Microeconomics (pp. 45-53). Springer, Cham.
Boland, L. A. (2014). Methodology for a New Microeconomics (Routledge Revivals): The
Critical Foundations. Routledge.
Chaney, T., & Ossa, R. (2013). Market size, division of labor, and firm productivity. Journal of
International Economics, 90(1), 177-180.
Zhelobodko, E., Kokovin, S., Parenti, M., & Thisse, J. F. (2012). Monopolistic competition:
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Nikaido, H. (2015). Monopolistic Competition and Effective Demand.(PSME-6). Princeton
University Press.
Holmes, T. J., Hsu, W. T., & Lee, S. (2014). Allocative efficiency, mark-ups, and the welfare
gains from trade. Journal of International Economics, 94(2), 195-206.

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Courses.byui.edu. (2018). ECON 150: Microeconomics. Courses.byui.edu. Retrieved 2 January
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