Micro and Macroeconomics Analysis for Real World Events

This report discusses the impact of Middle East hostilities on the petrol and passenger car market in Australia, interconnection between the electric car market and petrol car market, trade-off between current and future production, determinants of long term economic growth, burden of taxation, and Australian supermarket market structure.

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Student ID

1ECONOMICS
Table of Contents
Introduction........................................................................................................................2
Answer 1............................................................................................................................2
a) Middle East hostilities and petrol and passengers’ cars market in Australia............2
b) Electric car and petrol car market..............................................................................4
Answer 2............................................................................................................................5
a) Policy of government and impact on aggregate output.............................................5
b) Factors affecting long term economic growth............................................................7
Answer 3............................................................................................................................8
a) Burden of taxation......................................................................................................8
b) Australian supermarket market structure...................................................................9
Conclusion.......................................................................................................................10
References list.................................................................................................................11

2ECONOMICS
Introduction
Different concepts of economics are useful in understanding implications for
different real world events (Olitsky and Cosgrove 2016). In this report concepts related
to microeconomics and macroeconomics are considered to make some real world
analysis. Question 1 of the report discusses how hostilities in Middle East nations
affects the petrol and passengers’ car market in Australia. In the second part, the
question evaluates interconnection between the electric car market and petrol car
market. Question 2 analyzes the trade-off that a nation faces between current and
future production. In this context, the likely impact of Australian government’s policy to
increases attendance in universities degree on current and future production
possibilities are discussed. This part of the report also discusses different determinants
of economic growth in the long run. Question 3 is about difference in incidence of
taxation between tax on cigarettes and that on coffee. In this part, the paper discusses
market structure of Australian supermarket.
Answer 1
a) Middle East hostilities and petrol and passengers’ cars market in Australia
Hostilities in Middle East is likely to hamper supply of crude oil in Middle East.
Middle East is one of the primary source of oil supply in Australia. Australia imports
large volume of crude oil from Middle East countries. Fall in crude oil production in
Middle East, lowers crude oil supply in the nation. With a decrease in oil supply, petrol
supply falls. Shortage of petroleum in Australia increase petrol price. Now petrol and
passenger cars are complementary goods. Increase in price of petrol reduces demand
for passengers’ cars run by petrol (Karl et al. 2019). The market for passenger cars’
contracts causing a decrease in number of passenger cars sold and increases price of
cars. The dynamics of petrol and passenger cars’ market are shown in the following two
figures.

3ECONOMICS
Figure 1: Market for petrol in Australia
Figure 1 describes the petrol market in Australia. The demand condition in the
market is presented by the line D0D0. The state of supply is shown by the line S0S0. With
the given demand and supply, equilibrium attains at E0. The outbreak of hostilities in
Middle East reduces supply of petrol in Australian market (Mankiw 2014). Contraction of
supply moves the supply curve left. Equilibrium shifts up from E0 to E1. Quantity of petrol
at equilibrium falls and the price of petrol at equilibrium increases.

4ECONOMICS
Figure 2: Market for passenger cars in Australia
In the market of passenger cars with large engines running on petrol, the higher
petrol price increases cost of running passenger cars. The increasing cost for
maintaining passenger cars lowers demand for these car. Consequent demand curve
for passenger cars moves to the leftward direction (Hubbard et al. 2018). The market for
passenger cars experience a decline in price and quantity attained at equilibrium.
b) Electric car and petrol car market
The expected release of electricity cars at the affordable price makes electric
cars affordable for households. This increases demand for electricity cars. As petrol
cars and electricity cars are substitute in nature, lower price of electricity cars reduces
the demand for petrol cars and increases demand for electricity cars (Bumas 2015).
Lower demand for petrol cars reduces corresponding price and number of available
petrol cars at equilibrium.

5ECONOMICS
Figure 3: Market for petrol cars
Fall in demand of petrol cars causes an inward shift of the demand curve for
petrol cars. Demand curve for petrol cars shifts inward as depicted in figure 3. The
incidence therefore results in a decline in equilibrium price and equilibrium number of
petrol cars.
Answer 2
a) Policy of government and impact on aggregate output
An economy always suffers with the problem of scarcity that is lack of resource to
meet unlimited want of people. By making use of all the available resources an
economy can produce only limited amount of goods. The maximum amount of goods
that a nation can produce is shown by the production possibilities curve. An economy
not only faces trade-off between alternative goods and services but also there is a
trade-off between production at present and that in future (Banerjee 2014). An economy
often has to sacrifice production at present in order to achieve a higher output in future
as in the case of Australia. The government of Australia has taken the policy of
encouraging young people to attend universities with a view to increase the proportion
of educated workforce. When young people are encouraged to attend universities, the

6ECONOMICS
economy faces shortage of workers at present. This reduces current economic output
shifting the production possibilities frontier leftward (Geckil and Anderson 2016). Once
the young people finished their universities studies they economy realizes an increased
supply of skilled workforce. This tends to increase output in future.
Figure 4: Change in PPF at present
Figure 5: Change in PPF in future

7ECONOMICS
b) Factors affecting long term economic growth
Determination of economic growth in the long run is subject to several factors.
Trend in economic growth change depending on these factors. The first determinant is
productivity growth. This indicates ratio of output to inputs (labor, capital, different raw
materials and different services). Higher the productivity growth more output can be
produced leading to a higher growth. Availability of physical and human capital highly
influence long run economic growth (Bresser-Pereira, Oreiro and Marconi 2014).
Physical capital implies physical factor of inputs used in production. These include
buildings, machinery and other physical factor. Higher capital to labor ratio helps to
increase long term output. Human capital is the knowledge and skills including
personality, creativity and other attributes that help to enhance productivity and
economic growth. Level of technological development and infrastructure are other
important factors affecting economic growth.
Government has the ability to influence economic growth of a nation by using
fiscal and monetary policy. Fiscal policy instrument works through changes in taxes or
government spending. The main instrument of monetary policy is the interest rate. In
order to give stimulus to economic growth government undertakes either expansionary
fiscal or expansionary monetary policy (Heathfield 2015). The former is designed by
raising government expenditure or lowering tax rate. The economy receives monetary
policy stimulus through government’s decision to lower interest rate.

8ECONOMICS
Answer 3
a) Burden of taxation
Figure 6: Burden of tax for cigarette
The division of tax burden is entirely dependent of demand and supply elasticity.
In case of cigarette demand is mostly price inelastic. Demand is therefore relatively less
sensitive to price. Demand in this case is more elastic than supply as shown by the
steeper demand curve in figure 6. When government imposes sales tax on all brands of
cigarettes the supply curve shifts leftward by the amount of tax (Stoneman and Bartoloni
2018). After the tax equilibrium in the market moves to E2 and equilibrium quantity of
cigarette falls to QT. Value of cigarette to purchasers is PB. Brand retailers of cigarette
receive lesser price of PS. In this case since buyers can reduce their demand only to a
small extent buyers bear a higher tax burden.

9ECONOMICS
Figure 7: Burden of tax for coffee
In case of coffee however the demand is relatively elastic because of availability
of substitutes. When price of coffee increases because of imposed tax, buyers can
switch their demand to other beverages. Demand curve in this case is relatively flatter
shown in figure 7 (Jain and Ohri 2015). Price to purchaser is at PB while price to
retailers is PS. As buyers can adjust their demand for coffee to a large extent buyers
bear a smaller proportion of tax burden while sellers bear a greater burden.
b) Australian supermarket market structure
The most common classification of market structure is based on the extent of
competition which is determined by the size of buyers and sellers present in the market.
The supermarket in Australia is largely similar to a concentrated oligopoly market. It is
market where few large firms have a dominating market power and sell product or
service to a large group of buyers. Similar to an oligopoly market, in the grocery
supermarket of Australia Woolworths, Coles, Aldi and few others have a dominating
share with share of Coles and Woolworths being above 60 percent (Aph.gov.au. 2019).
Like oligopolistic firms, the dominating firms differentiate their product. Products are
differentiated in terms of packaging, brand name and others. Resembling to an
oligopoly market, the dominating players like Woolworths and Coles often involve in a
price war to undercut market share of rival firm.

10ECONOMICS
Conclusion
Disruption in oil production in Middle East because of hostilities adversely affects
the market petrol in Australia. Passenger cars being a complementary good of petrol
faces a decline in demand causing a decrease in price and quantity. Release of electric
cars at an affordable price decreases demand for petrol cars. If Australian government
tends to encourage young people to complete universities study, then present
production of the economy will be sacrificed for a higher output at future. Productivity
growth, physical and human capital, technology and infrastructure influence long term
economic growth of a country. Following a larger price sensitivity buyers of coffee bear
a smaller burden compared to purchasers of cigarette. Finally, the study has found that
for Australian supermarket oligopoly is the most appropriate market.

11ECONOMICS
References list
Aph.gov.au. 2019. Chapter 2 – Parliament of Australia . [online] Available at:
https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Former_Committees
/retail/report/c02 [Accessed 1 Oct. 2019].
Banerjee, S., 2014. Intermediate microeconomics: a tool-building approach. Routledge.
Bresser-Pereira, L.C., Oreiro, J.L. and Marconi, N., 2014. Developmental
Macroeconomics: new developmentalism as a growth strategy. Routledge.
Bumas, L.O., 2015. Intermediate Microeconomics: Neoclassical and Factually-oriented
Models: Neoclassical and Factually-oriented Models. Routledge.
Geckil, I.K. and Anderson, P.L., 2016. Applied game theory and strategic behavior.
Chapman and Hall/CRC.
Heathfield, D.F. ed., 2015. Topics in applied macroeconomics. Macmillan International
Higher Education.
Hubbard, G., Garnett, A.M., Lewis, P. and O'Brien, A.P., 2018. Microeconomics.
Pearson Australia.
Jain, T.R. and Ohri, V.K., 2015. Principal of Microeconomics. FK Publications.
Karl, E., Case, F., Oster, R. and Sharon, E., 2019. Principles of Microeconomics.
Pearson.
Mankiw, N.G., 2014. Principles of economics. Cengage Learning.
Olitsky, N.H. and Cosgrove, S.B., 2016. The better blend? Flipping the principles of
microeconomics classroom. International Review of Economics Education, 21, pp.1-11.
Stoneman, P. and Bartoloni, E., 2018. The Microeconomics of Product Innovation.
Oxford University Press.