Economics: Microeconomics and Macroeconomics

Running head: ECONOMICS
Economics
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ECONOMICS1
Table of Contents
Part A: Microeconomics..................................................................................................................2
Question 1....................................................................................................................................2
Question 2....................................................................................................................................2
Question 3....................................................................................................................................3
Question 4....................................................................................................................................4
Part B: Macroeconomics..................................................................................................................5
Question 1....................................................................................................................................5
Question 2....................................................................................................................................6
Question 3....................................................................................................................................7
Question 4....................................................................................................................................7
Question 5....................................................................................................................................8
References......................................................................................................................................10

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Part A: Microeconomics
Question 1
The structure of banking industry in Australia follows the structure of an oligopoly
market. Like an oligopoly market, banking industry in oligopoly is dominated by four major
banks – Westpac, Commonwealth Bank, NAB and ANZ. The four banks control more than 80
percent of domestic lending market (Duran 2018). The other oligopoly characteristics of banking
industry of Australia include presence of entry barriers and constraint faced by consumers to
switch between banks.
During Global Financial Crisis, banks in many other countries faced severe credit crisis.
In a sharp contrast to most other nations, Australian banks performed comparatively better. The
better performance of Australian banks was due to policy taken by Australian Prudential
Regulatory Authority (APRA) and Reserve Bank of Australia. In particular, the policy that
worked effectively was the ‘four pillar’ policy preventing mergers among the major banks. The
prevention of merger reduced risk-taking behavior of banks by limiting competition in the
industry. This in turn lowered vulnerability of banks to the adverse market condition. The
guarantee on deposit of small banks prevented banks to become bankrupt.
Question 2
The collusion of four big banks in Australia will reduce competition in the banking
industry, which in turn increase market power of the banks. The collusion will allow the banks to
charge a higher price for the product or services. This will make the major banks as price maker
and other small bank will follow the price set by the major banks. After collusion, the major
banks will behave like a monopolist. This will allow banks to set a high price for a relatively

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smaller quantity and earn a supernormal profit (Cowell 2018). This is shown in the following
figure. Because of collusion, banks can restrict the market quantity at QM and charge a high price
at PM. This allows firm to enjoy more than normal profit in the long run.
Figure 1: Effect of collusion in Australian banking
Question 3
The government seeks to increase competition in the banking industry in order to prevent
excessive market power of the dominating banks. The excessive market power allows banks to
exploit the market and pass on the cost burden to customers to increase profit without having fear
of losing market share. As discussed in figure 1, collusion among major banks can lead to a
monopoly power where banks charge a relatively high price and supply a relatively smaller
product. This in turn reduces competitive efficiency of the industry, exploits customers and
lowers social welfare as a whole (Hutchens 2018). In order to prevent unintended consequences
of excessive market power of dominating banks government is seeking to increase competition.