Economics: Microeconomics and Macroeconomics

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

1ECONOMICS
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..............................................................................................................................5
Question 3..............................................................................................................................6
Question 4..............................................................................................................................7
Question 5..............................................................................................................................8
References................................................................................................................................10

2ECONOMICS
Part A: Microeconomics
Question 1
The Australian banking industry is dominated by four banks that are ANZ, Westpac,
NAB and Commonwealth Bank. These four banks control over 80 percent of the Australian
banking industry. Their control is so intense that new entrants face significant barriers and the
customers face restriction in shifting to other banks (Bell and Hindmoor 2019). All these
characteristics are visible in oligopoly market structure. Hence, the banking industry in
Australia is an oligopoly market.
Unlike banks in other countries in the world, the Australian banks performed
sufficiently better during the recent Global Financial Crisis (GFC). The policies of the
Reserve Bank of Australia (RBA) and Australian Prudential Regulatory Authority (APRA)
were the principle reason behind relatively better performance of the Australian banks. The
policy worth mentioning is the “Four Pillar” policy that prevented mergers of the chief banks.
Limiting competition in the banking industry hindered the major banks from merging and
thereby induced safe playing. Increased assurance on small bank deposits avoided the chance
of bankruptcy. Hence, the banks in Australia endured the hostile market condition.
Question 2
Firms collude to increase their control over the market such that they can charge any
price to increase profitability. Similarly, if the four chief Australian banks collude, they will
get control over the market and increase their product price. Small banks treat large banks as
the price setter act accordingly. With further increase in market power, the large banks will
decrease their supply of products and act as monopolists. High price and low supply below
the competitive equilibrium will fetch supernormal profit for the large banks (McKenzie and
Lee 2016). Hence, collusion pushes the market towards a structure similar to monopoly

3ECONOMICS
market. In figure 1 the mechanism is explained. PM and QM are the respective price and
quantity that fetches supernormal profit. This enables the banks in long run to earn profit over
normal level.
Figure 1: Effect of collusion in Australian banking
Question 3
APRA has introduced a new licensing policy to allow potential applicants to enter the
banking industry to increase the competition in the sector. The reason behind such policy
implementation is to restrict the chief banks from merging and colluding such that they
cannot gain control over the market and act as monopolists. As already shown in the figure 1
that if chief banks gain monopoly power they will charge high price for low quantity of
products or services and thereby the exploit the customers by appropriating their welfare part
and increase their cost burden. Evidently, monopoly market reduces social welfare at the cost
of customers (Stoneman, Bartoloni and Baussola 2018). Hence, to prevent such market
disorders RBA and APRA intends to sustain the competitive market condition of the banking