Economics: Market Structures and Housing Affordability Crisis

This document discusses the market structures of perfect competition, monopoly, and oligopoly, and explores the housing affordability crisis in Australia. It explains the features of each market structure and their impact on consumers and producers. It also examines the causes and consequences of the housing affordability crisis and its effects on the economy.

Running head: ECONOMICS
Economics
Name of the student
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Table of Contents
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................6
Answer 3..................................................................................................................................10
Reference list............................................................................................................................14

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Answer 1
The market structure of the perfect competition is such that there is a presence of huge
number of buyers as well as sellers and everyone so engaged in either selling or buying the
homogenous products that is prevailing in the market. the features of the perfect competition
include:
Large number of buyers and sellers: in case of perfect competition there is a presence of large
number of buyers as well as sellers in the market. for this reason, the single seller or buyer
will not be able to influence the output or the price in the industry. Therefore, an individual
customer or an individual seller cannot affect the price of the product since it will be too
small in relation to the whole market.
Homogeneous product: the products that they sell in the market is completely homogeneous
in nature such that no single seller will be having preference for a particular seller over the
others. As the products sold in case of perfectly completive market are homogenous in nature,
an increase in price will let the customers to go to some other suppliers.
Free entry and exit of the firms: when there are presence of perfect competition in the market,
the firms can enter or leave the market whenever they feel. This states that when the firm will
be suffering from huge loses as a result of intense competition, then it can freely leave the
market and can begin its business operation in any of the industry. Therefore, there is absence
of any restrictions on the mobility of the sellers.
Under the monopoly market structure, the firm will be having full control over the supply of
the product. The elasticity of demand will be zero for the products and there will be only a
single seller in the market.

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One seller and large number of buyers : as there is only a single firm, the firm is considered
as industry. However, in this case the number of buyers is assumed to quite large.
Absence of any close substitutes: there will be absence of any close substitutes for the goods
sold by the monopolist where the cross elasticity of the demand between the product of the
monopolist and the others is known to be zero.
Closed entry of the new firms: there will be either artificial or natural restrictions on the entry
of the new firms even when the firms will be making abnormal profits.
Price maker: under the monopoly, it is known to have full control over the supply of the
commodity. Buyers need to pay fixed price by the monopolist. Monopolist will be having full
control over the supply of the commodity and there will be large number of buyers and
therefore the demand for one buyer will be known to be only the small part of the total
demand.

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In case od short run, the monopoly firm will be behaving same as the other firms. It will be
maximizing profits by producing the output at that point where the marginal cost will be
equal to the marginal revenue. The firm can earn either supernormal profit or normal profit or
even loss in the short run. During this time the demand for the commodity will be quite high,
there the seller can increase the price and quantity according to his wish. However, during
short term loses, when the firm will cease production it will then have to bear the total fixed
cost. For this reason, the firm in the short while earning loss prefers to operate in order to
reduce loss.

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In case of long run the monopoly, firm will be creating barriers and will block the entry of the
new firms in the industry. When there will be absence of any thereat which generally arises
from the entry o the new firms , the monopoly will be making long run adjustments in the
scale of the plant,. In the long run, all the factors of the production of the plant will be
variable in nature. The firm at that point will be maximizing the profit at that point of the
output where the marginal revenue will be equal to the marginal cost. At that point the long
run marginal cost will be intersecting the marginal revenue curve from below. The firm will
be at equilibrium at the point E. the firm will be earning profit in the long run as it can make
adjustments which are required in the firm.

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From the above diagram it can be said that under perfect competition, the PPC representns
the price in the perfect competition the demand curve is MR curve where the equilibrium
quantity is at the point QPC. In case of perfect competition it can be said that the producer
surplus and the consumer surplus will be at maximum. Therefore, in case of perfect
competition it can be said that the consumer surplus will be CAPPC and the producer surplus
will be PADPPC. On the other hand in case of monopoly market structure the consumer
surplus will be CEPM and the producer surplus EBDPM. Therefore it can be said that in case
of monopoly the consumer surplus will be declining while the producer surplus will be
increasing. However the deadweight loss in case of consumer surplus will be EFA and on the
other hand the deadweight loss in case of producer surplus will be FAB. In case of monopoly
the marginal revenue will be below the average revenue curve since the monopolist will have
to reduce the price in order to sell more. In case of monopoly the marginal revenue will be

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below the average revenue curve since the monopolist will have to reduce price in order to
sell more. The equilibrium output in case of monopoly will be QM and the price will be PM
where the marginal revenue will be equal to the marginal curve. Therefore, it can be said in
case of monopoly the prices will be higher and the quantity will be lower than in the perfect
competition. Also in case of monopoly there will be deadweight loss and an increase in the
producer surplus with a decrease in the consumer surplus.
Answer 2
In case of the oligopoly market structure there will be presence of a small number of firms
that will be dominating the market. there are few firms in case of oligopoly market as there
will be barriers of entry in the market. in this kind of market structure there will be presence
of high degree of the differentiated products. The banking industry of australia known to have
oligopolistic market. the banking sector of australia is dominated by the four large banks
which are the National Australia Bank (NAB), Commonwealth Bank (CBA) Westpac and
Australia and New Zealand Banking Group (ANZ). Although the market is highly
competitive in nature, the presence of high concentration by a small number of banks can
lead to an oligopolistic behavior. They are often termed as the Big Four. The banking sector
of australia known to have one of the highest barriers to enter the market. The oligopoly is the
business structure where there is non price competition, interdependent choice making and
barriers to entry in the market.
Features of the oligopoly market
 Monopoly power: since there are only few firms and each firms will be having a large
share of the market therefore the firms in the oligopoly market will be having
monopoly power.

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 Interdependence of firms: under the oligopoly market structure there will be only few
firms that will be produing homogeneous products or slightly diffetentiated products.
As the number of firms will be small each of the firms will be enjoying a large share
of the market that will be having significant influence on the output and price
decisions.
 Advertising: under the oligopoly market, each of the firms will be advertising teir
products on a frequent basiswith the intention to reach more customers and this will
help in increasing their customer base . this will result due to advertsising which will
be making the compettion intense.
 Lack of uniformity: there will be absence of any kind of uniformity among the firms
in terms of their size where some may be big some may be small.
Advertising is often used as a defensive mechanism in order to protect the existimg market
shares. One of the main objective of advertising is to make the customers look upon the
products as different from the other products. Oligopolists also have enough finance
resources to advertise. Although the market is highly competitive in nature, the presence of
high concentration by a small number of banks can lead to an oligopolistic behavior. They are
often termed as the Big Four. The banking sector of australia known to have one of the
highest barriers to enter the market. The oligopoly is the business structure where there is non
price competition, interdependent choice making and barriers to entry in the market. there are
small number of firms in the industry which will be creating oligopoly where there will be
existence of same barriers to entry as monopoly. Advertisement in market of oligopoly is
knon to be quite different than in the other markets. Both the efficiency and effectiveness of
the advertisements of the oligopoly market will be totally dependent on the level of product
differentiation which will be exiting within the markets. The adverstisement activity usually
ises the persuasive nature of the adverts that have a long time effect on the consumers and it

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also ensures that consumer will not be shifting to a competing brand. Theteore there are
presence of many reasons which states the need for high level concetration of advertisements
when comes to a oligopolistic market. in order to ensure that the product which the
consumers are using is far better than the rivals they will have a plan for advertisement.
Australia’s banking system has become so concentrated its major banks can pass on costs and
set prices to boost profits without fear of losing market share, through every stage of the
economic cycle. The policy of the four pillars which has underpinned the banking system of
australia have designed to prevent mergers between the four biggest banks in order to
maintain competition which contributed to the problem. The oligopolistic banking system is
known to exploit ythe existing customers who maintain their positions in the market with
opaque pricing. The firms in the oligopoly will able to increase the market share with the help
of advertising and they are known to compete on the basis of advertising rather than on
pricing. Excessive advertisiments by the oligopolist will be used a s barrier against the entry
of other firms. Advertisemnts are also used for informing the consumers of the new products
in the market. therefore, it can be said that excessive advertising by the oligopolist have been
used as a barrier against the entry of other firms. Advertisemnts also lead to a rise in the
output pushing down the average total cost curve towards the productive efficiency point
where the average total cost will be quite minimum. Although advertisemnts can also lead to
manipulation as opposed of informing consumers. It is also known that advertisemnts are
quite costly and might lead to improved efficiency where costs are less than the benefits from
the sales. Advertisemnts might also not have any kind of direct relationship or benefits to the
consumers. Although when increased in sales advertisements can led to reduced prices and
then the consumers will also enjoy some benefits.

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Answer 3

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Housing affordability crisis takes place due to lack of affordable housing. Both Melbourne
and Sydney known to have faced a serious housing crisis. The shortage of the affordable
separate housing stock will mean that the home buyers and renters will not be able to afford
the housing that are according to their needs. the factors that will be influencing the demand
for housing are the higher incomes, demographics, higher rents and lower interest rates with
the greater credit availability. There are also influence of taxation, speculative demand.
One of the key drivers which influences the price of the houses is the housing supply. The
housing approvals are known as the leading indicator on housing completions. The housing
affordability crisis of Australia will be creating a spiral of disadvantage which will be forcing
the poorest people of the society to move to poorer areas for accommodation. According to a
journal that have been published by Applied Geography in the year 2016, it states that the
housing affordability crisis will be pushing people to move constantly in order to find cheaper
accommodation. The research had found out that only 15 percent of the Australians are
known to move home each year. The housing affordability is also known to drive people into
the spiral of disadvantage. People also needs to move to new areas where there is very less
opportunity for getting a good job. There will be presence of structural barrier for people for
getting a good job due to the housing affordability problems. The housing affordability crisis
is also known to widen the gap between the rich and poor. The huge growth in the cost of the
housing in Australia have priced many low-income Australians out of the housing market. the
housing affordability had been a challenge for the Australian Federal and State governments.
The first home owners grant had been introduced in the year 2000 as a subsidy for assisting
the first home buyers for achieving the goal of home ownership. The home ownership in
Australia is also known to be the highest in the developed world. The first home owners grant
which is a type of subsidy will be having the similar effect on the economy which is quite

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equivalent to the fiscal subsidy of the government. Subsidies will be reducing the prices paid
by the buyers which will help in increasing the price received by the sellers and lead to
increase in the quantity of good. The grant has led to the savings of the potential homebuyers
for fulfilling the deposit that is required for the home loan. The elasticity of supply will relate
the change in quantity supplied as a result of the change in the price of housing. In the long
run, the supply of the housing services will be elastic as the land supply and construction can
respond to the change in price. in the short run, the land supply and housing will be known to
be very inelastic since it will take long time for new lots to be approved. The Australia
housing will be of low density with separate houses. Therefore, it can be said that during
short run a rise in demand will be generating a rise in house price as supply is slow to
respond to a price change. Some of the studies have also showed that the first home buyers
have taken enough advantage of the grant where it had increased rapidly in Western
Australia. Also, with the increase in the suburbs, there had been a great supply of the
affordable housing stock for the first home buyers which will be attracting the buyers to these
new areas. Although the rise in piece of the houses had been boon to the housing industry and
also the existing home owners, the first home buyers had been squeezed out of markets due to
the affordability issues. However, sales started to decline in June. The price of housing at the
lower end of the market will be continuing in the long run.
The sharp increase in the price of house in Australia have reflected the fact that the supply of
housing is unable to keep pace with the strong demand. Housing affordability will not be
addresses without rise in the supply of housing. The supply side factors affect the
responsiveness of the new dwelling construction t the changes in housing demand. There are
many supply side factors which are responsible for delaying the availability of the recent
developments. One such factor is complexity of the planning process. Another factor is
provision and funding of the infrastructure, ownership of land and geographical constraints

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and the public attitudes towards the infill development. The lack of coordination present
between the agencies and the presence of uncertainty about the planning standards act as
supply constraints. The residential landholdings also cannot be developed unless there is a
presence of sufficient infrastructure.

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