Economics Essay: Price Elasticity, Oligopoly, Climate Change

This essay discusses the concepts of price elasticity of demand, key features of oligopoly, and the causes and economic consequences of climate change. It also includes a brief description of the car manufacturing industry in Australia.

ECONOMICS ESSAY

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
a) Price elasticity of demand and economic determinants...............................................................3
Concept and types of Price Elasticity and its importance............................................................3
Elasticity of demand estimates and their magnitude....................................................................6
Role of elasticity of demand while setting price..........................................................................7
B.......................................................................................................................................................7
discuss the key features of oligopoly...........................................................................................7
Brief description of the car manufacturing industry and its oligopolistic characteristics............8
Analyse the impact of product differentiation and advertising in car manufacturing.................9
C.....................................................................................................................................................10
Causes and the economic consequences of climate change ......................................................10
Solution is attempted and proposed in Australia for addressing the problem of climate change
....................................................................................................................................................11
CONCLUSION..............................................................................................................................13
REFERENCES................................................................................................................................1

INTRODUCTION
Economics is a very wide filed and deals with the study of production, consumption and
the distribution pattern in an economy. It analyses the social neds and the manner in which the
unlimited wants can be satisfied. In the current report, the price elasticity of the demand, its
different types and the various economic determinants of the price elasticity of demand will be
determined. The report will also analyse the concept of oligopolistic market and this has been
explained by giving appropriate examples specifically of the car manufacturers. Lastly, the
economic impact o the climate changes and the actions that have been adopted in order to
forestall such impacts will be identified and discussed.
MAIN BODY
a) Price elasticity of demand and economic determinants
Concept and types of Price Elasticity and its importance
Price elasticity of demand is a concept that is defined as a measure that shows the
response or movement of the quantity demanded for a product in the market after the consequent
change in the price of that product. The increase or decrease in demand along with increase or
decrease in the price is termed as the price elasticity of demand of that product (Coglianese and
et.al., 2017). The formula for the elasticity is:
Price Elasticity of Demand: (percentage change in quantity demanded)/ (percentage
change in price)
There can be five major types or categorizations of price elasticity of demands and these can be
segregated as:
Perfectly Elastic Demand (Ep= ∞): Under this, the price of the product remains constant i.e.
there is a negligible change where a small fall in price either leads to infinite increase in the
quantity demanded or a small increase in price makes the demand falling down to zero. This is
therefore termed infinite elasticity and rarely has a practical application.

Perfectly Inelastic Demand (Ep= 0): This kind of inelasticity occurs when the price of
particular good, increases or decreases but the quantity demanded in market of that good remains
constant. Therefore, this zero elasticity leads to the situation being termed as perfectly inelastic.
Relatively Elastic Demand (Ep> 1): Under this the % change in the demand of the product is
relatively higher than the % variation in the price of that product i.e. the change in the price is
relatively lower and the consequent change in the quantity demanded is higher.

Relatively Inelastic Demand (Ep< 1): Here the overall % variation in the demand of quantity is
lesser than the % of variation in the price and subsequently, a small change in the price leads to a
much greater change in the price. The demand is termed to be inelastic.
Unitary Elastic Demand (Ep= 1): The demand can be termed as unitary elastic when the %
variation in the demand for quantity of a product is exactly equivalent to the % change in the
price of the product. This kind of elasticity does not exist in real life and is only a theoretical
concept (Labandeira, Labeaga and López-Otero, 2017).

The measurement of elasticity is very important for the companies and the consumers because it
helps in ascertaining what is the consumption level of the consumers and how does the change
with the change in the pricing of a product. It also helps in ascertaining what should be the
probable price of the product when it is launched in the market. Elasticity also helps the
consumers in predicating what will be the market trends i.e. the increase or decrease in the
supply of a particular product.
Elasticity of demand estimates and their magnitude
The estimates of the price elasticity signifies that whether the product is elastic or not and
thus discusses the magnitude of such elasticity or inelasticity. As per the research paper
published by Zuo, Ann Wheeler, Adamowicz, Boxall. and Hatton-MacDonald (2015), it was
concluded that the price elasticity regarding water entitlements in USA i.e. the rights related to
the permanent water ownership has been estimated to be inelastic, i.e. the analysis was done
regarding the entitlement for high security water and lower security water. It was concluded that
the price elasticity of demand for the lower reliability water entitlements was even more inelastic
than that of the water entitlements with higher security water.
Another major demand estimate is regarding the demand of food products and its
elasticity in Australia, that was published by the authors, Ulubasoglu, Mallick, Wadud, Hone,
and Haszler (2016). It was concluded that demand elasticity for the milk and milk related
products was elastic and accordingly the food prices also rose. Most of the milk related product

were concluded to have an elastic demand when compared to their product and therefore it was
significantly related to the prices of such milk and milk products in Australia.
Role of elasticity of demand while setting price
Elasticity of demand plays a significant role for the businessmen and the decision maker
regarding what should be the price, how much quantity should be produced, what are the trends
of the market etc. All these factors helps the companies in achieving their primary objective of
profit maximization by the sales of the products manufactured (Guerrero-López, Unar-Munguía,
and Colchero, 2017). It is particularly assistive while setting up the price of the product as it
assists in following manner:
Raising up the prices does not lead to increase in the revenue always and therefore, the
determination o the price elasticity helps in determining what is the correct pricing strategy that
should be adopted by the company. When the demand of the product is elastic, a small
percentage increase in the price will lead to a higher fall in the quantity demanded of that product
and thus the revenue of the company will fall. Similarly, when the demand for product in the
market is unitary elastic, the percentage change in the price of the product will lead to a change
in the quantity demanded by similar ratio. Therefore, the revenue earned by the company will
remain unchanged or unaltered (Stroebel and Vavra, 2019). Lastly, when the demand for a
product is inelastic, then the small percentage of increase in the price will not lead to a major
decrease in the quantity demanded of that product, i.e. it would fall but not by significant level.
Therefore, the revenue of the company will still increase and the increase in price will not affect
the revenue negatively, therefore, price elasticity of demand is of use while determining or
setting up the price of that product.
B.
discuss the key features of oligopoly
Oligopoly is the market which is controlled by the few manufacturer and it is a business
where there is a broad level of industry density. Further the key characteristics are as mention:
Few firms: In this, only few company run a market but there is a strong rivalry because
all firm introduce a momentous part of the full production.
Barrier to Entry: Under this, a company may gain net income in the prolonged trial as
there are different barrier to entry such that patents, licenses, control over the critical natural

material. Therefore, this reflect that barrier preclude the entry of new company in the
manufacture (Lamantia and Radi, 2018).
Non- price competition: Firm working under the Oligopoly, tries to avoid the price
competition because of a fear of price wars and that is why, they depend upon the different non-
price method such that advertising, warranties etc. Therefore, these also make sure that
companies influence the demand as well as build the brand recognition as well.
Selling cost: Another key characteristics of the Oligopoly in which company attempt to
debar the price rivalry and as there is a immense mutuality among the companies. Therefore, the
selling cost is quite high which is quite important for competing against the rival firm in order to
capture the larger market share as well (Yang, Ng and Ni, 2017).
Interdependence: Company working under this, hold an important share in entire yield
of the business because these firm are struck by the cost as well as last decision of competitors.
Hence, this shows that there is a lot of mutuality among the companies and these companies also
takes into account the activity as well as response of their competitory company by deciding
their cost and yield level.
No unique pattern of pricing behavior: As firm act independently and wants to earn
maximum profit and depends on this motive, the real life situation may varies by predicting the
pricing behavior among the companies which is quite impossible (Characteristics of Oligopoly
Market, 2018). Therefore, the companies may easily contend or interact with different company
hat may also lead to variety of pricing situation.
Brief description of the car manufacturing industry and its oligopolistic characteristics
Car Manufacturing industry in Australia:
The era of 1980 to 2000 is known as rapidly evolving industry for the car manufacturers
because it gives a birth of three largest car manufacturers i.e. Holden, Ford and Chrysler and in
1981, Chrysler was sold to Mitsubishi Motors Australia Ltd. Such that the first leading car maker
was Ford Australia. Further, in 1970, the manufacturer of car was also increases to around
million from the half and it is also exceed up to 400000 in 2004. further, in 2009, the entire
manufacture had also destroyed to 175000 and in turns, the Australian market was controlled by
cars that is strange from Asia and Europe (Chevalier‐Roignant, Flath and Trigeorgis, 2019).
Overall, there is an end of era of car manufacturing in Australia such that in 2013, Ford also
announce that it may also departure the industry by 2016 and in October 2017, Toyota also

closed its Melbourne plant in which 2500 people also leave their job due to high rates of car
manufacturing as well as low economy of the country.
Key features of Oligopoly market of car manufacturing in Australia:
 In Australia, there was a large number of manufacturers but among all, Toyota is consider
one of the key major player and there is a severe competition among automobile industry
and that is why, every company actually produces the important part of the entire
production.
 Moreover, the barrier of entry is another characteristics in which when any new firm
entered into the automobile industry, it requires a long process and different barrier to
entry i.e. patents, licenses and control over the critical natural material (Gao and Hafsi,
2019). Therefore, the barriers further forbid the launching of new company into an
industry.
 As the market of car manufacturers is decreasing from 2014 onward such that most of the
manufacture closed their business because of low economies of scale and high dollars. As
the industry of car manufacturing in Australia also provides a products either
homogeneous and differentiated. It is so because every company deal in automobile tries
to add new features and this makes it different from other ones.
Analyse the impact of product differentiation and advertising in car manufacturing
Product differentiation is the commerce scheme that separate the commodity and services
from the other rivalry firm. Therefore, product differentiation creates values such that Toyota
which is known as one of the major key player in car manufacturing whose product
differentiation strategy is to provide the comfortable space to driver, mainly focus on quality and
design. As a result, using product specialization scheme which chiefly focus on the outgo
measure of the ware and it created a sensed measure among users. There is another positive
impact of using product differentiation is such that it creates a brand loyalty among customers.
Further, it helps to gain market share and in car manufacturing, if company did not maintain
quality then its customers may switch to another company (Salman, 2019). Further, providing the
best variety of products to their customers, will help enhance the customer base and this is
actually automobile industry work upon.
Additionally, a study conducted by TVB and Futures Company shows that TV is consider
one of the top advertising platform for the car manufacturing. It is observe that advertising helps

to attract range of customers and as a result, it also helps to increase sales and in turns establish
the customers base too. Even the motor vehicle business is one of the large spender in the case
of advertisement such that General Motors who paying out $928 million in the first half of 2014
and its international advertising expenditure was about $ 5.5 billion, Therefore, it shows that
3.54% of its revenue (Tian, 2019) Overall, in car manufacturing product differentiation and
advertising allow the enterprise to contend in region except cost. Such that, car manufacture
distinguish its lines of cars as as picture attention or some status signal while other institution
mostly focussing on the value saving only. i.e. when Elon Musk sent Tesla car to Mars and that
is why, it generate the credible image of a brand among cars. Hence, this shows that product
differentiation and advertising creates positive impact upon the customers as well as business.
C.
Causes and the economic consequences of climate change
Causes of climate change
The climate of the earth is quite dynamic such that it always changes through a natural
cycle. Further, the causes of climate changes are as mention:
Greenhouse effect: it is consider one of the biggest reason to change the climate because
the gases such that water vapor and carbon dioxide and methane ingest force and also decrease
to heat loss as well. That is why, greenhouse gas perform as a blanket who making Earth warmer
and this activity is known as greenhouse effect (Parry, 2019). From the beginning of Business
alteration, human activities also impart substantially to the environmental condition change
because human added Carbon dioxide and other energy trapping gases to the ambiance and as a
result, this lead to increases the greenhouse effect. Further, it increases the temperature of Earth
which in turns leads to change the climate as well.
Human cause: the special human activity which also affect the sum as well as changes in
the actual condition In the GHG emission which occur due to burning of fuels.

From the above graph, it is interpreted that the addition in GHG concentration in
ambiance from the past 2000 years. Such that raise in the density of these gases from 1750 is
because of human activities in the business area, while density units per surround per million or
billions shows the amount of atom of GHG per million/billion molecule of air.
Economic consequences of climate change
Due to change in climate, the GDP of Australia is also affected in which Droughts and
Flood had a large effect on the Australia economy. As agriculture is quite smaller share of the
economy but the current drought is also decrease the farm results by 6% and GDP by 0.15%.
Moreover, due to drought, the aggregate output and inflation is finite and it also creates impact
on the people and business. Additionally, from the report of 2019 provide by Australian Bureau
of Agricultural and Resources Economics and Science published the report related to climate
change on the profitability of Australian agriculture state that profit of Australian farms was
cutup to 22% due to climate change in the year of 2000-2019 (Economic consequences of
Climate change, 2018).
Further, due to climate change, the level of sea is also increases and it is find out that up
to 247600 houses are at risk due to flooding and the level of sea also increases up to 1.1 meter.
There were 39000 buildings located and these all are at risk (Saltré and et.al., 2016). Hence, this
shows that there due to climate change Australia faces a great loss in terms of the economy.
Solution is attempted and proposed in Australia for addressing the problem of climate change
The current major task for Australia is to reduce the green house emissions where:
 As per the Kyoto Protocol it should be 5% below the 2000 levels by the year 2020 and,

 According to the Paris agreement, 26-28% below the level if the year 2005 by 2030.
Australia has developed a major climate policy where the different proposals to develop a
emission trading scheme and a carbon pricing mechanisms was also established in the year 2012.
In the year 2011, the country also approved a carbon trading plan where 500 worst polluters of
the country would be forced to pay taxes on every ton of carbon that they are emitting effective
from July 2012. The carbon price i.e. the tax rate was AU$ 23 per tonne but this was not a long-
lasting scheme and was rebutted very quickly (Australia's Emissions Reduction Fund is failing to
deliver, government data shows, 2019.). However, it was again repealed in the year 2014 by the
Abbott government. An Emission reduction Fund was established and this has been a major
policy for reducing the green house emissions and meeting the targets that have been set.
Emissions Reduction Fund has led to the purchase of the approximately 143 million tonne of
carbon-dioxide under the three subsequent auctions that were being held and there was also a
range of product that were being funded under the ERF so that they could collectivity work
towards reducing the emissions.
The Climate Change Authority has been set up by the former government and this is an
independent statutory authority that will give the government a rigorous and completely
Illustration 1: Australia's Climate policies
Source: Department of Environment, 2019

independent advice regarding the change policies that should be adopted in order to improve the
climate for the people of Australia. The ERF has also led to a success by delivering the
cumulative avoided emissions and the by the year 2018, it has been increasing.
The graph above shows the total amount of the green house emission that was avoided due to the
implementation of ERF and it can be concluded that it was success.
CONCLUSION
The research conducted in the report above can be used to conclude that the economical analysis
and the different concepts associated with it are indeed important in order to understand the
operating of an economy. The price elasticity of demand and its concept helped in concluding
that it is a very crucial concept for identifying the correct pricing strategy that should be adopted
by the organisations. By the oligopoly strategy it was concluded that the oligopolistic
characteristics were identified and discussed. The report also concluded that the green house
emission was a severe consequence and in order to address the problems there were several
measures that were being adopted by the country. The success of these measures specifically
ERF was discussed and analysed.
Illustration 2: Gas Emission Avoidance
Source: Climate change—reducing Australia’s emissions, 2019

REFERENCES
Books and journals
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the price elasticity of gasoline demand. Journal of Applied Econometrics. 32(1). pp.1-15.
Gao, Y. and Hafsi, T., 2019. Does charitable giving substitute or complement firm
differentiation strategy? Evidence from Chinese private SMEs. European Management
Review.
Guerrero-López, C.M., Unar-Munguía, M. and Colchero, M.A., 2017. Price elasticity of the
demand for soft drinks, other sugar-sweetened beverages and energy dense food in
Chile. BMC public health. 17(1). p.180.
Labandeira, X., Labeaga, J.M. and López-Otero, X., 2017. A meta-analysis on the price
elasticity of energy demand. Energy Policy. 102. pp.549-568.
Lamantia, F. and Radi, D., 2018. Evolutionary technology adoption in an oligopoly market with
forward-looking firms. Chaos: An Interdisciplinary Journal of Nonlinear Science. 28(5).
p.055904.
Parry, M. L., 2019. Climate change and world agriculture. Routledge.
Salman, D. M., 2019. An insight for the market driving forces: Case of Tesla Model-
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Saltré, F. and et.al., 2016. Climate change not to blame for late Quaternary megafauna
extinctions in Australia. Nature Communications. 7.p.10511.
Stroebel, J. and Vavra, J., 2019. House prices, local demand, and retail prices. Journal of
Political Economy. 127(3). pp.1391-1436.
Tian, C., 2019, June. Product Differentiation Strategy in Dual-channel Supply Chain Faced with
Free Riders. In 2nd International Conference on Economy, Management and
Entrepreneurship (ICOEME 2019). Atlantis Press.
Ulubasoglu, M., Mallick, D., Wadud, M., Hone, P. and Haszler, H., 2016. Food demand
elasticities for A ustralia. Australian Journal of Agricultural and Resource Economics.
60(2). pp.177-195.
Yang, L., Ng, C. T. and Ni, Y., 2017. Flexible capacity strategy in an asymmetric oligopoly
market with competition and demand uncertainty. Naval Research Logistics (NRL). 64(2).
pp.117-138.
Zuo, A., Ann Wheeler, S., Adamowicz, W.L., Boxall, P.C. and Hatton-MacDonald, D., 2015.
Measuring price elasticities of demand and supply of water entitlements based on stated
1

and revealed preference data. American Journal of Agricultural Economics. 98(1).
pp.314-332.
Online
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<https://www.tutor2u.net/economics/blog/a2-micro-oligopoly>.
Economic consequences of Climate change. 2018. [Online]. Available through:
<https://www.rba.gov.au/speeches/2019/sp-dg-2019-03-12.html>
Australia's Emissions Reduction Fund is failing to deliver, government data shows. 2019.
[Online]. Available through: <https://www.abc.net.au/news/2019-06-17/australian-
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Climate change—reducing Australia’s emissions. 2019. [Online]. Available through:
<https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/
Parliamentary_Library/pubs/BriefingBook45p/EmissionsReduction>
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