Monopoly in Australia: a case of Australian post

Running head: ECONOMICS FOR BUSINESS
Economics for Business
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1ECONOMICS FOR BUSINESS
Table of Contents
Answer 1....................................................................................................................................2
Price elasticity of demand......................................................................................................2
Determinants of elasticity of demand....................................................................................2
Evaluation of elasticity of three different products................................................................2
Answer 2....................................................................................................................................6
Monopoly in Australia: a case of Australian post..................................................................6
Inefficiency arising from monopoly and role of government intervention............................7
List of References......................................................................................................................9
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Answer 1
Price elasticity of demand
The measure of price elasticity of demand gives an estimation for responsiveness of
demand of a good for a proposed change in price. It is expressed as a ratio of percentage
change in quantity demanded to percentage change in price. If the estimated measure of price
elasticity exceeds 1, then demand is considered as relatively elastic. Demand here changes
more than price (Jain & Ohri, 2015). If the estimated measure of elasticity is below 1, then
this indicates demand changes less than price. This is called relatively inelastic demand. The
formula for price elasticity of demand is given as follows
Price elasticity of demand= Percentage change∈quanity demanded
Percentage change∈ price
¿ dQ
dP × P
Q
Determinants of elasticity of demand
The responsiveness of demand depends on a number of different factors. The major
factors determining price elasticity of demand are as follows.
 Number of available substitutes
 Proportion of income spent on the good
 Number of uses of the commodity (Nguyen & Wait, 2015)
 Complementarity between goods
 Time
Evaluation of elasticity of three different products
Gasoline
The study of Gasoline elasticity is one of the vital topic to understand the effect of a
proposed increase in price on demand of gasoline. There are several ways following which
one can reduce the fuel consumption because of a higher price. For example, people can take
carpool for reaching office or schools, can go to post office or supermarket in one trop
instead of making two trips or more. The price elasticity of demand for gasoline indicates a
hypothetical situation where that identifies the extent of change in demand for gas following
an increase in price. Most studies support the claim that price elasticity of demand for
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3ECONOMICS FOR BUSINESS
gasoline is relatively inelastic in nature. In the short run (considered a period less than 1 year)
the average price elasticity of demand for gasoline is -0.26. That is 10 percent increase in
gasoline price lowers demand by 2.6 percent. The elasticity measure however is different in
the long run. The estimated average elasticity of demand for gasoline in the long run is -0.58
(Moffatt, 2018). That means, in the long run given a 10 percent increase in gasoline price,
quantity demanded lowers by 5.8 percent.
Product Price Elasticity (short run) Price Elasticity (long run)
Gasoline -0.26 -0.58
The elasticity measure for gasoline though differs between short run and long run, in
both the cases estimated elasticity is less than 1 meaning a relatively inelastic demand. That
mean wen price of gasoline changes, the corresponding changes in quantity demanded is
always less than price. The inelastic demand curve for gasoline is shown in the figure below.
Figure 1: Demand (inelastic) curve for gasoline
(as created by author)
In case of gasoline elasticity varies with time. Demand is less sensitive in the short
run because of buying habits of people and less availability of substitutes. In the long run
people however adjust to high price by cutting back their fuel consumption by reducing
number of trips to supermarket or post office or using car pool (Lin & Prince, 2013). Also,
new substitutes can be developed making demand more sensitive in the long run.
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