ECONOMICS OF AUTOMOBILE INDUSTRY QUESTION ANSWER 2022

1200 words 29th sep 9am submission

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

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S1
S2
D
P1
P2
Q1Q2
P1
P2
Q1Q2 Quantity demanded
for passenger cars
Supply of petrol
D
Price of passenger carsPrice of petrol
ANSWER 1 (a)
Australia is heavily dependent on the Middle East for the petroleum. It imports almost all
of its oil majorly from Asia, Africa and the Middle East while exports almost the entire oil
production mainly to Singapore and Indonesia (Richardson 2018). The imports of petrol are high
as Australia’s domestic production has been declining. However, as hostilities break out in the
Middle East, the production as well as supply of petroleum or crude oil faces disruption and
creates uncertainty regarding the export supply across the world (Jaffe and Elass 2015). It raises
the price of the crude oil and hence, imports of oil from the Middle East become costlier in the
countries like Australia that imports a large amount of oil.
As oil is the complementary good for the automobiles, hence, price of oil affects the
demand for passenger cars as per the cross price elasticity of demand. The large passenger cars,
such as, the SUVs consume greater amount of petrol. Thus, a rise in the petrol prices reduces the
demand for these cars.
Figure 1: Impact of changes in petrol price and launch of electric cars in Australia

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From the above figure, it can be seen that due to shocks in the Middle East the supply of
oil reduces and that shifts the supply curve inward. It increases the price from P1 to P2 in the
export market of Australia. As oil is complementary to passenger cars, rise in oil price reduces
the demand for the cars from Q1 to Q2 that run on petrol.
ANSWER 1 (b)
The electric car is a substitute product for the passenger cars that run on petrol. As stated
by Pindyck and Rubinfeld (2015), a substitute product is that good which is used to serve the
same purpose similar to another good in the market. The consumers want less amount of a
product if they consume more of the other product. Thus, the demand for substitute products
shows a negative correlation. Hence, it can be said that as electric car is a differentiated product
under the automobile industry, it works as a substitute product for other types of cars. On the
other hand, as per the law of demand, when the price of a commodity falls, the demand for the
commodity rises, other things remaining same (Cowell 2018). Hence, if the electric cars are
launched at an affordable price in the Australian market, the demand for those cars will be higher
due to the reason that the price of petrol is going up, and hence the demand for passenger cars is
going down. Therefore, higher demand for the electric cars will lead to lower demand for the
passenger cars that run on petrol.
ANSWER 2 (a)
The production possibility frontier (PPF) represents a curve that illustrates different
combinations of production of two different goods with given resources and technologies
(Kokkinou 2017). In other words, the PPF curve shows all the possible combinations of outputs
of two different foods, which can be produced with the given amount of resources as well as
technologies (Mert 2018). Thus, as stated in the given problem that the workforce of Australia is
encouraged by the government to study further to enhance their skills before entering the
workforce, this is reducing the quantity of the available workforce at present and that is
decreasing the total output of the nation.

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USW2
USW1
SW2 Skilled workforce
Available
workforce
USW3
SW3SW1
Figure 2: Production possibility frontier in the Australian labor market
In figure 2, USW represents unskilled workers and SW represents skilled workers. From figure 2
it can be seen that with the increase in the amount of educated and skilled people in the
workforce increases the amount of total output in comparison to the output, when the number of
educated and skilled workforce is less.
ANSWER 2 (b)
Long term growth of an economy refers to the sustained increase in the amount of good and
services produced by the economy. It is mostly measured by the rate of percentage change in the real
gross domestic product, that is, real GDP. As highlighted by Dellink et al. (2017), real GDP is the
inflation adjusted value of GDP, while nominal GDP is the monetary value of total production of
goods and services of an economy measured at current prices. The long term determinants of

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economic growth are the increase in the capital stock accumulation, increase in the labor, measured
by the number of workers or the number of hours worked and the technological advancement
(d’Agostino, Dunne and Pieroni 2016). However, technological advancement is considered to be
the primary driver of long term economic growth.
The government of an economy can influence the long term economic growth through
monetary and fiscal policies. Under monetary policies, the government changes the interest rates and
controls the money supply in the economy. It lowers interest rate to stimulate the money supply and
capital stock accumulation in the economy (Ductor and Grechyna 2015). However, it may lead to
inflation. When the inflation becomes too high, the government lowers the interest rates to reduce
money supply and discourage spending. On the other hand, under fiscal policy, the government
controls the economic growth through expenditures, and taxation policy for influencing the aggregate
demand in the economy. For stimulating aggregate demand, the taxes are lowered and government
spending is increased (Dellink et al. 2017). Opposite happens when the government wants to reduce
aggregate demand.
ANSWER 3 (a)
Sales tax is an indirect tax. An indirect tax is the one that is levied on the goods and
services rather than on the incomes or profits. It can be defined by the tax in which the
imposition and the impact of the tax do not fall upon the same entity. Hence, the burden of this
type of tax can be shifted to the consumers by the taxpayers. Therefore, imposition of sales tax
increases the prices of the products or services, the burden of which is often borne by the
consumers (Korečko, Suhányiová and Suhányi 2017). Thus, when the government imposes a
sales tax on cigarettes, the manufacturers will increase the price and the consumers will bear the
maximum burden of the tax in terms of the increased price. At the same time, the producers will
earn less price as the tax revenue will go the government and thus, due to the tax, the producers
will reduce the quantity supplied in the market. On the other hand, as the consumers will have to
pay higher price for a pack of cigarettes, the demand for cigarettes will fall. There will be loss of
both producer and consumer surplus, which is the deadweight loss (Bisić and Ranđelović 2018).

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S2 = S1 + Tax
S1
D
Quantity of cigarettes
Price of cigarettes
P1
Q1
P2
Q2
P3
Sales tax per unit
A
B
E
X
Figure 3: Imposition of sales tax on cigarettes
In the above diagram, imposition of per unit sales tax increases the price of cigarettes to
P2. Due to the price rise, the supply of cigarettes is reduced and the new supply curve shifts to
the right by the amount of tax. P2 is charged from the consumers and hence the demand for
cigarettes is also reduced due to this price rise. However, the producers get the price P3 after tax
imposition. The government earns the tax revenue shown by the area AP2P3B, while the triangle
ABE shows the deadweight loss. The quantity demanded and supplied of cigarettes is reduced to
Q2 from Q1 after the imposition of tax.
The outcome will remain unchanged even if the sales tax is imposed on coffee as the
concept of price rise, changes in demand and supply and tax revenue would remain the same.
ANSWER 3 (b)
Coles and Woolworths are supermarkets and grocery retail giants of Australia. They operate
chain stores across the country. This sector resembles an oligopoly structure. Oligopoly is a form of

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market with imperfect competition. Under oligopoly, there are few sellers who control the entire
market with large number of buyers. The products are not perfect but close substitutes of each other,
that is, the products are slightly differentiated. The sellers are price makers in the market and they
behave like a group. When a seller takes any decision, the other sellers also follow to remain in the
competition. There is high level of non-price competition in oligopoly due to product differentiation
and there is high level of barriers to entry in this market structure (Pindyck and Rubinfeld 2015).
In the Australian supermarket and grocery industry, it has been observed that only few firms
like Coles and Woolworths dominate the entire market across the country. These sellers form a
cartel, that is, they behave like a group to create high barriers to entry for the new players. They set
the market price for differentiated products and often engage in price war to retain the market share.
The non-price competition is also high among these sellers (Head and Spencer 2017). Hence, it can
be said that the market structure of this industry follows oligopoly structure.

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References
Bisić, M. and Ranđelović, S., 2018. Cigarette excise tax policy in the Western Balkans: Trends,
effects and challenges. Ekonomika preduzeća, 66(5-6), pp.320-332.
Cowell, F., 2018. Microeconomics: principles and analysis. Oxford University Press.
d’Agostino, G., Dunne, J.P. and Pieroni, L., 2016. Government spending, corruption and
economic growth. World Development, 84, pp.190-205.
Dellink, R., Chateau, J., Lanzi, E. and Magné, B., 2017. Long-term economic growth projections
in the Shared Socioeconomic Pathways. Global Environmental Change, 42, pp.200-214.
Ductor, L. and Grechyna, D., 2015. Financial development, real sector, and economic
growth. International Review of Economics & Finance, 37, pp.393-405.
Head, K. and Spencer, B.J., 2017. Oligopoly in international trade: Rise, fall and
resurgence. Canadian Journal of Economics/Revue canadienne d'économique, 50(5), pp.1414-
1444.
Jaffe, A.M. and Elass, J., 2015. War and the oil price cycle. Journal of International
Affairs, 69(1), pp.121-137.
Kokkinou, A., 2017. Inefficiency Effects and Frontier Determining Factors: A Survey towards
Technology and Innovation. Journal of Regional & Socio-Economic Issues, 7(1).
Korečko, J., Suhányiová, A. and Suhányi, L., 2017. Principles of Indirect Tax Harmonization in
the EU. Economics, 5(6), pp.608-617.
Mert, M., 2018. Measuring economic growth using production possibility frontier under Harrod
neutrality. International Journal of Engineering Business Management, 10,
p.1847979018768416.
Pindyck, R.S. and Rubinfeld, D.L., 2015. Microeconomics.

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Richardson, A., 2018. Australia imports almost all of its oil, and there are pitfalls all over the
globe. [online] The Conversation. Available at: https://theconversation.com/australia-imports-
almost-all-of-its-oil-and-there-are-pitfalls-all-over-the-globe-97070 [Accessed 28 Sep. 2019].