Market Structure and Supermarket Success

This assignment examines the factors contributing to the success of supermarkets in a specific country by focusing on market structure principles. It highlights the dominant role of oligopolies, where few firms control the market through strategies like advertising, loyalty programs, and price undercutting. The analysis emphasizes how these non-price competition tactics, combined with product differentiation, have enabled supermarkets to thrive.

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ECO 105 ECONOMICS ASSIGNMENT
Student’s Name
Course
Professor’s Name
University
(City) State
Date

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ECO 105 ECONOMICS ASSIGNMENT
Question One
Primarily, market power pertains to the ability of a firm to change the price of its
commodities within a given market. Thus, the higher the market power, the greater the capability
of a firm to manipulate the market price of its goods and services (Reynolds, 2005). Ordinarily,
monopolies have a high market and, thus, can influence the price of their commodities. It is,
however, imperative to note that the level of market power between monopolies may differ
significantly (Reynolds, 2005). For instance, supposing there are two monopolies, one supplies
water services and the other provides landline phone connections. The monopoly that supplies
water has a higher market power than the firm that provides phone connections.
Predominantly, one can attribute this to the differences in the degree of elasticity of
demand for the two commodities. Typically, the elasticity of demand for water is relatively
inelastic. Mainly, this is because the commodity is a basic need. Therefore, any changes in the
price of water will bring about a small decline in the demand for that product. On the other hand,
the elasticity of demand for landline phones is relatively elastic since the product is a luxury
good. Thus, a slight increase in the price of phone connection would result in a significant
decrease in the quantity demand of that product (Khan, n.d.).In this regard, one can argue that the
monopoly that provides water has a higher market power than the phone connection firm since it
can change its prices without necessarily reducing the demand for its goods.

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Price elasticity of demand for water
Price
P2 inelastic PED
P1
Q2 Q1 Quantity Demanded
Source: (Khan, n.d.).
Price elasticity of demand for landline phone connection
Price
P2
P1
Q2 Q1 Quantity Demanded
Source: (Khan, n.d.).

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Question Two
It is worth noting that KFC, MacDonald’s and Hungry Jack are all restaurants that
operate in one market or industry. Typically, the restaurant industry has a large number of
businesses who offer slightly differentiated services and goods. For this reason, one may argue
that the market structure of MacDonald’s, KFC and Hungry Jack is predominantly a
monopolistic competition market structure. One may argue this from the point of view that the
three firms operate in an industry that has a large number of sellers, who offer the same kind of
products, but the products are slightly differentiated and possess an element of uniqueness, and
all sellers are competing for the same customers. Today, the products offered by the three firms
are differentiated in terms of quality, location and style. The differentiation of the product causes
consumers to perceive that the goods of one company are of a higher quality than the others.
Typically, each company has the power to make independent pricing decision about the
quantity of output and the price of the product based on its market. There is also free of entry and
exit into the restaurant market. As a result, there is stiff competition in the industry and firms
engage iin advertising to attract consumers to their businesses (Economics Online, n.d.).
Consequently, these firms make excess economic profits over the short term period. However, in
the long run, companies make normal profits due to the fact that the low barriers to entry allow
other firms to enter the market, leading to an increase in competition, thereby gradually eating
away the profits back to normal profits as illustrated below.

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Illustration of the long run profits of monopolistic competition firms
Price, Cost MC
ATC
P=ATC
DD
MR
QMC Quantity
Source: (Georgia State University, n.d.).
Illustration of the short run profits of monopolistic competition firms
Price MC
Profit ATC
P
ATC
DD
MR
Quantity
Source: (Georgia State University, n.d.).

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Question Three
By and large, the level of competition faced by the Charles Darwin University main
campus in Darwin is higher than the level of competition in its Sydney campus. At the moment,
the campus at Darwin serves students from the indigenous populace of the Australian Northern
territory. As a result, it serves many students in its campus and externally. On the other hand, the
campus at Sydney mainly serves international students. Given the voluminous nature of the
indigenous and local population, the level of competition in Darwin is stiff as students compete
for admission slots in the university. The demand for higher education in the region is also high
given that CDU is one of the major universities in the region, unlike Sydney which hosts other
prestigious universities.
Demand for admission in Darwin vs. Sydney
Price Sydney
P1
P2
Darwin
Q1 Q2 Quantity
Source:

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Question Four
At the moment, fire emergency services in the country are provided by the government.
In the event that the government stops offering the service and privatizes it, the demand and
supply of the service will change significantly. Typically, a fire emergency service is required on
rare occasions. However, when the demand for it arises, the customer has to pay for the price set
by the service provider. Therefore, given the nature of the commodity, its price elasticity of
demand is relatively inelastic. In turn, this provides an opportunity for private firms offering the
product to raise the price of the commodity without the fear of losing clients. In the same way,
given the nature of the infrastructural fixed costs for providing the service, the price elasticity of
supply is relatively inelastic. For this reason, a significant increase in the price of the service may
result in a less than proportional increase in the quantity of the product supplied.
The PED of fire emergency services
Price
P2
P1
Q2 Q1 Quantity
Source: (Khan, n.d.).

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The PED of fire emergency services
Price
P1
P2
Q1 Q2 Quantity
Source: (Khan, n.d.).
Question Five
In economic theory, there are five models of competition. These models include perfect
competition, monopolistic competition, monopoly and oligopoly.
Perfect Competition
Basically, perfect competition refers to a market where the price and quantity of goods
and services are determined by forces of demand and supply in the market. Thus, firms are price
takers as the price of their product is determined in the market. Mainly, this form of competition
arises where the number of sellers and buyers is large (Economics Online, n.d.). Firms offer a
homogenous product and compete equally for consumers. There is also free entry and exit in the
market. There are no barriers to the entry of firms in the market. Furthermore, the market is
characterized by perfect information between sellers and buyers. As a result, the level of
competition in the market is high and firms make normal profits.

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Monopoly
A monopoly market structure is dominated by one seller. As a result, there exists no form
of competition in the market. Also, the firm offers a unique product with no substitutes. In this
case, the firm sets its own prices and determines the quantity of goods and services that it
produces. As a result, the firm makes supernormal profits as they charge high prices for their
products, higher than the cost of production. What is more, there are high barriers to entry and
exit by firms. Today, monopolies are usually owned by the government to protect consumers
from exploitation.
Monopolistic Competition
Fundamentally, this form of competition is a combination of both perfect competition and
monopoly. It is a form of imperfect competition. In this market, there are many producers and
buyers. Firms offer similar but differentiated products. However, buyers view that there are non-
price variations among the goods sold by the sellers. Additionally, the market is characterized by
few barriers to exit and entry into the market. Just like in monopoly, companies have the power
to set their own prices since they offer differentiated products.
Oligopolistic Competition
An oligopoly structure refers to a market where few large firms dominate the market.
Mainly, it results due to collusion by large sellers in the market to gain a high market power and
control prices. For this reason, firms have the ability to set prices for their goods and services.
The products offered in this market may be differentiated or homogenous. Firms focus mainly on

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maximizing their profits and returns. Usually, they compete on non-price factors through
mechanisms such as advertising, gift vouchers, and loyalty schemes.
In reality, perfect competition is rare to achieve. However, monopolistic market
structures exist in real life in industries such as restaurants, and motor vehicle industries. In this
case, the number of sellers is high but they offer differentiated products. As a result, they are able
to set their own prices. Oligopolies are also realistic. The Australian supermarket industry is
predominantly oligopolistic as few large firms (Coles and Woolworths) dominate the market.
Question 6
An increase in the pass mark for enrollment at CDU will significantly affect student
enrollments. Mainly, this can be attributed to the fact that less students will be able to reach the
cut off marks set by the school. As a result, the demand for enrollment into the university would
reduce significantly as students with low performance seek enrollment in other schools. It is
worth pointing out that the supply of university education remains constant in this case. Thus, a
reduction in the demand for education services at the university amidst a rigid supply of the
service will put a downward pressure on the price of the service. For this reason, the school will
be forced to reduce the fees charged for students who enroll into the school.

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Price DD2
DD1
P2
P1
Q2 Q1 Quantity
Question Seven
a.
Ordinarily, the marginal cost curve slopes downwards first before sloping upwards. Mainly, this
attributed to the concept of diminishing marginal returns of production. As the firm begins
production, the quantity produced increases while the marginal cost reduces. Thus, the marginal
cost falls due to more productivity and less cost per unit. This explains the downward sloping
section of the MC curve. However, as production continues, the productivity reduces, the cost of
production per unit rises and, thus, the marginal cost of production starts rising. This explains the
upward sloping part of the MC curve.
It is imperative to note that the MC curve is linked to the opportunity cost.
Fundamentally, the opportunity cost of production refers to the cost of the best foregone
alternative (Khan, n.d.). On the other hand, marginal cost refers to the adjustment in the total cost

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when an extra unit of output is manufactured. Thus, one may argue that it is the opportunity cost
of manufacturing an additional unit of output. The relationship between MC and opportunity cost
implies that if the profits are greater than the expenditure incurred in creating an additional unit,
then the firm should produce an extra unit of the commodity. In contrast, if the opportunity cost
is greater than the profits, then the firm should not produce an extra unit of the product.
b.
The concept of marginal cost is important in economics because it helps firms to determine
whether or not it is profitable for a firm to raise its level of production. More specifically, firms
use this concept as a decision making and analysis tool to assist them maximize their profits. It
helps in determining the optimal level of production for the firm, such that producing an
additional unit does not result in extra costs for the firm.
c.
The marginal cost of adding an additional household onto the NBN network is negligible.
Mainly, this is because the firm has already invested in infrastructure such as cables and wiring
in most cities in the country (The Guardian, 2017). Therefore, the company has an increasing
marginal return as more households subscribe to its services. As such, it operates more
effectively under large scale and, thus, the higher the number of households subscribing to the
service, the lower their marginal cost of operation. In turn, this ensures that the marginal cost of
providing the service to one more households is minimal. Hence, it is profitable for the firm to
supply the service to additional house units.
Question 8

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The success of supermarkets in the country can best be explained using the concept of market
structures. Predominantly, the supermarket industry in the country is dominated by oligopolistic
firms. Few firms dominate the entire market, and collude to set high prices for their
commodities. In most cases, these firms avoid price competition. Instead, they engage in non-
price competition through strategies such as advertising, gift vouchers and loyalty schemes. On
rare occasions, they engage in price undercutting schemes to attract new customers and maintain
old ones. They also offer slightly differentiated goods and services, thereby creating the
perception that their products are superior than that of their competitors. A combination of these
factors has ensured the success of supermarkets in the country.
Reference List

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Economics Online. Monopolistic Competition. [Online] Economics Online. Available at:
http://economicsonline.co.uk/Business_economics/Monopolistic_competition.html [Accessed 2
Sept 2017].
Economics Online. Perfect Competition. [Online] Economics Online. Available at:
http://www.economicshelp.org/microessays/markets/perfect-competition/ [Accessed 2 Sept
2017].
Economics Online. Perfect Competition. [Online] Economics Online. Available at:
http://www.economicshelp.org/microessays/markets/perfect-competition/ [Accessed 2 Sept
2017].
Georgia State University. Monopolistic Competition. [Online] Georgia State University.
Available at: https://sites.google.com/site/referencematerialformarkets/monopolistic-competition
[Accessed 2 Sept 2017].
Khan, S. Perfect inelasticity and perfect elasticity of demand. [Online] Khan Academy.
Available at: https://www.khanacademy.org/economics-finance-domain/microeconomics/
elasticity-tutorial [Accessed 2 Sept 2017].
Khan, S. Perfect inelasticity and perfect elasticity of demand. [Online] Khan Academy.
Available at: https://www.khanacademy.org/economics-finance-domain/microeconomics/
choices-opp-cost-tutorial/production-possibilities/v/opportunity-cost [Accessed 2 Sept 2017].

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Reynolds, R. L. (2005). Firms with "Market Power". [Online] Boise State University. Available
at: https://cobe.boisestate.edu/lreynol/WEB/PDF/short_13_Market_power.pdfl [Accessed 2 Sept
2017].
The Guardian (2017). NBN website reveals when network will be connected at your premises.
[Online] The Guardian. Available at: https://www.theguardian.com/technology/2017/feb/27/nbn-
website-reveals-when-network-will-be-connected-at-your-premises [Accessed 2 Sept 2017].
The Voice of Australian Universities (2017). Charles Darwin University. [Online] The Voice of
Australian Universities. Available at: https://www.universitiesaustralia.edu.au/australias-
universities/university-profiles/Charles-Darwin-University#.WasbejBRXIU [Accessed 2 Sept
2017].