Economics: Markets, Flow and Gaps

This economics assignment delves into various key concepts. It begins by examining different market structures such as monopoly and oligopoly, analyzing their characteristics and how they influence pricing and output. The assignment then transitions to the circular flow of income, exploring its two-, three-, and four-sector models to illustrate the interconnectedness of production, consumption, and government in an economy. Finally, it tackles macroeconomic gaps, defining and explaining inflationary and deflationary gaps, highlighting their impact on economic stability.

SHORT ANSWER
QUESTIONS

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................1
A)............................................................................................................................................1
B)............................................................................................................................................3
QUESTION 2...................................................................................................................................6
A)............................................................................................................................................6
B)............................................................................................................................................8
QUESTION 3.................................................................................................................................10
A)..........................................................................................................................................10
B)..........................................................................................................................................13
QUESTION 4.................................................................................................................................15
A)..........................................................................................................................................15
B)..........................................................................................................................................17
REFERENCES..............................................................................................................................19

ILLUSTRATION INDEX
Illustration 1: Monopolistic market structure..................................................................................2
Illustration 2: Oligopolistic market structure...................................................................................2
Illustration 3: Demand curve...........................................................................................................4
Illustration 4: Marginal revenue curve.............................................................................................4
Illustration 5: Profit maximisation level..........................................................................................5
Illustration 6: External cost of production.......................................................................................7
Illustration 7: External cost of consumption....................................................................................7
Illustration 8: Congestion tax...........................................................................................................8
Illustration 9: Negative externality due to congestion tax...............................................................9
Illustration 10: Two sector circular flow of income......................................................................11
Illustration 11: Three sector circular flow of income....................................................................11
Illustration 12: Four sector circular flow of money.......................................................................12
Illustration 13: Inflationary gap.....................................................................................................16
Illustration 14: Deflationary gap....................................................................................................16
Illustration 15: Expenditure line....................................................................................................17

QUESTION 1
A)
Definition:
Monopolistic market:
The structure of market in which only one company operates in particular area and offer its
goods and services to the people is known as monopolistic market. In this, any other business
cannot enter in the market and operate (Chetty, 2012).
Oligopolistic market:
It is similar with the monopolistic market up to certain extent where instead of one, two or three
companies dominate the area and provide products and services. Further, such businesses have
high market share and generate profit up to the higher level.
Assumption:
It has been assumed that, due to operating single business, level of competition is negligible in
the market. Along with this, firm of monopolistic market able to charge more prices and boost
up profit without any product differentiation.
Apart from this, under the oligopolistic market competition is very low in which up to the very
lower extent companies use product differentiation strategy (Dopfer, 2012).
Diagram:
1

Illustration 1: Monopolistic market structure
Illustration 2: Oligopolistic market structure
Analysis:
Firms operating in monopolistic market not uses strategy of product differentiation because they
already have high market share. On the other side, companies of oligopolistic market adopt this
particular tactic sometimes due to operating two or three firms. The reason is that, attract
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customers towards them and gain competitive benefits.
B)
Kinked demand curve:
Economic theory of this particular curve is related with the two markets like monopolistic and
oligopoly. Further, the stated curve reflects sticky prices of the product and services using
marginal costs and revenue (Messai and Jouini, 2013).
Calculation of marginal revenue:
Competitor
s quantity
demanded
Price ($) Competitors
follow:
quantity
demanded
Total
revenue
(Column 1
* 2)
Marginal
revenue
(MR)
Marginal
cost (MC)
Marginal
profit (MP)
(MR - MC)
20 200 35 4000 - 1500 0
30 195 40 5850 1850 1500 350
40 190 45 7600 1750 1500 250
50 185 50 9250 1650 1500 150
60 180 55 10800 1550 1500 50
70 175 60 12250 1450 1500 -50
Diagram:
i) Demand curve
3

20 30 40 50 60 70
160
165
170
175
180
185
190
195
200
205200
195
190
185
180
175
Illustration 3: Demand curve
ii) Marginal revenue curve
30 40 50 60 70
0
200
400
600
800
1000
1200
1400
1600
1800
20001850 1750 1650 1550 1450
Illustration 4: Marginal revenue curve
iii) Profit maximisation curve
4

20 30 40 50 60 70
-100
-50
0
50
100
150
200
250
300
350
400
0
350
250
150
50
-50
Illustration 5: Profit maximisation level
Analysis:
i) Demand curve
Under the kinked demand curve all the prices along with output of product are represented. In
the present scenario as quantity of demand increases of the competitors in oligopolistic market
then prices declined by the company. Due to this particular reason, curve of demand is of the
declining trend.
ii) Marginal revenue curve
When looking at the above stated marginal revenue curve then it can be determined that, sum of
money of MR declining as level of output increases. The reason is that prices behind changing
quantity demanded are reducing. At the quantity of 30 units, MR of the firm in oligopolistic
market is $1850. Further, as demand enhances up to 60 and 70 units then prices declined which
resulting is that, marginal revenue reduced up $1550 and $1450 respectively.
iii) Profit maximisation curve
As per the above calculated marginal profit and graph it can be determined that maximum profit
is worth of $350 where output units are total 30. Henceforth, profit maximising level of output
is 30 units.
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QUESTION 2
A)
Definition:
Market failure:
The economic condition in which an economy makes expenses to force supply and demand but
not create positive impact on welfare of the society, considered as market failure.
External costs:
Those expenses which impose on third party due to consuming and manufacturing products and
services by an individual are known as external costs (Chetty and et.al., 2013).
MSC:
Adding one more private expenses to the cost of external, marginal social cost is obtained.
MC:
When a company produce one additional product then cost incurred which identified as
marginal cost.
MSB:
Net social value of any kind of goods, services and activities for the society in an economy is
called as marginal social benefit (Erosa, Fuster and Kambourov, 2016).
MB:
In a specific product or activity when additional advantage generated by using one more unit is
known as marginal benefit
Illustration:
6

Illustration 6: External cost of production
Illustration 7: External cost of consumption
Explanation:
When MSC is higher of as compare to the MC under the external cost of production of coal fire
7

power station then any kind of social welfare not arises. Further, it considers as the market
failure or negative externality in Australian economy.
Further, when MSB is lower than MB of external cost of consumption of the alcohol then create
advantages for the society and its welfare. Therefore, it considers as positive externality on
Australian economy (Gopinath, Helpman and Rogoff, 2014).
B)
Definition:
Congestion tax:
The charges which are taken by the government behind using more number of vehicles and
travelling through difference ways on road is known as the congestion tax.
Diagram:
Illustration 8: Congestion tax
8

Illustration 9: Negative externality due to congestion tax
Advantages and Disadvantages of three measures:
1. Enhance excise duty or petrol
When excise duty charges are increased by government of Australia then people start to prefer
bus as compare to personal motors like car, bike etc. which is main advantage. Therefore,
charges of congestion will decline in the economy.
However, selling of petrol decline which lead to create negative impact on the revenue of the
government (Anderson, 2016). Along with this, due to tax reduction Australian government
unable to spend more money on the public welfare.
2. Using bus and cycles within peak times
In the peak times, when public use transportation services like bus and cycle then pollution will
decline which is main benefit for the Australian economy. Along with this, it supports to the
economy in terms of reducing congestion level.
In opposite to this, tax and charges on congestion decline by which government incomes
affected in negative way which is disadvantages of this measure.
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3. Charges reduced from pre-paid smart card
As charges declined by the government on those who are using pre-paid smart cards as per the
level of congestion and days then it affects to the congestion of Australia. Benefit of this is that,
congestion will remain proper or average in whole week (Carvalho, 2014). Further, situation of
traffic will come into control.
On the other hand side, congestion tax declines which influence to the income level and growth
rate of the Australian economy. It is major limitation for using this particular measure in the
congestion situation.
QUESTION 3
A)
Definition:
Circular flow of money:
The neoclassical model of economy in which circulation of money within country is
represented, considered as circular flow of money. It reflects that how money flows in terms of
expenses and incomes in an economy. There are basically three models included like two, three
and four sector (Mukherjee, 2016).
Under the two sector model flow of money is shown between households and companies only.
Three sector model includes households, government and organisations.
In four sector model all the aspects of three sector involves along with financial market.
Diagram:
10

Illustration 10: Two sector circular flow of income
Illustration 11: Three sector circular flow of income
11

Illustration 12: Four sector circular flow of money
Assumptions:
)i When companies make expenses on research and development department then
injections will increase in the economy of Australia.
)ii When people of Australia make more investment in credit unions then
withdrawals will increase in terms of savings (Eaton, Kortum and Sotelo, 2012).
)iii The situation in which government comes under the budget deficit and raise
capital after print extra money then net injections will increase.
v)i When investors of Australian earn more dividend from overseas investment then
withdrawals will decline.
Analysis:
i) The reason is for enhancing injections are that, it is one kind of investment by the
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companies rather than expenses.
ii) The reason is that making investment in the credit unions is actually savings in the
economy rather than investment.
iii) The reason behind increasing net injections is that, taxes and government expenditures
are decline and enhance respectively (Balcells and Justino, 2014)). Further, the money
which is printed extra, considered as net injections.
iv) Reason for declining withdrawals is that net outflows reducing from the household
sector.
B)
Definition:
i) Gross Domestic Product
The monetary value of overall products and services which is manufactured within border of a
particular country or economy in one fiscal year is considered as gross domestic product (GDP)
(Bondarenko, 2017).
i) Withdrawals
From the economy when sum of money is reduced with the help of boost up savings, income
tax expenses as well as imports is withdrawals. Under this situation, circulation or flow of
money is decline within the economy.
iii) Injections
It is totally reverse to the withdrawals where circulation of the money is enhanced in the
economy by adding more investment and exports. Along with this, government also spend more
money in the market which lead to increase flow of money in the whole economy (Siebrand,
2013).
Formula:
i) GDP = C + I + G + NX
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Whereas, C = Total consumption
I = Total investment
G = Government spending
NX = Exports – imports
ii) Withdrawals
S + T + M
Whereas, S = Saving
T = Income taxes
M = Imports
iii) Injections
I + G + X
Whereas, I = Total Investment
G = Government expenditure
X = Exports
Calculation:
i) Gross Domestic Product
GDP for Disney Island is stated below:
GDP = (15000 + 60000) + 35000 + 25000 + (15000 – 20000)
= 75000 + 35000 + 25000 – 5000
= 130000
ii) Withdrawals
Withdrawals for Disney Island is stated below:
= 6000 + 15000 + 20000
14

= 41000
iii) Injections
Injections for Disney Island is stated below:
= 35000 + 25000 + 15000
= 75000
QUESTION 4
A)
Definition:
Inflationary gap:
In the economics, inflationary gap reflects difference between real Gross Domestic Product and
full employment in the country.
Deflationary gap:
The condition of an economy where government spends insufficient amount in order to buy
output which are supportive for raising full employment is known as deflationary gap (Wicker,
Hallmann and Breuer, 2012).
Illustration:
Inflationary gap:
When total output within an economy is worth of $7 billion and level of full employment is
only $4 billion. In this situation inflationary gap will be:
$7 – $4 = $3
Deflationary gap:
In an economy it is mandatory by buy full employment of $10 billion and government spends
only $6 billion. Further, deflationary gap will be:
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$10 - $6 = $4
Diagram:
Illustration 13: Inflationary gap
Illustration 14: Deflationary gap
Difference:
16

Inflationary gap Deflationary gap
In this, aggregate demand excess from the
market equilibrium (Fischer and Heutel,
2013).
Under this, short fall occurs in aggregated
demand.
Due to this gap inflation arises in the
economy.
It leads to create situation of recession.
Prices of products and services increase in the
market due to inflationary.
While, due to deflationary level of prices fall
down.
In order to fulfil inflationary gap government
uses fiscal and monetary policy (Simranjot,
2012).
To fill gap of deflationary, government makes
additional expenses on employment.
B)
Definition:
Expenditure line:
The plan made by businesses and households for making expenses on products and services at
the specific income level is known as expenditure line (Hakhverdian and Mayne, 2012).
Diagram:
17

Illustration 15: Expenditure line
Illustration:
i) People have expenditure line worth of $1000 at the income level of $40000. When they
make more savings, then plan of expenses decline.
ii) For instance: Australian net income is $20 billion where it expenses $1.5 billion.
Further, exports lead to boost up net income and reached up to $25 billion then
government of Australia will spend more money.
Explanation:
i) As saved income of people increases then level of expenses will reduce. Therefore,
expenditure line will affect adversely of the public.
ii) Due to increasing export level in Australia leads to boost up total sales and income of the
economy (Ascari and Sbordone, 2014). Further, as net income affects positively then
expenditure line will increase.
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REFERENCES
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Erosa, A., Fuster, L., & Kambourov, G. (2016). Towards a Micro-Founded Theory of Aggregate
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Online
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