Price Elasticity of Demand & Monopoly Market Structure Questions

This article discusses the concept of price elasticity of demand and the monopoly market structure. It explores the factors that determine price elasticity of demand and provides examples of different products. It also examines the Australian Post Corporation as a monopoly firm in the Australian market.

Running Head: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 1
PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS
Student name
Institution Affiliation
Date

: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 2
Price Elasticity of Demand & Monopoly Market Structure Questions
Question 1
In its basic definition, Price elasticity of demand is an approach used to measure the
elasticity or responsiveness of the quantity of goods or services demanded when there is a
change in price but other factors held constant. More precisely, it is defined as the percentage
change in the quantity of goods or services demanded when the price changes by a rate of one
percent. Expect for the goods which don’t conform to the law of demand like Giffen goods and
Veblen goods which have a positive price elasticity of demand, all other products always have a
negative price elasticity of demand (Jawad, Lee, Glantz & Millett, 2018). From the notion of
price elasticity of demand, inelastic or relatively inelastic goods are realized. Goods are said to
be inelastic if the PED is less than one. This is to imply that changes price have minimum effects
on the quantity of products demanded. On the other hand, when the price elasticity of demand is
greater than one, then the demand for a certain good is said to be elastic.
Arithmetically, Price elasticity of demand is taken as the relative change in the dependent
variables (quantities demanded) to the relative change in the independent variables (product
Prices) (Labandeira, Labeaga & López-Otero, 2017). Representing this definition arithmetically,
a simple formula to measure the price elasticity of demand is obtained. Using ‘e’ to represent
elasticity, then:

: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 3
Also, because elasticity is the percentage change in the quantity of goods demanded
divided by the percentage change in price, incorporating the percentage factor in the equation we
realize the equation:
In a case where the percentages are known, the elasticity can be calculated. Because the
coefficient of elasticity demand is a pure number i.e. its independent of measurement units, it can
easily be calculated or determined from the formula below:
Q is the quantity of goods demanded; P is the price, ΔQ/Q is the relative change in
quantity demanded while ΔP/P is the relative change in the product price. A negative sign (-) is
inserted in the formula before the fraction in order to make the coefficient of elasticity negative.
There are a number of factors which determine the price elasticity of demand for different
products. The common determinants include availability of close substitutes, necessities, time
and habits. Basically, if there is greater availability of product substitutes, then the product is
more elastic (Colchero, Salgado, Unar-Munguía, Hernandez-Avila & Rivera-Dommarco, 2015).
This is to imply that if the price of a product slightly goes up, consumers can easily turn to other
brands. On the other hand, if a product or service is a necessity, then the demand is inelastic.
That implies that an increase in the price of these types of products doesn’t have a huge impact
on the quantities demanded. In regard to the time factor, It draws from the fact that goods tend to
become inelastic where consumers have more time to find substitutes or alternatives. A good
example under this category is the price of gasoline. Over time, if the price goes up, people

: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 4
adjust to this change by driving less, using public transport or forming carpools. Finally, the
consumption habits of a product also play an important role when determining the price elasticity
of demand. The demand for addictive products is inelastic because consumers have no choice but
to pay for the products.
Product 1: Cigarettes
“Article: Chelwa, G., & van Walbeek, C. (2019). Does cigarette demand respond to price
increases in Uganda? Price elasticity estimates using the Uganda National Panel Survey and
Deaton’s method. BMJ Open, 9(3), e026150.”
According to the research by Chelwa & Walbeek (2019) which was based on Uganda’s
cigarette consumption, the price elasticity of demand for this product was estimated to be 0.66.
Based on this estimate (0.66), it was clear that even when the price for cigarettes goes up, the
impacts on demand was very small.
Cigarette smoking lies in the category of habitual products. Cigarette smoking is
addictive in nature and hence very few smokers can withstand the urge for smoking despite the
circumstances. This is to imply that cigarette smokers can do anything to ensure that they acquire
cigarettes, including approaches like forgoing meals and other basic needs.
Based on the price elasticity of demand estimate above (0.66), cigarettes are under the
category of inelastic products.

: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 5
From the diagram above, when the price of cigarettes increased from Price1 to Price2, the
quantity demanded decline from Q1 to Q2. To determine the elasticity of demand for the demand
curve above, the price elasticity of demand for cigarettes must be solved first (Miller & Alberini,
2016). Because the PED of cigarettes according to the research above is 0.66, then the product
has an inelastic demand. Cigarette demand is inelastic because of the addiction aspect of this
product, no matter how expensive it is, people will have to purchase it because of the addiction
force and hence a slight decline is observed.
Product 2: Soft drinks
“Article: Carlos M. Guerrero-López, Mishel Unar-Munguía, & M. Arantxa Colchero. (2017,
February 10). Price elasticity of the demand for soft drinks, other sugar-sweetened beverages and
energy dense food in Chile. Retrieved from
https://bmcpublichealth.biomedcentral.com/articles/10.1186/s12889-017-4098-x”

: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 6
According to this article by Carlos, Mishel & Arantxa (2017), the price elasticity of
demand for soft drinks was estimated to be -1.37. Based on this estimate, an increase in the price
of soft drinks by 10% would lead to a consumption decline of 13.7%.
The reason behind the price elasticity demand estimate above (-1.37) is because there are
more foods and beverages within the demand system of soft drinks which can act as substitutes
for soft drinks. For instance, plain water has a cross-price elasticity demand of 0.63 in the
demand system of soft drinks. This implies that a 10% increase in the price of soft drinks may
lead to a 6.3% increase in the demand for plain water.
As observed in the diagram above, when the price of soft drinks like soda increases, the
impact is felt almost equally in the demand of the product. As seen in the graph above, when the

: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 7
price increases by 10%, the demand declines by 7.8 %. This is a clear indication that the product
is an elastic demand product.
Product 3: Drinking water
“Article: Hoyos, D., & Artabe, A. (2017). Regional differences in the price elasticity of
residential water demand in Spain. Water resources management, 31(3), 847-865.”
According to the research by Hoyos & Artabe (2007), the price elasticity demand for
drinking water was typically low in Spain, ranging between -0.1 and -0.25. This implied that an
increase in the price of drinking water by 1% led to a slight decline in demand by 0.1% to -
0.25%.
The low price elasticity demand estimate (-0.1 and -0.25) was associated with the fact
that drinking water is a necessity product which must be taken for people to survive. For that
matter, people strive hard to make sure that they afford it. Its price increment hence can only
affect its demand by a very small margin.

: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 8
As observed in the diagram below, a price increase of drinking water by 40% leads to a
slight decline in demand by -10%. According to the elasticity rules, any product with a PED
below 1 is an inelastic demand product. This is a clear indication that the demand for drinking
water is inelastic in nature.
Question 2
For people who have played the board game monopoly, they understand the strategy of
controlling the economy as the strategy that limits the opponent to enable the proponent to win
the game by making him a monopolist. Far from the gaming world, this strategy is also applied
in the business world through what is known as monopoly power. In basic terms, monopoly

: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 9
power is defined as the supplier’s degree of setting product prices on the basis of its market
share. This paper scrutinizes Australian Post Company and its impacts on other firms as a
monopoly firm (Hamel, Caudill & Mixon Jr, 2016).
The Australian Post Corporation or Australian Postal Corporation which was formerly
known as the Australian postal Commission is a government-owned parastatal which provides
postal services within the country. Its headquarters are located at 111 Bourke Street in
Melbourne city, which serves as a post office. This corporation was established after the 1901
federation in Australia which saw the colonial mail systems merged into Postmaster-General’s
Department (PMG). PMG was the body given the mandate to oversee telegraph and domestic
telephone operations as the mechanical mail sorting system was being introduced in the country.
Early 1975, separate government commissions were initiated to take the operational
responsibilities of PMG. Among the commissions was the Australian Postal Commission which
is currently known as Australia Post (Chong, 2015).
Australia Post has been operating in three core markets: agency and retail merchandise
services, letters and the associated services; logistics and parcel services which span both in both
international and local markets. The corporation provides services such as collection, processing
and distributing letters across the entire country and other overseas countries. It has also
diversified its operations to provide agency services, logistics and supply chain management.
Recently it has initiated digital service provider which allows businesses, customers and
government entities to communicate through a secure online portal (Chong, 2015).
Based on the characteristics of a monopoly firm, it is clearly evident that Australia Post is
operating as a monopoly corporate in the Australian market. This is in consideration of the fact
that this company does not allow other private postal companies to facilitate parcel services on

: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 10
government post offices. This restricts the expansion of private postal companies in the country
at the expense of this corporate. Chong, (2015) has revealed that Australian Post through this
approach has kept hurting small businesses in the market because they are not allowed to trade
freely in the market. Also, this restriction has seen most of the startup businesses in the line
collapse leaving it with the full power to determine prices and control the entire market.
Just like most of the monopolies in Australia, Australia Post has not attained its
monopoly power through the free market. It has attained its monopoly power through the
government intervention into the market which was originally unrestricted (Cox, 2018). It was
formed when the Australian government gave it the privilege of providing postal and parcel
services to government postal offices and restricted the rest of the private postal services which
would have facilitated competition in the market. A clear indication that Australia Post
monopoly power has been facilitated by the government can be traced from the fact that this
company was given statutory monopoly under the APC Act over reserved letter services to
enable it to meet its operational costs of delivering its services
Although Australia Post has experienced some challenges as a monopoly corporate, the
benefits it enjoys outweigh those challenges. For instance, Australia Post has been enjoying the
benefits of economies of scale (Cox, 2018). This is as a result of increased output which leads to
decreased average costs of its operations. These have been passed to its consumers in the form of
low service prices. This can be expressed by the graph below

: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 11
As a monopoly, if it offers services worth Q2, then the average cost P2 is much lower
compared to a case where it would have been operating in a competitive market with several
firms producing at Q1 (P1) (Kopecký, 2017).
Also, Australia Post makes supernormal profits as a monopoly which can be used to fund
some of its high-cost capital investment. For instance, it has been doing research and
development supported by the high profits it makes. Through research, it has been able to
continually improve its services and lower costs in the long term (Branger, Flacke & Gräber,
2018).
Generally, monopolies hurt the consumers through their exorbitant prices they impose on
their goods and services. This is because of the lack of competition from other firms which make
them charge higher prices (P1) than it would have been in a competitive market (Branger, Flacke

: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 12
& Gräber, 2018). The same case applies to Australia Post which has been operating as a
monopoly. As shown in the diagram below, it is clear that consumers get fair prices for goods
and services when the market structure is competitive.
As shown above, area E, F, B is the economic welfare under a perfectly competitive
market. However, if the market is taken over by a monopoly, there is a loss of consumer surplus
which is shown by P P1 A B. New area of producer surplus, at exorbitant prices P1, is E, P1, A,
C. This leads to a net loss of economic welfare shown in area A B C (Woodall & Shannon,
2018).
A government may wish to intervene in a monopoly market structure to protect the
interests of its consumers. This is done to prevent excess prices, promote competition and
improve the quality of services. This is achieved in various ways (Elwert, 2018). The main
approach is through price capping. Through this approach, the government creates regulatory
bodies to oversee pricing mechanisms of a monopoly and limit prices where necessary.

: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 13
The second approach is through the regulation of service quality offered by a monopoly.
Through this approach, the qualities of services provided by a monopoly firm are examined by
the regulators in terms of quality to ensure that they are up to the standards required. Thirdly,
merger policies are used to intervene (Hafezalkotob, 2017). Through this approach, the
government investigates mergers which have the potential of creating monopoly power. In a case
where a merger creates a firm with more than 25% market share, it is termed as a competition
commission and may be blocked or allowed depending on different factors like the reason behind
its creation.

: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 14
References
Branger, N., Flacke, R. M., & Gräber, N. (2018). Monopoly Power in the Oil Market and the
Macroeconomy. Available at SSRN 3059613.
Carlos M. Guerrero-López, Mishel Unar-Munguía, & M. Arantxa Colchero. (2017, February 10).
Price elasticity of the demand for soft drinks, other sugar-sweetened beverages and energy dense
food in Chile. Retrieved from
https://bmcpublichealth.biomedcentral.com/articles/10.1186/s12889-017-4098-x
Chelwa, G., & van Walbeek, C. (2019). Does cigarette demand respond to price increases in
Uganda? Price elasticity estimates using the Uganda National Panel Survey and Deaton’s
method. BMJ Open, 9(3), e026150.
Chong, F. (2015). Stamping a firm footprint in China: Australia Post defines its future in e-
commerce. Asia Today International, 33(2), 7.
Colchero, M. A., Salgado, J. C., Unar-Munguía, M., Hernandez-Avila, M., & Rivera-Dommarco,
J. A. (2015). Price elasticity of the demand for sugar-sweetened beverages and soft drinks in
Mexico. Economics & Human Biology, 19, 129-137.
Cox, C. (2018). The Canadian Cannabis Act legalizes and regulates recreational cannabis use in
2018. Health Policy, 122(3), 205-209.
Elwert, G. (2018). Intervention in markets of violence. In Potentials of the disorder. Manchester
University Press.

: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 15
Hafezalkotob, A. (2017). Competition of domestic manufacturer and foreign supplier under
sustainable development objectives of the government. Applied Mathematics and
Computation, 292, 294-308.
Hamel, S., Caudill, S. B., & Mixon Jr, F. G. (2016). A good walk foiled: Monopoly power and
barriers to entry into the PGA Tour. Managerial and Decision Economics, 37(8), 574-584.
Hoyos, D., & Artabe, A. (2017). Regional differences in the price elasticity of residential water
demand in Spain. Water resources management, 31(3), 847-865.
Jawad, M., Lee, J. T., Glantz, S., & Millett, C. (2018). Price elasticity of demand for non-
cigarette tobacco products: a systematic review and meta-analysis. Tobacco control, 27(6), 689-
695.
Kopecký, P. (2017). The rise of the power monopoly: Political parties in the Czech Republic.
In Post-Communist EU Member States (pp. 139-160). Routledge.
Labandeira, X., Labeaga, J. M., & López-Otero, X. (2017). A meta-analysis on the price
elasticity of energy demand. Energy Policy, 102, 549-568.
Miller, M., & Alberini, A. (2016). Sensitivity of price elasticity of demand to aggregation,
unobserved heterogeneity, price trends, and price endogeneity: Evidence from US Data. Energy
Policy, 97, 235-249.
Woodall, P., & Shannon, T. L. (2018). Monopoly Power Corrodes Choice and Resiliency in the
Food System. The Antitrust Bulletin, 63(2), 198-221.

: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 16