Analysis of Demand Elasticity and Monopoly in the Australian Market

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Economics for business
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Table of Contents
Introduction:...............................................................................................................................3
Question 1:.................................................................................................................................4
Question 2:.................................................................................................................................7
Conclusion:..............................................................................................................................10
References:...............................................................................................................................11
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Introduction:
This report is based on the economic concepts of demand and monopoly and, going to be
prepared to deliver explanatory knowledge about these concepts. The report will be created in
two different eras, and each era will be focused on different concepts. In the initial part,
demand and different types of price elasticity of demand will be measured against the price
elasticity of three different products. It will help to understand how individual specifications
of a product affect the elasticity of price. In the next era, concepts and implications of
monopoly will be discussed to conclude that how monopoly is not suitable for the consumers.
The report will evaluate the steps that can make by the government to control the
implications of monopoly.
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Question 1:
Price elasticity of demand
It is an economic measurement which explains the probability of change in the demand for a
product or service due to variation in price stages. It interrogates the relation in demanded
volume and prices of product to identify that how a change in price stage leads to the change
in demand of such product (Coglianese, et. al., 2017). It should be considered that the concept
of PED works on the assumption that factors other than prices are unchanged.
Price elasticity of demand can be segregated in the following categories:
• Perfect elastic demand:
It is the situation in which the demand curve shows horizontal straight line behaviour of
shifting. It is the condition when a minor change in price stages creates huge alterations in
demand (Nitisha, 2019). For example, a small decline in prices may enhance the demand
significantly. In this situation, the demand curve will be as below:
Source: Nitisha, 2019
• Perfect inelastic demand:
In this situation, slop of the demand curve will be a vertical straight line which will present
that demand is content for every level of price. It means that demand for a product or service
will not be affected by any minor or significant changes in prices stages. Demand curve will
be presented as below:
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Source: Nitisha, 2019
• Relative Elastic Demand
It can be explained as the situation in which the demand curve will be gradually sloping, and
the value of elasticity will be between one to infinity. In this situation, a change in prices will
be lower than the change in demand (Nitisha, 2019). It means that particular level of demand
alteration cannot be founded against the price alterations.
Source: Nitisha, 2019
• Relative inelastic Demand
It is the condition in which the demand curve will slop rapidly, and numerical stage of
elasticity will be zero to one. Here, alteration in prices will be higher than the alterations in
demand volume. For example, if the change in prices is 50%, the change in demanded
volume will be lower than 50%. The behaviour of the curve will be as below:
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Source: Nitisha, 2019
• Unitary Elastic Demand:
When alteration in prices is similar to the changes in demand volume, it will be called unitary
elastic demand. In this case, the rectangular hyperbola shape will be made by the demand
curve (Nitisha, 2019). Here, the numerical figure of the elasticity will be one.
Source: Nitisha, 2019
These concepts can be applied to the following products:
Gasoline:
Generally, demand for gasoline products is assumed inelastic because these are related to the
day to day basic needs. From the research, it has been detected that electricity of Gasoline
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and similar products is (0.05) which is a minor value but significant for the study
conclusions.
From this finding, it can be said that the price elasticity of demand for Gasoline is relatively
inelastic because significant changes in prices will create minor alterations in demand volume
(Goetzke & Vance, 2018). Through the study of prices and demand of Gasoline products
from 2009 to 2017, it has been noticed that elasticity of Gasoline products was reached to
(0.23) in 2017 which is enough to say that price increment of Gasoline products is leading for
the enlargement in elasticity. Conclusions of the study are signifying that price elasticity of
Gasoline products will be relatively inelastic because continuous price increment will create
minor change in whole demand.
Renewable energy:
It presents modern sources of energy, which are available to humans other than traditional
resources. It has been learned that the demand for renewable energy is unitary elastic because
changes in prices of renewable energy lead to significant changes in demand. It is recognised
that prices of substitute products have a significant effect on the degree of elasticity and
demand (Qu, et. al., 2018). For example, due to the increase in electricity prices, people are
motivated to use solar systems. It is recognised that the price of electricity is Relative elastic
because the change in electricity prices can reduce the consumption of conventional energy
sources and customers can transfer to other options. Thus, the elasticity of renewable energy
resources is elastic; therefore price drop will increase demand, while the increase in prices
will decrease the amount of demand.
Luxury goods
Luxury goods can be explained as the items that are not essential for the completion of
necessities of life but highly desired due to their quality, uniqueness, and craftsmanship.
From the elasticity analysis of luxury goods, it is noticed that elasticity of luxury goods
remain nil or near to zero because prices of luxury goods never go down. If the demand for a
product never changes in accordance with price changes, the elasticity of such a product is
called inelastic demand (Kasztalska, 2018). The study is concluding that demand for Luxury
products can be changed with a minor value if a close substitute is available in the same
category. For example, the demand for a luxury car will show a minor elasticity if another car
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of the same segment is available at fewer prices. Findings are concluding that Semi-Luxury
goods always show unitary elastic demands.
Question 2:
Monopoly:
It can be described as a situation or specific market structure in which one seller covers all or
a major part of the industry. It is a Zero competition situation in which the buyer has no
option for the selection so prices cannot be affected by consumer behaviour (Corneli &
Kihm, 2013). For example, A company which is selling some unique electronic deceive and
there is no close substitute for such a product; it will be called a monopoly.
Thus, a condition in which a large number of consumers have only one choice regarding a
specific need, it will be called monopoly conditions. In respect of the Australian market,
NBN has significant monopoly status:
NBN Company:
NBN was formed in 2009 under the Corporation Act 2001 to provide broadband connectivity
in Australia. It is wholly owned by the Commonwealth government and focused on working
as the wholesaler in the Australian telecommunication market (Nbnco, 2019). Mainly
activities of NBN are focused to provide service to its local network and small internet
service providers.
Reason for the monopoly of NBN Company:
The main reason for the monopoly of NBN is control of the Australian government on the
sector. NBN was established by the Commonwealth government to ensure equality in internet
distribution and broadband connectivity. Currently, only NBN has the right to distribute
broadband connectivity through its local distribution channels (Nbnco, 2019). Entry
restrictions are another reason for the monopoly of NBN Company. The Commonwealth
government applied many entry restrictions to ensure effective control of the
telecommunication sector.
Benefits to NBN through monopoly:
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• Great profits;
Greater profitability is the primary benefit of a monopoly for the seller. In a monopoly
market, only one seller is available for a large number of customers so services or products
can be sold at higher prices (Haimson, 2015). In respect of NBN, options are not available for
the consumers, so the company is generating higher margins from operations.
• Price stability
Generally, monopoly refers to the stability of prices in which price elasticity remains zero. In
other markets, competition creates pressure on the prices, but the monopoly market provides
price stability to customers (Kumar, 2018).
• Quality innovations:
It is an assumption about the monopoly market that it discourages the quality improvement,
but a company which is working in a monopoly market will gain higher profits. These extra
funds can be utilised for the innovation, research and development activities. Through a
significant investment of time and funds in research, NBN can deliver better services to
customers at low prices.
• No competition:
Competition affects the organisation’s stability and profitability in several ways. For
example, a company that is operated in a highly competitive market will face price pressure,
quality pressure, marketing wellness pressure and more while a company like NBN which is
working in monopoly market will not face any of these issues (Yang, 2016). For example,
prices of broadband connectivity are higher in Australia, but there is no competition exists for
the NBN due to the control of the government. It is the main reason for the stable financial
condition of NBN.
• No harm from inefficacies:
From a seller's point of view, monopoly is a situation in which inefficiencies can be kept
harmless. A company like NBN working in a monopoly market situation cannot be affected
by operational and managerial inefficiency because core consumers have no choice in
selection (Haimson, 2015). Thus, if the power of monopoly is used, then the inefficient
strategy and operation will not cause any problems for the company.
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Intervention from the government to control monopoly power:
 By reducing entry barriers:
To create the monopoly of NBN, the Commonwealth government applied many regulations
to stop the entry of new companies in broadband connectivity market. If the government feels
that the monopoly is making an adverse impact on the economy and internet of the public, a
monopoly can be breached through the removal of entry barriers (Corneli & Kihm, 2013).
 Price control:
To reduce or remove the negative implications of monopoly, the government can set pricing
standards. For example, the Commonwealth government can set a price chart for the services
of NBN. It will stop the company to charge excessive amounts to customers and reduce the
negative impact of monopoly (Yang, 2016). As Monopoly condition leads to higher prices,
price control is the most popular way to control the implications of monopoly.
 Market Liberalisation:
Monopoly can be curbed through the market liberalization in which several benefits are
provided by the governing authorities to new companies so that monopoly can be breached
(Kumar, 2018). Tax benefits, low-cost utilities, free land or loans are some ways which can
be utilised by the Australian government to breach the monopoly power of NBN in
broadband connectivity market.
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Conclusion:
This report is about the concepts of economics that are associated with the elasticity of
demand and monopoly. Price elasticity of demand presents the chances of change in demand
due to price variations when other factors remain constant. Discussion of this report is
presenting detailed information about the price elasticity of luxury goods, Gasoline, and
renewable energy and, concluding that elasticity of luxury goods remains near to zero while
the elasticity of renewable energy shows a unitary elastic demand. Monopoly and its
implications are also discussed here which is sufficiently proved that monopoly creates many
advantages for the seller and government can reduce or remove the monopoly by applying
different steps. For example, NBN is the only seller in Australia's broadband market and is
enjoying a monopoly due to government support.
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References:
 Coglianese, J., Davis, L. W., Kilian, L., & Stock, J. H. (2017). Anticipation, tax
avoidance, and the price elasticity of gasoline demand. Journal of Applied Econometrics,
32(1), 1-15.
 Corneli, S., & Kihm, S. (2016). Will distributed energy end the utility natural monopoly.
Electricity Policy, 2.
 Goetzke, F., & Vance, C. (2018). Is gasoline price elasticity in the United States
increasing? Evidence from the 2009 and 2017 national household travel surveys (No.
765). Ruhr Economic Papers.
 Haimson, M. (2015). Domination: The Consequence of a Modern Day Monopoly.
 Kasztalska, a. M. (2018). Study on preservation and management of cultural luxury goods
and their surrounding legacy and environment in england. Traicon sc.
 Kumar, M. (2018). Top 3 Methods of Controlling Monopoly (With Diagram). Retrieved
from http://www.economicsdiscussion.net/monopoly/top-3-methods-of-controlling-
monopoly-with-diagram/7294
 Nbnco. (2019). About NBN Co | nbn - Australia's broadband access network. Retrieved
from https://www.nbnco.com.au/corporate-information/about-nbn-co
 Nitisha. (2019). 5 Types of Price Elasticity of Demand – Explained!. Retrieved from
http://www.economicsdiscussion.net/elasticity-of-demand/5-types-of-price-elasticity-of-
demand-explained/3509
 Qu, X., Hui, H., Yang, S., Li, Y., & Ding, Y. (2018, February). Price elasticity matrix of
demand in power system considering demand response programs. In IOP Conference
Series: Earth and Environmental Science (Vol. 121, No. 5, p. 052081). IOP Publishing.
 Yang, J. (2016). Monopoly VS Competition: Market Structure’s Impact on Product
Innovation-with Endogenous Quality of New Product.
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