ECO105 Assignment: Economic Analysis of Markets, Growth, and Taxation

This economics assignment analyzes the impact of events on individual markets and the overall economy using microeconomic and macroeconomic principles. It explores the effects of Middle East hostilities on the petrol and passenger car markets, examining the dynamics of supply, demand, and equilibrium. The assignment also investigates the relationship between electric and petrol car markets, considering the impact of affordable electric cars on petrol car demand. Furthermore, it delves into economic growth, assessing the influence of government policies on economic output and identifying long-term determinants of growth. Finally, it compares the burden of taxation on cigarettes and coffee, analyzing market structures, particularly the oligopoly model in the Australian grocery supermarket sector, and the impact of taxation on consumers and producers. The assignment utilizes figures to illustrate market scenarios and draws upon economic theories and concepts, including elasticity and production possibility frontiers, to provide a comprehensive analysis of economic phenomena.

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Course ID

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Table of Contents
Introduction........................................................................................................................2
Question 1..........................................................................................................................2
Question a: Hostilities in Middle East and impact on petrol and passengers’ car
market............................................................................................................................2
Question b: Relation between electric car and petrol car market..................................4
Question 2..........................................................................................................................5
Question a: Government policy and economic output...................................................5
Question b: Long term determinants of economic growth and role of government
policy..............................................................................................................................6
Question 3..........................................................................................................................8
Question a: Burden of taxation......................................................................................8
Question b: Market structure of Australian grocery supermarket..................................9
Conclusion.......................................................................................................................10
References.......................................................................................................................11

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Introduction
The report aims to discuss impact of some selected economic event on individual
market and the overall economy using concepts drawn from both microeconomics and
macroeconomics. These are done by answering three specific question. The first
question is related to demand, supply and equilibrium dynamics of market. First part of
the question discusses impact of hostilities in Middle East on petrol and passenger cars
market of Australia. The second part of the question discusses effect of a lower
affordable price of electric cars on the market for petrol cars. The second question
relates to the concept of economic growth. It discusses impact of specific government
policy on economic output. Along with this, the section discusses long term determinant
of economic growth and role of government policy in determining economic growth. The
third question makes a comparative analysis of burden of tax imposed on cigarette and
coffee. This part of the paper additionally discusses supermarket structure in Australia.
Question 1
Question a: Hostilities in Middle East and impact on petrol and passengers’ car
market
Hostilities in Middle East interrupts the supply of oil in Middle East. As Australia is
highly dependent on imported crude oil from Middle East, disruption in oil supply in the
Middle-east reduces the supply of crude oil in Australia. The petrol market in Australia is
therefore likely to suffer a crisis of shortage of petrol. The shortage of petrol increase
petrol price in Australian market. As petrol price increases, there is an increase in cost
of running passenger cars with large engines that run on petrol (Cowell 2018). Demand
for passenger cars therefore decreases lowering and quantity sold of passenger cars.
The market scenario in petrol and passenger cars is described in the following two
figures.

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Figure 1: Market for petrol
(As created by Author)
Figure 1 depicts the state of Australian petrol market after the outbreak of
hostilities in the Middle East. The demand for petrol is given by the downward sloping
line DD and supply of petrol is given by the upward sloping line SS. From the demand-
supply force, the market attains equilibrium at point E1. Because of the outbreak of
hostilities in Middle East there is likely to be a disruption in supply of crude oil in
Australia. In response to this, supply of petrol falls (Baumol and Blinder 2015). This
shifts the supply curve leftward to S1S1. The new equilibrium in the market is attained at
E2. Because of the event, equilibrium price of petrol increases to P2 and the equilibrium
quantity falls to Q2.
Figure 2: Market for passenger cars

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(As created by Author)
Petrol and passenger cars that run on petrol are complementary goods. With
increase in petrol prices after hostilities in Middle East their demand for passenger cars
is expected to decrease because of a higher cost of petrol (Cowen and Tabarrok 2015).
Decrease in demand for passenger cars is depicted by the inward move of the demand
to D1D1. As demand for passenger car contracts, equilibrium price and equilibrium
number of cars sold decreases.
Question b: Relation between electric car and petrol car market
Electric cars and cars run on petrol are substitute goods. Price of one good has a
positive relation with demand for the other good. The availability of electric cars at an
affordable price increases demand for electric cars. As people tend to shift their demand
from petrol run car to electric cars, demand for cars run on petrol is likely to falls ( Arrow
2015, p.5). Given the decline in demand of petrol cars, equilibrium price and equilibrium
number of petrol cars sold is expected to fall as illustrated in the following diagram.
Figure 3: Market for cars run on petrol
(As created by Author)

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In the market for cars that run on petrol, demand and supply of cars are given by
DD and SS respectively. Market attains equilibrium at E with a respective equilibrium
price and equilibrium number of cars of P* and C*. The availability of electric cars at an
affordable price reduces demand for petrol cars shown as the leftward shift of the car
demand curve (Mochrie 2015). As demand declines, equilibrium price falls to P1 and
equilibrium number of vehicles reduces to C1.
Question 2
Question a: Government policy and economic output
The primary problem of an economy is scarcity of resources and unlimited wants
of human to be fulfilled with the scare resources. The production possibility frontier of a
nation outlines the frontier of maximum possible output than can be produced with the
scarce resources. Because of scarcity of resources, there exists a trade-off between
current and future production. Increasing output in future implies sacrifice of output at
present (Kolmar 2017). The concept is relevant for discussing implication of Australian
government’s policy of encouraging young people to attend universities in order to
increase proportion of educated workforce.
Figure 4: Impact of new policy on present output
(As created by Author)

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This kind of policy reduces the current supply of labor in all industries as young
people tend to accomplish higher studies at universities. Shortage of labor in different
industries hampers current output of Australian economy. Accordingly, PPF of Australia
in current year shifts inward as shown in the above figure.
Figure 5: Impact of new policy on future output
(As created by Author)
The policy however has positive effect on future economic output. The educated
youth workforce is more productive in nature. After completing their university study,
once they join the labor force availability of labor in the economy increases (Hutchinson
et al. 2017). As supply of labor for all the industries increases there is an increase in
aggregate output as reflected from an outward shift of PPF figure 5.
Question b: Long term determinants of economic growth and role of government
policy
There are three main factors that determinants of long run economic growth are
physical capital, human capital and technological progress. Physical capital implies
machines, factories, transport equipment, computers and others. The stock of physical

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capital helps to expand capacity of an economy to produce good. When a worker is
provided with more physical capital productivity increases.
Human capital refers to the knowledge of workers embedded through education
in school, college, university or from other professional training. The gathered
knowledge helps labors to operate new machines efficiently increasing workers’
productivity (Teixeira and Queiros 2016, p. 1640). The higher productivity of workers
contributes to a higher growth in the long run.
Technology refers to the process of combining different factors into the
production. Firms aim to use advanced technology to use the scare resources efficiently
in the producing most desirable goods and services (Howitt 2019). Technological
advancement plays a crucial role in determining economic growth of a nation.
Apart from these three factors, another factor vital for long term economic growth
is infrastructure. Development of infrastructure encourages co-ordinate behavior of a
nation causing steady accumulation of human capital, physical capita and technological
knowledge.
Government of a nation can influence economic growth by using fiscal and
monetary policy instrument. Fiscal policy implies government’s policy of changing
expenditure and taxation to enhance economic growth. In order to increase economic
growth by increasing aggregate demand government either increases its spending or
lower tax rate (Bianchi and Ilut 2017, p. 128). Monetary policy signifies policy of
government to affect economic growth by adjusting money supply and associated
interest rate. In order to boost economic growth government increase money supply
resulting in a decrease in interest rate which help to boost investment.

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Question 3
Question a: Burden of taxation
Figure 6: Impact of a tax on cigarette
(As created by Author)
The proposed sales tax on cigarette immediate increases price of cigarette. The
burden of tax on buyers and sellers depend on elasticity of demand and supply. Higher
elasticity means a lower burden while lower elasticity means a higher burden. As
cigarette is an addictive item people are unable to adjust their demand much and
therefore face a relatively inelastic demand (McKenzie and Lee 2016). The relatively
inelastic demand for cigarette is shown by the steeper demand curve DD. Now
imposition of tax sales tax on cigarette shifts the supply curve of cigarette to the left to
S1S1. Because of imposed tax price that buyers’ pay increases to P2 and that of the price
that sellers receive reduces to P3. Because of the relatively inelastic demand,
consumers bear a greater burden of tax.

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Figure 7: Impact of a tax on coffee
(As created by Author)
The distribution of tax burden in case of tax imposition on coffee consumption
however is different. For coffee there are various substitutes available in the market.
Following availability of various substitutes of coffee in the market, the demand is
relatively elastic. The demand curve for coffee is therefore relatively flatter compared to
cigarette. Buyers are able to adjust their demand to a large extent in response to a high
price (Hendren 2016, p.65). Imposition of a similar tax on coffee shifts the supply curve
leftward. Because of the tax, price that buyers pay increases to P1 and that of the price
that sellers receive declines to P2. In this case, sellers bear the greater proportion of tax
burden.
Question b: Market structure of Australian grocery supermarket
Particular market structure of an industry depends on number of existing buyers
and sellers in the market. The Australian supermarket structure resembles to an
oligopoly market. By definition an oligopoly market is a market that is dominated by a

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relatively small number of firms along with a large number of buyers. In such a market
dominating firms hold a large market share. In the grocery supermarket sector of
Australia, Woolworths and Coles capture a dominating market share. These two
together control more than 60 percent market share. Other major players in the industry
are Aldi, IGA and Franklins. Each of the major supermarket chain has a considerable
degree of influence on the market similar to an oligopoly market (Merrett 2019). Product
differentiation is one important characteristic of oligopoly market. Woolworths, Coles
and others in the market engage in differentiating their products employing techniques
of own branding, changing packaging followed by other differentiating techniques.
Because of high degree of market power these two players can set market price of their
products. With the objective of attracting more customers they often engage in price
under cutting games. Another similarity of Australian supermarket to that of an oligopoly
market is the presence of high barriers of entry Huge competition between Woolworths
and Coles and high market power of dominating firms works as a threat to new entrants
to successfully enter the market (Knox 2015). All these features of Australian grocery
supermarket suggest that the market follows structure of an oligopoly market.
Conclusion
Hostilities in Middle East causes a contraction in market for both petrol and
passenger cars. A decrease in price of electric cars lowers the demand for petrol cars
lowering equilibrium price and number of vehicles sold. The policy of Australian
government to encourage youth to complete university education though lowers
aggregate output at present but may increase output in future. Physical and human
capital, technology and infrastructure are some factors affecting economic growth in the
long run. The burden of tax buyers is higher in case of a proposed tax on cigarette
compared to a tax on coffee because of relatively inelastic demand for cigarette. The
supermarket structure of Australia is similar to an oligopoly market.

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References
Arrow, K 2015. Microeconomics and operations research: Their interactions and
differences. Information Systems Frontiers, vol.17, no. 1, pp.3-9.
Baumol, WJ & Blinder, AS 2015. Microeconomics: Principles and policy. Nelson
Education.
Bianchi, F & Ilut, C 2017. Monetary/fiscal policy mix and agents' beliefs. Review of
economic Dynamics, vol.26, pp.113-139.
Cowell, F 2018. Microeconomics: principles and analysis. Oxford University Press.
Cowen, T & Tabarrok, A 2015. Modern principles of microeconomics. Macmillan
International Higher Education.
Hendren, N 2016. The policy elasticity. Tax Policy and the Economy, vol.30, no. 1, pp.
51-89.
Howitt, P 2019. The implications of knowledge-based growth for micro-economic
policies. Routledge.
Hutchinson, E ,Nicholson, M, Lukenchuk, B, & Taylor, T 2017. Principles of
Microeconomics. University of Victoria.
Knox, M 2015. Supermarket monsters: The price of Coles and Woolworths'
dominance, Vol. 6. Black Inc..
Kolmar, M 2017. Principles of Microeconomics. Springer International Publishing.
McKenzie, RB & Lee, DR 2016. Microeconomics for MBAs: The economic way of
thinking for managers. Cambridge University Press.
Merrett, DT 2019. The Making of Australia's Supermarket Duopoly, 1958–
2000. Australian Economic History Review.
Mochrie, R 2015. Intermediate microeconomics. Macmillan International Higher
Education.

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Teixeira, AA, & Queiros, AS (2016). Economic growth, human capital and structural
change: A dynamic panel data analysis. Research policy, vol.45, no.8, pp.1636-1648.