Economics for Managers: Market Structures, Banking, and Housing Crisis

This report provides an in-depth analysis of economic concepts relevant to managers. It begins by comparing and contrasting perfect and monopolistic competition, outlining their key features, equilibrium conditions, and efficiencies. The report then shifts focus to the oligopoly market structure, using the Australian banking industry as a case study to illustrate its characteristics. Finally, the report addresses the crisis of housing affordability in Australia, examining both demand-side and supply-side factors contributing to the problem and proposing potential solutions. The analysis incorporates relevant economic models and diagrams to support the arguments and provide a comprehensive understanding of the topics discussed.

Running Head: ECONOMICS FOR MANAGERS
Economics for Managers
Name of the Student
Name of the University
Author note

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Table of Contents
Answer a..........................................................................................................................................2
Basic features of perfect competition and monopolistic competition.........................................2
Equilibrium under perfectly competitive market.........................................................................3
Equilibrium under monopolistically competitive market............................................................7
Productive and Allocative efficiency...........................................................................................9
Answer b........................................................................................................................................11
Features of Oligopoly market....................................................................................................11
Australian Banking Industry and Oligopoly:.............................................................................12
Answer c:.......................................................................................................................................15
Crisis of housing affordability in Australia:..............................................................................15
Demand side factors impacting housing affordability:..............................................................16
Solution to the housing crisis:....................................................................................................17
Probable supply side solutions:.................................................................................................18
References......................................................................................................................................20

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Answer a
Market signifies an ideal place for exchanging goods and services between consumer and
producers. Consumers come in the market place with demand of certain goods. Based on
consumers demand sellers or producers supply goods. Transaction of goods occur when interest
of buyers coincides with that of sellers’ interest. Different form of market exists each having
their own characteristics. There are different means of classifying market. Number of market
participants is an important attribute of market differentiation (Zinn et al., 2016). The two main
categories of market are perfectly competitive market and imperfectly competitive market. Under
imperfect competition, there are monopoly, oligopoly and monopolistic competition.
Monopolistically competitive market and perfect competition are closely related with each other.
The two markets though have various similarities but also have distinguishing features. The
similar and discriminatory features of these two markets are as follows.
Basic features of perfect competition and monopolistic competition
Buyers and sellers: Number of buyers and sellers are basic means of market classification.
Under perfect competition, there are several buyers and sellers in the marketplace. The presence
of many buyers strengthens competition among the sellers. There are so many sellers in the
market that every seller has opportunity to capture only a small share of the market. Similar is
the case for monopolistically competitive market (Frank, 2014). This form of market as well has
numerous sellers.
Market power: In the competitive market, several sellers compete in the market place. As each
seller has only a small share in the market, there does not exist any market power in the hands of
sellers. As the sellers do not have any market power, they sell products at price determined in the

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market. Sellers are price taker in perfectly competitive market. In monopolistic competition also,
there are many sellers causing a significant reduction in market power. However, as sellers sell a
differentiated product they enjoy some market using, which they decide price of their own brand.
Type of good: The perfectly competing sellers sell an identical or homogenous product. As
similar product is available to every seller if any one of them charges a high price, buyers
automatically shift their demand to other seller. With monopolistic competition, sellers though
have similar type of product by nature, but they make it different with differentiation mechanism
(Mankiw, 2016). A differentiated product is sold in monopolistically competitive market in
contrast to identical product under perfect competition.
Advertising: As all the goods are identical or homogenous, there is no need of advertising in
perfectly competitive market. In the monopolistically competitive market, since differentiated
product is sold sellers spends a significantly large amount on advertising to promote their own
products.
Free entry and exit: In both the market, there is little or no barriers to entry or exist the market.
When existing sellers enjoy significant amount of profit then new firms enter the market. In
times of economic loss, firms leave the industry (Cowen & Tabarrok, 2015).
Equilibrium under perfectly competitive market
Short run equilibrium
In production operation, short run defines a period where firms cannot fully have
expanded because of constraint in input. Sellers are price takers under perfectly competitive
market. Because of fixed price, average and marginal revenue in the perfectly competitive
market are both equal to price. The demand curve and marginal revenue curve are horizontal

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straight line (Baumol & Blinder, 2015). Profit maximization of firms occur at the point where
marginal revenue equals with the marginal cost. Under perfect competition, price coincides with
marginal revenue and price is set at the level equal to the marginal cost. This is the first order
condition for profit maximization in the short run. The second order condition that needs to be
fulfilled is that slope of marginal revenue is less than the slope of marginal cost.
In the short run, competitive firms have opportunities to enjoy an above normal profit.
When price is more than average cost then total revenue exceeds total cost giving firms a
supernormal profit. Total revenue fell short of total cost when price goes below the average cost.
Firms in the perfectly competitive market thus in shirt run can enjoy either profit or may suffer
from a loss (Stein & Allione, 2014). The various short run situation in a perfectly competitive
market is shown in the following figures.
Figure 1: Short run profit in competitive market
(Source: as created by Author)

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Figure 2: Short run normal profit in competitive market
(Source: as created by Author)
Figure 3: Short run loss in competitive market
(Source: as created by Author)

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Long run equilibrium
As described above, in the short run there can be three different situations; supernormal
profit, normal profit or loss. In the long run however, this is very unlikely to happen. Any
situation yielding other than normal profit leads adjusted in the long run and lead to a normal
profit. Consider a situation where competitive firm enjoying more than normal profit by charging
a price higher than average cost. The resulting profit in the industry attracts new firms to enter
the market. When new firms enter the market then supply in the industry increases leading to a
low price and thus erode all the profit (Pindyck & Rubinfeld, 2015). When competitive firms
suffer from economic loss then existing firms leave the industry. This raises industry price and
the adjustment continues until normal profit is achieved. The long run equilibrium of the
competitive industry is shown in the figure below.
Figure 4: Long run equilibrium under perfect competition
(Source: as created by Author)

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Equilibrium under monopolistically competitive market
Short run equilibrium
The demand curve or average revenue curve in monopolistically competitive market is
downward sloping. Firms here have market power and can control price to some extent. The
equilibrium is found where marginal revenue and marginal cost matches with each other. Like a
perfectly competitive firm monopolistically competitive firm in the short run can make either
economic profit or loss depending on the extent of market power (Hill & Schiller, 2015). These
two short run conditions are shown in the figures below.
Figure 5: Short run profit of monopolistically competitive market
(Source: as created by Author)

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Figure 6: Short run loss of monopolistically competitive market
(Source: as created by Author)
Long run equilibrium
The free entry and exit mechanism both in the perfectly competitive and monopolistically
competitive market eliminate all the excess profit or loss in the long terms leaving the industry
only with normal profit. However, the industry output is different in the two markets. In the long
run competitive firm operates to the minimum point of average cost while monopolistically
competitive firms conduct its long run operation to the left of minimum average cost (Coto-
Millán, 2013). This results in an excess capacity in the industry.

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Figure 7: Long run equilibrium monopolistically competitive market
(Source: as created by Author)
Productive and Allocative efficiency
Production is considered to be conducted efficiently when firm is able to produce output
with an efficient combination of input. The productive efficiency is achieved when production is
done with least possible cost indicated by minimum average cost.

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Figure 8: Productive Efficiency
(Source: as created by Author)
Allocative efficiency signifies socially preferred production and allocation points. This
implies production points where marginal benefit equals to marginal cost.
Figure 8: Allocative Efficiency
(Source: as created by Author)

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In a perfectly competitive market, firms comply conditions of productive and allocative
efficiency. Under long run equilibrium of the perfectly competitive market, firms produce at
minimum point of average cost and hence achieve productive efficiency. Monopolistically
competitive firm by contrast stop operation to the left of minimum average cost leaving excess
capacity and therefore is productively inefficient.
Under perfect competition price always equal marginal production cost. This means
marginal benefit equals to marginal cost yielding allocative efficiency. In monopolistic
competition firms always charge a price above marginal cost and hence never achieve allocative
efficiency (Holmes, Hsu & Lee, 2014).
Answer b
Features of Oligopoly market
The market having relatively small number of sellers and numerous buyers is known as
oligopoly market.
Followings are some major features of an oligopoly market
 In the oligopoly market a few firm are present in the market marketplace. There is severe
competition among the few sellers capturing a significant market share. They have
considerable market power to affect price and output volume.
 The marketing strategy of each firm depends on strategy taken by its rival firms. Strategic
interdependence of firms is one if the major features in this form of market (Lee &
Johnson, 2015).

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 In this form of market non-price competition exists among firms. To prevent price war,
firms generally does not involve in price competition. Instead they compete in terms of
advertisement, brand promotion, betterment of service quality and others.
 To increase sales volume firms, make significant investment for advertising expenditure.
 In the oligopoly market, the demand curve has a kink. In one part of the demand curve
there is elastic demand while in other part there is inelastic demand (Rubinfeld &
Pindyck, 2013).
Figure 9: Oligopoly market and kinked demand curve
(Source: as created by Author)
Australian Banking Industry and Oligopoly:
Market that is recognized as the oligopoly market is separated from some of the sellers
that are selling similar but with slight differences. The market generally has higher barriers for
entry however the behaviour of the companies is subjected to be predicted based on the

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competition of the firm (Canto et al., 2014). The banking industry of Australia signifies the
features of oligopoly market and the Australian banking is the example of the oligopoly market.
Major banks such as NAB, ANZ Banking Group, Westpac and Commonwealth Bank.
For a country it is isn’t very astonishing to operate under the banking sector. As evident
from the feature of the banking industry the scale of the economies and the retail margin makes
the industry to be inevitably fall under the oligopoly banking sector. Australia is considered to be
not only the industry that has oligopoly banking industry (Schwager & Etzkorn, 2017). However,
in the nations such as Norway and Finland, there are three largest banks that capture the market
share of around 84 and 85 percent individually.
There is a higher amount of barrier for entry in the market for the Australian Banking
Industry and such barriers are not in the form of regulatory or capital requirement but also due to
the higher amount of market power of the big banks operating in the industry. Entry of the new
companies with greater dominants of incumbents involves higher amount of cost and risk. Even
though these banks is are considered to be separate distinct unit, researches have revealed that
majority of the shareholders and members of the board is identical (Rios et al., 2013). These
people are generally the overseas banks, fund managers of the HSBC, JP Morgan Chase. The
below stated tabular representation represents the four major banks;
Table 1: Table representing four major banks
(Source: Jones et al., 2016)

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Herfindahl-Hirschman Index (HHI) is one of the most common determinant of the
present degree of level industry. This represents that the size of the industry and the extent to
which the competition prevails in the industry. Depending upon the index of HHI it is understood
that the Australian banking industry is turning out to be more focused (Hildenbrand, 2014). The
rising amount of concentration in the banking sector has paved the acquisition of the St. George
Bank Ltd and CBA acquisition of Western Australia Bank in the year 2008. The below stated
tabular representation provides the measurement of the HHI index for the Australian Banking
Sector
Table 2: Tabular representation of the Australian Banking Sector
(Source: Daganzo, 2014)
Political Support for the Australian Oligopoly:
Politicians generally oppose oligopolies in the country but as evident in the situations of the
Australian Banks the success of the oligopoly structure often gains the support of the politicians.
From the spokesperson of Finance, it is understood that the supported structure of the oligopoly
and has suggested that the nation must assist in forming an oligopoly structure. The structure of
the oligopoly is considered to introduce innovations and increase the overseas competition

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(Daganzo, 2014). The oligopoly structure of the market is regarded to introduce innovation and
has increased the overseas competition. The support is not restricted to the politicians and it
extends to the central bank.
Economic consequences of oligopoly in Banking Industry:
Unlike the other industry attention in the banking industry helps in reducing the degree of
competition that results in higher price. Higher amount of interest is generally regarded as the
by-product of the increased competition (Taussig, 2013). The higher amount of profit lowers the
incentives of banks that helps in acting in different manner given there is only external pressure.
The external sources of pressure are viewed as the intervention, action groups and the
competition from the mutual banks.
Answer c:
Crisis of housing affordability in Australia:
Some of the major capital cities of Australia has to go through the rise in the price of
property from the year 1998. States such as Sydney and Melbourne has experienced increase in
the property prices to greater than 105% after the year 2009. The higher pricing of the housing
sector is combined with the lower rise of wages (Bernanke et al., 2015). The lower amount of
interest rates promotes the individuals to borrow and consequently result in higher amount of
debt. In terms of GDP the household debt has risen to 130 percent of the GDP. This leads to
unjustifiable rise in demand for the property. As evident from the report of the housing
affordability crisis has suggested that the average price of the houses Australian capital cities is
nearly equivalent to the average income for more than seven years. below listed are some of the
factors that have contributed to the housing affordability crisis are stated below;

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a. Financial deregulations raise the accessibility of the credit
b. After the GFC, lower amount of interest rates prevails in Australia and the lower amount
of interest rate helps in increasing the capacity of the due to the lower amount of
repayment (Laibson & List, 2015).
c. Government restricts the availability of new land and results in limited supply of housing
d. Greater demand for housing from the increased populations
e. Higher amount of foreign investment in the real estate market
f. The favourable system of taxation helps in influencing the investment in the property
market.
Demand side factors impacting housing affordability:
Higher income:
With increase in the productivity and greater amount of earnings from the export the
average income of the household and the level of wealth have risen. The household sector is
willing spend a portion of their earnings and their wealth (Case et al., 2014). As a result of this
there is an improved value of the housing. In this phase, the demand for the holiday homes
especially those that are situated in the coastal regions. Opposing to the rising demand there is
restricted reaction from the supply side.
Demographics:
A fall in the average size of the housing sector is accompanied with the declining size of
the household. This comprises of the marriage, increasing incidence of the separations and

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divorce has paved the way for the demand in the housing sector for the given set of populations.
Australia generally has greater growth of populations being the advanced economy. Greater
incidence of immigration to Australia has contributed greatly to the increased population rise and
the rising population raises the demand for the housing sector.
Higher rents:
The increasing trend of the rents leads to the change in the desire of people giving from
taking rent to purchasing their own house instead of renting them.
Lower amount interest rate:
The standard amount of interest rate on the housing loans has resulted in considerable fall
during the mid-1990 to the early years of 2000. As a result of this there was availability of the
funds in purchasing the new houses and increases the demand.
Solution to the housing crisis:
To address the affordability of the crisis the government has undertaken numerous
policies (Miller & Benjamin, 2015). The Australian government budget allocated large amount
of fund to provide the people with the facilities of purchasing house and a detailed discussion of
the same has been stated below;
First house purchasers:
The policy of the first house purchasers makes the use of the superannuation deposits to
purchase the house however the government contribution has contributed to the solution of
bridging the gap of housing crisis.

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Retired individuals:
The government has declared in its policies that it would providing exemptions to the
superannuation limit in order to increase the supply of the housing (Paciorek, 2013). To promote
the housing affordability, the retired person is provided exemption on the stamp duty in the case
of purchasing the small house and offering tax rebates based on the profit generated from the sale
of their present house.
Land:
To increase the housing affordability, the Australian government has released the supply
of commonwealth land to meet the demand.
International purchasers:
The Australian government has undertaken strong measures for overseas purchasers and
the government promotes housing affordability with demand concertation in few of the areas.
Probable supply side solutions:
To assess the problems of increasing housing price and continuous housing affordability
crisis and the supply of household must be met with the demand (Jones et al., 2016). The
solution of supply side is stated below;
The primary challenge is to locate the land for making house with the access to land
being the major constraint in the supply of housing affordability. The use of land to great extent
is to assist the lowering of standard housing cost and the country wise mapping reveals the
mapping of several opportunities.

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Cities should cut down the barriers of building houses by promoting the structure of
governance to represent the stakeholders. The original execution of the houses must be
rationalized.
Increasing the supply of the houses could be done by promoting the construction
industry. With lower amount of productivity from the building codes, procedure of permitting
and changes in the demand. It is also recommended that incentives must be provided at the
reasonable rate as this helps in increasing the housing supply.

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