Economic Analysis: Monopoly Market, Price Setting, and Regulation

This essay delves into the intricacies of monopoly market structures and the role of government in regulating prices. It begins with an introduction to fundamental economic principles, including microeconomics and macroeconomics, and explores different market structures like perfect competition and monopoly. The essay then focuses on the concept of monopoly, examining why governments intervene in price setting within such markets, particularly in natural monopolies. It discusses how governments implement price controls, such as setting price ceilings, to ensure fair pricing and access to essential goods and services. The essay also touches upon the Australian economy's equilibrium stage and the factors that influence its stability. The essay highlights the importance of government regulation in addressing market failures and protecting consumer interests within monopoly settings. Finally, the essay concludes by summarizing the key findings and emphasizing the significance of economic principles in understanding market dynamics and government interventions.

ESSAY QUESTION

Table of Contents
INTRODUCTION...........................................................................................................................1
Question 1: Why and how government regulate the price setting in the monopoly market
structure............................................................................................................................................1
Economic principles...............................................................................................................1
Different principles of the economics....................................................................................2
Different market structure......................................................................................................3
Why government set the price in natural monopoly..............................................................5
How government fix the price in natural monopoly..............................................................6
Question 2: Stable economic Equilibrium stage and assessment to find that Australian economy
is at the Equilibrium stage................................................................................................................7
Economic Equilibrium............................................................................................................9
Australia Current Equilibrium state......................................................................................11
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Economics is the process of evaluating manufacturing, distribution and consumption
of products and services. In simple words it can be said as it is the choice of people make the
products and why and how they make them when they are making the purchase. The study of
economics is classified under two categories that is microeconomics and macroeconomics.
Economic principle is the statement that states the inter-relationship between the various
economic factors such as cost, demand, supply, revenue, market structure etc. that explains
what factor may cause what to the economy and what is going to happen in the certain
circumstances, it is also known as economic law. Micro-economics is the study of economics
which are always referred for the individual or a specific company whereas macro economics
are refereed to the big picture of the economics and analyse the different companies and
global economic factors.
Question 1: Why and how government regulate the price setting in the
monopoly market structure
Economic principles
It is basically satisfying the unlimited wants of the consumer with the limited
availability of the resources. In other words it can be said as it is the study of different choices
of customers and how the consumer choices affect the market and different countries. The
consumer can be a organisation, company, government, household, tourist, individual or
group and the consumer goods can be both finished and unfinished goods. When the clients
buy something, it is that they hold the possession of that goods which may be in terms of
wearing, listing, watching etc. Buyer is the person who purchase the goods and services from
the market place, it can be for the re-sale or the consumption (Choi and Seppi, 2016).
A single buyer have various choices where the four marketing principles that can be
applied that is buyer can trade of the goods and services, he or she has to give something in
return to that products and services, they should consider some margin and they need to
respond for the incentives. Trade off is the different between the demand and supply so the
economy should decide properly what shroud be offered. Something is return is what when
the customer buy something from the seller, he or she has to give something in return for that
equal value, that can be in terms of goods, services or money (Bradley and Turon, 2017).
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There are two types of economics that are micro-economics and macro economics,
micro-economics is the branch of economics which studies the behaviour of the single person
or firm in making the decision regarded the allocation of the scare resources and
communication between the organisation and individual. The key objective of this economic
is to evaluate the mechanisms that helps to establish the relative price of the different products
and services with the proper allocation of the limited resources (Luo and Subrahmanyam,
2016). It is the sum total of economics that deals with the basic issues such as unemployment,
growth and inflation. There are several factors that are involved in the micro economics such
as demand, if the product is preferred by the consumer and he wants to buy it again and again
at that time the demand will increase which leads to enhance in the price of that products.
Other than that supply is other factor where if the supply of the goods is more than the
demand then the price of that product will fall. There is good relationship between the demand
and supply, where if the price of the product fall, the demand increases and the supply will
decrease and vice versa.
Whereas macro economics is the study of economics as the whole where all the global
companies have been considered and includes such concept like gross domestic product,
growth rate and unemployment rates. The study of macro economics is very significant for the
government for making policies, regulations and economic decision (Buss and Dumas, 2017).
Different principles of the economics
There are several economic principles that every country need to follow so that they
can create stable balance between demand and supply, price, flow of money etc. the principles
are as follows:
Scarcity: it I the most significant economic problem which each country is facing, as
the demand of every individual is unlimited and that can not be fulfilled by the limited
resources. The products or services that have non-zero price are being considered as the scarce
(Pollak, 2016).
Markets: It is the place where the buying and selling of goods and service take place,
every market have its demand and supply curve which state that the quality of goods are
willing to purchase and sell at the different price points. The demand curve is generally
downward sloping and the supply curve are upward sloping (Choi and Seppi, 2016).
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Trade off: it is the situation where one need to scarifies the one quality in order to
gain other quality.
Rational people generally think for the margin: The people who make rational
decision will always prefer that the marginal benefit should be grater than marginal cost.
The individual always respond to the incentives: it is something which motivate the
individual to act which may includes both rewards and punishment, they react because they
compare both cost and benefits (Bradley and Turon, 2017).
Different market structure
Perfect Competition And Its Impact On The Firm
Perfect competition refers to the market conditions in which perfect competition exists
between the firms operating in the market. Such a market is a myth in the real world. Few
examples of such markets are fishing, farming or company's stock. By perfect competition it
means that the product sold by the firms are identical to each other which implies that it is
entirely on the customer preference from where to buy the product and therefore the supply
and demand forces of the market decides the price of the commodity in the market (Luo and
Subrahmanyam, 2016). Some key features which define the perfectly competitive market are
as follows:
Excessive numbers of buyers and sellers: The reason for the perfect competition is
that in this market there are large numbers of buyers and sellers such that no one is in position
to influence the prices of the commodity.
Identical Products: Product having same features and characteristics are sold in such
market so that buyers get the same product from every seller.
Sound Knowledge of the market: Buyers of the product possess sound knowledge of
the product, prices and factors of production prevailing in the market.
Free to enter and exit from the market: Firms operating in such market are free to
enter and exit the market based on their will. This is the reason why n numbers of buyers and
sellers operate in such market structure (Buss and Dumas, 2017).
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No single firm can control the prices: As the buyers are well informed about the
product, price of the product is the same and identical products are sold therefore no single
firm is in a position to control the market conditions and prices.
Such market structure has both positive and negative impact on the firm. It is
advantageous because the profit is purely the result of competition and no firm can earn
abnormal profits in the long run however it is possible to earn abnormal profits in the short
run. Disadvantage of this market structure is that the firms will not be benefited from such
competition in the long run because they will not be able to earn above normal profits because
P=MC (Pollak, 2016).
Concept of monopoly and price setting
Monopoly is a restrained form of market structure where only there is a one producer
selling a single unique product for which there exists no substitutes. Monopolist attempts to
dominate the market by putting restrictions on the entry into the market by charging high
prices for the goods, imposing licences and copyrights to operate in the market, creating
artificial demand for goods and thereby raising the prices above normal. Such market
structures needs to be supervised by the government to avoid the exploitation on the part of
the customers. Sometimes government itself support monopoly in certain kinds of goods and
services for the purpose of national security or when the resources available to produce such
goods or provide such services are scarce and need to be conserved (Choi and Seppi, 2016).
This kind of market structures is also very rare in real world yet few of the examples of
monopoly are oil industry, postal delivery, Microsoft etc.
Price Setting Under Monopoly :
For a firm to earn a title of monopolist it has to charge price above the marginal cost
and earn supernormal profits. In this market structure the firm is price maker and the market is
the price taker. Although it has sole control to regulate the prices but it cannot charge a price
which is unaffordable by the buyers of the market. The monopolist firm will be in equilibrium
only when MR=MC so as long as MR is greater than MC the firm will find it profitable to
expand its output and reduce the output when MR is less than MC the firm will finally reach
equilibrium when MR=MC. A monopolist firm can therefore achieve economies of scale by
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expanding the output of the goods and reducing fixed costs thereby achieving benefits in long
run (Bradley and Turon, 2017).
Why government set the price in natural monopoly
The monopoly is the firm, which choose that at level of output they need to produce,
as they manufacture fewer products but their price is much higher than compare to the
competitive companies. They produce those goods where the price of product is high then the
marginal cost where they initiate the low allocation of the resources for the products. They
restrict the output and enhance the price in order to earn large profits. Some example of the
natural monopoly are natural gas, cable television etc. the government face some difficulties
while dealing with them such as electricity industry. In such industries they keep their market
on the base of the price and output in order to maximise their profits. They produce goods at
which the marginal cost is equal to the marginal cost. It is the situation where the marginal
revenue is less than the price and marginal cost is less than price. Hence, there is need for the
government regulation. They are concerned for getting right amount of product for the right
people at the right price so they set the price ceiling for the monopoly products like electricity
where the price is equal to the marginal cost for the organisation (Luo and Subrahmanyam,
2016). The ceiling of the price where the government have decided to make the price equal to
the average total cost in order to earn the normal profit or break even so that they can keep
their firm in the business and that is known as fair return price.
The products that are come under the monopoly are necessary for the people such as
natural gas and electricity. These companies have control over their prices, they make their
price at the high level in order to earn profit. In such situation the individual or families who
are not able to pay their price will not able to fulfil the necessity. So the government have
regulated over the price of these companies in order to satisfy the needs and wants of the
public. The companies try to abuse the customers, the goods are primordial for all the people
so some people will get ready to pay large amount to procure those products. The monopoly
usually increase the price of the products which are inelastic so the government are regulating
over the prices of those companies to lower down the abusiveness of the customers.
Government tries to prevent the exercise prices and without any their intervention, monopoly
organisation will charge the price above the competitive equilibrium (Buss and Dumas, 2017).
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They also try to promote the competition in the monopoly market so that there is less need for
their regulation
How government fix the price in natural monopoly
There are several ways by which government regulates the monopoly market, that are
as follows:
Price capping: There are newly private industries which make their monopoly such as
water, gas, electricity etc. the government have made some bodies for the each industry which
have the eves over those companies and not allow those organisations to increase the price
and abuse the customer. The bodies are as follows:
 OFGEM for the electricity and gas market
 OFWAT for the tap water and
 ORR for the office and rail (Pollak, 2016).
They also use X method which limit the increase the price of monopoly products which is also
called as RPI-X where the X is the amount at which they lower down the price such as if the
inflation rate id 3% and the X is 1% then the organisation can increase the actual price up-to
2% that is 3-1.
Marginal costing: The government force the monopoly organisation to fix the price
according to the marginal costings such as price(P) is $15 so 100-quantity= P then Q is equal
to 85. if the price is $15 and Q is 85 then the Average cost will be $19.71 so the profit
becomes ($15- $19.71)85 that is (-400.35) which is loss so the government should help the
company to set they price equal to the marginal cost so that the organisation will not leave the
market (Choi and Seppi, 2016).
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Illustration 1: Marginal costing
(Source: Marginal costing method, 2016)
Two part tariff: It is the charge which is called as admittance fee, is the fees which is
administrated by the government over the monopoly market. They sellers if pay the fees they
are allowed to sell the product with the average mark up which is set by the government
bodies. It is called as extra fees which is fixed by the government so that the monopoly seller
does not take the advantage of the customers.
Question 2: Stable economic Equilibrium stage and assessment to find that
Australian economy is at the Equilibrium stage.
Demand and supply
In the economics terms demand is the ability and willingness to but and consume the
products and services by consumer. There is inverse relationship between the demand and
price, if the price of the commodity will increase the demand for it will decrease and if the
price will decrease the demand will increase. This is also known as low of demand where all
the factors that effect the demand remains the constant expect price and if the price changes,
the demand will also change in the inverse way (Bradley and Turon, 2017). The demand curve
shows the demand for the different products at the different level of price. It is the downward
sloping line which clearly state that the demand and supply have inverse relationship.
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Illustration 2: Demand curve
(Source: Demand concept, 2015)
Supply is defined as the quantity of the commodity that is being offered for the sale at
the given price at the given period and in the given market. There is direct relationship
between the price and supply which states that it the price increase the supply increases and if
the price decreases the supply diminish (Luo and Subrahmanyam, 2016).
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Illustration 3: Supply curve
(Source: Supply concept, 2015)
Economic Equilibrium
It is the condition where the different economic forces are stable and balanced, it Is
also defined as the stage where the demand is equal to supply for the different products with
the equilibrium price where the demand and supply curve intersect each other. It is the point
where all the economic forces of the particular goods, market or industry reach at the optimum
balance level between the supply and demand including the price and cost level. It can be
applied to the different variable such as interest rate which allows the highest growth in the
financial and banking sector which create the large number of employment opportunities in
the different sectors. It can be dynamic or static or it can be in the single market or multiple
market (Buss and Dumas, 2017).
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The graph state that the D is demand curve and S is supply curve, AB is the point
where these curve intersect and this point is called as the equilibrium stage where the demand
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is equal to supply and P0 is the price where the customer is ready to pay according to different
supply and demand
Australia Current Equilibrium state.
`The Australian economy is current stable, as per the ABE's executive committee, the
members of the committee communicate that the economy is at the boost level where inflation
have the great impact over the policies made by the government. The country have the
abundant natural resources which give the various benefits to the economy. Due to effective
government system and proper functioning political system and independent bureaucracy have
given the entrepreneurial development. It is the wealthiest Asia's Pacific nation. In the year
2009 there was global recession but Australia haven done large spending on the labour
government. It has become the internationally competitive in technologies, different services
and manufacturing quality products (Pollak, 2016). The most important source of export of
them is agriculture and mining. The corruption. The regulatory environment of the Australian
have become the world's most efficient and transparent and highly contributing to the different
entrepreneur. The export and import together contribute 415 of GDP and the average tariff
rate is 1.9%. The GDP per capita of the Australia have been increase up to 51,878 in the year
2017 which was 51363 in 2016. The growth rate have been increases that is 2.5 in 2017 and it
was previously it was 2.4 in year 2016. Currently they have done export of $192 billion and
import of $190 billion. This state that Australia's currently is at stable equilibrium states (Choi
and Seppi, 2016).
CONCLUSION
It can be concluded from the project report that there are several market structures
such as perfect competition and monopoly, where in the perfect competition there are large
number of buyer and seller and they are price taker whereas monopoly is the market structure
there is only single or few sellers but large buyer and they are price maker. The government
are taking various measures such as marginal costing, X method etc. in order to keep control
over the price of monopoly products. The report includes the equilibrium theory which state
that equilibrium is the state where the demand is equal to supply. Currently Australia is the
stable equilibrium stage where import is $190 billion and export is $192 billion.
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