MBA Economics: Evaluating Market Dynamics and Government Policy Impact

This report provides an analysis of Australia's energy market, characterizing it as a monopoly market structure dominated by the Australian Energy Council. It evaluates the price and output behavior of large energy firms within this structure, highlighting the potential for market failures due to inefficient resource allocation and government policies. The report discusses a case study involving coffee prices, examining the impact of raw material costs and competition on company profits. It also explores the reasons behind companies slashing prices during economic downturns, emphasizing the importance of maintaining market share and customer base. The document is available on Desklib, a platform offering a wide range of study tools and solved assignments for students.

Running head: ECONOMICS ASSIGNMENT MBA
Economics assignment MBA
Name of the student
Name of the university
Author Note

1ECONOMICS ASSIGNMENT MBA
Answer 1:
A.
Energy market of Australia includes both electricity and gas, which represent
monopoly market structure. This is because the Australian Energy Council operates this
entire market with the help of three agencies, which are, Australian Energy Market
Commission (AEMC), Australian Energy Regulator (AER) and Australian Energy Market
Operator (AEMO). AEMO operates the National Electricity Market (NEM). Hence,
according to the characteristics of a monopoly market, it has single seller and large number of
consumers. However, competitive marker structure can be seen in electricity supply market
based on competitive wholesale generation sector and competitive retail sector. In this
context, monopoly market structure is taken under consideration as entire power of operation
is concentrated on the government and no private sector has entered into this market.
B.
In a monopoly market structure, single seller or firm operates the entire market
through selling products or services to large number of consumers. The chief feature of this
market is that the seller can set the price independently without considering any external
impacts and for this the person or firm is called price maker. On the other side, customers buy
products at this price though the amount of quantity demanded depends entirely on
consumers and elasticity of the product. In this market, downward slopping demand curve is
seen, representing that higher price can reduce the quantity demanded of consumers while
lower price implies the opposite scenario. In this context, an appropriate diagram can
represent the price and output behavior of a large energy firm, which is the government,
under this market structure.

2ECONOMICS ASSIGNMENT MBA
Revenue and cost
O Q
Output
MR
AR=D
ACMC
P
C
E
Figure 1: Monopoly market
Source: (created by author)
In above figure, a downward slopping average revenue curve is drawn representing
demand curve of the market. Marginal revenue (MR) curve also slopes downward. To obtain
equilibrium price and corresponding output, two conditions are required. Firstly, the marginal
revenue needs to be equal with marginal cost, which is, MR = MC. Secondly, marginal cost
curve intersects the marginal revenue curve from below. In figure 1, this equilibrium
condition occurs at point E, where corresponding price and output are P and Q, respectively.
The downward slopping demand curve follows the demand law representing an inverse
relationship between price and quantity demanded. Hence, by charging higher price, the firm
can reduce its quantity demanded for electricity and gas. However, energy has inelastic
demand, which means quantity demanded of this product may remain unchanged or may
decrease by small amount after increasing the price of per unit electricity or price of gas. The
monopoly firm can earn excess profit, normal profit or can incur loss in both short-run and
long run, as other firms or sellers cannot enter or exit from this market. In above figure, firm

3ECONOMICS ASSIGNMENT MBA
has earned excess profit, represented by the shaded area. The cost of this firm has represented
by C while profit is represented by the difference between price and cost.
Answer 2:
Market failure occurs due to inefficient allocation of resources under a free market
and this sometimes causes net social welfare loss. This economic phenomenon has occurred
due to various reasons like externalities and monopoly, factor immobility and information
asymmetries. One of the main examples of market failure is public good, whose consumption
cannot be limited by producers.
A.
Australia has possessed ample amount of energy resources, which in turn has made
this country one of the leading exporters of uranium, coal and natural gas. This energy sector
is experiencing some significant transformation within the domestic market. The country has
required some energy security concerns due to some issues. For instance, oil production in
domestic economy has been decreased while dependency on imported oil product and oil
supply chain has been increased rapidly. Thus, Federal energy policies start to support the
natural gas and coal mining in 2016 through providing subsidies for using and producing
fossil fuel. This is because those industries have significant contribution to the government
revenue and foreign exchange of this country. In 2007, the Labor government proposed to
introduce an Emissions Trading Scheme by 2010 and expanding of mandatory renewable
energy target for confirming 20% electricity supply from renewable sources within 2020. In
2015, the Abbott Government reduced the target of renewable energy from 41000 GWh per
year to 33000 GWh per year. However, market failure has occurred within this industry.
B.
This policy of the Australian government is related with monopoly market. Based on
general equilibrium concept of economics, a monopolist can recognize or generate a stiff

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demand curve and can prohibit supply, which in turn can generate deadweight loss in the
economy. This under provisions of products within this market can be said as market failure.
In energy market, entire power is concentrated into the Government. As a result, the
government can charge higher prices for electricity and gas from consumers through
inefficient allocation of resources. This economic phenomenon can be described as monopoly
power. Moreover, this market experiences lack of competition, which further provides lower
incentives to producers.
C.
The International Energy Agency (IEA) has stated that policy failures within the
renewable industry and a sufficient competition in electricity and gas markets have generated
a higher level of carbon emissions, which is higher compare to its international commitments
along with higher electricity prices for the last 8 years. Due to monopoly market structure
within the energy market, this market failure occurs in Australia. Hence, lack of competition
and charging higher prices within the energy markets have represented market failure in
Australia.
Answer 3:
A.
Producers set the price of a product through considering entire production process
until it comes to the market as a final good. Coffee beans are the raw materials that are used
to produce roasted coffee. Hence, increasing price of this raw material during production
leads the cost of producer. As a result, the concerned person charges higher price for roasted
coffee.
One pound of roasted coffee produces 50 cups of coffee then price of one-cup coffee
would increase by $ 0.01. However, producer can changes the productivity of roasted coffee
through changing human capital and technology. This increasing price of coffee beans can

5ECONOMICS ASSIGNMENT MBA
lead the producer to produce coffee through applying proper management so that increasing
cost cannot reduce the customers of this product.
B.
According to the given report, J.M Smucker Co. increases its coffee prices by 9%. In
market, Smucker has huge number of competitors though it has a brand name along with
brand value that can help this company to sustain within the market of competitive
environment. However, through increasing product price by 9%, J.M. Smucker Co. can
increase its cost of the product and this in turn can lead customers to go somewhere else for
purchasing this good by comparatively cheaper prices. Due to higher elasticity of demand and
strong competition within the coffee market, small change in price can change the number of
customers of this company significantly. In addition to this, change in quality of raw
materials can affect the demand for product. Increasing price of coffee beans has influenced
other three major coffee producing companies to increase their price of coffee as well. Thus,
cost of coffee has increased as a whole and consequently, the specified company has not lost
its customer base. Moreover, due to increasing cost of raw material and increasing price of
coffee, the amount of profit for this company has remained same as before. If Smucker would
decide to increase its coffee price for earning higher profit then it could lose its customer
significantly. As competition is strong, customers can change their preference for coffee
easily. Hence, from this discussion it can be said that, the profit of Smucker will not rise by
9% after increasing the retail prices by the same percentage.
C.
The company slashes prices due to some reasons. During recession, the company can
reduce its price of product for maintaining customer base. Some companies cannot change
their price level as they are charging lowest possible prices. Hence, further reduction of
coffee price can lead those companies to incur losses. During recession, income of consumers

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decrease and the economy experiences slow growth. Most of the companies set
comparatively higher price for their products to earn excess profit. Hence, for these
companies, decreasing cost of product is economically feasible. This further help those to
maintain a market share as charging lower price can help them to sustain within the market of
strong competition during this phase of economy. Market share represents the financial
support of a company. Hence, by purchasing a share of the company, customers actually
invest in it expecting that some profit can be earned in long run after the economy recovers
its condition. When companies decrease prices, it actually describes customers about their
company name, as they want to receive a better deal with this company. This can provide
assurance to these customers for future.