TECO 401 Economics: Price Elasticity and Monopoly Analysis

This economics report analyzes key economic concepts, including price elasticity of demand and market structures. The report examines the price elasticity of demand for tobacco products, automobiles, and alcoholic drinks, providing insights into how price changes affect consumer behavior. It also explores the concept of complementary products and their relationship to price elasticity. Furthermore, the report investigates the monopoly power held by Australian Post in the Australian market, discussing its impact on small businesses and consumers. It evaluates the benefits the organization derives from its monopoly and explores the consequences of its exercise of this power. The report also examines potential government interventions, such as price capping, merger policies, and breaking up monopolies, to control the monopoly power and protect consumer interests. The analysis is supported by references to academic literature and industry reports, providing a comprehensive overview of the topics.

Running head: ECONOMICS
Economics
May 11
2019

ECONOMICS 1
Table of Contents
Introduction................................................................................................................................2
Price Elasticity of Demand for Tobacco products.................................................................2
Price Elasticity of Demand for Automobile...........................................................................3
Complementary Products...................................................................................................4
Price Elasticity of Demand for Alcoholic Drinks..................................................................4
Global Price Elasticity in Alcoholic Drinks.......................................................................6
Monopoly in the Australian Market.......................................................................................6
Government interventions to control the monopoly power...............................................7
Conclusion..................................................................................................................................9
References................................................................................................................................10

ECONOMICS 2
Introduction
Economics is considered to be one of the most important subjects that must be studied in
order to understand its complexity. It illustrates the complex forces that are operated in the
economic system (Piketty, 2017). Besides this, it also describes the relationship between
customer and producer, management, and labor, etc. Even, it describes how the activity in
one segment influences the activity in another segment. Without the complete knowledge of
economic systems, the management of the company cannot work effectively and it may be
impossible for them to work in the business environment (Butler-Bowdon, 2017). The aim of
this report is to discuss some of the key topics of economics that is price elasticity of three
products and monopoly market structure in the Australian market.
Price Elasticity of Demand - Tobacco products
A central structure of the economic theory is that the decreasing or increasing price of any
product results in decreasing or increasing the product’s demand. Price elasticity of demand
is said to be the degree at which utilization of a goods decreases or increased after the
increase or decrease in its price. If the price elasticity of demand for a specific commodity is
low or if it is inelastic then the demand for that product will decrease or increase at very little
level like the retort to the variations in the price (Mücka, 2016). For instance, if the price
elasticity for a specific commodity is 0.1, then the demand for that product will decrease by
just 0.1% for every 1% increase in the product’s price. The demand for the product will
decrease by 1% for a 10% increase in the price, and by 2% for the increase of 20% in the
price. Demand for the good with high price elasticity will decrease at a high level as the
response to the increase in the price. If the price elasticity of demand for the commodity is
about 1.0, then the demand for the same product will decrease by 1% for every rise of 1% in
the price. The demand for item will decline by around 10% for the increase of 10% in the

ECONOMICS 3
price of the product. Similarly, there will be decline in the demand by 20% for the increase of
20% in the price of the product, 100% for a 100% increase in price (Tobacco in Australia,
2019).
For the tobacco products, the demand is not so elastic in comparison to other customer goods.
The study has reliably verified that rise in the price of the tobacco products are tracked by a
reasonable decrease in the number of individuals smoking and the number of tobacco items
that remaining smokers take. The number of people involved in smoking decreased due to an
increase in the tax rated, which results in discouraging the non-users to start, inspire present
consumers to leave and, depress former smokers to smoking again. This is because the
increase in the tax rates leads to increasing tobacco prices for everyone. The small effect of
tax rates on decreasing the use of tobacco can be huge in consideration of the entire
population.
Based on the size of the increase in price, results in decreasing the tobacco products
consumption due to increasing tax rated on tobacco products is quite considerable. In the year
1999, according to the review presented by World Bank, all else being equal, increasing in
the price of around 10% decrease in the consumption of tobacco by about 4% in the
industrialized nations and around 8% in the emerging nations (Tobacco in Australia, 2019).
Price Elasticity of Demand for Automobile
People do not purchase a car to enjoy a luxurious life or rife. But they purchase base to travel
from place to place. The automobile demand in the market is said to be a portion of a bigger
market because of the demand for conveyance in normal. As the price of the specific car
increased, then according to the law of demand the demanded quality will decrease for that
specific car.

ECONOMICS 4
For instance, the automobile demand in the short term is slightly elastic, as the acquisition of
a new vehicle could mostly be postponed. The demand in the market for a particular
automobile model will probably be highly elastic. This is because there is the presence of a
number of substitutes in the market (Lard Bucket, 2019).
Complementary Products
There is a number of complementary products that are purchased with the car that is oil,
insurance, and gasoline. A paired product is the one doe which there is negative cross price
elasticity of demand. In simple words, it could be said that if the oil prices increase, then the
number of cars purchased will reduce (Lard Bucket, 2019).
The cross-price elasticity of demand evaluates the retort of the demanded quantity of the
good to the alteration in the price of another good. Officially, it is said to be the alteration of
percentage in the required good quantity divided by the alteration in percentage in the price
of another product (Lard Bucket, 2019).
Price Elasticity of Demand for Alcoholic Drinks
The price elasticity enables the estimate of the consequence of a specific change in the price
has on the volume sales of that class. Generally, the indication of the price elasticity is
classically adverse, because the volume demand and price are projected to be contrariwise
associated for the most of products – if there is an increase in the prices; people are inclined
to consume less of that specific product. Normally, the product demand is moderately
inelastic when the price elasticity is less than -1.0. This reflects that the alteration in the
product price has a comparatively little influence on the demanded product quantity, and it is
elastic when the price elasticity is more than -1.0 (Gordon, 2017).
Price elasticity at the category level highlights how powerfully customers respond to the
change in the price, and whether are probable to shift to different category due to the change

ECONOMICS 5
in the price. For instance, if the beer price increased, the customers may like to consume less
beer and increase their consumption of wine. The power of the price elasticity reflects
whether this shift in probable to take place of the level of the price increases in the wide
category. This price elasticity is different from the price elasticity at the brand level, which
evaluates the inner-category rivalry between different bands and the influence on the change
in the price of a specific brand on its sales (Pryce, Hollingsworth and Walker, 2019).
Price elasticity considered at the category level is determined by a number of factors,
comprising the accessibility of substitute classes, the necessary degree, frequency of the
purchase, and whether the product category is related to habit forming like Alcoholic drinks.
The product demand is said to be more elastic to changes in the price if more close alternates
are accessible because people can simply shift from one category to another category
(Institute of Alcohol Studies, 2017). On the other side, products that are taken as regular
necessities for example staple goods have low price elasticity, because customers have to buy
them irrespective of changes in their price. For routinely demanded goods, customers are
comparatively less sensitive to the alteration in the prices, for example, the customer may not
respond to the change in the price as powerfully if he/she is habitual of taking a larger
amount of that product in place of other beer.

ECONOMICS 6
Global Price Elasticity in Alcoholic Drinks
Source [(Gordon, 2017)]
The above image is ranking the retail alcoholic drinks in terms of price elasticity. The figure
is related to the long-run global elasticity, with the average in 80 nations. According to the
analysis, in alcoholic drinks, the Average price elasticity is -0.4. This reflects that the alcohol
industry is hugely inelastic in the context of changes in the price. It can be because at the
category level the consumption is persuaded by habits, whereas, there is a usual verge on the
alcoholic beverage consumption. Furthermore, higher issues related to health among the
socioeconomic groups can also result in limiting the demand for these goods leading to
decreasing demand sensitivity to changes in the price.
Monopoly in the Australian Market
Australian post is presently working as the monopoly corporate in the market of Australia. It
does not permit any other private company or post to provide the delivery items to the post
offices of the government and manages the development of companies of private delivery in
the economy. The Australian Post is damaging the number of small businesses in the

ECONOMICS 7
economy by not letting them operate openly. With the power over the cost of the product and
control over the market, Australia Post is ruling the entire industry. Besides Australia post,
the Railway service and Water Service of Australia are also being the leading business and
creating a monopoly in the market (Carmody, 2015).
According to Sendle, the deliver start-up has initiated a petition asking Australia post to
enable it to distribute to PO Boxes. Till date, the plea snapped up around 6800 signatures.
This practice of anti-competitive is a damaging number of two million small businesses in the
Australian market who desire to have the capability to deliver parcels to Post Office Boxes
(Chung, 2017).
Australia post has the monopoly as whenever it wants to increases the prices it increases,
which is majorly impacting the small businesses in the market. Significantly, it is affecting
the Australian people who do not get the chance to pay fair value from the PO Box. It is
being believed that by not letting other companies of post services deliver Post Office Boxes,
company that is Australia Post is mistreating its monopoly power, by decreasing the level of
competition and hurting customers. The strong step of Sendle towards ceasing the monopoly
power of Australian post is going to show positive results. With around 6000 signatures, the
company is getting a fair indication that the societies also feel the same and want to step the
monopoly power of the company (Chung, 2017).
Government interventions to control the monopoly power
The government can regulate monopolies for safeguarding the interest of share of the
consumer. For instance, monopolies pose the power to set higher prices in the market in
comparison to competitive markets. The government can control the monopoly by yardstick
competition, ceasing the development of monopoly power, and price capping.

ECONOMICS 8
Price Capping by regulators
For several privatized industries, like electricity, gas, and water, the government has planned
to create regulatory bodies like
ORR – Office of the rail regulator
OFWAT – tap water.
OFGEM – gas and electricity markets (Tejvan, 2016)
Regulation of service quality
Regulators in the market can evaluate the service quality offered by the business with
monopoly power (European Commission, 2019). For instance, the postal service regulators
can examine the time of delivery and prices charged for the service delivery in order to
confirm that they do not cut corners.
The industry of electricity and gas, regulating bodies ensure that concern on old people is
resolved, for instance, disallowing to cut the gas supply in the winter season.
Policy of Merger
The government bodies have planned the policy to examine mergers that can result in
creating the power of monopoly. If the new merger built a business with more than 25% of
share in the market, it is routinely raised to the Competition Commission (Tejvan, 2016).
This commission possess the power to permit or disallow the merger.
Breaking up of a monopoly
In some of the cases, the government of the country can decide to break the need for
monopoly due to the increasing power of the monopoly (Economics Online, 2019). This
situation comes very rarely. In the case of Australian post, the international regulatory body
can decide to break the monopoly of the company as it has majorly affected small businesses

ECONOMICS 9
of postal services in the market. In addition to that, the step taken by Sendle by having 6000
signature on the petition could encourage the international regulatory to take a strong step.
Conclusion
The above paper is based on explaining two major concepts of economics that are price
elasticity of demand and monopoly in the Australian market. The paper has elaborated the
price elasticity of demand for three items that is tobacco, automobile, and alcoholic products.
From the analysis, it has been examined that the change in price results in changing the
quality of the demanded product depending on the type of product. If the price elasticity of
demand for a specific commodity is low or if it is inelastic then the demand for that item will
cut or rise a bit like the retort to the alterations in the price. In the case of tobacco, the
demand is not so elastic in comparison to other consumer products. The demand in the
market for a particular automobile model will probably be highly elastic. This is because
there is the presence of a number of substitutes in the market. Additionally, if the beer price
increased, the customers may like to consumer less beer and increase their consumption of
wine. On the other side, the monopoly market structure gives high to the business which
results in affecting small business operating in the same market. In the case of Australian
post, the company has covered the monopoly power, due to which it changes the price of the
services and set higher prices according to its own analysis. This has major damage to small
businesses operating in the industry as this is being done to reduce the competition in the
industry. However, there is a number of government interventions that could work to cease
the power of monopoly and save the rights of small businesses in the industry.

ECONOMICS 10
References
Butler-Bowdon, T. (2017). 50 Economics Classics: Your shortcut to the most important ideas
on capitalism, finance, and the global economy 1st ed. U.K: Hachette.
Carmody, B. (2015). Australia Post is hurting small businesses with PO Box monopoly, says
delivery company Sendle. Retrieved from
https://www.smartcompany.com.au/growth/australia-post-hurting-small-businesses-
with-po-box-monopoly-says-delivery-company-sendle/
Chung, F. (2017). Could this be the end for Australia Post? Retrieved from
https://www.qt.com.au/news/could-be-end-australia-post/3225585/
Economics Online. (2019). Competition policy. Retrieved from
https://www.economicsonline.co.uk/Business_economics/Regulation.html
European Commission. (2019). Effects of regulation on service quality. Retrieved from
https://ec.europa.eu/growth/content/effects-regulation-service-quality_en
Gordon, L. (2017) Price Elasticities in Alcoholic Drinks. Retrieved from
https://blog.euromonitor.com/price-elasticities-in-alcoholic-drinks/
Institute of Alcohol Studies. (2017). How does the price of alcohol affect consumption?
Retrieved from
http://www.ias.org.uk/Alcohol-knowledge-centre/Price/Factsheets/How-does-the-
price-of-alcohol-affect-consumption.aspx

ECONOMICS 11
Lard Bucket. (2019). The Demand for Automobiles. Retrieved from
https://2012books.lardbucket.org/books/theory-and-applications-of-economics/s21-
01-the-demand-for-automobiles.html
Mücka, S. (2016). Price Elasticity of Demand and its effect on Revenue 1st ed. Germany:
GRIN Verlag.
Piketty, T. (2017). Capital in the Twenty-First Century 2nd ed. U.K: Harvard University Press.
Pryce, R., Hollingsworth, B., and Walker, I. (2019). Alcohol quantity and quality price
elasticities: quantile regression estimates. The European Journal of Health
Economics, 20(3), 439-454.
Tejvan. (2016). Regulation of monopoly. Retrieved from
https://www.economicshelp.org/microessays/markets/regulation-monopoly/
Tobacco in Australia. (2019). Price elasticity of demand for tobacco products. Retrieved
from https://www.tobaccoinaustralia.org.au/chapter-13-taxation/13-1-price-elasticity-
of-demand-for-tobacco-produc