With the outbreak of COVID-19, you find some grocery items are in a great shortage. For instance, supermarkets often runs out of toilet roll stocks. (please limit all your answers to 300 words)
a) Define demand elasticity, from a customer perspective. (2 marks)
b) Explain whether toilet roll is a demand elastic good or demand inelastic good from a customer perspective at this outbreak of COVID-19? (4 marks)
c) Based on your observation of demand elasticity of toilet rolls, when the price of toilet rolls goes up, will the total revenue of toilet roll for a grocery market go up, down or remain the same? (4 marks)
Explain how each of the following affects consumption demand (please limit all your answers to 300 words)
The expectation that the economy is heading into a recession in the next year (2 marks)
Stock prices fall sharply (2 marks)
The price level rises by 10 percent (2 marks)
The interest rate on consumer loans falls sharply (2 marks)
Income taxes decrease (2 marks)
Assume an economy operates in the intermediate range of its aggregate supply curve. (please limit all your answers to 300 words)
a) Describe the factors that impact on the aggregate demand and factors that impact on aggregate supply (10 marks)
b) State the direction of effect on aggregate demand or aggregate supply for each of the following changes in the conditions:
The price of crude oil drops significantly due to the application of a new extraction technology known as "fracking". (2.5 marks)
A new strategic pact with a group of neighbouring nations is struck which the federal government judges will allow it to spend significantly less on defence for a few years. (2.5 marks)
A severe recession occurs in a country which has been a major importer of the nation's exports. (2.5 marks)
A new carbon emission reduction tax is introduced by the government which is imposed on the industry and electricity generators. (2.5 marks)
Suppose Australia passed a law stating that it would not purchase imports from any country that imposed any trade restrictions on its exports.
This is a common form of protectionism. In addition, assuming those restricted import goods are cheaper than their alternative domestic goods. Please use your knowledge of protectionism gained in the subject of International Economics to answer the following three questions: (please limit all your answers to 300 words)
Who would lose directly from retaliation (and why)? (3 marks)
Who would benefit directly (and why)? (3 marks)
What are the indirect impacts? (4 marks)
Case Study
Collaborative consumption facilitated by the Internet, increases competition in markets.
The rise of the internet as a global means of communication has led many commentators to argue that the ability of internet users to connect with businesses and consumers anywhere in the world as easily as they might communicate with their next-door neighbor. This means that the potential for international competition between firms has increased enormously. In other words, the internet is increasing global competition and promoting the efficiency gains that are an acknowledged outcome of competitive markets. But however more than this, the internet is facilitating what has become known as collaborative consumption, which vastly increases the number of suppliers in some markets. This increase in suppliers gives even further impetus to competition.
Way back in 1997 when the internet was in its infancy, the former Deputy Chairman of the ACCC, Allan Asher, drew the following implications for global competition from the internet revolution.
“It seems almost certain that on-line markets and other forms of electronic commerce will expand rapidly to the point where a truly global retail marketplace will emerge. Already some industries are feeling the effects of these new technologies, especially those which are essentially information and booking services.
The global electronic market will present both tremendous opportunities as well as some very real challenges for regulators, industry and consumers.
Electronic commerce has the potential to deliver significant gains to consumers in terms of price quality and service through increased competition. This is likely to happen for two interrelated reasons – lower barriers to entry and increased number of suppliers competing in product markets.
Since the internet allows newer and smaller players to promote and sell products in direct competition with larger players. It will increase the number of competition with larger players; it will increase the number of competitors in the market. Consumers can now tap into a global market and are not bound to a restricted number of physically nearby suppliers – improved choice, price and quality should result”.
Asher’s prediction that, by allowing the entry of newer and smaller players, the internet will increase the number of competitors in the market has become even more prescient with the recent explosion of sites promoting collaborative consumption. These sites, such as Uber, which allows almost anybody with a modern car to offer a taxi service, and Airbnb that enables householders to rent out a room to travelers have vastly increased the number of suppliers in many markets. This has increased competition markedly in these markets. So much so that taxi operators who have paid governments large sums for restricted licenses have staged protests against this competition. Not only do these cabbies face the problem of declining revenue from fares but they are also facing significant losses from the fall in value of these licenses.
Similarly, Airbnb’s entry into the hospitality industry has hotel operators shaking their heads while homeowners complain that their neighborhoods have become hotel precincts full of strangers. (please limit all your answers to 800 words)
- How will the internet and collaborative consumption change markets? (10 marks)
- How does the internet and collaborative consumption conform to the three assumptions of the perfectly competitive market structure? (10 marks)
- Why do you think the author quoted above welcomes the possibility that the internet will close the gap between market structures observed in the real world and the idealized model of perfect competition? (10 marks)
- Based on the other examples above, comment on Airbnb's and Uber's relation with perfectly competitive markets? (20 marks)
