Tutorial 10 Industry Application Questions PDF

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Tutorial 10 – Industry Application QuestionsNote: for water supply industry, think of Sth Aust situation only in all industry applied questions(all students answer all questions, whether they have been assigned the Water supply industry or not) Explain how your industry compares against each of the ...

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Tutorial 10 – Industry Application Questions Note: for water supply industry, think of Sth Aust situation only in all industry applied questions

(all students answer all questions, whether they have been assigned the Water supply industry or not) 1. Explain how your industry compares against each of the important conditions that define a monopoly market structure. Is your industry a monopoly industry? 3 marks + 1 mark The characteristics of a monopoly industry is that it is a single seller, there are no close substitutes within the industry and the firm is protected by high barriers to entry. There are very few monopolies within the economy; however, there are few firms which hold a monopoly over natural resources, eg. SA Water. SA Water is the only single seller of water within South Australia and cannot be affected by other sellers of water, eg. Bottled water, as these come under beverages and not water supply. Within this industry, there are no close substitutes, which enables SA Water to gain a monopoly over the natural resource and charge a price that is only set by them. Legislation and start - up costs can also prevent any other firms entering the industry, which can be caused by capital costs such as dams and water distillation plants. SA Water and the Water Industry is a monopoly industry.

2. How does each firm in a monopoly industry decide the price they will charge, and the quantity they will sell? Explain. Consider the cases of a private monopoly and a regulated monopoly. 3 marks A private monopoly is a firm that is a non-government firm that create their own policies and can charge a price that covers their cost with a maximizing profit output. Many private monopolies will charge a reasonable, but higher than normal price for their products; this being due to the fact that the firm knows consumers will still purchase the product, even at a higher price than the market demands. A regulated monopoly, is generally a government run or highly regulated industry. This firm will be set by a price floor or ceiling that the government has introduced, to ensure that the consumer is not being charged at a higher than average price than they should be. This regulation allows for demand to stay relatively high, whilst also continuing to maximize profits and revenue.

3. Is it possible for a firm in a monopoly industry to make an economic profit or an economic loss in the short run? Explain, using a diagram. Consider the cases of a private 5 marks monopoly and a regulated monopoly.

In a monopoly industry, it is possible to experience an economic profit, however; a loss can still occur. This can be due to weak demand or higher costs yet this would not cripple the firm in the short run or long run. If economic profits are being made by the monopolistic firm, new firms will try enter the industry, which if successful could bring the monopoly to an economic loss. As new firms are not entering in the short-run, the demand curve for the monopolistic competitor will stay relatively the same, allowing for an economic profit; this can only be completed in the short run though; as seen in the next question, profits are reduced in the long run by the firms entering the market.

4.

Is it possible for a firm in a monopoly industry to make an economic profit or an economic loss in the long run? Explain, using a diagram. Consider the cases of a private 6 marks monopoly and a regulated monopoly.

It is possible for a firm to make a profit; however, these are usually eliminated. Easy entry into the market can ultimately lead to economic losses in the long run; however, this can be altered with price setting and demand. Private monopolies can allow for other firms to enter the market, however, regulated and government owned monopolies can be blocked from the market by high regulations and legislations to ensure that the market is kept at the firm’s level to maximize economic total profit. The demand curve shifts to the left leading to a reduction in the marginal revenue for the firm, ultimately reducing the economic profits to zero.

5. How does the economic efficiency of the water supply industry compare to the economic efficiency of a perfectly competitive industry? 6 marks In the efficiency of both industry’s there are a vast range of differences between each, in productive, allocative and dynamic efficiency. Monopolistic firms are not productively efficient, as they do not produce at the minimum average total cost, it has excess capacity which if increased output occurs it could produce at a lower average cost. In comparison to a perfectly competitive industry, the monopolistic firms charge a higher price than their MC, meaning they do not follow the rule of P=MR=MC. In terms of inefficiency, the monopolistic industry is a lot less efficient in both aforementioned aspects; however, will be more efficient generally in dynamic efficiency, using better technology and advances to gain consumer interest. 6. What do the results you have discussed in the questions above suggest to you about these issues for the water supply industry-: 

How desirable the water supply industry is for new firms to enter the industry (for example, if there were an easily dammable supply of drinking quality water which is close to a significant population (for example, perhaps at Mt Barker in the Hills). Would it be likely a firm might want to enter the water supply industry?) 2 marks

At the current rate of monopoly within South Australia by SA Water, it would be very difficult for any firms to take over capital or resources that are owned or operated by SA Water. If a operational dam in Mt Barker was not owned by SA Water and was privately operated, a firm could in turn privatize this dam and start operating as a water supplier; however, due to the demand from one dam in one area of population would be extremely miniscule in comparison to the market majority that SA Water has, the revenue and competition that the firm would face is very unattractive.

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A firm spending significant sums to advertise their product (eg television advertising campaign; widespread national promotion) 2 marks

Monopolistic firms would not need to spend anything to a very small amount on advertising their product. As the single producer of this item within the market, consumers will continue to purchase at any price without any form of advertising or competition needed. The only advertising needed would be corrective or price/product change advertising. A firm spending a small amount to advertise their product (eg local newspaper advert; small scale promotion of their product) 2 marks The monopolistic firm, SA Water, as mentioned above would only need to spend a small amount on the advertising of their natural resource. As water is demanded by every South Australian, the need for advertising is redundant and only corrective/product change adverts would need to be released. 

Whether the firm would have the funds to be able to spend significant sums of money on research & development, in order to develop better (cheaper) production processes. 2 marks Research and development in the water supply industry is vital for the reduction of costs, desalination of sea water and constant supply of drinking water that is not contaminated by chemicals. A large sum of money would need to be set aside for R&D, as water is a large part of people’s lives and if water is not safe to drink, it would be the responsibility of the supplier. If the supplier does not invest in R&D, a boycott could occur in the form of not paying bills etc. ...