Tutorial 11 Industry Application Questions PDF

Preview

Summary

Tutorial 11 – Industry Application Questions Explain how your industry compares against each of the important conditions that define a monopolistic competition market structure. Which of the four industries included in the assignment is a monopolistic competition industry? 3 marks + 1 mark The three...

Description

Tutorial 11 – Industry Application Questions 1. Explain how your industry compares against each of the important conditions that define a monopolistic competition market structure. Which of the four industries included in the assignment is a monopolistic competition industry? 3 marks + 1 mark The three characteristics of monopolistic competition is that of many sellers, relatively free entry, with low set up costs and low economies of scale and product differentiation. In the term of coffee shops and café’s, there are many sellers within the industry, both large and small players demonstrating a variety of firms. This large amount of firms conveys that the market is relatively easy to enter, with low set up costs, regulations and economies of scale. This can be down to the fact of large demand for coffee in regional/metropolitan areas of Australia, allowing for firms to enter the market at any given time and still be in demand. The last criterion for this monopolistic competition is product differentiation; however, coffee shops and cafes sell identical beverages, with some differentiation but the main selling point if their coffee products. This can be deemed as not being product differentiation; yet, we do see differences in some food and beverages. The industry that meets these requirements the most out of the four assigned industries is the café and coffee shop industry.

2. How does each firm in a monopolistic competition industry decide the price they will charge, and the quantity they will sell? Explain. 3 marks The demand for a product depends on a range of factors, this can include location, colours and promotional material. This demand varies across firms and the market accordingly, yet price still is the determinant factor of demand. If a firm in the industry raises its price, they will see a reduction in demand as the law of demand states; however, the sum of that reduction and how large of an impact it makes is down to the enjoyment of the product by consumers and how much they are willing to pay for it. This has to be taken into account when setting the price for the products they sell and how much they will sell. The demand will be set by the price and other firms will research into how the other firms have set their prices. 3. Is it possible for a firm in a monopolistic competition industry to make an economic profit or an economic loss in the short run? Explain, using a diagram. 4 marks A firm in a monopolistic competition can make economic profits in the short run, with demand high and limited number of firms within the industry, yet again if the firm still makes their prices too high and demand is low, this can lead to economic losses. The demand curve will be above the marginal revenue at a set price.

4. Is it possible for a firm in a monopolistic competition industry to make an economic profit or an economic loss in the long run? Explain, using a diagram. 9 marks In the long run, as smaller firms in the industry are making economic profits, this will attract new firms to enter the competition and industry. This will result in a larger choice of products for the consumers, ultimately leading to a shift in the demand curve to the left. This is due to supply increasing and consumers not buying as much due to the price increases/large range of suppliers. This demand curve shift will reduce the industries profits and effectively each firm. This can be counteracted by the firm leading a differentiated product or service which stands out from the other firms, attracting consumers and increasing economic profits, even in the long run. This is another characteristic of the monopolistic competition, as the differentiation can create a monopolistic competition within an industry/market. 5. How does the economic efficiency of the café and coffee shop industry compare to the economic efficiency of a perfectly competitive industry? 6 marks (please discuss in terms of productive efficiency, allocative efficiency and dynamic efficiency) Productive efficiency within the café and coffee shop industry does not produce at a minimum average total cost, as this is a monopolistic competitive firm it produces at P>minimum ATC. This shows that they are not making a large profit, yet are covering their costs. Yet if they produced at a larger output it could produce at a lower average total cost to the firm. A monopolistic firm charges their prices so that P does not equal MC, and is largely greater than MC. This contrasts perfectly competitive markets as they ensure that P=MR=MC. This is the rule of thumb for all perfectly competitive markets as this ensures that they are covering the costs of producing the extra unit. In the long run, the monopolistic firms are not allocative efficient, meaning that they do not allocate their extra resources to the consumers benefit. Monopolistic competition is inefficient in the aspect of productive and allocative; however, may be more dynamically efficient in ever change technological and societal advancements in which the consumer will be more likely to demand their product.

6. What do the results you have discussed in the questions above suggest to you about these issues for the café and coffee shops industry-: How desirable the café and coffee shop industry is for new firms to enter the industry eg to open a new café in the suburbs or CBD of Adelaide. 2 marks In the market, it is relatively easy to enter as a monopolistic competitive firm as there is low barriers to entry such as costs and regulation etc. As there is a lot of competition it may be slightly unattractive, yet as those firms are still making economic profit, the attraction is still there. Demand allows for these firms to enter the market freely and still be in demand without effecting the demand curve to a large extent. 

A café or coffee shop spending significant sums to advertise their product (eg television advertising campaign; widespread national promotion) 2 marks Signifcant sums of money are not spent on advertising in this industry, as the majority of shops are small business who cannot afford this type of advertising. Large players such as Starbucks, McCafe and Cibo can spend larger amounts on advertising to show their importance within the market and position of power, these tactics do allow for market share increases and product awareness, however, many people still go to small coffee shops without any form of advertising whatsoever. 

A café or coffee shop spending a small amount to advertise their product (eg local newspaper advert; small scale promotion of their product) 2 marks Cafés and coffee shops spend little amounts on advertising, even sometimes limited to no sum of money spent due to the thriving growth of social media advertising, which is free and effective. Smaller players will spend little money on advertising, whereas detailed in the next question, large players can spend more on advertising to gain their majority of the market share. 

Whether a café or coffee shop 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 is vital in some industries; however, the café and coffee shop industry allows small room for this business aspect as the limited size and capacity of the small businesses and funds available. Cheaper production processes can be looked into at a small level, without many costs being associated, such as diagnostic tools etc. Larger players in this industry may choose to spend a larger sum of money on developing cheaper production processes, such as capital or labour costs and output efficiency. 



Whether a café or coffee shop would have the funds to be able to spend significant money on research & development, in order to develop better (more desired) versions of the product for their customer. 2 marks

In the café and coffee shop industry, coffee is very set at what it is. The product can be altered in flavor, texture and body; however, it will still be coffee. Other products such as food and other beverages may be tested and produced differently to meet consumer desire and needs yet this will be down to the business; moreover, larger corporations in the coffee market will have a larger fund to research into growing consumer needs which can be met with changed products and different coffee needs. Small business will then follow suit with the larger corporations, however will have spent no money on research and development.

7. Explain how your industry compares against each of the important conditions that define an oligopoly market structure. Which of the four industries included in the assignment is an oligopoly industry? (Look ahead to Week 12 Lecture notes)

3 marks + 1 mark Oligopoly has three distinctive characteristics that if met, can define a firm as an oligopoly. These characteristics are few sellers, each of these having a significant market share and making strategic decisions based on the other significant players in the oligopoly. The products sold can be completely identical or differentiated, however still can come from a range of categories. Finally, there are barriers to entry; however, these are not as high as a monopoly. The coffee and café shop industry is most definitely not a oligopoly, the small and large firms in this industry have only small and not significant shares in the market, with many sellers and there are hardly any barriers to entry, which in the case of an oligopoly there is. Products within this industry are both identical and differentiated, yet this is the only characteristic that the industry meets with an oligopoly. Out of the four industries included in the assignment, Supermarkets and Grocery Stores are part of an oligopoly. The three largest players in the Australian Oligopoly are Coles, Woolworths and Aldi supermarkets. The Industry application questions from Tutorial 6 to Tutorial 11 inclusive are the questions that constitute Assignment 2. There are no further questions on oligopoly than question 7 above....