CHARLES STURT STUDY CENTRE, SYDNEY.

SUBJECT: ECO 501

ASSIGNMENT # 2

ZEESHAN ALI

STUDENT ID: 11496404

Instructor: Harpareet Kaur

DATE: 04/ 05/ 2012

Q#1 What is the characteristic of a monopoly market that allows a natural

monopoly to potentially charge consumers a price premium above long-run

LRAC?

ANSWER :

Monopoly is a situation in which an organization is the only supplier or hold control most of the

market with a particular commodity. There is a lack of completion and substitute goods.

The characteristic of a monopoly that allows the natural monopoly to potentially charge

consumer a price premium above long-run LRAC is the cost advantage or cost benefit. Large

organization, for example Utilities, need huge amount of investment at the beginning. This

creates a barrier for the entry to minimize the number of possible entrants. Industry with a

standardized product or service and economy of scale, natural monopoly emerges. Utility

companies need immense infrastructure, and the cost of one or more customer is negligible up

to certain point. Addition of customers may increase the revenue of the organization and lower

the customer average cost in the long run. So, as long as the average cost of customer service

is decreasing, the organization. A natural monopoly has a very different cost structure. It has a

fixed cost and does not depend on its output. Its marginal cost is too small or constant. This cost

benefit in natural monopoly helps the organization to charge premium price above long run

average cost.

Q#2- What industries are dominated by cartels?

ANSWER:

Oligopolistic Industries are dominated by cartels. A cartel is an agreement between

competetitors (Competing organizations). Who agrees fix prices, marketing and production.

Oligopolistic industries are those where there are small numbers of sellers. They competing

organization may agree on total output, market shares, allocation of customers, establishment

of common sales, market price etc. This type of agreement also known as cartel agreement,

helps to increase each members profit and decrease the competition.

Q#3- Why is a change in the age structure of the population, increasing the

proportions of young or old workers in the labour force, likely to change the

natural rate of unemployment?

ANSWER:

Age is one of the factor that play a key role in the structure of unemployment. Every country has

almost different structure of unemployment related to age differences. A country having more

old workers in labor force, so the availability of work will automatically decrease for the young

worker. The unemployment among young worker will increase. Similarly, if there are more

young workers in the labor force, it will result in less workers for the old worker. The opportunity

of old work to get employment will decrease and the unemployment among old worker will

increase. Age is one of the factor in unemployment structure.

Q#4- Explain the difference between demand pull inflation and cost-push

inflation, illustrating your answer with examples of each. Then assess which of

the two are most likely to be a problem in Australia under the economic

circumstances we are likely to experience in the coming few years.

ANSWER:

COST-PUSH INFLATION VERSUS DEMAND-PULL INFLATION:

DEMAND-PULL INFLATION

When there is rise in aggregate demand categorized by the four section of macro-economics

which are household, businesses, foreign buyers and government demand-pull inflation occurs.

These four sectors when compete to purchase limited amount of goods or services, purchase

more output than economy can produce. The bid prices increases and inflation occurs. This is

also termed as large amount of money chasing few goods. It mostly occurs in expanding

economy.

Factors Pulling Prices Up

The demand-pull inflation caused by increase in aggregate demand can be the result of various

economic dynamics.

For example: aggregate demand may increase in the rise of government purchases, thus pulling

up the prices. Another factor can be the local exchange rates. Which increase the prices for

foreigners, reduces the price of exports and increases the prices of imports which results in

decrease the purchasing of imports, while purchasing of exports by foreigners increased. Rapid

overseas growth can also lead to increase in demand as more exports are purchased by

foreigners. If government decreases taxes, households are left with more disposable income.

This results in increase consumer spending. Thus, increasing aggregate demand causing

demand-pull inflation. Reduction of taxes can also result in growing consumer confidence in the

local economy, which also further increases aggregate demand.

Putting It Together

Increase in aggregate demand leads to demand-pull inflation, which is faster than

corresponding increase in aggregate supply. When there is no change aggregate supply, and

aggregate demand increases, the quantity supply will increases.

The graph shows the relationship between aggregate supply and aggregate demand. When

aggregate demand increases from AD1- AD2, in short-run, it will not affect the aggregate

supply. But the change in the quantity supply will occur along AS curve. The reason behind this

lack of shifting in aggregate supply is the aggregate demand reacts quicker to change in

economic conditions.

Due to the increase in demand organizations increase production. The cost to produce

additional output increases, as shown in the graph, from p1-p2. The reason is that to produce

additional output the company would need to pay worker more money in the form of wages or

overtime and can also invest in additional materials and equipments to keep up with the

demand, which leads to increase the cost of production.

As companies increase production due to increased demand, the cost to produce each

additional output increases, as represented by the change from P1 to P2. The rationale behind

this change is that companies would need to pay workers more money (e.g. overtime) and/or

invest in additional equipment to keep up with demand, thereby increasing the cost of

production. Just like cost-push inflation, demand-pull inflation can occur as companies, to

maintain profit levels, pass on the higher cost of production to consumers’ prices.

COST-PUSH INFLATION

The total volume of goods and services produced by an economy at a given price level is known

as aggregate supply. Cost-push inflation occurs when there is decrease in aggregate supply of

goods and services and increase in the cost of production. Cost-push inflation means when the

companies are already running at full capacity and the prices are pushed up by the increase in

cost of the production factors i-e labor, land, capita or entrepreneurship. Organization cannot

maintain their profit margins by producing same amount of goods and services, when

production cost is high and productivity is maximized. It results in the increased of cost which is

passed on to consumers, leads to rise in the level of prices, Inflation.

Production Costs

For example:

An organization may need to increase wages if the work force demand for more or high

salaries, which can be the effect of increase in prices and cost of living or labor become more

specialized. If the cost of production factors increase, organization needs to allocate more

resources to fulfill the cost requirement and to produce their goods or services. To maintain or

increase the profit margin, the company increase the retail prices, and thus the cost is passed

over the consumers. Along with the increase in sales and prices the company has to constantly

increase their bottom line too. Increase in the prices of raw materials or increase in the cost of

raw material if they are overseas. The government may also increase the taxes to cover higher

fuel and energy costs, forcing organization to allocate more resources.

Putting It Together

The graph below shows the shift in aggregate supply. It describes the level of output that can be

achieved at each price level. When the cost of production increases, the price level shifts from

P1-P2, means increase in the price. The aggregate supply also decreases from AS1-AS2, leads

to increase in the level of price. The reason behind the increase is that, the organizations wants

to maintain or increase the profit margins, they need to increase the retail price, which cause

inflation.

PROBLEM FOR AUSTRALIA :

The cost-pull inflation will be the major threat to Australia in the recent coming years. According

to the inflation calculator of the Reserve bank Australia the price of any item equal to 10$ in

1990s is now 17.10$. It occurs due to the increase in the cost of production factors, which are

labor, land, capital and entrepreneurship. The goverrnment also increases their taxes on

different goods and services.

During the coming years, the labor will be more specialized, as there are many qualified work

force available in the market, one factor is the large number of immigration to Australia, demand

for good salaries. Also the taxes are increasing with the time. Plus the prices of land increases.

Most of the raw materials are not available in Australia. So, some industrial sectors import the

raw material from other countries. Due to the recession and increase in the prices of fuel and

energy, raw material price also increase. The all above factors leads to increase in the cost of

production. Thus, organization needs to maintain or increase profit margin. So, in Australia the

prices of goods and services will increase more, as the industries of Australia needs to allocate

the resources. So they will increase the prices to meet their requirement, which results in cost-

pull inflation. This is how the cost-pull inflation will a major problem in Australia in coming years.

BIBLIOGRAPHY :

>Lecture notes of Harpareet Kaur

>Study Guide Business Economics written by Dr H. Kidane.

>Text Book, McTaggart, D., Findlay, C., & Parkin, M. (2010) Economics, Pearson Education:

Australia (6th Edition).

>Investopedia.com ( for diagrams )

>Reserve bank of Australia official website, rba.gov.au