Economic Analysis

Answer

Economic Analysis

Introduction

            In economics, markets structures are differentiated based on the features and characteristics present in those markets. Classification presents four market structures namely perfect competitive market, monopoly, oligopoly and monopolistic market structures. This paper analyses how my perfect market structure meets its characteristics requirements, current changes in Australian apartment market and the negative externality.

            My perfect competitive market is the Australian clothing market which I regularly participate as a consumer. It meets specific requirements as shown explained below.

A large number of Sellers and Buyers

            The Australian clothing market consists of many sellers and buyers of the clothing commodity. With the emergence of online selling, the number of buyers and sellers increase on a daily basis. In this kind of a market, single buyers only consume a small portion of the market supply. Likewise, an individual seller only supplies a small part of the total market demand. Since the number of sellers is large enough, they do not influence the market prices irrespective of their purchasing prices.

Homogeneity of Products

            All the sellers in the clothing market stock and sell identical products. For example, trousers sold by supplier A are the same as trousers sold by supplier B with no brand preferences and loyalties for ordinary consumers. The same products sold in Sydney are the same ones sold in Melbourne by another supplier.

Complete Information about the Product

            Again, in the clothing market, both sellers and buyers a perfect knowledge of prevailing market prices and therefore they will only be willing to sell or buy at the correct amount. The sellers do not only have complete information about the price but also about the new technology and other operation in the clothing market (Makowski & Ostroy, 2014). For example, a seller can post his/her products on social media to attract external consumers with aim of maximizing the profits. This is not considered as an advantage because all sellers are aware of social marketing. The clothing market in Australia fulfills this quality of a perfect market by lowering the cost of obtaining product information.

Ease of Entering and Exiting the Market

            Any firm or individual willing to participate in the clothing market can freely join the market. Likewise, entities already in the market may also leave willingly at no extra cost incurred. Since many suppliers in the country’s clothing market are price-takers, lengthy contracts that may prevent individuals from leaving the market are non-existent.         

Possible Economic Changes in the Gold Coast Apartments.

            The resurgence of overseas Chinese in the Sydney apartment market has led to some younger people moving to Gold Coast and Brisbane due to the unfavorable market conditions in Sydney. However, this movement is also likely to cause some economic changes in Gold Coast apartment market.

            One of the changes that could occur in Gold Coast is the increase in demand for Gold Coast apartments. According to the case study, a small population is moving from Sydney to Gold Coast, and however minimal the number may be, it could increase the demand due to increase in the number of people looking for the apartments in the city. The story also indicates harsh market conditions in Sydney. This may push an additional number of people to other cities thus causing arise the demand for apartments.

            Secondly, increase in demand for a product in a market usually attracts an additional increase in supply for the same product. Therefore, the second change likely to occur in Gold Coast is an increase in the supply of apartments. To cater for the increment in demand, the supplies will increase production to supply for the additional population. The case study highlights the weakness of the Gold Coast apartment market so an increase in demand could attract investment in the apartment business.

            The third change expected in the Gold Coast apartment market is a relative increase in rental prices. Increase in demand increase the price individuals wish to rent the apartments. This market change may take time but may increase as the demand increases above the supply. The diagram below represents the above changes and how they relate to each other.   

From the diagram above, the demand for apartments increases, making the initial demand curve to shift to the right. Similarly, the supply of accommodation services increases due to the excess demand making the initial supply curve to shift outwards. The increase in demand and supply raises the equilibrium price from P1 to P2. Q1 represents the initial apartment available in the Gold Coast apartment market. Q2 is the new availability quantity.

Assumptions

In generating the above changes, the following assumptions have been made:

People will continue coming to Cold Coast city in search of accommodation.

The unfavorable apartment situation in Sydney will continue to worsen or remain constant.

No changes in the consumer’s city preference.

            Negative externality refers to the cost incurred by a third party as a consequence of an economic transaction. In such an operation, the manufacturer and customer are the first and second parties respectively, and third parties may be any other organization, an individual, or resource affected directly (Chen & Chen, 2015). Example of business activity with negative externalities is the exportation of oil by sea. In this case, the fast party is the company exporting, the second party in the entity buying the oil and the third party may be the sea where oil spills affect the aquatic life or another company whose operations depends on marine life.

            I believe that the above transaction has negative externality because when the oil transported by sea spills, the natural resource experiences the direct effects of the spillage while the first and the second parties will not incur any additional cost. Also, the incident affects directly other firms that depend on marine life, for example, the hotel industry by increasing their value of the operation. The following diagram shows the negative externality where the producer and the consumer transaction leads to pollution.

Source: Economics. Help, n.d.

Corrective measure.

            Negative externalities can be internalized using many measures. For example, using the demand side to internalize the cost. The government may sensitize consumers about a producer whose production process massively pollutes the environment. This could be done to discourage consumers from purchasing the products of the producer. Reduction in the demand for the manufacturer’s products reduces the production volume and the amount of pollution. Under this policy, the production volume reduces causing the producer's profits to decrease. The consumers search for an alternative in the market to fulfill their needs. The amount of surplus also reduces due to the reduction in production.