Silo Pty Ltd: Micro-Economics Assignment

GROUP ASSIGNMENT

The assignment will demonstrate the student’s/group’s ability to:

• Represent the market of the firm’s product diagrammatically and explain in words the key factors influencing: demand for the firm’s product; the supply of the product; the price elasticity of demand.
• Illustrate with separate diagrams and explain the words the effect of; i) an external shock

  and ii) a change in government policy affecting the market of that the firm operates in.

The assignment will:

• Be less than 1000 words with a correctly labelled diagram(s).
• Include a title, introduction and conclusion.
• Include diagrams where appropriate.
• Word processed in 12 point font at 1.5 spacing
• Include a statement of authorship on the front page.

Grading process:

Each student in the group will receive the same mark for this assignment. One mark will be deducted for each day that a group assignment is late.

Groups can consist of 3 or 4 students and you are free to choose your own group. Each group will provide a statement of the frequency and dates of their meetings and a statement of how tasks for the completion of the assignment were allocated. In extreme circumstances, the class facilitator may adjust the allocation of marks in line with individual contributions to the assignment. These adjustments will be at the discretion of the facilitator.

Description of Group Assignment

Students will be allocated one of the following firms:

1. A farming company specializing in wheat and barley production (Silo Pty Ltd). The firm is one of many producers in the international market.
2. Dewey, Cheatem and Howe, a law firm specializing in compensation law. The firm is one of a number of local law firms.
3. Spend-Easy, a retail chain specializing in the sale of white goods. The firm is one of four

   large white goods retailer’s with a 20% market share in Australia.

4. Ex Hoon Pty Ltd, a producer of auto parts, specializing in high tech safety systems. The company has recently patented a new technology that will revolutionize vehicle safety.
5. McMansion Pty Ltd, a housing construction business competing with a number of other construction firms in the State of Victoria.

Part A

In the assignment you are required to describe three factors influencing the market demand and three factors influencing supply curves for the chosen firm’s product or service (e.g. how would a change in consumer income affect demand). You are also to explain the concept of price elasticity of demand and the income elasti8city of demand and explain why you believe demand is elastic or inelastic in the long and short run.

Part B

Students are to illustrate and explain, using comparative statics, the impact of the following shock in the market in which the chosen firm operates.

1. A bumper harvest in the U.S. and South America increase the global wheat yield.
2. There is a reported dramatic increase in the compensation claims going to court.
3. A multinational white goods retailer launches a strategy to open 20 new stores in Australia.
4. Ford to close its Broadmeadows and Geelong plants for which Ex Hoon Pty Ltd is a major supplier.
5. The construction industry faces a significant increase in labour costs.

Part C

Illustrate and explain with the market demand and supply curve the expected impact of a change in government policy on the chosen firm/industry:

1. The government introduces a tax on fertilizer used in agriculture due to runoff damages to rivers and streams
2. Government disbands the Traffic Accident Commission (TAC), a publicly funded compensation scheme
3. The government decides to increase GST from 10 to 15%
4. The government announces tough new safety standards for all new vehicles sold in Australia
5. The government announces it will scrap the First Home Buyers Grant.

Last for the firm chosen; what is the market structure that the firm operates in? Why? For example, does in operate in a competitive market, is it a monopoly, or someone in between such as monopolist competition or oligopoly?

Part B:

i. Spend-Easy, a retail chain specializing in the sale of white goods. The firm is one of four large

white goods retailer’s with a 20% market share in Australia.As the firm is operating in Oligopoly it has a market share in Australia, and this helps in both price and non price competition among the four firms in the market. When an external shock of a multinational retailer in white goods launching a strategy to open 20 new stores in Australia, the market supply is expanding to the extent that in place of four players in Australia, there is a entry of a new firm, which adds up to existence of five players in the market of white goods. The other shocks of bumper harvest; dramatic increase in compensation cases; Ford to close some of its existing plants; increase in the labour costs in construction industry will not affect the white goods industry as an entry of a new supplier of white goods would do.

Supposing the oligopolistic market in white goods industry is following a kinked demand curve model where the prices are sticky where the MC cuts the MR at the gap at which point there is a kink in the AR curve of the firm. This is shown in the figure below. The kink in the demand curve of the market shows the fact that the demand above the kink is relatively more elastic and any change in the supply curve that will shift the MC curve upwards will have a effect on its price and this price change is small if the demand curve is more elastic and the price change will be more if the demand curve is less elastic.

The supply shock of a multinational retailer entering the market is the increase in the costs of production that will shift the MC curve upward from MC1 to MC2. This results in a price increase to the amount of P1 P2 where P2 is the new price at which the firms sell their product. If the increases in costs are so small that the new MC curve cut the MR curve in the Gap itself, there will be no change in price. But if the new MC curve cuts the MR even before the kink as shown in the figure below, then the price will increase and that will have a negative impact on the quantity sold by the existing firms and their profitability.

In the above figure there is a kink in the demand curve AR which gives a gap in the MR curve. As long as the MC cuts the MR in the gap, the prices will be sticky around the same place, as in the oligopolistic market, if the firms increase their prices they fear losing the market share to those who have not increased the prices. And if the firms decreases the prices, the other firms in the market will follow suit. When there is a entry of new multinational retailer in the white goods market, the marginal costs of supplying the product increases and shifts upward to MC2 which increases the market price to P2 in the market.