The economic issue in this observation involves the concept of homogeneous and differentiated product in microeconomics

According to Lindeman (2002), product homogeneity is present when the merchandise produced by companies are equivalent, the same. Homogeneous products are also a feature of perfect competition market such as wheat, grain, cooper, etc where purchasers only shoot for the cheapest goods available for sale (Lindeman, 2002).

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In our circumstance, petrol and liquefied petroleum gas are homogeneous products regardless of the petrol train station or company (BP, Shell, Caltex, etc) you are buying from. In fact, the technique to extract and refine petroleum is nearly the same among those companies. On top of that, the consumers understand petrol as non-differentiated product plus they probably choose a cheaper brand to buy which explains why petrol price is more homogeneous because if the company makes its price greater than the competition, the drivers will fill up their tanks in the competitors’ petrol stations.

Lindeman (2002, p. 86) also suggested “differentiated product is out there where you can inform a difference between different organizations’ products within the industry”. By differentiating their products, companies are carrying out a non-price competition strategy and also companies can draw in more customers and create customer loyalty by enhancing its service or product. This will lead to a change of demand curve to the right (Lindeman, 2002)

In our case, water in bottles is perceived as differentiated products. Different companies can charge different charges for their bottled water. Actually, there remain 50 brands of botted drinking water selling on the market, such as Mt Franklin, Fiji normal water, Pump, H2GO, etc and in an array of price. Take fashionable Fiji water as an example; it is differentiated from other brands as the purest planting season drinking water, “untouched by man”, “a lot more pure and so more healthy than other bottled waters” (Fiji water, 2009). And, it has made it the priciest spring water bought from supermarket with $2. 99/ litre, even more expensive than Mt Franklin normal water of Coca Cola – best selling brand sold for $2. 96/ litre.

The second economical issue emerged in cases like this relates to the elasticity of both water and petrol.

Gans et al. (2009) remarked that petrol is considered as relatively inelastic in the short run due to the fact that even though the price tag on petrol rises, the amount of petrol demanded only slightly lowered in the first couple of months and also petrol is a distinctive product which has no replacement for it. However, in the long run, within many years, there would be a considerable drop in the petrol number demanded since people have bought more fuel-efficient vehicles, move closer to their office or turn to open public transports (Gans et al. 2009). It has described why petrol companies are not motivated to raise up their price (might adversely affect people driving a vehicle behaviour and therefore reduce businesses’ revenue)

Bottled drinking water on the other hand has a comparatively stretchy demand curve anticipated to normal water has many substituted products available in the market such as boiled/tap water, coke, fruit juice, different varieties of soft drinks, etc. This suggests the firms on the market to be very careful in their charges strategy (increasing or lessening both have certain effects on their customer bases)

Question 2+3: Exactly what will you inform them about the relative effects of import quotas and similar tariffs on the wellbeing of Russian vodka providers, Russian vodka consumers, and the Russian administration budget? Can a federal government always gain revenue by imposing a tariff? Start using a diagram to illustrate your answer.

Quota is a type of mechanism to protect local products by setting a physical limit on the number of vodka produced bringing into Russia that may be sold domestically in a given time frame. This is good for the vodka makers in domestic current economic climate as all consumers expense the good for the reason that current economic climate. Even, tariff and quota are used to safeguard oversea goods, but there are some unwanted effects to a country is applicable the method for trade restriction as well as it is less inexpensive useful than other methods. A couple of relative effects of transfer quotas and comparable tariff on the wellbeing of Russian vodka manufacturers, Russian vodka consumers, and the Russian federal government budget the following (Gans et al. 2009).

Relative effect on the wellbeing of Russian vodka producers

The Authorities would set local price of vodka above the world price and control the number of quantity of vodka imported in to the country when establishing quota rather than imposing tax. Taking into consideration the price is increase around the world price, the difference between price with quota and price without quota is added surplus of vodka company. Therefore, as much as the purchase price with quota is set over world price approximately vodka manufacturers could gain benefit in term of providing product at higher price (Gans et al. 2009).

Relative influence on Russian vodka consumers

While vodka makers gain advantage by shifting home supply and restricting number of transfer quantities leading to decrease the difference between price with and without quota decease. To consider the consumer surplus because of this method, as much as the price of vodka is set higher than world price, the purchasers are worse off when purchasing vodka (Gans et al. 2009).

Relative influence on Russian administration budget

The Federal government can consider the amount of vodka’s quantity to be imported, then licensing to importers who want to do Russian vodka business as well as supply the custom the energy to control the access of vodka products in to the country. This can result in a serious problem problem in the country with import quotas as the importers chosen to meet the quota will be the ones who can offer the most favours to the customs officers. To gain revenue the same level as tariff, Administration may need to sell transfer licenses for full value to importers. However, in case there is tariff, Administration can collect revenue when quantity of vodka increases while import quota Administration can gain the exact amount of earnings by providing licenses. In addition, a more substantial deadweight loss can occur considering to mechanism such as lobbying hired to allocate the import licenses. Also, an unreasonable price would cause smuggling issue which is likely that individuals may try to bring vodka in to the country illegally, equally as they might if the transfer quota is merely a small small fraction of the demand for the product whereas the limit of volume and shortages can cause smuggling problem and it would lead to large deadweight loss as well. Even when there are a few shortcomings of quota, this can be used as a disagreement against tariffs as the federal government cannot ensure that the number of imports will stay below a certain level and Federal continue accumulate the steady income (Gans et al. 2009).

Diagram 1:

(Gans et al. 2009)

A tariff is a duty on goods produced abroad and sold domestically and it can boosts the price of imported goods above the world price by amount of the tariff, furthermore, tariff can reduce the quantity of imports and move the local market closer to its equilibrium trade. The tariffs are not only control the price tag on a goods, they also indirectly control the number sold of this good due to the interaction of resource and demand. A Administration can gain earnings when the tariff is set above the world price near equilibrium without trade and amounts of brought in products with tariffs are counted. However, tariffs may cause smuggling great deal of thought is defined at unreasonable level of amount tariff. Also, the high amount group of tariff will probably cause people endeavoring to bring the products in to the country illegally. This may probably lead to deadweight reduction, thus the government may need to arranged the tariff at a reasonable level. Income from tariff is not secure as the merchandise are not limited for a company to enter into. Then by using tariff device taking into consideration the demand raises, the amount of products sold should be increased, and the Government is able to collect greater revenue, when demand falls, the Government can collect less earnings vice versa (Gans et al. 2009).

Question 4:

How might a drought that destroys half of all plantation crops be best for farmers?

Diagram 2:

A drought that destroys half of all plantation crops will reduce the supply of farm goods in the market; shift the supply curve left. Considering that the demand for plantation plants is inelastic (a higher change in cost results in small change in volume demanded), the switch left of the resource curve brings about an increase in cost that will consequently improve the total revenue for farmers who are unaffected by the drought if the purchase price elasticity of demand is less than 1.

If such a drought is good for farmers, let’s farmers destroy their own crops in the lack of a drought?

No farmer wants to eliminate their farm plants intentionally because they’re considered as price taker on the market and only if those hateful pounds destroy their plants, it is merely a small section and not enough to shift the supply curve left and consequently raise the price of farm goods.

However, only if all the farmers demolish their crops alongside one another, like by using a government program, it could make the farmers better off. Such program will advantage the farmers, but it achieves the target at the trouble of consumers (Gans et al. 2009).

Question 5: If the free trade treaty CER was signed between New Zealand and Australia, competitors said that New Zealand would go through significant job losses to more efficient Australian providers. Why could you not be surprised to discover that CER didn’t lift up unemployment in either country? Use diagrams and a good example in support of your answer?

CER was signed between New Zealand and Australia that did not lift up the unemployment in either country.


Firstly, because the Australia-New Zealand Better Economic Relations Trade Agreement (ANZCERTA) arrived to effect on 1983, the two economies have become increasingly designed (Petersen and Gounder, 2002). In this particular free trade contract, it is explained that both countries create a typical free trade area which includes removing all border limitations on trade in goods, and the administrative would be removed for the trading and investment moves such as liberalising. The liberalising trade in both countries help the trade fence can be ignored (Petersen and Gounder, 2002). There may be some interests gaining from ANZCERT thanks to the efficiency by cheaper imports of consumer goods and services within both countries. Because of this, the costs for producers and consumers can be reduced among free trade area. Along with the increase of producer’s success and the reduction in export fees in free trade area, the exporters more likely to boost the export goods and services. Those consequent can generate the needs and requirements in labour market.

Furthermore, in ANZCERTA, there is a freedom of travel within the traditional free trade area, for both labour market and communal reasons (Section of Foreign Affairs and Trade, 1997). These reasons can help the business enterprise in two countries to remove all obstacles in trading and preventing the increasing cost in producing. Besides that, the labour market can develop within both countries due to freedom in visiting. Therefore, there may be a reduction in additional expense for labour market. Which means that the employers can have more options and the employees can simply choose their company within two countries. Quite simply, the CER can create more opportunities in work, therefore the unemployment rate in Australia and New Zealand can be reduced.


Diagram 3:

Assuming the existing situation of labour market wool shavers in Australia is equilibrium. Matching to Gans et al (2005, pg. 392), “the price of labour is determined by source and demand curve displays the worthiness of the marginal product of labour, in equilibrium workers receive the value with their marginal contribution to the productions of goods and services. “

In addition, it is supposed that there lots of immigration employees’ determination to come Australia to shave the wool. When the CER is set up, due to liberty of visiting between two countries, you will see an increase of amount of shavers who’s from New Zealand to Australia. The supply of labour market will be shifted to the right or will increase the number of employees in supply.

Diagram 4:

From these diagram, there is a shift in Supply curve (increase in number of workers come to Australia), the point of new equilibrium is (L2, W2). It really is confirmed that the L2 is the number of increase in career.

In case of the labour demand increase, the assumption is that the wool price is increasing. Hence the demand of labour can be increase because the local employers need more staff in shaving wool. Therefore the demand of labour will be shifted to the right or a rise in labour demand.

Diagram 5:

The diagram 5 shows that, there new point of equilibrium is (L3, W3) in term of labour demand is increasing. The number of career is increasing from L1 to L3.

In summary, in both conditions of increasing in labour demand and labour source, the number of employment raises in a certain amount, because the CER between Australia and New Zealand create the benefit conditions for both manufacturers in enhance their efficiency in producing and present more independence of visiting for the employees so that they can have significantly more opportunities in employment in both countries. The CER has allowed many local businesses to go to globalisation which has been very important for wages and job leads in both economies.

Question 6: Identify an example of a duty levied in Australia. Illustrate and discuss the tax incidence using a diagram and the implications for policymakers and business.

The federal government in Australia imposes about 10 percent tax on way to obtain services as well as goods. This tax is usually called as Goods and Services Tax (GST or Value Added Taxes -VAT) and it is levied on individuals who have authorized for. The income, which are gained from Goods and Services tax is distributed on the list of states.

According to Breen et al (2002)’s research paper, they found that some businesses have a tendency to experience increasing costs over enough time due to working with GST or VAT.


Diagram 6:

With the implementation of the GST on the goods or services, you will see a rise of price, the new price Q2 which is higher than the Q1. Through the diagram, the total amount received can be reduced (the total amount received on diagram). The federal government tax income will distributed by the consumers and companies from two area of the equilibrium point.

The company surplus is the region which identified that the companies are willing to sell the products at that price. The deadweight damage is where in fact the consumers are to pay at that price. However, that price is taxed, therefore the people must to pay more for something and the suppliers will obtain less because of GST. As a result, the welfare for maker and consumer can be reduced, but the government tax income will benefit for the general public.

Furthermore, when the GST is exercised, the input materials are also taxed, as as a result, the cost in manufacturing can be increased significant. To cope with this problem, it is necessary for the reduced amount of the levels they provide because they can avoid paying the recycleables which might be gone up in price.