ECOM4000 Economics - Australian Economy Global Financial Crisis Assignment Solution

PART. 1 Microeconomics

1. The market structure for the Australian banks is oligopoly. This is mainly due to the collective share of top banks in the market as well as the range of their credits, loans and deposits. The market condition, i.e. oligopoly focuses on few interdependent firms. In this situation natural and legal barrier are created to restrict the entry of other firms. Australian banks depend on each other; hence price level is decided. Global financial crisis has affected this market competition by altering their size of output, deposit level and capital management. Banking is also affected due to corporate governance and hence creditors have altered their behaviors regarding fund deposits (Editorial, 2014). 
2. The four largest banks in Australian economy are Westpac, National Australia bank, Commonwealth Bank, and Australia New Zealand Banking Group. If these biggest four banks collude and start charging higher price on banking products, the demand and supply structure will alter (King, 2016).  

From the figure, it is clear that when price increases from p1 to p2, demand curve will shift from left to right, D1 to D2. This will also change the level of quantity demanded from Q1 to Q2. It will only happen if demand will increase, while in case when no change occurs in demand and price charged by banks increases, the level of quantity demanded will decline, as shown in figure below:

1. The increase competition in the banking sector is managed by government. For instance, if Australian banking system is facing high level of competition, government will also face issues in corporate governance because shareholders will be protecting their liability. This will make creditors and depositors to reduce their risk-taking criteria and as shown in figure above, demand will reverse back (PICKERING, 2014). Short term problems for banking will appear and shareholders will no longer receive incentives to keep their credits at bank. 
2. In a competitive market, new firms enter only on the hope to make economic profit, while already existing firms are making economic profit. If new firms face zero economic profit, they will face obstacles in sustenance; hence this process will end their further entry. In the competitive environment, new firms enter to seek more profit; this causes an increase in level of supply, while price level declines. 

The figure makes the situation clear, that if new firms enter the market, supply will increase S to S1 and so Quantity level. While this causes low prices for firms, and they will exit the industry.