Question 5 (3 points)

Read attachment 5.

a] (1 point) Use the demand/supply model and information in the attachment to explain why daytime electricity prices have decreased.

b] (2 points) Use the model of a firm operating in a competitive market to show how a decrease in the price of daytime electricity could cause suppliers with relatively high costs of production to need to exit the market.

Question 6 (3 points)

Read attachment 6.

a] (2 points) Use the model of a firm with market power to analyse how the entry of a new firm (Qantas) to what was previously a market with only one supplier (Rex) will affect profitability of the existing supplier?

b] (1 point) Is it credible that Rex would 'cut off air services to some regional towns' in response to entry to those markets by Qantas?

Attachment 5

Most of Australia's coal-fired power plants are running at a loss as electricity prices continue to slide, battering the profits of energy giants AGL and Origin and sparking warnings from within the industry of earlier-than-expected plant closures.

An influx of renewable energy has been driving down daytime electricity prices and piling enormous pressure on the nation's fleet of coal-fired power stations, which are far more expensive to operate and, increasingly, struggling to compete.

New figures reveal baseload electricity prices in Victoria crashed 70 per cent from about $80 a megawatt hour in March 2020 to $24 this month...

Price falls across the nation's main grid have been driven largely by the pandemic-led downturn in energy demand, a cooler-than-usual summer and the accelerating rollout of rooftop solar panels.

While demand is recovering, the flood of cheap renewable energy continues. With four gigawatts of new wind and solar already committed to enter the grid between 2021-23 and state governments in Victoria and NSW mapping out ambitious pro-renewables policies, investment bank UBS is projecting a 'huge uplift' in renewable penetration that could keep prices depressed.'

'Coal plants face closure as prices plunge' by Nick Toscano (The Age, Monday March 8 2021, p.8)

Attachment 6

Country airline Regional Express (Rex) has accused Qantas of predatory behaviour by launching flights on some of its monopoly routes and has threatened to cut off air services to some regional towns in response.

Rex's deputy chairman John Sharp said yesterday that Qantas was trying to weaken the smaller airline in the hope of making it a 'less formidable competitor'...

'Qantas has clearly embarked on a deliberate strategy of moving into Rex's routes that can only support one regional carrier in an attempt to intimidate and damage Rex in its traditional regional market', Mr Sharp said yesterday in a statement released to the ASX...

Since the start of the COVID-19 pandemic, Qantas has launched, or is planning to launch, on eight routes where Rex previously had a monopoly...

'Rex, Qantas in regional routes battle' by Patrick Hatch (The Age, Tuesday February 23, 2021, p.21)