Ecom4000 Economics Answers Assessment Answers

Question 1

What type of market structure do Coles and Woolworths operate in? Justify your answer with reference to some limited research and the appropriate economic theories. Your answer should include a diagram.

Question 2

Based on your answer to Question 1, and with reference to the appropriate economic theories, discuss the effects of pricing in this market, especially in regards to revenues. Is it in the interests of Woolworths and Coles to have a price discount war? Why or why not?

Question 3

What type of market structure is the market for vegetables provided by farmers? Explain why with reference to Sources 2 and 3 and the appropriate economic theories.

Question 4

How would falling prices for vegetable products due to the price war affect the individual vegetable producer? Demonstrate your answer with reference to a diagram showing only an individual farmer’s cost curves. Would small farmers be forced to leave the market in the long-run? Why or why not?

Use the above sources and some limited research to answer the following questions.

Based on the article and graphs above, what phase of the business cycle do you believe Spain was in during 2013? Explain why with reference to theory and represent this phase of the business cycle using an aggregate demand and supply model.

Based on the article and graphs above, what phase of the business cycle do you think Spain has entered in 2014? Why? Use your aggregate demand and supply model from Question 1 to demonstrate what happened to the economy in 2014.

Given Spain’s most recent unemployment rate, if 17,353,000 people were currently employed how many people would be unemployed?

Answer:

Introduction

The present assignment focuses on the application of economic theories in the retail industry of Australia. The study also analyzes on the current health of the Spain economy through various macroeconomic indicators such as unemployment rate, GDP growth rate. The assignment also assess on how India is still the fastest- growing nation in the globe gripped by uncertainty.  discusses about the phase of business cycle that the Indian economy has experienced in the year 2016.

Microeconomics

Question 1

The two main supermarket chains namely Coles and Woolworths control near around 70%-80% of the market share of the food retail industry. These two supermarket chains operates under oligopolistic market structure. Under this market structure, few sellers sell homogenous or differentiated commodities. Coles and Woolworths dominate this market and have control over product price. There has been existence of barriers in entry but have no hurdles in exiting this industry. Despite globalization and international firms searching for new firms, no entities has merged this Australian food retail sector. Even the firms operating in this industry are interdependent on one another in terms of decision -making. However, action of Coles has impact on Woolworths while determining price as well as output levels.

Figure 1: Oligopolistic market structure

Source: ( As created by Author)

The assumption that rival entity enhances its price, other firms might not follow. This is turn leads to kinked demand curve. The upper portion of AR curve is price elastic than lower portion. This is because the firms operating in this market do not follow high price but at lower price these firms reduce prices too. Coles and Woolworths maximizes profit at Q1 and P1 where MR= MC (Economicshelp.org. 2018).

Question 2

Under oligopolistic market structure, entities have the power to influence prices. The tries to avoid price competition due to price war (Sloman, Norris and Garrett 2013). These entities usually follow price rigidity policy, which depicts the circumstances where price apt to remain fixed irrespective to demand and supply change conditions. If one entity tries to decrease price, competitors might reduce their price. Moreover, if an entity tries to increase price, others might not follow.  It might lead to customers low for firms that intends to increase price. The entities in this market prefer non- price competition.  The pricing war might have huge effect on firms since it creates deflationary pressure on business. Thus, this adversely impacts the revenue of entities operating in thus market.

Coles and Woolworths have confirmed adoption of strategy with respect to price discount war. This is because Woolworths and other entities in Australian food retail sector have recorded price changes for keeping in line with Cole’s competitive prices.

Question 3

The vegetable market provided by the farmers operates under perfectly competitive market structure. This is because several sellers produce homogenous commodities, which are demanded by large number of food retail firms in Australian industry. The framers do not have restrictions in entering and exiting this industry and are obligated to be price takers. Thus, price wars drives farmers out of business.

Question 4

Declining price owing to price discount war might affect the farmers. The reason behind this is that farmers might continue production but they might lack financing with time. This might lower their morale and thus end up stooping production of commodities. The small framers might be forced out of this market as diseconomies of scale cause that farmers might not counter production of similar output at same cost.

Macroeconomics

Question 1

During the year 2013, Spain was in trough phase of the business cycle. The economic growth becomes negative and demand for products begins to decline in this stage.  The AD-AS framework helps to explain business cycle. The real GDP falls below potential GDP as shown in figure below-

The AD curve shifts to left from AD₀ to AD₁ and the new equilibrium have less output and low price level in comparison with original equilibrium. Rise in cost of inputs might shift AS curve to left from AS0 to AS1. The new equilibrium will have less output and higher price.

Figure 2: Impact in AD

Source: (As created by Author)

Figure 3: Impact in AS

Source: (As created by Author)

Question 2

Spain had entered into recovery phase during the year 2014. The Spanish economy started recovering from negative economic growth rate (Gabisch and Lorenz 2013). The employment rate increased and demand as well as supply of goods started picking up. The real GDP started increasing as AD and AS began increasing (Reisman 2013). However, price level also increases owing to increase in demand for goods. However, as the supply of goods increases AS curve shifts rightwards, thereby price falls and real GDP increases.

Figure 4: Impact in AD

Source: (As created by Author)

Figure 5: Impact in AS

Source: (As created by Author)

Question3

The recent unemployment rate of Spain has been recorded at 15.28% in the year 2018. However, the employment rate is 100%-15.28% =84.72%. If the total 17,353,000 people are employed, then,

84.72%of total population= 17,353,000

Total population=20,482,766.8

Number of unemployed=20,482,766.8-17,353,000

=3,129,766.8

Heath of Indian economy

Question1

The Indian economy had been in the recovery phase of the business cycle in the year 2016. The GDP growth rate was at 7.3%, which shows that output gap reduced in this year and is expected to close by first quarter of financial year 2017. In addition to this, the goods prices were lower, inflation rate was below the target rate 5% and demand for goods also increased (Courses.lumenlearning.com. 2018).

Figure 6: Business cycle phase where Indian economy has been operating

Source: (As created by Author)

Fall in energy prices will lead to rise in demand and supply of energy in the Indian economy. However, the GDP growth will continue to increase or remain stable by this reduced energy cost, driven by private consumption and private investment (businessline. 2018). Thus, the impact has been shown in figure below:

Figure 7: Impact of fall in energy price in 2016 of the Indian economy

Source: (As created by Author)

Question 3

Inflation rate must be monitored closely in India by the RBI in the year 2016. For controlling the risk to inflation, the RBI must tighten monetary policy and thus reduce the interest rate by 0.25%.  This will reduce the household burden of Indians and facilitate enterprise to increase its borrowings (Mankiw 2014).

Conclusion

The above discussion concludes that central bank and government intervention is necessary for stabilizing the growth rate and maintaining good health of the economy. Both the Australian and Indian economy are now at recovery phase of business cycle and thus is expected to reach at peak phase in the present years.

References

businessline. 2018. Nomura predicts India’s GDP growth at 7.8 %, 8% in 2016-2017. [online] Available at: https://www.thehindubusinessline.com/economy/nomura-predicts-indias-gdp-growth-at-78-8-in-20162017/article7976816.ece [Accessed 21 Sep. 2018].

Courses.lumenlearning.com. 2018. Business Cycles and Growth in the AD–AS Model | Macroeconomics Fall 2018. [online] Available at: https://courses.lumenlearning.com/wm-macroeconomics/chapter/growth-and-recession-in-the-as-ad-diagram/ [Accessed 21 Sep. 2018].

Economicshelp.org. 2018. [online] Available at: https://www.economicshelp.org/microessays/markets/oligopoly-diagram/ [Accessed 21 Sep. 2018].

Gabisch, G. and Lorenz, H.W., 2013. Business cycle theory: a survey of methods and concepts. Springer Science & Business Media.

Mankiw, N.G., 2014. Essentials of economics. Cengage learning.

Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.

Reisman, D., 2013. The Economics of Alfred Marshall (Routledge Revivals). Routledge.

Sloman, J., Norris, K. and Garrett, D., 2013. Principles of economics. Pearson Higher Education AU.