Macroeconomics: a Modern Approach - Assignment Example

Case Analysis Student’s Name Institutional Affiliation Question 1 The stiff industrial competition, existence of minimum barriers to entry, and lack of alternative cost for the customer make it hard for the Airlines to create an economic moat. Though Qantas had established very strong local or domestic business, it had not created a low-cost ahead of other Airlines that would have amounted to a moat. The nature of the market was perfectly duopoly between Virgin Australia and Qantas, where the Virgin had acquired around 60% stake from the previous competitor, Tiger Airways, a very low-cost carrier. Air New Zealand managed three-way tussle in all trans-Tasman routes and Emirate managed an A380 on the Auckland to Sydney route. The extra two airlines made the route to be saturated to the capacity. All the carriers attempted to differentiate their services with Airport lounges and in-flight entertainment. However, the market was ordinarily swayed by the prices of the tickets (Ryan 2014). Due to increased providers of the same services, the international travellers had a variety of choices. Therefore, prices were determined by the demand and supply of the services, where the international travellers chose services that were low-cost in nature. Taking that the flyer business had competitive advantages and it was benefiting from the network effect, means that the more the partners and members joined the program this network, the more attractive it was for the new partners and members to join. Additionally, travellers wanted to earn points from the airline they use (Ryan 2014). Therefore, Qantas was not protected by the economic moat as there were low barriers to the new entrants in the market, intense competition and very low toggling costs for customers. Airlines require huge capital and management find it hard in coping up with external factors such as cost of fuel and exchange rate fluctuation. The situation led to very high earnings volatility due to extreme uncertainty rating. It is quite obvious that Qantas’ implementation of a two-brand strategy was influential in the defense of its local market share. Qantas established Jetstar in competition with then Virgin Blue (later changed to Virgin Australia). The strategy helped Qantas to retain its premium-brand status and passenger loss to its competitors, Tiger and Virgin, who had adopted new technology of differentiating their brands (Ryan 2014). Question 2 Part a P2 SARS Price Level P P1 AD Y1 Y Y2 (Real GDP) Aggregate demand curve indicates the amount quantity of real output (real GDP) the buyers are willing to purchase collectively at prevailing price level (Arnold 2011). The correlation between the price level and real GDP is inverse (Chauhan 2009). This implies that when the price increases, it results to a decrease in the demanded quantity of the real GDP. Similarly, when the price level falls, the quantity of the real GDP demanded rises. Therefore, if the price for oil increases the level of the quantity of the real GDP demanded falls (Dwivedi 2006). Consequently, the price of the flight in the international airline market would rise and the quantity decrease. To reduce the excess supply, firms reduce prices and the level of real GDP demanded. This will be possible because, the inventory will compel the sellers to lower the prices; reduced prices will offer fewer incentives to enhance production. However, the consumers will have the tendency of purchasing more units of output at lower prices. If the price level rises more rapidly than expected in the short-run, this implies that the rise in the price level surpasses that of the wage rate and hence they are compelled to pay for the wages since they are usually fixed on contract (Fisher 2009). Part b A monopoly exists in the market when one firm is the sole producer of goods or services in the markets. Therefore, increase in oil prices will lead to rising in prices of ticket for Qantas and increase in prices for flight. Assuming the firm is a monopoly, it has the power to determine the prices in the market as opposed in the competitive market where the price is established through the forces of demand and supply in the market (Wisner, Tan & Leong 2011). Additionally, a monopolist would strive to make abnormal profits; therefore increase in price for oil implies that the cost of the firm has increased (Beaverstock 2010). Thus to avoid operating on losses Qantas will hike the ticket, as well as the flight prices. Similarly, a monopolist has a market power, implying that they have the ability of raising price above the marginal cost in order to make excess profits. Nonetheless, the extent to which any particular firm can raise its price above the level of marginal cost is dependent on the shape of the demand schedule at the profit maximizing output. The greater the P/MC (price vs. marginal cost) ratio, the greater the market power the monopoly would possess. As the price elasticity of demand rises, the ratio of P to MC approaches one whereas the market power moves towards zero (Landsburg 2011) .Question 3 Part a The Reserve Bank of Australia (RBA) controls the rate of interest through the use of monetary policy. In the short-run, the expansionary monetary policy aimed at reducing the rates of interest has the tendency of increasing the interest-sensitive spending. Consequently, this has an effect on the depreciation on exchange rate that results to increase in prices of exports and fall in import prices (Rittenberg et al 2008). To reduce the general expenditure in the economy, the RBA increases the rate of interest rates or vice versa. However, the degree to which increased interest-rate spending would lead to a rise in the total expenditure in the economy depend on how close the country’s economy is to full employment (Knoop 2010). A decrease in domestic rates of interest has a tendency of causing capital outflows, as well as the depreciation of the domestic currency. Hence, if the value of the domestic currency (exchange rate) is lower the foreign goods become more expensive as compared to domestic goods leading to an increase in net exports and consequently a rise in aggregate output (Boyes & Melvin 2013). Part b If the rates of exchange rates between domestic currencies compared to the foreign currency the Qantas revenue will decrease and its cost will increase due to lower exchange rates (Grant & Vidler 2000). For example, the revenue generated from the sales of tickets and flight in the home county will reduce as a result of weakening of the Australian dollar against the American dollar. Therefore, the decline in revenue will force Qantas to cut on its costs or charge higher prices for tickets and flights in order to remain competitive. Consequently, if the Australian dollar appreciates against the US dollar, Qantas revenue will increase and its costs will reduce. For instance, the firm will be able to buy the oil at lower prices due to domestic currency appreciation. Therefore, this will reduce on its costs and increase its revenue (Landsburg 2011). The ticket prices sold to foreigners, as well as the price paid for the flight, will increase the revenue for Qantas. Question 4 In spite of a very strong market share, the aggressive competition had negative impacts to the Qantas profitability and returns in the last few years. The saturated domestic market had applied pressure on yields and loads (Ryan 2014). The virgin, at the same time, had concentrated on the segment of the corporate travel which an area very lucrative for the Qantas in the last few years. Even though there were cost pressures such as rising fuel prices and carbon tax, the domestic airlines had been forced by the Australian government to cut their high fares down so as to stimulate demand (Barro 2008). The annual rate of passenger demand was growing at a rate of 6 percent in the last few decades, but it was partially increased due to the lower fares stimulated by the Australian government. The major risks that were encountered by the Qantas include increased competition, changes in the external (or macro-economic) conditions, volatility in currency, and rapid rise of the prices of the jet fuel. These risks negatively impacted passenger demand. Additionally, there were lower barriers to the new entrants in the market and cost advantages for international airlines (Ryan 2014). Equally importantly, new entrants in the market increased aggressive competition that contributed to the decline of the Qantas’ international market share. Furthermore, the competitor – Virgin Australia continues to threaten Qantas by targeting the segment of the corporate travel that was the major lucrative area for the Qantas as the area had a positive profitability in the last few years. Therefore, the market for the corporate travel tended to be stickier than the discount-oriented market where the prices were the key primary driver (Morrell 2013). The average passenger growth for the domestic market was expected to be smooth in the next five years. Recently, the strength of the Australian dollar created a favourable atmosphere for international travel business. However, this situation had a negative impact for the local leisure marker from which Qantas had relatively higher market share. It was anticipated that capacity would grow below the passenger growth as overflow capacity is utilized. The operating margins are anticipated to normalize to around 5 percent in the long term. The recovery of the margin is expected to be propped by the higher loads, cost saving initiatives, increased fare, cost efficiencies, and discarding loss-making routes from fleet reconfiguration. Unfortunately, the outlook for the international operations of the Qantas is expected to be a challenge in the long run (Ryan 2014). References Arnold, R. A. (2011). Macroeconomics. Mason, OH: South-Western/Cengage Learning. Barro, R. J. (2008). Macroeconomics: A modern approach. Mason: Thomson. Beaverstock, J. V. (2010). International business travel in the global economy. Farnham, Surrey: Ashgate. Boyes, W. J., & Melvin, M. (2013). Economics. Australia: Cengage Learning South-Western. Chauhan, S. P. S. (2009). Microeconomics: An advanced treatise. New Delhi: PHI Learning. Dwivedi, D. N. (2006). Microeconomics: Theory and applications. New Delhi: Pearson Education. Fisher, T. (2009). Firms, Markets and Business Management Economics II. Sydney: University of Sydney Grant, S., & Vidler, C. (2000). Economics in context. Oxford: Heinemann Knoop, T. A. (2010). Recessions and depressions: Understanding business cycles. Santa Barbara, Calif: Praeger. Landsburg, S. E. (2011). Price theory and applications. Australia: South-Western/Cengage Learning. Morrell, P. S. (2013). Airline finance. Farnham, Surrey, England: Ashgate. Rittenberg, L., Rittenberg, Libby., Tregarthen, Timothy D., & Flatworld Knowledge. (2008). Principles of microeconomics. Nyak, New York: Flatworld Knowledge. Ryan, P. 2014, 'Qantas: what's the future for the flying kangaroo?', ABC News, 16 March, viewed 11 May 2014 Wisner, J. D., Tan, K.-C., & Leong, G. K. (2011). Principles of supply chain management: A balanced approach. Mason, OH: South-Western Read More