Economics Questions & Answers - Assignment Example

Economics Questions & Answers Question 1: Imperfect markets a. Australian soft drink market and Oligopoly competition An oligopoly can be defined as an industry in which there are few firms that offer a homogenous product. In such a market, the number of firms in the market is sufficiently small and thus there is conscious dependence on each other when it comes to understanding competition in the market. In this case therefore, one firm understands that its future depends on both its policies and those of the rival in the market (Fischer, 2011). The Australian soft drinks market is an example of oligopoly because there are two firms namely Coca-cola and Pepsi that operate in the market. As a result, these firms can be able to adopt both high and low level price strategies when it comes to maximizing profit in the market. Coca Cola and Pepsi have products that they sell to this market and thus can determine the price at any given time but several factors have to be considered including a kinked curve. Cut-throat competition is always adopted by these two companies when it comes to attracting potential customers. There are a number of differences when it comes to looking at perfect competition and oligopoly competition in as far as market structures are concerned. In a perfect competition, numerous firms sell identical products just like in an oligopoly (Pichurin, 2012). However, firms in a perfect competition are price takers unlike in an oligopoly where they set the price of commodities. In an oligopoly, firms have a relatively large control in the market share unlike in a perfect competition where each of the firms control a small section of the market due to the high level of competition involved. Lastly, a perfect competition market is always characterized with freedom of entry and exit. On the other hand, an oligopoly market lacks the freedom when it comes to exit and entry in the market. Tacit collusion oligopoly This happens when firms in a market have to accept the kind of prices that have been set by the dominant firm in the market. When this happens, firms that are involved are likely to engage in price fixing cartels along the way. Non-collusive oligopoly This refers to a market in which firms compete with their sellers in the market. This can be attributed to the rigidity in the price. b. Criticism against kinked demand analysis Critics of market demand studies have been able to come up with a well thought criticism of the kinked demand analysis. They argue that: i. The demand for one product at a low and a high price cannot be mutually inclusive. ii. Firms nowadays have more incentives to increase and reduce their prices owing to a number of factors. c. Price discrimination. Price discrimination can be defined as an action by a firm to sell the same product at different prices in different markets. In my own view, this is not a bad thing due to the fact that different markets present an organization with different challenges and thus the cost of production varies in different markets. It is therefore important for organizations to make sure that they adjust to be in line with demands in different markets and the cost of operation in those markets has been matched with the profit that they gain. Question 2: Market failure & Government policies a. Market failures & government regulations in a perfect market In economics, market failure is said to occur when there is inefficient allocation of resources. The individual incentives for rational behaviors in the market end up with non-rational outcomes for the group in that particular market. To add on that, market failure can be attributed to a situation where individual decisions by firms are said to be good but the overall results to the market is bad (Remer, Lin, Yu & Hsin, 2008). This is the reason behind the need to make sure that the government has been involved the process of market regulation. Perfect competition is unique in nature because there is fair distribution of resources but still needs the involvement of the government because of the following reasons. There is need for government involvement even in perfect competition markets because of the following reasons: There is a high likelihood of one firm acting in accordance with self interests while on the other hand largely affecting the market as a whole. Involvement of the government is aimed at making sure that there are policies in place where each firm can adhere to even as they pursue their interests in as far as business is concerned. Emergence of monopolistic privileges is common especially in perfect markets and as a result, there is need to make sure that this trend has been put under checks and balances. The government plays a very critical role when it comes to making sure that these monopolies do not emerge which might automatically threaten and lead to market failure. Price fixing is also another major cause of market failures and this can be attributed to the manner in which different firms come together to set and control the price of a certain commodity in the market. The government has a duty to make sure that the price of crucial commodities has been brought under its control and thus eliminate cases of price fixing. b. Addressing climate change and global warming Climate change and global warming have remained two major market failures that different industries have continued to grapple with over the years. This is because of the environmental impact that the same has had over the years and at the same time how different populations have been affected over the years. There are several plausible policies that have been put in place when it comes to addressing this particular challenge. They include the following: Cutting on carbon emissions: There is need to make sure that carbons emissions have been cut in as far as processing companies perform and at the same time the kind of strategies they adopt when it comes to performance in the market. Different protocols have been adopted around the world with the aim of making sure that companies are able to adhere to a certain code of conduct. Carbon emissions have been known to cause global warming and as a result, there has been need for governments to come together in an effort to create policies that govern the rate of carbon emissions. Use of clean energy sources: Sources of energy that have been adopted by many manufacturing companies over the years are the reason behind the increased rate of carbon emissions. Policies that are formulated by governments around the world need to make sure that they focus on the successful use of energy sources that do not pollute the environment and thus lead to global warming as it is the scenario at the moment. Legislation: Legislation is important when it comes to placing climate change and global warming under control. Several countries have been able to adopt a policy where companies that work to reduce global warming within their operations get tax relief and at the same time utilize resources that are available for the better of the climate. These policies have gone along the way in making sure that everything is done the right manner. Question 3: Introduction to macroeconomics a. National Statistics Unemployment rate – 17% Growth in GDP – 6% Inflation rate – 3% b. Placement of Australia in Business Cycles The data provided by the Australian Bureau of Statistics above is a clear indication of the state of the economy in as far as the country is concerned (Freyssenet, 2008). In terms of employment, the country seems to be doing well because a large portion of its population is employed and thus engaged either directly or indirectly when it comes to production. In terms of its GDP growth, the country has been able to record improvement compared to the previous year while the rate of inflation still remains high at 3%. In general, the placement of Australia in business circle can be described as being firmly rooted at the top and thus a good destination to do business. c. GDP and GNE using expenditure approach In the expenditure approach, GDP is always calculated as the sum of four categories of expenditure on output. They include the following: Gross Private Consumption Expenditures(C) Gross Private Investment (I) Government Purchases (G) Net Exports (X - M) GDP = C + I + G +NX GDP = 220 + 755 + 95 -100 GDP = 970 Gross National Expenditure includes combined expenditures which are public and private in nature. The expenditures on the export are not included in this case. In this case therefore GNE will be given by GDP minus 380. GNE = 970 – 380 = 590 Question 4: Determination of GDP a. Government expenditure multiplier for the economy A change in government expenditure means that there is an automatic change in the income that is collected by the same government and as a result, several factors have to be considered. The impact of change in income as a result of change in government spending is called government expenditure multiplier (kG) The formula for calculating the multiplier is = 1/(1-MPC) Based on the data that is provided, MPC = Increase in GDP/Increase in expenditure MPC = 92.2% 1 – 92.2% = 7.8% 1/7.8% = 12.82 b. Inflationary/deflationary gap In this case, there is an inflationary gap that has been noted in the economy. This can be explained by the fact that the demand in goods and services within this particular economy exceeds the rate of production and this is because of the differences that have been noted in the GDP and the anticipated GDP. Of the two metrics, the current GDP is lower compared to the demand in the market as things stand now. c. Government policies needed The following are government policies that can be initiated when it comes to bridging the inflationary gap that has been noted in this particular case. An economic stimulus plan that will ensure increased production so as to meet the market demand while at the same time increasing the GDP Introducing tax incentives to make sure that the production is on a steady rise. d. Minimum wage legislation & poverty Minimum wage legislation has a direct impact on the country as a whole and this is because of the manner in which it impacts poverty. When there are clear rules regarding the minimum amount of wages that citizens are supposed to be paid for their labor, everything is done in a structural manner. In addition to that, the purchasing power of citizens is increased based on assessment of different factors within the economy. References Fischer, S. (2011). Growth, Macroeconomics, and Development. NBER Macroeconomics Annual, 6, 329. http://dx.doi.org/10.2307/3585065 Freyssenet, M. (2008). 'Reflective Production': An Alternative to Mass Production and Lean Production?. Economic And Industrial Democracy, 19(1), 91-117. http://dx.doi.org/10.1177/0143831x98191005 Pichurin, I. (2012). Analysis of per capita income dynamics of the USA and Russia gross domestic product. Economy Of Region, 108-115. http://dx.doi.org/10.17059/2012-3-10 Remer, D., Lin, S., Yu, N., & Hsin, K. (2008). An update on cost and scale-up factors, international inflation indexes and location factors. International Journal Of Production Economics, 114(1), 333-346. http://dx.doi.org/10.1016/j.ijpe.2008.02.011 Read More