Assignment 1 Essay Example

Assignment 1

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Question 1

  1. The Australian Banks operate in an oligopoly market. This is a market structure dominated by a few sellers. The entire output in an oligopolistic industry is produced by a few large firms and the contribution of each firm is sufficiently large to be significant in the market. Oligopoly is unique as markets structure in that the banks pricing and output decisions will also incorporate the perceived or expected reaction of competitors. This implies that the policies of firms in oligopolistic structures are interdependent (Mazzeo, 2002).

Global financial crisis has really affected competition in the banking industry in Australia. It has led to the development of perfect competition in the banking sector where there are many banks and the customers have their rights to join any. There has also been government intervention and the central bank coming up with different measures like sizeable fiscal stimulus, guarantees of bank deposits and bank debt issuance, a reduction in interest rates by commercial banks and in some cases, government intervention in troubled financial institutions.

  1. If the biggest four banks in Australia decides to collude and agree to charge a high price on banking products then there will be a collusive oligopoly. The term ‘collusion’ can be termed as to ‘play together’. When firms in the oligopolistic market came up with an agreement of not competing with each other about price or output, it is called collusive oligopoly. The firms may agree on setting output quota, or fix prices or limit product promotion or agree not to ‘poach’ in each other’s market: The firms that are in competition thus form a ‘cartel’ therefore behaving as if they are a single firm (Escrihuela‐Villar & Guillén, 2014).

For price output determination in a collusive oligopoly, we assume that there are only three firms in the industry and they form ‘a cartel’, the products of all the three firms are homogenous and the cost curves of these firms are identical.

nder the assumptions stated below, the equilibrium of the industry, under collusive oligopoly is explained with the help of a diagram.assignment 1U

The industry demand curve DD consisting of three firms is identical. So is the case with the MR curve and MC curve which are identical. The cartel’s MR curve intersects the MC curve at point L. Profits are maximized at output 001 where MC = MR. The cartel will set a ‘price OP, at which 001 output will be demanded.

The firms in an oligopoly may compete amongst themselves by using non price competition in order to increase their market share (Escrihuela‐Villar & Guillén, 2014).

There is ‘another alternative also. The cartel, Profit-maximizing cartel members may agree to divide the market between, them. Each member would give a quota. Their quotas, must add up to 01. In case the quotas exceeded 0Q1 either the output will remain unsold at OP price or the price would fall. The diagram can be illustrated as follows

Question 2

There are many things that trigger entry in a perfect competitive market. Many firms will tend to join in perfect competition since there are no barriers to entry and to exit. The prices in the perfect competition are determined by the forces of demand and supply. In the short run the firms in perfect competition may earn supernormal profits such that they have higher prices as compared to the average cost. In the short run the firms may also earn abnormal losses such that the prices are lower than the average cost and therefore some firm may exit the market. Also if the government intervenes by the use of price controls this may reduce the prices hence discouraging firms to enter into the market. There may also barriers in form of huge amount of capital required .Government legislation may also restrict the number of businesses in a certain sector (Davidson & Matusz, 2014).

The diagram below shows supernormal profits where price is more than the average cost shown by the shaded region

assignment 1 1

Part 2: Macroeconomic Perspective

Question 1

(a) The short run equilibrium is at 500 while the price stands at 95

(b) Recessionary gap exists when real GDP is less than Potential GDP (full employment GDP). In such a situation unemployment rate is greater than natural rate of unemployment. As more job seekers exist in the market, then there is tendency for them to settle for less or lower income.

In this case Japan is experiencing recessionary gap.

Since the short run equilibrium is at 500 and the potential GDP at 600 trillion yen then the magnitude is 100 trillion yen.

Question 2

  1. The main component of Aggregate demand is consumption. Government spending, investment and the net exports (Dunker, Hoderlein, & Kaido, 2014). According to the forecasts given for the year 2015 Greece. The levels of economic growth are likely to be low since the level of consumption have declined, low levels of investment as indicated by the declining levels of industrial production which will lean that the government revenues will reduce and also the levels of unemployment will rise. The levels of government spending are also predicted to reduce and the level of government debt is also likely to increase due to reduced levels of revenue. The levels of net export are also likely to reduce as a result of high levels of importation due to low levels of production (Davidson & Matusz, 2014).

(b) The main problems facing this economy are

  1. High dependency ratio ; the population that is working is very low and therefore the per capita income is likely to be very low which will eventually lead to low levels of economic growth.

  2. Low levels of investment; this will lead to low levels of government revenues and also high levels of unemployment. This may also lead to inefficient use of the available resources.

  3. The government of the economy may be overdependence on either internal or external borrowing.

This has led to debt crises in the country. This may discourage foreign investors to invest in the country.

  1. High levels of importation ; This will create deficits in the balance of payments

  2. Low demand for goods and services.

The government may use the following fiscal policy

  • Taxes may be reduces to reduce prices for goods and services thus increasing the levels of consumption. The government may also reduce taxes to investor especially the ones who are using the locally available materials.

  • The government can also increase its spending in areas which are likely to increase the levels of its revenues and would create high levels of employment to the huge population.

  • Government borrowing to the private investors should be discouraged to avoid the crowding out effect.

  • External borrowing should be discouraged to reduce the deficits in the balance of payments.

(c)The main challenges that the Greek government would face using the fiscal policy. Lower taxes should increase disposable income of consumers leading to higher levels of consumer spending. This should also increase aggregate demand and could lead to higher economic growth (Hamilton, & Olson, 2014).

(d) Unemployment refers to a situation where factors of production are willing and capable of being employed at the ruling market wages rates but are involuntarily unutilized or underutilized (Gohmann, & Fernandez, 2014).

Number of unemployed ÷Total workforce*100

Unemployed Rate (2014) = 1,319,620÷ (1,319,620+3,609,260)

=1,319,620 ÷ 4,928,880

Unemployment Rate (2015) =1,300,000 ÷ (1,300,000 + 3,781,000)

=1,300,000÷5,081,000

Labor Force Participation Rate=Total Labor Force ÷Working age

Population

Year 2014 = 4,928,880 ÷ 11,290,000

Year 2015 Labor Force=5,081,000÷11,240,000

(e) Based on the calculations above, we can conclude that there is a decline in the unemployment rate for the year 2015. The unemployment rate has declined by 1.18%

Therefore the country Greece is experiencing a positive employment growth rate.

References

Davidson, C., & Matusz, S. J. (2014). Globalization and the market for high‐ability managers. International Journal of Economic Theory, 10(1), 107-124.

Dunker, F., Hoderlein, S., & Kaido, H. (2014). Nonparametric identification of endogenous and heterogeneous aggregate demand models: complements, bundles and the market level.

Escrihuela‐Villar, M., & Guillén, J. (2014). ON THE SUSTAINABILITY OF COLLUSION IN A DIFFERENTIATED OLIGOPOLY WITH A CARTEL AND A FRINGE. Bulletin of Economic Research.

Gohmann, S. F., & Fernandez, J. M. (2014). Proprietorship and unemployment in the United States. Journal of Business Venturing, 29(2), 289-309.

Hamilton, E., & Olson, E. (2014). Was the Euro good for Greece?. Applied Economics Letters, 21(4), 248-251.

Mazzeo, M. J. (2002). Product choice and oligopoly market structure. RAND Journal of Economics, 221-242.