Economies Of Scale In Different Market Structures: Lessons From The Australian Airline Industry And The French Economy Essay.

1. Distinguish between and calculate accounting and economic profit
2. Define, calculate and graph total product, marginal product and average product
3. Define, calculate and graph total cost, marginal cost and average cost
4. Describe the concept of diminishing returns

Economies of scale and market structures

The efficiency of a firm is determined from its size. The large firms expand from gain in economies of scale. The benefits of scale is defined in terms of its relative cost advantage. A firm is said to experience economies of scale when expanding production operation leads to a continuous reduction in average production cost. This means a larger firm will attain a range of lower production cost as compared to other small competitors. This increases the risk of takeover for small competitors. There are both internal and external economies of scale. The internal economies of scale is related with expansion of the single firm. Different types of internal economy of scale involved technical economies, purchasing economies, administrative savings and financial savings (Fine 2016). External economies of scale on the other hand arises from external factors. Firms often enjoy a positive externality because of development of several industries or the economy as a whole. The average cost curve for most of the firms in the long run is U shaped reflecting presence of external economies and diseconomies of scale.

The falling part of long run average cost curve indicates economies of scale. To the left of minimum point of LAC, M economies of scale is present (Baumol and Blinder 2015).

In economy, different forms of market exists depending on the presence of buyers and sellers, the nature of goods, extent of market power, barriers to entry and exists and others. The popularly known forms of market are competitive, monopoly, monopolistic competition and oligopoly. Economies of scales are more relevant for markets like monopolistic competition and monopoly (Rader 2014)

The long run equilibrium in the monopolistic competition occur at the falling part of long run average cost. Here, demand curve is tangent to the left of minimum LAC and hence, firms enjoy economies of scale.

Natural Monopoly is another form of market where economies of scale is the most important. Natural monopoly is a special form of monopoly that arises from the presence of large fixed cost in the distribution. For example, goods that require large scale infrastructure for supplying the good. Supply of electricity, water and gas supply are some examples of natural monopoly (Varian 2014). In case of natural monopolies, presence of scale economies is very important for achieving minimum efficient scale. The economies of scale is achieved when there is only one firm of very large size.ted by Author)

Case study: Australian airline industry

The airline industry in Australia is one important industry both for Australia and for global economy. Depending on the number of buyers and sellers, markets are categorized in different forms. One dominant form of imperfectly competitive market is oligopoly market. In the oligopoly market there are only a few firms dominating the market (Gilbert 2018) . In the Australian airline industry, before 2003 there were mainly four big players. These were Qantas, Ansett, Virgin Blue and Impulse Airlines. This make the market structure close to that of an oligopoly market. However, after 2003, the market share in the airline industry had started to be concentrated in the hands of two major airlines – Virgin Blue and Qantas. The oligopoly market having only two dominating players is called duopoly market (Nicholson and Snyder 2014). Therefore, after increasing market share for Qantas and Virgin Blue the market structure becomes duopoly market.

In the oligopoly market, intense competition exists among the market players. The scale of economies is applicable for airline industry because of the presence of high infrastructure cost.  The airline industry in Australia though initially has an oligopoly structure but is gradually becoming a duopoly.

It is very unlikely that an economy always follows path of a smooth growth. Every economy undergoes with fluctuation in several times. The fluctuation in economic growth is explained with phases of business cycle. Different growth phases that an economy experience is related with four phase of business cycle namely – Recovery, boom, recession and depression. In 2008, a global wave of recession hit the global economy. Like several other western economies, France was affect by the recession hit and entered in a recessionary stage. During recession, an economy generally faced a very low growth, slow movement of price and high unemployment rate. However, government in France had provided as much support as possible. The undertaken policy framework helped France to maintain a growth rate of 1.2%. In recession, government generally takes expansionary fiscal policy in the form of raising government expenditure and declining tax burden (Hein et al. 2017). The by increasing burden on government budget leads to a budget deficit. The France government also faced such deficit budget during this time.

The budget deficit in France accounted a sudden decline to 7.2 in 2008 from a rate of -3.2 in the previous year. After 2008, budget deficit recovered gradually. It becomes -3.4 in 2016.

The effect of government support can be analyzed from the growth trend of GDP.

From 2008, the GDP growth of France constitutes a steady upward trend. After facing severe recession, the gradual recovery of economic growth indicates the France economy has entered to a phase of business cycle recovery. The movement of prices has slowed down with a fall in the inflation rate to 0.8% from 1.2% in the previous year. With this, the growth rate has declined by 0.1 percentage point. Another indicator of economic performance is the prevailing unemployment rate (Bec, Bouabdallah and Ferrara 2015). Unemployment in the economy has declined slightly and reached to 9.8%. The rate though is significantly high but indicates a better state as compared to earlier rate of 10%. The performance indicators of Franc economy assert that the economy is gradually making recovery and make a step towards expansionary stage.

The macroeconomic scenario of an economy can be presented using tools of aggregate demand and aggregate supply. The aggregate demand represents goods and services demanded in an economy at a certain point of time. Aggregate supply on the other hand presents goods and services actually produced and supplied in the economy. AD and AS curve together determines macroeconomic equilibrium indicting the level of national income and prices. The economic scenario differs in the short run from that in the long run. The aggregate demand curve slopes downward both in the short run and in the long run (Bernanke, Antonovics and Frank  2015). So far as aggregate supply is concerned, it slopes upward in the short run and is a vertical straight line corresponding to potential GDP in the long run.

Oligopoly and duopoly markets

The gradual recovery of the France economy can be seen from the shift of the equilibrium points from E₀ to E₁ to E_2. SRAS and LRAS represent the short run and long run supply curve respectively. A decline in the cost of production leads to an increase in productive activity, which in turn cause the aggregate supply curve to shift outward. As the short run supply curve shifts from SRAS0 to SRAS₁ and finally to SRAS_2. Along with this, long run supply curve also shifts raising income and pushing down price.

Recently, the economy needs a stimulus to aggregate demand. With a lack of aggregate demand, the aggregate demand curve shifts leftward from AD to AD_1. Consequently, there is a decline in both income and price level. This is revealed from the current data on France economy.

The main indicator of economic performance are growth of GDP, inflation and unemployment. Currently France follows a rigid labor law. By increasing availability of unemployment benefit, making hiring, and firing easy government intends to increase labor supply in the economy. However, what France currently need is to undertake expansionary policy to increase aggregate demand (Agénor and Montiel 2015). Rise of aggregate demand will create more jobs in the economy. This in turn will help to create more demand contributing to productivity and growth of the economy.

Education is a significant contributor of workers’ productivity. An educated and skilled workforce increase the supply of human capital in the economy. Once the economy rich in human capital it can produce better quality goods and services with less time. Therefore, the decision of Macron for investing in education will increases country’s productivity and brings economic growth. This can be explained as follows.

The benefit of education is explained using the framework of aggregate demand and aggregate supply. The investment in education will enhance development of skill. The labor market when enriched with skilled labor force then raise both short run and long run supply in the economy. This in turn will raise national income from Y0 to Y1 while decreasing price level from P0 to P1.

References

Agénor, P.R. and Montiel, P.J., 2015. Development Macroeconomics Fourth edition. Economics Books.

Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.

Bec, F., Bouabdallah, O. and Ferrara, L., 2015. Comparing the shape of recoveries: France, the UK and the US. Economic Modelling, 44, pp.327-334.

Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-Hill Higher Education.

Data.worldbank.org. (2018). France | Data. [online] Available at: https://data.worldbank.org/country/France [Accessed 29 Jan. 2018].

Fine, B., 2016. Microeconomics. University of Chicago Press Economics Books.

Gilbert, S., 2018. Natural Monopoly. In Multi-Market Antitrust Economics (pp. 113-129). Palgrave Macmillan, Cham.

Hein, E., Dünhaupt, P., Alfageme, A. and Kulesza, M., 2017. Financialisation and distribution in the US, the UK, Spain, Germany, Sweden and France: Before and after the crisis (No. 85/2017). Working Paper, Institute for International Political Economy Berlin.

Nicholson, W. and Snyder, C.M., 2014. Intermediate microeconomics and its application. Cengage Learning.

Rader, T., 2014. Theory of microeconomics. Academic Press.

Tradingeconomics.com (2018). France Government Budget | 1959-2018 | Data | Chart | Calendar | Forecast. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/france/government-budget [Accessed 17 Jan. 2018].

Varian, H.R., 2014. Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.