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Firm Perspective: Macroeconomic Perspective

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Questions:

Part 1: Firm Perspective

1. Based on the article what market form did the market for graduation regalia (a gown, hood and mortar board) at ANU most closely resemble before Mr. Liu started his UniGowns business? Why? Represent this using an economic diagram and the relevant price from the article.

2. Once the students started their rival business (UniGowns) what form would the market for a graduation set at ANU have taken? Explain your answer with reference to theory. How does the price and quantity in this market compare to the price and quantity before the students started this business?

3. Describe a business that you and your friends can start this year. What market form (i.e. monopolistic competition) is the market you want to operate in? How will this market form affect your profits? Draw a diagram to represent the market your business will be operating in and your individual cost curves. You will need to do some research here.

Part 2: Macroeconomic Perspective

1. Why might the misery index consist of measures of unemployment and inflation rates? What are the negative consequences of high unemployment (especially cyclical unemployment if it persists for a long time) and high inflation for the economy?

2. Based on the information in the above article and your own research what is likely happening to Australia’s real GDP in 2015? Explain why with reference to theory.

3. Use an aggregate demand and supply model to demonstrate where the Australian economy is currently operating in relation to full employment and explain the reasons for this. Based on your diagram, the above sources and your research what phase of the business cycle do you think the Australian economy is currently in? Explain your reasoning.

4. Based on your research what type of fiscal policy is the government pursuing at the moment? Do you believe this is appropriate given the state of the economy at the moment? Explain why or why not with the aid of a diagram.

5. Based on your research what type of monetary policy is the RBA pursuing at the moment?
 
 

Answers:

Part 1: Firm Perspective

Source 1:

1.) From the article provided, it can be said that the market for the graduation regalia which comprises of the gown hood and the mortar board at ANU resembles the monopoly structure of the market. The market resembled the monopoly structure before Mr Liu had started his own business. The characteristics of the monopoly market can be seen in the market structure presented in the article. In case of a monopoly market there is existence of only one supplier that supplies to the entire industry. In a monopoly market the company has higher authority over the market (Weber, Myers and Tucker, 2000). The price is set by the seller in case of the monopoly market. There is no impact of competitive pricing on the pricing strategy (The Economic Times, 2015). Thus in case of a monopoly market the supplier is the king. As the company has more power over the market, it can set the price and keep the profit margin higher. In the following diagram, the monopoly market structure has been represented in the form of price and quantity (Mankiw and Harris, 1998). The equilibrium quantity and price can be seen in the monopoly market. The Q* represents the equilibrium quantity and P* represents the equilibrium price.

2.)  The market structure post the students has started their rival business ( Unigowns) changed to duopoly market structure. It is a special form of oligopoly market. In the duopoly structure of the market there are only two producers that supplies the product. In the present scenario of selling gown to the students it can be said that after the students started their business, market structure changed to duopoly structure as there are two producers or sellers in the market. In case of ANU, similar case was noticed. The entry of the UniGowns into the market transformed the market structure from monopoly form to duopoly form. The market became competitive. The competitive firm is different from the monopoly firm. It is the price taker. In case of a monopoly firm, there are no competitors and the firm is free to choose the price and quantity. But in case of duopoly there is competitive form of pricing. The price is determined by the competing firms on the basis of the price set by the other firm. The freedom of setting the price of a product is not available in case of a duopoly (Thurow, 2008). The firms operating in a duopoly keeps the firms choice of output as fixed and the production quantities are set on the basis of the quantities that are produced by the competing firms. In the previous situation there was only one supplier selling the gowns to the University students (Gatti, Kirman and Gallegati, 2008). Thus they could charge a higher rate for the customers. But with the advent of Unigowns in the market, there was competition between UC union monopoly and the business started by ANU alumni. As Unigowns sold the gowns at a reduced rate of $89 the price of hiring was dropped by UC Union to $110 from $130. They also set a special price of $89.95 during the October graduation.

3.)  The business that was started by our friend group is an organic food canteen at the campus of University of Canberra. Earlier there was an organic food canteen at the premises of the University campus. It was a monopoly firm. The firm used to sell the organic food at high rates. It was preferred by the students of the University campus since it is a healthy form of food. The canteen started by me and our friends will sell organic food products at 5% reduced rates than the already existing canteen. The initial profit margin will be low but the quantity of food items sold will be more. The new canteen started by us will change the market structure from monopoly to duopoly. Competitive pricing will be one of the major changes that will be implemented in this form of market. This will keep the price of the food items sold by the competing organic firm under control. The existing canteen will have to change its pricing strategy and transform from being a price maker to a price taker. Our canteen will sell the same quality of food at lower prices. This will provide tough competition to the existing canteen selling organic food. The market strategy set by our group aims at selling food items at cheaper rates to the students at the campus.

 

Part 2 – Macroeconomic perspective

1.) Misery index is the sum of rate of unemployment and inflation rate for a given period of time in order to measure the health of the economy. The rate of inflation and the rate of unemployment are key indicators of the economic performance of the country. The rise in the misery index indicates that the condition of economy is worse. The inflation rate depends on the money supply in the country.  The monetary policy of the country controls the money supply in the country. With the increase in the rate of inflation, the prices of the goods increase. The rise of the prices of the goods results in decline of the purchasing power of the people. This increases the misery of the people. The cost of production of goods increases. This results in rise of price of the goods. As a result of the increase in inflation rate, there is decline in the investment. The growth of the economy is stalled with the decline in the number of investments. Thus the misery index is the key indicator of the economic performance of the country (Croushore, 2015).

High inflation rate has negative impact on the performance of the economy. With the rise in rate of inflation, the price of the goods increases. The rise in the price of the goods reduces the purchasing power of the individuals. There is decline in the standard of living of the people. The consumers demand for high wage rate as they are unable to meet the expenses. The rise in the rate of inflation results disparity between the income and expense of the consumers. On a medium term basis, high rate of inflation results in unemployment which leads to loss the international competitiveness of the country.

On the other hand, high rate of unemployment has negative impact on the economy. The slag in the growth of the economy, the economy faces recession. There are fewer jobs in the country. The decline in the purchasing power of the individuals results in lesser demand for the goods. There is high disparity between demand and supply in the country. High rate of unemployment results in erosion of skills. This has adverse impact on the economic performance of the country. It is basically robbing the economy of the country without utilizing the useful talents. The unemployment rate in the economy shows cyclical trends in growth and production that is seen in the business cycle. The peak in the business cycle will result in low cyclical unemployment because at time the total economic output will be maximized. But with the fall of the economic output, which can be measured by the gross domestic product (GDP) , the business cycle will be low and there will be significant rise in the cyclical unemployment.

Cyclical unemployment is described by the economists as a business that does not have enough demand for labor to employ as there is lack of labor in the country. The lack of demand fro employees occurs as there is lack of expenditure and consumption in the economy.

2.) The real GDP of Australia is better than the previous year. Since 2012, the growth of the real GDP of Australia has been at a rate of 2.3% (Wong, 2014). But there has been decline in the trade by 3.5% in 2015 (Data.worldbank.org, 2015). With the decline in the terms of trade, the expected growth rate of GDP will be 4.5% in 2015 (Statista, 2015). The growth rate in Australia will be supported by higher exports. The contribution of the resource sector to real GDP will fall. The economy of Australia will grow in a sustainable manner with the contribution from the non resource sectors (Garnett, Lewis and Hubbard, 2015).

3.)  The rate of unemployment in Australia has declined by 6.1% in December 2014. As there has been significant growth in the employment rate of the country with the growth of the economic performance, the unemployment rate has reduced (Tradingeconomics.com, 2015). There has been increase in the supply of labor in Australia as the demand for the jobs has increase in the country.

At full employment, the aggregate demand and supply is represented by –

 The rise in the rate of employment is a result of the increase of the aggregate demand for jobs. As the economy is recovering, there is increase in the number of investments (the Guardian, 2015). The productivity of the economy is rising. There is creation of jobs in the country. The rise in the demand for jobs has been plotted in the graph as the demand curve has shifted upwards.

The term recovery can be used to describe the stage of the business cycle in Australia (Cooley, 1995). The economy is recovering from a low point and it is expected that there will be better conditions for Australia in the near future (Galí, 2008). There will be sound investment in the economy and the productivity of the economy will rise (Achuthan, 2012). There is fall in the rate of unemployment in the country with the rise in the demand for jobs (the Guardian, 2014); (Puu and Sushko, 2006).

4.) The aim of the Government of Australia is to reach at a fiscal surplus. The major decision that has been taken by the Government includes investment for the development of Australian schooling, development of infrastructure of Australia which will enhance the productivity of the economy (Budget.gov.au, 2015).  A fairer policy will be implemented in Australia. The fiscal policy in Australia will maintain high rate of growth in Australia with a low rate of unemployment. For this purpose the Government has designed a stimulus package (Carmignani, 2013). Apart from the resource sectors that contribute to the growth of the economy like the production sector and exports, the non resource drivers of the economy will boost the economic growth of the country. The Government will continue to put strict measures to restrain on spending. This will control the money supply in the country and the growth of Australia will not be hampered. The economic condition of the country will be stable. The measures have been taken by the Government to offset the low receipt of tax in the previous year (Aph.gov.au, 2015).

The fiscal policy has been implemented by the Government to boost the economic growth of the country.

5.)  The monetary policy formulated by the Reserve Bank of Australia has the following features –

  • There has been significant reduction in the cash rate of the country. The cash rate has been reduced by 25 basis points. At present the cash rate is 2.25 percent. The reduction in the cash rate will be effective from 4th February 2015(Rba.gov.au, 2015).

  • The monetary policy that has been formulated by RBA is the easing monetary policy. There is considerable reduction in the oil prices globally. The economy is in disinflation.

The money supply in the country is controlled by an effective monetary policy. The interest rate has been reduced which will boost the money supply in the country (Rba.gov.au, 2015). The rate of interest will be reduced that will boost the money supply in the economy.  The control in the supply of money will maintain the inflation rate in a stable condition. In this way the high rate of unemployment will be controlled. The interest rate decisions taken by the Reserve Bank of Australia will control the money supply in the economy (Rba.gov.au, 2015). The money supply in the country will have significant impact on the inflation rate of the country. If the money supply in the country is high then the purchasing power of the consumers will rise. The rise in purchasing power of the consumers will result in high rate of consumption of the consumers. This will result in rise of price of the goods with excess demand (Rba.gov.au, 2015).

 

References

Achuthan, L. (2012). Beating the business cycle. [S.l.]: Must Read Summaries.

Aph.gov.au, (2015). The tools of macroeconomic policy—a short primer  – Parliament of Australia. [online] Available at: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook44p/MacroeconomicPolicy [Accessed 10 Feb. 2015].

Budget.gov.au, (2015). Budget Strategy and Outlook 2013-14 - Budget Paper 1 - Statement 4: Fiscal policy in the current economic environment - Introduction. [online] Available at: https://www.budget.gov.au/2013-14/content/bp1/html/bp1_bst4-01.htm [Accessed 10 Feb. 2015].

Carmignani, (2013). What is “good fiscal policyâ€Â in Australia?. [online] The Conversation. Available at: https://theconversation.com/what-is-good-fiscal-policy-in-australia-17589 [Accessed 10 Feb. 2015].

Cooley, T. (1995). Frontiers of business cycle research. Princeton: Princeton University Press.

Croushore, D. (2015). Money and Banking: A Policy-Oriented Approach. pp.500-600.

Data.worldbank.org, (2015). GDP growth (annual %) | Data | Table. [online] Available at: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG [Accessed 10 Feb. 2015].

Galí, J. (2008). Monetary policy, inflation, and the business cycle. Princeton, N.J.: Princeton University Press.

Garnett, A., Lewis, P. and Hubbard, G. (2015). Essentials of Economics. pp.400-500.

Gatti, D., Kirman, A. and Gallegati, M. (2008). Interaction and Market Structure: Essays on Heterogeneity in Economics. pp.40-50.

Mankiw, N. and Harris, R. (1998). Principles of microeconomics. Fort Worth, TX.: Dryden Press.

McEachern, W. (2015). ECON Macroeconomics. pp.100-200.

Puu, T. and Sushko, I. (2006). Business cycle dynamics. Berlin: Springer.

Rba.gov.au, (2015). RBA: Inflation Target. [online] Available at: https://www.rba.gov.au/monetary-policy/inflation-target.html [Accessed 10 Feb. 2015].

Rba.gov.au, (2015). RBA: Interest Rate Decisions - 2015. [online] Available at: https://www.rba.gov.au/monetary-policy/int-rate-decisions/index.html [Accessed 10 Feb. 2015].

Rba.gov.au, (2015). RBA: Monetary Policy. [online] Available at: https://www.rba.gov.au/monetary-policy/ [Accessed 10 Feb. 2015].

Rba.gov.au, (2015). RBA: Statement on the Conduct of Monetary Policy - 24 October 2013. [online] Available at: https://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-6-24102013.html [Accessed 10 Feb. 2015].

Statista, (2015). Australia - Gross domestic product (GDP) growth rate 2018 | Statistic. [online] Available at: https://www.statista.com/statistics/263602/gross-domestic-product-gdp-growth-rate-in-australia/ [Accessed 10 Feb. 2015].

The Economic Times, (2015). Monopoly Definition | Monopoly Meaning - The Economic Times. [online] Available at: https://economictimes.indiatimes.com/definition/monopoly [Accessed 10 Feb. 2015].

the Guardian, (2014). Australia's unemployment rate falls to 6.1% in August. [online] Available at: https://www.theguardian.com/business/2014/sep/11/australias-unemployment-rate-falls-to-61-in-august [Accessed 10 Feb. 2015].

the Guardian, (2015). Australia unemployment and employment statistics | Business | The Guardian. [online] Available at: https://www.theguardian.com/business/unemployment-and-employment-statistics-australia [Accessed 10 Feb. 2015].

Thurow, J. (2008). The maverick firm in duopoly markets. Laramie, Wyo.: University of Wyoming.

Tradingeconomics.com, (2015). Australia Unemployment Rate | 1978-2015 | Data | Chart | Calendar. [online] Available at: https://www.tradingeconomics.com/australia/unemployment-rate [Accessed 10 Feb. 2015].

Weber, W., Myers, A. and Tucker, I. (2000). Homework sets, Microeconomics for today, second edition, Irvin B. Tucker. Cincinnati, Ohio: South-Western College Pub.

Wong, L. (2014). Australia's growth slows in Q3, misses forecast. [online] CNBC. Available at: https://www.cnbc.com/id/102233965 [Accessed 10 Feb. 2015].

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