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Powerful Supermarkets Push The Cost Of Food

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  • Course Code: ECOM4000
  • University: Kaplan University
  • Country: United States

Discuss About The Powerful Supermarkets Push The Cost Of Food.

 

Answer:

Introduction

The market structure under which the operation of Coles and Woolworths takes place is oligopoly market structure (Andrew, 2014). This is because the supermarkets in Australia are several, but there are some giant supermarkets (McTaggart, Findlay and Parkin, 2012). The giant supermarkets controls the biggest market share (Richards and Devin, 2016).

Fig: Oligopolistic Market structure

Where MC is Marginal Cost. Oligopolies produce at MC = MR (Marginal Revenue). They sell quantity Q* at price P*. The demand curve for oligopoly firms is dD’ and has a kink. The reason for the kink is because the firms only follow a price cut but ignores a price rise. The path followed by a price raising oligopoly firm is ed’ because other fails to follow and thus a loss of market share (Abourizk, 2017). The path followed by price cutting oligopoly firm is eD’ because all others follow. The gap GH is a region where changes in MC has no impact on quantity change; only price changes (Gottheil, 2013).

In this market, players have market power. Competition is either through price or quantity (Strong, 2016). However, players are limited from raising prices to increase revenues. This is because, if one of the competing firms raise its price level, other players will ignore the move, this makers the initial customers for the price raising firm to shift their demand to other firms that never raised the price. The one firm ends up with reduced revenues. For price cuts, the revenues are also reduced because all other firms follow and thus the market share remains the same but sold at a lower price. It is on the interest of Coles to have price wars with Woolworths. This is because, Coles trying to kick Woolworth out of the market, it’s making it less profitable to stay in business. Cole is stealing a large market share from Woolworths; thus Woolworth is losing from the price wars.

 


Vegetables in Australia fall under competitive market structure. This is confirmed by source two and three. On the 2nd source, vegetable growers are noted to be impacted by the price discounts (Low, 2015). The farmers are price takers as they can only sell at the price offered by the supermarket players (Besanko, Braeutigam and Gibbs, 2011). On the 3rd source, 13% of the 136,800 firms (17,784 firms) sell directly to supermarkets. In perfect competitive markets, players are many, products are the same, and players can only increase revenues by raising the quantity of sales; they don’t have power over prices.

The price offered from price wars does not take into consideration the cost for producing the products. Thus, individual farmers may be selling at a loss or at a profit that is insignificant.

Graph: Short run Perfect competition

Players in this market produce at MC = MR. in this case, farmers are making losses because the price level is below the ATC (Average Total Cost). The losses in the short run will discourage some farmers and they will leave the farming business. Eventually, the losses will be eliminated as the number of farmers reduce and in the long run, the farmers will make only normal profits. The discouraged farmers may decide to produce other profitable products to eliminate the losses; otherwise they may change the line of business.

Spain was on a contractionary business cycle. Source one shows that the growth rate was negative (Román, 2014). The 2nd source shows that, the spending by consumers had fallen, indicating a reduction in aggregate demand. The unemployment rate was also very high.

Graph: Spain Aggregate Demand and Supply

Spain has not reached the F level of real GDP where it has fully employed all its resources. The Short Run Aggregate Supply (SRAS) curve intersect with AD curve at P0Y0. In 2013, the AD fell from AD0 to AD1, this lowers real GDP from Y0 to Y1, resulting in price level falling to P1.

Spain had entered an expansionary business cycle in 2014. This is confirmed by the increment in consumer spending from 91.15 in the 3rd quarter of 2013 to 91.55 in the first quarter of 2014. There was a slight increase in unemployment rate in the 1st quarter of 2014, but a big decline on the 2nd quarter. The economic growth rate also changed from negative to positive.

Graph: Spain Aggregate Demand and Supply

The Short Run Aggregate Supply (SRAS) curve intersect with AD curve at P0Y0. In 2014, the AD rose from AD0 to AD1, this raised real GDP from Y0 to Y1, resulting in price level rising to P1.

Unemployment rate = Unemployed/ (unemployed + employed)

Rates unemployment rate = 24.47

The number of employed = 17,353,000

24.47

24.47

24.47(17,353,000 + U) = 100U

424,627,910 +24.47U = 100U

424,627,910 = 100U - 24.47U

424,627,910 = 100U - 24.47U

424,627,910 = 75.53U

U = 5,621,977

The number of people unemployed is 5,621,977

India is on the expansionary phase of business cycle. There are certain allegations confirming this; the economy is fast-growing, there is recovery on private investment, households have higher real income, inflation is high meaning that aggregate demand is high, the tightening of monetary policy is also an indicator that the economy is doing well since expansionary policies would otherwise be employed and lastly the growth of GDP by 7.3% (Pandey, 2016).

Graph: Indian Aggregate Demand and Supply

The Short Run Aggregate Supply (SRAS) curve intersect with AD0 curve at P0Y0. In 2016, the AD for India rose from AD0 to AD1, this raised real GDP from Y0 to Y1, resulting in price level rising to P1. India is operating at price P1 and real GDP level Y1.

The falling energy costs will be inflationary for the Indian economy. This is because the economy is already under inflation. Lower energy costs will add to the income of households; an increase in disposable income will consequently raise aggregate demand.

Graph: Indian Aggregate Demand and Supply after a fall in energy costs

In 2016, the AD for India rose from AD0 to AD1, this raised real GDP from Y0 to Y1, resulting in price level rising to P1. If now energy costs fell, the increased disposable income will raise aggregate demand from AD1 to AD2; Real GDP will rise from Y1 to Y2; price level will rise from P1 to P2 (Inflationary).

The Indian macroeconomic Indicator that was to be observed closely is the consumer inflation. This is because the inflation rate was high, and the falling energy costs were most likely to push it higher. This would have worsened the situation of this economy. The reserve bank of Indian through its monetary policy tools could lower inflation by raising interest rates or lowering money supply. At higher rates, borrowing from financial institutions will be discouraged and households won’t have sufficient funds to maintain the high aggregate demand; falling aggregate demand pushes price down. This is a similar case for reduced money supply.

 

References

Abourizk, R. (2017). Oligopoly: Definition, Characteristics & Examples. [Online] Study.com. Available at: https://study.com/academy/lesson/oligopoly-definition-characteristics-examples.html [Accessed 08 Sep 2018].

Andrew, (2014). Australian Oligopolies. [Online] Blog.adonline.id.au. Available at: https://blog.adonline.id.au/oligopolies/ [Accessed 08 Sep 2018].

Gottheil, M. (2013). Microeconomics. Mason, Ohio: South-Western.

Besanko, D., Braeutigam, R., and Gibbs, M. (2011). Microeconomics. Hoboken, NJ: John Wiley.

Low, C. (2015). Woolworths trails Coles on grocery prices: Macquarie analysis shows. [Online] Financial Review. Available at: https://www.afr.com/business/retail/woolworths-trails-coles-on-grocery-prices-macquarie-analysis-shows-20150708-gi7iyz#ixzz3jPN0wEzX [Accessed 7 Sep. 2018].

McTaggart, D., Findlay, C. and Parkin, M. (2012). Macroeconomics. AU. Pearson Higher Education.

Mortimer, G. (2013). FactCheck: is our grocery market one of the most concentrated in the world? [Online] The Conversation. Available at: https://theconversation.com/factcheck-is-our-grocery-market-one-of-the-most-concentrated-in-the-world-16520 [Accessed 07 Sep 2018].

Pandey, V. (2016). India still fastest-growing economy in world gripped by uncertainty: IMF. [Online] The Economic Times. Available at: https://economictimes.indiatimes.com/news/economy/indicators/india-still-fastest-growing-economy-in-world-gripped-by-uncertainty-imf/articleshow/51796401.cms [Accessed 9 Sep. 2018].

Richards, C. and Devin, B. (2016). Powerful supermarkets push the cost of food waste onto suppliers, charities. [Online] The Conversation. Available at: https://theconversation.com/powerful-supermarkets-push-the-cost-of-food-waste-onto-suppliers-charities-54654 [Accessed 09 Sep 2018].

Román, D. (2014). Spanish Growth Quickens, Says Central Bank. [Online] WSJ. Available at: https://www.wsj.com/articles/spanish-economy-picked-up-pace-in-second-quarter-1406107241 [Accessed 8 Sep. 2018].

Strong, P. (2016). Why Australia’s love affair with oligopolies needs to end. [Online] SmartCompany. Available at: https://www.smartcompany.com.au/business-advice/legal/why-australias-love-affair-with-oligopolies-needs-to-end/ [Accessed 07 Sep 2018

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