1. What are economies of scale? In what market

1.   
What
are economies of scale? In what market types (i.e. perfect competition,
monopoly, oligopoly,monopolistic competition) are economies of scale most
important? Why?

According to Quarcoo, Bonsi, Tackie
and Hunter (2017) economies of scale refers to the concept of cost advantage
that is attained when output or production of a product or service is increased
manifolds. The theory behind economies of scale is the inverse relationship
that exists between quantity produced and the fixed cost of producing a unit.
When the quantity produced increases, the cost per unit decreases and this
leads to economies of scale(Quarcoo, Bonsi, Tackie and Hunter 2017).

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Likewise, according to Burke,
Genn-Bashand Haines (2018) economies of scale is most important fornatural monopoly
(and for the monopolistic competition in the short run only). The reason is, in
a monopoly (natural) the economies of scale is continuous which leads to a continuous
drop in average total cost. Such a situation ensures that the marginal cost is
always lower than the average total cost over the entire scope of production
run. Economies of scale is not useful for monopolisticcompetition on a longer
run and it is also not useful in oligopoly and perfect competition, as it does
not affect the cost per unit production under these conditions(Burke, Genn-Bash
and Haines 2018).

1.   
Based
on the article above and some limited research what type of market form you
think the airline industry in Australia was in 2002/03? Support your answer
with reference to theory.

In the year 2002 -03 Qantas had a near
monopoly control over the Australian airline industry(Kain and Webb2003).
Although it was not a perfectmonopoly because there were small players like virginblue,
but because virgin blue was not in a position to challenge Qantas directly and evenly,
therefore the market structure was similar to a near monopoly. Furthermore, even
if the small players were there, the market structure did not become oligopoly became
the competition has to be there to ensure that no single player dictates the
market.Moreover, as virgin blue limited itself to just a few routes as compared
to a full-fledged operation of Qantas. Therefore, it will be appropriate to state
that australian airline industry in the years 2002- 03 was more or less a near
monopoly(Kain and Webb 2003).

According to Toshimitsu (2017) the economic
theory explains the market type by stating that the buyers and sellers in a competitive
market decide the market type. For example, if there are only a handful of
sellers with large market control and lots of buyers, an oligopoly may result. Likewise,
one or two sellers and substantial number of buyers may create a duopoly and so
on. The Australian airline industry in the year 2002 – 03 was affected by the
limited number of sellers or just one dominant seller and a large number of
buyers, thus creating a near monopoly market type(Toshimitsu2017).

1.   
Based
on the current data for France what phase of the business cycle do you think thiseconomy
is in? Why? (Hint: Refer to the macroeconomic indicators)

France at the given time is going
through a trough (depression) phase of business cycle. The main reason the
current business cycle phase is called trough because

·        
Economicactivity
is very low and interest rates are even lower (Dekimpeand Deleersnyder2018).

·        
Individual
income has gone down

·        
National
output has decreaseddramatically.

·        
Employment
levels are very low.

·        
Low
consumer demand(Dekimpe and Deleersnyder 2018)

Therefore, these indicators all point
towards a trough phase of business cycle.

 

1.   
Based
on your answer in 1 represent the French economy in 2017 using the AD/AS model.
(7marks)

The graph is
exhibiting the current state of French economy

·        
At
present economic activity of any kind is at its lowest in France.

·        
Likewise,
the gap between output (which is difference tweenactualsame potential output)
is very high.

·        
In
the graph the AD (aggregate demand) line is located near the left side of the
aggregate supply curve. This indicate an extremely low level of economicactivity,
which also means low real GDP located at Y1 position(Mueller 2016).

·        
Furthermore,
even if one or more components of aggregate demand are increased, it will
affect real GDP but there will be negligible impact on price levels in the
economy because there are still unutilised resources in the economy. Therefore,
in the current scenario AD (aggregate demand) may not be able to improve prices
in the French economy (Mueller 2016).

 

2.   
What
factors contribute to economic growth according to the AD/AS model? According
to thearticle above, what policy should the French government be undertaking to
stimulate economicgrowth.

                                                                                                                      

Increase in real GDP is the most
important measure of economic growth. According to the AD/AS modelfactors that contribute
to economic growth are (Dutt2016)

·        
A
rise in national consumption of goods or service

·        
Increase
in investment by public and private entities

·        
Increase
in governmentspending’s in building infrastructure(infrastructure development ensures
long term growth)

·        
An
increase in exports from the nation

·        
Reduced
interestrates

·        
Increase
in consumerconfidence

·        
Increase
in assetprice like house price.

·        
Increase
in real wages

·        
Improvement
in human capital skills

·        
Technological
development to boost commerce and trade(Dutt 2016)

 

The
French government must

 

·        
Increase
governmentspending in building infrastructure

·        
Develop
measures to increase consumerconfidence

·        
Focus
on increase in real wages

·        
Focus
on human skills and in reskilling workers

·        
Invest
in technological development that can boost growth by improving avenues of
trade and commerce(Dutt 2016).

 

3.   
Imagine
that instead of his planned reforms to the labour market, Macron invested in educatingworkers to increase their
skills and in infrastructure. How would this affect France’s economy inthe long-run? Demonstrate your answer with
a diagram and explain your diagram.

 

If Macron invests in
educating workers to increase their skills and in infrastructure it will increasethelong
run aggregate supply (LRAS), which can ensure long run economic growth(Mankiw
2017). It is necessary that LRAS must increase, otherwise the AD (aggregate
demand) will lead to inflation, something that is very detrimental.

If Macron invests only in labour market,
it will create a short-termimprovement in economy and the results will be short
lived. Therefore, it will be wise to invest in infrastructure and upskilling
employees, for a long term economicgrowth(Mankiw 2017).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

 

Burke, T., Genn-Bash, A. and Haines,
B., 2018. Competition in theory and practice (Vol. 3).
Routledge.

Dekimpe, M.G. and Deleersnyder, B.,
2018. Business cycle research in marketing: a review and research agenda. Journal
of the Academy of Marketing Science, 46(1), pp.31-58.

Dutt, A. K., 2016. Aggregate demand,
aggregate supply and economic growth. International Review of Applied
Economics, 20(3), pp.319-336.

Kain J. and Webb, R., 2003 .Turbulent
Times: Australian Airline Industry Issues 2003
accessed on 10th January 2018.

Mankiw N. G ., 2017. Aggregate Demand
and Aggregate Supply
accessed
on 10th January 2018.

Mueller, R., 2016. The Aggregate
Demand AggregateSupply (AD-AS)Model accessed
on 10th January 2018.

Quarcoo, F., Bonsi, C., Tackie,
D.N.O., Hill, W.A., Wall, G. and Hunter, G., 2017. Economies of Scale in
Integrated Pest Management in Vegetable and Fruit Production. Professional
Agricultural Workers Journal, 5(1), p.53.

Toshimitsu, T., 2017. On consumer
expectations in a network goods market: The monopoly case. Economics
Bulletin, 37(1), pp.488-493.