Economic Theory - Coursework Example

Economic Theory Contents Part Firms Perspective 3 Part 2: Macroeconomic Perspective 4 Reference List 8 Part Firms Perspective a) Qantas Airlines is a well known premium airline company of Australia. After the global recession of 2008, consumers prefer to avail the services of low cost airlines, at the expense of minimal frill benefits. The International Monetary Fund (IMF) indicated that crude oil prices will surge by 20 % to 30 % in the near future (Abeles, 2001). Other factors such as problems in Persian Gulf, increased carbon taxes and reduced oil supply from Iran has augmented the global price of oil.

Such outcomes have increased fuel cost faced by Qantas from 14% to 28% (Abeles, 2001). Increasing cost has forced to enhance the prices of the company’s airline services. Rise in airline fares have lowered demand for the organizations’ aviation services. Figure 1: Price-Quantity Situation Qantas Price P2 B P1 A Quantity Demanded Q2 Q1 (Source: Author’s Creation) The above figure shows the case of contraction of demand (from A to B), where rise in price of Qantas’s services (from P1 to P2), has lowered its aggregate quantity of demand from Q1 to Q2. 1(b) Qantas Airlines is a premium airline company of the global aviation industry.

On the other hand, Tiger Airways is a low cost aviation organization, conducting trade within the same industry. Crude oil is a primal raw input for both the organizations, but the overall ticket prices Qantas is higher than Tiger Airways. Rise in fuel prices have enhanced the demand for both premium and low cost airline companies in the market (Abeles, 2001). All the aviation firms experience monopolistic threats of market rivalry and hence, face relative elastic demand in the market. Elasticity is the degree of responsiveness between the rate of change of quantity demanded with respect to rate of change of price (Mankiw and Taylor, 2006).

Rise in price has lowered Qantas’s market demand share and enhanced the demand for Tiger Airways. This is because; price rise, has made Qantas’s services less competitive than the same of Tiger Airways. Price rise have decreased the real income thresholds of the consumers (Mankiw and Taylor, 2006). Due to declining real income, consumers prefer to buy inferior quality of aviation services provided by low cost airlines. Thus, both the firms (Qantas and Tiger Airways) are facing relatively elastic demand in the market (elasticity >1; rise in quantity demanded is more than rise in price) (Corsetti and Dedola, 2003).

Demand for Qantas’s services is declining because of negative price effect and the same of Tiger Airways is increasing because of positive substitution effect. 2(a) During 2002 and 2003, the Australian aviation industry experienced monopolistic market competition. Under this regime, each company such as Qantas, Virgin Blue and Ansett Group provided qualitatively differentiated services in the market (Casson and Wadeson, 2012).These sellers established their own service prices, according to the extent of their product or service features.

Advertisement expenses were high for such firms and they experienced supernormal profits or losses in business (Mankiw and Taylor, 2006). The total strength of buyers was infinite but the sellers were finite in this type of market structure. 2 (b) An oligopolistic market structure is characterized by very few sellers and infinite number of buyers. Each seller owns a large share of industry demand in this type of a market. Oligopolistic firms often collude with each other, for experiencing mutual benefits and becoming one single dominant business power in the market (Casson and Wadeson, 2012).

Oligopolistic firms stay at the Nash equilibrium, if they collude with each other. At this equilibrium, different business entity interaction processes (of both the organizations) are stable. Under this regime, both the colluded business parties experience additional commercial benefit through mutually undertaken business level strategies. If the Australian aviation industry is oligopolistic and competitors such as Qantas and Virgin colludes with each other; then both the firms will operate at the Nash equilibrium.

The two collude firms will enjoy monopoly business power in the oligopolistic industry (Casson and Wadeson, 2012). Second degree price discrimination will be the best pricing strategy for the two combined business firms. Under this regime, the two companies will establish airline service prices on the basis of price elasticity of demand of each group of buyers in the market (Corsetti and Dedola, 2003). Part 2: Macroeconomic Perspective 1(a) The short run equilibrium in Japan’s economy will take place at the point of intersection between its short run real GDP (Gross Domestic Product) supply and real GDP demand.

GDP is the value of final goods and services produced within the domestic territory of a country, during a particular year. Figure 2: Short Run Equilibrium Real GDP Demand Short Run Real GDP Supply 95 yen 500 trillion yen (Source: Author’s Creation) In the short run, the equilibrium price is 95 yen and the equilibrium quantity supplied and demanded is 500 trillion yen. 1(b) The schedule shows that Japan faces an inflationary gap in its economy.

At the initial stages, the aggregate GDP demand quantity of the nation was more than its aggregate short run GDP supply. Greater demand relative to supply caused inflation in the economy of the nation and finally augmented its aggregate price level in the market (Corsetti and Dedola, 2003). Eventually, as the price level started to increase, the GDP demand of the country declined and aggregate supply become excess in the market. In order to eradicate the inflationary gap, the Japan’s political authorities should undertake expansionary fiscal policies in its economy (Corsetti and Dedola, 2003).

Such policies can be adopted by lowering the tax rates, increasing the welfare maximizing unilateral expenditures and increasing the amount of subsidies provided in the country (Oesch, 2010). Expansionary fiscal policies will help to once again revive the aggregate GDP demand of the country. 2(a) A business cycle elaborates the changes in the demand side factors of an economy. Such changes can be measured in terms of the country’s gross domestic product. Gross Domestic Product (GDP) = Consumption + Investment + Government Expenditure + Net Factor Income Received from Abroad (NX) Figure 3: Business Cycle (Source: Colorado, 2014) The above figure shows different stages of a business cycle.

According to the report, Italy was in the downturn or recessionary stage of business cycle in 2012. At this stage, the country experienced a fall in its gross domestic productivity level. Fall in employability, collapse of aggregate consumption spending and fall in government expenditure were the basic features experienced by the country, at that point of time (Oesch, 2010). During recession, the aggregate supply in the economy exceeds the aggregate demand. 2(b) An economy faces recession when its aggregate demand becomes less than collective supply in the market.

Figure 4: Demand Supply Model for Recession Aggregate Supply P1 P2 Final Aggregate Demand Initial Aggregate Demand Q2 Q1 (Source: Author’s Creation) The above figure explains the recession of Italy, through the aggregate demand and supply model. Recession had declined the aggregate supply of money in the Italian economy (McAfee, 2009).

The cost of investments made by the private and public sector enhanced due to decreased supply of money in the economy (Mankiw and Taylor, 2006). Such outcomes lowered the aggregate employability and consumption spending in the country. Given the supply curve, when the aggregate demand curve of Italy decreased (or shifted to the left), then the equilibrium price (from P1 to P2) and quantity (Q1to Q2) declined in the economy. 2(c) Unemployment rate elaborates the total percentage of jobless individuals in a country.

It includes only the involuntary unemployed workforce of an economy (Howker and Malik, 2010). Unemployment Rate = Total Number of Unemployed Individuals / Total Labour Force According to the table: January 2013 July 2013 Working Age Population 40100000 40900000 Labour Force 20000000 27000000 Total Number of Unemployed Individuals (Working Age Population- Labour Force) 20100000 13900000 Unemployment Rate 1.01 0.51 Labour Force Participation Rate (Labour Force/ Working Age Population) 0.49 0.

66 The labor force participation rate measures the proportion of employed and involuntarily unemployed individuals of a country (Howker and Malik, 2010). The voluntarily unemployed individuals of a nation are not included within its workforce participation rate. The above table shows that unemployment rate from January 2013 to July 2013, the unemployment rate of Italy has slightly declined (from 1.01 to 0.51). While the labor force participation rate of the country has slightly increased (from 0.49 to 0.66).

During the tenure, the proportion of unemployment rate has declined in Italy and this has helped to enhance its aggregate employability and labor force participation rate. Reference List Abeles, T. P., 2001. Impact of Globalization. The Impact zation. On the Horizon, 9(2), pp. 2 – 4. Casson, M. and Wadeson, N., 2012. The economic theory of international business: a supply chain perspective. Multinational Business Review, 20(2), pp. 114-134. Colorado, 2014. Business cycles. [online] Available at: [Accessed 30 September 2014].

Corsetti, G. M. and Dedola, L., 2003. Macroeconomics of international price discrimination. London: Centre for Economic Policy Research. Howker, E. and Malik, S., 2010. Jilted Generation: how Britain has bankrupted its youth. London: Icon Books. Mankiw, G. N. and Taylor, M. P., 2006. Microeconomics. Connecticut: Cengage Learning EMEA. McAfee, R. P., 2009. Competitive solutions: The strategists toolkit. Princeton: Princeton University Press. Oesch, D., 2010. What explains high unemployment among low-skilled workers?

evidence from 21 OECD countries European. Journal of Industrial Relations 16(1), pp. 220-288.