1. Whatare economies of scale? In what market types (i.e. perfect competition,monopoly, oligopoly,monopolistic competition) are economies of scale mostimportant? Why? According to Quarcoo, Bonsi, Tackieand Hunter (2017) economies of scale refers to the concept of cost advantagethat is attained when output or production of a product or service is increasedmanifolds. The theory behind economies of scale is the inverse relationshipthat exists between quantity produced and the fixed cost of producing a unit.
When the quantity produced increases, the cost per unit decreases and thisleads to economies of scale(Quarcoo, Bonsi, Tackie and Hunter 2017). 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, ina monopoly (natural) the economies of scale is continuous which leads to a continuousdrop in average total cost.
Such a situation ensures that the marginal cost isalways lower than the average total cost over the entire scope of productionrun. Economies of scale is not useful for monopolisticcompetition on a longerrun and it is also not useful in oligopoly and perfect competition, as it doesnot affect the cost per unit production under these conditions(Burke, Genn-Bashand Haines 2018). 1. Basedon the article above and some limited research what type of market form youthink the airline industry in Australia was in 2002/03? Support your answerwith reference to theory. In the year 2002 -03 Qantas had a nearmonopoly 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, evenif the small players were there, the market structure did not become oligopoly becamethe competition has to be there to ensure that no single player dictates themarket.Moreover, as virgin blue limited itself to just a few routes as comparedto a full-fledged operation of Qantas.
Therefore, it will be appropriate to statethat australian airline industry in the years 2002- 03 was more or less a nearmonopoly(Kain and Webb 2003).According to Toshimitsu (2017) the economictheory explains the market type by stating that the buyers and sellers in a competitivemarket decide the market type. For example, if there are only a handful ofsellers 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 soon. The Australian airline industry in the year 2002 – 03 was affected by thelimited number of sellers or just one dominant seller and a large number ofbuyers, thus creating a near monopoly market type(Toshimitsu2017).1. Basedon the current data for France what phase of the business cycle do you think thiseconomyis in? Why? (Hint: Refer to the macroeconomic indicators)France at the given time is goingthrough a trough (depression) phase of business cycle. The main reason thecurrent business cycle phase is called trough because · Economicactivityis very low and interest rates are even lower (Dekimpeand Deleersnyder2018).
· Individualincome has gone down· Nationaloutput has decreaseddramatically.· Employmentlevels are very low.· Lowconsumer demand(Dekimpe and Deleersnyder 2018)Therefore, these indicators all pointtowards a trough phase of business cycle.
1. Basedon your answer in 1 represent the French economy in 2017 using the AD/AS model.(7marks) The graph isexhibiting the current state of French economy· Atpresent 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.· Inthe graph the AD (aggregate demand) line is located near the left side of theaggregate 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 willaffect real GDP but there will be negligible impact on price levels in theeconomy because there are still unutilised resources in the economy. Therefore,in the current scenario AD (aggregate demand) may not be able to improve pricesin the French economy (Mueller 2016). 2. Whatfactors contribute to economic growth according to the AD/AS model? Accordingto thearticle above, what policy should the French government be undertaking tostimulate economicgrowth. Increase in real GDP is the mostimportant measure of economic growth. According to the AD/AS modelfactors that contributeto economic growth are (Dutt2016)· Arise in national consumption of goods or service· Increasein investment by public and private entities· Increasein governmentspending’s in building infrastructure(infrastructure development ensureslong term growth)· Anincrease in exports from the nation· Reducedinterestrates· Increasein consumerconfidence· Increasein assetprice like house price.· Increasein real wages· Improvementin human capital skills· Technologicaldevelopment to boost commerce and trade(Dutt 2016) TheFrench government must · Increasegovernmentspending in building infrastructure· Developmeasures to increase consumerconfidence· Focuson increase in real wages· Focuson human skills and in reskilling workers· Investin technological development that can boost growth by improving avenues oftrade and commerce(Dutt 2016).
3. Imaginethat instead of his planned reforms to the labour market, Macron invested in educatingworkers to increase theirskills and in infrastructure. How would this affect France’s economy inthe long-run? Demonstrate your answer witha diagram and explain your diagram.
If Macron invests ineducating workers to increase their skills and in infrastructure it will increasethelongrun aggregate supply (LRAS), which can ensure long run economic growth(Mankiw2017). It is necessary that LRAS must increase, otherwise the AD (aggregatedemand) 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 shortlived.
Therefore, it will be wise to invest in infrastructure and upskillingemployees, 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. Journalof the Academy of Marketing Science, 46(1), pp.31-58.Dutt, A. K.
, 2016. Aggregate demand,aggregate supply and economic growth. International Review of AppliedEconomics, 20(3), pp.319-336.Kain J.
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N.O., Hill, W.A., Wall, G.
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Toshimitsu, T., 2017. On consumerexpectations in a network goods market: The monopoly case. EconomicsBulletin, 37(1), pp.