Name Namrata Kumar

Question 1

You learnt that the Organization of Petroleum Exporting Countries (OPEC) decided to
reduce the supply of oil by 9.7 million barrels per day from May 2020. In this context,
answer the following questions.
Question 1A: Name and describe the phenomenon which involves such joint decision-
making. What are its advantages and disadvantages? (2+2 marks)

The phenomenon which involves such joint decision-making by Oligopoly market is called
Collusion.

Advantages of this are as follows:

• Ability to handle price from falling: Firms can hold down industry output, charge a
higher price, and divide up the profit among themselves.

• Firm control: Such organization also has firm control over the market and its
critical decisions.

• More political stability and decision-making ability: As OPEC is not democratic in

nature hence it has more stability as they can make decisions considering only
OPEC’s perspectives and make firm decision as one organization with not many
oppositions.

• Reduce burden: Required cost, research and development can be divided among the
partners to reduce burden.

Disadvantages:

• Less Choices: The consumers have very limited choices and options for the services
that they want. In many cases having to choose a company in an oligopoly is like
choosing the lesser evil.

• Fixed Prices: There is a set limit for just how low prices can go, forcing consumers
to pay high prices no matter what.
 • No Fear of Competition: Often the companies that are in the oligopoly market
become very settled with their business. The profits and the way they run are
guaranteed to work, so they no longer feel the need to come up with creative or
innovate new ideas.
• New entry in market: It’s tough for creative and new supplier’s entry in market.

Question 1B: What made OPEC decide to cut the supply of oil? What was the
desired outcome of the decision? What was the change in the supply and demand
curves of oil and the subsequent market equilibria? Analyze the changes both
before and after the decision to reduce supply. (1 + 1 + 3 marks)

There was a worldwide collapse in demand due to lockdown. The falling demand of the oil
led to the reduction of cost in petrol. Hence OPEC had to reduce the supply to stabilize the
price and prevent it from falling further. Traders also worried that the storage space for oil
would be run out.

The major desired outcome was that :

• Price of oil to stop falling.
• Reduction in storage cost of oil.

Supply and demand curves change before the decision to reduce supply is as below:
The demand for oil had decreased due to covid lockdown. The supply became surplus hence
the supply demand cure shifted towards bottom leading to decrease in prices.
Supply and demand curves change after the decision to reduce supply is as below:

When the supply reduced the demand was increased which led to upward shift of the graph.
Leading to increase in the prices.

Demand had increased as office started , improvement of supply chain took place due to
lockdown upliftment. Normal life resumed. Demand start picking up.
Question 1C: What market structure does the OPEC operate in? What are the key
features of such a market structure? (1 + 3 marks)

Market structure in which OPEC operate in is Oligopoly market.

Feature of Oligopoly market are :

1.Greater Market Share due to small number of competitions: The number of firms in an
oligopoly market is small where each firm controls an important proportion of the total
supply. The effect of a change in the price or output decision of one is noticeable and
significant. When a firm takes an action, its rivals will, in all probability, react to it.

2. Indeterminate Demand Curve: The demand curve of an individual firm under oligopoly
is indeterminate because it depends upon the uncertain reactions of its rivals.

3. High barriers to Entry: Unlike firms under monopolistic competition, there are various
barriers to the entry of new firms. These are similar to those under monopoly. Entry of new
firms into oligopoly market is difficult. It is neither free nor barred.

4. Profit margins are high: As the market is captured by few firms and price can be
controlled by them solely. Lesser the competition better the control on the price.

5. Interdependence: The distinctive feature of an oligopoly industry is that sellers must

recognize their interdependence. The action of one seller affect another and thus cause that
seller to respond in ways that will affect the first seller. But oligopolists are likely to deal
with this interdependence in difference ways, depending on the specific nature of the
industry.
A price war may occur in response to a seemingly innocuous price change. Many factor,
such as industry maturity, nature of the product, and methods of doing business, can affect
the way firms respond to actions of rivals.
Question 2

Question 2A: Assume that the business was operating at the profit maximizing level of
output before Covid-19. Each article brought in an ad revenue of €375.
• How many articles was the business producing? (2 marks)
• What was the total profit? (1 mark)
• Explain conceptually how you arrived at the profit maximising level of output. You don't need
to show exact calculations. (3 marks)

1. Business is producing 92 articles as that is that point of maximum profit

2. Profit earned at max profit is € 2500/-

3. Profit maximizing level is the level at which the marginal cost is equal to the marginal
revenue. Here there is no change in profit, going beyond this production limit increases our
marginal cost, which is not recovered.

Marginal cost is change in total cost/ change in quantity. Total cost includes fixed cost plus the
variable cost incurred in production of an entity.

Marginal revenue is change in total revenue/ change in quantity.

profit maximization happens when MC=MR= which gives us the no-92 articles for production. Below
is the calculation for the same.
Question 2B: On 9th March 2020, Italy went into lockdown. As a result, you had to shut
down your office and adopt a ‘work from home’ policy. This eliminated your fixed costs
of €8000. At the same time, your ad revenue per article reduced to €250. This was because
all companies suddenly reduced their advertising spending.
• How many journalists would you have to fire? Assume that you only care about maximising
profits. (2 marks)
• What is your new total profit? (1 marks)
• Why did you fire the journalists? Explain your answer conceptually. You don’t need to show
exact calculations. (3 marks)

1. 4 journalists would you have to be fired.

2. New total profit= €1500
3. Four journalists will need to be fired as the maximum profit the company will make is by
manufacturing 54 articles for which only 4 journalists are needed. Above this number of
articles written will not give profit to the firm. It will only incur variable costs by the office.
Hence it is best for the office to remove these employees considering the office wants to make
maximum profit with the given numbers in the question.
Profit maximization happens at a point where the MC=MR i.e marginal cost is equal to the
marginal revenue. The exact calculation is attached below.
Question 3

Question 3A: What type of unemployment would a country like India experience from
such a pandemic? Please provide an explanation. (2 marks)
elaborate your answer. (2 marks)

Jobs were lost due to falling aggregate demand hence cyclical unemployment was faced by India.
It’s a short length unemployment. Falling in aggregate demand leads to less profit margin for the
business/ factories and the employees get laid off. Hence less income leads to less purchasing
power and again less aggregate demand . When the aggregate demand catches up, the employment
will increase.

India experienced very low demand due to the pandemic leading to demand deficient
unemployment.

Illness and lockdowns reduce the ability of people to work, and sectors such as hospitality that
involve close human contact have been shut down.

Income falls from job losses also reduce people’s ability to spend, and uncertainty about the future
causes households and firms to delay spending until that uncertainty is resolved. Low demand
leads to low supply manufacturing and hence less jobs.

All these factor led to no job availability in the market which led to cyclic unemployment.

Question 3B: What type of recession would be caused by such a pandemic? Provide an
explanation. (2 marks)

The pandemic brought with it a recession which started as a supply shock recession. It disrupted
the supply chain. But quickly turned to demand led recession for a prolonged time. The aggregate
demand was consistently low. As the human movements were restricted due to pandemic. The
suppliers adjusted, made the system online. A lot of digitalization happened, hence the supply was
not a major issue.

When demand came back with vengeance and that led to supply chain disruption again. But
majorly it can be called a s a demand led recession.

The impact of COVID-19 could be felt in all sectors travel, tourism, trade, etc all met a major
setback due to covid lockdown. There was a major economic slowdown. There are virtually no
exceptions. Other than those who are manufacturing PPEs, sanitisers and other COVID-related
stuff. These are severe supply disruptions.

Demand for travel reduced hence reducing demand for energy and petroleum. Demand had also
fallen because social distancing measures and the fear of infection reduce people’s desire to
consume such service.

Hence factors like Lockdown, Restrictions, Uncertainty all this led to severe reduction in
aggregate demand.

In short it was a demand led and supply shock recession.

Question 3C: What would happen to the aggregate demand and aggregate supply in
India because of the above two phenomena? Elaborate your answer. (2 marks)

The fall in aggregate demand was much greater compared to aggregate supply. But we saw a fall
in aggregate demand and aggregate supply both. Aggregate Demand was low consistently and for
very long time. The Curve will shift towards left due to fall in aggregate demand and fall in
aggregate supply.
Graph 1 Below graph shows recession happening due to fall in supply.

Graph 2 shows recession happening due to fall in demand.

Graph 1 Graph 2

Question 3D: How will the AD/AS curves behave in this situation? Please elaborate
your answer. (2 marks)

In AD and AS graph Leftward shift was noticed as both supply and demand reduced. Aggregate
demand and supply reduced but aggregate demand reduced more comparatively.

Fall in demand due to covid was noticed. GDP went down due to fall in aggregate demand.
 Reasons why supply went down was because of the supply chain disruption due to borders getting
shutdown between the countries. Lockdown imposed in most of the part of the world. Business and
factories getting closed to maintain social distancing.

We witnessed Prolonged Demand led recession. But we didn’t witness inflation. The product price
remained same.

Question 4

Question 4A: What type of macroeconomic policy should the Indian government adopt
after such a crisis? Please mention the policy measures to be undertaken clearly with
explanations. (3 marks)

Government should adopt expansionary fiscal policies after such a crisis. It would help to
overcome economic slowdown.

Two types of such policies are:

1. Reduction in Taxation/Interest rates. This will let people borrow more money. Which will
increase money flow in market increasing money liquidity and controlling the economy on
country.
2. Increase in expenditure by government: Government expenditure in economy will boost
the money flow in market and prevent the market from falling further. It will also help poor
 uplift who were badly effected due to covid pandemic hit. Many people lost their jobs and
were left with no money to meet their basic needs. This led to economy fall.

Below are the examples of above policy:

20 lakh corore Aatma Nirbhar Bharat, Garib Kalyan Rojgar Abhiyaan

Government launched Garib Kalyan Rojgar Abhiyaan on 20th June 2020 to boost employment and
livelihood opportunities for migrant workers returning to villages, in the wake of COVID-19
outbreak. Abhiyaan focuses on durable rural infrastructure and providing modern facilities like
internet in the villages.
Skill Mapping of the rural migrant labour being done to help them work closer home.

5 tranches of atmanirbhar bharat are:

1. Alleviate the sweeping distress in the Micro, Small and Medium Enterprises sector.
Firstly, migrant workers, who are neither National Food Security Act (NFSA) or State
Card beneficiaries in the state they are stationed, will be provided 5 kg of grains per
person and 1 kg Chana per family per month free for two months, the Finance Minister
said.

2. Alleviate the distress for small farmers, migrant workers, small traders and self-employed
people.

3. Measures for Indian farmers of which 8 are related strengthening to logistics, and building
better logistics and storage in Agriculture, Fisheries and animal husbandry, and 3 related
to governance (government and administration).

4. Structural reforms in eight sectors, including coal, minerals, defence production, air space
management, airports & MRO, power distribution companies in Union Territories, space
sector, and atomic energy, were announced in the fourth tranche that was announced.

5. MNREGA, Health and Education, Business during COVID, Decriminalisation of Company

Act, Ease of doing business, Policy related to Public Sector Units, State government and
resources related to it. Building health facilities centre

Question 4B: What type of macroeconomic policy should the Reserve Bank of India
adopt after such a crisis? Please mention the policy measures to be undertaken clearly
with explanations. (4 marks)
Reserve Bank of India should adopt expansionary monetary policies after such a crisis. Types of
expansionary monetary policies like:

• Cash Reserve Ratio (CRR) – Banks are required to set aside this portion in cash with the
RBI. The bank can neither lend it to anyone nor can it earn any interest rate or profit on
CRR.
• Statutory Liquidity Ratio (SLR) – Banks are required to set aside this portion in liquid
assets such as gold or RBI approved securities such as government securities. Banks are
allowed to earn interest on these securities.
• Open Market Operations (OMO): In order to control money supply, the RBI buys and sells
government securities in the open market. These operations conducted by the Central Bank
in the open market are referred to as Open Market Operations.

• Others like Direct lending to banks, Bank reserve requirements, Unconventional emergency
lending programs, QE, and managing market expectations

Influx money and reduce interest rates are also techniques the banks can take to tackle the covid
situation.

Reduce interest rates: This will let people borrow more money. Which will flow in market
increasing money liquidity and not allow inflation to increase.

Influx money: Banks will increase inflow of money in market to allow greater transaction
maintaining the equilibrium of inflation and recession.

Basic policy implementation that could unburden the country individuals monetarily. Following
are measures that can be undertaken:

• No extension announced on loan moratorium beyond a particular date.

• Banks allowed to restructure stressed corporate and MSME Loans
• Relief to individual borrowers at banks' discretion
• Borrowing limits against gold relaxed
• Tenure can be extended up to two years for personal loans
• ₹10,000 crore support for NHB, NABARD
• Start-ups included in priority sector lending norms
• Quantitively easing relaxation in cash reserves in bank