COURSE: BUSINESS ECONOMICS

PROJECT: COVID-19: The Global Shutdown

Instructions for the submission:
• Please maintain the following: Font - Times New Roman, Font Size - 12, Line Spacing -
1.5

Name Anirudh Sharma

Question 1

As the world went into lockdown due to covid, the demand for crude oil fell drastically which
impacted the price, and in order to control the fall OPEC decided to cut the oil supply.

With this decision OPEC was able to limit the fall, have more price control and political
stability.

Before taking the decision supply was the same but there was a decrease in demand hence the
demand curve registered a leftward shift leading to a reduction in price. After the decision
demand started to pick up a little and due to a decrease in supply, the supply curve registered a
leftward shift which leads to an increase in the prices.

OPEC has an Oligopolistic market structure. Oligopoly is market where a few firms have
significant market power. Due to this the firms have a high interdependence on each other.
There are high entry barriers in an Oligopolistic market.

Question 2

The business was producing 92 articles.

Total profit was 2500.

Firms need to maximize their profits and this happens while understanding additional costs,
you should be able to recover that additional cost. Profit maximizes at the level where you are
able to cover your additional cost by additional revenue i.e Marginal cost = Marginal revenue.

4 journalists would have to be fired bringing the total number of journalists from 8 to 4.

New total profit is 1500.

 Firms need to maximize their profits and this happens while understanding additional costs,
you should be able to recover that additional cost. Profit maximizes at the level where you are
able to cover your additional cost by additional revenue i.e Marginal cost = Marginal revenue.

4 journalists would have to be fired bringing the total number of journalists from 8 to 4.

New total profit is 1500.

With the lockdown in place, dynamics of the economics of the business changed. Now the
business has new Marginal costs and marginal revenues. As a result the level at which profit
maximization happens shifted from 8 journalists to 4.

Question 3

India would experience a Cyclical Unemployment in period like this where in the demand in
the economy begins to decrease and producers cut supply and let people go. As the pandemic
hit India there was a fall in aggregate demand, people started saving more and did less
expenditure. As a result businesses were not able to sell and their profits went down. This
again leads to lay offs of worker who will do less expenditure as they lost their jobs leading to
more fall in aggregate demand.

It was both a demand and supply led recession as there was a fall in aggregated demand and a
supply shock in the economy. In India, the initial slowdown took place because of a decrease
in aggregated demand and once the lockdown was put into place the supply side was also
affected. Globally this was a confused recession as for the first three months it looked as a
supply-led recession as China, the factory floor of the world was the first to be in lockdown
and factories and industries were shut. After the first few months it turned out to be a demand-
led recession, people were in lockdown and in conservative mode. Afterwards it remained a
demand led recession for a long time for example in India the demand reached near to the pre-
covid levels only after September-October 2021.

Question 4
The Indian government should adopt an expansionary fiscal policy after such a crisis.
Expansionary fiscal policy is implemented during times of recession or slow economic activity
in order to stimulate the economy and increase aggregated demand. In order to do so the
government can reduce the Taxation and increase their spending. Reducing taxation will leave
people with more money which in turn will increase their ability to spend and higher
government expenditure will create employment opportunities for both industries and people.
For example the Indian Government introduced the 20 Lac Crore Atmanirbhar Bharat Plan in
which incentives were given to the MSME sector, provision for cover for employees, subsidy,
revised loan , etc was there. For people below poverty line government did Direct cash
transfers and provided them with free food grains. Also there was reduction in interest rates for
Agri & Industrial sector. NREGA was implemented in which eligible people in the rural area
are guaranteed 100 days of employment in order to increase the aggregated demand in rural
sector.

The Reserve Bank of India should adopt an expansionary monetary policy during such crisis.
The purpose of monetary policy is to influence the investments and savings and spending
decisions of the consumers and businesses. Monetary policy influences economic activity by
regulating money supply and interest rates. In order to regulate money supply RBI should buy
government bonds to increase money supply in the economy. This is also known as
Quantitative easing, which is a measure to increase money supply in the economy to boost
economic activity. Quantitative easing leads to a decrease in interest rates as banks have more
liquidity, this in turn boosts GDP. Lower interest rates increases aggregated demand as people
spend more money as rates are cheaper and are less interested in savings. RBI will directly
lend to banks, Cash holdings with banks is reduced in order to increase transactions. They will
indulge in Unconventional Emergency Lending Programs. They will come up with
announcements of policies and changes to ease peoples expectations of market policies. For
example RBI decreased both the Repo rate as well as the Reverse Repo rate into there
lockdown, Banks were allowed to restructure stressed corporate and MSME loans, tenure
extension for personal loans of upto 2 years, relief to individual borrowers, 10,000 crore
support for NHB, NABARD etc.