Name Dhiren Henry Monteiro

Question 1

Write your answer for Part A here.

The market structure here is an Oligopoly and the phenomenon could be considered as
Collusion. Here, you have only a few countries coming together to form OPEC and they
majorly control the production and distribution of oil across the globe. The main goal here
from these joint decisions to maximize profits of the firms.

Advantages:

1) Market stability with the control of supply in the market

2) Control of the falling prices in the market
3) No Competition

Disadvantages:

1) Reduced competition impacting the high market cost

2) Inefficient production due to lack of innovation
3) No substitute for product creating high barriers for entry

Write your answer for Part B here.

There are 2 reasons for OPEC for to cut the supply for Oil. The first being that, during the
pandemic, the demand for oil plummeted and hence causing the lower prices creating a
surplus. The second, OPEC tried reducing the supply to match the demand of oil and control
their market share to prevent the further downfall of the price.

The desired outcome was to reduce further downfall and stabilize the price of oil. This was
done to benefit the member nations and maximize the profitability.
Due to the pandemic, there was a sudden decline in the demand for oil. Referring to Figure 1,
you will notice this change represented in the demand curve shifting to the left from D to D2.
As production continued, it created a surplus in the market, hence, no change in the supply
curve. As there were changes in the demand curve the market forces then brought the
equilibrium point lower from E to E2 to adjust to the situation. However, the change in
equilibrium quantity is uncertain as we do not know the extent of change in the curves.

Figure 1: Pre-decision
With OPEC’s agreement with the oil producing countries to cut down production of oil to 9.7
million barrels a day during the pandemic, there was a reduction in the supply of oil. Referring
to Figure 2, we see a shift in the supply curve to the left from S to S1 to try and match to the
new demand D1. However, with the continued drop in demand and the surplus of oil with the
traders, the equilibrium price shift drastically lower from E to E1.

Figure 2: Post-Decision

Write your answer for Part C here.

The Organization of the Petroleum Exporting Countries also known as OPEC operates in an
Oligopoly market structure. This is when you have a few firms that dominate the market. They
control the product since there are no suitable substitutes for it, thereby giving them the edge
to oversee pricing, supply, and distribution. Some industry examples are Aviation,
Telecommunication, Oil, and Tobacco.

Here are some key features:

1) There are few firms that control the market

2) Restricted entry into the industry due to existing large firms
3) There are no suitable substitutes for the product; hence, price is controlled
4) Interdependence of firms on each other on innovativeness, pricing and production

Question 2

Write your answer for Part A here.

When the business was operating at a profit maximizing level of output it was producing 92
Articles with 8 Journalists. This is when their marginal revenue, matched their marginal costs.

The total profit at that time was EUR 2,500. We derived this from subtracting total cost from
the total revenue.

Here are the steps you can use to calculate the profit maximizing level of output.

1) Identify the fixed costs (rent + utilities) and variable costs (journalist wages) at each
level and add them up to calculate your total cost for each level. Identify your revenue
at each level by multiplying the quantity x cost. (no. of articles x price/article)
2) Calculate the Marginal Cost (MC) and Marginal Revenue (MR) for each level with the
following formulas. This is used to calculate the cost/revenue in producing one more
unit of good.
MC = (Change in Total Cost)/ (Change in quantity)
MR= (Change in Revenue)/ (Change in quantity)
 3) We now need to calculate the change in price at each level, by subtracting MR from
MC

Conceptually, we can derive that for a business to operate at profit maximizing level of
output is when change in price is zero and we know that change is price is calculated by
subtracting MR from MC. i.e. MR=MC at profit maximizing level of output.

Write your answer for Part B here.

Assuming that the intention is to maximize profits, we would need to fire 4 journalists. This
brings down the number of articles from 92 to 54 and stems from the fact that the revenue
from each article is now lowered due to the pandemic.

The new profit is not EUR 1,500 with 54 articles.

The four Journalists had to be fired due to reduced revenue generated per article during the
pandemic. With the lower revenue, the news website will not be able to run at profit
maximizing levels of output. Based on the difference between Marginal Cost and Marginal
Revenue being 0, the profit maximizing level was 4 journalists at 54 articles. Therefore, from
the previous 8 only 4 had to be fired.

Question 3

Write your answer for Part A here.

A country like India would face a Cyclic Unemployment, it usually takes places with changes
in business cycles, either due to an economic upturn or downturn. During an economic upturn
unemployment can reduce and can increase during a downturn or recession.

Due to the Pandemic, consumers will focus more on saving and limit their spending, this
causes a decrease in demand. The decreased demand impacted the manufacturing and
unorganized sectors resulting in reduced supply and cost optimization. With no alternatives,
the sectors chose to layoff the labour force for due to the lack in demand impacting our labour
force. India has the largest labour force of over 30% in the manufacturing, construction, and
unorganized sectors alone. This unemployment due to the economic downturn is known as
Cyclical Unemployment.

Write your answer for Part B here.

The recession caused due to the pandemic was a demand-led recession.

During the lockdown, consumers started to spend less due to pay cuts and the uncertainty of
their job. Business investments also declined in the market due to the lack of clarity and
duration of the lockdown, leading to economic uncertainty. This disrupted supply chains
leading to shortages and higher pricing. Hence, when the aggregate demand for goods goes
down, due to the unemployment and higher savings, it created a demand-led recession.

Write your answer for Part C here.

For aggregate demand in India:

Cyclic unemployment and the demand-led recession will probably leave household struggling
to meet ends. The aggregate demand will fall due to the lower consumer spending and the
reduced investment by business in the market.

For aggregate supply in India:

With the lockdowns and restrictions in place, production across the country was affected. The
cyclic unemployment and demand led recession, caused uncertainty in production due to the
lack of demand in the market and disrupting the supply chain.

Write your answer for Part D here.

 Referring to Figure 3, we notice the changes in the AD/AS curve. The AD curve shifts to the
left from AD1 to AD2 due to the demand -led recession and the unemployment. This means
that even at lower prices the demand will still be low. The market forces then act on the supply
curve to match the lower demand by moving it to the right AS1 to AS2 trying to restore it to
the long run equilibrium. Due to these factors, it creates a new Equilibrium price E2.

Figure 3: Aggregate demand

Question 4
Write your answer for Part A here.

Following the pandemic, the Government of India (GOI) needs to implement an Expansionary
Fiscal Policy to help stimulate the economy and support the population. Implemented during
times of recession or slow economic activity to stimulate the economy and increase aggregate
demand. Here are some examples.

1) Increased Government spending: Government should increase spends in manufacturing

and construction to help increase employment. This will help the vulnerable sections of
society. Since the largest section of labour is in agriculture, the government can help
with an MSP and buy large amounts of crops. They can also increase storage space for
food reserves which will boost the economy later
2) Reduced Taxation: GOI can reduce taxes such as GST, Income and Excise. This
should fuel the economy with more people having higher disposable incomes and
increases the demand for goods and services. This is will also boost businesses to
invest more in the economy
3) Targeted Transfers: Government can offer cash transfers or create subsidies for the
unemployed and the low-income households. They also target the vulnerable sections
and the daily wage workers with food supplies and lower cost of utilities

These basic fiscal polies should have a positive impact on the GDP and bring short term
stability to the economy.

Write your answer for Part B here.

The Reserve Bank of India (RBI) should implement an Expansionary Monetary Policy, to
reduce the leak in the system and have households increase expenditure in turn improving the
economy. Implemented in times of recession to increase the liquidity in the economy, with
measures like lowering interest and repo rates. Here are a few examples the RBI can
implement during a pandemic.
1) Repo Rate: The RBI can lower the repo rate, which is the rate at which it lends money
to commercial banks. This will make it cheaper for banks to then lend money to
households and businesses with lower interest rates impacting in a positive effect on
borrowings and investments.
2) Bonds and Securities: The RBI can purchase bonds from the market hence injecting
liquidity in the system. This will increase the purchasing power of consumers and
increase demand.
3) Loan Interest rates: RBI can reduce the interest rate on loans for the low-income
households and farmers. They can also look at easing the loan borrowing process
which would help small and medium enterprise who in turn will push it back into the
economy with their expansions.