Labor Market Adjustment and Skill Development

This assignment examines the influence of investment in worker skills and infrastructure on long-run labor market equilibrium. It utilizes the Cobweb Model to illustrate how increased skilled labor supply and demand lead to wage rate adjustments, stimulating aggregate demand and economic growth. The analysis concludes that targeted investments in human capital can contribute to sustainable economic development.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author Note

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Table of Contents
Part A:..............................................................................................................................................2
Answer 1:.....................................................................................................................................2
Answer 2:.....................................................................................................................................3
Part B:..............................................................................................................................................5
Answer 1:.....................................................................................................................................5
Answer 2:.....................................................................................................................................6
Answer 3:.....................................................................................................................................7
Answer 4:.....................................................................................................................................8
References......................................................................................................................................11

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Part A:
Answer 1:
In economics, the term economies of scale takes into account the phenomenon of
decrease in the cost of production, on average terms, with the gradual increase in the scale of
production of goods and services by any enterprise. In other words, as a company goes no
expanding and increasing its production, if its average cost of production goes on decreasing
eventually, then the company is said to achieve economies of scale. Economies of scale can be of
two types, external as well as internal. Internal economies of scale usually occur when a firm
itself reduces its cost of production and enjoys an increased production. This is entirely specific
to the firm. On the other hand, external economies of scale occurs when the industry, of which
the firm is a part, as a whole experiences cost effectiveness and efficiency due to increased scope
of operations (David Myers CEcD 2015).
Economies of scale, though can be found in many market structures, is of large
importance in those markets where it is good to have a natural monopoly. In several scenarios, it
may so happen that the presence of a single large firm in an industry is more efficient in terms of
cost production and pricing aspects as the presence of more than one firm may increase the cost
of productions for both the firms and none can enjoy economies of scale (Lewis 2013).

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Figure 1: Natural Monopoly and Economies of Scale
(Source: As created by the author)
If the commodity provided by that industry is of necessary or merit in nature, like
electricity, then it is better to allow only one big firm to enjoy economies of scale and become a
natural monopolist such that it can provide the commodity at a much cheaper price due to its low
cost of production. It can be seen from the above diagram.
Answer 2:
As can be seen from the case study provided, the airlines industry in Australia, before the
collapse of the Ansett group was more of a duopoly-structured industry with both the
competitors Quantas and Ansett, enjoying nearly same market power and a considerable size of
the market. However, in 2002-2003, after the collapse of the Ansett group and the emergence of

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the Virgin Blue group, though apparently the market structure remained of that of a duopoly, it
can be considered to be an industry with one and a half enterprises (Aph.gov.au, 2017). This is
because, the Quantas emerged as the more powerful and expansive and cash rich one with larger
domain of operations. Virgin Blue on the other side, though started as a moderately sized
enterprise, was seen to be gaining market importance in the market in spite of their services
being limited and constricted, the restraints being imposed by the enterprise purposefully (Varian
2014).
Figure 2: Duopoly Market
(Source: As created by the author)

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As can be seen from the above figure, if only one single firm would have been present in
the market, under monopolistic situation, the profit of the firm would have been OP0SN, under
Cornot Duopoly Model. However, with the advent of another firm, the profit of the first firm
decreases to OP1CN as the price falls due to competition between the two firms. The profit of
the second firm becomes NHCD (Carfì and Perrone 2013).
This can be related to the scenario prevailing in the aviation industry in Australia in
2002-2003, with two prominent competitors in the market. Cornot however assumes zero cost of
production, which is purely hypothetical and not true for this case. However, the profits of the
firms get shared as suggested by the above diagram.
Part B:
Answer 1:
The business cycle of a country shows the dynamics in the economy of that country with
time, including both the positive and the adverse ones, which can be seen from the performance
of the country with respect to the economic indicators like the growth rates of GDP, inflation and
the overall level of unemployment (Gabisch and Lorenz 2013).
In this context, taking reference to the data provided for the economy of France in the
current period, it can be interpreted that the economy is in its recovery phase of the business
cycle. The economy went to a severe recessionary situation, in 2008-2010, much of which can be
attributed to the occurrence of the Global Economic Crisis during that period of time, which had
immense negative implications on the European countries as a while (Sherman 2014). The

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economy, with the government budget hitting as low as -7.2 during that time, is seen to slowly
recover from the shock, though the budget is still in deficit, the magnitude being much less (-
3.4). The GDP growth rate of the country is still low (0.4%). However, the unemployment rate
prevailing in the economy has decreased from 10% to 9.6% and there has also been a moderate
decrease in the rate of inflation, from 1.2% to 0.8% in the recent times. Thus, it can be asserted
that the economy, though not performing extraordinarily, is consistently coming out of the
recessionary situation and is currently in the recovery period of the business cycle.
Answer 2:
The current phase of recovery of the economy of France can be represented with the help
of the AD AS Model:
With the recovery in the economy, as can be seen from the improvement in the budget
statistics and the decrease in the unemployment scenario, the aggregate demand of the economy
is expected to increase.

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Figure 3: Increase in Aggregate Demand
(Source: As created by the author)
As can be seen from the above figure, with the increase in the government budget and the
decrease in the trends of unemployment, the aggregate demand is expected to increase slowly,
which in turn is expected to increase the GDP as well as the overall price levels. Persistence of
this trend may help in increasing the supply in the economy in the long run (Benigno 2015).
Answer 3:
Economic growth, according to the AD AS model, can be achieved if both the aggregate
demand as well as the aggregate supply goes on increasing sustainably in the economy, such that

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the long term goals can be achieved. The aggregate demand consists of investment expenditures,
consumption expenditures, government spending and net exports. Increase in these factors helps
in increasing the aggregate demand, which in turn facilitates increase in the aggregate supply.
In this context, France can experience economic growth by decreasing the interest rates,
thereby facilitating investments in the economy. The government can also increase its
investments in sectors like health, education and infrastructure, which helps in long-term
capacity building, thereby contributing to the economic growth of the country. Employment
generation is also a key method for economic growth as it facilitates increase in the aggregate
household consumption spending, thereby contributing to the increase in the aggregate demand,
which in turn increases the aggregate supply, thereby taking the economy on the path of
sustained long term economic growth (Benigno 2015).
Answer 4:
The policy taken by Macron, regarding the reforms in the labor market of France, is that
of deregulation in order to make the labor market activities more flexible. However, the policy,
though targeted to increase the number of good jobs available in the market of the economy,
does not specifically work towards that goal (Theweek.com, 2017).
In this context, a more fruitful policy would have been investing in the development of
the skills of the workers and the infrastructure in the economy, which facilitates creation of new
jobs. As can be said with the help of the Cobweb Model, an increase in the skill development of
the workers and a better infrastructure, in short run may create fluctuations in the labor market

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due to alterations in the wages and demand for more skilled workers. However, in the long run,
stability can be achieved in the labor market in the following way:
Figure 4: Cobweb Model: Long run labor market adjustments due to skill development
(Source: As created by the author)
As can be seen from the above diagram, the Cobweb Model suggests that due to the
investment in education and infrastructure, which augments the skill and efficiency of the
workers, in the long run the supply as well as the demand for skilled labors increase. This in turn
pushes up the real wage rate from W0 to W1 (Ehrenberg and Smith 2016). A higher wage rate, in
its turn, increases the purchasing power, thereby increasing the aggregate demand in the
economy:

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Figure 5: Long run economic growth
(Source: As created by the author)
The increase in the AD, leads to an increase in the AS too, which in turn creates more
scopes of employment, income generation and again an increase in the AD. This cycle goes on
continuing such that in long run the economy moves to the point E1, on the Long Run supply
Curve. Thus, the policy of investing on the skill development and enhancement of the workers
would have been proved to be more beneficial, had it been implemented properly (Benigno
2015).

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References
Aph.gov.au (2017). Australian Airline Industry – Parliament of Australia. [online] Aph.gov.au.
Available at:
http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/
pubs/rp/rp0203/03RP10#dthe [Accessed 28 Sep. 2017].
Benigno, P., 2015. New-Keynesian Economics: An AS–AD View. Research in
Economics, 69(4), pp.503-524.
Carfì, D. and Perrone, E., 2013. Asymmetric Cournot duopoly: A game complete
analysis. Journal of Reviews on Global Economics, 2, pp.194-202.
David Myers CEcD, M.A., 2015. economies of scale. Economic Development Journal, 14(3),
p.11.
Ehrenberg, R.G. and Smith, R.S., 2016. Modern labor economics: Theory and public policy.
Routledge.
Gabisch, G. and Lorenz, H.W., 2013. Business cycle theory: a survey of methods and concepts.
Springer Science & Business Media.
Lewis, W.A., 2013. Theory of economic growth (Vol. 7). Routledge.
Sherman, H.J., 2014. The business cycle: growth and crisis under capitalism. Princeton
University Press.

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Theweek.com (2017). Emmanuel Macron has misdiagnosed France's ailing economy. [online]
Theweek.com. Available at: http://theweek.com/articles/705135/emmanuel-macron-
misdiagnosed-frances-ailing-economy [Accessed 28 Sep. 2017].
Varian, H.R., 2014. Intermediate Microeconomics: A Modern Approach: Ninth International
Student Edition. WW Norton & Company.