Economics Assignment - Market Structure, Price War, Unemployment and Inflation

This economics assignment covers topics like market structure, price war, unemployment, inflation, and business cycle. It includes graphs and diagrams to explain the concepts. The first part discusses the oligopolistic market structure of Coles and Woolworths, the effects of price war on individual vegetable sellers, and the competitive market of vegetable producers. The second part covers the economy of Spain and India, including the phases of the business cycle, unemployment rate, falling energy costs, and inflation control.

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
Answer 3................................................................................................................................4
Answer 4................................................................................................................................4
Part B..........................................................................................................................................5
Economy of Spain..................................................................................................................5
Answer 1............................................................................................................................5
Answer 2............................................................................................................................6
Question 3..........................................................................................................................7
Economy of India...................................................................................................................8
Answer 1............................................................................................................................8
Answer 2............................................................................................................................8
Answer 3............................................................................................................................9
References................................................................................................................................11

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Part A
Answer 1
Coles and Woolworths, being two of the primary supermarkets in Australia, operate in
an oligopolistic type of market structure. In general, an oligopoly market is characterised by
the presence of many buyers and few sellers, which in turn gives each producer considerable
market power and share of the market (Fudenberg and Tirole 2013). The sellers are also price
makers and depend on the decisions and strategies of their rivals. In this context, the market
share of supermarket industry can be seen to be as follows:
Figure 1: Market shares of companies in supermarket industry in Australia (2017)
(Source: Businessinsider.com.au, 2018)
Coles and Woolworths also compete in the aspects of price, thereby creating a
situation of price war in the oligopolistic market, which can be seen to be as follows:

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Figure 2: Price war in Oligopolistic Market
(Source: As created by the author)
Answer 2
As the market in which the supermarket giants Coles and Woolworths is that of an
oligopoly, there exist two forms in which the firms in this industry can compete with one
another- price war or non-price competition. In this market, pricing plays a significant role.
When one of the competitors decrease the price levels, it attracts significant customers from
other companies, which in turn is expected to increase the revenue of the former and vice-
versa (Dunne et al. 2013).
Thus, it can be seen that it is of interest on part of Coles and Woolworths to engage in
price war, in the short run as that can lead to increase in the clients and revenues of the
company providing products at more affordable prices. However, in the long run, continuous
price wars and discounts can lead both the companies to a sub-optimal situation, in terms of
lower profitability and inefficiencies (Keith 2012).

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Answer 3
The farmers who produce and supply vegetables, in Australia, can be seen to be operating in
a competitive form of market as there are many sellers and many buyers in the market and
each of the sellers sell mostly homogenous forms of commodities with not much difference
from one another. In economic conceptual framework, a perfectly competitive market is
characterised by the presence of many buyers and sellers, where both are price takers and
where there is free entry and exit in the market (Dunne et al. 2013). The products sold are
homogenous and in the long run there is only normal profit. This can be seen to be the case in
the market for vegetables provided by the farmers as they sell to big supermarkets as well as
many retailers.
Answer 4
The price wars among the supermarket can be seen to be detrimental for the
individual vegetable producer, as the same decreases the amount of money which the same
receive by selling their products. The effects of the same can be seen with the help of the
following figure:

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Figure 3: Effects of price war on individual vegetable seller
(Source: As created by the author)
If the price falls below the per unit cost of production of the producer, then the same
is expected to incur loss in the short run. This would let to exit of many sellers in the long
run:
Figure 4: Effects of fall in price in the long run
(Source: As created by the author)
In the long run, with the exit of some of the sellers, the price is expected to increase
till the point where it becomes equal to the minimum point of the AC curve (Frank and
Cartwright 2013).

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Part B
Economy of Spain
Answer 1
As is evident from the concerned graphs, during 2013, the GDP growth rate of Spain
can be seen to be negative along with a vary high unemployment rate and very low
consumption expenditure, which in turn indicates to the fact that the economy of Spain was in
a deflationary phase of the business cycle. This can be showed with the help of the following
AD-AS diagram:
Figure 5: AD-AS situation in deflationary phase
(Source: As created by the author)
Due to less growth in the GDP and high unemployment rate, the purchasing power of
population in Spain in 2013 was low which in turn decreased the total consumption
expenditure and aggregate demand in the economy (Galí 2015).

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Answer 2
In 2014, the unemployment rate in the economy of Spain can be seen to be
decreasing, which in turn has led to an increase in the consumption expenditure, thereby
leading to increase in GDP growth rate of the country (Mankiw 2014). This in turn, implies
that in 2014, the economy of Spain was entering in a recovery phase of business cycle from a
phase of deflation.
Figure 6: Recovery phase of the business cycle
(Source: As created by the author)
With the increase in employment and consumption expenditure, the aggregate
demand can be seen to be increasing, which in turn has led to both price and output levels in
the economy in 2014.
Question 3
The recent unemployment rate in Spain is 24.47%, which in turn imply that the recent
employment rate is 75.53%. This implies that 17,353,000 people belong to this 75.53% of the
population who were employed in Spain.

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Therefore, in the recent period, 5,621,976.83 or approximately 5,621,977 people in
Spain were unemployed.
Economy of India
Answer 1
The GDP growth rate of economy of India could be seen to be increasing in the 2016,
with the predictions of the same being positive for the rest of the year (2016), which in turn
shows that the country was experiencing the beginning of the phase of boom in the business
cycle, which can be shown as follows:
Figure 7: Phases of business cycle in Indian economy
(Source: As created by the author)
The Indian economy, in 2016, can be seen to be operating in the phase post recovery
and before peak of the boom phase of the business cycle.

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Answer 2
The falling energy costs can be seen to be leading to the fall in the cost of production
of different goods and services in the economy of India in 2016, which in turn can be seen to
be increasing the real income in the hands of the population of the country (Heijdra 2017).
This is turn can be seen to be increasing the demand for goods and services in the country,
the effects of which can be seen to be as follows:
Figure 8: Effects of fall in energy costs in increasing consumption and aggregate
demand
(Source: As created by the author)
This in turn can be seen to be increasing the growth of the economy of India in the
concerned period.
Answer 3
With the rise in the growth of the economy of India in 2016 and with further
expectations of future increase in growth of GDP and private consumption, the level of
inflation in India is expected to increase in the country in the coming years. This has to be

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controlled by the Reserve Bank of India to avert the negative implications of the same
(Heijdra 2017). This can be done by the RBI, by implementing contractionary monetary
policies like that of increasing the rate of interests or decreasing the prices of the bonds, so as
to decrease the money supply in the market (Mankiw 2014). Increasing the rate of interest is
expected to lead to a decrease in investment demand, thereby reducing money supply, where
as by reducing bond prices RBI can influence people to buy more bonds, thereby reducing
money supply in the economy.

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References
Businessinsider.com.au 2018. The biggest threat from Aldi to Woolworths and Coles is still
to come. [online] Business Insider Australia. Available at:
https://www.businessinsider.com.au/the-biggest-threat-from-aldi-to-woolworths-and-coles-is-
still-to-come-2017-5 [Accessed 16 Sep. 2018].
Dunne, T., Klimek, S.D., Roberts, M.J. and Xu, D.Y., 2013. Entry, exit, and the determinants
of market structure. The RAND Journal of Economics, 44(3), pp.462-487.
Frank, R. and Cartwright, E., 2013. Microeconomics and behaviour. McGraw Hill.
Fudenberg, D. and Tirole, J., 2013. Dynamic models of oligopoly. Routledge.
Galí, J., 2015. Monetary policy, inflation, and the business cycle: an introduction to the new
Keynesian framework and its applications. Princeton University Press.
Heijdra, B.J., 2017. Foundations of modern macroeconomics. Oxford university press.
Keith, S., 2012. Coles, Woolworths and the local. Locale: The Australasian-Pacific Journal
of Regional Food Studies, 2, pp.47-81.
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.