Economics 4 Assignment: Microeconomics and Macroeconomics

This economics assignment provides a comprehensive analysis of microeconomic and macroeconomic principles. Part A focuses on microeconomics, exploring economies of scale and market structures, specifically in the context of the Australian airline industry, analyzing it as an oligopoly. Part B shifts to macroeconomics, examining the French economy's contraction phase within the business cycle. It utilizes the AD/AS model to illustrate the impact of declining aggregate demand and discusses factors contributing to economic growth, including government interventions through fiscal policy. The assignment concludes with a graph demonstrating how investment in education and infrastructure can shift the aggregate supply curve, ultimately leading to economic expansion and lower prices. The solution is well-supported by economic theories and academic references.

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Part A: Microeconomics
Question 1
Economies of scale
Economies of scale denote a cost advantage that results from an increase in output of a
product. When production grows, it leads to lower average costs in the long run and hence
economies of scale. This advantage takes place due to the inverse correlation between the
average costs and the quantity produced. The higher the amount of a product generated, the
lower the average costs since the costs are spread over a big number of goods (Mankiw &
Cosgrove, 2014, p.29). The economies of scale are necessary because they enable a company to
become more efficient as it increases in size. For instance, in this airline industry, Qantas is
dominant, and it is said to be well cashed up, a scenario that demonstrates that this company is
benefiting from the economies of scale. Moreover, the focus on Virgin Blues leisure travel
makes it boost its productivity and thus economies of scale.
Market types
Economies of scale are most important in a monopoly and oligopoly market structures.
The existence of a monopoly company and oligopolistic firms depends on their ability to
maintain barriers to market entry. The economies of scales make a monopoly business to lower
the average cost of every unit of output and thus such company is in a position to reduce the
prices to bar other companies from entering the market. Likewise, an oligopoly generates goods
that exhibit significant economies of scale where the cost of making each unit decreases with
large quantities. Such economies deter other companies from entering the market because of

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little market share that can be gained and that the returns would not be sufficient to be profitable
(Frank, 2015, p.41).
Question 2
In 2002-2003, the Australian airline industry fell under oligopoly market structure.
Oligopoly entails a market structure where a few companies dominate the market, selling either
differentiated or homogenous product and with significant hurdles to market entry.
Interdependence is also another vital feature of oligopoly market structure (Tucker, 2016, p.34).
The companies are interdependent in decision-making because any alteration in the product or
price by a firm will have a direct consequence on the other businesses.
The 2002-03 Australian airline industry exhibit characteristics of an oligopoly market
structure. Foremost, there are a few firms in this sector, that is, Qantas and Virgin Blue. Since
there are only two companies in this industry, this oligopoly can be categorized as a duopoly
market structure. Although there exist only two companies, this industry is dominated by Qantas
meaning that Qantas has a larger market share than Virgin Blue. Measures by each company to
defend its market share show how decisions of one firm affect the other company. For example,
Qantas is focusing mainly on leisure travel on the main trunk routes. On the other hand, Virgin
Blue is protecting its market share through service innovations and upgrades. Furthermore, the
existence of only two companies in this airline industry shows that Qantas and Virgin Blue have
erected significant barriers to new market entrants.

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Part B: Macroeconomics
Question 1- Business cycle
The economy of France is in a contraction phase of the business cycle. This reasoning is
based on several factors. Firstly, the Gross Domestic Product (GDP) is on the decline as shown
by the drop in the growth rates. The previous GDP growth rate was 0.5% while the recent is
0.4%. The level of unemployment in this economy is also high, that is, 9.6%. This scenario
exhibits that the businesses in France have reduced their workforce while others have stopped the
hiring of new employees. The decline in the general prices in this economy signifies that the
aggregate demand is deteriorating. Usually, as the total demand deteriorates, the real Gross
Domestic Product declines, and unemployment rises (Hubbard et al., 2016, p.36).
Question two: AD/AS model
Graph 1: Decline in the aggregate demand
Price level
Real GDP (Y)
AS
P2
P1
AD 1
AD 0
Y2Y1

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The aggregate demand refers to the overall demand for goods and services in an
economy. This component is critical in stimulating economic growth and development in a
country. In the efforts to keep the budget deficit under 3% of the Gross Domestic Product as
stipulated by the Eurozone rules, France has sucked money out of the economy. This measure
has been detrimental to consumption levels and investment in the economy. As the consumer
consumption reduces, the business community is also affected. The companies reduce output and
scale back their investments causing the economy to contract and unemployment to rise
(Gillespie, 2014, p.54).
On the graph one above, a drop in the aggregate demand due to deteriorating
consumption and investment levels is demonstrated by the change in the aggregate demand curve
leftward from AD1 to AD2. This shift leads to a drop in the real Gross Domestic Product from Y2
to Y1 and also a decrease in the general prices in the economy from P2 to P1.
Question 3
Factors contributing to economic growth based on AS-AD model
Changes in the Aggregate Demand
Variations in the components of the aggregate demand will result in a change in the
economic development of the country. Foremost, for economic growth to occur, the consumption
and investment spending needs to be increased. The government often plays a significant role in
increasing consumption and investment. For instance, the government can reduce the interest
rates to make borrowing cheaper (Boyes & Melvin, 2012, p.40). Consumers will borrow more
and hence an increase in consumption. High consumption levels and low cost of borrowing will
encourage businesses to invest more leading to an increase in employment creation and finally

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economic expansion. However, it should be noted that low-interest rates do not guarantee that
the individuals will borrow money. There must be confidence among the consumers and
investors. The increase in government spending and a reduction in taxes will also increase the
aggregate demand and hence economic growth (Hubbard & O'Brien, 2013, p.72). Additionally,
an increase in export earnings will make the aggregate demand to increase and consequently
result in economic growth.
Change in the Aggregate Supply
Over the long term, economic growth is influenced by factors that cause a rightward shift
in the long run aggregate supply. If there is no increase in the Long Run Aggregate Supply, then
growth in the Aggregate Demand will be inflationary (Blanchard & Johnson, 2013, p.64).
Foremost, the critical infrastructures like roads, rail, water, and sewerage as well electricity
should be improved help companies to reduce the cost involved in the production and thus
expand their output. Human capital should also be enhanced to boost the productivity of
employees. The growth in labor productivity can enable the businesses to deploy more refined
production processes and hence become more efficient. Furthermore, the strength of labor
market is critical in influencing the Long Run Aggregate Supply (Nils Gottfries; Palgrave
Macmillan., 2013, p.56). Therefore, the labor markets should be more flexible to permit the
companies to hire the appropriate workforce.
Actions by French government to boost economic growth
The article proposes the use of expansionary fiscal instruments to stimulate economic
growth in France. The government is argued to stimulate aggregate demand by increasing
government expenditure on various schemes such as welfare benefits. There is also the need for

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the government to reduce the taxes imposed on consumers and the business community. The
increase in public expenditure and the reduction of taxes will help to stimulate the aggregate
demand and result in an increase in economic growth and job creation.
Question 4
Graph 2: increase in the aggregate supply
Price level
Real GDP (Y)
Investing in education will result in improvement in the productivity whereas
infrastructure will reduce the cost of doing business. As a result, the aggregate supply will shift
rightward from SRAS1 to SRAS2. This change will lead rise in the real Gross Domestic Product
and a drop in the general prices. The long-run aggregate supply is represented by the vertical
line.
AD
SRAS 2
SRAS 1
Yp
LRAS
P1

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Bibliography
Blanchard, O. & Johnson, D.R., 2013. MACROECONOMICS. Boston : Pearson.
Boyes, W.J. & Melvin, M., 2012. Macroeconomics. Mason, OH: South Western.
Frank, R.H., 2015. Microeconomics and behavior. New York, NY : McGraw-Hill Education.
Gillespie, A., 2014. Foundations of economics. Oxford : Oxford Univ. Press.
Hubbard, R.G., Garnett, A., Lewis, P.E.T. & O'Brien, A.P., 2016. Essentials of economics. 3rd
ed. Melbourne, Victoria: Pearson Australia, [2016].
Hubbard, R.G. & O'Brien, A.P., 2013. Macroeconomics. Boston ; Montreal : Pearson.
Mankiw, N.G. & Cosgrove, S., 2014. Principles of microeconomics. Stamford, CT: Cengage
Learning.
Nils Gottfries; Palgrave Macmillan., 2013. Macroeconomics. Basingstoke ; New York: Palgrave
Macmillan.
Tucker, I., 2016. Microeconomics For Today. Australia : South-Western: Cengage Learning.