Managerial Economics Report: Market Analysis and Oil Price Impact

This report delves into the realm of managerial economics, providing a comprehensive analysis of the UAE telecommunications market and the effects of oil price fluctuations. The first part of the report examines the evolving market structure of the UAE telecom industry, transitioning from a monopoly to a monopolistically competitive market. It explores pricing strategies like penetration pricing and profit maximization in both the short and long run, supported by relevant economic models and graphs. The second part of the report investigates the impact of oil price changes on the US economy, differentiating between short-run and long-run effects on aggregate supply, demand, and price levels. The analysis covers both oil price increases and decreases, providing a nuanced understanding of macroeconomic dynamics and the importance of elasticity in the market.

Running head: MANAGERIAL ECONOMICS
Managerial Economics
Name of the Student
Name of the University
Student ID

1MANAGERIAL ECONOMICS
Table of Contents
Question 1..................................................................................................................................2
Question a...............................................................................................................................2
Question b..............................................................................................................................2
Question c...............................................................................................................................2
Question 2..................................................................................................................................4
Question a...............................................................................................................................4
Question b..............................................................................................................................5
References..................................................................................................................................6

2MANAGERIAL ECONOMICS
Question 1
Question a
The telecommunication market of UAE was initially characterized as a monopoly
with dominance of a single firm Etisalat. Since 2006, the entry of Du in the market, it had
become a duopoly market. Now, as the government allows Virgin mobile and other domestic
and foreign firms to operate in the market, the industry now is likely to become
monopolistically competitive market. This is market where large number of different brands
operate in the market with intensive competition prevailing among them (Cowen and
Tabarrok 2015). Some distinctive characteristics of the emerging market forms include large
group of firms and buyers, permission to free entry or exit, high degree of product
differentiation and a relatively higher demand elasticity.
Question b
The pricing strategy that is most expected in the new form of market is the penetration
strategy. This indicates a marketing strategy of firms where they introduce their products by
setting a relatively low price. The low price is expected to attract more customers which in
turn enables firms to increase their market share (Nijssen 2017). The telecommunication
market for a long time has been dominated by two big players. The new entrants thus should
take strategy that can attract customers towards the new brands. Low price is an effective way
to attract customers and hence, penetration is an appropriate strategy for new firms entering
the market.
Question c
In an industry characterized as monopolistically competitive market profit
maximization in the short run differs from that in the long run. Short run profit maximization
requires two conditions to be satisfied. First, marginal revenue of firms should be same as the

3MANAGERIAL ECONOMICS
marginal cost. The second order condition is that at the point of profit maximization marginal
cost should cut the marginal revenue from below. Firms in the short run are in a position to
enjoy profit that exceeds normal profit.
Figure 1: Short run profit of firms
In the long run however with no barriers new firms continue to enter the market. As
number of firm increases profit earned by each firm reduces. New firms enter until profit
declines to zero (Mochrie 2015). As each brand in the market has some market power they do
no extend production until minimum point of average cost. Rather they operate to the left of
minimum point of average cost leaving firms with some excess capacity.

4MANAGERIAL ECONOMICS
Figure 2: Profit maximization in the long run
Question 2
Question a
Short run and long run impact of oil price increase
In the period ranged from 1973 to 1975, there was marked increase in oil price due to
a combined reduction in oil supply by OPEC countries. As oil price increases across the
world, US firms engaged in producing gasolines, tires and other oil supplementary products
experienced an increase in cost of production. The increased cost encourages them to reduce
supply at the given cost. In the short run, demand for oil is relatively inelastic in nature. Firms
therefore cannot reduce their demand for oil much. The aggregate supply curve in the short
run shift to the left lowering equilibrium output (Uribe and Schmitt-Grohe 2017). The supply
shortage in the economy put an upward pressure on price level.
Figure 3: Short term effect of an increase in oil price
In the long term however the situation is somewhat different. Demand for oil in the
long run is relatively elastic in nature. The manufactures of U.S that heavily depends on look
for products alternative to oil. Higher price also encourages new suppliers to supply oil in the

5MANAGERIAL ECONOMICS
world market. In the long run thus demand of oil become relatively elastic (Heijdra 2017).
With availability of oil from alternative sources manufactures can recover production
increasing aggregate supply. As supply increases equilibrium output gradually moves
towards potential output lowering pressure on price.
Question b
Short run and long run effects of a decline in oil price
A decline in oil price reduces cost of US firms using oil as one major input. With fall
in oil price the firms thus face a lower cost of production. This encourages them to supply
more adding to aggregate supply of the nation. The short run aggregate supply curve shifts to
the right increasing equilibrium output and lowering the price level. This is illustrated in the
figure below.
Figure 4: Short term effect of a decline in oil price
In the long run the lower oil price does not have much effect on the economy. As
firms already reach to the potential output, they cannot increase their demand for oil

6MANAGERIAL ECONOMICS
(Goodwin et al. 2015). Also in the long run, the economy gradually reduces its dependence
on oil through improving conservation and change in technology.
References
Cowen, T. and Tabarrok, A., 2015. Modern principles of microeconomics. Macmillan
International Higher Education.
Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Macroeconomics in
context. Routledge.
Heijdra, B.J., 2017. Foundations of modern macroeconomics. Oxford university press.
Mochrie, R., 2015. Intermediate microeconomics. Macmillan International Higher Education.
Nijssen, E. J. (2017). Entrepreneurial marketing: an effectual approach. Routledge.
Uribe, M. and Schmitt-Grohe, S., 2017. Open economy macroeconomics. Princeton
University Press.

7MANAGERIAL ECONOMICS