1. Which of the following are macroeconomic issues, which are microeconomic ones and which could be either depending on the context?
(a)Inflation is one of the major macroeconomic issues as it allows the government to boost the rate of growth of aggregate supply
(b)" Low wages in certain service industries", it can be either microeconomic or macroeconomic issues. In a macroeconomic ways, there might be a high unemployment level of the country, this allows the services industries have lot of choices, which leads to a lower wages as everyone trying to gain a job. In a microeconomic issue, a particular service industry might have financial problems which could leads to redundancies and reduce the wages for employees.
(c) "Why the price of cabbages fluctuates more than that of cars" is a microeconomic issue, which can be caused by complements.
(d) "The rate of economic growth this year compared with last year" is a macroeconomic issue it could leads to a higher standard of living and rising employment level.
(e) The decline of traditional manufacturing industries. It is a macroeconomic issue because it is a traditional industry.
2. (a) Draw the country's production possibility curve.
(b) Producing 400 units of X and 70 units of Y, the opportunity cost of producing another 100 units of X will be 5 unit of Y
(c) Explain how the figures illustrate the principle of increasing opportunity cost and diminishing returns.
In the production possibility frontier, the opportunity cost will consists of the benefit when it could have produced more of Unit X by sacrificing to make more Unit Y. For the diminishing return, if one factor of production increased whiles the other remain constant. The overall return will relatively decrease after a certain point.
(d) Now assume that technical progress leads to a 10 per cent increase in the output of X for any given amount of resources. Draw the new production possibility curve. How has the opportunity cost of producing extra units of Y altered?
As the output of X had increase by 10 per cent, the opportunity cost of producing extra unit of Y will be decreasing. This means that if the production producing the same amount as before of Unit X, the production of unit Y will be increase.
3. Which of the following will have positive signs and which will have negative ones?
(a) Price elasticity of demand; positive sign
(b) Income elasticity of demand (normal good); positive sign
(c) Income elasticity of demand (inferior good); negative sign
(d) Cross elasticity of demand (with respect to changes in price of a substitute good); positive sign
(e) Cross elasticity of demand (with respect to changes in price of a complementary good); negative sign
(f) Price elasticity of supply; positive sign
4. Briefly explain how planned economies can achieve enhanced economic growth and state 2 advantages and disadvantages each of planned economies.
(8%)
A planned economy is an economic system in which the government decides what sorts of goods and services to produce and how they are to be priced and allocated to the production of particular market.
The advantages of having planned economies is that it allows the government to have a stability long term infrastructure investment without any fear of market downturn which leads to abandonment the project. This is an important issue where the returns involve risk or when the return is diffuse. The other advantage is that the government will have everything under control, which makes the economy growth steadily.
The disadvantage of planned economies cannot detect consumer preferences, shortages and surpluses with sufficient accuracy and therefore it cannot efficiently co-ordinate production. This is called economic calculation problem and is caused by lack of supply. As the government decide what sorts of goods to be entered to the free markets, the innovative product is less likely to be promoting in this economy. The other disadvantage is the government set the prices on goods, which leads to consumer have no freedom of choice and this could ends up workers have a low morale efficiency and not motivated.
5. Briefly explain how you can use the concept of Opportunity Cost to explain a typical negatively sloping Demand Curve.
Opportunity cost is the cost we pay when we scarify something to get something else. For example, in this production possibility curve the maximum unit it could produce for food is 8 millions, but there will be no units of car being produced. If the productions would like to produce the maximum unit of car which is 7 millions, then it has to scarify all the units of food. As it shown the point on the graph from A to I, this curve has a negatively sloping demand curve. This tells us that the center point D allows the production to produce the maximum units for cars and food as it adds up to 10 millions which is higher than any other points on the curve. However, company always aiming for profit and therefore they will aim to produce certain amount of food and cars rather than produce only one sector as it can helps the company spread the risk and attract more brand loyalty.
Section B: Essay Section (50% of Coursework Mark)
Using the example of supermarkets in the UK explain the competition policy issues associated with oligopolistic markets.
An oligopolistic is when market dominated by a few large competitor. In a UK supermarket industry, there are four main companies which are (Tesco, Sainsbury, Asda and Morrison), although there are many small supermarkets in this industry. Those firms are price makers which they control over the prices are determined by the level of coordination among them.
As most of the food manufacturer industry will supply many different supermarkets which means that they all carry out similar products such as Heinz and Kellogg. The only thing that supermarket could do is to make produce differ by producing its own genetic goods for some of the product (Tesco Value). However, most of those private label products are provided by one company for offer under another company's brand. This means that all the product which is available for sale in the supermarket is exactly the same, and this is one of the features in an oligopoly market.
In an oligopolistic market, entering to the market as a new firm is difficult because of the entry of barriers. These entry barriers can be structural (economic of scale) or artificial (limited licenses issued by government). In this market, big firms could choose their price and output to maximize profit as they are a price maker. This means that the dominant player could set a low price strategy in order to make an entry barrier for stopping any new firms coming into the market such as price war. Price war is when one supermarket announces a range of price cuts in its products and the other follow. At the moment, Asda has starts a "price roll back" scheme, which introduced 1 pounds range as part of 1000 production line. Tesco, Sainsbury's and Morrison are all gearing up to respond and prepare their own discounts. Tesco has already waging a petrol price war, boasting it is selling a liter of unleaded at a four year low price of 82.9p. During this period, the four major supermarkets have been hit by competition from Aldi and Lidl who have won over an army of middle-class shoppers with their sharply lower price, but high quality range of food. Tesco and Sainsbury's announced that they would try to match Asda's lower prices and they would not let Asda to win yet any more market share.
Furthermore, as oligopolistic firms have little to gain through competition, they generally rely on non price methods of competition. It can be advertising, opening time, location, home delivery system, research and development (R&D). Many supermarkets have their own loyalty card to reward their customers, and sending some voucher to the loyalty holder to encourage them to continue using the loyalty card. This is one of the ways in which supermarket try to increase their market share and attract more customers while holding the line on price.
Each oligopolistic firm keep a close eye on the activities of other firs in the industry, the decision made by one firm will be invariably affects others and invariably affected by others. For instance, if one supermarket decides to open 24 hours a day, it will increase their market share because customers who would have previously waited to shop at a rival can now shop at any time in supermarket. All other supermarket will recognize and start to follow even though they now have higher cost with no additional revenues. This is the strategic of interdependence in action. In an oligopolistic firm, one way to pursue the balance competition is through merge which is legally combining two separate firms into a single firm. This is because oligopolistic industry only has a small number of firms, so the incentive to merge is quite high and the market share would likely to rise which gives the result of the firm a greater market control. For instance, Morrison Safeway merger in 2005, this gave the combined group a market share of more than 15% which is enough to challenge the third-placed player Sainsbury.
Another common method that supermarket used is through collusion, this is when two or more firm that secretly agree to control the product prices, production or other aspects of the market. If they have done the procedure correctly, the firms will behave as one firm which can be called monopoly. Those supermarkets will collaborate to set a monopoly price and a monopoly quantity and allocate resources as inefficiently as a monopoly. In 2007, the top four supermarkets were accused of colluding to fix the price of dairy products resulting in a £270 million cost to Britain's shoppers.
Finally, oligopoly markets always have good and bad in our economic world. The bad oligopoly market tends to be inefficient in the allocation of resources. They charge a higher price and produce less output than the efficiency benchmark of competition. Another bad oligopoly is that they tend to increase the concentration of wealth and income, so that they can be self-reinforcing and inhibit pursuit of the microeconomic goal of equity. Moreover, the good thing about oligopoly market is that it is the one which most likely to develop the advance level of technology (R&D), expand the production capabilities, promote the economic growth and so it would likely to lead a higher living standard. As oligopoly market only have a small number of large firms, they can take the advantage of economic of scale which could reduce the production cost and the prices. This means that it can either increase the profit for supermarket or lower the product price to attract more customers for increasing market share.
