Firm Perspective and Macroeconomic Perspective

Questions: Part 1: Firm Perspective As the debate over deregulation and soaring degrees costs continues around the nation, Australian National University (ANU) alumni Eric Liu and Haosi Zhang have started their own business selling discounted academic gowns. Their challenge to the established market appears to have forced a 30 per cent price cut from the University of Canberra. Mr Liu, 25, now studying a masters in law, said the pair's UniGowns business began in July and was motivated more by saving students than making profit. "Basically the idea came from some of our friends at the ANU and UC who were complaining about how ridiculously expensive [graduation gowns] are," he said. "We think of it as a business to challenge the universities' UC Union monopoly [previously there was only one supplier for ANU Australian National University] and collapse the price." A gown, hood and mortar board are a mandatory part of graduation ceremonies around the nation. UniGowns sold about 30 of their $89 sets in the company's first outing at the UC graduations last month. Mr Liu said the university has dropped their hiring price for the set from $130 to $110 as a result, which includes the mortar board to keep, but went further to offer a special $89.95 purchase at the October graduation. The UC Union, a-ownedwhollyentity of the university, has previously been the exclusive seller of the graduation wear. Union chief executive Joe Roff could not be reached for interview this week, but said UC welcomed competition particularly where students benefit. 1. Based on the article what market form did the market for graduation regalia (a gown, hood and mortar board) at ANU most closely resemble before Mr. Liu started his UniGowns business? Why? Represent this using an economic diagram and the relevant price from the article. 2. Once the students started their rival business (UniGowns) what form would the market for a graduation set at ANU have taken? Explain your answer with reference to theory. How does the price and quantity in this market compare to the price and quantity before the students started this business? 3. Describe a business that you and your friends can start this year. What market form (i.e. monopolistic competition) is the market you want to operate in? How will this market form affect your profits? Draw a diagram to represent the market your business will be operating in and your individual cost curves. You will need to do some research here. Part 2: Macroeconomic Perspective 1. Why might the misery index consist of measures of unemployment and inflation rates? What are the negative consequences of high unemployment (especially cyclical unemployment if it persists for a long time) and high inflation for the economy?2. Based on the information in the above article and your own research what is likely happening to Australias real GDP in 2015? reference to theory. 3. Use an aggregate demand and supply model to demonstrate where the Australian economy is currently operating in relation to full employment and explain the reasons for this. Based on your diagram, the above sources and your research what phase of the business cycle do you think the Australian economy is currently in? Explain your reasoning.4. Based on your research what type of fiscal policy is the government pursuing at the moment? Do you believe this is appropriate given the state of the economy at the moment? Explain why or why not with the aid of a diagram. 5. Based on your research what type of monetary policy is the RBA pursuing at the moment? Answers: Part 1: Firm Perspective Source 1: 1. On the basis of the article, it can be said that the market for graduation regalia (a gown, hood, and mortar board) at ANU resembles the monopoly market structure before Mr. Liu started his own business. The market basically resembles the monopoly market due to the similarity in the characteristics. In this case it is seen that, like a monopoly market, in this market also there was only one supplier in the market supplying to the entire industry. The company had higher market power and thus it was able to provide the good at a much higher price than the average cost of the product. So it can be said that the graduation regalia resembles monopoly market and in the following diagram the equilibrium price and quantity in the monopoly market can be shown. Here Q* is the equilibrium quantity and P* is the equilibrium price (Norman, Thisse and Phlips, 2000). 2. Once the students started their rival business (UniGowns) the market form changed to a duopoly market structure and it is a special form of oligopoly market. It is known that in the duopoly market, there are only two producers in the market, supplying the products to the entire industry. In case of ANU, similar situation was faced when UniGowns entered the market and supplied the commodity to the entire industry. Here the market became more competitive. A monopoly firm differs from the competitive firms. It is not the price taker. There are no competitors in the market and the firm operating in the monopoly market is free to choose its price and quantity. In case of duopoly, competitive pricing of goods takes place. The cost structures are decided by the organization on the basis of the cost structures of the competing firm. Each firm in a duopoly keeps the other firms choice of output level as fixed and the production quantities are set according to the quantities produced by the competing firms. Previously there was one supplier for supplying the gowns to the students (Norman, Thisse and Phlips, 2000). The University used to charge high rate for the gowns. But with the advent of the UniGowns, there was competition between the UC Union monopoly and the business started by ANU alumni. As Unigowns sold the gowns at a price of $89, the UC Union dropped their hiring prices from $130 to $110. They also offered a special price of $89.95 during the October graduation (Arnold, 2001).3. A business has been started by our friends to sell stationery products at the University campus of Canberra. Earlier the stationery items were sold by a monopoly firm within the campus. They used to charge high price for the goods. The stationery items like note books, files, pens were sold by the firm at the campus at high price. But the stationery shop opened by us at the campus will offer the stationery items at cheap rates. The same material will be offered at reduced rates. Init ially the profit margin will be less. But the new business will offer tough competition to the existing monopoly firm. Fig : Firms operating in Duopoly Part 2 Macroeconomic Perspective 1. Misery index comprises of the sum of the rate of unemployment and inflation rate for a given period to measure the well being of the economy (McEachern, 2015). The inflation rate and the rate of unemployment are the key indicators of the economic performance of a country. With the rise of the misery index, indicates worse economic condition for the country. The rate of inflation is controlled by the monetary policy of the country, CAD surplus or deficit. Thus it is the key indicator of the economic performance (Kirkpatrick and Dahlquist, 2006). High rate of inflation causes adverse effects on the performance of the economy. High rate of inflation results in high price of the goods. The purchasing power of the consumers decline. High rate of inflation also results in higher demands for wages as people want to maintain the same standard of living. The labour market is affected with high inflation rate. High rate of inflation results in unemployment in the medium term which leads to loss of international competitiveness of the country. High rate of unemployment poses negative threat on the economy. The standard of living of the people of the country reduces. It reduces the purchasing power of the people. High rate of unemployment for a long period of time leads to the erosion of the skills which is basically robbing the economy by not utilising the useful talents. 2. The real GDP of Australia is better than the previous year. Since 2012, the growth of the real GDP of Australia has been at a rate of 2.3%. The trade is expected to decline by 3.5% in 2015. With the decline in the terms of trade, the GDP growth is expected to be 4.5% in 2015(Economywatch.com, 2015). The higher exports will support growth in Australia. The contribution of the resource sector to the real GDP growth will fall. Sustained economic growth will be maintained by contribution from the non resource sectors. 3. The unemployment rate of Australia has declined to 6.1% in December 2014. This shows that there has been rise in the employment rate of the country. The supply of labour in Australia has increased as a result of increase in demand for jobs. (Tradingeconomics.com, 2015) At full employment, aggregate demand and supply is represented as The increase in the rate of employment is a result of the rise in aggregate demand of jobs. The economy is recovering. As the investment in the economy is rising, there is increase in the number of jobs. This has resulted in the shift of the demand curve upwards. The term recovery can be used to describe the business cycle stage of Australia. The economy is recovering from its low point and it is expected that better conditions ahead for Australia. There is fall in the unemployment rate in the country and the productivity of the country is rising (Rba.gov.au, 2015). 4. The Governmnet of Australia aims at reaching to a fiscal surplus. The major decisions taken by the Government includes investment in Australian schooling , infrastrcuture that will enhance the productivity and ensure fairer policy in Australia. The fiscal policy will maintain the solid growth of Australia and the low unemployment rate. The Governmnet has designed a stimulus package. Apart from the resource sector like the production sector and exports , the non resource drivers of growth will be taken into consideration (Budget.gov.au, 2015). The Governmnet will continue to exercise its restrain on spending that will not hamper the growth of Australia and employment rate. The measures have been taken to offset the lower tax receipts by the Government(Financial Review, 2015). The fiscal policy implemented by the Government is appropriate to boost the economic growth of the country. 5. The monetary policy by the RBA has the key features The cash rate has been reduced by 25 basis points to 2.25 percent. The reduction will be effective from 4th February 2015. The monetary policy by RBA is an easing monetary policy with the fall in the global oil prices and disinflation in the economy. The monetary policy of the country has been formulated to control the money supply in the country. The interest rate cuts of the country will boost the money supply in the country. The rate of inflation will be controlled. The high rate of unemployment can be controlled by the country (Rba.gov.au, 2015). References Arnold, R. (2001). Economics. Cincinnati, Ohio: South-Western College Pub. Budget.gov.au, (2015). Budget Strategy and Outlook - Budget Paper No. 1 - Statement 3 - Overview of fiscal position. [online] Available at: https://budget.gov.au/2013-14/content/bp1/html/bp1_bst3-01.htm [Accessed 3 Feb. 2015]. Economywatch.com, (2015). Australia Economy | Economy Watch. [online] Available at: https://www.economywatch.com/world_economy/australia [Accessed 3 Feb. 2015]. Financial Review, (2015). Fiscal Policy. [online] Available at: https://www.afr.com/tags?tag=T-Fiscal-Policy [Accessed 3 Feb. 2015]. Kirkpatrick, C. and Dahlquist, J. (2006). Technical analysis. Upper Saddle River, N.J.: FT Press Financial Times. McEachern, W. (2015). ECON Macroeconomics 4. pp.100-150. Norman, G., Thisse, J. and Phlips, L. (2000). Market structure and competition policy. Oxford, UK: Cambridge University Press. Rba.gov.au, (2015). RBA: Media Release-Statement by Glenn Stevens, Governor: Monetary Policy Decision. [online] Available at: https://www.rba.gov.au/media-releases/2015/mr-15-01.html [Accessed 3 Feb. 2015]. Rba.gov.au, (2015). RBA: Speech-The Business Cycle in Australia. [online] Available at: https://www.rba.gov.au/speeches/2014/sp-ag-131114.html [Accessed 3 Feb. 2015]. Tradingeconomics.com, (2015). Australia Unemployment Rate | 1978-2015 | Data | Chart | Calendar. [online] Available at: https://www.tradingeconomics.com/australia/unemployment-rate [Accessed 3 Feb. 2015].