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ECONOMIC ASSIGNMENT

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ECONOMIC ASSIGNMENT

Part A: Microeconomics

Question 1

The case study provided for this assignment is on Woolworths and Coles. Both these organisations operate in the Australian grocery sector. They function as the components of a oligopoly market, where very less number of competitors or two competitors co-exist in the same economy. Both Woolworths and Coles produce homogenous goods for everyday household needs and groceries in the oligopoly market. In this assignment, both the groups of supermarket chain are evident to be in a price war that is related to the Bertrand model of oligopoly (Alipranti, Milliou & Petrakis, 2014). Since, Woolworths reduced the price of their commodities by 1.9%, Coles followed the same procedure and reduced their prices by 3.1%. This presents as a prominent characteristic of the Bertrand model of oligopoly. Competition between existing rival businesses by offering the consumers elaborate price cuts is a tactic of increasing sales (Cusumano,  Kahl & Suarez, 2015). The diagram below states the                                            

                                                            Figure 1: Oligopoly Market Condition

                                                 (source: Created by learner)

Question 2

Price war is defined by the procedure businesses use in order to conduct more sales than the other company does by providing more discounts on the offered products. Due to the price war raged on by Woolworths and Coles, the former gained an increase in their market share. This was attained by reducing the prices of available commodities by 1.9%. Coles presented a price cut for their consumers by a 3.1%. This got them a market share of 37% whereas Woolworths procured a market share of 43%. With an increased price cut, Coles failed to gather more revenues because of reduced market shares. Woolworth’s revenues were greater than Coles. Coles is incapable of producing anymore price cuts since they have reached the margin of possible discount that could be offered by a company on sales. This is because; Coles had incurred an excessive advertising cost on their price cut strategies due to heavy advertising campaigns. Despite the obvious beneficial results for both the organisations, Woolworths gained more revenues because o0f their increased market shares than Coles.

Question 3

In an oligopoly market structure, usually the leading and competing companies make profit, whereas the smaller business elements suffer financial losses (Sturgeon, 2017). Due to these losses, the smaller businesses fail to enter the competitive stretch of business with the other organisations. As per the Bertrand model, organisations reduce the cost of commodities to increase sales, attract more consumers and in turn, reap in more market shares (Nagle & Müller, 2017). By reducing the prices, companies decline the possibility of earning maximum revenue from sales but increase the number of sales. This strategy encourages other businesses to inculcate a similar pricing strategy. This hampers the smaller businesses as they cannot support the losses that they incur through this method, as companies cannot function in a market lesser than the marginal cost available for the commodity (Knittel & Pindyck, 2016). A continuous effect of this situation stops the reduced pricing after the maximum production for a certain commodity with reduced price is reached. This follows the marketing strategy of organisations ‘offer lasts till stocks last’ (Grant, 2016). The minor businesses find it impossible to continue in an oligopolistic market due to the higher production costs and lower prices; they cannot earn the required revenue. This mostly happens in the vegetable production and sales industry since technology use in this industry is lesser than any other industry.

Question 4

The reason an oligopolistic market structure exists is that hegemonic organisations deduct minor businesses by using pricing strategies. These bigger organisations apply excessive price war and gain maximum market share, leaving the minor organisations with no scope for competition. With a decrease in the price of a commodity, the demand for the same commodity increases (Kim & Mauborgne, 2014). Due to an increase in demand, the production also increases. A single organisation is capable of influencing the market demand for a product if the organisation has maximum influence over the market shares. A hegemonic organisation is capable of manipulating the prices and supply-demand ratio of the market they operate in (Jo, 2018). The increase or decrease in funds allocated for advertising of a company determines the efficacy of price wars in an oligopolistic market. Since the minor business, entities do not have the necessary funding to continue in an oligopolistic market structure, with time, they leave the market. Giant organisations that cater to a greater range of consumers push the minor entities out of business.  The following figure explains the demand and supply graph within an oligopoly market.
                                 
 
                                                   Figure 2: Demand and supply
                                                      (Source: Created by learner)
Part B: Macroeconomics

After studying the provided case study of Spanish economy in 2013, it is understood that the Spanish economy went through the trough position of a business cycle. This is evaluated from the negative GDP of the country during the year 2013. With the reduced purchasing capacity of consumers due to low employability rates, the demand for products was also low. Since, there was reduced demand for products; the production rate was also reduced. This again led to an increase in the pre-existing rate of unemployment. A cycle of continuous restrictive finances of individuals results in reduced demand for products. With a reduction in reduced aggregate demand for commodities the production and supply also diminishes. This scenario explains the condition of a trough situation, positioned in a business cycle model. A comprehensive evaluation of the Spanish economy in 2013 shows a negative picture, as with an aggregate low demand there is a reduced low supply. 

Question 2

In a business cycle model, the trough situation is followed by the expansion state of an economy or business. The expansion stage Spanish economy experienced can be summarised as, the increase in aggregate demand of commodities. The policies Spanish government implemented for the improvement of Spanish economy influences an increase in demand for commodities. Government policies such as expansive financial plans improve the trough condition and help in beckoning the expansion state of an economy. An improvement in the financial condition of the country improved the individual finances of consumers leading to the increase in cash quantity available to them. With an improved financial condition of the consumers, demands for commodities are replenished, which results in boosting the production of commodities to accommodate the rising demand of the market.  The following figure shows the relation between aggregate demand and aggregate supply.

 

 

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