Business Economics - Covid 19 Sheet
Question 1A: Name and describe the phenomenon which involves such joint decision-making.
What are its advantages and disadvantages?
when Oligopolies firms comes together and makes joint decision that is called collusion.
Advantages of such decision-making could be the following:
High Profits: Due to little competition in market they have potential to bring large number of
benefits.
Simple Choices : Having only a few companies that offer the goods or service that you are
looking for makes it easy to compare between them and choose the best option for you.
Competitive Prices: No single firms can increase prices Being able to easily compare prices
forces these companies to keep their prices in competition with the other companies involved in
the market. Example OPEC they make prices steady as economy are dependent on oil export
and imports.
More investment in research and development on profit margins to make operating cost less or to make
product better.
Disadvantages of such decision-making could be the following:
Less choice for consumer: consumers has very limited choices and options for the services
that they want. This is one of the biggest pitfalls of an oligopoly. example coca cola, Pepsi and
Telecommunications company.
Fixed Prices Are Bad for Consumers: No discounts on products
No Fear of Competition: Due to very settled and stable business vey less competition.
Difficult to Forge A Spot: For small firms it is very difficult to find spot in oligopoly firms.
Question 1B: What made OPEC decide to cut the supply of oil? What was the desired outcome
of the decision? What was the change in the supply and demand curves of oil and the
subsequent market equilibria? Analyze the changes both before and after the decision to reduce
supply.
What made OPEC decide to cut the supply of oil?
Due to lockdown imposed by governments so manufacturing firms shut down and demand of oil got
reduced OPEC decided to cut oil supply, But OPEC resume their production in same manner. Supply
was same but demand was less due to this crude oil price goes down and country like china and India
make benefits and reserves the oil.
What was the change in the supply and demand curves of oil and the subsequent market
equilibria?
Majorly Logistics, manufacturing units were playing part for demand in crude oil. Due to reduce in
demand, there is also reduction oil refineries like reliance got impacted as their production also went
down. Demand curve moves left.
Manpower also got reduced. Demand for other items also got impacted. And other items supply also
impacted both domestic as well as globally. Subsequently global economies to also looking for a
substitute.
Analyze the changes both before and after the decision to reduce supply.
Changes in oil Before supply
OPEC getting surplus benefits before covid 19 form oil dependency organization due to all demands.
Trade deficit as lots of import of crude oil.
Changes After supply
Consumers got benefited. Oil and gas Refineries firms got impacted due to low production and salary
wages also impacted. Trade deficit got reduced those who are depended on oil import like china and
India.
Question 1C: What market structure does the OPEC operate in? What are the key features of such
a market structure?
Oligopoly market structure OPEC operates. Here they are limited numbers of suppliers | producers and
distributers of certain oil and gas products.
Total 13 countries part of the Organization of the Petroleum Exporting Countries (OPEC) which makes
joint decision and controls over 50% of global oil supplies and about 90% of proven oil reserves.
Key Features:
Firms make decisions to beat competition: The firms cooperate with each other in determining price
or output or both
Interdependence: Firms under oligopoly are interdependent
Few firms: Less advertisements and more research to reduce operational costs.
Question 2
Question 2A: Assume that the business was operating at the profit maximizing level of output
before Covid-19. Each article brought in an ad revenue of €375.
Maximum profit no. of journalist is 8.
How many articles was the business producing?
92
What was the total profit?
Maximum earning per month will be = ad revenue per article * No. of articles per month =
375*92 = 34500 €
Total profit = maximum earning -( wages of 8 journalists + office building and utilities cost)
= 34500 -(3000*8+8000) = 2500 €
Explain conceptually how you arrived at the profit maximizing level of output. You don't need
to show exact calculations
Profit maximum level output - Marginal profit is marginal revenue minus marginal cost and total profit
is the sum of marginal profits. In this case the total revenue per month and reduced the total revenue.
Question 2B: On 9th March 2020, Italy went into lockdown. As a result, you had to shut down your
office and adopt a ‘work from home’ policy. This eliminated your fixed costs of €8000. At the same
time, your ad revenue per article reduced to €250. This was because all companies suddenly
reduced their advertising spending.
How many journalists would you have to fire? Assume that you only care about maximizing
profits.
6 journalists
What is your new total profit?
Total profit=1500
Why did you fire the journalists? Explain your answer conceptually. You don’t need to show exact
calculations
Ad revenue are less during covid19 period, Profit margin was zero or negative as if number of journalists
remains same. In order to balance profit journalists were fired.
Question 3
3A: What type of unemployment would a country like India experience from such a pandemic?
Please provide an explanation.
Cyclical unemployment takes place when the demand in an economy begins to decrease. In such cases,
the producers reduce their supply and, in the process, let go of employees.
First supply affected from china. After WHO declare pandemics lockdown implemented and there is
suddenly demand of goods and services got affected and drops. That leads to reduction in supply and
production. Also leads to reduction in manpower which causes layoffs in order to maintain the balance
in benefits. After mass layoff consumer are in saving modes and leakage in macroeconomics.
It drives to John Maynard Keynes' theory: That aggregate demand drives production in an economy.
Stock market got crashed supplier retailer and consumers all got affected.
3B: What type of recession would be caused by such a pandemic? Provide an explanation.
Supply-led recession earlier in china as sudden decrease in the supply of an essential commodity,
which affects production in an economy.
After WHO declares pandemics and lockdown in across the world.
Demand-led recession occurs when there is a lack of demand in an economy owing to various factors
like an increase in leakage from the economy by way of high imports or high savings, higher taxes, etc.
3C: What would happen to the aggregate demand and aggregate supply in India because of the
above two phenomena? Elaborate your answer.
Both aggregate demand and supply got affected, Automotive demand got reduced | tourism hospitality
air supply logistics rail transport, loan failure. Increase in Insurance cover, medical health packages, term
plan, hospital, telecommunication and IT sectors.
As per Keynes' Law states that demand creates its own supply. Overall, aggregate demand continues to
lag aggregate supply, especially due to weak services activity and subdued urban consumption.
India saw the sharpest decline in economic output among major. The vein hunt for a painless way out of
our current covid bubble ... In other words, the aggregate supply shock was bigger than the aggregate
demand shock.
3D: How will the AD/AS curves behave in this situation? Please elaborate your answer.
AD/AS curve shall move to the left due to lower demand and supply in short term.
The level of aggregate demand and aggregate supply in the economy and real GDP has decreased in
the economy.
Question 4
Question 4A: What type of macroeconomic policy should the Indian government adopt after such
a crisis? Please mention the policy measures to be undertaken clearly with explanations.
Monetary policy: The RBI should keep a low interest rate to increase cash in the market, the idea is to
create demand in market like automotive, real estate sectors etc. Due to this increase in the supply
chains in terms of manufacturing. increase circular flow of money to boost economic activity.
Expansionary Fiscal policy: Tax cut by the government, people will purchase more and increase in the
firms demands.
Spend on building infrastructure, gives money to businesses, more money flow in the economy and more
jobs more demand and more supply.
Question 4B: What type of macroeconomic policy should the Reserve Bank of India adopt after
such a crisis? Please mention the policy measures to be undertaken clearly with explanations.
RBI should cut in repo rate on loan and increase production of money print so money will flow in market
and demand of product will increase also supply will increase.
Reducing interest rate. Consumer will further go for home loan, personal loan etc so increasing
the demands in terms of real state, automobile sectors.
EMI moratorium- Three-month moratorium on loan repayment is likely to help borrowers tide
over any current financial hardship.
selling government securities in the open market.
Increase in investment expenditure will increase the level of aggregate demand in the economy
shifting the AD curve rightwards
