Name Madhusmita Das

Question 1

1A

The phenomenon which involves such joint decision like the OPEC one is known as
Collusion.

Advantages:

- As there is no competition in the market, the prices are higher than if competitions
were present, so members are assured of a reasonable profit margin.

-The group has monopoly power in the market, they restrict new entrants to the market,
and so the products can be sold at higher prices to maximize profit.

- As the Cartel undertakes the responsibility of marketing, the manufacturer is free to

focus on the production and efficiency, cost reduction can be achieved

Disadvantages

--Goods or services are offered as one non differentiated product offering, competitive
pricing, innovative products are avoided

-Monopoly created out of the cartels have adverse effect on the interest of the consumer
by restricting output, creating artificial scarcities, deciding higher prices for the products.

-Cartels are voluntary associations, so they do not have control over their members so
there is lack of stability, the members may be leave if their interests are not being served.

1B.
 -OPEC decided to cut down the supply of oil to control and stabilize oil prices and to
control massive oil stock builds. As demand of oil decreased, but the supply was continuous, it
increased the oil stock which reduces the price of oil in the market.

-The desired output of the decision was that Oil price would stabilize and oil stock supply
will not be more than required.

Before the Decision:

As the pandemic hit and the Countries took measures to control the spread, the demand of
crude oil decreased. So as we can see in the graph below that the demand curve shifted to left.
But before the decision the supply was constant, so the supply curve shifted rightwards.

As a result, the equilibrium point moved downwards, that means the price of crude oil
dropped.
After the Decision:

Once OPEC took the decision to reduce the supply, we can see a leftward shift of the supply
curve. The demand also slightly increased so the demand curve moved slightly rightwards. So
we can see the equilibrium point moving upwards that means the price of the crude oil also
bounced back to an extent after the decision of decreasing the supply.
1C.

OPEC operates in Oligopoly market structure. The key features are mentioned below –
- There are fewer companies in the market
- The company produces a similar product
- Demand for each company is relatively equal
- Market demand is relatively inelastic
- Entry barriers are high
- Weak law enforcement

Question 2

2A

 Assuming that the business was operating at profit maximizing level of output before
Covid 19, it was producing 92 articles.
 The total profit was 2500 €.
 A business maximizes profit when the value of the last unit of product (marginal
revenue) equals the cost of producing the last unit of production (marginal cost). Profit
is maximized at the level of output where the cost of producing an additional unit of
output (MC) equals the revenue that would be received from that additional unit of
output (MR). When the production level reaches a point that cost of producing an
additional unit of output (MC) exceeds the revenue from the unit of output (MR),
producing the additional unit of output reduces profit.
So, we calculated a point where MR =MC, beyond which the profit reduces even after
increased revenue. Marginal Cost =Change in Cost /Change in Quantity. In this
scenario we find that, Marginal Revenue =Change in Revenue/Change in Quantity
=375€ is same at all levels. So, for this firm will arrive at profit maximizing level of
 output for below mentioned scenario
When No of Journalist -8
Articles per month -92
Total Profit -2500 €
Marginal Cost -375€
Marginal Revenue -375€

2B

 As per the given market conditions and to maximize profit we have to fire 6
journalists. In this scenario, the profit maximization i.e. MC=MR ,happens
when the company has 4 journalists.
 The new total profit is 1500€
 We have to fire the journalist because –
- The profit maximization condition is met at Marginal cost value
of 250€, which happens when the no of journalist is 4.
- It is observed that the total profit decreases when the no
journalists increase from 4.
- It is also observed that, when the no of journalist increases from
4,the MC>MR ,that means the cost of creating one additional
article would be more than the revenue generated from the same

Question 3

3A

During such a pandemic a country like India will experience a cyclical unemployment.

Economists describe cyclical unemployment as the result of businesses not having

enough demand for labor to employ all those who are looking for work at that point within the
business cycle. When demand for a product and service declines, there can be a corresponding
reduction in supply production to compensate. As the supply levels are reduced, fewer
employees are required to meet the lower standard of production volume. Those workers who
are no longer needed will be released by the company, resulting in their unemployment.

Soon after the pandemic hit when Government imposed restriction on human interaction,
gathering to keep the situation under control, people avoided spending money and started
saving more due to the uncertainty prevailed. This caused a less economic activity in the
market and there was less demand in demand the market. People were reluctant to spend
money. People stopped buying non-essential (Essential as well) products or services.
Companies had to decrease their supply so that they are not in huge loss as a result they
reduced their production. For reduced production to reduce variable cost they do not need as
much labor they had before. So, companies laid off the workers. As a result of which it
increased unemployment to a great extent.

3B.

A pandemic like COVID-19 would create supply-led recession or a supply shock and
eventually it turned out to be a demand-led recession or demand shock.

As in the case of COVID-19, there was huge loss of economic output due to lockdown in
India, that triggered from the supply side as labor had to had to stay away from work after
sudden announcement from government that except essential services no one can gather in
public place, production was hit, entire supply chain was disrupted, and it started as a supply
shock recession.

With time when people realized about the uncertainty of the situation, the demand side caused
further loss as consumption of goods and services decreased due to fall of customer mobility
as per the macroeconomic report published by Department of Economic affairs.

The twin supply-demand shock on output subsequently led to loss of income, which caused
further decline in consumption resulting in further loss of output. People stopped spending
money, instead they preferred to save for bad time. They stopped spending in non-essential
products/services which led to decrease in demand and lowered economical activity in the
market.

Soon after the pandemic hit Government put on hold many activities which are not considered
essential resulted in lower consumer demand, investment uncertainty, liquidity constraints for
firms.

Some industries like Airline, Automobiles and as we saw in our case Crude oil industry were
hit hard and many were laid off, we saw many who worked on the shopping malls, cinema
halls, daily wage workers were not required any more as there were no demand. In case of
OPEC first demand decreased of crude oil, so they decided to reduce the supply. Less supply,
so they need less resources for production, so laid of unwanted resources.

So, though both supply and finally demand shock would create recession in this type of
scenario but this was largely a demand shock recession.

3C

Due to pandemic situation unemployment and recession could be seen in India. As almost
69% of GDP is due to consumption of citizen, when people started spending less in
consumption, the economic activity decreased in the market. There was no cash flow in the
market. Companies had to decrease production and had to lay off employees which in turn
resulted in unemployment and Recession.

As the unemployment increased people reduced their consumption more eventually decreasing
the aggregate demand in the market.

As mentioned, industries decreased production which also reduced the supply in the market,
hence aggregate supply also decreased in Economy.
 3D

Due to pandemic situation as there was Government imposed restriction on citizen’s mobility
and gathering. When the citizens realized the situation is not going to be normal in near future,
people stopped spending money on consumption. This in turn decreased the decreased the
demands of product/services in the market. So, we can say the Aggregate demand curve
shifted leftwards. But there was continuous supply in the economy initially, so as a result the
price of the product/service fell down and real GDP as well.

As the demand decreases the industries had to take a decision to decrease the supply to
decrease their cost of production. Thus, aggregate supply curve also shifted leftwards. They
started laying of people which caused unemployment. People became more conscious about
consumption. So, there was less economic activity in the market and low GDP. This caused
recession.

Both Aggregate demand and aggregate supply curve moved leftwards.

Question 4

4A.

The Indian government should adopt an expansionary Fiscal policy. During such a situation,
the Government should opt for a Fiscal policy which has a multiplier effect also shift the
aggregate demand curve to the right.

The policy measures that Government can take are mentioned below –

 Government can increase its spending and decrease the tax as a result of which there
will be more money on the Economy and people will increase their consumption.
 As Indian Government introduced “The Pradhan Mantri Garib Kalyan Yojana /
Package” in March 2020, to reach out to the poorest of the poor, with food and money
 in hands, so that they do not face difficulties in buying essential supplies and meeting
essential needs is a comprehensive relief package of Rs 1.70 Lakh Crore Yojana for the
poor to help them fight the battle against Corona Virus.
 As in The Pradhan Mantri Garib Kalyan Yojana the policy should insurance cover for
the health worker, free essential goods, ex-gratia of Rs 1,000 to 3 crore poor senior
citizen, poor widows and poor disabled, a minimum income amount to the farmers,
women of the country
 Thus, as the pandemic hit, people reduced their consumption as a result the demand
decreased in the economy. People started saving more and there was very less
economic activity in the market. When the Government takes such expansionary Fiscal
policy people starts spending and the demand start increasing in the economy.

4B.

The Reserve bank should adopt an expansionary monetary policy. The monetary policy
designed should be regulating money supply to the economy, interest rate and buying
Government bonds to increase money supply.

The policy measures RBI can take are mentioned below –

 The RBI should introduce regulatory measures to promote credit flows to the
retail sector, micro, small and medium enterprises (MSME).
 RBI should ease the money banks are required to maintain as reserves (CRR),
this would promote banks to lend, pushing the aggregate demand to the right,
which will help in opening up the economy and reducing unemployment,
 Reducing the Repo rate will decrease the cost of borrowing for the banks, this
will help increasing money in the economy by ways of loans at cheaper rates ().
 With QE, RBI should purchase securities to reduce interest rates, increase the
supply of money and drive more lending to consumers and businesses
 In COVID-19, Government introduced Moratorium on Term Loans, Deferment
of Interest on Working Capital Facilities, Easing of Working Capital Financing.