Economics Questions And Strategies

Short-Run Costs and Curves Analysis

i)

iii)  Based on given cost structure of this company, AC and MC curves do not have any relationship. MC curve of this Red T-shirts company is a horizontally straight line while its AC curve has a normal “U” shape (Geerling et al., 2018). Thus, these two curves do not intersect with each other.

Question 2:

i) This convenience store operates under a perfectly competitive market structure. This type of store sells grocery items, which are similar for other stores as well (Naumenko & Moosavian, 2016). Moreover, the number of sellers and buyers are also very large and the store can stop its business and leave the market at any time.

1. ii) ASB Bank of New Zealand operates its business under oligopoly market structure.

            Within this market structure, a small number of sellers operate their business and the market is highly concentrated (Friedman, 2017). With the help of various types of collusion, oligopolies can decrease competition and can increase prices for their consumers.

iii) Auckland Airport belongs to duopoly market structure. The airport has large number of airlines companies, which offer airlines for various destinations. However, Air New Zealand and Jetstar Airways offer maximum services (Friedman, 2017). Hence, these two companies have control and dominant entire airport

 Four essential features of perfectly competitive market:

• Large number of buyers and sellers
• Both buyers and sellers have perfect knowledge about the market
• Each product is homogenous by its nature, which means, all products within this marker are identical
• Both sellers and buyers are price taker and no one can change it

It is difficult to obtain identical products in real life (Naumenko & Moosavian, 2016). Products can be close substitute but not perfectly substitute.

Question 3:

            In a perfectly competitive market, price of product is equal to the average revenue and marginal revenue of the firm. When price and marginal cost equates with each other, the market obtains its equilibrium amount of output and price, which is, P= MC.

            When the market price is $60, Chris can produce 1 unit of output, as at this point marginal cost (MC) is also $60. However, at this pint ATC is higher compare to the market price though AVC is low (Geerling et al., 2018). Hence, at this point, Chris needs to operate his business by incurring losses to overcome its certain amount of cost.

When the market price is $30, Chris can operate his business through producing lawns between 6 and 7. However, Chris cannot produce at 6, as at this level MC is 20. He only can produce output when MC becomes 30. On the other side, ATC is 32 when output is 6 and 31 when output is 7. Thus, the person can earn normal profit or incur loss by small amount through producing output between 6 and 7.

            When market price is $20, Chris can produce 6 unit of output, as at this point MC is also 20. At this point, AVC is also 20 while ATC is 32. Hence, this is the shut-down point of Chris. If AVC decreases further, then it can be better for him to close the business.

Answer 4:

Air New Zealand airlines:

Jetstar airlines:

According to above table, it can be said that Air NZ is more competitive when it provides flights for Auckland to Wellington and Auckland to Christchurch. This is because Jetstar also provides flights for the same route. However, Jetstar does not have any flights for Auckland to Blenheim and Gisborne. Hence, Air NZ can utilise monopoly power. Thus, in real life mixed market structure can be seen.

Market Classification and Justification

Section B

The Role of Government 

Answer 1

1. Allocative efficiency refers to the state of economy where production represents customer preferences especially, every products or service is produced up to that point in which marginal benefit to the consumers becomes equal to marginal cost (Chen, He & Wang, 2018). The five conditions that must be fulfilled for attaining allocative efficiency are described below-

• A firm must produce an output where price becomes equal to marginal cost
• Consumers will purchase one product until marginal benefit equals marginal cost of product
• There is no economies of scale
• There is maximization of economic surplus
• No interdependence occurs which means no collusion between the manufacturers decision to sell and buyers decision to purchase.

1. The objective of free tertiary education for first year tertiary students in NZ signifies positive externality. Education being a public good has positive social externalities as they basically benefits both individual as well as society (Johnson et al., 2016). The fees free policy generally aims to target not only those individuals who like to attend tertiary education but also to those who would not have attended due to high cost. Positive externality occurs when consumption or production of a product causes benefit to the third party, which involves- individual, enterprise, resource etc. However, consumption by the individuals creates benefits for the society. Market Failure can result as the total quantity produced by free market would be less than socially optimal quantity.

Answer 2:

1. The output of steel in unregulated market where there is no government intervention is shown by output Q1.
2. In an unregulated market, marginal cost of steel is equal to the private marginal cost. Hence, MC curve is shown as MC1.
3. When there is government intervention, output of steel in regulated market is shown by Q2.
4. In a regulated market, marginal social cost (MSC) lies above the marginal private cost (MC) curve. This curve is denoted as MSC2.
5. The government intervenes in the market with the help of taxes and subsidies. MSC is the summation of marginal private cost (MPC) and Marginal external cost (MEC). This marginal external cost makes the MSC curve higher than MPC.

 Answer 3:

1. Allocative efficient is mainly concerned with resource allocation and optimal production given other factors of production. On the contrary, equity is more concerned with how resources are generally distributed throughout the society. In this case, the NZ government plans to ban foreign buyers to buy NZ property in order to tackle housing crisis through halting trend across the globe (Chen, He & Wang, 2018). However, this creates conflicts that the market is equitable than allocative efficient provided the decision of NZ government.
2. NZ has been pledging to increase minimum wage by $20 per hour as part of supply agreement and confidence. This increase might offset for employers with enterprise tax cut package for negating increased cost to employers as well as business to pay fair wage. Thus, conflicts occurs as the market is considered to be more allocative efficient given the decision of NZ.

Answer 1

Table A

Answer 2

            In the circular flow model, leakages indicate withdrawal of income from the circular flow. Leakages can be taken place in form of savings, import and payments of tax. Injection on the other hand indicates introduction of income into the circular flow. Injections are in the form of investment, government expenditure and export (Mankiw, 2014).

            Injections can be greater, equal or less than leakages. The effect of these three situations on national income is given as follows

a)Injection > leakage

            This indicates a state of disequilibrium in national income model.  When injections are greater than leakages then income, expenditure and output will increase leading to a boom in economic activity. As income of the household increases, they have a higher propensity to save. This increases saving in the financial sector (Goodwin et al., 2015). Additionally, there will be an increase in taxation of higher threshold along with a rise in spending capacity on import. With a gradual increase in leakages the economy moves towards a higher equilibrium.

1. b) Injection = leakage

            This indicates the state of equilibrium in national income. As long as injections equal leakagesthe circular flow of income goes on indefinitely.

1. c) Injection < leakage

            This is again a situation of disequilibrium. As injections are less than leakages income, expenditure and output fall causing a contraction in national income and overall economic activity. This slow-down in economic activity is known as recession (Mankiw, 2014). With a fall in household income, saving, imports and taxation declines as well. This causes a decline in leakages setting the equilibrium to a lower level.

Answer 3 Consumer Price Index

            The Consumer Price Index captures changes in average price of a specific basket of goods and services purchased by the household. By tracking change in consumer price index, one can measure changes in the cost of living of two different periods (Baumol& Blinder, 2016). CPI is a commonly used tool for measuring state of inflation or deflation in an economy.

Given that New Zealand’s GDP in 2016 was equal to $640 million.

Therefore,

Answer c

            Nominal GDP expresses the value of aggregate output in terms of current year prices. Nominal GDP though is easy to compute but it fails to capture true changes in output. As it is not adjusted for a change in prices, an increase or decrease in nominal GDP may be due to an increase or decrease in associated prices leaving the output unchanged. Nominal GDP thus understates or overstates the true state of an economy (Bernanke, Antonovics& Frank, 2015). A better measure is the use of real GDP. Real GDP valued the aggregate output at constant base year prices and thus is adjusted for inflation. Any change in real GDP is thus solely contributed from change in level of output representing true state of the economy.

Reference list

Baumol, W. J., & Blinder, A. S. (2016). Principles of Macroeconomics. Cengage Learning.

Bernanke, B., Antonovics, K., & Frank, R. (2015). Principles of macroeconomics. McGraw-Hill Higher Education.

Chen, L., He, F., & Wang, J. (2018). Allocative Efficiency of Carbon Emission Allowances among Sectors in China. Polish Journal of Environmental Studies, 27(2).

Friedman, L. S. (2017). The microeconomics of public policy analysis. Princeton University Press.

Geerling, W., Mateer, G. D., Smith, B. O., Tierney, J. E., & Wooten, J. J. (2018). Lesson Plans for Teaching Economics with The Big Bang Theory. Journal of Economics Teaching, 3(1), 162-184.

Goodwin, N., Harris, J. M., Nelson, J. A., Roach, B., &Torras, M. (2015). Macroeconomics in context. Routledge.

Johnson, L., Becker, S. A., Cummins, M., Estrada, V., Freeman, A., & Hall, C. (2016). NMC horizon report: 2016 higher education edition (pp. 1-50). The New Media Consortium.

Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.

Naumenko, A., & Moosavian, S. A. Z. N. (2016). Clarifying theoretical intricacies through the use of conceptual visualization: Case of production theory in advanced microeconomics. Applied Economics and Finance, 3(4), 103-122.

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