(i)Monopolistic competitive market is the economic market model with many sellers selling differentiated products. The demand curve is elastic and downward sloping as shown in the graph by DD curve. Both in the short run and long run, the monopolistically competitive firms maximises its profits or minimises its losses by producing that level of quantity where marginal revenue is equal to marginal cost.
In the graph, the quantity where marginal revenue and marginal cost are equal is 40. This is the level of output where the monopolistically competitive firms maximises its profits. An economic profit is earned by the firms if the average total cost is less than the market price. In the graph, ATC1 curve is below the market price where marginal revenue is equal to marginal cost. The market price at the output where MR is equal to MC is 20. The average total cost by ATC1 is 17.5. Therefore, the economic profit earned will be (20-17.5) * 40 = 100. This is calculated as (Market Price – ATC) * Quantity.
The monopolistically competitive firms will incur losses if ATC is more than the market price. The loss will be equal to the difference between ATC and market price multiplied with the quantity produced. In the graph, ATC2 curve is above the market price where marginal revenue is equivalent to marginal cost. The loss can be calculated as (22.5 – 20) * 40 = 100.
Therefore, the monopolistically competitive firms will earn economic profit of 100 if the average total cost is below the market price. If the average total cost exceeds the market price, then the firms will incur loss of 100, as seen in the graph.
(ii)Imperfect competitive firms maintain their dominance in the market with the help of barriers in the entry of market. There are barriers created which makes it costly or difficult for the rivals to enter in the market. The barriers can be of two types, either it can be natural barriers or it can be artificial barriers.
If the incumbents of the market have already exploited significant economies of scale, the new entrants are deterred. This is natural barrier which is known as economies of large scale production. High set up costs and R&D costs also deter initial entry by firms.
Artificial barriers include predatory pricing. The incumbents lower their prices to force rivals out of the market. Advertising is done by the incumbents which is sunk cost incurred to deter new entrants. There are schemes like Tesco’s Club Card which helps to retain loyalty in customers. Other types of strategic barriers include patents and licenses which deter new entrants from entering into the market. For example, contracts between suppliers and retailers that can exclude other retailers to enter into the market.
The data of Goodland Republic for the year 2017 and 2018 is given in the table. To examine the status of economic welfare of Goodland Republic in the year of 2018, GDP deflator, Real GDP and Nominal GDP is to be calculated. GDP deflator can be explained as the level of prices of all the final products that are domestically produced in a given year. It is calculated as nominal GDP to real GDP. To calculate the value of GDP deflator, calculating the value of real and nominal GDP:
Nominal GDP (Year 2018) = Price per unit (Year 2018) * Quantity (Year 2018)
Nominal GDP = (2*55000) + (2.5*98000) + (2450*45000) + (70*145000) + (3.5*2300) + (1.2*6500) + (1.5*850) + (8.5*4800) + (3.75*600) + (2.5*7500)
Nominal GDP = $120,833,925
Real GDP (Year 2018) = Price per unit (Base Year 2017) * Quantity (Year 2018)
Real GDP = (1.5*55000) + (2*98000) + (23000*45000) + (50*145000) + (2.5*2300) + (0.8*6500) + (1.1*850)
Real GDP = 1,042,590,785
GDP Deflator = (Nominal GDP / Real GDP) * 100= (120,833,925 / 1,042,590,785) * 100 = 11.589%
It is necessary to calculate real GDP because real GDP shows the true increment in economic output of the country and adjusts for inflation. It gives a realistic and better picture of the growth of an economy than nominal GDP. The real GDP is more than nominal GDP in the year 2018. GDP deflator shows the extent to which the increase in GDP is due to higher prices rather than increase in output. This turns out to be 11.589%. It is seen as a comprehensive measure of inflation.
There are many demand side and supply side factors which causes business cycle fluctuations. Some of the fundamental are: Confidence, credit cycles, technological shocks, interest rates etc. The government spending or consumer spending affects the aggregate demand of the economy which further affects the business cycle. For example, if the government spending is increased, this will lead to a rise in aggregate demand and thus, causing an economic expansion.
1..The impact of inflation is adverse on the deposit. This is because the real interest rate will be the difference between nominal interest rate and inflation. Therefore, the real interest rate will be (5-6)% which is -1%. The deposit does not earn real interest. In fact, there is a loss of 2,000 dollars as the inflation rate has increased as compared to previous years. This will lead to increase in the prices of food and accommodation expenses.
2.Australia’s Labour Force = No. of Employed + No. of Unemployed
Labour Force = 13.5 + 0.7 = 14.2 million
No. of People Not in Labour Force = 20.8 – 14.2 = 6.6 million
The main cause of structural unemployment in Australia is excessive labour market regulation and labour market immobilities.
i.If the economy is producing below full employment level, then the rise in government spending will increase both the output and price of the economy. The output can increase by shift in the aggregate demand curve from ADD3 to ADD1 to ADD0. Whereas, if the economy is at its full employment level, then the increment in government expenditure will only give rise to prices as in the case of ADD2.
The AD curve slopes downward because:
1. Increased spending power: At lower prices, higher disposable income is available, leading to more spending and rise in AD.
2. Increase in demand for exports: Lower price will make goods more competitive and exports and AD will rise.
3. Lower interest rates: At lower price, interest falls and AD will increase.
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