Economics Assignment

Part A: Microeconomics - Consider the following sources and answer the following questions:

Source 2 - Australian Airline Industry

Economic Characteristics of the Airline Industry

Economies of Scale

Parts of the airline industry are characterised by economies of scale. Economies of scale occur when expanding the production of a service results in a lowering of the average cost of its production. The implication of this is that a larger service provider will achieve lower costs than his smaller competitors.

This could be relevant in today's airline industry, with its 'David and Goliath' structure in the form of an emerging, relatively modestly sized and resourced Virgin Blue versus a dominant and well 'cashed-up' Qantas.

Competition between Qantas and Virgin Blue is arguably more limited than between Qantas and the Ansett group under the former industry structure. Virgin Blue focuses mainly on leisure travel over major trunk routes rather than an integrated trunk and regional network and it offers only one-class service and relatively infrequent flights. In this sense, it is not a comprehensive replacement for the former full-service Ansett operation.

Qantas is trying to defend its market share through service upgrades and innovations such as the CityFlyer services on key trunk routes.

Virgin Blue's strategy seems to be one of 'cherry picking'that is focusing on a limited number of high-density routes and not operating a more traditional route system of a nationwide network that cross-subsidises less profitable routes. Virgin Blue has also sought to minimise costs through more flexible working arrangements including multi-skilling (relative to past standards and to Qantas), and low overheads (for example not having lounges or catering).

Questions -

1. What are economies of scale? In what market types (i.e. perfect competition, monopoly, oligopoly, monopolistic competition) are economies of scale most important? Why?

2. Based on the article above and some limited research what type of market form you think the airline industry in Australia was in 2002/03? Support your answer with reference to theory.

Part B: Macroeconomics - Consider the sources below and answer the following questions.

Source 1: Opinion Piece

Emmanuel Macron has misdiagnosed France's ailing economy

A few weeks ago, Emmanuel Macron won France's presidential election. Then a few days ago, his party won crushing victories in France's legislature. If he wants to fulfill his promise to bring "hope and renewed confidence" to France, Macron has his chance.
The country's economy is in the doldrums: GDP per person hasn't changed in years, nor has its unemployment rate of roughly 10 percent. Macron's solution is to cut back on France's rigid labor market laws, making it easier to hire and fire people. He's not the first French leader to attempt this, but previous efforts hit ferocious opposition from unions and labor groups.

Unfortunately, Macron's solution to France's economic woes fundamentally misdiagnoses the problem. At best it will do nothing, at worse it will intensify the country's social upheaval.

No doubt, France's labor laws are remarkably rigid and demanding compared to America's. They set payscales, overtime, and severance packages that employers must follow. Furthermore, letting a worker go is a remarkably time-consuming process.
Workers can only be fired under specific circumstances (like gross negligence), and can sue for wrongful termination.

Macron's goal is to make France's labor market more like America's, with more churn and more freedom to hire and fire people. He also wants to increase the availability of unemployment benefits, to help workers transition from one job to the next.

But if the goal is expanding the total number of good jobs available, then Macron's proposed reforms just miss the basic economic mechanics at work here.

Fundamentally, what creates jobs is the aggregate level of demand in the economy: How many goods and services people can buy. The higher aggregate demand rises, the more jobs get created, and the more employers have to compete for workers.

That forces employers to improve job offers to attract hires, expanding the availability of good benefits and security to everyone in the economy.

Raising aggregate demand requires getting more spending money into people's pockets. Government spending is a great way to do this, either through welfare benefits are direct public employment. At the same time, taxes take money out of people's pockets. So running large budget deficits is usually necessary to get aggregate demand up.

France, unfortunately, does none of this. The eurozone's rules demand that member countries keep their budget deficits under 3 percent of GDP. Economic collapses like the Global Financial Crisis of 2008 tend to blow deficits wide open, so France spent the aftermath of 2008 massively shrinking its deficit - from about 7 percent of GDP to 3 percent - and thus sucking money out of its economy. The eurozone's taskmasters are pressuring Macron to stick to the 3 percent ceiling, and he's pledged to oblige with a smattering of spending cuts, particularly to France's civil service.

If Macron confronted the eurozone and either forced the currency union to reform or got France out from under its rules, he could expand the deficit and jumpstart stimulative spending. Macron would have plenty of options: France's schools need much more investment, especially in poor areas, for instance. And public transit needs an upgrade while the French working class needs more assistance to be able to afford it. As aggregate demand increased and French employers ran out of available workers, they'd be forced to offer everyone a better deal regardless of whether the labor laws change.

Questions -

1. Based on the current data for France what phase of the business cycle do you think this economy is in? Why? (Hint: Refer to the macroeconomic indicators)

2. Based on your answer in 1 represent the French economy in 2017 using the AD/AS model.

3. What factors contribute to economic growth according to the AD/AS model? According to the article above, what policy should the French government be undertaking to stimulate economic growth.

4. Imagine that instead of his planned reforms to the labour market, Macron invested in educating workers to increase their skills and in infrastructure. How would this affect France's economy in the long-run? Demonstrate your answer with a diagram and explain your diagram.

Attachment:- Assignment File.rar