Economics Individual Assignment

Part 1: Micro Economics

Based on the material in Sources 1 and 2 below, answer the following questions:

Source 1- Australian Supermarkets - Fresh Produce category

Fruit, veg prices slashed in supermarket price war

Fruit and vegetables have just become the latest battleground in the discount war between supermarket giants Coles and Woolworths. Coles' bid to get a bigger share of Australia's grocery market kicked off today with a flurry of ads spruiking discounts on fresh produce.

A range of items have been discounted by as much as 50 per cent.

The latest round of cuts comes on top of Coles and Woolworths scrambling to undercut each other on items such as bread and milk.

But while lower prices may be good news for consumers, farmers' groups are renewing warnings that the price war risks driving growers out of business. But not all growers are happy. They say the supermarket price wars are making it tough for them to stay in business.

William Churchill, spokesman for peak body Ausveg, says dropping prices at Coles places pressure on the rest of the industry.

"Ausveg's main concern is, are these discounts for Coles growers sustainable? And what's this going to do to the rest of the industry as growers and farmers who supply to independent retailers, Woolworths, or even just the markets, start to see their sales volumes through those outlets dry up as people start to shift to Coles for these prices," he said.

"We're seeing some substantial heartache happening in the milk industry, we're seeing growers producing milk for less money and they're having to work more for that," he said.

Woolworths will not say whether it will match the prices yet, but it is sceptical about claims Coles is discounting by as much as 50 per cent.

http://www.abc.net.au/news/2012-01-31/concerns-over-fruit2c-vegetable-discounting/3802094

Source 2 - Supporting Data

1. What type of market structure is the supermarket industry? Explain why with reference to Sources 1 and 2 and with reference to economic theory.

2. From an economics perspective, is it in the interests of Woolworths and Coles to have a price discount war? Explain why. What effect would the price discount war have on the final consumers?

What would be a more appropriate revenue based strategy for Coles and Woolworths to undertake in regards to pricing?

3. What type of market structure is the market for vegetables in which farmers who supply the supermarkets operate? Explain with reference to Sources 1 and 2 and using economic theory.

4. Within the market structure you have nominated above, how would reduced prices for their vegetable products due to the price war affect individual vegetable farmers?

Explain in words and illustrate your answer using a diagram showing an individual farmer's cost curves and the impact of price reductions. Would small farmers be forced to leave the market in the long-run? Why?

5. If individual farmers made significant improvements in their production technologies, could they overcome the price falls discussed above and stay in business in the long-run?

Support your answer by referring/supplementing your diagram in part 4 and with reference to a producer's costs.

Part 2: Macroeconomic Perspective

2.1 Based on an analysis of the article below*, answer the following questions in relation to the Australian economy:

Statement by Glenn Stevens, Governor, Reserve Bank of Australia: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 2.25 per cent. Moderate growth in the global economy is expected in 2015, with the US economy continuing to strengthen, even as China's growth slows a little from last year's outcome.

Commodity prices have declined over the past year, in some cases sharply. The price of oil in particular is much lower than it was a year ago. These trends appear to reflect a combination of lower growth in demand and, more importantly, significant increases in supply. The much lower levels of energy prices will act to strengthen global output and temporarily to lower CPI inflation rates. Prices for key Australian exports have also been falling and therefore Australia's terms of trade are continuing to decline.

In Australia the available information suggests that growth is continuing at a below-trend pace, with overall domestic demand growth quite weak as business capital expenditure falls. As a result, the unemployment rate has gradually moved higher over the past year. The economy is likely to be operating with a degree of spare capacity for some time yet. With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate.

Credit is recording moderate growth overall. Growth in lending to investors in housing assets is stronger than to owner-occupiers, though neither appears to be picking up further at present. Lending to businesses, on the other hand, has been strengthening recently. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems likely, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.

At today's meeting the Board judged that it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will continue to assess the case for such action at forthcoming meetings.

Source: http://www.rba.gov.au/media-releases/2015/mr-15-05.html

a) What are the key components of Aggregate Demand in an economy? Which of these components did the RBA Governor provide commentary on and what was the RBA's assessment of their impact on the Aggregate Demand?

b) Based on the above article what has been the effect of the economic developments mentioned on the 3 key macroeconomic indicators of the Australian economy?

2.2 Based on an analysis of the article below, answer the following questions:

India still fastest-growing economy in world gripped by uncertainty: IMF

NEW DELHI: The International Monetary Fund (IMF) retained India's GDP forecast for this fiscal year and the next, confirming its status as the world's fastest-growing major economy, as it pared global expansion estimates citing weakening worldwide recovery amid increasing financial turbulence.

India's growth in FY17 and FY18 was pegged at 7.5% in the World Economic Outlook (WEO), the Fund's flagship publication, unchanged from January.

"Growth will continue to be driven by private consumption, which has benefited from lower energy prices and higher real incomes," WEO said. "With the revival of sentiment and pickup in industrial activity, a recovery of private investment is expected to further strengthen growth," it said of India, in contrast to the gloomy outlook for rest of the world. The global economy is expected to grow 3.2% in 2016, only marginally ahead of 3.1% in 2015 and down 0.2 percentage point from the 3.4% forecast in January.

"Global growth continues, but at an increasingly disappointing pace that leaves the world economy more exposed to negative risks. Growth has been too slow for too long," said IMF economic counsellor Maurice Obstfeld, calling for an "immediate, proactive response" in a statement.

...INDIA STABLE IMF's long-range forecast sees India growing at 7.8% in FY22, well ahead of others and still the most rapidly accelerating major economy. "Sustaining strong growth over the medium term will require labour market reforms and dismantling of infrastructure bottlenecks, especially in the power sector," it said.

Lower commodity prices, a range of supply side steps, and a relatively tight monetary policy have yielded a faster-than-expected slowing of inflation, the IMF said, creating room for rate cuts.

However, it cautioned that the "upside risks to inflation" could require tightening of monetary policy. The Reserve Bank of India cut the key rate by 0.25 percentage point last week,

India should achieve its 5% consumer inflation target in the first half of 2017, the IMF said, while flagging poor monsoons and the pay commission wage award as risks. To be sure, the India Meteorological Department forecast an above-normal monsoon this year on Tuesday. The IMF also called for continued fiscal consolidation through revenue reforms and reductions in subsidies.

Source: http://economictimes.indiatimes.com/news/economy/indicators/india-still-fastest-growing-economy-inworld-gripped-by-uncertainty-imf/articleshow/51796401.cms

a) Based on the above articles what phase of the business cycle is the Indian economy experiencing in 2016? Explain why and justify your answer with reference to economics theory, supporting your analysis with an appropriately labelled (AD/AS) graph showing where the Indian economy is operating.

b) How would the impact "from lower energy prices" affect the Indian economy in 2016? Why? Show this effect in your graph from a).

c) What macroeconomic indicator in the above articles should be monitored closely in India in 2016? Drawing on your knowledge of macro-economic theory, what could the Reserve Bank of India do to control this indicator?