Name Divya Keshari

Question 1

This phenomenon is called collusion. The colluding countries together form a cartel. In such
decision making the countries mutually determine the total output of the oil that should
prevail.

Advantages –

1. OPEC’s main goal is to stabilize oil production and prices, it is able to exert some
influence over production from other nations.
2. OPEC is committed to finding ways to ensure that oil prices are stabilized in the
international market without any major fluctuations.

Disadvantages –

1. As a cartel, OPEC members have a strong incentive to keep oil prices as high as
possible while maintaining their shares of the global market.
2. The protection for their personnel and assets.

The countries did not have enough oil storage space. In order to avoid price from falling
further they needed to reduce the supply. It was decided so that they could retain the levels of
profits which they previously had or even reduce losses to a certain extent.

There is an inverse relationship between the supply and prices of goods and services when
demand is unchanged. As there was an increase in supply of oil while demand remained the
same, prices fell to a lower equilibrium price and a higher equilibrium quantity of goods and
services for which oil is an input.

When the OPEC took decision, there was no change in the demand curve because the decision
didn't lead to any sudden rise or fall in demand. But as per the decision the supply was
reduced by 9.7 million barrels per day. That means the supply curve moved leftwards/upwards
after the decision was taken.

OPEC operates in the Oligopoly Market Model. The word ‘Oligopoly’ is derived from Greek
words 'oligio, meaning ‘few’ and polein, meaning ‘to sell’. The few leading dominant firms
have a high level of market concentration in the Oligopoly structure. Generally, an oligopoly
exists when the few leading firms have nearly 60% of the market share and when the demand
is inelastic and accounts for the maximum sales.

Key features -

Product branding: Each firm in the market sells a differentiated product and has its own niche
in the market.

Entry barriers: There are substantial entry barriers for smaller firms in an oligopoly market,
which prevents the dilution of competition in the long run and maintain enormous number of
supernormal profits for the dominant firms.

Interdependent decision-making: Dominant firms collude with each other and determine the
price and taken into account the reaction of their rivals to change in market price or output

Non-price competition: non-price competitions are a steady characteristic of the competitive

strategies of oligopolistic firms.

Collective Action: In Oligopoly market if you sell above the market rate you lose and if you
sell lesser you do not make profits this makes companies interdependent and therefore, they
take collective actions for mutual benefit.

Question 2

• Total 92 articles
• 2,500 €
 • 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). In this case, when 8 journalists are producing 92 articles, both MC
and MR are at 375.00 €

• We will have to fire 4 journalists to keep the output at maximized output

• 8250.00 €
• To keep the profit maximized, additional journalists had to be fired. MC = MR was
with 4 journalists and higher number of journalists MC was higher than MR.

Question 3

The breakout of coronavirus variants coupled with recurring lockdowns resulted in a

fluctuating trend of unemployment gripping the nation which is also termed as cyclical
unemployment. Social-distancing resulted in job losses, specifically those within Indian
society’s lower economic strata. This condition has contributed to a loss of buying power in
people's pockets. Without jobs or low-paying jobs and low farm prices, people just didn’t have
the money to buy things. This decreased demand and, in effect, also impacted the factory
output and services market. The country has now undergone a downward trend. Higher
unemployment along with lower household savings and the fear of the second wave has
resulted in a sharp drop in consumer sentiments. Manufacturing was probably the worst
affected from the labor supply shock, reflected in part by a sharp reduction in industrial
production in the second quarter of 2020. Sector-wise, the worst employment effects were in
mining, manufacturing, electricity, and consumer durables sectors.

COVID-19 pandemic has given a big blow to the already slowing India’s trade, especially
exports. India is mainly reliant on European Union (EU), USA, China and South East Asian
countries, collectively contributing around two third of India’s exports and imports
respectively. It is worth noting that India’ exports and imports exposure to EU, USA and
China together are two-fifths and one-thirds, respectively and those are severely coronavirus-
affected countries. Hence, there is less possibility of rise in exports amid falling rupee as these
countries may face recession and experience significant fall in aggregate demand.
The Covid Pandemic has severely impacted the people lives and affected economies across the
globe whether it is developed nation or undeveloped. India did not remain untouched with the
Covid19 affects. In India sectors like tourism, hospitality, and entertainment have been hit the
worst the most. People employed in these sectors were deprived of their jobs as either they
were laid off by the companies or they had to take pay cuts. Medical sectors seen a growth in
employment, digital devices manufacturing companies also sought a growth since the demand.
Remote working promoted digital product purchases as well.

During the first wave, mobility restrictions and supply shortages led to a surge in retail
inflation. While the economy was mending its way up, the second wave beginning March 2021
led to loss of many more lives and further deceleration of growth momentum.

As central banks wind back the pandemic-era measures which were intended to support
growth during an economic downturn, the fears of a prolonged recession have emerged fueled
by a sharp uptick in inflationary pressures and poor demand recovery. Add to this the Covid
situation in China and the Russia-Ukraine war, the global economy is in a vexing position.

The aggregate demand increased since there was unemployment but money supply by getting
loan on less interest on easy terms grow and aggregate supply was on down side. Since there
was infusion of the capital by the government money supply increase but due to social
distancing norms everywhere in the factory, workers immigration there were lockdown and
hence no production of the goods. This created the supply Shock.

That said, the negative supply shock associated with the COVID episode could prove to be
unusual in that the productive capacity of the economy could recover more quickly, for
instance, if a vaccine was available relatively soon, or if businesses had found creative ways
to restore operations even in the presence of continued social distancing.

Recession and unemployment go hand in hand—a spike in unemployment and its persistence
are recession hallmarks, and joblessness aggravates recessions. The short-term and long-term
 costs of unemployment have led governments to develop a range of policy measures aimed at
curbing joblessness during downturns.

Aggregate demand will Increase and aggregate supply will Decrease and hence AD Curve
will be shift to Right side and AS Curve will be on Left.

Question 4

The Covid19 pandemic have put the Indian economy in recessionary gap where actual level of
GDP in the economy is below the full employment level of GDP in the economy. In order to
eliminate the recessionary gap, here are a few ideas that Indian government can choose as
they gear up to deal with the economic crisis.

There are various mechanisms that could be utilized:

MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) and Jan
Dhan accounts. To a certain extent, the MNREGA system works as an automatic stabilizer
because if people need jobs they can just apply. The key will be to ensure that the funding is
available, and in the hands of the states and panchayats, such that when the appropriate time
comes and large number of workers sign up for MNREGA, the mechanism works as designed.

Another option will be for the government to give large-scale direct cash transfers using
the Jan Dhan accounts, and to start this right away to help the informal sector cope with the
shock. The optimal design of the cash transfer program needs to be figured out in terms of
targeted recipients, amounts, and duration.

The government’s first priority should be to pay the large amounts of accumulated arrears to
the MSMEs, reportedly in billions of rupees. This will be an immediate infusion of cash, and
encourage banks to continue to finance them. Interest subsidies could also be given to banks,
to allow them to reduce the cost of credit for MSME loans. A loan guarantee fund could be set
up, targeted to MSMEs that have been hit hard by the crisis and that may now be considered
too risky by the banks to lend to.
The Reserve Bank should implement the expansionary fiscal policy. To increase the level of
investment expenditure in the economy, RBI should decrease in the level of interest rate in the
economy. Increase in investment expenditure will increase the level of aggregate demand in
the economy shifting the AD curve rightwards and thus eliminating the level of recessionary
gap in the economy.

When the federal bank purchases the open market securities from the market, it injects the
money into the economy and hence because of the rise in money supply the inflation rate Rises
and unemployment Falls

To fight this recession, they should reduce in the reserve ratio that provides a greater
encouragement to banks to lend to the general public and hence increase in money supply and
rate of inflation and reduces the level of unemployment will increase in purchasing capacity
for increase the level of aggregate demand in the economy.

The RBI should provide higher discount rate and greater incentive to commercial banks for
borrowing funds. After borrowing from Central Bank at cheaper interest rate the commercial
banks lend the loans to general public at cheaper interest rates and that will increase the
money supply which will decrease inflation and hence decrease rate of unemployment.