Name P.

S Naveen Kumar

Email ID [email protected]

Question 1

I) The phenomenon which involves such joint decision making among the OPEC countries is called
Collusion, Where The counties involved with OPEC share an Oligopoly market structure, they seek to
make decisions that’s in the best interests of everyone involved.

Advantages of collusion:

 Commodities like oil is of essence for industrialization. Thus, pricing them accordingly is a crucial
factor for the participants involved. Thus, collusion helps in fixing appropriate price ranges that aligns
with the demand and supply.

 The Collusion among OPEC to reduce the supply of oil by 9.7 million barrels per day is to make sure
to create enough demand for oil due to the world pandemic crisis. Thus, the main motive behind that
decision has a lot to do with protecting the participants involved from adverse price fluctuations due to
uncertain demand and supply outlook.

 Collusion among the OPEC countries enables them to prevent any other participant with adverse
motives to enter and disrupt the market at times like that. Thus, it helps in maintaining the market
stability of that particular industry even during uncertain times.

 Collusion among the industry giants would enable the market to have a benchmark to assess the supply
and demand dynamics of the product involved since majority of the production is weighed on the
major paricipants.
Disadvantages of Collusion:

 Though the actions taken by OPEC seems to be reasonable from markets perspective, in an economic
perspective it still seems autocratic when it comes to such joint decision making since commodities
like oil touches each and every industry on this planet, Any adverse policies could trigger a world-wide
shock for that particular commodity.

 Though collusion prevents new entrants into the market it also prevents people from exploring and
looking into other alternative potential solutions for the problem at hand. Even a new participant can
change the demand and supply markets of the industry and foregoing such an opportunity seems bad
for that industry.

 Artificial demand and supply for the products can be easily created through collusion. Which prevents
the real demand and supply outlook for that commodity.

 Since there are only a very few participants under the oligopoly market structure. The scope for market
manipulation is very high under collusion due to business politics and other external factors apart from
the demand and supply factors.

These are the merits and demerits of collusion among OPEC countries.

II)

 Since the demand for oil has been drastically reduced due to the demand shock created by the
pandemic, to support the Participants from the falling prices OPEC has decided to cut its production
to the tune of 9.7 million Barrels per day.
 The desired outcome of that decision from the OPEC is to stabilize the falling prices of Crude oil in
the global market and provide a temporary support to its prices till the market cools down.
Source: Trading View (Figure 01)

 Since the start of the year Crude oil prices have corrected from $63.03 to $0.23 within a matter of few
months due to the COVID19 pandemic. This is the very reason why OPEC had to cut their supply
production. Once it was announced you may see the prices have bounced back.
Since Crude Oil being a globally industrialized commodity, the demand for it stays pretty much at the same rate of
its consumption. But due to the adverse price fluctuations because of the pandemic, OPEC decided to cut its supply
which made the supply cure to shift to the left from S to s1. And since the demand is inelastic for this commodity,
The new equilibrium has been shifted from E to E1. Ultimately the efforts taken by OPEC was only to stabilize the
price and to not focus much on the demand aspect since price is what hurt them the most.

From fig 01 it is very evident that the efforts taken by OPEC to curb supply to stabilize the prices have worked pretty
well because since then the crude oil prices have reverted back above their historical mean price levels. As of
03.09.2023 Crude oil is trading at a rate of $85.98 per barrel.

III)

The market structure in which the OPEC operates is called the Oligopoly market structure. To be very
specific in the markets view they are collectively called as the oil cartel as they are the one that owns
majority of production reserves in the crude oil market.
Key Features of oligopoly market:

 OPEC being an oligopoly enjoys a certain amount of monopolistic powers in the market. Since they
control the price and outputs of crude oil in the global market.

 As the major oil producing countries are a part of this cartel. There is a huge amount of
interdependence among the participants and each one of them have a significant influence on the price
and output decisions that has a very volatile impacts on their revenue and profits.

 Since only a few sellers and a large number of buyers are present under this market, it enables the
producers /manufacturers of the products to enjoy the oligopolistic powers.

 Participants in an oligopolistic market structure has conflicting attitudes among each other, thus the
scope for collusion and market manipulation is high in this market structure.

 The demand curve under this market structure is indeterminate since any steps taken by rivals has the
potential to shift the demand curve sharply.

These are all the key features of an Oligopolistic market structure under which the OPEC countries operate.

Question 2

I) Assuming that the business was operating at the profit maximizing level of output before COVID19:

 The optimum level of articles produced by the Italian news website to achieve the maximum
profitability level would be between 84 and 92 articles per month with around 7 to 8 journalists since
that is the output at which the profitability of the business peaks.

 The total profit achieved by the Italian news website with its optimum level of labour and output
would be around €2500 per month.

 Since each article brought in an ad revenue of €375. The optimum capacity of 84 - 92 articles per
month is found out by plotting the data in excel and see as to in which combination of journalist and
 articles produced does the company makes the maximum amount of profitability. This can be
identified by calculating the total profit by deducting the total revenue from total cost. The same can
be identified by plotting the data points in graph.

II)

 After Italy went into lockdown, in order to maximize profits the Italy news website had to fire almost 4
to 6 journalists for making the company run profitably as with 6 journalists the website still makes a
minimum profit of €750 while with 4 remaining makes the maximum profit of €1500 as its total
profits. The break-even is at the point where the company has 7 journalists producing 84 articles per
month.

 The new total profit at its profit optimizing output would be when the website has around 3 to 4
journalists producing around 42 to 54 articles per month with the maximum total profit per month to
the tune of €1500.

 Though the fixed cost of €8000 as rent & utilities has been eliminated due to the pandemic, the ad
revenue has also taken a hit as it has been dropped from €375 to €250 per article produced. And as the
companies have reduced their advertising spending owing to the bleak outlook of the economy. In
order to stay in business, the Italian news website has to consider the cyclical unemployment situation
 prevailing in the economy and make sure it finds the right combination of journalists and number of
articles to stay afloat. Thus, since the demand for the ad is decreased the number of journalists needed
to produce the articles would also decrease , the optimum combination is found between 3 to 4
journalists producing around 42 to 54 articles per month.

Question 3

I) India, being a developing nation and the most populated country on earth had a lot of economic pressure
due to the pandemic situation especially in terms of the employment landscape. As the sudden shift in the
overall country’s economic outlook has happened due to COVID a very serious Cyclical unemployment
took place wherein companies let go off many of their employees due to the economic situation of the
country which resulted in the unemployment rates hitting record high of ~23.5% in April 2020.
II) Like every other country, India has also got into a Demand - led recession first and then later got hit by
the supply led recession due to the global supply chain issues. At the time of the pandemic, the shock led
due to the demand led recession has made the Country’s Quarterly GDP to correct to the tune of 23.4% in
Q1 2020-21. Though the shock was temporary it did have a lasting impact on the growth of the Indian
Economy for Decades to come.
III) Due to the cyclical unemployment and a Demand led recession. In the short term, the country’s
aggregate Demand will be less, Shifting the curve to the left as shown in the picture below, as there is less
AD, the short-term supply will also be reduced so as to match the low demand. Although there are certain
exceptions when it comes to Giffen goods as during the pandemic, although the aggregate demand for most
of the goods / services went down, the demand for necessities and certain products like face masks, Hand
Sanitizer, Toilet papers have shot up due to the uncertain Pent-up demand.
IV) Due to COVID, as the country faces a Demand Led recession shock across all the states. The aggregate demand
for most of the goods and services would shift to the left from AD2 to AD1. While the long run Aggregate supply
LRAS is assumed to be constant. In the short run, The Short run Aggregate supply SRAS will be reduced to match
the lessened demand resulting in the contraction of the overall economy from the point A to B in the short run. These
volatile effects will pan out once again on a different level once the supply led recession kicks in due to the global
Supply chain issues as seen below.

This is how the AD/AS curve react in a country’s growth under a global pandemic situation.
Question 4

I) In a country like India, where such pandemics affects millions of people and severely hamper the
economy. The macroeconomic policies that could be carried out by the Government of India is as
follows:

 Due to the health impact of the pandemic, the first order of business of the government should be
instigating policies that enables providing adequate health care infrastructure for all the people in the
country.

 Making sure that each and every citizen of the nation has proper access to vaccinations and proper
treatment is of utmost importance.

 Providing incentives, granting Subsidies and interest free loans for companies and industries that helps
the Government in producing the essentials such as the PPE kits for the masses.

 Next, to support each and every citizen from the social security standpoint. Relief packages in the form
of cash transfers for low-income groups, collateral free loans to support self-help groups, employment
provision for migrant workers must be provided. Furthermore,

 Regulatory and compliance measures such as postponing tax filing and other compliance deadlines.
Faster clearing of MSME dues and agricultural loans shall be arranged since these sectors form a major
part of the country’s GDP growth.

 Also, at dire situations like these, Adequate insurance coverage for the people working in the health
care sector must be provided to them despite all classes of workers in order to safeguard the people
who are saving lives of others by risking their own lives.
II) The macroeconomic policies that could be carried out by the Reserve Bank of India is as follows:

 Providing collateral free loans to support the micro small and medium enterprises and financial
assistance to farmers in the forms of additional emergency working capital funding during these
situations.

 RBI could implement Quantitative easing measures for the troubling industries and sectors to revive
the aggregate demand which the country faces in the short term in its economy.

 Reducing the Repo rate to possible lows to encourage businesses to take loans and expand their
operations in order to revive the economy.

 Injecting liquidity into the capital markets to reduce the uncertainty in the stock markets and enable
companies to have a steady capital to work with.

 Increasing the borrowing limits of state Governments to support their own fiscal and monetary policies
for the benefit of the people.

 Providing Tax cuts for companies providing their infrastructure for manufacturing essential health care
products to curb the pandemic from deepening further.

These are all the various measures which the Reserve Bank of India could take in order to revive the
economy from the economic crisis.