Business Cycles Aggregate Demand and Supply

Question: Discuss about the Business Cycles Aggregate Demand and Supply. Answer: Introduction: It is an oligopolistic market structure made up few large firms that dominate the market. Woolworths and Coles supermarket have a cumulative market share of 80 percent. Thus, they have a significant market power and influence the market prices and quantity of goods. As such, Coles, through its large market share has reduced its prices significantly through discounts of up to 50 percent (Edwards 2012). Consequently, this price wars pose great risks and may drive growers out of business. No, it is not in the best interest of Coles and Woolworths to have a price discount war. Mainly, this is because price wars may lead to a reduced profit margin. Woolworths and other competitors will be forced to reduce their prices, thereby reducing their profit margins. The strategy will affect the final consumer who will prefer to purchase cheaper alternatives. Thus, consumers may shift to Coles which has cheaper substitutes (Edwards 2012). The best strategy would be to compete on non-price factors like differentiation. The vegetable market is a monopolistic competition market structure. Mainly, this is because there are many farmers in the market who sell differentiated products, among them vegetables and melons, fruits, and nuts. The products are not close substitutes. Each seller occupies a small market share (Edwards 2012). Reduced prices will force farmers to reduce their prices. Otherwise, customers will shift to cheaper substitutes. In the short run, the farmers may increase the quantity of produce, thereby enhancing their profits. However, reducing prices will lead to a decline in revenues in the long run. Thus, firms make zero economic profits. As a result, small farmers may be forced to leave the market in the long run due to negative economic profits. Significant improvements in technology lead to increased productivity. Hence, firm can produce more efficiently and low costs. This allows them to charge low prices for goods and can thus compete with the prevailing market prices and make economic profits. Thus, they can overcome the price falls and stay in business in the long run. The key components of Aggregate demand include consumer spending, investments, exports, government spending, and imports. The RBA provided commentary on investments and exports. The prices of major export products are declining, thereby causing a decline in terms of trade between Australia and the rest of the world resulting in lower aggregate demand. Also, investments in housing assets and businesses increased steadily, enhancing AD (Stevens 2015) Consumer Price Index. Economic developments have led to decreased consumer prices. Oil prices have also decreased significantly due to lower growth in demand and significant increases in supply. The lower energy prices may increase global output and lower CPI inflation rates. Employment Indicators. Economic growth continued at a sluggish rate, and the overall demand remained weak. As a result, capital expenditure fell, causing the unemployment rate to increase in the previous financial year. Interest rate spread. The cash rate stagnated at 2.25 percent (Stevens 2015). The board also suggest that the interest rates should be held constant for some time. In turn, this is expected to enhance sustainable growth in demand and inflation in Australia. The Australian economy was below potential full employment, and there is room for improvement. The diagram shows that the economy is producing below its full potential (Guiton 2011). The Indian economy is experiencing an expansion. Mainly, this is because the economy is growing and its GDP is continuously positive. Also, the inflation rate is low at 5 percent, meeting the boards target (Pandey 2016). The graph shows that the economy is currently producing at a real GDP that is greater than the LRAS. On the business cycle, the Indian economy is producing at a point above its growth trend. The lower energy prices will affect the general supply of goods and price levels in India. Consequently, the LAS curve will shift to the right, allowing the marker to correct itself, bringing the economy to full employment. In 2016, inflation rates should be monitored closely to ensure it does not exceed the anticipated level. The upward risks to inflation require a strict contractionary monetary policy. Typically, this could be done through open market operations by selling securities to banks, thereby reducing their capital and capacity to lend. This leads to higher interest charges, thereby reducing inflation. The government can raise the reserve requirement and increase taxes, thereby reducing the amount of money in circulation (Pettinger 2010). Reference List Edwards, M. (2012). Fruit, veg prices slashed in supermarket price war. [Online] ABC News. Available at: https://www.abc.net.au/news/2012-01-31/concerns-over-fruit2c-vegetable-discounting/3802094 [Accessed 27 Dec. 2016]. Eskra, K. (2016). Business Cycles, Aggregate Demand, and Aggregate Supply . [Online] Sophia. Available at: https://www.sophia.org/tutorials/business-cycles-aggregate-demand-and-aggregate-sup-2a396d80-bec5-414d-ab3e-7188735bc505 [Accessed 27 Dec. 2016]. Gitton, H. (2011). Business Cycle. [Online] Encyclopedia Britannica. Available at: https://www.britannica.com/topic/business-cycle [Accessed 27 Dec. 2016]. Pandey, V. (2016). India still Fastest-growing Economy in World Gripped by Uncertainty: IMF. [Online] The Economic Times. Available at: https://economictimes.indiatimes.com/news/economy/indicators/india-still-fastest-growing-economy-in-world-gripped-by-uncertainty-imf/articleshow/51796401.cms [Accessed 27 Dec. 2016]. Pettinger, T. (2010). Methods to Control Inflation. [Online] Economic Help. Available at: https://www.economicshelp.org/blog/2269/economics/ways-to-reduce-inflation/html [Accessed 27 Dec. 2016]. Stevens, G. (2015). Statement by Glenn Stevens, Governor: Monetary Policy Decision. [Online] Reserve Bank of Australia. Available at: https://www.rba.gov.au/media-releases/2015/mr-15-05.html [Accessed 27 Dec. 2016].