COURSE: BUSINESS ECONOMICS

PROJECT: COVID-19: The Global Shutdown

Instructions for the submission:
● Please maintain the following: Font - Times New Roman, Font Size - 12, Line Spacing -
1.5

Name ARHASHAD

Question 1A: What made OPEC decide to cut the oil supply? What was the desired outcome of
this decision? What was the change in the supply and demand curves of oil and the
subsequent market equilibrium? Analyze the changes both before and after the decision to reduce
supply with respect to price change and shift in demand curve.

Answer:

Reason behind OPEC's (Organization of Petroleum Exporting Countries) decision to

reduce oil supply in the market:

1. Oil demand fell drastically due to the lockdown, resulting in a surplus of oil and higher
storage costs; as a result, people were willing to sell the oil at a lower price to avoid the
storage costs.
2. Lack of storage space at oil producers’ storages forced OPEC to limit oil production.
3. OPEC desired to restrain market supplies until demand increased.

Desired outcome of the decision:

The desired outcome of the supply cut was to raise oil prices, which had fallen into negative
territory due to a record supply shock as a result of the global shutdown.

Due to the global oil embargo, major oil importers such as China and India reduced their oil
requirements, initially it began with a supply shock recession and then evolved into a demand

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shock recession. As a result, the oil market was severely affected by a combination of supply
and demand shocks.

Change in Demand and supply curve before the decision: Due to the record fall in the oil
demand the demand curve got shifted broadly to the left (D2) & supply would remain the same
since at the same time, the decision to cut the supply was not made. This would lead to fall in
the price & create surplus in the market as per below graph

Change in Demand and supply curve after the decision:

After the decision to supply, the oil price would slightly increase however, of course not equal
to before pandemic. The supply curve will shift ( S1) & new equilibrium increased the price and
slight rightward shift in the demand curve ( D1) towards the end of the year.

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Question 1B: What type of market (market structure) does OPEC operate in? What are the
three key features of such a market structure?

Answer:

OPEC operates in Oligopoly market. An oligopoly is a market state where there are limited
number of suppliers/ Producers/ distrubutors of a certain product. As a result, such a group
gains an advantage in determining the product's price and supply in a way that their interests
are safegaurded. The Organization of Petroleum Exporting Countries ("OPEC") is a perfect
illustration of an oligopoly, in which a limited number of countries (13 countries) dictate oil
production and pricing to the global economy.

Key features of such a market are:

1. Only few large firms dominate the market.

2. Restricted entry into the industry due to existence of big players in the market.
3. The product supplied can be identical like commercial airline, telecom industry &
differential like soft drink industry.
4. Interdependence within the players in the market like change in price of Jio will affect
Airtel & Vodafone- Idea.

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Question 2A: Assume that the business was operating at the profit maximizing level of
output before the Covid-19 outbreak. Each article brought in ad revenue of €375.

• Determine how many articles was the business producing?

Answer: Business was producing 92 Articles, as that is where Marginal cost (MC) is equal to
Marginal revenue (MR).

• What was the total profit?

Answer: The total profit was €2500, i.e- Total Revenue – Total Cost (€34,500- €32,000)

Explain conceptually how you arrived at the profit maximizing level of output. You do not
need to show exact calculations.

To reach to at the profit maximizing output, following steps were followed:

1. Identify Fixed and variable cost and add both to arrive at Total cost for each level of
output. Calculate Marginal Cost at each level by dividing change in total cost by
change in output.
2. Identify Revenue at each level by multiplying price of each article & No. of article.
3. Calculate Marginal Revenue at each level by dividing Change in Revenue by Change
in the Output.
4. Finally, Subtract Marginal Revenue & Marginal Cost to arrive at change in the price.

When the change in price, at certain output level, reaches Zero i.e MC = MR, it will be the
profit maximizing output.

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Question 2B: On 9 March 2020, Italy went into lockdown. As a result, you had to shut down
your office and adopt a work-from-home policy. This eliminated your fixed costs of €8,000. At
the same time, your ad revenue per article fell to €250. This was because all companies
suddenly reduced their advertising spending.

• How many journalists would you have to fire? Assume that you only care about
maximizing profits.

Answer:

If we follow profit maximization, the business will have to fire 4 employees. The new profit-
maximizing level has been cut from 92 to 54 articles every month. According to the current
scenario, this resulted in the addition of 4 staff.

• What is your new total profit?

The new Total profit is €1500, i.e 13,500- 12,000

• Why did you fire the journalists? Explain your answer conceptually. You do
not need to show exact calculations.

Reason of the layoff are:

1. The profit reduced substantially due to decrease in price of per article from €375 to
€250. The decrease in profit lead to smaller Total profit i.e €1500 than previous €2500
previously.
2. Since company’s main concern is profit maximization, the negative change in profit
would lead to extra cost and no profit. Keeping extra employees was not in line with
company’s favor.
3. The difference between Marginal cost and Marginal revenue become Zero at 4
journalists & 54 articles as apposed to 8 journalists & 92 articles previously. To follow
profit maximization, 4 journalists has to be fired ( 8- 4 journalists).

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Question 3A: What type of unemployment would a country like India experience from such a
pandemic? Please provide an explanation.

Answer:

Due to pandemic like calamity, India would experience Cyclical unemployment.

According to the 2018-19 Economic Survey, 85 % of Indian population work in the informal
sector, such as domestic help, construction labor, car repair, and grocery stores. This type of
job might be classified as "quasi-legal," meaning that the work is "lawful." However, because
it is unregulated and unprotected by any contract, a pandemic might put these people out of
employment.

When the Prime Minister implemented the lockdown on March 24, 2020, small shop owners
and small enterprises saw a drastic drop in revenue, forcing them to lay off most of their
workforce. A minor, short-term recession caused aggregate demand to decline. Because of the
uncertainty, consumer spending has been reduced. This caused a rise in unemployment among
daily wage workers, domestic helpers, and travel agencies until the end of the year, when the
lockdown was gradually removed, and firms regained some market share. Because the
pandemic was only temporary, the unemployment caused by it was cyclical.

Question: 3B: What type of recession would be caused by such a pandemic? Provide an
explanation

Answer: Demand led recession would be caused by such a pandemic.

In an economy, aggregate demand includes consumer spending, investment, government

spending, and the difference between imports and exports. The pandemic created a situation of
unrest worldwide due to virus being unknown & deadly. The lockdown, as necessary and
beneficial as it was, caused most of the population's revenue disruption. Lack of income and
unemployment reduced demand and spending limits, resulting in a drop in aggregate

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 demand. A decrease in aggregate demand also lowers GDP. Investors and consumers
preferred to keep their money rather than spend it, which slowed the economy's money flow.

As a result, this pandemic was a demand-driven recession.

Question 4 A: What type of macroeconomic policy should the Indian government adopt after
such a crisis? Mention the policy measures to be undertaken clearly along with explanations.

Answer:

Indian government should take following macroeconomic steps after pandemic like crisis:

1. Expansionary Fiscal policies:

i) Taxation: Lowering the tax directly benefits consumers by giving them more
money to spend. In times of crisis and recession, many democratic countries
use this well-known method.

ii) Government Expenditure: In a country like India, where more than half of the
population was unemployed following the lockdown, relief programs such as
unemployment compensation for daily wage workers and farmers, free travel
for unemployed migrants, control of basic medical charges, and provision of
basic healthcare to the poor should be implemented.

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Que: 4B: What type of macroeconomic policy should the Reserve Bank of India adopt after
such a crisis? Mention the policy measures to be undertaken clearly along with
explanations.

Answer:

Bank of India should opt following steps after the crises created by such as pandemic:

Monitory policies:

i) Reduce Interest Rate: To enhance money supply in the market, the interest rate
should be reduced. Lower interest rates will encourage consumers to borrow more
and spend more in the market, increasing the money supply. Certain part of
Farmers and daily wage labor loans should also be relieved. Also, allow small
businesses and the unemployed to postpone loan repayments.
ii) Influx money: RBI should purchase govt bonds from the open market, so the
population has more money in hand to spend and create demand.

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