Economies Of Scale Aviation Space Technology: Market Structures And Their Impact

Perfect Competition

Question:

Discuss About The Economies Of Scale Aviation Space Technology?

Economies of Scale: When a company or a business achieves more efficiency and output with decreased input, its marginal costs in terms of production decreases, thus business is said to have achieved the economies of scale (Tegtmeier 2013). For Example, discount on bulk purchases, information sharing related economies, department or labor specialization etc.

Perfect Market: In such a market there are almost infinite number of buyers and sellers and so no one seller can influence market in their way.

Economies of Scale have usually no importance in such markets as each supplier assumes constant returns on economies, and so the unit costs remain the same. One basic reason of this is the price is set my marketing and no single supplier can set price on his own (David Myers 2015).

Monopoly: Such a market has one big supplier of particular goods or services. He may be doing differentiation and controls the whole market.

In a monopolistic market, the economies of scale is important, as it keeps increasing and total average cost keeps falling. This is due to considerable amounts of fixed costs, big discounts on purchases and large scale production.

Oligopoly: In an oligopoly instead of one supplier, a number of limited producers of goods or services collude with one another and derive the market. They may be two or more in number (Polkinghorn 2016). Oligopoly Firms are also able to take advantage of economies of scale by decreasing their average costs.

Monopolistic Competition: Such a market combines the features of a monopoly and perfect competition. Every provider of goods or services in large enough to influence its market but is differentiated from the other one.

Economies of scale are achieved by every player due to large production capacities, so mostly the competition is based on quality, customer retention and differentiation (Dunne, Klimek, Roberts and Xu 2013).

With the commencement of 21^st century the Australian industry had two key player Qantas and Ansett along with two new entrants Virgin Blue, and Impulse airlines. With the acquisition of Impulse airline by Qantas and collapse of Ansett Group, only two airlines were left to compete in Australian Industry. So it showed a “Monopoly” of one big Airline Qantas in 2002-03. Although Virgin Blue was expanding, but still large market share (almost 80%) was possessed by Qantas airlines in domestic industry and Virgin Blue had to do more to transform the market into “Perfect Competition” or an “Oligopoly”.

Monopoly

In International market of Australia the only “Flag Carrier” remained was the “Qantas Airlines” in 2003, but the international Market share was very low and it had to face “Perfect Competition”. This was because Qantas airlines were facing many unmanageable circumstances at that time. In their annual accounts of 2003 Qantas themselves stated reduced planned international flights by 20%. Additionally they had to bear low levels of working capitals and redundancies:

“These initiatives resulted in a one off charge of $91 million for the write-down of Boeing 767-200 fleet, which will be retired by the end of 2003-04 financial Year.” Qantas Audited Accounts 2003

If we take a look at macroeconomic data, France’s economy is currently undergoing “Expansion” and soon may hit “Cyclic Peak” followed by a “Recession” in some years. Because the GDP has almost reached its maximum level it can be predicted as a “bust” in the economy. Although France has a steady trend in terms of GDP and unemployment the GDP of the country may start declining at this stage, the employment rate of the country is decreasing but with a slower rate as a result the economy can contract. The small decrease in unemployment rate may not be stable as Macron has implemented the same policies as former leaders. This all can result in a tight labor market and future uncertainty about the inflation. Decreased Tax cuts and more government spending is needed to meet the aggregate demand in the economy and making the buyer purchasing power stronger. “Most of the unemployed, lack qualifications that fit the labor market’s needs. France’s unemployment rate, at around 10%, suggests that this skill gap runs deep.” Article by Bloomberg: The French is bad in a crisis

The AS describes the total amount of commodities in French economy available at all feasible levels of prices whereas AD denotes the amount of commodities in French economy that will be purchased at all feasible level of prices. In the economy, as the prices of most commodities alter, the level of price alters and individual and businesses alter how much they purchase (Baldwin and Scott 2013). The AS curve on graph displays the relationship between prices and output supplied while AD demand curvature denotes relationship between price and the real GDP demanded. Since French economy is expanding in 2007, it will mean that both AS and AD will be positively shifting as shown in AD-AS Model below:

Oligopoly

Bringing together AD and AS curves shows AD/AS equilibrium in economy. The intersection of AS1 and AD1 curves indicate an equilibrium prices level P1 and equilibrium real GDP Q1 before the shifts. When both curves are shifted outwards since French economy is expanding in 2007, the intersection between AS2 and AD2 indicate an equilibrium price level P2 and equilibrium real GDP Q2 after the shifts.

• Increase the working hours of employees and raise their participation to make their skills better as well as segmentation of job division according to the specifications and requirements.
• Emanuel Macron must translate and provide details about his policies, especially on deregulations and social protections.

Macron, Investment in educating workers and infrastructure. What Macron needs to do is to make the fluctuations of economy more close to trend lines so that recession are not severe and expansion can reach at full peak (Lange, Ross and Vannicelli 2016). The investment in education and training of the workers of the country is a major variables in the determination of how well the economy will perform. Increasing education levels culminates to well-trained workers which tend to make workers more productive and are able to earn more money than workers with poorer training (Buckley and Casson 2016). New investment in education will yield workers capable of functioning in novel industries (Fägerlind and Saha 2016). French economy shall become more productive since the proportion of the educated workers increase because the educated workers can more efficiently undertake their task that call for literacy and critical thinking (?tef?nescu-Mih?il? 2015). The French economy will thus see faster economic growth. This is because education is investment in human capital, identical to investment in better equipment. It will lead to a knowledge-based economy and the firms will be able to increasingly produce theoretically (Ehrenberg and Smith 2016). This is because the knowledge and skills of employees in labor supply remains a critical factor in the determination of both business as well as economic growth (Blaug 2014).

French economy will subsequently have substantial supply of skilled labor arising from school education and training and hence able to capitalize on such an opportunity via the development of more-value industries like high-tech manufacturing (Carlton and Perloff 2015). The Cobweb Model can be used to show that since training and education takes duration to complete, shifts in the demand for a given kind of workers have distinct effects in the long- and short run (Baum 2015). The model analyzes the supply over the long-run, but demand shifts and wage shifts are perceived in short-run as they move towards the long-run equilibrium (Foster and Rosenzweig 2017). The short run shifts in demand and wage rate is shown below:

Monopolistic Competition

In the short run, the rise in demand for better-trained employer leads to increase in wages beyond equilibrium level (A). Rather than increase being along long-run labor supply curvature, it takes place along more inelastic short-run labor supply curvature (L). The short-run curvature remains more inelastic since there is a restrained number of employees that have or can immediately train for novel skills (Gertler et al. 2014).  As more workers get trained (B), the labor supply will shift rightwards with the new workers affecting wage rate as shown:

Due to the declining wage rate, fewer workers become interseted in training for skills that employers demand. This subsequently push wage rate upwards to W3, though the wage increase comes in smaller and smaller increments (Barro 2013). The wage cycle increases and labor rises continues till it has hit equiibrium; the initial upward shift in demand intersects the long-run labor supply.

References

Baldwin, W. and Scott, J., 2013. Market structure and technological management change (Vol. 18). Taylor & Francis.

Barro, R.J., 2013. Education and economic growth. Annals of Economics and Finance, 14(2), pp.301-328.

Baum, W.C., 2015. French Economy and the State. Princeton University Press.

Blaug, M., 2014. Economics of education: A selected annotated bibliography. Elsevier.

Bloomberg Article: The French Economy is bad in a crisis, Written by: Phillippe Waechter, Publish Date: May 16, 2017

Buckley, P.J. and Casson, M., 2016. The future of the multinational enterprise. Springer.

Carlton, D.W. and Perloff, J.M., 2015. Modern industrial organization. Pearson Higher Ed.

Ciliberto, F., Murry, C. and Tamer, E.T., 2016. Market structure and competition in airline markets.

David Myers CEcD, M.A., 2015. economies of scale. Economic Development Journal, 14(3), p.11.

Dunne, T., Klimek, S.D., Roberts, M.J. and Xu, D.Y., 2013. Entry, exit, and the determinants of marketing structure. The RAND Journal of Economics, 44(3), pp.462-487.

Ehrenberg, R.G. and Smith, R.S., 2016. Modern labor economics: Theory and public policy. Routledge.

Fägerlind, I. and Saha, L.J., 2016. Education and national development: A comparative perspective. Elsevier.

Foster, A.D. and Rosenzweig, M., 2017. This paper seeks to explain the U-shaped relationship between farm productivity and farm scale-the initial fall in productivity as farm size increases from its lowest levels and the continuous upward trajectory as scale increases after a threshold-observed across the world and in low-income countries. We show that the existence of fixed transaction costs can explain why the smallest farms are most efficient in their use of labor, slightly larger farms least efficient and larger farms as efficient as the … (No. 1059).

Gertler, P., Heckman, J., Pinto, R., Zanolini, A., Vermeersch, C., Walker, S., Chang, S.M. and Grantham-McGregor, S., 2014. Labor market returns to an early childhood stimulation intervention in Jamaica. Science, 344(6187), pp.998-1001.

Lange, P., Ross, G. and Vannicelli, M., 2016. Unions, change and crisis: French and Italian union strategy and the political economy, 1945-1980. Routledge.

Polkinghorn, A., 2016. Economies of scale. Br J Gen Pract, 66(648), pp.351-351.

Qantas Annual Report 2003, https://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file/annual-reports/2003AnnualReport.pdf, Page:4

?tef?nescu-Mih?il?, R.O., 2015. Social Investment, Economic Growth and Labor Market Performance: Case Study—Romania. Sustainability, 7(3), pp.2961-2979.

Tegtmeier, L.A., 2013. Economies of Scale. Aviation Week and Space Technology, 175(4).