Question

Pick any 2 questions and answer it (answer should be half page long per question):

1. Globalization seems to have brought benefits for almost everyone, though one exception is African farmers. Blocked from global food markets by trade restrictions, Africans cannot take part in the prosperity globalization has brought to the rest of the world. Many of the health crises such as AIDS, malnutrition, and even starvation are clearly linked to poverty. Moreover, many of Africa’s nations are politically unstable. If African farmers had better access to global markets, what would the implications be for African societies, nations, and economies?

2. Why do cell phone users get offered free phones if they sign a contract with a service provider? Or why do most cable or satellite television service providers offer free installation, free receivers, and free satellite dishes?

3. In what ways can producers in a monopolistically competitive market increase the demand for their product? Consider grocery stores: they have little latitude on prices as their markup is so small, so to build sales they attract customers in what ways?

4. OPEC, the Organization of Petroleum Exporting Countries, was formed in Baghdad in 1960. Since its formation, this cartel has suffered from a major problem with respect to the quota (limit) of output it assigns each member nation. What is OPEC’s goal and what sort of quota do you think the cartel assigns? How and why do nations cheat on their quota? What happens when a nation cheats on its quota?

Answer 1

Ans: (1) Globalization is a phenomena wherein high specialization takes place within a country as per their core resources. A country starts specializing in a product / manufacturing which has least cost advantage. The result is, whatever gets produced within a country at low cost becomes internationally sellable as a large number of a particular goods / services can be produced with the given resources. The promise of globalization is to reduce poverty, increase incomes and employment opportunities.

The case of Africa is special. This continent is richest in resources but it is not able to convert resources into useful goods and services due to internal political conditions. The result is a situation where Africa needs to produce every kind of goods and service; irrespective of the possibility to specialize. As an almost closed economy; Africa is unable to have high growth and the other benefits of Globalization.

If African farmers had better access to global markets, the following economic benefits can be observed:

1. Farmers would get the right price in global markets. In local market conditions, production is not rewarded based on quality, availability, packaging, usability and branding. However, in international market, African produce would have a monopolistic / oligopoly market. This situation has twin advantages. Firstly, better than local prices can be realized. Secondly, for the same amount of produce, African farmers will be paid in Dollar and other international currencies; thereby multiplying the returns from international trade.

2. In case of a bumper crop, usually, prices come down and farmers loose. This might not happen when there is international trade.

3. African society will see a rise in income and living standards.

4. Since farm sector is linked with secondary and tertiary sectors, there will a domino effect in terms of increased production and growth.

5. Globalization will also bring in new technology and ways of production and distribution.

6. African currency will slowly gain value with respect to other currencies.

7. Private economy will see a rise in terms of distribution of national income.

8. Public sector may withdraw the large presence in the econom; giving rise to privatization policies

9. Consumer choice will emerge in different markets resulting in overall social welfare

10. Reduction in poverty and better health indicators have also been a consequence of globalization in other developing economies.

  Ans: (2) The market for Cell Phones, Cable / Satellite Service Providers and other related markets show Monopolistic Competition. In this form of competition, the ability of the seller to differentiate the products and services is minimal or non-existent. In short, product differentiation is not possible. In such a scenario, there is non-price competition. Consumer satisfaction, creation of ambience, customer service, bundling of one good / service with other etc. are popular strategies in this kind of market.

In Monopolistic Competition or Oligopoly markets, “Selling Costs” are used to give the last push to sales. Many a times consumer is ready to buy but there is one percentage of hesitancy which does not allow sales. Generally, the following types of selling costs are incurred:

1. Free Maintenance

2. Home delivery of goods

3. Ambience

4. Air conditioning

5. Lighting arrangements

6. Showcasing of goods

7. Sales force – Salesmanship

8. Guarantee / Warrantees

9. Customer loyalty benefits

10. One Plus one Free scheme

11. Elevators / Lifts / Location of the shop / More number of branches to aid customer convenience

By incurring above mentioned facilitation / selling costs, the seller is able to push sales on indecisive customers. In the language of demand elasticity, the demand for goods and services become less elastic due to selling cost incurrence. The customer’s price sensitivity is reduced because if schemes, customer facilitation and helping the customer choose and buy effectively.

Ans: (3) Market for grocery, water etc. are not capable of product / service differentiation. Prices cannot be hiked up as other sellers are selling same kind of goods / services. In such situations, salesmanship and customer satisfaction is the only way to do well in the market. All such markets use the following strategies to woo customers:

1. Pleasant Customer interaction

2. Good Ambience

3. Credit Facilities

4. Buy Back Promises

5. Guarantees and Warrantees

6. Serving customer with a smile / pleasant attitude

7. Home delivery of goods

8. Bundling of goods

9. Rebates and discounts for loyal customers

10. Marketing of goods by informing the goodness of the goods / services

Ans: (4) Cartels are illegal in almost all countries of the world. Cartels are a system where many sellers come in a contract (tacit or open) with a view to maximise profits and business benefits. In market of crude oil or any other chemical or mineral which ahs specific chemical properties, price competition is not possible. This is why all sellers in a Cartel are given Quotas. By adjusting Quotas, a Cartel can have command over total supply and hence the price control is higher in a Cartel.

OPEC is an organization that controls total supply of oil and oil products through their cartel system. If OPEC wishes to increase prices, they ask the Cartel members to stop selling toil in international market. When the Cartel supplies less in the global market, prices increase.

When nations cheat on their Quota assigned by OPEC, the price control of the Cartel system becomes less effective. Overall the Cartel looses its significance if the members do not follow the assigned quota.

One consequence of cheating is removal of their membership from the Cartel. The other result of such actions by the members is the international oil prices will decrease; therefore reducing the profit of the individual member as well as the overall cartel.