Economics Principles Task

1. Context and Overview

The Economics Principles Task (EPT) is worth 30% of the final mark. ❦

• Part 1 is seen through the lens of a price-making monopoly firm with substantial market power, worth 20 marks.
• Part 2 is seen through the lens of the competitive demand and supply forces at play over real historical time, worth 10 marks.
• The two parts are to be answered with sufficient explanations, using well-labelled, hand-drawn diagrams, where relevant.

A general guide on what the marker is looking for in the EPT is recalling the tutor-student discussions in the workshop sessions: WAQ_5 of Module E2 (M7) for indirect guidance to do Part 1b; WAQ_5 of Module E3 (M8) for indirect guidance to do Part 2. Your tutor as an exemplar would have gone through the process on how best to explain the key diagrams, and so on.

Note, the 1600-1800 words count is a suggested maximum. The main thing is that you just answer the question and have sufficient explanations.

1. Assessment Tasks

Part 1 – 20 Marks

Case Study on Amazon in the US

Under capitalism, firms are always looking for economic rents made by degrees of monopoly power, through institutionalising innovation. Consider Amazon, which started out in the mid-1990s as a humble online book retailer and is now the largest retail seller outside of China. Known as the ‘Everything Store’, Amazon has seen record profitability of late in its core offerings of online shopping with home delivery, media streaming and cloud web-services.

Your tasks for Part 1 are as follows:

To give you some relevant background knowledge on Amazon, read the following news articles:

1. Grimmer, Louise, Gary Mortimer and Martin Grimmer (2021) “What’s next for Amazon after Jeff Bezos? No dramatic changes, just more growth and optimisation”, The Conversation, February 4th, available: https://theconversation.com/whats-next-for-amazon-after-jeff-bezos-no-dramatic-changes-just-more-growth-and-optimisation-154553
2. Banker, Steve (2021) “Amazon Supply Chain Innovation Continues” Forbes, April 1st, available: https://www.forbes.com/sites/stevebanker/2021/04/01/amazon-supply-chain-innovation-continues/
3. Chant, Tim De (2021) “After helping decimate department stores, Amazon plans to open its own”, ArsTechnica, August 20th, available: https://arstechnica.com/tech-policy/2021/08/after-helping-decimate-department-stores-amazon-plans-to-open-its-own/
4. Stoller, Matt (2021) “At last, the regime that enabled Amazon's monopoly power is crumbling”, The Guardian, February 4th, available: https://www.theguardian.com/commentisfree/2021/feb/04/amazon-jeff-bezos-monopoly-power-antitrust
5. Feiner, Lauren and Annie Palmer (2021) “DC attorney general sues Amazon on antitrust grounds, alleges it illegally raises prices”, CNBC, May 25th, available: https://www.cnbc.com/2021/05/25/dc-attorney-general-sues-amazon-on-antitrust-grounds-alleges-it-illegally-raises-prices.html
6. Do some additional research and elaborate on the following vis-à-vis innovational processes:

• Three investment strategies of Amazon done in the recent past (2017 to 2021) to ensure cost efficiency within the supply chain, the picking, packing, and shipping of orders.
• Two concrete examples from recent years of the dominant forces of creative destruction as Amazon pursues new customers and goes beyond its online-only presence.

[700 to 800 or so words is the suggested amount for Part 1a]

[8 marks for quality of explanation]

7. Illustrate using an appropriate diagram where amazon.com sets price to maximise profit (adapting Figure 7.9d from CORE ESPP) to explain in some detail how the outcomes to customers compare to a more competitive, price-taking firm.

• In your diagram, assume at the profit-maximising point in Q2 of 2021 the average price of items is $27*, and also that Amazon’s online shopping customers are very price-conscious. Use hypothetical values (rough guesses) relying on intuition for quantities and cost.
• In your answer, do a little more additional research and elaborate on alleged ways the monopolist sustains its profitability in light of the accusations of the attorney general for the District of Columbia.

                    [500 to 600 or so words is the suggested amount for Part 1b]

       [4 marks for diagram + 8 marks for quality of explanation = 12 marks]

*= based on a rough estimate by Kynan Eng (2016), available: https://slate.com/human-interest/2016/03/how-much-would-it-cost-to-buy-one-of-everything-on-amazon.html

Part 2 – 10 Marks

The Market for Cars in the US

There has been a strong increase in global demand for semiconductors from around Q3 2020 to Q3 2021, which has led to inventory shortages for new and used cars in particular.

Your tasks for Part 2 are as follows:

Read the following key articles:

1. Hopkins, John L (2021) “Yes, the global microchip shortage is COVID’s fault. No, it won’t end any time soon”, The Conversation, June 2nd, available: https://theconversation.com/yes-the-global-microchip-shortage-is-covids-fault-no-it-wont-end-any-time-soon-161903
2. Undercoffler, David (2021) “Five Ways Car Shoppers Are Responding To Record Low Inventory”, Forbes, September 8th, available: https://www.forbes.com/sites/davidundercoffler/2021/09/08/five-ways-car-shoppers-are-responding-to-record-low-inventory/
3. O’Brien, Sarah (2021) “Buying a new car is a challenge amid a global chip shortage and limited inventory”, CNBC, September 3rd, available: https://www.cnbc.com/2021/09/03/discounts-on-new-cars-are-hard-to-come-by-how-to-find-a-good-deal.html

Use the demand and supply (D&S) model to demonstrate the change in the market conditions from Q3 2020 to Q3 2021 for the new car market and used car market in the US.

• Use two separate D&S diagrams corresponding to the two markets, and carefully label the curves and clearly indicate all equilibrium prices and quantities.
  • For your price points, use values based on actual data where possible.
  • Use hypothetical values (rough guesses) relying on intuition for quantities.

What do you think the price elasticity of demand (PED) might look like for new or used cars in Q3 2021 compared to Q2 2020? In your answer, discuss a key determinant of PED.

                                   [400 or so words is the suggested amount for Part 2]

     [4 marks for diagrams + 6 marks for quality of explanation = 10 marks]