A newspaper article mentions that two of South Korea’s largest semiconductor manufacturers, – Samsung Electronics Company and Hynix Semiconductor – would suspend all their memory chip p

BE274 Managerial Economics

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Q1.) A newspaper article mentions that two of South Korea’s largest semiconductor manufacturers, – Samsung Electronics Company and Hynix Semiconductor – would suspend all their memory chip production for some time. The article goes on to say that another large semiconductor manufacturer was likely to follow suit. Collectively, these chip manufacturers produce about 30 percent of the world’s basic semiconductor chips. Based on this information, how is the market for computers altered? Explain in detail. (600 words)

Note: This answer involves no numerical computation. However, graphs/plots should be used to elaborate your answer. (30% of the total mark)

Q3.) There is increasing scientific evidence that climate change caused by human actions has substantially impacted surface temperatures on Earth. However, what is unclear is the tools available to managers and policymakers to reduce carbon emissions. Greenhouse gas emissions come from a large number of sources such as power plants, and factories to automobiles all around the world. Therefore, the number of pollution sources that need to be controlled is enormous. Additionally, countries often balk at the enormous price of curtailing their emissions. To address some of these challenges, the European Union adopted a cap-and-trade system to reduce their emissions. As an economic advisor and consultant to the European Union, your opinion has been sought on the cap-and-trade system and whether it is beneficial in reducing carbon emissions. Using the tools of managerial economics, analyse the cap-and trade system and comment on the ability of this policy to reduce carbon emissions. Does a cap-and-trade system benefit a firm and the government? (600 words) (30% of the total mark

Module Learning Outcomes

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Question NO. 1

Answer

Introduction:

Recent news reports indicate a significant development in the semiconductor industry, with major players Samsung and Hynix suspending their memory chip production, jointly contributing to approximately 30% of the world's semiconductor supply.

To visually represent this, we can plot a graph where the X-axis represents time and the Y-axis signifies the quantity of memory chips. The graph demonstrates a noticeable decline in chip supply following the production suspension.

Fig 1: Graph: Supply of Memory Chips Over Time

Understanding the Economic Impact:

Supply Chain Disruption:

· Before the production suspension, the global supply of memory chips might be, for example, 100 million units per month.

· After the suspension, the supply could drop to 70 million units per month, representing a 30% reduction.

Fig 2: Supply Chain Disruption

Rising Prices for Computers:

The suspension triggers the fundamental economic principle of supply and demand. A reduced supply of memory chips in the market is anticipated to lead to an increase in prices due to heightened scarcity.

· Assume the cost of memory chips in a computer is $50 before the production suspension.

· Due to the shortage, the cost might increase to $70 per chip, leading to a $20 increase in the overall cost of manufacturing a computer.

Fig 3: Raising Prices for computers.

Market Opportunities for Other Manufacturers:

The theory of market competition suggests that, in the face of reduced supply from major players, other manufacturers would seek to increase production to capture a larger market share. This reflects the idea of firms entering or expanding within a market to take advantage of profit opportunities.

For instance, if other manufacturers can increase their production to fill the gap, they might go from producing 50 million units to 80 million units, gaining a 10% increase in market share.

Global Economic Impact:

The disruption's broader economic impact can be explained using the multiplier effect. The semiconductor industry is a significant contributor to the global economy. A reduction in its output can have a multiplier effect, leading to reduced income and spending in related industries, potentially resulting in a negative economic impact beyond the semiconductor sector.

· The semiconductor industry contributes, for example, $500 billion to the global economy annually.

· A disruption in production could lead to a 5% reduction in the industry's contribution, impacting related industries and potentially leading to job losses.

Market Alterations for Computers:

· Employing the demand-supply equilibrium theory, we can anticipate alterations in the computer market. A visual representation, such as a graph showing the shift in equilibrium price, would be insightful.

Fig 4: Equilibrium Price Shift in the Computer Market

Further compounding the issue, there are indications that another significant semiconductor manufacturer is likely to follow suit in suspending production.

This additional development compounds the challenges already faced by the semiconductor industry. If another significant semiconductor manufacturer follows suit, it would contribute to a broader and more profound disruption in the supply of semiconductor chips globally. This is because it expands the scope of the issue from being a problem for specific companies to becoming a more widespread concern for the entire industry.

The implications could include a more severe shortage of memory chips in the market, potentially leading to increased prices, supply chain complications for industries relying on these chips, and an overall impact on various sectors that use semiconductor components in their products.

In essence, the statement emphasizes the potential worsening of the situation with the looming possibility of another major semiconductor manufacturer joining in the suspension of production, which could have broader and more profound effects on the semiconductor industry and related markets.

Critical Thinking:

This situation demands critical thinking as we apply economic concepts to predict and understand market changes resulting from the disruption in the semiconductor industry.

There's a heightened awareness of current economic issues, especially those directly impacting the semiconductor industry and broader commerce.

Strategic thinking comes into play as we consider potential market opportunities for other manufacturers in response to the supply chain disruptions.

Quantitative skills are applied in estimating the potential impact on computer prices and market demand.

This analysis highlights the practical application of economic concepts and tools in understanding and predicting real-world scenarios, aligning with the specified learning outcomes and transferable skills.

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