- Business Economics take home exam
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Table of Contents
Part – A.. 2
1. Opportunity Cost and its effectiveness in decision making with examples. 2
2. Price Elasticity of Demand and its significance for the Business Environment, giving two instances of inferior goods. 3
3. Expansionary Fiscal Policy and its relationship with Automatic Stabilizers in the case of UK. 4
4. The difference between the government expenditure multiplier and the tax multiplier and the most preferable one in the economy. 5
5. The key factors affecting the demand and supply for currency and its impact on the international trade. 6
Part – B.. 8
1. The factors involved in pushing up house prices in the context of inflation theory. 8
2. The impact of currency values on: 9
(i)The demands of the products we produce – 9
(ii) The prices of the products we buy – 9
Part – A
1. Opportunity Cost and its effectiveness in decision making with examples.
The opportunity costs are defined as the cost of any decision making that is measured in the context of the next substitute which has been abandoned. In other words, it is the comparison between the policy which was chosen and the policy that was jilted. It can also be explained as the forgone adversary of revenue of not making the best use of the available substitutes. This concept of opportunity cost is significant for the manager while decision making. This opportunity cost or the alleged cost is not exactly incurred by any firm or organization (Marburger and Peterson, 2004).
Opportunity Cost is a basic idea in financial matters that applies to all types of choice making. Opportunity expenses possess large amounts of our day by day action and each association succeeds or fizzle taking into account choices taken by its chiefs. A large portion of the key choices concentrate on assembling rare assets and creating important products and administrations (Ojediran, 1996). Finding the genuine open door expenses of assets, e.g. offices, gear, work supply, licenses, copyrights, fund and time) can prompt better administrative choices.
At an essential level, open door expense is a straightforward thought. In view of shortage, each activity attempted by an individual or gathering blocks the likelihood of taking certain different activities. By utilizing an asset as a part of one action implies that the same asset can’t be utilized all the while as a part of another movement, that is, the exercises are totally unrelated. In this way, if a customer buys a container of squeezed orange, that same cash can’t likewise buy bread. On the off chance that an understudy decides to rest, she can’t likewise utilize that time get ready for an exam. In the event that the city of London funds another football stadium this year, it may swear off building another healing center at this point. Putting away cash under a sleeping cushion does without the premium give back that may be earned on a bond and, so on.
The principal stride to settling on a steady choice is to think about the exchange offs included. At that point, among the accessible choices, distinguish the best one. The open door expense is the chief’s net addition throughout the second best decision, if selecting the best option. One ought to pick to do something just if the related net advantage exceeds that of the second best option. The idea of chance expense has pertinence to aggregate social choices and to individual choices (Arora and Nandkumar, 2009).
Pondering open door expenses helps us to remember the pervasive impact of lack and need of measuring our choices keenly, on the off chance that we are to boost the worth we acquire from our decisions. Economists and numerous directors endeavor to represent all expenses of utilizing assets in gainful action. The procedure of communicating assets in money related qualities is referred to in financial matters and account as valuation.
2. Price Elasticity of Demand and its significance for the Business Environment, giving two instances of inferior goods.
The demand law shows the only change in direction in the demanded quantity of goods in relation to the change in price. The elasticity of demand defines how much and to what extent the demanded quantity of goods would change in relation to the price change. According to Marshall, the famous Economist, the price elasticity of demand can be explained as the percentage change in the quantity demanded divided by the percentage change in price while according to Dooley, another Economist, the price elasticity of demand measures the receptivity of the demanded quantity to the change in its price (Sloman and Sutcliffe, 2003). The formula thus goes like this: Price Elasticity of Demand = Percentage change in quantity demanded/Percentage change in price. The different degrees of price elasticity of demand are: Perfectly elastic demand, Perfectly Inelastic Demand, Unitary Elastic Demand, Relatively Elastic Demand and Relatively Inelastic Demand.
Organizations can benefit from the price elasticity of demand for goods and services for setting policies regarding price. The price elasticity of demand demonstrates the customer sensitivity for changing the price which would leave an impact on the volumes of sales, profits and revenues. The optimal pricing policies would result into maximization of profits by actually charging what the market would bear (Boyes and Melvin, 2008). The directors may adjust their strategies regarding pricing on the basis of the changes in the competitive environment and the demand of the consumers.
Ideal evaluating arrangement is otherwise called immaculate value segregation, which implies that an organization fragments the business into particular client gatherings and charges every gathering precisely what it is willing to pay. The ideal cost and volume allude to the offering cost and volume at which an organization augments its benefits. Ideal estimating is conceivable just when there is a distinction in value versatility for diverse shopper bunches. For instance, a market chain may value the same thing higher in an affluent neighborhood, in which buyers may be less delicate to value and lower in a common laborers neighborhood, in which customers may be touchier to costs. The variables that influence value flexibility incorporate the accessibility of substitute items and the extent of discretionary cash flow needed to purchase certain item. The value versatility will be high if buyers can purchase elective items or on the off chance that they need to pay a lot of their pay (Friedel, 2008).
Inferior goods are the goods for which the demand diminishes as income of the consumer increases. So in this case the income elasticity of demand would be negative. Individuals and households tend to purchase less of poor quality products that are associated with living in poor communities as incomes would be rising. In some cases even firms that are operating under limited budgets might spend more on low quality paper which is an inferior good (Hildenbrand et al., 2001). Better instances are inter-city service of buses and consumption of cheap junk food like hamburger, frozen meat, etc. So in general it can be concluded that with changes in income would lead to shift in the demand curve as there would be changed in the quantity demanded at any level of price.
3. Expansionary Fiscal Policy and its relationship with Automatic Stabilizers in the case of UK.
The Expansionary fiscal policy occurs with the increase in spending of the government in terms of purchasing of goods and services along with the decrease in taxes for increasing the aggregate demand at the time of recession. Expansionary Policy is a valuable instrument for overseeing low-development periods in the business cycle, yet it likewise accompanies risks. First and chief, financial specialists must know when to grow the cash supply to maintain a strategic distance from causing reactions like high swelling. There is additionally a period slack between when a strategy move is made, whether expansionary or contractionary, and when it meets expectations its way through the economy. This makes up to the minute examination about outlandish, not withstanding for the most prepared business analysts (Caballero and Krishnamurthy, 2004).
The system of automatic stabilizer naturally grows monetary strategy amidst economic retreats and contract it amidst economic booms are one type of countercyclical financial arrangement. In UK, Unemployment protection, on which the administration spends additionally amid subsidences when the rate of employment is low, is an instance of an automatic stabilizer. Essentially, on the grounds that expenses are generally relative to compensation and benefit, the measure of charges gathered is higher amidst an economic boom than amidst an economic retreat. In this way, the duty code additionally goes about as an automatic stabilizer,
4. The difference between the government expenditure multiplier and the tax multiplier and the most preferable one in the economy.
The government expenditure multiplier is the impact of an adjustment in government use on products and administrations (G) on total interest. An increment in government expenditure on commodities and services boost the cumulative expenditure, which gets under way the multiplier procedure (Barro and Redlick, 2009). The formula is: Government Expenditure Multiplier (g) = (1)/ (1-MPC), MPC is the marginal propensity to consume.
The tax multiplier measures the adjustment in total creation activated by a self-governing change in government charges. This multiplier is valuable in the examination of monetary arrangement changes in duties. The tax multiplier contrasts from the expenditure multiplier in view of how the independent change influences total uses. The tax multiplier mirrors the way that a given self-governing change in expenses does not bring about an equivalent change in total consumptions. Expenses change extra cash, which causes changes in both utilization of the consumption expenditure and total saving (Chahrour et al., 2010).
In the case of UK’s economy, the tax multiplier is the most suited one. The tax multiplier impact happens when an introductory infusion into the economy results into a greater last increment in the national wage. For instance, when the UK’s government expanded spending in terms of £1 billion, there will be a starting increment in a cumulative demand of £1 billion. Nonetheless, if this infusion in the end created genuine GDP to increment by £2 billion, then the tax multiplier would be having an estimation of 2.0. Tax or Fiscal Multiplier (k) = Real GDP change (Y) / Variation in Injections (J). Injections would include the government expenditure, investment and export.
The tax multiplier effect also is relevant in terms of a tax deduction which doesn’t have any effect on the government expenditure but it should affect the spending of the consumer, such as the UK’s government cut the Value Added Tax from 17% to 15. Therefore, a cut in the rate of tax would increase the spending of the consumer and it may result into entirely rise in the aggregate demand in the economy. This implies that organizations would get an increment in the demand and sell more commodities. This increment in yield, would urge a few organizations to employ more employees to take care of higher demand. Along these lines, these employees would now have higher earnings and they would be spending more. That’s the reason there is a tax multiplier impact and additional advantages of spending of others in the economy.
5. The key factors affecting the demand and supply for currency and its impact on the international trade.
There are few main economic factors that affect the demand and supply of any nation’s currency, as in the case of Pound Sterling for UK. In gliding swapping scale frameworks, the business sector estimation of a coin is controlled by the interest for and supply of currencies. Most money managing is theoretical yet exchange and venture choices likewise have a part to play
Some key components that can influence currency of UK are as per the following:
Balances of Trade: A nation like UK, that have solid exchange and current record surpluses tend to see their monetary standards acknowledge as cash streams into the roundabout stream from fares of merchandise and administrations and from venture salary. This builds the interest for currency and realizes comprehension in its quality. Determined exchange deficiencies can prompt cash devaluation.
Portfolio Investment: More exchange of currency is utilized to back cross-fringe portfolio speculation, for instance financial specialists putting their trusts into stocks and shares, government securities and property. Solid inflows of portfolio speculation from abroad can bring about a coin to appreciate (Gillespie, 2009).
Foreign Direct Investment (FDI): An economy that draws in high net inflows of capital venture from abroad will see an increment in money interest and a rising swapping scale.
Differentiated Interest Rate: In the event that a nation’s advantage rates are higher than rates on offer in different nations then ceteris paribus we hope to see an inflow of money into banks and other budgetary organizations. The higher the interest rate differential, the more prominent is the motivating force for trusts to stream crosswise over global limits and into the economy with the higher interest rates. Nations offering high premium rates can hope to see hot cash streaming over the coin markets and bringing on a valuation for the conversion scale (Reinhart, 2005).
For carrying out effective global trade, under the system of international exchange of foreign currency, the currency of UK, that is Pound Sterling is being converted in to the another country’s currency through Foreign Exchange Market. It would also cater to the increase in export and import of goods and services. The exchange rate of currency is identified by the forces of demand and supply. Hence, if for some specific reason there is increase in demand of the currency then the price of the goods would increase leaving the provision of the supply being stable. On the other hand, if the supply increases then the price would reduce leaving the provision that the demand is stagnant.
Part – B
1. The factors involved in pushing up house prices in the context of inflation theory.
Inflation means there is a supported increment in the value level. The primary driver of inflation is either overabundance of total interest financial development too quick or expense push components that is, supply side variables (Phelps, 1999).
Rising house costs don’t specifically bring about inflation, yet they can bring about a positive riches impact and empower shopper drove monetary development. This can by implicated by the reason of demand pull inflation. Ascending of house cost is intensely reflecting change between the trends of demand and supply. The factors considering that impact the ascent of house cost are (i) Fluctuations in lodging business sector, (ii) Rise in development expenses of lodging, (iii) Population development over lodging, (iv) Expanding interest on lodging, (v) Long term benefit of lodging, (vi) GDP development, (vii) Declining in supply of new lodging, (viii) Transfer charge and tariff of lodging, and (ix) Lodging quality, house appearance and open offices (Bekaert and Wang, 2010).
Generally in the case of demand pull inflation, if monetary development is over the long run pattern rate of development. The long run pattern rate of financial development is the normal economical rate of development and is dictated by the development in efficiency. In the 1980s, the economy of UK experienced fast financial development. The administration cut interest rates furthermore cut assessments. House costs ascended by up to 30% fuelling a positive riches impact and an ascent in purchaser certainty. This expanded certainty prompted higher spending, lower sparing and an increment in getting. In any case, the rate of monetary development came to 5% a year – well over the UK’s long run pattern rate of 2.5 %. The outcome was an ascent in swelling as firms couldn’t take care of demand. It additionally prompted a present record shortage.
2. The impact of currency values on:
(i)The demands of the products we produce –
The domestic products of GDP can be defined as the cumulative production measure that is equivalent to the sum of the total value added products produced by all the firms that is engaged in production which includes taxes and deduction any subsidies (Sahin, 2009). If the value of the currency depreciates then the demand of the domestic products will rise as the price of the products would reduce. While on the other hand if the value of the currency appreciates then the price of the domestic products would increase leading to the demand of the products to fall down drastically.
But also it can be pointed out in the case of currency depreciation, when the demand of the products would rise it might be difficult for the domestic producers to cope up with the supply increased demand of the products, so then there might be a situation of the price of the domestic products to rise. Likewise in the context of currency appreciation, the demand of the products would fall then there might be a situation that the producers might reduce the price to a little margin. The domestic producers would face difficulty if the currency value goes up in the context of carrying out the global trade.
(ii) The prices of the products we buy –
Despite the fact that the impacts can require some serious energy, changes in the currency value can have a major effect on the economy and on our own particular way of life and buying force. There is frequently banter about whether a nation ought to have a high or low rate of exchange of currency. At the point when the value of a currency raises it implies it expanded in worth in respect to another coin; when the value falls then it implies debilitated or fell in quality with respect to other currency (Twomey, 2012).
The value of currency plays a significant role for the nation’s import and exports of raw materials, such as, if the value of the currency falls down then it would make the domestic products cheaper and therefore the exports would be cheaper leading to the benefit of the exporting firms in the country. If the value of the currency raises would make the price of the domestic products increase hence making the exports expensive and would diminish the competitive nature of the firms involved in exports.
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