Economics for Business - Individual Portfolio - Case Study Example

? Question A) Calculate average and marginal cost, average and marginal revenue (Fundamentalfinance). Sales Volume Total Costs Total revenues Marginal Cost Avg. Cost Marginal Revenue Avg. Revenue 0 1 0 0 1 0 0 1 13 27 13 13 27 27 2 24 53 11 12 26 26.5 3 33 78 9 11 25 26 4 40 102 7 10 24 25.5 5 50 125 10 10 23 25 6 66 147 16 11 22 24.5 7 84 168 18 12 21 24 8 104 188 20 13 20 23.5 9 126 207 22 14 19 23 10 150 225 24 15 18 22.5 B) In the preceding graph which plots the average costs and revenue with the marginal cost and revenue for each successive unit of output, the point in which profit is maximized is at an output of eight units (Varian, 2003) C) How much profit is being made at this combination of price and output? There are two methods of determining where a company’s profit is maximized: 1) One method is to calculate the maximum total profit by subtracting Total Costs from Total Revenues for each level of unit output in order to determine at what level of production maximum profit occurs. 2) The second method of determining at what unit output the company maximizes its profit by calculating the marginal costs and marginal revenue for each additional unit of output. The maximum profit level is achieved when marginal costs equal marginal revenue (Cliffnotes, 2011). As shown in the following example- Maximum profit output occurs at an output of eight units, which earns the maximum level of total profit of $84. $188 - $104 = $84 (Total revenues-Total costs = Total Profit) D) Giving your reasons what sort of market structure do you believe this firm is operating in? By examining their profit structure we have determined the maximum profit level for this firm occurs at the point where the marginal revenue equals marginal cost. There are two possible market structures that fit the characteristics of this company. The first option is that the company is part of a perfectly competitive market structure. This market structure is characterized by a homogeneous mix of market participants where no company is powerful enough to set or control the price of a specific homogeneous product or service. Since in the real world the first option is highly unlikely, the second market structure is called a monopoly (Sparknotes, 2011). A monopolistic market structure implies that only one company or firm can produce or provide a specific product or service and that no real competition for market share exists in its market of choice. Question 2 A) What economic factors appear to have contributed the most recent (2008/09) recession in the UK economy? The 2008-2009 UK recession often referred by many individuals as the ”Global Recession” was instrumental in destabilizing the world economy as well as in the United Kingdom. This recession was the direct cause for the failure of many large financial institutions, banks and investment firms in the UK as well as a major downfall in all the major stock markets around the world. Additionally caused the government to institute controversial financial easing measures such as the government bank and financial institution bailouts which have cost taxpayers in the UK about 850 billion pounds (Wordpress, 2011). There were a number of reasons or causes that caused the global recession of 2008.The main driving factors for the financial crisis were: The “Housing Bubble”- Credit standards for house mortgages plummeted to never before seen standards. By the mid 2000’s almost anybody could get a mortgage for no money down, without proof of income, assets or credit rating. In this sub-standard mortgages there was no way of ensuring the individuals taking out this huge mortgages could to really be able to pay their liability. Typically this type of mortgage came with an adjustable interest rate, where the customer would be offered an extremely low introductory rate and then after two years the interest would be adjusted to a much higher interest rate. Since the housing market was really strong at the time with ever increasing equity prices, many individuals that were ill equipped financially started speculating in the housing market. The mortgage companies did not really care whether individuals could really pay their loans since they would bundle and sell these mortgages almost immediately in the open markets. Their troubled and ill-conceived strategy worked fine until the housing prices collapsed and individuals could not flip the houses they mortgaged so a wave of mortgage defaults was the direct effect of the economic downturn. The Banks- Financial lending institutions, mainly commercial banks were the ones financing the sub-standard mortgages through a financial scheme where all these mortgages were bundled together and converted into mortgage backed securities that individuals could invest in. Additionally many of these assets were recorded at artificially inflated prices created by the artificial markets they created. Since there had never been a nationwide epidemic of mortgage defaults, the banks were not prepared for the economic explosion about to occur and directly caused by deregulation and their own irresponsible lending practices. With the repeal of the “Glass-Steagal” Act in 1999,which effectively removed the rules and limitations regarding the level of investment risks and type of investments a bank could invest in the separation between depository banks and Wall Street type investments was effectively eliminated. Another factor was the high degree of financial leverage these institutions were exposing themselves in their day to day operations, with many institutions surpassing the 30 to 1 ratio of liquid assets versus total .liabilities. Rating companies and AIG Insurance- Financial instrument rating agencies such as Moody’s and Standard and Poor’s were the parties responsible for grading all financial securities from its highest investment grade to junk securities. Their role in the financial collapse is irrefutable since many of these junk securities were graded blindly classified as an investment grade yet were really highly risky sub-prime mortgages which would qualify as junk status. Trillions of pounds of these nefarious mortgage backed securities were sold in the global open markets as investment grade securities. An untold number of private as well as governmental pension funds invested in this type of securities under the impression that these were safe investments. Millions of individuals as well as corporations lost all or most of their investments in the financial downfall. AIG insurance was the company responsible for insuring these types of bonds. Their job was to protect bondholders of these mortgage –backed securities in case of default. When the market collapsed and AIG could not meet the number of claims the company went into bankruptcy, therefore leaving all the investors on their own to absorb the losses. B) How does the most recent recession compare to the two previous recessions? The causes for the recessions of 1979-81 and from 1990-91 in the UK were not the same as this latest financial downturn. For the 1979-81 UK recession changes in the economic structure of the UK and the deindustrialization of the country caused the recession. The proportion of individuals employed in the production of goods or manufacturing declines. Basically it signifies an internal economic structural change of a company where employment starts to deviate from a manufacturing based economy towards a more service based one. The 1990-91 recession had its roots closer to the causes of the current financial downturn. The junk bond market and its eventual collapse and the savings and loan scandal were the main drivers of the 1990-91 recession (Blacksacademy, 2003).The corruption of the financial markets and illegal unscrupulous practices of certain financial institutions were responsible for that recession. The stock markets were negatively affected although it was short lived. The negative impact was felt in the markets for over 7 months until April of 1991when the recession ended (Factoidz, 2011). C) What are the factors that are mainly responsible for the recent recovery of the UK economy? There are three main factors that have contributed to the recovery of the economy in the UK: A gradual recovery in the level of consumer confidence and its impact on overall economic growth. There has been a slow and gradual recovery of the financial stock market since the recession. Businesses also are starting to ramp up production and expansion plans. The growth in Asia and other emerging markets has been fueling economic growth in the UK and the rest of the world. By providing an inexpensive source of raw materials, cheap labor and the necessary infrastructure, the Asian market continues to grow and provide investment opportunities for the UK industrial base. The continued commitment of the government of these countries to provide foreign investment incentives and build a market based economy has helped fuel the recession recovery efforts in the UK. D) Comment on the strength of recovery from the most recent recession. The strength of the recent recovery will depend largely on the extent that consumer and business confidence maintains a positive outlook. Other factors affecting the recovery is how the financial institutions that caused this problem will be reorganized, regulated and what additional measures need to be implemented in order to eliminate the possibility of this type of financial downturn of occurring again (Sentance, 2010). The easing of government financial help needs to be implemented in order to eliminate the unnecessary public expenditures of public taxes. Question 3 A) The benefits of trade and demonstrate the principle of comparative advantage Free trade policies in general benefit the economies of the world as whole since they help: Create a level of open competition which leads to better more cost effective production methods through constant innovation and technological advances. It leads to increased consumer spending, better jobs for the parties involved, and a n increased level of consumer choice at increasingly lower consumer prices and increased standard of living (Fronning, 2000). The principle of comparative advantage entails that countries posses certain attributes that make them more suitable for the production of certain types of products. In this scenario if two countries trade different products which both build under comparative advantage, both countries will benefit mutually since they can purchase the other product cheaper that what they can produce it. B) Hong Kong China Germany Spain Canada Trade in Goods -3,928 -18,907 -15,386 -76 -1,199 Trade in Services 827 1,255 1,864 41 1,346 All the countries suffered a similar fate to the UK as far as their balance of trade of goods and services. The countries most affected overall compared in its trade goods balance compared with the UK, China, and Germany. China is known for the world manufacturer of general goods and products, where Germany is known for their high technology industrial and transportation sector. This is evident since both of these countries have become highly industrialized and are manufacturing hubs in their respective specialties and are dependent on the global demand of the products they export. References Blacksacademy.biz (2003). Factor Immobility. [Accessed 2 December 2011]. Cliffnotes.com (2011). Profit Maximization. [Accessed 4 December 2011]. Factoidz.com (2011). What Caused the Great Recession of 2008-2009? [Accessed 2 December 2011]. Froning, D. (2000). The Benefits of Free Trade: A Guide of Policymakers. < http://www.heritage.org/research/reports/2000/08/the-benefits-of-free-trade-a-guide-for-policymakers> [Accessed 3 December 2011]. Fundamentalfinance.com. Marginal Cost (MC) & Average Total Cost (ATC). [Accessed 3 December 2011]. Sentance, A. (2010). Andrew Sentence: Prospects for Global Economic Recovery. [Accessed 4 December 2011]. Sparknotes.com (2011). Monopolies and Oligopolies. [Accessed 4 December 2011]. Varian, R. (2003). Intermediate Microeconomics: A Modern Approach (6th ed.). New York: W.W. Norton & Company. Wordpress.com (2011). UK Bank Bail Out = 93.5% of UK National Debt. [Accessed 4 December 2011]. Read More