Business Economics - Report Example

Business Economics Table of Contents Business Economics Table of Contents 2 Question Bonus tax 3 Question 2 - Markets, growth and sustainability 4 Question 3 - Monopoly versus competition 5 Question 4 - Playing games 6 Bibliography 6 Question 1 - Bonus tax The implementation of bonus is going to increase the aggregate demand condition in the market as has been described in the adjoining diagram. With the introduction of bankers’ bonus, the aggregate demand curve tends to shift rightwards and the equilibrium position will rise from point C to A. given that the supply schedule remains unchanged and full employment output is not reached, there will be a rise in both the equilibrium price and quantity. However, as soon as a bonus tax of 50% is imposed, there will be a slight reduction in the aggregate demand situation in the society, since there will be some individuals whose total bonus amount might fall on account of the tax and so there will be a fall in demand on their part. But, the aggregate demand will, undoubtedly remain more than the original demand situation and that is why, the final equilibrium position will be at B. it is found that, B is located at a lower position than A, i.e., prior to the introduction of tax, but at a higher position than C, i.e., the original demand situation. Question 2 - Markets, growth and sustainability The free market system is one of the most vital of all discoveries made by the advocates of economics and is often considered as the secret mantra behind the fast pace of global development. In free market economics, the equilibrium price and quantity are determined by the market demand and supply schedules, rather than due to any explicit government policy. This has facilitated the possibilities of widespread transactions across international borders, where the basis of trade is the specialisation that one economy has over others, in the production of any particular commodity or service. The range of trade going on across international premises has helped in accelerating the growth rates across nations as well as improving on the general standard of various social welfare indices. However, one loophole in the system is that, in the absence of any restrictive forces, the uncontrollable rate of trade might lead to a declining stock of many exhaustible resources that can affect the world at a later stage. In order to prevent such an alarming consequence, there must be some minimum degree of government intervention into the system. The domestic administration must impose tariffs on the transaction of commodities that need the utilisation of scarce resources, across national boundaries. Implementation of these constraints need not restrict the relative growth rates or lower the social index values of the nations, given that almost all nations around the world would be subjected to a similar situation as meanwhile the world had got accustomed to the advantages of specialisation and thus have started relying on the resource-abundant nation. Question 3 - Monopoly versus competition Theoretically speaking, the concepts of economies of scale and perfect competition do not correspond to each other. Economies of scale can arise in cases of increasing returns, i.e., when there are chances of reduction in per unit production costs with rise in the production capacity. On the other hand, in cases of perfect competition, there is a constant return to scale, since the chances of an abnormal profit (as in the case of IRS) will attract many outsiders into the market given that there are no barriers to entry and hence CRS will settle down once again. Moreover, competition helps to keep the urge towards improvisation alive and also discourages any exploitative activities of the sellers. However, most people argue about economies of scale and demand for mergers that might threaten the efficiency of the firms. In order to prevent the possibilities of monopolies as well as take advantage of the benefits of scale, the sellers prefer to create barriers to entry in the market, so that the operation in the market remains restricted to a few players. Each of these players will have a good proportion of the market share with them, so that each of them might as well take advantage of benefits of scale. At the same time, the competition will remain high among the participants, since each of them will have substantial power to influence the market – thus the threat towards a lack of efficiency could be dealt with easily. This type of market is known as an oligopoly. In the real world too, this is the type of market structure that actually exists. Question 4 - Playing games The competition among firms is more like a zero-sum game. Despite the companies trying to advertise the fact that there are slight distinctions between each and every brand products in any industry, it is widely known among customers that these differences are nothing but apparent in nature and basically it is only the brand names that the distinctions are all about. Once the customers have an access to the underlying information, they prefer to purchase those commodities that have a good popularity among the mass or are able to serve their purpose more suitably. This sort of activity might hamper the business of many less efficient firms since the capacity of the market is limited. Hence, with the success of one brand, a rival brand is bound to suffer as there is a loss in the proportion of market capture. The better brand which is able to win over the consumers’ heart will have a greater market share than its rivals. Thus, it is quite evident that the success of one brand is likely to disturb the growth process of another rival in the business, which is why it might be compared with a zero-sum game. A point that might be noted here is that, there are some people who prefer to stay loyal to a particular brand, despite the availability of far better products in the market. However, if the activities of the society as a whole are considered, the above deduction is correct. Bibliography Samuelson, N. (2005) Economics (18th Edition) New York: McGraw-Hill. Read More