The Economics of Business - Assignment Example

Running Header: Business Economics Student’s Name: Instructor’s Name: Course Code: Date of Submission: Business Economics Question 1-Preamble People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in conspiracy against the public or in some contrivance to raise prices. Examine the argument in favor of a free market system of resource allocation. Free market resource allocation is the process that is applied directly on the existing marketing structures. The structures are mostly governed by the ultimate diverse demand of the products and services in question. Once the demand and supply has been identified in an area, all interested parties have to put effort to ensure that specific goods and services are provided. This determines the prices of the goods and services that are needed and how they should be provided. Free market resources ensure that it is possible for the economy and resources to be controlled and governed by other existing structures other than the state. This creates the free flow of resources from the areas that lack the products and services. The issue of prices of the said goods and services is governed by the existing demand for the resources allocated in an area. In many instances, the market has been infiltrated against all acts of economic fraud and malpractice. This is because many of the involved parties do not take time to improve what the current system of buying and selling has to offer (Hacker 2010). Many used the process of demanding and buying to create avenue of scarcity and hoarding. Once this happened, it was possible to create the avenues for parties to intervene in a greedy practice. They provided this products and services by thriving on the nonexistent shortage to hike price. The fact that the existing demand determines what it needs and what it does not is an added advantage. This is because the general cost of producing goods and services not needed is avoided. It is possible to ensure that the producers of the goods and services are produced at a cost for people who will consume them. This keeps the chain of demand and supply flowing smoothly (Hacker 2010). Through such processes, it is possible to ensure that the wealth that exists in a certain area is distributed equally. This is because the state does regulate or interfere with the processes of buying or selling. The monopolization of prices is governed by an external structure that does not have connection to the government. This ensures that it is possible to create avenues and structures to deal with the trade and business expectations. The external party has the ability to deal with all concerned parties in a non partisan way. This ensures that both suppliers and those that demand goods and services have access to many financial leeways. This is in reference to the aspect of taxation and access to loans and other credit facilities (Ayal 1998). Each country is deemed economically stable once it has the ability to merge economic freedom with the demands by consumers. This is because it is analyzed as a stable institution that has the capacity to stand firm and coordinate all the activities that are entitled in the economic front. The policies that revolve around the economic files are guided by the policies that are formulated at each and every point. Free market resources ensure that all the economic variables are arranged in a way that suits the current economic situation in each and every instance. The private aspects of production also help reduce the aspects of inflation and levels of poverty. This is because the lack of government involvement creates avenues that ensure that the prices of essential goods and services remain as consistent as possible (Ayal 1998). This creates a scenario where the consumers of the goods and services have active chances to get the goods and services that they are demanding for from the market. Free market allocation of resources creates an active avenue for the needs of each and every person in any particular market segment. This is based on the needs and expectations of each of those demanding for the goods and services. If the demand of a good or service is analyzed, all interested parties use this factor to ensure that they meet this demand. The advantages of free market procedure are seen in an active example in Singapore (Ayal 1998). It allows the process to occur at each and every step. In many cases, there is no way that the government interferes with the activities of the foreign MNC’s. This creates an active chance for the MNC’s to be attracted by the situation in the country. Once they are, they invest heavily in the region. This ensures that jobs are created, infrastructure is improved and the foreign leaders and stakeholders understand and relate well with each other. This is one of the best reasons as to why many economies encourage free market economy to thrive (Ayal 1998). 1B Explain how market failure can occur and suggest how the government in a country of your choice has sought to correct those market failures. In many instances, the aspect of free market also aims to ensure that market failure does not occur. Market failure is as a result of the failure of the flow of goods and services from one area to the other. Many times there are very many suppliers who contravene the general flow of goods and services from one area to the next. This creates market failure (Gravelle 2004). The wants and needs of the consumers are not met by the supply of the goods and services from the other area. This creates a situation where it is practically impossible to balance the demand for goods and services and the general processing of supplying. The imbalance created by this forms and creates market failure. Many government and leaderships have created an excuse to interfere with free market by insisting that market failure is being experienced. Many of these governments and leaderships do this with the sole aim of ensuring that they have propagated many of their own interests which have nothing to do with economic balance (Mankiw 2009). Many of them want to alter the goods and services on the market or their overall price. There are very many other reasons and instances that lead to market failure. They include lack of information balance. Each and every market is governed by the need to ensure that the information that they get equates to the economic situation on the ground. If suppliers get the wrong information, they may produce and supply either inadequate or surplus products. Once this is done, it is impossible to attain equilibrium (Weimer 2004). This is because the consumers will have limited goods to buy. This will create avenues for price hikes to cater for the additional consumers or to limit demand. In the case of surplus production, the consumers are going to buy all that they need and leave the supplier with the rest. Once this is done, it will be impossible for the supplier to create avenues where the entire production that was produced for specific clients to be consumed. This is the situation where the supply overrides the overall demand. The supplier incurs huge losses and the general cost of production is ultimately not met (Mankiw 2002). The supply and demand chain and the benefits that accrue from it are not met as this results in market failure. All markets aim for a competitive edge. This competition creates an avenue for economic efficiency of all the involved parties. Economic efficiency ensures that it is possible to have the right systems in place to deal with each and every economic situation. The aspect of lacking or non competitive markets creates market failure. Competition between markets ensures that goods and services produced by suppliers ensure the best possible deal for the consumer (Mankiw 2009). This is despite the fact that there are very many other suppliers of the same goods and services. Competition ensures that once the goods and services have been produced, each and very person who takes part in what the market has to offer has a choice. This ensures that they have the choice to make in each and every situation. If there is no competition in a market, it means that the prices of goods and services in the market will remain the same from all suppliers (Gravelle 2004). In such instances, the price will definitely be high and unattainable for the consumers of the specific goods and services on offer. This is also another situation that ultimately leads to market failure. There are very many external factors that lead to the emergent problem of market failure. The general cost of production of any good or service is felt when the goods and services are produced at a certain average cost. This creates an opportunity for the producer to sell the goods and services produced at an average cost. This cost will cover the overall cost of production and some profit from the sale of the goods and services. There are very many external aspects that lead to the ultimate collapse of the average cost of production and consumption. If the cost of production is high because of certain reasons, the prices produced to the consumers will also be high. This is in the sense that the cost of production will have to be shouldered by the consumers. The aspects of labour cost of production materials and the current economic situation will definitely affect the prices of the goods and services. In general, acceptance of these goods by the consumers will also be affected. This will determine whether they will consume the goods and services or not. In Africa, there is a country known as Kenya. This will be the perfect example to show how market failure occurs. Petrol and fuel is a very rare commodity in the country. The aspect of the country being third world does not make matters easier in the development of goods and services. Fuel is a major commodity in the production of many goods and services creation. The shortage of fuel creates a scenario where the ultimate cost of production shoots up exponentially (Gravelle 2004). The shooting up of fuel prices affects each and every aspect of production. This ultimately affects the price of consumption. The levels of inflation and the aspect of the poverty line have been increased dramatically as a negative impact of the overall high price of fuel. Many of the goods and services in many shops and malls are so high that majority of the citizens in the area cannot afford to access and enjoy basic commodities. The economic situation in this area is unbearable as a result of the tough times that are experienced in this area. The government and all the economic infrastructures are at a loss on how to regulate the price of fuel. This is because once this is achieved, the aspects of market failure will be reduced and the general cost of production of many goods and services will be regulated. This will lead to the production of goods and services that the consumer can afford. Once the goods and services have been consumed, the supplier will have the active chance of producing and supplying more goods and services. This will create active mechanisms that will reduce or reverse the market failure currently experienced (Gravelle 2004). Question 2 Preamble The problems in the global banking system have affected most major economies of the world. In response governments have introduced monetary and fiscal policies to try to improve the situation. With reference to a country of your choice examine how the government of that country has adjusted its monetary and fiscal policy in response to the world downturn. Explain reasoning behind these adjustments. Monetary policy has the sole aim of ensuring that the economy of each and every country is stable. It is heavily involved in the aspects of regulation and the specific supply of money from one source to another. The body tasked with monetary authority does this with the aim of ensuring that all the monetary allocations have a specific interest rate. The rate is to be used in several areas in the economy. This is to avoid the high rates of unemployment and inflation. Monetary policies have the general purpose of ensuring that it is either easy for interested parties to borrow from banks or the supply of the amount in the economy is expanded (Taylor 2009). The aspect of borrowing is made easier as a result of the fact that the interest rates in the banks are very limited. This has the sole aim of encouraging all the interested borrowers in ensuring that they have the capacity to borrow from existing lending institutions. This includes banks and other financial institutions (Taylor 2009) Once they have borrowed from the banks and those other financial institutions, they will have an active chance at injecting the investment into the economy. This will create a somewhat stable environment for the investors and the overall economy to reverse the negative effects that are being experienced. It should be noted that there are very many differences between the monetary and fiscal policies created at each and every point. Monetary policies deal with the regulation of government spending and expenditure. This is to ensure that the money is injected in other areas of the suffering economy. They are also solely tasked with ensuring that it is possible to come up with policies that limit the high interest rates experienced during borrowing (Heyne 2002). Fiscal policies in all instances attribute their policies on the stipulated government budget to reverse certain financial aspects. It also deals with aspects of overall taxation where all interested parties have a duty to ensure that they pay their taxes to sustain the economy. The aspect of borrowing is also felt as a result of the economic hit being felt at each and every point. This can be from economies that have the ability to ensure that they can offer some form of lending (Larch 2009). World down turn can be described as economic instability that is being experienced in many areas all other parts of the world. The general cost of production is very high and it affects the overall prices of goods and services bought and sold in many regions all over the world. This creates a situation where all the parties involved in the channel of production to ultimate consumption are affected by the high prices. This translates to a stagnant economy that ensures that market failure is experienced in many regions. In the USA there is a special institution that represents the central formation and execution of monetary and fiscal policies. The Federal Reserve System (FDS) in the US has this mandate. The monetary policies in the US have been changed to ensure that they adequately deal with world down turn (Heyne 2002). The system has created avenues that form very stringent monetary policies. The policies create an avenue for the market operations to be free at each and every point. This ensures that the quantity of the products and services that are needed are controlled by a private identity who may not be interested in gaining any profits. This creates a scenario where it is possible to attain the required goods and services in the most manageable price. The FDS has mechanisms that ensure that they have managed the flow of money in the economy. This is through the in depth analysis of currency circulation and the coordination of all the activities that revolve around the currency. The US financial process also has policies and measures that deal with specific exchange rate of different countries differently. This targets the foreign countries that trade with the region in one way or other. The main reason as to why this is the case is because of the profits that are aimed at when formulating the policies. This has created policies that make it possible to deal with the world down turn that is experienced in each country. The fiscal policies in the US were greatly affected during the war on terror and the period of recession (Heakal 2010). As a result of the lessons learnt from this period, the government has ensured that it has cut back on the spending. The government expenditure is regulated in such a way that many of the spending is followed through a carefully analyzed and planned budget. The budget takes time to analyze what the economy needs and what it can handle. This creates a scenario where the US government only spends what it has. This is one strategy that has worked in its favor for very many years. This is as compared to many other countries that spend a lot of money that they do not have (Larch 2009). This is where massive borrowing and inadequate structures to pay back come into effect. These changes ensure that it is possible for the country to stay afloat financially as compared to many others that are struggling. 2C Indicate the problems which are created for the government’s finances as a result of it seeking to avoid an even deeper recession. What solution might you recommend?  There are very many methods that have been taken in dealing with recession. The aspects of recession have ensured that the governments take time to increase their overall spending. This is because there is the general aim of ensuring that it is possible to reverse the harsh effects of recession. The decreasing effect of taxation has also ensured that there are mechanisms that deal with the effects of recession. This is because all the parties that live in the area are adversely affected by the harsh economic overturns of the recession (Cohen 2008). Their economic ability is greatly hampered and the high cost of taxes generally chokes their ability to pay taxes. Many governments ensure that they reduce the taxes paid to them for people to have the capacity to cater for the goods and services needed at each and every point in the economy. Many other governments ensure that they have taken into consideration the current supply of money in the economy. Once they have, they then increase the money supply in relation to the needs felt. Economists argue that this procedure does not help much. This is because money supply can be increased but there are no products to be consumed (Cohen 2008). This creates the scenario where the money does not contribute in any way to the growth and productivity in the country. The effects of recession can be dealt with in any other way. The best possible way of dealing with recession is by increasing government expenditure and the ultimate regulation of the processes of goods and services (Gaffen 2008). The allocation of a free market will also ensure that it is possible to deal with all aspects of recession. References Ayal, EB, Karras, G, 1998, Components of Economic Freedom and Growth, Journal of Developing Areas, Vol.32, No.3, spring 1998, 327–338, Western Illinois University, Illinois. Boettke, PJ What Went Wrong with Economics? Critical Review Vol. 11, No. 1, P. 35. p. 58 Cohen, D 2008, Recession stock picks, Free Press, New York. Gaffen, D 2008, Recession puts halfway rule to the test, Cambridge University Press, Cambridge.  Gravelle, H, Rees R 2004, Microeconomics, Essex, England: Prentice Hall. Hacker, JS, Pierson, P, 2010, Winner-Take-All Politics: How Washington Made the Rich Richer- -and Turned Its Back on the Middle Class. Simon & Schuster, New York. Heakal, R 2010 What is Fiscal Policy, Free Press, New York. Heyne, PT, Boettke, PJ, & Prychitko, DL 2002, The Economic Way of Thinking, Prentice Hall Atlanta. 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