Application of Economic Analysis for Business - Essay Example

NОMIС АNАLYSIS FОR BUSINЕSS Name University Course Tutor Date ЕСОNОMIС АNАLYSIS FОR BUSINЕSS Area 1 Value added of products is an economic concept attempting to answer the following questions to economists: What is the primary objective of economic activities? What is the t meaning of value added in the context of economic activities? Under what circumstances is an object/item considered to have economic value? Ideally, according to the "value added" economic theory, something is said to have value when its owner is better off than those without. In this case, people might wish to possess that which seems to be of the value of utilize it in the production of something else. Notably, in an immense deal of cases, one ought to give up a valuable thing in order to obtain something else of value. The value of a good or a service is associated with its ability to satisfy needs or its usability to come up with another valuable. The transformation of a real/service (prior to its use) is of the essence for it to be termed as productive. The production of such an excellent/service is subject to the effort, time, capital, and natural resources. This has the implication that for production to take place, there has to be the consumption of valuables. In other words, valuable inputs have to lose value in the course of production alongside machinery's wear and tear. Indeed, in some events, production leads to complete loss of value with the burning of coal being an outstanding example. The theory of value added explains that resources have to be used in order to add the value of a good or service. Most of the organizations that use revenues to enhance their incomes have been recording sharp increases in wages over the years. The Knight Foundation quotes the period between 2011 and 2013 as a significant period in which such organizations recorded sharp increases in income. Article Illustrating Value-added Emergent organizations around the globe are making a tremendous effort to enhance their revenue thus extending their audience. This is because it has emerged that, in the contemporary business world, an individual, entity, or organization has to make use of resources in order to add the value of existing assets. For instance, according to the Knight Foundation, funds by non-profit organizations have been on an increase since the year 2013. In addition, these organizations have exhibited diversification with respect to their means of making money. The funds owned by these groups have thus increased as a result of a great deal of investment done by these organizations. For instance, 23% of the organizations surveyed by the Knight Foundation have been relying on revenues as a means of enhancing their income implying that they are in-line with the value added theory. Source: < http://www.niemanlab.org/2015/04/in-the-world-of-nonprofit-news-different-paths-to-sustainability-for-local-and-state-news-sites/> Area 2 Marginal analysis is believed to be the basis of economic thinking. With respect to marginal analysis understanding, as decision happens in the present with benefits coming with associated costs. According to decision-making psychology, individuals have included the unchangeable past in making future decisions. The marginal analysis attempts to answer the following questions: When is a decision said to have benefits that match the costs incurred in the process of decision-making? What is the meaning of the marginal cost of a decision? Ideally, the theory of marginal analysis entails decision-making processes. According to this theory, the present acts as the platforms of making all decisions, irrespective of the time of making the decision or the duration of making the decision; this has the implication that the time of making the decision was its present in that context. While doing a marginal analysis of a decision, the present is the only that matters. This has the implication that any process of decision-making took place at a time when the past was irreversible and when the future was unknown. The theory of marginal analysis that holds that it was the right time of making the decision and that its benefits could match the costs. This has the implication that an immense deal of uncertainty surrounds such a process of decision-making because there are still doubts about the benefits of such a decision. This theory is applied in Marginal Cost and Marginal Revenue. It holds that a right decision is expected to have greater Marginal Revenue than Marginal Cost, which is: MR>MC. Article illustrating marginal Analysis MacDonald's is an outstanding example of an organization that has been enhancing decision making via marginal analysis. The outlet recently made the announcement that it intends to raise wages alongside providing over 90,000 employees with benefits in US-based outlets. This would offer an outstanding response to the competitive pressure as a result of the global labour market. The decision is based on the analysis of the likely benefits as compared to the cost thus taking the course of Marginal Analysis Theory. In this move, the company intends to make an increase of wages of between $1 and $9.90per hour before the month of July, 2015. The company also announced that it would make an expansion of a program with an objective helping workers both operated by franchisees and those in restaurants. It is expected that this will act as a motivational factor for employees with increased employee output being the benefit of the decision. Source: Area 3 The circular flow of income plays a significant role in bringing an understanding of the relations existing between economic elements. It is a clear indicator of real production factors’ flow in a single direction with the other direction having services/goods. The circular flow of income answers the following questions: What is the meaning of production factors? What is the relationship between product and production factors? Who are the owners and users of production factors? In the course of the interpretation of the circular flow of income, economists ought to begin with production factors. Ideally the production factors under consideration are inclusive of the capital, entrepreneurial talent, labour, and land; all have the purpose of the production of services and goods. According to this theory, such payments as rent, wages, interest, and profit are made in return for production factors' use. In addition, funds designated for consumption ought to be returned to the businesses' revenue stream. There are, however, cases in which producers receive some of the money spent on consumption and fail to use it; it is instead going to financial institutions as savings. Ideally, a comparison between classical models and Keynesian has been provided by the circular flow diagram. According to the Keynesian model, various investment and saving decision result to significant impediments thus preventing closure of the circle. In the case of the classical model, recessions have no significant consequences. The application of the circular flow of income on saving and income holds that the use of GDP can either be in terms of savings or Consumption. This, therefore, leads to an essential equation-Y=C+S. Article illustrating the circular flow of income The month of January, 2014 saw ACWA Power, a Saudi company won a bid that will see it construct a power plant in Dubai with a capacity of 200-megawatt. This solar power plant is expected to produce electricity at a rate of 6 cents/kilowatt-hour. This project highly takes into consideration production factors thus taking the course of circular flow of income which takes one direction. It is expected that the price of electricity produced by this plant will be less than the cost of electricity from coal and natural plants. The production factors in this project are inclusive of technological advances such as photovoltaics with the capability of converting higher sunlight percentages into industrial energy. The costs will be driven down by global economies of scale. There is a thus clear indication that the gross product obtained from any project or business activity is subject to a combination of various production factors. Source: Area 4 The Classical Theory of Business Cycles ideally explains the phases of a business. It attempts to answer the following questions: At what is business performing well or poorly? What are the reasons behind either poor or good performance of a company? Why the recession is not an obvious consequence of business failure? According to this theory, an ideal business is characteristic of four phases. It can be observed that each of the four stages of business leads to its successor as a result of the behaviour of the unemployed, consumers, governments, and businesses. In many cases, the business cycle diagram has exhibited significant misrepresentation. Notably, different business cycles differ in terms of length of respective phases. However, irrespective of the length of a specific phase of the business cycle, it will still be followed by its successor. Therefore, this theory assumes that upturns sooner or later succeed business downturns; the opposite is also true. The lowest point of a business cycle is referred to as the trough and is characterized by the lowest rate of GDP growth, which is indeed negative. This phase of an economy is also characterized by the highest level of unemployment. The trough is always succeeded by the recovery that is an economic upturn. This stage of business cycle always a slow start, but it soon peaks characterized by significant economic improvements. The subsequent stage is the Peak occurring without prior notice. In the course of the summit, economists can realize that a turn down of conditions is imminent. In most cases, the peak lasts for a few months heralding the downwards phase arrival. The fourth phase of a typical economic cycle is the Recession. This stage is characteristic of low pace economic growth; indeed, national output contraction alongside a sharp increase in rates of unemployment. Economists have identified that this phase is always characteristic with different severity degrees frequently accompanied by personal stress. Notably, this step is inevitable in business. Article illustrating The Classical Theory of Business Cycles Irrespective of the volatility of modern-day, the contemporary stock market seems to be on the run past ancient highs. There is, however, the question of the expected duration of this cycle. For instance, in Europe, Greece and Ukraine which have been referred to as European worries seem to have acquired fresh legs? According to FactSet researchers, S&P 500's earnings are expected to decline by 4.9% in the first quarter of 2015. This will have succeeded a peak phase that had seen a gain of 295,000 jobs in February translating to a 5.5% drop in the rate of unemployment. The current decline in earnings is, however, expected to pave the way for recovery. It thus follows that, times of economic boom (characterized by low rates of unemployment) will give way to subsequent times of economic crisis characterized by high rates of unemployment. Source: Area 5 The role of saving has well been elaborated by Kates (2014) and seeks to answer the following questions: What limit of current purchases ought to be less than earnings? What are the other sources of income besides production or sale of goods in the market? What role do reserve resources play on productivity? According to Kates and various other scholars, there is no economic growth in the absence of saving. This is a choice that must be faced by all communities; indeed, communities ought to consider the portion of their resources to be used up in routine activities and the part to be added to the communities' productive capabilities. Notably, the mode of living of a population is subject to its accumulated wealth. This can be illustrated in a number of ways; for instance, making a purchase does not imply that the buyer is paying the producer's wages. Indeed, the manufacturer made payment of the wages prior to the sale of the commodity suggesting that he/made some form of saving. It can, therefore, be said that, since the payment was done prior to the sale of the commodity, payments of wages are done from savings. Lending is an essential component of finance. No one leads from sales of products, but from his/her accumulated wealth. This has the implication that saving has another crucial role in the activity of lending. The overall result of saving in an economy is thus increased productivity considering its role in such activities as manufacturing, payment of wages, and credit. Article Illustrating the Role of Saving According to Adrian Frost, savings have made GlaxoSmithKline an outstanding investment. Frost indicates that savings have holdings of GlaxoSmithKline. The company has consequently recovered immensely following years of underperformance. Considerably, the US had been hit by pricing pressures that making growth quite difficult. The alleviation of this situation greatly owed to enhance stakeholders' participation via the means of savings. The company was able to grow in terms of holdings thus overcoming difficulties created by pricing in the US. Frost observes that after the reduction of shareholders' holding in Centrica, the company recorded a sharp drop in profits further indicating the essence of savings. It is also observed that Imperial Tobacco is the most outsized holding in a fund with an investment of about £225 million. Source: References Kates, S., 2014. Free Market Economics, Second Edition: An Introduction for the General Reader. Cheltenham: Edward Elgar Publishing. Read More