Economics for Business and Management - Assignment Example

?Economics for Business and Management Table of contents Part A 3 Answer to Question 3 Answer to Question 2 4 Answer to Question 3 5 Part B 8 Answer to Question 3 8 References 12 Bibliography 12 Part A Answer to Question 1 A good investment climate is the defined as one which improves the socio-economic situation as a whole in the sense that not only the producers experience an increased profit margin, the buyers too are benefited out of a lowered price and efficient distribution. Such elements are bound to be reflected through an enhancement in the output being generated but also through an improved rate of employment and reduced rate of poverty. Market system is often regarded as the best mechanism for assuring a society about a good investment climate through an efficient allocation of scarce resources in a society. Market forces generally are not controlled by any external forces and depend entirely upon the buying and selling traits of the producers and consumers. Scarce goods are associated with an inelastic supply so that a slight change in demand could result to a huge change in the price of the commodity. Moreover, their break-even price is set at a high level which automatically makes adjustments at the consumer base. Usually, scarce resources are found to be the ones associated with a high amount of demand which is why it is wrongful to bar buyers from consuming the same. In many cases the consumers are found to be prepared for paying a high price for acquiring a marginal amount of the commodity. If the distribution of such commodities are rationed and controlled by some external factor, the society is unlikely of reaching the optimum level of efficiency. In fact, in order to restore efficiency in market mechanisms, it is highly essential to incorporate competition in the field. The greater the competition is, higher will be the propensity among sellers to deduce ways through which they might be able to distribute a particular good at reasonable rates (Buigues & Rey, 2004, p. 183). However, maintaining such a stance in case of a scarce good might turn out to be detrimental for the society in the long run if the commodity is exhaustible in nature. Hence, some amount of restriction must be present to specify the level of price floor, which automatically curtails the aggregate market demand. On the other hand, if the commodity in question is not an exhaustible one, i.e., gets replenished over time, then an unrestricted market mechanism could be regarded as the best option to instil efficiency and eventually, a good investment climate in the economy. Scarcity of a good often leads to innovation and greater productivity in order to invent substitute commodities of the said item. A successful innovation is thus, often triggered by excess demand in the market. The substitute commodity is quite often associated with a lower price level so that even the poorer consumers are able to afford the same. Furthermore, the scarce good is deployed as little as possible which drives its supply schedule leftwards thus lowering the equilibrium market price. An effective innovation is likely to rouse demands which could be beneficial for the economy. Higher the prospects of innovation and productivity is, better are the employment prospects and thus, of output generation. Answer to Question 2 Although efficient allocation of resources could be accomplished best through the introduction of market system in the society, there are some exceptions where government intervention could turn out to be beneficial for the society as a whole. In situations where the commodity in question is a scarce good, it being exposed to market forces might lead to excessive deployment of the same. If the good is an exhaustible one like fossil fuels, the ultimate consequence could turn out to be quite damaging. Even if the commodity is inexhaustible in nature, too much use of the same could lead to exigent situations when the good is unavailable. In such situations, it is necessary for the government body to intervene in market operations and introduce rationing. Rationing implies a situation where a limited volume of a scarce good is made available for consumption so as to retain a regular supply of the same over time. On the other hand, even if the system of rationing is not applied, an administrative body can take care of the situation through imposing price floors so that the supply price could not be legally pulled down below a certain limit for the sake of attracting higher demand. Apart from imposing restriction upon excessive employment of scarce resources, it is important to restrain the production of commodities which could hamper the environment or production of other goods. Many-a-times government bodies are found to impose taxes upon the operational activities of certain factories involved in the production of certain goods. In most of the cases, production of those goods is associated with the emission of harmful by-products which might not be bio-degradable in nature, and thus hamper the smooth operation of other factories located nearby. Imposing taxes on the production of such goods could discourage them from getting involved in excessive manufacture. In many situations, the government is also found to be extracting license fees from potential manufacturers as the cost of entering a particular market. Such costs are necessary to ensure that the particular industry contains a limited number of players, which is essential to prevent certain harmful consequences. For example, in many nations, entities willing to enter the transportation business need to bear a certain amount of license fees which the government of the respective nation extracts out of them. The primary purpose of introducing such entry fees is that the higher the number of transportation vehicles in a nation, greater will be the problem of traffic congestion and environmental pollution (caused through the emission of harmful gases). Furthermore, an untrained driver could cause accidents frequently which are unwanted in a society. Through licensing the government of any nation assures the safety of citizens and also makes compensation for the environmental damage it is likely to make. Answer to Question 3 Government intervention is essential in some fields to assure a smooth running of the particular sector. In many situations it is found that the initial cost of carrying out a particular production activity is so high that manufacturers are discouraged from getting involved in the same, even though it turns out to be profitable for the society. If the absolute cost of production is not high, the relative cost seems to be high enough to compel producers from opting to produce the more profitable item. Thus, the ultimate outcome is that the profitable commodity is produced and supplied in excess of what its demand is, thus pulling down the price of the same. Such cases could result to multiple impacts upon the society. Not only does the profit margin for producers fall, the society also suffers from an imbalanced production. Hence in such cases, the national government of the concerned nation enters the scenario and grants subsidies to producers in order to encourage them towards producing the less profitable product. In United Kingdom, the national government in a similar way grants agricultural subsidies to the farmers under the Common Agricultural Policy (CAP) Act. According to the policy, agricultural plots located in four major counties comprising United Kingdom are covered by a single agricultural policy framework. The prime objective behind the measure adopted by the national government is to promote agricultural activities in these regions. Producers in these regions are more inclined towards the production of manufactured items which fetch high prices in the market and are also demanded beyond domestic frontiers. However, such a standpoint could not be profitable in the long run as the people of UK have to depend upon other nations for importing agricultural and farm products to their nation. This is the reason why the national government of UK has desperately been striving to promote agriculture throughout the nation. The table shows the amount of expenditure that the national government had been incurring, to prop up various segments of farm and agricultural production. It clearly points out that the government had actively participated in the program since its initiation during 2000. However, its contribution has receded substantially in some aspects while has consistently increased in some. For instance, the volume of subsidisation has significantly increased in the field of agro-environmental factors and has stayed constant in respect of ‘Least Favoured Areas’ subsidy. However, the volume expended as agricultural subsidies has been reduced in a number of areas such as, cattle, sheep, livestock, crop, etc. In some other cases like that for ‘Beans subsidies’, the amount is found to have been increased in the midway but gradually have receded with time (UK Agriculture, 2010, ‘Statistics for Agricultural Subsidies’). Such adjustments had been made as the national government grew more and more seasoned with the agricultural situation in the economy and demarcated the areas which need to be paid a greater degree of attention. Part B Answer to Question 3 Monopoly power prevalent in a nation could turn out to be beneficial as well as harmful for the society depending upon the commodity in question as well as the nature of the monopolist. In the cases of scarce resources, empowering a single seller for the market supply of the particular commodity could turn out to be beneficial for the society. Such a system could actually reduce the consumption of the commodity beyond a certain extent and also prevent possibilities of price competition leading to excessive expenditure of the good. For instance, the production and supply of oil is the responsibility of a single entity called OPEC which also determines the price at which it is willing to supply the same. If the responsibility is entrusted to more than one entity, it could lead to the problem of price competition which ultimately might result to an excessive deployment of the exhaustible fossil fuel. Secondly, there are possibilities that monopoly business turns out to be more efficient than competition. Many a time, producing on a large scale is likely to produce economies of scale which actually reduces the average cost of production. Such a possibility might not arise in case of a perfectly competitive market environment where most of the producers are responsible for producing a small amount as each of them serve only a small fragment of the total population. Hence, in such cases, monopoly business turns out to be a better choice for the society. This is because, as a monopolist is responsible for serving the needs of a hue population, he is likely to produce on a large scale. Thirdly, the monopolists might also be the only option viable to the society as is the case for natural monopolies. In case of natural monopolies, the entry cost being incurred is found to be the very high which is why it might not be feasible for most of the competitors to enter the market post the entry of the first mover. The first mover usually enjoys some cost advantages in the beginning which the latter entrants might not enjoy which is why it turns out infeasible for most of them. In such cases, a competitive strategy could push up the average cost of production which is reflected in the form of a hiked final price. Hence, the consumers are the sufferers in those cases and ultimately the society might not enjoy the benefits of a reduced price (Mankiw, 2008, p. 314). Fourthly, many times when the national government enters into a monopoly, it turns out to be beneficial for the society given that they charge a reasonable rate from the consumers. In such cases, if the market is left open for competitors, the ultimate outcome could be an increased price. Lastly, many a times, opening up a market for competition could lead to a fall in the quality of goods as each of the economic units strive to earn a greater share of the market through reducing their prices and compromising on the quality of the product in question. This is the reason why some people tend to support monopolists over competitors (Ferrera, 2005, p. 79). On the other hand, in cases when the commodity in question is neither scarce nor exhaustible in nature, a monopoly could curtail the consumption of the commodity. For instance, if the consumption of any good is rationed through a high break-even level of price, most of the people cannot afford to purchase the good. Their production could also be increased if potential entrants had not been warded off artificially. In such cases, neither the social level of consumption and nor production reaches the optimum level of efficiency. Secondly, in cases, when there is room for innovation and technological enhancement in production, a monopolist might not be instigated in investing in ample amount of research and development, due to lack of competitors. Innovative activities could actually lead to betterment in quality of the produce as well as a reduction in the final price of a commodity. But lack of such activities could create stagnation which is why many researchers are against monopoly practices. In addition, many a time, the production of a particular commodity is often associated with the emission of various by products which could prove harmful for the society as a whole from an environmental perspective as well as one that hampers the production of other commodities. In cases of monopolies, such situations go unwarranted for as there is no competitor for the producer and he is not driven by an initiative to alleviate the problem. However, such cases could be tackled with the entry of competitors who try to be more environments friendly and thus attract more number of buyers. Hence, a monopolist is often found to be not much consumer friendly as the players in a competitive market are. Lastly, monopoly activities could lead to a shortage of employment opportunities which might turn out to be detrimental for the society and the economy as a whole. Furthermore, with lowered chances of participating in production activities, many producers might feel deprived which could actually lead to a negative business environment. Hence, optimum level of social efficiency is not reached which is why the system finds many opponents as well. In most of the cases, governing bodies are found to impose anti-trust laws in order to curb monopoly practices. These anti-trust laws, commonly known as Competition Laws, try to promote competitive environment in a market. Telecommunications in USA is an industry which is highly characterised by monopoly powers. The national government however, imposed anti-trust laws against the monopoly player to prevent it from charging high prices for telecommunication services which is often counted as one of the most important of all services in the nation. The industry previously had been ruled by the monopoly giant Telestra. However, the national government had been concerned of the problems being faced by the nationals on account of such a market strategy. Thus, the national government intervened at the time when the company had been deciding to roll out its plans for initiating broadband services in the nation. it had been conscious of the company’s intentions of charging unaffordable rates from the subscribers. Thus, the national government entered into a deal with the company worth, US$ 11 billion which granted it with some shares of the company and an automatic say over the proceedings of the latter. The national government had initially opted to tax the company heftily for its strategies. But opted out of the same as such a step could actually be reflected in the form of a hiked final price of broadband service. Such a step can not only assure the subscribers of a cheaper service but a better one as well. It is only due to government intervention that they could be assured of a strict monitoring upon the proceedings of the company. Not only will the government restrain from charging a high price of the service but also it will not allow the company to compromise with the quality of the same. the national government not only had solved the problem of potential subscribers, but also of the shareholders of Telestra who claim to have been exploited by the whims of the management through poor pay of dividends and retaining a large proportion of total income. On the other hand, there is absolutely no way that the national government can allow the entry of new players into the field given that the initial cost of operation is quite high in this arena and allowing more number of players in the field is likely to invite a price competition in the sector. Price competition is something which is absolutely unwanted given that it could have very damaging results upon the economy through social disadvantages being faced by the producers of the service (Hoy, 2011, ‘Broadband battle continues’). The measures being undertaken by the national government of USA has actually influenced many other nations towards initiating such a step as well in order to provide their residents with a better and a cheaper broadband service. Nations such as Australia and United Kingdom are soon coming up with equivalent strategies to curb the problem of monopoly. References Buigues, P. & Rey, P. (2004). The economics of antitrust and regulation in telecommunications: Perspectives for the new European regulatory framework. London, UK: Edward Elgar. Ferrera, M. (2005). The boundaries of welfare: European integration and the new spatial politics of social protection. London, UK: OUP. Hoy, G. (February 10, 2011). ‘Broadband battle continues’. ABC News. Available at http://www.abc.net.au/7.30/content/2011/s3135732.htm (Accessed: February 12, 2011). Mankiw, N. G. (2008). Principles of Economics. USA: Cengage. UK Agriculture. (2010). ‘Statistics for Agricultural Subsidies’. Available at http://www.ukagriculture.com/farming_today/bg_support_changes.cfm (Accessed: February 12, 2011). Bibliography Borodina, S. & Shvyrkov, O. (2010). Investing in BRIC Countries: Evaluating Risk and Governance in Brazil, Russia, India, and China. New York: McGraw-Hill. Dinnie, K. (2008). Nation branding: concepts, issues, practice. London: UK: Butterworth-Heinnemann. Mankiw, N. G. (2003) Macroeconomics (5th Edition) New York, USA: Worth Publishers. Schmidt, V. A. (November 2003). Post-war varieties of capitalism. French capitalism transformed, yet still a third variety of capitalism. Economy and Society Volume 32 Number 4. Routledge Taylor and Francis Group. Read More