Employment, Inflation and National Debt - Coursework Example

Macro and micro economics Employment In the current work force, most baby boomers are headed for retirement, and arebeing replaced by the Generation Xs and mostly Generation Y who are tech savvy and have cultural diversity. There is a rapid technological growth in the world today, and despite fears that most companies adapt development technologies from overseas, the rapid advance of ideas and the demand for constant upgrades assures technology professionals of job security in the next five years. Other professionals will find themselves locked into an arms race with their competitors, and companies will have to provide their teams with the best equipment or face serious defeat. The advancements in medicine will reduce the population of potential employers lost through disease, and increased child care cost will force most employees to find ways of bettering their wages, either through job hoping, or making themselves marketable. Workers will telecommute; enabling them to use time spent commuting into productive work. The choices available for reemployment will be endless due to new, upcoming jobs including computer programmer, day care provider, environmental engineer, and elder specialist. People will be working during the weekends, in the evenings and on holidays (Roger Backhouse).  Inflation Inflation is expected to increase in the next five years, because the rising prices of commodities is not lasting a short time. Prospects of currency shifts and high commodity prices will cause the inflation to increase. In my view, the current market imbalances will continue keeping commodity prices rising in the next five years, with the inflationary pressures hitting emerging markets more, since a bigger share of their consumption is commodities. New emerging markets have in the past been a source of disinflation for most of the developed economies, because cheap imports from countries like China decreased inflation in the US and Europe, but that dynamic will be changed with higher commodity prices. The developed world policy makers will also try making their economies competitive through a cheaper currency, which in my view; will cause higher inflation for net importers like United States. In addition, emerging economies will let their currencies appreciate with a bid to combat inflation causing exportation of inflation to countries that buy their goods (Roger Backhouse). Interest rates Suppressing interests now will lead to disproportionate rise after five years. In addition, the proposed low rate encourages depositors, who can relocate their money elsewhere, leading to more pressure for a rise. In my opinion, the monetary system is in a complete mess characterized by cons and quick solutions to serious economic problems. Currently no single borrower or saver can be immune. There is a lot of fake currency with no fixed value, and the trend seems to be escalating with time. Although there are few exceptions including gold silver coins and liberty dollars. With the currency and legal system plus savings and pension, most people are enslaved. There is no longer money, and people are just dealing with negative and positive numbers, which are illusions of debt and credit, of which we have no control. Probably, we can introduce some feel in the monetary system by nailing the currency to stabilize the unstable financial environment. The question, therefore, is how one can plan and be successful with their finances. This, therefore, makes interest rate speculation meaningless (Roger Backhouse). Level of taxation The middle class has been the category of tax payers who have mostly felt the weight of the tax mans demands. With increasing government spending, and demand for more infrastructures, the level of taxation is expected to go up, because the government will have to meet its high budget, while at the same time provide necessary social facilities for its citizens. The expected rise in inflation would also mean the governments would be faced with the challenge of getting the excess money circulating in the economy to be able to maintain a mild- inflation level that is efficient for strong economic growth. Most countries have established that progressive taxation is actually a fair method for distribution of income and wealth in an economy, and probably most countries will amend progressive tax policies to ensure it is more effective, to regulate the taxable capacity for the middle-class population (Roger Backhouse). National debt Innovation and increased demand for advanced technology has caused several countries to import a lot of machinery, and electronics from abroad. This equipment is necessary in ensuring that countries remain competitive by using current production processes that meet consumers demand, hence making a country competitive in the global market. In five years to come, technology will have evolved to a more advanced level, and America will have to borrow in order to meet its demand since it cannot continuously increase taxes. This means that the deficit will increase further than it is currently. America is home for several technological advancements, but is facing stiff competition from Europe and Asian countries like Japan and China, who are becoming prime exporters in the world today. Despite America having more inflows than outflows. The situation might be reversed in the next five years, since its citizens will prefer importing up to date goods from these developed economies, causing deficits from the higher outflows (Roger Backhouse). MICROECONOMICS (four questions) Question 2. Utility is used to describe goods ability in satisfying consumers want. The more and more a consumer consumes a good, he/she gets satisfied up to a point where consuming more of the good becomes irrelevant and does not lead to any further satisfaction. This implies that as one consumes a particular good, the utility keeps increasing at an increasing rate. Gradually as more and more of that good is consumed, the utility increases at a decreasing rate, up to a point where it becomes irrational consuming more of the good. This is referred to as diminishing marginal utility e.g. if a starving person buys a plate of chips, the first plate will make the person full, but as more plates are added, they become irrelevant since the person is already full and cannot consume more plates. On the other hand, an indifference curve is a graph indicating different bundles of goods of which the consumer is indifferent. On every point of the indifference curve, there is no preference for any bundles (Roger Backhouse). The consumer gets the same utility from this bundles, and in order for them to consume more of one good e.g. good 1, a consumer will have to sacrifice the other good, say good 2 as shown in Figure 1. A, B and C points on the curve, indicate where the consumer is indifferent in consuming good 1 and 2. Point D and E represent higher and lower utility and are dictated by consumer’s income. Figure 1. The concept that certainly works for consumers, in my opinion is the indifference curve, since it is restricted by the budget line, representing a real life situation of how consumers derive utility on goods, and how they can be constrained in their consumption. Diminishing marginal utility may not be my choice because consumers can be greedy and still consuming a good even after deriving maximum utility. Question 5. Companies are rational and would always want to maximize profits. Meaning, companies want the Marginal profit (additional profit from producing an extra unit of output) to be equivalent to zero. For the given number of employees that a profit maximizing firm employs, it cannot hire more, because if it does, the MC>MR, and it would lose money. Additionally, they cannot hire less than that number since MR>MC meaning there is room for greater profit. Therefore, the company would always settle where MR = MC e.g. Assuming someone is producing below optimal output. Here, MR >MC (say MR = 30 and MC = 20), now if the person adds one more unit, say MR falls to $29, and MC rises to $21. The person will have made $8 more profit than before, and if he increases production, the profit would be more although it would be decreasing, this continues until Marginal profit is zero. Marginal revenue implies the extra revenue from producing one extra unit of output, while Marginal cost is the extra cost of producing one extra unit of output. Marginal Profit = (Marginal Revenue – Marginal cost) (Roger Backhouse). Question 6. Perfect referring to economics means best allocation of resources to maximize efficiency, but this is not possible in the real world. Perfect would imply that shortages and over supply totally eliminated. Perfect competition is not actually perfect, since there are several constraints in the real world, like information on goods and consumers income. Perfect information is not common since it is not possible. The assumptions for pure competition are not characteristic in the majority of markets in the world. Suppliers will always try to exert some power to exploit monopoly power. Consumers always have imperfect information concerning goods, and their choices and preferences can always be determined by advertising and marketing. The markets are also full of heterogeneous products, as a result of product differentiation. The real world has positive and negative externalities in both consumption and production, which can always lead to diverging between social and private benefits and costs. There can also be imperfect competition on essential labor, capital goods and raw materials. Although we can come close to a perfect competition, in reality, there is always a barrier. The economies of the world cannot allow for perfect competition. Rather oligopoly and monopolistic competition are common due to their features like differentiated products, and limited buyers and sellers (Roger Backhouse). Question 7. Monopolies can be good or evil based on their formation. If they are established according to free market laws, they may be objectively beneficial. Although if established based on irrational policies, they tend to be evil. Monopolies can result from government policy preventing competition or declining average costs, meaning it would be expensive for two firms to produce. A monopoly involves a single seller who may be in the form of a company or an individual owner referred to as monopolist. The monopolist has control over the supply of goods in the market, and is the price maker. Most monopolies are normally regulated by the government, which stipulates the rules and regulations that the monopolies are supposed to follow. In a way, the government tends to be fair to its citizens by regulating the prizes of these monopolies, if they charge a much higher price, hence, ensuring that the citizens are charged fair prices for the goods and services. The government always tries to ensure that its citizens get quality products and services by ensuring that it follows up on the quality of goods produced by monopolies. The government is, therefore, not evil (Roger Backhouse). Microeconomics (Points question) 1. Initial price (P1) = $800 final price (P2) = $700 Revenue= Price x Quantity $64000= $800 x Q1 $63000 = $700 x Q2 Therefore, Q1=80 Therefore, Q2 = 90 Elasticity of demand = (change in Q/change in P) x (P/Q) = 90-80/700-800 X 800/ 80 = -1 Elasticity of demand is < 1 implying that the quantity demanded changes less than proportionately, in response to the given change in the price; therefore, the crafts man faces an inelastic demand situation. When the crafts man decreases the price to $700, from $800 the change in the quantity demanded (which in this case is an increase) from 80 to 90 is less than proportionate in response to the given change in the price. This implies that the demand curve is vertical, and, therefore, even if the price changes by a larger or smaller margin, there will be little change in the quantity demanded (Roger Backhouse). 2. Average fixed cost is total fixed cost per unit output (AFC= TFC/Q) incurred by a firms engagement in the short run production. It can be obtained by deducting average variable cost from (TC/Q) average total cost. When output increases, it decreases since the total fixed cost is constant, and does not vary with changing output. Cost is spread per unit of output increases, in comparison to the price. It shows whether a rational firm should continue running or close down. If average fixed cost is less than price, then the firm can be able to pay, fixed cost. Although the firm might incur losses, the losses will be less through production than by closing down, but the firm is better shutting down in case the price for its products is less than average fixed cost. Average variable cost is defined as the total variable cost per unit of output (AVC=TVC/Q), normally incurred in a firms engagement in the short run production. It can be obtained by deducting the firms average fixed cost from its average total cost. It simply indicates how unit of output is spread along the firms variable costs. Average variable cost is more valuable in ascertaining the profit level or loss of a company; since it involves the variable costs which are the firms expense change resulting from its activities. These variable costs keep changing and clearly establish a firm’s financial position by comparing it to a firm’s revenue (Roger Backhouse). I.e. profit = revenue – costs (variable cost). 3. Product differentiation normally entails distinguishing products characteristics, so that it stands out and becomes more attractive compared to its substitutes. In a monopolistic competition, sellers sell differentiated products, there is free entry or exit from the market, and there are several producers in the industry. There are several firms, but due to product differentiation, each firm is able to set its own price for consumers. In the soft drink industry, there are several producers e.g. Coca-Cola and Pepsi, who produce differentiated products. Coca-Cola attracts its customers by how it has packaged its drink, and the flavors used for the drink. Pepsi also attracts its customers by their attractive packaging and the flavors it uses for its drinks. This has enabled the two firms to set different prices for their commodities, and still attract customers, who tend to be more attracted by the uniqueness of either a Pepsi or a Coke. The product differentiation also leads to advertising since each firm, always aims at attracting more customers through marketing and advertising and expanding its share of the market (Roger Backhouse). Microeconomics in-class exercise 1. Social regulation is necessary to ensure there is a convenient environment for business in a given country. Areas that need more social regulation by the federal government are education, gun control, health care, environment and political order. With more emphasis on environment, regulation practices affecting the environment have been a current development in the US, and it represents a substantial intervention by the government for social purpose in the economy. From 1960s, Americans have been always concerned about the impact of the environment on industrial growth. Engine exhausts from motorcars have caused air pollution in big cities worldwide. This pollution has always been termed a negative externality, since it is a cost that responsibility can entirely eliminate, although the whole society has to bear. Since market forces cannot address such problems, environmentalists in the United States suggested that it is the government’s duty to protect the earth’s ecosystem, even if it means sacrificing economic growth. Despite all the efforts, environmental pollution is still witnessed widely in the United States, and the government needs to be more stringent with its social regulations to ensure, there is a better environment for doing business, and to safeguard the environment for future generations (Roger Backhouse). 2. The United States compared to other developing countries, experiences much more severe social problems than economic problems, and the government has spent a lot of money controlling these social problems. Some areas that need less social regulation are gambling, pornography, abortion, homosexuality and illegal immigration. All these social problems consume a lot of the government’s revenue and do not cost the country’s economy. With emphasis on illegal immigration, it has been profitable for most of American employers, and the US government as a whole, the benefits also trickles to Mexico, which constitutes large immigrants into US. The profit hungry US employers entice immigrants to enter the country and work illegally. These immigrants work in 24 hour shops and restaurants and boost the US economy; therefore, the government needs to ease social regulation since these illegal immigrants actually help their country grow (Roger Backhouse). Works Cited Roger Backhouse, Roger Middleton. Exemplary Economists: North America. Massachusetts: Edward Elgar Publishing, 2000. Print. Read More