Economics for Business: Economic Factors that Led to the Recession of 2008/2009 - Assignment Example

? Economics for Business Word count (1862 a) Average cost or average total cost is the average cost per unit of output. To find it, divide the total cost (TC) by the quantity of production (Q). Average cost (AC) or average total cost (ATC): total cost divided by unit cost of output ATC= TC/Q (Q) (TC) (ATC) 0 1 1 1 13 13 2 24 12 3 33 11 4 40 10 5 50 10 6 66 11 7 84 12 8 104 13 9 126 14 10 150 15 Marginal cost is the additional cost that results from increasing from increasing output by one unit. This means the additional cost per additional unit of output (BBC Economy tracker, 2010). This is the difference between total costs per every additional unit of output. The marginal cost is abbreviated using (D) (Q) (TC) (D) Average revenue is the average revenue obtained per unit of output. To find it, divide the total revenue (TR) by the quantity of production (Q). Average Revenue (AR) divided by per unit cost of output AR= TR/Q (Q) (TR) (AR) 0 0 0 1 27 27 2 53 26.5 3 78 26 4 102 25.5 5 125 25 6 147 24.5 7 168 24 8 188 23.5 9 207 23 10 225 22.5 Marginal revenue is the additional revenue that results from increasing from increasing output by one unit. This means the additional revenue per additional unit of output. This is the difference between total revenue per every additional unit of output. The marginal revenue is abbreviated using (Z) (Q) (TR) (Z) 0 0 0 1 27 27 2 53 26 3 78 25 4 102 24 5 125 23 6 147 22 7 168 21 8 188 20 9 207 19 10 225 18 b) Graph of average cost and marginal cost verse units per out put Red – Marginal cost Blue – average cost Graph of average revenue and marginal revenue verse units per out put Red – Marginal cost Blue – average cost C) Profit is obtained by subtracting the total revenue from the total costs at the maximum is at five units per put 625- 250 = 375 d)The economic profit for the company is positive, then the firms decision are optimal. That is, its price and output yield a profit larger than any alternatives prices that output. The type of market that this firm is operating on is oligopoly (BBC Economy tracke, 2010). Oligopoly prices are expected to be more stable that those in a monopolistically competitive market. This is evident in the graph that results in long run oligopoly market equilibrium of a Price/output solution that is identical to that of a competitive market. 2) a) Economic factors that led to the most recent recession of 2008/2009 include Main causes if recession Credit crunch in U.K – the U.K mortgage lending caused very serious problems for the Northern Rock. It had a high percentage of risky loans. When the subprime crisis hit, the Northern Rock could no longer raise enough funds for the usual capital market. It had to borrow emergency funds from the Bank of England. As a result of the credit crunch, the U.K saw a change in the mortgage market. The mortgage started to become expensive. Falling of house prices in the U.K - since getting mortgages became difficult, the demand for houses started to fall. This was also related credit crunch. Cost push inflation restricting income and reducing disposable income. The fall in confidence of the financial sector that caused lower confidence amongst real economy. Supply side shock – in this case higher oil prices would increase cost of production and the effect would lead to a short run aggregate supply to shift to the left. Demand slide shock: the factors include higher interest rates which lead to a reduction in investment and borrowing. The fall of real wages, the reduction of consumer confidence, a period of deflation as falling of prices often encourage the delay of spending. b) Comparison to the other two recession The 1979- 1981 recession was caused by the following economic factors: High strength of the pound (British currency) and this made the price of exports became more expensive thereby having a reduced AD (Aggregate Demand). This recession particularly affected the British manufacturing (Bank of England, 2012). The high interest rate was another factor. The British government was committed to reduce the high inflation that was in place by implementing a tight monetary policy which reduced inflation but at a cost of falling, investment, output and spending. Presence of a tight Fiscal policy – in order to control the inflation, the government was committed to reducing the levels of government borrowing. The government was forced to increase taxes that led to the reduction of the disposable income of consumers and eventually led to the reduction of consumer spending. Causes if 1990-1991 recession Joining of the Exchange Rate Mechanism – the government became committed to the maintaining a high value of their currency. This forced them to implement high interest rates that eventually caused the large fall in Aggregate demand. In addition, the pound was also over valued making export very expensive. BOOM and BUST. The economic growth was too fast to control therefore unsustainable. This led to inflation that increased to over 10%. In order to control the inflation, the government increased interest rates in order to lower spending in order to deflate the economy (Bank of England, 2012). High interest rates led to increase of the cost of mortgage interest payment. This forced many to sell and eventually a fall in house prices. The effect of a fall in house prices caused a decline in consumer wealth and lower confidence. This caused lower spending. C) The economy of UK shrank by 0.2% in the final quarter in the year 2011. This was the first quarter of negative growth for the year and a fall was more slightly that expected. The city has expected a fall of 0.1%. The contraction in Gross Domestic Product showed a sharp slowdown with respect to the 0.6% rise that was realized in the previous three months of 2011. This projected fears of a double dip recession. The negative growth in the final three months was driven by a fall of 0.9% in manufacturing, a drop of 4.1% in electricity and gas production this was mainly due to the fact that people turn down their heating devices due to the hot weather (Balassa. A drop of 0.5 was also witness in the construction sector. Output in the service industry did not change and government contract went up by only 0.4%. This was the first drop of GDP for the first time since the first quarter of 2010 which was blamed on bad weather. d) The European GDP was projected to decline between 0.6% and 2%. This means the U.K will probably be hit by a temporary recession. The rate of un employment is likely to rise due to lack of new employment opportunities. The unemployment rate currently stands at 8.3% The inflation rate is expected to sharply to decline as we can see a CPI down to 15 in the second half of the years should the public sector charges and public utilities rises are not exceeding. The European banks are to be bailed out. The French and German banking systems should be bailed out to compensate for the write-downs of their sovereign debts. With the euro zone crisis, the factory out puts in most euro countries fell among other factors that show deterioration in the GDP. 3) a) International trade is significant to the process for globalization. Over the years, most countries have increasingly opened their economies to international trade. The benefits of international trade are that key economic features of globalization include deeper integration in capital, product and labor markets. International trade has caused significant structural changes in parts of the world economy. The main forces that drive global integration have been facilitated by political change, technological innovation and economic policies. International trade currently accounts for about 25% of the world GDP (Balassa, 1996). The opening up of trade in goods and services coupled with the increase in foreign investment across national boundaries is a major factor towards economic growth. Economists have asserted the positive effects that are obtained from trade. Despite those who feel the effect of inequalities of the global trading system, those countries that fell marginalized struggle to build and maintain competitive advantage. The concept of competitive advantage was introduced by David Ricardo. This only exists when a country has a margin of superiority in either production of a good or services. This is when the marginal cost of production is lower. In this case, a country like U.K will usually specialize in the export of services that will factors in the input that they abundantly have at their disposal (Bank of England, 2012). If all the countries specialize in those services and goods which they have an advantage, there total output will increase. There will be a rise in allocative efficiency and economic welfare. This country will be able to make sure the produced is handled effectively. Expanding trade by jointly reducing barriers is the most significant tool that countries can use to work together as the can deploy in order to reduce poverty and raise the living standards of their citizens. b) When measuring of standardized net export shares this process is known as revealed comparative advantages. One has to take inter country differentials into factor in order to see its advantage. The comparative advantage patterns between U.K and its other trading countries have been affected by the fact that the last two decade there has been appraisal in the number of emerging economies that have been engaged in technology – intensive production. In estimating revealed competitive advantages for trade in service, it becomes evident that any interpretation of the chart that trade critically hinges upon the mode of supply of individual services sectors. This occurs when the services are supplied across the border more than the products. Compared to the to the product trade statistics, the service trade statistics are much higher. Services are not only supplied by cross border trade but also by movement of the consumer to the producer. References http://www.guardian.co.uk/business/2012/may/03/eurozone-crisis-spain-debt-auction-downgrade BBC Economy tracker: http://www.bbc.co.uk/news/10613201 The Telegraph (26/01/2010) UK recessions since 1945: how they compare http://www.telegraph.co.uk/finance/recession/7073667/UK-recessions-since-1945- how-they-compare.html The Telegraph (26/01/2010) UK exits worst recession in decades http://www.telegraph.co.uk/finance/recession/7077377/Britain-exits-worst-recessionin-decades.html ONS (28/03/2013): Quarterly National Accounts Q4 2011. [online] Available at http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q4-2011/stb---quarterly-nationalaccounts-gdp-q4-2011.html ONS (05/10/2011): GDP and the Labour Market. [online] available at http://www.ons.gov.uk/ons/dcp171780_237417.pdf National Institute Economic Review, October 2011, Economic Overview, the UK Economy. Available from the Library as an online ejournal. Balassa, B.A. (1986), Comparative Advantage in Manufactured Goods: A Reappraisal. 68 Review of Economics and Statistics 2, pp. 315–319. BBC (12/02/2012) Bank of England says UK economy to “zig zag” this year: http://www.bbc.co.uk/news/business-17040658 Bank of England (2012) Inflation report [online] http://www.bankofengland.co.uk/publications/Documents/inflationreport/ir12febo.pdf http://ec.europa.eu/enterprise/policies/single-market-goods/files/pink-book_en.pdf Read More