Analytical tools in making decisions concerning increasing commodity price - Essay Example

? Micro and Macro Economics 10th December Introduction Economics is the study of manufacture, distribution and the consumption of goods in a market structure. Economics is a social science that revolves around people’s life starting when they are born till when one dies. Economics has various agents’ that conduct the business in the market, some of these agents includes customers, suppliers, producers and the governments. The government is the referee in making sure that there is fairness in the business. Economics being a social science it revolves the behavioral aspect of the human life which is imposed by the scarcity of resources in a person life. In a market the interaction between the sellers result what is called economic equilibrium which results the issue of competitiveness in the market. The term economics is a broad discipline that consists of microeconomics and macroeconomics. Microeconomics Microeconomics is a branch of economics that mainly deals with the decision that the agents of the market make while conducting business. The agents of the market are the people and businesses. In essence the study of microeconomics deals with basics of the market. It is more of specific than general. Microeconomics tries to bring the relevance of the small agents in the market that could be neglected but are very important in the study of economics. The consumers provide the market while the suppliers and the businesses provide with the goods and services. The major dwelling of microeconomics is in the supply and demand forces that operate in the market. The supply forces refers to the availability of goods and services to the market while the demand refers to the availability of customers of various products and services in the market. These forces are crucial in the determination of the price of various commodities in the market. The higher the demand it would mean that the goods and services are in short supply while the lower the demand it means the goods and services are in high supply. Thus in high demand the prices are in sky rocketing while in low demand the price are very low than normal (Zhang, 2005) Macroeconomics This is a branch of economics that mainly the whole industry in the market rather than a specific entity like a company. It tries to look an economy at a wide view e.g. the general economy of the country. In macroeconomics, issues such as the GDP are keenly followed and how they are affected by factors such as price levels, unemployment and the rate of growth. The two terms lead to a better understanding of economics. There could be some differences between them but they still deal with study of production, distribution and consumption of goods. In our module we have greatly dealt with microeconomics which entails eh study of the behavioral aspects and factors affecting the agents of economy. There are various theories that try to explain the term economics. These are the supply and demand theory and the classical theory. The supply and demand theory of economics mainly entails looking at the two forces in the market that entirely explains the relationship between the buyers and sellers. The other theory is the classical theory which entirely concentrates on the equilibrium in the market which operates in the market when the market is not interrupted. The theory mainly stresses on the factor that the market should operate freely without any interference (Adams, 2008). Analytical tools in making decisions concerning increasing commodity price The price of any product affects the sales of any company, which exponentially affects the profits acquired by the company. In any decision making process of any profitable company coming up with price rise is usually a tricky situation as it directly touches on the customers’ feelings. At the price level is where the company directly interacts with the customers. Price increase cannot be done overnight but it is usually as a result of many factors that contribute to this course. It is mainly as a result of many factors in the market that affect the determination of any price. Not forgetting that production determines the price of any commodity proportionally. The higher the production cost the higher the price of the commodity produced by the company produces. Also the demand in the market determines the price of any commodity the higher the demand then it would automatically mean that the price would go up because the commodity is few in the market. While when the demand is low it means the commodity is readily available in the market making it hard to sell at high price because the value of the money as compared to the commodity is a bit lower than previous times (Adams, 2008). The issue of price change also touches on the issues of competitiveness in both the commodity and the business in general. This greatly affects the decision making in the market by the customers of your product. Assuming that one does not enjoy nay monopoly in the market then it would automatically mean that he is not alone in the market; there is rival or competitor in the market producing the same product as him. In this situation one should make sure that the customers don’t feel the pinch while they remove their money in exchange of the commodity. In our case we have let’s assume the price of the insulators has increased by some dollars. This means that the customers have to buy the insulators at a higher price than their previous usual price (Dodge, 2011). This is where the marketing aspect of economy comes into play. With proper advertising through marketing this would ensure that the customers are swayed to continue buying the product of the company. Thorough marketing would make sure that the customers do not shy a way from the commodity because of the price factor. Issues like the quality of the product of the product should be stressed. The company should make sure that the quality of the insulating materials is the best in the market. This would make sure that the customers do not replace the insulating materials with the one of the competitor (Dodge, 2011). . Another strategy would be made by looking at the behavioral factors of the customers and ensuring that the customers know that the increasing in the production cost is the one that has pushed to where you are. This is where due to the increase in the production cost it definitely meant that you would increase the price automatically. This is done to make sure that the insulating company remains relevant in the market. Some times a decrease in the price of the insulating materials makes the customers to doubt the efficiency of the insulating materials (Adams, 2008). In such situation, the company should look at how the insulating materials are fairing on in the market. If they are high in demand then this would give the green light to increase the price, but in a situation where the demand of the product is particularly low then it would mean that the company has to prepare itself for low sales. Not forgetting the company has employ in terms of wages. To remain relevant in the market the company has two options. One is to lay off some of its employees; this could prove costly because it would mean that the company would have to reduce its production capacity. Fewer employees’ means that the labor force has decreased thus the collective energy is less in the company. Reducing of the employees wage would become appropriate since the company would incur less cost in production and therefore this would mean there would be a shift in the profit margin of the company (Dodge, 2011). Suppose the price of the commodity was reduced then it would mean that the customers would have more bargaining power to the firms insulating materials. A decrease in price usually attracts the customers to buy you commodity. This mainly entails the decision making aspect of the customer or client. The question that comes to the clients mind is “would I get the same utility from this product as the one for company X?” This is a crucial part in capturing the mind of loyal customers and new customers. A clear reduction in the price of the commodity while at the same time maintaining the quality of the insulating material would give the company an added advantage over their competitors. This mainly is the strong point that favors the insulating company while the customers are making the decision on which insulating material to buy. The customer would see the value of his money by the insulating material. He would see that he has gotten more than what have he bargained for (Kaufman & Kaufman 2013). Just like businesspersons, the customers usually plan a head, especially if it concerns the buying of a new product that they are going to use for a long term. They do the prospectus if the commodity would increase its value in the coming period. A customer would only want to spend once on a commodity not buying the commodity now then come two months the commodity has spoiled and there is need for replacement for the same commodity (Kim & Mauborgne, 2005). In the doing prospecting by the customers, suppose you reduced the price of the commodity some customers would buy the insulating material not because it is cheap but they are anticipating the price of the insulating material would increase in the near future. By buying it is a precaution they are taking in ensuring that when the future rise in price of the insulating material happen they would be safe because they would have already bought the insulating material. It I like a bet if you see the best bet then you take advantage of the situation so that you do not regret in the future over spoilt milk. Sometimes the customer may just have been waiting the day the price of the insulating to reduce then he/she can make a buy (Musgravea, 2009). In the cases of a reduction of price, the insulating company would have realized that the company over time has lost most of its loyal customers. This has come out as a turn around strategy in order to attract new customers and bring back their old customers. This could be after a thorough analysis of the market and discovering that the more sales one make the more profit one accumulates. This is after a thorough analysis on the past trend and then discovering that when the price commodity was high the company sold a few copies and did not return the profit that the company needed. This could be as a result of much capital being in the companies possession in terms of commodities not sold to the market. Therefore, the only way of offloading the product is by selling the product with a much lower price while at the same time increasing the profit of the commodity (Morton & Goodman, 2003). Sometimes one reduces the price of his commodity because of regulation by the government. The government can try to bring fairness in the market thus resulting in the reduction of the price of the commodity. This strategy could be taken as a safety precaution towards the avoiding court cases with the government. The classical theory This is regarded as the pioneer of the modern day economics. These are ideas that originated from Adam Smith, through the book The Wealth of Nation. The theory mainly dwells on the assumption that if a market is left free then it can regulate itself automatically. The proponents of this theory stress that the market should not interrupted or controlled by any one. This is to bring that equilibrium, since the stress on the idea that the market can find its equilibrium without any help from any one. The theory also stresses a lot on allowing flexible prices and wages without changing them to suit any one. The basis of the classical theory was mainly split between two theories, the monetary theory and the value theory. The monetary theory argued that the banks should hold and supply money. The value theory stressed much on the value and the price to regulate the market. The value theory encompasses many things which include the tastes and preferences of the market, out put of the market and the wages as they were called during that time. Main theme of this theory is that the economy should be left to operate on its own after role it can finds its equilibrium. Thus, the issue of interrupting the economy is not a feasible idea because the economy though considered as begin guided by a natural force it eventual finds its equilibrium (Reddington, 2012). The classical theory is an important component in the definition of current day economical activities. It tries to simplify the complex economical activities to simple terms that can be understood by any common individual without a basis of economic knowledge. The idea of letting the market free encourages hard work, where issues of manipulating the market in order to further ones own personal interests are greatly discouraged by the model. Its major proponent of letting natural forces to operate ensures that a case of few people controlling the economy is discouraged (Yomba & Simon, 2009). The classical economic theory has its own weaknesses, which lie in shying a way in explaining the facts; it is more of theory that lacks a practical sense. In the real economic world some facts cannot be applied technically. The theory also bases on many assumptions, which might be negligible but have significant effect on the market operation. The first assumption revolves around the assumption that all human beings are rational. It takes out that every one is rational while leaving out of the economic human beings. This class is very different from the other human beings. In the business world, virtues as fairness and being rational are things which are not considered, and therefore its basic would operate if one of the main assumptions does not any water. This is because these are that basis of the paradigm that we are studying. The assumption of equilibrium also produces some form of ambiguous explanation on constant moving economies. This is because the economy changes over time either upwards or down thus maintaining this equilibrium is not a feasible idea. The assumption made in rational expectation seen not to go so well with the concept of realism. This is because in reality it is hard to have a situation where there is rational expectation in the market. Of course can share the same expectation but having the same expectation is no a feasible idea and in application in the current state of affairs (Setterfield, 2010). In conclusion, the theory is the basis of our modern economics though it could have some challenges. It is expected that any theorem has its own share of weaknesses since the condition that were there when the theorem was formulated are not the same as the current conditions, more so economics. The theorem tries to bring the practical aspect on how the economic activities usually take place. The idea of the equilibrium, I was much amazed at the explanation of this paradigm. Reference Adams, B. (2008). The wow factor: how I turned one great idea and my unbridled enthusiasm into a golf revolution. New York, NY, Sky horse Pub. Dodge, E. (2011). 5 Steps to a 5 AP Microeconomics/Macroeconomics. McGraw-Hill Publishing. Kaufman, P. J., & Kaufman, P. J. (2013). Trading systems and methods. Hoboken, N.J., Wiley. Kim, W. C., & Mauborgne, R. (2005). Blue ocean strategy how to create uncontested market space and make the competition irrelevant. Boston, Mass, Harvard Business School Press. http://www.lib.sfu.ca/cgi-bin/validate/books24x7.cgi?bookid=11368. Morton, J. S., & Goodman, R. J. B. (2003). Advanced placement economics: teacher resource manual. New York, N.Y., National Council on Economic Ed Musgravea.t.l.(2009).Barron's AP microeconomics/macroeconomics. Hauppauge, N.Y., Barron's Educational Series Reddington, B. (2012). 500 AP microeconomics/macroeconomics questions to know by test day. New York, McGraw-Hill. Setterfield, M. (2010). Handbook of Alternative Theories of Economic Growth. Cheltenham, Edward Elgar Pub. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=534831. Yomba, Simon Jean-Paul. (2009). Micro Economics to Macro Economics. Author house. Zhang, W.-B. (2005). Economic growth theory: capital, knowledge, and economic structures. Aldershot [u.a.], Ashgate. Read More