Manipulations on Market Economy - Report Example

Macro Economics Name Course University Market Economy In a market economy, the different activities are controlled by individuals. However, governments undertake a number of these activities to varying degrees. These may be in form of legislations to provision of vital services. The role of entrepreneurs in market economies makes them an integral part of the entire economy. Wealth distribution depends on the market activities which in turn impact on the varied levels of wealth from one economy to another. The dynamics of market economies have for a long elicited heated debate and research into the possible causes of variations in a market economy. Kates (2011) observes that a specific economy forms a fundamental part of community’s political structure. It is undeniable that the prevailing or a community’s preferred market structure governs wealth distribution, present day’s political affiliations and decisions. Economists have studied the underlying forces that define each economic structure. Most importantly, these economists have defined the market forces for example causes of recession, unemployment and others in a bid to identify the perfect market scenarios. In most cases, questions arising from observations within different market structures form the back bone of the analysis. Economic theories state a set of questions whose answers point to the existence of and the nature of each economy. The following section will review different economic questions that shape the economies of each country. In an analysis of the axioms of free market, Kates explores the different aspects of a free market that adequately support the existence and flourishing of free markets. The main questions include the following. To begin with, the fundamental factors that determine market prices and availability of products cannot be controlled. Second to this is the question of predictability of markets. This is supported by the fact that markets are susceptible to changes and that it is impossible to avoid these changes. It is a fact that every business is expected to make profits. This brings to the fore the last question that Kates poses. Is it possible for individuals in a market environment to serve their interests or those of strangers? Pointedly, the answer to this explains the ideals of free markets which dictate the activities, price variations and supply and demand. Value added on factors of production influences the utility and at the same time improves the product and company’s image. Value is therefore added in different parts of the market. For example, value can be added in production and also through communication. Economists are obsessed with value added because of various reasons. Therefore, it is important to question the impacts of value added to a product on the consumer. Value added theory is studied by seeking answers to this question. Is a product having value if a consumer is considerably better off with the product or when not having the product. Second to this question is the ability to quantify value added? Kates notes that value is added when the value of the finished product exceeds that of production. Lastly, does production only add value or does it add and equally destroy value? This is better explained using the value added and economic growth perspective. It is important to observe that economic growth involves extraction of resources followed by production. Production will definitely fail if the vital factors are not availed. It is commonly held that in case one of the inputs that enable production is missing, it is impossible to complete production processes in time. Economic theory states that there is a close relationship between the main factors namely labour, capital and land (Heijung 2001). Whereas this traditional view, a number questions arise leading to a modern classical view of the relationship. To begin with, possibilities of carrying out the various activities without the entrepreneur are limited. However, the question is, are entrepreneurs really that necessary in production? An adequate answer to the question leads to the third question regarding the contribution workers, capital owners and entrepreneurs to economic growth. In her analysis, Kates questions the validity of the commonly elusive question on who takes responsibility for unemployment and economic growth. This begs the question; is it true that the rich man’s unproductive expenses deny the poor job opportunities? This takes the reader back to the attributes of an entrepreneur. Supply and demand determine the strength of an economy and ultimately the market structure. The economic theories suggest that a fall in the two can potentially lead to a recession. The modern macroeconomic analysts point out that demand levels determine the growth rate and output in a given economic environment. For instance, it is notable that levels of employment and the growth rate are dependent on demand. On the contrary, the two are largely independent of the supply structure. In her argument, Kates explores the demand and supply aspects in line with Say’s and Keynesian theories. The question in this chapter is the relationship between supply and demand. Is demand capable of creating its own demand? Does supply depend on demand or can supply possibly exist without a demand? Lastly, what are the dynamics that influence supply and demand in a free market environment? (Kates, 2011). Firms quantify the returns on activities outside production. Using marginal analysis, the firm makes decision on ways of maximizing their profits after adopting the additional activity. In macro and microeconomics, the fundamental question that companies seek to address is the possible returns that each additional activity has. The theory explicates the uncertainty levels producers have on the ever shifting consumer behaviour and the inherent relationship with other market variables. In discussing marginal analysis, it is important to identify the various questions economists ask. For example, Kates suggests that the entrepreneur or the management of firm have to make commercial decisions that will impact on the future. From the following questions, the economist has to include a marginal analysis. To begin with, how does the company set a future price? Does the firm have adequate measures to survive a dynamic business environment? And lastly is it possible to increase profits by spending more in one activity and what are the measures of quantifying the underlying profits? (Kates, 2011). Keynesian economics principles provide a basis for the analysis of aggregate expenditures. On the other hand, the injections-leakages model provides a model for the analysis of the non consumption expenses incurred in production and the non consumption in income. The model is designed to explore the balance between the injections which are expenses on investment, purchases and the overall government exports. The leakages include savings, tax levied on goods and during production and the costs of imports. Government involvement in business is often intended to offer vital commodities, monitor trends in free market environments and also to ensure the domestic market is adequately protected from international investors. In using the models in analysis, the fundamental question is based on Keynes’ principle that with increased savings, an economy is likely to slip into a recession. Secondly, in an economy, are the injections and leakages in equilibrium? The impacts of a fall in this balance and its potential effects on the employment and market stability prompt an analysis. Considerably, Kates brings to the fore the inherent fact that the aggregate supply and demand curves are independent. Using Keynesian cross model, it is possible to analyze the market structure effectively following Say’s notion that supply has the ability to create its own demand. (Kates, 2011). In an economy the final demand for goods produced within or from outside the country varies at different prices and time. The aggregate demand is therefore the overall quantity of goods and services that a market requires at the stated price over a given time. It should be noted that the aggregate demand curve is different from the normal demand curves. The fact is that the aggregate demand curve slopes going down due to the tendency of consumers to demand more at lower prices. Kates notes that Keynes’ interest rate effect, exchange rate effect and the wealth distribution contribute to the shape of the curve. This gives the three main questions economic theorists explore. Firstly, what is the impact of varying wealth distribution on demand for specific goods in an economy where the government is involved? Second to this, how does Keynes’ interest rate effect impact on the aggregate demand and supply in a market? Considering supply, the aggregate supply is the total number of commodities that suppliers intend to sell in a given period. (Kates, 2011). The economic recessions are considerably caused by a number of factors. The various reasons posted by different economic theories point to a mix of factors. For instance, the classical theory especially the business cycle theory observes that infrequent upwards and downward movement of economic activities is the major cause of recession. The different opinions that Say suggested against the above opinion are that consumers’ purchasing power can only increased by increased production. In essence, the classical theorists believe that governments are entirely responsible for the surging recessions. In their argument, the recurring questions are the role of government lending institutions, and mostly the link between fluctuations in business cycles to governments’ control in banking and money. Secondly, what are the results of increased production in a given area or specific product if more employment results in increased wages? Lastly, classical theorists are concerned with the fact Keynesian economics impacts on the economy and create a monopoly where traders are likely to create artificial demand. According to Kates (2011), in classical theory, the primary causes of recession are better understood by evaluating the phases of the cycle. The important question in this assertion is that the economist should find out what happens when the various parts of the economy drifted off phase with one another. Inflation in an economy is determined by the difference in money and credit. However, other aspects of inflation are inherent. Kates (2011) observes that inflation arises when there is too much money in circulation and consumers chasing too few commodities. It is therefore possible to assert that inflation occurs when an economy produces too much money and credit and low levels of supply and a decreasing demand. In a market economy, following inflation and the trends are achieved by exploring the relationship between the different aspects of credit and money theories. Murphy (2011) asserts that it is important to understand the functions of money in an economy. Money and credit theory attempts to view the value and functions of the money and how money impacts overall market equity. The questions this theory bases include. What are the value of money and credit in a market? Can these values be improved through other activities? Lastly, what are the effects of changing money values have on interest rate, inflation rates and the supply and demand? The effect on the economy when different mediums of exchange are used is equally an elemental question that money and credit theory seeks to explain. Interest rates are subject to changes following government directives. The natural interest rate in a market reflects the real scenario and factors that determine the rates. According to Keynesian theory, the market rates are different from the natural rates. Pointedly, market interest rates are predetermined and do not rely on the natural forces that prompt changes. In essence, the market determined rates have disruptive effects in a market environment. In economics, the natural and market interest rates influence the amount of money that can be allocated for the present consumption and also used to evaluate the viability of future investments in the specific environment. Developed by Wicksell, economists use the theory to explain the different rates at which the economy is in equilibrium. Secondly, changes in the natural interest rate are vital for economic growth. Given this fact, economists point use the theory to advice on changes that are governments should avoid and the need to allow free market mechanisms determine the interest rate. Question: Questions with multiple choice answers Axioms of free market Which of the following best explains the axioms and principles of a free market economy? a) The basic determinants of a free markets economy structure b) Rules that govern the business operations and trends within a free market economy c) A set of mechanisms that determine the way business operations and activities in free market economies run. d) Trends set by individuals and impacting on the mode of business operations in market economies e) All of the above f) None of the above State the reasons why you have chosen the answer. Answer. Alternative © The axioms of a free market economy are a collection of principles and natural factors that direct the operations of free markets. Alternative Question List down three axioms and principles of free market economy Answer: the future is unpredictable, change is inevitable in every economy, without prices, no one is capable of knowing the value of a commodity. Value added The value added on any commodity is a factor that can either increase the economic growth and can equally destroy the value of a product. Using this argument, identify the statement from the multiple choices given that is relevant to value added in regard to economic growth. An economy that does not replenish used value is better placed and can achieve growth in all the aspects. a) In the event that the value created is less after the completion of a production process, this is an indication of possible growth and only time is needed for the form to realize value added from the activity b) Viable and vibrant economies replace the previously existing values with new products with the least value realized c) Value added on production has no fundamental impact on economic growth d) Activities that require inclusion of more resources to increase the value derail economic growth e) All the alternative choices above are true f) None of the alternatives is correct Answer: (b) In the alternatives, (b) elaborates the aspect of value added and its impacts on economic growth. Additionally, the answer gives reference to the aspects of economic growth. Alternative question Economists believe that value is subjective, explain this concept. Answer This means that value added has returns however little efforts or resources are involved. Equally, there is always utility added when value is added on a commodity or in a process. Factors of production Which of the following is not an essential aspect of production? a) Capital b) Entrepreneurship c) Labour d) Capital e) Land f) None of the above g) All of the alternatives Answer: (f) The answer is none of the above because all the factors of production are listed. Alternative question Capital is a vital factor of production. Which of the following is not true about capital? a) Capital is entirely cash and cannot be in form of machinery b) With solid capital, production can proceed c) Capital is provided by the entrepreneur and other sources d) Capital should be in form of anything that can make production easy when applied with the other factors of production. Answer is (a) Capital is in different forms namely solid and liquid. Marginal Analysis The concept of marginal is commonly employed in macro and microeconomics theories. From the following, choose the correct definition of the concept. The economics process that uses marginal evaluations to explicate the possibilities of maximizing production procedures and gains The analysis of complex systems by manipulation of the various variables The analysis of marginal factors that influence production in free market economies All the alternatives define the concept None of the statements adequately define the concept Answer: alternative a and b The first alternative gives the definition of the concept in a macroeconomics perspective while the second alternative defines the concept in a micro economics scenario. Supply and Demand The forces that determine the demand and supply in an economy are independent. According to economic theories, the following statements give an overview of demand and supply. Which one is true? a) Demand is determined by the quantity supplied in a market b) Supply is independent of the demand in a given market c) Supplied quantity and the demanded quantity must be in equilibrium for a free market economy d) Alternative a and b are true e) None of the above is true f) All the alternatives are true Answer: alternative a Demand and supply are dependent. The second alternative is wrong because supplied quantity determines the demand and the opposite is true fro supply. Alternative question Plot the curve for supply and demand in a market Aggregate Demand and supply What is the most appropriate definition of aggregate demand and supply? a) The value of supplied quantity and the supplied in a market b) The total number of commodities that a market can purchase without leaving surplus c) The total number of commodities and services that an economy is willing to purchase at a given time and a t a price d) None of the above e) All of the above Answer alternative (c) The aggregate is the overall quantity in the entire economy and supplied quantity is the total number that the economy receives at the stated price and time. Alternative question: What is the general slope of an aggregate demand curve? a) Upward b) Horizontal c) Downwards d) Vertical e) Flat f) None of the above Answer :( C) The curve slopes downwards Causes of recession in classical economic theory Which of the following is the classical theory on the causes of recession? a) Money is invested into an economy so as to increase demand. In effect, the economy is stable with the investments. The result is that more money is stashed in banks and consequently a recession b) With higher amounts of money invested in banks, more private spending leads to a recession c) With natural and supply of goods, the impending recessions will automatically adjust. With this in mind, the major cause of economic recession is government involvement in business and controlled spending and rates. d) None of the above e) All of the above Answer: Alternative (c) The classical theorists point out that the various mechanisms the government uses lead to artificial; shortages that businesses create. The answer is based on this notion. Alternative question Recession according to the classical theory is a market condition. Which economic theory posits that governments can control recessions. Answer: Keynesian theory Money and credit The list below contains the functions of money. Which one is not? a) Medium of exchange b) Measure of value c) Store of value d) Capital e) None of the above f) All of the above Answer: alternative d Money is not capital but can be used as capital. Alternative question Before the existence of money, was there a medium of exchange. Explain Answer: There was different media of exchange varying from community to community. Market and Natural rate of interest Which of the following differentiate market and natural interest rate? a) Market rate is the interest rate that is prevailing at the present day b) Natural interest rate is determined by the market forces while a market rate is the created interest rate c) None of the above d) All of the above e) Answer b The answer is choice b because natural rates are not pre-empted by the market players. Keynesian cross –injection leakages analysis Identify which among the following is not included in the leakages when using the injection-leakages analysis a) Taxes b) Interest rate c) Exchange rate d) Savings e) None of the above f) All of the above Answer: alternative (c) Alternative question Mention one of the advantages of using the Keynesian cross model in analysis Answer: Through the model, a country can determine the benefits if its savings increase and taxes levied on imports reduce List of References Heijungs, R. 2001. A theory of the environment and economic systems: A unified framework for ecological economic analysis and decision-support. Cheltenham, UK: Elgar. Kates, S. 2011. Free market economics an introduction for the general reader. Cheltenham, UK Northampton, MA: Edward Elgar. Murphy, P. 2011. Study Guide to the Theory of money and Credit. Ludwig Von Mises Institute. Read More