Different Microeconomic and Macroeconomic Aspects to Be Considered by the Manufacturing Company - Assignment Example

Name Title Date (i) Different Microeconomic and Macroeconomic aspects to be considered by the manufacturing company Microeconomics is a field of study on the decisions that businesses and people make concerning the division and allocation of resources and pricing of goods and services, in individual markets. This includes taking into consideration taxes and other government formulated regulations. In basic terms, microeconomics focuses on the dynamics of supply and demand as well as other forces determining the price levels of goods and services in a given region (Bensako,2010, p. 21). On the other hand, Macroeconomics is a field in economics that focuses on behavior of the whole economy and not just specific industries or companies. This involves economy-wide issues such as Gross National Product, its effect as well as how it is affected by various changes in national income, price levels, rate of growth and changes in unemployment (Gamber, 2006, p.17). The two studies of microeconomics and macroeconomics are interdependent and therefore complement each other as there are overlapping issues between the two disciplines. Examples of microeconomic factors to consider include: competition, logic, the state of the economy and a variety of variable, unknown factors. Logic refers to the reduction of microeconomic data into mathematical constructs from which important logical decisions are then made (Ohri, 2003, p.32). The factor of competition seeks to establish what the competition is doing and the consequent effects on the market. The state of the economy refers to various economic indicators affecting individual markets while variables and unknown factors connote various issues such as customer preference, desires, taste and changing fashions (Ohri, 2003, p.35). Macroeconomic factors influencing businesses include issues such as: economic growth, inflation and interest rates. Economic growth refers to the changing levels of buying and selling occurring in an economy over a period of time, often affected by factors such as income levels, political activities natural disasters and changing prices of raw materials. Inflation refers to a general increase in the price of goods and services in an economy over a period of time and this has a bearing on costs of operation and payment of employees. Interest rates refer to charges levied on loans by the banks in a given period of time. High interest rates cause high interest expenses (Blaug, 1980, p.20). (ii) Explanation on how to run the company while focusing on one microeconomic aspect, one macroeconomic aspect and giving real world examples Let’s consider the aspect of competition and take two competing manufacturing firms A and B. Both firms manufacture and sell raincoats that are similar in quality and in style. However, Firm B’s raincoat is being sold at $3 less than Firm A’s $30 coat. Firm A needs a competition strategy that works in the face of Firm B’s underpriced commodity. In microeconomic theory, it is held that reduction in price should increase the demand of a product or service. If Firm A reduces the pricing of its raincoat to a price less than that of Firms B’s raincoat, then, Firm A’s raincoats should outsell the competition, albeit theoretically (Samuelson,1992, p.71). However, it must be explained how the reduction in price affects the set profit margins in Firm A. For instance, will the reducing profits negatively impact the firm’s capability to pay interest and principal on its debts? Furthermore, will there be sufficient money for advertising and marketing? Also, considering that the share price might decline, will it result in further stock sales, hence lowering the prices further? Microeconomic data and research shows that in such a scenario, a vigorous advertisement campaign can be quite successful in beating close competition (McCoskey, 1983, p.491). In the case of Firm A, the Managing Director can increase the marketing and advertising funding by at least 5% instead of cutting down the profit margin by 10%. Additionally, some money should be set aside to investigate how production costs can be reduced while maintaining product quality and style. This should mainly focus on process wastage, costs of raw materials and overall equipment efficiency. Inflation is a macroeconomic factor affecting businesses. In many economies, most large companies are better suited to buffer themselves against the impacts of inflation. Many automobile manufacturers such Toyota simply raise their product prices to offset the high costs arising from inflation in raw materials and energy (Ayhan, 2011. P.64). In 2011 the American Airlines announced a loss of $436 million in the first quarter as a result of rising jet fuel prices. This was followed by an immediate increase in the prices of their services across various flight destinations (Ayhan, 2011, p.70). However, smaller and mid-level businesses are in weaker positions to adjust prices in the face of inflation. This is because they might be already weakened by recession and other pertinent factors and hence hesitant to raise prices. The solution is usually frequent small price increments instead of one big jump. Additionally, cash reserves will act as a buffer since costs increase faster than the company can increase prices. Therefore, Firm A mentioned previously can build up cash reserves as a way to buy time till it can be in a position to pass along the higher prices to the customers when faced with high inflation (Ohri, 2003, p.77). It is important to also note that debt can create big risk to businesses in times of high inflation. During inflation, the banks will use interest rates increments to fight it. As such, the company should pay variable-interest loans quickly, since interest rates are more likely to increase over the long term and drives up the cost of debt (Samuelson, 1992, p.122). Additionally, inflation will create wage pressures. Profits will be pinched as the payrolls go up. The best strategy in this case is focus on improving efficiency and the productivity of the work force. (iii) Choosing a non EU country to locate a new branch and justifying the choice by analyzing the macroeconomic conditions and current economic policy of that country. The country of choice to locate a new manufacturing branch is India. In macroeconomic analysis, a company needs to determine if expanding production into a new economy will be welcomed by the particular market. On the other hand, consumers need to determine how easy it is to find employment and costs of both goods and services in the particular market. Additionally, governments use macroeconomics to budget spending, create taxes, fix interest rates and come up with policy decisions (Gamber, 2006, p.54). As such, Macroeconomic analysis focuses on three important things: national output (measured through GDP), inflation and unemployment. The economy of India is the world’s 8th largest by nominal GDP and 3rd largest by purchasing power parity. It is a member of the G-20 economies and is one of the fastest Developing Economic Superpowers with a growth rate of above 5% annually (Venugopal, 2007, p.24). With such a strong and growing economy, it only means increasing profits for companies. Additionally, strong purchasing capabilities of the large domestic market connotes good fortunes especially in the manufacturing sector. It is also worth noting that industry accounts for over 26% of India’s GDP and employs over 22% of the country’s total workforce (Venugopal, 2007, p.27). The Unemployment rates measure the number of people who are actively looking for employment as a percentage of the total labor force. India has an average unemployment rate of 7.6%. With a large working population, India has a large pool of relatively highly trained laborers due to government subsidies on training facilities as well as the expansion of production and infrastructure over the years, which led to mass training and retraining of high-end personnel. Another important factor is the astonishingly low cost of labor, which is at an average of $1 per hour compared to EU’s $20-$30 per hour (Ayhan, 2011, p.230). In macroeconomics, inflation rate or the rate at which prices hike is primarily measured through Consumer Price Index (CPI) and the GDP deflator. The CPI will give current pricing of selected goods and services and must be updated periodically. On the other hand, the GDP deflator gives a ratio of the nominal GDP to the real GDP. Though known for its negative effects, moderate inflation signifies a good economy. Minimal inflation is quite beneficial to an economy and it encourages more buying and borrowing. While current inflation rates in India are stated as around 8%, India has historically existed with significantly lower inflation rates and economic futures have always been positive (Gamber, 2006, p.183). One other important aspect to consider is Demand and the Disposable Income. Demand is what determines output. Demand is derived from consumers, the government and from imports and exports. However, demand alone will not determine the level of production since what the consumers have demanded is not what they will afford to buy. Thus, to determine demand, the disposable income of the consumer must be measured (Samuelson, 1992). With an ever increasing per capita disposable income, India is a high consumer country whose appetite for manufactured commodities is almost at par with China’s. It also has a well established system of exporting surplus commodities and as such is a favorable location to set up a manufacturing branch. Monetary policy is a process through which a country’s monetary authority, usually a central bank, controls supply of money within its economy by controlling the interest rates in a bid to maintain reasonable price stability while achieving positive economic growth (Hossain, 2003, p.12). In India, the Reserve Bank of India is the main monetary authority. The RBI carries out a number of operations to regulate economic growth. Open market operations involve the buying and selling of government securities to or from the banks and the public, in a bid to influence the reserve position of banks. The Cash Reserve Ratio is a percentage of bank deposits that banks should keep with the RBI as reserves. Other main operations include Statutory Liquidity Ratio, Bank Rate Policy, and Moral Suasion as well as Repo rate and Credit Authorization Scheme. The aim is to have price stability, controlled expansion of bank credit, promote fixed investment, promote exports, equitable distribution of credit and promote efficiency (Venugopal, 2007, p.139). The Indian monetary policy has been skewed in favor of heavy manufacturing and value addition as well as encouraging foreign investments. Fiscal policy is the use of taxation and government spending in a bid to influence the economy. The Indian government has spent a lot of money on building and expanding industrial training facilities as well as promoting higher education to ensure home grown expertise (Hansen, 2003, p.55). Government policies have also ensured the shielding of the manufacturing sector from heavy taxation, hence spurring growth and favorable conditions for manufacturing within India. References Ayhan, M. K., Francis, X. K., Diebold, B. S. & Marco, T. A. 2011. Globalization, the Business Cycle, and Macroeconomic Monitoring. International Monetary Fund. Besanko, D. and Braeutigam, R. 2010. Microeconomics. Hoboken, NJ: John Wiley & Sons Blaug, Mark. The Methodology of Economics: or how economists explain, Cambridge University Press, Cambridge, 1980. Gamber, E. and Colander, D. C. 2006. Macroeconomics-Prentice hall series in economics. South Africa: Pearson. Hansen, B. 2003. The Economic Theory of Fiscal Policy. London: Psychology Press. Hossain, A. A. 2009. Central Banking and Monetary Policy in the Asia-Pacific. Edward Edgar Publishing. McCloskey, Deirdre. "The Rhetoric of Economics," Journal of Economic Literature, Volume 21, June 1983, pp 481-517. Ohri, V. K. & Jain T. R. 2003. Principles of Microeconomics. NewDelhi: FK Publications. Samuelson, Paul and William Nordhaus, Economics , 14th Edition, McGraw-Hill, Inc.: NY, 1992. Venugopal, K. R. 2007. Fiscal and Monetary Reforms in India. New Delhi: I.K. International Pvt Ltd. Read More