Economic Analysis for Business - Essay Example

NОMIС АNАLYSIS FОR BUSINЕSS Name University Course Tutor Date ЕСОNОMIС АNАLYSIS FОR BUSINЕSS Value-added Economists have employed various concepts in an attempt to answer certain important questions. "Value Added" of products is one such concept. The term can be deemed a metric of performance evaluation for a business. It is the difference between the cost of production and sale of the product. It has been applied to understand issues such as; The main object of economic activities The economic value of items The "Value Added" theory holds that when the owner of an item is better off with it, this item is of value. Goods and services are ideally evaluated by their ability to satisfy needs of users. Ideally, trade would involve the exchange of goods and/services with something else that is of more value. Goods and services have to be put to use for this theory to be correct. Production is the process of transforming an object or service to a state that it can be used. It is subject to the effort, time, capital, and natural resources. (Kates, 2014, p.63) In the Financial Friday Magazine of January 16th, 2015, it discussed that for it to take place there has to be utilization of goods/services. Dependent on the process, production can degrade the value of other items. This in essence explains the concept of Value Added. One or more items have to lose value so that other goods or services gain value. Marginal Analysis Marginal Analysis is another concept in economics. It is inevitable that most decisions made are based on consideration of experience. This concept is therefore employed in decision-making. This is the basis of this theory, and it tries to address particular issues including; the importance of decisions that have benefits matching cost incurred in decision-making; The marginal cost of a decision. In the Entrepreneurship Magazine of February 6th, 2015,This concept mainly touches on decision-making processes. All decisions are made in the present. The marginal analysis considers the current as what matters. Variables involved in the marginal analysis include the quantity of production, number of inputs and value of sales in the business. These are all referred to as control variables. (Askew, 2011, p.73). The focus would, therefore, be on whether the variables are being increased or decreased. The idea implemented when establishing marginal cost would be an explanation of how one unit of a control valuable would impact on the cost. Another element is that the benefits of the decision should match the costs. Doubts will always be present, and this concept takes this into consideration. (McDonnell, 2004, p.34) However, it is maintained that a right decision should have greater revenue than marginal cost. Therefore, for the units to be increased, the marginal benefits should exceed the marginal cost. The Circular Flow The term "Circular flow of income" is a concept used to describe the exchange of money and how it runs in the economy. Understanding the relations that exist between economic elements is greatly enhanced by the circular flow of income. Production factors would move in one direction while on the other hand goods and services flow in the other. (Gray, 2002, p.68). Circular flow of income seeks to address many concerns including; what are production factors and their meaning; the association between product and production factors; which parties are concerned with production factors. Production factors include labor, capital, talent, and land. All of these have their role to play in the production of goods and services. Finances put into consumption need to be channeled back into the business revenue flow. The economy is therefore seen as a collection of households and firms. The function of the households is to provide the companies with the necessary needs of the production. The companies will provide the land and capital while the households provide the required labor and market for the goods and services produced. Money, therefore, moves to workers in the form of wages and then back to the firms through the purchase of goods and services. In essence, supply is seen as creating its own demand. This concept gives an explanation of the interdependence of different factors in the economy. It also demonstrates the relativity that exists in the production income measured from the production output considering the value of services and goods that are manufactured or designed. In the Business Magazine of January 16th, 2015, it discusses that this concept has been used to demystify the complexities of economics. (Gore & Jarrod, 2011, p.32)For example, the various forms of injections and withdrawals include investments, saving, taxes, trade-in the form of exports. The withdrawal from governments would include the provision of health services, infrastructure, and schools. Entrepreneurial mistakes and the classical theory of the cycle The business cycle is the upward and downward movement of GDP. It is characterized by periods of growth and decline over a long duration of time. Ideally this describes the stages of a business. It tries to demystify ideas such as; Business performance reasons behind good or bad performance Recession not being a direct result of poor performance. This concept divides a business into four stages. These stages are the expansion, the peak, contraction and finally the recession. The development phase is characterized by a rise in income after the trough stage that is the last stage of a business. More money is available during this stage. Businesses can, therefore, increase production of goods and services, hiring more employees and engaging in new projects. As the rate of unemployment reduces, the households, therefore, have more money that they can channel back to the purchase of goods and services. It is the followed by the peak stage. The peak could occur before various economic indicators are seen which include an increase in sales and the number of employees. This is represented by economic growth. It begins slowly but subsequently hits the highest point and is momentous in terms of economic growth. The contraction stage then follows this. As the business reaches its highest level, it is characterized by a decline of conditions. It is the opposite of the expansion stage. Economic indicators will go down. The outcome is the output of fewer goods and services and possibly the reduction of human labor. (Carlson, S. & Nero, 2002, p.73) Households will, therefore, have less income to purchase goods and services. It would also be characterized by a strain on governments’ capability to expand infrastructure and other amenities to the populace. The fourth and final stage is the trough also referred to as the recession. It is the opposite of the peak. The major features of the phase are low economic growth and a significant increase in unemployment. This stage has different severity that is usually accompanied by stress. In the Economics Magazine of January 16th, 2015, the story outlines that it is a negative aspect of a business. If the GDP remains small for a very long time, then this stage will be referred to as a recession. Each of these stages leads to the next as a result of various actions of the consumers, governments, unemployed and businesses. All these stages have different lengths and in most cases will follow this order and then go right back to the beginning stage, if they do not fall entirely. Role of Saving Savings play a critical role in the economy, business and individual level. It tries to demystify certain difficulties such as; should current purchases be less than the earnings other sources of income other than production or sale The role of resources in productivity Savings are done at the household level, business and government. Without saving there is no economic growth. These institutions have their unique reasons for saving. Families save for future expenses and retirement. (Deans & Metcalfe, 2002, p.37) Businesses would retain savings for future investment which could be expansion of facilities and purchase of equipment. The government saves to invest in roads and infrastructure, hospitals, schools and other social amenities. Accumulation of wealth is critical to the growth of a business and people. This concept can be explained in many ways. For example, a manufacturer pays wages before selling a product. These wages are paid from saving hence explaining the significance of the same. In the Economics Newsletter of January 10th, 2015 it highlights that Manufacturers cannot be dependent on buyers to buy the goods in order to make their profits. Savings, therefore, increase productivity by playing various roles in manufacturing, wage payment and also credit. Failure to save could have detrimental effects on all these entities. References Kates, S., 2010. The Economics of Free Market,2nd Ed: The General Reader Introduction. Cheltenham: Edward Elgar Publishing. Read More