Hypothetical Production Possibility Frontier, Economic Growth in Australia - Case Study Example

Managerial Accounting Student’s Name Instructor Institution Course Date Table of Contents 1.0.Part 1 A: Hypothetical Production Possibility Frontier (PPF) 2 1.1.Opportunity cost and Marginal Analysis 4 1.2.Part 1 B: Determining the Equilibrium Price of Wine 4 1.2.1.Factors Affecting Demand Curve 5 1.2.2.Factors Affecting Supply Curve 6 2.0.Part 2: Collection of Data for Australia from 1986 to 2005 6 2.1.Economic Growth in Australia (1986 to 2005) 6 2.2.Unemployment Rate in Australia (1986 to 2005) 6 2.3.Inflation rate in Australia (1986 to 2005) 6 2.4.Part 2 B: How the Australian Economy has been Performing 1986-2005 7 2.5.Macroeconomic Reasons for the Movements in Economic Growth 8 2.6.How Movements in Overall Economic Growth Affect Business Plan in Part I 8 2.7.How Unemployment Rate and the Inflation Rate Would have Impact on Wine Business 8 List of Figures Figure 1: Production Possibility Frontier for Product A and B 3 Figure 2: Determination of Equilibrium for Wine 5 Figure 3: Effects of Inflation and Unemployment on Wine Business 9 Managerial Accounting 1.0. Part 1 A: Hypothetical Production Possibility Frontier (PPF) The choice on the two products (A and B) will represent the point at which the economic environment is likely to be more efficient thus production of goods and services to influence allocation of resources in optimal way possible. On the other hand, Parker et al. (2016) found that if the economy fails to produce the quantities that will be shown by the PPF then it means that the allocations of resources have not been managed prudently thus affecting the production of the society. Taking the product as A and B, the PPF will be as shown below: Figure 1: Production Possibility Frontier for Product A and B Assuming that product A and B are Wine and Cotton respectively, the PPF figure is as shown above. The curve represents all maximum output possibilities for Wine and Cotton given a set of different inputs that may include but not limited to labour and resources. However, as the figure shows, the assumption taken is that all inputs have been used effectively and efficiently. As indicated, points C, B and A are representations of the various position at which production of Wine (good A and Cotton good B) are most efficient. On the other hand, the point marked X (in red) is a representation of the position at which inputs, particularly resources are not utilized effectively and efficiently in the process of producing goods Wine and Cotton. On the other hand, the point marked Y (in red) is a representation of a point where the output is not achieved with regard to the given inputs. 1.1. Opportunity cost and Marginal Analysis With regard to opportunity cost and marginal analysis, there will be need to decide how to allocate resources in accordance with opportunity cost. Relating it with the figure above, if the economy will have to start the production of more cotton; there will be a need to divert resources from making product A (Wine) thus less production of Wine. As the figure shows, moving production from point A to B means the economy will have to decrease the production of Wine by a given amount in comparison to the increase of output in cotton. On the other hand, a movement of economy from B to C will cause significant reduction to wine but increase in cotton. It therefore means that it is easy to go with wine than cotton as the opportunity cost will be the same to the cost of giving up the needed cotton production. 1.2. Part 1 B: Determining the Equilibrium Price of Wine Since product A and B were hypothetical, determination of product A (which is Wine) means taking the supply and demand curve (formulas) of the product then equal them to determine the equilibrium. Hypothetically, Quantity demanded (QD) for Wine stands at 100 – 2p Quantity of wines supplied (QS) stands at 20 + 2p Therefore it means that QD = QS -20 + 2p = 100-2p 120 = 4p (This value is obtained by summing up 2p and 2o to both sides so as to cancel out the negative values). It therefore means that equilibrium price of wine from these hypothetical figures will be: 120/4p = $30. This determination is provided in the figure below: Figure 2: Determination of Equilibrium for Wine From figure 2 above, quantity and equilibrium are determined by the point of intersection of demand and supply. The slight change in demand, or supply or both for the wine will change the determined equilibrium price. 1.2.1. Factors Affecting Demand Curve Increase in income for inferior goods Increase in price of a complement good Price decrease of a substitute good 1.2.2. Factors Affecting Supply Curve Increases in prices (this will make companies to have more incentives to supply more) Technological advancement which advances the processes of production Sellers' expectations 2.0. Part 2: Collection of Data for Australia from 1986 to 2005 2.1. Economic Growth in Australia (1986 to 2005) This is for table This is for line graph 2.2. Unemployment Rate in Australia (1986 to 2005) This is for table This is for line graph 2.3. Inflation rate in Australia (1986 to 2005) This is for table This is for line graph 2.4. Part 2 B: How the Australian Economy has been Performing 1986-2005 Based on the table and charts presented, it is clear that between 1986 and 2005 the Australian economy had been on the upward trend. The rates of inflation, economic growth and unemployment show remarkable performance especially between 1995 and 2004---a trend that is unprecedented both in the economy of Australia history and among other developed economies. Based on the graphs on inflation rates above, it is apparent that after the recession in the early 1990s, the economy of Australia started to grow in the September quarter of 1991. Additionally, since this period the tables and graphs indicate that the economy of Australia has grown in every quarter except in three. On the other hand, there were some years when Australian economy slowed down and such changes were noticeable. However, at no time between 1986 and 2005 did year-ended growth turn negative. For instance the slowdown was witnessed in 2000 and 2001, when growth was reported 3.9 (representing 1.4 per cent). It has to be noted that while economic growth remained positive, the slowdowns that were witnessed indeed affected a noticeable incidences of unemployment. Anytime there was slow in the growth, the rate of unemployment was high. Looking at the tables and graphs, this trend was common between 1990 and 1991 (being the longest period of unemployment recorded in the country). 2.5. Macroeconomic Reasons for the Movements in Economic Growth Australian economy between 1986 and 2005 showed unprecedented degree of flexibility making it resilient to the numerous external shocks that rocked her growth in the years between 1970s and early 1980s. At least between 1986 and 2005 issues such as the collapse of the dot-com bubble, Asian crisis and collapse of the US sub-prime credit bubble did not affect the economy between 1986 and 2005 (Rusticelli et al. 2015). Secondly, the floating exchange rate in Australia has played significant role between 1986 and 2005. The Australian dollar has been instrumental (played countercyclical role) by falling and rising in response to different external events (Chan et al. 2015). 2.6. How Movements in Overall Economic Growth Affect Business Plan in Part I Establishment of wine business as suggested in the part above will be dependent on the economic situation in Australia. Generally, since the economy is in a state of upswing, it means that wine business will have a rush of expanded or new business opportunities. As Chan et al. (2015) noted, a strong economy as it is the case here will provide the wine business with greater prosperity. In such environment, disposable income will be high, low unemployment and consumer confidence will make people to pump their money back into the economy by purchasing none-essential goods such as the wine. 2.7. How Unemployment Rate and the Inflation Rate Would have Impact on Wine Business In the periods of economic slow-down, what come are the high rates of inflation and unemployment. In such cases the wine business, which happens to be small business will face different challenges. In such cases, consumers will be more careful or concerned about the stability of their jobs and, as a result, they are careful on the amount of money they will put on wine---which apparently is none-essential good. When this situation go on there will be decreased revenues for the business. Parker (2016) found that when there is slow stream of profit then this can be difficult for wine business especially in the repayment of creditors negatively affecting long term viability of the business. As time goes by, the business would want to ask for loans but with inflation and unemployment rates it means financial struggles thus limiting business’ qualification for loans for operations and capital expenditures. The figure 3 below explains the point. Figure 3: Effects of Inflation and Unemployment on Wine Business The figure 3 above indicates that business, inflation, unemployment and economic growth change cyclically over period of time. From the figure, the wine business will reach its high when inflation is high but unemployment is low. References Chan, J.C., Koop, G. and Potter, S.M., 2015. A bounded model of time variation in trend inflation, NAIRU and the Phillips curve. Journal of Applied Econometrics. Parker, P.D., Jerrim, J. and Anders, J., 2016. What effect did the global financial crisis have upon youth wellbeing? Evidence from four Australian cohorts. Developmental psychology, 52(4), p.640. Rusticelli, E., Turner, D. and Cavalleri, M.C., 2015. Incorporating anchored inflation expectations in the Phillips curve and in the derivation of OECD measures of the unemployment gap. OECD Journal: Economic Studies, 2015(1), pp.299-331. Read More