Says Law and the Classical Theory of the Cycle, Saving and Economic Growth - Essay Example

nоmiс Аnаlysis for business Name Course Tutor Institution Date Есоnоmiс Аnаlysis for business Value Added Value added refers to the quality that is added to an item which in turn increases its value and consequently its worth. Information regarding this is in the book by Kates (2014, Pp 78). Adding value encompasses transforming a less valuable product into a more valuable one through the production process. Value creation involves a transformative process that ensures a set of goods or services is completely turned into a new set that is able to provide more value in comparison to the inputs used. For instance, a nail, hammer, saw, wood and some time can all be transformed into a table with more value. By considering this, a product can be defined to have gained more value if it fetches more value or return in its final state in comparison to its initial state. For instance, clothes are expected to earn more returns or to have a larger monetary value compared to cotton and the time used. The raw material has value, however, either the raw material is unsuitable for consumption in its current state or it cannot generate the desired value or satisfaction. In the real world, cotton cannot be worn unless they are processed into clothes. In the same way, chewing sugarcane and drinking sugarless tea may not have the same effect as adding refined sugar into the tea. Therefore production process only increases that value, hence value added The theory of value added is much reflected in the article ‘iPhone SE vs. iPhone 6: Specs Showdown’ published on Skymag.net on March 24. The theory of adding value provides an important parameter for understanding the article. In this case, plastic and electronic components, through a transformative process, turn into phones. However, this goes even further, just as the article indicates. The article describes two versions of iPhones produced by Apple Inc. The first versions are iPhone Se and iPhone 6. iPhone 6 is the improved version of iPhone SE. For this reason, iPhone 6 has increased capacity than iPhone SE which in turn elevates the value and to a greater extent the monetary value or returns of iPhone 6. For instance, the article indicates that the average price of iPhone 6 is $549 while iPhone SE goes for $399. The Role of the Entrepreneur The role of the entrepreneur is widely discussed by Kates (2014, Pp 111-113). Entrepreneur is definitely the most vital factor among all the four traditional factors of production. Thus, production cannot occur without the entrepreneur even if all factors of production are present, there has to be someone to organize all the factors of production. In emphasizing this point, this is the only factor of production that not only hires but also rents and purchases the remaining three factors of production while directing them to a productive use. This may further entail bringing together factors such as labor, materials, and inventory as well as incurring the necessary cost for production to take place For the economic market to function effectively there has to be someone responsible for making all the necessary decision. This is the way contemporary economies are differentiated from the primitive ways of producing goods and services. In this case, the role of the entrepreneurs is to ensure that their businesses succeed by making effective decisions. Most entrepreneurs ensure they inspire their labor force to produce to their maximum potential by offering incentives. Furthermore, the essence of any business is to realize profit. This can hardly take place if risks are not taken. It is the role of the entrepreneur to guide the business through uncertainties to determine viable opportunities; otherwise the entrepreneur suffers the risk of the business being unprofitable. This theory is of great significance in understanding the news article ‘Vivian Lee: Trust in Your Own Leadership Style”. As stated earlier, an entrepreneur needs to ensure that the company has the right workforce who can steer the organization towards the realization of the set objectives. This involves establishing the right hiring techniques which enable the business to attract the best talents from the job market. The news article ‘Vivian Lee: Trust in Your Own Leadership Style” published in the New York Times on April 29, 2016, features an interview which reveals qualities of an entrepreneur in line with the previous suggestions. In this case, the theories covered under the roles of an entrepreneur can be used to provide understanding on the topic. The article features the qualities that entrepreneurs look for when recruiting a new member of the workforce such as innovativeness. Supply and Demand Demand and supply are the major market forces that determine the flow of goods or services in a given market and are greatly described in details by Kates (2014, Pp 161-163). Demand refers to quantity of products that a buyer is willing to buy at a given price and at a certain time. Supply, on the other hand, is the quantity of products that the market is willing to offer at a given price. Further still, supply is determined by the demand in the sense that suppliers are willing to supply the quantity demanded only at a given price. Similarly if the suppliers are not willing to supply more at the prevailing market price, fewer products will be supplied to the market. The ultimate impact is that the prices will increase since more is demanded and less is available. The opposite is true. If the producers are willing to supply more to the market the price of the products will go down since the amount of supply is more than the demand. This consequently reaches an equilibrium point at which the free market forces determine the average demand, supply and price. However, in some case the government may intervene in the market situation if it considers the equilibrium price as not befitting hence set the price for the products, for instance by imposing a price ceiling for protection purposes. The equilibrium price will therefore be rendered ineffective. When the price ceiling is below the equilibrium price then the quantity supplied will be less than the equilibrium quantity, the quantity demanded will be high, and the intended protection will not be satisfactorily realized. A graph illustrating the principle of price ceiling Pursuing this further, price floor is the opposite of price ceiling and is defined as the lowest price set by the government. The theory of demand and supply is quite significant in relating to the issues highlighted by the news article ‘ExxonMobil and Chevron profits slide on low oil prices’ published on the BBC business segment on April 29, 2016. This news article reports the drop in profit margins felt by oil giants. The huge losses are caused by a reduction in the price of the crude and weak refining margins. The article cites oversupply of crude oil, the entrance of new players and reduction of crude oil from China and other developing nations as some of the factors that have led to the losses. Oil is one of the highly consumed commodities globally. This makes oil one of the most important elements of the economy of most countries. As a result, the prices become very significant and the subsequent fluctuations caused by market forces must be monitored keenly. The theory of supply and demand can be employed to make sense of the situation. The impacts of demand and supply are felt due to the uncertainties revolving around the production. Say’s Law and the Classical Theory of the Cycle Kates (2014, Pg323 and Pp336-338) is deeply concerned with Say’s law and the classical theory of the cycle hence discusses them in more details. The classical theory of the cycle revolves around fours important aspects of the classical economy which include income, production, demand, and supply. Say’s law and the theory of the business cycle holds that the goods or services supplied to the market create their own demand. According to Say’s law, this implies that all income earned are likely to be spent buying goods and services supplied into the market. In other words, an aggregate demand is created by aggregate production. The underlying assumption regards the motive for earning income as to spend it on the goods and services that are supplied to the market. Under this model, at a full employment level, there is equilibrium between the flow payment leaving a business and the amount of demand into the business. However, this is often not the case. There are leakages which sip or reserve of the income preventing the perfect flow between income and expenditure. These leakages include taxes (T), savings (S), exports (E), imports (M), investments (I) and government spending (G). the classical theory of the cycle is covered under five theories which include purely monetary theory, over-investment theories psychological theories, under-consumption theories and entrepreneurial error and creative destruction. All these theories point out the changes in the money flow which in turn affects economic activities. Say’s law and the classical theory of the cycle serve a critical role in understanding the news article ‘NATO spending target 'met by MoD accounting changes' as they explain the flow of cash in an economy. As indicated, the underlying assumption that every income earned is spent on goods and services produced within the economy do not often hold the ground. ‘NATO spending target 'met by MoD accounting changes' explores the UK’s government expenditure on defense. The Article elaborates that the UK government had pledged to spend 2% of the country’s GDP on defense. This indicates how funds diverge from the flow of money in a classical economy. Thus, there are exceptional cases where the money does not flow hundred percent from earnings to expenditure. The shortcomings in the flow of money from income to the purchase of goods can be considered as leakages. One of the leakages, as noted in the news article, is the government spending or expenditure. The Relationship between Saving and Economic Growth The relationship between saving and economic growth is greatly discussed at length by Kates (2014, Pp385-387). The relationship between savings and economic growth can be analyzed as a causal and effect. The existence of one aspect leads to the consequences or reward of the other. Saving is an important factor of economic growth. When savings accumulate, they serve as a reserve of capital which can be tapped into when creating production, investment or employment. It is unquestionable that these are the activities that impact economic growth. In connection to that, economic growth is often affected negatively when there are more borrowers in the market as opposed to those willing to save. The harmful consequences in such a case include insufficient investment funds, slow or stagnated economic growth, an increase in inflation and inflation of prices of assets. The reverse holds. If the borrowers are reduced, the amount savings will eventually increase which in turn increases the amount of capital available for investment, production and employment. A graph illustrating various investment levels at varying interest rates “Europe’s Economy, After 8-Year Detour, Is Fitfully Back on Track” published by Peter Goodman on New York Times on April 29, 2016, can be understood clearly using theories incorporated in the relationship between savings and economic growth. The article explains that major banks across Europe are reluctant to lend money. This is one of the strategies that the continent is using to recover from deep economic turbulence. As explained earlier, the relationship between the two economic variables (savings and economic growth) is determined in terms of causal and effect. Accumulated savings implies that there are sufficient funds for investment as opposed to having borrowers within an economy. In that case, it is important to observe that an economy where the lending institutions discourage borrowing is likely to improve. This is because there are enough capital resources accumulated in the form of savings which can be used to create employment, production, and investment. Recent News Items Dealing with the Five Topics The News Articles Used Include Kates, S., 2014, Free market economics: an introduction for the general reader, Edward Elgar BBC News, 2016, ExxonMobil and Chevron profits slide on low oil prices - BBC News. [online] Available at: http://www.bbc.com/news/business-36167499 [Accessed 30 Apr. 2016]. BBC News, 2016, Nato spending target 'met by MoD accounting changes' - BBC News. [online] Available at: http://www.bbc.com/news/uk-politics-36094112 [Accessed 30 Apr. 2016]. Bryant, A., 2016, Vivian Lee: Trust in Your Own Leadership Style. [online] Nytimes.com. Available at: http://www.nytimes.com/2016/05/01/business/vivian-lee-trust-in-your-own-leadership-style.html [Accessed 30 Apr. 2016]. Digitaltrends.com, 2016, iPhone SE vs. iPhone 6: Specs Showdown. [online] Available at: http://www.digitaltrends.com/mobile/iphone-se-vs-iphone-6/ [Accessed 30 Apr. 2016]. Goodman, P., 2016, Europe’s Economy, After 8-Year Detour, Is Fitfully Back on Track. [online] Nytimes.com. Available at: http://www.nytimes.com/2016/04/30/business/international/eurozone-economy-q1.html?ref=business [Accessed 30 Apr. 2016]. Read More