Says Law and the Classical Theory of the Cycle - Essay Example

nоmiс anаlysis for business Name Course Tutor Institution Date Value Added This is discussed Kates in page 79. Value added is a result of production, and the value added refers to whatever is done to the original material or product so as to make it better, therefore increasing its value and worth. In the creation of an end product, an item known as a raw material is transformed into a final product which is then to be sold out. Value added in the production process is then measured by the worth of the end product. For value add to occur, the value at which the end product is sold must be higher than the total cost of its production. For example, the production of beef stew in a restaurant involves the cost of the meat, ingredients, labor and other overheads which may include transportation of the items to the restaurant. For value add, the total price at which the beef stew is to be sold out to customers should be in excess of all these costs incurred in making the stew. For businesses operating in bulk and to the economy in general, value is added when revenues received from sale of products exceed the production cost and the cost of all materials put into the production. An economic activity therefore is a value creating activity where available goods and services are used to create other goods and services of higher value. Since the main goal of a business is to make profits, value addition is at the core of every business. Value addition is discussed in the article ‘Value addition: Not just a buzzword’ appearing in the Mail and Guardian on 19 February 2016. The writer says that value addition should be viewed from a business case perspective and not as an affirmative action. Value addition is proposed as the solution to the Africa’s poverty and low economic growth challenges. Most of the items produced in Africa are of low quality and therefore have low net worth. Equally, the costs of production are quite high. To help earn more revenues and therefore improve their economic growth, the continent should therefore focus on steps to enhance value addition. For instance, Namibia, an exporter of gold, processed its gold in South Africa as it would be expensive building such processing plants at home. Ivory Coast on the other hand has achieved value addition through building factories for its cocoa. The continent should also focus on value addition at sub-regional level and reap from the benefits of economies of scale. Role of the Entrepreneur This is discussed by Kate in pages 111-113. An entrepreneur is a person who organizes all the other factors of production. Being one of the four factors of production, an entrepreneur is the most important of them all as he takes the ultimate responsibility in decision making. The role of an entrepreneur cannot be overemphasized in an economy. The business world, being full of uncertainties, requires people who can make important decision. An entrepreneur bears all the risks and in the face of all uncertainties makes key economic decisions like when, how and what to produce. He mobilizes all the resources and brings them together to the point of production. These factors include labor, capital and land. An entrepreneur also provides the required leadership that drives the economy. The growth of the economy depends on the decisions of the entrepreneur. This is because such decisions directly influence the level of production. In the article ‘The only good reason to start a business in 2016’ featured in the entrepreneur magazine on 5th January 2016, the writer agrees to Kates by saying that the role of an entrepreneur is critical as he is the one to identify the market need and customer problems. He goes on to mention a number of successful entrepreneurs who have identified market needs, taken the risks and consequently come up with products and services that have led to massive economic growth. The risks borne by every according to Steve Tobak include abandonment of career and the chance to grow in experience by working for others. Because of their passion for risk, they are able to help bring equilibrium between supply and demand. That is to say, an entrepreneur will identify a need in the market. At this point, there are willing buyers for a good or service currently unavailable in the economy or available in low quantities. He will then mobilize all the factors needed for production of this good or service. This activity increases supply, thereby creating parity in the market. As a result, production and expenditure increase, leading to increased economic growth. Supply and Demand The topic is discussed by Kates in pages 161-163. These are the two major factors that influence the flow of goods and services and their prices especially in free markets. Demand refers to the amount of goods and services that buyers are willing and able to buy at a given time. Demand affects the prices of goods and services directly. That is, when demand increases, prices tend to go higher while when demand is low then prices fall. Supply on the other hand is the number of goods and services that sellers are willing and able to sell at a given time. If supply is more than the demand in the market then prices tend to fall while when supply is lower that demand, prices tend to go high. At a point of equilibrium, supply equals demand. The price for goods and services at this point is called equilibrium price. The market is considered stable at this point. The graph below shows the equilibrium price and quantity which occur at the point of intersection between the demand and the supply curves. At given times and for given reasons, the government may try to influence prices by dictating the market prices for certain goods and services. This influence may come in form of either price floors or price ceilings. Price floor is the minimum price set by law at which a good or service can be bought. A price ceiling is the maximum price set by law. These normally cause disequilibrium in the market, and often lead to hoarding and shortages. In an online article titled ‘Avocado prices hit record highs with increased demand and scarce supply’ written on 20th January 2016, the prices of avocado fruits in Australia hit the roof due to the forces of demand and supply. With the weekly production during the year having fallen from 360,000 units to below 100,000 and the demand remaining constant, shortages have been noted. The prices are still on the rise as the supply is still expected to be low during the year. Because of the high prices also, people have gone ahead to plant more avocado trees, and it is expected that later in the year there will be sufficient supply which will again normalize the prices. This agrees pretty well with Kates’ argument of the forces of demand and supply in a free market. Say’s Law and the classical theory of the cycle This is discussed by Kates in pages 324-325. In an open economy, goods are exchanged for others using money as the intermediary. The classical theory of the business cycle recognizes that economies or business cycles result from four main economic factors including demand, supply, income and production. These economies however had no explanation for the causes of recession and unemployment. According to Say’s Law supply creates demand. This implies that production should be increased instead of increasing demand as aggregate demand is a function of aggregate supply. According to this law therefore, when one produces goods or services, he gets paid for the work done. He can then use the money to demand other goods and services. In other words, ‘goods buy goods’. It is therefore not the amount of money in circulation in the economy but the amount of goods produced at a given time that influences the growth of that economy. The existence of money plays an intermediary role but as well has the potential of leading to market instability. The classical economists incorporated Say’s law by arguing that it is savings rather than consumption that leads to creation of wealth. Low production therefore leads to recession while high production and supply is the remedy to recession. This however is at times affected by the decisions of producers. Many producers always make wrong decisions which including the coordination of activities and timing of production. This law is however highly opposed by other class of economists who believe that prices direct production. While Say maintains that money is simply a mode of transfer in the economy, these economists explain that suppliers will determine the quantity to produce depending on various factors. One thing that cannot be refuted here is that low prices therefore reduce production while high market prices increase supply. In an article by Nick Timiraos appearing on The Wall Street Journal titled ‘Five trends that will shape the future of the US economy’, on 22nd February 2016, the writer cites low production as one factor that has led to the recession that the US economy has faced in the recent times. He says that economists have been worried about the productivity slump faced in the country in recent times. The economy is onto ways of increasing production as they believe this will spur economic growth. New technologies are being developed so as to help increase production. This is quite in agreement with the law in relation to the economic cycles as also propagated by the classical theorists. The relationship between saving and economic growth The passage I discuss here is in pages 365-366. While people may have money that they use in production, this only represents goods and services initially produced for consumption or purchase. Saving is one component of national income beside investment, consumption, government expenditures and net exports for economies involved in international trade. From an economic perspective, savings refers to spending by a person other than the earner of the income. It is defined so since business and individuals borrow and spend money saved into financial institutions by other people and businesses. A diagram illustrating how savings flow to potential users. There is a cause effect relationship between savings and economic growth. Savings enhance economic growth in the sense that these resources can be borrowed by those in need so as to create wealth, increase production and undertake various investments. Borrowings by individuals for purchases of consumer goods however do not spur economic growth as it does not add anything to the economy’s productive potential but only brings intended consumption to an earlier date. Investment activities also lead to creation of employment. Increased savings therefore lead to increased economic growth. An economy with a low propensity to save on the other hand faces a slower economic growth, normally characterized by inflation, unemployment and low production. The level of savings in a free economy also affects the interest rates. Low savings means there are no funds to borrow for investments, therefore interest rates, which is the price for money, go up. In an economy that saves a lot, the interest rates are low. This follows the same rule for demand and supply earlier discussed. In the article ‘Has the global economic growth malaise become the new normal?’ published in the Guardian newspaper on 2nd May 2016, this is brought out quite clearly. The world economy has been on slow down according to research by the International Monetary Fund. The writer attributes this to a number of factors, among them poor savings. The marginal propensity to consume has been on the rise, and this only means that savings have therefore declined. This has consequently made borrowing expensive due to high interest rates. The resultant effect is low investment both by businesses and individuals. Most economies are characterized by overspending and under saving. As part of the solutions that the world may enforce to revert this trend, Nouriel Roubini, the writer, says that savings must rise both in the public and private sectors so as to reduce the high deficits and debts. Bibliography Timiraos, N., 2016, Five Trends That Will Shape the Future of the U.S. Economy, The Wall Street Journal. Retrieved on 10th May 2016 from M&G, 2016, Value addition: Not just a buzzword, Mail &Guardian. Retrieved on 10th May 2016 from: Tobak, S., 2016, The Only Good Reason to Start a Business in 2016, Entrepreneur Retrieved on 10th May 2016 from Webster, L., 2016, Avocado prices hit record highs with increased demand and scarce supply, Rural. Retrieved on 10th May 2016 from < http://www.abc.net.au/news/2016-01-20/australian-avocado-prices-hit-record-highs/7099046> Roubini, N., 2016, Has the global economic growth malaise become the 'new normal'? The Guardian. Retrieved on 10th May 2016 from Read More