Applied Business Economics - Assignment Example

Running Head: Applied Business Economics Name: Lecturer: Course: Date: Question 1 The state or the government provides resources and funds for public funding, meant for the operation and maintenance of political parties and/or candidates. According to the government provisions, the candidates as well as the political parties should have an equal access to the funds. Although not clearly entrenched in law, the rules and regulations on public funding, despite being well clarified will often times be misused by an incumbent candidate or party. However, legal measures such as multi-party systems are necessary to hold administrators accountable and responsible. While the funds may be derived from various sources, the uses of the funds are categorized into direct and indirect public funding. The political parties/candidates receive direct public funding in form of money, while indirect public funding exists is provided in form of resources with s monetary value. As most organization managers are tasked with managing finances, the government process essentially involves management of public finance through resource mobilization, budgeting for the funds, vetting for priority projects, exercising controls and efficiently managing resources. Gradually, emphasis is increasing on the management of financial resources; thereby the public demands for accountability for their funds, has increased (Goodwin et al, 2009, p. 317). The government expenditures such as direct and indirect funding are financed through government revenue and government borrowing. Taxes and on-tax revenue from assets sales, government-owned corporations and wealth from sovereign funds determine the amount of revenue. Similarly, the options through which the government decides to borrow its finances is likely to have a significant effects on income redistribution (dissemination of income and wealth) and market efficiency (tax effects on prices and efficiency). Once market adjustments have been considered and tax burdens redistributed, tax incidence is associated with how tax effects on income distribution, occurs. Consequently, analysis of the various types of taxes and borrowing exposes such administrative issues such as tax enforcement (Iyengar, Jiang & Huberman 2004). Considering the move by most governments to finance political parties/candidates through public funds, public funding is positively perceived in numerous ways. Primarily, public funding is naturally considered democratic and necessary. Some major expenses for political parties and candidates include, electoral campaigns; professional fees; maintaining contacts with constituency members; and enact policy decisions. Throughout the years, the desire for independent candidates and/or stable political parties, has forced governments to support political party candidates financially. Similarly, public funding aids in curbing corruption and reducing acceptance of interested money during electoral campaigns. Unlike funding from donors and individuals with ill intentions for the composition of the legislature, public funding provided for candidates/political parties, curtails the chances of policy influences and voting composition of the legislature. Provision of public funds accords the state the power to mobilize support for a minority few through policy changes. Using public funds, the state can motivate or demand reforms for political parties, support for election, and woman from a minor community (Armstrong & Vickers 1991). Corruption and lack of transparency among the candidates will be curtailed through provision of public funding. Once the activities and expenses have been funded by public funds, candidates will be willingly and faithful to publicly avail their financial statements for public scrutiny. As such, voters choose to accept as legal, certain sources of funding while at the same time holding their leaders accountable. Societal issues such as socioeconomic differences might transform to political differences in the government if political parties and candidates receive funds singly from private funds. It is therefore imperative that support base for political parties be divided on the basis of socioeconomic lines. For instance, labor parties have had a less wealthy support base compared to other parties; which if allowed to continue with cause the socioeconomic differences within the society to determine representation and access to political power in the government. According to Iyengar, Jiang & Huberman (2004) the increasing costs of campaigns have gradually forced political parties and candidates seek alternative sources to finance the expensive advertisements, purchase on-air time to reach to the diverse voters; and high staff costs within the political parties. Unfortunately, candidates and political parties from societies with high poverty levels, expect little or no contribution for the campaigns. In such situations, the state assumes the responsibility of funding the campaigns in order to protect the poor members of the society from parting with the meager resources. Use of public funding serves as a means of ensuring that money is in circulation throughout the economy. Although a sudden increase in money supply could result into inflation, money supply during times of economic growth will instead stabilize prices. In the Money Market MS -Money Supply and MD-Money Demand However, sudden increase in money supply lowers the nominal rate of interest. Nevertheless, the increase in money supply raises real income, causing the demand for money to increase (demand curve shifting to the right). Eventually, the fall in the interest rate occurs by a margin less than it would have declined had the income stagnated. On the other hand, full anticipation for the money supply causes the demand to increase by a higher margin than it would have risen had the change been unanticipated. Because of anticipated increase in money supply, a booming economy translates to an increase in demand for labor. The boom means, performing businesses; plans to invest in newly proposed projects, hence demanding for workers; the boom improves the living standards of the poor by alleviating poverty through jobs. The labor demand curve The demand curve shows the amount of work (in work hours) demanded by firms at varying wage rates. Because the firms opt to downsize if work becomes expensive, the curve has a negative slope. The use of public funds to finance activities that directly affects the lives citizens, serves in removing the objections to paying taxes by individuals. Due to opposition to the policies and institution imposing tax, individuals need to be convinced as to why they should willingly pay taxes. Effective and efficient use will ensure accountability of spending public finances; thus convincing the taxpayer, to pay willingly. While the benefits are numerous, arguments against use of public funding exist from the point of view of individuals opposed to funding candidates and political parties. Fundamentally, the distance between the political bigwigs (leadership and candidates) and ordinary citizens (supporters, members and voters) increases. Due to the financial independence on the supporters monetary contributions and voluntary labor, the political parties and candidates will increasingly sideline the members from party decisions and policy issues. Secondly, established candidates and political parties deriving support from the public funds are likely to remain in power fro relatively long period. New parties seeking political representation may find it difficult to oust the existing regime. In order to counter this vice, a separate package should be set aside for new political parties and candidates. Thirdly, the political parties and candidates that succeed due to public funding enforce views and personalities on taxpayers, not considering their views and opinions. Because, the public fund exceeds any amount an ordinary taxpayer could contribute to the political party, their decisions will contribute little to change the way electoral voting takes. Fourth, the huge demands for funding electoral campaigns takes money meant for social amenities as schools and churches. Public use or funds such as salaries, roads and schools, means a criterion has to be followed while determining which projects to fund, ahead of the others. Question 2 Competition policy is linked with price discrimination primarily because of three controversial concerns. Primarily, a monopolistic firm through price discrimination may “exploit” the final consumers in the hope of reducing the consumer’s total welfare. The circumstances that may consider price discrimination as adversely affecting the consumer’s welfare will depends on the welfare standard that regulates implementation of competition law. Additionally, the policy objective of obtaining a “single market” across a region requires that a firm does not price products differently according to geographical regions or ensure that arbitrageurs are not prevented from souring goods from low-priced regions and reselling o to high-priced regions. As a result, segmentation by firms targeting price discrimination is curtailed. Lastly, discrimination might be viewed by a competition authority as strategy by market leaders or oligopolies to weaken potential competitors. However, rarely has price discrimination been effective to disadvantage the seller’s rivals or the buyer’s rivals forcing them to compete less fiercely or to quit the market. The fact that a given form price discrimination may efficiently avail products to consumers in one hand, but still impose exclusionary effects on the other hand, remains for the competition policy and laws to mitigate the risk of firms using price discrimination to make the market less competitive (Kelner et al, 1999, p. 145-154). Despite the above misgivings, certain economic motives present the situations during which price discrimination will have beneficial effects on the rivals, consumers and total welfare. Unfortunately, welfare problems by firms maximizing their monopoly power are associated with inadequate information concerning the consumers’ preferences and public policy restrictions. However, when firms are allowed to engage in price discrimination, they often times realize efficient prices; though consumers’ welfare may be negatively impacted. Therefore permitting firms to practice price discrimination leads to efficient prices; opens or shuts markets; affects output; causes some prices to rise and others to fall; intensifies competition; relaxes competition; and affects entry into new markets. Fundamentally, allowing firms to practice price discrimination is likely to open new markets that would otherwise not been accessed. For example, a firm enjoying market power has two independent markets; one with “low value” and the other with “high value”. If discrimination is not allowed and the “high value” market is comparably huge, the monopolist will opt to serve the high-value market. On the contrary, allowing discrimination results in Pareto improvement; maintaining the high-value market price, but ensuring that the low-value consumers are equally served, translating to high margins for the firm. Consequently, a firm that discriminates can generate a higher profit to cover its fixed costs, unlike a firm that does not discriminate. For instance, a rail operator is sure to breakeven if it can discriminate low income-earners and other kinds of travelers, or a broadcaster will reap high profits if it can bundle together the channels its offering. Although Pareto improvement results from an environment of price discrimination, rarely do markets shut down completely if the practice is banned. Instead, there will always be an individual willing to pay any price for a high-value product; thus, price discrimination also affects total output. Secondly, price discrimination causes total output to be sub-optimally disseminated from a social welfare angle, if different products with varying marginal prices have the same marginal cost. In order to outweigh the undesired effect of “unequal marginal utilities” firms should be allowed to price discriminate. Although a decrease in a firm’s output due to price discrimination may result in an increase in the consumer’s welfare, an increase in output will not always lead to Pareto improvement (Armstrong & Vickers 1991). Thirdly, consumers’ in a price-discriminatory markets will have to contend with the increases and decreases in prices. Mathematically, the average of the discriminatory prices considered as the non-discriminatory price. For instance, a monopoly faced with two markets 1 (profits less than zero) and 2 (profits greater than zero) will price discriminate by lowering the price in market 1 and raising the price in market 2. Further, if competing firms are price discriminating in two markets, prices will rise in the markets considered strong by both firms, and prices will fall in markets considered weak. Fourthly, competition intensifies in environments where firms are allowed to practice price discrimination, thereby causing all prices to fall. In one model, firms discriminate on the basis of consumer brand preferences, while the second model, firms discriminate under competitive bundling. In the first case, firms considered to be aware of customers’ preference will raise their prices to take advantage of the close customers’ unwillingness to call the firm a distance away. All factors kept constant, customers who are indifferent of the brands, will get the best prices, and the firms will be forced to set prices above the discriminatory prices. Hence, at equilibrium, the likelihood of all prices decreasing with discrimination is very high. The major difference between competition and monopoly is the fact that firms might be made worse off when allowed to participate in price discrimination (Kelner et al, 1999, p. 170-172). A monopolist is therefore better off when it is allowed to price discriminate; by generally setting different prices. hence as a monopolist in the public transport system, the Melbourne company using trams, trains and buses, discriminates by availing greater range of tickets on the full fare option than on the concessions. Although the concessions may be priced lower than full fare, the company opts to take advantage of the full fare consumers, who are unwilling to wait for the concessions option. Question 3 Price is defined as the monetary or compensation exchanged between the buyer and the seller in return for goods or services. The existence of price variation in a market with homogeneous goods is an indicator of imperfect information in the market and suggests that when consumers buy high-priced instead of identical lower-priced ones, welfare losses occur. An economic issue of varying prices in the market is that the price of water changes due to various brands, which brings about monopolistic competition (Lott 1991). Under monopolistic competition, differentiated products exchange hands among many competing producers of similar products. The products though differentiated through branding and packaging are substitutes of each other. On the other hand, the ability of firms behaving like monopolists and even generate profits using market power, though in the short run, is characteristic of monopolistic competition. However, entry of other competing firms into the market in turn decreasing the benefits associated with differentiation, in the long-run. As a result, just like perfect competition, the market players can no longer enjoy economic profits (Goodwin et al, 2009, p. 317). In the graph, the firm reaches the equilibrium especially during the short term. At the intersection of marginal revenue (MR) and marginal cost (MC), the quantity of products maximizes the firm’s profits. Based on the marginal revenue (MR) curve the firm can collect a price. The difference between the firm’s average revenue and average cost gives it a profit. A number of benefits accruing due to varying prices include, (a) many producers and many consumers in a given market and no business has total control over the market price, (b) consumers perceive that there are non-price differences among the competitors' products, (c) few barriers to entry and exit, (d) producers degree of control over price,(e) product differentiation, (f) presence of many firms, (g) free entry and exit in long run, (h) independent decision making, (i) monopoly power, and (j) buyers and sellers have perfect information. However, a number disadvantages exists for varying prices, including. (a), a monopolistically competitive firm making zero economic profit in the long-run, (b) fostering of advertising and the creation of brand names, and (c) existence of marginally inefficient market structures because marginal cost is less than price due to virtually identical brands and relatively inexpensive information gathering (Cooper et al, 2005). Consequently, a number of economic issues exist for homogenous prices. Homogenous prices in the market like oil price are due to small number of sellers (oligopolies) which creates oligopolistic market. Oligopolistic competition results when the one firm’s decision to influence equally affects another firm within a market. Consequently, the affected firms diverse reactions depending on the impact level will include, restricting production, market sharing to hike prices, and collusion characteristic of monopolies. Just like monopolies, collusion by firms is aimed at planning for development and investment by mitigating the risks common in these markets, and to stabilize the otherwise unstable markets. Oligopoly theory makes heavy use of game theory to model the behavior of oligopolies: (a) Stackelberg's duopoly, whereby firms in the market move sequentially, (b) Bertrand's oligopoly. In this model, the firms simultaneously choose prices, and (c) Cournot's duopoly, where firms dictate the amount of products (Lott 1991). Additionally, firms in an oligopoly follow similar principles as an imperfect competition. Firms opt to use non-price competition to acquire market share and greater revenue due to the cut-throat competition from the sticky-upward demand curve. The numerous benefits of homogeneous prices include, Profit maximization conditions: An oligopoly maximizes profits by producing where marginal revenue equals marginal costs; ability to set price: Oligopolies are price setters rather than price takers; entry and exit: Barriers to entry are high; number of firms: "Few" – a "handful" of sellers; long run profits: Oligopolies can retain long run abnormal profits; product differentiation: Product may be standardized or differentiated; perfect knowledge: Assumptions about perfect knowledge vary but the knowledge of various econ; interdependence: The distinctive feature of an oligopoly is interdependence; and economies of scale (for production and new product development) (Cooper et al, 2005). However, homogenous prices have major disadvantages in the oligopolistic competition. The few firms in this market have extensive amounts of power and may even collude to set prices; price-discriminate in order to determine the amount of income they generate. References Amstrong, M and Vixckers, J 1991, ‘Welfare effects of price discrimination by a regulated monopolist,’ Rand Journal of Economics, vol.22, no. 4, pp. 571-580. Cooper, J, Froeb, L, O’Brien, D & Tschantz, S 2005, ‘Does Price Discrimination Intensify Competition? Implications for Antitrust,’ Antitrust Law Journal, vol. 72, pp. 327—373. Goodwin, N, Nelson, J, Ackerman, F & Weissskopf, T, 2009, Microeconomics in Context, Sharpe, p. 317. Iyengar, SS, Jiang, W, & Huberman, G 2004, ‘How Much Choice is Too Much? Contributions to 401 (k) Retirement Plans,’ in Pension Design and Structure: New Lessons from Behavioral Finance, Oxford University Press, pp. 83-96. Kelner, B, et al., 1999, ‘Market Segmentation Strategies and Service Sector Productivity’, California Management Review. pp. 145-172. Lott, JR, Jr, & Roberts, RD, 1991, ‘A Guide to Pitfalls of Identifying Price Discrimination’. Economic Inquiry, vol. 29, pp. 14-23. Read More