Economic Value Added: The Invisible Hand at Work - Assignment Example

Economic analysis for business Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission Economic analysis for business Question 1: A firm X is trying to calculate the overall added value of its product aimed at assessing its economic viability. Which of the following contexts explain how the value added will be calculated in company X? a) It is the NOPAT (net operating profit after tax) less a dollar cost of capital charge b) It is the overall variation between the book value of equity and the market value of the firm c) It is the difference between what the consumer in the market is willing to pay for the product and the cost of the product d) None of the above The value added calculation is a major maze that confronts many students and this spills over when they are appointed in various organizations. They fail to grasp the general utility of value added in the eventual selling price of the final product reaching the consumer relative to the cost of the product. Against this background, the calculation of value added is embedded in the definition of the term. Durant (1999) perceived value added in economics to mean the net operating profit after the overall cost of capital and taxes. In this regard, the prudent procedure of calculating the value added of the product in firm X will be through precise calculation of the overall cost of producing the product subtracted from the cost of the product in the market. For instance, if the cost of producing that particular product is $10 and the product is selling at $15 in the market, then the total value added of that product in firm X can be perceived to be $5. Question 2:Which of the following does not constitute factors of production? a) Entrepreneurship b) Capital c) Land d) Labour e) None of the above There have been major discourses on what constitutes factors of production in any given firm among economists. Some have alluded that the only land, capital and labour are the only traditionally accepted factors of production and their feasibility stands to date, Nonetheless, another school of through has proposed the inclusion of entrepreneurship in this list on an equal measure. Even other scholars like Kendal and Scott (1990) advocated for the inclusion of information in the traditional list of factors of production. However, despite this ideological antagonism, it is apparent from economic argument trickles back to the original factors of production based on what each factor produces or the output in any given firm. Nonetheless, the eventual inclusion of entrepreneurship in this list is after a profound reflection on the role of this factor in different firms, which has placed it to be the most important and at the center of the production process. This is founded on the background the entrepreneur rents, hires and purchases the other three factors of production and then undertakes the eventual role of directing them towards their productive use. In this regard, entrepreneurship plays an integral role in the production process thus core among the other traditional factors of production. In addition, the economists have also concurred on the inclusion of finance as a minor factor as a result of its role in the production process and because it is not categorized under capital. Question 3: The following outlined factors have effects on influencing the price of a commodity in the market. Which one of them poses no effect on the price of commodities? a) Demand and supply b) Inflation c) Stocks and inventories d) None of the above There are diverse factors that have massive influence in determining the price of commodities in the market. Most proponents of price shifts have forwarded various factors, but it has been pointed out that there are four major factors that influence these shifts. It is fundamental to focus on each of them. If the supply and demand of a product is in perfect balance with no external factors affecting the transactions, then this will culminate in the stabilizing of the commodity’s price over the years. However, changes in consumer demand in preference of an alternative product will be influential in lowering the price of the original product in the market and heightening of the price for the alternative product. In addition, incase factors like drought cause decline in supply of certain agricultural products, and the farmers had net kept any stock to cater for such a contingency, and the demand from the consumers is still high, then this will result in elevated price for the product. Inflation raises the price of the commodities, for instance, if the inflation goes up by 5%, a milk producer is bound to increase the price of the product by 5% due to the increased cost of production in terms of animal feeds, electricity and transport. On the other hand, the consumers will be willing to pay the increased 5% based on the fact that like everything else, their income has gone up by 5%. Question 4: A certain manufacturing firm produces 10 phones per day at a cost of $500 and selling them at a cumulative amount of $1,200. This firm plans to increase its output to 12 phones per day which will increase the cost of production to $580 and the overall selling amount to $1,500. In regard to marginal analysis, which of the following factors are not bound to inform the viability of its plan? a) The total initial benefits from the output b) The total initial cost incurred during the production process c) The amount of time spent in the course of the production process d) The Total final cost incurred during the production process e) The total final benefit from the output According to Evans (2005), this procedure is imperative in the process of forwarding recommendations to any given producer and for selecting alternative production means. The rudimentary principle underpinning this process is that it is worthwhile for a producer to elevate the inputs in a particular production process as long as the benefits of the output are more or equal to the increased cost. The viability of marginal analysis is informed by various factors in the production process. The marginal benefit is arrived at after subtracting the initial benefit from the final benefit. In this case, the marginal benefit will be $300 (Final benefit-initial benefit). Similarly, the marginal cost will be $80(final cost-initial cost). In this case, it will be viable for the producer to increase the amount with extra 2 units. However, the total time spent during the production process does not have any influence in the calculation of either the marginal benefit or cost, and thus does not inform the decision of the producer. Question 5: There are various economic indicators that are used in measuring the economy. From the list below, which of them is not an imperative economic indicator to be put into utility when measuring the economy? a) Unemployment rate b) The consumer price index (CPI) c) Price elasticity of demand d) Gross domestic product (GDP) e) Balance of payment Measuring the economy in any given country or regional trading block is paramount determining the capacity and growth of an economy which is also key in the identification of gaps which require urgent interventions from the involved stakeholders. This is chief in informing policy formulation and implementation. There are several indicators that are put into utility in measuring an economy. Unemployment rate measures the proportion of the population that is not under either formal or informal employment thus increasing the dependency ratio in a country. On the other hand, the consumer price index measures the average price of an average consumer basket has heightened overtime. In a generic sense, gross domestic product infers to the overall output in an economy through a synergy of all the resources available in a given period of time. Lastly, balance of payment is a correlation between the total exports and total imports in a country over a given period of time. All these economic indicators play an integral role in measuring the economy. However, the price elasticity of demand is not prudent in these measurements. Question 6: There are several macroeconomic activities that can lead to injection of money into the economy (according to Keynesian analysis). From the subsequent list, which two activities don’t result in injection? a) Consumption of goods and services b) Government expenditure c) Savings d) Investment into viable ventures e) Taxation Consumption of goods and services has a great impact in injecting money back to the system. This is founded on the background that the money which is subsequently spent on consumption of these goods and services goes straight back into the revenue stream of business in a given country. Similarly, investment is key in injecting money into the economic system. This is whereby when investors borrow money that was previously saved in financial institutions and subsequently use it for investment purposes, this has an overall impact of increasing money supply in the economy. Lastly, government or public expenditure has the impact of taking monies from the treasury and eventually channeling them to the economy in the process of providing public goods and services. On the contrary, savings and taxation have the overall effect of reducing money supply in the economy by extracting a proportion of the economic agents’ income. Question 7: Which of the following statements based on Keynesian view on aggregate demand and supply is not true? a) When aggregate demand equals aggregate supply, this results in equilibrium market price b) When there is a deficiency in aggregate demand, the economy will slow and unemployment will heighten c) If an economy is pushed beyond its productive potential, it will generate an inflationary effect d) The government is the only determinant of the aggregate demand in an economy Market price is usually under a great deal of influence from the market forces of demand and supply. When these antagonistic forces are at equilibrium, this has an overall effect of generating the equilibrium market price. In a phenomenon whereby the aggregate demand is minimal when juxtaposed with the aggregate supply, this means that there is very little money in the economy seeking to absorb a high supply of goods and services. Eventually, the producers will instigate laying off surplus human capital pushing up the magnitude of unemployment. This will lead to slow economic growth which can be attributed to reduced gross domestic product. On the other hand, if the aggregate demand exceeds the aggregate supply, this has the implication that there is a large supply of money chasing few goods. Producers will thus increase their commodity prices to match the excess presumed money supply. This will have an inflationary effect on the economy. These three statements form the basic tenets of the Keynesian perception of aggregate demand and supply. On the contrary, the perception that only the government can influence the aggregate demand of goods and services in the economy is false. Question 8: According to the classical theorists, there are several causes of recession in an economy. Which of the listed reasons below does not reflect the classical viewpoint on the causes of a recession? a) Errors in the production process b) Errors in monetary system c) Demand deficiency From the classical theory of the business cycle, it is apparent that radical uncertainty pervades business environment. Against this background, the producers are endowed only with a generic idea of the extent to which a particular product will be sought from them in the forthcoming period. Consequently, they are requires to make appropriate adjustments in every production season in order to match the future projected demand. However, certain conditions may make this adjustment process unfeasible, inefficiency of the technological knowhow, poor skills and knowledge among the human resources, mismanagement of resources and other unforeseen events like weather change or natural disasters like cyclones in the case of agricultural production. In addition, the issues of breakdown of the monetary system can also impede this adjustment process. This is epitomized by the failure of the financing institutions to avail funds to worthwhile borrowers and increase in the cost of borrowing. According to the classical theorists in regard to business cycle, both of the factors can result to a recession in any given country. However, the concept of deficiency in demand has been proposed by more contemporary theories of the business cycle. Some of the most notable proponents in these theories include Keynesian among others. Question 9: There are diverse methods that can be put into utility aimed at controlling inflation in a particular country or region. Which one of the following is not applicable? a) Reducing the level of unproductive public spending b) Encouraging elevated levels of national savings c) Reducing the level of taxation d) Encouraging activities geared towards entrepreneurship e) Containing growth in money and credit sectors Makinen (2003) perceived the term inflation as inferring to a continued or sustained elevation in the generic level of prices. On the other hand, inflation can also be viewed as the continuous as sustained decrease in the money value. Diverse countries in the global scale have put into utility different mechanisms aimed at curtailing the adverse effects posed by inflation. These strategic approaches can generally be categorized based on the type of inflation; either demand pull or cost push inflation. Some of these approaches have been successful whereas others have not been fruitful in achieving the desired goals and objectives. Proponents in the realms of economics have proposed several interventions aimed at controlling inflation. However, reducing the level of taxation by the government has not been cited as one of the prudent solutions. This is founded on the fact that the reduction in taxes will have an overall effect of increasing the money supply in the economy. This would increase demand and subsequently prices of goods. Question 10: Below are some of the consequences of a phenomenon where the market rate is below the natural rate of interest. Which one is not a viable corollary? a) Reduced policy interventions b) Inefficiencies in investment c) Heightened inflation d) Slower economic growth In such a scenario mentioned in the above question, the effect of the market rate being below the natural rate of interest will prompt an increase in money supply in the economy. This would push for large sums of money to go after few goods in the economy. As a result, there will be heightened inflation and subsequent slower economic growth. These effects will spill over to the investment activities, rendering most of them inefficient and ineffective. This would prompt swift intervention from an authoritarian body like the government, Federal Reserve banks or the central bank. This contradicts the presumption in answer (a) that the overall effect will be reduced policy intervention from the involved bodies. References Durant, M. (1999). Economic Value Added: The Invisible Hand at Work. Westminster: Credit Research Foundation. Evans, E. (2005). Marginal Analysis: An Economic Procedure for Selecting Alternative Technologies/Practices. Gainesville: University of Florida. Kendal, W.R. &Scott, C.R. (1990). Information as a Factor of Production. Journal of Information Technology management, 1(2), 39-43. Makinen, G. (2003). Inflation: Causes, Costs, and Current Status. Retrieved May 07, 2012 from http://www.policyalmanac.org/economic/archive/inflation.pdf. Read More