Economics Topics Discussion - Case Study Example

Economics Topics Discussion Name Course Professor’s name University name City, State Date of submission Economics Part 1 In Economics, the concept of value added is used either in reference to the value added goods or value added tax. In this discussion, I will try to elaborate this concept in the both contexts. Value addition in goods refers to the process of increasing the value of goods and services at every step of production. In regard to value added goods, this tries to explain ion is the following. This concept tries to answer the following questions. Why should countries concentrate on value addition, on their goods and services before exporting? What is the benefit of value added goods and services? In a free market economy, where goods and services have mobility across regions, companies continue increasing their competitive advantage. Due to the rising challenges from the developing countries which operate at low production costs as well as evolving consumer needs, most companies tend to shift to value added goods and services. Consumers are shifting their consumption from consuming goods in their raw state to consuming value added goods and services. In the international race of improving the competitiveness, value addition is fundamental because it provides firms with greater opportunities of engaging in a long term relationship with their customers. The value added from improved customer relationship help companies to acquire quicker entry into the markets as well as accessing information that is relative in improving product design. Economies throughout the world are encouraging the exportation of value added goods because value added goods give more returns than the exportation of goods in their raw state. For example, a country would gain more by exporting wheat flour than exporting wheat. Value added tax on the other hand is the tax levied on the value added products or services. The purpose of this tax is to generate tax revenue to the government. Part2 Marginal analysis is the criteria that is applied in the process of analyzing the benefits and cost brought about by a one unit increment of a given activity. In other words, marginal analysis is used to identify the incremental effect on the total revenue and total cost as a result of one unit increment in the level of output or input. This concept play very important role in decision making in companies as well as at an individual level. For examples, most companies employ the concept of marginal analysis as a decision making tool to help them in maximizing their profits and minimizing their costs of production. To make optimization decisions, managers are faced with the problem of trying to minimize or maximize some objective function, the concept marginal analysis, helps them in solving these problems. To solve the maximization problem, managers solve the problems by applying the simple rule that states that, in order to maximize net benefits, it is necessary to decrease the level of activity up to the point where marginal benefit achieved fro the activity equals to the marginal cost incurred by performing the activity. This is demonstrated in the equation below MB=MC MB this represents a marginal benefit which the additional gain that is achieved in the production of one extra unit of a good or a service MC is the opportunity cost incurred in the production of one additional unit of a good or a service. According to the principle of marginal analysis, as long as the marginal benefit of producing one more unit of a product is greater than the marginal cost incurred in producing one more unit of the same product, one will continue making profit. It is there advisable to continue increasing production up to the point where marginal cost equals marginal benefit a point that economists refers to profit maximization level of output. Producing beyond this point is said to unfavorable because costs of production will exceed the total profits which eventually lead to loss making [Tej10]. This concept is also used in analyzing consumers’ utility. That is in law of diminishing marginal utility which states that the amount of marginal utility tends to decrease with every additional unit of a good consumed. Consumers are rational being and they make decisions at the margin. In deciding whether to consume an additional unit of a good, consumer compare the marginal utility and the additional marginal utility that must be given up in order to obtain that commodity. They will continue consuming additional unit of the good up to the point where additional marginal utility of consuming the good is equal to the additional marginal utility that must be given up( in terms of money) to obtain the commodity. In order to maximize utility, the following condition must hold [Tej10]. MUa =  MUb =  MUc = and so on... Pa  Pb  Pc Part 3 Circular flow of income is used to explain the relationship between the different sectors within the economy. That is: Shows the flow of goods, services and the factors of production It also shows how national income and Gross Domestic Product is calculated. The economy is made of two sectors: the household and the firms. The households are the owners of the factors of production. They provide the firms with the required factors of production which include, land which is given by landlords, human capital, which is provided in the form labor, real capital, which is provided by capital owners as well as enterprise provided by the entrepreneurs. Firms on the other hand use the factors of production toes, which produce goods and service which they sell to the households and other firms [Ran79]. Factors of production earn income, landlord receive rent for lending out their lands while human capital receive wages. Real capital on the other hand receive rate of return while entrepreneurs receives a profit. Individuals in the households use the income they receive from selling from their factors of production to pay for the goods they consume.[Ran79] A simple production function of this relationship is derived Q= f (L, La, k) this function implies that output (Q) is determined by the factor input of Land (L), labor (La) and capital (K). When a transaction occurs, income Y in the economy flows from one part to another. Consumption by individual (C) generate new income (Y) which in return generate more spending c and the process continues so in a circular flow of income [Mas12]. Part 4 The concept of the entrepreneurial errors helps to explain why errors occur in the marketplace and businesses. In the real world of business, there is no single person is able to perfectly oversee the future and therefore is always the possibility of making errors in the course of the various transactions. Most entrepreneurial errors occur due to the wrong believe that the market always works. Some people believe that the market can solve all problems automatically [Mas12]. An Austrian economics, however, argue that markets are characterized by loss and profits, success and malfunction, certainty and uncertainty and hence there is always room for improvement and the main role of entrepreneurs is to eliminate errors and inefficiencies. Markets have self-made mechanism whose function is to reduce failures and errors made by entrepreneurs. The classical theory of the business cycle explain that entrepreneurial errors occurs due to the downwards movements in the business cycle, which lead to poor decision making in some sectors which eventually spread out to the whole business at large .Lack of enough knowledge and problems in estimating the correct future demands of various goods and services contributes a lot in entrepreneur errors this could be partially as a result of independent decision making among the various producers. Every producer will make decision that will lead to maximum profit generation [Mas12]. This is likely to lead to competitive duplication in production, which leads to errors in estimating the future demands of the economy. Unnecessary investments are another cause of entrepreneurial errors. When the business tends to be at the highest level of the cycle that is at the time of high level of business performance decentralized decision making lead to over-investments in some sectors of production[SKO99]. This leads to reduced business performance. Creative destruction: This refers to the persistent product and process innovation system through which new products replace the old ones. At business cycle frequency, restructuring declines during recession, adding significant cost to downturns. This process involves numerous complex decisions making to create and destroy production arrangements [LAI11]. This calls for the need of high talented managers as well as the existence of sound institutions that provide a proper transaction framework. Failures sin this process can lead to serious economic consequences. Out and out errors cause firms to realize that they cannot earn the profits they originally thought they would. This is because the levels of sales fail to match with the original expectations. Although the economy might end up stronger with improved higher living standards, the transitions experienced as a downturn in the activity Part 5 Savings play a crucial role in any given economy. The role of saving is important at different levels. In this topic we will try to understand the following questions Who are the savers? Why do people save? How does saving affect the main performance of the overall economy? Saving is done at three different: households, companies and the government Households save for two major reasons. One of these reasons is to cater for future expenses. These expenses vary from paying for hospital bills, paying for education, buying durable goods among others. Another reason why individuals save is to facilitate for retirement [Agh90]. Failure to save implies that individuals will have no money to cover for their expenses and they would eventually strain in their years of retirement. Companies on the other hand save part of their profits, which remain after paying dividends to their shareholders. These savings are used in financing future investment projects in the business. If the companies fail to save, they lack capital for expanding their investments this in return lead to decreased efficiency in the company performance and in extreme cases it may lead to lack of enough funds to pay the employees and the end result is laying off workers [Agh90]. The government saves when the tax revenues exceed the expenditures. The savings by government is used in the construction of new roads, bridges, hospitals and schools. If the government fails to save, no money will be available to cater and improve the social and physical infrastructures. Adequate saving is a precondition for higher economic growth overtime but is not a sufficient condition. This is because an economy cannot depend on savings alone to sustain higher economic. In the process of analyzing the data on how American workers are saving for retirement benefits, two facts have been laid down. Millions of Americans are in great danger for not saving enough money to sustain their living standards during their retirement. Studies have confirmed that this situation is deteriorating with time. [Mad15]. The consequences of the increased shortfalls in savings are seen as a threat to the America as a country .This is because most American households may be forced to minimize their spending in retirement and rely on the families, well wishers as well as the government in the struggle of smaking a way to survive. Data showing how American households put up financial assets indicate that America is struggling to prepare itself for retirement and that is becoming less well prepared over time. Three trends, illustrate how Americans are not ready for retirement One third of employed Americans do not have retirement savings A high population of Americans do not save anything for retirements Families that save have insufficient assets References Tej10: , (Pettinger, 2010), Ran79: , (Rangarajan & Dholakia, 1979), Ran79: , (Rangarajan & Dholakia, 1979), Mas12: , (Mastrianna, 2012), SKO99: , (Skousen, 1999), LAI11: , (Lainton, 2011), Agh90: , (Aghevli, 1990), Mad15: , (Madland, et al., 2015), Read More