Micro and Macroeconomic Analysis - Assignment Example

The Economic Report By (Name) Institution Instructor Class/Course City Date This assignment has two parts. In the first part, the questions and analysis are focusing on Microeconomic. The second part of the assignment deals with the concepts learned of Macroeconomic analysis with particular emphasis on the issues. Part 1 In a plan for a business set up, there are two product options available to the business, the following series of economic analysis assist to choose the best product, its equilibrium pricing, and its profitability for the business. a) The hypothetical production possibility frontier involving the above two products (Product A and Product B) and identify the efficient and inefficient points of production. The production possibility frontier depicts maximum output possibilities for two or more products, in this case products A and B based on the given sets of resources used efficiently. According to Russell (2013), production possibility frontier represent the maximum possibilities of products that can an economy can attain in consideration to all resources used efficiently and completely. Resources are fixed in supply, thus relocating these resources from others require forgoing some costs and making a choice. Using the concept of the reducing returns, the cost that must be forgone (opportunity cost) for increasing the output of product A would be determined by the measure of lost units of product B is increasing. Along the PPF as more resources are allocated in producing product A, the extra output gets smaller and more of product B is forgone to produce product A. However, in the efficient production of products A and B, the true concept of equilibrium price and profitability must apply. For production of either product A or B, the production points C, F, and H are efficient production points lying on the PPF. However, the production points M and N are inefficient combinations since not all resources are fully utilized. Consider the diagram below of the PPF of products A and B A D C E N F G M H I J K B According to the diagram above, the marginal output of product B diminishes as more resources are allocated to it. However, the result is that the opportunity cost measured in lost Product A output increases. Thus, I would prefer to product A business. b) The equilibrium price of product A is best determined under the forces of demand and supply. However, production possibility curve helps in showing how the inputs and outputs are related. Using a combination of the production possibility frontier and sets of indifference curves, the equilibrium prices are determined as follows; Price of A P0 P1 U3 U2 Constraint U1 S1 Po S2 P1 q0 q1 Q Factors affecting the demand curve of product A i. Decrease in the price of product B ii. The market size, determined by the position of the indifference curves iii. Income and expectations Factors affecting Supply curve of product A i. Changes in production cost ii. Technological improvements iii. Expectations of market behavior Charging higher price that the equilibrium price would causes changes along the budget constraint of the consumers. Equilibrium quantity adjusts downwards and reducing demand. c) Elasticity of demand relates to the sensitivity of demand to any price change of a particular product, in this case product A. Usually, consumers react significantly negative when price goes up, but the concept of elasticity shows by how much is the stretch of change in demand due to that price change depending on the percentage. Consider the demand curve below: Price P1 P2 P3 P4 q1 q2 q3 q4 Quantity As noticed above, elasticity increases with the increasing price and the demand increases more in (q4-q3/p1-p2) than in (q2-q1/p3-p4). At the top, it begins with perfect inelastic demand in which quantity demanded does not change irrespective of any price change. Elasticity moves down to perfect elasticity whereby there is only one price at which consumers are prepared to pay (Hirschey, 2009). In the case of using price adjustments to increase sales, it is better to use an inelastic demand because consumers do not react so much on price increase. In fact, in perfectly inelastic demand curve, consumers are willing and able to buy the product at any price set. d. The primal objective of every firm is to maximize profit by producing output that would help the firm achieve this objective. In doing this, the link between the cost of production and profits attained must be correctly checked, thus the criticality of the firm’s determination of how much is produced of the output. In the short-run, a firm potentially increases output through the increment of the variable factor amounts (Hirschey, 2009). The firm in this case maximizes profit at the point where the MC equals the MR. However, by considering the current and future equilibrium of the supply and demand, the firm adjusts to the long-run profit mechanism. As argued by Mukherje, et.al. (2003), the implicit costs of a firm, consisting of the opportunity costs, and the explicit costs are very crucial in linking the various kinds of profits both in the long-run and the short-run. The diagram below illustrates the short-run profit maximization case of a firm. P MC ATC P D=AR=MR Economic profit C Q Q Short-turn profit is maximized where the MC curve cuts the MR curve. Part 2 A) Collect data on economic growth, unemployment rate, and inflation rate for Australia from 1986 to 2005. Present each of the above in three separate tables and three separate line graphs. Table 1: Table of Australian economic growth rate (1986-2005) Time GDP per capita: Chain volume measures - Percentage changes Mar-1986 -0.3 Jun-1986 -0.2 Sep-1986 0.1 Dec-1986 0.6 Mar-1987 1.0 Jun-1987 1.2 Sep-1987 1.3 Dec-1987 1.0 Mar-1988 0.4 Jun-1988 0.2 Sep-1988 0.3 Dec-1988 0.7 Mar-1989 1.1 Jun-1989 1.1 Sep-1989 0.7 Dec-1989 0.4 Mar-1990 0.1 Jun-1990 0.0 Sep-1990 -0.3 Dec-1990 -0.7 Mar-1991 -0.9 Jun-1991 -0.8 Sep-1991 -0.3 Dec-1991 0.2 Mar-1992 0.4 Jun-1992 0.6 Sep-1992 1.0 Dec-1992 1.1 Mar-1993 0.8 Jun-1993 0.4 Sep-1993 0.5 Dec-1993 1.1 Mar-1994 1.3 Jun-1994 1.0 Sep-1994 0.5 Dec-1994 0.2 Mar-1995 0.3 Jun-1995 0.5 Sep-1995 0.8 Dec-1995 0.9 Mar-1996 0.7 Jun-1996 0.7 Sep-1996 0.5 Dec-1996 0.6 Mar-1997 0.9 Jun-1997 1.0 Sep-1997 1.0 Dec-1997 0.8 Mar-1998 0.8 Jun-1998 1.1 Sep-1998 1.1 Dec-1998 1.0 Mar-1999 0.6 Jun-1999 0.4 Sep-1999 0.7 Dec-1999 0.9 Mar-2000 0.8 Jun-2000 0.2 Sep-2000 -0.2 Dec-2000 -0.1 Mar-2001 0.3 Jun-2001 0.7 Sep-2001 0.8 Dec-2001 0.8 Mar-2002 0.8 Jun-2002 0.7 Sep-2002 0.5 Dec-2002 0.2 Mar-2003 0.1 Jun-2003 0.6 Sep-2003 1.0 Dec-2003 1.1 Mar-2004 0.8 Jun-2004 0.5 Sep-2004 0.4 Dec-2004 0.4 Mar-2005 0.4 Jun-2005 0.5 Sep-2005 0.6 Dec-2005 0.3 Graph 1: Graph of the economic growth trend represented in the above table Table2: Table of Australian Unemployment rate (1986-2005) Taking the months of January for summary purposes Time Unemployment rate - looking for full-time work ; Persons ; Jan-1986 7.8623383 Jan-1987 8.4160056 Jan-1988 7.749548 Jan-1989 6.6404955 Jan-1990 6.0812692 Jan-1991 8.5814153 Jan-1992 11.1302768 Jan-1993 11.967332 Jan-1994 11.3729081 Jan-1995 9.3687303 Jan-1996 8.8405836 Jan-1997 8.940505 Jan-1998 8.4300624 Jan-1999 7.6365335 Jan-2000 6.8510562 Jan-2001 6.3763909 Jan-2002 7.1983086 Jan-2003 6.3353744 Jan-2004 5.5327534 Jan-2005 5.1118257 Graph 2: Graph of the Unemployment rate trend represented in the above table Table 3: Table of Australian Inflation rate (1986-2005) Period All Group CPI Mar-1986 41.4 Jun-1986 42.1 Sep-1986 43.2 Dec-1986 44.4 Mar-1987 45.3 Jun-1987 46.0 Sep-1987 46.8 Dec-1987 47.6 Mar-1988 48.4 Jun-1988 49.3 Sep-1988 50.2 Dec-1988 51.2 Mar-1989 51.7 Jun-1989 53.0 Sep-1989 54.2 Dec-1989 55.2 Mar-1990 56.2 Jun-1990 57.1 Sep-1990 57.5 Dec-1990 59.0 Mar-1991 58.9 Jun-1991 59.0 Sep-1991 59.3 Dec-1991 59.9 Mar-1992 59.9 Jun-1992 59.7 Sep-1992 59.8 Dec-1992 60.1 Mar-1993 60.6 Jun-1993 60.8 Sep-1993 61.1 Dec-1993 61.2 Mar-1994 61.5 Jun-1994 61.9 Sep-1994 62.3 Dec-1994 62.8 Mar-1995 63.8 Jun-1995 64.7 Sep-1995 65.5 Dec-1995 66.0 Mar-1996 66.2 Jun-1996 66.7 Sep-1996 66.9 Dec-1996 67.0 Mar-1997 67.1 Jun-1997 66.9 Sep-1997 66.6 Dec-1997 66.8 Mar-1998 67.0 Jun-1998 67.4 Sep-1998 67.5 Dec-1998 67.8 Mar-1999 67.8 Jun-1999 68.1 Sep-1999 68.7 Dec-1999 69.1 Mar-2000 69.7 Jun-2000 70.2 Sep-2000 72.9 Dec-2000 73.1 Mar-2001 73.9 Jun-2001 74.5 Sep-2001 74.7 Dec-2001 75.4 Mar-2002 76.1 Jun-2002 76.6 Sep-2002 77.1 Dec-2002 77.6 Mar-2003 78.6 Jun-2003 78.6 Sep-2003 79.1 Dec-2003 79.5 Mar-2004 80.2 Jun-2004 80.6 Sep-2004 80.9 Dec-2004 81.5 Mar-2005 82.1 Jun-2005 82.6 Sep-2005 83.4 Dec-2005 83.8 Graph 3: Australian Inflation Rate graph (1986-2005) B) Focusing first on the economic growth rate table and graph, it is important to note that the GDP per capita in terms of the volume measures and the percentage changes of the same, were high early stages of 1987 and sunk low in 1988. It sunk extreme lower in early 90s before rising in 1992-3. The growth rate fluctuated between 1994 and 1999 falling in 2000. Between 2001 and 2005, the growth rate remained a fluctuating figure (ABS, 6202.0 - Labour Force, Australia, Jun 2014 , 2014). This kind of trend upward and downward trend represent unstable economic growth rate. The Australian unemployment rate was coupled with highs and lows from 1986 going down to 1989. The early 90s saw the unemployment rate rise high to 12% peaking in 1992 and 93. From then, the unemployment rate has trended downwards steadily closing in about 5% in 2005. Inflation rate on the other hand has been coupled with a steady increase between 1986 and 2005. According to the graph 3, the Consumer Price Index in 1986 was slightly above 40%. Ever since, it has exponentially rises up the years registering slightly above 80% in 2005 (ABS, 6401.0 - Consumer Price Index, Australia, June, 2014). C) Every business performs badly if the economy is not performing well. In this case, it is true that the rate of economic growth has a direct impact on every business plan. Every investment model depends on the current and the expected inflation rate in an economy. A fluctuating economic growth means the plan must be coupled with risks of economic nature; hence, the overall movement of economic growth as depicted in the graph may affect the business plan as illustrated in the diagram below. Increased economic growth stabilizes spending and aggregate prices in the economy. Aggregate Expenditure 450 C (P3)+I+G+NX C (P2)+I+G+NX C (P1)+I+G+NX GDP1 GDP2 GDP3 P levels P1 P2 P3 AD GDP1 GDP2 GDP3 GDP Increased economic growth increases spending in the economy and the aggregate output and demand. The general price in the economy reduces due to reduced production cost. The reverse is true, meaning that the fluctuations in the economic growth have effects on the business plan. D) The trade-off between the unemployment and inflation rates is very critical for any business. The rise taken together demand causes an increase in the aggregate output. Prices would increase because of this hence the rise inflation. However, since there is a general increase real GDP (per Capita), firms takes more workers leading to decline in unemployment. The trade-off between these two macroeconomic variables sets in variations in the interest rates and prices that directly affect demand, prices, and investments in the business (Pettinger, 2011). Consider the diagram below. PL AS P2 P1 AD2 AD1 Y1 Y2 Real GDP (Y) Inflation-unemployment trade-off (Philip’s curve) affects rate of interest and price that directly affects the business. Inflation rate Unemployment rate References ABS. (June, 2014). 6401.0 - Consumer Price Index, Australia. CANBERRA: Australian Bureau of Statistics. ABS. (2014, June). 6202.0 - Labour Force, Australia, Jun 2014 . Retrieved September 18, 2015, from Australian Bureau of Statistics: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6202.0Jun%202014?OpenDocument Hirschey, M. 2009. Fundamentals of managerial economics. Mason, OH: South-Western/Cengage Learning. Layton, A. P., Robinson, T. J. C., & Tucker, I. B. 2011. Economics for today. South Melbourne, Vic: Cengage Learning. Mukherjee, S., Mukherjee, M., & Ghose, A. 2003. Microeconomics. New Delhi: Prentice-Hall of India. Pettinger, T. 2011, November 21. Trade Off Between Unemployment and Inflation. Retrieved September 18, 2015, from Economic Help: http://www.economicshelp.org/blog/571/unemployment/trade-off-between-unemployment-and-inflation/ Russell, J. 2013. Production possibility frontier. [S.l.], Book On Demand Ltd. Samuelson, P. A., & Nordhaus, W. D. 2010. Economics. New Delhi, Tata McGraw Hill. Yamarone, R. 2012. The trader's guide to key economic indicators. Hoboken, N.J., Wiley Read More