Economic Resources and Allocation - Term Paper Example

COVER PAGE ECONOMIC RESOURCES AND ALLOCATION Mahmood Alnaimi Economics 202 2009-10-15 6TABLE OF CONTENTS PAGE NO. …………………………………………………………………………… 3 Introduction: …………………………………………………………... 4 1, Market form……………………………………………………………………. 4 1.1. Monopolistic competition …………………………………………... 4 1.2 Monopoly ………………………………………………………….. 5 1.3 Natural monopoly…………………………………………………. 5 2. Economics by region 2.1 Economy of Africa …………………………………………. 6 2.2 Economy of North America………………………………………... 7 2.2 Economy of Asia……………………………………………… 7 3. General economic concepts 3.1 Aggregate demand……………………………………………. 8 3.2 Black market …………………………………………………. 9 3.2 Capital………………………………………………………… 9 4. Comment 10 4. References………………………………………………………….. 12 Mahmood Alnaimi Economics 202 2009-10-15 Abstract The topic covers opportunities for allocation of capital as a scare resource that has to be allocated in many ways. Others see prospects in monopolistic environment, while others perceived the pure and natural monopoly more advantageous for their particular intention. Economies of countries differ because of economies of scale. This results to differences in GDP of poor and rich countries. We also see that aggregate demand is affected by price levels that either lowers or raises income and eventually influences balance of trade. Also, we have come at a conclusion that capital is the backbone of any business, but there are several decisions needed before a business could be established. Lastly the black market thrives in the underground economy, but economic advantages are not foretold because this is illegal. Economic Resource and Allocations Introduction Economics is a social science that studies production, distribution and consumption of goods and services. By extension economics also studies economic system, human welfare the creation and distribution of wealth, and the scarcity and alternative uses of resource. Under this definition, this study looks at the different market structure in a monopoly environment, examines the economy of selected countries, and studies the capital structure of business in order to understand the process of distribution of wealth. Content: 1. Market form Market form is a market structure that describes the way it operates relative to competition. This study views at three aspects of market structure along the line of monopoly. 1.1 Monopolistic competition A monopolistic competition is a form of an imperfect competition which results from the differentiation of products by sellers. Dean, J. (p. 51) describes monopolistic competition as a situation where there are many sellers and no one can claim of control of major part of the common commodity. For example, McDonalds cannot claim a monopoly of hamburger sandwich as many others are selling the same product. McDonald differentiates its product thru advertising and promotion. Chart below shows a monopolistic competition which shows that on a short run basis, profit margin is comfortable for seller. However, as more sellers enter the market, profit is squeezed as price goes down and costs going upward. Source: King, William. Monopolistic Competition. At price of $85, price and cost are in equilibrium. When other sellers come in, marginal revenue goes down and marginal cost goes up. 1.2 Monopoly Monopoly is a market situation when there is a single seller, there is no close substitute for the product, and there are barriers to entry. Examples of monopoly are gas, water and electricity. Telephone service used to be a monopoly, but with the emergence of cell phones, internet service, I believe it is now in the category of monopolistic competition. Monopoly as described by Dean (p. 65) has a nature of “the cross elasticity of demand” It means, company is happy in the situation because they can dictate the prices, but customers are not, but they are forced to accept because they have no other choice. 1.3 Natural monopoly Natural monopoly has a resemblance with monopoly as here; there is also a single seller of the commodity. The Theory of Natural Monopoly is based on the economies of scale because they can supply the commodity at the lowest cost at “a socially optimal quantity of output”. This has been defined as “an industry where the fixed cost of the capital goods is so high that it is not profitable for a second firm to enter and compete.” (Foldvary. F.) This is a case where services are applicable to a large number of people, typically found in utilities services. For example, gas, water and electricity wherein set up costs are too high, and in most cases done by the government. 2. Economics by region 2.1 Economy of Africa African continent is composed of 54 different countries, with a population of 887 million people and described as having 14% of the world’s population (Economy watch). In this report, The African Development Bank has placed the GDP (purchasing power) of Africa in 2007 as US$2.572 trillion in 2007. The countries within Africa differ in their GDP. The richest countries in the continent are South Africa with a GDP of US $467 billion and Egypt with US404 billion in 2007. The poorest country is Zimbabwe and has a per capita income of US$200. GDP per capita income is “a measure of how rich the average person is in a country” (Economy Watch) As compared with other nations, Africa has been found to be the poorest nation judging from their per capita income. Qatar has US$80,000 GDP per capita, US has $46,000 GDP per capita while the average per capita of Africa is US$2,875. Recent economic forecast shows positive outlook for one of the countries in the African continent, Ethiopia that is located in the north eastern part of Africa. Economist Magazine pictured Ethiopia as a country having the 4th fastest growing economy which is expected to grow by more than 7% in 2009. Chart shows a GDP growth forecast showing expected performance of Africa. In Nazret’s account, Ethiopia is portrayed by Economist’s magazine as shaving the fastest non-oil economy in Africa with a GDP of $56.06 billion in 2007 estimate, and will further go up to $71 billion in 2009. It is also predicted that if the present growth continues, Ethiopia could be the biggest economic earners of East Africa in a few more years. (Nazret.com) 2.2. Economy of North America North America is comprised of 24 nations, and has an estimated population of 440,600,000 as of 2004. Economy Watch had figured out that the North American Economy has a total of GDP (PPP) of US$15.560 trillion. This region produces corn, wheat, meat, tobacco and soybeans and is considered a major producer of these commodities. The region is a leader in manufacturing and rich in mineral deposits. In 2008, the economy of North America suffered an economic crisis due to the US sub-prime real estate problems... An adverse effect to the economy is experienced by the country as a consequence of the crisis. Equity market and labor market went through a period of depression which, Economist Watch, still sees “no turn around in the near future.” 2.3 Economy of Asia Result of reports gathered shows that the economy of Asia had been hardest hit by high oil prices that led to inflationary pressure. Economy Watch said that in 2006 the economic problems of Asian countries came from macroeconomic management as a result of high oil prices. Asian nations were forced to adopt stricter monetary policies that include higher rates of interests. Cost cutting measures were done such as “energy conservation and mass transit system” to allocate the effects of the rising prices of oil. Economy Watch stated that in spite of oil price hike, the overall Asia-Pacific Economy posted a positive growth rate in 2006. Some countries have benefited from this, as bounty went to oil producing countries in Asia such as Iran, Russian Federation, Azerbaijan, Kazakhstan, Brunei, Darussalam, Malaysia and Vietnam. The North and South East Asian nations benefited in the growth of the electronic sector. Table below shows growth status of 4 selected nations in Asia County Status Australia As per analysts, after 16 consecutive years of expansionary phase, this economy had finally softened up Japan This economy bore brunt of astronomical rates of inflation as well as economic slowdown. India Inflation turned into an epidemic. Rate of growth of GDP slipped from record high levels Indonesia This economy witnessed exceptionally high levels of both wholesale price and consumer price inflation figures. 3. General economics concepts: 3.2 Aggregate demand Aggregate demand is defined as “the sum of all demands in an economy. It can be computed by adding the expenditure on consumer goods and services, investment and net exports (total exports minus total imports) (Mike Mofat) The aggregate demand AD is explained in the graph below that shows the relation of price level. The Aggregate Demand Curve What does the demand curve mean? As the price level rises from P1 to P2, there is a falling of real income, and consumers are less able to afford UK produced goods and services, and demand shifts to Y2. A fall of price level from P1 to P3 expands demand to Y3. Consequently, an increase in the price level also increases demand for money supply and a rise in interest rate which causes a deflationary in the economy. (Tutor2u) 3.2 Black market Black market is an illegal economic activity taking place outside the sanction of the government. It is one way to avoid government price controls such as taxes and usually done in “under the table” terms. It is a form of buying and selling done illegitimately to further profits, avoid taxes and sell prohibited items. An example are illicit drugs transactions and non declaration of goods Because it is illegal, there is a scarcity of data to show effects to economy. 3.2 Capital A capital is the money used by the company in pursuing a business. It is the lifeblood for the success of a business. A business with easy access to capital is a big advantage in the operation. \ There are several sources of business capital and funding solution. Most common are debt and equity capital. Capital may also come from internal and external sources. For young business, or start up ones, there are seven alternatives for capital sources (Romollata, 2007). Each alternative has advantages and disadvantages. A starting business entrepreneur may find it difficult to take a business loan from banks because of many requirements. First thing to do is use his personal savings and investments in business. Owner will save cost of interests, but there is a probability of losing his savings in case business falls. Next, a starting business may borrow from friends and relatives and pool this money to start the business. But he should always be sure to pay as this is the most reason for break up of relationship. Some consider use of credit card to purchase needed items for the business. However, this is only good for a short term financing because credit card companies charge financing interests. Other alternative is termed as “bootstrapping”. Romollota described this as a being frugal, using savings instead of borrowing. Owner exercises more freedom on business management if he is free of debt, says Romollota. Other ways of bootstrapping are “owner financing, minimization of accounts receivable, joint utilization, delaying payment, minimizing inventory and subsidy finance.” The last capital structure calls for a venture capital which is not appropriate for small enterprise. Investors of this kind look for companies that are willing to go public, have a solid business plan, a good business potential, and promises an ROI of 40% or more per year. Investment in venture capital is usually for a period of 5 years, then cash out, together with the returns of their investment.(Remollota, 2007 Comment Based on studies presented , there are optimal advantages in cost and capital allocation in a pure and natural monopoly. Because of huge investment, it is agreeable that a second option is not economical. For instance, another water or pipeline service may no longer be feasible it will serve the customers. The differences of the GDP of countries reviewed are a matter of economies of scale. Rich countries have resources at their disposal, while poor countries have very little. The number of population may also be the reason for having a small GDP as Africa has a very large number of population as compared to US. In determining capital resources for business, we see that it is the backbone of any industry, but several decisions have to made. REFEREMCES Dean, Joel. “Monopolistic Competition”, Managerial Economics. Reprinted by Phoenix Press Inc. Philippines, 1972. (p. 65) Economy Watch. “North American Economy” viewed 09 November 2009 from http://www.economywatch.com/world_economy/north-american/ Economy Watch. “Asian Economy” viewed 09 November 2009 from Economy Watch. “African Economy” viewed 09 November 2009 from Foldvary, Fred E. “Natural Monopolies”. Viewed 09 November 2009 from King, William. “Monopolistic Competition” Viewed 09 November 2009 from. http://william-king.www.drexel.edu/top/prin/txt/imch/MC3.html Mofat Mike. “Aggregate Demand Definition” About.com, viewed 09 November 2009 from. Nazret.com. Economy of Africa: Viewed 09 November, 2009 from Remollota, Amy Grace, 2007. “Seven Alternative Sources of Capital for Setting up a Business.” Viewed 09 November, 2009 from Tutor2u. “Aggregate Demand” Viewed 09 November, 2009 from http://tutor2u.net/economics/revision-notes/as-macro-aggregate-demand.html Read More