Economics for Managers

Question: Explore the standard of living. Answer: Topic 1.2 The standard of living is the ease by which people living in a particular place or time are able to satisfy their wants/needs. It is measured by income per person, quality of health care, education standards, income growth, and life expectancy. Factors such as level of goods and services available, ownership of capital equipment and technology determine the standard of living (Cantillon, 2013). When the micro economic environment is favorable, productivity increases, and this in turn increases the amount of goods and services available to individuals, and income generated both by the entrepreneurs and the employees. Macroeconomic environment affects micro-entrepreneurs decisions and vice versa. For example, a rise in oil prices will have a considerable impact on the cost push inflation, income generated by micro entrepreneurs and the standard of living (Wang, 2013). Acquisition of a new technology will likewise minimize costs, increase production, and accelerate national economic growth. So, both the micro and the macro environments will determine the standard of living. Topic 2.3 Demand refers to the quantity of a product a consumer is willing and able to buy at a given price. Demand of Petrol Demand for petrol is affected by own price, the price of related products, and expectations about the future prices. When the price increases, many commuters opt for public means as opposed to private cars. While the demand for petrol is price inelastic in the short run (a change in price does not significantly affect demand) its elastic in the long run. A motorist will not sell his/her fuel inefficient car right away when the price of petrol rises. A company will likewise not replace its machines in the short run to save on fuel costs. But both will do so in the long run. Demand for petrol today is a result of price changes experienced in the past. Australia depends on Singapore for her petroleum imports. So, a change in price in Singapore will affect local demand both in the short (though not significantly), and in the long run (Valadkhani, 2013). The price of related products (substitutes or complements) affects demand. An increase in demand for new cars (complementary good) due to tax incentives or for other reasons increases demand for petrol. When some consumers and sellers expect the price of petrol to increase in the near future, they purchase it in huge volumes hoping to sell later at a profit. Overseas Travel Factors affecting the demand for overseas travel include the households disposable income, the strength of Australian dollar, leisure travel patterns, costs of inputs, and aviation supply capacity. A 1.0 percent increase in domestic income increases outbound tourism by 1.0 percent. A 1.0% increase in Australian dollar increases outbound tourism by 0.5 percent (Athanasopoulos et al., 2014). Aviation supply capacity and airfares also contribute to outbound tourism. Ceteris paribus, a 1.0 percent increase in domestic fares increases outbound tourism by 0.6 percent. Topic 3.5 A good is said to have an inelastic price elasticity of demand if the percentage change in demand is less than the percentage change in price. The demand curve for an inelastic good is steeper and vertical for perfect demand inelasticity. Total revenue for a seller of an inelastic good can be analyzed in terms of price effects- increase in price increases the total revenues. A decrease in price will conversely reduce the total revenues of a supplier. Examples of inelastic goods include health care, demand for petrol (in the short run), and the basic commodities such as salt. A good is demand elastic if the percentage change in demand is greater than the percentage change in price, holding other factors constant. The demand curve for elastic goods is downward sloping and horizontal for perfect elasticity (Văduva, 2015). Total revenue of a supplier for elastic goods can be analyzed in terms of quantity effects (a decrease in quantity demanded as a result of the price increase, and vice versa). Price elastic goods normally have close substitutes. People often prefer competing products when the price rises. Examples include tea and coffee, and a particular type of bread. Topic 5.2 McKinsey Australia and New Zealand is a management-consulting firm which has a global presence. It spans in multiple sectors such as retail, energy, healthcare, finance, government, social sector, and others. The two major conditions of supply for the company are the factor prices and the prices charged by competing companies. Factor price acts as one of the major determinants of supply. Factors refer to inputs of production such as labor, computers, and others. If the factors are readily available and are in low prices, production will increase. The availability of cheap labor such as a large pool of interns reduces the cost and the price of consultancy (Arman, Bazrafkan and Tabar, 2014). With reduced price, demand increases and supply follows suit. The prices charged by competing firms also affect the supply. Holding other factors such as consumer tastes and preferences constant, when the competing firms are charging less, consumers prefer competitors, and this lowers the supply for management consultancy of McKinsey Australia and New Zealand. Topic 6.3 Conditions for a perfect competition include: many buyers and sellers, buyers have complete information about goods produced and the price charged; free entry and exit, homogenous products, and firms are price takers. Under perfect competition, the price charged reflects supply and demand. Since consumers have many substitutes, they will abandon the seller if his/her goods become more expensive or the quality falls short. Sellers under perfect competition dont have an incentive to overcharge. They only earn enough profit to keep them in business. Because the entry is free, more sellers will be attracted if the existing ones earn more, thereby driving the costs down (Misra, n.d.). Firms are price takers. Because the products are homogenous, no single firm can charge a price higher than competitors without closing business. Perfect competition is more favorable to buyers than sellers because the former have many choices and sellers have no incentive to exploit buyers by overcharging them to earn supernormal profits. Topic 7.2 Monopoly is a market with one seller for a good or a service and no close substitutes. Firms would pursue a position of monopoly so as to produce less, charge more than competitive prices and increase their revenues. Factors such as the ownership and control of key resource needed for the production of a particular good, government franchise, and economies of scale contribute to monopoly. A firm with control over strategic raw material or knowledge about an ingredient or a chemical combination needed to solve a particular problem will tend to be monopolistic. Likewise is a firm with unlimited economies of scale and high fixed costs for the production of a particular good (Skapa, 2013). A firm getting close to monopoly will have a large market share and will restrict barriers to entry through price under cuttings. The firm will take advantage of economies of scale and sell its goods and services below the cost of production thereby driving new entrants out of business. Another indicator of monopoly is when large firms are trying to merge to gain power and control over the market. Topic 7.5 Rationing refers to the controlled distribution of scarce goods, services, and resources among competing wants. Since the needs and wants are unlimited and resources are finite, the available commodities must be distributed to competing needs. The price rations commodities by limiting the purchase only to those willing and able to pay a price. When the demand of a particular good or service outstrips supply, price increases, and buyers willing and able to pay the price are the ones to receive satisfaction from the good or the service. Public owned utilities such as game parks will charge a price not to generate a profit, but limit the number of people visiting the place (Grassi and Ma, 2014). When such a place is free of charge, many people will visit leading to congestion, dumping, and other problems. Charging a given price is a rational way to limit the number of people visiting the area. Topic 8.1 The five entities in the circular flow of income include the households, the government, financial markets, the firms, and the rest of the world. Households provide labor, raw materials, and capital and are paid wages, profit, interest, and rent from the factor markets. From that money, they pay taxes to the government. The government buys goods and services from firms, and pays some money to the households in the form of government transfers. The households use their disposable income to either buy goods or services, or save/invest to the financial markets. Financial markets provide loans to the government and households. They also provide capital to businesses. Firms produce goods and services and pays wages, rent, and dividends to households. Some of these goods are exported to the foreign countries. Firms import capital equipment from foreign countries. The outside world provides imports of goods and services to the firms and households, and offer loans to the financial markets. Topic 8.3 GDP is an important identifier of the current state of the economy, the business and the investment environments. If the GDP records indicate a fall in two or more consecutive quarters, the economy is said to be in a recession. When it records a decreasing growth for two or more consecutive quarters, it is said to be in a slowdown. The boom and bust cycles, which are important determinants of business environment, largely depend on the GDP numbers (Andresen, 2015). The GDP portrays an inclusive picture about the health of the economy and provides a useful insight to investors and managers. It is often viewed as an indicator of corporate profits in a country. If the GDP growth is slow, investors will be wary of investing in the country, hence affecting the level of foreign direct investments (Wang, n.d.). The knowledge of GDP helps managers to manage their portfolios and diversify their risks. It is also useful in policy formulation by political leaders and policy makers. Topic 8.5 Economic well-being refers to a persons living standards based on how well they are doing financially (their material welfare). Measures of economic well-being include the quality of health services, education standards, life expectancy, and the number of people owning non essentials such as cars and refrigeration, income per capita, and income growth (McDonald, 2013). Other factors that indicate economic well-being include national economic growth, infrastructural growth, class disparity, and incidence of diseases. Availability of employment, hours of work needed to buy goods and services, inflation, and hours of leisure consumed are also good indicators of economic well being. Affordable housing, environmental quality, political and religious freedom, climate and safety are also important indicators of economic well-being in Australia. Index of Human Development (HDI) is a good indicator of economic well being. It is a combination of GDI per capita, education, and life expectancy. The above measures combined define the economic well-being in Australia. References Andresen, M. (2015). Unemployment, GDP, and Crime: The Importance of Multiple Measurements of the Economy. Canadian Journal of Criminology and Criminal Justice, 57(1), pp.35-58. Arman, A., Bazrafkan, R. and Tabar, S. (2014). An Evaluation of Factors ( Wages and Output ) Affecting the Demand for Labor in the Industrial Workshops ( Using GJR Method ). Academic Journal of Research in Economics and Management, 2(9), pp.22-29. Athanasopoulos, G., Deng, M., Li, G. and Song, H. (2014). Modelling substitution between domestic and outbound tourism in Australia: A system-of-equations approach. Tourism Management, 45, pp.159-170. Cantillon, S. (2013). Measuring Differences in Living Standards Within Households. Fam Relat, 75(3), pp.598-610.