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Role of household: In two
ways, households seem to take part in the
economy: as suppliers of resources which are productive, i.e. capital and labor etc. and as consumers
for services and goods
Role of firms: Firms in
their entirety operate in 2 ways: as suppliers of finished services and goods
and as consumers of resources which are productive
Role of government: In economic processes, the government
actually acts in three ways: as a consumer it seems to gather taxes from firms
and household while using these as revenues for hiring elements of production
and develops certain services and goods for firms and households: as suppliers
of several services and goods; and it also guides, regulates, and controls
economic processes with the objective obtaining specific economic and social
aims (Society’s Welfare).
1. What is the purpose and
role of a firm in the economy?
For consumers, many advantages are
created by firms, and due to them,
an increment in the living standard is
experienced by organizations. Organizations by doing well, do well. Resources like equipment and labor are obtained by
firms and utilize them for specializing in the development of specific
services and goods. Organizations produce what is desired by consumers and what
they are willing to buy. For offering these products, organizations compete and
attempt to beat each other. Businesses are encouraged by this competition for
providing the optimum service at the lowest cost possible. Due to firms being
present in the economy, the quantity, quality, and variety of services and
goods available to customers automatically rise
while the price decreases (MCEE, 2008 p 499).
2. What role do prices play
in the economy?
In the modern economy’s economic system, an important role is played by price. Following are the major
elements of prices
·
Distributive function: Where to and for
whom to develop. Requirements are unlimited while resources and goods are
limited; so it will be the price that will determine cheapness of price and limited will be achieved by those with the
purchasing capability.
·
Allocative function: what to produce, when to produce, for
whom to produce.
·
Signaling function: Supply and demand situations are signaled
by prices. Surpluses and shortages are illustrated in lower prices and high
rates respectively.
·
Equilibrating function: Matching of supply and demand is facilitated by prices
which clears the market.
·
Rationing function: Then again, questions regarding unlimited
demands versus limited resources.
·
Transmission function: Information is
transmitted by prices to several areas in the market, therefore, allowing them
to make decisions which are informed on
when to and what to sell and buy.
·
Provision of incentive: To producers and
consumers, prices take the form of disincentives or incentives.
·
Enhancing marketing performance and efficiency: The marketing machine will be oiled
by the right price signals. But the market’s
smooth functioning will be hindered by wrong signals in terms of price due to
which poor performance will result.
3. What important role do
consumers play in the economy?
It can be said that a consumer
is responsible for paying something for consuming the produced services and
goods. Due to it, a vital role is played by consumers in the nation’s economic
system. Producers, without the demand of consumers, would lose a key motivation
for producing: to sell to customers. A part of the
distribution chain is also formed by consumers.
4. What role does the market economy serve in the economic system?
The economic system is served by the market
economy through choices or decisions concerning
distribution, production, and investment guided by prices which are developed
by the forces of demand and supply. The presence of factor markets is an
important specification of the market
economy that plays a leading role when it comes to allocating production
factors and capital.
5. What role does the financial sector play in the country’s economy?
In the operations of an economy, an important role is played by the
financial sector through nothing but intermediation. It can be simplified that the sector of finance falls
in between borrowers and savers: funds are taken by it from savers in the form
of deposits for instance and lends them to those who wish to take them or
borrow whether they are governments, businesses, or households
6. What role should the
government play in an economy?
The role or duty of government in an economy must be limited to
powering up specific ground rules which seem to facilitate nothing but
commerce, along with, but not restricted to, protective rights of private
property and enforcing contracts. Additionally, the role of government must be
all about creating an atmosphere in which individuals think that they will
experience benefits of their innovation by carrying out acts like ensuring the
decrement in taxes, powering contract rights up, and saving property rights.
7. Why do most economies today
operate somewhere between a market and a centrally planned economy?
At the moment, economies function almost in between the market
economy and a centrally planned since a combined economy allows private
involvement in the development which permits a healthy completion that might
result in nothing but profit. Furthermore, it contributes to public ownership
as well in manufacturing that has the capability of addressing the needs of
social welfare
Problem 2: Consider
yourself as a manager of the medium-sized
firm, explain the role of managerial economics in preparing you as successful
managers in the decision-making process?
[Hint. The
Economics of Effective Management] [4
points]
It can be said that the possibility that conditions affect a business
entity is an uncertainty about what is to come and because of the modifications
in the environment in business, complexities result
in business decisions. Because no data
regarding future costs, profits, and sales is available to an executive of the business, decisions have to be made by
approximations and past data. To make sure that the process of decision making
takes place under such conditions effectively, the theory of economic holds
great relevance and value since it seems to deal with pricing, cost demand, and
production. Due to it, the wish to realize the concepts and theories for
managerial economic for a manager of business emerges so that economic
principles might be applied by him to an organization while appraising the
impact and relevance of external facts on the organization (Baye, 2010 p 4-14).
No doubt,
managerial economics is quite useful for organizational managers and capable of
dealing with numerous objectives in the process of decision making regarding
the internal environment. Simply put, it focuses on the economic theory’s
development of a company while facilitating the process of decision making concerning profits and sales. Additionally, it
allows us to carry out the process of
decision about inventory policies and right production policies for the time to
come. It aims to make efficient forecasts
in the positive form with the goal of mitigating the risks which are involved. It
is related with the elements like how
much money must be invested regarding the choices of projects what amount of
cash must be available while making the feasibility of economy of several lines
of production possible (Baye, 2010 p 4-14).
Regarding the
product pricing being developed by an entity of business, it is quite a
critical decision or choice for a manager to adjust the product price just like
it is using decisions regarding pricing
which the managing task, the revenue
inflow is evaluated. In this respect, price
forecasting, line pricing of a product, and price methods are the sectors that
are to be covered through the application
of managerial economics (Baye, 2010 p 4-14).
Topic: Market Forces (Demand Theory)
Problem 3. Please explain briefly the factors influencing the demand? And how the elasticity of demand helps in forecasting future demand? [2 points]
It has been recognized by economists that demand is impacted by several variables. For instance, advertising expenditures, consumer income, and price of shirts alter the way how customers are financially able to purchase and are willing. Furthermore, any variable affecting the capability of consumers or their willingness to buy a specific product is affected by a certain variable is a real demand shifter. For instance, the need for cigarettes is affected by health cares, and the need for diapers is affected by the birth rate. Following are the main factors that influence demand: (Baye, 2010, p 38-42)
Source: Self-made (idea taken from Topic 2, slide 15)
Income: The capability of
customers to buy a product is affected by income and alterations in the income
impacts the number of customers purchasing the product at any rate. The demand for durable products is affected profoundly by
alterations in income, and these effects are usually magnified in rural sectors and
developing nations.
Prices of Substitute: The
demand curve is shifted for good by
changes in the related good prices. If the rate of Coke rises, for instance, many customers will turn to Pepsi
as the price of Coke is relatively higher than ever before.
Advertising: Consumers are often provided with information by
advertising about the product caliber or
existence which causes more consumers to turn to the good. For instance, using
the element that raises the demand for a
certain item of fashion for advertising might raise the need for that item by making it as a thing which is
worth buying.
Population: Changes in the
population and size also influence the demand for
a product. Usually, with an increment in the population, more individuals want
to purchase the product that is given.
Consumer Expectations: Demand can also be influenced by alterations in
customer expectations. For instance, the need for automobiles will certainly increase if consumers hear that the
price is expected to go higher the next year.
Demand’s
elasticity assists in forecasting the demand in the time to come as
responsiveness’s A measure of a variable modifies in the other; in one
variable, the percentage modifies which takes place because of the change of
percentage in another variable. For instance, grade’s elasticity in terms of
studying or education, denoted EG,S is actually the change of
percentage in grade or score (%∆G) which will be resulted from the change in a
given percentage in the time that is spent on studying (%∆S) (Baye, 2010, p75).
Problem 4. Income Elasticity of demand has a various application, with an increase in
income a consumer may increase or decrease the purchase of a good. Explain the Veblen
effect on an individual’s demand behavior. [2
points]
It can be said that the rule of demand forecasts that
if two equal products are given, the
demand will be increased by the lower
price and it will be decreased for the
higher price. Moreover, the Veblen effect is considered an exception. It was observed by the economist Thorstein Veblen
that sometimes demand is increased when the price is raised while sometimes, the demand is decreased when the price is
lowered. Typically, this impact is related to precious or luxury services like luxury cruises, hotels, fine
wines, cars, clothes, jewelry, and art. According
to Veblen, this cause is all about the need for
status and are of two types: invidious comparison, simplified as the need to be
seen as high and not as low, and pecuniary emulation which is simplified as the
need to be seen as belonging to only the upper class (Lidwell et al., 2010, p248).
The presentation
of the Veblen effect is all about the behavior which is status-seeking that results
in purchasing’s conspicuous acts and status gains which are store-related. But,
all the consumers of Diamond increase the gap that exists between the purchase
price and their willingness to give or pay, whatever is bought by them in
high-price stores or their lower-priced
counterparts. The increment in the pay willingness for a certain item is followed by alterations in the savings which
are expected on buying. The differences among internal reference rate and the purchase
price is regarded by the consumer as something that is gained. This rise changes the balanced
opportunity search costs. And high-price stores are opened more with an
increment in the search’s opportunity costs since “high-price stores are
visited only by individuals of high-search-cost.”
(Malakhov, 2012,
p2).
For instance,
the search is stimulated by the choices of a high-priced
store if it is visited by the individual and his
doesn’t have the prices. Consumer fears are making a wrong decision as “due to
the lack of knowledge, and the incentive
is provided for organizations to increase the effective price and lower the caliber of the product.” The normal assumption that search
is stimulated by the increments in price might be supported by the fact or
simple economic logic. Simply put, when the
choice of consumption leisure is optimized by a consumer on the market
where expected savings’ absolute value is more than his rate of wage, Veblen
effects are produced by the efforts in
search (Malakhov,
2012, p6).
Problem 5. Suppose you are the marketing managers of
the firm which is trying to fix the most suitable price for the product which
has been launched a few times back and
you have the sales records of the past.
The data show that the product had
different elasticities at different
prices. Explain, with the help of graph/exhibit, the relationship between
elasticity of demand and revenue and explain why revenue is maximized when price elasticity of demand is
1 (one). [4
points]
It can be seen in the above
graph that total revenue increases due to the increase
in price when the elasticity of price is less
than 1. On the other hand, the above graph shows that an increase in price causes a decrease in revenue when the elasticity of price is greater than 1. The
revenue is at its maximum when the elasticity
of price is equal to 1. Hence, the price of the product will be settled at the point where elasticity is equal to 1. The revenue is maximized when price elasticity of demand is
one because, at this point, an increase in price causes a decrease in demand that maintains revenue at its
point.
Topic: Market Forces (Supply Analysis)
Consider you are at the decision maker of an
organization which produces personal
computers. A report in Daily News Paper tells that the demand for personal
computers will fall by 8-10 percent over the next six months.
Problem 6 a. Explain your business strategy (inputs
purchase, the speed of production process,
optimal quantity to produce, price determination). [3 Points]
Because demand for PCs will fall up to 8-10% in the upcoming six months, it is obvious that I don’t wish to
let my organization be the victim of this downfall. Instead of succumbing to
it, I will create an effective strategy which will help me and my firm stay
productive even when there is no demand for PCs. First of all, I will lower the
inputs purchase. Generally, it is better to save investments and purchase costs
for the decrement that will arrive soon. I will manage the inventory and make
sure that there are enough materials for the next
six months before lowering the purchasing power in comparison with the past.
This way, I will be able to ensure that the organization is not purchasing more
even when the demand for personal
computers has lowered substantially. Moving on to the other elements of my
strategy, I will increase the speed up the production because the downfall will
arrive soon. That is why it is important to increase the speed and produce as
many PCs as I can to sell them more and earn more. After all, the demand will
decrease after six months and sales will go down. Furthermore, I will increase
the number of products which are being created. This way, I will be able to save
costs in the time of downfall and sell the products which have already been created. At the moment, I will raise the
price because the demand is expected to go down which means that sales will
decrease. So with raised prices, profits will be increased.
Problem 6b. Consider yourself as a decision maker in
the firm that sells software to a large personal
computers manufacture. What will be your business strategy after reading the
above information in the Daily News Paper? [3 points]
The very first
thing that I would consider when I read the statement that the demand of PCs is
expected to lower up to 8-10 percent in the market, I will, first of all,
determine the cost that is consumed in
creating a software first. After all, there are
numerous skilled developers investing their efforts in creating a
customized solution for clients. It doesn’t matter to the workforce that the
demand for personal computers is expected
to go down and it would impact the organization. It is their wage that matters,
and it is important to ensure that
employees are not resistant at all. First
of all, I will increase the rates of my software. This way, clients will have
to pay more for using applications or
software. Increasing the price will help me ensure that the organization
doesn’t suffer from a backlash because generally, the revenues of an
organization suffer when the demand decreases. While increasing the prices of
my software, I will make sure that I am not investing more. Further investments
in such a short period will not put the firm in any beneficial position. With a
potential held in the investments,
savings will not be wasted anymore.
Furthermore, I will keep a hold on buying advanced technologies to be utilized
by IT professionals. Therefore, it will help in protecting the organization, and for being safe in the downfall of the market, I will ensure that the speed of the production process is increased to sell more
custom packages.
Topic: Market Forces (Market
Equilibrium)
Problem 7. Explain how equilibrium price and quantity are determined in a market, and show how
equilibrium changes in response to changes in determinants of demand and
supply?
[4 points]
[Draw the graph of supply and
demand curve and show point out the price on Y-axis and corresponding quantity
on the X-axis, then draw two more graphs; the first graph showing the effect of
changes in the demand on the equilibrium price and quantity, and the second
graph showing the effects of changes in the supply on the equilibrium price and
quantity]
In the above graph, E point
represents equilibrium point, P* represents equilibrium price, and Q*
represents equilibrium quantity. It can be seen
in the graph that the equilibrium price and
quantity are determined at a point where the
demand curve and supply curve intersect each
other in the market. In the market referring to the above graph, Q* quantity is being
produced at price P* (Baye, 2010, p 60-65).
The above graph shows how equilibrium changes in response to a change in determinants of demand. Suppose that the
income of the consumers has increased that
causes a rightward shift in the demand
curve of cars. This increase in the determinant
of demand curve of cars will cause an increase
in the price of cars from P* to P’ and an
increase in the quantity of cars from Q* to Q.’
A new equilibrium will take place at E’
where the new demand curve intersects the
supply curve (Baye,
2010, p 60-65).
The above graph
shows how equilibrium changes in response to a change
in determinants of supply. Suppose that the price
of cars’ raw material has decreased that causes a rightward shift in the supply curve of cars. This decrease in the determinant of supply curve of cars will cause a
decrease in the price of cars from P* to P’ and an increase
in the quantity of cars from Q* to Q.’ A new
equilibrium will take place at E’ where the new
demand curve intersects the supply curve (Baye, 2010, p 60-65).
Problem 8a. [4
points]
KSA is aiming to
change its overall outlook: it focuses on the transformation of the economy to
diversify the growth, reduce dependency on oil and increase the role of the
private sector. The focus of Vision 2030 is on to change the economic outlook
of KSA and creating jobs for Saudis to operate a modern and productivity-led
economy by replacing them with the foreign labor/expatriates.
The above strategy,
in an overall
sense, is regarded as “good” for the economy, especially in the labor market. However, there are some
reservations in this regards too especially in hiring the local labor. Keeping the above strategy into consideration,
kindly answer the following case:
Suppose, you
are a manager of a medium-sized labour-intensive
manufacturing firm in a competitive market where your firm employees a large
number of foreign labor for manual,
physical and technical works, keeping in consideration the wages of foreign are
cheaper, and they are more productive
than the local/domestic labour.
Problem 8a. If you are required to replace the
expatriates with the local/domestic labor,
predict and explain what problems/costs your firm will face if she really tries
to maintain the same level of production? And what will happen to the profits
of the firm, (considering the higher salaries the local will demand)? Explain,
alongside the higher salaries what kind of incentives you have in your plan to
give to local labor to motivate them to
work more?
Being a manager
of a medium-sized labor intensive firm
where it is required to replace the expatriates with local or domestic labour;
the firm will face the following problems
or costs to maintain the same level of
production:
Business will become expensive: the cost of business will become too much
expensive because the local labor will demand much more high wages than expats.
Replacing expats with Saudi domestic labors or nationals are expected to increase
the costs of hiring by 30% (Gonçalves, 2018).
Limited Pool of Candidate:
Relying on the good, the number of
candidates might be bound. It doesn’t mean that the local cannot be hired by a
company and train them. It just simplifies that more time and money invested in
bringing the workforce up to the eligible level of skill.
Limited Recruitment Chances: In the geographical area, it might be tough to hire just the right
person. Even though there are many ways, local candidates can be searched, but
there is always a risk that the soft or hard skills that the organization is
looking for aren’t available or are limited in the operating country or nation.
Lack of Motivation among Local Employees: Compared to local workers, expats are daring and self-motivated
people who gaze at the bigger picture of life. When it comes leaving home in search of new adventures and opportunities,
local workers cannot be as willing or courageous since they cannot leave their
home. Meanwhile, expats don’t back away from moving abroad, and it makes them better since they attain not only opportunities but also
challenges. Because the home of left by
the expat for a certain aim and unless he obtains
it, he will keep on working, and this
motivation may lack among local employees.
Inappropriate Expertise: If
the organization is planning to do something that is pioneering in the organization
with no experience of the service or product, it will no doubt be tough and
might be impossible for achieving complete engagement of business vision,
values, and methods with local employees for the time to come. An international
candidate, however, might have worked in a similar field and might be ready
again not only to bring ideas but boost the concepts, knowledge, and even
expertise.
Furthermore, considering
the higher salaries the local will demand, the profit of the firm will be reduced because giving higher salaries means
the firm will have to bear a higher cost. A higher salary is not a single
variable that will add to the firm’s cost
and reduce the profit margins, the firm will be adding other incentives too in
the salary plan to give local labor and
motivate them to work more such as home allowance, health insurance, car or
other traveling source, kids’ education insurance.
Problem
8b. [4
points]
In the goal of
achieving the economic expansion with the greater role of private sector, where
privatization foster competition among the economic agents, including
individuals and firms to achieve the efficiency
in the markets, what is your opinion on the following case?
Case: You are a manager in
a firm who is operating in the private sector, that requires higher dependency
on the skilled labor and the domestic/local labor lack the technical skills and
also the motivation to do manual and strenuous works on competitive wages, how
your firm can cope/overcome with this problem if she wish to sustain in the
market/industry?
Considering the above case, to sustain in the market or industry then the
firm can overcome or cope with above-mentioned
problem by giving an adequate amount of training to the local labor to enhance their technical skills. Furthermore, the rewards and incentives would
be announced for a good performance to
increase motivation to do manual and strenuous works on competitive wages.
It will be
ensured by the organization that its nationals are qualified suitably for occupying the available
local jobs. The skills of employees will be
enhanced by the firm by creating a corresponding session of training. For
instance, the training might include topics regarding the basics of writing like accurate word use,
sentence structure, punctuation, and spelling for the lack of writing skills of workers. Building on such
foundations, applicable exercise can be given to participants like writing more
or less a letter to a consumer apologizing for the ship that is belated. It
will be quite good for providing the background information of participant
about the consumer. Thus, they will be told
that the consumer has bought for a decade
and has made prompt payments. Ten to fifteen minutes might be given to them for composing a rough draft
and present a letter to nothing but the group. Once the letter is read by someone, participants will be simply asked to
given feedbacks for more improvements or optimizations; as the trainer for pointing
out the letter’s positive aspects. The ongoing education will be helped by
another mechanism which is all about enabling members of staff for developing
an affiliation with an industry or group of association. This education is not
only tangible but has also been proved to have a track record which is positive
with the trade groups and local offices. An opportunity is given to staff members for coming together and discuss the
issues that they are facing.
For everyone, this is more or less a positive experience: The gained data can be useful to others who might have the potential of partaking in a situation that is similar while people who have phased through a likewise situation have the opportunity of talking about the solutions which proved to be more beneficial.
References
Baye, M. R., 2010. Managerial Economics
and Business Strategy. 7th ed. s.l.: McGraw-Hill/Irwin.
Fernando, A., 2011. The Functioning of an
Economy: Basic Concepts. In: Business Environment. S .l.: Pearson
Education India, pp. 3-11.
Gonçalves, P., 2018. Saudi Arabia ramps
up efforts to replace 60,000 expat workers with nationals. [Online]
Available at: https://www.internationalinvestment.net/internationalinvestment/news/3503697/saudi-arabia-ramps-efforts-replace-expat-workers-nationals
Lidwell, W., Holden, K. & Butler, J.,
2010. Universal Principles of Design. S .l.: Rockport Publishers.
Lumen, 2019. The Benefits of Mixed
Economies. [Online]
Available at: https://courses.lumenlearning.com/suny-internationalbusiness/chapter/reading-the-benefits-of-mixed-economies/
Malakhov, S., 2012. Veblen effect,
search for status goods, and negative utility of conspicuous, s.l.: Munich
Personal RePEc Archive.
MCEE, 2008. The role of business in the
economy. [Online]
Available at: http://www.econedmontana.org/resources/elms/files/16_business_economy.pdf
OER Africa, 2019. Agricultural Marketing
and Price Analysis. [Online]
Available at: https://www.oerafrica.org/FTPFolder/Agshare/Marketing%20and%20Price%20Analysis/functions_of_prices.html
Reserve Bank of Australia, 2014. The
Role of the Financial Sector. [Online]
Available at: https://www.rba.gov.au/publications/submissions/financial-sector/financial-system-inquiry-2014-03/role-of-financial-sector.html
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