Managerial Economics at HelpWithAssignment.com

Managerial Economics

Managerial Economics is the science of directing scarce resources to manage effectively. Whenever resources are scarce, a manager can make more effective decisions by applying the discipline of managerial economics. These may be decisions regarding customers, suppliers, competitors or the internal workings of the organization. It does not matter whether the setting is a business, not for profit organization or home. In all these settings, managers must make the best use of scarce resources.

Scope of Managerial Economics

Managerial economics must be distinguished from microeconomics and macroeconomics. Microeconomics is the study of individual economic behavior where resources are costly. It addresses issues such as how consumers respond to changes in prices and income and how businesses decide on employment and sales. Microeconomics also extends to such issues as how voters choose between political parties and how governments should set taxes. Managerial economics has a limited scope as it is the application of microeconomics to managerial issues. Managerial economics consists of three branches namely: Competitive markets, market power and imperfect markets.

By contrast, the field of macroeconomics focuses on aggregate economic variables. Macroeconomics addresses such issues as how a cut in interest rates for example can affect the inflation rate and how a depreciation of a currency will affect unemployment, exports and imports. While it is certainly true that the whole economy is made up of individual consumers and businesses, the study of macroeconomics often considers economic aggregates directly rather than as the aggregation of individual consumers and businesses.

Some issues overlap in both microeconomics and macroeconomics. For example, energy has such an important role to play in the economy that changes in the price of energy have both macroeconomic and microeconomic effects. If the price of oil were to rise by 10% , it would trigger increases in other prices and hence generate price inflation, which is a macroeconomic effect. The increase in the price of oil would also have microeconomic effects, for instance, power stations might switch to other fuels, drivers might cut back on using their cars and oil producers might open up new fields.

The fundamental premise of managerial economics is that individuals share common motivations that lead them to behave systematically in making economic choices. If economic behavior is systematic, then it can be studied. Managerial economics proceeds by constructing models of economic behavior. An economic model, is a concise description of behavior and outcomes. By design, the model omits considerable information so as to focus on a few key variables. Economic models are abstractions, like maps; a map with too much detail is confusing rather than helpful. Models are constructed by inductive reasoning. For instance, inductive reasoning suggests that the demand for new software increases with the amount that the publisher spends on advertising. We can build a model in which the demand for a product depends on advertising expenditure. The model should then be tested with accrual empirical data. If the tests support the model.

In managerial economics, many analyses resolve to a balance between the marginal values of two variables. Accordingly, it is important to understand the concept of marginal value. Generally, the marginal value of a variable is the change in the variable associated with a unit increase in a driver. By contrast, the average value of a variable is the total value of the variable divided by the total quantity of a driver.

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Other articles on Economics include: Industrial Policy, Government Policies on Living standards, Balance of Payments, Economic Growth and Economic Development

Economics- the demand for money at HelpWithAssignment.com

Economics- The Demand For Money

The demand for money is he quantity of monetary assets, such as cash and checking accounts, that people choose to hold in their portfolios. Choosing how much money to demand is thus a part of the broader portfolio allocation decision. In general, the demand for money – like the demand for any other asset – will depend upon the expected return, risk and liquidity of money and other assets.

There are two features of money that are particularly important. First, money is the most liquid asset. This liquidity is the primary benefit, of holding money. Second, money pays a low return (indeed, currency pays a zero nominal return). The low return earned by money, relative to other assets, is the major cost of holding money. People’s demand for money is determined by how they trade off their need for liquidity against the cost of a lower return.

There are some key macroeconomic variables effect the demand for money. Although we primarily consider the aggregate, or total, demand for money, the same economic arguments apply to individual money demands. This relationship is to be expected, as the aggregate demand for money is the sum of all the individual money demands.

The macroeconomic variables that have the greatest effects on money demand are the price level, real income and interest rates. Higher prices or incomes increase people’s needs for liquidity and thus raise the demand for money. Interest rates affect money demand through the expected return channel. The higher the interest rate on money, the more money people will demand, however, the higher the interest rate paid on alternative assets to money, the more people will want to switch from money to those alternative assets.

The Price Level

The higher the general level of prices, the more dollars people need to conduct transactions and thus the more dollars people will want to hold. For example, sixty years ago, the price level in the United States was about one tenth of its level today. Less money was needed for transactions and the number of dollars that the people back then held was also less. So, the nominal demand for money was probably much smaller than the amount of money that we hold today. The conclusion is that a higher price level, by raising the need for liquidity, increases the nominal demand for money. In fact, because prices are ten times higher today than they were in the past, an identical transaction takes ten times as many dollars today as it did back then. Thus, everything else being equal, the nominal demand for money is proportional to the price level.

Real income

The more transactions that individuals or businesses conduct, the more liquidity they need and the greater is their demand for money. An important factor determining the number of transactions is real income. For example, a large, high-volume supermarket has to deal with a large number of customers and suppliers and pay more employees than a corner grocery. Similarly, a high-income individual makes more and larger purchases than a low income individual. Because higher real income means more transactions and a greater need for liquidity, the amount of money demanded should increase when real income increases.

Unlike the response of money demand to changes in the price level, the increase in money demand need not be proportional to an increase in real income. Actually, a 1% increase in real income usually leads to less than a 1% increase in money demand. One reason that money demand grows more slowly than income is that higher income individuals are firms typically use their money more efficiently. For example a high income individual many open a special cash management account in which money needed for current transactions is automatically invested in nonmonetary assets paying a higher return. Because of minimum balance requirements and fees, such an account might not be worthwhile or a lower-income individual.

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Other articles on Economics include: Industrial Policy, Government Policies on Living standards, Balance of Payments, Economic Growth and Economic Development

Macro Economics at HelpWithAssignment.com

Macro Economics

Macroeconomics is the study of the structure and performance of national economies and of the policies that governments use to try to affect economic performance. Important branches in macroeconomics include the determinants of long-run economic growth, business cycles, unemployment, inflation, international trade and lending and macroeconomic policy.

As macroeconomics covers the economy as a whole, macroeconomists ignore the fine distinction among different kinds of goods, firms or market consumption. The process of adding individual economic variables to obtain economy wide totals is called aggregation.

The activities engaged in by macroeconomists include forecasting, macroeconomic analysis, macroeconomic research and data development.

The goal of macroeconomics research is to be able to make general statements about how the economy works. Macroeconomic research makers progress toward this goal by developing economic theories and testing them empirically – that is, by seeing, whether they are consistent with data obtained from the real world. A useful economic theory is based on reasonable assumptions, is easy to use, has implications that can be tested in the real world, and is consistent with the data and the observed behavior of the real world economy.

A positive analysis of an economic policy examines the economic consequences of the policy but does not address the question of whether those consequences are desirable. A normative analysis of a policy tries to determine whether the policy should be used.

Disagreements among macroeconomists may arise because of the differences in normative conclusions, as the result of differences in personal values and beliefs, and because of the differences in the positive analysis of a policy proposal.

The classical approach to macroeconomics is based on the assumptions that individuals and firms act in their own best interests and that wages and prices adjust quickly to achieve equilibrium in all markets. Under these assumptions the invisible hand of the free-market economy works well, with only a limited scope for government intervention in the economy.

The Keynesian approach to macroeconomics assumes that wages and prices do not adjust rapidly and thus the invisible hand of the free market economy may not work well. Keynesians argue that , because of slow wage and price adjustment, unemployment may remain high for a long time. Keynesians are usually more inclined than classics to believe that government intervention in the economy may help improve economic performance.

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Other articles on Economics include: Industrial Policy, Government Policies on Living standards, Balance of Payments, Economic Growth and Economic Development

Emergence of Oligopoly in Economics from HelpWithAssignment.com

Emergence of Oligopoly in Economics

An Oligopoly is a market structure with a small number of firms. A good example of an oligopoly is the petroleum industry in which a few firms have accounted in recent years for much of the industry’s refining capacity. Each of the major oil firms must take into account of the reaction of the others when it formulates its price and output policy is likely to affect theirs.

Oligopolistic industries like others, often pass through a number of stages – introduction, growth, maturity and decline. The industry’s sales grow very rapidly in the introduction phase, less rapidly in the growth phase and even less rapidly during maturity. In the stage of decline, the industry’s sales fall. As an industry goes through these stages the nature of competition often shifts.

During the early stages of Oligopoly when industry sales are growing relatively rapidly, there frequently is a great deal of uncertainty about the industry’s technology. Which product configuration will turn out to be the best? Which process technology will be most efficient? Because of small production volume and the newness of the product, production costs tend to be higher than those that the industry will eventually achieve.

At an early stage of an industry’s evolution in Oligopoly, one of the major strategic questions facing managers is: which markets for the industry’s new product will tend to open up early and which ones will open up relatively late? This question is important both because firms should allocate marketing efforts and R&D resources to relatively receptive markets and because the nature of the early markets can exert a significant influence on the way the industry evolves. To forecast which markets or market segments are likely to be most receptive to a new product, one should consider some factors.

Most of the receptive buyers tend to be those for which the new product is most profitable. For example, if a new robot is much more profitable in the railroad industry than in the agricultural equipment firms. It is more likely to be used first by railroads, not by agricultural equipment firms.

Buyers who face a relatively low cost of product failure are likely to be quicker to adopt a new product than those for which the potential costs are very high. Thus, if the new robot could cause millions of dollars of losses in the auto industry but only minor losses in the steel industry, it is more likely that steel producers will take chance on it than that auto firms will do so.

The buyers who would experience relatively low costs in switching from old products to new one sold by this industry are likely to be more receptive to this industry’s product than buyers who would experience high changeover costs.

Eventually, most industries enter the maturity phase, when industry sales grow much more modestly then before. This is often a critical phase for many members of the industry. Since firms cannot maintain the growth rates to which they are accustomed merely by protecting their market share, there is often a tendency for firms to attack the market shares of their rivals in the same industry.

During the maturity phase, rivalry among firms often centers on cost and service, rather than new or greatly improved products. Because of slower growth, more knowledgeable customers and greater technological maturity, competition tends to focus on cost and service, which may prompt a significant reorientation of firms that have competed on other grounds in the past. Also, as the industry adjusts to slower growth, there generally is a reduction in the additions to productive capacity. Often, firms do not realize that they have entered this maturity phase until after they have installed more capacity than is required. Thus, for a time, the industry suffers overcapacity.

After the maturity phase, many industries enter a stage during which sales decline. One reason for such a decline may be that the product is being supplanted by a new one. Another reason may be shrinkage in the size of the customer group that buys the product, perhaps because of demographic changes. Still another reason may be a change in buyers’ tastes and needs.

Although firms in declining industries are often advised to curtail investment and get lots of cash out of the business as quickly as possible this is not always the best strategy. Some industries, like some people, grow old more gracefully and profitably than others. Some firms have done well by investing heavily in a declining industry, thus making their businesses better “cash cows” later. Others have avoided losses subsequently experienced by their rivals by selling out before it was generally recognized that the industry was in decline.

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This article is in continuation with our previous articles on Economics which include Inflation, Business Cycles, Solow's Growth Model, Phillips Curve

Industrial Policy for Overall Economic Development in Economics from HelpWithAssignment.com

Industrial Policy:

Beyond support for basic science and technology, an aggressive approach has been proposed for encouraging technological development is industrial policy. Generally, industrial policy is a growth strategy in which the government – using taxes, subsidies, or regulation – attempts to influence the nation’s pattern of industrial development. More specifically, some advocates of industrial policy argue that the government should subsidize and promote “high-tech” industries, so as to try to achieve or maintain national leadership in technologically dynamic areas.

The idea that the government should try to determine the nation’s mix of industries is controversial. Economic theory and practice suggest that under normal circumstances the free market can allocate resources well without government assistance. Thus advocates of industrial policy must explain why the free market fails in the case of high technology. Two possible sources of market failure have been suggested and borrowing constraints and spillovers.

Borrowing Constraints: Borrowing constraints are limits imposed by lenders on the amounts that individuals or small firms can borrow. Because of borrowing constraints, private companies, especially start up firms, may have difficulty obtaining enough financing for some projects. Development of a new supercomputer, for example, is likely to require heavy investment in research and development and involves a long period during which expenses are high and no revenues are coming in.

Spillovers: Spillovers occur when one company’s innovation stimulates a flood of innovations and technical improvements by other companies and industries. The innovative company thus may enjoy only some of the total benefits of its breakthrough while bearing the full development cost. Without a government subsidy (argue advocates of industrial policy), such companies may not have a sufficiently strong incentive to innovate.

A third argument for industrial policy has less to do with market failure and more to do with nationalism. In some industries (such as aerospace) the efficient scale of operation is so large that the world market has room for only a few firms. For the world, the most desirable outcome is that those few firms be the most efficient, lowest – cost producers. However, in terms of a single country, like the United States, at least some of the firms in the market should be US firms so that profits from the industry will accrue to the United States. Moreover, having US firms in the market may enhance US prestige and yield military advantages. These perceived benefits might lead the US to subsidize its firms in that industry, helping them to compete with the firms of other nations in the race to capture the world market.

These theoretical arguments for government intervention all assume that the government is skilled at picking winning technologies and that its decisions about which industries to subsidize would be free from purely political considerations. However, both assumptions are questionable. A danger of industrial policy is that the favored industries would be those with the most economic promise.

The available evidence on the arguments for industrial policy has been surveyed by Gene Grossmann. Grossmann concluded that, in general, industrial policy is not desirable because, in choosing industries to target governments have frequently “backed the wrong horse”, the costly attempt of European governments to develop Supersonic Transport (SST) and other new types of commercial airplanes is a case in point. Grossman also points out that alternative policies – such as tax break for all research and development spending – promote technology without requiring the government to target specific industries.

However, Grossman also concedes that government intervention may be desirable in some cases, notably in the early development stages of technologically innovative products, such as computers and CAT scanners. Empirically, the potential for beneficial spillovers in these cases appears so large that the government may choose to support ultimately will not prove worthwhile.

This article is in continuation with our previous article on Government Policies to Raise Living Standards

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Government Policies to Raise Long run Living Standards in Economics from HelpWtihAssignment.com

Increased growth and a higher standard of living in the long run often are cited by political leaders as primary policy goals. We will take a closer look at government policies that may be useful in raising a country’s long run standard of living whether changing the form of government – democratic or nondemocratic – affects the long run growth rate of an economy.

Policies affecting the Saving Rate

The Solow Model suggests that the rate of national savings is a principal determinant of long run living standards. However, this conclusion doesn’t necessarily mean that the policymakers should try to force the saving rate upward, because more saving means less consumption in the short run. Indeed, if the “invisible hand” of free markets is working well, the saving rate freely chosen by individuals should be the one that optimally balances the benefit of saving more, against the cost of saving more.

Despite the argument that saving decisions are best left to private individuals and the free market, some people claim that Americans save too little and that US policy should at raising the saving rate. One possible justification for this claim is that existing tax laws discriminate against saving by taxing away part of the returns to saving; a “pro-saving” policy thus is necessary to offset this bias. Another view is that Americans are just too shortsighted in their saving decisions and must be encouraged to save more.

Now, here comes the question of ‘what policies can be used to increase savings?’ If saving were highly responsive to the real interest rate, tax breaks that increase the real return that savers receive would be effective. For example, some economists advocate taxing households on how much they consume rather than on how much they earn, thereby exempting from taxation the income that is saved. Although saving appears to increase when the expected real return available to savers rises, most studies find this responsive too small.

An alternative and perhaps more direct way to increase, the national saving rate is by increasing the amount that the government saves; in other words, the government should try to reduce its deficit or increase its surplus. Many economists also argue that raising taxes to reduce the deficit or increase the surplus will also increase national saving by leading people to consume less. However, believers in Ricardian equivalence contend that the tax increases without changes in current or planned government purchases won’t affect consumption or national saving.

Policies to Raise the Rate of Productivity Growth

Of the factors affecting long-run living standards, the rate of productivity growth may well be the most important in that – according to the Solow Model – only ongoing productivity growth can lead to continuing improvement in output and consumption every year. Government policy can attempt to increase productivity in several ways.

Improving infrastructure: Some research findings suggest a significant link between productivity and the quality of a nation’s infrastructure – its highways, bridges, utilities, dams, airports and other publicly owned capital. The construction of the interstate highway system in the United States, for example, significantly reduced the cost of transporting goods and stimulated tourism and other industries. In the past 25 years the rate of US government investment in infrastructure has fallen, leading to a decline in the quality and quantity of public capital. Reversing this trend, some economists argue that might help achieve higher productivity.

Building Human Capital: Recent research findings point to a strong connection between productivity growth and human capital. The government affects human capital development through educational policies, worker training or relocation programs, health programs, and in other ways. Specific programs should be examined carefully to see whether benefits exceed costs, but a case may be made for greater commitment to human capital formation as a way to boost productivity growth.

One crucial form of human capital, which we haven’t yet mentioned, is entrepreneurial skill. People with the ability to build a successful new business or to bring a new product to market play a key role in the economic growth.

Encouraging Research and Development: The government also may be able to stimulate productivity growth by affecting rates of scientific and technical progress. The US government directly supports much basic scientific research. Most economists agree with this type of policy because the benefits of scientific progress, like those of human capital development, spread throughout the economy, Basic scientific research may thus be a good investment from society’s point of view, even if no individual firm finds such research profitable.

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This article is in continuation with our previous articles on Economics which include Balance of Payments, Economic Development and Growth, Inflation, Business Cycles

Balance of Payments Continued in Economics from HelpWithAssignment.com

For examining the factors that affect international trade and lending first requires an understanding of the basics of balance of payments accounting. The Balance of Payments accounts, which are a part of the national income accounts are the record of the country’s international transactions.

When we examine the accounts, we can see that the current account measures a country’s trade in currently produced goods and services, along with unilateral transfers between countries. We can divide the current account into three separate components, (1) net export of goods and services, (2) net income from abroad and (3) net unilateral transfers.

Net Exports of Goods and Services: Net exports, NX or exports minus imports, as part of the expenditure approach to measuring GDP. Net exports are often broken into two categories: merchandise (goods) and services.

Merchandise consists of currently produced goods, such as American soy-beans, French perfume, Brazilian coffee and Japanese cars. When an American buys a Japanese car for example, the transaction is recorded as a merchandise import for the United States (a debit item for the United States, because funds flow out of the United States to pay for the car) and a merchandise export for Japan (a credit item for Japan because funds flow into Japan to pay for the car). The difference is called “merchandise trade balance”, or simply the trade balance.
Net Income from abroad: Net Income from abroad equals income from abroad minus the income payments to residents of other countries. It is almost equal to net factor payments from abroad, NFP. The income receipts flowing into a country, which are credit items in the current account, consist of compensation, received from residents, working abroad, plus investment income from assets abroad. Investment income from assets abroad includes interest payments, dividends, royalties and other returns that they own in other countries. The income payments flowing out of a country, which are debit items in the current account, consist of compensation paid to foreign residents working in the country plus payments to foreign owners of assets in the country.

Net Unilateral Transfers: Unilateral transfers are payments from one country to another that do not correspond to the purchase of any good, service, or asset. Ex are official foreign aid, or a gift of money from a resident in one country to family members living in another country. When the United States makes a transfer to another country, the amount of transfer is debit item because funds flow out of the United States. A country’s net unilateral transfers equal unilateral transfers received by the country minus unilateral transfers flowing out of the country.

Current account balance: Adding all the credit items and subtracting all the debit items in the current account yields a number called the current account balance. If the current account balance is positive- with the value of credit items exceeding the value of debit items- the country has a current account surplus. If the current account balance is negative – with the value of debit items exceeding the value of credit items – the value of credit items – the country has a current account deficit.

The Capital and Financial Account

International transactions involving assets, either real, or financial are recorded in the Capital and Financial Account is a newly defined category that encompasses unilateral transfers of assets between countries, such as debt forgiveness or migrants’ transfers. The Capital Account Balance measures the net flow of assets unilaterally transferred into the country.

Most transactions involving the flow of assets into or out of a country are recorded in the Financial Account. This account was called the Capital Account. When the home country sells an asset to another country, the transaction is recorded as a financial inflow for the home country and as a credit item in the financial account of the home country. When a home country buys an asset from abroad, the transaction involves a financial outflow from the home country and is recorded as a debit item in the home country’s financial account because the funds are flowing out of the home country.

The Financial Account Balance equals the value of financial inflows (credit items) minus the value of the financial outflows (debit items). When residents of a country sell more assets to foreigners than they buy from foreigners, the financial account balance is positive, creating a financial account surplus. When residents of the home country purchase more assets from foreigners than they sell, the financial account balance is negative, creating a financial account deficit. The Capital and Financial Account Balance is the sum of the capital account balance and the financial account balance. Because the capital account balance of the United States is so small, the capital and financial account balance is almost equal to the financial account balance.

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This is in continuation with our previous article in Economics on Balance of Payments.

Balance of Payments in Economics from HelpWithAssignemnt.com

The Balance of Payments Accounts, which are a part of the country’s national income accounts, are the country’s international transactions. The balance of payments contains the information about how the balance of payments accounts are constructed.

Modern economies have become open economies with virtually no exceptions. This means that they engage in international trade of goods and services and in international borrowing and lending. Economic openness is of tremendous benefit to the average person. Because the United States is an open economy, US consumer can enjoy products from around the world and US businesses can find new markets for their products abroad. Similarly, the internationalization of financial markets means that US savers have the opportunity to purchase German government bonds or shares in Taiwanese companies as well as domestic assets and US firms that want to finance investment projects can borrow in London or Tokyo as well as New York.

The ability of an open economy to spend more than it produces is both an opportunity and a potential problem. For ex: by borrowing abroad, the United States was able to finance a large excess of imports over exports during the 1980s and 1990s. As a result, Americans enjoyed higher levels of consumption, investment and government purchases than they could have otherwise. At the same time, however, they incurred foreign debts that may be a future burden to the US economy. Similarly, by borrowing heavily from abroad from abroad during 1970s, some less developed countries were able to avoid large reductions in domestic spending even though the two oil price shocks of the decade caused sharp declines in their output. During the 1980s however, many less developed countries were unable to cope with the burden of their foreign debts – a situation that became known as the LDC debt crisis – and perhaps as a result suffered severely reduced economic growth.

Why do countries sometimes borrow abroad to pay for an excess of imports over exports but at other times export more than they import and lend the difference to other countries? Why doesn’t each country just balance its books and import as much as it exports each year? The fundamental determinants of a country’s trade position are the country’s saving and investment decisions. To explore how desired national saving and desired investment help determine patterns of international trade and lending, we can extend the ideas of market equilibrium, to include a foreign sector. We know that unlike the situation in a closed economy, in an open economy desired national saving and desired investments don’t have to be equal. Instead, when a country’s desired national savings exceeds its desired investment, the country will be a lender in the international capital market and will have a current surplus. Similarly, when a country’s desired national saving is less than its desired investment, the country will be an international borrower and will have a current account deficit.

One can observe through these accounts that some of the numbers are positive and some numbers are negative. To sort out which international transactions are entered with a plus sign and which are entered with a minus sign, some principles are followed. Any transaction that involves a flow of funds into a country is a credit item and is entered with a plus sign and any transaction which involves the flow of funds out of that country is a debit item and therefore entered with a minus sign.

CURRENT ACCOUNT

Net Exports of goods and services (NX)			-164.3
Exports of goods and services		933.9
Goods	670.2
Services	263.7
Import of Goods and Services		-1098.2
Goods	-917.2
Services	-181.0
Net Income from Abroad			-12.2
Income receipts from abroad		258.3
Income payments to residents of other countries		-270.5
Net Unilateral transfers			44.1
Current Account Balance (CA)					-220.6

CAPITAL AND FINANCIAL ACCOUNT

Capital Account
Net Capital account transactions			0.6
Financial Account
Net Financial flows			209..8
Increase in US owned assets abroad		-292.8
US official reserve assets	-6.8
Other foreign assets	-286.0
Increase in foreign owned assets in US		502.6
Foreign official assets	-21.7
Other foreign assets	524.3
Capital and Financial Account Balance				210.4
Statistical Discrepancy				10.1
Balance on goods (merchandise trade balance)				-247.0
Balance on goods and services				-164.3
Balance on goods, services and Income				-176.5
Official settlements balance =
Increase in US official reserve assets minus increase in foreign official assets = 6.8 –(-21.7)				28.5

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This article is in continuation with our previous articles on Economics which include Inflation, Business Cycles, Solow's Growth Model, Phillips Curve, Economic Development & Growth