Economics for Business - Assignment Example

1(a)Average and Marginal Cost, average and marginal revenue b) Graph c) Profit made at this level: Total Revenue at this level = $188 Total Cost at this level = $104 Total Profit = $84 Profit Per unit = $10.50 per unit 1(d) As more and more units are being produced, the overall profit per unit is decreasing suggesting that other players may have been entering into the market or consumers have other less expensive options available to exercise. With the reduction in profitability and marginal revenue, it can be concluded that the market is working in a perfect markets. This is based upon the assumption that there are many goods and services available in the market and the buyers have the choice to buy from many suppliers in the market. The reduction in the profit therefore suggests that the firm is reducing its marginal revenue in order to sell into the market. (Mandel, 2011) 2(a) The chart given in the question depicts three important recessionary periods in the recent history of UK and how it affected the overall economy of the country. The current recession seem to have a larger impact on the economy as compared to the other two recessions. The overall reason and the factors behind the current recession therefore may be relatively different and unique to the situation which is currently prevailing within the economy. The key factors which might have contributed towards the current recession in UK are discussed below: Globalization and economic integration If one traces the origins of current economic recession in UK, it will lead to US where it all started due to slump in the housing market and subprime mortgage crisis. The constant de-regulation of the developed economies like US and UK has encouraged economic integration of countries where the overall survival of global economies largely depends upon the performance of leading economies. It is mostly argued that one of the key factors behind the current recession is the spillover impact of the decline in the US economy. Performance of financial institutions The current crisis started with the decline in the performance of financial sector of the country. Few UK banks even witnessed a bank run thus further declining the prospects of economic recovery of the financial institutions. The lending decisions made by the banks adversely affected their economic capital and hence Government has to intervene through equity participation in financial institutions like RBS and Lloyds TSB. The overall performance of the financial institutions deteriorated in UK due to credit crunch which resulted due to certain practices of the financial institutions. 1Banks started to lend to the subprime borrowers and also at the same time securitized their portfolio by issuing financial derivatives. However, once the subprime borrowers failed to pay, banks found themselves short of liquidity to lend further to the consumers. This therefore has resulted into shortage in supply of consumer credit and resultantly banks’ overall performance greatly reduced. Due to this, UK government has to intervene and provide support by reducing discount rate, equity participation as well as through quantitative easing. Falling Housing Prices One of the key reasons as to why the economy further made a slide into recession was the drastic reduction into the housing prices. Housing prices sharply declined due to credit crunch and lack of consumer credit as banks became reluctant to offer new mortgage credit. Some estimates suggested that housing prices fell by more than 10% thus putting the overall housing market at the risk of double dip recession. Inflation Another important factor behind the current recession was the cost push inflation which further squeezed the incomes of the consumers and reduced the disposable income. A reduction in disposable income reduced the household consumption level and aggregate demand. The overall inflation in UK remained over 2% for extended period of time and same was also duly corroborated by low interest rates in the economy. Consumer Confidence Another important factor which remained one of the key concerns for even the policy makers was the low consumer confidence. The low performance of the financial services sector coupled with the fears for the economic collapse resulted into the sharp decline into the overall consumer confidence. There were trends towards saving more rather than spending thus resulting into a decline in the overall aggregate demand. This shift towards saving was one of the key indicators that the overall consumer confidence is low and consumers preferred savings over consumptions in order to meet their future consumption requirements. 2(b) One of the common elements of all three recessions was the higher inflationary pressures on the economy and how government responded to it. The recession during 1979-1981 was mostly due to the higher inflation i.e. almost 27% which government wanted to reduce. In a bid to reduce the inflation, government initiated tighter monetary policy measures which though reduced the inflation rate but also decreased the spending and investment rates. The economic growth achieved by UK during 1980s was considered as unsustainable because of its overall pace. The high pace of economic growth in the country therefore put pressure on the economy and resultantly inflation rates increased. Government, in order to control the inflation, started the policies which were deflationary in nature thus reducing the pace of economic growth.2 Though the real cause of the current recession may be different however, inflation was also one of the key reasons as to why the UK economy went into recession. Cost push inflation actually further reduced the disposal income of the individuals and this was further magnified with the systematic withdrawal of the State benefits. Reduction in voluntary transfers by the government as well as higher prices therefore created an impact on the economy which further increased the economic pressures on the government. Another important similarity between all three recessions is the international trade and globalization. On almost all three occasions, UK went into recession when economic conditions outside UK started to worse. Since UK is one of the top economies in the world, therefore it was naturally affected by the economic changes at the international level. 2(c) Overall strength of recovery from the current recession may not be sufficient enough to allow UK to fare well. Over the period of time, UK has drastically taken measures to reduce the overall impact of recession on the economy. Some of the measures took included exercising expansionary monetary policy by reducing the interest rates as well as increasing the money supply within the economy. However, despite such efforts, the overall recovery is relatively low because of lack of consumer confidence as well as the low performance by the manufacturing sector of the economy. During 2008-2009 recession, the overall decline in growth rate was 7.1%.3 Housing market has not been able to pick whereas the banks are still reluctant to lend thus restricting the overall flow of credit towards the consumers. It is also important to understand that government has also taken different austerity measures which reduced the overall state benefits thus also reducing the disposable income. Such sudden reduction in the fiscal expenditure by the government therefore has further reduced the disposable income of consumers. (Oxlade, 2011) Such measures therefore have reduced the aggregate demand in the economy thus further slowing the pace of recovery. It is also important to understand that EU is going through sovereign debt crisis with countries like Greece and Italy are badly affected. The measures taken at the EU wide level to avert the crisis therefore has further weakened the overall recovery in the country as UK has to participate into the efforts taken to avert the crisis at regional level. 3(a) The principle of comparative advantage suggests that two countries will benefit from trade if one is relatively more efficient in producing the same good. The law of comparative advantage therefore suggests that the relative differences in the efficiencies of two countries play important role in determining whether one country is willing to trade with another country or not. (Mankiw, 2003) It is also important to understand that the comparative advantage suggests a country can have comparative advantage over another country if it can produce any good or service at relatively lower prices as compared to other country. Countries with absolute advantage therefore do not necessarily can excel under international trade if they don’t have the comparative advantage. As such the overall benefits of comparative advantage can be achieved when there exists two different sets of opportunity costs for the countries to produce any good or service. A country with lower opportunity cost to produce will have comparative advantage over others. (OSullivan, , A. et al. 2011) One of the key advantages of trade therefore is the achievement of relative efficiencies as well as importing the goods and services at relatively lesser prices. A country may have an absolute advantage in producing a good or service however, it can benefit from trade if its trade partner have the comparative advantage in producing the same good or service. Another important benefit of trade is based on the assumption that nations which are actively engaged in international trade tend to dominate the world economy. Increasing participation in the trade therefore may allow a country to become relatively more powerful not only economically but also politically too. 3(b) A closer look at the data suggest that Germany remained the largest partner in international trade with UK as over the period of ten years, the volume of export to Germany has grown to £38.713 billion. UK’s exports to Germany during 2000 were just £29.465B which increased to its current level. Similarly, exports to Spain reached at £15.079 Bn showing increase from £10.557 B.4 These trends therefore indicate that UK prefer to trade with its neighboring countries within EU region and as such trade in goods forms the larger part of UK’s export to Germany and Spain. It is also important to understand that UK’s imports from these countries are relatively on the higher side too suggesting that UK may have comparative advantage in producing certain goods and services while other countries might have comparative advantage in producing a different class of goods and services. Trade with China and Hong Kong has increased too and UK now exports goods of approximately £7.6 Bn whereas Hong Kong caters to £4.456 B trade with UK in terms of exports made to the countries. Similarly, trade with India is also growing as imports from India are approximately over £8 billion whereas exports are over £6 billion. The above data therefore suggests that the UK is carrying out extensive trade with other countries and Germany is its largest trade partner in the world. References 1. Mandel, M. (2011) Economics: The Basics, New York: McGraw Hill. 2. Mankiw, N. (2003) Principles of Economics, New York: South-Western College Pub. 3. OSullivan, , A. et al. (2011) Economics : Principles, Applications and Tools, 7th ed. London: Pearson. 4. Oxlade, A (2011) Economy watch: Is Britain heading back into recession? Read more: http://www.thisismoney.co.uk/money/news/article-1616085/Economy-watch-Is-Britain-heading-recession, [online] Available at: http://www.thisismoney.co.uk/money/news/article-1616085/Economy-watch-Is-Britain-heading-recession.html [Accessed: 1st Jan 2012]. Website Top of Form Bottom of Form Top of Form Bottom of Form Read More