Economic Analysis of Product - Coursework Example

MICROECONOMICS Student’s Name Course Professor’s Name University City (State) Date Table of Contents Introduction 2 Part 1 3 a 3 Part 2 6 Conclusion 10 References 11 Introduction Before introducing any product in the market, it is necessary to conduct environmental audit to know the product that will have the best results. It is because businesses that perform well in the market must have clear knowledge of the market and introduce the best product that can generate more revenue. In this regard, the management has the responsibility of making sure that they develop products that can sell and increase the competitiveness of the company (Bade & Michael, 2001, 20). The purpose of this paper is to perform economic analysis of product A and B to determine the best line of product to venture into. Part 1 a). The following is the hypothetical production possibility frontier graph showing products A and B. Product A output a b Product B output Based on the above graph, one can identify that there are two products to choose from and they are product a and b. It is the responsibility of the management to select the best form of business to invest. An economist can explain that opportunity cost is at play at this point. When there are two products to choose from, they must choose one product and forgo the other one because of the scarcity of resources. If the management decides to increase the production of product A to point a, it means that there will be few resources used to produce the product (Bade & Michael, 2001, 20). It means that the cost used to produce product B will decline and hence less production of the product. It means that they must forgo one product so that they can have resources to produce the other one. According to the law of diminishing returns to scale, as more and more of a product is used, the less the satisfaction the customers derive from the same product. The business can invest more resources but when the product reaches at its peak, it will generate less income despite investing many resources in it. The points are lying within the production possibility frontier meaning that the resources are not fully utilized. However, product B shows that more of its production resources are not utilized effectively (Bade & Michael, 2001, 20). On the other hand, the marginal analysis tool helps to understand and choose the best product to invest. In this case, product B has high potential of wasting resources according to the graph. In this case, the business should adopt and invest in producing product A because of the limited chances of wasting resources. b). The diagram below shows the graph showing the equilibrium price Price Supply Demand Quantity Equilibrium price is the price at which the quantity demanded equals to the supply. However, the assumption is based on the fact that all other factors remain constant (Colander, 2008, 15). In the diagram above, the point at which the supply curve meets the demand curve is the equilibrium price and quantity. The prices help to satisfy the customers as well as the business because it will not make a loss even though it limits the chances of making more profits. The market forces determine the pricing and output decisions thus promoting fair competition. The factors that affect the demand curve include the price of the product because when the price increases the consumers shift their demand. Availability of substitute products also provides alternative option to the customers thus reducing the demand and the curve will shift inwards. Changes in consumer preferences also affect the demand curve to shift inwards because they shift their demand to alternative products. On the other hand, the factors that influence the supply curve include the cost of production, the demand and changes in technology (Bade & Michael, 2001, 20). Application of technology increases the quantity produced while increase in demand forces the business to increase the production to meet the demand in the market. In this regard, various factors influence demand and supply curves depending on the prevailing market conditions. When the business increases the price beyond the equilibrium price, the demand decreases and this makes the demand curve to shift inwards because of the decline in the demand as well as reduction in the production quantity (Colander, 2008, 15). The law of demand states that as the demand increases, the prices also increase and this affects the demand to decline and eventually lead to the decline in quantity demanded. Part 2 a). The table below shows the economic growth of Australian economy between 1986 to 2005. Year Economic growth 1986 1.5 1987 6 1988 3.3 1989 4.8 1990 0.3 1991 0.7 1992 4.2 1993 3.6 1994 4.2 1995 3.4 1996 3.6 1997 4.7 1998 5 1999 3.8 2000 1.9 2001 3.7 2002 3.4 2003 4 2004 3.1 2005 3.1 The table below shows unemployment rate in Australia between 1986 to 2005 Year Unemployment rate (%) 1986 -1.71 1987 0.11 1988 -11.10 1989 -14.57 1990 12.73 1991 38.17 1992 11.99 1993 1.08 1994 -10.51 1995 -12.78 1996 0.29 1997 -1.56 1998 -8.17 1999 -10.62 2000 -8.74 2001 7.98 2002 -5.79 2003 -6.93 2004 -9.27 2005 -6.19 (Index, 2016, 2) The table below shows the inflation rate in Australia between 1986 to 2005 2005 2.97 % 3.01 % 3.15 % 3.51 % 2.80 % 2.53 % 3.17 % 3.64 % 4.69 % 4.35 % 3.46 % 3.42 % 3.39 % 2004 1.93 % 1.69 % 1.74 % 2.29 % 3.05 % 3.27 % 2.99 % 2.65 % 2.54 % 3.19 % 3.52 % 3.26 % 2.68 % 2003 2.60 % 2.98 % 3.02 % 2.22 % 2.06 % 2.11 % 2.11 % 2.16 % 2.32 % 2.04 % 1.77 % 1.88 % 2.27 % 2002 1.14 % 1.14 % 1.48 % 1.64 % 1.18 % 1.07 % 1.46 % 1.80 % 1.51 % 2.03 % 2.20 % 2.38 % 1.59 % 2001 3.73 % 3.53 % 2.92 % 3.27 % 3.62 % 3.25 % 2.72 % 2.72 % 2.65 % 2.13 % 1.90 % 1.55 % 2.83 % 2000 2.74 % 3.22 % 3.76 % 3.07 % 3.19 % 3.73 % 3.66 % 3.41 % 3.45 % 3.45 % 3.45 % 3.39 % 3.38 % 1999 1.67 % 1.61 % 1.73 % 2.28 % 2.09 % 1.96 % 2.14 % 2.26 % 2.63 % 2.56 % 2.62 % 2.68 % 2.19 % 1998 1.57 % 1.44 % 1.37 % 1.44 % 1.69 % 1.68 % 1.68 % 1.62 % 1.49 % 1.49 % 1.55 % 1.61 % 1.55 % 1997 3.04 % 3.03 % 2.76 % 2.50 % 2.23 % 2.30 % 2.23 % 2.23 % 2.15 % 2.08 % 1.83 % 1.70 % 2.34 % 1996 2.73 % 2.65 % 2.84 % 2.90 % 2.89 % 2.75 % 2.95 % 2.88 % 3.00 % 2.99 % 3.26 % 3.32 % 2.93 % 1995 2.80 % 2.86 % 2.85 % 3.05 % 3.19 % 3.04 % 2.76 % 2.62 % 2.54 % 2.81 % 2.61 % 2.54 % 2.81 % 1994 2.52 % 2.52 % 2.51 % 2.36 % 2.29 % 2.49 % 2.77 % 2.90 % 2.96 % 2.61 % 2.67 % 2.67 % 2.61 % 1993 3.26 % 3.25 % 3.09 % 3.23 % 3.22 % 3.00 % 2.78 % 2.77 % 2.69 % 2.75 % 2.68 % 2.75 % 2.96 % 1992 2.60 % 2.82 % 3.19 % 3.18 % 3.02 % 3.09 % 3.16 % 3.15 % 2.99 % 3.20 % 3.05 % 2.90 % 3.03 % 1991 5.65 % 5.31 % 4.90 % 4.89 % 4.95 % 4.70 % 4.45 % 3.80 % 3.39 % 2.92 % 2.99 % 3.06 % 4.25 % 1990 5.20 % 5.26 % 5.23 % 4.71 % 4.36 % 4.67 % 4.82 % 5.62 % 6.16 % 6.29 % 6.27 % 6.11 % 5.39 % 1989 4.67 % 4.83 % 4.98 % 5.12 % 5.36 % 5.17 % 4.98 % 4.71 % 4.34 % 4.49 % 4.66 % 4.65 % 4.83 % 1988 4.05 % 3.94 % 3.93 % 3.90 % 3.89 % 3.96 % 4.13 % 4.02 % 4.17 % 4.25 % 4.25 % 4.42 % 4.08 % 1987 1.46 % 2.10 % 3.03 % 3.78 % 3.86 % 3.65 % 3.93 % 4.28 % 4.36 % 4.53 % 4.53 % 4.43 % 3.66 % 1986 3.89 % 3.11 % 2.26 % 1.59 % 1.49 % 1.77 % 1.58 % 1.57 % 1.75 % 1.47 % 1.28 % 1.10 % 1.91 % (Tim, 2016, 2) b). Considering the above figures, virus reasons can account for the shifts in the figures. In the first place, factors affecting the shifts in the economy include government policies and availability of capital for investment. The government of Australia advocates for economic growth through easing the cost of doing business and managing interest rates (Colander, 2008, 15). Also, the primary factors for unemployment rates include shifts in government policies and economic growth creating employment opportunities to its citizens. For instance, global economic stability and regional trade creates job opportunities. Further, the federal bank has developed policies to regulate inflation with the aim of promoting economy. c). Movements in economic growth affects the business plan in various ways. Firstly, it determines the output of the products as well as the pricing decisions. It also affects the cost of production because it determines the cost of labor and raw materials (Colander, 2008, 15). For instance, low economic growth hinders the buying power of the consumers and this affects the profitability of the business. d). The diagram below shows the impact of unemployment and inflation on the business. From the diagram, one can identify that unemployment rate affects the business because high unemployment rate affects the ability of the consumers to buy the products. It is because the success of the business is directly proportional to the disposable income among the consumers (Colander, 2008, 15). On the other hand, inflation affects the demand for the products because the central bank will increase the interest rates to discourage bank borrowing ensuring limited circulation of money. It also leads to increase in prices affecting the demand and can eventually lead to deflation. Conclusion In conclusion, environmental scanning is critical because it helps to know the dynamics of the business and select the best business or products to venture. The economic activities that influence the business include unemployment, economic growth and inflation rates. The business must take these factors into account so that it can develop appropriate strategies to succeed. References Bade, R & Michael, P 2001, Foundations of Microeconomics. Addison Wesley Paperback 1st Edition. Colander, D 2008, Microeconomics. McGraw-Hill Paperback. Tim, M 2016, Historical Inflation Rate, retrieved on 31st December 2016 from http://inflationdata.com/Inflation/Inflation_Rate/HistoricalInflation.aspx Index, M 2016, Australia Unemployment rate, retrieved on 31st December 2016 from http://www.indexmundi.com/australia/unemployment_rate.html Read More