Principles of Economics: Learn by Doing - Research Proposal Example

ECONOMICS EVALUATION INTRODUCTION Demand in General This is defined as desire backed up by the ability to pay. Hence the penniless, however hungry, have no "demand" (economically) for food and are invisible to market forces. On the other hand "teenagers" was coined in the 1950s in acknowledgement of the buying power now exercised by a previously economically impotent section of the population. There is information asymmetry between buyer and seller and the former uses price as an indication of quality, as with antiques. Price rises are regarded as a precursor of further rises, as with housing and share price booms. In such cases the bubble inevitably bursts. Output markets SUPPLY DEMAND Firms Households DEMAND SUPPLY Input markets Circular flow of Economic Activity The demand in the output markets are determined by the households from the above diagram. A household's decision about what quantity of a particular product depends upon the following factors: 1. The Price of the product 2. The income available to the household A household's income is the sum of all the wages, salaries, profits, interest payments, rents and other forms of earnings received by the household in a given period of time. 3. The Household's amount of accumulated wealth Wealth is the total value of what a household owns less what it owes. It is the amount left after a household sells off all its possessions and pays off all its debts. 4. The Prices of other products available in the market Other products include substitutes (Airplane and Train) and complementary goods (Computers and gasoline) 5. The households tastes and preferences 6. The household's expectations about future income, wealth and prices. Ultimately, the law of demand - "As price rises, quantity demanded decreases and vice versa" will play a crucial role in decision making by the household's. FACTORS DRIVING DEMAND Income Usually the higher aggregate income, the higher demand. In some instances less in absolute terms is demanded as income changes, for instance bus transportation and cheap products in general, if cheap implies low quality. Hence as income rises consumers may demand more in quantity and/or will move up the price-quality continuum. In some instances consumers demand more as income rises but not proportionately. Income is an important factor to be considered regarding computers. Higher the income, better it is for the computer market. Computer was once a luxurious product and nowadays computers have become a necessity. This has caused a change in the demand for the product. Since computers are now available at a lower cost all the factors change. This will create a move of the whole curve (a change in the level of demand). Distribution of Income and Population This factor is a crucial one for the marketer to position the market and segment it. Demand for any product will almost certainly depend upon the distribution of the population and of income, across age groups, classes and regions. In the case of computers, London is considered to be a high income area and there would be about 4 to 5 computers per household in this area. Marketers must now target this area to sell high quality high priced computers. Similarly, marketers must target different areas according to the income level for different budget computers. An issue for marketers is the degree that income can be separated from social-economic groups. It would seem quite clear that the latter is not just a matter of income but of buying habits and life-style. Indeed there are sub-groups within each social economic group. It has been suggested that, in the U.K., the newspaper-read may represent a reasonable predictor of buying behaviour. Hence an increase in income to "Guardian" reading public employees would have a different impact on consumption patterns from an increase to "Daily Telegraph" reading privately employed managers. An issue for marketers is the degree that income can be separated from social-economic groups. It would seem quite clear that the latter is not just a matter of income but of buying habits and life-style. Indeed there are sub-groups within each social economic group. It has been suggested that, in the U.K., the newspaper-read may represent a reasonable predictor of buying behaviour. Hence an increase in income to "Guardian" reading public employees would have a different impact on consumption patterns from an increase to "Daily Telegraph" reading privately employed managers. The Price of Substitutes This is again another important factor. The substitutes have a great impact on the sales of computers. Mobiles are becoming a substitute for computers these days. High end phones like Black Berry etc. have replaced computers to a certain extent. The Price of Complements This factor is a serious issue as the complement product of computers is processors. Recently, the price of processors has come down drastically. This indicates that the maintenance cost of computers is going to rise and also the running cost. The variable cost will be an issue to watch out while purchasing computers and this may lead to the fall in computer sales. Taste This is a catch-all for the other influences on demand:- The demand for computer products has a seasonal element, even products bought by businesses tend to increase during the academic opening seasons when new graduates will be joining schools and colleges. During this season, computer sales will peak up. Fashion plays a part in many consumer products. Some sectors accept and exploit the constant changes in consumer habits as in computers. Others find fashion more problematic e.g. restaurants. Long-term This is the most difficult to analyse and, hence, to predict its outcome. Some changes reflect new technology. Over the last 40 years, for instance, seismic changes have occurred as a result of the micro-chip and of the informatics revolution. Other changes reflect change in consumer preferences. This may be the result of demographic factors e.g. a shift from nappies to SAGA holidays. It may reflect other influences, for instance increased exposure to other cultures. In the case of computers, in the past 20 years, huge revolution has taken place in the computer market from mainframe based computers to desktop Pc's to palm tops. During all these changes, price was kept constant and the features were added further. This scenario has now changed. Both the price and features are now coming down drastically. Computer Products Demanded by Business a) They are not demanded for their own sake. The state of the purchasers' market will be important as well as that of the economy as a whole. b) If they are expensive:- interest rates retained earnings tax laws expectation about the above will all play a part. c) Demand will be influenced by changes in technology. d) For some products wage-levels may be important but the direction of the impact will depend upon whether labour is a complement or substitute for capital. e) With the increasing importance of human capital (the skills and knowledge contained within people) the markets for the inputs into firms traditionally assumed by economics textbooks, such as machinery, are in many sectors losing in importance to the labour market for skilled workers. f) Purchasers usually have a high level of knowledge about the products they purchase. This, in turn, will influence the type of marketing that is appropriate. ELASTICITIES Own Price Elasticity Own Price Elasticity: -ve ______ -1 ________0 _____________ +ve elastic inelastic 'Gifffen good' For computers, there is an in elastic demand. As quantity increases, the price of the product decreases. Nowadays, it is getting transformed into perfectly in elastic. Income Elasticity Income Elasticity: -ve ____________ 0 __________ 1 _______ +ve inferior goods necessities luxuries Computers will come under the category of luxuries but now with the increase of low cost computers, it will become a necessity and even go to inferior goods category. Cross Elasticity Cross Price Elasticity: -ve _____________ 0 __________ +ve complements substitutes Considering the complements, computers have a negative elasticity and regarding the substitutes also is negative. ECONOMIES OF SCALE Economies of scale include the factors of production like Indivisible Fixed Costs The cost of inputs cannot be scaled down below a minimum level in the case of computer production. The computer manufacturing is a capital intensive one. Specialisation A computer production line has various specialized departments like processor, software, Hardware, assembling etc. Purchasing Large orders may cost less because of suppliers accept lower prices to secure steady demand, customers exploit market power Research and Development The major focus is on technological improvement in the computer market. IMPACT OF TECHNOLOGY ON THE MARKET FOR COMPUTERS Technological progress forces the average cost curve to fall. Such progress includes human capital i.e. the skills and knowledge contained in people. Technological progress has been the principal engine for economic progress. In computers, technology plays a major role contributing to the economy as a whole. b) A perfectly elastic demand curve is parallel to the quantity axis, a perfectly inelastic parallel to the price axis, and one with constant elasticity is a rectangular hyberbola (See Figure III). Figure III The Product as a Bundle of Characteristics An advanced concept is to view a good as a collection of characteristics rather than as a single thing. A car could be so much power, (measurable), colour (recognisable) or image (as perceived) It facilitates an understanding of what "new" means. It would be those characteristics of a new product which were not included in existing products. Hence the first propeller driven planes across the Atlantic would reflect: the price consumers were prepared to pay for trans-Atlantic travel, which would be determined under competitive conditions with ocean liners the price consumers were prepared to pay for whatever characteristics were unique to planes e.g. speed, glamour or whatever. Similarly ocean liners would see the price they could charge for the former fall in response to the new competition but would maintain a monopoly in whatever is special about their form of travel e.g. the luxury, the possibility of romance or whatever. When jet planes were introduced into transatlantic routes they would have been able to charge a higher price than propeller driven planes that reflected the "price of speed". This differential would have been less than the price consumers would have been willing to pay for the extra speed provided by Concorde. On long haul there is some scope for offering differing characteristics and air fares demonstrate a concomitant spread. On short-haul there is little scope for differentiation except time of departure and airfares show minimal variation. The characteristic approach provides a clear understanding of what is meant by product differentiation. It can refer to: the presence or otherwise of particular characteristics. consumer weighting between characteristics, whether or not the result of persuasive marketing Location of Economies of Scale It may be important to distinguish between advantages from size at the level of the individual site from that at organisation level. If Tesco's advantages lie in its purchasing power, rather than the size of its stores, a chain of convenience shops might be able to match its prices but, on the other hand, a single super store may not be able to compete. There may well be advantages from the size of the total sector because of spin offs ("externalities" in economic jargon) from one company to another e.g. in contributing to the volume of expertise available. This is related to the current debate on the advantages of creating geographical clusters of businesses in related activities e.g. as in Silicon Valley, the City of London or China Town. Diseconomies of Scale a) Bureaucracies It is common for organisations to develop stultifying internal structures and processes as they grow in size. Microsoft is now being offered in the media as an example. b) Management Limitations Senior management may readily acknowledge that, in principle, an organisation may be too big for the incumbent management to run but rarely will they accept they would be examples. This is particularly the case with mergers. c) Limited Choice Traditionally a trade-off occurred between size of production and range of choice, though modern technology has largely reduced this. d) Disfunctional Culture Though strictly speaking not a result of size per se continued success can breed cultures of arrogance, tunnel vision, or sleepiness which can distort both decision making and the interpretation of evidence. IBM and Marks and Spencer would be ready examples but it should be remembered that sustained long term competitive advantage is a rarity. This is partly a reflection of market conditions and partly the aforesaid cultural decay. Though beyond the scope of this course this could be a phenomena common to all social entities from empires to football clubs. Economies of Scope Whereas economies of scale refer to advantages from volume of output this refers to the advantages from the range of products a firm offers. a) Common facilities The same inputs can be employed to produce quite different products. A manufacturer of men's clothing could utilise the same production facilities to produce women's clothing and hence would face lower costs than if entering the clothing business for the first time. b) Transferable Experience For instance when M.B.S. entered the executive M.B.A. market it benefited not only from the facilities already offered to the full-time programme but from the experience it had gained in this area. c) Influences on Demand Textbooks usually limit their attention to the effects of scope on costs but demand can be affected if the customer goodwill created by one product benefits the sales of a second. Clearly this is the basis of successful branding. 1.0 Implications of Economies of Scope a) Possibly no two multi-product companies face the same average costs for the same product. b) Economies of scope can facilitate entry into a market by lowering costs or increasing demand. c) Such economies can serve as a barrier to entry if a full range of products must be offered to be successful in a market. This may be the explanation for the continued success of the "Big Four" accounting firms. Technology Technological progress forces the average cost curve to fall. Such progress includes human capital i.e. the skills and knowledge contained in people. Technological progress has been the principal engine for economic progress. CONCLUSION A highly contentious issue is the extent that businesses benefit, not only from the levels of output at which they currently produce but from the past levels, because of the experience thus gained. Learning curves are well documented and refer to falling labour costs as workers "learn by doing". The Boston Consulting Group went much further in promulgating the concept of the Experience Curve which allegedly drives down all costs. They used this as a basis for a once influential strategy to strive for maximum market share, whatever the short-term cost, in order to accumulate experience and hence gain a long-term competitive advantage. Costs can effect all aspects of business strategy, e.g. by definition only large firms can exploit economies of scale. Small firms can usually only compete on cost by lowering quality, thus launching into a downward spiral of profits. In a market for a totally undifferentiated product the number of competitors will, in the long-run, be determined by size of market/minimum efficient scale, the point at which most of the benefits from scale have been achieved. Reference: 1. Case, E. Karl, Fair, C, Ray, Principles of Economics, Pearson Education, Pg. 45-79 2. David Beg, Damian Ward (2007), Economics for Beginners - 2nd Edition, McGraw-Hill Read More