Module title/ Business and Managerial Economics


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London School of Commerce

MODULE TITLE/ Business and Managerial Economics

SEMESTER: Semester One
SEMESTER: February - May 2010

Student Name:
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1.
Demand Deficient Unemployment
This type of unemployment occurs when there is not enough demand in the economy to sustain full employments. If the general demand for products decreases, a firm would sell and supply less, and so reduce production, and if the firm is producing less, which lead to low demand for workers. Firm may reduce their workforce and stop employing new workers. In a case where there is prolonged period in fall in demand, a firm may become bankrupt, of which leads to mass redundancy. Factors that may affect demand deficient unemployment causing it to be worsened can stem from: the economy moving into recession – this would fuel further rise in unemployment, of which affects consumer confidence and spending. Householders may turn to saving instead of spending that can lead to further decrease in the demand of the firm’s products, and further reduce economic growth and continuous rise in unemployment. When an economy moves into recession, unemployment among the young are among the highest, the firm may cut some of its old staff by laying off these staff, but will not higher any new staff. Furthermore, the increase in interest rates, would increase the borrowing cost of business contribute reduction in the number of people the a firm employees.

Real-Wage Unemployment
Under this type of unemployment, the assumption is that labour market is perfectly, that is market equilibrium wage is set by the forces of demand and supply of labour. However, if wages rise above the market equilibrium wage, will lead to the cause of unemployment. In this case unemployment reflects the disequilibrium in the labour market. Factors that may affect this type of unemployment, arises from legislation that ensures everyone a minimum wage, for examples 60% of the national wage average. This is seen by economics as wages above the market clearing equilibrium and as such would increase unemployment. Economics argue against legislation and trade union to artificially increase real wage. If real wage were allowed to fall inline with the market level, there would be no unemployment within the economy.

Frictional Unemployment
This is occurs when people moves between jobs, for example graduates changing jobs for the next best alternative, this is common form of unemployment, of which would-be worker may be encourage to stay out of work because of high state benefits. In addition, this can also be explained as a supply-side economics approach to solve unemployment. Where government policies attempts to advance productivity and efficiency and reduce unemployment. Under this approach, the remedies put forward to reduce unemployment includes: providing better information about job, reduction of benefits, reduce the power of trade unions with the labour market, increase flexibility within the labour market, and the provision of education and training. The factor that can worsen frictional unemployment would come from government decision to close job centers in an attempt to save money, as this would reduce the availability of information pertaining to jobs, that the unemployed required getting them employed. In crease in the income tax by 2% would impacted on the amount of net earning available for workers, and worker may not be motivate to seek employment, especially in circumstances where the state benefit is high, and would be more or equally to what the would-be employee would get after tax.
Structural Unemployment
This form of unemployment occurs when because of mismatch of skills in the labour market, of

which is caused by: occupational immobility – occurs where there is difficulties in learning new skills require for a new industry because of change in technology; geography immobility – the inability of workers to get jobs regionally; change in technology – the development of machine tense industry that reduce the demand for labour; and structural changes – a decline in one industry, because of the lack of competition, and leaves a lot of people who use to work in that industry unemployed. The factors that can worsen this type of unemployment would come from: the introduction of robots in manufacturing, and the development of the single market in Europe that leads to a movement of capital to the ‘centre of gravity’ in Europe.

Technological Unemployment
This is unemployment caused by the introduction and application of new technology that eliminates by changing the nature and of works available. Those who would have previously have worked would no longer have the applicable skill to do so with the new technology. This type of unemployment would be worsened, if the introduction of robots in manufacturing process was being implemented in manufacturing industries.


Seasonal Unemployment
This unemployment is expected based on given time of year. For example certain industry experience seasonal unemployment because of the off-season. This is adjusted in government statistics as seasonal adjustments. Factors that would worsen this type of unemployment would come from more people force to take their annual holidays when the schools are on holiday, because there is not business demand would fall because school is out.


2.
a)

Figure 2.1


This image was copied from http://centralecon.wikia.com/wiki/Perfect_Competition

A firm is break even when total sales revenues equals to its total cost. This is the point at which average variable cost AC intersect with marginal revenue MR. At the break even point, the company will not make any profit or loss. The shut down price is when a firm average variable cost curve is above the marginal revenue curve. When this occurs, is an indication that the firm will leave the market. At the point of the firm leaving the market, the supply would decrease, that would lead to the increase in the profit of the firms that staff in the market.

b)

Figure 2.2

This image was copied from http://centralecon.wikia.com/wiki/Perfect_Competition

A firm in a perfect compaction market can have the three short-run profit outcomes. The firm can try to maximise its profit, and produce at quantity at which marginal cost (MC) = to marginal revenues (MR). As the firm is a price taker, and the market force of demand and supply has set the price. (1) The firm can break even; this occur when the average total cost (ATC) curve interests with MR curve at is lowest point and earn a normal profit, see figure 2.1 diagram above; (2) Where the ATC curves lies below of the MR curve, the firm can earn an “abnormal profit”, the area of which is highlight by yellow in diagram in figure 2.2 represent this abnormal profits; and (3) where the lowest point of the ATC curve is above the MR curve, the firm will make loss, see figure 2.3 below.


Figure 2.3



This image was copied from http://centralecon.wikia.com/wiki/Perfect_Competition

3.

a) Ways in Which Countries can achieve economic growth

Economic growth is measure in terms of the gross domestic production of a country, and to achieve economic growth there are four main important determinants that will contribute to growth in the total output. These include growth in the labour force, investment in human capital, investment in physical capital, and technological changes.
^ Growth in labour force
The growth in the labour force arises when a country, achieve nearly full employment or significant reduction in unemployment population. The means that the majority of the working populations are employed and contributing to the production output of the economy. The fundamentals are that the rise in working population would also give rise in the participant rate of employment. When the country achieve near full employment, the government revenue from employment taxes rises, which enables the government to increase spending; householders’ income increase that fuelled consumer spending. Both government and consumer spending create a cyclical system for job creation and spending between the consumers and the government. Government can help to improve labour force, by providing incentive for companies and individual to start up businesses, by offering tax incentives and government grants for investors to invest in industries.
^ Investment in Human Capital
Investment in human capital such as formal education and on the job-experience is a way by which a country can increase the skill level of the labour force. In view of contemporary economy, more and more jobs require skill labour instead of unskilled as technologies replace the need for unskilled labour force. Therefore a country should investment in formal education of its population, to increase their skill level. This investment can take various forms, however, should included the provision for education at secondary and university level. The can be achieve through providing free education at primary, secondary and university level.
In addition, investment human capital can also be derived through on the job training, for school secondary school leavers. The government can offer incentive, to companies to encourage this type of training.The benefits to be derived from investment in human capital not only will result in a skill labour force, but also increase in research and development that can result in new technologies and expertise, which facilitate job creation and new technological.
^ Investment in Physical Capital
To increase the production of output of country, considerable amount of investment should be made in physical capital such as factories, machines, transportation, roads and telecommunications facilities. Governments are primarily responsible for investments in roads, and telecommunications. However, an increasing characteristic of contemporary economy is that the private sectors are playing a role in investment, not just in new factories but also in transportation and telecommunications facilities that were synonymous with government responsibility. If the country operates a free market economy, then investment in physical capital can be achieved from both the private and public sector organizations, where by the government can offer incentive to attract the private sector to investment in physical capital outright or through a joint venture. These investments are need to fuelled employment creation in the economy that would increase overall production output of the country.
^ Technological Change
Investment in human capital and research and development will brought about innovation that introduces new products and new ways of producing existing products, and new forms of business organisation. Technology change is intrinsically linked to the investment in human capital and research and development, of which would give a country the comparative edge in manufacturing a product, and the technological know-how of new technologies.

(b) The Pursuit of economic growth is not a people’s long-term interest

The idea that the pursuit of economic growth is not in peoples’ long-term interest, is a concept being advocated by economist and academics. In examining the merit of this arguments, first let look at the impact of economic growth on people in general.
First, the benefit of economic growth on the ordinary people is that, economic growth is an effective means to fight against poverty. This has contributed to the increase of family earnings that helps to transform the living standards or ordinary individuals, it has been argued that the advancement of the industrial nations over the last centuries shows the massive improvements in living standards and quality of life that economic growth make possible. Family life-style often experience growth and change, as increase in their household income leads to significant change in the pattern of their consumptions, for examples they have more extra cash to buy luxury items that they would not normally afford. In a broader context, the increase income has fuelled the demand for luxury goods such as motor cars. This in turn caused the government to build more roads to meet the demand for cars, this resulted in traffic congestion, and environmental pollution cause by Co2 emission by the motor cars, of which is not good for environment and endanger the health and safety of people.
Second, Technological changes in how goods are produce, available and consumed, has change the entire way of life of people compared to the Victoria era, whilst one peoples income and standard of living changes can be considered as much better than the Victorian, the technological changes brought about by economic growth impact on family life that affects the social fabrics of society.
Third, economic growth has help to re-distribute wealth, to those that are less well off in society through the welfare systems. Rapidly growing economy fines it easier to this because of revenue income generated from employment and profits of the economy. However, some people standard of living has to be lower to fund the less fortunate citizens of the country because of the rate of tax implement on their high earnings.
There are cost, that economic growth has a negative impact on peoples lives, which adversely affect individuals and family life of the masses. The opportunity cost of the growth, which promises more good tomorrow, if people consume less goods today, and for the economy as a whole this is a sacrifice of current consumptions. There are social and personal cost of economic growth, stem from the changes in the economy from manual labour to automated due to technological development. People fines themselves unemployed for because technologies has replaced their job, of which have an impact of these individuals ability to maintain their families. Moreover, growth rate creates fewer manually new jobs compared to old jobs destroyed because of technologies. The costs of technological changes are borne immediately compared to the benefits to be derived that are takes much longer to be realised. These cost includes, job lost, cost for training people in the old technologies that lost their jobs and the cost of old skill that has become outdated. It would be better for people to achieve the economic benefits of the old technologies now, instead of waiting for the benefits of the new technologies in the future. Economic growth has contributes to external externalities such as continuous environment damages, that will affect the livelihood of people in the present and future. These includes global warming and over mining of natural resources,

4.


Price elasticity of demand can be defined as a measurement of the responsiveness in the quantity demanded to change in price, with the assumptions that all other factors remains constant. The measurement assesses the percentage change in quantity demand divided by the percentages change in price that brought it about.
The elasticity of demand Ed = Q2-Q1 x 100

(Q1+Q2)/2

P2-P1 x 100

(P1+P2)/2

(a) Elastic
Price is elastic, when the quantity demanded and supplied changes by a larger percentage than price. This numerical measurement of price elasticity of demand is greater than one, but less than infinity,

-    1.
(b) Unit elastic
Price is unit elastic, when quantity demanded and supplied changes by the exact same percentage as the price. The numerical measurement of price elasticity of demand is one,  = -1.
(c) Perfect inelastic
Price is perfectly or completely inelastic, when the quantity demanded and supplied does not change as price changes. The numerical measurement of price elasticity of demand is zero,  = 0.


(d) Inelastic

Price is inelastic, when the quantity demanded and supplied changes by a smaller percentage than of price. The numerical measurement of price elasticity of demand is grater than zero, less than one, -1   0.

(e) Perfectly elastic
Price is perfectly, completely, or infinitely elastic, when purchasers and sellers are prepared to buy and sell all they can at some price, and none at all at a higher or lower price. The numerical measurement of price elasticity of demand is infinity,  = -.

5.
Figure 5.1 Fur Coat Market
Price







S

E1

P1

P0 E0

D1

D0




Q0 Q1

The demand and supply theory can be used to explain the changes in the fur coast and woolen and angora coat markets. Using the diagram in figure 5.1 above to represent the market of fur coast, before the harassment of people wearing fur curs by environmentalist, the demand curve for fur coast is represented by D1, and supply of fur coast is represented by S. The market achieves equilibrium at E1, where the price of fur coast is at P1 and the quantity demand and supply is at Q1. Changes in the consumer demands cause by environmentalist ant-fur group harassment of people wearing the fur would see demand decrease from D1 to D0, a shift to the left. When this happens, the price of fur coast will decrease from P1 to P0 and supply of fur coast would decrease from Q1 to Q0, that reflected by the new market equilibrium at E0. Therefore, the tumble in the price and sales of fur coat is caused by the decrease in consumer demand of the fur coasts, of which affects the price and sales quantity.
At the same time, since there is a substitute market for natural fur coats that is luxury woolen and angora coats, the demand for luxury woolen and angora would rise to reflect this change. This is the exact opposite of what took place in the natural fur coat markets. Using the diagram in figure 5.2 below to represent the market of luxury woolen and angora coats before the changes has occurred; the demand curve for luxury woolen and angora coat is represented by D0, and supply of fur coast is represented by S. The market achieves equilibrium at E0, where the price of fur coast is at P0 and the quantity demand and supply is at Q0. Changes in the consumer demands for natural fur coats, has seen the consumer switching to a substitute of luxury woolen and angora coat, and would have demand for luxury woolen and angora increase from D0 to D1, a shift to the right. At this point, the price of luxury woolen and angora has increase from P0 to P1, and supply increase from Q0 to Q1, that achieve a new market equilibrium at E1. Thus, increase the price and sales of quantity of the luxury woolen and angora coast.


Figure 5.2 Woolen and Angora Coat Market
Price







S

E1

P1

P0 E0

D1

D0




Q0 Q1

6. a)

Price Elasticity of Demand
Price


S1

E1

P2 S0

P1 E2
D




Q1 Q2 Quantity

Yes price elasticity can be used to explain the situation in the restaurant. Price elasticity of demand evaluates the response in the quantity of food demand when a change in price has occurred.
Price elasticity of demand as the degree of: ^ Proportionate change in quantity demand

Proportionate change in price

The Restaurant manager has notice that, when the prices of meals are lowered, total revenue rises. Using the diagram above, if price of meals have been before at P2, where the quantity of meals demanded is at Q1 and market equilibrium is at E1 before any changes, and if the prices have decrease from P2 to P1, would have seen the demand increase from Q1 to Q2 and new market equilibrium at E2.
The elasticity of demand Ed = Q2-Q1 x 100

(Q1+Q2)/2

P2-P1 x 100

(P1+P2)/2
In the case, elastic (E) is greater than 1, where the quantity demand is relatively elastic, that is the change in price has caused even larger change in quantity demand. Ed is equal to infinity that refers to as perfect elastic. The demand curve is horizontal. Therefore the total revenue increase is caused by the greater increase in demand of the restaurant meal, when there is a lowering of the price of these meals.
b)
Three Factors that determine price elasticity of demand of a product.

The Availability of substitutes:

If there are possible substitutes of the same product, the greater the elasticity of price would be. It should be noted that the number of substitutes depends on how the definition of product is broadly defines.
Degree of necessity or Luxury

Products that are classified as luxury products tend to have greater price elasticity. Products that have some degree of necessity, or form parts of habitual demand of consumer can become necessities to some consumers and would have a greater elasticity.
Proportion of the Consumer’s budget to be consumed by the product

Products that consume the greater proportion of the consumer’s budget tend to have a greater elasticity of price.




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