What are other factors
that cause a change in demand and a change in supply?
Price
is not the only factor that determines how much of goods people will buy. Demand
is also affected by the following:
Tastes. The more desirable people find the goods, the more the will demand for it. Tastes are affected by factor such as advertising, fashion, observation of other consumers, considerations of health and experiences form consuming the good on previous occasions.
The number and price of substitute goods (that is the competitive goods). The higher the price of substitute goods, the higher will be the demand for this good as people switch from the substitutes. For example the demand for McDonald’s burger will be depend on the price of the burger from KFC or Burger King.
The number and price of complementary goods. Complementary goods are those that are consumed together: cars and petrol, shoes and polish, bread and butter. The higher the price of complementary goods, the fewer of them will be bought and hence the less the demand for this goods.
Income. As people incomes rise, their demand for most goods will rise. Such goods are called normal goods. There are exceptions to this general rule. As people get richer, they spend less on inferior goods, such as cheap margarine, and switch to better-quality goods.
Distribution of income. If, for example, national income were redistributed from the poor to the rich, the demand for luxury goods would rise. At the same time, as the poor got poorer, they might have to turn to buying interiors goods, whose demand will rise too.
Expectations of future price changes. If people think that prices are going to rise in the future, they are likely to buy more now before the price does go up.
Nature, random shocks and other unpredictable events. Example in our latest event, the missing of MAS plane MH370, demand of travelling using flight is dropping. In the hot weather, water demand is higher.
Like demand, supply is not determined simply by the price. The other factors of supply are as follows:
The costs of production. The higher cost of production, the less profit will be made at any price. As cost rising, firm will cut back the production and supply will go down. The main reason for change of costs are as follow:
Tastes. The more desirable people find the goods, the more the will demand for it. Tastes are affected by factor such as advertising, fashion, observation of other consumers, considerations of health and experiences form consuming the good on previous occasions.
The number and price of substitute goods (that is the competitive goods). The higher the price of substitute goods, the higher will be the demand for this good as people switch from the substitutes. For example the demand for McDonald’s burger will be depend on the price of the burger from KFC or Burger King.
The number and price of complementary goods. Complementary goods are those that are consumed together: cars and petrol, shoes and polish, bread and butter. The higher the price of complementary goods, the fewer of them will be bought and hence the less the demand for this goods.
Income. As people incomes rise, their demand for most goods will rise. Such goods are called normal goods. There are exceptions to this general rule. As people get richer, they spend less on inferior goods, such as cheap margarine, and switch to better-quality goods.
Distribution of income. If, for example, national income were redistributed from the poor to the rich, the demand for luxury goods would rise. At the same time, as the poor got poorer, they might have to turn to buying interiors goods, whose demand will rise too.
Expectations of future price changes. If people think that prices are going to rise in the future, they are likely to buy more now before the price does go up.
Nature, random shocks and other unpredictable events. Example in our latest event, the missing of MAS plane MH370, demand of travelling using flight is dropping. In the hot weather, water demand is higher.
Like demand, supply is not determined simply by the price. The other factors of supply are as follows:
The costs of production. The higher cost of production, the less profit will be made at any price. As cost rising, firm will cut back the production and supply will go down. The main reason for change of costs are as follow:
- Change in input price. Price of raw material is higher, making cost of production higher.
- Change in technology. Technology advancement will make production easier and cost might be reducing.
- Organizational changes. Various cost savings can be made in many firms by reorganizing production.
- Government policy. Costs will be lowered by government subsidies and raised by various taxes.
The profitability of
alternative products
(substitutes in supply). If the other product is making more profit,
firm will likely switch to the profitable product. This will make
the supply for the first product reduced.
The profitability of
goods in joint supply. Sometimes when one good is produced,
another good is also produced at the same time. For example in
producing a petrol, the firm will also produce diesel, paraffin and NGV. So
if more petrol is produce, all other joint supply goods will also produce
higher.
Nature, random shocks
and other unpredictable events. Example where weather and
diseases is affecting the farm output. Wars affecting the supply of
imported raw materials. The breakdown of machinery, industrial
disputes, earthquakes, floods and fire and others.
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Advantages of Sole
Proprietor Form of Business:
Easy formation:
The
formation of sole proprietorship business is very easy and simple. No legal
formalities are involved for setting up the business excepting a license or
permission in certain cases. The entrepreneur with initiative and certain
amount of capital can set up such form of business.
Direct motivation:
The
entrepreneur owns all and risks all. The entire profit goes to his pocket. This
motivates the proprietor to put his heart and soul in the business to earn more
profit. Thus, the direct relationship between effort and reward motivates the
entrepreneur to manage the business more efficiently and effectively.
Better control:
The
entrepreneur takes all decisions affecting the business. He chalk out the plan
and executes the same. His eyes are on everything and everyone. There is no
scope for laxity. This results in better control of the business and ultimately
leads to efficiency.
Promptness in
decision-making:
When
the decision is to be taken by one person, it is sure to be quick. Thus, the
entrepreneur as sole proprietor can arrive at quick decisions concerning the
business by which he can take the advantage of any better opportunities.
Secrecy:
Each
and every aspect of the business is looked after by the proprietor and the
business secrets are known to him only. He has no legal obligation to publish
his accounts. Thus, the maintenance of adequate secrecy leaves no scope to his
competitors to be aware of the business secrets.
Flexibility in
operations:
The
sole proprietorship business is undertaken on a small scale. If any change is
required in business operations, it is easy and quick to bring the changes.
Scope for personal
touch:
There
is scope for personal relationship with the entrepreneur and customers in sole
proprietorship business. Since the scale of operations is small and the
employees work under his direct supervision, the proprietor maintains a
harmonious relationship with the employees. Similarly, the proprietor can know
the tastes, likes and dislikes of the customers because of his personal rapport
with the customers.
Inexpensive formation
and management:
The
cost of formation of a sole proprietorship is the minimum because no cost is
involved in its formation excepting the license fee in certain cases. The
management of the business is also inexpensive as no specialists are normally
appointed in various functional areas of the business which is the added
advantages.
Free from Government
control:
Sole
proprietorship is the least regulated form of business. Regulated laws are
almost negligible in its formation, day-to-day operation and dissolution.
Easy dissolution:
Like
that of formation, the dissolution of the sole proprietorship is also very
easy. Since the proprietor is the supreme authority and no regulations are
applicable for closure of the business he can dissolve his business any time he
likes.
Socially desirable:
New
and small entrepreneurs can take up business on small- scale basis. There will
be no scope for concentration of wealth in few hands. Sole proprietorship
continues its operation in almost each and every area of business activity and
caters to the need of the society. Further, it provides ample opportunities for
large-scale self-employment for rural and less skilled personnel. Thus, it is
socially desirable.
Below
are the disadvantages as a partnership firm:
- Business partners are jointly and individually liable for the actions of the other partners.
- Profits must be shared with others. You have to decide on how you value each other’s time and skills. What happens if one partner can put in less time due to personal circumstances?
- Since decisions are shared, disagreements can occur. A partnership is for the long term, and expectations and situations can change, which can lead to dramatic and traumatic split ups.
- The partnership may have a limited life; it may end upon the withdrawal or death of a partner.
- A partnership usually has limitations that keep it from becoming a large business.
- You have to consult your partner and negotiate more as you cannot make decisions by yourself. You therefore need to be more flexible.
- A major disadvantage of a partnership is unlimited liability. General partners are liable without limit for all debts contracted and errors made by the partnership. For example, if you own only 1 percent of the partnership and the business fails, you will be called upon to pay 1 percent of the bills and the other partners will be assessed their 99 percent. However, if your partners cannot pay, you may be called upon to pay all the debts even if you must sell off all your possessions to do so. This makes partnerships too risky for most situations. The answer would be a different business structure.
Disadvantages of
Cooperative Society:
Despite
many an advantages, the cooperative society suffer from certain limitations c
drawbacks. Some of these limitations, which a cooperative form of business has,
are as follows:
1. Limited resources:
Cooperative
society’s financial strength depends on the cap contributed by its members and
loan raising capacity from state cooperative banks. The membership fee is
limited for which they are unable to raise large amount of resources as their
members belong to the lower and middle class. Thus, cooperative are not
suitable for the large scale business which require huge capital.
2. Inefficient
management:
A
cooperative society is managed by the members only. They do not possess any
managerial and special skills. This is considered as major drawback of this
sector. Inefficiency of management may not bring success to the societies.
3. Lack of secrecy:
The
cooperative society does not maintain any secrecy in business because the
affair of the society is openly discussed in the meetings. But secrecy is very
important for the success of a business organization. This paved the way for
competitors to compete in better manner.
4. Cash trading:
The
cooperative societies sell their products to outsiders only in cash. But, they
are usually from the poor sections. These persons require to avail credit
facilities which is not possible in the case of cooperatives. Hence, marketing
is a shortcoming for the cooperatives.
5. Excessive Government
interference:
Government
put their nominee in the Board of management of cooperative society. They
influence the decision of the Board which may or may not be favorable for the
interest of the society. Excessive state regulation, interference with the
flexibility of its operation affects adversely the efficiency of the management
of the society.
6. Absence of
motivation:
The
members may not feel enthusiastic because the law governing the cooperatives
put some restriction on the rate of return. Absence of relationship between
work and reward discourage the members to put their maximum effort in the
society.
7. Disputes and
differences:
The
management of the society constitutes the various types of personnel from
different social, economic and academic background. Many a times they strongly
differ from each other on many important issues. This becomes detrimental to
the interest of the society. The different opinions and disputes may paralyses
the effectiveness of the management.
Disadvantages of Public
Coorperation:
1. Difficulty of
formation:
It
is comparatively more difficult to set up a public company. A prospectus had to
be issued and filed. Allotment of shares has to be done in accordance with
legal guidelines. A certificate of commencement of business is required and
business cannot be started immediately after incorporation of the company.
2. Delay in decisions:
There
are several directors and managers in a public company. Decisions are taken in
meetings of the Board of directors with the consultation of concerned
officials. The decisions may often get delayed.
3. Lack of secrecy:
A
public company has to file several documents with the Registrar of Companies.
Its annual accounts are published and its records are open for inspection to
public. Therefore, business secrets cannot be guarded effectively.
4. Legal formalities:
A
public company is required to observe several legal formalities. There is
excessive Government control over public companies. Flexibility of operations
is reduced.
5. Lack of motivation:
There
is divorce between ownership and management in a public company. Paid officials
do not have the incentive to work hard and increase efficiency of operations.
It
may not be possible to maintain personal contacts with customers and employees.
There can be a clash of interests among shareholders, debenture holder and
managers of the company.
6. Unhealthy
speculation:
Shares
and debentures of public companies are bought and sold daily on stock
exchanges. Clever and dishonest people may indulge in reckless speculation in
these securities for private gain. There is lack of protection to minority
shareholders.
========================================
1. What are the meanings
of the following terms?
Scarcity: is the excess of human
wants over what can actually be produced. Because of scarcity,
various choices have to be made between alternatives. The
problem with scarcity is lack of production.
The
basic economic problem that arises because people have unlimited wants but
resources are limited. Because of scarcity, various economic decisions must be
made to allocate resources efficiently.
Choice: We
constantly making choice : what to goods and services, how are things going to
produced and for whom the things going to be produced.
Opportunity cost: is what you
give up to get it/do it. In other words, it is cost measured
in terms of the best alternative forgone. Example, the opportunity
cost of working overtime is the leisure time with family you have to sacrified.
Explain
how those terms are related.
People,
business has to make choices. Society has to choose what goods and
services to produce, how to produce them and for whom to produce them.
Relational
choices involve the weighing up the marginal benefits of each activity involve
in the business to its marginal cost. If marginal benefits are
higher than marginal cost, business should go for it.
2. Distinguish between
microeconomic and macroeconomics?
Microeconomic: This
includes all the economic factors that are specific to a particular firm
operating in it’s own particular market.
Example
:
- one firm may be operating in a highly competitive market, whereas another may not (e.g. astro).
- one firm may be faced by rapidly changing consumer tasted (e.g. a designer clothing manufacturer)
- while another may be faced with a virtually constant consumer demand (e.g. a potato merchant)
- one firm may face rapidly rising costs, whereas another may find that costs are constant or falling.
Macroeconomic: This is the
national and international economic situation in which business as a while
operators.
Business
in general will fare much better if economic is growing then if it is
recession.
In
examining the macroeconomic environment we will also be looking at the policies
that governments adopt in their attempt to steer the economy, since this
policies, by affecting things such as taxations, interest rates, exchange
rates, will have a major impact on firms.
3.a. Distinguish between
marginal benefits and marginal costs.
Marginal benefits: the
additional benefits of doing extra activity. Let say DHL wants
to buy another plane for the company, business will check the benefits of this
plane to the company profit.
Marginal costs: the
additional costs of doing extra activity. From the above example
business team will check the cost of buying this plane.
From
above example DHL business team will then check the relational choices if the
marginal benefits is more than the marginal costs so they will buy the plane.
If
the marginal cost of the plane is more than the marginal benefits, DHL will not
buy the extra plane for the time being. They will wait and weight
both marginal benefit and marginal cost again.
3.b. How would a firm
use the principle of weighing up marginal costs and marginal benefits when
deciding whether:
i) To
take an additional worker: to take an additional worker, a firm
should consider the salary they will offer to this workers. If the
workers are an experience worker, the salary must be higher than a fresh
graduate worker. And if the worker is a foreigner or local term.
The
space taken for this extra worker need to be considered too, should the firm
open new warehouse, buy a new building or just rent new space for this new
workers.
Both
will have marginal costs and marginal benefits to be considered.
ii) To
offer overtime to existing worker: this is the most marginal benefit
a firm can consider. But sometime worker will not feel good to
work overtime as they also might have another commitment.
When
overtime offered, worker might get injured or not feeling well and sometimes
they will resign. This will make firm more marginal costs.
In
the other hand, as in marginal benefits, firm will not need to hire new
employee as hiring new employee will take so much time, effort and money.
4. Briefly explain the
following macroeconomics policies:
Fiscal
policy: is the use of government revenue collection (taxation) and expenditure
(spending) to influence the economy. The two main instruments of
fiscal policy are changes in the level and composition of taxation and
government spending in various sectors.
These
changes can affect the following macroeconomic variables in an economy:
- Aggregate demand and the level of economic activity;
- The distribution of income;
- The pattern of resource allocation within the government sector and relative to the private sector.
Fiscal
policy refers to the use of the government budget to influence economic
activity.
Monetary
policy: is the process by which the monetary authority of a country controls
the supply of money, often targeting a rate of interest for the purpose of
promoting economic growth and stability.
The
official goals usually include relatively stable prices and low unemployment.
Monetary economics provides insight into how to craft optimal monetary policy.
Monetary
policy is referred to as either being expansionary or contractionary, where an
expansionary policy increases the total supply of money in the economy more
rapidly than usual, and contractionary policy expands the money supply more
slowly than usual or even shrinks it.
Expansionary
policy is traditionally used to try to combat unemployment in a recession by
lowering interest rates in the hope that easy credit will entice businesses
into expanding. Contractionary policy is intended to slow inflation in order to
avoid the resulting distortions and deterioration of asset values.
Monetary
policy differs from fiscal policy, which refers to taxation, government
spending, and associated borrowing.
How
these policies affect business?
This
policy will affect business as when fiscal policy from government that giving
special incentive or tax exemption for certain new product, this product will need
more supply and maybe reduce some price.
Example
lately our government has given special incentive of tax exemption for an fuel
economic electronic cars. This makes this kind of cars having lower
price and higher in production.
