Tuesday, June 3, 2014

Basic Economic Notes..

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:
  • 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. 


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.


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.

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