Factors Determining Demand and Supply of Goods and Services and Relevance of the Economic Theory - Assignment Example

BUSINESS ECONOMICS (Student Name) (Course No.) (Lecturer) (University) (Date) Business Economics Question A Operational business enterprises depend on the resource cost structure to determine their effectiveness on the field of competition. Resource cost structure is the analysis of the distribution of the costs associated with the production of goods and services. It considers all the factors of operation such as labor, capital, raw material among others. Consequently, a business firm considers its sales and marketing expenses in determining the cost structure. In brief, cost structure evaluates the expenditure and income of a firm. Moreover, the management system and external forces such as competition and government regulations affect the effectiveness of the kind of cost structure adopted by a firm (Mankiw, 2014, 39). The steps to establishing a business cost structure involves invention of the idea of the product, assessing the raw materials and evaluation of the other factors of production required to complete the production of the product into useful product. Essentially, harmony of other components of operations such as the wages and salaries to the employees is crucial. Consequently, ancillary services offered to the workers such as vacation, retirement, and health benefits contribute to the determination of the cost structure. Mankiw (2014, 47) records that the components of effective, however, do not end at the initial production stage of the good, but also incorporates the transportation, storage and marketing policies and methodology. The determination of the cost structure depends on two major specific elements of cost determination such as fixed costs and variable costs. However, other costs determinants like marginal revenue and marginal costs. Improper calculation of the cost structure is likely to hinder the performance of a firm. The determination of the costs under the fixed and variable costs is crucial as it directly affects the performance of the firm. For instance, placing a cost that is dependent on the net production in fixed cost is likely to deprive the performance of the firm and, therefore, lowers its net income and performance. Such costs should be under the variable costs so that the increment in the profit of the firm subsequently promotes an increase in the operational income. Some firms, therefore, record higher performance to others because of proper cost structure in their managerial operations. The analysis of the cost structure on one side helps the producer to determine the unit price of the good and services offered. The price must exceed the cost of production. In the case of higher cost of production than the unit price of the good then the business is likely to experience closure of its operations. Moreover, cost structure aids a firm in determining the profit margin through evaluation of its expenses and refining its structures to increase efficiency and responsible utilization of the limited resources to maximize output. The aspect creates an impact on the unit output raising the profit margin (Bird and Bird, 2007, 97). Firms that do not manage their cost structure effectively suffer from bankruptcy. For example, Solyndra Company, a solar panel manufacturing company that was a model of the United States green technology after obtaining a loan of $ 535 million could not pay back due to improper cost strategy. Even though the company claimed that their bankruptcy was due to stiff competition in the international solar panel industry especially in China, Bird and Bird (2007) records that their bankruptcy was because of poor cost structure. Their unit cost of manufacturing was approximately $6 per watt while their sales were $ 3.5 per watt. On the other hand, Shell, one of the world leading oil and Gas Company, thrives because of proper cost structure. Shell evaluated its cost structure through the zero-based cost management strategy and presently records a better performance. It is, therefore, clear that the cost structure contributes greatly to the bankruptcy of a firm. Question B The determination of demand and supply of goods and services depend on several factors referred to as economies of scale. Market size and forces govern the effectiveness of the firm. The number of buyers plays a significant part in the production and the determination of the economies of scale. An increase in the number of potential buyers raises the demand since there would more customers willing and able to buy. Conversely, a decrease in the number of potential buyers reduces the demand for goods and services. A low demand for goods and services subsequently reduces the degree of production in an attempt to minimize surplus production. Mankiw (2014, 127) asserts that the supplies of goods and services also depend on the availability of the ready market. Upsurge in the number of potential buyers tends to increase the supply of goods and services due better returns from the sales. Large firms take advantage of the economies of scale by promoting bulk buying and sales limiting the demand and supply of small firms. The position of technology determines the demand and supply for a firm. An advancement of technology subsequently leads to a growth in the supply of goods and services. This is due to the adoption of robotic control and running systems, which are capable of automatically running the operational procedures. In addition, with advance in technology, reduces the labor force required and, therefore, reduces the number of employees. The producer reduces the expenses such as high wages, salaries, allowances, retirement benefits among others. The funds recovered is diverted to improve the operations of the firm especially production and manufacturing. Government policies and regulations also affect the optimal size of demand and supply. Government interventions such as health and sanity regulation, taxes, hour and wage laws, land use regulations and change in the electricity and natural gas rates directly affects the cost of production. For example, Higher taxation tend to raises the level of production leading to a rise in the unit price of commodities reducing the supply of such commodities. Subsequently, escalation in the prices of goods and services is likely diverting the preference of potential customers a substitute product reducing the demand. Accessibility of substitutes negatively affects the demand for goods and services. Substitutes are good and services that perform the same function as another good. For, example, coffee, and tea are both stimulants in drinks and, therefore, are substitutes. According to Mankiw (2014, 111), an increase in the cost of one of the products lowers the demand for that product. Most of the potential customers shift to the immediate alternative especially when the unit price is lower than that of their previous choice. On the other hand, in the supply, substitutes refer to different products performing the same function from the same producer. For example, a company that produces both tea and coffee may reduce the supply of tea, but increases the production of coffee. Most people will purchase coffee raising its supply. The unit cost per commodity dictates the purchasing and selling power of customers and producers respectively. The equilibrium of demand and supply depend on production cost, which regulates the cost of product sales. Price elasticity demand curve shifts to the negative in case of increase in the price of a commodity indicating a negative demand for such goods. According to the law of demand, most customers will demand more goods at lower price. The demand curve shifts down from left to right. Conversely, an increase in the price of a product increases the supply of that product as shown in figure 1. Figure 1: The optimal size of demand and supply curve in reference to pricing (Prasch, 2008, 118). Question C (i) Relevance of the economic theory Economic theory outlines the total spending and its effect on output and inflation. It further discusses major theories that contribute to the performance and general operations of a business premise. Inclusive in the theory are classical and modern economic theory, cooperative and non-cooperative game theory, macroeconomics, and microeconomics theory. Economic theory explains the existence of the dynamic forces in a firm outlining the mechanisms to relative them with the aim of maintaining an effective performance. Keynesian theory referred to as, describes the ideas and principles aimed at maintaining a competitive business operation. Classical theory, a portion of the economic theory, demonstrates a free market without the intervention of the government. The theory argues that freeness of people in the business operations records a higher attraction of consumers promoting the amount of sales and interaction among producers. However, the theory encourages the participation of the court of law in solving differences among producers and customers. The theory maintains fair and constant supply of resources to all firms regardless of their size in the market. Furthermore, the government avail the resources to specific producers, award jobs to a class of people and apply heavy taxes to regulate the economies. The economic theory strives to eliminate the government involvement in order to create fair competition (Bird and Bird, 2007, 198). (ii) Limitations of Economic Theory The economic theory uses the concept of individualism to determine the actions of other producers in the business market. The theory, also known as homo economicus, considers people as rational and self-interested whose opinion devolves around their lives. The theory, therefore, ignores the contribution of a managing trustee in making the final decision. In attempt to create a free market, without the government intervention, the struggle, and overexploitation of the limited resources without control tends to deplete non-renewable resources, which eventually halts the operation of firms. The effect is massive closure of most of the firms contributing to massive unemployment. Globally, the employment can never be available to everyone. The argument of classical economists on the government awarding jobs to people of a specific class is not practical since not everyone is capable of getting employment. Furthermore, the control of wages and salaries as well as working hours is important to reduce the overexploitation of employees. References Bird, G. R., and Bird, G. R. 2007. An introduction to international macroeconomics: Theory, policy, and applications. New York: Palgrave. Mankiw, N. G. 2014. Principles of Economics. New York: Worth Publishers. Read More