Contemporary Business Analysis - Essay Example

Contemporary Business Analysis Monopoly and perfect competition Monopolistic market represents is a situation where a single business, company or group owns all or nearly the entire market share for a given type of either service of products. Unlike this, a perfect competition also known as pure competition would describe a situation where no particular business, company or group has larger market share enough to control prices. Similarities Demand elasticity. Both economic markets have a sense of elasticity of demand in the long run. Whenever the prices go high, the consumers become sensitive and this leads to fall in demand for the particular product or service. Number of firms The number of participant in both markets is high in both markets. As both markets have high number of clients and demand is high, this encourages more firms to venture into the market. Freedom of entry and exit Both markets allow entry of new firms as well as exit from the market. This freedom allows firms that find the markets unfavourable to exit or new firms that see opportunities to join Competition The two markets are characterised with competition. Even in the monopolistic economy, the smaller firms still pose a threat and competition to the business with the highest market share. Differences Standards of products and services In a perfect competition market, the products and services are similar and have same standards. This ensures that clients have no preference to products from one firm over the rest of the participants. In a monopolistic market there is disparity in the products and services. Prices for products and services The prices of goods and services in a perfect competition are determined by the market demand and therefore no firm can develop their own prices. In monopolistic market, every firm has its own price policy under monopolistic competition. Demand Curve Graphically, in a perfect competition the demand curve AR is perfectly elastic and this concedes with the marginal revenue curve ER. In contrast to this, the demand curve of a firm also elastic but downward fall and its corresponding MR curves are below it. Below is a diagram that makes a comparison of the perfect competition market and monopolistic market Concerns over industries with small number of suppliers An industry either, monopolistic or perfect competition needs to have enough participants for effective operations. When the number of suppliers is low, concerns are made regarding the state of the services offered as well as the freedom of the consumers. One of the main concerns is the quality and standards to be offered. With small number of suppliers, there are high chances that the quality of products and services will be compromised. This is because there are very few suppliers offering the same service and therefore regardless of the quality, customers will still go for the products. The other concern is failure to comply with the legal obligation and negligence by the existing suppliers. The government also has very little control over such suppliers. Most times, the government allows freedom in such markets as a way of encouraging and attracting new suppliers. This leaves the consumer in a very harsh situation. An article from BBC (2014) analyses the state of energy sector in the UK where the few existing suppliers have taken control of the market to extend of blocking their customers and businesses from working with their competitors. The same industry is reported by BBC (2013) where the suppliers in the industry were focused on achieving high profits other than working on improving the services offered to their clients. All this is because there are few participants in the energy sector and hence very few substitutes to the consumers. Shift versus Movement along a Demand Curve Shift A shift in the demand curve brings about changes to the equilibrium position. As illustrated in the diagram below, the shift in the demand curve leads to the movement of the market equilibrium from point A to point B leading to a higher price. The price shifts from 4£ to 6£. The quantity equally rises from 30 Units to 40 units. A different case would be experienced if the curve shifted to the left. This would lead to the decline of both the equilibrium price and the quantity. Shift in the demand curve Movement A change in price brings about in a movement along a fixed demand curve. This can also be referred to as a change in quantity demanded. For example, an increase in prices from 4£ to 6£ reduces quantity demanded products and services from initial 30 units to a lower figure of 20 units. This price change results in a movement along a given demand curve. Change in any other variable that affects quantity demanded leads to a shift in the demand curve or a change in demand. The terminology is subtle but very significant. Majority of the confusion that people have with supply and demand concepts is mainly based on understanding the differences that exists shifts and movements along demand curves. Take an example where that incomes in a community rise because a factory is able to give employees overtime pay. The higher income leads to people to demanding more products and service. For the same given price, quantity demanded is now relatively higher than one before. Observation Table 4 against the figure titled Shift in the Demand Curve represents such a case. As peoples income rise, the quantity demanded for products and services priced at 6ddd goes from 20 (point A) to 40 (point A). Likewise, the quantity demanded for videos priced at 4£ rises from 30 to 50. The entire demand curve shifts to the right. TABLE 4 Change in Demand for products and service after Incomes Rise Price Initial Quantity Demand New Quantity Demand Quantity Supplied 10£ 10 30 50 8£ 20 40 40 6£ 30 50 30 4£ 40 60 20 2£ 50 70 10 Effect of Help to Buy Policy on residential property market Help to Bus is a government scheme established in order to help UK citizen acquire and build new homes. The policy seeks to fund up to 95% for purchase or construction of a new home. In the recent years, the cost of housing has been increasing very fast in the UK. With almost double digit increase in the last five years, majority of the people have not been able to afford houses. Nonetheless, the demand for the houses has still remained high. With the introduction of Help to buy, it is expected that the demand will even go higher as many people have a readily available option to acquire houses. According to Financial Times (2014) it is estimated that about 400,000 had acquired homes through the Help to buy policy. The residential property is likely to continue rising the prices of the houses as more and more people now want to use the policy. The effect of the policy will see increase in the prices of the houses as well as the increase in the number of units of houses in sale within the whole market. Consequently, the revenue within the industry is expected to bloom in the next few years. In regard to projected success and the increasing demand for houses, there is a high chance of new players to go into the market as a way of fighting for the high opportunity. This means that the market will start to face high competition. Types of unemployment and inflation Unemployment is a state where an individual in an economy does not have work and actively seeking to get one. There are three types of unemployment and have been discussed below. Frictional unemployment This consists of individuals who are searching for jobs or even waiting to take jobs soon. Many regarded as being desirable since the economy is more productive if workers take the time to find jobs that are well- matched to their skills. Frictional unemployment is also considered to be inevitable because the process of job creation and job destruction and the fact that new workers are always entering the job market Structural unemployment This results when the number of people seeking jobs in a labor market is higher than jobs available at the current remuneration rate. It is associated with changes in the structure of the demand for labor. The most important factors that lead to a wage rate that is relatively above the equilibrium price are minimum wages, efficiency wages, labor unions and the side effects of government policies. Cynical unemployment This occurs when a given economy only needs low workforce. The demand for labor directly increases with the growth of an economy. Cynical unemployment takes place during financial crisis like recession and depressions. Whenever an economy goes through depression, demand for labor decreases and some of the workers are send home as the unemployed labor force. Inflation This is a state in which the value of money is decreasing and the prices are increasing. In economics, it refers to general rise in prices Measured against a Standard Level of Purchasing Power. Open Inflation This is a form of in inflation where costs increase because of economic trends of spending on products and services. Suppressed Inflation Inflation disguised by governments control of prices or other interferences in the economy. Such suppression is temporary because no governmental measure can completely control accelerating inflation in the long run. It can also be known as repressed Inflation. Galloping Inflation When inflation rises to ten percent and above, it wreaks absolute havoc on the economy. Money loses its value quickly that business and employee income cannot measure up to costs and prices. Hyper Inflation This occurs mainly by excessive deficit spending (caused by printing more money) by a government, some economists say that social breakdown and degradation leads to hyperinflation, and that its roots are based on political rather than economic interests. UKs state of unemployment and inflation in 2014/2015 The employment rate in the UK has raised record high since the global recession of 2009. The number of employed people rose by 345,000 bringing it to 30.54m in the first three months of the year 2014. The rate of unemployment in January and February in the same year went down from 6.8% to 6.6% which was lower percentage compared to the previous year of 7.8%. However the annual average earnings growth dropped from 1.7% to 0.7% in the same period. Nonetheless, with the accelerating growth in the economy, the same is expected to reflect in the wage growth. There was an experience of drastic drop in the rate of inflation. The consumer price inflation went down to 1.7% a record low in four years. However, this is not expected to affect or influence any monetary policies as The Bank of England sets the interest rates based on its prediction for future inflationary pressure. The current low interest rates are expected not to change anytime soon and this combined with the low inflation rate is expected to make it easier for businesses to plan ahead and invest. According to Lipsey and Chrystal (2007) when his economy is experiencing low interest rates as well as inflation rates, it is the best moment for businesses to consider expanding their operations. Below is a table showing the trend of UK inflation since 2009. Economic well-being, Net National Income and Gross Domestic Product Economic Well-being This is an individuals or familys standard of living mainly based on how well they are doing financially. Governments do analysis of economic well-being of their citizens in order to determine how they are well or bad they are faring as it is an integral in the citizens overall well-being. Net National Income Net national income is a term that is used economics based on national income accounting. Net national income combines the income of households, businesses in the nation and the government income. It can be acquired by taking net national product minus indirect taxes. Gross Domestic Product Gross domestic product otherwise known as GDP is total output produced by a country in a year or given period. It indicates the monetary value of all the produced goods and services within a country in a specific time period. Most of the times, GDP is normally calculated on an annual basis. Relationship between Gross Domestic Product measure economic well-being Currently, GDP is facing challenges as economists and world leaders are concerned about measuring a nation’s economic status on the concept of well-being. GDP has been criticized as being erroneous as it takes no account or record of sustainability or durability. Progress and development have little consideration although they can be measured effectively with other metrics. GDP is calculated without making reference to a countrys population and therefore a rise in GPD might be very positive but if it were to be related to the population growth, the numbers might be very different. According to Stiglitz et al (2010) economists never intended GDP to be the used in measuring economic well-being. The growth in GDP can easily create an illusion regarding the well-being of people since it assumes allot of social factors that if accounted for, might give the true picture of the situation. Economic well-being which flows from economic output is a very significant aspect of general well-being. Nonetheless, GDP has limitations when it comes to measure economic output. GDP will account for current production, consumption and investment goods as well as services but excludes non-market household services and activities. Combined measure of output and income such as GDP fail to reflect social preferences of people concerning equity goals. Exchange rate regime This refers to how currency a country relates to the currencies of other countries in the world. Most governments (primarily the central bank) control how their currency relates to others by deploying common exchange rates. There are different forma of exchange rate regime which include; Float exchange rate They are the most common regimes and are sometimes referred to as managed float since they are characterized with interference from central bank as a way of controlling excessive depression or appreciation. Fixed exchange rate They are convertible with other currencies. This exchange rate is usually used in order to stabilize the value of a particular currency. This is done by changing its value in a predetermined ratio to a more stable international currency. Intermediate Exchange rates They are also referred to as crawling and they target particular zones. Implications for an economy of a rising exchange rate Most people expect the rise in the exchange rates brings allot of positive implications on the economy. However, the impacts are both diverse and extensive. In the short run, the implication is the improvement in trade as a countys exports become more expensive and imports turn out to be comparatively cheaper. The increase in trade brings about a larger amount of imports to be purchased with a particular amount of exports. This is primarily in the increase in the purchasing power of domestic production Due to the relative price fluctuations, chances are high that there will be an increase in domestic spending on imported goods, and on the other hand a decreased demand for exports from foreign countries. Take a scenario where in UK a £1 exchanges for $1.50 on the foreign exchange market. In this case a product from UK that is selling at £100 will eventually sell for £150 in America. If the exchange rate appreciates such that £1 buys $1.6 the same product will now be selling at %160. If the demand for that particular price in the US has been stagnant, this will lead to rise in revenue for the businesses selling the product. The case would be different if by any chance the demand for the product is elastic in the US. On the other hand, the rise in exchange rate will mean that if UK imports products from the US, a product worth $ 100 will now be selling at a lower price. According to Mankiw (2012) whenever an exchange rate rises domestic international corporations are in a more favourable environment as they are able to increase their revenue and acquire products from other markets at cheaper prices. Reference list BBC (2014, April 10). British Gas arm ordered to pay £5.6m by Ofgem. Retrieved April 28, 2015, from BBC: http://www.bbc.com/news/business-26967438 BBC (2013, November 26). Ofgem attacks record and profits of energy suppliers. Retrieved April 28, 2015, from BBC: http://www.bbc.com/news/business-25101062 Financial Times (2014, July 31). UK Help to buy scheme used by almost 40,000 people. Retrieved April 28, 2015, from Financial Times: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CCQQFjAA&url=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Fd623dc8c-18ad-11e4-a51a-00144feabdc0.html&ei=JYA_VZekMMG4UvHwgLAK&usg=AFQjCNE2B8AL8YVXnrax5GSLn48dZ3sumA&sig2=NPh-lidCa Top of Form Lipsey, R. G., Chrystal, K. A., & Lipsey-Chrystal (2007) Economics Oxford [u.a.], Oxford Univ. Press Top of Form Mankiw, N. G. (2012). Brief principles of macroeconomics Mason, OH, South-Western Cengage Learning Bottom of Form Bottom of Form Read More