The Outburst of the USA Housing Bubble - Assignment Example

ECONIMIC ASSESSMENT by Student’s name Code+ course name Professor’s name University name City, State Date Question 1 The outburst of the U.S.A (United States of America) housing bubble, peaking in 2006, resulted into the values of securities tying to the U.S. real estate prices to plummet, thus damaged the financial institutions worldwide. This financial collapse was as a result of intricate interaction of the policies that advocated for home ownership, and this provided a straightforward access to loans for (lending) any borrower. There was an overvaluation of the bundled sub-prime mortgage on the basis of the theory that the housing price(s) could keep on escalating, dubious trading activities on behalf of the buyer and seller, compensation practices that prioritized short-term deal flows as opposed to long-term value creation. There was an increased inadequate capital holding from majority of banks and insurance businesses in backing the financial commitments they made. Concerns in regard to bank solvency, decline in credit accessibility and the dented investor’s confidence affected the worldwide stock markets, whereby securities faced a significant loss from 2008 to the early 2009. Economy globally ended up slowing down throughout this time, as credit was tightening and global trade deteriorated. Governments as well as the central banks reacted with unmatched fiscal responses, financial policy development and institutional bailouts. In USA, the Congress enacted the American Recovery and Reinvestment Act of 2009 (Joseph 2012). Following the financial collapse, palliative fiscal and monetary strategies were embraced to decrease the impact to the global economy. On July 2010, Dodd–Frank regulatory reforms got implemented in the U.S.A as an approach of lessening the probability of the recurrence of the crisis (Joseph 2012). The Financial Crisis Inquiry Commission in USA gave a report on January 2011 that was concluding that the crisis could be avoided and was as a result of the prevalent failure in the financial guidelines, not forgetting about the failure of the Federal Reserve in stemming the tide of toxic mortgage; dramatic breakdown within the corporate governance as well as excessively many financial companies carrying their duties heedlessly and assuming on excessively much risk; an unstable combination of too much borrowing and risk by families and Wall Street that were subjecting these financial firms to the financial crisis; major policy makers were not well equipped for this collapse, not having a substantial understanding of the financial structure they were overseeing; and systemic breaching in responsibility and moral values at every level (Joseph 2012). Question 2 Opportunity cost of the decisions is rooted in what has to be given up resulting from the decision. The decisions that involve making a choice between at least two options, entails an opportunity cost. Accounting costs don’t put into consideration the forgone opportunities. Opportunity cost is of great importance in the evaluation of the costs and benefits of choices. Usually, it has its expression in terms of non-monetary terms (Henderson 2008). In case Paul individual decides to invest $10,000 in Mutual Fund CDE for a period of one year, and he decides to forego any return that might have been made from the very $10,000 provided that it would have been placed in stock LTD. In case the returns were anticipated to be 17% on the stock, therefore, Paul will be having an opportunity cost of $1,700. The mutual fund might only be expecting returns of 10% ($1,000), thus, the difference existing between the two is $700 (Henderson 2008). Question 3 The changing in fashion and tastes has effect on the market for the affected good. In case the broad toe shoes replace the narrow toe, there isn’t any amount of decrease in the prices of the narrow toe shoes that is adequate in clearing the stocks. The broad toe conversely, would have more clients although its prices might be going up. The law of demand turns out to be proven incorrect. A customer’s ignorance is also an aspect that, sometimes, might induce a customer to make purchases more of the good at higher prices. This is so when the customer gets haunted by the fear that the high-priced commodities are of better quality than the cheaper ones (Sullivan and Steven 2003). Whenever the price is rising, the families have a tendency of purchasing large quantities of the good out due to their worry that the price might still rise. As the prices are anticipated to be lower, consumers remain to make purchases at a later time when the good is cheaper. Therefore, quantity demanded the fall when the price is falling (Sullivan and Steven 2003). Question 4 Price inelastic refers to the scenario in which the supply and demand for the goods or services aren’t affected when the prices of those goods or services change. Price inelastic has a meaning that whenever the prices go up, clients’ buying habit remain about the same, and whenever the prices go down, the clients’ buying habits also remain unaltered (Parkin and Matthews 2002). Perfect inelastic demand (Varian 2010) Perfect elastic demand (Varian 2010) Necessities have a tendency of being inelastic (gasoline, electricity, water) , on the other hand, luxurios commodities remain the opposite (chocolate, foodstuff, entertainment), since they are easily cut out by the consumers when their prices rise and possible there exist various substitutes of these goods and services. Therefore, while marketing, one is supposed to take note on whether the commodities have substitutes or not. Therefore, if a commodity has a stiff competition that is significantly similar, raising its price would most probably be driving customers away. Therefore, a business should have some integral features in their services that other competitors don’t offer. Therefore, the manner in which a business markets, prices and bundles has to vary. It is worth noting, pricing is a continuous procedure that requires being integrated into the trajectory any company (Parkin and Matthews 2002). Question 5 Availability of substitute services: the more and close the substitute courses and universities availability is, the higher the elasticity will be. Therefore, people will be able to get more alternative degree courses that are at lower prices from many universities and therefore, there will be a significant substitution impact and vice versa (Landsburg 2002). The breadth of definition of the university courses: for instance, if the courses in university X would have a higher elasticity of demand in case a good number of substitute courses are accessible and vice versa. The percentage of income of the degree program: if the courses are representing an insignificant percentage of the parent’s income, the impact will be negligible and demand will be inelastic and vice versa. The more necessary a university degree program is, the lower is its elasticity. If the students are not directly paying for their education, the demand would turn out to be more inelastic (Landsburg 2002). Question 6 a. Public goods Public goods is non-excludable and non-rivalrous due to the fact that people can’t be successfully excluded from using them and whereby, their usage by one person doesn’t decrease their availability to other individuals.  Examples include: the fresh air, knowledge, a lighthouse, the security of a nation, deluge control system and street lighting. b. Merit goods They are commodities and services that the government has a feeling that are likely to be under-consumed by individuals, and which have to be subsidized or offered for free at a point of use so as to have their consumption not depending mainly on the capability of paying for the goods or services (Sullivan and Steven 2003). Examples are:  government providing food stamps as a way of supporting nutrition, health services as a way or improving the citizens’ quality of life and reducing morbidity, subsidizing housing and possibly education. c. Externalities They are the costs or benefits that affect the parties who did make a choice of incurring the costs or benefits. For example, manufacturing activities that result to air pollution inflict health and clean-up cost on the entire community (Varian 2010). Question 7 Goods exhibiting negative income elasticity are inferior goods in that their demand decreases as the income of the consumers increase since the consumers will be led to more luxurious substitutes such as the Margarine and public transportation. At zero income elasticity of demand arises when the increase in income has no association with changes in demand of the goods. They would be the sticky commodities. A positive income elasticity of demand is related to normal goods in which an increase in income results to rising of demand. E.g. Automobiles (Wall and Griffiths 2008). Therefore, income elasticity below suggests that a rising part of consumer's budget will be meant for the purchase of an automobile and restaurant meal and a smaller portion to cigarettes and margarine. Question 8 Availability of substitute goods and services: the more and close the substitute goods availability is, the more the person will be able to get more alternative commodities that are at lower prices from different vendors and vice versa. The percentage of income of the service or commodity: if the goods are representing an insignificant percentage of the workers’ income, the impact will be negligible and demand will be inelastic and vice versa. The more necessary a commodity is to the person, the lower the more likely is the person going to choose the commodity. If the person is not directly paying for the service, the demand will be increased and the person will likely go for the service (Gillespie 2007). Question 9 It refers to the decreasing in the marginal output of the production processes as the quantity of the single factors of production increase incrementally, as the amount of all the other aspects of production remain constant. An example is that of increasing more employees to a workplace such as in the assembling of a truck on a garage floor. At particular instance, addition of more employees result to more chaos, for example, employees are likely to get in each other's way or more often have to wait for access to a section. In this process, to produce one more units of output per unit of time would finally cost gradually more, as a result of the inputs that are aren’t being used effectively (Samuelson and Nordhaus 2001). Question 10 The economic theory is deeply rooted in the assumption that consumers keep on attempting to do to their best despite the challenges facing them. The consumers buy commodities that they have believe that they would make them feel more relieved, however, their purchase is limited by the income they are earning. Economists advocate for profit maximization since it is grounded on profits and making of profit is mandatory for the survival of all businesses. Profit is the true measurement of how viable the business models are. Without making profit, the businesses loss their fundamental objectives and thus have direct risk on their continued existence. The profit maximization targets to indirectly cater for the social welfare. In different businesses, profits are used in proving the well-organized exploitation and allotment of resources. Resource allotment and payment for land, labor and organizations handles social and economic interests (Samuelson and Marks 2003). Reference List Gillespie, A, 2007, Foundations of Economics. Oxford University Press. Joseph F,2012, Economy into the Ditch Who Really Drove the? New York, NY: Algora Publishing Henderson, D, 2008, Opportunity Cost. (2nd ed.). Indianapolis:Library of Economics and Liberty. Landsburg, S, 2002, Price Theory and Applications (fifth ed.). South-Western Parkin, M; and Matthews, K, 2002, Economics. Harlow: Addison-Wesley Samuelson, P; and Nordhaus, W, 2001, Microeconomics (17th ed.). McGraw-Hill.  Samuelson, W; Marks, S, 2003,  Manageral Economics (fourth ed.). Wiley Sullivan, A., and Steven M, 2003, Economics: Principles in action. Upper Saddle River, New Jersey: Pearson Prentice Hall. Varian, H, 2010, Intermediate microeconomics: a modern approach. New York, NY: W.W. Norton & Co. Wall, S; Griffiths, A, 2008, Economics for Business and Management. Financial Times Prentice Hall. Read More