The Perks of Proper Economic Analysis for Business - Example

Name: Institution: Professor: Course: Date: PART I FACTORS OF PRODUCTION Steven Kates discusses the relationship that exists between various inputs and the outputs of the production process. The underlying dynamics of the economy can be well understood by analyzing all these factors of production. There are three primary factors of production. These factors include land, capital and labor. For successful production process, all these three factors must be combined. The land is a representation of all the natural resources necessary for production. Economic activities, therefore, are centered on putting together the natural resources for efficient, practical use. Those who engage in farming activities, use land as a ground for planting and keeping livestock. However, the biggest economic problem is to allocate the resources such as water and air to use (Kates 103). Labor is the human effort in the production process. Land must be combined with work. Human effort is mainly the employees. Employees have different jobs. The difference in jobs is due to the difference in skills, age, and even experience. Some people work in manufacturing industries while others work in mining industries. All these are human efforts used in the production process. An economic system is composed of several combinations of employees with varied abilities work as a team to achieve success (Kates 103). Capital is the output of the production process that is reused as input for further production. Capital comprises of the value added used in the production of goods and service. Capital is also employed in the production of the inputs. The economic theory explains various issues concerning these factors of production. The first theory is that industry is limited by capital. This theory argues that production is dependent on the amount of capital invested. In the world, it is true that capital drives the production. The level of capital determines the success of the production. To produce more means that capital needs to be increased. The second theory is that capital is the result of saving. There is a strong believe that there is no growth in the economy without savings. People in business, therefore, must save to get the capital. More savings leads to more the capital leading to growth in the economy. In the real world, who generate income do not spend all in consumption. They do save a portion of their income. These savings improves the productiveness of a nation’s economy. This is a clear indication that we must save to invest (Kates 107). MARGINAL ANALYSIS Marginal analysis is significant in economic thinking. It is based on the fact the decisions are made in the present. These decisions have an impact on the future of the economy involved. Decisions are made without the apparent certainty of the results. Economic decisions only have implications on the future of the economy. Marginal decisions, therefore, is all about what can be altered in the future. Marginal decisions in the economy, dwells on the analysis of the costs concerning the benefits anticipated in the future (Kates 171). Several economic theories have been formulated to explain these concepts in details. Cost and benefits analysis is one of the theory applied here. For every project undertaken, there is a potential benefit expected in the future. Economics emphasizes on positive returns. The returns of the projects undertake should outweigh the cost incurred. Opportunity cost must also be considered. Projects with higher returns are considered and undertaken that the others. Business people try as much as possible to minimize costs while maximizing profits. Time of the economic return proves to be a complex part in this. The time takes to realize the economic returns expected is imperative. Maximization of profits should be the core objective of any business. Traditional marginal analysis theory makes it complex to understand how the economy works. The theory of the firm is imperative here. The theory of the firm concentrates more on the product that the business offers than the business itself. This largely depends on demand and supply (Kates 179) In the real world, marginal analysis helps entrepreneurs make better decisions. It is very clear that the decisions made in the present have a great impact on the future. Businesses that apply marginal analysis theory and concepts outshine the rest in business. Quality decisions promote the performance of the business. Commercial decisions that businesses make influence their profitability. Cost and benefits analysis, therefore, is important when making decisions. Business concentrates on the issue of supply and demand. The supply and demand of the products and services must be balanced to ensure higher profitability. MEASURING ECONOMIC GROWTH Macroeconomics is the branch of economics that deals with this part. These sections in economics include unemployment, the balance of payments stability and inflation rates. There are four essentials to consider when measuring the economy of a country. These features include Gross Domestic Product (GDP), Rate of unemployment, balance of payments and Consumer Price Index (CPI). The national accounts data help in the determination of economic growth. These figures normally revolve around the rate of economic growth, areas where the economy is growing and the level of the economy (Kates 201). The Gross Domestic Product measures how much is produced at a particular time. Comparisons of the amount of products produced within a specified period can be made. GDP facilitates these kinds of comparisons hence showing the level of economic growth. Consumer Price Index is concerned with the measurement of the price movements. This means that the rate of inflation can be measured easily here. Price index ensures that the progress in the increase or decrease of prices is tracked. Employment and the unemployment rate are paramount in the measurement of the economy. Economics refers unemployment as the wasted opportunities in an economy. Determining the total number of persons in the labor force is paramount here. It ensures that those already with job opportunities can be measured against the ones without jobs. The balance of payments is concerned with the recording of purchase and sale of goods in local and forex markets. In economics, these are records of accounting (Kates 230). In reality, governments try as much as possible to reduce the number of unemployed people. This is done by encouraging education and creation of employment opportunities in the country. The level of unemployment leads to decrease in the economy. Fluctuation in exchange rates affects the economy. However, financial analysts have developed theories to enable the make predictions in the forex markets. Theories such as calculation of demand and supply have been very instrumental in making various decisions in the forex and local markets (Mohan, 2006). SAY’S LAW AND THE CLASSICAL THEORY OF THE CYCLE Says law’s main concept is that supply creates its demand. In economics, this law states that the income generated is spent in buying the products produced. Classical economists, therefore, are trying to answer the question of the income and spending. Keynes’s law can also be understood that the income received from the supply of goods and services is used to demand these services later. Money is the intermediary in trade of goods and services in the market. Money therefore in the economy is referred to as a medium of exchange in trade. One feature of this theory is that it did not explain clearly the instability that can be caused by money as a medium of exchange. The theory did not also suggest the variations expected when the economic conditions are altered. Economic conditions do vary during different times. The law, therefore, fails to give the suggestions of how income will be spent on such occasions of variations. Kates argues that “The classical theory of recessions aims at explaining why production decisions would at different times not match the specific demands of buyers” (Kates 325). Bad production decisions in business have a negative impact. In reality, business firms should ensure that they make good production decisions. Bad production decisions will lead to losses. The business needs to be very decisive since the economic conditions are uncertain. The wrong production will lead to a downfall of the economy. These theories were aimed at understanding the causes of recession and unemployment. However, it is ironical that the same made the economist lack a clear understanding of both issues. There is a need to understand the demand in the market before producing. Production of lots of goods is encouraged when the demand is high. This will ensure that no goods are wasted due to lack of buyers. The products should be profitable once they reach the market. The recession and the subsequent upturn are always almost unexpected. The business cycle is not always in regular occurrence. At times, there are good times while at times there are bad times. All the times are uncertain and hard to predict. THE RELATIONSHIP BETWEEN SAVING AND ECONOMIC GROWTH There exists a great relationship between saving and economic growth. The first relationship is that capital is the result of saving. Individuals who earn income save part of their income. This portion save cannot be spent on consumption like the rest of the income. This saving is used to invest. Investments are a source of profits. These profits in investments such as business contribute to the growth of the economy. Saving, therefore, is directly proportional to the economic growth. A country where the majority of the people are employed records higher savings. These savings are invested leading to higher economic growth (Mankiw 2008). The fundamental theory of capitalism states that the ratio of national capital to income is equal to savings divided by the economic growth rate. Investments through savings contribute a lot to the economic wealth of a nation. This is an indication that increasing savings lead to increased investment that translates to higher GDP. Theory of marginal propensity to save states that increasing of income leads to expanding in saving. Research reveals that low rates of saving have resulted in deficits in accounts of several countries. In this case, the internal saving cannot meet the demand for investment. This will force the country to borrow funds elsewhere to sustain their economy. All these facts show that there is a strong relationship between saving and economic growth. PART II FACTORS OF PRODUCTION NEWS The news item to be discussed here is “Technology needs to be embedded in the process of governance, the Competition Commission of India Chairman." Retrieved from http://www.thehindubusinessline.com/economy/technology-needs-to-be-embedded-in-governance/article7680476.ece The source of this is Hindu Business line dated 23rd September 2015. It is a fact that economist considers that capital; land and labor are the only factors of production. However, there is a rising concern that technology should be considered a factor of production. The Hindu business line reports that the chairman, Ashok Chawla gave this information. It is a fact that all over the world, technology is being used in production. The majority of the industries all over the world are applying technology in day to day activities. The technology ensures faster and reliable processing than human labor. There is great need, therefore, to consider technology as one of the production factors. MARGINAL ANALYSIS NEWS The story to be analyzed here is “How economic recession may affect you, by Prof. Ekpo”. Akpan Ekpo is a professor in economics at Western African Institute for Financial and Economic Management (WAIFEM). The story is retrieved from http://www.vanguardngr.com/2015/09/how-economic-recession-may-affect-you-by-prof-ekpo/ The story explains that the economy is not yet in recession but a slowdown. The stress in which economy is at currently may lead to a recession. The story reports that there is slow growth in the economy and falling of oil revenue. If the economy is not diversified, then recession can set in by next year. This is an indication that there is a need for better decisions. Decisions must be made to ensure that economy is diversified. This will ensure that economy does not enter a recession by the year 2016. Prof Ekpo says that currently the rate of unemployment is almost reaching national crisis level. He goes on to differentiate between economic depression and recession. All these issues under discussions call for marginal analysis to save the economy. MEASURING ECONOMIC GROWTH NEWS The news under discussion here is sourced from the Globalist. It can be retrieved from http://www.theglobalist.com/china-economy-usa-gdp-dollars/ The title of the news is “When will China overtake the united States as the world’s largest economy?”. Predictions indicate that china’s economy will be larger than the US by 2028. There has been great growth in the economy of China. This has led to the stiff competition with the economy of other countries in the world. The economic growth rate of China is believed to have been slightly higher than that of US in some period in 2014. This has sparked a lot of discussion on the issue of economic growth of the two countries. The story also reveals that there is lower price level in China than the US. SAY’S LAW AND THE CLASSICAL THEORY OF THE CYCLE The story of discussion here is “CAN KEYNES RESCUE EUROPE FROM THE EURO CRISIS?” Written by Martin Haller, published July 23rd September. Retrieved from https://www.indybay.org/newsitems/2015/09/21/18777905.php The story is divided into several sections. Such sections include Keynes relevance today, ideas of Keynes and the criticisms. My concern mainly will be the relevance of Keynes theories to today’s world. The theories were formulated long ago. Factors that were considered in those periods have now changed due to numerous changes. All these changes affect the economy in one way or another. One of Keynes ideas that have been discussed in this issue is profit maximization. It is a fact that business must ensure that they maximize on profitability. This will ensure that they survive in the competitive markets. Investments must also be increased. This will contribute to the improvement in the economy. RELATIONSHIP BETWEEN SAVING AND ECONOMIC GROWTH NEWS The story under discussion here can be retrieved from http://www.theaustralian.com.au/national-affairs/treasury/alp-faces-57bn-hit-to-budget/story-fn59nsif-1227546485091?nk=dcce7339d0a64732c11d6e9df26f2e0f-1443376985 Part of the story reads: “He also pledged to consider any reforms that helped Australians “work, save and invest’’. This is a report by an Australian government treasurer. Their main aim is to address the problem facing the country economically. This is a spending problem. The government is in the process of encouraging the citizens to work, save and invest. This is a clear indication that there is a relationship between saving and economic growth. For a nation to grow economically, people must work to earn income. The income earned is saved and invested. This will lead to growth in the economy of the nation at large. References Gregory M 2008. Essentials of Economics, fifth edition, Cengage Learning, P 375-378 Kates, S 2014. Free market economics 2nd edition: an introduction for the general reader, Edward Elgar Publishing, United Kingdom. Mohan, R.2006. Causal Relationship between savings and economic growth in countries with different income levels, Bryant University Read More