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1.0. Introduction

The aim of this guide is to assist in selecting an Economics dissertation topic and to provide practical advice on how to go about writing a dissertation. Economics dissertations incorporate numerous topics covering various aspects of the two main branches of the subject: macroeconomics, which focuses on national or aggregate economy concerning issues of inflation, unemployment and business cycle. On the other hand microeconomics concentrates on markets and issues such as pricing, industry concentration and labour employment. Typically, writing an economics dissertation involves questions such as how to report the features of the design and how to adequately report research results. Consequently, the latter part of the guide serves as a handy reference source to navigate the writer through the process.

2.0. Categories and dissertation titles

2.1. Macroeconomics

2.1.1. An investigation into the demographic dominance of youth unemployment in South Africa. A quantitative study

2.1.2. Is the imposition of sanctions on Zimbabwe to be blamed for hyperinflationA critical review of the current literature

2.1.3. Assessing the plausibility of GDP as a proxy indicator of human development and well-being. An exploration of complementary indicators to the GDP metric

2.1.4. Analysing the adequacies of income/consumption patterns as a national measurement for poverty. A study of Uganda

2.1.5. An investigation into the impact of low interest rates on conventional savings. Has low UK interest rates discouraged savings?

2.2. Microeconomics

2.2.1. The impact of price elasticity on demand for Fair trade products. Determining UK consumer preparedness to pay more for Fair Trade products than conventional substitutes

2.2.2. Identifying appropriate poverty alleviation measures for Haiti. An applied general equilibrium approach

2.2.3. An assessment of the correlation between information asymmetry and corporate governance structure. A case of firm performance in Botswana

2.2.4. A review of the regulatory environment in Ireland. Regulatory failure and the Irish banking crisis

2.2.5. Internal devaluation to quantify Eurozone imbalances: A study of fiscal devaluation as a solution for the Greek financial crisis

2.3. Development Economics

2.3.1. Investigations into IMF debt sustainability framework for low-income countries. The Implications of defining debt in terms of ability to pay

2.3.2. The impact of climate change on economic development. How have frequent cyclones and floods impeded economic development in Bangladesh?

2.3.3. An empirical analysis of private-sector driven economic growth and poverty alleviation in Zambia

2.3.4. An assessment of foreign direct investment as an enabler of economic growth in Malawi. The Opportunities and challenges

2.3.5. Foreign aid and economic development in Mozambique. An empirical study correlating aid with economic growth

2.4. Economic Policy

2.4.1. Readdressing regional economic imbalances. Rebalancing England’s North/South divide with regional growth fund policy measures

2.4.2. An examination of the extent of convergence in the Eurozone as reflected in membership state differentiations in inflation and output growths. The implications of the single monetary policy and national economic policies of member-states

2.4.3. How viable is the achievement of macroeconomic convergence in African countries for the African Monetary Cooperation Program objective to accomplish collective policy measures for a harmonised monetary system?

2.4.4. Conceiving supportive economic policy measures for demographic transition patterns in the UK. Legislating for growing old age dependency

2.4.5. An assessment of inflation targeting and economic policy in Argentina. Formulating and promoting a macroeconomic framework

2.5. International Trade

2.5.1. An examination of the influence exerted by post –apartheid South African trade policy on the composition and aggregate growth of trade. An empirical study

2.5.2. A study of international trade in Sub-Saharan Africa. Examining the consequences of globalisation

2.5.3. An analysis of the impact of trade liberalisation and trade performance. The application of import and export demand models in the Turkish economic context

2.5.4. Exposing and overcoming corrupt exploitation of natural resources in international trade systems of the Democratic Republic of Congo. A review of the current literature

2.5.5. An examination of the challenges and opportunities of international trade in the agricultural sector of developing countries: The Jamaican banana production and export market

3. How to Structure an Economics Dissertation, Tips

For details on how to structure your economics dissertation, kindly check out the following post:

How to Structure a dissertation (chapters)
How to structure a dissertation (chapters and subchapters)
How to structure a dissertation research proposal

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International economics and finance

PART ONE INTRODUCTION

The most basic needs in an economic functioning is the starting of the expanding deficit and natural resources which are the essentials of making manufactured goods and are the most important foundation of consumption of economy. As the impact on the financial and economic development is a very entensive debate on its desirability in United Kingdom. Globalisation in both developed and developing countries have changed prior to the relatively unnoticed capital flows in the 1990’s. The UK is one of the richest countries in the world, especially with the current decline in the global economy. They are one of very few that is managing to keep their heads above water.

As broadly defined, a Balance of Payment Account records all of the financial transactions of the government with the rest of the world (international economy) over a period of one year. (Begg D, 1987). Essentially, each transaction is always recorded relating with the double-entry bookekeeping. Any amount involved must be entered on each of the two sides of the balance of payment accounts to complete the balances. If the two sides of the balalcen of payment account are not the same, then the case if imbalance occurs. Therefore, these balances are referred to as surpluses or deficits in the balance of payment account.

This assignment attempts to discuss how can there be deficits or surpluses of the balance of payment account if the balance of payment account must always balance. With the introduction in the first part, it states the definition and principles of balance of payment. Part two consists of Structure of a balance of payment account, how does balance of payment account balance, causes of balance of payment surplus or deficit, reasons for financing a short term deficit and the steps in rectifying or correcting the deficit. Part three is the last part where there is a conclusion of any suggestions pertaining why the balance of payment account must always balance. Part four states the referencing and bibliography and details of the sources of information used in this essay.

PART TWO Structure of Balance of Payment Account

The Balance of Payment Account is divided into two sections where the current account measures both the trade in goods and trade in services whilst the capital account tracks associated money flows with investment, services and the currency stabilisation of the UK. Any credit transaction must have a corresponding debit entry so therefore; the sums must always be equal or balance at the end of each transaction made. In 1998 the UK’s Balance of Payments transactions were brought into consideration with other members of the International Monetary Fund (IMF). The Balance of Payment’s statistics was classified into groups as follows: the current account, the capital account, the financial account and the international investment position.

How does a Balance of Payment Account balances?

As it has always been at the back of my mind when I was taught about the accounting principle of double entry, in every balance sheet there is a credit and debit entry. Every credit entry must have a sorresponding debit entry ans should always have an agreed sum of equal balance. Wherevet there is a surplus, there must be a deficit because they come to terms in a financial transaction and offset each other. Whenever the current account is a surplus, then there should be a deficit in the capital account. If there is a deficit in the capital account then it means that there is abruptly a rise in investment for the UK in the outside world but it cannot last because the other countries wolud also not want to be selling their assets to make another country benifiting from them. If the UK faces a current account surplus, then it is said to be that there is a flow of trade in goods and services funds. A current account surplus leads to an increase of external assets outside the UK.

On the other hand, if the current acount is on deficit there is a decrease of assets which are sold to finance the country. Each external transaction is entered in both the current and capital accounts to show the original transaction and how it has been financed.

Causes of Balance of Payment Surplus or Deficits

There can be so many ways of causes of the balance of payment reaching the level of surplus or deficits. There might be a time when other outside countries are facing current account deficits whilst the UK is facing current account surplus. Therefore this is the most essential time to point out what causes the current account deficit before trying to find ways of correcting them. The causes are explained below as follows:

An over valued exchange rate can be a factor of current account deficit as it is believed that it is a branch of the exchange rate being too high which can lead to high export rate and high foreign markets when the import rate is going cheaper. The rising and falling of the imports and exports will affect the current account.

The rising of the level of the economic growth can also be a good reason for current account deficit because when consumption and investment tends to rise, there is an increase in spending for consumers which will encourage the deteriorating of the current account. The greater the marginal propensity of import, there will be an increase in imports too.

Lack of capacity productivity, poor pricing and non-pricing competition can cause current account deficit because if there in insufficient capacity to meet the needs from their consumers from the producers, then the imported goods and services comes into terms with the satisfaction of excessive demand. Quality, design, offers and reliability can also be considered as they are very important factors. Whereas inflation is seen as a key role for international competitiveness. It the inflation rate of the UK is higher to the rest of the world, and then it will be less competitive to the rest of the world.the UK’s manufacturing sector has suffered over the last 25years because of low cost of production in some new industralised countries which is a declining comparative advantage.

Reasons for Deficits and Financing a Short Term Deficit

Ways of rectifying / correcting a Deficit

There can be ways in rectifying a deficit in the UK with government policies such as Expenditure Reducing Policies and Expenditure Switching Policies. In expenditure reducing policies, there can be higher direct taxes which can lead to a lower disposable income, increased interest rates to soften consumer confidence and consumption, and even the excess in the economy. By reducing the growth of domestic demand, it may encourage UK businesses to switch their production towards export markets. In other words, expenditure switching policies raises sterling price of imports, higher profitability of exporting but there can be an impact of lower exchange rate which depends on elasticity of overseas demand for UK exports. There can also be an instance of achieving a period of low relative inflation which helps the British economy with macroeconomic stability and important for their competitiveness.

PART THREE CONCLUSION

Currently, the UK is experiencing a current accouant deficit which is getting worst. On the other hand, it ignores the fact that trade deficits are linked to a weak pound currency. The government policy which is aimed at bringing an improvement of trade perrformance does not necessarily turn a deficit into a surplus but hence, the trade deficit is increasing around the world economy as the outside world is accpting the pounds in return for their import payments. The best thing the UK should dois to ignore the trade deficits and concentrate on the how to have a strong economy to attract foreign investment. Investors around the world are seeing the UK as a safe and profitable place for their savings so therefore, the trade deficit will still persisit and the British are better off because of it.

PART FOUR REFERENCING AND BIBLIOGRAPHY

Richard G L AND Chrystal K.A (2004) (10th Ed) Economics, Oxford: Oxford

University

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European journal of law & economics

1 Introduction

Liability rules are important tool of environmental risks management in Canada, United States and Europe. The major legislations are CERCLA (Comprehensive Environmental Response, Compensation and Liability Act) adopted by the American Congress in 1980 and the Directive of the European Parliament and the Council on Environmental Liability with regard to the Prevention and remedying of environmental Damages which came into force in April 2004. A *E.J.L. & E. 78 liability rule induces correct incentive for risk prevention only if information is symmetric and the potential injurer has sufficient wealth to cover his liability. Indeed, it is well known from the previous literature that when the injurer’s wealth is not sufficient to pay liability judgments ex post (the injurer is said to be judgment-proof) this leads to underprovision of care ex ante (Summers 1983; Shavell 1986). In the case of environmental risks, on the one hand, perfect control of firm’s actions in prevention is not possible, and on the other hand, the wealth of the polluter may be small relative to the clean-up costs and victims’ compensation.

There are many policies to alleviate the judgment-proof problem. The first one is to extend liability to the parties who have a contractual relationship with the risky firm, the case under CERCLA which imposes extended liability to lenders. The economic analysis of the extended liability has given raise to mitigated results. Pitchford (1995) considers a one-period moral hazard model with two states of nature (accident or not). Since the loan fee fixed by the lender included his expected liability costs, the more the lender is liable, the more he charges the firm in the no-accident state. Then, the state of the nature “no-accident” becomes unfavourable for the firm and the full liability of the lender2 leads to a suboptimal level of effort whereas partial lender’s liability allows achieving the optimal level of prevention. In a two-period model, Boyer and Laffont (1997) show that partial liability of lender is optimal. Consequently, these authors conclude that the society has to make a tradeoff between prevention and compensation. In an alternative setting in which environmental damages are stochastic and prevention cost is a monetary investment that needs external funding, Dionne and Spaeter (2003) show that lender extended liability has a positive effect on the firm’s prevention level if and only if an increase in the face value of the debt implies an increase in prevention investment. Moreover, Balkenborg (2001) and Lewis and Sappington (2001) show that the benefits of extending liability to lenders depend on the observability of the firm’s prevention level by the lender, the bargaining power of each party and the nature of environmental damages. Finally, Hutchison and Van’t Veld (2005) consider a model with both observable damage-reducing activities and non-observable probability-reducing measures and show that introducing extended liability to lender induces judgement-proof firms with high gross profits to take socially optimal levels of care, those with intermediate gross profits to take suboptimal level of care and drives those with low gross profits out of business.

Financial responsibility is another remedy for the judgment-proof problem. Under a regime of financial responsibility, the firm is required to demonstrate that the cost of the harm she can cause is covered. The most common instrument of financial responsibility is the insurance contract. But as it is well known, the compulsory liability insurance induces the efficient level of prevention only when the insurer is able to observe the prevention level performed by the firm (Shavell 1986; Jost 1996; Polborn 1998). Following the analysis of Jost (1996), Feess and*E.J.L. & E. 79 Hege (2000, 2003) consider a model with monitoring-based incentives and show that the mandatory liability coverage for total harm leads to an allocation that is closed to the first-best.

In this paper, we investigate how the socially optimal allocation can be implemented through ex ante financial responsibility and ex post strict liability rule. We do not restrict our analysis to insurance contract but on contrary analyze financial guarantee contract. Indeed, in the Directive of the European Parliament and the Council on environmental liability there is a focus on a future legislation that imposes financial responsibility on the polluting firms. Then we analyze the consequences of financial responsibility on the incitation to prevention in a context of asymmetric information and show that the first-best allocation may be attainable. This follows from the fact that the level of damages provides a signal of the firm’s prevention level (Lewis and Sappington 1999) and can be used to design an optimal contract. But contrary to Lewis and Sappington (1999), in our setting, prevention measures do not only involve a disutility for the firm but also reduce the funds available for compensation and clean-up (Beard 1990; Lipowsky-Posey 1993; Dionne and Spaeter 2003; Dari-Mattiaci and De Geest 2005).

We consider a firm which activity yields a non-random gross profit and generates random environmental damages. The firm can improve the distribution of damages by an investment in prevention at the beginning of the period and safety measures during the production process. At the end of the period, only the damages and the resources of the firm net of the prevention cost are observable. Moreover, it is assumed that the firm’s wealth is lower than the highest amount of damages its activity can generate. We establish a necessary and sufficient condition for the implementation of the socially optimal allocation in spite of moral hazard when the firm is mandated to cover the highest amount of damages its activity can generate. We also demonstrate that the set of contracts that implement the socially optimal level of prevention includes a particular contract of the form “reward or maximal penalty” which is closed to a finite risk product referred to as spread loss treaty. The rest of the paper is organized as follows. The following section presents the firm’s optimal choice in the absence of the financial responsibility regime. Section 3 investigates the impact of financial responsibility on the firm’s prevention level. Finally, Section 4 concludes.

2 The optimal choice of the firm without financial responsibility

Consider a risk-neutral firm which activity generates a fixed profit P and creates a possibility of environmental damages ## ]0, L[. The firm can improve the distribution of damages by an investment in prevention at the beginning of the period and safety measures during the production process; these two measures are represented by a single prevention variable denoted e. However, the reduction of risk generates a cost c(e) when the firm chooses a level of prevention e. Moreover we assume that before engaging in its activity, the firm has initial wealth (equity) Rwhich can be partially used to cover the cost induced by prevention measures. Let f(##/e) and F(##/e) be respectively the density and the distribution function of the damages; the following is assumed:

*E.J.L. & E. 80 Assumption 1 ##e, f(##/e) > 0, decreases with ##.3 This means that the observation of a lower level of damage is relatively more likely if a higher level of prevention has been adopted. This assumption implies the first order stochastic dominance: ## ]0, L[,Fe (##/e) > 0. Moreover, Fe (0/e) = Fe (L/e) = 0.

Assumption 2 ## ]0, L[, Fee (##/e) < 0. This distribution function is strictly concave in e. 4

Assumption 3 ce (e) > 0 and cee(e) > 0. The prevention cost is strictly convex in e.

Assumption 4 If the amount of damages is very high, the firm’s assets may be insufficient for compensation; then the firm will be pushed into bankruptcy. Assume that the discount rate is null so that the firm’s net value without investment in prevention noted ## equals R + P.Formally, this liability assumption can be written as L > ##.

What about the optimal level of prevention from the firm’s point of viewThe intuition suggests that a firm facing limited liability will underinvest in prevention. But, as stated by the following lemma this is not always true.

Lemma 1 A judgment-proof firm does not always choose a suboptimal prevention level.

Proof: See the “Appendix”.

The social welfare criterion is assumed to be the minimization of the total cost which is the sum of the expected damages and the prevention cost. We assume that the regulator observes the prevention level. At the social optimum, the expected marginal benefit of prevention equals the expected marginal cost.

The objective of the firm is to maximize its net revenue which equals to the sum of its profit and equity minus the expected liability payments (compensation and clean-up costs). The firm can only pay up to her assets. Hence the private expected marginal benefit is lower than the social one because of the partial internalization of environmental damages by the firm. Moreover, the private expected marginal cost of prevention is lower than the social one because the funds invested in prevention are not available for compensation and clean-up. At the private optimal level of prevention, the private expected marginal benefit of prevention equals the private expected marginal cost. Consequently, the optimal private level of prevention may be lower or higher than the socially optimal one, depending on which effect dominates. However, the judgment-proofness of the firm may result in a partial remediation of damages. One can think about compulsory liability insurance which covers the highest amount of damages as a solution to this problem. But it is well known from economics literature that when care is non-observable, a full insurance leads to underprovision of care by the insured. In the following section we demonstrate that under a guarantee structure, incentives work well even if it is *E.J.L. & E. 81 impossible to observe the care by the polluter. The reason is that under the guarantee the polluter receives a return on investment in prevention. Moreover, this scheme provides the full coverage of damages: prevention and compensation are both satisfied.

3 Financial responsibility

This section is devoted to the economic analysis of a hybrid regime of ex ante regulation through financial responsibility requirement and ex post strict liability. More precisely, in our setting the financial responsibility takes the form of a guarantee provided by another party that has deep pockets. Then the hybrid regime can be viewed as a regime of vicarious liability in which the guarantor and the firm are joint liable. As we know, in this setting, the victims generally choose to collect from the guarantor because the later has deep-pockets. Then, in what follows, we will assume that the firm and its guarantor are jointly liable and that it is the guarantor who has to compensate for the damages generated by the firm.5,6

The analysis is based on the principal-agent paradigm. In this framework, the firm is the limited liability risk neutral agent and the guarantor is the risk neutral principal. The prevention level performed by the firm and consequently the cost of such a measure are not observable by the principal. Moreover, the amount of damages and the net resources of the firm at the end of the period are observable. The timing of the model is as follows. First, the guarantor and the firm sign a contract which stipulates the state-contingent-payments (transfers) that the firm has to make to his guarantor. Secondly, the firm performs a level of prevention and bears the associated cost which is unobservable by the guarantor. Then, the profit is realized and the damages occur and finally the transfer is made to the guarantor. Moreover, it is assumed that the guarantor has all the bargaining power and his objective is to design a scheme of transfers that maximizes his profit. However, the guarantor has to take into account some constraints. The first one is the participation constraint of the firm which reflects the fact that the financial guarantee must yield expected revenue at least equals to what the firm would have obtained without contracting (condition 1). The second one is the firm’s limited liability constraint (condition 2). The third constraint reflects the fact that the transfer is bounded below in such a way that the firm could be rewarded (condition 3).7 The last condition is the incentive compatibility constraint which reflects the optimal behaviour of the firm in choosing the prevention level (condition 4).8

*E.J.L. & E. 82 Formally, if we denote t(##) the transfer made by the firm when the amount of damages equals ##, the guarantor’s problem (P1) can be written as:

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

subject to

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

The existence of schemes of transfers that solve the problem above is not guaranteed. Then it is essential to characterize the conditions under which the problem (P1) admits a solution for a given utility u (expected firm revenue) and a given prevention level e. We can establish the following result:

Proposition 2 The problem (P1) admits a solution, i.e. the levels of utility u and prevention e can be implemented if and only if:

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

Proof: See the “Appendix”.

The intuition underlying the proposition 2 is the following. For a given level of prevention e it is not possible to find a scheme of transfers that gives a level of utility u if the marginal cost of such a measure is greater than the marginal benefit. Let us remark that the marginal benefit of prevention is reflected by the reduction of the expected transfers that the firm has to pay to her guarantor. We have demonstrated (see the “Appendix”) that there is a scheme %23t(##) that gives the maximum marginal benefit of prevention, which equals [## – c(e) – B]Fe (##). If this upper limit of the marginal benefit of prevention is lower than the marginal cost of prevention for a given e, then any scheme of transfers cannot implement the prevention level e.

From the analysis above we can derive the following result:

Proposition 3 The social optimum (u, e*) can be implemented with the financial responsibility if and only if:

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

*E.J.L. & E. 83 Proof: See the “Appendix”

The left-hand-side term of the condition (5) represents the rate of change of the marginal benefit of prevention at the point e* with a transfers scheme %23t(##), whereas the right-hand-side represents the rate of change of the marginal cost of prevention at the same point. Consequently if there is a level of damage ## such that the rate of change of the marginal benefit is at least equal to the rate of change of the marginal cost of prevention then the social optimum can be implemented.

The last step of the analysis is devoted to the characterization of a scheme of transfers that implements the first-best level of prevention. We can establish the following proposition:

Proposition 4 The set of transfers that implement the socially optimal level of prevention contains a scheme of the following form:

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

Proof: See the “Appendix”

The scheme of transfers 23t(##) is such that if at the end of the period, the actual damage is lower than the target level ##, then the firm is rewarded by receiving the bonus payment B, so her net revenue at the end of the period equals ## Conversely if the actual damage is greater than the target level ##, then the payment made by the firm to the guarantor equals ## – c(e*) and the firm net revenue at the end is null.

This form of contract can be approached to a spread loss treaty. It is an alternative risk transfer (ART) solution, more precisely a finite risk product. By this contract, the financial responsibility of the firm is transferred to her guarantor (that can be a bank or an insurer).9,10 At the beginning of the contract, the firm pays either annual or single premium into a so-called experience account. Furthermore, the two parties contractually agree on an investment return. The funds are used to compensation and the rest is returned to the client. But if the claims payments exceed the funds available, the client has to pay the remainder.

In this paper, we consider a one-period model. Consequently, the model can be viewed as if we have aggregated the periods of the spread loss treaty. Moreover, if the realized damages are low, the funds into the experience account are sufficient for compensation whereas in the bad states of nature (high realized damages), the funds *E.J.L. & E. 84 are not sufficient. Hence, because of its limited liability, the firm cannot pay back the claims payments of the guarantor. Then, the guarantor takes this fact into account by penalizing the firm in the intermediate states of nature [those such that the amount of damages is between the target level ## and ## – c(e*)]. Consequently, the reward is used as an incentive device.

4 Concluding remarks

A potentially judgment-proof firm may not internalize the social cost of its activity and then may have insufficient incentives to choose the socially optimal level of prevention. Whereas most of papers studied the incentive effect of extending liability to the lenders of the injurer-firm, this paper on contrary considers another remedy to the problems generated by the judgment-proofness. I demonstrate that a full financial responsibility (operation licence subject to the demonstration of a financial guarantee which covers the highest remediation cost) is compatible with the socially optimal level of prevention and establish a necessary and sufficient condition under which this is realized.

Furthermore, I have shown that when the socially optimal outcome is attainable, a contract of the form “reward or maximum penalty” is included in the set of first-best solutions. Such a contract rewards the firm when the actual damages are lower than a target level because the guarantor infers that the firm took an adequate prevention level. Conversely, if the amount of the damages exceeds the target level, then the firm is maximally punished. This particular contract can be approach to an alternative risk transfer product referred to as spread loss treaty. Consequently, the alternative risk transfer solutions seem suited not only for the hedging of environmental risks, but also for incentive purpose.

Finally, recall that the Directive of the European Parliament and the Council on Environmental Liability has a special focus on a future legislation which imposes financial responsibility on the polluting firms. It is necessary that before the promulgation of such legislation, European authorities help insurance and banking sectors to develop the market for environmental guarantees.

Acknowledgments I am very grateful to an anonymous referee and to the editor for helpful remarks on a previous version of the paper. I would like to thank Jean-Marc Bourgeon, Georges Dionne, Marie-Cecile Fagart, Mahamadou Fall, Claude Fluet, Bruno Jullien, Anne Lavigne, Remi Moreau, Pierre Picard, Sandrine Spaeter, Jean-Marc Tallon and Daniel Zajdenweber. The paper also benefited from the comments of session participants of the 2005 SCSE congress in Charlevoix, 2005 AFSE congress in Paris and seminar participants at HEC Montreal, Universite d’Orleans, Universite de Sherbrooke and Universite du Quebec a Montreal. Financial support by CREF-HEC and the hospitality of the Canada Research Chair in risk management are acknowledged.

Appendix

Proof of lemma 1

The social optimum e* is the solution of the following problem:

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

*E.J.L. & E. 85 The associated first-order condition is given by:

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

The firm’s problem can be written as:

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

The left-hand-side term of Eq. 6 (7) represents the social (private) expected marginal cost of prevention and the right-hand-side represents the social (private) expected marginal benefit. From the comparison of (6) and (7) eP can be lower or higher than e*.

Proof of proposition 2

Part 1: u ## [u,## – c(e) – B]

Every level of utility u is given by the following expression:

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

Taking into account this expression, the objective function of the guarantor becomes:

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

Moreover, (2) and (3) imply: ## – c(e) ? ## t(##)f(##/e)d## ? B; thus 0?u ? ## – c(e) – B

Consequently, the existence of a transfers scheme verifying (1), (2) and (3) implies that the utility of the firm is bounded: u ## [u,## – c(e) – B]. Note that the principal’s objective function depends only on the expected transfer (by u). Therefore, all solutions that verify the agent’s incentive constraint and that have the *E.J.L. & E. 86 same expectation are equivalent from the principal’s point of view. However, the existence of such solutions is not guaranteed. Indeed, if the problem does not admit a solution, then it is not possible to implement a given level of prevention e for a given level of utility u.

Part 2: [## – c(e) – B]Fe (##/e) ? ce(e)

Let us assume that u ## [u,## – c(e) – B], then the next step consists to establish conditions under which the incentive constraint (4) is satisfied. Let ## = {t(##)/B ? t(##) ? ## – c(e)##}, be the set of admissible transfers. Let us define:G[t(-)] = ## t(##)fe(##/e)d##; m = min ## t(##)fe(##/e)d## and M = max ##t(##)fe(##/e)d##.

We can establish that m is strictly negative and M strictly positive.11 Thus the function G [t(.)] is bounded in the set of admissible transfers. Then the validity of the incentive constraint depends on the value taken by m as follows.

Lemma 2 the incentive constraint is satisfied for a given e and u if and only if:

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

Lemma 3 the scheme of transfers %23t(##) which minimizes the function G [t(-)] = ## t(##)fe(##/e)d## has the following form 12:

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

The second part of proposition 2 follows from lemmas 2 and 3.

Proof of proposition 3

From proposition 2, we can derive that when the guarantor’s problem (P1) admits at least one solution, it is equivalent to the following problem (P1bis):

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

Conditions (9) and (10) imply proposition 3.

*E.J.L. & E. 87 Proof of proposition 4

From the proposition 3 we know that the socially optimal prevention level can be achieved if Fe(##/e*)/F(##/e*) ? ce(e*)/u. Moreover, we can demonstrate that the function Fe(##/e*)/F(##/e*) is not increasing in ##.13 Consequently, if Fe(##/e*)/F(##/e*) ? ce(e*)/u, there is a level of damages ## > ## such that Fe(##/e*)/F(##/e*) = ce(e*)/u.

References

Balkenborg, D. (2001). How liable should a lender beThe case of judgment-proof firms and environmental risk: Comment. American Economic Review, 91, 731-738.

Beard, R. (1990). Bankruptcy and care choice. RAND Journal of Economics, 21, 626-634.

Boyer, M., & Laffont, J.-J. (1997). Environmental risks and bank liability. European Economic Review, 41, 1427-1459.

Dari-Mattiacci, G., & De Geest, G. (2005). Judgment Proofness under four different precaution technologies. Journal of Institutional and Theoretical Economics, 161(1), 38-56.

Dionne, G., & Spaeter, S. (2003). Environmental risk and extended liability: The case of green technologies. Journal of Public Economics, 87(5-6), 1025-1060.

Feess, E., & Hege, U. (2000). Environmental harm and financial responsibility. Geneva Papers on Risk and Insurance, Issues and Practice, 25(2), 220-234.

Feess, E., & Hege, U. (2003). Safety monitoring, capital structure and financial responsibility. International Review of Law and Economics, 23,323-339.

Hutchison, E., & Van’t Veld, K. (2005). Extended liability for environmental accidents: What you see is what you get. Journal of Environmental Economics and Management, 49, 157-173.

Jost, P. (1996). Limited liability and the requirement to purchase insurance. International Review of Law and Economics, 16, 259-276.

Lewis, T., & Sappington, D. (1999). Using decoupling and deep pockets to mitigate judgment-proof problems. International Review of Law and Economics, 19, 275-293.

Lewis, T., & Sappington, D. (2001). How liable should a lender beThe case of judgment-proof firms and environmental risk: Comment.American Economic Review, 91, 724-730.

Lipowsky-Posey, L. (1993). Limited liability and incentives when firms can inflict damages greater than worth. International Review of Law and Economics, 13, 325-330.

Pitchford, R. (1995). How liable should a lender beThe case of judgment-proof firms and environmental risk. American Economic Review, 85,1171-1186.

Polborn, M. (1998). Mandatory insurance and the judgment proof problem. International Review of Law and Economics, 18, 141-146.

Ringleb, A. H., & Wiggins, S. N. (1990). Liability and large-scale long-term hazards. Journal of Political Economy, 98, 574-595.

Rogerson, W. (1985). The first-order approach to principal-agent problems. Econometrica, 53, 1357-1367.

Shavell, S. (1986). The judgment proof problem. International Review of Law and Economics, 6, 45-58.

Summers, J. S. (1983). The case of disappearing defendant: An economic analysis. University of Pennsylvania Law Review, 132, 145-185.

IRDES, 10 rue Vauvenargues, 75018 Paris, France e-mail: [email protected]; [email protected]

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Culture, ideology, politics and economics are linked in the output of media organisation in way that is true for no other sector of capitalist enterprise

Introduction

Although some might believe otherwise, the media is not a neutral or objective institution. It is rather a disputed space that can be manipulated to serve certain interests. McNair (2007:103) affirms that “culture, ideology, politics and economics are linked in the output of media organisation.” This statement is especially true of the UK newspaper industry. McQuail (2008:7) also argues that power structures social relationships and that this has an effect on the way the mass media is organized. Both historically and presently the influence of the media can be observed. Newspapers promote certain ideologies, create and reinforce cultural patterns, and greatly influence views on politics. Media products that are made for mass consumption are often controlled by a handful of wealthy owners. This is very similar to what Karl Marx calls the ‘bourgeoisie’ or the owners of the means of production. They are in control of factories and the livelihoods of workers. However, in much the same way, media production serves the interests of the few, and not those of the masses. The ruling class often determines the content of widely distributed newspapers. In support of McNair, I will argue that media output is very closely linked to culture, ideology, and politics, in a way that is advantageous to those who own the means of production. In order to show this, I will discuss all factors (culture, ideology, politics, and economics) in relation to each other and analyse the influence that the newspaper industry has had historically on political, economic, and cultural affairs. The paper will mainly look at 18th century, 19th century, and present press and media output in Britain.

Critical Analysis

The struggle over control of newspaper content is also an economic struggle between the bourgeoisie and the workers or the lower classes. This is a conflict that mirrors the Marxist notion of class struggle. Starting as far back as the 18th century, the UK ruling class has fought to destroy radical newspapers of the time, such as Poor Man’s Guardian, Twopenny, and Republican. The aims of the radical press were to promote class organisations through the development of a critical political analysis. Class organizations and unions were meant to earn workers better wages and more rights. Thus, by developing radical newspapers, the working class sought to improve their economic condition. This is an example of the struggle between the aristocracy and the workers who were criticising corruption and the repressive taxation which was impoverishing them (Curran 2010:13). Here, politics is also interrelated to the media and to economics. It was only through adopting a critical political analysis that workers could advocate for their rights. On the other hand, the politics of the right (or the wealthy owners) represent their economic interest of keeping the wealth and control of the press in the hands of few.

The emergence of more progressive publications in the early 1800s showed how the ideology of the ruling classes was in opposition of radicalism. Their politics served to prevent the workers from gaining more control of the media output. Between 1830 and 1836 there was an increase in circulation of radical newspapers. In London alone, the readership grew from half a million to 2 million. Dr Philmore, a member of Parliament, complained that “these infamous publications […] inflame working people’s passions, and awaken their selfishness, contrasting their present condition with what they contented to be their future condition- a condition incompatible with human nature, and with those immutable laws which providence has established for the regulation of human society “ (Curran 2010 : 14). In other words, the rich believed that it is their right to maintain their social and economic standing. In response to radicalism, they sought to pass regulations that would control the media output. This implied that they could promote the views that would benefit their own economic and social condition. As already seen, those who can control media output use this resource to promote their ideology, culture, and politics. In this way, they also maintain their wealth.

In order to silence the voice of radical newspapers in the 1800s, the government decided to introduce the stamp duty, which meant that publications were redefined to include political periodicals. Curran and Seaton (2010) also note that during those days, the government sought to increase press taxation. This was to ensure that those in charge of the press are wealthy men of high social standing. Curran and Seaton explain that the reason behind stamp duty was “to restrict the readership to a well to do by raising the cover price; and to restrict the ownership to the propertied class by increasing the publishing cost “ (Curran and Seaton 2010:11). This shows how economics plays a big role in restricting those who do not have the necessary means from promoting their own ideology, politics, and culture. The example clearly illustrates the link between economics, culture, and politics that McNair talks about. It also portrays, once again, how those who own the means of production can promote the ideologies that benefit them.

Over time, those who were financially in control of the media used this to their advantage and slowly began to take radicalism out of the picture. It became the norm that only those who have enough capital could have a say in politics and influence the ideology of the masses. In the late 19th century, when some control methods failed and stamp laws were repealed, the press establishment embarked on a “sophisticated strategy of social control”, where the radical newspapers were replaced by apolitical, commercial publications, read by mass audiences and controlled by capital (McNair 2009:87). According to McNair (2009), the radical publications of the end of the 19th century had either been forced out of existence, moved right politically, or become small specialist publications. As newspapers became cheaper and the market expanded, capital investment and running costs increased beyond the capacity of radical publishers. Thus, radical voices were once again silenced. This shows that the output of news is greatly influenced by the ownership and capital, as only the wealthy are powerful enough to determine the course of media production.

Currently, it can be said that media output in the newspapers is still dependant on who owns the enterprise, what are their politics, and what kind of ideology and culture they want to promote. Oftentimes, the output does not necessarily reflect the truth, but rather takes the form that is best suited to serve the interests of the few. It is not uncommon for stories to be censored or even not published at all. To illustrate this, Anthony Bevins (1997:47) argues that “Journalists cannot ignore the pre-set ‘taste ‘of their newspapers, use their own sense in reporting the truth of the any event, and survive. They are ridden by news desks and backbenches executives, have their stories spiked on a systematic basis, they face the worst sort of newspaper punishment –byline deprivation.”

Conclusion

The history of newspaper publishing in the UK shows that economic interests influence media output immensely. I have argued that, historically, culture, ideology, politics, and economics are all interrelated influences on the content of media. In order to show this, my paper has looked at historical events that have had an impact on the course that the media (especially newspapers) has taken during the past few hundred years. Starting with the 18th century, the press has been a battlefield between the rich and the poor. Radical newspapers fought to have a say in politics. Unfortunately, those who had more wealth and invested more capital were the ones able to take control of the press. With the control of the press also came the promotion of certain ideologies. The ruling class favoured the politics that went against the interests of the workers. Politicians and capitalists alike strived to protect their standing. The stamp duty is an example of measures that they were taking to ensure that radical media output does not grow enough to influence political views. Even though this measure did not last, the effect that commercialization has had on newspapers and media output, in general, is still evident. Those who own media corporations prefer an apolitical and commercial approach. Over time, the voices of workers with radical demands have stopped being heard in the mainstream media. Moreover, even the practices of journalists nowadays are influenced by this approach to media as a profit driven enterprise. The relevance of stories is often determined based on commercial appeal and sensationalism, rather than facts. Stories can be censored and facts hidden. Economics, as well as politics are mainly to blame for these developments. McNair (2009) sums up this interrelationship perfectly through his work. The fact that politics, economics, culture, and ideology play a big role in determining media output is undeniable. Although this is unlikely to change in the near future, it is important to know whose politics and interests influence what we read, hear, and see in the media.

Bibliography

Curran, J. and Seaton. Power Without Responsibility : Press, Broadcasting and the Internet in Britain. Routledge, Abingdon, 2010.

McNair, B. News and Journalism In the UK . Routlege, London, 2003.

McQuail D. Mass Communication. SAGE, London, 2008.

Tumber H. News : A Reader. Oxford University Press, Oxford, 1999.

Wahl-Jorgensen, K. & Hanitzsch, T. The Handbook of Journalism Studies. Taylor & Francis, Abingdon, 2009.

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Business Strategy And Economics

Abstract

This paper is focused on the importance of disruptive innovation as described in the teaching of Professor Clayton Christensen.The first part of the paper introduces a business report of Christensen’s theory on disruptive innovation. The focus is on major assumptions of this theory, as they are applied to the performance of one of the leading European airline companies, Ryanair. Moreover, the second part of the paper outlines a plan that clarifies how the professor’s teaching enhances the potential of individuals to move forward to a sustainable and successful future based on the model of disruptive innovation.

Introduction

The theory on disruptive innovation has gained adequate importance in the global business environment. Introduced by Professor Clayton Christensen, this theory emphasises that companies should refocus their capacities and resources on technology in order to achieve a sustainable competitive advantage and growth in particular market segments (Christensen et al., 2008). Disruptive innovation is a powerful tool to drive the expansion of companies that are concerned with the attainment of long-term success (Christensen, 1997). The objective of this paper is to provide a business report on the theory of disruptive innovation as applied in the case of Ryanair, as well as to outline a plan of how the professor’s teaching can lead to developing of a sustainable and successful future, as human beings.

Business Report

In The Innovator’s Dilemma, Clayton Christensen (1997) introduced his distinct concept on disruptive innovation. Disruptive innovations are usually initiated as versions of products and services that already exist in the market, but they are identified as less desirable due to the aspect of lower quality. However, such products and services tend to improve with time and thus gain recognition among major customer population (Christensen et al., 2008). The conceptual framework of disruptive innovation is based on opportunity recognition, which is associated with the generation of useful ideas through implementing a past, present and future approach. The importance of considering past events have been acknowledged as a way to understand the specificity of how certain innovations have occurred (Cortez, 2014). Awareness of current trends in a particular business sector should be maintained in order to demonstrate disruptive innovation. Moreover, presenting possible scenarios is another essential step of this approach that could help companies gain a strong competitive advantage (Christensen, 1997).

Disruptive innovations can be perceived as ‘factor changers’ in the sense that they shape the markets into which specific products and services are introduced (Govindarajan et al., 2011). Therefore, disruptive innovations can refer to any product or service that has successfully altered dimensions of behaviour or technology in a particular market. It can be indicated that disruptive innovation usually characterises as low-end innovation and new market innovation (Christensen et al., 2008). Low-end innovation takes place when leaders tend to implement a strategy of over-supplying the needs of their customers with substantial technological capability or services that they may not actually need. As a result, a vacuum is created within such low-end market, which in turn reflects in a situation where customers with low demands are more likely to achieve their goals at lower cost (Jang, 2013). This aspect illustrates the validity of the theory on disruptive innovation considering the numerous examples of successful companies that have relied on this strategy, including Apple, Ryanair, and Rolls Royce.

The second type of disruptive innovation, new market innovation, is focused on the formation of a new niche of customers by the introduction of new products or services. Individuals can be facilitated to complete certain procedures or processes that have been previously identified as challenging or quite demanding in terms of requiring a wide range of skills and knowledge (Christensen, 1997). However, established organisations usually demonstrate a trend to ignore the growth of new markets because of the prevailing conception that such markets are low margin. Similarly to low-end disruptive innovation, new market innovation indicates the importance of enhancing product offerings and expanding product niches (Habtay, 2012). Emphasis is put on attracting customers away from recognised or established products and services. Substantial disruption takes place as a direct result of this process, as the newly introduced products and services have the power to change the existing market on a permanent basis (Maldonado, 2014). The theory of disruptive innovation is valid because of the focus it maintains on the capacity of companies to refocus on technology advancements to optimise their performance.

An example of the theory on disruptive innovation in practice can be found in the business operations of Ryanair. In the 1990s, leading airline European companies in the industry decided that the opportunities arising from the implementation of a low-cost strategy do not present a substantial threat to their market (Paton, 2013). Yet, newcomers in the European airline industry, such as EasyJet, applied the example of Ryanair’s point-to-point strategy. A direct outcome of this initiative was the creation of a low-cost niche market, which led to significant shifts in market behaviour as well as technology utilisation (Maldonado, 2014). It can be suggested that such niche of customers have realised the importance of Ryanair’s strategy even though they have not been identified as regular flyers. In addition, the low-cost and no frills strategy soon started to attract a considerable number of business travellers, who demonstrated a rapid switch from high-cost airline companies to low-cost airlines (Christensen et al., 2008). This has been done with the assumption that low-cost airlines have significantly improved their service as a result of the implementation of disruptive innovation principles (Habtay, 2012). Such aspect demonstrates the validity of the theory considering its successful application to expanding companies’ growth in new markets.

Ryanair has succeeded in the creation of a new market of budget travellers, which represents an example of the theory on disruptive innovation. The basic of such success was to offer routes to customers that no other airline did at rather competitive, affordable prices. The main aspect of disruptive innovation is to refocus technology use (Paton, 2013). This has helped the airline to maintain a close contact with its customers through optimisation of the internet use, commitment to quality, and safety maintenance and adequately focused criteria for growth. Ryanair has achieved its objective to reduce its operation cost through maximising its use of technical advances, as it introduced the options of booking of tickets and issuing of boarding cards online (Schmidt and Druehl, 2008). This airline company has provided a relevant example of how its operational teams and processes are brought together to deliver innovation in specific target niches. It has been assumed that the innovation introduced by Ryanair is desired by the target niche market (Habtay, 2012). Therefore, it can be argued that innovation levels should be maintained in balance in order to achieve the company’s initially presented goals for growth and expansion.

As illustrated in Professor Clayton’s theory on disruptive innovation, an emergent strategy that organisations should adopt should be based on essential principles. Initially, companies that consider the option of disruptive innovation should incorporate elements of learning into their strategy plan (Paton, 2013). Furthermore, organisations should be focused on finding relevant information that can guarantee that they move in the right direction, similarly to what Ryanair did in the European airline industry through its adherence to the disruptive innovation model (Schmidt and Druehl, 2008). As a result, this type of innovation can produce long-term catalytic change, as illustrated in the example of Ryanair.

The way in which a new technology addresses the demands presented in an existing customer segment is an important condition for success. Existing customers have been found powerful to affect an organisation’s resource allocation process (Christensen et al., 2008). The basic idea behind the application of disruptive innovation in practice is to introduce new functions or attributes, as Ryanair introduced a low-cost strategy and flexible fares to its customers (Petrick and Martinelli, 2012). A significant assumption can be provided in relation to new market disruptive innovation in the sense that it is more likely to prosper among customers that companies have not been addressed previously.

As implied in The Innovator’s Dilemma, Professor Clayton’s theory of disruptive innovation illustrates both the strengths and weaknesses of using financial ratios to measure business performance in both the short-term and long-term (Christensen, 1997). The strengths associated with using these ratios refer to the capacity of companies to use specific financial information to advance their business operations. Weaknesses of these ratios include improperly maintained focus or irrelevant or inaccurate financial details. The most important ratios with regards to Professor Clayton’s theory are the following profitability ratios:

Return on Capital Employed (ROCE);
Current Ratio and Acid Test Ratio (Christensen et al., 2008).

The ratio of RONA presents a comparison of net income with the specific net assets. The ratio of ROCE provides significant information about the returns that an organisation achieves from the capital it employed. In the case of Ryanair, the company’s ROCE ratio indicated a significant increase from 6.86% in 2011 to more than 10% in 2013 before tax (Paton, 2013). The formula for calculating the current ratio is to divide current assets and current liabilities. Therefore, Ryanair’s current ratio in 2013 is 1.97:1. Acid test ratio is obtained through subtracting current assets and inventory and the result is divided with current liabilities (Habtay, 2012). The acid test ratio in 2013 is 1.97:1. These ratios indicate that the company performs well in its niche target market as a result of the introduction of disruptive innovation.

Plan

Professor Clayton’s teaching provides fundamental business ideas that can help individuals move forward to a sustainable and successful future, as human beings. His concepts reinforce the potential of professionals in the business world to bring about a substantial change that can alter positively their lives (Christensen et al., 2008). When human beings are confronted with new technological innovations, they tend to explore the numerous opportunities associated with such technology advancements that can help them become more successful in their operations. Sustainability emerges as an essential dimension in Clayton’s teaching on disruptive innovation (Petrick and Martinelli, 2012). By finding new markets for new technologies, individuals can help companies move in the right direction through adhering to the model of disruptive innovation (Christensen et al., 2008).

Technology is the key to a sustainable and successful future for human beings considering the emphasis on improvement in product performance. There has been always a drive to seek improvement of products and services in any market segment. Clayton’s teaching motivates individuals to restructure their thinking and present distinct inferences regarding the application of disruptive innovation models in practice (Chandra and Yang, 2011). In fact, the model suggested by the professor indicates a proven path to achieving a sustainable and successful future based on the concept of disruptive innovation. The ability of human beings to innovate is leading in the contemporary business world, which is oriented towards long-term success. Clayton’s ideas are focused on presenting a realistic framework according to which sustainable is achievable as well as new innovations address current needs and expectations identified in different markets (Christensen et al., 2008). As Clayton argued, market leaders are responsible for embracing such innovations and exploit the numerous advantages of technologies. As a result, this would contribute to the emergence of a high level of sustainability in the dynamic business environment (Maldonado, 2014).

The model introduced by Professor Clayton provides managers with an opportunity to offer relevant insights into the most appropriate way of utilising disruptive technologies. The professor presents his arguments in a clear, consistent manner, which helps individuals understand the specificity and applicability of his theory (Christensen, 1997). The emergence of particular value networks is in line with the basic idea to refocus on technology through the distinct model of disruptive innovation (Petrick and Martinelli, 2012). Moreover, Professor Clayton emphasises the necessity to discuss different managerial decisions, which contribute to enhanced sustainability in the business world.

Moving to a sustainable and successful future may be challenging for human beings, but they can make a sense of all activities pertaining to disruptive innovation and apply them in practice. This can help individuals realise the potential and practicalities of the ideas shared by Professor Clayton (Habtay, 2012). Emphasis on the learning cycle shows that both individuals and companies can embrace the concept of change, which may contribute to expanding sustainability not only in the organisational context but also in society (Christensen et al., 2008). The professor’s teaching is intended to clarify any misunderstanding related to business performance in the contemporary world. His ideas suggest that sustainability and business success are attainable through the simple realisation of companies’ potential (Christensen, 1997). In addition, the development of new capabilities as related to specific organisational boundaries may be a relevant solution to overcome problems in a company’s performance.

Conclusion

This paper discussed Professor Clayton Christensen’s theory on disruptive innovation, which has been recognised as a significant tool in driving the growth of many organisations (Christensen et al., 2008). The paper also provided arguments pertaining to the successful implementation of the theory in practice. Ryanair was referred to as an example of company, which adheres to the model of disruptive innovation (Paton, 2013). It has been concluded that Ryanair’s low-cost strategy has brought substantial success to the company. Moreover, the paper discussed details on how the professor’s teaching is inspiring for human beings in the process of moving forward to a sustainable and successful future.

References

Chandra, Y. and Yang, S. (2011). ‘Managing Disruptive Innovation’. Journal of General Management, vol. 37(2), pp.23-50.

Christensen, C., Johnson, C. W. and Horn, M. B. (2008). Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns. New York: McGraw-Hill.

Christensen, C. (1997). The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Boston: Harvard Business Review Press.

Cortez, N. (2014). ‘Regulating Disruptive Innovation’. Berkeley Technology Law Journal, vol. 29(1), pp.175-228.

Govindarajan, V., Kopalle, P. K. and Danneels, E. (2011). ‘The Effects of Mainstream and Emerging Customer Orientations on Radical and Disruptive Innovations’. Journal of Product Innovation Management, (1), pp.121-132.

Habtay, S. R. (2012). ‘A Firm-Level Analysis on the Relative Difference between Technology-Driven and Market-Driven Disruptive Business Model Innovations’. Creativity & Innovation Management, vol. 21(3), pp.290-303.

Jang, S. W. (2013). ‘Seven Disruptive Innovations for Future Industries’. SERI Quarterly, vol. 6(3), pp.94-98.

Maldonado, E. R. (2014). ‘How to Identify Disruptive New Businesses’. Global Conference on Business & Finance Proceedings, vol. 9(1), pp.510-520.

Paton, M. (2013). Ryanair Profits Soar 21% [online]. The Motley Fool. Available at: http://www.fool.com/investing/general/2013/01/28/ryanair-profits-soars.aspx [Accessed: 14 August 2014].

Petrick, I. J. and Martinelli, R. (2012). ‘Driving Disruptive Innovation’. Research Technology Management, vol. 55(6), pp.49-57.

Schmidt, G. M. and Druehl, C. T. (2008). ‘When Is a Disruptive Innovation Disruptive?’ Journal of Product Innovation Management, vol. 25(4), pp.347-369.

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Macroeconomics Living Standards

1.  Define the GDP price index.  Identify the person(s) who gave this idea.

A GDP price index is a measure of the price of a specified collection of goods and services in a given year as compared to the price of an identical or highly similar collection of goods and services in a reference year.

William Stanley Jevons (1835-1882) provided the earliest contribution to the development of index numbers. Later Wesley Clair Mitchell (1874-1948) contributed broader efforts to gather statistical data and improve economists’ ability to assess economic well-being.

2. Define find the concept and measurement of `Business Cycles. Identify the person(s) who gave this idea.

Economy normally goes through a series of cycles, of booms and depressions condition. For example, a slowing business activity may undergo revival activity which in turn results in business prosperity, prosperity then may breed economic crisis, economic crisis then leads to depression, after a long period of depression it may then go back to some revival activity which goes back to the same cycle. Business cycles could represent the most serious of economic instability. Survey data and cyclical indicators are the most effective measurements of business cycles. This would allow prediction of economic crisis for prevention purposes.

The economist who contributed the most to this idea of business cycles is Wesley Clair Mitchell (1874-1948).  John Maynard Keynes formalized the analysis of business cycles.

3. Define the idea of `real interest rates’. Identify the person(s) who gave this idea.

The “real interest rate” is calculated from the nominal rate of interest, adjusted for compounding, minus the inflation rate. Real interest rate is will depend primarily on the volatile inflation rates which poses some risk on borrowers and lenders.

The person who gave meaning to ‘real interest rates’ was Irving Fisher (1867-1947). The increase in nominal interest rates in anticipation of inflation is even called as “Fisher Effect” because of his contribution.

4. Indicate who first advanced the modern theory of business cycles and where he taught.

John Maynard Keynes contributed the most on the advancement of modern theory of business cycles. He lectured in Cambridge.

References:

C. MacConnell, S. Brue (2005). Economics: Principles, Problems, and Policies, 16/e. Origins of Idea (Chapter 7). Retrieved January 7, 2007 from

http://highered.mcgraw-hill.com/sites/0072819359/student_view0/chapter7/origin_of_the_idea.html

C. MacConnell, S. Brue (2005). Economics: Principles, Problems, and Policies, 16/e. Origins of Idea (Chapter 8). Retrieved January 19, 2007 from

http://highered.mcgraw-hill.com/sites/0072819359/student_view0/chapter8/origin_of_the_idea.html

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Macroeconomics Equilibrium GDP

1. Move the green pointer on the horizontal axis to an income level of 430. Then click on the “income adjustment” button. What happened? Why did income return to equilibrium at 470? The GDB rises to restore equilibrium. This is because at GDP=430, the aggregate expenditures is higher than production. This is a state of imbalance so that production opportunities will rise to match the total spending.

2. Move the green pointer on the horizontal axis to an income level of 510. Then hit the “income adjustment” button. What happened? Why did income return to equilibrium at 470?

GDP decreases to restore equilibrium. This is because at GDP=510, production is higher than aggregate expenditures. This means that there will an excess in production. The excess will force production to reduce to maintain profitability until equilibrium point is achieved. So GDP will always return to equilibrium point of 430 where aggregate expenditure equals production.

3. What happened to Income in Chapter 10 exercise when Investment was increased?

Income also increases as indicated by GDP line at 6000.

4. Explain why the resulting increase in equilibrium Income was greater than the change in Investment spending.

Investment will produce some level of gains or in numbers this is a multiplier. This gain (multiplier) is what causes the GDP change in equilibrium to be higher.

5. Give three real-world forces that could cause a “shift in Aggregate Demand.”

5.1 An increase in consumption will increase the Aggregate Demand.

5.2 An increase in government expenditure will increase the Aggregate Demand.

5.3 An increase in net export will increase the Aggregate Demand.

6. Give three real-world forces that could cause a “shift in Aggregate Supply.”

6.1 An increase wages and salaries will increase the Aggregate Supply.

6.2 Education and Training will shift the Aggregate Supply.

6.3 Research and Development will shift the Aggregate Supply.

References

C. MacConnell, S. Brue (2005). Economics: Principles, Problems, and Policies, 16/e. Graphing Exercise: Equilibrium GDP (Chapter 10.1). Retrieved January 27, 2007 from

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In Economics

Bush’s actions have placed America in a devastating position by altering its funding to the top 10% households. We, as a nation, must find ways to adapt to the ever-changing effects to the fluctuating income rates of the bottom 90% of households that are strained through his tax cuts. Middle-income families are harnessing a 23% loss of income due to the tax cuts; what will come of their living conditions? The lower ends of households have experienced some unfortunate hits to their income capabilities because of the tax cuts. Now, more of the concern has gone from what is Bush’s real objective in handling these new ventures. In some ways, I feel that Bush has taken the nation by storm by making complementary movements to increase the income of the $1,000,000,000+ households to gain their favor.

The motivations behind this economic trivia could be examples of the supply and demand scenario in which he supplies more loopholes for the rich and they will demand his stay in office. This conclusion may seem a bit far fetched, but it accurate considering the changes our nation will undergo if his tax cuts remain permanent.

If permanent tax cuts exist, the existence of a constrained economy could harm our nation’s lead in industrial developments. He places younger generations in a bind through reducing funding (the $90 billion lost in tax reductions) from getting a good education. President Bush’s actions are seemingly inappropriate and this has robbed individuals with lower-paying jobs in need of additional benefits. Not to seem negative, but I feel he has done this to keep his ‘friends’ of the wealthy families on the top of their game.

Why would a president strip his own nation of their needed funding? Many people will lose out on jobs (reduced budgeting/outsourcing), benefits ($90 billion from taxes), and help (Social Security). I feel that this could hurt our nation in more ways than one. More issues may arise that are unforeseen at the moment, but it is possible that we will endure a long and hard recovery. According to the article, the government has lost $90 billion dollars each year he has been in office. President Bush entered office in 2000; six times $90 billion is plenty of money we could have used to better our nation or the world.

For instance, what will happen to financial aid that is available to college students? Will college students have to pay out of pocket fees although the 90% bottom households are losing funds through tax cuts? This could be one issue many economic students and studies should be undertaken to determine the frets it will place on our position as a world leader. In accordance to lost financial aid, some students will not have the adequate qualifications to get the appropriate technical training to excel in a technological world.

Our New Economy will lead to an unstable and incomparable society of education-lacked generations. Another issue will be the benefits taken away from lower-paying jobs. Many of these individuals pay high insurance fees in order to secure preventative health care. Certain programs such as Blue Shield as well as Blue Cross will find less funding an appropriate answer for senior citizens and low-income families impossible. Besides these obvious effects of the tax cuts, we have to worry about the future. Should we start bracing ourselves for a turbulent economy with a lack of funding in the bottom 90% who are working hard to contribute to the nation? The answer lies in the equilibrium that will eventually happen within the government.

 

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Scope of Managerial Economics

Q1. Yes. Firms represent a combination of people, physical assets, and information (financial, technical, marketing, and so on). People directly involved include stockholders, managers, workers, suppliers, and customers. Businesses use scarce resources that would otherwise be available for other purposes, pay income and other taxes, provide employment opportunities, and are responsible for much of the material well-being of our society. Thus, all of society is indirectly involved in the firm’s operation. Firms exist because they are useful in the process of allocating resources –producing and distributing goods and services.

As such, they are basically economic entities Q2. A. The most direct effect of a requirement to install new pollution control equipment would be an increase in the operating cost component of the valuation model. Secondary effects might be expected in the discount rate due to an increase in regulatory risk, and in the revenue function if consumers react positively to the installation of the pollution control equipment in production facilities. B. All three major components of the valuation model–the revenue function, cost function, and the discount rate–are likely to be affected by an increase in advertising.

Revenues and cost will both increase as output is expanded. The discount rate may be affected if the firm’s profit outlook changes significantly because of increased demand (growth) or if borrowing is necessary to fund a rapid expansion of plant and equipment to meet increased demand. C. The primary effect of newer and more efficient production equipment is a reduction in the total cost component of the valuation model. Secondary effects on firm revenues could also be important if lower costs make price reductions possible and result in an increase in the quantity demanded of the firm’s products.

Likewise, the capitalization rate or discount factor can be affected by the firm’s changing prospects. D. The time pattern of revenues is affected by such a pricing decision to raise prices in the near term. This will alter production relationships and investment plans, and affect the valuation model through the cost component and capitalization factor. E. A general lowering of interest rates leads to a reduction in the cost of capital or discount rate in the valuation model. F. Higher rates of inflation, leading to an increase in the discount rate, cause the present value of a constant income stream to decline.

Unless the firm is able to increase product prices in order to maintain profit margins, the value of the firm falls as inflation and the discount rate increases. Of course, the economic effects of inflation on the economic value of the firm are complex, involving both asset and liability valuations, so determining the overall effect of inflation on the economic value of individual firms is a difficult task Q3. The economic profit concept provides the most appropriate basis for evaluating the operations of a business since it allows for a risk-adjusted normal rate of return on all capital devoted to the enterprise.

Even when business profits are substantial, economic profits can sometimes be negative given the effects of risk, inflation, and other factors. Substantial business profits are no guarantee to the growth, or even maintenance, of capital investment. In actual practice, investors adjust reported accounting data to account for additional factors that must be considered Q4. A. Interesting perspective on the characteristics of wonderful businesses has been given by legendary Wall Street investors T. Rowe Price and Warren E. Buffett.

The late T. Rowe Price was founder of Baltimore-based T. Rowe Price and Associates, Inc. , one of the largest no-load mutual fund organizations in the United States, and the father of the “growth stock” theory of investing. According to Price, attractive growth stocks have low labor costs, superior research to develop products and new markets, a high rate of return on stockholder’s equity (ROE), elevated profit margins, rapid earnings per share (EPS) growth, lack cutthroat competition, and are comparatively immune from regulation.

Omaha’s Warren E. Buffett, the billionaire head of Berkshire Hathaway Inc. , also looks for companies that have strong franchises and enjoy pricing flexibility, high ROE, high cash flow, owner-oriented management, and predictable earnings that are not natural targets of regulation. Like Price, Buffett has profited enormously through his investments. To apply Price’s and Buffett’s investment criteria successfully, business managers and investors must be sensitive to fundamental economic and demographic trends.

Perhaps the most obvious of these is the aging of the population. Health-care demands will continue to soar. In recognition of this fact, investors have bid up the shares of companies offering prescription drugs, health care, and health-care cost containment (e. g. , home health agencies). Perhaps less obvious is that an aging and increasingly wealthy population will save growing amounts for their children’s education and retirement. This bodes well for mutual fund operators, insurance companies, and other firms that offer distinctive financial services.

As the overall population continues to enjoy growing income, spending on leisure activities is apt to grow; companies that offer distinctive goods and services in this area will do well. Helping well-heeled customers have fun has always been a good business. Productivity enhancement to combat economic stagnation is also likely to be a major thrust during the coming decade. In this area, it is perhaps easier to pick likely beneficiaries of emerging technologies than it is to chart the future course of technical advance.

For example, catalog retailers, long-distance and cellular phone companies, and credit card providers are all major beneficiaries of the rapid pace of advance in computer and information technology. Similarly, major broadcasters, cable TV companies, movie makers, and software providers are all prone to benefit from increasingly user-friendly technology for leisure-time activities. B. The American Express Company, Coca-Cola, Procter & Gamble, and Wells Fargo are well-known examples of major common stock holdings of Warren Buffett’s Berkshire Hathaway, Inc.

Each of Berkshire’s major holdings are large capital-intensive companies with long operating histories of above-average rates of return. Like any really good business, they display a wise use of assets as indicated by an average ROE that is well above typical norms. Enhancing the attractiveness of these companies is the fact that they also display above-average annual rates of growth in stockholders’ equity. Thus, they can all be described as beneficiaries of high-margin growth. As is often the case, attractive financial and operating statistics reflect essentially attractive economic characteristics of each company.

The American Express Company is a premier travel and financial services firm that is strategically positioned to benefit from aging baby boomers. The Coca-Cola Company, one of Berkshire’s biggest and most successful holdings, typifies the concept of a wonderful business. Coca-Cola enjoys perhaps the world’s strongest franchise owner-oriented management, and both predictable and growing returns. Also, the company is not subject to price or profit regulation. From the standpoint of being a wonderful business, Coca-Cola is clearly the “real thing. Newspapers, banks, and cable TV companies, such as The Washington Post Company and Wells Fargo &Company, translate immense economies of scale in production into dominating competitive advantages. They also fit Buffett’s criteria for wonderful businesses. In the case of Gillette, above-normal returns stem from unique products that are designed and executed by extraordinarily capable management. The late T. Rowe Price was prone to invest in high-tech companies that produced distinctive products.

On the other hand, Buffett is fond of saying that he doesn’t “understand” high-tech and doesn’t want to be blown out of business by a few guys “working in a garage somewhere. ” Of course, Buffett’s thinly-veiled reference to Hewlett-Packard and the Silicon Valley revolution that was started by “two guys in a simple garage” means that Buffett clearly does understand the problems of investing in hard-to-project high-tech companies. Thus, while Buffett avoids high-tech stocks, T. Rowe Price, if he were alive today, might find compelling the advantages of high-tech companies such as Microsoft, Intel, and Cisco Systems, among others. C.

Above-normal returns from investing in wonderful businesses are only possible to the extent that such advantages are not fully recognized by other investors. In the case of T. Rowe Price, early investments in Avon Products, Xerox, and IBM generated fantastic returns because Price saw their awesome potential far in advance of other investors. On the other hand, Buffett has profited by taking major positions in wonderful companies that suffer from some significant, but curable, malady. In 1991, for example, Buffett made a large investment in American Express when the company suffered unexpected credit card and real estate loan losses.

When the company absorbed these losses without any lasting damage to its intrinsic profit-making ability, its stock price soared and Buffett cleaned up. Companies that are conservatively financed enjoy a similar ability to profit when an unexpected business downturn causes financially distressed rivals to sell valuable assets at bargain-basement prices . Therefore, while above-average stock-market returns provide the clearest evidence of having picked good businesses for investment, short-term results can be disappointingly average or below-average if the virtues of these good businesses are clearly recognized in the marketplace.

More frustrating still is the problem of finding and investing in good businesses at attractive prices and then having to wait while conventional wisdom comes around to recognizing them as such. The overall stock market is extremely efficient at ferreting out bargains and adjusting prices so that subsequent investors earn only a risk-adjusted normal rate of return. For individual investors seeking above-average returns, finding good businesses is a necessary first step, but they must also be incorrectly priced (too cheap). Buffett succeeds because he is unusually adept at finding high-quality bargains.

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Economics Syllabus

CARIBBEAN EXAMINATIONS COUNCIL Caribbean Advanced Proficiency Examinations Correspondence related to the syllabus should be addressed to: The Pro-Registrar Caribbean Examinations Council Caenwood Centre 37 Arnold Road, Kingston 5, Jamaica, W. I. Telephone Number: (876) 920-6714 Facsimile Number: (876) 967-4972 E-mail address: [email protected] org Website: www. cxc. org Copyright © 2008, by Caribbean Examinations Council The Garrison, St. Michael BB 11158, Barbados This document CXC A20/U2/08 replaces CXC A20/U2/03 issued in 2003. Please note that the syllabus was revised and amendments are indicated by italics and vertical lines.

First Issued 2003 Revised 2008 Please check the website www. cxc. org for updates on CXC’s syllabuses. RATIONALE1 AIMS 2 SKILLS AND ABILITIES TO BE ASSESSED2 PRE-REQUISITES OF THE SYLLABUS3 STRUCTURE OF THE SYLLABUS3 UNIT 1: MICROECONOMICS MODULE 1: METHODOLOGY: DEMAND AND SUPPLY 4 MODULE 2: MARKET STRUCTURE, MARKET FAILURE AND INTERVENTION……… 12 MODULE 3: DISTRIBUTION THEORY 17 UNIT 2: MACROECONOMICS MODULE 1: MODELS OF THE MACROECONOMY27 MODULE 2: MACROECONOMIC PROBLEMS AND POLICIES28 MODULE 3: GROWTH, SUSTAINABLE DEVELOPMENT AND GLOBAL RELATIONS36 OUTLINE OF ASSESSMENT44

REGULATIONS FOR PRIVATE CANDIDATES 55 REGULATIONS FOR RESIT CANDIDATES56 ASSESSMENT GRID57 RESOURCES58 GLOSSARY59 T T he Caribbean Advanced Proficiency Examinations (CAPE) are designed to provide certification of the academic, vocational and technical achievement of students in the Caribbean who, having completed a minimum of five years of secondary education, wish to further their studies. The examinations address the skills and knowledge acquired by students under a flexible and articulated system where subjects are organised in 1-Unit or 2-Unit courses with each Unit containing three Modules.

Subjects examined under CAPE may be studied concurrently or singly, or may be combined with subjects examined by other examination boards or institutions. The Caribbean Examinations Council offers three types of certification. The first is the award of a certificate showing each CAPE Unit completed. The second is the CAPE diploma, awarded to candidates who have satisfactorily completed at least six Units, including Caribbean Studies. The third is the CAPE Associate Degree, awarded for the satisfactory completion of a prescribed cluster of seven CAPE Units including Caribbean Studies and Communication Studies.

For the CAPE diploma and the CAPE Associate Degree, candidates must complete the cluster of required Units within a maximum period of five years. Recognized educational institutions presenting candidates for CAPE towards the award of the Council’s Associate Degree in nine categories must, on registering these candidates at the start of the qualifying year, have them confirm in the required form, the Associate Degree they wish to be awarded. Candidates will not be awarded any possible alternatives for which they did not apply. T ? RATIONALE

Economics is the study of how society provides for itself by making the most efficient use of scarce resources so that both private and social welfare may be improved. The subject, therefore, covers the study of individuals, households, firms, government and international economic institutions as they attempt to make better use of scarce resources. The study of Economics enables individuals to develop a better understanding of the economic issues which affect them and the world in which they live. It will also enable students to offer informed comments on economic matters.

The knowledge gained from this course in Economics will be of lifelong value to the student. The influence of the subject on all areas of activity should stimulate the individual to continue reading and conducting research in Economics. It is recognised that persons doing this course may be drawn from different backgrounds and may possess different interests. Some may wish to study Economics as preparation for further specialisation in the subject. Others may study the subject to complement other subject disciplines, such as, careers in finance, accounting or law.

Some students may see the subject as one worthy of study in its own right. Students of Economics will be able to contribute, significantly, to economic and social development in the Caribbean and the wider world by acting as catalysts for wider awareness of social and economic issues. A study of Economics at the CAPE level will be of benefit to all students by introducing them to the philosophy which underlies everyday economic interactions. The study will also train the student to think logically, critically and impartially on a variety of contentious issues. AIMS The syllabus aims to: 1. promote understanding of the basic principles and concepts of economics which are accepted in large measure by economists while recognising that the field is changing continuously; 2. develop an appreciation of the various methods used by economists in analysing economic problems; 3. develop an understanding of the global economy and of the relationships between rich and poor nations with respect to international trade and finance and the most important international financial institutions; 4. ncourage students to apply economic principles, theories and tools to everyday economic problems, for example, inflation, unemployment, environmental degradation, sustainable development and exchange rate instability and to contribute meaningfully to any dialogue on these issues; 5. encourage students to apply economic theory to the critical issues which affect the small open Caribbean-type economy; 6. encourage students to evaluate contentious economic issues so that decision-making may be informed by logical and critical thinking; 7. sensitize students to the need for ethical behaviour in the conduct of economic transactions. SKILLS AND ABILITIES TO BE ASSESSED The assessment will test candidates’ skills and abilities to: 1. identify and explain economic theories, principles, concepts and methods; 2. interpret, analyse and solve economic problems using economic models and concepts; 3. develop structural and reasoned expositions and evaluate economic theories and policies. PRE-REQUISITES OF THE SYLLABUS Successful participation in this course of study will be enhanced by the possession of good verbal and written communications skills. A good foundation in Mathematics would be an asset to students doing this course.

STRUCTURE OF THE SYLLABUS The Syllabus is arranged into two Units. Each Unit consists of three Modules, each Module requiring 50 contact hours. UNIT 1: MICROECONOMICS Module 1-Methodology: Demand and Supply Module 2-Market Structure, Market Failure and Intervention Module 3-Distribution Theory UNIT 2: MACROECONOMICS Module 1-Models of the Macroeconomy Module 2-Macroeconomic Problems and Policies Module 3-Growth, Sustainable Development and Global Relations Lists of resources are provided in the syllabus. The lists provide information that may be helpful for the study of each Module.

It is advised that the topics listed in the sections do not necessarily follow sequentially. Teachers may thus introduce certain concepts before others. It is recognised that Economics may be taught using a strictly qualitative approach or a strictly quantitative approach. However, a proper mix of the two approaches is critical to the understanding of the subject at this level. Teachers are advised, therefore, that proper delivery of the subject would involve the integration of the two approaches. ? UNIT 1: MICROECONOMICS MODULE 1: METHODOLOGY: DEMAND AND SUPPLY

GENERAL OBJECTIVES On completion of this Module, students should: 1. appreciate the main problem of economics namely, the allocation of scarce resources and the inevitability of choice; 2. understand the laws, principles and theories governing demand and supply; 3. understand the basic tools of economic analysis. SPECIFIC OBJECTIVES TOPIC 1: Central Problem of Economics Students should be able to: 1. explain the concept of scarcity; 2. apply the concept of opportunity cost in a variety of real-life situations; 3. explain the concept of production possibilities frontier (PPF); . use the production possibilities frontier to indicate constant returns, diminishing returns and increasing returns; 5. account for shifts in the production possibilities frontier (PPF); 6. differentiate between positive and normative economics; 7. outline the advantages and disadvantages of the alternative mechanisms by which resources are allocated. CONTENT 1. The meaning of scarcity, free goods and economic goods. 2. (a)Definition of opportunity cost. b) Choice: what, how and for whom to produce. UNIT 1 MODULE 1: METHODOLOGY: DEMAND AND SUPPLY (cont’d) ) The concept of opportunity cost applied to economic agents (individuals, households, firms and governments). 3. (a)Assumptions: maximum output attainable, given full employment and constant state of technology. (b)Regions: attainable, unattainable, efficient and inefficient levels of production. 4. Production possibilities frontier: slopes and shapes. 5. Use of production possibilities frontier to show growth and technological change. 6. Examples of positive and normative statements. 7. Different types of economic systems: traditional, market, planned and mixed. SPECIFIC OBJECTIVES

TOPIC 2: Theory of Consumer Demand Students should be able to: 1. explain the concept of utility; 2. explain the law of diminishing marginal utility and the limitation of marginal utility theory; 3. explain the meaning of indifference curves and budget lines; 4. explain consumer equilibrium using the marginal utility approach; 5. explain consumer equilibrium using the indifference curve approach; 6. isolate the income and substitution effects of a price change; 7. explain effective demand; 8. derive the demand curve using both the marginal utility and indifference curve approaches; 9. ifferentiate among normal, inferior and Giffen goods; 10. distinguish between shifts of the demand curve and movements along the curve; UNIT 1 MODULE 1: METHODOLOGY: DEMAND AND SUPPLY (cont’d) 11. identify the factors that affect demand; 12. explain the meaning of consumer surplus; 13. explain price elasticity, income elasticity and cross elasticity of demand; 14. calculate numerical values of elasticity; 15. interpret numerical values of elasticity; 16. assess the implications of price elasticity of demand for total spending and revenue; 17. state the factors that determine the price elasticity of demand.

CONTENT 1. Utility: total, marginal, cardinal (marginalist approach), ordinal (indifference curve approach). 2. (a)Explanation of diminishing marginal utility. (b)The main assumptions and limitations of Marginal Utility Theory. 3. Indifference curves and the budget constraint (budget lines). 4. The law of equi-marginal returns. 5. The point of tangency of the budget line to the indifference curve. 6. Income and substitution effects of a price change. 7. Effective demand. 8. Deriving the demand curve using the marginal utility as well as the indifference curve approach. . Normal, inferior and Giffen goods using the indifference curve approach. 10. Shift versus movements along demand curves. 11. Price and the conditions of demand. 12. Consumer surplus including graphical representations. UNIT 1 MODULE 1: METHODOLOGY: DEMAND AND SUPPLY (cont’d) 13. Price, income, and cross elasticities. 14. Calculation of values of elasticity. 15. Classification and interpretations (sign and size); including the drawings and interpretations of graphs. 16. The implications of price elasticity of demand for total spending and revenue. 17.

Factors that determine the price elasticity of demand. SPECIFIC OBJECTIVES TOPIC 3: Theory of Supply Students should be able to: 1. identify the factors of production; 2. explain the term production function; 3. differentiate between the short run and long run; 4. explain the law of diminishing returns; 5. calculate total, average and marginal physical product; 6. explain the relationships among total, average and marginal physical product; 7. identify the stages of production as they relate to total, average and marginal product; 8. calculate total, average, marginal and other costs; 9. xplain the relationship among total, average and marginal costs; 10. explain why supply curves are usually positively sloped; 11. explain the concept of producer surplus; 12. explain the shape of the short run and long run supply curves; UNIT 1 MODULE 1: METHODOLOGY: DEMAND AND SUPPLY (cont’d) 13. explain returns to scale and the concepts of economies and diseconomies of scale; 14. distinguish between a movement along the supply curve and a shift in the supply curve; 15. explain the concept of elasticity of supply; 16. calculate elasticity of supply; 17. interpret elasticity of supply. CONTENT . Factors of production: land, labour, capital and entrepreneurship. 2. Relationship between output and input. 3. Fixed and variable factors. 4. The law of diminishing returns. 5. Calculation of total average and marginal physical product. (See suggested teaching and learning activities). 6. Change in the relationship as input increases. 7. Production and its stages, as they relate to the total, average and marginal product including the use of graphs. 8. (a)Fixed cost, variable cost, total cost, marginal cost, average fixed cost, average variable cost, average total cost, sunk costs. ) The shape of the long run average total cost curve. c) Productive optimum. 9. The relationship between total, average and marginal cost including the use of graphs. 10. Relationship between quantity supplied and price. 11. Producer surplus including graphical representations. UNIT 1 MODULE 1: METHODOLOGY: DEMAND AND SUPPLY (cont’d) 12. Relationship between marginal cost and the average cost in the short run and long run. Explanation of why the supply curve is the section of the marginal cost curve above the average variable cost and average total cost. 13. (a)Long run and economies of scale. ) Factors determining economies of scale. c) Internal and external economies of scale. d) Diseconomies of scale. 14. Price and the conditions of supply. 15. Concept of elasticity of supply. 16. Calculation of elasticity of supply. 17. Classification and interpretation (size of coefficient) including the drawing and interpretation of graphs. SPECIFIC OBJECTIVES TOPIC 4: Market Equilibrium Students should be able to: 1. explain the concept of the market; 2. explain market equilibrium; 3. calculate equilibrium price and quantity; 4. outline factors that cause changes in equilibrium; . evaluate the impact of price controls on market equilibrium; 6. analyse the effects of taxation and subsidies on market equilibrium. UNIT 1 MODULE 1: METHODOLOGY: DEMAND AND SUPPLY (cont’d) CONTENT 1. The concept of the market. 2. Equilibrium price, equilibrium quantity. 3. Use of demand and supply data to calculate equilibrium price and quantity. 4. Changes in conditions of supply and demand. 5. The effects of price ceilings and price floors on equilibrium. 6. (a)The effects of taxation and subsidies on market equilibrium. (b)The incidence of an indirect tax.

Suggested Teaching and Learning Activities To facilitate students’ attainment of the objectives of this Module, teachers are advised to engage students in the teaching and learning activities listed below. 1. For topic 1, Central Problem of Economics, let students provide examples from personal life, the home, firms and government to demonstrate opportunity cost and the production possibilities frontier (PPF). 2. For topic 2, Theory of Consumer Demand, let students derive their own schedule and plot the demand curve for commodities which they use in their everyday lives. 3.

For utility, use water or any other drink to show the different levels of satisfaction (utility). Use the data to derive total and marginal utility curves. 4. For the concept of elasticity, teachers may use two types of materials, one that could change in varying degrees and the other which remains the same regardless of circumstances. Teachers should then apply this concept to market conditions illustrating the concepts of elasticity and inelasticity. 5. For deadweight loss, teachers may use the graphs for consumer and producer surplus to show how market intervention may lead to loss welfare (deadweight loss). 6.

For stages of production, allow students to derive the total average and marginal product curves using simulated data. Use the results of the graphs to point out the different stages of production. An example is given below. UNIT 1 MODULE 1: METHODOLOGY: DEMAND AND SUPPLY (cont’d) GRAPH SHOWING THE STAGES OF PRODUCTION [pic] (i)Stage 1occurs up to the point where APPL is at its maximum. (ii)Stage 2 occurs from the point where APPL is at a maximum up to the point where MPPL is zero. In this stage new workers add to total physical output. (iii)Stage 3 occurs when MPPL is negative. The producer will operate in stage 2.

In stage 1 there is insufficient labour being used (up to the point where MPPL is at its maximum) and the output per worker is increasing. In stage 3 the producer gets no addition to total physical output from additional workers. It would be possible to have more total physical product with less labour applied to a fixed factor (say machinery). UNIT 1 MODULE 2: MARKET STRUCTURE, MARKET FAILURE AND INTERVENTION GENERAL OBJECTIVES On completion of this Module, students should: 1. appreciate the distinction between the different types of market structures; 2. develop awareness of the causes of market failure; . appreciate the measures that can be adopted to reduce or eliminate market failure; 4. appreciate the arguments which suggest that government intervention may not necessarily improve economic performance. SPECIFIC OBJECTIVES TOPIC 1: Market Structure Students should be able to: 1. outline the goals of the firm; 2. explain how firms measure profits; 3. explain the concepts of average, marginal and total revenue; 4. explain the concept of market structure; 5. outline the characteristics of the different market structures; 6. distinguish among the different market structures; 7. xplain the factors that influence the pricing and output decisions of the firm; 8. calculate measures of industrial concentration; 9. interpret measures of industrial concentration. UNIT 1 MODULE 2: MARKET STRUCTURE, MARKET FAILURE AND INTERVENTION (cont’d) CONTENT 1. Profit maximization, growth, satisficing, sales and revenue maximization, market dominance. 2. Total revenue, total cost, normal and economic (abnormal) profit. 3. Relationship between average, marginal and total revenue. 4. Types of market structures: perfect competition, monopoly including price discrimination, monopolistic competition, oligopoly and cartels. . Characteristics of the different market structures. a) barriers to entry; b) control over market and price; c) nature of the good; d) numbers of buyers and sellers; e) competitive behaviour and performance. 6. Focus on all characteristics of the different markets in addition to profit maximization. a) Examples of close approximations of market structures in the Caribbean. 7. Marginal cost and marginal revenue, total cost and total revenue, marginal cost pricing and average cost pricing. 8. Herfindahl Hirschman Index – the percentage of an industry’s output produced by its four largest firms (four-firm concentration ratio): pic] where si is the market share of firm i in the market, and n is the number of firms. 9. (a)Interpretation related to market structures. b) Limitations of measures of industrial concentration. UNIT 1 MODULE 2: MARKET STRUCTURE, MARKET FAILURE AND INTERVENTION (cont’d) SPECIFIC OBJECTIVES TOPIC 2: Market Failure Students should be able to: 1. explain the concept of economic efficiency; 2. distinguish among private goods, public goods and merit goods; 3. distinguish between social costs and private costs and social benefits and private benefits; 4. explain the concept of market failure; 5. explain what is meant by deadweight loss; . outline the causes of market failure. CONTENT 1. Inclusion of discussion of Pareto efficiency. 2. (a)Examples of private goods, public goods and merit goods. (b)Discussion of issues of rivalry and exclusion. 3. Social costs, private costs, social benefits, private benefits, external costs, external benefits. Use of graphical representations. 4. Divergence of social costs and social benefits and efficiency. Use of graphical representations. 5. Deadweight loss including verbal and graphical representations. 6. Causes of market failure: a) monopoly; b) public goods and merit goods; c) externalities: positive and negative;

UNIT 1 MODULE 2: MARKET STRUCTURE, MARKET FAILURE AND INTERVENTION (cont’d) d) divergence between social and private costs and social and private benefits; e) imperfect information; f) asymmetric information: adverse selection and moral hazard; g) open access to resources; h) lack of property rights (squatting, streams, ocean); i) non-existence of markets (for trading). SPECIFIC OBJECTIVES TOPIC 3: Intervention Students should be able to: 1. evaluate the measures used by government to correct market failure; 2. evaluate the measures used by the private sector to correct market failure. CONTENT 1.

Measures used by government to control market failure: a) -regulation; – anti-trust policy; – taxation; – privatisation and deregulation; – state ownership; – subsidies; – legislation; – market creation (tradable permits); b) pros and cons of government intervention; c) -merits and demerits; – effectiveness of intervention in Caribbean societies (effect of small size in relation to policy making). UNIT 1 MODULE 2: MARKET STRUCTURE, MARKET FAILURE AND INTERVENTION (cont’d) 2. Private Sector Intervention: (a)corporate code of conduct; (b)corporate social responsibility; (c)voluntary agreements; (d)corporate ethics.

Suggested Teaching and Learning Activities To facilitate students’ attainment of the objectives of this Module, teachers are advised to engage students in the teaching and learning activities listed below. 1. For price discrimination, teachers could identify the first, second and third degree price discrimination using different examples from students’ experiences. Teachers should then illustrate by use of diagrams. 2. For the kinked demand curve model, teachers may use the daily newspaper or mobile phone industry as examples. UNIT 1 MODULE 3: DISTRIBUTION THEORY GENERAL OBJECTIVES On completion of this Module, students should: . understand what accounts for the returns that accrue to the owners of the factors of production; 2. appreciate the issues surrounding poverty and the measures used to alleviate poverty; 3. develop skills in applying microeconomic analysis to critical social issues involving income inequality. SPECIFIC OBJECTIVES TOPIC 1: The Demand for and Supply of Factors Student should be able to: 1. explain the rewards of the factors of production; 2. explain the concept of derived demand; 3. outline the marginal productivity theory; 4. apply the marginal productivity theory to the demand for land, capital and labour; 5. nalyse the factors affecting the supply of land, capital and labour; 6. analyse the factors determining rent, interest and wages; 7. distinguish between transfer earnings and economic rent. CONTENT 1. Rent, interest, wages and profits. 2. Derived demand. 3. (a)The assumptions and limitations of Marginal Productivity Theory. (b)Marginal Physical Product, Marginal Revenue Product and their relationship. UNIT 1 MODULE 3: DISTRIBUTION THEORY (cont’d) 4. The value of the Marginal Product: a) land; b) labour; c) capital – using present value (use of graphical representation required). 5.

The fixity of land, the supply of loanable funds and the labour supply. 6. The demand for and supply of factors. 7. Numerical, graphical and verbal explanations of transfer earnings and economic rent. SPECIFIC OBJECTIVES TOPIC 2: Wage Differentials Student should be able to: 1. explain the concept of wage differentials; 2. analyse imperfections in the labour market; 3. analyse the effect of labour mobility on wages; 4. explain the concept of compensating wage differentials; 5. explain the role of Government, Trade Unions and Employers’ Associations in the pricing of labour. CONTENT 1.

Differences in wages within industries and among industries. 2. Imperfections on the demand side (for example, differences in marginal productivity) and on the supply side (for example, geographical immobility). 3. The mobility and immobility of labour; geographical (migration of workers), occupational. 4. Compensating (equalizing) differentials. UNIT 1 MODULE 3: DISTRIBUTION THEORY (cont’d) 5. The minimum wage rate; monopsonies; migration of workers; collective bargaining; trade union strategies, the role of employers’ associations; efficiency wage. SPECIFIC OBJECTIVES TOPIC 3: Income inequality, Poverty and Poverty Alleviation

Students should be able to: 1. differentiate between size and functional distribution of income; 2. explain the concept of income inequality; 3. explain the measures of income inequality; 4. explain the measures used to reduce income inequality; 5. distinguish between absolute and relative poverty; 6. outline factors that contribute to poverty; 7. explain why certain categories of people are more susceptible to poverty than others; 8. evaluate the different ways used to measure poverty; 9. outline strategies used by Governments to alleviate poverty; 10. analyse the economic costs of poverty; 1. assess the economic benefits of government intervention to alleviate poverty. CONTENT 1. Size and functional distribution of income. 2. How income is distributed. 3. Lorenz curve measurement of income inequality; and Gini coefficient (interpretation only). 4. Measures to reduce inequality: taxes, subsidies, transfers. UNIT 1 MODULE 3: DISTRIBUTION THEORY (cont’d) 5. Absolute versus relative poverty. 6. Factors that contribute to poverty including: a) social and physical environment; b) discrimination – gender, race; c) restrictions on certain economic activities; d) non-ownership of resources; ) family size; f) single parent; female- headed families. 7. Persons who are most susceptible to poverty: (a)people with special needs; i) physically challenged; ii) elderly; iii) youth; iv) single parent families; v) indigenous people; (b)reasons – Limited access to employment, level of training, legislation, availability of income to share among family. 8. Ways used to measure poverty: a) basic needs; b) poverty line; c) head count; d) UNDP Human Development Index (HDI). UNIT 1 MODULE 3: DISTRIBUTION THEORY (cont’d) 9. Strategies to alleviate poverty: a) transfer payments; b) free education and health care; ) housing; d) minimum wage legislation; e) equal employment opportunities; f) Government employment creation(special works programmes). 10. The cost of poverty, including: a) unemployed human resources; b) lower potential output; c) inefficient allocation of Government expenditure; d) social and environmental costs. 11. Economic benefits including: a) provision of education and health leading to development of human capital; b) improvement in well- being as measured by the UNDP (HDI); c) more equitable distribution of income. Suggested Teaching and Learning Activities

To facilitate students’ attainment of the objectives of this Module, teachers are advised to engage students in the teaching and learning activities listed below. 1. Use knowledge from topic 3, unit 1, Theory of Supply, to derive the demand curve for factors of production. 2. Teachers may use graphical representation of the Lorenz Curve to illustrate unequal distribution of income. Teachers should also relate the Lorenz Curve to the GINI coefficient. Also show the effect of taxes on the Lorenz Curve and the GINI coefficient. UNIT 2: MACROECONOMICS MODULE 1: MODELS OF THE MACROECONOMY

GENERAL OBJECTIVES On completion of this Module, students should: appreciate the notion of National Income accounting and the importance of these accounts for macroeconomic theory and policy; 1. understand the views of the classical keynesian and monetarists schools; 2. understand the factors that influence the level of investment in an economy. SPECIFIC OBJECTIVES TOPIC 1: National Income Accounting Students should be able to: 1. explain the circular flow of income; 2. explain the concept of National Income Accounting; 3. explain the different ways of deriving National Income Accounts; 4. nterpret National Income statistics; 5. use National Income accounts to analyze the performance on an economy as a whole; 6. derive real GDP from nominal GDP; 7. explain the limitations of GDP. CONTENT 1. Economic agents. 2. Gross Domestic Product (GDP),Gross National Product (GNP) and other measures. 3. Calculation of GDP, GNP and their components (personal income, disposable income), Net National Income (NNI), and per capita income; avoidance of double counting. UNIT 2 MODULE 1: MODELS OF THE MACROECONOMY (cont’d) 4. Total measures: a) GDP at market prices; b) GDP at factor costs. 5.

Use of National income accounts to measure economic performance over time and to make inter-country comparisons. 6. Calculation of real and nominal GDP using the price deflator. 7. Limits of National Income Accounts as a measure of well-being: a) non-inclusion of the informal sector (the underground economy, illegal activities); b) non-payment for do-it-yourself activities; c) non-accounting for externalities, environmental degradation (Green GDP); d) the fact that it measures changes in the value of output but not changes in the quality of life. SPECIFIC OBJECTIVES TOPIC 2: Classical models of the Macroeconomy

Students should be able to: 1. explain why within the classical model, all employment is voluntary; 2. explain how full employment is restored in the classical model; 3. explain the factors that influence aggregate demand; 4. explain the factors that influence aggregate supply; 5. interpret the classical long run supply curve; 6. explain price level determination within the classical model; 7. use the classical aggregate demand and supply model to show changes in the price level and employment. UNIT 2 MODULE 1: MODELS OF THE MACROECONOMY (cont’d) CONTENT 1. Flexibility of wages and prices. 2.

The role of wage price and interest rate flexibility. 3. The factors that influence aggregate demand: a) consumer spending; b) investment spending; c) Government spending; d) net export spending. 4. Factors that influence aggregate supply including changes in input prices and incomes. 5. The assumptions of the vertical aggregate supply curve. 6. The interaction of the classical aggregate demand and supply curves. 7. Shifts in the aggregate demand and aggregate supply curves. SPECIFIC OBJECTIVES TOPIC 3: Basic Keynesian Models Students should be able to: 1. explain the consumption function; 2. xplain the relationship between saving and consumption; 3. calculate the simple multiplier; 4. explain the effect of changes in investment on national income; 5. explain the effect of government spending on national income; 6. describe the effect of withdrawals and injections on national income; UNIT 2 MODULE 1: MODELS OF THE MACROECONOMY (cont’d) 7. explain the relationship between net exports and national income; 8. determine the equilibrium level of national income; 9. explain inflationary and deflationary gaps. CONTENT 1. Autonomous and induced consumption. 2. (a)Income = consumption plus saving. b)marginal propensity to consume and save. (c)average propensity to consume and save. 3. Simple multiplier [pic]. 4. Relationship between changes in investments and national income. 5. Government’s expenditure and its effects on national income. 6. (a)Concepts of injections and withdrawals in an economy. (b)The effect of injections and withdrawals on national income. (c)Small multipliers in the Caribbean context due to leakages. 7. (a)Relationship between net exports (x – m) and national income. b) Exports as an injection and imports as a withdrawal. 8. Determination of equilibrium income using: a) 45 o line or E=Y; ) withdrawals and injections approach; c) the Keynesian aggregate demand and supply curves (long run and short run). UNIT 2 MODULE 1: MODELS OF THE MACROECONOMY (cont’d) 9. (a)Full employment level of output. (b)Actual level of output. (c)Equilibrium level of national income could be either below, at or above potential level of output. SPECIFIC OBJECTIVES TOPIC 4: Investment Students should be able to: 1. explain the concept of investment; 2. differentiate between the investment demand curve and the investment curve; 3. explain the accelerator theory; 4. outlinethe factors that account for the volatility of investment.

CONTENT 1. Investment (induced and autonomous). 2. (a)Marginal efficiency of capital (investment demand as a function of expected rate of return). b) Marginal efficiency of investment (non-interest rates as determinants of investment demand, taxes, costs, stock of capital goods on hand expectations). 3. Accelerator theory of investment. 4. Determinants of investment: a) The accelerator; b) Durability; c) Irregularity of innovation; d) Variability of profits, expectations and interest rates. UNIT 2 MODULE 1: MODELS OF THE MACROECONOMY (cont’d) Suggested Teaching and Learning Activities

To facilitate students’ attainment of the objectives of this Module, teachers are advised to engage students in the teaching and learning activities listed below. 1. For topic 1, teachers should pay special attention to the rules of accounting working from the GDP down to consumption and savings. Teachers should also deal with the concepts such as market price and factor costs, as well as real GDP and normal GDP. Make use of the circular flow diagram from the closed economy to the open economy. 2. For topic 2, Classical Models of the Macroeconomy, teachers should use graphs to emphasize flexibility and the automatic return to equilibrium. . For topic 3, teachers could demonstrate the operation of the multiplier by using data to show the successive rounds of spending. Calculations and graphical representations of the multiplier are required. 4. Use the 45° line and average demand and average supply to show inflationary and deflationary gaps. 5. For topic 4, Investment, teachers may use tables to illustrate and explain the accelerator, that is, the necessity to increase expenditure, constantly, for investment. UNIT 2 MODULE 2: MACROECONOMIC PROBLEMS AND POLICIES GENERAL OBJECTIVES On completion of this Module, students should: nderstand the reasons why an economy may be characterised by unemployment and how intervention may be used to improve economic performance; appreciate the role of the Central Bank in the economy; understand monetary and fiscal policy and their applications; understand the nature and burden of the national debt. SPECIFIC OBJECTIVES TOPIC 1: Unemployment and Inflation Students should be able to: 1. explain what is meant by the labour force; 2. explain the unemployment rate; 3. distinguish between unemployment and underemployment; 4. evaluate the costs of unemployment; 5. explain the causes of unemployment; 6. valuate the policies used to reduce unemployment; 7. explain the causes of inflation; 8. distinguish between real and nominal variables; 9. explain how inflation is measured; 10. explain the causes of inflation; 11. evaluate the effects of inflation; UNIT 2 MODULE 2: MACROECONOMIC PROBLEMS AND POLICIES (cont’d) 12. evaluate the policies used to combat inflation; 13. explain the relationship between the unemployment rate and inflation. CONTENT 1. Employed and unemployed. 2. The unemployment rate. 3. Unemployment and underemployment. 4. The effect on output, income and growth: additional financial burden on the state; social costs. . Labour immobility, other market imperfections, structural changes in the economy, inadequate aggregate demand, increase in labour force participation rate, seasonality, intervention. 6. Fiscal policy, monetary policy, wage subsidies, retraining programmes, investment tax credit, employment tax credit, government employment programmes, reducing market imperfections. 7. Inflation: general price level. 8. Real and money wages: a) real and nominal GDP; b) real and nominal interest rate. 9. The GDP deflator; the retail price index; the producer price index. Calculations and limitations of the indices. 10.

Demand shocks, supply shocks, increase in the money supply growth rate. 11. The costs and benefits of inflation: the impact of redistribution of wealth; impact of business activity and growth, impact on the balance of payments. 12. Income policy, monetary policy, fiscal policy and supply side measures. 13. Trade-off between inflation and the rate of unemployment: Phillips curve – stagflation. UNIT 2 MODULE 2: MACROECONOMIC PROBLEMS AND POLICIES (cont’d) SPECIFIC OBJECTIVES TOPIC 2: Monetary Theory and Policy Students should be able to: 1. explain the concept of money; 2. outline the functions of money; 3. explain the demand for money; . explain the supply of money; 5. explain monetary policy; 6. explain how the money supply is controlled; 7. explain how money is created in the banking system; 8. explain why residents substitute foreign for domestic currency; 9. explain the Quantity Theory of Money; 10. outline the types of monetary policy; 11. describe the effects of monetary policy on national income; 12. evaluate the limitations of monetary policy. CONTENT 1. (a)The meaning of money. (b)Types of money: token and commodity. 2. Functions of money. 3. (a)Liquidity Preference Theory. (b)Motives for holding money (transactions, precautionary, speculative). UNIT 2

MODULE 2: MACROECONOMIC PROBLEMS AND POLICIES (cont’d) 4. The money supply (M1, M2). 5. Monetary policy – expansionary and contractionary policies. 6. (a)The role of the central bank in creating high-powered money (monetary base). (b)Instruments of monetary control: i) open market operations; ii) discount rates; iii) financing fiscal deficits; iv) reserve requirements; v) moral suasion; vi) interest rates. 7. (a)Excess reserves. (b)Credit creation. (c)The money multiplier. 8. The nature of currency substitution and hoarding. 9. The Quantity Theory of money. 10. (a)Tight monetary policy (inflation). (b)Easy monetary policy (unemployment). c)Balance of payments. 11. How monetary policy affects national income. 12. Limitations of monetary policy including the fact that it is: a) permissive, not compelling and only creates the environment; UNIT 2 MODULE 2: MACROECONOMIC PROBLEMS AND POLICIES (cont’d) b) difficult to control the money supply of foreign-owned commercial banks; c) difficult to eliminate lags in monetary policy; d) weakened by fiscal indiscipline. SPECIFIC OBJECTIVES TOPIC 3: Fiscal Policy Students should be able to: 1. explain the concept of fiscal policy; 2. outline the goals of fiscal policy; 3. explain the nature of the budget; 4. xplain the balanced budget multiplier; 5. outline methods of financing budget deficits; 6. evaluate the limitations of fiscal policy; 7. distinguish between discretionary and non-discretionary fiscal policy. CONTENT 1. The meaning of fiscal policy. 2. Fiscal policy as a means of addressing: a) aggregate demand; b) unemployment; c) inflation; d) balance of payments. UNIT 2 MODULE 2: MACROECONOMIC PROBLEMS AND POLICIES (cont’d) 3. The nature of the budget: a) taxation, revenue, transfer, expenditure; b) budget surplus and budget deficit; c) balanced budget. 4. Explanation of the balanced budget multiplier. 5.

Methods of financing budget deficits including external and domestic borrowing. 6. Lags and potency of fiscal policy. 7. (a)Expansionary and contractionary. (b)Automatic stabilizers. Specific objectives TOPIC 4: Public Debt Students should be able to: 1. explain the national debt; 2. explain the cause of the national debt; 3. evaluate the effects of the national debt on the economy; 4. explain the burden of the national debt; 5. evaluate ways of reducing the debt burden; 6. interpret the debt service ratio; 7. calculate the debt service ratio. UNIT 2 MODULE 2: MACROECONOMIC PROBLEMS AND POLICIES (cont’d) CONTENT 1. The national debt: ) stock/flow; b) fiscal indiscipline; c) domestic and foreign debt. 2. The causes of the national debt. 3. The effects of the national debt on the economy: a) output and investment decisions; b) exchange rate pressures; c) inflation; d) crowding out and crowding in. 4. The responsibility for debt repayment. 1. Management of the national debt: a) internal and external borrowing; b) taxation; c) debt rescheduling; d) debt forgiveness. 2. Interpretation of the debt service ratio. 3. Calculation of the debt service ratio (principal plus interest as a percentage of export). UNIT 2 MODULE 2: MACROECONOMIC PROBLEMS AND POLICIES (cont’d)

Suggested Teaching and Learning Activities To facilitate students’ attainment of the objectives of this Module, teachers are advised to engage students in the teaching and learning activities listed below. 1. For topic 1, Unemployment and Inflation, teachers should use the Phillips Curve to show the relationship between the unemployment rate and inflation rate. 2. For topic 2 (money multiplier), show the various rounds in the money expansion process as done in the multiplier. Use Central Bank Acts and Reports for data gathering. 3. For fiscal policy, there is no need for students to derive the balanced budget multiplier.

This should only be explained. 4. Teachers should emphasize the causes of the national debt and the burden it places on future generations. UNIT 2 MODULE 3: GROWTH, SUSTAINABLE DEVELOPMENT AND GLOBAL RELATIONS GENERAL OBJECTIVES On completion of this Module, students should: 1. understand the basic concepts of growth and development; 2. understand the impact of imports and exports on the macroeconomy; 3. understand the balance of payments accounts and appreciate the causes and consequences of balance of payments crises; 4. become aware of the benefits and costs derived from current integration arrangements, such as CARICOM, FTAA and the EU; . understand the role and functions of international economic institutions. SPECIFIC OBJECTIVES TOPIC 1: Growth and Sustainable Development Students should be able to: 1. distinguish between growth and development; 2. explain the concept of sustainable development; 3. outline the factors that determine growth; 4. outline the factors that contribute to sustainable development; 5. explain the concept of human development; 6. anaylse the structural characteristics of Caribbean economies; 7. analyse the impact of the region’s structural characteristics on sustainable economic development. UNIT 2

MODULE 3: GROWTH, SUSTAINABLE DEVELOPMENT AND GLOBAL RELATIONS (cont’d) CONTENT 1. Differences between growth and development. 2. Current growth versus the well-being of future generations. 3. Differences between exogenous (technical change) and endogenous growth (capital accumulation, human capital). 4. Economic, social and environmental factors. 5. Indices of human development including mortality rates, literacy, per capita income, life expectancy. 6. Structural characteristics of Caribbean economies including: a) small size; b) openness; c) composition of exports; d) resource base; e) poverty; f) economic dependence. . Implications for regional economies: a) dependence on aid; b) preferential trade agreements; c) foreign direct investment (FDI); d) vulnerability to natural and man-made change; e) changes in world prices. UNIT 2 MODULE 3: GROWTH, SUSTAINABLE DEVELOPMENT AND GLOBAL RELATIONS (cont’d) SPECIFIC OBJECTIVES TOPIC 2: International Trade Students should be able to: 1. analyse the role of imports and exports in a small open economy; 2. outline the factors that influence exports and imports; 3. explain the effects of foreign exchange earnings on a small open economy; 4. explain the theory of comparative advantage; 5. valuate the arguments for protection; 6. evaluate the arguments for Trade Liberalisation; 7. outline methods of trade protection; 8. explain the commodity, terms of trade; 9. interpret changes in the commodity terms of trade; 10. calculate the commodity, terms. CONTENT 1. The role of exports in creating domestic income and the role of imports in generating income for foreigners. 2. The factors which determine exports and imports including: a) international price; b) domestic production; c) domestic prices and exchange rates; d) international economic activity as it affects the tourism market in the Caribbean; UNIT 2

MODULE 3: GROWTH, SUSTAINABLE DEVELOPMENT AND GLOBAL RELATIONS (cont’d) e) shifts in international demand and the emergence of substitutes; f) changes in International Income. 3. Foreign exchange earnings from exports: a) access to capital goods; b) the export multiplier; c) access to consumer goods; d) increased domestic production. 4. The theory of comparative advantage. 5. Arguments for protection including: a) infant industries; b) employment; c) food security. 6. Arguments for Trade Liberalisation including access to technology, availability of cheaper goods and services. Application of the theory of comparative advantage. . Methods of protection including: tariffs, quotas and other non-tariff methods. 8. Explanation of the commodity terms of trade. 9. Interpretation of changes in the commodity terms of trade. 10. Export price index divided by import price index multiplied by 100. UNIT 2 MODULE 3: GROWTH, SUSTAINABLE DEVELOPMENT AND GLOBAL RELATIONS (cont’d) SPECIFIC OBJECTIVES TOPIC 3: Balance of Payments and Exchange Rates Students should be able to: 1. explain the balance of payments; 2. distinguish between the current account and capital account; 3. analyze the causes and consequences of balance of payments disequilibria; 4. utline the policy measures for correcting balance of payments disequilibria; 5. explain exchange rates; 6. explain exchange rates determination; 7. distinguish between fixed and floating exchange rate regimes; 8. describe the effects of the exchange rate changes. CONTENT 1. Explanation of the balance of payments. 2. Capital items and current items. 3. The causes and consequences of balance of payments – disequilibria. 4. Policy responses to balance of payments crises including: a) devaluation; b) expenditure switching; c) expenditure reducing measures. 5. Explanation of exchange rates. 6.

Determination of exchange rates. UNIT 2 MODULE 3: GROWTH, SUSTAINABLE DEVELOPMENT AND GLOBAL RELATIONS (cont’d) 7. Fixed and floating exchange rate systems (fixed, free floating and managed float). 8. The effects of exchange rate changes. SPECIFIC OBJECTIVES TOPIC 4: Economic Integration Students should be able to: 1. explain the main forms of economic integration; 2. evaluate the costs and benefits of economic integration; 3. evaluate the objectives of Caribbean integration; 4. analyse the implications of international integration arrangements for Caribbean economies. CONTENT 1. Main forms of economic integration, including: ) free trade area; b) customs union; c) common market; d) economic union. 2. The costs and benefits of economic integration including trade creation and trade diversion. 3. The objectives of CARICOM and the rationale for the CARICOM Single Market and Economy (CSME). 4. The significance of integration movements, for example European Union (EU) and the North American Free Trade Agreement (NAFTA) for Caribbean Economies. UNIT 2 MODULE 3: GROWTH, SUSTAINABLE DEVELOPMENT AND GLOBAL RELATIONS (cont’d) SPECIFIC OBJECTIVES TOPIC 5: International Economic Relations Students should be able to: 1. xplain the role and functions of the World Trade Organisation (WTO); 2. explain the role of international financial institutions (IFI’s); 3. explain the term multinational (transnational) corporation; 4. explain the nature of foreign direct investment; 5. outline the potential benefits and disadvantages of foreign direct investment; 6. explain the term globalisation; 7. describe the factors responsible for globalisation; 8. evaluate the effects of globalisation on developing countries. CONTENT 1. The role and functions of the WTO. 2. The role of the IMF and World Bank in the International Financial System. . Explanation of multinational (transnational) corporation. 4. The nature of foreign direct investment. 5. Potential benefits and disadvantages, including: a) access to technology and capital; b) access to markets; c) access to management skills; d) repatriation of profits; UNIT 2 MODULE 3: GROWTH, SUSTAINABLE DEVELOPMENT AND GLOBAL RELATIONS (cont’d) e) transfer pricing; f) crowding out of domestic businesses. 6. The concept of globalisation. 7. Forces driving globalisation, for example, technological innovation, trade liberalisation, and liberalisation of capital markets. 8.

Implications of globalisation for developing countries with particular reference to the greater Caribbean (greater competition, access to markets, access to technology, cheaper prices and greater variety of goods, loss of preferential markets). Suggested Teaching and Learning Activities To facilitate students’ attainment of the objectives of this Module, teachers are advised to engage students in examining the structure of the economies of the Caribbean and the problems of imports and exports using international partnership agreements and policies. Teacher should ensure that students could distinguish among; ) Terms of Trade; b) Balance of Trade; and c) Balance of Payments. ? OUTLINE OF ASSESSMENT Each Unit of the syllabus will be assessed separately. The same scheme of assessment will be applied to each Module in each Unit. Grades will be awarded independently for each Unit. Candidate assessment on each Unit will comprise two components: i) External Assessment undertaken at the end of the academic year in which the Unit is taken. This component contributes 80% to the candidate’s overall grade. ii) Internal Assessment undertaken throughout the course of the Unit. This contributes 20% to the candidate’s overall grade. EXTERNAL ASSESSMENT | (80%) | |Paper 01 |Forty-five multiple-choice items, fifteen (15) on each Module. |30% | | |(1 hour 30 minutes) | | | | |Paper 02 |The paper consists of three (3) sections comprising six (6) questions spread across |50% | | |(2 hours 30 minutes) |all Modules in the Unit.

Each section contains two (2) essay type questions from which| | | | |candidates are required to attempt one (1). | | | | | | |INTERNAL ASSESSMENT FOR EACH UNIT | | |

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Discussion Questions Week 1 Economics 365

Discussion Questions Week One Economics 365 TEAM C- WEEK ONE DISCUSSION QUESTIONS 1. What is economics? What role does economics play in your personal and organizational decisions? Provide an example of the role of economics in decision making. (Ana K Gonzalez) * According to “What Is Economics? A Definition Of Economics” (2012): * Economics is the study of the production and consumption of goods and the transfer of wealth to produce and obtain those goods. Economics explains how people interact within markets to get what they want or accomplish certain goals.

Since economics is a driving force of human interaction, studying it often reveals why people and governments behave in particular ways. There are two main types of economics: macroeconomics and microeconomics. Microeconomics focuses on the actions of individuals and industries, like the dynamics between buyers and sellers, borrowers and lenders. Macroeconomics, on the other hand, takes a much broader view by analyzing the economic activity of an entire country or the international marketplace (Para. 2 & 3). Economics play an important role in all aspects of life and sometimes people don’t realize that they are using economics day by day.

With the use of economics people can understand how to spend time and money. Unemployment, technological progress, interest rates and budget deficits are important issues presented in our daily personal and professional lives. As students, economics can help us to acquire more knowledge about what kind of difficulties business in our region presents, how to solve it, and the difference procedures to follow to succeed as a business holder. 2. What is the difference between a movement along and a shift of the demand curve?

What is the effect on the equilibrium price and quantity that results from an increase in demand, supply, and both? Provide examples for each instance. What is the role of supply and demand in decision making? Provide a real-world example. (Sonia Elias) The difference between a movement along and a shift of the demand curve in the movement along is caused by a change in the price of goods or services performed and a shift of the demand curve is caused because a change in any non-price determining on the demand and it can change to both side the right or the left.

The effect in the equilibrium price and quantity that result from the increase in demand is the price goes up because of the demand of the product is more and also the quantity has its effect because with more demand it requires more quantity on the product. A good example is the petroleum now its price is going up because of the demand it is suffer. The role of the supply and demand takes the role of decide how much quantity will require to provide the costumers with their demands on a certain product; it makes the decision of require more quantity of products to supply the costumers. . What is the definition of price elasticity of demand? What is the relationship between price elasticity of demand and total revenue? How does price elasticity of demand affect a firm’s pricing decisions? How does the availability of substitutes affect the price elasticity of demand? Provide an example. (Chuck Crain) By definition, price elasticity simply means the way demand responds to price changes. The relationship between price elasticity and total revenue can be a very successful one or a total nightmare based on whether or not the product has good elasticity.

As long as the product is something the general public either needs or is very high on their want list, then the product has good elasticity and the profits will continue to increase, thus making total revenue much greater. However, if the product is something society can live without, then the product has bad elasticity and total revenue will go down. When a firm decides to make or sell a product, many considerations go into their long term plans, such as will this product stand the test of time and will it be profitable even in tough financial cycles.

As long as the product has good price elasticity and the competition is low, then prices can be adjusted to meet the current market price or to increase revenues. However, if the product has a bad elasticity, then the business will have to decide on whether or not to raise prices, but this decision could cost the company money now and in the future because the customers chose not to pay a higher price. When people want a similar product without the high price, they turn to substitutes.

This can include any generic brands of products that provide close to the same experience for the customer, without the higher price of their original brand. Substitutes greatly affect the elasticity of price, because people can choose to buy another product at a lower price, and basically get the same results from the product. An example would be if a person loves to drink Coke, but can’t afford the price they charge.

The person would turn to a cheap brand such as Sam’s Cola and receive basically the same benefit, without spending the extra money. * Reference Principles of Macroeconomics. (2009). Retrieved from http://ocw. mit. edu/courses/economics/14-02-principles-of-macroeconomics-fall- 2009/ What is Economics? A Definition of Economics. (2012). Retrieved from http://www. whatiseconomics. org/ Why is economics considered social science?. (2012). Retrieved from http://wiki. answers. com/Q/Why_is_economics_considered_social_science

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Quiz Essay Questions Economics

CHAPTER 12 Fiscal Policy A. Short-Answer, Essays, and Problems 1. Give a brief definition of fiscal policy? What are its economic goals? 2. What is the Council of Economic Advisers? 3. “The Employment Act of 1946 is no more than a vague and ill-defined commitment by the Federal government to assist in the achievement of full employment. ” Do you agree? Explain. 4. Explain the effect of a discretionary cut in taxes of $40 billion on the economy when the economy’s marginal propensity to consume is . 75.

By how much is output likely to expand if the economy is operating in the horizontal range of its aggregate supply curve and there are no complications to this fiscal policy? How does this discretionary fiscal policy differ from a discretionary increase in government spending of $40 billion? 5. Explain the effect of a discretionary increase in government spending of $50 billion on the economy when the economy’s marginal propensity to consume is . 75. By how much is output likely to expand if the economy is operating in the horizontal range of its aggregate supply curve and there are no complications to this fiscal policy? . Explain the aspects of expansionary and contractionary fiscal policy. During which phases of the business cycle would each be appropriate? 7. Differentiate between discretionary fiscal policy and nondiscretionary or built-in stabilization policy. 8. Describe two ways the Federal government can finance a deficit and explain which would have the more expansionary effect. 9. Describe two ways the Federal government could retire debt in the event of a budget surplus and explain which would have the most contractionary impact. 10. What is the anti-inflationary or contractionary effect of a budget surplus? 11.

Explain how a small budget surplus could actually be somewhat expansionary rather than contractionary. 197 Chapter 12 New 12. Comment on the statement: “Increasing government spending is preferred to a cut in taxes when the U. S. government seeks to fight a recession. ” 13. Explain what is meant by a built-in stabilizer and give two examples. 14. “The more progressive a tax system, the greater is the economy’s built-in stability. ” Explain this statement for both recessionary and peak phases of the business cycle. 15. Explain how the below graph illustrates the built-in stability of a progressive tax structure. 6. In Year 1, the full-employment budget showed a deficit of about $100 billion and the actual budget showed a deficit of $150 billion one year. In Year 2, the full employment budget showed a deficit of about $125 billion and the actual budget showed a deficit of $150 billion. Based on these data, what can be concluded about the direction of fiscal policy? 17. What is the difference between the actual deficit, the full-employment deficit, and the cyclical deficit? 18. What does the “full-employment budget” measure and of what significance is this concept? 19.

Complete the table below by stating whether the direction of discretionary fiscal policy was contractionary (C), expansionary (E), or neither (N), given the hypothetical budget data for an economy. 198 Fiscal Policy (2) (3) Actual budget deficit (–) or Full-employment budget Yearsurplus (+)deficit (–) or surplus (+) fiscal policy 1 2 3 4 5 6 – 3. 9% – 4. 5 – 4. 7 – 3. 9 – 2. 9 – 2. 2 – 2. 1% – 2. 6 – 3. 0 – 2. 6 – 2. 0 – 1. 9 (1) (4) Direction of _____ _____ _____ _____ _____ 20. In what fundamental way do the spending-taxation decisions of government differ from the consumption-saving plans of households?

Why is this difference significant? New 21. Comment on the statement: “Discretionary fiscal policy offers an ideal approach to dealing with the nation’s economic problems. It is without problems, criticisms, or complications. ” New 22. Explain the six problems, criticisms, or complications that arise in the implementation of fiscal policy. New 23. Explain the problems giving rise to this statement: “You would think the government would want to do something to improve economic conditions when the economy is in trouble, but the government is slow to act. New 24. How do expectations about the future by households and businesses affect the effectiveness of fiscal policy? Cite examples. 25. “If economic forecasting was a more exact science, the business cycle could be entirely corrected by fiscal measures. ” Do you agree? 26. Explain the crowding-out effect. 27. Using the below graph, illustrate the possible impact of a crowding-out effect of a fiscal policy by drawing in the relevant aggregate demand shifts. Label and explain any shifts in the demand curve shown. 199 Chapter 12 28.

Explain how the net-export effect would reduce the effectiveness of fiscal policy. New 29. What fiscal policy is most likely to be invoked during a period of recession and high unemployment? A period of rapid inflation? What political, investment, and international problems might the U. S. Congress encounter in enacting these policies and putting them into effect? 30. (Last Word) What is the purpose of the Conference Board’s index of leading economic indicators? 31. (Last Word) Why is the index of leading economic indicators a composite index of ten economic statistics and not just one? 00 Fiscal Policy B. Answers to Short-Answer, Essays, and Problems 1. Give a brief definition of fiscal policy? What are its economic goals? Fiscal policy is the use of the federal budget to achieve full employment, control inflation, and stimulate economic growth. The changes to the federal budget can be made through increases or decreases in government spending or through increases or decreases in tax revenues. [text: E p. 214; MA p. 214]. 2. What is the Council of Economic Advisers?

The Council of Economic Advisors is responsible for assisting and advising the president on economic affairs. One of its principal responsibilities is to prepare an annual report for the president that is submitted to Congress that describes the state of the economy and recommends economic policies to achieve full employment, control inflation, and encourage economic growth. [text: E pp. 214-215; MA pp. 214-215]. 3. “The Employment Act of 1946 is no more than a vague and ill-defined commitment by the Federal government to assist in the achievement of full employment. Do you agree? Explain. To agree with this statement does not diminish the importance of the Employment Act of 1946. The Constitution has also been called vague and ill-defined, but that does not diminish its importance. This act committed the Federal government to following policies which would attempt to stabilize prices and promote full employment and established the CEA and JEC to assist in this task. While specific policies were not outlined, the intention of the act is clear it is a responsibility of the Federal government to assist in this effort.

That had not been an explicit on-going policy before 1946. [text: E p. 214; MA p. 214] 4. Explain the effect of a discretionary cut in taxes of $40 billion on the economy when the economy’s marginal propensity to consume is . 75. By how much is output likely to expand if the economy is operating in the horizontal range of its aggregate supply curve and there are no complications to this fiscal policy? How does this discretionary fiscal policy differ from a discretionary increase in government spending of $40 billion? If MPC is . 75, the multiplier is 4.

A tax cut of $40 billion will result in initial increase in consumption of $30 billion (. 75 ? $40 billion). This initial increase in spending will ultimately result in an increase in consumption spending of $120 billion because of the multiplier process. In contrast, an initial increase in government spending of $40 billion will ultimately increase consumer spending by $160 billion (4 ? $40) because none of the initial increase is siphoned off as savings as would be the case with a $40 billion tax cut. [text: E pp. 215-216; MA pp. 215-216] 5.

Explain the effect of a discretionary increase in government spending of $50 billion on the economy when the economy’s marginal propensity to consume is . 75. By how much is output likely to expand if the economy is operating in the horizontal range of its aggregate supply curve and there are no complications to this fiscal policy? If MPC is . 75, the multiplier is 4. An initial increase of $50 billion government spending will result in a total increase in output of $200 billion. [text: E pp. 215-216; MA pp. 215-216] 6. Explain the aspects of expansionary and contractionary fiscal policy.

During which phases of the business cycle would each be appropriate? 201 Chapter 12 Expansionary fiscal policy refers to increases in government spending or decreases in taxes or both, so that the net effect on aggregate demand is an increase in net government spending. Contractionary fiscal policy is the opposite: an increase in taxes or decrease in government spending or both, so that the net effect on aggregate demand is a decrease in net government spending. Expansionary policy would most likely be used during a recession (or trough) phase.

A contractionary policy would most likely be employed near the peak of the business cycle as the economy reaches full-employment GDP and the potential for inflation accelerates. [text: E pp. 215-217; MA pp. 215-217] 7. Differentiate between discretionary fiscal policy and nondiscretionary or built-in stabilization policy. Discretionary fiscal policy is the deliberate manipulation of taxes and government spending by the Congress to alter real domestic output and employment, to control inflation, and to stimulate economic growth during a particular period of time.

Nondiscretionary fiscal policy, on the other hand, is the change in government expenditures or taxes which occurs automatically as a result of existing laws. In particular, personal income taxes have progressive rates and will slow spending and inflation as GDP expands; when GDP declines, taxes will decrease by a more than proportionate amount allowing incomes and spending to decline at a slower rate than GDP. There are also many transfer payment programs which become effective when incomes decline or unemployment occurs to reduce the decline in disposable income.

Conversely, these programs automatically are reduced when the economy expands and unemployment declines and spending increases. [text: E pp. 215, 219-220; MA pp. 215, 219-220] 8. Describe two ways the Federal government can finance a deficit and explain which would have the more expansionary effect. The government can borrow money from the private sector in which case it will be competing with private business borrowers for funds. If planned investment spending is “crowded out,” the impact of expansionary deficits will be offset by the decline in investment spending.

The government can also finance a deficit by issuing new money which essentially means that the Federal Reserve has financed the deficit. This type of financing would be more expansionary than borrowing from the private sector. [text: E pp. 217-218; MA pp. 217-218] 9. Describe two ways the Federal government could retire debt in the event of a budget surplus and explain which would have the most contractionary impact. The government could use a budget surplus to pay off existing debt which would “recycle” funds back into the economy and potentially offset the decline in government spending.

Alternatively, the government could impound the surplus funds, or allow them to stand idle, which means these funds are not injected into the economy and would have a more contractionary effect than the first alternative. [text: E p. 218; MA p. 218] 10. What is the anti-inflationary or contractionary effect of a budget surplus? The anti-inflation effect of a budget surplus depends on what the government does with the surplus. The budget surpluses may be used for debt reduction. In this case, bonds 202 Fiscal Policy are bought back by the government and money is pumped back into the economy.

Interest rate will tend to fall, and this may increase consumer and investment spending, thus offsetting some of the contractionary effect of the budget surplus. The government may also impound funds (not spend them). This action will be more contractionary because it actually removes spending from the economy that would have been spent otherwise. [text: E p. 218; MA p. 218] 11. Explain how a small budget surplus could actually be somewhat expansionary rather than contractionary. This could be the unlikely result of what the government decides to do with the surplus.

If it is used to retire existing debt, then the surplus is pumped right back into the economy and with the multiplier effect this additional liquid wealth in the hands of individuals could lead to an increase in aggregate demand and GDP. [text: E p. 218; MA p. 218] New 12. Comment on the statement: “Increasing government spending is preferred to a cut in taxes when the U. S. government seeks to fight a recession. ” The statement is a normative one. Either action, increased government spending or taxation, can be use to fight a recession. The policy choice will depend on the preferences of the individual.

Those individuals who want to fight a recession with an increase in government spending may want to preserve the size of government in the economy and have specific government programs they would like to see funded. Those individuals who prefer a tax cut may want to reduce the size of government and give people more money and the freedom to spend it as they chose. [text: E p. 218; MA p. 218] 13. Explain what is meant by a built-in stabilizer and give two examples. Built-in stabilizers are changes in tax revenues or government spending which occur automatically during different phases of the business cycle.

For example, the progressive income tax will dampen any expansion of aggregate demand in the recovery peak phases; and will dampen any decline in income and aggregate demand during a recession as taxes are automatically reduced by a greater proportion than the decline in personal income. There are also government spending programs which increase during recessionary periods automatically as incomes decline or are lost. The so-called “safety net” programs include unemployment compensation, welfare programs, and food stamp spending.

These spending programs are automatically reduced during a recovery peak phase which would dampen aggregate demand and inflationary pressures automatically. [text: E pp. 218-219; MA pp. 218-219] 14. “The more progressive a tax system, the greater is the economy’s built-in stability. ” Explain this statement for both recessionary and peak phases of the business cycle. A progressive tax would take a progressively greater proportion of rising incomes during the peak phase of the business cycle which means it would dampen spending increases and aggregate demand which, in turn, reduces inflationary pressures.

On the other hand, a progressive tax would take proportionately less away from declining incomes during a recessionary phase allowing disposable income to fall less rapidly than real GDP. Therefore, aggregate demand would decline less rapidly than GDP and the magnitude of the spending decline that might occur in the absence of the tax would be reduced. [text: E pp. 219-220; MA pp. 219-220] 203 Chapter 12 15. Explain how the below graph illustrates the built-in stability of a progressive tax structure. The graph illustrates how net taxes are negative as GDP declines which will add to aggregate demand.

When GDP expands, tax revenues increase which dampens aggregate demand. [text: E pp. 219-220; MA pp. 219-220] 16. In Year 1, the full-employment budget showed a deficit of about $100 billion and the actual budget showed a deficit of $150 billion one year. In Year 2, the full employment budget showed a deficit of about $125 billion and the actual budget showed a deficit of $150 billion. Based on these data, what can be concluded about the direction of fiscal policy? Fiscal policy was expansionary because the full-employment budget deficit increased from one year to the next.

The actual deficit is composed of the full-employment portion and the cyclical portion. The full-employment portion of the actual budget deficit rose from $100 to $150 billion. The cyclical portion is determined by taking the actual deficit and subtracting the cyclical portion from it. The cyclical portion of the actual deficit fell from $50 billion to $25 billion. The actual budget deficit did not change, but it does not provide a good indication of the direction of fiscal policy. Only the full-employment budget tells the direction of fiscal policy. text: E pp. 220-221; MA pp. 220-221] 17. What is the difference between the actual deficit, the full-employment deficit, and the cyclical deficit? The actual budget deficit for any year consists of the full-employment and the cyclical deficit. The full-employment deficit is the difference between government expenditures and tax collections which would occur if there were full employment output. The cyclical deficit is the portion of the actual deficit that arises because the economy is in recession and is produced by this downturn in the business cycle.

During a recession, a cyclical deficit often occurs because tax revenues fall as incomes fall and government expenditures increase as more is spent for government transfer payments and other programs. The cyclical deficit occurs because of the operation of these automatic stabilizers. [text: E pp. 221-222; MA pp. 221-222] 18. What does the “full-employment budget” measure and of what significance is this concept? The full-employment budget refers to the budget deficit or surplus that would result with existing tax and spending programs if the economy were operating at full-employment.

In other words, tax revenues and government spending are estimated at the level that would result if full employment existed. 204 Fiscal Policy Some economists believe that the full-employment budgetary deficit or surplus is what should determine the expansionary or contractionary nature of fiscal policy rather than the actual budgetary deficit or surplus. If the full-employment budget is not in deficit, then expansionary fiscal policy is not being followed according to this view even if the actual budget is in deficit. text: E pp. 221-222; MA pp. 221-222] 19. Complete the table below by stating whether the direction of discretionary fiscal policy was contractionary (C), expansionary (E), or neither (N), given the hypothetical budget data for an economy. (2) (3) Actual budget deficit (–) or Full-employment budget Yearsurplus (+)deficit (–) or surplus (+) fiscal policy 1 2 3 4 5 6 – 3. 9% – 4. 5 – 4. 7 – 3. 9 – 2. 9 – 2. 2 – 2. 1% – 2. 6 – 3. 0 – 2. 6 – 2. 0 – 1. 9 (1) (4) Direction of E E C C C [text: E pp. 221-222; MA pp. 221-222] 20.

In what fundamental way do the spending-taxation decisions of government differ from the consumption-saving plans of households? Why is this difference significant? The spending-taxation decisions of government are made in a political environment in which the majority must be satisfied, or satisfied enough to continue to vote for its elected representatives. Furthermore, since the government does not have a limited lifespan and always has the ability to tax, deficit-spending and debt do not have the same significance to governments that they do to individual households.

Households face a much more uncertain future with regard to their power to raise revenue (income) and therefore must plan their spending and saving to coincide with their lifetime earnings expectations. The difference is significant because so many people try to draw an analogy between government spending policies and household spending plans when it is usually not appropriate to do so. [text: E pp. 223-224; MA pp. 223-224] New 21. Comment on the statement: “Discretionary fiscal policy offers an ideal approach to dealing with the nation’s economic problems. It is without problems, criticisms, or complications. Discretionary fiscal policy does offer government policymakers potential tools (changing taxes or government spending) to use for stimulating the economy during a recession or for contracting the economy during a period of high inflation. Fiscal policy, however, is not without its problems, criticisms, or complications. First, there are timing problems in getting it implemented at the right time so it will be effective. Second, there are political problems in getting it accepted because it takes time to get the actions passed through Congress and signed by the President.

Third, there are expectations problems because policies may be reversed in the future. Fourth, the taxing and spending decisions of the Federal government may be partially offset by the taxing and spending decisions of state and local governments. Fifth, some economists are concerned that expansionary fiscal policy that requires the Federal government to borrow money will raise interest rates and crowd out investment spending, thus reducing 205 Chapter 12 the expansionary effect of the fiscal policy. Sixth, there are complications arising from the connection of the domestic economy to the world economy.

Aggregate demand shocks from abroad or a net export effect may increase or decrease the effectiveness of a given fiscal policy. [text: E pp. 223-225; MA pp. 223-225] New 22. Explain the six problems, criticisms, or complications that arise in the implementation of fiscal policy. First there is a timing problem. Three lags are identified under the “timing problem” category. There is a lag in recognizing the phase of the business cycle; there is an administrative lag in deciding which policies to follow; there is an operational lag in terms of the impact of the policy once it is implemented.

Second, there are political considerations in the adoption of fiscal policy. There is some evidence of a political business cycle where particular expansionary policies are followed in election years whether or not economic conditions merit them. Third, there is an expectations complication. If businesses and households expect that the fiscal policy will be reversed in the future, they may not change their behavior in the way that would be expected if the fiscal policy was permanent.

Fourth, the taxing and spending decisions of state and local governments may counteract or reduce the effectiveness of fiscal policy decisions at the federal level. The U. S. government may enact an expansionary fiscal policy by increasing its budget deficit, but state and local governments often have to balance a budget and economic conditions may force them to adopt a contractionary policy that partially offset what the federal government is seeking to achieve.

Fifth, there is concern about possible offsetting effects of government borrowing crowding out private spending that would occur in the absence of the government deficit; and an offsetting net export effect which partly counteracts expansionary policy or contractionary policy. Sixth, there are complications to domestic fiscal policy from the national economy’s connection to the world economy. Economic shock from abroad can have an effect on the nation’s imports and exports. The net export effect can reduce the intended effects of fiscal policy. text: E pp. 223-226; MA pp. 223-226] New 23. Explain the problems giving rise to this statement: “You would think the government would want to do something to improve economic conditions when the economy is in trouble, but the government is slow to act. ” Fiscal policy is subject to timing problems. There are three timing lags that limit the speed with which fiscal policy can be enacted and effective. First, there is a lag in recognizing the phase of the business cycle to determine when the government might want to provide help.

Second, there is an administrative lag in decision-making that involves deciding which specific policies should be adopted. Third, there is an operational lag because the adoption of policies takes time to have an effect on output and employment. [text: E p. 223; MA p. 223] New 24. How do expectations about the future by households and businesses affect the effectiveness of fiscal policy? Cite examples. If households or businesses expect that the fiscal policy changes are only temporary, they may not change their behavior in the expected way.

For example, if tax cuts are enacted to stimulate consumer spending, some consumers may not change their 206 Fiscal Policy spending habits if they think the tax change is only temporary. In the future, they will have to pay more in taxes, so they might increase their saving. Similarly, businesses may not invest in new plants and equipment if they get a tax cut, if they expect taxes in the future to rise or the fiscal policy to be ineffective. [text: E pp. 223-224; MA pp. 223-224] 25. “If economic forecasting was a more exact science, the business cycle could be entirely corrected by fiscal measures. Do you agree? Exact forecasting, if possible, would still not solve all of the problems encountered in trying to correct the business cycle. There is also the problem of timing the enactment and application of fiscal policy, not to mention the coordination of monetary policy and international economic policies, or reduced private spending (“crowding out”). [text: E pp. 223-225; MA pp. 223-225] 26. Explain the crowding-out effect. The crowding-out effect is the notion that government borrowing to finance a deficit may crowd out or reduce private borrowing.

To the extent that this occurs, the expansionary impact of fiscal policy is reduced because increased demand by the government is partially offset by reduced demand in private investment. [text: E pp. 224-225; MA pp. 224-225] 27. Using the below graph, illustrate the possible impact of a crowding-out effect of a fiscal policy by drawing in the relevant aggregate demand shifts. Label and explain any shifts in the demand curve shown. Expansionary fiscal policy increases demand from AD1 to AD2, but this crowds out some private investment spending that offsets the increase to some extent causing AD2 to decrease to AD3.

See graph below. [text: E pp. 224-225; MA pp. 224-225] 28. Explain how the net-export effect would reduce the effectiveness of fiscal policy. 207 Chapter 12 If an expansionary fiscal policy brings with it higher interest rates, this could increase the demand for American dollars by foreign investors seeking to earn the higher U. S. returns. This appreciation of the dollar makes U. S. goods and services more expensive to foreigners and foreign imports less expensive to Americans. The net export category of ggregate demand will be reduced which would reduce the impact of expansionary fiscal policy. A contractionary fiscal policy could have the opposite effect causing net exports to increase that again reduces the desired effect of the contractionary fiscal policy. [text: E pp. 225-226; MA pp. 225-226] New 29. What fiscal policy is most likely to be invoked during a period of recession and high unemployment? A period of rapid inflation? What political, investment, and international problems might the U. S. Congress encounter in enacting these policies and putting them into effect?

During recession and high unemployment, the government would most likely initiate an expansionary fiscal policy. A contractionary fiscal policy would most likely be called for during a period of rapid inflation, especially if it seems to be demand-pull inflation. Several problems are likely to arise in enacting either of these policies. Timing lags in recognition, implementation, and impact are one concern. Another has to do with political realities. A contractionary policy has many unpopular aspects to it because it calls for raising taxes and for cutting government spending.

There are also unique problems associated with expansionary policy: crowding out is one potential result that would reduce the expansionary effect of the policy. In both cases, the net-export part of aggregate demand is likely to move in a direction that would tend to offset the policy. [text: E pp. 223-226; MA pp. 223-226] 30. (Last Word) What is the purpose of the Conference Board’s index of leading economic indicators? The index of leading indicators is a monthly index of economic statistics that are used to forecast the direction of real GDP.

Changes in the index provide an indication of the future direction of the economy and are useful to policy makers in developing responses to deteriorating conditions in the economy. The rule of thumb is that three successive decreases or increases in the index indicate a change of direction in the economy. [text: E p. 227; MA p. 227] 31. (Last Word) Why is the index of leading economic indicators a composite index of ten economic statistics and not just one? Each of the economic statistics used to prepare the index may increase or decrease in any month and thus give false or contradictory signals about the direction of the economy.

It is less likely that all these economic indicators, taken together, will give as many false signals about the direction of the economy as one indicator will. Thus the composite index is more reliable than any one indicator. The composite index, however, is not infallible and can also give false indications about the direction of the economy because of changes in the structure of the economy or developments that are not covered by the indicators that make up the index. [text: E p. 227; MA p. 227] 208

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Introductory Economics Cheatsheet

Problems by Command 1. Information collection 2. Principal-agent 3. Disagreement among multiple decision-makers. Arrows’ impossibility theorem. Paradox of voting. 4. Enforcement Coordination by Market Princes as signals of scarcity/abundance Induces coordination Requires much less info No enforcement costs No principal-agent problem No problem with multiple decision makers Qualification: some command systems exist within a market (eg firms) Public Good Has free-rider problem due to non-excludability. Can only be provided by a coercive authority that can force users to pay for these goods. Taxes. Collective Goods

Provide benefits for a group. Cartels and Unions Has free riding problem. Prevent by sanctions Common Resources Non-excludable but exhaustible Natural resources goods Lack of well-defined property rights encourages overuse. The tragedy of the commons. Solve by asserting ownership rights over common resources. Coarse theorem Markets generate themselves for property transfer that internalize externalities. Adverse selection & Moral hazard Market price based on expected quality Reward people for not maintaining quality High quality sellers drop out Cycle continues Market collapse FDI promotes technology transfer without moral hazard.

Equilibrium – no one has an incentive to change their behavior. Price ceiling Cause a shortage due to excess demand Leads to rationing or preferential allocation, long queues, inefficiency. Those who do get will benefit from the lower prices. Price floor Eg Minimum wage Only those workers who don’t lose their jobs benefit from the higher wages. Consumer surplus When price goes down, CS increase due to 2 reasons. Existing buyers pay less. More buyers are able to enter market. Producer surplus Markets select low cost suppliers. Only those whose costs of production are below the market price enter.

When price goes down, ‘marginal seller’ drops out. When price goes up, PS increases due to 2 reasons. Existing producer get a higher price. More producers can enter. Total welfare = CS + PS Govt intervention decreases this Factors of demand Income & substitution effect Change in tastes Expectation of future prices Change in number of buyers Factors of supply Change in technology Change in input prices Expectation of future prices Change in number of sellers Elasticity Price elasticity of demand for a good is the % change in demand when the good’s price falls by 1%. Elasticity along a linear demand curve decreases with a decrease in price.

Factors affecting elasticity of demand Number of substitutes/whether the good is a necessity/time frame/broadness of category Income elasticity of demand is the % increase in its demand for a 1% rise in income. Indifference curve Non-lexicographic and non-satiation Convex to origin – preference for variety Cant cross each other due to consistency and transitivity Marginal rate of substitution(MRS) Negative of an indifference curve’s slope at any point Equal to the ratio of marginal utilities of the 2 goods at that point Slope of budget line is the negative of the relative prices of the 2 goods.

At tangent, slope of budget line and slope of indifference curve must be equal. MRS=relative prices at this point The ratio of marginal utility to price is equal for both goods at the point chosen (equimarginal principle) Income and substitution effect Cost curve AFC=TFC/Q, AVC=TVC/Q, ATC=AFC+AVC AFC declining with Q. AVC first falls then rises. U shaped. Rising marginal cost. When MCMC. No supply curve. MC Pricing P=MC, lead to losses for natural monopoly, which govt can subsidize. But tax has its own deadweight loss. P=ATC , zero profits. Alternative, public ownership Price discrimination

Increase monopolist profits First degree – extract entire CS, socially optimal but unlikely Second degree – Charge buyers based on observable characteristics Third degree – separated markets Quantity discounts Contestable Market No barrier to entry Maintain monopoly only due to the fact that it entered first P=MC, zero economic profits Durable Goods Monopoly MC=0 Compete against its future price Cartels and collusion Incentive that monopoly profits are higher Each has an incentive to sell more than the agreed amount, resulting in a collapse of the agreement. Bertrand duopoly Assumption constant MC.

Equilibrium at AC=MC. Naive thinking and no capacity constraint and price easily adjusted Sweezy model Each firm assumes that if it cuts its price, this will be matched by all its rivals while if it increase its price, it will not be matched. Perceive demand curve to be very inelastic below the existing price and very elastic above existing price. Result in price rigidity Reverse kink Each firm assumes that its price increases will be matched by all rivals, while its price cuts will not. Demand curve becomes elastic below the existing price as the cut speedily increases the demand for this firm’s product.

Inelastic above the existing price. Result in price instability. Likely during depression. Competition in output Cournet Model Supposes wrongly that other firms will not react to its own output decisions. Will not result in zero-profit outcome. MR=MC. Monopolistic competition Large number of sellers with differentiated products No barriers to entry Each firm faces a downward sloping demand curve Short run, try to max profits by MR=MC. Due to free entry, more firms enter in long run as long as positive economic profits are made. Shifts demand curve to the less are market share reduced. Long run equilibrium, P=AC.

Not at minimum of AC curve, thus inefficiency as each firm has excess capacity. Provide more variety though. Game theory Dominant strategy equilibrium No incentive to deviate as none of the players can do better by choosing a different strategy. Nash Equilibrium Each player has no incentive to deviate by himself. Each guess what other player choose. Coordination problem Multiple equilibrium Solve by convention Focal point – higher payoff for 1 equilibrium Zero-sum games Solve by maximin rule – maximize his minimum payoffs. Repeated games Grim trigger strategy cannot work if the game is repeated a known finite number of times.

If infinitely, can sustain if they do not discount the future heavily(sufficient weight to future punishments). Discount factor > 1/3. Sequential game Backward induction – work backwards to solve Subgame perfect Nash equilibrium – additional property of ruling out empty threat GDP – the market value of all final goods and services produced within a country in a given period of time Relies on market prices Includes market value of the stream of services from durable goods Miss out value of non market services Excludes transfer payments Consumption + Investment + Government spending + Net export

Y=C+I+G+NX GDP deflator = (Nominal GDP/real GDP)*100 GDP per capita flawed as a welfare measure as it excludes value of leisure, clean environment, and safety. CPI measures the cost of a fixed basket of goods bought by a typical consumer. Overstates cost of living because of substitution bias. Introduction of new goods and thus increased living standards is not reflected. Quality changes is not measure. GDP deflator includes goods not bought by typical consumer. CPI includes imports. Real interest=nominal interest – inflation Productivity is a key to rapid growth. Physical capital

Human capital Natural resources Technology Y= AF(L, K, H, N) Productivity is given by Y/L = AF(1, K/L, H/L, N/L) Technology progress continuously expands the resource frontier. Phases of rapid growth have occurred when a technological innovation opens up a new elastic supply source. Eg Industrial revolution, Railway boom, IT. Policies to promote growth Encourage savings and investment. Diminishing marginal productivity of capital implies that high saving will no longer lead to fast growth beyond a point. Convergence effect. Encourage FDI. Builds up physical and human capital accumulation.

Has learning effects through tech transfer and positive externalities. Education. Secure system of property rights Lack of corruption or political instability Pursuing free trade Population growth can lead to lower capital-labor ratio which might decrease productivity Also inefficiency in human capital accumulation as same educational facilities spread thinly Large families may keep woman out of labor force which reduces total productivity C and IM tend to increase as national income rise. So C= C+cY, IM=IM+mY where c and m are marginal propensity to consume and import. An increase in GDP of $1 increases C by c and IM by m. c,m

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Bu204 Macroeconomics Unit 2 Assignment

Renea Frymoyer BU204 01 September 29, 2012 ? Questions: 1. A representative of the American clothing industry recently made the following statement: “Workers in Asia often work in sweatshop conditions earning only pennies an hour. American workers are more productive and as a result earn higher wages. In order to preserve the dignity of the American workplace, the government should enact legislation banning imports of low-wage Asian clothing. ” Answer the following: a. Which parts of this quote are positive statements? Which parts are normative statements?

Positive statements are “claims that attempt to describe the world as it is” (Mankiw, 2011, p. 31). Normative statements are “claims that attempt to prescribe how the world should be” (Mankiw, 2011, p. 31). Positive statements * Workers in Asia often work in sweatshop conditions earning only pennies an hour. * American workers are more productive and as a result earn higher wages. Normative statements * In order to preserve the dignity of the American workplace, the government should enact legislation banning imports of low-wage Asian clothing. b.

Would such a policy make some Americans better off without making any other Americans worse off? Explain who, and why. “In order to preserve the dignity of the American workplace, the government should enact legislation banning imports of low-wage Asian clothing. ” Sweatshops once existed in the United States. With the accumulation of capital, technology was developed and implemented; workers became more educated, productive and their income increased; and working conditions improved (Hendrickson, 2006). This is the process of economic development.

The explosion of sweatshops abroad has led to the decline of the apparel industry in the United States (Hendrickson, 2006). Economists are known to have conflicting views due to differences in values and perceptions (Mankiw, 2011, p. 34-35). Economist Josh Hendrickson believes it is in the best interest of Americans to import garments at lower cost because it allows the United States to focus capital and educated and skilled labor on ventures and enterprises that increase the standard of living and overall wealth of our country (2006).

The United States has an absolute advantage in producing apparel and the opportunity cost is higher. Conversely, third-world countries with sweatshops have a comparative advantage and the opportunity cost is lower (Mankiw, 2011, p. 54-56). In regards to the preservation of dignity, sweatshops offer jobs where none existed before. Voluntary sweatshop workers are generally paid well in comparison to many in their country. The concern really should be for those who have jobs that pay less with worse working conditions and for those who have no job (Hendrickson, 2006). The standard of living in the locality of sweatshops increases.

United States workers are incited to become educated and work hard to obtain high paying jobs. The majority do not feel in competition with third-world sweatshop workers. c. Would low-wage Asian workers benefit from or be hurt by such a policy, and why? Without a doubt, low-wage Asian workers would not benefit from such a policy. First, due to the difference in economic development and the standard of living, we cannot compare wages in the United States with (sweatshop) wages in third-world countries. Asian sweatshops generally offer their workers higher wages and acceptable working conditions.

Because the work is manual, hours are long and productivity is low. Realizing that many have jobs with lower wages and worse working conditions or no jobs at all (Hendrickson, 2006), voluntary sweatshop workers are glad to have their jobs and enjoy a higher standard of living. 2. Referring to the same situation in question 1, but instead of legislation banning the imports, assume that the government enacts a special tax on imported clothing that is so high that the selling price of the imports would be equal to the selling price of the same clothing made in America.

This kind of tax is called a tariff and is enacted to protect domestic producers of the same items that can be imported at much lower costs. Answer the following: a. What would shoppers see when they shopped in Wal-Mart and the other “big box” stores that sell so many imported items? If the government enacted a special tax on imported clothing making the selling price equal to the selling price of clothing made in the United States, shoppers would see imported items with much higher prices in discount stores.

If the prices of clothing made in sweatshops and in the United States were comparative, shoppers would consider the trade-offs and opt to buy clothing made in the United States for higher quality, loyalty to United States workers, and the health of our economy (Mankiw, 2011, p. 4). Wal-Mart and “big-box” stores that sell so many imported clothing items would see a decrease in sales. Shoppers would choose to buy clothing at stores that sell clothing made in the United States. These stores would see an increase in sales. b.

Would this tax policy have a better effect, worse effect, or no different effect on American workers than the legislation banning the imports discussed in question 1? What kind of effect would the tax have on the Asian workers? Trade between two countries can make each country better off (Mankiw, 2011, p. 10). Third-world countries with sweatshops have a comparative advantage in producing clothing at a lower opportunity cost (Mankiw, 2011, p. 54-56). Sweatshops play a vital role in economic development by bringing investment, technology, and the opportunity for workers to build skills and improve their standard of living.

By importing clothing, the United States is allowed to focus capital and educated and skilled workers on more lucrative ventures and enterprises aimed at advancing economic development and our standard of living (Hendrickson, 2006). Trade allows countries to specialize in the activities they do best and to benefit from a multiplicity of goods and services at lower cost (Mankiw, 2011, p. 10). The tax would negate the economic development of third-world countries with sweatshops. Further, when Americans purchase imported goods and services, we are in effect, providing aid to poorer countries. . Atlantis is a small, isolated island in the South Atlantic. The inhabitants grow potatoes and catch fresh fish. The accompanying table shows the maximum annual output combinations of potatoes and fish that can be produced. Obviously, given their limited resources and available technology, as they use more of their resources for potato production, there are fewer resources available for catching fish. Maximum annual output options Quantity of potatoes Quantity of fish (pounds) (pounds) A 1,000 0

B 800 300 C 600 500 D 400 600 E 200 650 F 0 675 a. Examine the Maximum annual output options table above and the resulting Production Possibility Frontier Graph below and answer parts b – f. Production Possibility Frontier Graph b. Can Atlantis produce 500 pounds of fish and 800 pounds of potatoes? Explain. The economy of Atlantis can produce any combination of fish and potatoes on or inside the frontier. Given the economy’s resources, points outside the frontier are not feasible (Mankiw, 2001, p. 26).

Because point b is outside of the frontier, Atlantis does not have the resources to produce 500 pounds of fish and 800 pounds of potatoes. c. What is the opportunity cost of increasing the annual output of potatoes from 600 to 800 pounds? If the annual output of potatoes is increased to 800 pounds, only 300 pounds of fish can be produced. Because the production possibilities frontier is bowed outward, the opportunity cost of potatoes is highest when the economy is many pounds of potatoes and fewer pounds of fish. It is steeper at point 800/300.

When producing fewer pounds of potatoes and many pounds of fish, the frontier is flatter and the opportunity cost of pounds of fish is lower. It is flatter at point 600/500 (Mankiw, 2001, p. 26-27). Answer: the opportunity cost is higher. d. What is the opportunity cost of increasing the annual output of potatoes from 200 to 400 pounds? If the annual output of potatoes is increased to 400 pounds, 600 pounds of fish can be produced. Because the production possibilities frontier is bowed outward, the opportunity cost of potatoes is highest when the economy is many pounds of potatoes and fewer pounds of fish.

It is steeper at point 400/600. When producing fewer pounds of potatoes and many pounds of fish, the frontier is flatter and the opportunity cost of pounds of fish is lower. It is flatter at point 200/650 (Mankiw, 2001, p. 26-27). Answer: the opportunity cost is lower. e. Can you explain why the answers to parts c and d are not the same? When Atlantis is using the majority of its resources to produce pounds of fish, the resources best suited for producing pounds of potatoes are being used to produce pounds of fish.

Because these workers likely are not good at producing pounds of fish, the economy will not have to forfeit producing many pounds of fish to increase producing more pounds of potatoes. The opportunity cost of pounds of potatoes is low and the frontier is flatter (Mankiw, 2001, p. 27-28). When Atlantis is using the majority of its resources to produce pounds of potatoes, the resources best suited for producing pounds of potatoes are already producing pounds of potatoes. Producing more pounds of potatoes means transferring some of the most skilled fishermen from producing pounds of fish to produce pounds of potatoes.

Producing more pounds of potatoes will mean a significant loss in producing pounds of fish. The opportunity cost of producing pounds of potatoes is high and the frontier is steeper (Mankiw, 2001, p. 28). f. What does this imply about the slope of the production possibility frontier? The production possibilities frontier shows the trade-offs of producing fish and potatoes at a point in time. Due to a variety of circumstances, trade-offs can change. For example, the development and use of new fishing nets increases the pounds of fish that can be produced.

Atlantis can now produce more pounds of fish compared to pounds of potatoes using the same resources. If Atlantis does not produce and pounds of fish, it can still produce 1,000 pounds of potatoes. One end point of the frontier stays the same (pounds of potatoes) but the rest of the production possibilities frontier shifts outward allowing economic growth (pounds of fish) (Mankiw, 2001, p. 28). The slope of the production possibilities frontier denotes the scale of the trade-off (Beggs, 2012). Beggs, Jodi. 2012). The production possibilities frontier. About. com Economics. Retrieved September 29, 2012, from http://economics. about. com/od/production-possibilities/ss/The-Production-Possibilities-Frontier_4. htm Hendrickson, Josh. (May 18, 2006). The economics of sweatshops. The Everyday Economist. Retrieved September 29, 2012, from http://everydayecon. wordpress. com/2006/05/18/the-economics-of-sweatshops/ Mankiw, N. Gregory. Principles of Macroeconomics. United States: Cengage Learning, 2011. Print.

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Economics in construction

1. Perfect competition maybe described as a theoretical form of market wherein no buyer or supplier has the capacity (or what is termed the ‘market power’) to control the market price. Regular definitions of perfect competition in economics describe it as a situation in which there is absolutely ‘efficient outcome’. The hypothetical situation of ‘perfect competition’ is primarily conjured to build the fundamentals of the supply and demand theory.

Totally contrary to the ideas of a perfectly competitive market is the idea of a monopoly, which maybe defined as a continual market situation within which there is only one supplier of a particular service or an item. All monopolies are necessarily devoid of any economic competition and the utter deficiency of ‘substitute goods’. Often a monopoly is sanctioned by the state. Such a monopoly is called a ‘legal monopoly’ or a ‘government granted monopoly’ and is authorized by the government so as to encourage firms to take up a particularly ‘risky’ or ambitious project. Instead of allowing a certain firm to take up a venture in this manner the state might also keep the project all to itself. Such a situation will then be referred to as a ‘government monopoly’. (King, 126)

Unlike in a monopoly in a perfectly competitive market there are a number of minor suppliers and buyers who operate at equal capacities in the market. Given their equal status neither of them manages to attain enough significance to influence the market in their favor. The firms in such a set-up are therefore price-takers rather than price-setters, as in the case of monopolies. Also, while a monopoly provides a particular, unique item or service to the market in a perfectly competitive market no firm enjoys any sort of individuality. Instead, each of their products is quite like the others such that there is no room for ‘product differentiation’.

A monopoly remains the sole provider of a certain product or service by simply barring other similar firms to enter the market by some means or the other. Often such means include government authorization, like in the case of ‘legal monopolies’ discussed above. In case of perfect competition however no such entry barrier can be introduced. As a result any given firm can enter the market if it wishes to. Similarly, unlike in a monopoly in a perfect competition set-up all firms have access to the same kind of resources all of which are completely ‘mobile’. In a monopoly of course a particular firm controls (and occasionally even withholds) essential resources and production expertise.

Given the large number of close substitutes available for the products/services sold by firms in a perfectly competitive set-up it is only obvious that no single firm or even a group of firms have any say about the ‘market-price’. The price of the products or services of firms in an arrangement such as this is duly decided instead by the market, which in turn depends on the behavior of the buyer.

A monopoly however doesn’t remain obligated to the market in this manner. Instead, it effectively determines the market price simply by increasing or decreasing the quantity of its produce. Such independence is enjoyed by a monopoly simply because it faces no form of price pressure from opponents. However, there is a limit to which this liberty maybe pushed. Monopolies that raise their price far beyond permissible limits invite competition and may soon have to face rivals providing the same services/products either legally or even illegally. (Fletcher, 188)

2. The residential construction industry might pretend to be a single, solid, well defined industry but it in fact is far from being that. As anyone who has ever had a house made knows building a great house involves a number of things; great plumbing, great carpentry, great painting etc. etc. etc. Given the large demands of building a residential outfit the residential construction industry does not represent one single market, like it appears to be but rather a variety of sectors.

However, not all of them need to come into play in every residential construction project. Often a particular house does not need all the facilities the industry is capable of providing it with. For instance if an environmentalist who feels strongly about the use of wood in his house decides to build a house tomorrow he is hardly likely to employ a carpenter, irrespective of how easily he can land one. Similarly a family who decides to paint their interiors themselves will not need painters, at least to the extent they are usually needed by new house owners. Also, in many cases residential construction involves repairing old structures. This obviously takes less effort and expertise than those required for building a house from scratch.

As is obvious therefore there are a number of ifs and buts in the industry. We will take a look at some of these a little closely.

Normally, specialist contractors who have long standing reputation in the field carry out residential constructions. These individuals take complete responsibility of building an entire building from scratch and cover everything from plumbing to painting. Once they achieve the contract however they duly sub-contract additional independent workers who assist and accompany their own crew.

Contractors are often described as the king of the jungle in their own area. They are managers, salesmen, supervisors and directors all rolled into one. As a result of their unique capacity to bring in professionals of their own field under their wings these individuals soon turn out to be perfect monopolies by themselves. Often many of these professionals operate all by themselves in a given area, without any form of opposition or competition. Given their advantageous position they duly flex every possible monopoly muscle they possibly can and obviously determine the market price of the services they provide.

Similarly special service providers in the industry, such as say wood engravers or carvers who are both sophisticated and rare in terms of their skill usually monopolize the market and set the market price by themselves. Unlike them plumbers or electricians, who are found in plenty and whose skills hardly vary can never really behave in a monopolistic manner. Instead, their circuit closely replicates what can be called a ‘perfectly competitive’. Much like them painters and carpenters can hardly afford to be choosy or ultra expensive since they are easy to substitute.

A good illustration of this point is provided by the use of lumber in the industry in the past decade or so. The U.S. residential construction industry is, by all accounts the biggest consumer of softwood lumber. However, the amount of softwood lumber available to the industry fell dramatically following the restrictions that came to be placed on state and federal forests in the past few years. As a result of this unfortunate fall in supply a large chunk of the industry soon shifted to other alternatives available in the market.

Amongst the 2,500 builders we surveyed for this particular study about 12.8% reported to have increased their use of alternative structural materials in the past decade alone. 99% of the respondents also confessed to having started to use at least one out of the long list of alternative structural materials that we provided them with. Till 1995 only 91% of the builders interviewed used substitute materials. (Kar, 145)

While the decreased supply of lumber has obviously proved unfortunate for the lumber industry the construction industry itself has survived virtually unscathed. This is primarily due to the wide availability of materials such as reinforced concrete, plastic fiber, steel etc. which maybe easily used as a replacement for lumber.

This example clearly proves the market for construction material itself therefore it maybe said to be a ‘perfectly competitive’ market. With easily available substitutes, easy entry into the market and hardly any product differentiation it fits almost every characteristic of the ‘perfect competition’ market to the tee.

Unlike lumber and its alternatives however other important facets of construction are not as easily obtained. The expertise required to design a house for instance is far harder to replace than the construction material it is to be built with. Due to the utter importance of their job and how extraordinarily dependant on knowledge and skill it is, the architect and the whole engineering industry maybe described as a bit of a monopoly. It is of course difficult to enter their market, there are hardly any ‘substitutes’ available (since the level of skill and expertise of each engineer varies from the other) and the engineers themselves tend to determine the market price of their know-how. (Lamb, 243-245)

Thus we see how the residential construction industry of U.S.A. is actually a mélange of a wide variety of competitive markets and not a single market by itself. It is the proper functioning of each of these individual parts that ultimately allows the construction business to function properly.

References:

Fletcher, R; Economy: Beliefs and Knowledge; Believing and Knowing. (Mangalore: Howard & Price. 2006) pp 188

Kar, P; History of Indian Consumer Market Applications (Kolkata: Dasgupta & Chatterjee 2005) pp 145

King, H; Fiscal Fitness Today (Dunedin: HBT & Brooks Ltd. 2005) pp 126

Lamb, Davis; Cult to Culture: The Development of Civilization on the Strategic Strata. (Wellington: National Book Trust. 2004) pp 243-245

 

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Business and Economics (Matewan)

Matewan is a story which focuses around the violent labor disputes which occurred in the West Virginia coal fields in 1920. During these days, there was no benefits and job security for workers as the Stone Mountain Coal Company displays. Due to the efforts by the workers of the coal fields to form a union, the Stone Mountain Coal Company publicized to their workers that those who were in unions were to be replaced and pay cuts would be rationed out. Outrage ensued between the workers and the new African American workers that were being brought in.

However, Joe Kenehan, who worked for the United Mine Workers, decided that if the replacement workers joined the union, the company had to accept it as they wouldn’t have workers. In order to stop the idea of a labor union, the coal company sent C. E. Lively to investigate the workers undercover. Lively then brings in two armed agents from the Baldwin-Felt Detective Agency handle the work he cannot as he is undercover. This entire situation escalates into a violent shootout and reinforcement agents from Baldwin-Felts came to evict workers who were part of a labor union.

A total of nine people were killed during the shootout where workers just wanted to have basic rights. Apparent ethical issues are portrayed throughout the movie. In today’s society, labor unions are prominent and respected. Undercover agents are not being sent in order to destroy the unions which are protecting rights of workers. Corporations back in 1920 did not want to deal with the cost of fair pay and protecting their workers. Until OSHA was enacted, most companies sought to find the cheapest form of labor.

Also, the event of a shootout due to workers wanting their jobs to be secure is unexplainable. Money and power corrupts the minds of humans and fallouts such as the one which occurred in West Virginia between coal field workers and the Stone Mountain Coal Company. As stated in lecture nine, America is a materialistic country. Most of the citizens overlook the value in everyday things others may long for their entire lives but attain it. The advancement of technology, and the accessibility of nearly any luxuries, has caused degeneration in the virtues of American’s minds.

Overlooking the necessities to sustain a basic life, the people of the nation look towards the excess. One can easily live without the newest tablet device, yet they shall still buy it. The worst part of that is how that same person with the tablet may also be getting their ends meet by using food stamps. Americans have embedded their mindsets in the goal of obtaining materialistic items to keep themselves content, all the while forgetting the values humans have been contempt with for centuries.

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Common Sense Economics

Macroeconomics Professor Coppedge December 5, 2011 Common Sense Economics Common Sense Economics is packed with valuable information, and approaches presenting this information in a way that is less dry than a conventional textbook. Although there is a lot to learn in this book, I feel like I have already been introduced to 90% of the content in class, this book is simply a supplement and review. The book is broken down into 4 sections: Ten key elements of economics, Seven major sources of economic progress, Economic progress and the role of government, and Twelve key elements of practical personal finance.

I believe the discussion of personal finance outlined in the fourth section, while important, is outside of the scope of this course and will therefore not be discussed in this paper. This book is very much a textbook, therefore going through the material and listing off what is in the book will not be feasible in such a short paper, I will however cover the information that struck me as the most interesting or important.

Almost everything in the first part of the book is common sense, there is nothing free, people respond to incentives, decisions are made in the margin, profit drives business decisions, the invisible hand. The points that I found more interesting were points 7 and 10: People earn income by helping others and too often long-term consequences of an action are ignored. The book states that if you figure out a way to help other people you will be rewarded with a large income.

Even people who are damaging themselves believe that they are getting what they want, for instance cigarette smokers, they are ruining their bodies and destroying their lives, but they want the cigarette and by helping them get the cigarette, companies make a very large amount of money. Cigarette smoking can also tie into point 10: Too often long-term consequences, or the secondary effects, of an action are ignored. Many people who smoke will tell you that they simply “don’t think about it” because they know if they consider the secondary effects, or he opportunity cost of their decision to smoke, they would quit. Of the second section in the book: Seven major sources of economic progress, I find point number 4 the most interesting. An efficient capital market, this is something that I had not thought of when considering things that need to happen for the economy to grow, it is something that happens behind the scenes and you don’t hear much about it, but it seems like one of the more important driving forces.

If there is no-one investing capital into wealth creating projects then the economy will continue to only grow minimally until there is a way of getting money into the hands of investors. I believe that investors need to have low barriers to entry, IE taxes and fees, but they do need to be held accountable for any botched projects, this will give investors a reason to seek out good investments and let the bad investments sink rather than making Americans pay for them.

Perhaps one of the more interesting topic of discussion is: Economic progress and the Role of Government. This topic can go on for days, but the basic functions that the government needs to fulfil in order for the economy to progress are: protect the private rights of individuals and supply goods that cannot be provided through markets. There are many things that can impede the government from doing it’s job, the most prevalent in my opinion is human nature. Voters vote for politicians promising the most benefit to them, ignoring rule 10 of part 1.

The book states that “unless [the government is] restrained by constitutional rules special interest groups will use the democratic process to fleece taxpayers and consumers. ” The reason this happens is because of rule 1 in part 1, incentives matter, everyone is attempting to get the most out of the system for themselves, without considering external costs. Overall, this book breaks down complex economic ideas into something that is easily understandable and the examples given are easily relatable. I will definitely keep this book for my reference, and I will refresh my self on it every couple of years.

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Microeconomics and faber-castell

The perfect definition of a purely competitive market in microeconomics states that there should be specific factors which must be followed in order to guarantee that firms who are participating in the business for companies which are moving in the markets do not have control of prices.  Such factors are easy transportation, perfect communication, and a host of many other variables. However, practicing the most important factor in determining a perfectly competitive states in the economy and a perfectly competitive product is the homogeneity of a certain good.

And this is where our definition of commodity comes in.  In microeconomics, a commodity is usually defined as an object or a good in which there is a certain demand, but however which is supplied by firms without differentiation between the other products.  And although we are all to used associate the word commodity with absolutely anything that has to do with a good or service that we should be purchasing,  in its purest sense and definition, a commodity is characterized by something in where it is the market which defines their prices, and not any other factor of control. Note that our keyword for this point of discussion is that a quantity should not be differentiated from other goods because if it is so, then it would theoretically be able to define the market price in its own, and not because as an effect of other factors imperfect competition (Mankiw, 2006).

We then come to the discussion of an article by the economist.com website where in it discusses the history of the pencil company Faber-Castell.

Our discussion of Faber-Castell as a commodity now becomes sacrificed, for he can now say, after being given a definition of what a commodity is that Faber-Castell cannot possibly be a commodity.  The reason for this is that as the article discusses, unlike the many other pencils available to our global markets, both in the local and international sense, today are more or less homogeneous in nature (Economist, 2007).  Meaning that although of course they can have many other brands which define their names, we do not necessarily care among the brands because each pencil is basically the same as the other.  The case of Faber-Castell, however, is that its pencils are produced in such a way and distributed in such a way that it may be further identified as a pencil with true quality and a much higher value therefore than the other pencils available in the market.

Again of course one may argue that a pencil is still a pencil.  However, as we have discovered in the reading of the article, because of the nature of how the pencil is created specifically the lead content, the wood used in creating its frame, even its eraser and design has specifically put the user into mine even up to the point of already creating a steady following for its use. The article stated extremely popular names as the handful of the people who are loyal to the use of such a pencil.

The shifting of the brands classification from commodity may even be thought of as a move where in is the owner of the company, Count Anton Wolfgang von Faber-Castell .net actually classify it as not a commodity, that it would eventually do so because the quality of the pencils themselves creates its own definition (Mulligan, 2007).

as we have perhaps learned in many of our economics and management courses, as well as to the floor of the many here ethical marketing books out in the market today, product integrity plays an important role in the popularity and eventually the profit maximizing value of outputs of products.  Not only would there be higher revenues and therefore higher profits in London was to say able to maintain the integrity of the company’s products, it will also serve as a self advertising method for the companies.

Perhaps the closest thing that we could compare to our model of Faber-Castell is the company of General Electronics headed by Jack Welch, where it is also product integrity as low as quality of the outputs being produced that displays at the highest importance and role in the company.

If we were to use a theoretical model for microeconomics in understanding the issue of product integrity, perhaps you could relate it most closely to the demand equation of the supply and demand model.

although the movement in the demand curve and eventually the demand schedule is determined specifically by price, the shifting of the said curve is affected by many other variable such as the income of consumers, the tastes and preferences of consumers, the price is up for latent or substitute goods, and the other factors except for price.  It is here that we see that if we were to factor in integrity into such economic variables, ceteris paribus, we arrive at the conclusion that product integrity may also be able to shift the demand curve further upward if product integrity is maintained or increased.

The opposite may also be true, however, and that is essentially the danger in economics, where in unlike the labor supply of macroeconomics by John Keynes which is sticky upwards, micro economic models such as the demand function and to demand equation are effected both ways and both sides.  Increasing the integrity of a product may be able to increase its demand and therefore increase revenues and profit, but a decrease in the integrity of the product may also be able to perform the opposite effect, which is to decrease revenues and profits as well as increased costs, therefore moving the company closer to shut down point or already above the equilibrium price.

Also, if we take in Faber-Castell to our situation, we also realize that the firm’s economic model is at actually a perfectly competitive model or not even close.  What it does close to, however, is a monopoly model for the economy where in the demand curve for certain firm is downward sloping and its marginal revenue curve is also below the demand curve where in decreasing quantity produced results in an increase in price.

Because of the impacts on welfare of a monopoly model of a firm in an economy, it is more or less cited as negative by economists.  However, in the real world situation where it is money that rules, we could not ignore the fact that Faber-Castell has achieved a monopoly setting again because it has shifted its commodity into a monopoly good.

We therefore arrive at the final question of efficiency.  Economic efficiency highlights that there is no welfare loss, which is explained by the Pareto Optimality condition of the production possibilities frontier.  However, real world definition of efficiency states clearly higher profits (Sutton, 2007).  And in the case of our Faber-Castell model, we can perhaps say that it has achieved efficiency within itself because of how it has been able to market its good so effectively that demand is higher.

Works Cited

“At the sharp end; Face value.(Faber-Castell Corp.).” Economist (US), The, March  3, 2007.

Mankiw, N. Gregory.  Principles of Microeconomics. Mason, OH:  South-Western College Pub, 2006.

Mulligan, Mark. “Pencil me in: the CEO of Faber-Castell, the world’s top pencil maker, sets his sights on Latin America. Why not? Most of his production is already in Brazil.” Latin CEO: Executive Strategies for the Americas , June  1, 2001.

Sutton, John.  Sunk Costs and Market Structure: Price Competition, Advertising, and the Evolution of Concentration. Cambridge, Massachusetts:  The Mit Press, 2007.

 

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Micro Economics

We stand in the beginning of the twenty first century with new groups in positions of great power within our economic. One would think that, with this peak strength, American man would be secure, ready to move forward. An uncertainty, however, seems to be besetting us. We are unsure of ourselves. Internally, we are ill at ease and suspect one another – so much so that sometimes we seem can forget our fundamental belief in the dignity of mankind. People enjoy a standard of living, but often we do not enjoy life. People are mobile in their cars and can see the whole world in television.

Yet people are not sure where they want to go or what they want to see. Modern world baffles people, and we do not know how to turn our knowledge into creative expression both as a nation and as individual citizens. Such a situation, if to continue, is in danger of in the end to sap our viability. Unless people try to understand the fundamental nature of our society as interrelated systems of power – economic, business, political, and moral – we can misunderstand our mission in this world. I believe that the mission of every person is to establish a great civilization on this continent and to create peace and security for mankind.

Therefore, the fulfilment of my aspirations for effective and moral living is, and must be forever, a never ending business. My life must be a business. It is the most important business I will ever be responsible forever. I will face challenges and risks with little or no planning. Economics is a kaleidoscope that touches all aspects of the business of living.

According to several reports issued by the Small Business Administration (SBA), the single most dominant reason businesses fail is directly attributable to a lack of planning. This paper is intended to build my life’s economic plan. It will consider issues of wants and needs, supply and demand, long term employment probability, unexpected economic challenges, and what I believe the economic future to be and how I will adapt to it.

Planning

I can use the terms “plans” and “planning” to many different aspects of my everyday life. One use of the term “plan” I will use to describe a procedure for achieving a particular goal or desired outcome. For example, when somebody asks me “So, what’s the plan?” I think of a set of directions to guide my thoughts and actions. That is, I create the directions on what to do and when to do it, and this in turn might tell me those things that are most important and those things to consider. Ideally, my plan should be complete. That is, the contents and ordering satisfactorily accomplishes the goal.

The plan should be efficient and foolproof. The instructions of the plan should be easy to memorize, monitor and execute, with little chance of things going wrong (Morris 99). However, in my daily life, plans may still be useful without offering explicit guidance or instructions. A map of the new city or an architect’s diagram detailing the layout of a house may also be correctly referred to as plans. However, these plans provide a representation or overview of a project or problem, rather than a set of directions.

A clear understanding of the current state and what should to be done, together with awareness of the different means and methods at my disposal may greatly facilitate the efficacy of achieving my goals. Through using planning and strategies, a chosen subset of new alternatives may be found more quickly and more efficiently than would be the case if I used only pure trial or error, or if I regularly investigated each and every possibility in turn.

Many theories of planning propose that the first stage is to form a suitable mental representation of the goals. The representation may include the initial state and the goal state as well as a range of possible actions that could be taken (Morris 123). Planning tips, strategies and tactics are known as heuristics and algorithms. My planning involves intended actions to be taken in the future, motivational control may be needed in order to carry them out appropriately.

My planning is subdivided into four sections: first, a number of key goals are introduced; second, SWOT analysis is introduced; third, short summary descriptions are provided outlining the main themes and issues to emerge from the savings planning; fourth,  a view on the nature of man as consumer is presented.

Goals

I have specific goals that consistently pursue. There are a mixture of goals and success factors which are important to the achievement of my goals. True goals are probably confined to the first three categories.

Long term employment

Profitability

Growth

Of these three the one of primary importance to me is profitability. From my perspective this could be more specifically defined as Return. Growth and Long term employment are pursued to the extent that they yield a long term benefit in terms of Return. After graduating I am going to be a manager employed by a company. How do I as a manager make my decisions? Perhaps these decisions can be better appreciated by setting up a scenario and observing the behavior patterns of a manager of a factory.

Let us suppose that the factory is part of a corporate empire in which top management is ensconced in a big city office and middle management runs the factories located somewhere in the hinterlands, far from the lights, fun, and frolic of the big city. Suppose that I am a middle-level manager of a factory that makes widgets along with an assortment of other products. I have both production and marketing responsibilities and report to a president who is held accountable for the overall operation of the factory by those in the corporate headquarters.

In the game of Musical Chairs, the winner lasts as long as it takes to set up the chairs, turn the record over, and play a new round. And in the game of King of the Hill, one remains king for as long as he can fend off new attacks. There is a transient aspect to positions of power that is true in children’s games of fun and in adults’ games of life.

Nevertheless, whether a king is attempting to maximize the profits of his company or trying to maximize his longevity in power, somewhere in the king’s organization, there are middle-level managers. These aspirants to power have not yet risen in position to dream of toppling the king. They are still in the Musical Chairs stage of development. While biding their time until they are in a high enough position to try and topple the king, which may never come about for some, they have to think about something else to justify their jobs.

And there is no better justification for a job than thinking about the profitability of the company. What this means is that, while top management and the members of the board may be taking a more tangential view of profitability, there is someone in the organization looking at the price of goods in the marketplace, the cost of making goods on the factory floor, and the inventory of finished goods in the warehouse. That person is making, or recommending, some important decisions:

1. Expanding or contracting production

2. Raising or lowering prices

3. Building a new plant or closing an existing one

These are certainly important decisions if one is a worker employed by this company.

The development and implementation of good system for a business will be a task for a manager. This involves a mixture of techniques and technologies. Related to this development and implementation process is the proper planning and leadership needed to identify and organize modern technology. Also, there is the cultural aspect. This aspect promotes an atmosphere of community and intelligence sharing among company employees.

In its intention to get the required resources for its future success, the manager creates and then implements management practices that encourage new technology. In order to better understand the mixture of techniques and technologies used in the development and implementation of business system, the following four basic elements are recapped below (Hoctor 78):

1. upgrading current information systems to tie in with smart business system

2. employing data storage to its fullest extent for optimization. The focus is on using appropriate aged data and real-time data

3. utilizing smart business software for optimizing a company’s operations today as well as in the future

4. making great use of computer networking in particular on E-commerce

In modern world, the creation of good system for business is leading the way to optimizing a company’s operations in quality control for changing times. Not only is computer technological innovations are changing more quickly each day, but also are business demands. Managers are being pressed to respond to customer needs. They also face competitive threats in days and weeks instead of months or years.

Products and services that could wait for 6 to 12 months just a few years ago today need to get out the door in a much shorter period of time. And it is not just multinational companies or global organizations that are being pressed with shortening time frames. Almost any business, from a small firm up to the world’s largest corporation, is at risk of being replaced by a more quick-witted, E-business-enabled rival. The success of businesses will be estimated by how well managers have developed E-business applications to distinguish themselves from the competition. Therefore, how well the managers can respond to changing times is important factor for its success. Systems for a business can be the means to meet these fast changing times for a modern company.

SWOT analysis

SWOT is a widely used thinking framework for identifying Strengths, Weaknesses, Opportunities and Threats. It enables key factors to be visibly recorded as a high level summary of personal (or a business) situation. It is a summary that is simple but powerful. The technique can be used to document the key factors arising from the review of a particular project or business, through looking at the Opportunities and Threats it faces in the wider world. The SWOT summary may be used to consolidate key issues identified through other forms of analysis (Elkin 90).

The uncertain world of the consumer

Not all the money may be spent. Some may be saved. Savings will be important to me because we live in a world of uncertainty. The uncertainty aspect that worries me most might be death, but a close second is unemployment. Unemployment is a consequence of a free market environment in which employers not only are free to dismiss, lay off, or in other ways terminate employees but also are forced to do so by the workings of the free market itself.

If a factory makes a product, and if for any number of diverse reasons that product cannot be sold, at some point the factory owner must reduce the factory’s output. If he does not dismiss any workers, the factory owner is paying for workers who are producing goods that are not being sold. This is a cash outflow at the same time when he is not selling his product.

Consequently, there is no revenue from sales to generate a cash inflow to counterbalance the cash outflow. What is his choice with regard to laying off his workers? Does he even have a choice? The answer is no. Thus, savings are necessary to provide some sort of cushion, a security blanket, a nest egg for the bad times. Savings are my safety net to protect myself when things turn against me.

Savings have little to do with the running of a communist society. The economic philosophy behind communism is that the state will take on all the burdens of an individual such that he is never exposed to risk of any kind (Dunning 56). Housing, food, medical care, education, you-name-it -these are all the responsibility of the state. The communist system does not expect that an individual has to save, as he would in the free market system, because all aspects of personal security are guaranteed by the state. However, it must be noted that individuals in communist nations do save.

Sometimes it is to accumulate the funds necessary to make a major purchase, such as an automobile. Sometimes the act of saving is a default condition in that there is nothing on the shelves that a consumer wants to buy. Saving then reflects the inability to spend. Perhaps this best illustrates the fundamental difference between the two economic systems. In one, a consumer saves because of the inability to guarantee a secure income. In the other, a person saves because of the inability to be a consumer.

The philosophic underpinnings of the free market system assume that man is basically an unhappy and dissatisfied individual who abhors work (Dunning 90). People work for one basic reason: if they don’t, the alternative is to starve to death in a dark, cold room. Relatively few people find satisfaction in work. Most work is tedious, repetitious, and boring. The primary incentive to man a machine is to earn some money to feed one’s family, keep clothes on their backs, provide a roof over their heads, and keep the rooms lighted and warm.

Because the very nature of the free market system hardly inspires confidence in the future, man as consumer saves a portion of his pay for a rainy day. The amount that he saves varies from individual to individual and depends on a number of issues. Among these are the extent of his present savings, his possession of material things, the general direction of prices, the relationship between the interest he receives on his savings and the effect of inflation on the price of goods, and his confidence in holding onto his job. While these are the more important considerations one takes into account in determining how much to save, one consideration overrides all others. That consideration is confidence.

Possession of material things

The desire to possess material things influences spending habits. If a person feels that he is behind, so to speak, on the possession of material things with respect to his peers, he will have a general tendency to. When people see the unemployment lines getting shorter and the want ads for jobs becoming more common, their attitude toward spending becomes more positive. Good times begin as soon as unemployment rates start decreasing. Even with continued high unemployment, the fact that things are getting better permeates the thinking of consumers.

If unemployment rates are decreasing, and if one has a job, then the chances of being laid off are nil. The worst is over, and it is time to forget the bad times. Declining unemployment means that the security associated with a job is going to be much greater than during times of increasing unemployment. One can afford to be a bit more profligate than during less auspicious times. As the economy falters because sales are collapsing, fear of losing one’s own job makes one more cautious in his spending habits. This is in the best interests of me – spend less, save more, and add to the nest egg in case things get even worse.

References

Dunning, John H. (2001). Global Capitalism at Bay? Rutledge: London.

Elkin, Paul. (1998). Mastering Business Planning and Strategy: The Power of Strategic Thinking. Thorogood: London.

Hoctor, James J. (2003). Smart Business Systems for the Optimized Organization. Praeger: Westport, CT.

Morris, Robin. (2004). The Cognitive Psychology of Planning. Psychology Press: Hove, England.

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Microeconomics Homework

Patent is defined as the bundle of rights of an investor or his assignee to have “exclusive rights” granted by the state for a fixed given time in trade for a discovery of an invention (Freeadvice.com 2008: 1). Based from this definition of patent, it is already clear that an individual can have the freedom to solely produce a certain good given that he/she invented it. This sole production of an individual or a firm triggers for the existence of monopoly in the market.

Monopoly requires only a single producer and many buyers. Therefore, with the aid of patent, an individual can easily engaged into monopoly since the government would provide that said person legal protection and privilege to be the sole producer of a certain good after a specific period of time. This legal protection of a certain invention serves as the barrier for other people to reproduce it other than the inventor or his assignee.

As for the case, due to the discovery of sucralose as a substitute for sugar the state awarded Tate & Lyle its property rights over sucralose leaving them the sole producer of the said products. Since the company is the sole producer in the market of sucralose, it turned out that the company already created monopoly in the market. Other market players can only start to produce sucralose only by 2020, which means, no other market entities will be able to supply the market with the said product other than Tate & Lyle for the next 12 years.

Using examples from the data, explain why firms take out patents.

It was identified and stated on the given case that the production of artificial sweeteners in the market is very profitable to a point wherein almost 20 percent of the total profit of Tate & Lyle comes from their production of sucralose. Tate & Lyle is already on the process of putting more manufacturing plants to further increase their production capacity to supply the high demand of artificial sweeteners in the market which eventually to the acquisition of more profit out of their production.

This high profitability in the monopoly of Tate & Lyle of sucralose made other firms in the market to eagerly find ways to enable them to also produce artificial sweeteners in the market legally. Even if the patent becomes expired by 2020, the demand of artificial sweeteners will be high enough to accommodate the entry of other producers of artificial sweeteners in the market. In addition to this, since Tate & Lyle charges high prices on their artificial sweeteners, industries that use artificial sweeteners as one of their inputs wanted to take out the patent rights of Tate & Lyle to lower down the price of artificial sweeteners in the market as competition step into the market.

Although artificial sweeteners are already cheaper as compared to conventional sugar in the market, industries would still want to further lower down its prices by infusing market competition through getting rid of Tate & Lyle’s patent rights over the production of artificial sweeteners in the market.

Discuss whether patents in the artificial sweeteners market lead to market efficiency or market failure.

Read also Homework Solutions – Chapter 3

Although not implied directly on the given case, but certainly, the existence of patent rights to Tate & Lyle causes failure in the market. Price of artificial sweeteners would not be that high if there is competition existing in the market. Consumer welfare will surely improved if price level of artificial sweeteners in the market would go down. There will also be enough room for those companies that uses artificial sweeteners to minimize their production costs, thereby leading to cutting of the prices of their products. In this regard, it is clear that it is not only the consumers that will be benefited by the removal of patent rights to Tate & Lyle but also other firms that use artificial sweeteners as a factor of production as substitute to the conventional sugar in the market.

Yes, it is true that the discovery of artificial sweeteners provided benefits to the market as a replacement to sugar, but that benefits can still be further improved if its prices will be controlled by market competition and not by simply monopolizing agent who’s goal is to on how to increase their profit through utilizing the bundle of rights that was given by the government. But on the other side of the coin, of the government would remove property rights to those who will discover something new in the market, there is a big possibility that they will be de-motivated to have an initiative to conduct researches and make inventions since it will be easily copied by other firms in the market thereby defeating the initial purpose of conducting research – provide ways to improved the market position of the company.

Well, this scenario is inevitable since the government would still have to protect the interest of the consumers as well as the inventors. As an alternative to solve this problem of improving the quality of welfare of both parties, the government could provide patent rights to a certain company but with a condition of setting floor price or price ceiling in order to protect the interest of the consumers as well as the company itself.

Works Cited

Freeadvice.com (2008). What is Patent [online]? Available: http://law.freeadvice.com/resources/gov_material/patent_trademark_office_patent_defined.htm [Accessed 1 March 2008].

 

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Econ 120 – Principles of Micro-Economics

ECON *120: Principles of Microeconomics Spring 2010 I. FOUNDATIONS OF ECONOMICS A. Scarcity, Production Possibilities, Efficiency and Exchange Section I. A Learning Objectives: • Define or explain a number of basic economic terms and concepts. • Explain, illustrate, and apply marginal analysis. • Explain, illustrate, and apply the production possibilities model. • Explain, illustrate, and apply the law of comparative advantage. 1. “Life is Economics” Q: Is this statement true or false? Why? 2. Economic Goals and Priorities of Society, or, “What does society want out of its economy? • • • • • Economic growth/rising living standards Low unemployment/high employment Low inflation/stable prices Economic equity Economic efficiency Remark: On the individual decision-making level, the incentives that motivate economic activity and choices are utility maximization for consumers, profit maximization for producers/firms, and social welfare maximization for government units. 3. Economics Defined a) Economic Scarcity DEF: Economic scarcity exists when human needs and wants exceed an economy’s ability to satisfy them given available resources and current technology.

DEF: The four basic economic resources are labor, capital (a capital good is a produced good that is used as an input in the production of other goods and is not available for current consumption), land (energy, natural resources, raw materials and other “gifts of nature”) and entrepreneurial ability (the ability to recognize and exploit economic opportunities, develop and produce new goods/services and organize economic resources). Technology refers to the ability (based upon a body of knowledge or set of skills) to transform resources into goods and services. 1

DEF: An economic good (bad) is something that increases (decreases) an individual’s “utility”, the economic term for well-being, happiness, satisfaction or welfare. Examples: Economic goods: kringle, DVDs and shoes. Economic bads: garbage and pollution. CLAIM: Economics is based on two axioms (self-evident truths): (i) society’s material wants and needs are unlimited or insatiable; (ii) economic resources and current technology are limited. Remark: Physical scarcity alone does not cause economic scarcity. Economic goods are both physically and economically scarce.

Economic bads, such as pollution, toxic wastes and garbage, are physically scarce but they are not economically scarce. CLAIM: Economic scarcity implies that (i) people must compete for scarce goods and resources, (ii) goods and resources must be rationed by some rationing device or mechanism, (iii) choices must be made and when choices are made, other opportunities and alternatives must be sacrificed. 2 Remark: Economic scarcity is most easily seen when a person has to give up or sacrifice something (in the form of money or time) in order to obtain more of something else.

Price is a clear indicator or signal of economic scarcity. Remark: People and society in general are confronted with the following problem: The Economizing Problem: Attain the greatest or maximum fulfillment of a person’s or society’s unlimited wants (the goal of production) given limited resources and technology (the means of production). Question: How does one make the “best” or “optimal” choice? DEF: Economics is the study of economic scarcity and how individuals and society allocate their limited resources and technology to try to satisfy their unlimited needs, wants and desires; i. . , economics is the study of how best to solve the Economizing Problem. b) Opportunity Cost Claim: To solve the “Economizing Problem,” the decision-maker must make choices or decisions and so must know the value or cost of alternatives. DEF: The opportunity cost of a choice or decision is the value of the next best alternative that is forgone or sacrificed when the choice or decision is made. What is the opportunity cost of (or sacrifices required by) the following? taking Econ *120 or working an additional 10 hrs/week • buying 100 shares of Microsoft stock or conducting wars in Iraq and Afghanistan • developing the oil fields in Alaska’s ANWR or operating a coal fired power plants Remarks: (i) Opportunity cost focuses on tradeoffs and so opportunity cost is measured in terms of sacrificed alternatives and not necessarily in terms of money. (ii) Opportunity cost is subjective and typically varies from person to person. (iii) The opportunity cost of an activity usually increases as more of the activity is pursued.

Example: Suppose your employer wants to increase your work hours in increments of 2-hour blocks of time. What is the opportunity cost of each additional block of time and how does the opportunity cost of each additional block of time change? List alternatives. 1st 2-hr block of work, give up _____? 2nd 2-hr block of work, give up _____? 3rd 2-hr block of work, give up _____? 4th 2-hr block of work, give up _____? 5th 2-hr block of work, give up _____? or, 1st hour of studying: give up _____? or, 2nd hour of studying: give up _____? r, 3rd hour of studying: give up _____? or, 4th hour of studying: give up _____? or, 5th hour of studying: give up _____? 3 (iv) Differences in opportunity cost provide the basis for mutually beneficial exchange. Example: Suppose that Max, a plumber, and Wanda, an electrician, each had 5 days of vacation time and each wanted to add a bedroom and bathroom onto their houses. Max can plumb a bathroom in 1 day and wire a bedroom in 4 days; Wanda can wire a bedroom in 1 day and plumb a bathroom in 4 days.

In terms of opportunity cost: OCM1 wired bedroom = 4 plumbed bathrooms; OCM1 plumbed bathroom = 1/4 wired bedroom. OCW1 wired bedroom = 1/4 plumbed bathroom; OCW1 plumbed bathroom = 4 wired bedrooms. In five days, both Max and Wanda each could complete their house additions. How should they spend their time? Can Max and Wanda benefit from an exchange of some sort? Because of the differences in opportunity costs, Max should plumb both additions and Wanda should wire both additions and then each would have the desired additions to their houses plus three “extra” days. Trading” or exchanging 1 plumbed bathroom (one unit or day of plumbing) for in return for 1 wired bedroom (one unit or day of wiring) would be mutually beneficial. Example: Suppose Wilma has 20 cookies and 5 apples and Fred has 25 cookies and 10 apples. Wilma prefers apples over cookies and Fred prefers cookies over apples. Will Wilma and Fred eat the cookies and apples that they initially possess or will they exchange/trade? Explain. 4. Economic

Methodology a) Model/Theory Building The process: (i) Observe economic phenomena; (ii) Identify important variables; (iii) State assumptions that clarify, simplify and focus the relevant economic issues and questions being investigated; (iv) State the hypothesis or propositions; (v) Evaluate the validity of the propositions by proving the proposition logically and by testing the propositions against “reality” or “real-world” evidence; and, (vi) Accept the theory/model or reject it and reformulate the theory/model or construct a new theory/model. ) Marginal Analysis and Efficiency “DEF”: Marginal means incremental or additional and refers to a small change in an economic variable resulting from a unit change in some other economic variable; e. g. the marginal utility of a good X, the marginal cost of a good Y, the marginal product of labor. Remark: Marginal analysis evaluates and compares the marginal benefit and the marginal cost of a decision or choice and provides the solution to the “Economizing Problem. ” 4 DEF: The marginal benefit, MB, of an economic variable Q is the change in the total benefit, ?

TB, resulting from a unit change in Q); the marginal cost, MC, of an economic variable Q is the change the change in the total cost, ? TC, resulting from a unit change in Q); that is, MB = ? TB/? Q, and, MC = ? TC/? Q. CLAIM: A rational economic decision-maker will increase a economic variable Q as long as the marginal benefit of that change in Q exceeds the marginal cost of that change; that is, if MB > (( MC at the quantity Q1 (or, MB < MC at the quantity Q2), then the quantity Q1 (Q2) is inefficient.

Example: Suppose that you buy a used car for $500 but after you gain possession of the car you discover that repairs are needed to make it go and stop. The MB from driving the car is $1,000, MB = $1,000; the MC of fixing it up is $700, MC = $700. Do you spend an additional $700 to fix up and keep the car? Yes! Because, the MB of having and driving the car = $1,000 > $700 = the MC of having and driving the car, repair the car. The net benefit of repairing the car is $300 > 0. The $500 spent to buy the car is a sunk cost, a cost that has been incurred in the past and cannot be changed and or ecovered. Thus, a sunk cost does not enter into the decision/choice to repair the car. Example: A pizza place next to a residence hall on a university campus operates from 11 am to 9 pm and sells 400 pizzas for $10 each during its business hours. After observing a large number of students carrying-in pizza boxes during the later part of the evening, a part-time pizza worker and economics student has suggested that the firm stay open later into the night. The student estimated the total benefits and total costs for different closing times (hours of operation) and created the table below.

Should the pizza place stay open later? If so, how late? What should be its closing time? That is, what is the efficient or optimal closing time? 5 Closing Time 9 pm 10 pm 11 pm 12 am 1 am 2 am Total Benefit, TB $4,000 $4,500 $4,900 $5,200 $5,400 $5,500 Marginal Benefit, MB – Total Cost, TC $1,000 $1,100 $1,250 $1,500 $1,900 $2,500 Marginal Cost, MC – Answer: For the hour ending at 12 am, MB = $300 > $250 = MC and so the pizza place should still be open at 12 am. For the hour ending at 1 am, MB = $200 < $400 = MC and so it doesn’t “pay” to be open until 1am.

Thus, the firm should close somewhere between 12 am and 1 am. Formally, the efficient o r optimal closing time is somewhere between 12 am (midnight) and 1 am, at which point MB = MC. Graphically: c) Microeconomics vs. Macroeconomics DEF: Microeconomics is the study of (i) economic decision-making by the individual consumer, firm or governmental unit, (ii) the allocation of resources and the determination of prices and output in specific markets and industries, (iii) the distribution of income in society, and, (iv) market structures. DEF: Macroeconomics is the study of conomic “aggregates” or “totals” such as Gross Domestic Product (GDP), national income, national employment/unemployment, economic growth, the price level/inflation, interest rates, the money supply, total consumption, total investment, govt. spending, total spending, industrial capacity, and trade/budget deficits. Remark: Microeconomics focuses on the decision-making of the individual economic agent (a person, firm, or governmental unit) and the “small” individual parts of the economy. Macroeconomics focuses on the whole economy and the sum of its individual parts. 6 d) Positive vs.

Normative Economics Positive economics is descriptive and predictive and investigates “what was, what is and what will be” and is value free (does not depend on one’s value system or religious beliefs). Normative economics is prescriptive and investigates “what should be”; it evaluates the desirability of economic decisions and policies using value judgements and depends upon one’s moral code or religious beliefs. e) Fallacy of Composition Claim: What is true for a single economic agent (individual consumer or producer) is NOT necessarily true for the economy as a whole.

Examples: the balanced budget amendment; 15% wage increase for one person vs. everyone. f) Assumptions in Economics Remark: Assumptions simplify and distill the real world into its basic component parts in order to obtain a better understanding of the basic structure of an economy and its parts and the fundamental relationships; “separates the wheat from the chaff. ” Assumption: ceteris paribus or “all other things held constant” or “nothing else changes. ” g) Causation vs.

Correlation “DEF”: Correlation (or association) occurs when two variables are related in some systematical and dependable way; the variables change together but a change in one variable does NOT necessarily cause a change in the other. Causation occurs when a change in one variable causes a change in the other. Remark: Economic analysis focuses on causation, not correlation. The ceteris paribus assumption simplifies the analysis and enables one to determine and understand the causal relationships between variables Remark: Unintended effects generally complicate economic analysis.

For example, installing and using seatbelts and airbags are intended to reduce traffic deaths and injuries. But, despite the presence of these safety devices, the number of traffic accidents and deaths and the severity of traffic accident injuries initially increased instead. Why? The greater protection offered by these devises in auto crashes actually encouraged greater highway speeds and reckless and risky driving, all of which tend to increase the number of accidents and traffic deaths and injuries.

Seatbelts and airbags do not cause more traffic deaths and injuries, but these variables are correlated or related in a systematic way. h) Teakettle and Table Problem 7 5. The Production Possibilities Frontier (Curve) Model a) Definitions and Properties of the PPF Model DEF: The Production Possibilities Frontier, PPF (or Curve, PPC) shows the different combinations of goods and services that an economy can produce given the efficient use of available fixed resources and current technology. Example: Consider the Guns – Butter PPF below.

If the economy is operating at point C and producing 370 units of guns, then the maximum quantity of butter that the economy can produce using its technology and available resources efficiently and fully is 200 units. Alternatively, if the economy is producing 400 units of butter, the maximum quantity of guns it can produce is 200 units. Remark: Construct your own PPF; can you work 20 hours per week and achieve a 3. 67 (A–) gpa? Alternatively, construct the PPF for the U. S. for health care and cell phones or for food and energy (should we grow corn and sugar to eat or to make biofuels? . Remark: The PPF model can be used to illustrate three basic concepts: (i) the opportunity cost of a good; (ii) the law of increasing opportunity cost in the case of a concave outward PPF; and (iii) economic efficiency (productive efficiency, full employment and allocative efficiency). DEF: Productive (technical) efficiency is achieved when given quantities of goods are produced in the least costly way, or equivalently, when employed resources produce the maximum possible output of goods and services. Full employment is achieved when all available resources are employed. Remark.

Productive efficiency and full employment are achieved at output combinations that lie on the PPF. Inefficiency occurs at output combinations that lie inside the PPF (resources or technology are either not being fully or efficiently used). Unattainable output combinations lie outside the PPF. 8 DEF: Allocative efficiency is achieved when the economy is producing the combination of goods most desired by society. Remark: Which point on the PPF that is “best” depends upon society’s preferences and thereby becomes a normative issue. In the PPF below, is point C “better” than point D or is D “better” than C?

Democrats and Republicans have different perspectives on which combination of butter and guns is “best. ” Claim. Moving from one efficient output allocation (point on the PPF) to another requires a transfer of resources from the production of one good to another. Consequently, when more guns are produced, less of butter can be produced; the opportunity cost of an increase in the production of guns is the resulting decrease in the production of butter. Furthermore, the |slope| of the PPF at a point shows the opportunity cost of one additional unit of good X as measured in terms of the other good Y.

That is, the |slope| indicates how much of good Y must be sacrificed in order to obtain one additional unit of good X. Graphically: (see above graph) Points A, B, C, D, E and F represent three different combinations of guns and butter that the economy can produce when using all of its resources in a technologically efficient manner. When all resources and technology are used to produce butter, 500 units of butter can be produced but zero units of guns can be produced (pt. F). At any point on the PPF, the economy must sacrifice some guns to obtain more butter.

Point G is inefficient because more of either or both goods can be produced; in this case, the opportunity cost of either good is zero. b) Constant Opportunity Costs and the Linear PPF Model DEF: A resource is specialized if it is not completely adaptable to alternative uses or cannot easily be substituted for another resource in the production of some good. Claim: If resources used in the production of goods X and Y are non-specialized or perfectly substitutable, then the opportunity costs are constant and the PPF is linear.

That is, if the opportunity cost of a good X (as measured in terms of another good Y) is constant, then the same quantity of Y must be sacrificed for each additional unit of X, regardless of the quantity of X produced, and so the PPF is linear (a downward sloping straight line). Example: Assume that a farmer has 80 acres of land (of uniform fertility) and given quantities of other economic resources (labor, capital and entrepreneurial ability) with which to produce either corn or soybeans. On each acre of land, the farmer can produce either 100 bu. f corn or 50 bu. of soybeans. The opportunity cost of one bu. of soybeans is 2 bu. of corn and the opportunity cost of one bu. of corn is 1/2 bu. of soybeans. The farmer changes the combination of corn and soybeans produced by changing the number of acres planted in corn or soybeans. Non-specialized Resources – Linear PPF Production Possibility Schedule Possible Output Combinations A B C D E 0 2000 4000 6000 8000 4000 3000 2000 1000 0 Corn: Soybeans: 9 Note: At pt. A, all acres are in soybeans. At pt. B, 20 acres are in corn and 60 acres are in soybeans.

At pt. C, 40 acres are in corn and 40 acres are in soybeans. At pt. D, 60 acres are in corn and 20 acres are in soybeans. At by E, all acres are in corn. Remark: The opportunity cost of 4000 bu. of soybeans is 8000 bu. of corn; the opportunity cost of 8000 bu. of corn is 4000 bu. of soybeans. The opportunity cost of 2000 of corn is 1000 bu. of soybeans whereas the opportunity cost of 3000 bu. of soybeans is 6000 bu. of corn. Remark: At any point on the PPF, the opportunity cost of one additional bu of corn is 1/2 bu. of soybeans = |slope| of the PPF; i. . , OCcorn = ? bu. of soybeans per bu. of corn. Likewise, the opportunity cost of one additional bu of soybeans is 2 bu of corn = 1/|slope| of the PPF; i. e. , OCsoybeans = 2 bu. of corn per bu of soybeans = 1/(1/2) bu of corm per bu. of soybeans. Note that ? soybeans/? corn = |slope| of PPF can be written as (i) ? soybeans = |slope| ? ?corn, or, (ii) ? corn = ? soybeans/|slope|. Thus, if ? corn = 1, then ? soybeans = |slope| of PPF ? ?corn = ? ? 1 bu = ? bu, or, OCcorn = ? bu of soybeans. Likewise, if ? soybeans = 1 bu. , then ? corn = ? oybeans/|slope| = 1 bu. /(? ) = 2 bu. , or , OCsoybeans = 2 bu of corn. b) Increasing Opportunity Costs and the Concave-outward PPF Model The Law of Increasing Opportunity Cost: When resources are specialized, increased production of a good X comes at increased opportunity cost. That is, as the production of a good X increases, the quantity of a good Y that must be sacrificed for each additional unit of good X increases. Claim: The Law of Increasing Opportunity Costs and specialized resources are represented by a concave outward PPF.

A movement down along a concave outward PPF implies that the opportunity cost of X is increasing. Remark: Most economic resources are specialized in the production of some good and so PPFs are most often drawn bowed outward. 10 Specialized Resources – Concave Outward PPF Production Possibility Schedule Possible Output Combinations A B C D E Good X (butter) 0 100 200 300 400 Good Y (guns)400 400 395 370 315 200 F 500 0 Examples: Given pt. B, the opportunity cost of 100 additional units of good X (butter) is 25 units of good Y (guns). At pt. C = (200X,370Y), suppose the |slope| of the PPF at C is OCX = ? 0. 5, then the opportunity cost of one additional unit of X (butter) is 0. 5 units of good Y(guns); alternatively, the opportunity cost of one additional Y is 2X. I. e. , at pt C, OCX = ? Y and OCY = 2X. At pt. D = (300X,315Y), suppose the |slope| of the PPF at D is 0. 8. The opportunity cost of one additional unit of X is 0. 8 units of good Y and the OC of one additional Y is 1/0. 8 = 1. 25 units of X. Formally, recall that ? Y/? X = |slope| of PPF. So, at pt D, |slope| = ? Y/? X = 0. 8, which can be rewritten as either (i) ? Y = 0. 8 ? ?X, or, (ii) ? X = ? Y/0. 8. So, at pt. D, if ?

X = 1 (good X increases by 1 unit from 300 to 301 units of X), then good Y must be decreased by approximately 0. 8 units. That is, given ? X = 1 unit, it follows that ? Y = |slope| ? ?X = 0. 8 ? ?X = 0. 8 ? 1 unit, or OCX = 0. 8 units of Y. Likewise, at pt. D, if ? Y = 1 (good Y increases by 1 unit from 315 to 316 units of Y), then good X must be decreased by approximately ? X = 1/(0. 8) = 5/4 units. That is, given ? Y = 1 unit, it follows that ? X =? Y/0. 8 = 1 unit/0. 8 = 1 unit/(4/5) = 5/4 units = 1. 25 units, or OCy = 1. 25 units of X. Similarly, if at pt. E the |slope| = 1. , then OCX = 1. 5 Y = 3/2 Y and OCY = 2/3 X = 0. 67 X. 11 d) Shifts of the PPF Claim: Shifts of the PPF are caused by • changes in the quantities available resources: L^ or K^ ? PPF shifts from PPF1 to PPF2. • changes in technology: TechX^ ? PPF shifts from PPF2 to PPF3. • changes in capital good vs. current consumption good choices Examples: Remark: An economic recession, a decrease in national real output for six or more months, is represented by a movement to a point inside the PPF and not an inward shift of the PPF, because in a recession not all resources (e. g. labor and capital) are fully or efficiently employed. 6. Choices and the PPF a) Choices Claim: Any society must decide: (i) What, how much and when to produce. (ii) How to produce (production technology) and distribute goods (allocation mechanism). (iii) For whom to produce, how to divide the economic pie. b) An Illustration: Present Choices, Future Possibilities and the PPF Model Claim: A choice of fewer capital goods and more current consumption goods implies smaller future increases (outward shifts) of the PPF, less capital accumulation, slower economic growth and smaller increases in living standards.

In other words: “Party now, pay later. Pay now, party much more later. ” 12 Graphically: Choose wisely! 7. Opportunity Cost, Comparative Advantage and Exchange (See Arnold, pp. 457-62). DEF: A(n) nation, firm or individual has a comparative advantage (CA) in the production of a good X if it can produce good X at a lower opportunity cost than can any other nation, firm or individual. A(n) nation, firm or individual has an absolute advantage in the production of a good X if it can produce more of good X with a given amount of resources than can any other nation, firm or individual.

CLAIM: Every country has a CA is the production of at least one good. CLAIM: If nations, firms or individuals specialize in the production of the good in which they have a comparative advantage and engage in free, unrestricted trade (exchange), then total production will increase and exchange/trade can result in mutual gain for every nation, firm or individual. Remark: Specialization based on comparative advantage and free trade implies that a nation can consume outside its economy’s PPF and that “self-sufficiency breeds inefficiency. An Example of Comparative Advantage and Mutual Gain Given: Wilma and Fred, computers and pizza, 100 units of labor, and linear PPFs. • Wilma can produce either 50 comps or 1000 pizzas ? 1 comp “? “ 20 pizzas ? OCWcomp = 20 pizzas and OCWpizza = 1/20 comp • Fred can produce either 20 computers or 900 pizzas ? 1 comp “? “ 45 pizzas ? OCFcomp = 45 pizzas and OCFpizza = 1/45 comp 13 Hence, Wilma has a CA in computers because OCWcomp = 20 pizzas < 45 pizzas = OCFcomp, and, Fred has a CA in pizza because OCFpizza = 1/45 comp < 1/20 comp = OCWpizza. Remark.

Even though Wilma has an absolute advantage in the production of both pizza and computers, Fred still has a comparative advantage in the production of one of the goods. (i) “Autarky”: Initial no trade production and consumption: Labor Allocation Wilma 50% on comps 50% on pizza Fred: 50% on comps 50% on pizza Totals Production 25 comps 500 pizzas 10 comps 450 pizzas 35 comps 950 pizza Consumption 25 comps 500 pizzas 10 comps 450 pizzas 35 comps 950 pizza (ii) Mutual Gain from specialization and free trade. Fred and Wilma each specialization in the production of the good in which they hold a comparative advantage.

Labor Allocation Wilma 80% on comps 20% on pizza Fred: 0% on comps 100% on pizza Totals Production 40 comps 200 pizzas 0 comps 900 pizzas 40 comps 1100 pizza #1 Trade –15 comps +425 pizzas +15 comps –425 pizzas #1 Cons Allocation 25 comps 625 pizzas 15 comps 475 pizzas #2 Trade –12 comps +360 pizzas +12 comps –360 pizzas #2 Cons. Allocation 28 comps 560 pizzas 12 comps 540 pizzas Remark. Note that “all-or-nothing” specialization for both Wilma and Fred is not required to establish the result. This is true in general as well.

Remark: The mutually agreeable terms of trade, or mutually beneficial price, for one good X as measured in terms of the other good Y is established between the opportunity costs of good X of each individual/country. That is, OCWcpu = 20 pizzas < terms of trade (tot) < 45 pizzas = OCFcpu, or, OCWpizza = 1/20 computer > 1/(tot) > 1/45 computers = OCFpizza. 14 In the above example, Wilma trades away 12 computers in exchange/return for 360 pizzas and so the terms of trade, tot, are 1 computer for 30 pizzas; i. e. , the tot or “price” of 1 computer = 30 pizzas.

Hence, total (world) production and consumption are both greater under specialization and free trade than under autarky. Mutual gain results because Fred and Wilma each consume more of both goods. That is, specialization and free trade leads to an allocation that is Pareto superior to autarky. DEF: An allocation A is Pareto superior to an allocation B if no person is worse off at allocation A than at allocation B and at least one person is better off at allocation A than at allocation B. An allocation C is Pareto efficient (Pareto optimal) there does not exist an allocation D that is Pareto superior to allocation C.

That is, allocation C is Pareto optimal if it is impossible to find another allocation D that makes one person better off without making someone else worse off. [The concept of Pareto efficiency is attributed to Vilfredo Pareto, a late 19th – early 20th century Italian economist. ] Graphically: The “specialization and free trade” consumption bundle (EW, EF) = ((560 pizza, 28 comps), (540 pizza, 12 comps)) is Pareto superior to the “autarky” consumption bundle ((500 pizza, 50 comps), (450 pizza, 10 comps)) because, compared to autarky, at least one person is better off and no one is worse off (in this case, both Fred and Wilma are better off). 5 ECON *120: Principles of Microeconomics I. FOUNDATIONS OF ECONOMICS B. Demand Section I. B Learning Objectives: • Explain and differentiate the quantity demanded of a good and the demand for a good • Explain, illustrate, and apply the law of demand and the demand curve • Explain and illustrate the effects of changes in the determinants of demand (a. k. a. , non-own price factors or demand “shifters”) • Explain and illustrate the effects of taxes and subsidies on demand 1. Definitions “DEF”: Demand represents the behavior f the consumer and the relationships between the quantities of a good an individual consumes and other factors such as the good’s price, the consumer’s income, the consumer’s tastes and preferences, the prices of goods related in consumption (substitutes and complements), expectations, government policies (taxes and subsidies), and the number of consumers. DEF: The quantity demanded of a good X, QXd, is the specific quantity of good X that a consumer is willing and able to purchase at a particular price.

DEF: The demand curve, DX, shows the maximum quantity demanded of good X, QXd, by a consumer at each possible price in a series of prices for good X, ceteris paribus; alternatively, it shows the maximum price that a consumer is willing and able to pay for each possible quantity demanded of good X, QXd, in a series of quantities for good X, ceteris paribus. Remark: Demand is represented by the entire demand curve. The quantity demanded is represented by a single point on the demand curve—a particular price and quantity pair. 2.

The Law of Demand The Law of Demand: the quantity demanded of a good X, QXd, varies inversely with the price of good X, PX, ceteris paribus; i. e. , PX^(v) ? QXdv(^) and so the demand curve is downward sloping. 16 A brief explanation of the notation: The expression “PX^(v) ? QXdv(^)” is a form of symbolic shorthand, which will appear frequently in the lecture notes. The items outside the parentheses are associated with each other and the items within parentheses are associated with each other. Thus, the above expression can be separated and re-written as two separate expressions: “PX^ ?

QXdv”, and, “PXv ? QXd^”. The expression “PX^ ? QXdv” reads: “an increase in the price of good X, PX, causes a decrease in the quantity demanded of good X, QXd. ” Similarly, the expression “PXv? QXd^” reads: “a decrease in the price of good X, PX, causes an increase in the quantity demanded of good X, QXd”. Thus, the initial expression “PX^(v) ? QXdv(^)” states that an increase in the price of good X, PX, implies or causes a decrease in the quantity demanded of good X, QXd, and a decrease in the price of good X, PX, implies or causes an increase in the quantity demanded of good X, QXd.

CLAIM: The Law of Demand is based on (i) substitution and income effects and (ii) the Law of Diminishing Marginal Utility. Intuitively: The income effect is the change in the quantity demanded of a good X, QXd, caused by a change in the purchasing power of a consumer’s income, a. k. a. real income, which results when the price of good X, PX, changes, i. e. , PX^(v) ? purchasing power v (^) ? QXdv(^) The substitution effect, SE, is the change in the quantity demanded of a good X, QXd, caused by a change in the relative price of X (and while holding real income constant).

PX^(v) ? the consumer substitutes the relatively cheaper good Y (X) in ? QXdv(^) place of the relatively more expensive good X (Y) Assumption: A consumer’s total utility or happiness can be measured in terms of “utils. ” DEF: The marginal utility of a good X, MUX, is the increase in total utility, TU, (satisfaction, happiness) that a consumer derives from the consumption of an additional unit of good X, ceteris paribus: MUX = ? Total Utility/? QX = ? TUX/? QX.

The Law of Diminishing Marginal Utility (LDMU) states that the marginal utility derived from the consumption of a good X decreases (increases) as the quantity of good X consumed increases (decreases), ceteris paribus, i. e. , MUXv(^) as QX^(v) Remark: The LDMU implies that as the quantity consumed of a good increases, the price a consumer is willing to pay for those additional quantities decreases: QX^(v) ? MUXv(^) ? the price the consumer is willing to pay v(^).

In the D2L “Interactive Graphs” section, click on the link “Demand Schedule & Curve” to see the interactive graph “An Example of a Demand Schedule and Demand Curve. ” 17 3. Determinants of Demand (Non-own Price Factors or “Demand Shifters”) Remark: An increase in demand means that at any given price, consumers are willing and able to buy a larger quantity of the good, or, alternatively, that at any given quantity, consumers are willing and able to pay a higher price per unit.

A decrease in demand means that at any given price, consumers are willing and able to buy a smaller quantity of the good, or, alternatively, that at any given quantity, consumers are willing and able to pay a lower price per unit. Claim: Movements vs. Shifts. Changes in a good’s “own” price, PX, cause changes in the quantity demanded of X, QXd, and movements along the good X demand curve, DX. Changes in the determinants of demand (a. k. a. the non-own price factors or “shifters” of demand) cause changes the demand for good X, DX, and shifts of the entire demand curve, DX.

Example: A decrease in the price of gas, Pgas causes an increase in the quantity demanded of gas, Qgasd, and a downward movement along the demand curve for gas because Pgas is the “own” price of gas. In contrast, the same change in Pgas causes an increase in the demand for SUVs and an outward or upward shift of the SUV demand curve because Pgas is a “non-own price” factor with respect to SUV demand. In the D2L “Interactive Graphs” section, click on the link “An Increase/Shift in Demand” to see the interactive graph “An Explanation of an Increase in Demand and a Shift of the Demand Curve. a) Tastes and preferences Tastes and preferences for good X ^(v) ? DX^(v), the demand curve shifts up/right (down/left). An “increase” in preferences implies that at any given price, say P1, the consumer is willing and able to buy a greater quantity, Q2d instead of Q1d. Or equivalently, at any given quantity, Q1d, the consumer is willing and able to pay a higher price, P2 instead of P1. 18 Examples: • summer vacation travel ? the demand for gasoline increases, DX shifts up/right • tornado destruction in the Midwest ? he demand for lumber increases, DX shifts up/right • mad cow disease ? demand for McDonald’s hamburgers decreases (DX shifts down/left) and demand for chicken sandwiches (good Y) increases (DY shifts up/right) • medical studies change the demand for various goods (cigarettes, bran, mercury, etc. ) b) Consumer income: normal and inferior goods DEF: A good X is a(n) normal (inferior) good if an increase in the consumer’s income I increases (decrease) the demand for good X, ceteris paribus; i. e. , Normal good: I ^(v) ? DX^(v) Inferior good: I ^(v) ?

DXv(^) 19 Remark: Whether a good is normal or inferior depends upon an individual’s preferences and tastes. Goods such as computers, new cars, eating out and jewelry are typically considered normal goods whereas goods such as pasta, potatoes, hotdogs, beer and the Bible. c) Prices of goods related in consumption: substitutes and complements DEF: Two goods, X and Y, are substitutes (complements) in consumption if an increase in the price of good Y, PY, increases (decreases) the demand for good X, DX, ceteris paribus; i. . , X and Y are substitutes: PY^(v) ? DX^(v). X and Y are complements: PY^(v) ? DXv(^). Examples: • • Complement goods: beer and pizza, gasoline and cars, staples and staplers, and computers and software, printers and printer cartridges, shoes and socks. Substitute goods: Pepsi and Coke, sub sandwiches and hamburgers, tea and coffee, ice cream and frozen yogurt, and staples and paperclips. Example: If jelly and peanut butter are complements in consumption, then Pjelly^(v) ? Qdjellyv(^) ? Dpeanut butterv(^).

In this example, an increase in the price of jelly, Pjelly^, decreases the quantity demanded of jelly, Qdjellyv, which then (because consumers are buying less jelly) decreases the demand for peanut butter, Dpeanut butterv and shifts the demand curve for peanut butter down and to the left: when the intermediate step is removePjelly^ ? Dpbv . 20 Example: If coffee and tea are substitutes in consumption. Then Pcoffee^(v) ? Qdcoffeev(^) ? Dtea^(v). d) Expectations about future income, prices, and availability of goods. e) Government policies (taxes and subsidies).

Remark: An excise tax (subsidy) on the consumption of a good shifts the “effective” demand curve vertically down (up) by the amount of the tax (subsidy). Graphically: An excise tax on consumption and the effective (after tax) demand curve. 21 Example: A $0. 50 excise tax shifts the “effective” demand curve down vertically by $0. 50 from the perspective of the producer because of the tax, the maximum price consumers are willing and able to pay producers (again, from the producers perspective) for Q0 = 100 units falls from $2. 25 to $1. 75. Consumers still pay the original $2. 25 but after the tax is imposed, producers receive $1. 5 and the rest goes to the government. Graphically: An excise subsidy on consumption and the effective (after subsidy) demand curve. Example: From the perspective of producers, an excise subsidy increases the maximum price consumers are willing and able to pay and so shifts the demand curve up vertically by $1. f) Number of consumers ^(v) ? DX^(v) Remark: Follows directly from the derivation of the market demand curve (next page). In the D2L “Interactive Graphs” section, click on the link “Examples of Changes in Demand” to see the interactive graph “Determinants of Demand and Shifting the Demand Curve. Please note the remark about the incorrect scripting of one of the cases of a demand change. 22 4. The Market Demand Curve Claim: The market demand curve is the horizontal summation of the individual demand curves of all consumers. Graphically: 23 ECON *120: Principles of Microeconomics I. FOUNDATIONS OF ECONOMICS C. Supply Section I. C Learning Objectives: • Explain and differentiate the quantity supplied of a good and the supply for a good • Explain, illustrate, and apply the law of supply and the supply curve • Explain and illustrate the effects of changes in the determinants of supply (a. k. a. nonown price factors or supply “shifters”) • Explain and illustrate the effects of taxes and subsidies on supply 1. Definitions “DEF”: Supply represents the behavior of the producer and the relationships between the quantities of a good a firm produces and other factors such as the good’s price, technology, prices of inputs, prices of goods related in production, expectations, government policies (taxes and subsidies), the number of producers. DEF: The quantity supplied of a good X, Qs, is the specific quantity of good X that a producer is willing and able to produce and make available for sale at a specific price.

DEF: The supply curve for a good X, SX, shows the maximum quantity supplied of good X by a producer at each possible price in a series of prices, ceteris paribus; alternatively, it shows the minimum price per unit that a producer must receive (or is willing to accept) for each possible quantity of a good X in a series of quantities, ceteris paribus. Remark: Supply is represented by the entire supply curve; the quantity supplied at a specific price is represented by a single point on the supply curve—a particular price and quantity pair. 2.

The Law of Supply The Law of Supply: the quantity supplied of a good, Qs, varies positively with the good’s price P, ceteris paribus; i. e. , P^(v) ? Qs^(v) and so the supply curve is upward sloping. 24 CLAIM: The Law of Supply and the upward sloping short run (SR) supply curve are based on the Law of Increasing Opportunity Costs. As the quantity supplied/produced increases, more inputs or resources must be used. Because inputs experience increasing opportunity cost, the opportunity costs of additional inputs increase thereby increasing the per unit cost of producing additional output.

Producers must receive a higher price in order to cover the higher costs of production. 3. Determinants of Supply (Non-own price factors or supply “shifters”) Remark: An increase in supply means that at any given price, producers are willing and able to produce a larger quantity of the good, or, alternatively, that at any given quantity, producers are willing and able to accept a lower price per unit. A decrease in supply demand means that at any given price, producers are willing and able to producer a smaller quantity of the good, or, alternatively, that at any given quantity, producers must receive a higher price per unit.

Remark: Movements vs. Shifts. Changes in the good’s own price cause changes in the quantity supplied of good X, QXs, and movements along the supply curve. Changes in the determinants of supply (the non-own price factors) cause changes in supply of good X, SX, and shifts of the entire supply curve, SX. a) Production technology: Tech ^(v) ? S^(v) 25 b) Input prices/resource costs: Input prices ^(v) ? Sv(^) Graphically: c) Prices of goods related in production: substitutes and joint products DEF: Two goods/products, X and Y, are substitutes in production if PY^(v) ? SXv(^).

Two goods/products, X and Y, are joint products if PY^(v) ? SX^(v) X and Y are substitutes in production: PY^(v) ? QsY^(v) ? SXv(^). X and Y are joint products: PY^(v) ? QsY^(v) ? SX^(v). Example of Joint Products: Beef and Leather (Other examples: Donuts and donut holes, electricity and wall board/gypsum). Example of Substitutes in Production: Kringle and donuts. (Other examples: Jockey sweatshirts and T-shirts, SUVs and pickups, corn and soybeans. ) 26 d) Expectations with respect to. Inventories, future prices (of both inputs and output) and resource availability ) Government policies (taxes, subsidies and regulations) Remark: An excise tax (subsidy) on production shifts the “effective” supply curve vertically up (down) by the amount of the tax (subsidy). Graphically: An excise tax on production and the effective (after tax) supply curve. Graphically: An excise subsidy on production and the effective (after tax) supply curve. 27 f) Number of producers 4. The Market Supply Curve Claim: The market supply curve is the horizontal summation of the individual supply curves of all producers/firms. Graphically: 28 ECON *120: Principles of Microeconomics I. FOUNDATIONS OF ECONOMICS D.

Market Equilibrium Section I. D Learning Objectives: • Explain and illustrate a market equilibrium quantity and price • Explain and illustrate market disequilibrium (shortage or surplus) • Explain and illustrate the functions of market prices • Explain and illustrate the effects of changes in the determinants of demand and supply on the market equilibrium quantity and price 1. Definitions DEF: A market equilibrium is a price P* and a quantity Q* such that at P* the quantity demanded equals the quantity supplied, Qd = Q* = Qs. DEF: A surplus exits at a price P1 if Qd ; Qs at P1. A shortage exits at the price P2 if Qd ; Qs at P2.

Remark: Intuitively, a market equilibrium exists when market forces (demand and supply) are balanced and there is nothing that causes a change in the market price or quantity of a good. Illustrations: a marble at the bottom of a bowl. Remark: At a market equilibrium quantity and price, Q* and P*, the quantity demanded, Qd, equals the quantity supplied, Qs, equals Q* (Qd = Q* = Qs) at P*. At a market equilibrium, demand DOES NOT EQUAL supply; i. e. , it is NOT the case that D = S. To state that D = S means that the demand curve is identical to the supply curve, which clearly is an incorrect statement! 9 2. The Functions of Prices Claim: Prices play a critical role in competitive markets: (i) Prices are flexible and adjust to “clear” the market; prices ensure internal consistency by coordinating the production and consumption plans made independently by producers and consumers. DEF: The price adjustment mechanism: at a price P0, Qd ;( Q0* = Qs at P0* ? P^(v) as consumers bid up (down) prices ? Qdv along D1 from Q1 and Qs^ along S0 from Q0* (Qd^ along D1 from Q1 and Qsv along S0 from Q0*) until Qd = Q1* = Qs at P1*. Graphically: Dv and S constant ? P*v and Q*v. 30

Examples: Be able to work through changes in preferences, income for normal goods (e. g. , cell phones and computers) and inferior goods (e. g. , hotdogs and pasta); prices of substitutes (e. g. , tea and coffee, Coke and Pepsi, staples and paperclips), prices of complements (beer and brats, staples and staplers, computers and floppy disks), etc. For the case of an increase in demand, see with the interactive graph “Demand Increase & Market Clearing,” which is available on the D2L ECON 120 website. b) S^(v) and D constant ? P*v(^) and Q*^(v). Remark: S^(v) from S0 to S1 ? surplus (shortage) is created at the initial equilibrium price P0*, i. e. , Qd = Q0* ; Q1 = Qs at P0* ? Pv(^) as consumer bid down (up) price ? Qd^ along D0 from Q0* and Qsv along S1 from Q1 (Qdv along D0 from Q0* and Qs^ along S1 from Q1) until Qd = Q1* = Qs at P1*. Graphically: Sv and D constant ? P*^ and Q*v. For the case of an increase in supply, see with the interactive graph “Supply Increase & Market Clearing,” which is available on the D2L ECON 120 website. Examples: Be able to work through changes in technology, input prices or resource costs (e. g. , wages, pizza toppings, energy), prices of substitutes in production (e. . , kringle and donuts, corn and soy beans), prices of joint products (donuts and donut holes, hamburger beef and leather, electricity and bricks). c) Simultaneous changes in D and S Claim: When demand and supply change simultaneously, then the change in the equilibrium price and quantity demand upon the magnitudes of the change in demand and supply. Four cases exist: 31 (i) (ii) (iii) (iv) D^ and S^ ? Q*^ and the change in P* is indeterminate D^ and Sv ? P*^ and the change in Q* is indeterminate Dv and Sv ? Q*v and the change in P* is indeterminate Dv and S^ ? P*v and the change in Q* is indeterminate

Graphically: Case (i) D^ and S^ ? Q*^, P* may increase, remain constant, or decrease (? P*??? ). Or, equivalently: Work through the remaining cases on your own! 32 ECON *120: Principles of Microeconomics I. FOUNDATIONS OF ECONOMICS Section I. E Learning Objectives: • Explain and illustrate consumer surplus and producer surplus • Explain and illustrate total benefit and total cost • Explain and illustrate the efficiency of a competitive market equilibrium for a pure private good • Explain and illustrate the effects of price controls, taxes and subsidies and the resulting deadweight losses E.

Applications 1. Consumer and Producer Surplus Recall: The Marginal Benefit, MB (Marginal Cost, MC) of a good Q is the increase in total benefit, TB (cost, TC) resulting from a unit increase in Q; i. e. , MB = ? TB/? Q (MC = ? TC/? Q). Claim: Because the maximum price a consumer is willing and able to pay for an additional unit of a good is based upon the consumer’s MB from consuming that additional unit, the demand curve represents the marginal benefit derived from the consumption of the good.

Likewise, because the minimum price a producer is willing and able to accept for an additional unit of a good is based upon the producer’s MC from producing that additional unit, the supply curve represents the marginal cost incurred from the production of the good. Thus, the demand (supply) curve can be used to measure a consumer’s (producer’s) “economic welfare” at a given quantity. CS (PS) is used to measure the change in consumer (producer) welfare resulting from a change in the price and quantity and of a good consumed by consumers (produced by producers).

DEF: Consumer Surplus, CS, is the difference between the price that a consumer is willing and able to pay and the price the consumer must actually pay in the market. 33 Remark: CS at a quantity Q1 is the difference between the total benefit of the consumer at Q1 (represented by the area under the demand curve between 0 and Q1 or the area of 0abQ1) and consumer total expenditures at Q1 (= P1? Q1 or the area of 0cbQ1). Thus, CS at Q1 represents the net benefits of consumers and is illustrated by the area between the demand curve and the market price line.

DEF: Producer Surplus, PS, is the difference between the price that a producer is willing and able to accept and the price the producer actually receives for that good in the market. Remark: PS of a given quantity Q1 is the difference between the total revenue of the producer at Q1 ( = P1? Q1 or the area of 0cbQ1) and the total cost at Q1 (represented by the area under the supply curve between 0 and Q1 or the area of 0dbQ1). Thus, PS at Q1 represents the net benefits of producers at Q1 and is illustrated by the area between the supply curve and the market price line.

Remark: For consumers, a price increase (decrease) lowers (raises) consumer surplus CS. The los (gain) of CS measures the decrease (increase) in consumer economic welfare. For prioducers, a price increase (decrease) raises (lowers) producers surplus PS. The gain (loss) of PS measures the increase decrease) in producer economic welfare. 34 Recall: The Total Benefit, TB (Total Cost, TC) at a given quantity Q1 is represented by the area under the MB (MC) curve between 0 and the quantity Q1. In the graph below, TB at Q1 = area abQ10 and TC at Q1 = area deQ10. Similarly, TB at Q2 = area acQ20 and TC at Q2 = area dfQ20.

Remark: The change in TB caused by a change in Q is given by the area under the MB curve for that change in Q. For example, given an increase in Q from Q1 to Q2, the increase in TB = ? TB = area bcQ2Q1. Likewise, given an increase in Q from Q1 to Q2, the increase in TC = ? TC = area efQ2Q1. Remark: At a given quantity, Q1, the economic gain to consumers and producers at the market equilibrium is represented by the Total Surplus or Net (Social) Benefit = net benefit of consumers + net benefit of producers = CS(Q1) + PS(Q1) = TB(Q1) – TC(Q1) = area abd in the graph below. 35 2.

Market Equilibrium and Efficiency in the “Private Good” MB/MC Model DEF: A good is a pure private good if there are no external benefits or costs from the consumption or production of that good and so Dmkt = MB = ? iMBi and Smkt = MC = ? jMCj. DEF: In a market, the quantity Q* is efficient if the maximum price consumers are willing and able to pay per unit for Q*, which represents the marginal benefit to consumers or “consumers price” equals the minimum price producers are willing and able to accept per unit for Q*, which represents the marginal (opportunity) cost to producers or “producers price”.

That is, the quantity Q* is (socially or economically) efficient if MB = MC at Q*. Claim: (The First Fundamental Theorem of Welfare Economics) In a market for a pure private good, the market equilibrium quantity is efficient, provided that certain technical conditions are satisfied; i. e. , at the market equilibrium Q* and P*, P* = MB(Q*) = MC(Q*). Remark: In other words, net social benefit is maximized at Q*. In addition, if at a quantity Q0, MB ) MC, then Q0 is inefficient and a deadweight loss, DWL, (also know as a “welfare cost” or “loss in efficiency”) is imposed upon society.

The DWL at Q1 (Q2) is represented below by the area bce (cgh). Remark: The quantity Q1 is inefficient because MB(Q1) > MC(Q1); similarly, the quantity Q2 is inefficient because MB(Q2) < MC(Q2). At Q1 (Q2), society can be made better off by producing one more (less) unit of Q. Increasing Q from Q1 to Q* increases social welfare by the amount DWL at Q1 = area bce = ? TB – ? TC = area beQ*Q1 – area ecQ*Q1. Alternatively, decreasing Q from Q2 to Q* increases welfare by DWL at Q2 = area cgh = ? TB – ? TC = area Q*chQ1 – area Q*cgQ1. 3.

Price Controls DEF: A price ceiling is a maximum legal price that a producer/seller may charge for a good or service; a price ceiling, Pc, is effective only if it is below the market equilibrium price (Pc < P*mkt). A price floor is a minimum price, fixed and “supported” by the government, that a producer/seller can receive for a good or service; a price floor, Pf, is effective only if Pf > P*mkt. 36 Claim: At a price floor Pf, the quantity supplied in the market, Qsmkt, is inefficient and the good is “overproduced” (i. e. , Qsmkt > Q*mkt) because t Qsmkt, the maximum price consumers are willing and able to pay per unit for Qsmkt is less than the minimum price producers are willing and able to accept per unit for Qsmkt. That is, at Qsmkt, MB < MC and so Qsmkt is inefficient. Graphically: (iii) At a price ceiling, Pc, the quantity supplied in the market, Qsmkt, is inefficient and the good is “under-produced” (i. e. , Qsmkt < Q*mkt) because at Qsmkt, the maximum price consumers are willing and able to pay per unit for Qsmkt is greater than the minimum price producers are willing and able to accept per unit for Qsmkt.

That is, MB > MC and so Qsmkt is inefficient. Graphically: 37 4. Taxes and Subsidies: Who Pays and Who Benefits? DEF: Consumers price vs. producers price. Claim: An excise tax (subsidy) drives a “wedge” between the consumers’ price and the producers’ price and imposes a deadweight loss (welfare cost or loss in efficiency) upon society because the losses in CS and PS exceed the tax revenues. Graphically: Excise tax on consumption. Remark: The after-tax equilibrium quantity, Qtax, is inefficient because MB > MC at Qtax, and so a deadweight loss is imposed upon society, represented by DWL(Qtax) = area abc.

The tax revenue is not an economic loss for society in general but does constitute a redistribution of economic welfare from consumers and producers of the good to society in general. The DWL is the difference between the sum of the loss in consumers surplus, area P*dab, and the loss of producers surplus, area eP*bc and the tax revenue generated by the excise tax, area edac, i. e. , DWL(Qtax) = ? CS + ? PS – Tax Revenue = area P*dab + area eP*bc – area edac = area abc Graphically: Excise tax on production. 38 ECON 120: Principles of Microeconomics Spring 2010 II. MICROECONOMIC MODELS AND DECISION-MAKING Section II. A

Learning Objectives: • Explain and calculate the price elasticity of demand • Explain and illustrate elastic, inelastic, unit elastic, perfectly elastic, and perfectly inelastic demand and corresponding demand curves • Explain the determinants of elasticity • Explain and illustrate the effects on total revenue of producers or total expenditures of consumers of a change in price given elastic, unit elastic, and inelastic demand • Explain and calculate other elasticities of demand (income and cross price elasticities) • Explain and calculate the price elasticity of supply and its basic determinant • Explain and illustrate how the elasticity of demand and supply affect consumers and producers prices given an excise tax on production A. Elasticity of Demand and Supply 1. Elasticity of Demand a) The Concept of Elasticity and Elastic/Inelastic Demand Curves DEF: The (own) price elasticity of demand, Ed, is a numerical measure of the sensitivity or responsiveness of the quantity demanded to changes in price, ceteris paribus, and is calculated as Ed = ? %? Qd/%? P?. Examples: Suppose that the quantity demanded of gas, Qgas, decreases by 10% when the price of gas, Pgas, increases by 20%. Then Ed = ? –10%/20%? = 0. 5.

If the Qd of Mountain Dew decreases by 50% when the price of Mountain Dew increases by 20%, then Ed = ? –50%/20%? = 2. 5. Remark: %? Qd = – Ed? %? P. Example: If Ed = 2 and price increases by 8%, %? P = +8%, then %? Q = –2? (8%) = –16%. If Ed = 0. 4 and price decreases by 25%, %? P = –25%, then %? Q = –0. 4? (–25%) = +10%. Alternatively, if a firm wants to increase its sales by 30% and Ed = 1. 5, then it should decrease price by 20% because %? P = %? Q/ –Ed = 30%/ –1. 5 = –20%. DEF: Midpoint elasticity formula: Given two points on a demand curve, (Q1,P1) and (Q2,P2), the (own) price elasticity of demand at the midpoint between these two points is calculated by Ed = ? %? Qd/%? P? = ? (Q1 – Q2)/(Q1 + Q2)]/[(P1 – P2)/(P1 + P2)] ?. 39 Example: Let pt A = (Q1,P1) = (8,16); pt. B = (Q2,P2) = (12,14); pt. C = (Q3,P3) = (28,6); pt. D = (Q4,P4) = (32,4). The midpoint price elasticity of demand between pts A & B: Ed = ? [(8 – 12)/(8 + 12)]/[(16 – 14)/(16 + 14)]? = (4/20)/(2/30) = 3. pts B & C: Ed = ? [(12 – 28)/(12 + 28)]/[(14 – 6)/(14 + 6)]? = (16/40)/(8/20) = 1. pts C & D: Ed = ? [(28 – 32)/(28 + 32)]/[(6 – 4)/(6 + 4)]? = (4/60)/(2/10) = 1/3. Remark: A linear demand curve has a different elasticity coefficient, Ed, at each point on the demand curve, Ed ranges from Ed = 0 at the horizontal intercept to Ed = ? at the vertical intercept.

DEF: Demand is said to be: elastic if Ed > 1 or ? %? Qd? > ? %? P? , unit elastic if Ed = 1 or ? %? Qd? = ? %? P? , inelastic if Ed < 1 or ? %? Qd? < ? %? P? , perfectly elastic if Ed = ? and perfectly inelastic if Ed = 0. Remarks: (i) Perfectly elastic demand is represented by a demand curve that is horizontal at the market price. A perfectly elastic demand curve implies that, at the market price, consumers will buy whatever quantity producers are willing and able to produce. (ii) Perfectly inelastic demand is represented by a demand curve that is vertical at the market quantity and implies that consumers will pay whatever price producers want for the market quantity. iii) Elastic demand can be represented by a demand curve that is relatively flat, such as D3. The majority of the demand curve D3 that appears in the graph is the elastic portion of the demand curve because the midpoint of the demand curve, where Ed = 1, is near the “lower-end” of D3. 40 (iv) Likewise, inelastic demand can be represented by a demand curve that is relatively steep, such as D2. The majority of the demand curve D2 that appears is the inelastic portion of the demand curve because the midpoint of the demand curve, where Ed = 1, is near the “upper-end” of D2. b) Determinants of Elasticity Claim: The demand for good X is more elastic (inelastic) (i) the greater (fewer) the number of substitutes there are for good X.

Remark: In general, Edcaterory < Edbrand. For example, because very few substitutes for gas exist but many substitutes for Mobil gas exist (such as BP, Citgo, Phillips, Shell, etc. ), Edgas < EdMobil gas. Likewise, Edsoda < EdMountain Dew. (ii) the more (less) an item absorbs as a share or portion of a consumer’s budget, Example: Because student expenditures on tuition or rent as a percentage are much greater than their expenditures on toothpicks or salt as a percentage of their income, Edcollege ; Edsalt. (iii) the less of a necessity and the more of a luxury (the more of a necessity and the less of a luxury) good X is; for example, Edfood ; Eddiamond jewelry. iv) the longer (shorter) the time interval considered, which allows for changes in preferences or the emergence of more substitutes; i. e. Edshort run ; Edlong run. c) Elasticity and Total Expenditures (Total Revenue) Remarks: Total Revenue of producers = TR = P? Q = TE = Total Expenditures of consumers. Because TR = TE = P? Q, total revenue or total expenditures can be represented graphically by the area of a rectangle of width Q and height P. 41 Claim: Along the (i) elastic portion of the demand curve, Ed ; 1 or ? %? Qd? ; ? %? P? : Pv(^) ? TE^(v). (ii) unit elastic point of the demand curve, Ed = 1 or ? %? Qd? = ? %? P? : Pv(^) ? ?TE = 0. iii) inelastic portion of the demand curve, Ed ; 1 or ? %? Qd? ; ? %? P? : Pv(^) ? TEv(^). Remark: In the graphs below, consider a given change in price, ? P (= P1 – P2 = P3 – P4), and change in quantity demanded, ? Q (= Q1 – Q2 = Q3 – Q4). Along the elastic section of the demand curve (left graph), the decrease in price, ? P, from P1 to P2, and the increase in the quantity demanded, ? Q, from Q1 to Q2, increases total expenditures of consumers (or total revenue of producers); i. e. , TE1 = P1·Q1 ; P2·Q2 = TE2 because the increase in expenditures from a greater quantity is greater than the decrease in expenditures from a lower price.

Alternatively, along the inelastic section of the demand curve (right graph), the same decrease in price, ? P (from P3 to P4), and increase in quantity demanded, ? Q (from Q3 to Q4), decreases total expenditures of consumers (or total revenue of producers); i. e. , TE3 = P3·Q3 ; P4·Q4 = TE4 because the increase in expenditures from a greater quantity is less than the decrease in expenditures from a lower price. 42 Claim: TR is at a maximum at the quantity at which Ed = 1. d) Other Elasticities of Demand (i) Income elasticity of demand, EI, is a numerical measure of the responsiveness or sensitivity of the quantity demanded to changes in income, ceteris paribus. If EI ;(( %? P), then supply is elastic, 1 ; Es ; ?. f production costs do NOT increases as output increases, then supply is perfectly elastic, Es = ?. • 44 P perfectly inelastic : ES = 0 S1 S2 inelastic: 0 ; E S ; 1 S3 elastic: 1 ; E S ?P S4 perfectly elastic : E S = ? ?Q 2 ? Q 3 0 Q0 Q • Given S2, a change in price of ? P yields a relatively small change in the quantity supplied (i. e. , %? P ; 0 ? %? Qs ; 0 but %? P ; %? Qs) and so 0 ; ES = %? Qs/%? P ; 1. For example, if supply is inelastic, then a 5% increase in price results in a less than 5% (perhaps 3%) increase in Qs. Given S3, a change in price of ? P yields a relatively large change in the quantity supplied (i. e. , %? P ; 0 ? %? Qs ; 0 but %? P ; %? Qs) and so 1 ; ES = %? Qs/%? P.

For example, if supply is elastic, then a 5% increase in price results in a more than 5% (perhaps 8%) increase in Qs. Given S4, a change in price of ? P yields an “infinite” response from producers. Producers are willing to produce and sell whatever quantity consumers are willing and able to buy at the market price (i. e. , %? P ; 0 ? %? Qs = ? and so ES = %? Qs/%? P = ? ). • • 3. Elasticity and Taxes Claim: Given an excise tax on either consumption or production, if the elasticity of demand is greater (less) than the elasticity of supply, then the portion of the tax paid by consumers is less (greater) than the portion of

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Microeconomics – Product & Resource Markets

It was at Menlo Park Laboratory Complex that Thomas Edison first unveiled the incandescent light bulb in December 1879 (Bellis 2006). More than a century has passed and, in that time, his famed invention has spread all over the world, marking great cities visible to passing planes. It has diminished from an astonishing wonder to an everyday, commonplace thing. In a large portion of the globe, light bulbs have become a basic necessity, placing it among products with inelastic demand.

Without the artificial lighting, all manner of work at night would have to be severely limited. Artificial lighting also satisfies the demand for abstract concepts like the feeling of security and comfort. Demand for this product is inelastic because there are no substitutes for light bulbs; no other invention can efficiently produce artificial lighting. Incandescent light bulbs can be sold for less than a dollar a piece and requires a very small proportion of income. Changes in the price of artificial lighting is likely to cause only relatively small shifts in demand.

If more than a century after Edison invented incandescent lighting, a new invention was placed in the market- a paint product that provided light when supplied with a weak electrical current. This new product presents itself as a substitute, which in turn, steals dollar votes for light bulbs. The quantity of light bulbs is sure to go down as some consumers favor the new product, forcing light bulb manufacturers to either exit the industry, increase prices, lower manufacturing costs, or innovate.

A lot of women around the world, even those who don’t know fashion TV and the like, want a Prada bag. They can fetch a price of some hundreds to thousands of dollars. The supply for these bags, however, is inelastic. Even if the tiniest bag were to suddenly jack up in price, the quantity of Prada bags in the market would remain the same, or even go down as Prada will realize that their market has shrunk considerably. A Prada bag is unique, requiring very specific materials and highly skilled labor, including that of the designer, put together in a controlled manner. Because there is only one fashion house for Miuccia Prada, she, as a resource, has no substitution possibility contributing to the inelasticity of supply.

Reference List:

Bellis, M. (2006).

The inventions of Thomas Edison. Retrieved November 2, 2006, from:

http://inventors.about.com/library/inventors/bledison.htm

 

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Microeconomics in my Life

The role of microeconomics in every person’s life is enormous; therefore, it is very important to study it. The objects of microeconomics surround us all the time. Microeconomics studies the aspects of functioning of all companies, and we deal with various companies throughout our lives. I shop for food and clothes in stores, go to movie theaters to see popular movies, buy stationary at Home Depot, transfer funds through banks. All of these companies function according to certain laws, which are all studied in microeconomics.

My favorite brand of car is Toyota, and microeconomics is able to determine what the most efficient volume of production for the company is. It is able to give the managers an answer to the question of what the most efficient combination of their resources should be, i.e., how many employees they should employ, how many materials they should get from suppliers and many other issues.

We constantly have to go shopping, and deal with prices which are established according to supply and demand, cost of production and other factors. Whenever the price of tomatoes in the store goes to the roof, we usually see a note in the store that the crops in Florida turned out not as large as it was predicted or that the hurricanes destroyed all of the crops. Even though the same tomatoes cost half the price just a short time ago, we realize that the law of supply and demand has been efficiently applied here.

The demand for tomatoes remained the same, but the supply decreased dramatically and thus prices were destined to increase. I also deal with the concept of elasticity all of the time. Companies never make discounts on products the demand for which is inelastic because the volume of sales is going to remain stable anyway. Therefore, there is usually hardly a chance for me to get such products for a lower price. However, I am always a good shopper when it comes to products with high elasticity because companies decrease their prices on such items from time to time to attract more customers. For example, there is always a chance to buy some clothes on sale.

I deal with the concept of utility all of the time in my life as well. Some of the products have a high level of utility for me, and I am going to buy them at any price because I am simply unable to live without them. For example, DVD’s of my favorite movies are extremely valuable for me, and I am ready to pay any money to be able to see my favorite actor or actress. At the same time, some items have a very low utility for me, and only low price on such items is able to attract me. I am the type of person who always judges products by their utility for me and not by how fashionable they are.

Like every person, I am forced to deal with various market forms, such as perfect competition, monopoly, oligopoly, or monopolistic competition. In most cases, I see the market of monopolistic competition because there are very many items with slightly different features. The market of the United States has very many companies which produce similar items but try to attract consumers by unique features and by efficient advertising. For example, there are very many producers of cars in the United States.

There are also many multinational companies based in the United States which produce cars, for example, Japanese Toyota, Korean Honda and many others. They all produce cars which have quite similar features. All of these manufacturers come up with various models of cars so that they can attract people who like sports cars, who have children, who need to travel in the mountains, or who need fuel-efficient cars. Every manufacturer tries to come up with some unique feature which competitors do not have. To some extent, it is very good for me as a consumer because competitors are fighting for customers and thus they constantly introduce new great deals for us. I am able to fight the model of the car which I want and perhaps even get it at a lower price.

I also often deal with oligopolistic competitors. The market of providers of wireless phones is not as large as the car market. There are some major players in it, and I have to choose among the most powerful of them. It was very challenging for me to decide whether to use the services of T-Mobile or Verizon, but I finally made a choice for Verizon. Oligopolistic competitors can be very difficult for analysis because they usually make different steps according to the steps of their competitors.

Since there are very few competitors in the market, it is very important for oligopolists to bring their actions in accordance with the actions of the competitors. Oligopolists also often sign various agreements with one another in order to control the market. For example, I often see that when T-Mobile introduces new offers, Verizon follows this company with very similar offers. Since I am a consumer, the knowledge of microeconomics can greatly help me to take a choice in different type of the market.

Another concept of microeconomics which I am destined to face is externalities. I often read in newspapers how government does its best to take care of various kinds of externalities. I know many plants which pollute water and atmosphere, and in my opinion, it is very good that government makes such companies pay higher taxes or install purifying systems in order to eliminate the impact of its pollution.

In conclusion, it is necessary to say that microeconomics is one of the disciplines the concepts of which can be seen everywhere. The knowledge of these concepts helps me to make smarter choices in life and understand different phenomena better. All of the consumer decisions are being made on the micro level, and that is why it is very important for every person to have a deep knowledge of microeconomic concepts.

Bibliography.

Baumol, William J., John Panzar, and Robert Willig. Contestable Markets and the Theory of Industry Structure, New York: Harcourt Brace Jovanovich. 1982.
Campbell R. McConnell, Stanley L. Brue. Economics: Principles, Problems, and Policies. Eleventh Edition. 1996.
Curwen Peter, Else Peter. Principles of Microeconomics. Unwin Hyman. 1990.
Cullis, J. G. and Jones, P. R. Microeconomics and the public economy: a defence of Leviathan Oxford: Basil Blackwell. 1987.

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Novel Prize on Economics in 2009

TOPIC: Novel Prize on Economics In 2009 Abstract: This year’s Nobel Prize in economics goes to Elinor Ostrom and Oliver E. Williamson. Elinor Ostrom received the prize for her analysis of economic governance, especially the commons while Oliver E. Williamson received the prize for his contributions to the economic governance, emphasizing the boundaries of the firm and its role in conflict resolution and case bargaining. Michael Spence, the 2001 Nobel prize winner, briefly summarized the main contributions of Elinor Ostrom and Oliver E.

Williamson to the economic theory. Many economist and critics has given their speech about the novel prize award of this year. Some of them criticize the novel committee for giving the prize of these two persons while others congratulate the prize winners as well as the novel committee. Most of the people think Novel prize received by the right person for their great contribution on economics. Introduction: The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was established in 1968.

Technically, there is no ‘Nobel’ prize in Economics; on the website of Nobel foundation, amongst Nobel Prize in Physics, Chemistry, Medicine, Literature and the Nobel Peace Prize, later ‘Prize in Economics’ commenced since 1969. After that this prise has been given regularly. 41 Prizes in Economic Sciences have been awarded every year since 1969. 22 Prizes in Economic Sciences have been given to one Laureate only. 15 Prizes in Economic Sciences have been shared by two Laureates. 4 Prizes in Economic Sciences have been shared between three Laureates. Nobel Prize in economics gets Elinor Ostrom and Oliver E.

Williamson jointly in this year. Elinor Ostrom received the prize for her analysis of economic governance, especially the commons while Oliver E. Williamson received the prize for his contributions to the economic governance, emphasizing the boundaries of the firm and its role in conflict resolution and case bargaining. Objectives of the study: We are very interested about the novel prize that has been given on economics. Economics is one of the important issues for any country all over the world. As we are the student of business faculty we have to achieve vast knowledge on economics.

A countries development basically depends on the prosperous economy. Moreover, we want to know about how economist of one country’s places their contribution in the development of the economy of the country. We also want to know how economist get novel prize on the economics. What contribution helps them to get the novel prize? After all as we are the students of business faculty we want to learn more about the economics. The main objective of the study is to know for what kinds of activities Elinor Ostrom and Oliver E. Williamson get the novel prize in the year 2009.

Novel Prize on Economics In 2009 Nobel Memorial Prize in Economic Sciences The Nobel Memorial Prize in Economic Sciences, commonly referred to as the Nobel Prize in Economics is an award for outstanding contributions to the science of economics and is generally considered one of the most prestigious awards for that science. The official name is the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. It is not actually one of the Nobel Prizes established by the will of Alfred Nobel during 1895, but is commonly identified with them.

The Prize in Economics, as it is referred to by the Nobel Foundation, was established and endowed by Sveriges Riksbank, Sweden’s central bank, during 1968 on the Bank’s 300th anniversary, in memory of Alfred Nobel’s 1895 will. Like the Nobel Laureates in Chemistry and Physics, Laureates in Economics are selected by the Royal Swedish Academy of Sciences It was first awarded during 1969 to the Dutch and Norwegian economists Jan Tinbergen and Ragnar Frisch, “for having developed and applied dynamic models for the analysis of economic processes. ” Funding of the Prize

An endowment “in perpetuity” from Sveriges Riksbank pays the Nobel Foundation’s administrative expenses associated with the prize and funds the monetary component of the award Since 2001, the monetary portion of the Prize in Economics has been 10 million Swedish kronor , equivalent to the amount given for the Nobel Prizes Since 2006, Sveriges Riksbank has given the Nobel Foundation an annual grant of 6. 5 million Swedish kronor. Relation to the Nobel Prize The nomination process, selection criteria, and awards presentation of the Prize in Economic Sciences are performed in a manner similar to that of the Nobel Prizes.

The Prize is awarded by the Royal Swedish Academy of Sciences “in accordance with the rules governing the award of the Nobel Prizes instituted through his [Alfred Nobel’s] will”, which stipulates that the prize is awarded annually to “those who … shall have conferred the greatest benefit on mankind”. The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is the only non-Nobel prize that has ever been associated officially with the Nobel Foundation. The next time a similar offer was made — an offer by Jakob von Uexkull, who subsequently established the Right Livelihood Award — the offer was declined.

Award nomination and selection process: Announcement of the Nobel Memorial Prize in Economic Sciences 2008 According to its official website, the Royal Swedish Academy of Sciences “administers a researcher exchange with academies in other countries and publishes six scientific journals. Every year the Academy awards the Nobel Prizes in Physics and Chemistry, the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, the Crafoord Prize and a number of other large prizes”.

Each September the Academy’s Economics Prize Committee, which consists of five elected members, “sends invitations to thousands of scientists, members of academies and university professors in numerous countries, asking them to nominate candidates for the Prize in Economics for the coming year. Members of the Academy and former laureates are also authorised to nominate candidates. ” All proposals and their supporting evidence must be received before February 1. The proposals are reviewed by the Prize Committee and specially appointed experts. Before the end of September, the committee chooses potential laureates.

If there is a tie, the chairman of the committee casts the deciding vote. Next, the potential laureates must be approved by the Royal Swedish Academy of Sciences. Members of the Ninth Class (the social sciences division) of the Academy vote in mid-October to determine the next laureate or laureates of the Prize in Economics. As with the Nobel Prizes, no more than three people can share the prize for a given year; they must still be living at the time of the Prize announcement in October; and information about Prize nominations cannot be disclosed publicly for 50 years.

With the Nobel Laureates in Physics, Chemistry, Physiology or Medicine, and Literature, each Laureate in Economics receives a diploma, gold medal, and monetary grant award document from the King of Sweden at the annual Nobel Prize Award Ceremony in Stockholm, on December 10—the anniversary of Nobel’s death The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2009: The winners of the novel prize in 2009: | | Elinor Ostrom| Oliver E. Williamson| Elinor Ostrom: She got the novel prize for her analysis of economic governance, especially the commons.

Her work is much more in the realm of economics than I believe you give her credit for, regardless of whether economists have heard of her. She did work in the allocation of resources and how economic institutions and situations are formed. Her work is incredibly important in study. Understanding that The majority of economists just postulate the existence of economic institutions and the matters of economic decision making and then study the behavior – without ever questioning where the institutions and units that permitted that behavior ever came from.

Her work is helpful in explaining that because she gets away solely from the economic perspective and looks at it from what circumstances and how we as humans function allows us to set up those institutions. Anyone who has read Dr. Ostrom’s work knows that her research is (1) heavily informed by the micro theory work done on the themes that she studies, and (2) she pays a lot of attention to the details that define the interactions between the individuals under Those are, of course, two characteristics inherent in the best applied economics research done anywhere in the world (political science departments included).

Her work is carefully crafted, pragmatic in the sense of not being driven by fixed ideas about how the world works, sophisticated (in a game theoretic sense) and most importantly, very insightful in illuminating the issues she studies. Oliver E. Williamson: He got the novel prize for his analysis of economic governance, especially the boundaries of the firm. His research was viewed as a hip, iconoclastic contribution to economics — something that was talked about by economist. What’s interesting is that in the ensuing 15 years, it seems that economists have talked less and less about Williamson’s research.

It is also seemed that most assistant professors of economics have barely heard of him. Yet it is thought that the older generation of economists will applaud this choice. However most of the economics thinks that he was the appropriate person to get this prize. The Prize Amount The list below shows the Prize amount in Swedish kronor (SEK) through the years. The Prize amount for 2009 is set at Swedish kronor (SEK) 10 million per full Prize. YEAR| | PRISE AMOUNT | 2001|  | 10,000,000 | | 2002|  | 10,000,000 | | 2003|  | 10,000,000 | | 2004|  | 10,000,000 | | 2005|  | 10,000,000 | | 2006|  | 10,000,000 | | 007|  | 10,000,000 | | 2008|  | 10,000,000 | | 2009|  | 10,000,000| Nobel Prize for Economics 2009 Predictions: * MARK L. GERTLER Henry and Lucy Moses Professor of Economics, New York University, New York, NY, USA • 2007-2008 Guggenheim Fellow and 2008 First Prize Award for Best Paper presented at the NBER’S International Seminar on Macroeconomics during its first 25 years Here are my comments for each of the fields. Behavioral Economics- I have read a bit of all the above except Ernst Fehr. The Prize was given in 2002 for behavioral economics and I think giving another one in 2009 will be too early.

And not having Thaler in the list for behavioral economics would be like awarding another award for International Trade without having Bhagwati on the list or an award for environmental economics without having Nordhaus on the list. Moreover Rabin is just about 46 now and as per Nobel Prize winners’ age is too young for the award. But yes whenever behavioral economics is awarded next, Rabin would be a strong contender. Environmental Economics- I have read very little about these two guys and environment economics in general. I have to read a lot more on this to comment anything.

But yes see some recognition of the importance of the field soon. Till the committee does not award the field, it will always be in the prediction list. Monetary Economics- I have read quite a bit of John Taylor and if monetary economics is recognized, he would most likely get the award. His work on getting rules into monetary policy framework is quite a revolution. There are strong critiques of John Taylor but this is the case with much of economics. Gertler has written quite a few papers with Bernanke and is a leading proponent with Jordi Gali (see this) on New Keynesian Theory and DSGE Models.

Given the current criticism on these models, I don’t think they will be awarded this time. So let’s wait for 12 October…. Ashok Chatterjee Says: September 11, 2009 at 5:40 pm Prof. Jagdish Bhagwati’scandidature for receiving this year’s Nobel Prize is not only overdue, but also it will be a fitting tribute to an economist whose contribution to the promotion of Globalization in Macroeconomics is unparalleled and unsurpassed. It would be a great pity if the Nobel Committee gets bogged down in an endless argument in stead of seeing the obvious giant among the great talents in Ecnomics Teddy Chabot Says:

September 14, 2009 at 7:12 am I wouldn’t be surprised to see Jean Tirole win (with perhaps a few other folks given the committee’s recent track record) for his contributions to applied game theory in general and industrial organization in particular. The ’80s saw a veritable explosion in work in IO associated with game theory. In the last 10-15 years, we’ve seen a number of Nobels for game theory contributions, some of which involved more or less applied work. But we have yet to see anyone win for the massive insights that game theory provided to our understanding of competition among firms.

Tirole is the most obvious candidate to be rewarded for those advances. YangC Says: September 14, 2009 at 11:57 am In the past couple of years, Hyperwage Theory has become controversial since it came out in 2005, because it has a specific solution to reducing poverty in the Third World countries. The only problem — the solution is one that is the opposite conventional wisdom. A few economics teachers are now giving the theory as basis for critiques. (I am a math major so I do not know one economic theory from the other, but the portion i’ve read makes sense to me. I think the Nobel should consider Hyperwage Theory at least. Ralph Byrns Says: October 9, 2009 at 5:39 pm Fehr, Rabin, and Thaler all deserve serious consideration. Their varied contributions in behavioral economics force us to rethink what economics has been (the study of decisionmaking and its consequences) versus economics as more narrowly focused on rational decisionmaking. If economics is defined, per the views of some scholars, as focused only on raional decisionmaking, then we are doomed to irrelevance in a world that is increasigly in need of multidisciplinary research. David Says: October 11, 2009 at 12:17 am

It is only a wishful thought, but I would be very happy if Tom Sargent wins the prize. Not only a great academic, but also a great person and teacher. Thanks. What This Year’s Nobel Prize in Economics Says about the Nobel Prize in Economics: By STEVEN D. LEVITT Earlier today, Elinor Ostrom and Oliver Williamson were awarded the Nobel Prize in economics for their work on the role of institutions. Congratulations to both of them! When I was a graduate student at MIT back in the early 1990’s, there was a Nobel Prize betting pool every year. Three years in a row, Oliver Williamson was my choice.

At the time, his research was viewed as a hip, iconoclastic contribution to economics — something that was talked about by economists, but those students was not actually trying to emulate (and probably would have been actively discouraged from had they tried to do so). What’s interesting is that in the ensuing 15 years, it seems to me that economists have talked less and less about Williamson’s research, at least in the circles in which I run. I suspect most assistant professors of economics have barely heard of him. Yet I suspect the older generation of economists will applaud this choice.

The reaction of the economics community to Elinor Ostrom’s prize will likely be quite different. The reason? If you had done a poll of academic economists yesterday and asked who Elinor Ostrom was, or what she worked on, I doubt that more than one in five economists could have given you an answer. I personally would have failed the test. I had to look her up on Wikipedia, and even after reading the entry, I have no recollection of ever seeing or hearing her name mentioned by an economist. She is a political scientist, both by training and her career — one of the most decorated political scientists around.

So the fact I have never heard of her reflects badly on me, and it also highlights just how substantial the boundaries between social science disciplines remain. So the short answer is that the economics profession is going to hate the prize going to Ostrom even more than Republicans hated the Peace prize going to Obama. Economists want this to be an economists’ prize (after all, economists are self-interested). This award demonstrates, in a way that no previous prize has, that the prize is moving toward a Nobel in Social Science, not a Nobel in economics. According to Eric A:

Elinor Ostorm’s work is much more in the realm of economics than I believe you give her credit for, regardless of whether economists have heard of her. She did work in the allocation of resources and how economic institutions and situations are formed. Her work is incredibly important in understanding that. The majority of economists just postulate the existence of economic institutions and the matters of economic decision making and then study the behavior – without ever questioning where the institutions and units that permitted that behavior ever came from.

Her work is helpful in explaining that because she gets away solely from the economic perspective and looks at it from what circumstances and how we as humans function allows us to set up those institutions. It’s a failure of economists to not recognize some of the implications for her work; not the failure of the Nobel committee for honoring her insights into “New Institutional Economics. ” Also, take a look at yourself. You’ve won a Clark medal and most of your work could easily be classified as sociology.

If you had a degree in sociology and did the same work, you could make the same case that the Clark medal is becoming a prize for “social sciences”; but because your degree is in economics it’s without notice. I’m curious though, were economists upset by the prize being awarded to Thomas Schelling whose most impressive work is arguably just political science with insights from economics and game theory? Or because he’s an economist by training and manner that his prize is still considered an “economics prize”?

Perhaps the award will act as a wakeup call to economists – just because it’s not called “economics” doesn’t mean it’s not applicable to your field. The natural sciences figured this out decades ago when the fields started to converge upon one another (see: the line between areas like physical chemistry and physics) – perhaps economist needs to start looking at the advantageous of political science research when it is clearly applicable to their area of study, rather than just ignoring it.

One of the reasons the natural sciences have seen an explosion in information and advancement in the 20th century is because of the breaking down of barriers between fields and using insights of other areas in a synthesis – economics should do the same where applicable in fields of political science, sociology, and psychology. According to Sebastian The people who feel the need to comment on Obama here should be ashamed: This is an amazing day for two highly original, fascinating scientists. Why can’t you talk about their work or shut up? And the Obama Nobel jokes were old on Saturday, already). I actually don’t think that economists are going to hate this quite as much as Levitt thinks. I think Krugman is right that this is a price for institutional economics and I think many people can relate to that, especially as it’s also timely – institutional economics is very good in addressing regulation – be it of CO2 emissions or of the financial system. Certainly no begrudging from Alex Tabarok at MR, Krugman on his Blog and Michael Spence at Forbes. Too bad you don’t say a little more of their work.

Readers who want to learn something should go to MR, which has two fantastic short posts. CONCLUSION: In this year Nobel Prize in economics 2009 gets Elinor Ostrom and Oliver E. Williamson jointly in this year. For her analysis of economic governance Elinor Ostorm gets the prize, especially the commons and Oliver E. Williamson received the prize for his contributions to the economic governance, emphasizing the boundaries of the firm and its role in conflict resolution and case bargaining. Many economist and critics has given their speech about the novel prize award of this year.

Some of them criticize the novel committee for giving the prize of these two persons while others congratulate the prize winners as well as the novel committee. Different people have different viewpoint but we think that Elinor Ostorm and Oliver E Williamson won the prize for their great contribution on the economic field. In the time of economic recession they analyzed economics governance and find out what are the reasons behind the economic recession. So we think that they received their prize for their great contribution in economics. References: Newspaper Magazine Articles on Novel prize in 2009 and Internet

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Economics Commentary

Economics Internal Assessment Writing a Commentary on News article Task 1 Headline: Pharmaceutical giant Paladol misjudge its market by raising the price on its best-selling headache relief tablet. Price elasticity of demand (PED) is a measure of the responsiveness or sensitivity of consumers to a change in the price of a particular good. In this article, Paladol raised the price of its product, which was a mistake; there are a lot of other medicines for a headache and most of them would be cheaper which is what Paladol should have considered before raising their price.

PED= Percentage change in quantity demandedPercentage change in price=%? QD%? P Cross-price elasticity of demand (XED) measures the responsiveness of consumers of a particular good to a change in the price of a related good, both complements and substitutes. In this article, however, we will be focusing more on the substitute goods. XED= Percentage change in quantity of good APercentage change in price of good B=%? QA%? PB Substitute goods are goods or products that one might easily use in place of another; because they’re so similar, an increase in the price of one may lead consumers to switch consumption to the substitute.

The substitution effect (which underlies the law of demand) states that as the price of a good decreases, consumers switch from other goods to this good because its price is comparatively lower. As the price of Paladol increases we can see the substitute effect, people switching from Paladol which is expensive to Tylonel, for example; because its price is still the same which is cheaper than Paladol. Demand is a curve showing the various amounts of a product consumers want and can purchase at different prices during a specific period of time.

When Paladol increased its price for a particular headache relief medicine, consumers responded by decreasing their purchase of that expensive product, which decreased the quantity demanded; a movement up and left along the demand curve. Consumers will now demand another good that is cheaper, a substitute, for example tylonel. Graph A represents Paladol. As the price increase for the product the supply decreases (a shift of the supply curve to the left) because the producers want to make more profit and increase their total revenue.

However, the demand is slowly decreasing for Paladol as people realize that there are cheaper headache relief medicines; a movement up and left along the demand curve as was mentioned earlier. So, consumers start switching to substitute goods. Graph B represents Tylonel (a substitute good for Paladol). As the demand for Paladol decreases, the demand for tylonel starts increasing; a shift of the demand curve to the right. This happens as it’s less costly for consumers.

The total revenue for Paladol will definitely decrease due to the decrease in quantity purchased and that will also decrease their profit as the cost is now more than the sales. However, the total revenue for Tylonel will now increase in response to the decrease in Paladol’s decrease of quantity demanded. Paladol misjudged their market by thinking it has a relatively inelastic demand and that if they increased their prices a little it won’t change the quantity demanded by much.

A firm producing at a quantity and price combination along the inelastic range of its demand curve can always benefit by reducing its output and increasing its price, since consumers will be relatively unresponsive and total revenues will therefore increase—that didn’t work well with Paladol. As their demand wasn’t inelastic, that plan couldn’t work out for them. They had a relatively elastic demand and one of the reasons of why they have an elastic demand is that they have a lot of substitute goods and competition in that particular good (headache relief medicines are very common).

As a result of this misjudgment made by them, the quantity demanded decreased and caused a decrease in the total revenue and profit made by Paladol as well. Due to their bad decision, Paladol will certainly suffer a loss which is a decrease in total revenue. However, their competition (firm of substitute goods) will gain more consumers thus increasing their total revenue. The consumers won’t suffer or in other words they won’t be affected by Paladol’s decision to raise their price as they will have many substitutes to choose from.

As Paladol is producing at an output and price combination along the elastic range, the firm could benefit if they change their prices again, this time by lowering them since consumers are relatively price sensitive and the percentage increase in quantity sold will exceeded the percentage decrease in price, improving the firm’s revenue figures and giving Paladol a competitive advantage over the market of headache medicines once again.

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Economics of Best Buy

One of the fortune 500 companies in our society is Best Buy. Best Buy is one of the largest consumer electronics retailer company in the United States and Canada. There are many products Best Buy distributes, such as; computers, computer equipment, video and audio products, refrigerators, coffeemakers, compact discs, video games, DVD and VHS movies and players, CD’s, computer software, cameras, cell phones, and satellite systems and so on. In addition, their customer service is very helpful and has improved throughout the years.

The Geek Squad is one of their forms of customer service they provide and they offer various computer-related services and accessories for residential and commercial clients. Best Buy didn’t always have these products and services available. They are an industry that changes with the times. They supply products that are in high demand by the consumers. Best Buy was started in 1996 by Richard R. Schulze and his business partner James Wheeler. It was originally known as Sound of Music and the first store was located in St. Paul, Minnesota.

In 1983, the company’s name was changed to Best Buy and the first store named Best Buy was located in Burnsville, Minnesota. By 1984, there were only 8 Best Buy’s in the Midwest, but by 1987 the number tripled and their sales and earnings were at a high $239 million and $7. 7 million respectively. And since they have money to spend, they increased their warehouse size and products. In 1985, Best Buy went public and then two years later they were listed on the New York Stock Exchange. By 1988, sales had doubled to $439 million, but net earning declined 64%.

Despite the net earnings declining, revenues were still increasing well into 1989. Also, in 1989, Best Buy launched its Concept II stores with bigger show rooms, fewer sales people and more self help product information. From 1992-1993 Best Buy had the best financial performance in the company’s 27 year history with an increase in revenues and earnings. Following this, 38 new stores were opened up. By 1997, Best Buy became the industry leader. This caused net profits to jump to $94. 5 million and revenues to jump to $8. 36 billion and for their stock to increase to $36 per share.

In 1998, Best Buy created an online music store and in 2000 they expanded it and it offered more then music, it offers DVDs, consumer electronics, computers, software’s and games. Having a website made Best Buy’s income grow even more. By 2001, profits increased 14%, revenues rose to $15. 33 billion. Despite the recession in 2001, Best Buy bounced back the following year with $570 million in profits and $19. 6 billion in revenue. And by 2004, revenue reached $25 billion and net income rose to $705 million. Best Buy is a publicly traded corporation.

A publicly traded corporation is the style of many companies in the United States, Europe and India. They are liable, taxable, have legal rights that an individual citizen would have, they can sue and be sued and must establish a paperwork identity with state and/or federal governments as required by local laws. When it comes to liability, public corporations have limited liability which means a partner or investor cannot lose more than the amount invested and the investor or partner is not personally responsible for the debts and obligations of the company in the event of bankruptcy.

For taxes public corporations are taxed twice; once for revenue for the corporation and once for personal income for the shareholders. Best Buy is the type of company that always stays up to date with the latest technologies which keeps the consumers coming back and interested. They also have every product on the floor when you walk in so the choices of products are endless and you never have to wonder if there is more. In addition, they base their stores on low pricing and efficiency in operation; this explains why Best Buy’s industry has grown so much since 1966.

Mostly every corporation deals with competitors. The biggest competition Best Buy faced was Circuit City. They were competitors because they were the top two retail chains for electronics. Eventually Best Buy took over and put Circuit City out of business. Why? The answer is because Best Buy does a better job of utilizing marketing through brand recognition, incentives and customer service. Best Buy has gotten a lot better at putting the customers first and helping them in any way they can and Circuit City has had many problems with keeping their customers satisfied.

Also, Circuit City’s problem is they aren’t competitive; they keep losing money quarter after quarter. Even their stock dropped from $22 to $3. 83. Why is Circuit City losing money? It’s because they aren’t updated enough with the latest technologies like Best Buy is. Also, whatever Circuit City has Best Buy already has and better so people want to go to Best Buy for that reason. In addition, Best Buy offers services such as computer service and support and home theater installation, which makes Best Buy different from Circuit City and other fortune 500 companies.

Before Circuit City went out of business, there have been reports about how Best Buy would benefit from reduced competition. There was an estimation of a $12 million increase in revenue if Circuit City wasn’t in business. In addition, more suppliers will be forced to sell their products to them whether they want to or not. For example, if Best Buy demands for better terms on Sony’s big screen LCD TV’s and if Sony doesn’t like the terms they have nowhere to turn to. Every company uses and must use adverting in order to gain popularity and people’s interest.

Both Best Buy and Circuit City use advertising, but they both advertise in different ways. Best Buy’s strategy is aggressive advertising and competitive pricing and pursuit of cost saving strategy. There are three messages they portray in their TV advertisements, they are; “you can trust us to always have your best interests in mind, we have a unique take on how technology and entertainment can make your life better and you can always expect to find great prices”. For example, their commercial titled “True Stories” focused on Best Buy employees telling their true stories on how they helped customers.

As the years go on advertising becomes ignored because people don’t trust the misleading ads so, to fix this problem Best Buy recently featured their customer’s comments from online product reviews and product ratings in their nationwide Sunday newspaper circular. This helps because potential customers will most likely trust people who have already bought something from Best Buy then the Best Buy salesmen. This practice of advertising is called “Bazaarvoice” and it is very affective and it is the future of advertising.

In addition, Best Buy has advertisements that highlight key entertainment groups like MGM Studios, Activision, Sega and Rock Band which showcase the enjoyment people are acquiring from these products and this makes people want to have these items because everyone likes to have fun and enjoy themselves. The problem with Circuit City is they never did anything like Best Buy. Circuit City never changed its ways and products so they never adapted new advertising methods like the “Bazaarvoice”. In addition, since they never update their inventory onsumers were probably never interested in their ads because Circuit City’s products were outdated. Circuit City never got into selling video games and they never sold any thriving companies’ products like Apple Computers. Also, Circuit City never improved their website and the internet is used a lot now to sell products so if they are not up to speed with everyone else people will loose interest in their store. In addition, Circuit City stopped selling appliances which can stop a lot of people from buying from you.

My prediction is that Best Buy will continue to prosper in the future for many reasons. One reason I think this is because their Revenue is $20. 9 Billion. Also, their price per stock is $54. 15 (a 138% change in stock price) which is very high compared to their competitor Circuit City which is $3. 83 per stock. Best Buy’s market cap is also $18. 6 billion. In addition, there are 750 Best Buy stores throughout the United States and in Canada. As you can see, Best Buy makes a lot of money and the more money a company has the more successful they are.

So, if Best Buy keeps satisfying the customers, updates their products and basically just changes with the times then I don’t see a reason for how they will ever go out of business. Work Cited Best Buy Co. , Inc.. 2010 funding universe. 5/7/10 . “Best Buy. ” Company Profiles for Students. 1999 ed. Best Buy Launches New Holiday Advertising Campaign; Alliance with Major Entertainment Groups Highlight Customer Experience. 2002 Business Wire. 5/7/10 . Best Buy Using Reviews in Advertising. 2010 Bazaarvoice Inc. 5/13/10 . Best Buy. 2010 Mahalo. com inc. 5/7/10 .

Coleman, Quentin. Public Corporation Information. 2010 eHow. 5/11/10 . Hamilton, Anita. Why Circuit City Busted, While Best Buy Boomed . 2010 Times Inc. 5/13/10 . January and February Best Buy Advertising. 2010 Barry Judge CMO of Best Buy. 5/11/10 . Muller, Turley. Best Buy Will Benefit from Reduced Competition. 2008 Seeking Alpha. 5/7/10 . Peterson, Matthew. Circuit City Vs Best Buy Marketing – Why Circuit City Failed and Best Buy Won 2010 EzineArticles. com. 5/13/10 . Watson, Julie. Best Buy vs Circuit City. 2006 Forbes. com inc. 5/13/10 .

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Managerial Economics and Business Strategy

Dr. David J. St. Clair Managerial Economics and Business Strategy 3551 #6 Answers – Summer 2012 1. What type of evidence did Dupont introduce in its plastic wrap trial that proved decisive in its acquittal? __ It brought in cross elasticities to show that there were many substitutes for plastic wrap. It then argued that the market had to be defined to include all substitutes. This broadened the definition of the market to the point where DuPont’s market share was small. ___ 2. What had Alcoa done that made the judge find it guilty of being a monopoly? It had a market share above 90%_. Did the judge rule that Alcoa was a “dirty” firm? _ No ___ 3. Why did the verdict in the U. S. Steel antitrust case confuse everyone? __ U. S. Steel was ruled to be “reasonable” under the courts “Rule of Reason” doctrine. This was confusing because the company had a notorious reputation for price fixing and uncompetitive practices __ 4. Bill Gates took a very aggressive approach to dealing with the Justice Department in the Microsoft case even though Microsoft had an “Alcoa Problem. ” What was Microsoft’s “Alcoa Problem? ___ Microsoft had a large market share approaching the 90% threshold established in the Alcoa case ___ 5. When something is illegal “per se,” what does this mean? __ The government only has to prove that you did it; motive or intent does not matter ___ 6. What was the remedy in the Standard oil and American Tobacco cases? __ divestiture (i. e. , the companies were broken up) ____ 7. What, according to Andrew Carnegie, was destructive competition? ___ excessive and ruthless competition among big firms that eliminated profits but not competitors __ 8. When we were discussing oligopoly, we referred to the two faces of oligopoly.

Which face of oligopoly was Carnegie referring to in his discussion of ‘destructive competition? ’ the non-cooperative, extremely competitive rivalry _ 9. What does the Hart-Scott-Rodino Act require? ___ pre-merger notification and approval by the Justice Department and the FTC ____ 10. What is a tying contract (or agreement)? __ a firm refuses to seel product that you want unless you also buy one of the firm’s other products ___ 11. The Sherman Act was short and sweet. It outlawed two things. Identify both: a. ___being a monopoly ______________________ b. ___trying to become a monopoly __________________________ 2. Which antitrust act made vertical market foreclosure a violation of antitrust laws? __ the Celler-Kefauver Act __ 13. What was the reason why the European Union blocked the merger of GE and Honeywell? __ It violated the EU’s “portfolio power” doctrine __ 14. What is a “soft loan? ” ___a government loan that is never going to be paid back; a disguised subsidy __. Why have many American economists likened “portfolio power” to a soft loan? ___They argue that portfolio power is a disguised protectionist policy masquerading as an antitrust policy___ 15. What was IBM’s defense in its mainframe computer antitrust case? _ It challenged the government’s narrow “large main-frame computer” definition of the relevant market ___ 16. What was DuPont convicted of in the GM case (be specific). ______ vertical market foreclosure ____ 17. What precedent did the Pabst Brewing case set? __if the market is a local, then the relevant market must be local ____ 18. What precedent did the Staples/Office Depot case set? ___the Justice Department or the FTC can disallow a merger based on the anticipated price and competitive consequences ________________ 19. What happened to U. S. antitrust policy following the E. C. Knight case? __ as a consequence of the E.

C. Knight case, antitrust laws did not apply to manufacturing and there was a wave of mergers in the manufacturing sector __ 20. In the 1890s, German courts were taking a very different approach to cartels and antitrust. What did the German court rule in the pulp cartel case? __ cartel agreements were legally enforceable contracts; cartels were legal and socially beneficial ___ 21. What was Brown Shoe accused of in the Kinney Shoe antitrust case? ____ vertical market foreclosure _____ 22. What was the remedy in the Brown Shoe/Kinney Shoe Case? ____ The merger was disallowed and the two firms were separated _______ 3. What does the firm have to do in a consent decree? _ stop the offending practices without admitting guilty _. What does the Justice Department agree to do in return? ___ drops the case _ 24. Why do most firms prefer a consent decree to a trial, even when they feel that they are innocent? __ the case is quickly resolved and there is no conviction that can be used to expose the firm to civil suits seeking triple damages __ 25. Are interlocking directorates illegal per se? Yes. Is price fixing illegal per se? Yes 26. Are tying contracts illegal per se? Yes Is price discrimination illegal per se? _ No 7. How can the Justice Department and the FCC respond to a notification of merger filed under the Hart-Scott-Rodino Act? (Hint: they have three options. ) __1) approve; 2) deny; or 3) approve with conditions __ 28. English Common law became the basis for American Common Law. What dos the Common Law say about damages for parties injured by restraint of trade? ___ injured parties are can collect triple damages ____ 29. Which type of elasticity is often important in antitrust cases? _ cross elasticity __ 30. Why did the Justice Department allege that Microsoft was using a tying agreement or contract? ___The Justice Department alleged that Microsoft was tying the MS-DOS operating system to the purchase of its browser ___ 31. Bill Gates was rather arrogant and combative in dealing with the Justice Department in the Microsoft case. He seemed unaware of Microsoft’s “Alcoa problem. ” What was Microsoft’s “Alcoa problem? ” _________This is a duplicate question – see above____________ 32. How did IBM’s mainframe computer antitrust suit end? ___ the Justice Department dropped the case because the court was unlikely to accept its narrow definition of the relevant market ____ 33.

Why was Microsoft accused of “vertical market foreclosure? ” ___ Microsoft was accused of using its operation system monopoly (MS-DOS) to foreclose browser maker from the market ___ 34. Why was Nabisco giving up on its strategy of seeking to create a cracker of biscuit monopoly? __It was unable to eliminate competition, especially the competition of capitals __ 35. Why was Nabisco so open in its 1901 annual report about discussing its efforts to monopolize the cracker (biscuit) industry? __Because of the E. C. Knight Case, there were no antitrust laws in 1901 that pertained to manufacturing firms _ 6. In its 1901 annual report, Nabisco announced that it was giving up on its efforts at creating a cracker or biscuit monopoly. What was the company’s new strategy going to be? ____Nabisco was going to concentrate on making better products and creating a more efficient and competitive firm ___ 37. What did Liggett accuse Brown & Williamson Tobacco of doing in its law suit? (don’t simply say “of being a monopoly” or “violating antitrust laws”) ___Liggett accused Brown & Williamson of engaging in predatory pricing by selling it cigatettes at below Brown & Williams’ AVC______ 8. Under the Areeda-Turner test, predatory pricing is defined as a firm selling its product at a price ____below its average variable cost_____ 39. Was the Areeda-Turner test upheld (validated or confirmed) by the court in the Liggett vs. Brown & Williamson’s case? ___No, the Areeda-Turner test was replaced by the “recoupment test” ___ 40. What must a plaintiff (the one who files the law suit) do (show) in order to keep a predatory pricing law suit from being dismissed (thrown out even before it goes to trial) under the “recoupment test? ____The plaintiff must show that the defendant did have a reasonable chance of raising prices in the future to make up for, (that is, to recoup) its short term losses due to the low prices ___ 41. Does the recoupment test introduced in the Liggett vs. Brown & Williamson case make predatory pricing law suits more likely, less likely, or equally likely compared to the old Areeda-Turner test? ____less likely _____ 42. The courts have held that predatory pricing cases require a showing that a firm has reduced price below its costs. What is the relevant cost for this criterion? ________average Variable cost (AVC) _________ 3. Many economists have used the concept of “barriers to entry” in their criticism of predatory pricing antitrust laws. Explain their criticism. __Predatory pricing only makes sense if the firm can raise prices after using it to attain a monopoly and if it has barriers to entry that can keep new competitors out. However, if it had such barriers in the first place, it would probably not need predatory pricing. Predatory pricing does not give the firm the required barriers to entry, unless one envisions constant predatory pricing. But constant predatory pricing is nothing more than price competition. ___ 44.

During the 1930s, large American cigarette companies faced competition from small cigarette companies offering new brands at 10 cents per pack. How did they meet and deal with this competition? __They resorted to predatory pricing, i. e. , they dramatically reduced their prices (in some case to below costs) in order to drive the new competitors out of the market ___ 45. Did the response of the “Big Four” tobacco companies to the challenge from the new 10-cent brands competitors in the early 1930s work? Why or why not? _the Four Majors were unable to drive out two competitors created by the 10-cent brand episode.

They had a 91 percent market share before the episode and only a 69 percent market share after. Two formidable competitors emerged and the Big Four became the Big Six__ 46. What was the verdict in the 10-cent brands cigarette case? _____the major cigarette companies were found guilty of violating the antitrust laws______ 47. Was predatory pricing the government’s primary allegation against the majors in the 10-cent brands cigarette price wars? If not, what was the primary complaint? _the court focused primarily on the collusion among the majors to fix prices__ 48.

What was the court’s remedy in the 10-cent brands cigarette case? ___the court fined the guilty parties and restricted their ability to communicate and work together ____ 49. Why do most economists argue that antitrust laws prohibiting predatory pricing are actually anti-competitive? ____ Most economists argue that antitrust laws prohibiting predatory pricing are actually anti-competitive because any firm that lowers it’s prices to compete against it’s market competitors are susceptible to being charged with predatory pricing, even when no such intent probably exists.

Furthermore, filing an antitrust lawsuit related to predatory pricing is often abused and a convenient way for businesses to compete with their competitors without matching their competitors price cutting especially since antitrust laws concerning predatory pricing are sometimes difficult to distinguish from predatory pricing, market competition, and competitive business practices. __ 50. Suppose there are five (5) firms in an industry with the following market shares: 15%, 20%, 2%. 45%, and 18%. What is the Herfindahl Index for this industry? _______2,978_______. According to the 1992 Horizontal Merger Guidelines, how would this industry be classified? ___It would be classified as a ‘highly concentrated’ market. _____ 51. Ceteris paribus, would a merger that raised the Herfindahl index from 1900 to 1941 be likely to trigger interest by antitrust regulators? Why or why not? ____No, because while this market would be classified as ‘highly concentrated,’ the merger does not raise the HHI by more than 50 points and will therefore not trigger the interest of regulators. ___ 52. Ceteris paribus, would a merger that raised the Herfindahl index from 750 to 985 be likely to trigger interest by antitrust regulators? Why or why not? ___No, because a market with a Herfindahl Index below 1,000 is considered to be ‘unconcentrated’ and mergers in unconcentrated markets are unlikely to be challenged by regulators. _____ 53. Tying contracts are illegal per se under American antitrust laws. However, enforcing their illegal per se status has proven to be very difficult.

What is the problem here? ___While tying contracts are illegal per se under antitrust law, there seems to be no way of getting around some tying during the course of routine business, e. g. , left shoes tied to right shoes, etc. This therefore introduces the element of intent and competitive consequences; two features that are not supposed to figure into illegal per se allegations. Currently, this problem is most pronounced in the practice of ‘bundling’ in high tech markets. ____ 54.

In the YouTube video on Monopoly, what did Milton Friedman think was the primary cause of longer-lasting monopolies? ____government market restrictions ___________ 55. In the YouTube video on Monopoly, what did Milton Friedman think was the very best policy for dealing with monopolies and market power? ____free trade or measures to make trade more free and open _______ 56. In the YouTube video on Monopoly, Milton Friedman never mentioned or discussed Smith’s Formula. However, based on his comments, what do think his position would have been on our 200-year old question? __Friedman would definitely argue that markets had, if government leaves them alone, sufficient competition to make Smith’s Formula society’s primary line of defense against monopoly abuse. __ 57. What happened when Coca-Cola tried to introduce its new soft drink Peppo in the late 1960s? ____Dr Pepper sued for trademark infringement and Coka Cola had to change the name of the product to ‘Mr Pibb’. _____ 58. How did the FTC end up defining the relevant market in Coca Cola’s proposed acquisition of Dr Pepper? _The FTC took a very narrow view and defined the relevant market as the ‘pepper-flavored soft drink market’ __. How did the FTC rule on the proposed acquisition? __The FTC denied the request for merger approval. __ 59. Both the FTC and Coca Cola introduced Herfindahl Indexes in support of their positions in the proposed acquisition of Dr Pepper. What was the critical point on which the proposed merger was decided? ____The definition or scope of the relevant market ____

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Economics of Sumeria

By 7000 BCE there was farming, which required permanent settlement. ————————————————- By 4500 BCE, people archaeologists call Ubaidians were living in towns near where the Tigris and Euphrates rivers emptied into the Persian Gulf. EKONOMIKS –( http://earlyworldhistory. blogspot. com/2012/01/sumer. html poltics) (http://www. sjsu. edu/faculty/watkins/sumer. htm-poltics) This was Mesopotamia (Greek for “between two rivers”). It was around 4000 BCE that a people called Sumerians moved into Mesopotamia.

By 3800 BCE the Sumerians had supplanted the Ubaidians and Semites in southern Mesopotamia. They built better canals for irrigating crops and for transporting crops by boat to village centers. They improved their roads, over which their donkeys trod, some of their donkeys pulling wheeled carts. And the Sumerians grew in number, the increase in population the key element in creating what we call civilization Do you know? Civilization is a word derived from an ancient word for city. LIVINGS around each city were fields of grain, orchards of date palms, and land for herding.

Besides planting and harvesting crops, some Sumerians hunted, fished, or raised livestock. In addition to an increase in population, civilization was also about variety, and enough food was produced to support people who worked at other occupations — such as the priesthood, pottery making, weaving, carpentry and smithing. There were also traders, and the Sumerians developed an extensive commerce by land and sea. They built seaworthy ships, and they imported from afar items made from the wood, stone, tin and copper not found nearby The Sumerians used slaves, although they were not a major part of the economy.

Slave women worked as weavers, pressers, millers, and porters. The social structure of the Sumerians was decidedly different from other societies of that and later times. The Sumerian communities were city states organized around a temple and ruled by a priesthood. There was a class of craftsmen in addition to the priests and peasants. The craftmen devoted most of their time to producing things for either the temples or the warrior-soldiers which protected the temple community. The people were to devote their lives to propitiating the gods to prevent calamities from befalling the community.

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Statistics for Business and Economics

Openmirrors. com CUMULATIVE PROBABILITIES FOR THE STANDARD NORMAL DISTRIBUTION Cumulative probability Entries in this table give the area under the curve to the left of the z value. For example, for z = –. 85, the cumulative probability is . 1977. z 0 z 3. 0 2. 9 2. 8 2. 7 2. 6 2. 5 2. 4 2. 3 2. 2 2. 1 2. 0 1. 9 1. 8 1. 7 1. 6 1. 5 1. 4 1. 3 1. 2 1. 1 1. 0 . 9 . 8 . 7 . 6 . 5 . 4 . 3 . 2 . 1 . 0 .00 . 0013 . 0019 . 0026 . 0035 . 0047 . 0062 . 0082 . 0107 . 0139 . 0179 . 0228 . 0287 . 0359 . 0446 . 0548 . 0668 . 0808 . 0968 . 1151 . 1357 . 1587 . 1841 . 2119 . 2420 . 2743 . 3085 . 3446 . 3821 . 4207 . 4602 . 5000 01 . 0013 . 0018 . 0025 . 0034 . 0045 . 0060 . 0080 . 0104 . 0136 . 0174 . 0222 . 0281 . 0351 . 0436 . 0537 . 0655 . 0793 . 0951 . 1131 . 1335 . 1562 . 1814 . 2090 . 2389 . 2709 . 3050 . 3409 . 3783 . 4168 . 4562 . 4960 .02 . 0013 . 0018 . 0024 . 0033 . 0044 . 0059 . 0078 . 0102 . 0132 . 0170 . 0217 . 0274 . 0344 . 0427 . 0526 . 0643 . 0778 . 0934 . 1112 . 1314 . 1539 . 1788 . 2061 . 2358 . 2676 . 3015 . 3372 . 3745 . 4129 . 4522 . 4920 .03 . 0012 . 0017 . 0023 . 0032 . 0043 . 0057 . 0075 . 0099 . 0129 . 0166 . 0212 . 0268 . 0336 . 0418 . 0516 . 0630 . 0764 . 0918 . 1093 . 1292 . 1515 . 1762 . 2033 . 2327 . 643 . 2981 . 3336 . 3707 . 4090 . 4483 . 4880 .04 . 0012 . 0016 . 0023 . 0031 . 0041 . 0055 . 0073 . 0096 . 0125 . 0162 . 0207 . 0262 . 0329 . 0409 . 0505 . 0618 . 0749 . 0901 . 1075 . 1271 . 1492 . 1736 . 2005 . 2296 . 2611 . 2946 . 3300 . 3669 . 4052 . 4443 . 4840 .05 . 0011 . 0016 . 0022 . 0030 . 0040 . 0054 . 0071 . 0094 . 0122 . 0158 . 0202 . 0256 . 0322 . 0401 . 0495 . 0606 . 0735 . 0885 . 1056 . 1251 . 1469 . 1711 . 1977 . 2266 . 2578 . 2912 . 3264 . 3632 . 4013 . 4404 . 4801 .06 . 0011 . 0015 . 0021 . 0029 . 0039 . 0052 . 0069 . 0091 . 0119 . 0154 . 0197 . 0250 . 0314 . 0392 . 0485 . 0594 . 0721 . 0869 . 038 . 1230 . 1446 . 1685 . 1949 . 2236 . 2546 . 2877 . 3228 . 3594 . 3974 . 4364 . 4761 .07 . 0011 . 0015 . 0021 . 0028 . 0038 . 0051 . 0068 . 0089 . 0116 . 0150 . 0192 . 0244 . 0307 . 0384 . 0475 . 0582 . 0708 . 0853 . 1020 . 1210 . 1423 . 1660 . 1922 . 2206 . 2514 . 2843 . 3192 . 3557 . 3936 . 4325 . 4721 .08 . 0010 . 0014 . 0020 . 0027 . 0037 . 0049 . 0066 . 0087 . 0113 . 0146 . 0188 . 0239 . 0301 . 0375 . 0465 . 0571 . 0694 . 0838 . 1003 . 1190 . 1401 . 1635 . 1894 . 2177 . 2483 . 2810 . 3156 . 3520 . 3897 . 4286 . 4681 .09 . 0010 . 0014 . 0019 . 0026 . 0036 . 0048 . 0064 . 0084 . 0110 . 0143 . 0183 . 0233 . 294 . 0367 . 0455 . 0559 . 0681 . 0823 . 0985 . 1170 . 1379 . 1611 . 1867 . 2148 . 2451 . 2776 . 3121 . 3483 . 3859 . 4247 . 4641 CUMULATIVE PROBABILITIES FOR THE STANDARD NORMAL DISTRIBUTION Cumulative probability Entries in the table give the area under the curve to the left of the z value. For example, for z = 1. 25, the cumulative probability is . 8944. 0 z z . 0 . 1 . 2 . 3 . 4 . 5 . 6 . 7 . 8 . 9 1. 0 1. 1 1. 2 1. 3 1. 4 1. 5 1. 6 1. 7 1. 8 1. 9 2. 0 2. 1 2. 2 2. 3 2. 4 2. 5 2. 6 2. 7 2. 8 2. 9 3. 0 .00 . 5000 . 5398 . 5793 . 6179 . 6554 . 6915 . 7257 . 7580 . 7881 . 8159 . 8413 . 8643 . 8849 . 9032 . 192 . 9332 . 9452 . 9554 . 9641 . 9713 . 9772 . 9821 . 9861 . 9893 . 9918 . 9938 . 9953 . 9965 . 9974 . 9981 . 9987 .01 . 5040 . 5438 . 5832 . 6217 . 6591 . 6950 . 7291 . 7611 . 7910 . 8186 . 8438 . 8665 . 8869 . 9049 . 9207 . 9345 . 9463 . 9564 . 9649 . 9719 . 9778 . 9826 . 9864 . 9896 . 9920 . 9940 . 9955 . 9966 . 9975 . 9982 . 9987 .02 . 5080 . 5478 . 5871 . 6255 . 6628 . 6985 . 7324 . 7642 . 7939 . 8212 . 8461 . 8686 . 8888 . 9066 . 9222 . 9357 . 9474 . 9573 . 9656 . 9726 . 9783 . 9830 . 9868 . 9898 . 9922 . 9941 . 9956 . 9967 . 9976 . 9982 . 9987 .03 . 5120 . 5517 . 5910 . 6293 . 6664 . 7019 . 7357 . 7673 . 967 . 8238 . 8485 . 8708 . 8907 . 9082 . 9236 . 9370 . 9484 . 9582 . 9664 . 9732 . 9788 . 9834 . 9871 . 9901 . 9925 . 9943 . 9957 . 9968 . 9977 . 9983 . 9988 .04 . 5160 . 5557 . 5948 . 6331 . 6700 . 7054 . 7389 . 7704 . 7995 . 8264 . 8508 . 8729 . 8925 . 9099 . 9251 . 9382 . 9495 . 9591 . 9671 . 9738 . 9793 . 9838 . 9875 . 9904 . 9927 . 9945 . 9959 . 9969 . 9977 . 9984 . 9988 .05 . 5199 . 5596 . 5987 . 6368 . 6736 . 7088 . 7422 . 7734 . 8023 . 8289 . 8531 . 8749 . 8944 . 9115 . 9265 . 9394 . 9505 . 9599 . 9678 . 9744 . 9798 . 9842 . 9878 . 9906 . 9929 . 9946 . 9960 . 9970 . 9978 . 9984 . 9989 .06 . 5239 . 636 . 6026 . 6406 . 6772 . 7123 . 7454 . 7764 . 8051 . 8315 . 8554 . 8770 . 8962 . 9131 . 9279 . 9406 . 9515 . 9608 . 9686 . 9750 . 9803 . 9846 . 9881 . 9909 . 9931 . 9948 . 9961 . 9971 . 9979 . 9985 . 9989 .07 . 5279 . 5675 . 6064 . 6443 . 6808 . 7157 . 7486 . 7794 . 8078 . 8340 . 8577 . 8790 . 8980 . 9147 . 9292 . 9418 . 9525 . 9616 . 9693 . 9756 . 9808 . 9850 . 9884 . 9911 . 9932 . 9949 . 9962 . 9972 . 9979 . 9985 . 9989 .08 . 5319 . 5714 . 6103 . 6480 . 6844 . 7190 . 7517 . 7823 . 8106 . 8365 . 8599 . 8810 . 8997 . 9162 . 9306 . 9429 . 9535 . 9625 . 9699 . 9761 . 9812 . 9854 . 9887 . 9913 . 9934 . 9951 . 963 . 9973 . 9980 . 9986 . 9990 .09 . 5359 . 5753 . 6141 . 6517 . 6879 . 7224 . 7549 . 7852 . 8133 . 8389 . 8621 . 8830 . 9015 . 9177 . 9319 . 9441 . 9545 . 9633 . 9706 . 9767 . 9817 . 9857 . 9890 . 9916 . 9936 . 9952 . 9964 . 9974 . 9981 . 9986 . 9990 STATISTICS FOR BUSINESS AND ECONOMICS 11e This page intentionally left blank STATISTICS FOR BUSINESS AND ECONOMICS 11e David R. Anderson University of Cincinnati Dennis J. Sweeney University of Cincinnati Thomas A. Williams Rochester Institute of Technology Statistics for Business and Economics, Eleventh Edition David R. Anderson, Dennis J. Sweeney, Thomas A.

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Macintosh and Power Macintosh are registered trademarks of Apple Computer, Inc. used herein under license. Library of Congress Control Number: 2009932190 Student Edition ISBN 13: 978-0-324-78325-4 Student Edition ISBN 10: 0-324-78325-6 Instructor’s Edition ISBN 13: 978-0-538-45149-9 Instructor’s Edition ISBN 10: 0-538-45149-1 South-Western Cengage Learning 5191 Natorp Boulevard Mason, OH 45040 USA Cengage Learning products are represented in Canada by Nelson Education, Ltd.

For your course and learning solutions, visit www. cengage. com Purchase any of our products at your local college store or at our preferred online store www. ichapters. com Printed in the United States of America 1 2 3 4 5 6 7 13 12 11 10 09 Dedicated to Marcia, Cherri, and Robbie This page intentionally left blank Brief Contents

Preface xxv About the Authors xxix Chapter 1 Data and Statistics 1 Chapter 2 Descriptive Statistics: Tabular and Graphical Presentations 31 Chapter 3 Descriptive Statistics: Numerical Measures 85 Chapter 4 Introduction to Probability 148 Chapter 5 Discrete Probability Distributions 193 Chapter 6 Continuous Probability Distributions 232 Chapter 7 Sampling and Sampling Distributions 265 Chapter 8 Interval Estimation 308 Chapter 9 Hypothesis Tests 348 Chapter 10 Inference About Means and Proportions with Two Populations 406 Chapter 11 Inferences About Population Variances 448 Chapter 12 Tests of Goodness of Fit and Independence 472 Chapter 13 Experimental Design and Analysis of Variance 506 Chapter 14 Simple Linear Regression 560 Chapter 15 Multiple Regression 642 Chapter 16 Regression Analysis: Model

Building 712 Chapter 17 Index Numbers 763 Chapter 18 Time Series Analysis and Forecasting 784 Chapter 19 Nonparametric Methods 855 Chapter 20 Statistical Methods for Quality Control 903 Chapter 21 Decision Analysis 937 Chapter 22 Sample Survey On Website Appendix A References and Bibliography 976 Appendix B Tables 978 Appendix C Summation Notation 1005 Appendix D Self-Test Solutions and Answers to Even-Numbered Exercises 1007 Appendix E Using Excel Functions 1062 Appendix F Computing p-Values Using Minitab and Excel 1067 Index 1071 This page intentionally left blank Contents Preface xxv About the Authors xxix Chapter 1 Data and Statistics 1 Statistics in Practice: BusinessWeek 2 1. 1 Applications in Business and Economics 3 Accounting 3 Finance 4 Marketing 4 Production 4 Economics 4 1. Data 5 Elements, Variables, and Observations 5 Scales of Measurement 6 Categorical and Quantitative Data 7 Cross-Sectional and Time Series Data 7 1. 3 Data Sources 10 Existing Sources 10 Statistical Studies 11 Data Acquisition Errors 13 1. 4 Descriptive Statistics 13 1. 5 Statistical Inference 15 1. 6 Computers and Statistical Analysis 17 1. 7 Data Mining 17 1. 8 Ethical Guidelines for Statistical Practice 18 Summary 20 Glossary 20 Supplementary Exercises 21 Appendix: An Introduction to StatTools 28 Chapter 2 Descriptive Statistics: Tabular and Graphical Presentations 31 Statistics in Practice: Colgate-Palmolive Company 32 2. 1 Summarizing Categorical Data 33 Frequency Distribution 33 Relative Frequency and Percent Frequency Distributions 34 Bar Charts and Pie Charts 34 x Contents 2. Summarizing Quantitative Data 39 Frequency Distribution 39 Relative Frequency and Percent Frequency Distributions 41 Dot Plot 41 Histogram 41 Cumulative Distributions 43 Ogive 44 2. 3 Exploratory Data Analysis: The Stem-and-Leaf Display 48 2. 4 Crosstabulations and Scatter Diagrams 53 Crosstabulation 53 Simpson’s Paradox 56 Scatter Diagram and Trendline 57 Summary 63 Glossary 64 Key Formulas 65 Supplementary Exercises 65 Case Problem 1: Pelican Stores 71 Case Problem 2: Motion Picture Industry 72 Appendix 2. 1 Using Minitab for Tabular and Graphical Presentations 73 Appendix 2. 2 Using Excel for Tabular and Graphical Presentations 75 Appendix 2. 3 Using StatTools for Tabular and Graphical Presentations 84 Chapter 3 Descriptive Statistics: Numerical Measures 85 Statistics in Practice: Small Fry Design 86 3. Measures of Location 87 Mean 87 Median 88 Mode 89 Percentiles 90 Quartiles 91 3. 2 Measures of Variability 95 Range 96 Interquartile Range 96 Variance 97 Standard Deviation 99 Coefficient of Variation 99 3. 3 Measures of Distribution Shape, Relative Location, and Detecting Outliers 102 Distribution Shape 102 z-Scores 103 Chebyshev’s Theorem 104 Empirical Rule 105 Detecting Outliers 106 Contents xi 3. 4 Exploratory Data Analysis 109 Five-Number Summary 109 Box Plot 110 3. 5 Measures of Association Between Two Variables 115 Covariance 115 Interpretation of the Covariance 117 Correlation Coefficient 119 Interpretation of the Correlation Coefficient 120 3. The Weighted Mean and Working with Grouped Data 124 Weighted Mean 124 Grouped Data 125 Summary 129 Glossary 130 Key Formulas 131 Supplementary Exercises 133 Case Problem 1: Pelican Stores 137 Case Problem 2: Motion Picture Industry 138 Case Problem 3: Business Schools of Asia-Pacific 139 Case Problem 4: Heavenly Chocolates Website Transactions 139 Appendix 3. 1 Descriptive Statistics Using Minitab 142 Appendix 3. 2 Descriptive Statistics Using Excel 143 Appendix 3. 3 Descriptive Statistics Using StatTools 146 Chapter 4 Introduction to Probability 148 Statistics in Practice: Oceanwide Seafood 149 4. 1 Experiments, Counting Rules, and Assigning Probabilities 150 Counting Rules, Combinations, and Permutations 151 Assigning Probabilities 155 Probabilities for the KP&L Project 157 4. 2 Events and Their Probabilities 160 4. 3 Some Basic Relationships of Probability 164 Complement of an Event 164 Addition Law 165 4. 4 Conditional Probability 171 Independent Events 174 Multiplication Law 174 4. Bayes’ Theorem 178 Tabular Approach 182 Summary 184 Glossary 184 xii Contents Key Formulas 185 Supplementary Exercises 186 Case Problem: Hamilton County Judges 190 Chapter 5 Discrete Probability Distributions 193 Statistics in Practice: Citibank 194 5. 1 Random Variables 194 Discrete Random Variables 195 Continuous Random Variables 196 5. 2 Discrete Probability Distributions 197 5. 3 Expected Value and Variance 202 Expected Value 202 Variance 203 5. 4 Binomial Probability Distribution 207 A Binomial Experiment 208 Martin Clothing Store Problem 209 Using Tables of Binomial Probabilities 213 Expected Value and Variance for the Binomial Distribution 214 5. Poisson Probability Distribution 218 An Example Involving Time Intervals 218 An Example Involving Length or Distance Intervals 220 5. 6 Hypergeometric Probability Distribution 221 Summary 225 Glossary 225 Key Formulas 226 Supplementary Exercises 227 Appendix 5. 1 Discrete Probability Distributions with Minitab 230 Appendix 5. 2 Discrete Probability Distributions with Excel 230 Chapter 6 Continuous Probability Distributions 232 Statistics in Practice: Procter & Gamble 233 6. 1 Uniform Probability Distribution 234 Area as a Measure of Probability 235 6. 2 Normal Probability Distribution 238 Normal Curve 238 Standard Normal Probability Distribution 40 Computing Probabilities for Any Normal Probability Distribution 245 Grear Tire Company Problem 246 6. 3 Normal Approximation of Binomial Probabilities 250 6. 4 Exponential Probability Distribution 253 Computing Probabilities for the Exponential Distribution 254 Relationship Between the Poisson and Exponential Distributions 255 Contents xiii Summary 257 Glossary 258 Key Formulas 258 Supplementary Exercises 258 Case Problem: Specialty Toys 261 Appendix 6. 1 Continuous Probability Distributions with Minitab 262 Appendix 6. 2 Continuous Probability Distributions with Excel 263 Chapter 7 Sampling and Sampling Distributions 265 Statistics in Practice: MeadWestvaco Corporation 266 7. 1 The Electronics Associates Sampling Problem 267 7. Selecting a Sample 268 Sampling from a Finite Population 268 Sampling from an Infinite Population 270 7. 3 Point Estimation 273 Practical Advice 275 7. 4 Introduction to Sampling Distributions 276 _ 7. 5 Sampling Distribution of x 278 _ Expected Value of x 279 _ Standard Deviation of x 280 _ Form of the Sampling Distribution of x 281 _ Sampling Distribution of x for the EAI Problem 283 _ Practical Value of the Sampling Distribution of x 283 Relationship Between the Sample Size and the Sampling _ Distribution of x 285 _ 7. 6 Sampling Distribution of p 289 _ Expected Value of p 289 _ Standard Deviation of p 290 _ Form of the Sampling Distribution of p 291 _ Practical Value of the Sampling Distribution of p 291 7. Properties of Point Estimators 295 Unbiased 295 Efficiency 296 Consistency 297 7. 8 Other Sampling Methods 297 Stratified Random Sampling 297 Cluster Sampling 298 Systematic Sampling 298 Convenience Sampling 299 Judgment Sampling 299 Summary 300 Glossary 300 Key Formulas 301 xiv Contents Supplementary Exercises 302 _ Appendix 7. 1 The Expected Value and Standard Deviation of x 304 Appendix 7. 2 Random Sampling with Minitab 306 Appendix 7. 3 Random Sampling with Excel 306 Appendix 7. 4 Random Sampling with StatTools 307 Chapter 8 Interval Estimation 308 Statistics in Practice: Food Lion 309 8. 1 Population Mean: Known 310 Margin of Error and the Interval Estimate 310 Practical Advice 314 8. Population Mean: Unknown 316 Margin of Error and the Interval Estimate 317 Practical Advice 320 Using a Small Sample 320 Summary of Interval Estimation Procedures 322 8. 3 Determining the Sample Size 325 8. 4 Population Proportion 328 Determining the Sample Size 330 Summary 333 Glossary 334 Key Formulas 335 Supplementary Exercises 335 Case Problem 1: Young Professional Magazine 338 Case Problem 2: Gulf Real Estate Properties 339 Case Problem 3: Metropolitan Research, Inc. 341 Appendix 8. 1 Interval Estimation with Minitab 341 Appendix 8. 2 Interval Estimation with Excel 343 Appendix 8. 3 Interval Estimation with StatTools 346 Chapter 9 Hypothesis Tests 348 Statistics in Practice: John Morrell & Company 349 9. Developing Null and Alternative Hypotheses 350 The Alternative Hypothesis as a Research Hypothesis 350 The Null Hypothesis as an Assumption to Be Challenged 351 Summary of Forms for Null and Alternative Hypotheses 352 9. 2 Type I and Type II Errors 353 9. 3 Population Mean: Known 356 One-Tailed Test 356 Two-Tailed Test 362 Summary and Practical Advice 365 Contents xv Relationship Between Interval Estimation and Hypothesis Testing 366 9. 4 Population Mean: Unknown 370 One-Tailed Test 371 Two-Tailed Test 372 Summary and Practical Advice 373 9. 5 Population Proportion 376 Summary 379 9. 6 Hypothesis Testing and Decision Making 381 9. 7 Calculating the Probability of Type II Errors 382 9. Determining the Sample Size for a Hypothesis Test About a Population Mean 387 Summary 391 Glossary 392 Key Formulas 392 Supplementary Exercises 393 Case Problem 1: Quality Associates, Inc. 396 Case Problem 2: Ethical Behavior of Business Students at Bayview University 397 Appendix 9. 1 Hypothesis Testing with Minitab 398 Appendix 9. 2 Hypothesis Testing with Excel 400 Appendix 9. 3 Hypothesis Testing with StatTools 404 Chapter 10 Inference About Means and Proportions with Two Populations 406 Statistics in Practice: U. S. Food and Drug Administration 407 10. 1 Inferences About the Difference Between Two Population Means: 1 and 2 Known 408 Interval Estimation of 1 – 2 408 Hypothesis Tests About 1 – 2 410 Practical Advice 412 10. Inferences About the Difference Between Two Population Means: 1 and 2 Unknown 415 Interval Estimation of 1 – 2 415 Hypothesis Tests About 1 – 2 417 Practical Advice 419 10. 3 Inferences About the Difference Between Two Population Means: Matched Samples 423 10. 4 Inferences About the Difference Between Two Population Proportions 429 Interval Estimation of p1 – p2 429 Hypothesis Tests About p1 – p2 431 Summary 436 xvi Contents Glossary 436 Key Formulas 437 Supplementary Exercises 438 Case Problem: Par, Inc. 441 Appendix 10. 1 Inferences About Two Populations Using Minitab 442 Appendix 10. 2 Inferences About Two Populations Using Excel 444 Appendix 10. Inferences About Two Populations Using StatTools 446 Chapter 11 Inferences About Population Variances 448 Statistics in Practice: U. S. Government Accountability Office 449 11. 1 Inferences About a Population Variance 450 Interval Estimation 450 Hypothesis Testing 454 11. 2 Inferences About Two Population Variances 460 Summary 466 Key Formulas 467 Supplementary Exercises 467 Case Problem: Air Force Training Program 469 Appendix 11. 1 Population Variances with Minitab 470 Appendix 11. 2 Population Variances with Excel 470 Appendix 11. 3 Population Standard Deviation with StatTools 471 Chapter 12 Tests of Goodness of Fit and Independence 472 Statistics in Practice: United Way 473 12. Goodness of Fit Test: A Multinomial Population 474 12. 2 Test of Independence 479 12. 3 Goodness of Fit Test: Poisson and Normal Distributions 487 Poisson Distribution 487 Normal Distribution 491 Summary 496 Glossary 497 Key Formulas 497 Supplementary Exercises 497 Case Problem: A Bipartisan Agenda for Change 501 Appendix 12. 1 Tests of Goodness of Fit and Independence Using Minitab 502 Appendix 12. 2 Tests of Goodness of Fit and Independence Using Excel 503 Chapter 13 Experimental Design and Analysis of Variance 506 Statistics in Practice: Burke Marketing Services, Inc. 507 13. 1 An Introduction to Experimental Design and Analysis of Variance 508 Contents xvii

Data Collection 509 Assumptions for Analysis of Variance 510 Analysis of Variance: A Conceptual Overview 510 13. 2 Analysis of Variance and the Completely Randomized Design 513 Between-Treatments Estimate of Population Variance 514 Within-Treatments Estimate of Population Variance 515 Comparing the Variance Estimates: The F Test 516 ANOVA Table 518 Computer Results for Analysis of Variance 519 Testing for the Equality of k Population Means:An Observational Study 520 13. 3 Multiple Comparison Procedures 524 Fisher’s LSD 524 Type I Error Rates 527 13. 4 Randomized Block Design 530 Air Traffic Controller Stress Test 531 ANOVA Procedure 532 Computations and Conclusions 533 13. Factorial Experiment 537 ANOVA Procedure 539 Computations and Conclusions 539 Summary 544 Glossary 545 Key Formulas 545 Supplementary Exercises 547 Case Problem 1: Wentworth Medical Center 552 Case Problem 2: Compensation for Sales Professionals 553 Appendix 13. 1 Analysis of Variance with Minitab 554 Appendix 13. 2 Analysis of Variance with Excel 555 Appendix 13. 3 Analysis of Variance with StatTools 557 Chapter 14 Simple Linear Regression 560 Statistics in Practice: Alliance Data Systems 561 14. 1 Simple Linear Regression Model 562 Regression Model and Regression Equation 562 Estimated Regression Equation 563 14. 2 Least Squares Method 565 14. Coefficient of Determination 576 Correlation Coefficient 579 14. 4 Model Assumptions 583 14. 5 Testing for Significance 585 Estimate of 2 585 t Test 586 xviii Contents Confidence Interval for 1 587 F Test 588 Some Cautions About the Interpretation of Significance Tests 590 14. 6 Using the Estimated Regression Equation for Estimation and Prediction 594 Point Estimation 594 Interval Estimation 594 Confidence Interval for the Mean Value of y 595 Prediction Interval for an Individual Value of y 596 14. 7 Computer Solution 600 14. 8 Residual Analysis: Validating Model Assumptions 605 Residual Plot Against x 606 Residual Plot Against y 607 ? Standardized Residuals 607 Normal Probability Plot 610 14. Residual Analysis: Outliers and Influential Observations 614 Detecting Outliers 614 Detecting Influential Observations 616 Summary 621 Glossary 622 Key Formulas 623 Supplementary Exercises 625 Case Problem 1: Measuring Stock Market Risk 631 Case Problem 2: U. S. Department of Transportation 632 Case Problem 3: Alumni Giving 633 Case Problem 4: PGA Tour Statistics 633 Appendix 14. 1 Calculus-Based Derivation of Least Squares Formulas 635 Appendix 14. 2 A Test for Significance Using Correlation 636 Appendix 14. 3 Regression Analysis with Minitab 637 Appendix 14. 4 Regression Analysis with Excel 638 Appendix 14. 5 Regression Analysis with StatTools 640 Chapter 15 Multiple Regression 642 Statistics in Practice: dunnhumby 643 15. 1 Multiple Regression Model 644 Regression Model and Regression Equation 644 Estimated Multiple Regression Equation 644 15. Least Squares Method 645 An Example: Butler Trucking Company 646 Note on Interpretation of Coefficients 648 15. 3 Multiple Coefficient of Determination 654 15. 4 Model Assumptions 657 Contents xix 15. 5 Testing for Significance 658 F Test 658 t Test 661 Multicollinearity 662 15. 6 Using the Estimated Regression Equation for Estimation and Prediction 665 15. 7 Categorical Independent Variables 668 An Example: Johnson Filtration, Inc. 668 Interpreting the Parameters 670 More Complex Categorical Variables 672 15. 8 Residual Analysis 676 Detecting Outliers 678 Studentized Deleted Residuals and Outliers 678 Influential Observations 679 Using Cook’s Distance Measure to Identify Influential Observations 679 15. Logistic Regression 683 Logistic Regression Equation 684 Estimating the Logistic Regression Equation 685 Testing for Significance 687 Managerial Use 688 Interpreting the Logistic Regression Equation 688 Logit Transformation 691 Summary 694 Glossary 695 Key Formulas 696 Supplementary Exercises 698 Case Problem 1: Consumer Research, Inc. 704 Case Problem 2: Alumni Giving 705 Case Problem 3: PGA Tour Statistics 705 Case Problem 4: Predicting Winning Percentage for the NFL 708 Appendix 15. 1 Multiple Regression with Minitab 708 Appendix 15. 2 Multiple Regression with Excel 709 Appendix 15. 3 Logistic Regression with Minitab 710 Appendix 15. 4 Multiple Regression with StatTools 711

Chapter 16 Regression Analysis: Model Building 712 Statistics in Practice: Monsanto Company 713 16. 1 General Linear Model 714 Modeling Curvilinear Relationships 714 Interaction 718 xx Contents Transformations Involving the Dependent Variable 720 Nonlinear Models That Are Intrinsically Linear 724 16. 2 Determining When to Add or Delete Variables 729 General Case 730 Use of p-Values 732 16. 3 Analysis of a Larger Problem 735 16. 4 Variable Selection Procedures 739 Stepwise Regression 739 Forward Selection 740 Backward Elimination 741 Best-Subsets Regression 741 Making the Final Choice 742 16. 5 Multiple Regression Approach to Experimental Design 745 16. Autocorrelation and the Durbin-Watson Test 750 Summary 754 Glossary 754 Key Formulas 754 Supplementary Exercises 755 Case Problem 1: Analysis of PGA Tour Statistics 758 Case Problem 2: Fuel Economy for Cars 759 Appendix 16. 1 Variable Selection Procedures with Minitab 760 Appendix 16. 2 Variable Selection Procedures with StatTools 761 Chapter 17 Index Numbers 763 Statistics in Practice: U. S. Department of Labor, Bureau of Labor Statistics 764 17. 1 Price Relatives 765 17. 2 Aggregate Price Indexes 765 17. 3 Computing an Aggregate Price Index from Price Relatives 769 17. 4 Some Important Price Indexes 771 Consumer Price Index 771 Producer Price Index 771 Dow Jones Averages 772 17. 5 Deflating a Series by Price Indexes 773 17. 6 Price Indexes: Other Considerations 777 Selection of Items 777 Selection of a Base Period 777 Quality Changes 777 17. Quantity Indexes 778 Summary 780 Contents xxi Glossary 780 Key Formulas 780 Supplementary Exercises 781 Chapter 18 Time Series Analysis and Forecasting 784 Statistics in Practice: Nevada Occupational Health Clinic 785 18. 1 Time Series Patterns 786 Horizontal Pattern 786 Trend Pattern 788 Seasonal Pattern 788 Trend and Seasonal Pattern 789 Cyclical Pattern 789 Selecting a Forecasting Method 791 18. 2 Forecast Accuracy 792 18. 3 Moving Averages and Exponential Smoothing 797 Moving Averages 797 Weighted Moving Averages 800 Exponential Smoothing 800 18. 4 Trend Projection 807 Linear Trend Regression 807 Holt’s Linear Exponential Smoothing 812 Nonlinear Trend Regression 814 18. Seasonality and Trend 820 Seasonality Without Trend 820 Seasonality and Trend 823 Models Based on Monthly Data 825 18. 6 Time Series Decomposition 829 Calculating the Seasonal Indexes 830 Deseasonalizing the Time Series 834 Using the Deseasonalized Time Series to Identify Trend 834 Seasonal Adjustments 836 Models Based on Monthly Data 837 Cyclical Component 837 Summary 839 Glossary 840 Key Formulas 841 Supplementary Exercises 842 Case Problem 1: Forecasting Food and Beverage Sales 846 Case Problem 2: Forecasting Lost Sales 847 Appendix 18. 1 Forecasting with Minitab 848 Appendix 18. 2 Forecasting with Excel 851 Appendix 18. 3 Forecasting with StatTools 852 xxii Contents Chapter 19 Nonparametric Methods 855 Statistics in Practice: West Shell Realtors 856 19. Sign Test 857 Hypothesis Test About a Population Median 857 Hypothesis Test with Matched Samples 862 19. 2 Wilcoxon Signed-Rank Test 865 19. 3 Mann-Whitney-Wilcoxon Test 871 19. 4 Kruskal-Wallis Test 882 19. 5 Rank Correlation 887 Summary 891 Glossary 892 Key Formulas 893 Supplementary Exercises 893 Appendix 19. 1 Nonparametric Methods with Minitab 896 Appendix 19. 2 Nonparametric Methods with Excel 899 Appendix 19. 3 Nonparametric Methods with StatTools 901 Chapter 20 Statistical Methods for Quality Control 903 Statistics in Practice: Dow Chemical Company 904 20. 1 Philosophies and Frameworks 905 Malcolm Baldrige National Quality Award 906 ISO 9000 906 Six Sigma 906 20. Statistical Process Control 908 Control Charts 909 _ x Chart: Process Mean and Standard Deviation Known 910 _ x Chart: Process Mean and Standard Deviation Unknown 912 R Chart 915 p Chart 917 np Chart 919 Interpretation of Control Charts 920 20. 3 Acceptance Sampling 922 KALI, Inc. : An Example of Acceptance Sampling 924 Computing the Probability of Accepting a Lot 924 Selecting an Acceptance Sampling Plan 928 Multiple Sampling Plans 930 Summary 931 Glossary 931 Key Formulas 932 Supplementary Exercises 933 Appendix 20. 1 Control Charts with Minitab 935 Appendix 20. 2 Control Charts with StatTools 935 Contents xxiii Chapter 21 Decision Analysis 937 Statistics in Practice: Ohio Edison Company 938 21. Problem Formulation 939 Payoff Tables 940 Decision Trees 940 21. 2 Decision Making with Probabilities 941 Expected Value Approach 941 Expected Value of Perfect Information 943 21. 3 Decision Analysis with Sample Information 949 Decision Tree 950 Decision Strategy 951 Expected Value of Sample Information 954 21. 4 Computing Branch Probabilities Using Bayes’ Theorem 960 Summary 964 Glossary 965 Key Formulas 966 Supplementary Exercises 966 Case Problem: Lawsuit Defense Strategy 969 Appendix: An Introduction to PrecisionTree 970 Chapter 22 Sample Survey On Website Statistics in Practice: Duke Energy 22-2 22. 1 Terminology Used in Sample Surveys 22-2 22. 2 Types of Surveys and Sampling Methods 22-3 22. Survey Errors 22-5 Nonsampling Error 22-5 Sampling Error 22-5 22. 4 Simple Random Sampling 22-6 Population Mean 22-6 Population Total 22-7 Population Proportion 22-8 Determining the Sample Size 22-9 22. 5 Stratified Simple Random Sampling 22-12 Population Mean 22-12 Population Total 22-14 Population Proportion 22-15 Determining the Sample Size 22-16 22. 6 Cluster Sampling 22-21 Population Mean 22-23 Population Total 22-24 Population Proportion 22-25 Determining the Sample Size 22-26 22. 7 Systematic Sampling 22-29 Summary 22-29 xxiv Contents Glossary 22-30 Key Formulas 22-30 Supplementary Exercises 22-34 Appendix: Self-Test Solutions and Answers to Even-Numbered Exercises 22-37

Appendix A References and Bibliography 976 Appendix B Tables 978 Appendix C Summation Notation 1005 Appendix D Self-Test Solutions and Answers to Even-Numbered Exercises 1007 Appendix E Using Excel Functions 1062 Appendix F Computing p-Values Using Minitab and Excel 1067 Index 1071 Preface The purpose of STATISTICS FOR BUSINESS AND ECONOMICS is to give students, primarily those in the fields of business administration and economics, a conceptual introduction to the field of statistics and its many applications. The text is applications oriented and written with the needs of the nonmathematician in mind; the mathematical prerequisite is knowledge of algebra.

Applications of data analysis and statistical methodology are an integral part of the organization and presentation of the text material. The discussion and development of each technique is presented in an application setting, with the statistical results providing insights to decisions and solutions to problems. Although the book is applications oriented, we have taken care to provide sound methodological development and to use notation that is generally accepted for the topic being covered. Hence, students will find that this text provides good preparation for the study of more advanced statistical material. A bibliography to guide further study is included as an appendix.

The text introduces the student to the software packages of Minitab 15 and Microsoft® Office Excel 2007 and emphasizes the role of computer software in the application of statistical analysis. Minitab is illustrated as it is one of the leading statistical software packages for both education and statistical practice. Excel is not a statistical software package, but the wide availability and use of Excel make it important for students to understand the statistical capabilities of this package. Minitab and Excel procedures are provided in appendixes so that instructors have the flexibility of using as much computer emphasis as desired for the course.

Changes in the Eleventh Edition We appreciate the acceptance and positive response to the previous editions of STATISTICS FOR BUSINESS AND ECONOMICS. Accordingly, in making modifications for this new edition, we have maintained the presentation style and readability of those editions. The significant changes in the new edition are summarized here. Content Revisions • Revised Chapter 18 — “Time Series Analysis and Forecasting. ” The chapter has been completely rewritten to focus more on using the pattern in a time series plot to select an appropriate forecasting method. We begin with a new Section 18. 1 on time series patterns, followed by a new Section 18. on methods for measuring forecast accuracy. Section 18. 3 discusses moving averages and exponential smoothing. Section 18. 4 introduces methods appropriate for a time series that exhibits a trend. Here we illustrate how regression analysis and Holt’s linear exponential smoothing can be used for linear trend projection, and then discuss how regression analysis can be used to model nonlinear relationships involving a quadratic trend and an exponential growth. Section 18. 5 then shows how dummy variables can be used to model seasonality in a forecasting equation. Section 18. 6 discusses classical time series decomposition, including the concept of deseasonalizing a time series.

There is a new appendix on forecasting using the Excel add-in StatTools and most exercises are new or updated. • Revised Chapter 19 — “Nonparametric Methods. ” The treatment of nonparametric methods has been revised and updated. We contrast each nonparametric method xxvi Preface • • • • • • • • with its parametric counterpart and describe how fewer assumptions are required for the nonparametric procedure. The sign test emphasizes the test for a population median, which is important in skewed populations where the median is often the preferred measure of central location. The Wilcoxon Rank-Sum test is used for both matched samples tests and tests about a median of a symmetric population.

A new small-sample application of the Mann-Whitney-Wilcoxon test shows the exact sampling distribution of the test statistic and is used to explain why the sum of the signed ranks can be used to test the hypothesis that the two populations are identical. The chapter concludes with the Kruskal-Wallis test and rank correlation. New chapter ending appendixes describe how Minitab, Excel, and StatTools can be used to implement nonparametric methods. Twenty-seven data sets are now available to facilitate computer solution of the exercises. StatTools Add-In for Excel. Excel 2007 does not contain statistical functions or data analysis tools to perform all the statistical procedures discussed in the text.

StatTools is a commercial Excel 2007 add-in, developed by Palisades Corporation, that extends the range of statistical options for Excel users. In an appendix to Chapter 1 we show how to download and install StatTools, and most chapters include a chapter appendix that shows the steps required to accomplish a statistical procedure using StatTools. We have been very careful to make the use of StatTools completely optional so that instructors who want to teach using the standard tools available in Excel 2007 can continue to do so. But users who want additional statistical capabilities not available in standard Excel 2007 now have access to an industry standard statistics add-in that students will be able to continue to use in the workplace. Change in Terminology for Data.

In the previous edition, nominal and ordinal data were classified as qualitative; interval and ratio data were classified as quantitative. In this edition, nominal and ordinal data are referred to as categorical data. Nominal and ordinal data use labels or names to identify categories of like items. Thus, we believe that the term categorical is more descriptive of this type of data. Introducing Data Mining. A new section in Chapter 1 introduces the relatively new field of data mining. We provide a brief overview of data mining and the concept of a data warehouse. We also describe how the fields of statistics and computer science join to make data mining operational and valuable. Ethical Issues in Statistics.

Another new section in Chapter 1 provides a discussion of ethical issues when presenting and interpreting statistical information. Updated Excel Appendix for Tabular and Graphical Descriptive Statistics. The chapter-ending Excel appendix for Chapter 2 shows how the Chart Tools, PivotTable Report, and PivotChart Report can be used to enhance the capabilities for displaying tabular and graphical descriptive statistics. Comparative Analysis with Box Plots. The treatment of box plots in Chapter 2 has been expanded to include relatively quick and easy comparisons of two or more data sets. Typical starting salary data for accounting, finance, management, and marketing majors are used to illustrate box plot multigroup comparisons. Revised Sampling Material.

The introduction of Chapter 7 has been revised and now includes the concepts of a sampled population and a frame. The distinction between sampling from a finite population and an infinite population has been clarified, with sampling from a process used to illustrate the selection of a random sample from an infinite population. A practical advice section stresses the importance of obtaining close correspondence between the sampled population and the target population. Revised Introduction to Hypothesis Testing. Section 9. 1, Developing Null and Alternative Hypotheses, has been revised. A better set of guidelines has been developed for identifying the null and alternative hypotheses.

The context of the situation and the purpose for taking the sample are key. In situations in which the Preface xxvii • • • • focus is on finding evidence to support a research finding, the research hypothesis is the alternative hypothesis. In situations where the focus is on challenging an assumption, the assumption is the null hypothesis. New PrecisionTree Software for Decision Analysis. PrecisionTree is another Excel add-in developed by Palisades Corporation that is very helpful in decision analysis. Chapter 21 has a new appendix which shows how to use the PrecisionTree add-in. New Case Problems. We have added 5 new case problems to this edition, bringing the total number of case problems to 31.

A new case problem on descriptive statistics appears in Chapter 3 and a new case problem on hypothesis testing appears in Chapter 9. Three new case problems have been added to regression in Chapters 14, 15, and 16. These case problems provide students with the opportunity to analyze larger data sets and prepare managerial reports based on the results of the analysis. New Statistics in Practice Applications. Each chapter begins with a Statistics in Practice vignette that describes an application of the statistical methodology to be covered in the chapter. New to this edition are Statistics in Practice articles for Oceanwide Seafood in Chapter 4 and the London-based marketing services company dunnhumby in Chapter 15. New Examples and Exercises Based on Real Data.

We continue to make a significant effort to update our text examples and exercises with the most current real data and referenced sources of statistical information. In this edition, we have added approximately 150 new examples and exercises based on real data and referenced sources. Using data from sources also used by The Wall Street Journal, USA Today, Barron’s, and others, we have drawn from actual studies to develop explanations and to create exercises that demonstrate the many uses of statistics in business and economics. We believe that the use of real data helps generate more student interest in the material and enables the student to learn about both the statistical methodology and its application. The eleventh edition of the text contains over 350 examples and exercises based on real data.

Features and Pedagogy Authors Anderson, Sweeney, and Williams have continued many of the features that appeared in previous editions. Important ones for students are noted here. Methods Exercises and Applications Exercises The end-of-section exercises are split into two parts, Methods and Applications. The Methods exercises require students to use the formulas and make the necessary computations. The Applications exercises require students to use the chapter material in real-world situations. Thus, students first focus on the computational “nuts and bolts” and then move on to the subtleties of statistical application and interpretation. Self-Test Exercises

Certain exercises are identified as “Self-Test Exercises. ” Completely worked-out solutions for these exercises are provided in Appendix D at the back of the book. Students can attempt the Self-Test Exercises and immediately check the solution to evaluate their understanding of the concepts presented in the chapter. Margin Annotations and Notes and Comments Margin annotations that highlight key points and provide additional insights for the student are a key feature of this text. These annotations, which appear in the margins, are designed to provide emphasis and enhance understanding of the terms and concepts being presented in the text. xxviii Preface

At the end of many sections, we provide Notes and Comments designed to give the student additional insights about the statistical methodology and its application. Notes and Comments include warnings about or limitations of the methodology, recommendations for application, brief descriptions of additional technical considerations, and other matters. Data Files Accompany the Text Over 200 data files are available on the website that accompanies the text. The data sets are available in both Minitab and Excel formats. File logos are used in the text to identify the data sets that are available on the website. Data sets for all case problems as well as data sets for larger exercises are included. Acknowledgments A special thank you goes to Jeffrey D. Camm, University of Cincinnati, and James J.

Cochran, Louisiana Tech University, for their contributions to this eleventh edition of Statistics for Business and Economics. Professors Camm and Cochran provided extensive input for the new chapters on forecasting and nonparametric methods. In addition, they provided helpful input and suggestions for new case problems, exercises, and Statistics in Practice articles. We would also like to thank our associates from business and industry who supplied the Statistics in Practice features. We recognize them individually by a credit line in each of the articles. Finally, we are also indebted to our senior acquisitions editor Charles McCormick, Jr. , our developmental editor Maggie Kubale, our content project manager, Jacquelyn K Featherly, our marketing manager Bryant T.

Chrzan, and others at Cengage South-Western for their editorial counsel and support during the preparation of this text. David R. Anderson Dennis J. Sweeney Thomas A. Williams About the Authors David R. Anderson. David R. Anderson is Professor of Quantitative Analysis in the College of Business Administration at the University of Cincinnati. Born in Grand Forks, North Dakota, he earned his B. S. , M. S. , and Ph. D. degrees from Purdue University. Professor Anderson has served as Head of the Department of Quantitative Analysis and Operations Management and as Associate Dean of the College of Business Administration at the University of Cincinnati. In addition, he was the coordinator of the College’s first Executive Program.

At the University of Cincinnati, Professor Anderson has taught introductory statistics for business students as well as graduate-level courses in regression analysis, multivariate analysis, and management science. He has also taught statistical courses at the Department of Labor in Washington, D. C. He has been honored with nominations and awards for excellence in teaching and excellence in service to student organizations. Professor Anderson has coauthored 10 textbooks in the areas of statistics, management science, linear programming, and production and operations management. He is an active consultant in the field of sampling and statistical methods. Dennis J.

Sweeney. Dennis J. Sweeney is Professor of Quantitative Analysis and Founder of the Center for Productivity Improvement at the University of Cincinnati. Born in Des Moines, Iowa, he earned a B. S. B. A. degree from Drake University and his M. B. A. and D. B. A. degrees from Indiana University, where he was an NDEA Fellow. During 1978–79, Professor Sweeney worked in the management science group at Procter & Gamble; during 1981–82, he was a visiting professor at Duke University. Professor Sweeney served as Head of the Department of Quantitative Analysis and as Associate Dean of the College of Business Administration at the University of Cincinnati.

Professor Sweeney has published more than 30 articles and monographs in the area of management science and statistics. The National Science Foundation, IBM, Procter & Gamble, Federated Department Stores, Kroger, and Cincinnati Gas & Electric have funded his research, which has been published in Management Science, Operations Research, Mathematical Programming, Decision Sciences, and other journals. Professor Sweeney has coauthored 10 textbooks in the areas of statistics, management science, linear programming, and production and operations management. Thomas A. Williams. Thomas A. Williams is Professor of Management Science in the College of Business at Rochester Institute of Technology.

Born in Elmira, New York, he earned his B. S. degree at Clarkson University. He did his graduate work at Rensselaer Polytechnic Institute, where he received his M. S. and Ph. D. degrees. Before joining the College of Business at RIT, Professor Williams served for seven years as a faculty member in the College of Business Administration at the University of Cincinnati, where he developed the undergraduate program in Information Systems and then served as its coordinator. At RIT he was the first chairman of the Decision Sciences Department. He teaches courses in management science and statistics, as well as graduate courses in regression and decision analysis.

Professor Williams is the coauthor of 11 textbooks in the areas of management science, statistics, production and operations management, and mathematics. He has been a consultant for numerous Fortune 500 companies and has worked on projects ranging from the use of data analysis to the development of large-scale regression models. This page intentionally left blank STATISTICS FOR BUSINESS AND ECONOMICS 11e This page intentionally left blank CHAPTER Data and Statistics CONTENTS STATISTICS IN PRACTICE: BUSINESSWEEK 1. 1 APPLICATIONS IN BUSINESS AND ECONOMICS Accounting Finance Marketing Production Economics DATA Elements, Variables, and Observations Scales of Measurement Categorical and Quantitative Data Cross-Sectional and Time Series Data 1. DATA SOURCES Existing Sources Statistical Studies Data Acquisition Errors DESCRIPTIVE STATISTICS STATISTICAL INFERENCE COMPUTERS AND STATISTICAL ANALYSIS DATA MINING ETHICAL GUIDELINES FOR STATISTICAL PRACTICE 1 1. 4 1. 5 1. 6 1. 7 1. 8 1. 2 2 Chapter 1 Data and Statistics STATISTICS in PRACTICE NEW YORK, NEW YORK BUSINESSWEEK* With a global circulation of more than 1 million, BusinessWeek is the most widely read business magazine in the world. More than 200 dedicated reporters and editors in 26 bureaus worldwide deliver a variety of articles of interest to the business and economic community. Along with feature articles on current topics, the magazine contains regular sections on International Business, Economic Analysis, Information Processing, and Science & Technology.

Information in the feature articles and the regular sections helps readers stay abreast of current developments and assess the impact of those developments on business and economic conditions. Most issues of BusinessWeek provide an in-depth report on a topic of current interest. Often, the in-depth reports contain statistical facts and summaries that help the reader understand the business and economic information. For example, the February 23, 2009 issue contained a feature article about the home foreclosure crisis, the March 17, 2009 issue included a discussion of when the stock market would begin to recover, and the May 4, 2009 issue had a special report on how to make pay cuts less painful.

In addition, the weekly BusinessWeek Investor provides statistics about the state of the economy, including production indexes, stock prices, mutual funds, and interest rates. BusinessWeek also uses statistics and statistical information in managing its own business. For example, an annual survey of subscribers helps the company learn about subscriber demographics, reading habits, likely purchases, lifestyles, and so on. BusinessWeek managers use statistical summaries from the survey to provide better services to subscribers and advertisers. One recent North *The authors are indebted to Charlene Trentham, Research Manager at BusinessWeek, for providing this Statistics in Practice. BusinessWeek uses statistical facts and summaries in many of its articles. © Terri Miller/E-Visual Communications, Inc.

American subscriber survey indicated that 90% of BusinessWeek subscribers use a personal computer at home and that 64% of BusinessWeek subscribers are involved with computer purchases at work. Such statistics alert BusinessWeek managers to subscriber interest in articles about new developments in computers. The results of the survey are also made available to potential advertisers. The high percentage of subscribers using personal computers at home and the high percentage of subscribers involved with computer purchases at work would be an incentive for a computer manufacturer to consider advertising in BusinessWeek. In this chapter, we discuss the types of data available for statistical analysis and describe how the data are obtained.

We introduce descriptive statistics and statistical inference as ways of converting data into meaningful and easily interpreted statistical information. Frequently, we see the following types of statements in newspapers and magazines: • The National Association of Realtors reported that the median price paid by firsttime home buyers is $165,000 (The Wall Street Journal, February 11, 2009). • NCAA president Myles Brand reported that college athletes are earning degrees at record rates. Latest figures show that 79% of all men and women student-athletes graduate (Associated Press, October 15, 2008). • The average one-way travel time to work is 25. 3 minutes (U. S. Census Bureau, March 2009). 1. 1 Applications in Business and Economics 3 • A record high 11% of U. S. omes are vacant, a glut created by the housing boom and subsequent collapse (USA Today, February 13, 2009). • The national average price for regular gasoline reached $4. 00 per gallon for the first time in history (Cable News Network website, June 8, 2008). • The New York Yankees have the highest salaries in major league baseball. The total payroll is $201,449,289 with a median salary of $5,000,000 (USA Today Salary Data Base, April 2009). • The Dow Jones Industrial Average closed at 8721 (The Wall Street Journal, June 2, 2009). The numerical facts in the preceding statements ($165,000, 79%, 25. 3, 11%, $4. 00, $201,449,289, $5,000,000 and 8721) are called statistics.

In this usage, the term statistics refers to numerical facts such as averages, medians, percents, and index numbers that help us understand a variety of business and economic situations. However, as you will see, the field, or subject, of statistics involves much more than numerical facts. In a broader sense, statistics is defined as the art and science of collecting, analyzing, presenting, and interpreting data. Particularly in business and economics, the information provided by collecting, analyzing, presenting, and interpreting data gives managers and decision makers a better understanding of the business and economic environment and thus enables them to make more informed and better decisions. In this text, we emphasize the use of statistics for business and economic decision making.

Chapter 1 begins with some illustrations of the applications of statistics in business and economics. In Section 1. 2 we define the term data and introduce the concept of a data set. This section also introduces key terms such as variables and observations, discusses the difference between quantitative and categorical data, and illustrates the uses of cross-sectional and time series data. Section 1. 3 discusses how data can be obtained from existing sources or through survey and experimental studies designed to obtain new data. The important role that the Internet now plays in obtaining data is also highlighted. The uses of data in developing descriptive statistics and in making statistical inferences are described in Sections 1. 4 and 1. 5.

The last three sections of Chapter 1 provide the role of the computer in statistical analysis, an introduction to the relative new field of data mining, and a discussion of ethical guidelines for statistical practice. A chapter-ending appendix includes an introduction to the add-in StatTools which can be used to extend the statistical options for users of Microsoft Excel. 1. 1 Applications in Business and Economics In today’s global business and economic environment, anyone can access vast amounts of statistical information. The most successful managers and decision makers understand the information and know how to use it effectively. In this section, we provide examples that illustrate some of the uses of statistics in business and economics. Accounting Public accounting firms use statistical sampling procedures when conducting audits for their clients.

For instance, suppose an accounting firm wants to determine whether the amount of accounts receivable shown on a client’s balance sheet fairly represents the actual amount of accounts receivable. Usually the large number of individual accounts receivable makes reviewing and validating every account too time-consuming and expensive. As common practice in such situations, the audit staff selects a subset of the accounts called a sample. After reviewing the accuracy of the sampled accounts, the auditors draw a conclusion as to whether the accounts receivable amount shown on the client’s balance sheet is acceptable. 4 Chapter 1 Data and Statistics Finance Financial analysts use a variety of statistical information to guide their investment recommendations.

In the case of stocks, the analysts review a variety of financial data including price/earnings ratios and dividend yields. By comparing the information for an individual stock with information about the stock market averages, a financial analyst can begin to draw a conclusion as to whether an individual stock is over- or underpriced. For example, Barron’s (February 18, 2008) reported that the average dividend yield for the 30 stocks in the Dow Jones Industrial Average was 2. 45%. Altria Group showed a dividend yield of 3. 05%. In this case, the statistical information on dividend yield indicates a higher dividend yield for Altria Group than the average for the Dow Jones stocks. Therefore, a financial analyst might conclude that Altria Group was underpriced.

This and other information about Altria Group would help the analyst make a buy, sell, or hold recommendation for the stock. Marketing Electronic scanners at retail checkout counters collect data for a variety of marketing research applications. For example, data suppliers such as ACNielsen and Information Resources, Inc. , purchase point-of-sale scanner data from grocery stores, process the data, and then sell statistical summaries of the data to manufacturers. Manufacturers spend hundreds of thousands of dollars per product category to obtain this type of scanner data. Manufacturers also purchase data and statistical summaries on promotional activities such as special pricing and the use of in-store displays.

Brand managers can review the scanner statistics and the promotional activity statistics to gain a better understanding of the relationship between promotional activities and sales. Such analyses often prove helpful in establishing future marketing strategies for the various products. Production Today’s emphasis on quality makes quality control an important application of statistics in production. A variety of statistical quality control charts are used to monitor the output of a production process. In particular, an x-bar chart can be used to monitor the average output. Suppose, for example, that a machine fills containers with 12 ounces of a soft drink. Periodically, a production worker selects a sample of containers and computes the average number of ounces in the sample.

This average, or x-bar value, is plotted on an x-bar chart. A plotted value above the chart’s upper control limit indicates overfilling, and a plotted value below the chart’s lower control limit indicates underfilling. The process is termed “in control” and allowed to continue as long as the plotted x-bar values fall between the chart’s upper and lower control limits. Properly interpreted, an x-bar chart can help determine when adjustments are necessary to correct a production process. Economics Economists frequently provide forecasts about the future of the economy or some aspect of it. They use a variety of statistical information in making such forecasts.

For instance, in forecasting inflation rates, economists use statistical information on such indicators as the Producer Price Index, the unemployment rate, and manufacturing capacity utilization. Often these statistical indicators are entered into computerized forecasting models that predict inflation rates. Applications of statistics such as those described in this section are an integral part of this text. Such examples provide an overview of the breadth of statistical applications. To supplement these examples, practitioners in the fields of business and economics provided chapter-opening Statistics in Practice articles that introduce the material covered in each chapter.

The Statistics in Practice applications show the importance of statistics in a wide variety of business and economic situations. 1. 2 Data 5 1. 2 Data Data are the facts and figures collected, analyzed, and summarized for presentation and interpretation. All the data collected in a particular study are referred to as the data set for the study. Table 1. 1 shows a data set containing information for 25 mutual funds that are part of the Morningstar Funds500 for 2008. Morningstar is a company that tracks over 7000 mutual funds and prepares in-depth analyses of 2000 of these. Their recommendations are followed closely by financial analysts and individual investors. Elements, Variables, and Observations Elements are the entities on which data are collected.

For the data set in Table 1. 1 each individual mutual fund is an element: the element names appear in the first column. With 25 mutual funds, the data set contains 25 elements. A variable is a characteristic of interest for the elements. The data set in Table 1. 1 includes the following five variables: • Fund Type: The type of mutual fund, labeled DE (Domestic Equity), IE (International Equity), and FI (Fixed Income) • Net Asset Value ($): The closing price per share on December 31, 2007 TABLE 1. 1 DATA SET FOR 25 MUTUAL FUNDS 5-Year Expense Net Asset Average Ratio Morningstar Value ($) Return (%) (%) Rank 14. 37 10. 73 24. 94 16. 92 35. 73 13. 47 73. 1 48. 39 45. 60 8. 60 49. 81 15. 30 17. 44 27. 86 40. 37 10. 68 26. 27 53. 89 22. 46 37. 53 12. 10 24. 42 15. 68 32. 58 35. 41 30. 53 3. 34 10. 88 15. 67 15. 85 17. 23 17. 99 23. 46 13. 50 2. 76 16. 70 15. 31 15. 16 32. 70 9. 51 13. 57 23. 68 51. 10 16. 91 15. 46 4. 31 13. 41 2. 37 17. 01 13. 98 1. 41 0. 49 0. 99 1. 18 1. 20 0. 53 0. 89 0. 90 0. 89 0. 45 1. 36 1. 32 1. 31 1. 16 1. 05 1. 25 1. 36 1. 24 0. 80 1. 27 0. 62 0. 29 0. 16 0. 23 1. 19 3-Star 4-Star 3-Star 3-Star 4-Star 3-Star 5-Star 4-Star 3-Star 3-Star 4-Star 3-Star 5-Star 3-Star 2-Star 3-Star 4-Star 4-Star 4-Star 4-Star 3-Star 4-Star 3-Star 3-Star 4-Star Fund Name American Century Intl.

Disc American Century Tax-Free Bond American Century Ultra Artisan Small Cap Brown Cap Small DFA U. S. Micro Cap Fidelity Contrafund Fidelity Overseas Fidelity Sel Electronics Fidelity Sh-Term Bond Gabelli Asset AAA Kalmar Gr Val Sm Cp Marsico 21st Century Mathews Pacific Tiger Oakmark I PIMCO Emerg Mkts Bd D RS Value A T. Rowe Price Latin Am. T. Rowe Price Mid Val Thornburg Value A USAA Income Vanguard Equity-Inc Vanguard Sht-Tm TE Vanguard Sm Cp Idx Wasatch Sm Cp Growth Fund Type IE FI DE DE DE DE DE IE DE FI DE DE DE IE DE FI DE IE DE DE FI DE FI DE DE WEB file Morningstar Data sets such as Morningstar are available on the website for this text. Source: Morningstar Funds500 (2008). 6 Chapter 1

Data and Statistics • 5-Year Average Return (%): The average annual return for the fund over the past 5 years • Expense Ratio: The percentage of assets deducted each fiscal year for fund expenses • Morningstar Rank: The overall risk-adjusted star rating for each fund; Morningstar ranks go from a low of 1-Star to a high of 5-Stars Measurements collected on each variable for every element in a study provide the data. The set of measurements obtained for a particular element is called an observation. Referring to Table 1. 1 we see that the set of measurements for the first observation (American Century Intl. Disc) is IE, 14. 37, 30. 53, 1. 41, and 3-Star.

The set of measurements for the second observation (American Century Tax-Free Bond) is FI, 10. 73, 3. 34, 0. 49, and 4-Star, and so on. A data set with 25 elements contains 25 observations. Scales of Measurement Data collection requires one of the following scales of measurement: nominal, ordinal, interval, or ratio. The scale of measurement determines the amount of information contained in the data and indicates the most appropriate data summarization and statistical analyses. When the data for a variable consist of labels or names used to identify an attribute of the element, the scale of measurement is considered a nominal scale. For example, referring to the data in Table 1. , we see that the scale of measurement for the Fund Type variable is nominal because DE, IE, and FI are labels used to identify the category or type of fund. In cases where the scale of measurement is nominal, a numeric code as well as nonnumeric labels may be used. For example, to facilitate data collection and to prepare the data for entry into a computer database, we might use a numeric code by letting 1 denote Domestic Equity, 2 deno

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Key Learnings from a Microeconomics Class for Mba Students

30. 11. 2012 Key learnings from Micro Economics module It was a very informative session and an eye opener. I was under the impression that economics only deals with fiscal and monetary policies. This was my first acquaintance with micro economics and it opened up a new perspective. I am in a position now to understand many events that happen every day around me. I am able to have a broad idea about how these events may have a direct or indirect impact on me as an individual (professionally as well as personally) and to an organisation.

Detailed below are a few (but not all) significant points that were new to me : Law of Demand & Supply : The quantity demanded of a good falls when the price rises and the quantity supplied of a good rises when the price rises. Price of a good adjusts to bring the quantity supplied and demanded into balance. Other determinants of consumers demand include income, price of substitutes, expectations etc. Any change in these factors shifts the demand curve. Equilibrium : A situation where market price is at a level at which supply and demand quantity equals.

Equilibrium of supply and demand maximizes the sum of consumer and producer surplus. Surplus : A situation in which supply is greater than demand Consumers’ surplus : Buyers’ willingness to pay for a good minus the amount the buyer actually pays for it. It measures benefit buyers gets by participating in a market. Producers’ surplus : The amount sellers receive for their goods minus their costs of production. It measures benefit sellers get from participating in a market. Dead Weight Loss : The fall in total surplus that results from a market distortion. Marginal Utility :

Additional utility derived by consuming additional unit quantity of goods. Competitive markets : Prices in a perfectly competitive market always equal marginal cost of production. To maximise profit firms chooses output quantity such that marginal revenue equals marginal cost. A Monopolistically competitive market is characterized by attributes like many firms, differentiated products and free entry. Each firm in a monopolistically competitive market has excess capacity. There is standard deadweight loss of monopoly caused by the mark up of price over marginal cost.

The product differentiation inherent in monopolistic competition leads to the use of advertising and brand names. Oligopoly is a market structure in which only a few sellers offer similar or identical products. Above concepts also clarified how Marginal cost, Sunk cost, Average Cost, Variable cost and Fixed cost help in determining sustainability of doing business and how they help in arriving at decisions like “maximize profit” or “continue to produce to cover costs”. Concepts of monopolistic and perfect competition along with examples covered in the class were apt for digesting the underlying principles.

It also helped to understand how political/governmental interferences balances or imbalances the market forces and thus effecting the price and/or consumers’ and producers’ behaviour. Price Discrimination (PD) : Important concept on types of price discrimination used by various industries and businesses were interesting to know. I am a consumer of discriminated prices since birth however, never realized that I am a victim or beneficiary of the same. How business use it to their advantage. Concepts of types of PD and their application was an eye opener and gave me a new perspective to look at the market competition in a different way.

Others : Prisoner’s Dilemma and Rivalry in Consumption, never heard off but fun to understand. How externalities (positive or negative) influence producers. Tragedy of common and enclosure movement were also unknown but not any longer. In conclusion : I have been thru’ above every day of my life but was never able to understand it the way I am able to do it now. Biggest surprise of all to me was that the underlying theme of all these is Microeconomics. And, I thought Economics is one field and was unaware of micro and macro.