Economic Questions
Name
Institution
Question 1
Perfectly competitive industries do not exist; however, it is imperative to study them (Picard, 2001). This market is a possible extreme. Producers within multiple firms face multiple competitors selling similar products. In such an instance, they often act like price takers. For that matter, irrespective of the inexistence of perfect competition markets, the industries are essential in the study for two key reasons. Firstly, multiple marketplaces can be described as reasonably as competitive. Several agricultural as well as commodity markets, stock exchanges, building constructions, retails and wholesales, and various forms of market bear many otherwise all features markets which are perfectly competitive. The model of competitive demand and supply works sufficiently within these markets, which precisely forecast the impacts of transformations within costs, taxes, incomes as well as other elements on marketplace equilibrium. Secondly, a perfectly competitive market has multiple desirable features. Thus, economists are using this model as an ideal against that real-world marketplaces get compared.
Besides, the perfectly competitive industry ought to be a small player within the general markets to increase or instead decrease outputs exclusive of noticing the impacts on overall supplied quantity as well as prices within the market (Picard, 2001). Thus, it is imperative to study perfectly competitive industries in economics.
Question 2
In business, the segments of loss-making like customers, locations, and products might be an essential drain on organizational resources. Maintaining a business segment that is generating loss consistently might be hard for one to justify when its economics in the future are unlikely to improve (Brown, Carpenter & Petersen, 2019). However, decisions on shut-downs can be daunting for businesses due to invested time and resources within a failing enterprise. In the decision-making process, the problem of shut-down ought to be considered as an implication deemed long-term. However, the issue of shut-down can be simplified into short-term pronouncements by putting into application pertinent costing principles. Theoretically, businesses should terminate activities which do not generate enough funds capable of paying its expenses in long-run. That is to say, a firm should have positive net cash flows. In evaluating shut-down predicaments, it is imperative to take into consideration the related costs of business activities. These can include variable expenses like direct labor and direct material. The direct fixed costs can never be avoided when closure of an organization occurs. Also, decision-makers can take into consideration the opportunity costs of continuing business activities. These are some of the factors which should be considered for either continuation or shut-down:
Customer relations- discontinuation of product line might to adverse reactions from clients. It is significant to take into consideration the impacts of shut-down on customer relationships. Strategic fit, which looks into the location of the business and vital importance to business operations outweighing the losses likely to be made in the short-term. Suppliers’ relationships suffered when the product is dropped. Thus, it brings about goodwill loss. Hence, upon assessing the outlined factors, decision-makers in an organization will establish whether to shut-down or continue with the product.
Question 3
Product differentiation refers to the marketing strategy which businesses are using to distinguish products as of comparable offerings in the marketplace (Ma & Wooton, 2019). Product differentiation is essential since it creates value. Firms use differentiation, which focuses on product cost values against other comparable products in the market. Thus, it establishes perception values amongst existing and prospective clients. Again, product differentiation permits businesses to compete in other areas instead of prices. For instance, candy enterprise might its candy form other brands concerning quality and tastes.
Product differentiation creates brand loyalty among clients. This enables an organization to penetrate a particular market share via quality or instead cost savings, which creates customer loyalty.
On the other hand, advertising is essential as well in an organization. Advertising assists in instilling the brand loyalty sense amongst the customers. In the advertisement, product depiction portrays ideals, images, as well as personality, is matching the demographic targeted. Again, advertising promotes product awareness in that it informs customers concerning product characteristics, functionality, and purpose. This is essential for firms that unveiling fresh products in the market. Advertising increases the market share of a provided firm.
Question 4
As indicated by Freeman, Savva & Scholtes (2019), economies of scale refer to cost advantages that are gained by organizations whenever there is efficient production. Firms attain economies of scale through augmenting production as well as reducing costs. It happens since costs are distributed over a massive quantity of products. The cost might be both variable and rather fixed. For example, within an assembling firm, the cost per unity can be reduced through the continuous use of robot technology.
Another example can be attained from t the restaurant kitchen to illustrate that economies of scale are limited. That is multiple cooks within a smaller space gain entry to one another ways. Also, in hospital setup, it is just the 25 minutes consultation with the doctor even though overhead costs of the hospital system are often distributed across several doctor’s visitations. Besides, an individual aiding the doctor is not the degreed nurse but a nursing aide.
Question 5
The government should provide for public goods because the critical concern with public goods is that they are always undervalued. The producer bears the production cost of such commodities. The producer can never exclude the benefits the recipients who are not contributing to the goods attain. Thus, the producer fails to capture multiple benefits of the production works. Public goods shall never be supplied adequately by the private sectors due to the cost of production. Again, people cannot be excluded from utilizing public commodities (Caron, Fally & Markusen, 2020). They can never be charged money for using them. Hence, private suppliers may not make much money offering such types of commodities. Overall, since public goods are never supplied adequately by the private sectors, such products have to be provided by the public sectors.
Question 6
Income elasticity of demand (YED) quantifies the level of responsiveness of demand regarding consumer’s change in income levels (Mankiw, 2020). It is significant for both firms and governments at different levels. To begin with, it assists in the classification of goods based on the association between demand and income. YED assists in the demand forecasting, that is, businesses and government parastatal making decisions on the goods which they can produce as well as how income level change in an economy shall have impacts on the demand of different products. Again, firms use YED in deciding on product pricing. That, it used to determine whether to increase or lower prices concerning changes in the income levels of buyers.
Question 7
When the demand is elastic, an increment in tax means that the prices will soar. This will bring about a more significant proportion in the fall of demand for cigarettes. When the demand is inelastic, an increase in tax by the government shall bring about a smaller percentage fall in demand. The tax shall be passed onto the clients (Mankiw, 2020). When the demand is of unit elasticity, an increase in tax will lead to a rise in the prices of cigarettes, thus leading to low quantity demanded as many people will not be able to afford to buy the products at higher prices.
Question 8
A sole proprietorship refers to a business owned and operated by the owner. The partnership is owned by or more persons. A company is a legal entity that is separated from the business owners. The sole proprietorship is the most accessible form of business to start since it needs no filling of several documents. All losses and profits are taxed to the proprietor, like personal incomes. In partnership, every partner takes part in managing the business unless a formal partnership says otherwise (Mankiw, 2020). Partners agree in writing on how to share the proceeds of the activity. A company is a legal entity that is separate from the owners- shareholders. The shareholders are not operating the business, but they elect a board of directors tasked with electing officers to run the business. Companies pay taxes in the form of profits. Upon taxation, the shareholders get earnings in the form of dividends.
Question 9
Apart from profit maximization, firms do have other goals to execute. For instance, growth maximization, businesses have the objective of expanding their market shares as well as increase the size of business operations. This can be attained by cutting on prices as sales are increased (Towse & Hernández, 2020). Again, businesses have the goals of ethical concerns. Companies cannot only be motivated by making money only; however, they are mandated to offer services to the local communities.
Question 10
A normal profit is defined as a metric that considers both implicit and explicit costs (Towse & Hernández, 2020). It can be viewed alongside economic gains. It occurs is the difference between total organizational revenues and costs-both implicit and explicit are equivalent to zero. It exists when the total revenues are equal to total costs. A firm can make both normal and maximum profits. This is possible when the marginal revenues are similar to marginal costs, which are then equivalent to total revenue and total cost (Towse, & Hernández, 2020).
References
Picard, P. M. (2001). Job additionality and deadweight spending in perfectly competitive industries: the case for optimal employment subsidies. Journal of Public Economics, 79(3), 521-541.
Brown, J. R., Carpenter, R. E., & Petersen, B. C. (2019). The temporary shut-down decision: Lessons from the Great Recession. Managerial and Decision Economics, 40(7), 772-786.
Ma, J., & Wooton, I. (2019). Market size, product differentiation, and bidding for new varieties. International Tax and Public Finance, 1-23.
Freeman, M., Savva, N., & Scholtes, S. (2019). Economies of scale and scope in hospitals: An empirical study of volume spillovers. History.
Caron, J., Fally, T., & Markusen, J. (2020). Per capita income and the demand for skills. Journal of International Economics, 123, 103306.
Mankiw, N. G. (2020). Principles of economics. Cengage Learning.
Towse, R., & Hernández, T. N. (Eds.). (2020). Handbook of cultural economics. Edward Elgar Publishing.