Economics Questions on Entrepreneurs, Equilibrium Pricing Essay

Within today’s unstable economy, it can be difficult for any business to produce goods and services to satisfy the wants and needs of an ever growing number of consumers.

This assignment question will demonstrate the above at through models, diagrams, symbols, number tables and detailed analysis.

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In the current economic climate, the majority of entrepreneurs work within a mixed economy with most businesses and consumers coming across some forms of politico-economic issues.

A farmer for example has many economic priorities. Firstly a farmer will look to utilise natural resources of his land which includes the ground beneath and air above.

Land has been defined as “one of the four basic categories of resources or factors of production” (www.econguru.com)

In order to utilise all possible resources the farmer will consider production possibilities of the land, what the value of production will be and if there will be any labour cost which would impact overall profit from the product.

The farmer will need to consider alternative combinations of goods produced if the economy fully uses all available resources (www.econguru.com)

For example Crop A is cheapest to grow but is not popular resource within the local economy. If the farmer chose a combination that does not fulfil the needs of the consumer then there will be a delta value and a state of disequilibrium will be created as the production value of the chosen combination of resources will not offset each other which will create a shortage of a needed resource (not chosen by the farmer) and a surplus of an unwanted resource.

In order to be a successful entrepreneur the farmer will need to consider the need of the consumer and organise will need to consider the need of the consumer and organise production to fulfil the need by bringing together labour, capital and land as well as managing the risks therein.

All entrepreneurs endeavour to follow the benchmark model for their particular product. There benchmark model is defined as:

“The process of identifying best practice in relation to both products and processes by which these products are created and delivered (www.econguru.com)

This model gives the farmer a picture of how production could look and can be illustrated in a number of ways.

Diagram 1 show a basic benchmarking system. Benchmarking is important as it helps any entrepreneur to identify the most effective ways in which to produce resources needed within the economy and can also tell an entrepreneur where they “stand with respect to competitors and other industries across the world.

Another way the farmer could use the benchmarking model is as a point of reference for measurement of success.

Although benchmark can be an effective planning, monitoring and evaluation tool, there are also costs that any entrepreneur will need to consider. The costs include visit costs, time costs and benchmarking database costs.

It is important that any entrepreneur utilising the benchmark model also compares themselves to local, national or even international like-businesses as this will help to identify effective processes and a healthy competitiveness between similar businesses which ultimately benefits the consumer which can also be demonstrated in diagram

The benchmark model can be regularly influenced by a variety of inverse determinants, if prices (X) goes up, then demand (Y) come down. For example if cost for a product goes up, demand from the consumer will go down.

Part of the mixed economy’s purpose is to help to strike the balance between X and Y by limiting prices of product through capping and subsidising the open markets. This also has an impact of the real value on the product and the farmer will need to use the benchmark model to evaluate whether the amount of profit generated by the product is worth the production of the product.

A normative statement expresses a value judgement about whether a situation is subjectively desirable or undesirable

QUESTION 2

a.

Equilibrium point is 1200 Apartments at £180,000 per apartment

1. Using the formula PED = âQ x (P1+P2)/âP x (Q1+Q2)

-200 x (220000 + 200000) / 20000 x (800 + 1000)

-84000000 / 36000000 = -2.33

c.

1. The availability of close substitutes, the more amount of availability as well as the closer alternative other apartments are, the higher the price elasticity of the apartments, with buyer satisfaction being less affected into changing from one apartment to another in reaction to changes of the price.

1. The degree of necessity this is where a good/product is viewed to being necessary by the purchaser/consumer then it doesn’t have close substitutes. If necessities go up in price, then adjustments to economies are made on other goods. If necessities fall in price, then demand won’t expand by much because people will have been buying the good/product at the higher price in any case.

1. The definition of the product influences its overall necessity, price elasticities of most branded goods/products will be high, because purchasers/consumers are likely to alternate between brands when the price changes. Advertising is aimed to increase the seeming necessity of a good and to make us accept that the good has no really close substitutes.

1. PED can also be influenced by the proportion of income spent on goods/products. Normally, the lower amount of income spent on goods/products, the less likely will the consumption get affected by changes in price. With regard to apartments, mortgage and interest payments will make up a considerable part of any budget, with interest rate rises these are going to have large effects on the request for mortgages, which will likely lead to be interest elastic with interest being the price of the finance.

2. The availability of credit will have an effect on the PED values, because if credit is available, it will assist consumers/purchasers to spread the effect of a rise in price over future and current income. Effectively reducing the amount of expenditure with regard to income by allowing future income to become relevant. The real income will be weakened and will reduce the likely PED.

3. When a good/product is inferior it can lead to complications as when price rises there is a large effect on purchasing power, the consumer/purchaser can be enticed to an inferior good/product rather than repelled. This perverse real income effect will then offset the normal substitution effect. The substitution effect will push the consumer/purchaser one way and the perverse real income effect will push them in the other way, which may result to a no demand response.

D:

Scheme 1.

Price ceilings which are set up by installing regulations which are designed to guard individuals with lower income from being unable to meet the expense of important resources. Whenever a price ceiling is fixed, then a shortage will occur The price where the ceiling price is fixed , there will be increased demand than when the price is at the equilibrium price. Where there will also be reduced supply then there is set at the equilibrium price, therefore there is an increase in the quantity demanded rather than the quantity supplied. Inefficiency will occur because at the price ceiling where quantity is supplied then the marginal benefit will exceed the marginal cost. If the price ceiling is below the equilibrium level there is a deadweight loss generated. Potential problems that can occur in the practice of black markets, fees, and search time, which can be added but will not directly be associated with any sale.

The Government can legally imposed maximum price that is set in a market so that suppliers can’t surpass, in the believe to avoid the market price from exceding a certain price. In order to be effectful a maximum price is set below the free market price.

Scheme 2.

Subsidies are payments given to the builders by the government in order to reduce the variable expenditures of production to try to encourage the builders to increase the output of building the apartments.

The result of the subsidy is a down ward slope on the demand curve which is to increase the quantity of apartments sold and also to reduce the price at market equilibrium. As shown below in the diagram.

The subsidy will cause the builders supply curve to move to the right as the builders costs have been reduced. This will mean that supplies can be increase at each price.

The further inelastic that the demand curve is then the greater the purchasers gain will be from the subsidy. When demand becomes perfectly inelastic then the purchaser will gain the whole subsidy as the market price will decrease at the cost of the subsidy. If demand becomes relatively elastic then a subsidy increase the impact on the quantity sold and purchased therefore causing only a minor fall in the market price.

The associated risks with subsidies are not without controversy as the government will need to justify the subsidy to encourage the building and production of the apartments that create positive externalities. It should be noted the subsides have to be financed through other methods and this is often via addition taxation.

Cases for having subsidies should be adjudicated on the basis of economic efficiency but include fairness. Subsidies need to be evaluated as to who should gain from the subsidy and who will pay whether the money might be betterutilised by being spent somewhere elseand inevitably what the opportunity cost is..

Subsidies can also produce continued inefficiency amongst the builders as the operation of the free market forces may end in a better and increased efficiency in the allocation of the required resources.

The subsidy should be judged on economic and social grounds of the economic efficiency and associated fairness

QUESTION 3

A. Imperfect competition occurs when a company has too much control over the market of a particular good or service and can therefore charge more than its market value. When the market for a certain good or service doesn’t have very many competitors, the sole or few firms control the market.

Imperfect competition is imperfect because supply, demand, and price are not the only factors that have to be considered. In theory, imperfect competition occurs where the competitive situation in any market where conditions required necessary for perfect competition are not fulfilled, a market structure which does not meet the necessary conditions for perfect competition. It will exist where the numbers of sellers or buyers are finite, the product is not the same amongst sellers, if one must pay for the right to buy and sell a product or service, buyers do not know about everything about the seller, or where sellers do not know about everything about the buyers.

If anyone of these conditions is met, then competition will be imperfect because there will be at least one more variable, which will make the economic curve more complex than a simple price as a function of supply and demand. There are three types of competition within imperfect competition, these include an oligopoly, monopolistic competition and a monopoly.

1. An Oligopoly

This is where there are a number of firms with only a small number that are dominate in the market where an

Under an oligopoly every firm has a distinguished product which often comes with a robust brand identity. As several brands can be competing within am identical market. Therefore brand loyalty among customers gets encouraged via advertising as well as promotions. The firms in the market are regularly believed to contend in a form of non-price competition. Therefore prices will often remain stable for extensive periods which only get disturbed by pricing wars.

While brand loyalty will allow a degree of price control many businesses will often follow the changes to price of its leader. Therefore they will tend to be interdependent. Although in extreme cases firms may even fix prices. This is sometimes illegal and can be known as a restrictive trade practice.

Where barriers to entry exist and if it was easy for any new firms to gain entry to an industry, then they could then set up to try to take some of the market share from the larger producers. Some barriers to entry may be the following:

1. Legal and legislation restrictions for instance patents which stop other businesses replicating products Where high start-up costs occur, such as steel manufacturing and its associated costs

2. the advertising or promotion required, for example, in the tobacco or soap powder industries;

3. Agreement between various businesses in cartelscan act with each other to stop new entrants.

4. Monopolistic Competition

Monopolistic competition occurs when a number of moderately small firms contend in a particular industry. Where there are fewer barriers to its entry, therefore it is objectively easer for companies to be setup as well as leave markets. Companies will then also have a perfect understanding within the market.

Every company will have a product that differs from the other companies. This will be achieved through various branding where a product has been given its own identity. A business can face different competition within a range of other companies competing within a same market with similar, but differentiated products.

Companies operating within these circumstances aren’t the price takers but will merely have a restricted degree of control with the prices that they can charge. Although there are small amount of markets in the United Kingdom which can include legal services.

A monopoly

A monopoly will occur where one company has the total control within its market and it is the solitary producer of a product. This monopoly shouldn’t be confused with what is considered a legal monopoly which will occur in the United Kingdom where a company controls twenty five percent/or extra of a market.

Monopolists will try to create barriers in order to prevent various other companies from coming into the market. A strong influence will be exerted onto the price that which they will charge for the product. Yet since monopolists are the solitary supplier of the product then it doesn’t mean that control of what is charged is whatever they think. If the price is raised a large amount then demand will decrease to an extent. However since the influence that monopolists do have on price then they’re frequently referred to as the price setters/makers.

Monopolies have certain disadvantages and advantages from a business point of view as to some extent that these are the reverse of problems and benefit within perfect competition Monopolies will have a tendency to make abnormal profits when compared to other competitive businesses. There then maybe minimal or no incentive when looking to innovate a larger business if it has a deficiency of competition. There is a possibility that it may be less efficient or profitable than is possible. This could then lead to bureaucracy, inefficient management as well as a smaller dividend for the shareholders.

The Imperfect competitive market structures are prominent because resources are not allocated efficiently. Because of the Market control they have they are inefficient. Monopolistically and monopolistically competitive companies have an unassertive degree of control within the market and oligopolistic firms have more significant control within the market.

Whether the market control is moderate or more significant, then the imperfect competitive sellers will face a negatively sloped demand curve and therefore imperfect competitive buyers will face a positively sloped supply curve. In both cases where the price isn’t the same to the marginal cost. Then satisfaction which is obtained from its production will not the same to the satisfaction that is lost from the foregone production.

Motivation for progression – The lack of motivation is a reason to the limitation of growth of a firm.

Background and experience – the lack of background and experience in the business sector.

In-access to finances and capital constraint – The in-access to finances – the constraint of raising funds from financial institutions being raised by the business owners.

Lack of business plan/vision for the business

Coming down to the matter of lack of a proper business plan/vision for the business

Poor management – Poor management can be categorised in two parts these being poor management experience and lack of management training.

Education and training and improper record keeping – These are the lack of proper record keeping and inadequate education and training. It is obvious that the inadequacy of education and training leads to improper record keeping or rather say no record keeping at all.

People factor – The people factor/lack of needed talent is another problem identified in the study.

Professional advice and consultation – The improper professional advice and consultation as a factor limiting small business growth is of great significance.

Competition – Competition on the other hand has been mentioned by small business owners also as a barrier to growth.

Government policy – there is a matter of government policy, the policies are there but they aren’t really benefiting the expansion or development of the company.

Technological barrier – limiting the success of small firms is technological barrier. It is argued that the firms that adopt modern technological tools in their business are more likely to cause the business to grow faster than small business without modern technological tools.

Unfavourable economic conditions – In this matter it is important to notice that most of these economic factors are hard to deal with since they are triggered by many outside factors.

QUESTION 4

The labour supply curve to any occupation or industry will be with an upward slope. This will be because, as salaries and wages rise, additional workers enter into the industry enticed with the incentive of achieving higher rewards. They might have relocated or moved from different industries and/or they might not have formerly had a job, for example the unemployed or school leavers. The level to where a increase in the usual salary or wage in a profession leads to growth in the resource of labour will depend on the elasticity of the labour supply.

Major factors affecting the labour supply a specific occupation will be influenced by a number of monetary as well as non-monetary thoughts.

The current and real salary rate on offer within the industry itself higher salaries will increase the prospect of increasing factor rewards which should increase the number of potential people being willing as well as being able to carry out work.

With overtime there are opportunities to increase earnings through overtime payments and productivity related payment schemes as well as potential financial discounts and share option schemes for employees in certain positions.

Where you can substitute an occupation this is where the real salary or wage rate that can be earned in opposing jobs or career is a factor because this will affect the wage/salary and earnings difference that does exist between two occupations. For example when an increase in relative earnings is available to trained surveyors this may cause people to change jobs.

There may be barriers to entry of a career or job. When artificial limitations to a particular industry labour supply, for example the introduction of minimum admission requirements as well as other legal barriers to enter this can restrict the labour supply and then force average wages and salary levels up higher this is in particular the scenario in professions such as medicine and legal services where more strict entry criteria is in place to the professions. These market barriers of labour are partly considered to maintain high salaries and maintaining a high quality of individuals which enter these professions

There are improvements in the occupational mobility of labour where people have the required skills that is necessary to work within a specific occupation

The non-monetary features of a job can also be as important they will include the factors such associated risk within various jobs, requirements to work unsociable hours as well as the non-financial benefits that various jobs can provide which include job security, chances for advancement or the opportunity to work and live aboard, employment- training, healthcare, leisure services and pension schemes.

The migration of labour, as the United Kingdom is in the EU this allows free movement of labour. A rise of people looking for work in the United Kingdom makes labour migration an significant factor when determining the labour supply obtainable to various industries.

The wage differentials will in some way act as compensation for individuals who will work antisocial hours and either who are open to various degrees of hazards at the workplace, both in short or the long term run.

The elasticity of labour supply to various occupations will measure the amount to where labour supply will respond to changes in wage rate within a period of time. In minimal skilled occupations labour supply is expected to be elastic. Which this will mean that labour is readily available and people are employable at a objectively low wage. Whereas jobs that require particular skills including lengthy training then labour supply will be more inelastic.

In various professions there will be artificial barriers to worker entry. For example surveyors will need higher level qualifications which will make the supply of recently qualified candidates to the occupation relatively inelastic in the short term and is a reason as to why they may have a higher salary than the average.

The income effect, this is where higher real salaries increases the possible income that can be earned from a job, however that will also mean that time that has to be spent at work in order to earn adequate amounts to pay for a specific items declines. Basically with higher wage levels that mean that a potential target wage may be accomplished with less hours of a labour supply. Therefore the income effect may persuade individuals to work fewer hours and therefore enjoy more leisure/free time.

The substitution effect of a greater salary should explicitly give individuals an reason to work longer hours because of the added financial rewards of doing the extra work is raised and with the opportunity cost of not working being increased.

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