...sustained rise in the average price level. Inflation is measured in two ways the CPI and the RPI. CPI is a measure of the price level used across the European Union and used by the bank of England for setting its inflation target which is currently at 2%, it is calculated using a weighed basket of goods. This basket contains 650 goods. 100,000 households buying patterns of the goods in the baskets are recorded and the inflation rate is calculated through these figures. Maintaining a stable and anticipated inflation rate is a key government objective as it allows them to plan government spending for the future. There are two main theories for why inflation occurs demand pull and cost push. Demand pull inflation arises from aggregate demand shifting at a faster rate than aggregate supply. When the economy is working at near to its productive capacity, an increase in any components of aggregate demand are likely to cause a rise in price level as seen below. In contrast cost push inflation arises when the price level is pushed up by increases in the cost of production. A common cause of this is a faster rise in wages and a rise in the cost of raw materials eg a rise in the cost of oil will cause fuel costs to rise therefore increasing the costs of distributing goods in turn increases the cost of many household products. There are many costs associated with inflation some problems are larger than others, a relatively small cost is that of ‘menu costs’ this is the cost of changing...
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...Midterm 1. Opportunity costs are most simply defined as cost in terms of foregoing alternatives. This means what you potentially lose in making a choice for one thing in a decision. Stella would need to be aware that whatever resources she allocates to paying for the new car, will be removed from using them for other purposes. She should consider how much the car will cost in comparison with the other uses for her funds combined with the cost of another means of transportation. In short, for this to be a good choice, the cost of the car should be lower than the cost of the alternative uses + the cost of alternate transportation if she wishes to maximize this decision. http://wordnetweb.princeton.edu/perl/webwn?s=opportunity%20cost 2. In regards to which method should be used, I would make my choice based on the cost of the method. This means that I would be looking to put the cheapest labor option in to use. To determine this I calculated the cost of each option. Method 1 Cost – 20x10 + 10x100 = $1,200 Method 2 Cost - 50x10 + 2x100 = $700 Method 3 Cost - 100x10 = $1,000 Method 4 Cost - 10x10 + 12x100 = $1,300 After determining that method 2 is the cheapest method, I would suggest that the trucker use method 2. 3. I feel that Enron’s biggest problem was the misappropriation of its profit and revenue. They did not do all they could to ensure that their fixed costs were covered while simultaneously managing their money. Instead they were victim of accounting fraud, frivolous...
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.... Opportunity costs are most simply defined as cost in terms of foregoing alternatives. This means what you potentially lose in making a choice for one thing in a decision. Stella would need to be aware that whatever resources she allocates to paying for the new car, will be removed from using them for other purposes. She should consider how much the car will cost in comparison with the other uses for her funds combined with the cost of another means of transportation. In short, for this to be a good choice, the cost of the car should be lower than the cost of the alternative uses + the cost of alternate transportation if she wishes to maximize this decision. http://wordnetweb.princeton.edu/perl/webwn?s=opportunity%20cost 2. In regards to which method should be used, I would make my choice based on the cost of the method. This means that I would be looking to put the cheapest labor option in to use. To determine this I calculated the cost of each option. Method 1 Cost – 20x10 + 10x100 = $1,200 Method 2 Cost - 50x10 + 2x100 = $700 Method 3 Cost - 100x10 = $1,000 Method 4 Cost - 10x10 + 12x100 = $1,300 After determining that method 2 is the cheapest method, I would suggest that the trucker use method 2. 3. I feel that Enron’s biggest problem was the misappropriation of its profit and revenue. They did not do all they could to ensure that their fixed costs were covered while simultaneously managing their money. Instead they were victim of accounting...
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...equal. Since profit maximization also implies that marginal revenue is equal to marginal cost, marginal cost must be $10. c. Average fixed cost is equal to AFC /Q which is $200/100 = $2. Since average variable cost is equal to average total cost minus average fixed cost, AVC = $8 - $2 = $6. d. Since average total cost is less than marginal cost, average total cost must be rising. Therefore, the efficient scale must occur at an output level less than 100. Q5. a. Figure 5 shows the typical firm in the industry, with average total cost ATC1, marginal cost MC1, and price P1. b. The new process reduces Hi-Tech’s marginal cost to MC2 and its average total cost to ATC2, but the price remains at P1 because other firms cannot use the new process. Thus Hi-Tech earns positive profits. c. When the patent expires and other firms are free to use the technology, all firms’ average-total-cost curves decline to ATC2, so the market price falls to P3 and firms earn zero profit. Figure 5 Q8. a. The rise in the price of crude oil increases production costs for individual firms and thus shifts the industry supply curve up, as shown in Figure 3. The typical firm's initial marginal-cost curve is MC1 and its average-total-cost curve is ATC1. In the initial equilibrium, the industry supply curve, S1, intersects the demand curve at price P1, which is equal to the minimum average total cost of the typical firm. Thus, the typical firm earns no economic profit. Figure 3 b...
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...Demand Estimation Mayra Perez Dr. Lundondo Mumeka ECON 550 31 July 2014 Demand estimation Elasticity is the ratio whereby one variable changes causing a change in the other one. The variables being considered are independent variable and dependent variable. In the words of Andrew (2007), the percentage change in one variable causes a one percent change in the other variable. Elasticity estimates the relationship in demanded quantity of the product and the price change. The formula for calculating elasticity of demand is demonstrated below; Elasticity of demand = change in demanded quantity / change in price Option One: Quantity demanded = -5200 – 42(166.67) + 20(200) + 20(10000) + 25(5000) = 345399.86 = -5200 – 42(26) + 20(200) + 20(10000) + 25(5000) = 322708 Elasticity of independent variable = (345399.86 – 322708) / (120 – 26) = 199.05 Option 2 Quantity demanded = -2000 – 100(66.67) + 15(640) + 25(100) + 10(5000) = 53433 = -2000 – 100(120) + 15(640) + 25(100) + 10(5000) = 48100 Elasticity of independent variable = (53433 – 48100) / (66.67 – 120) = -100 Implications of the change in elasticity In the first option, the change in price from 166.67 to 26 per unit caused a change in the quantity demanded from 345399.89 to 322708. In the second option, the change in price also caused a change in the quantity demanded. When the price is 66.67 per unit, the quantity demanded is 53433. Change in the price to 120 per unit made the quantity demanded to down to 48100...
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...society, they are: low and stable inflation, a favourable current account position on the balance of payments, low unemployment and sustained economic growth. One macroeconomic objective that might be affected by rising oil prices is the current account of the balance of payments. The current account is a record of the trade in goods and services, income flows, and current transfer. The balance of payments is a record of the financial transactions over a period of time between a country and its trading partners. With oil prices rising, import prices will also rise likely causing the levels of demand for oil to decrease. This means that that the price elasticity of demand is very low, so a price change causes a proportionately bigger change in quantity demanded because oil is a necessity due to high usage of oil for transport and there are very little substitutes. As the price increases, quantity demanded will fall but only by a small amount due to it being a necessity. Therefore spending on importing oil will likely rise. This means that imports will likely rise, worsening the current account. There is also inflation, as oil prices are rising. Inflation is the sustained rise in the average price level in an economy. Firms have to pay more to import oil, therefore their costs of production will likely rise leading to a cut in some areas of the firm in order to lower their average costs. One area will likely be wages, some workers will likely be sacked leading to a rise in unemployment...
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...profit-maximizing firm is equal to its marginal cost because if price were above marginal cost, the firm could increase profits by increasing output, while if price were below marginal cost, the firm could increase profits by decreasing output. A profit-maximizing firm decides to shut down in the short run when price is less than average variable cost. In the long run, a firm will exit a market when price is less than average total cost. 3. In the long run, with free entry and exit, the price in the market is equal to both a firm’s marginal cost and its average total cost, as Figure 1 shows. The firm chooses its quantity so that marginal cost equals price; doing so ensures that the firm is maximizing its profit. In the long run, entry into and exit from the industry drive the price of the good to the minimum point on the average-total-cost curve. [pic] Figure 1 Questions for Review 1. A competitive firm is a firm in a market in which: (1) there are many buyers and many sellers in the market; (2) the goods offered by the various sellers are largely the same; and (3) usually firms can freely enter or exit the market. 2. Figure 2 shows the cost curves for a typical firm. For a given price (such as P*), the level of output that maximizes profit is the output where marginal cost equals price (Q*), as long as price is greater than average variable cost at that point (in the short run), or greater than average total cost (in the long run). [pic] Figure...
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...of differentiation 9 An unprecedented recession Since the downturn in 2008, the machine tools industry, like many other manufacturing industries, has suffered from an unprecedented crisis which has shaken the strongest companies, not only in Europe and the USA but also Asia. Machine tools OEMs (Original Equipment Manufacturers) saw their sales plummet by up to 65% in the wake of the decline of their customer markets, such as automobile manufacturing. The crisis, made worse by the decline in lending, effectively stopped all capital investment over the last couple of years. With such low turnovers, none of the classical cost reduction measures like short time working, inventory reduction and efficiency measures was enough to avoid negative earnings. In contrast, the traditional industry challenges of improved machining quality, reduced machine costs and improved end user operating costs still demand addressing. In such a challenging environment, the panacea could come from innovative solutions devised and developed by ever more creative companies. This paper presents some of those innovations. Improved thermal stability of new motor technology raises spindle productivity and machining quality Machining quality is among the most enduring expectations from machine tools...
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...locale for high value-added industries -> investors seek to partake in these promising ventures -> strong inflow of FDI -> Increase in I - Increasing numbers of foreign talent are emigrating to Singapore and taking up permanent residence -> Increase in C, especially in major markets like the housing market and automobile market - Singapore is export-dependent -> any increases in export demand will have a major impact. Increases in export demand may be due to the Monetary Authority of Singapore adjusting its monetary policy to reduce the currency slope. All these factors lead to excessive growth in AD in relation to AS, beyond what Singapore's current potential output can support. This leads to bottlenecks in both the factor and product markets, causing costs of production and consumer prices to rise. The Singaporean economy is especially susceptible to demand-pull inflation as it is operating at full employment. Increase in AD from AD1 to AD2 causes the GPL to rise to OP2 with no increase in output. This results in demand-pull inflation as all available resources are already fully employed and real GNP is already at its maximum level. Firms begin bidding up factor rewards in order to increase production, leading to rising production costs. Because AD is strong, producers transfer rising costs to consumers in the form of higher prices. If wages then rise in response to rising consumer prices, producers will again transfer the higher production costs to consumers...
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...when economic activity is rising and other times when the level of economic activity slows down. The Business Cycle The Four Stages of the Business Cycle are: Boom: A period of very fast economic growth, with rising incomes and profits. Inflation will rise and there will be shortages of key skilled worker, leading to high wage increases. High inflation will make the country less competitive, and business confidence will eventually fall due to rising cost. Interest rates are increased to slow down growth. Recession/Downturn: Demand stats to fall as interest rate rise. Real GDP stats to slow and will eventually fall. Incomes and demand fall, as do profits. Some firms will be forced out of business. Possible Strategies during a recession: • Close down arts of the business and make redundancies • Develop new products that appeal to customers as income fall • Lower price to maintain sales • Look to expand, as prices will be much lower than during a boom • Target growth markets overseas Slump/Trough: Real GDP falls substantially, which leads to higher unemployment and further failure of businesses. Confidence low and interest rates are reduced to try and stimulate new demand in the economy. Recovery/Upswing: The low interest and inflation rates will start to encourage new spending in the economy. Real GDP will begin to increase and the country will start to employ more workers and become...
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...introduction Page 3 Consumer Response to Changes in gas prices Page 3 Price Elasticity Page 4 Suppliers Response to Price Changes Page 4 Equilibrium Prices under low price elasticity Page 5 What Causes Gas Prices to Increase Page 6 Opportunity Cost Page 7 Conclusion Page 7 Introduction Prices are set by demand and supply. When supply falls, prices rise quickly. The demand for oil continues to hit a record high. Countries like China and India are consuming it more frequently as they industrialize, but cars and power factories. However, the supply of gasoline has been restricted by certain requirements forcing oil refiners to manufacture different gasoline for an assortment of purposes. The price of gasoline reflects producers’ costs and consumer’s willingness to pay. Gasoline prices tend to rise if the cost to produce and supply such commodity rises, or if people decide to buy less gas at the current price (when supply is greater than demand). The price of gasoline will stop rising or falling when a price is reached at which quantity demanded is equal to quantity supplied by producers, otherwise known as equilibrium. Consumer Response to changes in the price of gas 3 The rising price of gas will affect consumer spending rather than significantly impacting the amount of gasoline being purchased. The major aspect of the consumer life affected by the spike in gasoline prices is the change made to...
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...IM Aggregate Demand Aggregate demand (AD) is the total demand for all goods and services produced in an economy in a given price level and time period. AD = C + G + I + (X – M) C means consumer expenditure. This makes up the majority of AD in most countries (about 65% of the total). I means investment in capital goods from firms, and this is the most volatile component of AD. This typically accounts for 15-20% of GDP, and the majority (75%) is from private sector businesses. G means government spending on state-provided goods and services. Transfer payments (state benefits) do not count because these payments are not producing an output – they are a transfer of money from one group to another. X means exports; M means imports. Exports are goods sold to overseas countries and imports are what the UK buys from foreign countries. (X – M) represents net exports. If this is positive, there is a trade surplus which adds to AD. Conversely, a negative net exports value means there is a trade deficit, which reduces AD. Consumer Expenditure Consumer expenditure is influenced by… The amount of real disposable income is the main influence on consumer expenditure. Households and economies with more disposable income tend to spend more in total than poorer ones. The proportion of income that is spent is called the average propensity to consume (APC). Wealth (the value of a stock of assets) affects C. Wealthier people tend to spend more. Wealth can be spent and can be used...
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...| A New House-Decision | Heather Chuan | | AXIA College | 11/27/2011 | | A home purchase is an important decision that a person can make in his or her lives. It is a place for the principles of economics to take into account to yield a decision that is profitable. The process requires a comparison of the marginal costs and the marginal benefits. It also requires that a person weigh out the own personal disadvantages and advantages related to this decision. I would take my family’s needs into consideration during this process in my life. There are five principles that is an appropriate to guiding a home purchase. The first of these is the principle “People Face Trade-offs”. People have to make choices if they are going to pay for a new home. The second principle is “The Cost of Something is What You Give Up to Get It”. The third principle that I believe is relevant here is “Rational People Think at the Margin”. There are marginal changes that we have to make to reach a successful action plan in this situation (Mankiw, 2007). The final two principles that apply are “People Respond to Incentives” and “Trade Can Make Everyone Better Off”. I would want to consider price of the biggest element in my decision for a new home purchase. I want to remain within my own planned budget when I make this decision. I will not consider that I have a demand for a house outside my given price range, so I will look for a home that meets my budget needs as well as meets my other...
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...Globalisation from the facts of Economics ‘is considered by a rise across borders in the flow of goods, services and financial resources alongside with a rise in international movement of technology material and characters’ Boyes & Melvin (2011). As it was announced on BBC News (2012) about how Chinese companies are moving to Bangladesh to make clothes even though China is a worldwide leader in the manufacturing businesses. Absolute advantage involves the specialism of trade benefit among countries, well as according to the law Comparative advantage is that ‘when one Country has fewer efficiency then it has absolute disadvantage with detail to the further Countries production of both merchandises, there is still a source for commonly useful trade’ Simatele (2013). Heckscher- Ohlin (H-O) theory is founded on two theories, the H-O theorem and the factor price Equalisation theorem. The following essay will outline the trade established on Absolute advantage, H-O Theorem, the theory of Comparative advantage and the way the theory opportunity cost can be used to explain Comparative advantage then examples will be given to illustrate the movement of Chinese firms to Bangladesh to make clothes. Lastly a conclusion will be given to sum up the essay. Absolute advantage according to Adam Smith’s innovative account of the case for trade, enclosed in The Wealth of Nations (1776), was contained in positions of absolute cost variances among countries. That is, Smith supposed that both countries...
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...possible to cushion or pass on the effects of the price rises, they often had a negative impact on company profits. Rising raw material prices are not the only problem that buyers have, as the buyer is responsible not only for a fixed calculation or price basis but also for ensuring continuity of the production process, certainly over the medium term and thus over a planning period of 12-24 months. Price volatility presents the same problem, as it makes commodity prices genuinely unpredictable. An active financial risk management process is necessary, to answer the following questions: How high is the exposure? What percentage of the production costs do raw material costs account for? What effect does the price fluctuation of raw materials have on total profits? Can price fluctuations be passed on? What is the competition doing? Based on this peak, the company is exposed to a price movement risk of USD 1.700 per tonne or a total of USD 5.1m. Accordingly, the price opportunity on the basis of the record low in 1997 of USD 1.000 is relatively small at USD 150 around per tonne or around USD 500,000. In addition to the market price risk, raw materials prices have a significant effect on production costs. Table 1 Ascertaining the point of departure EUR million 100 20 30 50 % 100% 20% 30% 50% G G Production costs Structural costs Employee costs Materials costs Breakdown of materials costs Raw materials costs Other costs G G G 40 10 80%...
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