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ECON6000 Economic Principles Decision Making

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Question:

 
1. Interpret and successfully apply economic concepts of supply and demand for effective organisational problem solving.

2. Apply quantitative methods to forecast complex business variables including demand, supply, production and costs.

3. Critically analyse production processes and cost functions and classify the main forms of market structures as well as recommend appropriate pricing and strategies.

4. Critically evaluate the role and impactof various forms of government intervention in the economy including the implications of competition and deregulation policy for managerial practices.
 
 

Answer:

Introduction:

This report is aimed to provide detailed information to the board of directors of the Schmeckt Gut in order to describe the change in demand proposition of their energy bar under the different income development, tariff rate development and inflation rate development. Through this report, different economic principles will be utilised in order to demonstrate the impact of the changes in the market situation and additionally the report will focus on the policies utilising which the firm can minimise the adverse outcomes (Epstein 2018). In order to demonstrate the policies in order to deal with the changing market situation and enhance the relation among different factors like inflation, tariff rate and income change with the demand of the energy bat from the Schmeckt Gut, the report will provide recommendations as well.

 

Different projection:

This section of the report will explain the demand projection under different scenario of the market utilising the economic principles and frameworks.

Income (Y)

Development of inflation rate (In)

Import tariff (Tem)

Y * In

Y * Tem

Y * Y

In * In

 Tem * Tem

 Tem * In

1

2

7.5

2

7.5

1

4

56.25

15

3

3

10

9

30

9

9

100

30

5

4

5

20

25

25

16

25

20

7

5

0

35

0

49

25

0

0

16

14

22.5

66

62.5

84

54

181.25

65

Table 1: Multiple regression

Source: (Created by Author)

As per the above table of multiple regression below section will describe the demand projection of the Schmeckt Gut energy bar utilising the different economic principles.  

Supply and demand:

As the table 1 highlights, with rise in the tariff rate, there will be fall in income, however the magnitude of the same can be seen from the different alternative combination of the income, tariff rate along with inflation level (Azevedo & Leshno, 2016) . As per the demand and supply framework, it can be seen that, there is a negative relation between the tariff and demand. With higher tariff, price of the commodity tends to rise and with this rise, there will be fall in the demand allowing the producer to face loss (Georgios & Efstratios, 2015).

Demand = autonomous consumption + Average income + tariff rate + Number of stores

Considering the demand function of the energy bar as mentioned above, given data regarding the energy bar demand shows the following result:

SUMMARY OUTPUT

Regression Statistics

Multiple R

0.955932682

R Square

0.913807292

Adjusted R Square

0.898596814

Standard Error

7.81913539

Observations

21

ANOVA

 

df

SS

MS

F

Significance F

Regression

3

11019.2105

3673.07

60.07749

2.95E-09

Residual

17

1039.36093

61.13888

 

 

Total

20

12058.57143

 

 

 

 

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept

-12.16021978

11.30761101

-1.0754

0.297222

-36.0172

11.69675

-36.0172

11.69675

Average income per person

0.004837918

0.001815213

2.665207

0.016316

0.001008

0.008668

0.001008

0.008668

Tariff rate on imports of energy bars

-6.456977068

1.041615246

-6.199

9.71E-06

-8.65459

-4.25936

-8.65459

-4.25936

Number of stores where energy bars are offered

4.072444073

1.897801051

2.145875

0.046614

0.068434

8.076454

0.068434

8.076454

Table 2: ANOVA of demand

Source: (Created by Author)

As it can be seen from the table 2, there is a negative relation between the energy bar demand and the tariff. On the other hand, average income shows a positive and significant demand that depicts demand of the energy bar from Schmeckt holds the framework of supply and demand (Olsen, 2015).

 

Aggregated demand and aggregated supply:

There is a negative relation between the tariff and aggregate demand. Under higher tariff rate, price of the goods or services becomes higher that force the consumers to buy the desired product at a higher price while reducing the consumer surplus (Silvente et al., 2015). 

Figure 1: Supply and demand framework

Source: (Coibion & Gorodnichenko, 2015)

As it can be seen from the figure 1, it can be seen that with fall in the supply there would be rise in price, which will eventually lead to fall in income as well as aggregate demand too (Gillespie & Shackell, 2014). Red straight line in the figure 1, depicts the aggregate supply and the positively slopped line demonstrate the aggregate supply, where the production enhance with rise in prise (Azevedo & Leshno, 2016). As it can be seen from the above figure, if the price rise from initial position P0 to P1, then it will allow the red coloured aggregate supply curve to shift from its present situation to leftward because there will be fall in quantity supplied (Michaillat & Saez, 2015).

The Philipps Curve:

As per the Phillips Curve, economic growth can come with inflation and it is good for the sustainability of the economy. Under the small amount of inflation there will be higher demand that will lead to rise in the job creation allowing the money supply to enhance and aggregate demand in successive terms to enhance as well (Coibion & Gorodnichenko, 2015). Though, the idea of Phillips curve is not empirically proved due to the stagflation during 1970, yet it has solid theoretical background that enables the researcher to consider it as a valid theory that states the relation between employment, inflation and growth (Mavroeidis et al., 2014).

Considering the case of the Schmeckt Gut energy bar, it can be seen that there is moderate amount of demand expectation for the new product, however, under the fluctuating market scenario, it can be seen that the income is not stable enough (Daly & Hobijn, 2014). As per the regression, it can be seen that, if the import duty rise, there will be rise in inflation due to the rise in the price of the products under the new tax regime (Ball & Mazumder, 2014). It will further reduce the job creation and allowing the firm to face lower income in the coming days. Contrary to this, if the income rise, then it will enhance the aggregate demand leading to rise in the price allowing the consumer surplus to eventually fall (Chen et al., 2018). Under this scenario, as per the Phillips Curve, it can be said that, Schmeckt Gut energy bar can perform well if the price of the product rise because it will lead to rise in aggregate demand and new job creation as well allowing the disposable income in the economy to rise, which will lead to rise in the demand of the same in the successive period in future.

The Laffer curve: 

Laffer Curve is the graphical presentation of the relation between the tax rate and tax revenue. As per the same, if the government impose tax on the goods or service, then it need to be limited to a certain point, where the government gains maximum amount of revenue through tax and the workers remain motivated to work hard (Feve et al., 2017). If the tax rate is higher than the optimal level, then it will lead the workers to work less and enjoy leisure more because the incentive to work more will be less (Blanchard et al., 2015).

Considering the case of the Schmeckt Gut energy bar it can be seen that, if the tariff rate is higher than optimal level, then it would lead to fall in the revenue of the government because with rise in the tariff rate, there will be fall in the production because people will prefer to work less because their incentive to work will be lower (Badel & Huggett, 2017). Under this scenario, income will fall and the economy will face lower sustainability.

Considering the above analysis, it can be said that there is inherent relationship between the inflation rate, tariff and income and considering the case of the Schmeckt Gut energy bar, given growth prospect in different variable is true.

 

Impact on potential demand of Schmeckt Gut:

To demonstrate the potential demand of the Schmeckt Gut under the impact of income enhancement, tariff growth and development of inflation rate, multiple regression can be utilised. In order to develop the multiple regression equation, data provided in the Excel sheet can be utilised and the number of observation in such case is 4.

Multiple regression equation in this case can be formed as:

Utilising the Least Square Method, parameters of the multiple regression can be derived.

General form of multiple regression is as follows:

 

 

 

From here parameters of the multiple regression can be analysed.

 

 

 

Then, considering the value of β, it can be found that

 

Thus, the derived multiple equation is

From the above analysis, it can be seen that if there is rise in the tariff rate by 10% along with a growth in the inflation rate by 2%, then it will reduce the income by 1.64% because under the higher tariff rate and inflation price will be higher and the consumer surplus will be lower too. In addition to this, under rise in the tariff on import, income will rise by 2.84% as well as the inflation will tends to rise in the successive years that will allow the price to remain higher and job creation to be enhanced as well. With the higher job creation, there will be rise in the disposable income allowing the aggregate demand to rise as well (Blanchard et al., 2015).

Recommendations:

Above discussion has showcased that there would be negative impact on the demand of the Schmeckt Gut energy bar in case the tariff rate has been enhanced, however, with rise in the disposable income, there will be rise in the demand as well. In another instance it can also be seen that, if the demand becomes lower, then it will eventually lead to fall in the production and the inflation rate will fall as well because, with lower demand, unemployment will be higher and the demand will be reduced too causing fall in the inflation rate. Under this situation, following recommendations can be provided to the firm:

  • Considering the negative relation between the import tax and the demand, import tax should be abolished that will eventually enhance the production and lead to fall in the inflation through the same. Additionally it will lead to rise in the demand under enhanced job creation.
  • Board of Directors need to consider the account of sacrificing ratio that would allow them to estimate the percentage points of annual output utilised to reduce the inflation under certain level that otherwise would not be possible for the firm.
  • It would be ideal for the firm to bring in effective incentive structure that would attract more number of job opportunities for varied workforce depending upon their skill level in case of rise in the tariff rate. It will enhance the production as well as the disposable income too allowing the firm to have higher opportunity to earn profit.
  • For the sustainable operation of the firm, through market survey, firm need to have updated market demand scenario of their product and depending upon the same it can take auxiliary decision to enhance the performance of the firm.
 

Conclusion:

From the above discussion it can be seen that there is a negative relation between the demand and tariff rate of the energy bar from the Schmeckt Gut. However, if there is an indirect growth in the disposable income of the consumers or a tax cut is there, then it will enhance the consumer spending eventually allowing the demand of the energy bar to rise. Above analysis has also highlighted that, as per the supply and demand framework, if tariff is imposed, it will lead to fall in the demand of the energy bar that will eventually lead to fall in the employment as well leading to fall in the price of the said product in subsequent period as well. This fall in the demand will bring in lower inflation rate, which will rather hurt the interest of the investors to invest in the Schmeckt Gut energy bar allowing the firm to reach to its shut down point. With effective policies mentioned above the firm can deal with its demand situation in further instance allowing the firm to have better future prospect.

 

Reference:

Azevedo, E. M., & Leshno, J. D. (2016). A supply and demand framework for two-sided matching markets. Journal of Political Economy, 124(5), 1235-1268.

Badel, A., & Huggett, M. (2017). The sufficient statistic approach: Predicting the top of the Laffer curve. Journal of Monetary Economics, 87, 1-12.

Ball, L., & Mazumder, S. (2014). A Phillips Curve with Anchored Expectations and Short?Term Unemployment. Journal of Money, Credit and Banking.

Blanchard, O., Cerutti, E., & Summers, L. (2015). Inflation and activity–two explorations and their monetary policy implications (No. w21726). National Bureau of Economic Research.

Chen, X., Leith, C., & Ricci, M. (2018). Debt Sustainability and Welfare along an Optimal Laffer Curve (No. 2018-01).

Coibion, O., & Gorodnichenko, Y. (2015). Is the Phillips curve alive and well after all? Inflation expectations and the missing disinflation. American Economic Journal: Macroeconomics, 7(1), 197-232.

Daly, M. C., & Hobijn, B. (2014). Downward nominal wage rigidities bend the Phillips curve. Journal of Money, Credit and Banking, 46(S2), 51-93.

Epstein, M. J. (2018). Making sustainability work: Best practices in managing and measuring corporate social, environmental and economic impacts. Routledge.

Fève, P., Matheron, J., & Sahuc, J. G. (2017). The Horizontally s-shaped laffer curve. Journal of the European Economic Association, 16(3), 857-893.

Georgios, M., & Efstratios, N. (2015). Rolling horizon optimization framework for the simultaneous energy supply and demand planning in microgrids. Applied energy.

Gillespie, M., & Shackell, E. (2014). Exploring the effectiveness of the oxygen supply and demand framework in nursing education. Dyn. official J. Can. Assoc. Crit. Care Nurses, 25(4), 22-26.

Mavroeidis, S., Plagborg-Møller, M., & Stock, J. H. (2014). Empirical evidence on inflation expectations in the New Keynesian Phillips Curve. Journal of Economic Literature, 52(1), 124-88.

Michaillat, P., & Saez, E. (2015). Aggregate demand, idle time, and unemployment. The Quarterly Journal of Economics, 130(2), 507-569.

Olsen, A. J. (2015). E-learning in Asia: Supply and Demand. International Higher Education, (30).

Reifschneider, D., Wascher, W., & Wilcox, D. (2015). Aggregate supply in the United States: recent developments and implications for the conduct of monetary policy. IMF Economic Review, 63(1), 71-109.

Silvente, J., Kopanos, G. M., & Espuña, A. (2015). A rolling horizon stochastic programming framework for the energy supply and demand management in microgrids. In Computer aided chemical engineering (Vol. 37, pp. 2321-2326). Elsevier.

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