Economics

Macro economics is the study of the aggregate economic performance of an economy whereas micro economy focuses on the individuals and studies their economic decisions (Investopedia). It is clear that macro economy has more number of variables and hence it is more complex as compared to the microeconomics. The most important indicators of macro economy are the Gross Domestic Product (GDP), unemployment and inflation (Investopedia). GDP is the accumulated market worth of finished goods and services produced within the boundaries of a country during a particular period of time, usually one year.

Nominal GDP (inflation not adjusted) should not be confused with real GDP (inflation adjusted) as the increase in nominal GDP (merely increase in prices) doesnt mean that country has made more money during a certain period (Investopedia). Unemployment is equal to the number of people who could not get jobs among the total labour force available at a particular time. The inflation means the rate of increase in the prices of goods which is measured by the Consumer Price Index (CPI) and GDP deflator (a ratio of nominal and real GDP) (Investopedia). Some other important variables of macro economy are the interest rates, economic growth, budget deficit and poverty.

US Macroeconomic Scenario in 1990
United States economy is considered to be the greatest and most diversified economy of the world having a per capita Gross national Production (GNP) of more than 21,000 per annum. In 1989, the US has begun its eights year of continuous growth which is considered to be the longest period in peace times. This growth is the outcome of consistent improvements in the wages and employment opportunities. The unemployment rate was 5.2 at that time which was the lowest in the previous ten years and the inflation rate was the around 4.8 at that time. In 1990, the year I was born, the US economy entered into a period of recession. The major factors of that economic down turn were the significant increase in the oil prices because of the invasion of Iraq on Kuwait (Greene and Tishchishyna). There was also a quick increase in interest rates. This increase in the interest rates put negative impact on the availability of credit to the industry. These factors along with many others drag the national economy to recession. Because of this recessionary pressure, the output of the nation was decreased by 1.6 (Bureau of Economic Analysis). Due to the slowdown in the business activity, almost 1.7 million people were laid off (Bureau of Economic Analysis). Unemployment rose from 5.2 in 1989 to 7.5 in 1990 (Bureau of Economic Analysis). However, the economy has started to revive in the next year (1991) and this positive trend persisted in the next decade which is considered to be the third longest growth period after World War II. During this growth period, the real GDP kept on fluctuating between 2 and 3.5 till 1998.

US Macroeconomic Scenario in 2009
The CPI-U (i.e. Consumer Price Index-Urban) for the year 2009 was increased by 2.7 for all items as stated by the Bureau of Statistics. This increase is due to the rise in energy prices by 18.5 (Bureau of Economic Analysis). The unemployment rate was about 10 and the total unemployed personals were 15.3 million till December 2009 (Bureau of Economic Analysis). On average, the hourly earnings per person were 18.8 in the year 2009 (Bureau of Economic Analysis). The GDP rate has shrunk to 2.6 and its worth in dollars was about 14.204 trillion which was 22 of the worlds economy (Bureau of Economic Analysis). Per capita nominal GDP was 46,442 till December 2009. United States has witnessed the most wobbly situation in 2009 which is considered to be the most uncertain case during the last 70 years. Because of this uncertainty, government has experienced a negative trade balance, capital accounts deficits and balance of payments deficits as compared to the previous years. Main causes of this recession are the subprime mortgage loans, excessive derivative activity, real estate bubble and huge expanses on defence due to the war against terrorism. Though U.S. has injected a large chunk of money (700 billion as a bailout plan) to support the economy, yet it was considered insufficient by the experts (News). In January 2009 the United States congress approved a bill consist of an additional 787 billion fiscal stimulus of which two-thirds amount will be spent on additional spending and almost reaming money on tax reductions in order to create jobs and to assist the economic revival (Congress).

Comparison of US economy (1990 and 2009)
By comparing the economic snapshots of 1990 and 2009, it is clear that total buying power of Americans has increased from 4.3 trillion in 1990 to  11.1 trillion in 2009 (a total of 159 increase), while at the same time there was an increase of 66 in the inflation (Bureau of Economic Analysis). It means that on average there was an improvement of 93 in the real purchasing power of people. Average rate of growth in the purchasing power and inflation from 1990 to 2009 was 5.1 and 2.5 respectively (Bureau of Economic Analysis). It means that if a typical American earns 100 in 1990, he or she earns 105 in 2009 and the inflation adjusted income is 102.5. During these nineteen years, county has seen two mild recessionary periods and one longest growth period. The duration of the 1990 recession was 8 month and GDP of the country went down by 1.4, consumption by 0.7 and investment reduced by 3.2 (Bureau of Economic Analysis).  But the recession of 2008 to 2009 is comparatively longer and deeper (Bureau of Economic Analysis). In 1990, a typical American has the nominal income equal to 28970 per annum, while the price of a new house at that time was  123,000 on average a new car can be bought in 16,000 and price per gallon of gas was 1.34 (The People History).  The value of a 100 currency note has increased to 150 during the last nineteen years (The People History). Average retail price of electricity was 9.81 cents per kilowatt-hour in 2009.

Similarities and differences between 1990 and 2009
Although a lot of things have changed since I was born in 1990, there have been few similarities as well. For example, when I was born, there was war going on in the Middle East between US and its Allied Forces which are trying to force Iraq to bow down. Today in 2010 as well, we have war going on in different theatres of the world, which are being conducted to eliminate terrorism. Back in 1990s, the world was suffering from a surge of recession in market, and this phenomenon has repeated now as well. On the other hand, things which have changed dramatically since 1990 include increase in the overall purchasing power of an average American, the positive influence of e-commerce and  the Internet everywhere. Many things have changed for the worse as well. If we look as unemployment rate, inflation, food prices and house prices, all these have either increase to make the life of a common man more difficult today.

Q1. Discuss the difference between profit maximization and shareholder wealth maximization. Which of these is a more comprehensive statement of a companys economic objectives
In technical terms, Shareholder wealth can be calculated by multiplying a firms total number of shares outstanding with the price of the particular firms stock trading in the market, hence, it is the market value of the firms stock. On the other hand, profit maximization is primarily a more stationary concept in the sense that it defines, in simplistic terms, the extra revenue that is generated after paying off all costs. In essence, profit maximization does not really cater to the risk and time elements involved with the calculation of the profit. Shareholder wealth maximization, on the other hand, does include all internal as well as external forces that have an impact upon the firms profit generating abilities.

Shareholder wealth maximization is a more preferred approach than simple profit maximization because it is a long term objective of a company and therefore is more aligned in terms of achieving economic growth. Basically, Shareholder wealth maximization function incorporates all the managerial decisions that have a long run impact upon the firm and therefore is, without doubt, a more comprehensive approach.

Q2. What are some of the forces that cause managers to act in the interest of the Shareholders
The main cause behind managers not acting in the favor of shareholders is defined adequately by the principal agent problem. Since the question has not asked us to go into the details of the reasons behind the problem, lets just move on to some of the policies that help align shareholder and manager priorities upon a common platform. Incentive based measures such as commission on extra revenue generation, profit sharing, frequent performance measurement evaluation and efficiency wages can entice managers to work in the interests of the shareholders. Such incentive based policies primarily work because of the sole reason that both entities, the shareholder and the manager, are gaining from it.

Q3. A company has two million shares outstanding. It paid a dividend of 2 during the past year, and expects that dividends will grow at 6 percent annually in the future. Stockholders require a rate of return of 13. What would you expect the price of each share to be today and what is the value of the companys common stock
We will essentially use the Dividend Discount Model to calculate the price of the share and eventually the value of the common stock.

Dividend Discount Formula  Price  D1 (k  g)
D1  2 x (1  0.06)  2.12
Therefore, Price of share  2.12 (0.13  0.06)  30.28
Value of Common Stock  Share price x number of shares outstanding
                                          30.28 x 2,000,000  60,560,000.

Q.4 Discuss the difference between the calculation of shareholder wealth and the concept of Market Value added. Which of the two would appear to be more meaningful from the view point of a shareholder
There are a number of ways through which shareholder wealth can be measured, the most common being the calculation of the EPS (Earnings per Share). Shareholder wealth is primarily defined as the return an investor receives per dollar that he or she has invested. The higher the EPS, the better off the shareholder is. Market Value Added or MVA also works along the same lines in the sense that it is the difference between the market value of the company and the capital contributed by investors. A high MVA, therefore, denotes that the company has been doing well in the past and that it has created substantial wealth for its investors.

Both terms are of importance to the shareholder but in my opinion, Market Value Added is off far more importance because it incorporates managerial decisions that have an impact upon shareholder wealth. The EPS is an extremely basic measurement and can be manipulated whereas MVA provides a far better economic perspective of a firm in regards to investment.

Q.5 Briefly explain why some firms are large and others are small. And list components of transaction cost.
In principle, there are inherent differences between small and large firms. However, the most significant reasoning lies in the sort of product or service the company is willing to sell because eventually that is what determines its size. Some firms specialize in providing products and services that have no substitutes therefore they face no competition and can gain profitability at a relatively small structural size whereas amongst industries that have a large number of competitors, firms in order to cater to larger customer base and demand have to achieve economies of scale in order to cut down on costs and achieve profitability.
Therefore, it can be stated with certainty that profit margins at the smaller level are slightly easier to establish.
Transaction cost, on the other hand, is defined as the cost of doing business with other firms including costs such as investigation, enforcement of contracts and negotiations.

Q.6 State the main factors that have contributed to the growth of outsourcing and give three examples.
The main factors that primarily contributed to the major drive towards outsourcing basically included the need to reduce expenses such as labor costs while also saving on operational costs such as administrative, utilities etc thereby increasing productivity and enabling firms to sell their products at a lower price than their competitors while still maintaining profitability. The global internet network has also provided firms with the ability to facilitate the flow of information from anywhere around the world within seconds. Such efficient linkages between nations have allowed them to utilize each others resources in such a way so as to benefit each other.

The three basic types of outsourcing are Information technology outsourcing, business process outsourcing (Call centers etc) and outsourcing production facilities.

Q.7 List the primary economic and non-economic goals of a company.
The primary economic objectives of a firm are to achieve long term growth in order to promulgate profitability for themselves as well as their shareholders who have invested a large amount of capital. The economic existence of every firm revolves around the concept of profitability. However, on the other hand, the non-economic goals include corporate social responsibility which dictates that the firm must also keep under consideration the view of the shareholders as well as the stakeholders in matters concerning the public at large, such as the firms economic activities affecting the environment. The non-economic goals of a company also include the provision of products and services which maximizes the utility function of its consumers.

Scarcity and opportunity cost are the economic decisions that are very crucial in any entity. Scarcity is defined as a situation when people inside the economy would demand or need more than what is available in the environment or economy as a whole. Economics always assume that people will always have unlimited wants. However, resources are not enough to respond to what people demands. Scarcity, in essence, is the reason for being of economics. Economics studies how these resources will be distributed so that people can be satisfied. Underlying the concept of scarcity, is opportunity cost. People may have unlimited demands, but they give up something in the expense of another good. This is the essence of opportunity cost. These two concepts are important in managerial decision. It is assumed the people will continue to strive for something in their lifetime, but since resources are not available for all, they will have to sacrifice something in settle for another thing. The crucial decision lies on how to acquire these needs given the limited resources and what to give up, in case the resource is not available and what are the consequences of not getting such resource.

Should the company makes its own spare part or buy them from an outside vendor  This is how do we produce question.

Should the company continue to service the equipment that it sells or ask customers to use independent repair companies  This is a what do we produce question.

Should a company expand its business to international markets or concentrate on the domestic market  This is a for whom do we produce question.

Should the company replace its own communications network with a virtual private network that is owned and operated by another company  This a how do we produce question.

Should the company buy or release the fleet of trucks that it uses to transport its products to market.  This is a how do we produce question.

Running a successful business does not only rely on the external condition of the business environment, but also on how this business is managed from within. Recently, economics have been tied-up strategically with management as so respond to the different challenges that most organizations face. Managerial skills encompass the different aspects of production, marketing, finance and human resource in a business. A manager should be adept in decision making related on various business concerns as these involve resources and demands sustainability on the part of the business. A combination of technical skills and people-relationship abilities should be possessed by the manager in order to make sound business decisions and drive the company to success. However, according to Peter Drucker (1993), having business knowledge is not enough. In the world where things get competitive, a manager should also possess the qualities of an entrepreneur. An entrepreneur is a person who thinks strategically and always put innovations and change in mind. A business organization must continue to explore new products and technologies in order to keep their organization at par with competition. The business must be ready to face the different challenges in the economy, and as an entrepreneur, he must be able to take risks and respond uncertainty with strategic decisions. With managerial skills coupled with entrepreneurial mindset, the business sustains itself to deliver necessary goods and services which are of importance to the economy.

Managerial economics is a merger of the economic theories and the science of managing organizations (Maurice and Thomas, 2007). In a business firm, it is not sufficient that a manager has only the expertise on handling people and technical knowledge in the business. Economics, as an influential factor on the business environment has to be considered. Managerial economics branched from the theoretical groundings of microeconomics and was designed to be more effective when it was matched with management science. A firm operates based on the condition of the economy. It takes part in the whole business model thus in order to manage it well, managerial skills has also been incorporated ensure the success of the business. Managerial economics can be linked to the discipline of management and industrial economics.

Allocation of scarce resources remains to be a major challenge to most business organizations. These organizations employ different resources, from human to product inputs in order to deliver services to the consumers. Economics assumes that these resources are only limited, thus, efficient managerial decisions have to be made to sustain the business and its operations. For a manager, he can use two major decision making methods on dealing with the allocation of resources. First, strategic planning serves a blueprint of the business organizations goals and plans and how much resources will be used to attain these goals. In this way, an organization an foresee how much resources are available and needed and that the capacities of the existing resources are fully utilized. The second management decision is resource leveling. Like strategic planning, the manager has to make sure that the demands of the goals are balanced as to what resources that the organization has. These resources therefore should be used efficiently in order to produce maximum output.

Most of the business companies have evolved through economic changes. These economic changes have placed emphasis on how businesses were run in the economy. Thus, there is a four stage model of economic changes which most businesses, even the established ones, often undergo. In the first stage, most companies enjoy high profits out of their services. Especially those who are offering new services, these companies high profit margins in order to cover up investment costs. The next stage tells us that companies experience cost restructuring in their lifespan. Because of economic changes, these businesses adapt through reducing or downsizing the firm to cope up. Third phase is the structuring of prices of the goods. Due to the previous stage, businesses cope by changing the prices of their services in order to maintain sustainability. Lastly, as their progress being market leaders, they proceed in the stage where they have steady revenues can continue to expand their economic base.

On the country level, the perspective on what, how and for whom takes on a macroeconomic standpoint. A country usually produces goods and services that can be beneficial to the population and other clients internationally. These are embodied on the forms of export, where it could be a product or a human resource. The economy facilitates on how these outputs will be acquired, usually by other economies in another country. For example, professionals in one certain country get to work abroad, whatever they would earn would be accounted on the gross national product of their home country. Business-wise, it works in the same way. Businesses provide products and services that are consumed by the market. These are made through labor and capital, directed to the consumers, and these consumers pay the company for the product that they have received.

The research question examined was  Is employee s annual wage influenced by their years of education  The hypotheses tested were
H0   0 (Annual wage is not influenced by years of education.)
H1   0 (Annual wage is influenced by years of education.)

The selected level of significance,  is 0.5. The selected test is hypothesis test for zero slope.

Table 1 shows the data for employees annual wage and years of education. Both years of education and annual wage are interval (ratio) scale variables. Figure 1, shows the scatter plot of employees current annual wage against their years of education. Since, an ellipse can be visualized therefore, assumption of linearity is met. There appears a positive linear relationship between years of education and annual wage.

Table 2 shows the results of regression analysis for employees annual wage against their numbers of years of education. The p-value (.001) is less than the selected level of significance of 0.05, thus, null hypothesis H0 is rejected.

Years of education significantly influences annual wage,  .41,t(98)  4.43,p .001.Years of education also explains a significant proportion of variance in annual wage,R2 .17,F(1, 98) 19.58,p .001. The effect as measured by coefficient of determination (R2) is small.

The regression equation is given by
Wage (in Dollars)  -699.95  2477.09(Years of Education)

The slope coefficient suggests that every years of education increases employees wage by about 2,477. The intercept coefficient is not relevant in this context.

In conclusion, employees years of education significantly influences their annual wages, however, there is a small effect of years of education on annual wage.

A few decades ago, the developing countries were producing primary products more than the manufactured products. A new trend has been observed that indicates an increase in production of manufactured products. The effects of globalization can be said to have resulted in this phenomenon along other causes. Developing countries are exporting more manufactured products than primary products today.

Globalization has caused the rapid technological progress in the world. New technologies have been researched on and new products and production methods are being developed each day. The developing countries have rapidly absorbed these new technologies. This has led to establishment of new industries which are focused on the manufactured products rather than the primary products. Globalization has increased communication between developed and developing countries. Technology can be transferred to different parts of the world more easily today. More investors from the developed countries can invest in the markets of developing countries. This has transformed the developing nations from primary producers to manufacturers.

Trade has increased between the developed and developing countries. There are many trade agreements being formed between countries to improve trade in the international markets. The developing countries have increased their bargaining power in the international market in the trade of goods and services. The expanded market has created opportunities for developing countries to shift from producing primary products to manufacturing. The developing countries have been able to access markets which were inaccessible and this has increased the capacity to produce manufactured products. Regulations in the international markets have been enacted to prevent exploitation of the developing nations by the advanced countries. Such regulations have reduced competition from established industries in the world.

Integration of financial markets creates the opportunity for faster long-term growth of the developing countries. Business activities can be conducted all over the world due to the ease in access to the financial markets. Exchange rates are being developed to enable the smooth operation of the international market activities. Some countries have developed common currencies to be used across the borders. This has enabled the developing countries access markets for their manufactured products hence, shifting from production of primary products.

The increasing climate change is not favoring agricultural production. Most developing countries rely on natural resources to produce agricultural products and raw materials. This has reduced over reliance on these resources since they are becoming scarce. The scarcity of resources to produce primary products has caused these countries to result into producing manufactured products.

The theoretical foundations of the international trade analysis indicate that the developing nations produce more primary products than the manufactured products. The reverse has been explained to happen for the developed countries. These theories have been disapproved by the recent trade patterns in the international scene. More manufactured products than primary products are being exported by the developing countries.

Conclusion
The theories about developed countries that were developed some decades ago should be changed to include the current trends in the international market. Developing countries are rapidly shifting from production of primary products to manufacturing products.

Markets theory has been in existence for centuries and is basically concerned with the determination of outputs and prices of services and goods as well as the usage and prices of factors employed in production of various services and goods. This theory illustrates the different structures of the market and market strategies that exist in an economy. There are basically two chief markets, these are monopoly and competition. The dispute of which of the two markets is better than the other is one of the major discussions in the field of economics between governments and economists. Monopoly has been described as an individual company that maintains its market under stocked so as to raise demand and hence sells such stocks at prices that are above normal. On the other hand, in competition markets, the individual traders have no significant control over prices they charge to the consumers of their services and goods. In fact, the prices of the services and goods they offer to the market are largely determined by forces of demand and supply.

Monopolies have been considered to be bad as far as the economy is concerned and this is a very correct position. The position is correct because the characteristics of this market usually lead to consumer exploitation by the monopolistic organizations. These characteristics include one major trader selling services and goods to a very large number of buyers who are independent. There are usually no substitutes that are close to the products being offered by the monopolistic supplier and hence the consumers have no alternative but to purchase the products being supplied by the monopolistic supplier. This type of market leads to the creation of barriers by the monopolistic company, and thus no new companies can join the market. Since the monopolistic companies operate on the basis of these characteristics, the position held that they are not ideal market structures is correct since they end controlling the market and can therefore increase the prices of their products and hence exploit the consumers.

Competition markets are better than the monopoly ones because the existence of monopolistic markets is largely as a result of greed emanating from these traders. Due to the fact that they are the only competitors in a market, they are in a position of increasing their wealth drastically by exploiting consumers through unnecessary price increments. This particular behaviour that is usually demonstrated by these traders does not benefit the economy as a whole in the long run. The accumulated wealth as a result of such trade practices enhances the powers of these traders both socially and politically and thus influence most economic decisions in such a manner as to favour them as opposed to the entire economy.

Monopolistic markets lead to increased levels of technical inefficiencies since there no competitors posing any threats to the monopolistic sellers. In a market that is monopolised, the suppliers can comfortably afford being inefficient since they will not incur any costs as a result of their inefficiencies. In such a case, this type of market structure will lead to under exploitation of the available resources within the economy and hence the rate of economic growth and development will be low. Monopolistic markets are worse as compared to the competition markets since they can easily exploit profits through the practice of price discrimination, whereby the monopoly charges dissimilar prices for the same products but to different consumers, and these difference in prices is not as a result of production or transport costs.

There are several indicators showing that monopolistic have the tendency of raising prices and at the same time produce less and therefore will not satisfy growing public interest and economy. Furthermore, they lead to the introduction of unjust strategies of marketing like price discrimination. In addition, with cartels introduction, several of them will and can take advantage of the various markets in the economy. In order to prevent such from taking place, there is dire need to create anti trust laws aimed at combating such practices. Monopolies can effectively be curbed by these laws and thus shield the entire economy from the negative effects of monopolistic markets.

Competition which is the effort of several independent parties acting in order to shield a third partys business by offering the third party favourable terms. In this type of market, the term favourable is of great essence, since it is used to determine the price of the differentiated products being offered in the market. This type of market structure is better than monopolistic one since it is characterised by factors that enhance competition and hence lead to better products being offered to consumers at more favourable terms in respect to price and quality. Some of these characteristics include many buyers and firms with none of them having substantial influence in the market. There is also freedom of exit and entry since there are no exit or entry barriers. There is usually perfect knowledge concerning the market by both the sellers and the buyers and hence none of them can take advantage of the other.

One of the greatest advantages of competition in a market is the existence of several suppliers in the market and therefore cannot be in a position of controlling the price of various services and goods they offer to the market. This therefore means that unlike in the case of monopolistic markets where the sole traders can increase prices as they wish, in this market structure, the consumers are well shielded against any form of exploitation. The presence of several suppliers can be as a result of low entry sunk costs which can attract entrants to join the market and thus make the market to be contestable perfectly.

Since firms operating in a perfect competition are not in a position of controlling the prices of various products they offer to the market, the only way of ensuring that they maximise their profits is by increasing their output at low costs of production. In order for a firm to achieve such, it must acquire technology that is more advanced so as to lower the cost of production and increase production efficiency in the long run. This implies that average cost of producing a product will lower and hence the firm can be in a position of lowering the prices it charges to its customers. Since the products produced in this market structure are homogenous, consumers will be able to buy the cheapest products in the market. This will make the other firms operating in the same market to discover the new improved technology of producing products more efficiently and they will therefore be in a position to compete effectively with the firm that first discovered the technology. This form of competition is not only beneficial to the consumers but also to the firms themselves and the entire economy in which the firms are operating in. The firms will be able to produce more effectively and efficiently and thus lower their costs of production and earn more profits, while the available resources are exploited more effectively by the modern technology and hence the maximum possible value is added to various products and services leading to a higher gross domestic product. Competition in an economy is therefore much better as compared to a case of a market with a single player.

Conclusion
Monopolistic markets are usually associated with several disadvantages that affect the consumers and the entire market adversely in the long run and therefore, where possible, it is advisable to avoid this type of market structure. It leads to consumer exploitation the consumers are charged high prices for products of less quality. At the same time, it results to a slow in economic growth and development since the available resources in an economy are less exploited with less value being added on them. On the other hand, a competitive market is better than a monopolistic one since the consumers are less exploited. They are able to obtain quality products from the market at competitive prices and hence they get real value for their money. In addition, the gross domestic value is greatly enhanced since, the increased competition leads to increased real value of various services and products offered in the market. Therefore, a market in which competition is allowed is better than one without competition.