Economics

For a while now, the globe has been struggling with the challenge of the widely publicized recession. While the financial institutions have been actively involved in the attempt to arrest the recession, it would be a great overstatement to say that they are innocent. A lot of what is being experienced currently has a lot to do with the way financial institutions conducted their affairs in the past few years. Although the crisis was in the pipeline for several years, the collapse of the Lehman Brothers is said to have been the main precipitant. As it would be expected, all those who sought shelter under the financial institutions had a lot to loose. Financial liberalization meant that the financial institutions were in a position to take loans off the balance sheet. It also meant that there was a decrease of underwriting, as well as oversight in lending. Financial institutions no longer carefully monitored credit risks. One of the resultant factors was huge credit growth, a thing that largely contributed to the crisis. This study is concerned with the role of the financial institutions to the extent of their participation in the current financial crisis. Since the current recession is said to have started in the U.S., it will be of interest to this study therefore, to consider the role of the Securities and Exchange Commission, the Federal Reserve, as well as the investment banks in the current crisis.

The Role of Financial Institutions
One of the reasons why the recession, which started only in one country, spread rapidly around the world is the rapid globalization that has taken place in modern times. Due to this fact, financial institutions across the world are threaded together into a mesh of complementary financial partners. This makes it possible for various financial institutions to trade with each other, and influences the global financial outcome. This means that the success of one influences the other, and vice versa. At the same time, a great majority of the large financial institutions are established internationally. Although this is a good thing, a down turn may not allow for any salvation because wherever they are, regulatory practices and rules apply. It would be almost impossible for instance, to bail out a company with over one hundred subsidiaries across the globe. It was reported that some of the institutions pressured the Securities and Exchange Commission to change some of the rules that it in place in order to facilitate easier trading. What this did in effect was to create gaps that made it possible for these financial institutions to deal unscrupulously (Gillian 60). In the United States in particular, the financial institutions got deeply involved in housing business in an attempt to take advantage of the low rates that were offered by the Federal Reserve. As the Credit Default Swaps (CDS) grew, the major financial institutions took some huge risks without properly assessing their exact nature (Gillian 71). All of this time, the regulators in the industry did not offer the right advise to these institutions. As a matter of fact, the rating that was offered to insurance companies respecting CDS indicated that it was the way to go. This was the case, for instance, with AIG. Due to the wonderful ratings, the company did not post security when it made decision to insure debt securities. The fact that most of the institutions involved were huge gave assurance to investors. This confidence was perhaps an extra reason, why people went on with investments because the situation was that there was no regulatory body observing and all of this time the rating agencies were indicating that it was an all time high. Obviously the mistake that institutions made was to assume that the way insurance operated could be applied in the securities market (Gillian 68). In other words, if a house is broken into, it is not the case that other houses would experience the same eventuality. However, things are different with the bonds market, because there is a certain correlation. Defaults cause further defaults. Thus when Lehman Brothers failed, for instance, a chain of other institutions were at great risk of failure. In particular AIG, the main insurer of Lehman Brothers was greatly compromised by this down turn of events.

The Federal Reserve and Bank Policies
When the Federal Reserve made the decision to bring down its rates to 1.0 percent from 6.5 percent between 2000 and 2003, it encouraged a lot of borrowing, because people wanted to benefit from the favorable environment. The reason that was offered for this measure was that people really needed a break from the harsh effects of the terror attacks the dot com bubble collapse, as well as need to prepare to handle the deflation that had been perceived (Gillian 69). At the same time, it became clear that the countrys current account deficit was on the rise. This meant government borrowing heavily from abroad, which already encouraged further spending. Financial assets, as well as mortgage backed securities, became the preferred investments. Unfortunately, it meant a further reduction of interest rates. When the Federal Reserve raised its rates later on, the interest rates went up across the divide. This meant that the choice investment areas were no longer attractive. Mortgage backed securities as well as financial assets were now suffering a major set back.

On the other hand, the biggest investment banks were taking steps to increase leverage. This obviously meant that incase of a down turn they had no cushion against the financial shock. In 2007, only five of these institutions had over 4.1 trillion dollars in debts. This also came along with the fall of huge financial institutions as the Lehman Brothers, the sale of Merrill Lynch, and Bears and Stearns (Gillian 54). It was also the time that Morgan Stanley and Goldman Sachs were converted into commercial banks.

At the same time, Freddie Mac and Fannie Mae had been encouraged by the government to expand in mortgage lending. Over five trillion dollars were already lost in 2008 when the government placed them into conservatorship (Gillian 57). These two corporations, as well as the five investment banks had over nine trillion dollars in debts, while they enjoyed privileges that depository banks did not.

The SEC and the Financial Crisis
The Securities and Exchange Commission has terribly failed in its role as the protector of investors. The chairman was quoted saying that the commission did everything in its power to avert the financial crisis (The Wisconsin-Madison University 1). This statement by the commission pointed to a serious neglect of its responsibility. If it did all it could, which did not cushion the investors, and indeed the world, from massive financial losses, then it means it is incompetent. The absence of the chairman of the commission in the meetings held by the directors of the various corporations and the regulatory agencies, in which discussions were held on how to save the situation, was very conspicuous. In September last year but one, the chairman was quoted saying that the problem of short selling, and the manipulation of the market was taken care of. Allegedly there have been several cases of what is referred to as naked shorting. Brokers have the tendency of borrowing shares, and selling them at a high price, then when prices come down they buy shares to replace the ones they had already borrowed. Sometimes, these people do buy the shares, but they delay the delivery, creating a possible manipulation of prices, in order to benefit from this situation, by selling non existent securities. There is high possibility that this is exactly what happened in the current financial crisis. But it is not enough for the commission to come in after the worst has already happened. Its role is to ensure that the investors are warned, or informed of possible crisis. This is not what the commission did in this crisis. Those on the commissions side argue, however, that there isnt much it can do in terms of helping out the falling companies, especially companies whose policies are formulated by parent companies elsewhere. Some have even blamed the Congress, arguing that they set stage for the crisis in the 90s when they took away the tools necessary to offer directions to emerging markets and securities. The chairman, when summoned by a committee of the Congress said that the commission didnt have the powers to control the kind of risks that these corporations took. They argued that rules that were two centuries old, were expected to regulate modern markets all this in an attempt to absolve the commission from blame.

The commission is supposed to check on all the securities firms and all the brokers as well in order to ensure that those that are experiencing difficulties in performance can be highlighted for the public (Securities and Exchange Commission 1). This would go along way in ensuring that the public knows exactly what is going on. Unfortunately, the commission in several instances didnt even seem to know what was going on in these companies. This is evidenced by the fact that so many companies that are in serious financial mess have come into public eye in the last one year. It is a fact now, that there is increased leverage in the U.S., but sadly, there are no rules or even acknowledgement of this fact. As earlier mentioned, the commission said that it had control only over the subsidiaries, rather than over the parent companies (The Wisconsin-Madison University 1). This however is not entirely true. In 2004, an arrangement was made to have to have the commission access information regarding a companys stability from companies that function from any of the European countries. This effectively places the commission at a position where it can monitor the performance of the parent companies. This means that if the subsidiary does not have the ability to stand financially, the commission is already aware, and thus raises the alarm to the potential and already existing investors. This they didnt do either before, or at the beginning of the crisis. The collapse of so many huge institutions means that there is a lot that wasnt done, and instead of the commission setting up conferences to tell us that they had done all in their power, they should have come clean, and apologized to the public for a neglect of their important duty as guardians of the investors (Southern California Public Radio, 2009). What did they tell us regarding the over sixty percent of banks that vanished out of the horizon Absolutely nothing
The commission has all the powers needed to demand of a company that it furnishes the public with additional financial information, yet to date few have the knowledge of the height of leverage in their choice investment companies. The Commission may investigate any firm if it feels that that firm submitted in accurate information, or left out some information regarding its performance. It also has the duty of investigating any broker if it feels they were unfair in their dealing with the customer. It is worth noting that the commission was created after investors suffered great losses from the Great Depression of 1929 in order to ensure that they do not suffer similar losses in the future out of careless securities firms (Financial Industry Regulatory Authority 1). This is the prime role this commission failed in. Since the securities markets are so significant for prosperity, the Securities and Exchange Commission must be guided by integrity and the awareness that they are not only controlling business investments but the lives of all the citizens of the United States of America, and by extension of all citizens of the world.

Various financial institutions enjoy an interconnectedness which makes it possible for them to expand rapidly. However, financial institutions played a huge role in the development of the crisis. Most institutions pushed for a relaxation of rules, which made it possible for them to take advantage of gaps that were in existence. Consequently, institutions were able to take on huge amounts of debts, due to the low interest rates. All this coupled with the laxity of the Securities and Exchange Commission precipitated what is currently a global concern, namely the global financial crisis. The entire life of the globe seems to hang on the threads of financial stability. If one thread comes loose, the entire network is threatened. As already mentioned, the Securities and Exchange Commission has a role of protecting the investors against possible fraud. This was the role that was placed on it after the depression of 1929. However, the commission did not take its role very seriously, a fact that is attested by the fall of great giants in the financial industry, such as the Lehman Brothers. The financial institutions, the regulators as well as the agencies charged with the responsibility of rating performances should have done a lot more to ensure that what the world is going through right now was avoided. It would only be fair that they own up to their mistakes and do something more to reverse the situation now.

1 If the demand for corn increases due to its use as an alternative energy source, what will happen to the supply of corns substitute such as soybean Explain, in economic terms, why this is so.

Demand can be defined as a schedule or a curve which shows varied amounts of a product which consumers are wiling as well as able to purchase at varied prices in a given period of time. On the other hand, supply is defined as the schedule or curve that reflects the quantities that producers or firms are willing to supply into the market in a specified time and at varied prices. The law of demand states that other things held constant, the quantity demanded has an inverse relationship to prices of the said good while the law of supply states that other factors held constant, the quantity supplied has a direct proportional relationship with the prices. These laws explain the downward sloping demand curve as well as the upward sloping supply curve. (McConnell, Brue  Campbell, 2004).

An increment in the demand for corn due to the fact that it can be used for other purposes precisely as an alternative source of energy will have an effect on corn substitutes such as soybean. Substitute goods tend to replace each other in consumption but the degree by which this is possible will be influenced by whether the goods are perfect substitutes or imperfect substitutes. Again, if the prices of soybean (corn substitute) remain constant while those of corn increase with the increment in its demand then more soybeans will be purchased as opposed to corn. An increment in the relative prices of corn translates to a decline in purchases of corn. (McConnell, Brue  Campbell, 2004). If the prices of soybean and corn increase in similar amounts then consumers are likely to purchase more, less or equal amounts of both soybean and corn. This will therefore influence the quantity of soybean supplied as producers respond to the prevailing demand.

The supply of soybean will depend on the prices where high prices will trigger increased supply as producers strive to earn higher revenues. Factors that will play a relevant role in influencing the supply 0of soybeans will be the existing technological knowhow to process soybeans. The cost as well as the productivity of the required or relevant inputs such as labor and will also come to play. Their ease availability will ensure increased supply of soybeans. Other factors such as the peoples expectation regarding the market consumption or prices and government policies such as taxes or subsidies will also determine whether the supply of soybeans will increase, remain constant or decrease.

2 What will happen to the price of corn oil

The prices of corn will respond depending on the prevailing market conditions. If the soybeans and corn are perfect substitutes then the prices of corn oil are likely to be controlled. They would not be too high or too low. This would emanate from the fact that although the demand for corn oil would be high necessitating higher prices before their supply is adequately met bearing in mind the competing roles performed by corn, the increased supply from the substitutes in this case soybeans will check the quantity supplied in the market. (McConnell, Brue  Campbell, 2004).

However, the supply as well as the demand of corn oil will also influence the prices. A very high supply will be accompanied by lower prices as fewer consumers would be chasing a large supply of goods. The prices of corn would also be affected by the availability of corn and since corn is an agricultural product factors such as the weather and pests will be of a significant role. If there is less production emanating from unfavorable conditions, there would be less production of corn and consequently less corn oil would be produced. This would lead to higher prices of corn oil as due to the economies of scale the production of large quantities of corn is cheaper as opposed to the production of fewer quantities of corn. High production costs are transferred to the producers in form of higher prices. (media.wiley.com).

The technological know how as well as the input requirements required producing corn oil would also influence the prices of corn oil. If high level skills are required to produce corn oil then the prices of corn oil would be high in a bid to compensate the skilled manpower. The use of expensive machinery in production would also precipitate increased corn oil prices. All the same the production of soybean oil as well as other energy sources such as crude oil would also influence the prices of corn oil as they would eliminate any chances of corn oil operating as a monopoly thus exploiting the market by charging high prices. (media.wiley.com).

3 How does the price elasticity of demand for corn oil influence the quantity-demanded of corn oil and the Total Revenue earned by sellers of corn oil Explain, using economic terms, why this is so

Price elasticity of demand refers to the measure or degree of responsiveness of the quantity demanded to the changes in prices of the said good or product. (McConnell, Brue  Campbell, 2004).In other words it refers to the sensitivity of the consumer demand to the changes in prices. It is the percentage change in the quantity demanded of a good divided by the percentage change in its price.

Demand is said to be elastic when the price elasticity of demand attained by dividing the percentage changes in demand and prices as explained above is greater than one (1). This implies that a given change in the prices of a given good in this case corn leads to a greater change in the quantity of corn. (media.wiley.com).
When the coefficient is less than one it is said to be inelastic and a given change in the prices of corn will lead to a less or smaller amount of corn. If the coefficient is equal to 1 we say there is a unitary price elasticity of demand and a unit change in the price of corn results to a unit change in the amount of corn demanded. (McConnell, Brue  Campbell, 2004).

The price elasticity of demand for corn can be said to be perfectly inelastic when the coefficient is equal to infinity and a change in price will see consumers purchase as much as they can when the prices are low but demand will be zero when the prices are increased. However, if the coefficient is equal to zero there will be no effect in the quantity demanded due to price changes.

Whether elasticity will be unitary or 1, elastic1 or inelastic 1 will be influenced by factors such as the number of substitutes in the market, the proportion of the commodity purchased to the consumers income as well as the nature of the good in terms of whether it is a necessity or luxury good. The time span at which the price of the product is to prevail in the market also influences its price elasticity of demand. (media.wiley.com).

The price elasticity of demand for corn will influence the revenues in the sense that when it is elastic it implies that a slight increase in prices will trigger a larger change in the quantity demanded and the firms will yield higher revenues. When the demand is inelastic, the implication is that changes in prices do not affect the quantity demanded. Reducing the prices will lead to a slight change in the quantity demanded and consequently the revenues will decline. The total revenue will remain constant in the case of unit elasticity as a given rise in prices will lead to a similar change in the amount demanded. (McConnell, Brue  Campbell, 2004).

Free trade is a system where governments allow trade without interference. Trading partners can access markets without restrictions. This creates some mutual benefits to all members of the trading block within the agreement. Governments remove protection policies and allow a competitive market to prevail between the domestic traders and the partners within the trade agreement. Under free trade domestic, prices reflect the true demand and supply.

The purpose for developing free trade agreements
Free trade allows specialization. Countries can produce goods which they have a comparative advantage in producing. Specialization helps increase production and improves on the quality of products that are produced (Ready,  Bognanno, 1993).

Prices in the domestic market reflect the international prices under free trade system. International prices are in most cases lower than the domestic prices. Consumers within a country can buy cheaper products under the free trade system. Domestic industries improve on their production efficiency so as to compete with the products in the international markets. This improves the quality, quantity and the price of products being offered in the domestic markets (Wilson  Roberts, 1996).

How the establishment of free trade areas represents both a threat and an opportunity for global corporations
Free trade increases production. Countries can produce according to comparative advantage. This increases the quantity of output since each country produce products at the lowest cost. Economies of scale enable countries to increase production. In addition, it expands the market for goods (Ready,  Bognanno, 1993).
Consumers gain from free trade in that they can access a variety of products. The prices of products are reduced since competition between domestic and foreign products results into reduction in prices (Taussig, 1920). Free trade creates efficiency in production. Resources are allocated optimally due to specialization. Efficient use of resources results into increased productivity. Free trade enhances competition, hence increasing innovation in production and marketing of products (Conti, 1998). Other benefits are gain in foreign exchange, increased employment and general economic growth (Hoctor  Thierauf, 2003).

However, free trade creates domestic economic instability. Countries become over dependent on international economy. This leads to economic crises which affect most economies due to over reliance on global markets (Taussig, 1920).

Developing industries find it difficult to grow in the free trade market. International competition from well established companies leads to closure of small industries. Free trade creates harm to the environment since countries follow the idea of massive production and do not include the factors of environmental conservation in their prices. Dumping of products is a problem that is related to free trade. Countries dump their surplus products in the international markets to avoid loss. Structural unemployment is likely to be encountered in the short run by most economies practicing free trade (Wilson  Roberts, 1996).

How and why the forms of business organization used to manage business commerce changed over time
The changing business environment has compelled many businesses to change their management styles. Increasing competition in the business arena has caused many organizations to adopt new marketing and overall performance of their activities. Technological change has challenged most organizations and this has led to change in the management styles (Eoyang  Olson, 2001).

New forms of management are e-commerce. This involves the use of electronic media in the running of activities within the business (Hoctor,  Thierauf, 2003). A customer-oriented management style has been adopted by many organizations. This has been caused by the increasing competition in business. The customer is the most important aspect in any business. For a company to succeed, it must capture this aspect with a lot of care (Eoyang  Olson, 2001).

Free trade involves removal of all barriers to trade. Many countries have benefited from trade. For a country to succeed, it must employ some amount of protectionism. These measures will protect the domestic economy from international interference and overdependence. Modern businesses should develop new strategies of operation since there are many changes that are coming up in the production and marketing. Companies must conduct continuous market research and development so as to develop an integrated market.

Gross Domestic Product (GDP) is determined by a nations whole economic yield. The worth of all final products made within the nations borders constitutes the GDP. This measure has overtime been associated with the peoples standard of living since it shows wealth within a country. Satisfaction, on the other hand, can be defined as a measure of the fulfillment response by a consumer of a product. It focuses on how well a product (good or service) meets or surpasses the consumers expectations.

A survey reported on Version 6.2 of the Penn World Table indicates that real per capita GDP rose by 18.9 on average for the 82 countries surveyed between 2000 and 2004. This shows that people are becoming a lot better than they were some years ago. The survey predicted that the real per capita GDP will be doubling in every 16 years. Shiller noted that Americans spent 23 of their huge increases in income on their homes, 12 on transport, and 9 on personal business matters while 10 was spent on leisure. He predicted that this trend could be duplicated around the world as long as people are able to maintain the worldwide growth at its present rate (Shiller, 2006).

Galbraith argued that the prosperous world as shown by the United States had by then risen from grim scarcity, when awful necessity ordered our lives, to a world of riches. He further stated that so enormous has been the transformation in the living standards that lots of the requirements of a person is not even evident to them anymore. He indicated that affluence is the unyielding adversary of understanding. Many people are converted by the advertisements and salesmanship that have turned into the most significant and endowed professionals. Though real per capita GDP for the US is currently thrice higher than it was in 1958, many people have been spending all this money on what is ordered by the salesmen and advertisers who are now inventing our needs.  In their pursuit for affluence people are sometimes guided by ideas that are irrelevant in their own lives, leading them into purchasing what is unnecessary and unwise Galbraith, 1998, p.1-2)
The notion that growth in a countrys GDP makes people successful and attains better living standards has therefore been highly criticized in the recent past. Stewart challenges that happiness is the secret to success. She further states that mounting of the GDP doesnt necessarily lead to more satisfied people. Having noted that having more doest make people better, the question of what really makes people satisfied arises (Stewart, 2009)

Measurement of satisfaction comprises of - 1) measures of satisfaction as a whole, 2) Measure of satisfaction by a particular good or service quality, and 3) Measure of satisfaction arising from the benefits of the purchase. The focus of satisfaction is usually the consumer of a product (i.e. the person who uses the product) and not the customer (i.e. the person who purchases it). The argument in this is that the buyer may not necessarily be the user of the product. Satisfaction requires experience and use of a product.
It is important to note that satisfaction is a feeling or a short-term attitude that can easily change with changes in circumstances. It dwells in the mind of the user and is not like other observable behaviors such as product selection or re-selection and complaining. Satisfaction levels range from lower to upper, meaning they range from under-fulfillment to over-fulfillment.  Satisfaction may be determined using two models macro-models and micro-models.

The Macro-Models
The following assumptions are made in these models

Where the consumer is especially new to the product, or it is difficult or intangible, perceived performance will most likely diverge from the objective performance.

Evaluation measures can be derived from several sources which vary widely by personality, circumstances prevailing, and by product kind.

The feeling of satisfaction is an attitude or a mental state. A consumer may experience mixed feelings for diverse product parts experience.

The results of satisfaction could be word of mouth, whereby the consumer approves or disapproves the product to others, or the consumer may purpose to purchase it again. There are other variables that may affect these results. For example, the customer may fail to complaint if heshe thinks that it may not bear any benefit. (Hom, 2000, p. 102)

A traditional macro-model of customer satisfaction is shown below

Further research has born a model that recognizes value as a thrust in the choice of products and its relationship to satisfaction as a short psychological response to a section of a value chain. This model linking consumer value to satisfaction is as shown below

A different macro-model links the overall product satisfaction, the products encounter satisfaction, and the perceived product quality. It recognizes the contrast between overall general satisfaction and the encounter product satisfaction.

This model is as shown below

Micro Models
These are the fundamentals making up satisfaction concept. Hom, 2000, p. 101 summarizes micro-models into expectations disconfirmation, change, equity, attribution, and regret.

Expectations Disconfirmation Model This model shows that expectations are derived from beliefs. Here, consumers have pre-consumption expectations that make them develop an attitude of satisfaction towards the product.

Norms Model - it is similar to Expectations Disconfirmation Model in that the consumer uses a standard for performance to evaluate perceived performance. The standard in this case is however not predictive, but he uses what should happen as the standard for comparison.

Perceived Performance Model This model shows that expectations do not play an important role in the formation of satisfaction. It presents well where a products performance is so positive such that the expectations of the consumers get dissolved in their post-consumption response towards the product.
Multiple Process Model - This is where consumers use multi dimensions to form satisfaction of a product.
Attribution Model - This model incorporates perceived products performance causality into the process of satisfaction. Here, consumers use the locus of causality, constancyfirmness, and controllability factors to establish the effect of attribution in satisfaction.

Affective model  this model reaches beyond the normal processes. Satisfaction or dissatisfaction feelings after product usage are affected by mood, emotions and liking of the product.

Equity Model - this model stresses the attitude of the customer on reasonable treatment while consuming the product. Reasonable treatment may be determined using equity ratio (total returns for efforts made) or by social comparison (the comparative level of a products performance experienced by other consumers).

According to Oliver, the comparison standard could be summarized to cover-
Needs  whether the experience of consumption reached their need.

Regret  what might have been situation.

Nothing  where consumers develop the feeling of dissatisfaction or satisfaction without cognition. (Oliver, 1997, p. 111).
He gives a summary of the above as follows-

Comparison OperatorResulting CognitionExpectationsDisconfirmationExcellence (ideals)QualityFairnessEquityinequityEvents that might have happenedRegretNothingUnapprised cognition
(Source Oliver, 1997, p.112)

The concept of consumer satisfaction needs to be given much attention in both the public and private sectors. The diversity of satisfaction models leaves researchers with the option of maneuvering consumer satisfaction concept if they are to measure it. They ought to presume a model for this subject matter. So many people in the world today are getting riches day after the other, yet we see more of dissatisfaction every day.

Marketers on the other hand need to adopt consumer satisfaction as key factor in their strategic marketing endeavors. We all need to realize that it is the well being and happiness that is going to count on our development, unlike the earlier thought that it is the accumulation of wealth.

Price elasticity of demand is the economic term for the negative of the percentage change in quantity demanded divided by the percentage change in price (Katz  Rosen, 1994). It is therefore a measure of the responsiveness of quantity demanded to any given price change. The downward slope of a demand curve accounts for the opposing signs of percentage change in quantity demanded and percentage change in price and hence, their negative ratio. It has been customary to present price elasticity of demand in positive form by multiplying the ratio with -1 for the purpose of avoiding confusion and complexity. Price elasticity of demand (ED) will therefore be positive, given a downward-sloping demand curve (Katz  Rosen, 1994).
   
This formula is used for computing the price elasticity of demand
         ED   _     Q2  Q1                  P2  P1
                       (Q1  Q2)2        (P1  P2)2

where ED is the price elasticity of demand, Q2 is final quantity demanded, Q1 is initial quantity demanded, P2 is the final price and P1 is the initial price. The price elasticity of demand of apples in this example will be computed using the aforementioned formula.

         ED   _     20  30               4.00  3.50         _   -10        0.50     _  (-0.4)      3.00
                       (30  20)2       (3.50  4.00)2              25      3.75           0.1333
   
The price elasticity of demand of apples in this case is 3, indicative of a price-elastic demand. Demand for a good is price-elastic when a 1 increase in price effects in a greater than 1 decrease in quantity demanded. A 1 price hike in the apple case dampened demand by 3 demand was therefore very responsive to the price change. This price-responsiveness of the demand for apples is probably due to the presence of close substitutes, other fruits and foods which will make up for the lost utility.

Production Cost  (labor units wage)  other variable inputs  (70,000  100)  500,000  7,500,000
Revenue  units produced  output price  300,000  30  9,000,000

With the recent strike of financial crisis all over the globe, it is expected to see businesses experiencing hardships in maintaining their profitability and financial stability. As for the company concerned in this paper which has been experiencing net loss on its operations, it is not advisable to shut down its operations even though it has been earning in negative position since it will only cost the company more compared to continuing its operations. The fixed cost that the company invested such as machineries, land, and buildings will not be recovered if it will shut down its operation at this point in time. The company still has to pay the cost of its fixed investments whether it continue or not the production of goods services in the market.

Moreover, as a common knowledge among economists, in the short run a firm must continue its operation for as long as the revenue exceeds its variable cost. As for the case of the company concerned, the revenue at present is still greater than the variable cost (9,000,000  7,500,000  1,500,000). Although producing anything will give the company returns not enough to offset the fixed cost as part of the variable cost, but, by not producing, the company will lose the entire fixed cost.

Therefore, the most effective way for the company to surpass its financial difficulty would be to continue its operations and wait for the recovery of the market  which is already on its way according to most analysts (Euromonitor International, 2008). Given the competitive recovery of numerous markets around the globe, the company should hold on the future trends of the economy. By doing this, the adverse effects of market deterioration will only inflict a small wound on the companys financial stability.

1. Economics is the study of how a society manages and allocates its scarce resources (Mankiw 4). Scarcity connotes the limited nature of societys resources (Mankiw 3). Resources are limited i.e. their available quantity cannot satisfy all productive uses, while wants are infinite. Every individual and household in society cannot acquire the standard of living they dream of (Mankiw 3). A shortage of resources over desires creates scarcity and necessitates making of individual and collective decisions about optimum allocation of resources. Study of economics, in essence, deals with how people make decisions about scare resources  (Mankiw 4) and is therefore, inherently dependent upon the phenomenon of scarcity.

2. Efficiency means that society is getting the maximum benefits from its scarce resources while equality refers to those benefits are distributed uniformly among societys members  (Mankiw 5).When government tries to redistribute income from rich to poor, equality within society increases while efficiency falls (Mankiw 5). By allocating some portion of rich mens income to the poor, government reduces the discrepancy between income earned by poor and rich households and average household income, thereby achieving greater equality in income distribution. However, by allocating rich peoples hard earned money to poor unemployed people, government discourages them from producing goods and services at optimum levels, reducing efficiency (Mankiw 5). Mankiws decision is correct as long as governments intervention of income redistribution interferes with a market producing efficiently and negative outcomes are indicated as per marginal analysis, i.e. costs outweigh benefits. However, in case of market failures (Mankiw 11) and when marginal analysis indicates that benefits outweigh decision costs, for instance when majority of rich are withdrawing money from circular flow of income and hindering production at optimum levels or when rich find a way to exploit poor people by lowering wages or through lay-offs to make up for taxes imposed on the rich and that discrepancy in rich and poor household income increases instead of declining, then Mankiws decision will be wrong and both equality and efficiency will both increase or decrease.
   
3. Opportunity cost of a decision is the value of the good or service forgone (Nordhaus 13) or given up for the same (Krugman 7 Mankiw 5). The opportunity cost of attending AIU was the knowledge, experience and fun I would have derived from Undergraduate Economics Degree at the University of British Columbia, or the University of Victoria. In case I was not selected for any of the aforementioned universities, opportunity cost of attending AIU would be the income and experience I could have gained from a job. The opportunity cost of coming to class last Wednesday was the enjoyment of watching Avatar, a film, at the movie theatre with my school friends.
   
4. An incentive is anything that induces or motivates a person to act such prospects of reward and punishment (Krugman 10 Mankiw 7). Extension of AIU terms from 10 to 15 weeks will provide certain incentives to students, either in the form of higher or lower motivation for study and leisure. Studious people, who are burdened by paucity and insufficiency of time for obtaining mastery of course materials, may be encouraged to dig deeper into taught concepts and enhance their overall understanding and mastery of the subjects. Similarly, students may be motivated to submit top notch assignments and projects which were earlier not feasible due to tight time constraints. Conversely, students may also be encouraged to postpone studies and assignments, and put in lesser hours of work each day, because of extended time schedule. Some may be motivated to use the spare time to indulge in leisure activities like eating out and movies. Still others may seek part time jobs or extend their work hours to earn some money along with study. These are the possible outcomes that may ensue if the term period at AIU is increased from 10 to 15 weeks.
   
5. Government intervention in a market economy can improve economys performance when the market is not producing efficiently (Krugman 16) and suffering from market failures like externalities and market power (Mankiw 11) that result due to side effects of individual actions, when some one or more parties try to capture a greater share of resources discouraging mutually beneficial trade and when the very nature of certain goods promotes inefficiency (Krugman 16). In such cases, Mankiws hypothesis that increasing equality through re-distribution of income from rich to poor lowers efficiency (Mankiw 5) may stand negated.