Topics Related To Economics

Globalisation and its Impact

The economic trend of globalisation had started in the second part of the 20^th century. With the advent of globalisation, the trade barriers between various countries were removed and there was free trade market all over the world. People could now buy and sell all over the world.

Globalisation increased the variety of products for consumers. Consumers can now get products from around the world. Hence, the variety increased. Due to the increase in variety, there is increase in competition between different markets and this lowered the prices of the products and improved their quality. With globalisation came a consumer-driven society where the markets were heavily influenced by consumers and their satisfaction about a product. Due to globalisation, the local merchants can be bypassed and the products can be searched around the world to fulfil the desires of the consumers to the fullest.

Globalisation led to rebirth of the industries and firms. There was labelling in the product about the country in which it was produced, which led to higher extent of consumer trading in foreign markets and hence replacing the local goods.

The most fundamental concept of economics is the forces of demand and supply. Demand and supply are the backbone of any economy. Demand is the quantity of goods that a consumer is ready to purchase from the market. The demand relationship is the relationship between the quantity and prices of goods. It is the quantity of goods that a consumer buys at a certain price.

The law of demand states that all other factors remain the same, the higher is the quantity demanded by a consumer, and the higher is the prices of the goods. Also, the lower is the quantity of goods, the higher will be prices.

The points A,B, and C in the above diagram represents the quantity demanded of the product at various prices. Hence, we can clearly see that there is a negative relationship between the demand of quantity and the prices of the product.

On the other hand, in the shifting of demand curve the demand line will move as a whole towards right or left due to change in an underlying determinant of demand. The shift in the demand curve occurs due to change in the quantity demanded even though there is no change in prices. This implies a change in the overall demand relationship. This means that there has been some other factor other than price due to which there has been a change in the demand.

Demand and Supply in Economics

Economies and diseconomies of scale co-exist in an economy.

“Economies of scale” is referred to as the increase in the efficiency of production with the increase in the production. Due to increase in production, the average cost per unit also decreases. The overall cost is shared between higher quantities of goods leading to lowering the average cost per unit of the product.

“Diseconomies of scale” refers to there is no increase in efficiency due to increase in production of the good. This happens mainly due to the communication gap in the organisation. The average cost per unit of the good in this case increases.

This shows that the fixed cost if its distributed over more quantity of goods then it lowers the cost and vice versa. Both the economies and diseconomies in scale are interrelated to each other and they go hand in hand with one another. A firm always focuses on the achievement of the economies in scale and hence it should find out a point where the diseconomies in scale can be removed.

There are various factors of supply which lead to an effect in the supply curve and a shift in the supply curve. These factors are called the determinants of supply. The determinants of supply are kept constant so as to study supply as a relationship between the quantity supplied and the price of the good.

The six types of determinants of supply are stated below:

• Technological innovations
• Sellers in the market and their number
• Suppliers change in expectation
• Price change in the product
• Change in prices of related goods
• Taxes and subsidies change

A change in supply is caused by a change in determinants.

For example, in oil sector, there are various technological innovations regarding the extraction of oil and gas.

Below is the diagram which clearly shows the shift in Supply curve of Natural Gas due to determinants of supply: 

 

Substitute goods are those goods, which replaces on another. In other words, if one good is not there then the other good can be used in place of that good. If the price of a good increases then the quantity demanded if its substitute increases as people replace the good with its substitute.

For example: Tea and Coffee

Complementary goods are those goods which go hand in hand with one another. In other words, these goods are used together with each other. They are not replaceable. The demand of one good has a direct impact on the other that is the increases in price of one good will also decrease the demand for its complementary good.

Economies and Diseconomies of Scale

Imperfect competition of market structure is the form of market which is not perfect in the sense that there are elements of monopoly which a particulars producer or a group of producer to take control over the market structure. The imperfect markets are less competitive in nature. The seller under imperfect competition influences the price of the product  and hence are able to earn more profits.

There are four types of imperfect competition in a market structure:

• Monopoly- there is only one seller in the market and he influences the prices as per his wishes.
• Oligopoly- there are only a few sellers in the market for a good
• Monopolistic- many sellers with differentiated products
• Monopsony- there is only one buyer of the product 

Barriers to entry under a monopoly market are the cost that a new firm has to pay for its entry into the market. The cost involved is both monetory and non-monetory.

Barries to entry can be of various types.

• Product differentiation: In this the product is associated highly with its brand name. Due to this it becomes very difficult for a new company to enter into the market and sell that product.
• Institutional barrier: these are the barriers which are imposed by the government. They are the following:

Licensing restriction

Patents

Franchisee

Tariffs and quotas

• Economic Barriers: there may be production restrictions in some markets due to which the number of competitors reduces.

Environmental policies are established in case of both market failure and government failure. The failure of the government leads to environmental policies to implement by the government. The environmental policies help in creation of better economy so that all the failures of the government can be covered under it. Government failures can occur due to lack of government accountability, or due to failure to comply with the law or due to inefficient and insufficient regulatory policies adopted by the government. Hence, by implementing environmental policies a better transparency and accountability can be created and it can revive the trust of the people in the government. 

Circular flow of income is a model of ecomony in which the exchange of goods and services and the flow of money is described. It describes the flow of m0oney in the economy. The flow of income assumes that the economy consists only of the households and firms. The flows into firms due to sale of goods to the households and flows out of the firm due to payments for the factors of production like wages and raw materials. Also, for the households the money flows out for the purchase of goods and flows into the households due to the income on form of wages from the firms. It illustrates the interdependence of various factors in an economy.  

Unemployment is a situation in which a person who is willing and is able to work is unable to find himself a work. Unemployment is used to measure the health of the economy. Unemployment can be to two types. One is the voluntary unemployment and the other is the involuntary unemployment. When a person who is able to work willingly does not work the it is called voluntary unemployment. On the other hand, when a person is able to work and is willing to work but is not getting work due to other factors, it is called involuntary unemployment.

Determinants of Supply

Unemployment rate in UK has an increasing trend in last twenty years; however, fluctuations in the unemployment rate can be seen over the years since 1996. During last twenty years, unemployment rate was highest during 1996 to reach the point of 8.19%. Unemployment rate dropped steadily till 2001. However, the rate started to increase further during 2005-11.  

1996	8.19	2006	5.35
1997	7.07	2007	5.26
1998	6.2	2008	5.62
1999	6.04	2009	7.54
2000	5.56	2010	7.79
2001	4.7	2011	8.04
2002	5.04	2012	7.89
2003	4.81	2013	7.53
2004	4.59	2014	6.11
2005	4.75	2015	5.3

 

 Figure 1: UK unemployment rate

(Source: data.worldbank.org 2017)

The reason for falling unemployment during 2005-11 shrinks in GDP and the effect of global financial crisis. As GDP has fallen, there was a decrease in aggregate demand in the economy, which further had a negative impact on the labour market. As demand for product falls, demand for resources such as labour also falls. Major reasons of UK unemployment are recession, frictional unemployment and structural factor. As pointed out by Flanders (2013), the major reason of UK unemployment in recent time is increase in self unemployment. However, unemployment rate in UK has been falling since 2012.

Full time job has risen significantly in these periods following labour market reform (Inman 2016). Increase in real wage has increased the supply of labour. Natural rate of unemployment in Britain has been set at 5.4%. During 2015, unemployment rate is below the natural rate of unemployment, which indicates increase in productivity of different sectors of the economy. Devaluation of pound has led the growth of the export processing sector in recent periods as a possible effect of Brexit and hence, demand for labour in the export sector has risen significantly.

The four types of financial statements are the following:

• Balance Sheet:

It is also referred to as the Statement of Financial Position. It gives the details of the assets, liabilities and the owners’ equity of the company at a given point of time.

Balance sheet is divided into two parts upon which an equation is formed as follows:

Assets = Liabilities + Shareholders’ Equity

The purpose of balance sheet is to provide an idea about the financial positions of the company and the company’s assets and liabilities.

• Income Statement:

It is also referred to as the Profit and Loss Statement.

An income statement gives the information to the company about the operations of the company. It includes the sales and other expenses of the company along with the profits or losses incurred in the company.

The purpose of Income Statement is to provide an ability of the company to generate profits or losses.

• Statement of Changes in Equity:

Substitute and Complementary Goods

It is also referred to as the Equity Statement or Statement of retained earnings.

It gives a detail of changes in equity of the company during the stated period. The purpose of Statement of changes in equity so as to get a better knowledge about the financial statement.

• Cash Flow Statement:

Cash Flow Statement is the financial report which shows the cash flow of the company. The purpose of the cash flow statement is to give the details of the company’s cash receipts and payments for a specified period of time.

	2016 (£m)	2015 (£m)
Assets
Noncurrent assets	7,015.00	6,741.10
Current assets	1,461.40	1,455.00
Total Assets	8,476.40	8,196.10
Liability
Current liabilities	2,104.80	2,111.60
Non-current liabilities	2,928.20	2,885.70
Total liabilities	5,033.00	4,997.30
Net assets	3,443.40	3,198.80
Equity	3,443.40	3,198.80

(Source: annualreport.marksandspencer.com 2016)

Balance sheet of Marks & Spencer indicates that financial position of this company in 2016 has been stronger compared to 2015 as total assets are greater than total liabilities. However, as current assets are less than current liabilities, it indicates less liquidity while paying short term debt. Noncurrent assets of the company are greater than noncurrent liabilities. The main reason of less liquidity is that trade payable is greater than trade receivables in the company during 2016. However, overall performance of the company is better compared to previous year.

Income statement

 

Figure : Income statement

(Source: annualreport.marksandspencer.com 2016)

Income statement shows the revenue, operating cost and profit for the financial year. Total revenue of Marks and Spencer has increased from 2015 to 2016, although operating profit has also fallen. Annual profit has fallen in 2016 due to increase in operating profit. Basic earring per share has fallen and it indicates that confidence of the investors from the company has fallen.

Statement of equity

 

Figure : Shareholder’s equity statement

(Source: annualreport.marksandspencer.com 2016)

Equity statement of this company includes comprehensive income, foreign currency translation, dividend, deferred tax and total equity attributed to the shareholders. Shareholders equity has increased from 2015 to 2016. The ‘Retained earnings reserve’ includes a cumulative £4.8m loss in the currency reserve during 2016.

Cash flow statement	(2016) £m	(2015) £m
Net cash inflow from operating activities	1,212.00	1,278.00
Net cash used in investing activities	-576.1	-649.1
Net cash used in financing activities	-631.4	-614.5
Closing net cash	196	187.8
Opening net debt	-2,223.20	-2,463.60
Movement in net debt	84.9	240.4
Closing net debt	-2,138.30	-2,223.20

Positive sign in the cash flow statement indicates cash inflow and negative amount reflects cash outflow. Net cash outflow from investment activities has decreased in the company cash outflow in the financial activities have increased. The cash flow statement reflects positive net cash at the closing time and net debt during 2016 has decreased.

	2014	2015	Benchmark (Similar Industry)	Favorable (F), Unfavorable (U), or Approximate (A)? 2015/2014
1. Current ratio	2.59	3.52	2.00	U/U
2. Days cash on hand	18.35	27.99	15.00	F/F
3. Days in A/R	77.72	70.25	45.00	U/U
4. Operating margin	0.03	0.02	4%	U/U
5. Return on total assets	1.22	1.10	4%	U/U
6. Return on net assets	3.05	3.14	10%	U/U
7. Debt to capitalization	0.54	0.61	50%	U/U
8. Times interest earned	3.36	2.47	4.00	U/U
9. Debt service coverage	1.30	1.28	2.00	U/U
10. Fixed asset turnover	2.84	3.24	3.00	U/A
11. Salary and benefit/NPSR	0.84	0.85	55%	F/F

The four phases of management accounting are the following:

• Planning and Decision Making:

Planning and decision making involves determining the future courses of action to be taken by a company. Planning involves decision making and taking future courses of action.

• Organizing:

Imperfect Competition

It involves coordinating the resources and the activities. Organizing involves coordinating and assembling all the activities and resources in the organization.

• Leading:

Leading involves motivating people and managing people in the organization to achieve the goals of the company. The objective of leading is to instill efficiency and effectiveness.

• Controlling:

Controlling involves monitoring and evaluating activities of the company so that the goals can be achieved. It involves comparing, checking deviation and then taking corrective actions. 

Relevant Costs are those costs which keep on changing with each decision. If there are two options and each option gives a different opinion about the costs. These costs directly affect the cash flows and the amount of money that goes out and comes into the business.

Irrelevant Costs are those costs that do not change with the different alternative courses of actions. These costs will happen with any course of actions. Irrelevant costs are sunk costs and fixed overheads.

The risk and return is the relationship between the amount earned from an investment and the amount of risk undertaken. The more is the return involved, the more is the risk in the project. Returns are the profits or losses earned from a business at a particular period of time. Risk means the probability of losing some or more of the investments. Every person wants a low risk and a higher return.

Capital Structure is the overall finances of the firm and its operations and growth using the various sources of capital. Capital structure involves debt and equity. Debt is the outside liabilities of the firm while equity is the owners’ investment.

Ammortisation Table

Year	Principal	Interest	Installment	Balance
1	8333	2250	10583	16667
2	8333	1500	9833	8334
3	8334	750	9084	0

References:

Globalisation: Effects of globalisation. Website. Retrieved from

https://yourbusiness.azcentral.com/globalization-affect-customers-16345.html

Globalisation: Effects of globalization on consumers. Website. Retrieved from

https://www.neumann.edu/about/publications/NeumannBusinessReview/journal/Review2014/Scriven.pdf 

Demand: Movement along the demand curve. Website. Retrieved from

https://www.investopedia.com/university/economics/economics3.asp 

Demand: Shift in the demand curve. Website. Retrieved from

https://www.economicsonline.co.uk/Competitive_markets/Demand_shifts.html 

Economies and diseconomies of scale: Definition. Website. Retrieved from

https://economicsmicro.blogspot.in/2008/11/normal-0-false-false-false-en-us-x-none.html 

Economies and diseconomies of scale: Difference. Website. Retrieved from https://smallbusiness.chron.com/economies-scale-vs-diseconomies-scale-78858.html 

Supply: Determinants of supply. Website. Retrieved from https://wealthyeducation.com/determinants-of-supply/

Substitute and complementary goods. Website. Retrieved from https://www.econogist.com/home/complements-and-substitutes 

Imperfect completion of market: Definition. Website. Retrieved from https://economictimes.indiatimes.com/definition/imperfect-competition Monopoly market: Barriers to entry. Website. Retrieved from 
https://cstl-hcb.semo.edu/bdomazlicky/ec101text/chap7/chap7sec1.htm 

Flow of income. Website. Retrieved from https://www.investopedia.com/terms/circular-flow-of-income.asp 

Flow of income. Website. Retrieved from https://en.wikipedia.org/wiki/Circular_flow_of_income 

Unemplyment: Definition. Website. Retrieved from https://www.investopedia.com/terms/u/unemployment.asp 

Financial Statements: Cash flow statements. Website. Retrieved from https://www.accountingcoach.com/blog/purpose-of-cash-flow-statement 

Four Stages of management accounting. Website. Retrieved from https://iedunote.com/function-of-management-process

annualreport.marksandspencer.com 2016. Annual report & financial statements 2016 https://annualreport.marksandspencer.com/M&S_AnnualReport_2016.pdf [accessed on: 04.19.2017] 

data.worldbank.org. 2017. United Kingdom. Available at: https://data.worldbank.org/United Kingdom  [accessed on: 04.19.2017] 

Flanders, S., 2013. Unemployment in the UK: What’s in a number? Available at: https://www.bbc.com/news/business-23545881 [accessed on: 04.19.2017] 

Inman, P., 2016. UK unemployment falls to 11-year low. Available at: https://www.theguardian.com/business/2016/nov/16/uk-unemployment-falls-september-office-for-national-statistics [accessed on: 04.19.2017]