Effects Of Globalization, Movement Of Demand Curve, Economies Of Scale And Determinants Of Supply

Effects of Globalization

a) Effect of Globalization

The phenomenon of globalization started in a nascent way when human beings first settled down in various parts of the world. Nonetheless, it has displayed a rather rapid ad steady progress in recent years and has turned into a global dynamic which, owing to technological progression has grown in scale and speed (Soproni, 2011).

Impact of globalization on firms –

• Higher free trade
• Better movement of labor
• Greater capital flows (Veseth, 2014)
• Increased competition
• Enhanced economies of scale
• Growth of multi-national corporations

Impact of globalization on consumers –

• Lower prices
• Higher choices in products and services (Doku and Oppong, 2011)
• Improved product quality

b) Movement and shift in demand curve 

A movement along the demand curve happens when there is a change in price. A rise in price, P1 to P2 results in change in demand of quantity from Q2 to Q1. Changes in price do not shift the demand curve – we only move from one point of demand curve to other.

 

Figure 1: Diagram of movement along demand curve

(Source: Fisher, 2007)

There is a shift in the demand curve when customers alter their perceptions regarding the worth of a good or service. If customers decide they are ready to pay greater prices for a good, then the demand curve shift to right and vice versa. Variables that are likely to shift the demand curve either ways entail changes in incomes, changes in customer expectations and changes in trends (Fisher, 2007).

 

Figure 2: Diagram showing shift in demand curve

(Source: Fisher, 2007)

c) Economies of Scale and Diseconomies of Scale

Economies and Diseconomies of Scale are related notions and are completely opposites of each other. Economies of scale surface when the cost per unit decreases with increase in production of units. On the other hand, diseconomies of scale emerge when the cost per unit rises with the increase in production. Economies of scale are advantages that an organization gets as it increases its size e.g. purchasing in bulk. As the company can buy more so it may get a discount, hence reducing the average cost per unit. Diseconomies of scale are the bad things that the organization experiences with the increase in its size (Shaffer, 2012). For e.g. managerial diseconomies of scale like loss of communication.

 

Figure 3: Average cost/unit in economies and diseconomies of scale

(Source: Shaffer, 2012)

d) Determinants of Supply

Determinants of Supply are the elements influencing the quantity of a good or service supplied. Following are the main determinants of supply besides price:

Number of sellers

Higher the number of sellers, higher will be the amount of goods supplied and vice versa. For instance, in automobile industry, when the number of automobile makers increase, the supply of vehicles will also rise (Ball and Seidman, 2011).

Movement and Shift in Demand Curve

Production Technology

Advancement in technology allows more efficient production of products and services, thereby mitigating the production costs and augmenting profits. Resultantly supply increases and the curve shifts rightward. Automobile technology is growing progressively and thereby eliminating the redundant costs and increasing the supply.

Price of related products

Companies that produce related products (e.g. refrigerators and ACs) will shift their production capabilities to product whose price increases significantly in comparison to the related product. This will cause a decrease in the supply of the related product. For instance, a company that produces sedans also produces SUVs. If the price of SUVs increase, the company will manufacture more sedans and less SUVs (Ball and Seidman, 2011). Resultantly the supply of SUVs will reduce.

 

Figure 4: Price of related goods and supply curve

(Source: Ball and Seidman, 2011)

Taxes and Subsidies

Taxes decrease profits, hence rise in taxes is likely to mitigate supply and vice versa. Subsidies on the contrary, mitigate the burden of cost of production on suppliers, thereby augmenting profits. Hence, rise in subsidies leads to increased supply and vice versa (Arestis, 2011).

Input Prices

The price of raw materials has a negative impact on the supply curve, if the price increases, supply will decrease. For e.g. the price of auto-components increases, as it now costs more to make the automobiles, the companies will charge more for the vehicles or shift the curve to left.

 

Figure 5: Input prices and supply curve

(Source: Ball and Seidman, 2011)

e) Substitute and Complementary goods

Two products are considered to be perfect substitute if the customer is willing to replace one for another to meet his needs. With the increase in price of one substitute, customers tend to move to another one and hence companies making substitutes have little or no pricing power. For instance, the price of SUVs double, so the customer buys a smaller car instead. Both automobiles fulfill the same purpose and as long as the customer does not hold strong preferences, he/she will change the demand toward smaller car (Flynn, 2011).

On the other hand, complementary goods are those where usage one product increases the use of other. For instance, hike in demand for X-box will elevate the demand for gaming CDs and DVDs, or an increase in automobile sale increases the demand for petrol. If the price of one product increases then not just its demand will decrease but it will also lessen the demand for the other good (Flynn, 2011).

Economies of Scale and Diseconomies of Scale

a) Imperfect competition market structure

Imperfect competition market is one wherein some of the norms of perfect competition are not pursued. Virtually, every real-world market follows this market structure because in practice every market has some type of imperfection. A perfectly competitive company experiences a horizontal demand curve and is a price taker (Bellalah and Said, 2012). All other types of firms face a downward sloping demand curve for their products and are known as imperfectly competitive firms. The common forms of imperfect competition entail: monopolies, monopolistic, duopolies, monopsony and oligopolies. A pure monopoly represents an extreme case wherein the downward demand curve of the company is the industry demand curve. Oligopoly signifies a market structure in which a few companies sell either a differentiated or standardized product and in which entry is challenging. A market structure wherein several companies sell a differentiated product and in which entry is quite easy is a monopolistic market structure. Under monopsony structure there are several sellers but only one buyer (Buttimer, 2011).

b) Barriers to entry for a monopoly firm

Product Differentiation – The customer identifies with the brand name of the company with the product. In markets where there is considerable market differentiation, it is very challenging for new companies to enter. Potential new entrants ought to overcome the customers’ tendency to recognize a seller’s brand name with the good and this is not very simple (Weizsäcker, 2012).

Institutional barriers – These are established by the government. Such barriers assume several forms and include licensing restrictions, exclusive franchise rights and the use of quotas and tariffs.

Financial barriers – In certain markets, the first investment needed to establish production facilities is huge such that new entrants might face a challenging time acquiring the requisite capital (Weizsäcker, 2012).

c) Environmental policy to address market failure

When free markets are not able to maximize the welfare of society, they are reckoned to be “failed” and policy intervention is required to correct them. Several economists have stated climate change as an example of market failure. Policy makers have two instruments at their discretion for modifying production and consumption habits in the society. They may employ conventional regulatory approach (command and control approach) which establishes specific standards across polluters, or they may employ economic incentive or market-based regimes which depend on market forces to rectify the production and consumption behavior (Clark, 2012). For instance, the UK government has introduced taxes on negative externalities. These are intended to make producers/consumers pay the entire social cost of the product. This mitigates consumption and leads to a more socially effective result. Examples of such taxes include tax on unhealthy foods, carbon tax etc. (Tucker, 2016) 

Determinants of Supply

d) Circular flow of income

Income in any economy flows from one sector/party to the other whenever a transaction happens.  New expenditures produce new incomes, which further produces new expenditures and further new incomes and the cycle continues. Incomes and expenditures continue to move around the macro-economy in which is known as the circular flow of income. This circular movement reflects the interrelationships between various sectors of a country’s economy. It displays flow of products and services and factors of production between companies and households. It also demonstrates how GDP of a country is computed (Tieben, 2012).

However, not all incomes flow directly from households to businesses. Some portion of the household income is kept aside for future spending, paid to the government as tax and spent on imports.

 

Figure 6: Circular flow of income

(Source: Tieben, 2012)

e) Unemployment

Manpower is a driving factor in all economies – wages and salaries paid for labor trigger consumer expenditure, and the output from labor is critical for organizations. Similarly, unemployed individuals signify wasted potential production in an economy. Resultantly, unemployment is a big concern within macroeconomics. In official terms, unemployment implies the number of civilian workers under permissible working age who are looking for work actively and not receiving wages currently (Shaikh, 2010). Provided the official unemployment definition excludes those who want to work but have become disheartened and stopped looking for employment, the real rate of unemployment is always greater than the official rate.

The figure illustrated below displays the unemployment rate in the UK during the last two decades. 1971 recorded the lowest unemployment rate of only 3.4%, while 1984 recorded the highest rate i.e. 11.9%. In January 2016, UK witnessed an unemployment rate of 5.1% (Clegg, 2016).

 

a) Four basic Financial Statements

Income Statement – This presents a summary of a company’s results of operations for a defined time period. It gives information about expenses incurred and revenues generated. The differential figure between revenues and expenses is net loss or net income. This computation presents creditors and investors the overall profitability of the organization besides how effectively the firm is producing profits from total revenues (Kramer and Johnson, 2009).

 

Balance Sheet – The Balance sheet concentrates on the accounting equation by disclosing the financial resources owned by a company and the claims against such resources. A balance sheet reflects a company’s financial position (Kramer and Johnson, 2009).

Substitute and Complementary Goods

 

Cash Flow Statement – This statement details a company’s cash inflows and outflows. It reveals how cash is produced and spent over a defined period of time. Cash inflows and outflows are categorized into three sections i.e. operating activities, investing activities and financing activities (Kramer and Johnson, 2009).

 

Statement of Owner’s Equity – This statement discloses the changes in the equity accounts of shareholders due to net income/loss, withdrawals and contributions.

 

b) Calculation of Financial Ratios

Financial ratios of Tesco

Liquidity ratio

Particulars	Formula	2015	2014	Impact on performance
Current ratio		0.60	0.73	Liquidity position has been weakened as it is reduced as ideal ratio should be 1.5:1.

 
Market Value ratios

Particulars	Formula	2015	2014	Impact on performance
Price-earnings ratio		-96.27	893.89	There has been drastic reduction in ratio and it turns to be negative due to huge financial losses.

 
Asset management ratio

Particulars	Formula	2015	2014	Impact on performance
Inventory turnover ratio		17.59453552	18.2296	Inventory turnover ratio has been reduced which shows reducing sales efficiency of business.

Debt management ratio

Particulars	Formula	2015	2014	Impact on performance
Interest coverage ratio		-11.78	6.05	Due to financial losses Interest coverage ratio is negative which shows reducing credibility of business.

Profitability ratio

Particulars	Formula	2015	2014	Impact on performance
Net profit ratio		-9%	3%	Due to reducing sales and increasing expenses there are financial losses in a current year.

c) Four phases of Management Accounting

Phase 1 – During the initial phase, organizations were emphasized more on cost determination about overhead allocation and stock valuation.

Phase 2 – Once the cost principles were developed, the firms began concentrating on information collection for planning and control to make feasible decisions (Needles, Powers and Crosson, 2013).

Phase 3 – This phase witnessed huge worldwide competition because of growing technological development and globalization. Implementation of updated techniques like JIT and ABC methods companies focused on reducing costs and making complete use of their resources.

Phase 4 – This stage is identified with the evolution of management accounting because firms were concentrating on value added techniques such as TQM, Re-engineering, Benchmarking etc. (Needles, Powers and Crosson, 2013).

d) Comparison and contrast of relevant and irrelevant cost

	Relevant Cost	Irrelevant Cost
Definition	Costs that must be included in a company’s analysis when taking an important managerial decision	Costs that must be disregarded when taking an important managerial decision
Type	Future cost	Sunk cost

a) Analysis of concept of Risk and Return

Risk refers to the probability that an investment’s real return may vary from what is expected. Practically risk implies that a company has the likelihood of losing all or some of its original investment. Low risks are usually linked with low likely returns and vice versa. The risk-return trade-off is an attempt to accomplish a balance between the desire for highest probable return with the lowest probable risk (Griff, 2014).

 

Figure 7: Risk Return Tradeoff

(Source: Griff, 2014)

b) Concept of Capital Structure

Capital structure is concerned with how a company decides to categorize its cash flows into two wide components i.e. a fixed one which is assigned to meet the debt obligations, and a residual component which goes to the equity shareholders. It refers to the proportion of different long term financing sources. A typical capital structure of an organization is composed of equity and debt which comprise the company’s funding of its assets (Needles, Powers and Crosson, 2010).

Imperfect Competition Market Structure

c) Amortization schedule

		A	B	C	D	E
				(C+D)	A*9%	(A-C)
Year	Date of payment	Opening Balance	Scheduled Payment	Principal	Interest	Ending Balance	Cumulative Interest
1	01-01-2018	25,000	9,876	7,626	2,250	17,373	2,250
2	01-01-2019	17,373	9,876	8,312	1,563	9,060	3,813
3	01-01-2020	9,060	9,876	8,245	815	0	4,629

Loan Summary

Scheduled Payment	£    9,876.37
Scheduled Number of Payments	3
Actual Number of Payments	3
Total Interest	£  4,629.11

d) Money required for the accomplishment of goal

Lump sum amount to be invested to earn $800 on an annual basis for three years 

e) Evaluation of projects for investment

NPV of project A

Years	Project A	PV factor @12.5%	Present value
1	18000	0.888889	16000
2	18000	0.790123	14222.22
3	18000	0.702332	12641.98
4	18000	0.624295	11237.31
5	18000	0.554929	9988.721
	Total present value of inflow	64090.23
Less	Initial investment	50000
	Net present value	14090.23

NPV of project B 

Years	Project B	PV factor @12.5%	Present value
1	0	0.888889	0
2	0	0.790123	0
3	0	0.702332	0
4	0	0.624295	0
5	99500	0.554929	55215
	Total present value of inflow	55215
Less	Initial investment	50000
	Net present value	5215

 
Computation shows that investment should be made in project A as it is providing higher return on the similar initial investment and will deliver the desired return to the investor.

References

Arestis, P. 2011. Microeconomics, Macroeconomics and Economic Policy: Essays in Honour of Malcolm Sawyer. Springer.

Ball, K. M. and Seidman, D. 2011. Supply and Demand. The Rosen Publishing Group.

Bellalah, M. and Said, B. S. 2012. International Portfolio Choice: The Case of Market Competition, in William A. Barnett, Fredj Jawadi (ed.) Recent Developments in Alternative Finance: Empirical Assessments and Economic Implications (International Symposia in Economic Theory and Econometrics, Volume 22) Emerald Group Publishing Limited, pp.53 – 66.

Buttimer, J. R. 2011. The financial crisis: imperfect markets and imperfect regulation. Journal of Financial Economic Policy, 3(1), pp.12 – 32.

Clark, D. 2012. Why do economists describe climate change as a ‘market failure’? The Guardian. [Online]. 21^st May. Available through: <https://www.theguardian.com/environment/2012/may/21/economists-climate-change-market-failure>. [Accessed on 20^th March 2017].

Clegg, R. 2016. UK Labor Market: March 2016. Office for National Statistics.

Doku, P. N. and Oppong, A. K. 2011. Identity: Globalization, culture and psychological functioning. International Journal of Human Sciences, 8(2), pp.1-8.

Fisher, B. 2007. The Supply and Demand Paradox: A Treatise on Economics. Byron Fisher.

Flynn, M. S. 2011. Economics for Dummies. John Wiley & Sons.

Griff, M. 2014. Professional Accounting Essays and Assignments. Lulu Press Inc.

Kramer, B. and Johnson, C. 2009. Financial Statements Demystified: A Self-Teaching Guide: A Self-teaching Guide. McGraw Hill Professional.

Needles, E. B., Powers, M. and Crosson, V. S. 2010. Principles of Accounting. Cengage Learning.

Needles, E. B., Powers, M. and Crosson, V. S. 2013. Financial and Managerial Accounting. Cengage Learning.

Shaffer, S. 2012. External economies in banking. Journal of Financial Economic Policy, 4(4), pp.354 – 365.

Shaikh, S. 2010. Business Environment. 2^nd ed. Pearson Education.

Soproni, L. 2011. The globalization of communication. Eurolimes, 12, pp. 5-8.

Tieben, B. 2012. The Concept of Equilibrium in Different Economic Traditions: An Historical Investigation. Edward Edgar Publishing.

Tucker, B. I. 2016. Macroeconomics for Today. Cengage Learning.

Veseth, M. 2014. Introductory Microeconomics. Academic Press.

Weizsäcker, C. 2012. Barriers to entry: a theoretical treatment (Vol. 185). Springer Science & Business Media.