Globalization and its Effects
Globalization refers to the economic, financial, communication and cultural integration of different nations. Globalization promotes free movement of goods and services across the countries, beyond the national boundaries. This has given birth to consumer driven economy in the global market. As the exports and imports have increased significantly across the globe, more foreign-made goods have become available to the consumers. They can access the global stores online and make purchases. Firms are developed due to increase in exports, as well as increased competition, exchange of technology and transfer of knowledge. They are putting efforts to improve their product quality. This benefits both the local and global consumers (Beck 2015).
Movement along the demand curve refers to the change in quantity demanded. A demand curve represents the inverse relationship between price and quantity demanded. As the price of a good increase, the quantity demanded decreases and vice versa, other things remaining the same. This leads to a movement along the demand curve (Gillespie 2014).
Figure 1: Movement along the demand curve
(Source: Author)
Figure 1 shows as the price of a good decreases from P1 to P2, its quantity demanded increases from Q1 to Q2. There is a movement along the demand curve (D) from point A to point B.
Shift in the demand curve refers to the change in the position of the demand curve, rightwards or leftwards. When any other parameter than the price of the good changes, the demand curve changes its position. For example, if the income level of the consumers increases, then the demand shifts to the right. Price of the good remains the same but quantity demanded increases due to rise in income (Varian 2014).
Figure 2: Shift of the demand curve
(Source: Author)
Figure 2 shows as the income level of the consumers increased, the demand curve shifted rightwards from D1 to D2. Price of a good remained same at P, but quantity demanded increased from Q1 to Q2.
Economies of scale refer to the advantages of cost, which arises with increased level of production of a product. There is an inverse relationship between quantity produced of a product and cost per unit of it. As the production level increases, the cost per unit decreases as it is distributed over a large number of goods and due to increased efficiencies.
Diseconomies of scale arise when a firm no longer experience economies of scale. It represents the situation where average cost of a firm increases with the increase in output. It is generated due to a number of inefficiencies, which arises due to the huge size of the firm and which diminishes the benefits earned from economies of scale (Lu, Gzara and Elhedhli 2014).
Demand Curve and Shifts in Demand Curve
Figure 3: Economies and Diseconomies of scale
(Source: Author)
Figure 3 shows the economies and diseconomies of scale for a firm. Up to break even output level Q*, the firm enjoys economies of scale, since, the average cost decreases with the increase in output. After Q*, the average cost curve rises with the output level. Then the firm experiences diseconomies of scale.
Supply refers to the stock of a particular good or service that is available to the consumers to satisfy their wants or demands. Determinants of supply are the factors, which influence the supply of a product. Numbers of sellers, cost of production, technology, taxes and subsidies, supplier’s expectations regarding future price, price of related products are all determinants of supply for a particular product. For example, in retail industry, if the number of seller increases, the supply of products increases too; if cost of production rises, supply of products falls (Rios, McConnell and Brue 2013).
In economics, goods are classified into two types: substitute and complementary. Substitute goods refer to those that can replace some other similar goods to satisfy the consumers demand. When the price of such a good rises, consumers buy another similar good of lower price. Thus, a rise in the demand for one good leads to a fall in the demand for the other. For example, tea and coffee are substitute goods. When tea becomes costlier, customers might want to purchase coffee to satisfy their regular beverage needs.
Complementary goods refer to those goods that need to be consumed together. When the demand for one such good rises, the use of the other good rises too. Again, when the price of one good rises, it would not only decrease the demand for that good, but would decrease the demand for the other good also, as they are dependent on each other. For example, the X box player and games DVDs are complementary goods. If the demand for X box rises, it would push up the demand for the games DVDs also (Amir, Erickson and Jin 2017)
Imperfect competition is a market structure where there are one, few, or many sellers with heterogeneous products, as opposed to perfect competition. The features of imperfect competition are:
- sellers are the price makers;
- differentiated products;
- barriers to entry
Monopoly (one seller), oligopoly (few sellers), monopolistic competition (many sellers and highly differentiated goods), monopsony (single buyer of a good) are all examples of imperfect competition (Nermuth 2013).
Monopoly is a market structure with one single seller of a good that has no close substitutes. In monopoly, there are high barriers to entry. It is very difficult to enter the market in monopoly. The brand name, pricing policy along with the lack of close substitute products create barriers to entry in monopoly. A monopoly firm sets the price in such a way that it becomes difficult for other firms to make profit. Sometimes people identify a product by its name. For example, Microsoft enjoys monopoly power for their intellect product ‘Windows’. Thus, the brand name also creates a barrier to entry for other firms (Elfenbein, Fisman and McManus 2015).
Economies and Diseconomies of Scale
Market failure refers to the situation when there is inefficiency in the allocation of products and services in the market. The governments of all the nations use environmental policies to ensure the efficient allocation of resources to prevent market failures (Tietenberg and Lewis 2016). One of the factors of production is land. It is a scarce resource. The government can take measures for efficient allocation of land. Again, when pollution of the environment is caused by a company, thereby creating negative externality, then government can intervene constructively to ensure that the society gets compensation.
The circular flow of income is an economic concept, which refers to the flow of money through different sectors of the economy. In simple words, the economy is considered to have two sectors, firms and households. The principle of this theory is that, in a simple two-sector economy, the money flows to the workers as wages, and it flows back to the firms in exchange for goods and services (Deleplace and Nell 2016).
Figure 4: Circular flow of income
(Source: Author)
The households supply factors of production such as, labor, capital and entrepreneurs to the firms and the firms provide wages, interests and profit to the household as remuneration of the factors. On the other hand, the households use the money received as wages to purchase the goods and services produced by the firms, and hence, the money again flows back to the firms. This is referred to as circular flow of income.
Unemployment refers to the situation in the economy when a person is willing or able to work, but cannot find any job. It is represented with the help of unemployment rate, which is the percentage value of unemployed pool of people divided by the total work force. Workforce includes the people who are willing to work, able to work and available for work (Mankiw 2014).
Figure 5: Unemployment in UK
(Source: World Bank)
Figure 5 shows the unemployment in UK from 1983 to 2013. It was highest in 1985-86 at 11.5%, and lowest in 2001 at 4.7%.
Financial statements summarize the financial activities of an organization. These are prepared and applied any time in the financial year. The four basic financial statements are (Minnis and Sutherland 2017):
- Balance sheet:represents the financial position of an organization at a particular reporting date. It consists of the assets, liabilities and stockholder’s equity of the organization. The value of assets is always equal to the total value of liabilities and equity.
- Income statement: represents the operational results of the organization in terms of revenues, expenditures and profits or losses generated in the organization during the reporting time. The net income is calculated in this statement.
- Statement of cash flows: represents the inflows and outflows of cash in the organization during the reporting time. It covers three basic categories of activities: operating activities, investing activities and financing activities.
- Statement of retained earnings: represents the changes in the equity during the reporting time period. It includes buying and selling of stocks, payments of dividends, and changes made by profits or losses. This statement is least used by the companies and included only in the audit reports.
Four phases of management accounting are planning, organizing, controlling and decision making. For any efficient management operation there has to be an adequate plan for profit decisions, capital investment, financing, sales forecasting, and expense budgeting. After that, efficient organizing is required to execute the plans. Controlling takes place while comparing the actual performances with the plans. Reporting and interpreting the results of the operations are necessary at all management levels. The final phase is the decision-making. The success of business operations is very much dependent on efficient decision-making (Kaplan, R.S. and Atkinson, A.A., 2015)
Determinants of Supply and Examples
Relevant costs are those costs that are affected by the managerial decisions in a business situation, while the costs, which are not affected, are called irrelevant costs. In decision making between alternatives, there are some costs incurred. Some costs are affected for one alternative while some are affected for a different alternative. Relevant costs differ between different alternatives in decision-making. These costs include the expected costs, which would be incurred and the opportunity costs, that is, forgone benefits when one alternative is chosen over the other. Differential, opportunity and incremental costs are relevant costs.
Irrelevant costs are the ones, which are not affected by the decisions of choosing one alternative over the other. These costs do not make any difference or impact in the decision-making. Sunk costs and unavoidable costs are irrelevant costs (Drury 2013).
Risks and returns are fundamental concepts in investment decisions. Every investment decision is based on the calculation of risks and returns. Returns are the gains or losses incurred from an investment in a specific period and generally quoted as a percentage value. Risk is defined as the chance that the actual return from an investment would be different from what is expected. It involves the chance of gaining or losing, that is, the uncertainty involved in the investment decision. Low level of risk leads to lower level of potential returns and higher levels of risks are associated with higher returns. The businesses tend to make decisions with lowest possible risk to get highest possible return (Mishra 2015).
According to Albul, Jaffee and Tchistyi (2015), Capital structure refers to the way a company finances its business operations and growth with the use of different sources of funds. It is a part of the financial structure of a company and represents the proportion of various sources of funding. It consists of debt and equity securities of a company and it is the undeviating financing structure, which is presented by the long term debt, net worth and preferred stock. Hence, it is related to the capital arrangement, excludes the short term borrowings, and composed of shareholder’s funds, share capital and long term debt.
Amortization Schedule: £25,000.00 at 9% interest, with 3 annual payments, at Constant Principal Payments of £8333.33
Total Payments: £29,500.00
Total Interest: £4,500.00
Return or Interest per annum (I) = £800
Rate of interest (R) = 6%
Time (T) = 3 years.
Thus, principal (P) for each year = (I * 100) / R = (800 * 100)/6 = £13,333.
For 3 years Gary will have to deposit 13,333 * 3 = £40,000.
NPVA= $18,000[(1/0.125)-(1/(0.125*(1+0.125)5)] – $50,000
= $14,090.23.
NPVB= $99,500(1/1.1255) – $50,000
= $5,215.43
NPVA> NPVB; $14,090.23 > $5,215.43;
Hence, Project A should be chosen.
References:
Albul, B., Jaffee, D.M. and Tchistyi, A., 2015. Contingent convertible bonds and capital structure decisions.
Amir, R., Erickson, P. and Jin, J., 2017. On the microeconomic foundations of linear demand for differentiated products. Journal of Economic Theory.
Beck, U., 2015. What is globalization?. John Wiley & Sons.
Deleplace, G. and Nell, E.J. eds., 2016. Money in Motion: the post-Keynesian and circulation approaches. Springer.
Drury, C.M., 2013. Management and cost accounting. Springer.
Elfenbein, D.W., Fisman, R. and McManus, B., 2015. Market structure, reputation, and the value of quality certification. American Economic Journal: Microeconomics, 7(4), pp.83-108.
Gillespie, A., 2014. Foundations of economics. Oxford University Press, USA.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Lu, D., Gzara, F. and Elhedhli, S., 2014. Facility location with economies and diseconomies of scale: models and column generation heuristics. IIE Transactions, 46(6), pp.585-600.
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.
McMillan, D.G., 2013. Risk and Return. J Bus & Fin Aff, 2, p.e130.
Minnis, M. and Sutherland, A., 2017. Financial statements as monitoring mechanisms: Evidence from small commercial loans. Journal of Accounting Research, 55(1), pp.197-233.
Mishra, C.S., 2015. Risk and Return. In Getting Funded (pp. 193-218). Palgrave Macmillan US.
Nermuth, M., 2013. Information structures in economics: studies in the theory of markets with imperfect information (Vol. 196). Springer Science & Business Media.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.
Tietenberg, T.H. and Lewis, L., 2016. Environmental and natural resource economics. Routledge.
Varian, H.R., 2014. Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.
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