Economic Analysis Essays
- American (domestic) current event, firm, or market.
In the year 2013, the Department of Justice (DOJ) in the United States moved to court to stop the merger of the US Airways and the American Airlines (AMR) parent company. This issue is highlighted in the article “The U.S moves to Block the US Airways – American Airways Merger.” According to the article, the reason for the DOJ lawsuit was that the deal would end up hurting competition in the industry since the presence of a few players in an industry affects the costs consumers have to pay for the services. The characteristics of the U.S airline industry oligopoly market structure affects the pricing of its services and more combinations are likely to hurt the competition further.
A few large firms that are interdependent characterize an oligopoly market structure and the huge barriers to entry that exist in this structure making it hard for new firms to enter the market. The interdependence of firms implies that a change in the prices by one firm has an effect on the revenues of the other competing firms. Thus, an oligopolistic firm always has to put into consideration the reaction of other firms when coming up with pricing strategies. United States has five major airlines including, Delta, Southwest, United, American and U.S. Airways. Over the years, the numerous consolidations in the U.S airline industry and the collapse of many smaller airlines have made the market become an oligopoly, resulting in a sharp increase in prices. Another consolidation would allow only four airlines to control more than 80 percent of the market in the country. The DOJ had been previously involved in stopping other consolidations such as the 2001 attempts to combine United Airlines and US Airways. After supporting previous mergers in 2005, the Justice Department said in their suit that they had realized consumer interests were threatened after learning the previous acquisitions had reduced competition.
In this lawsuit, the DOJ focused on demonstrating how further consolidation of the airlines would hurt competition. It focused on a strategy used by US Airways referred to as Advantage Fares that had been employed to undercut the prices of other Airlines by offering inexpensive, one-stop fares. This strategy pushed the other airlines to reduce their prices more than they normally would. This demonstrated that, if the merger took place the strategy would be abandoned and put an end to the competition that would require consumers to pay more fares. The increase in the size as a merged airline would only contribute to hurting customers in a bigger way.
Another characteristic of an oligopoly is the economies of scale. The airlines cited various reasons for this merger that shows the advantages of economies of scale. The merger would help to improve the consumer benefits through the construction of a new airline that would effectively compete with larger rivals. The new company would provide a route network that is more attractive, more flight options and improved connections to overseas destinations and at the same time improve job security and compensation for employees.
It is clear from the analysis that an oligopoly market structure provides economies of scale in the industry and firm interdependence. However, the barriers to entry and the presence of a few large firms may hurt the competition in the market resulting in higher prices being charged to customers.
- Analyze a foreign (outside of the U.S.) current event, firm, or market.
Nike Company has been involved in strategic actions whose purpose is to reduce the costs of manufacturing its products and give it a competitive advantage to its competitors. These actions involve the transferring of the Company’s manufacturing activities to developing countries such as Bangladesh where there is the availability of cheap labor. However, as highlighted by the article “Inside Nike’s Struggle to Balance Cost and Worker Safety in Bangladesh” these efforts to reduce costs has brought about labor issues in the factories contracted by Nike in developing countries. These issues have resulted in significant declines in revenues of the company due to the poor image associated with the company manufacturing activities. The cost of productions of a firm affects the profits obtained from its products.
The cost of production is comprised of factors of production such as, land, labor and capital. Production costs also referred to as the manufacturing costs can further be divided into direct costs and indirect costs. Direct manufacturing costs are the direct materials and direct labor costs used in making a product while indirect costs are the overheads allocated to the product costs in different proportions. Examples of indirect manufacturing costs are repairs and maintenance, depreciation of production facilities and equipment, salaries and wages and any other costs related to manufacturing. In Nike Company, these costs are covered by the contracts entered with factories in oversee countries. The company has had various issues while trying to source for cheap labor from various suppliers in developing countries. One such supplier is the Lyric industries from Bangladesh that provided very poor working conditions for their employees as well as poor pay. A different supplier in India is also said to have violated rules on wages, but Nike did not take any action.
The problems arising from the sources of cheap labor indicate that the company has not managed to reduce its manufacturing costs effectively. This is because the negative publicity associated with their sources of labor affects their revenues. The creation of Nike Company in 1964 was on the premise that it would offer quality footwear produced at reduced costs by making use of cheap labor from foreign factories. The use of cheap labor would help to reduce the overall costs of productions ensuring that the company can offer its products at relatively lower prices as compared to their competitors. However, the competing companies in the apparel industry have also been involved in production activities in the low-cost nations making it difficult for the company to have the low cost advantage that will enable it to sell products at competitive prices. As highlighted by the article, it also makes it harder for Nike to select a top priority between cost control and ensuring there are safe working conditions in its efforts to reduce costs.
The rapid growth of Nike in earlier years can be attributed to the lower cost of producing footwear that enabled the Company to offer quality products at low prices, boosting the demand for the products. However, issues concerning the conditions of the oversee factories and the adoption of a similar strategy by competitors reduce the effectiveness of the reduced costs of manufacturing. They eliminate the competitive advantage of low costs since competitors have also been able to reduce their production costs, the negative image associated with this cheap labor also affects the popularity of Nike’s products.
- Analyze your favorite Case Study from the Modules Forum.
The “New Steak on the Block” case study provides an elaboration of how the Steakhouses Restaurants has changed their business strategy by diversifying into new beef cuts with fanciful names to attract more customers. The restaurants have also made changes to the interior designs with an aim of enhancing the customers’ experience. Product diversification in business is an effective way to increase customer satisfaction and increases the demand of products.
Product diversification involves the provision of more than one product to the market that offers a wide range of experiences to the targeted customers. Customers also have a wide range of choices to select from than when only one or two products are offered. Businesses may diversify their products by adding distinct features to a product that makes it appear different from the other products. The diversification strategy used by the steakhouses involves making changes in their menus by incorporating different cuts of beef. These new beef cuts are offered by steakhouses like the Gramercy Tavern make use the entire cow, which also improves efficiency. The cuts include the Beef Carpaccio prepared with the eye round from the hind leg. The shank and shoulder meat is used for Open ravioli beef. Shoulder meat makes the flat iron steak while hindquarter and shoulder make the smoked Kielbasa. In addition, they have made changes in their restaurants interior designs to beef themed styles that are more appealing. This makes it a wholesome experience to the customers since it does not only concentrate on the steak but the establishment as well.
Product diversification may help a business to reinvent itself, adopt more cost saving strategies, and conduct research on what satisfies their customers more. In this case, the rise in the cost of beef, as well as the innovative and evolving culinary trends, pushed the steakhouses to make changes and diversify into several beef cuts. Such changes help a business to continue growing because it quickly adapts to the new changes in the market. The restaurants also took measures to solve some of its problems experienced after the introduction of new cuts. To reduce confusion caused by new steaks and changes from previous cuts, waiters hired were well equipped to handle the customer issues. The case highlights that research revealed that the steak-themed restaurants with waiters had increased their sales by 3.5% in 2011. The industry has also researched on fanciful names for the new cuts to make them marketable. Another issue is that most of the beef Americans consume is the ground meat and not high-end steak. Thus, the beef industry has been forced to do research on identifying the beef cuts that are offered at prices between inexpensive ground beef and high-end steak. This implies that research and continuous improvements have been used to ensure the products have a stable demand in the market.
The Steakhouses can get a wide range of customers more than other styles of restaurants since they offer a variety of products. This includes improving the steakhouse concept to match other culinary trends that match the changing customer needs. Therefore, product diversification is essential for businesses that want to improve their sales, safe costs and create strong brand names.
- Analyze another second Case Study from the Modules.
The second case study is from the article titled “Chinese College Graduates Play it Safe and Lose Out”, which highlights the lack of entrepreneurial spirit among the young Chinese graduates. The graduates only look for jobs in state-owned companies that are considered to offer high profile jobs. It also highlights the existence of poor government systems that make starting a business unattractive to most young people. The establishment and growth of private enterprises play a major role in the growth of an economy since the businesses play a role in the demand and supply economic model. Creation of new businesses is essential in ensuring there is enough market supply for goods and services that are affordable.
The ability of a market to produce and supply goods and services in an economy is determined by the creation of new business enterprises, and the presence of government policies and systems that support the growth of these businesses. Businesses provide a wide range of goods and services in the economy, and the presence of many enterprises enables the demand for goods and services to be meet at favorable prices. The economic model of demand and supply illustrates the changes in the price of goods and services in relation to what is available in the market and the desire to buy the goods and services at a given price. It is clear from the case study that the most of the young people in China do not want to get involved in starting new businesses. Moreover, most of them do not want to work in the private enterprise, which affects the ability of private businesses to acquire the best talents for their growth. This poses a threat in the quantity of products and services that the Chinese economy will be able to produce and supply to the market at affordable prices.
Business enterprises also create employment, enabling people to get a source of income that will help in taking care of their needs by enhancing their purchasing power. According to the case study, as a study conducted in 2011 shows the unemployment rates were at the highest level among those who had attained the highest level of education at 16.4 percent while those with elementary level education had 4.2 percent unemployment rate. A significant number graduates who get jobs, usually get jobs at very poor wages. This reduces the likelihood of having new ventures cropping up in China, since as the unemployment rate increases, more people will not manage to save enough capital to start businesses. Employment opportunities may also help the young people to learn and improve their skills that they can transfer to their new ventures.
Corruption and bureaucracies in the government are also a main source of the problem to the Chinese graduates who wish to start businesses. To start a business, the youth encounters various problems from the corrupt government officials as well as long processes that kill their motivation to become entrepreneurs. Moreover, there is no government support provided to Chinese students who would want to be in business such as capital and research funding. The curriculum that the Ministry of Education has developed does not prepare students to become entrepreneurs. Therefore, the education system can also be blamed for its failure to produce innovative individuals.
The lack of entrepreneurship spirit, the desire to work only with the state-owned companies and failure of government support to graduates to start businesses is likely to have a negative effect on the Chinese economy. This is because creation of new businesses is essential because it guarantees there is a good supply of goods and services needed in the country. It also helps in creating employment providing a source of livelihood for many individuals.
- The Agony of Reform
In Episode II of The Agony of Reform, macroeconomic views are used in demonstrating a capitalist revolution that began in the 1980s. The revolution was meant to introduce changes in the economic structures to help majority of the countries in the world to gain economic growth. The efforts involved the elimination of communism, centralized economies, and general economic dictatorship. The main reason behind this revolution was the negative effects of economic recession that arose from the financial breakdown that had taken effect globally. Countries like South America, India, Poland, and Russia, had to look for the best solutions that would effectively solve the issues of the economic recession. The Agony of Reform, therefore, represents a revolution in the 1980s that advocated for capitalism and free market reforms to solve recession problems globally.
Counties had to apply macroeconomic policies that would help in recovering the fiscal guidelines necessary in fighting recession. The first revolution in Chile, a country in South America, was to move from a socialist economy, but this did not help due to the lack of an economic plan resulting to very high levels of inflation. Instead, a centralized system that advocated for nationalization of businesses and imposing of price controls took effect. The country realized much later that a free market was the only solution. The country needed to reduce the imposed import tariffs, abolish the artificial price controls, increase exports and increase in privatization of industries. However, in the short run, the free market led to more suffering since the rates of unemployment increased to 30%. In the end, Chile became one of the best-performing countries in South America. Bolivia, another country in South America, experienced high inflation rates due to the high government spending which was at least 30 times more that what was collected in taxes. The finance minister had to come up with a plan called shock therapy that involved doing away with the dependency theory. It reduced government spending; removed price controls, and reduced import tariffs and the results of the program were an increase of overall prices of commodities in the short run.
Poland adopted the free market reforms to solve its recession problemsand mixed them with various monetary policies and macroeconomic measures with the objective of improving the economy. The Solidarity labor movement started a revolution to change the communist economic system to free market. To solve the inflationary pressures, Poland worked on controlling the balance of trade deficits by having a drastic reduction in imports and increasing the exports. Macroeconomic reforms that supported the flexibility of the labor market made it possible to increase the imports. A flexible labor market helped in enhancing the competitive strength of products manufactured in Poland. The shock therapy model was also implemented, transforming the economy to a free market. In the short run, prices doubled, shortages occurred, and it had to take time before the law of demand and supply started to take effect. Many small enterprises were also established, the enterprises employed a significant number of the workforce in Poland, and they produce a huge percent of the total output of the nation.
Major economic reforms in Russia also played a role in successfully pushing the country to a fiscal recovery. Under the Soviet Union, people lacked the motivation to work due to lack of incentives. The economy could not produce enough to sustain itself since it was more interested in acquiring military power leading to its collapse. Initially, an economic reform plan referred to as Perestroika was made for the Soviet Union after the realization that the communist system was not effective. It would help in using the gradual political changes to come up with new infrastructure for the market economics. The establishment of a new system of governance put in place a different economic system that had various aspects related to a reform package. These reforms introduced a liberalized system in the areas of pricing, rates of exchange and manner of doing business. Government spending on state-owned projects especially in the funding of military apparatus was significantly reduced as well as reduction of subsidies in industries owned by the government. Privatization of state-owned enterprises had a rapid increase ensuring the industries started to operate effectively in a competitive market.
In India, socialism was the solution from the economic problems of a centralized government system. In a centralized plan, the government in India controlled the private sector enterprises, and this supported corruption and bureaucracy in doing business. It was impossible for the government to run the economy successfully since conducting any business was not possible. Dependency theory had also been part of the centralized government, whereby imports were restricted resulting in poor products at high prices. A free market enabled the businesses to increase self-sufficiency; incentives were availed to local manufacturing industries giving them a competitive edge in the global market.
The efficiency of the macroeconomic policies applied in these countries could be ascertained from the positive economic improvements in the individual countries and the global markets. The nations attained these improvements using efficient labor markets, deregulation and privatization. Other measures involved liberalization of trade, tax and external debt reforms that reduced government expenditure. Opening up the economy was also an effective measure of fighting various issues such as corruption, which greatly affected economic development.
- Describe specifically how your economic thinking has been affected by this course and how you can best make use of the central principles and theories which were studied.
My economic thinking has been affected by this course in that I can now understand various aspects of the economy that determine the decisions made by companies and individuals in the allocation of limited resources. Firstly, I learned that there are different market structures, and each has its characteristics. The microeconomic theory of market structures helps in determining which structure is more desirable to the society. Individuals and firms can use the theory to make decisions in their business depending on the type of market structure that their businesses belong. For instance, due to the oligopolistic nature of the airline industry in U.S, a merger between two airlines was blocked by the DOJ to avoid hurting the competition.
Secondly, I learned that the theories of demand supply and the price mechanisms also explain the reasons behind various business decisions by firms and individuals. These theories are applicable in various business decisions, for instance, the Nike Company efforts to reduce costs is aimed at increasing profits. This is achieved by offering their products to the consumers at lower prices, which increases the demand for their products. Product diversification by steakhouses increases the volume of sales because the restaurants are able to attract more customers and reduce costs by utilizing the entire animal for the product. The theory is also used to demonstrate the importance of cultivating an entrepreneurial spirit among the youth in China since more businesses increase the total market supply of goods and services making them affordable. It also creates more stable jobs for the population increasing the level of disposable incomes of the consumers. Therefore, the theories of microeconomics are capable of demonstrating a cause and effect analysis of various economic decisions that are made in a market. These theories also support a capitalist economic structure because it is only in such kind of a structure that they can take effect.