Different Aspects of the Business That Should Be Looked at from an Economics Perspective in Order to Run the Company Efficiently
As a managing director in one of the manufacturing company in UK I should consider both the macroeconomics and macroeconomics aspects. Microeconomics includes business firms, industrial activities, as well as individual households and it focuses on demand and supply as well as other forces which may determine price levels in the economy (John 2011). Looking at microeconomics, I should look at effects of the national economic policies and try to analyse market failure. For instance, microeconomics looks at how specific companies could maximise their production capacity so they could lower their prices and better in the industry.
On the other hand, macroeconomics is described as a branch of economics that study economy as a whole. This means that macroeconomics is the study of behaviour of entire economies or industries but not just on the specific companies (Reeves 2012). It takes into consideration at economy-wide phenomena like Gross National Product and how the phenomena is affected by changes in issues like unemployment, business cycles, inflation, growth and unemployment. Meaning that macroeconomics looks at factors which influence the aggregate demand and supply of the products. This aspect focuses on the aggregate relationships like how the household consumption is related to the income as well as how the government policies affect growth.
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Both microeconomics and macroeconomics are much interrelated. Meaning that what happens in an economy as whole is based on an individual decisions while these individual decisions are made in the economy and can only be understood within that context (John 2011). For instance, whether an organisation decided to expand its production capacity depends on what owners of the organisation expect will happen to demand for his or her products. These expectations are determined by the macroeconomics conditions of the region where the organisation operates in. Therefore, as the managing director in a manufacturing company within UK I must take into consideration of both the two aspect of economics i.e. micro and macroeconomics in order to run the company effectively. This is due to the fact that both provide a fundamental tool for any individual operating a company and they should be treated inseparable in order to understand how a company operates and earns revenues (Reeves 2012).
How to Improve Running of the Company Using Microeconomic and Macroeconomic Aspect
The main microeconomic aspect that as a managing director I should consider is the individual behaviours and decisions (micro) towards the finished products while the major macroeconomic aspects to be considered is the level of GDP. Changes in consumer behaviour in consumption of a particular product may result to changes in price of both the raw material and finished products which in turn may have either a negative or positive impacts on the company operations. Thus, as the managing director of a manufacturing company I should consider this aspect and also look at the macroeconomic aspect which mainly affect price in order to improve running of the company. For instance, high GDP results to a high per capita income of individuals which in return causes individuals to purchase more goods and services. This in turn causes end’s product’s price which is charged to the customers to increase. Meaning that demand of the product will decrease due to price increase of the end products (Jack, Amihai &David 2005).
Decrease in demand may result to a lower equilibrium price and in turn result to surplus. For instance, as the demand of the product increases and the supply of the same product remains the same, a shortage of the product may occurs leading to higher equilibrium price (Mirowski & Hands 2006). On the other hand if demand of a product decreases and the supply remain constant, surplus may occur hence leading to lower equilibrium price. Therefore, as the managing director of the company, I should ensure both of these two micro and macroeconomic aspects are keenly considered in making any decision of whether to increase production or to reduce production.
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Using the consumer theory concept of demand and supply, the fundamental theorem of the products demand states that as the price increases, the rate of consumption decreases. Meaning that if a person does not have sufficient money for paying the product price, then he or she cannot purchase any of those products. As the prices increases, consumers will look for a substitute away from the higher priced products choosing the less costly alternatives. When GDP of a country is high, the per capita income of the people will also be high and in return their living standard will be improved. Consequently, as wealth of an individual rises i.e. rise in per capita income of an individual, quantity demanded of the products increases, hence shifting the demand curve to higher point at all consumption rates (Mckenzie 2002). As wealth of individuals rises, the consumers will tend to substitute away from the less costly inferior products choosing the higher priced alternatives. This in turn may result to increase in the level of consumption where individuals tend to purchase more products and in return increases quantity demanded. An increase in quantity demanded causes the demand curve to shift to the right where at each price point greater quantity of products is demanded. This results to a rise in the equilibrium prices from the initial price P1 to price P2. In turn the equilibrium quantity demanded rises from Q1 to Q2 (Mckenzie 2002).
Figure 2: Increase in Quantity Demanded
On the other hand if the level of GDP is low, per capita income will also be low hence low standards of living. Subsequently, if the wealth of individuals decreases, the quantity demanded will decrease and in return shift the demand curve downward to the left (Mirowski & Hands 2006). If demand curve shift leftward, equilibrium price will decrease and in return the equilibrium quantity decreases (Mckenzie 2002). This may result to the company experiencing surplus which is not recommendable for any company which want to be profitable. Thus, as the managing director of the company, one should take into consideration of both GDP (macro) of the country in which the company operates and individual behaviours and decisions which causes price of the products to rise and fall (micro) which in turn affects the level of quantity demanded or supplied of the products.
Figure 2: Decrease in Quantity Demanded
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The Country Where the New Branch would be Located Based on a Macroeconomic Analysis
To expand a company internationally I should evaluate all the macroeconomics conditions in the country which might influencethe whole operation of the company such as the changes in Gross National Product, inflation or deflation and employment levels (Reeves 2012). Therefore, as the managing director of the manufacturing company, I would locate the new branch of the company in India due to it favourable macroeconomic conditions. India is among the tenth largest worldwide by a nominal GDP and also third largest by the purchasing power parity. India GDP has grown tremendously over the last few years with 9.3% growth in 2010-2011 financial year, hence the growth rate has almost halved in only three years since 2008 creating a favourable environment for the manufacturing company environment in India (Marjit 2010). Additionally, India has a liberal and a free-market principles and it has also liberalised its economy to the international trade. This will enable the company to operate freely without any restriction of operation in the country.
Per capita income in India has also been rising over the years an estimated rise from Rs. 61564 in 2011-2012 to Rs.68747 in 2012-2013. This indicates how India living standard has grown and is also estimated to rise by 11.7% every year (Reserve Bank of India n.d.). This situation will also be favourable for the company operations since people will have the money to purchase the company products. Additionally, India is among the leading producers of oil and electricity products in the world. This condition is also favourable for the company operation since it will leads to reduced costs of production in the country since electricity cost is low and hence will charge moderately low price for the products attracting more consumers to buy the company products.
Though, inflationary pressures in India had remained a stubborn with 7.55% in the mid 2012, it has shown a decreasing trend from 7.55% to 6.6% and is expected to decrease further (Reserve Bank of India n.d.). India has been facing a decreasing trend in inflation over the past year which is believed to have been contributed by both demand side and supply side factors in India. A major driver in the supply side has been from food inflation that has both cyclical and structural components. Structural component mainly arises from the rising incomes particular in the rural areas that is leading to shift in the dietary habits from the cereals to the protein foods. The inflation of the protein food prices has been decreasing with a double digit over the past 2 years. Cyclical component of the food inflation on the other hand arises from monsoon related spike in the prices of food like vegetables. Secondly, the global commodity price in India particularly price of the crude oil is a major factor that contributes to decrease in inflation. India imports around 80% of its oil demand. Thus, the global oil price is a crucial variable in evaluating inflation outlook (Marjit 2010).
India has elite schools that have varying degrees of excellence. This boost the level of knowledge and skills of the employees in India hence expanding the company operation in India will benefit the company due to availability of highly skilled employees. A decrease in inflation in a major contributor of as company success since decrease in inflation leads to a decrease in the raw materials price which in return leads to a decrease in the finished products price. If the products price decreases, the demand for the company products increases (Jack, Amihai &David 2005).
Figure 1: Effect of Price Increase on Demand
In the face of perceivable macroeconomic climate, well-organised economic policies have been employed in order to boost the Indian economy to its current position. According to Galhotra (2013), fiscal policy and monetary policies should be properly aligned with the structural policies which support green growth as well as direct job creation. Further, the monetary policies should be better coordinated internationally as well as regulatory reforms of the financial sectors be hastened so as to stem the capital flow volatility and exchange rate which pose a greater risks to economic prospects of the countries.
To curb inflation in India, monetary policies played a major role. Reserve Bank in India reserved crisis period’s accommodative monetary stand in a quick order to control inflation. The bank has also raised policy interest rate from 4.75% to 8.5% i.e. 13 times, cumulatively by around 375 basis points (Marjit 2010). The reserve bank of India has also raised reserve requirement on the banks operating in India i.e. the cash reserve ratio by around 100 basis points from 5% to 6% (Reserve Bank of India n.d.). the monetary policy work with lags and therefore as a consequence of tight monetary policy in India, WPI inflation that peaked at 10.9% in 2010 has now been reduced to 6.6% in 2013 and is also expected to reduce more in the coming years (Galhotra, 2013). This aims at controlling flow of money in the country in order to keep inflationary pressures minimum. The reserve bank in India also restricted banks to give easy loans even against the collateral securities through putting higher charges for getting a loan (Reserve Bank of India n.d.).
On the other side to enhance investment in the country in order to reduce the high rate of unemployment, the government has increased price of commodities such as electricity, water, food items and oil. The service taxes for existing sectors have also hiked and tax net has broadened by additional of new sectors. Using money from these, the government have given aid to corporate through exemption of taxes and spent in the crowd pulling programmes such as Mahatma Gandhi National Rural Employment Guarantee Scheme, Food Security and Right to Education (Galhotra, 2013).
Galhotra, C. P 2013, Challenges that India faces in key areas of fiscal policy; Viewed at 26th February 2014 from: http://www.caclubindia.com/articles/challenges-that-india-face-in-key-areas-of-fiscal-policy-16526.asp#.Uw2xVuOSzId
John, B 2011,Principles of Microeconomics – free fully comprehensive Principles of Microeconomics and Macroeconomics. Columbia, Maryland.
Marjit, S 2010,India macroeconomics annual 2009. Los Angeles: SAGE.
Mckenzie, L. W 2002, General equilibrium theory. Cambridge, Mass, MIT Press.; Viewed at 26th February 2014 from: http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=75000.
Mirowski, P., & Hands, D. W 2006, Agreement on demand: Consumer theory in the Twentieth Century. Durham: Duke University Press.
Reeves, S 2012, Microeconomics and macroeconomics. Delhi: Orange Apple.
Reserve Bank of India. (n.d.).Macroeconomic and monetary developments in. Mumbai: Reserve Bank of India.