Business and Financial Environment Assignment

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Business and Financial Environment

Part 1(a)

Demand is the capacity that customer are capable and willing to buy at each reasonable price. Severely speaking this definition depicts effective demand, as resist to latent demand when a customer is incapable to fulfill their demand, no matter it is because of be short of knowledge on the availability of a goods or because of lack of money (Grant 2000). Or Effective demand is the "ability" to pay for goods and services.

Since demand is based on human decision many factor can influence demand. One may categorize these factors into 2 sets. One set influences the position of the demand curve as a whole while the other set of factors influences the gradient, also known as the Price Elasticity of Demand, or PED for short.

"Demand

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Diagram: Demand curve D1 shifts to new position of D2.

"D

Factors influencing the position of the demand curve influence the whole position of the demand curve on the price towards quantity graph. Thus variation one or more of the elements will result in the shift of the demand curve to the left or right. There are some factors that influencing the position of the demand curve (Begg 2003). One of the factors is taste. Taste may vary due to custom, fashion or favor. For example when there has increase in popularity of video games has encouraged the raise in demand for games consoles. The next factor is related goods. Related goods can be categorised into substitute goods and complementary goods. Variation in demand, and thus price, of substitute goods would frequently have the inverse effect on the demand of a good. For example the low price of Chinese vacuum cup has cut down the demand for vacuum cup made in the West.

Complementary goods demand change lead to the exactly inverse effect compared to demand variation of substitute goods. If the price of complementary good falls then the demand for a good, which the complementary good complements, will rise, is then shift to the left. For example a significant falls in oil prices may lead to rise in petrol driven vehicles. Income is the following factor. The more money the customer has to spend the more likely the consumer is to spend that money. Many factors influence disposable income. For example, interest rates or job opportunities. It is considerable to know that certain low cost goods, like chewing gum for example, are not involved by variation in income compared with other goods, like houses, are.

"Demand

Part 1(b)

Price elasticity of demand measures the responsiveness of demand to changes in price for a particular good. Demand is said to be elastic when the percentage change in price bring about a more proportionate change in the quantity demanded. And so, the demand for the company’s package holidays is elastic as the value is greater than one which is 1.8. The degree to which the quantity demanded for a good change in response to a change in price can be influenced by a number of factors. Factors include the number of close substitutes and whether the good or service is a necessity or luxury. In this case, it is luxury. Income elasticity of demand indicates the measure of responsiveness of a change in the quantity demanded to changes in the incomes of the consumers. Income elasticity of demand is an economics statement that mention to the responsiveness of the quantity demanded for some of the good in response to alter in the public’s incomes.

The income elasticity of demand for the company’s package holidays has a value of 2.5 which is positive income elasticity. Income elasticity for the service is said to be positive when a rise in income brings to an increase in the quantity demanded for the goods. During the time of rising incomes, the quantity demanded for luxury goods incline to raise at a higher proportion than the quantity demanded for necessity. The quantity demanded for luxury products is very responsive to the changes in incomes. The managers of Flying Delights Limited are suggested to lower the price of the package holidays in order to attract more customers.

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Part 2

The equilibrium price and quantity of a good or service can be determined by superimposing the supply curve on the demand curve. The equilibrium price can be illustrated as the price at which the quantity demanded is equal to the quantity supplied. From the strength of demand and supply process on the price mechanism, equilibrium price can be accomplished. It is the position at which quantity demanded and quantity supplied is equal. Market equilibrium, for example, mentions to a term where a market price is create by competition such that the amount of goods or services look for by buyer is equal to the total of goods or services produced by sellers. This price is usually known as theequilibrium price.

In the graph below the point at which the demand curve connects the supply curve is theequilibrium price.

"market

Equilibrium is ‘self righting’. It means that if we try to move away from the equilibrium situation it will revert back to its original position, if there is no external disturbance. Figure below explains the concept.

"excess

In this diagram the equilibrium price is P* and the quantity supplied Qe. However, the prices have been increased to P2. If the price rises it would bring about more suppliers to enter the market and supply rising to Qs. Meanwhile, a rise in price to P1 will bring about a decrease in demand according to the law of demand. This will establish anexcess supply circumstances. At this moment, the suppliers would realised it troublesome to sell their goods and they will have to lower their price to attract more customer. This will proceed till the price achieves its initial amount which is P*. Therefore the circumstance is ‘self righting’ if the prices are increased without affect by any external factor.

"excess

It can be see that the prices have been decreased from P* to P1. This leads to an decrease in supply from Q* to Qs. As the prices decrease from P* to P1, people can afford to buy more of that good and demand rise from Q* to Qd. Again anexcess demandstatus is established. In order to obtain the most out of this status the suppliers will begin rising their price. Meanwhile, demand will begin decreasing as the prices rise. This will be goes on till the prices settle at equilibrium price i.e. Pe. Therefore, it can be said that equilibrium is‘self-righting’

Part 3(a)

Interest rate standards are an element of the supply and demand of loan: A raise in the demand for credit will increase interest rates, while a fall in the demand for credit will reduce them. In turn, a raise in the supply of credit will decrease the interest rates while a fall in the supply of credit will increase them. The supply of credit is raised by a raise in the measure of money made accessible to borrower. For an example, when somebody opens a bank account, it is practically lending money to the bank. Relying on the type of account you open, the bank may do some money invested activities. A certificate of depositwould give a higher interest rate than a checking account, in which may have the capability to access the funds at any possible while. And so, the bank may lend out the money to other customers. There will be more credit available in the economy as the bank can lend more. In other words, if the supply of credit rises, the interest falls. Credit available in the economy is reduced as lenders determine to stay the re-payment of their credits. For example, when determine to delaypaying the current month's credit card billuntil next month or later, it is not only raising the measure of interest that have to pay, while also reducing the measure of credit available in the market. And so, there will be increasing the interest rates in the economy. Inflation would also influence interest rate standards. The interest rates will be raise more as the higher in the inflation rate. It takes place as lenders would demand higher interest rates as compensation for the falls in purchasing strength of the money they would be pay back in the future. The government has a voice on how interest rates are influenced. Thefederal funds rate, or the rate that organisations charge each other for mightly short-term loans, influence the interest rate that bank fix on the money they lend. The rate then in the end shed down into other short-term lending rate. When the government acquires even more securities, banks are infused with more money than they may make use for lending, and so the interest rate falls. When the government sells security, money from the banks is flow out for the business deal, render less funds at the banks' disposal for lending, compelling an increase in interest rates.

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Part 3(b)

(i) The influence of an increase in the interest rates is to reduce the present discounted value (PDV) of people's intended future consumption. It means that, higher interest rates indicate the lesser money are needed to fund a particular measure of future consumption. Intended future consumption is then less expensive, causing people better off in a lifetime sense, and lead people to spend more these days. But, since the interest rate decided the measure of money practically in circulation, a higher interest rate may also reduce the consumption, where might be influence all elements of GDP.

(ii)Investment is inversely corresponded to interest rate, which are the price of borrowing and the repay to lending. There have few impact of a change to the rate of interest. That is, if interest rates go up, the opportunity cost of investment go up too. In other words, an increase in interest rates also increases the return on funds deposited in an interest-bearing account, which lower the attractiveness of investment corresponding to lending. Therefore, investment resolutions may be put off until interest rates back to lower stage. Thus, if interest rates rise, companies can expect that consumers would lower their spending, and the interest of investing will be reduced. Investing to extend need that consumers at least keep their current spending. Therefore, an anticipated falls is likely to obstruct corporation from investing and compel them to delay their investment plans.

(iii)Interest rates, inflation and exchange rates are all particularly correlative. By controlling interest rates,central banksimpose influence on exchange rates, and changing interest rates influence currency values. Higher interest rates provide lender in an economy a higher return comparative to other state. Consequently, higher interest rates attract foreign capital and lead to the exchange rate to increase. The impact of higher interest rates is mitigated, however, if additional elements help to push the currency down. The inverse relationship exists for lower interest rates tend to reduce exchange rates.

Part 4(a)

The main reason for regulation of banking is depositor protection. Pressure for this regulation take place as the public started doing financial transactions via banks, and as business and individual started holding a major part of their funds in banks. Banking proposes an amount of distinct issues for consumers and creditors (Ogren 2011). Many bank clients take a bank mostly while writing checks and conducting other financial transactions. In order to do this, they have to keep a deposit account. As a result, bank customers take the role of bank creditors and do linked with the wealth of their bank (Spong 2000). This differs with most of the other businesses, where customers just pay for goods or services and not ever become creditors of the corporation.

Part 4(b)

It can be disputed that regulation refrains innovation and growth.This hurt growth and cut down efforts by banks to engage in better profit making scheme.Others argue that regulation is essential to avoid abusive practices and assure equitable access for everyone.This makes increased occasion for lending to poor and underserved society. Both sides have effective arguments to this question.The test of whether bank regulation is essential or needed is in how well the economy goes through. It is possible to both over-regulate and under-regulate banks.Congress may set in place too various banking regulations that raise administrative expense for banks and strengthen profitability, causing banks to break down.The regulator may be very loose in their oversight tasks and miss to carry out primary provision of the banking law.

Part 4(c)

(i)Risk asset normally mentions to assets which have a major degree of price volatility, such as equity, commodity, high-yield bonds, real estate and currency. Especially in the banking circumstance, risk asset consult to an asset owned by a financial organisation whose value can undulate by the variation in interest rates, re-payment risk, credit quality and more. The term can also mention to equity capital in a financially extended or nearly-bankrupt corporations, as the shareholders’ claim will scale under those of the company’s bondholders and other lender.

(ii) The risk is related with the in advance unscheduled return of primary on a fixed-income protection. Certain fixed-income securities, such as mortgage-backed securities, have embeds call options that may be performed by the issuer. The yield-to-maturity of such securities cannot be known for some at the time of buying from the cash flows are not known about. When principal is return in advance, the coming interest payment would not be paid on that section of the principal. If the bond was bought at a premium the bond's yield would be less than what was predicted at the time of buying.For a contract with an embed call option, the more a contract’s interest rate corresponding to current interest rate, the more the prepayment risk.For instance, in a mortgage-backed security, the more the interest rate respective to present interest rate, the more the possibility that the relating mortgage would be refinanced. Besides to being so correlative with decreasing interest rate, mortgage prepayment are extremely correlate with rising home prices, as rising home price lead incentives for borrower to swap up in home or else make use of cash-out refinances, all leading to mortgage prepayment.

(iii) The risk begins from the short of marketability of an investment that cannot be bought or sold immediately enough to avoid or minimize a loss. Liquidity risk is normally reported in extraordinary wide bid-ask spreads or large price movements. The regulation of thumb is which that the smaller the measure of the securities, the greater the liquidity risk.Even though liquidity risk is mostly correlative with micro-cap and small-cap stock or security, it may sometimes influence even the biggest stocks in time of climacteric. The consequence of the 9/11 assaults and the 2007-2008 global credit crisis are two comparatively recent cases of times while liquidity risk rose to unusual high standards. Raising liquidity risk regularly turn into a self-fulfilling prophecy, since panicky investors attempt to offer for sale their holdings at any value, result in widening bid-ask disseminate and large value denies, which further devote to market liquidity.

References

  • David Begg, (2003), Economics 7th edition
  • Grant.S, Vidler.C, (2000), Economics in Context
  • Ogren.A, (2011), The Sub-âprime Crisis and how it Changed the Past
  • Spong.K, (2000), BANKING REGULATION Its Purposes, Implementation, and Effects Fifth Edition