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Definitions and Concepts in Economics Studies

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Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Published: Thu, 18 Jan 2018

Task 1

a. Definition of economic.

Economics is a social science researches the production and consumption of goods and the transfer of wealth in human society. Economics explains human behavior as a relationship between ends and scarce means which have alternative uses. Therefore, economics is the study of trade-offs when selecting between alternative sets of decisions involved. (Study Economics 101, 2014)

Purpose of its activities.

The main purpose of economic activity is the production of goods and services to satisfy consumer’s needs and wants. To meet the needs of the people to use both as a way of life but also to meet their ever-growing demand for a better lifestyle or standard of living. (Norsafiah, 2012)

Economic problems.

The basic economic problem is about scarcity and choice since there are only a limited amount of resources available to produce the unlimited amount of goods and services which human, people wants and needs. Because of scarcity, various economic decisions must be made to allocate resources efficiently. (Norsafiah, 2012)

Definition:

  1. Needs: Needs are the things we must possess in order to survive food, water, and clothing. (Norsafiah, 2012)
  2. Wants: Things that human would like to have in order to improve the status in life. Having limited resources leads to why we encounter this problem. (Norsafiah, 2012)
  3. Scarcity: Resulting from the lack of availability in resources, from people’s insatiable wants, or from a combination of the two. (Norsafiah, 2012)
  4. Choice: Resources are scarce and most of our wants are extensive, a choice has to be made about how to use scarce resources in the best way. Based on the choice, the highest-value option will be forgone and this is called ‘opportunity cost’. (Norsafiah, 2012)

Example of economic problem nowadays:

i. Land

Land includes all natural resources such as water, soil, natural oil and metal ores. (Norsafiah, 2012) Natural resources are either renewable or non-renewable depending on whether or not they replenish naturally. Natural resources are materials and components can be found within the environment. Every man-made product is composed of natural resources. Due to increasing scarcity but also because the exportation of natural resources is the basis for many economies. (Norsafiah, 2012)

ii. Labor

Labor includes all physical and mental effort such as construction labour import from Bangladesh, Myanmar and Vietnam to occupy the emptied position to do the labour work. Since, the local tend to choose blue collar job that has more stable income and less risk compare to construction labour work. (Norsafiah, 2012)

iii. Capital

Capital includes machinery and other items that go into further production such as the latest technologies that needed to use in construction process that only available at other region. In order to use the technologies need to import it and it cost more including the transportation cost , skill labour cost that only few of them knows to operate the technologies and other unexpected cost. (Norsafiah, 2012)

iv. Enterprise

Enterprise is the art of combining the other three factors in the production process. (Norsafiah, 2012)

b. Discuss and outline a comparison between Supply and Demand.

 

Supply

Demand

Definition

The willingness and ability of sellers to produce and offer to sell different quantities of goods at different prices during a specific time period. (Ksamouce, 2014)

The willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period. (Ksamouce, 2014)

Laws

As the price of good rises, the quantity supplied of the good rises, and as the price of a good falls, the quantity supplied of the good falls.

(Ksamouce, 2014)

As the price of a good rises, the quantity demanded of the good falls and as the price of a good falls, the quantity demanded of the good rises.

(Ksamouce, 2014)

Equation

Pp =Ss

Ss =Dd

Theoretical operations

  1. As the price increases, other things constants, a producer becomes more willing to supply the good. Price act as signals to existing and potential suppliers about the rewards for producing various goods at higher price attract resources from lower-valued uses.
  2. Higher price also increase the producer’s ability to supply the goods. Since, producers face higher marginal cost of production, they must receive a higher price for that output in order to be able to increase the quantity supplied.
  1. Substitution Effect
  • When a Price of a good increase, its relative price makes consumers less willing to purchase this good.
  1. Income Effect
  • When the prices of a good increases – real income declines – reduces the ability to buy good – decline in quantity demanded

Example

Sugar factory willing and able to supplied sugar and sell 1000 packet during Hari Raya season at RM 2.50 per packet.

P(RM)

Supply

Qty no(Demand)

Mirae demand for comic by saying that she is willing and able to buy 30 comic a month at RM 8 per comic.

P(RM)

Supply

Qty no(Demand)

Task 2

“It is best to think the cost-benefit analysis approach as a way of organizing thought rather than as a substitute for it.’ – Michael Drummond-

Cost Analysis Benefit

Cost Analysis Benefit estimates and totals up the equivalent money value of the benefits and costs to the community of projects. (Watkins, Valley& Alley, ET, 2014) It has been established as a tool for use by the government in making their social and economic decisions. While it also measures costs and benefits to the community of adopting a particular course of action such as constructing a highway. Cost Analysis Benefit a decision making device for evaluating activities that not priced by the market by attempts to stimulate a market result in areas where the market does not operate to establish prices or to quantify and include in estimates of cost and benefits to the client but also the community. (Norsafiah, 2012)

Example:

Improvements in transportation often involve saving time. The question is how to measure the value of time saved. The value should not be merely what transportation planners think time should be worth or even what peoplesay their time is worth. The value of time should be that which the public reveals their time is worth through choices involving tradeoffs between time and money. (Watkins, Valley& Alley, ET, 2014)

Task 3

Definition of “Price Mechanism” by Adam Smith.

Adam Smith defines the ‘invisible hand of the price mechanism “in which the hidden hand market operates in a competitive market through the pursuit of resources allocated selfish best interest of the community. (Riley, 2012)

Theory

Price mechanism is a term used to describe the means by which millions of decisions taken by consumers and businesses interact to determine the allocation of scarce resources between competing uses. (Riley, 2012)

Theprice mechanism plays three important functionsin a market:

  1. Signaling function

They adapt to indicate where resources are needed, and where they do not. If prices rise due to high demand from users, this is a signal to the supplier to increase production to meet higher demand. Prices go up and down to reflect scarcities and surpluses. (Riley, 2012)

  1. Transmission of preferences

Through their choices consumers send information to producers about the changing nature of needs and wants. (Riley, 2012)

  1. Rationing function

Prices serve to ration scarce resources when market demand exceeds supply. (Riley, 2012)

Example

RON95 petrol and diesel was increased by 20 sen to MYR2.10 a liter (+ 10.5%) and MYR2.00 per liter (+ 11.1%), effective September 3, 2013 fuel prices were last raised in July / Dec 2010 (5.7 %).The expected impact of this 3 Sep fuel price hike to be small on the earnings of research coverage. Sectors directly impacted would be the building materials which are the steel and cement that consume relatively more gas and electricity than the other sectors. (Maybank IB Research, 2013)

Higher diesel prices will lead to higher costs in managing construction machinery or heavy equipment and transportation costs are higher for construction materials. Building material prices could still rise due to the increase in transportation costs. Most contractors have however been associated raw material cost increases in their construction projects. (Maybank IB Research, 2013)

Task 4

a. Definition of ‘competition’ in business.

Competition in which every seller tries to get what othersellersare looking at the same time:sales,profit, andmarket shareby offering a combination of the best practices of price, quality and service. If market information flows freely, competition plays a regulatory function in the supply and demand balance. (Business Dictionary, 2014)

b. Factor affecting the economics of an organization

  1. Demand and Supply

Demand and supply are the two main factors that affect the working of any business model. Demand is the will and ability of consumers to buy certain commodities, while supply is the ability of the business to provide for the demand.

Example, mobile phones embedded with latest technologies introduced in the market, it will have a higher price because of the demand in the market. Prices will continue to rise if the supply does not meet demand. (Buzzle.com, 2014)

  1. Economic Growth and Development

Economic growth set financial sum society as a whole is showing total income and development of the money invested in long-term channel up gradation. Among all the economic factors, the development is one of the most important, as a business that has to meet the demands of society in terms of a dynamic economy.

For example, luxury brands performed well during the economic upturn, more than the companies that produce significant deals. (Buzzle.com, 2014)

  1. Income and Employment

Important aspect of the economy that affect business operations, is the density of employment and income levels. The per capita income and density of employment determines the rate of demand, density of demand, and also the purchasing power of the people.

For example, during the development of the economy, there are jobs that generate income that allows people to have a stronger purchasing power. On the other hand, as the density of employment and income levels dropped in the recession, people’s purchasing power is reduced. (Buzzle.com, 2014)

c. Source of finance.

Source of finance

Example

Internal

(raised from within the organisation)

  1. Owner’s investment
  2. Retained profits
  3. Sale of stock
  4. Sale of fixed assets
  5. Debt collection

External

(raised from an outside source)

  1. Bank Loan
  2. Bank Overdraft
  3. Additional Partners
  4. Share Issue
  5. Leasing
  6. Hire Purchase
  7. Mortgage
  8. Trade Credit
  9. Government Grants

Task 5

SP Setia Sdn Bhd has decided to develop massive residential projects in Greater Klang Valley area after considering the factors of rate of return and the cost benefits analysis conducted.

a. Definition of financing source

Money available for a business to spend in the form of cash, liquid securities and credit. Before going into business, entrepreneurs need to obtain sufficient financial resources to operate efficiently and well enough to encourage success. (Business Dicionary, 2014)

Types of sources based on the project

Source of finance

Use Source of finance

Retained profits

Retained earnings in the company and not paid to shareholders as dividends. Retained earnings are widely regarded as the source of the most important long-term finance for business. (Aashfield, 2009)

Bank Loan

This is money borrowed at an agreed rate of interest over a set period of time. This is a medium or long-term source of finance. (Aashfield, 2009)

Bank Overdraft

This is where the business is allowed to be overdrawn on its account. This means they can still write cheques, even if they do not have enough money in the account. This is a short-term source of finance. (Aashfield, 2009)

Additional Partners

This is sources of finance suitable for a partnership business. The new partner’s can contribute extra capital. (Aashfield, 2009)

Mortgage

This is a loan secured by property. Businesses will own the property once the final payment is made. This is a long-term source of finance. (Aashfield, 2009)

Government Grants

Government organisations such as Invest NI offer grants to businesses, both established and new. Usually certain conditions apply, such as where the business has to locate. (Aashfield, 2009)

b. Propose a financing source suitable for the project.

Based on the SP Setia Sdn Bhd massive residential projects in Greater Klang Valley area, I propose to use Retained profits, Bank Loan, and Additional Partners as multiple financing sources. The reason I choose to use multiple financing source because this project is massive project and it needed more resource, if just rely on one source is not enough to cover the whole cost of project. (Aashfield, 2009)

Firstly, by uses retained profit method SP Setia Sdn Bhd using their internal source, these earnings are readily available to the management and directors don’t have to ask outsiders for finance.Retained earnings are cheaper than external equity because the floatation costs, brokerage costs, underwriting commission are other issue expenses are eliminated. Relying on retained earnings eliminates the fear of ownership dilution and loss of control by the existing shareholders. Retained earnings carry positive connotation as compared to equity issue as far as stock market is concerned. (Shenoy, 2012)

In addition, applying for a bank loan because they offer a set repayment spread over a period of time which is good for the budget. Therefore, to maintain the project operating cash flow, and making it easier for SP Setia Sdn Bhd to cover unexpected expenses. Thus, SP Setia Sdn Bhd are able to make payments on their loans using the new income earned from businesses grow. (Bolander, 2011)

Lastly, use partnering the ability to raise funds may be increased, both because two or more partners may be able to contribute more funds and because borrowing capacity may be greater. Prospective employees may be attracted to the business if given the incentive to become a partner. Partnerships can benefit from a combination of complementary skills of two or more people. Have a broader knowledge, skills and contacts. Partnerships can be cost-effective as each partner specializes in certain aspects of their business. There are opportunities for income splitting, the advantages of particular interest because of the tax savings generated. (Koppel, 2009)

In conclusion, I propose on using multiple financing source such as Retained profits, Bank Loan, and Additional Partners to finance the massive residential projects in Greater Klang Valley area since rely on one source is not enough to cover the whole cost of project.

Reference

[1] What is Economics?, (2014), [Online], Available: from http://www.whatiseconomics.org/ [17 September 2014]

[2] Thayer Watkins, Silicon Valley & Tornado Alley, (2014), An Introduction to Cost Benefits Analysis, [Online], Available: from www.sjsu.edu/faculty/watkins/cba.htm [17 September 2014]

[3] Norsafiah Bt. Norazman, (29 November 2012), Cost Benefits Analysis [17 September 2014]

[4] Geoff Riley, (23 September 2012), Functions of the Price Mechanism, [Online], Available: from http://tutor2u.net/economics/revision-notes/as-markets-price-mechanism.html [17 September 2014]

[5] Ksamouce, (2014), Macroeconomics Chapter Three, [Online], Available: from http://quizlet.com/12554647/macroeconomics-chapter-three-flash-cards/ [17 September 2014]

[6] Business Dictionary, (2014), Competition, [Online], Available: from http://www.businessdictionary.com/definition/competition.html [18 September 2014]

[7] Buzzle.com, (2014), Factor affecting the economics of an organization, [Online], Available: from http://www.buzzle.com/articles/economic-factors-affecting-business.html [18 September 2014]

[8] Norsafiah Bt. Norazman, (29 November 2012), Scarcity and Choice in Resource Allocation [18 September 2014]

[9] Maybank IB Research, (19 September 2013), Subsidy Rationalisation Assessing the Impact On PLCs, [Online], Available: from http://research.maybank-ib.com/pdf/documentrg/Subsidy_rollback_19_Sep_2013_2893.pdf [21 September 2014]

[10]Business Dictionary.com, (2014), Financial resources, [Online], Available: from http://www.businessdictionary.com/definition/financial-resources.html [21 September 2014]

[11] Dinayak Shenoy,(2012), What is Retained Earning? What are its advantages and disadvantages, [Online], Available: from http://www.publishyourarticles.net/knowledge-hub/economics/what-is-retained-earning-what-are-its-advantages-and-disadvantages.html [21 September 2014]

[12] Tom Koppel, (2009), Partnership Advantages and Disadvantages, [Online], Available: from http://www.how-to-start-a-business-guide.com/partnership-advantages.html [21 September 2014]

[13] Jarie Bolander, (14 February 2011), The Advantages of a Business Loan, [Online], Available: from http://www.thedailymba.com/2011/02/14/the-advantages-of-a-business-loan/ [21 September 2014]

[14] Aashfield, (12 January 2009), Sources of Finance , [Online], Available: from http://www.rewardinglearning.org.uk/common/includes/microsite_doc_link.aspx?docid=9699-1 [21 September 2014]


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