Analysis Of Inflation, Tariff Rates, And Income Growth On Schmeckt Gut’s Potential Demand

Demand and Supply

In order for Schmeck Gut to have an effective launch of its Besser energy bar in Atollia, it needs to look at a couple of things such as inflation, income growth and Tariffs on imports (Akimaya& Dahl, 2018). Therefore, the company has to consider if the various projections affect each other. In this case, it is noted that income growth, inflation, and Tariff on imports from industries match each other. A tariff can basically be a tax in form of a trade policy added to imported goods’ cost.

 The Tariffs are imposed so as to protect the small or infant industries within a given country. On the other hand, inflation is defined as continuous rise in prices of services and goods in a given economy. Therefore, inflation means that the currency of a given economy is less compared to each unit required to purchase less of the services and goods (Afonso&Kazemi, 2017). An increase in Income growth simply refers to the rise in the organization’s or person’s income that is received or earned.  To note, income growth, inflation rate growth, and tariff on the imports from production units can match according to demand & supply, aggregated supply & aggregate demand, Laffer and Philipp’s Curves. These following ways indicate how different projections can match.

In this case, an income growth of 5% implies that there will be increased investments leading to high output in the economy.Thus, increase in the output will consequently boost on the demand for labor which in turn leads to an increase in the incomes of the people which boost on the demand levels. In this case, firms will be forced to hire more workers due to increase in the demand of their goods and services. This in turn leads to a decrease in the levels of unemployment but increase in the incomes may end up shooting the prices levels high (Burke &Abayasekara, 2018).

 To note, an increase in demand within a decreased supply leads to rise in prices of products. Therefore, 5% increase in income leads to 2 % increase of inflation rate as according to demand and supply. On the other hand, a 10% increase in tariffs leads to a 5 % increase in income due to an increase in price of imported goods. Additionally, an increase in the tariff by10% leads to less demand for imported and domestic products due to higher prices imposed (Coglianese et al., 2017). In this case, the consumers reduce the number of goods consumed leading to limited supply. In addition, the domestic consumers of the products are affected by tariff as they pay extra charges or higher prices (Cole, et al., 2017).

In figure 1 above, the small increase in income (P₀) leads to a slight increase in the quantity demanded from Q₀-Q₁.

In figure 2 above, a large increase of income without any increase of tariff and inflation leads to a rise of prices from P*-P₂andan increase of quantity demanded from Q₀-Q₃.

According to microeconomics, there are two forms of equilibrium that is to say long run and short term. The short run happens when wages and related prices do not match to the changes in the economic conditions. Therefore, as economic conditions change, prices of products may not quickly rise to maintain the market equilibrium (Dimopoulos & Sacchetto, 2017). On the other hand, the long run is a microeconomics analysis where prices and wages are flexible irrespective of the economic condition.

Demand and Supply Curve

The aggregate supply/aggregate demand model is a concept that illustrates or predicts the total demand or total supply of a given economy. In addition, it determines how the total supply and total demand interact on a macroeconomic standard. In this case, it is noted that as the level of productivity increases, the aggregate supply curve moves right words leading to the lower inflation rate, and increased income growth (Hayn et al., 2018).

 In addition, a shift of the aggregate supply curve to the left due to the rise in tariff leads to lower imports, higher prices, and high rates of inflation. Therefore, it is observed that the rise of tariff by 10% could lead to increased income by 5% hence causing 2% rate of inflation as a result of a stagnant growth of the economy. In addition, if income rises, then the profits of the firm increase. In this sense, if the profits of the company increase then the firm will wish to produce and sell more in case they can be in the position to manage the resources drawn into the production (Jungherr, A., et al., 2018). To note, if income increases by 5% and tariff by 10%, then the desire of expanding output will also rise leading to a 2% inflation in case prices lag (Ruiz, 2012).

An increase in the tariff by 10% will lead to the high production of the local firms hence an increase in the aggregate demand of the local products causing a rise in the price of goods referred to as demand-pull inflation. In addition, an increase in the Tariff rate by 10% leads to the monopoly of the home-produced goods forcing firms to increase the prices of goods in the market hence causing a 2% increase of inflation. If the level of income increases by 5%, Aggregate demand could also increase hence causing a rise in the prices by 2% in the long run.

According to the graph, an increase in aggregate demand from AD1-AD4 leads to the increase in the price of the commodity demanded. In this case, as tariff increases, prices of domestically produced goods and imports increase leading to an increase in the rate of inflation

As a result of an increase in Tariff rate by 10%, the economy receives a stagflation caused by the limited supply of imported goods which compete within the domestic goods. In this case, the imposed tariff may lead to a number of shocks in the aggregate supply of goods (Lichteret al. 2017). Therefore, the domestic firms remain independent in the market leading to an increase in price hence causing inflation. As the aggregate supply of imported goods decrease, the Growth Domestic Product of the economy also decreases, prices increase leading to cost-push inflation.

In the figure above, a small income increases and a large tariff leads to increase of prices P₁-P₂. An increase of P₁-P₂leads to a slight shift of the AD/AS curve from Y₂-Y₁making the Gross Domestic product of the economy low.

Aggregate Supply/Aggregate Demand

In figure 4 above, a large increase of income with large increase in tariffs leads to a slight rise in the price P₀-P₁causing an increase in the real GDP of the economy from Y₀-Y₁.

In this case, as the aggregate supply of the product facing an increase in tariff decreases, aggregate supply moves to the left. The result of the decreased supply of imported products and inflation may end up causing a situation referred to as stagflation.

The Phillips Curve basically explains the tradeoff which is faced by the economy between keeping the levels of inflation and unemployment low. As expressed in the theory of Keynes, demand-pull inflation is as a result of increased demand due to an increase in the employment level beyond the economy (Parenti et al., 2017). In this case, a 10% increase of Tariff rate leads to the limited supply of imported product causing an increase in the aggregate demand of the product followed by limited domestic supply as a result of employment constraints. In addition, the theory assumes that there is full employment in the economy and the rate of aggregate demand will be equivalent to the rate of aggregate supply hence reducing the inflation rate from 2% (Parenti et al., 2017).

All economies face the tradeoffs between keeping either the levels of inflation low at the expense of high levels of unemployment. This is well explained by the Philips curve. In this case, when the inflation levels are up, the Philips curve indicates the decline in the unemployment levels. This is due to the fact that deliberate attempt by the central bank to increase on the money supply in the economy boosts investments. Therefore, an increase in investments leads to a rise in the demand of laborers thus reducing on the unemployment levels. Thus, the Philips curve relates the high levels of inflation to the lower levels of unemployment as illustrated in the diagram below;

In figure 6 above, the rise in inflation by 6% leads to a drop in the rate of unemployment by 2%. The instance is as a result of high demand and low supply.

On the other hand, when the levels of inflation are down, the Philips curve indicates an increase in the levels of unemployment in an economy. For instance, the deliberate attempt by the central bank to reduce on the money supply in an economy implies reduction in investments. This is due to increase in the levels of interest rates. The increase in the levels of interest rates forces firms to reduce on the production levels and thus lay off some of their workers. Therefore, the Philips curve relates the reduction in the inflationary levels to high rates of unemployment in an economy as illustrated in the diagram below;

In figure 5 above, the drop-in inflation by 5% leads to a rise in the rate of unemployment by 3% caused by low supply and high demand. If the rate of inflation is low, there will not be any need of employing more people because demand will also be low.

Aggregate Supply Shocks

Scenario 3 – Taxation Up: The relationship between Taxation and Luffer curve

According to The Laffer Curve imposing high taxes is important in helping the economy to generate more tax revenue but it is bad thought (Mankiw et al, 2011). In this case, the Laffer curve represents graphical relationship between tax revenue, taxable income, and tax rates. A high tax rate in an economy increases on the burden faced by the tax payers. This policy of levying higher taxes may increase on the revenues only in the short run but bears long run negative effects on the taxation revenues in an economy. It leads to the reduction on the taxpayers’ disposable income which reduces on their consumption levels in turn. In the end, there is a fall in the levels of aggregate demand in the economy caused by increase in the stocks that are not sold off. This forces the producers to cut on their production levels and thus worsening the problem of unemployment in the economy. Thus, in the long run, the government’s tax base falls leading to the reduction in the tax revenues.

The Laffer curve explains the long run importance of reducing on the taxation levels in the economy. In this case, when the government cuts down the levels of taxation, reduces on the government revenues and increases on the amounts of money in the hands of the individuals. This in turn increases on the disposable incomes in the economy. Therefore, most of the business activities increase as result in increase in the recruitment by the companies and this endup into economic growth. The increase in the rate of economic growth generates higher revenues for the government through creation of a larger tax base in the long run. Both two scenarios are illustrated in the figure below;

The income growth, inflation rate growth, and tariff rate growth predictions have a great impact on the Schmeckt Gut demand. The growth of income would either affect or doesn’t affect the demand of Schmeckt Gut, this is because the goods supplied in the bar are needed and are luxury goods. The increase in income of the consumers would increase the demand of the product because the goods and products of the bar are normal goods (Afonso & Kazemi, 2017).

According to the research conducted, the higher the income the higher the demand of bar products. This is because the different individuals would be interested in gaining a higher level of satisfaction. Given the fact that increase in income can cause an increase in demand of inferior goods by consumers so as to improve their lives, improving lives is done through shifting to superior goods (Steffen, 2012). Therefore, there exists a positive correlation between the consumers income and commodity demand but for case of inferior goods it’s a negative correlation (Akimaya & Dahl, 2018). The products/ commodities sold by the company are normal goods not inferior goods. This means that even though the incomes increase relatively the same quantity demanded of goods in the bar would be constant by the individuals and same applies when the incomes go low.

 The demand of the products of the bar has a great impact on the inflation development within the country. This phenomenon was described by Keynes an economist, he stated that when possibly the consumers demand for the goods at a rate which is faster than their production, this would cause a larger money supply which in turn causes inflation. This is referred to as the Demand-pull inflation. Therefore, the demand of the product of Schmeckt Gut in the suggested area would cause possibly inflation when the production rate is low (Akimaya & Dahl, 2018).

On the other side, inflation has a great impact on the price of commodity and price of commodity has a very big impact on the demand of the commodity. When the inflation rate in the country is high, prices for the Schmeckt Gut products would be high thus causing the demand of the product to reduce because very low-income earners will be affected and shift to other options of commodities (Rhona, 2010). When the inflation in the country is very low, the prices of the commodity would be low thus demand of the commodities of Schmeckt Gut product would be low.

Tariff rates are always useful when increasing the price of imported goods to a certain amount which may be quite unaffordable to the population. Tariffs are always used by the government to prevent cheaper goods which are imported into the country to compete with the goods that are domestically produced (Lichter & Siegloch, 2017). The tariff prediction has a big impact on the demand of Schmeckt Gut.

A low tariff rate would reduce on the price of Schmeckt Gut commodities thus increasing competition of the commodity with the domestically produced goods, Free trade will favor the bar in the way that the prices of the commodities would be as low as possible thus increasing the demand of the commodity therefore the company making a lot of revenue from the sales. Given the fact that free trade and low tariff rates are very advantageous to Schmeckt Gut, high tariff rates may affect it negatively (Hayn, et al., 2018). The high tariff rates affect Schmeckt Gut in the way that prices of the commodities in the bar would be high which may make the consumers to resort to other commodities. This would be disadvantageous in the way that the company may experience less revenue leading to its fall in the long run.

Table1

4 scenarios

	Basis	Income	Inflation	Tariff
Scenario 1	Inflation up	5%	5%	0%
Scenario 2	Inflation down	1%	2%	10%
Scenario 3	Tax up	2%	1%	10%
Scenario 4	Tax down	3%	3%	0%

Y = β0 + β1 income + β2 inflation + β3 tarrif rate +

Log(y) = β0 + β1 income + β2 inflation + β3 tarrif rate +

y = exp (β0+ β1 income + β2 inflation + β3 tarrif rate +

Y=exp (β0) * exp(β1) ^x1 * exp(β2) ^x2 * exp ()

ANOVA
	Df	SS	MS	F	Significance F
Regression	1	1409521	1409521	0.53524	0.597897
Residual	1	2633438	2633438
Total	2	4042958
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	15031	2478.848	6.063704	0.104052	-16465.8	46527.75
0.05	83950	114748.4	0.731601	0.597897	-1374066	1541966

From the regression coefficient table, the different independent variables have a p-value which is less than 0.05. This identifies that these variables have a great effect on the dependent variable since its identified that if a P-value of given independent variable falls above 0.05 therefore it has no impact to the dependent variable (Mankiw,2014).  In other words, as taxes increases, income falls. Also, as taxes fall income increases. When the level of inflation falls down income also rises and vice verser.

Conducting a multiple regression analysis, the different independent variables are the average Income for person, number of energy bars stores, and energy bar tariff rate. The dependent variable is the mean annual demand for energy bars for each person. These results were obtained after conducting a multiple regression study (William, 2016).

Y = β0 + β1 income + β2 energy bars number + β3 tarrif rate +

The following tables were obtained after carrying out a multiple regression analysis.

Table 2: The regression statistics table

The following tables were obtained after carrying out a multiple regression analysis.

Table 1: The regression statistics table

Table 2: table showing ANOVA results

Table 3: Illustration of the different regression coefficients

The regression statistic table represents impact of independent variables on the dependent variable (Silverman, 2018). From the regression coefficient table, the different independent variables have a p-value which is less than 0.05. This identifies that these variables have a great effect on the dependent variable since its identified that if a P-value of given independent variable falls above 0.05 therefore it has no impact to the dependent variable (Mankiw,2014).

The multiple R from the regression statistic table represents the correlation coefficient of the independent variables and dependent variable (Silverman, 2018). Therefore, the resultant correlation between the dependent and independent variables in our analysis is 0.955933 which identifies a strong relationship between the variables (Silverman, 2018).

The regression equation can be obtained from the coefficient of the different independent variables after conducting the regression analysis (Silverman, 2018). This equation is described by; Taking mean demand for energy bars for each person’s as Y, mean income for each person as Income pp., Import Tariff rates on energy bars as Tariffs, and stores numbers for offering energy bars as Stores.

Regression equation can be determined through

Y = β0 + β1 income + β2 tariff rate + β3 energy bars stores +

Y = 0.004838*Income pp – 6.4568*Tariff + 4.072444*Stores- 12.1602.

 Considering the different coefficients, The Mean income for each person has a positive correlation with the annual mean demand for energy bars for each person, also quantity of stores for offering energy bars also has a positive correlation with the annual mean demand for energy bars for each person (Campbell, 2009).

 Import Tariff rates on energy bars in accordance to its coefficient has a negative correlation with the dependent variable which is the annual mean demand for energy bars for each person (Griffiths & Wall, 2011).   

While carrying out regression, the coefficient of determination identified as R Square was obtained as 91.38% which means that the closeness of the dependent variable as explained by independent variables is 91%. Considering the Anova table, The F-statistics which is calculated through obtaining the ratio of Mean square regression (MS Regression) to mean Square residual (MS Residual). The resultant statistic is compared to critical F value 3 and 17 degrees of freedom which are (available within the F-tables) to help in testing the different hypothesis especially the null (Silverman, 2018).

The P-value related to the calculated F-statistic identifies the probability which is beyond the calculated value. Comparing the value with a 5% gives either acceptance or rejection of the null hypothesis. The different result of the regression line which is estimated comprises of; standard error of coefficients, estimated coefficients, corresponding p-value, calculated t-static, and both 90% and 95% confidence intervals (Liz, 2012).  

Part C

Scenario 1: Inflation up.

Assuming a high inflation rate 5%, with income rate increase of 5% and tariff rate 0%, there are possibilities of making revenue due to free trade but the inflation may make production rate high and goods seem expensive though the demand would be high. Therefore, there is need to control the inflation within the place where the bar is to be placed. The board of directors can go ahead and establish Schmeckt Gut Company because the demand would be high but there will be less revenue because of increased costs.

Scenario 2: Inflation down

When inflation is down, given that the income is 1% and tariff rate 10% causing an inflation of 2%, there is a possibility of Schmeckt Gut of making low revenue. So as to facilitate the smooth running of the Schmeckt Besser bar within the market, the research department of Schmeckt Gut has to conduct research on the existing companies within the region dealing in the production of the same commodities (Mumbower, et al., 2014). This is very useful because through analyzing the market, the company would be in position to understand the relation between the demand and price for the energy bar drinks in the market (Dimopoulos & Sacchetto, 2017).

Scenario 3:

 Having taxes up at a rate of 10% and expected rise incomes of 2%, these cause a low inflation of 1%. Therefore, it’s advisable for the Schmeckt Gut to be established because there are low inflations causing a possibility of increasing revenue.

Determining the prices of goods, the income development, tariff rates, and inflation rate development as well as their relationship with demand of the commodity is very crucial because it would help the company in setting its own prices where it could easily obtain revenue. The price of the commodity set for the commodity would be favoring the income of the different consumers, should be overcoming burdens and effects of the inflation within in the country as well as Tariffs existing in the region (Jungherr et al., 2018).

Scenario 4

 When the taxes are down and there is free trade, there is expectation of increase in inflation due to increased demand of commodities especially the foreign goods. This could happen if the incomes of consumers are increasing within the given area. Assuming tax rate of 0%, causing inflation rate of 3% at an income increase of 3%. Schmeckt has to produce more commodities so as to increase revenue because there are no taxes. Proper management of the income development, tariff rates, inflation rates, and price of the commodity will be helpful in rising revenue to the company while their improper management will lead to low revenue or even failure of the business.

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