There are number of factors that could be considered by Schmeck before launching Besser energy drink bar in Atollia, the considered factors should be economic and environment friendly factors. A few of these factors include the growth of income, the inflation rates within the country, and tax rates on imported commodities (Parenti, Ushchev &Thisse, 2017). Therefore, the company should vividly consider these factors when looking forward to enjoying economies of scale and make profits from the energy bar. According to the law of demand, there is a correlation between the demand of commodities and government policy of taxation, the level of income within the country, and inflation growth rate. Tariffs refers to those taxes imposed on foreign goods so as to monitor their supply within the country. Tariffs are always meant to protect domestic products from competitions. When tariffs within the country are not well controlled, they may be dangerous to the economy (Akimaya & Dahl, 2018). Inflation refers to rise in prices of services and goods persistently mainly caused by failure of balancing their supply and demand within the country. So as to obtain the rate or level of inflation within the country, the purchasing power of unit of commodity or service is compared to the value of money or currency within the country. The increase or income growth of an individual is the rate of increase in the earnings of an individual within a specified period of time. The specified period of time may be annually, monthly, or weekly (Parenti et al, 2017). The correlation between income growth, tariff rates, and inflation growth rate can be well explained through using Philips and Laffer curves, aggregate demand and supply curves, law of demand and law of supply together with their curves. Growth rates in income, inflation, and tariff and how they would affect the demand of energy bars are explained below;
The increase of income of individuals by 5% possibly cause increase in demand of Besser energy bar products, in the long run this demand may also cause reduction or shortage in supply(Akimaya & Dahl, 2018). The rise of income within an enterprise will lead it to employ more labor thus increasing production, increase in production will lead to rise in demand due to reduced prices which may also lead to rise in the wages of the employees. Inflation sometimes is caused by reduction in supply of good and services within the country which fails to meet the demand of the product. 5% income development would increase the rate of inflation by 2% because of increase in the demand of the commodity, this is well explained by the law of demand and supply. Considering the income of the company, increase in the tax or tariff rates by 10% would lead to the reduction in supply of the goods within the economy, this may reduce the income levels by 5% (Akimaya & Dahl, 2018). Supply of local goods will increase if there is an increase in the tariff rates, this is because the high tax rates will reduce on the supply of imported goods within the economy. In the long run, there is a possibility of locally produced goods failing to meet the market potential thus the demand of the commodities within the country exceeding their supply. This may in turn lead to demand-pull inflation.
Phillip’s curve can be used in explaining the effects of inflation and demand of commodities within the country. The demand of Besser energy bar products can be explained using this theory as expressed by Keynes. Keynes a known economist used the Phillip’s curve in giving explanations about the theories of inflation in an economy. He explained what is meant by cost-push as well as demand-pull inflation types. Keynes explained that demand-pull inflation as type of inflation caused by growth of goods and service demand as a result of employment level growth in the economy. For this matter, when the rate of taxes on imports increase within the economy by a percentage of 10%, there would be a reduction on the supply of the imported products of Schmeck. Reduction in the supply of Besser will lead to increase in supply of local products but increased demand of foreign products since the supply of local goods cannot meet the market potential due to limited supply of the commodity because of labor and other factor of production constraints. The Phillip’s curve and theory gives an assumption of an employment level which is full, this makes aggregate supply and aggregate demand rates within to be equivalent therefore causing a 2% increase in the rates of inflation within the economy. The diagram below illustrates the Phillip’s curve:
Aggregate demand is referred to as the total demand or willingness to purchase goods and services within the economy while aggregate supply is also referred to as the total quantity of goods and services produced within the economy. Aggregate demand and supply are explained as a concept or principle of micro-economic. Within these same these concepts, equilibrium within the economy falls under two types that is long-term and short-term equilibrium. Long term equilibrium happens when salaries or wages together with prices in the country become flexible despite of the economic situations. The short term equilibrium in aggregate demand and supply always exists if salaries or wages together with product prices do not correspond or match economy economic situations (Zhao et al, 2018).Therefore, for short term equilibrium, the economic factors within the economy for example price of commodities do not change instantly for the purposes of maintaining equilibrium.
Aggregate demand as well as aggregate supply models relate to the total demand and supply of given commodities in the economy. The model of aggregate demand and aggregate supply are helpful in analyzing the relationships between total supply and total demand. Increase in the levels of productivity within the economy may cause a right ward shift of the aggregate supply curve, this gives a possibility of reducing on the levels of inflation as well as cause growth of income (Hayn, Zander., Fichtner., Nickel, Bertsch, 2018).On contrarily, the left shift of the aggregate supply curve due to increase in the tariff rates may possibly cause lower imports, high levels of inflation, and higher prices of goods and services in the country. Therefore, the increase in tariffs by a percentage of 10% will affect the supply the energy bar products, it will decrease supply and cause rise of inflation by a percentage of 2% therefore reducing the levels of income for the company by 5%. This phenomenon will lead to reduction in the growth of the economy (Oladosu, Leiby, Bowman, Uría-Martínez, & Johnson, 2018). Increase in income of both individuals and firm is useful since it will cause more profits because of increased demand and supply. Increase in consumers’ income by 5% as reduction in tariff rates to 0% will increase the desire and willingness of consumers to buy more products as well as Schmeck to supply more.
When the rates of Tariffs are 10%, there is increase in level of production among the local firms so to compensate the low supply of foreign goods within the country, this leads to increase in demand of locally produced energy drinks causing increase in the goods and services prices. High demand of energy bar with supply that is not corresponding causes inflation which is referred to as demand-pull inflation (Kiley, 2008). Tariffs rates which are high at 10% would affect Schmeck thus causing monopoly tendencies by local firms, this will cause the inflations to increase by 2%. If the levels or rates of earnings increases among the consumers with a percentage of 5%, Total demand of the commodities will rise within the long run.
The 10% increase in tariff rates on products imported into the country will lead to stagflation. Stagflation can be explained as condition within the country characterized by high unemployment and very redundant economic growth because of skyrocketing inflation. Stagflation will occur because of decrease in the supply of Schmeck energy bar commodities. The Tariffs placed on these drinks would cause shocks to aggregate supply of the drinks (Taylor, 2008). These shocks are as reason of domestic firms for energy drinks remaining not competed leading to price increase for services and energy drinks provided in the economy. The reduction on total supply of foreign goods may possibly cause a reduction on value of Growth Domestic Product (GDP) therefore causing inflation known as cost-push inflation.
The diagram below shows reduction in the aggregate supply caused as a reason of supply shocks.
The above diagram shows a situation of stagflation where there is reduced goods supply and increasing rates of inflation. When the tariff rates increase as shown in the above diagram, there will be a sudden decrease in aggregate supply for the energy drinks. This cause the supply curve to make a left shift.
Using Laffer curve as shown in the diagram below;
One of the uses of Laffer curve is to offer graphical correlation between tax rates, tax revenue, as well as taxable income. A number of individual’s do not believe in the Laffer curve explanations as well as its existence. 10% increase in the tariff rates would cause reduction on revenue generation because of the limited energy drink supply, this would cause increase in the supply of domestic goods which are substitutes to the energy drinks. There is increase in the supply of these local goods according Laffer curve because there is need to compensate for the reduced supply of imported energy drinks. Increasing tariffs on foreign goods possibly reduces exploitation of economy’s resources and leads to development of local industries. In an economy, charging taxes on imported goods should be done carefully because it would raise more fiscal challenges than advantages or opportunities (Prateek, 2018).
This section identifies the effects of tax rate, the income growth, as well as inflation rate on Besser energy demand. So as to identify the impacts of these three factors on demand of Besser energy bar, three scenarios are considered, scenario where the inflation is Up, scenario when the inflation is down, scenario when the tariff rate is high, and scenario when the tariff rate is low.
When the rate of inflation in the country is low at 5%, the tax rates are 0%, and the income level for the different individuals is at 5%, the demand for Schmeck Gut product would be high and this would cause the company to increase their supply therefore gaining more revenue (Kiley, 2008). The demand of these commodities will be high because of free trade, free trade will increase the supply which causes reduction in prices of the commodities thus high demand. The increasing consumer income is also another factor that would possibly cause an increase in the demand of commodities supplied by Schmeck. According to the law of demand, the demand of a given commodity increases with increase in consumer’s income and decreases with decrease in the income of the consumer except for normal goods, necessities, and inferior goods (Afonso & Kazemi, 2017). The demand increases with increase in income of consumers because consumers would like to gain maximum satisfaction.
When there are high tax rates at a percentage of 10%, low inflation levels at 2%, as well as low income of 5% would have an impact on commodities demand. Since these tariff rates are very high, they will reduce on the supply of goods imported into the country. Reduced supply will cause price increase thus reduction in demand (Oliver, 2010). The demand of foreign goods will reduce which causes the local products to gain market but unluckily they cannot meet the market demand due to constraints in factors of production (Zhao et al, 2018). The price of energy drinks for both local and foreign will increase thus may possibly cause inflation.
The tax rate within the country will definitely affect Schmeck Gut products. Having a high tax rate of 7.5% on foreign goods, an increasing income rate of 2%, as well as low inflation rates will negatively affect the demand of Schmeck Gut products in the chosen area (Atallio). Few of these commodities will be brought into the area identified for setting up an energy bar. Taxes high affect the demand of foreign goods into the country (Mumbower, Garrow, & Higgins, 2014). The demand will be low because there would be high prices for the goods to compensate for the costs of trade and production. High prices will send away consumers. An economist Keynes suggested that increase in demand of products within a state or area higher than supply rate would skyrocket the prices therefore causing increase in money circulation and hence causing inflation (Roth, 2012). This form of inflation is known as demand-pull. Few supply of Schmeck products may cause inflation. The government always uses high Tariff rates to regulate the importation of poor quality and cheaper products into the state (Lichter & Siegloch, 2017). Therefore, Schmeck board has to focus so much on the levels of tariffs within the country before introducing its Besser energy drinks.
When the tariff rates within the country are low, there is increase importation of foreign goods within the country. This means if the Tariffs or taxes are very low, Schmeck Gut product demand will increase. Increase in consumer’s income by 3%, fall of tariff rates to 0% will cause an increase in Schmeck product demand and supply therefore causing inflation fall by 3%. The most important advantage of low tariff rates within the country is increase on competitions limiting the causes of monopoly tendencies (Andreas, 2018).Free trade facilitates supply increase of Schmeck energy bar products thus increasing revenue for the firm(Diaz,2012). Increasing on the tariff rates will definitely affect the firm’s revenue as well as cause reduced product supply within the economy (Hayn et al, 2018).
Multiple regression was carried out so to determine how “annual individual mean income”, “number of bar stores”, and “tariff rates” affect the demand of energy bars for each individual. This results represented below were obtained after the multiple regression process (William, 2016). The table(s) shows the results that were got when multiple regression was carried out using Microsoft excel.
By regression statistics table, multiple R is useful in determining the strength of correlation between the dependent and independent variables (Silverman, 2018). The correlation coefficient between dependent and independent variable is 0.955933 which shows that the variables are strongly correlated (Silverman, 2018).Through using the regression coefficient, the independent variables have a big p-value higher than 0.05, this means they have an impact to the dependent variables (Mankiw, 2014).The Multiple regression line equation can be got through obtaining and using the coefficients of independent variables (Silverman, 2018). So as to obtain the equation of the line, the individual demand for energy bars variable is considered T, individual income is considered as YY, tax rates as R, and numbers of stores as Numstor. The regression equation can be obtained using this equation below:
Using independent variable coefficients, their relationship between the dependent variables is determined. Individuals’ income is related positively with the demand of energy bars, this shows that increase in personal income of individuals increases the demand of the drinks. The number of energy stores is also positively related to demand of bar drinks per individual which gives a conclusion that an increase in number of stores would cause an increase in demand of the products and vice versa (Campbell, 2009). Tariff rates are negatively correlated to the demand of the energy products meaning that increase in tariffs reduces the demand and reduction in tariffs increases the demand (Labandeira, Labeaga, &López-Otero, 2017).
When the inflation within the country is high and assumed at a percentage of 5%, the income level of individuals also at 5% as well as tariff rates at 0% the company can increase its production and supply so as to generate revenue. Problems will rise from inflation leading to increased distribution and production costs. At low inflation rates of 1%, there are expectations of strict tariff rates at 10%. The board of the firm has to assess the market structure so as to avoid making losses. The board has to supply few goods and at high prices (Dimopoulos &Sacchetto, 2017).
When the taxes rates are high at 10% and the income is expected to rise by 2%, with low inflation of 1%. The company can only make profits when they charge high prices at low supply. The tax burden is transferred to the consumers. On the other hand when the taxes are low or at free trade, the inflation rate within the country is low as well as the incomes of individuals are high, the firm has to maximize its production so as to make a lot of profits.
Conclusion
For the board of Schmeck to introduce its energy products, it has to put into consideration the different factors that affect demand of a given product. These factors as explained in the paper are tax rates, inflation rates, and income rates or distribution within the country. Using regression, the level of income is analyzed to be correlated positively to demand of the product were increase in income level causes increase in demand of the product (McConnell, 2009). The tariff rates are negatively correlated to demand of the product were increase in tax rates cause reduction in supply thus increasing price then lowering demand. The rates of inflation are also assumed to be positively correlated to demand of the product. Increase in inflation may cause increase or reduction in demand of the product.
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