Economics And Finance Topics Covered In This Content

Globalization Effects on Consumers and Firms

(a) Globalization refers to the economic trend to eliminate the barriers on trade regulations and to benefit the consumers with greater variety of products at lower prices maintaining the quality. Effect of globalization increased the purchasing power for the consumers due to the practice of free- trade policies and free system in product marking across the borders (Adam, Kammas and Lagou 2013). Other than the benefit of variety and reasonable price for of the products, benefit of quality products has been established to fulfill the needs of customers that resulted in change in buying behavior. Similarly, globalization affected the firms by providing comparative advantage to provide specialized products in the international market that eventually increase the competition among the firms that helps in reducing firms cost (Baumers et al. 2016).

(b) Movement along the demand curve refers to the change in demand considering a change in product price and quantity from one point to the other. Movement along the demand curve reflects consistency in demand relationship, which will change due to change in price of product keeping all other factors constant (Wang et al. 2014).

Figure 1: Movement along the demand curve

(Source: Created by author)

Besides, Shift in demand curve represents change in the quantity demanded even if the price of products remains same, which states the change in demand relationship takes place due to other factors. Shift in demand curve take place when the entire demand curve shits to right or to the left. For instance, if the income level of consumers increase and price of the product remains same, consumers will be able to buy more quantity of product at the same price (Lin 2014).

Figure 2: Shift in demand

(Source: Created by author)

(c) Economies of scale refer to the internal and external economies, which provide that the marginal cost of product would decrease if the production efficiency increases. Moreover, diseconomies of scale refer to the concept under which firms experience decrease in cost due to increase in the output. Accordingly, diseconomies of scale represent increase in the factor of marginal cost due to the increase in output. Economies of scale consider the advantage due to the factors of technology, finances or marketing while the external factors include training and competency, transportation accessibility and other industrial support. However, diseconomies of scale occur due to increase in the firm’s workforce (Baldwin and Scott 2013).

(d) Determinants of supply refers to the change in quantity supply due to change in price which is represented by a movement in the same supply curve. It represents that the shift of supply curve will take place due to the change in factors other than the price. Considering the retailing industry, growth in profitability occurs due to the factors of operating cost, which is determined by inflation, employment rates and consumption rate. As the objective of firms is to maximize the profit income, it is essential to control the production cost, which is determined by the factors of input prices or government regulations (Ericson and Starc 2015).

Demand Curve and Economies of Scale

Figure 3: Determinants of supply

(Source: Created by author)

(e) Substitute goods refer to the similar product perceived by the consumers so that the desire of having other product becomes less. It can be said that the substitute goods provides “positive cross elasticity of demand” representing the increase in demand due to increase in the price of another good. For instance, tea and coffee or margarine as well as butter represent substitute goods. Besides, complementary goods refer to the “negative cross elasticity of demand” stating the increase in demand of good due to decline in the price of other good. For instance, tea and sugar, which states the demand of sugar will increase if the consumption of tea increases (Schröder and Sørensen 2014).

(a) Imperfect competition market structure refers to the market, which consists of many sellers involving the sale of heterogeneous products as against the perfect competition market structure. Imperfect competition involves large competition that is followed to make surplus profits as the sellers have the luxury to the influence the price of products (Ericson and Starc 2015). Monopoly, Oligopoly, Monopolistic competition and monopsony are four different types of imperfect market structure. In each of the imperfect market structure, sellers have the choice to influence the products process when the sale of products involves non- identical goods. Monopoly imperfect market structure refers to the market that has one seller and many buyers therefore sellers can influence the price for their products which creates imperfect competition (Malesky, Gueorguiev and Jensen 2015).

(b) Monopoly market refers to a market structure in which one seller and many buyers exist that result in imperfect market competition. However, several barriers in the economy make it difficult for the new firms to enter the monopoly market that involves product differentiation, institutional barriers, licensing restrictions and economic barriers (Murray, Skene and Haynes 2015). Product differentiation states the brand value of existing firms which is difficult to overcome for the new entrants. For instance, brand value of flavored gelatin required for desert is known by the name Jello instead of the product name. Institutional barriers associate with the restriction to get license or franchise rights and barriers in use of tariffs.

(c) The environmental policies used by the government to address the market failure incorporates price, economic variables with respect to the external factors in the market structure. Pollution is one of the major environmental policies addressed for market failure that incorporated the factor of external cost for production or the activities of consumption through tax charges (Eriksson and Rooth 2014). Government also use the environmental policy on the irreversibility degree related to the stock of natural capital and availability of resources at reasonable prices which affected the market sustainability. The policy used by government for market failure involves lack of international co- ordination due to relevant ecosystems resulting in creating conceptual problems to operate business activities (Eisfeldt, Lustig and Zhang 2016).

(d) The circular flow of income refers to an economic model that the represents major exchanges as flows in terms of money, products as well as services among the economic agents. The model depicts the flow of money in the economy that basically consists of households and business firms (Eisfeldt, Lustig and Zhang 2016). The flow of money is represented between the firms and household or a consumer that is money flows out of the firms to workers as wages while it flows to the firms for exchange of products. The circular flow of money presents the interdependencies of several economic factors stating the equality between the profits incurred from production as well as the value of products or services provided (Eriksson and Rooth 2014).

Determinants of Supply and Retail Industry Example

Figure 4: Circular flow of income

(Source: Created by author)

(e) Unemployment means the number of individuals in the work force desires to work but do have the work or job to undertake. In the economy, labor is said to be a significant driving force as it constitutes payment of wages for consuming labor fuel while the labor output is required for the organizations. Accordingly, unemployment refers the “wasted potential production” within macroeconomics and associates an essential concern (?ahin et al. 2014).  

Figure 5: Unemployment rate

(Source: Created by author)

Year	Unemployment rate
1983	11.1
1984	10.9
1985	11.5
1986	11.5
1987	11
1988	9
1989	7.4
1990	7
1991	8.6
1992	9.8
1993	10.3
1994	9.7
1995	8.7
1996	8.2
1997	7.1
1998	6.2
1999	6
2000	5.6
2001	4.7
2002	5
2003	4.8
2004	4.6
2005	4.8
2006	5.4
2007	5.3
2008	5.6
2009	7.5
2010	7.8
2011	8
2012	7.9
2013	7.5
2014	6.1

Considering the above graph for unemployment rate in the United Kingdom, unemployment rate during the earlier years had been highest while it is lowest during the years 2006 to 2008. Besides, the unemployment rate increased in the recent years 2009 to 2013 while it declined slightly in the year 2014.

(a) The basic financial statements include income statement, statement of financial position, cash flow statement and statement of changes in equity that are prepared in accordance of accounting principles and standards in vertical format. The purpose of preparing and presenting the financial statements is to evaluate the financial performance of the company during the reporting period as well as analyzing the company’s financial position for the use of stakeholders (Bollerslev et al. 2013). The financial statement is prepared to analyze the business risk in terms of financial risk, liquidity risk and credit risk.

(b)  Financial ratios of Tesco Plc for the year 2015

1	Liquidity ratio
	Current ratio	(Current Assets/ current liabilities)	0.60
2	Market value ratio
	Earnings per share	(Reported earnings/ Outstanding number of shares)	(70.82)
3	Asset management ratio
	Receivables turnover	(Sales/ Accounts receivable)	29.37
4	Debt management ratio
	Debt ratio	(Total debt/ total Assets)	0.84
5	Profitability ratio
	Gross margin	gross profit/ net sales * 100	(3.39)

Table 1: Financial ratios

(Source: Created by author)

Considering the current ratio of TESCO, which reflects 0.60, it can be said that the company’s asset is not sufficient to meet the obligations as per industrial standard current ratio is required to be more than one (Tesco.com 2017). Besides, Next Plc is said to be efficient as its current ratio is more than one. Similarly, Market value ratio, EPS of Tesco reflects negative value hence it can be considered as poor as compared to that of Next Plc which is positive as 419.8p (Next.com 2017). Further, Asset management and debt management ratio of Tesco Plc represents good ratio since the company 29.37 times efficient in collecting the credit sales whereas Next Plc with 4.74 times reflects non- efficiency (Tesco.com 2017). As the gross margin of Tesco Plc reflects negative balance while gross margin of Next Plc reflects positive balance, it can be said that Next Plc is more efficient in generating profit from operating revenues (Next.com 2017).

(c) Management accounting refers to the procedure of preparing reports of management and accounts to determine the accurate information on company’s finances and statistics to take business decisions. Accordingly, the four phases of management accounting incorporates formulation, implementation, evaluation and modification. Formulation refers to the procedure through which the management selects the most profitable action required for success of business activities together by conducting SWOT analysis (Bollerslev et al. 2013). Second phase involves implementation and execution of the relevant strategies to ascertain the set objectives as well as to identify the positive impact. Evaluation is the third phase, which is conducted by using gap analysis to analyze the performance of the company. Final phase modification is important to rectify the weakness conducted during the evaluation phase while strengths can be implemented in the specific areas (Kimmich and Fischbacher 2016).

Substitute and Complementary Goods

(d) Relevant cost means the cost affected by the decision of management in a specific business situation. Accordingly, the cost can be incurred in one business alternative and can be ignored in the other business alternative. Besides, irrelevant cost means the type of cost that is not influenced by the business decision and can be involved in all the business alternatives. For instance, one- time benefit cost of retirement is relevant cost since it will be applied if a particular business unit is disposed off. Moreover, Salary of CEO becomes irrelevant cost since it will be incurred irrespective of business alternatives (Theriault Serra and Sterns 2013).

(a) Concept of risk is a term that defines the uncertainty associated with the investment returns, which is expected to be realized from the project in future. Investment or project risk refers to the variability from the investment return termed as deviation degree and incorporates the possibility of incurring actual return less than the expected returns (Hofmann and Lampe 2013). Systematic risk and unsystematic risk are two basic elements of risk that measures the risk by considering the factors of interest risk, market risk and other firm- specific risk. Concept of return refers to the profit or loss from the investment security consists of income as well as capital gain determined in terms of percentage. It can be measured by dividing the investment cost and total amount of profit earned by considering the return measures as investment return, equity return or assets return (Dokas, Giokas and Tsamis 2014).

(b) Capital structure defines the manner in which a company or firm finances its entire business operations by using various sources of capital funds. Company’s capital structure constitutes long- term as well as short- term debt together with the sources of equity shares and preference shares. Each of the sources of capital has different and specific cost, which needs to be analyzed along with the analysis of debt- equity ratio to determine the financial leverage of the company (Konchitchki and Patatoukas 2013). For instance, if the company’s capital structure incorporates high amount of debt then the company can be said to be more aggressive which represents higher risk to the investors.

(c) Amortization schedule

Payment	Amount	Interest	Principal	Balance
				25,000
Year 1	10,583.33	2,250.00	8,333.33	16,666.67
Year 2	9,833.33	1,500.00	8,333.33	8,333.33
Year 3	9,083.33	750.00	8,333.33	Nil
Total	29,500.00	4,500.00	25,000.00	–

Table 2: Amortization schedule

(Source: Created by author)

(d) Computation of deposit amount today

Amount to received in future £ (each year for next 3 years)	800.00
Interest in savings account	6%
Total amount of future value	2,400.00
Present value required for the investment	Future value/(1+r)ˆ3
Present value of amount	2400/(1+6%)ˆ3
	2400/1.19
Amount of money need to be deposited today	2,016.81

Table 3: Computation of deposit amount

(Source: Created by author)

(e) Net present value

Year	Project A- cash flows $	Project B- cash flows $	Discounting factor @12.5%	Present value of cash flows
				Project A- cash flows $	Project B- cash flows $
0	-50,000.00	-50,000.00	1.00	(50,000.00)	(50,000.00)
1	18,000.00	0	0.889	16,002	0
2	18,000.00	0	0.79	14,220	0
3	18,000.00	0	0.702	12,636	0
4	18,000.00	0	0.624	11,232	0
5	18,000.00	99,500.00	0.555	9,990	55,222.5
Total				14,080.00	5,222.50

Table 4: Net present value

(Source: Created by author)

Considering the above table, viability of project A and project B has been determined through the net present value in accordance with the required rate of return 12.5%. Net inflow in project A represents higher income than the project B since the cash inflows in project A are even during five years which has been discounted at lower rate. Besides, cash inflows from project B reflects lump- sum amount in the fifth year, which has been discounted at higher rate hence present value of the amount represented lower value. Therefore, Project A will be selected instead of project B since the amount of return in first project is high.

Reference List

Adam, A., Kammas, P. and Lagou, A., 2013. The effect of globalization on capital taxation: What have we learned after 20years of empirical studies?. Journal of Macroeconomics, 35, pp.199-209.

Baldwin, W. and Scott, J., 2013. Market structure and technological change (Vol. 18). Taylor & Francis.

Baumers, M., Dickens, P., Tuck, C. and Hague, R., 2016. The cost of additive manufacturing: machine productivity, economies of scale and technology-push. Technological forecasting and social change, 102, pp.193-201.

Bollerslev, T., Osterrieder, D., Sizova, N. and Tauchen, G., 2013. Risk and return: Long-run relations, fractional cointegration, and return predictability. Journal of Financial Economics, 108(2), pp.409-424.

Dokas, I., Giokas, D. and Tsamis, A., 2014. Liquidity efficiency in the Greek listed firms: a financial ratio based on data envelopment analysis. International Journal of Corporate Finance and Accounting (IJCFA), 1(1), pp.40-59.

Eisfeldt, A.L., Lustig, H.N. and Zhang, L., 2016. Risk and Return in Segmented Markets with Expertise.

Ericson, K.M.M. and Starc, A., 2015. Pricing regulation and imperfect competition on the massachusetts health insurance exchange. Review of Economics and Statistics, 97(3), pp.667-682.

Eriksson, S. and Rooth, D.O., 2014. Do employers use unemployment as a sorting criterion when hiring? Evidence from a field experiment. The American Economic Review, 104(3), pp.1014-1039.

Hofmann, E. and Lampe, K., 2013. Financial statement analysis of logistics service providers: ways of enhancing performance. International Journal of Physical Distribution & Logistics Management, 43(4), pp.321-342.

Kimmich, C. and Fischbacher, U., 2016. Behavioral determinants of supply chain integration and coexistence. Journal of Forest Economics, 25, pp.55-77.

Konchitchki, Y. and Patatoukas, P.N., 2013. Taking the pulse of the real economy using financial statement analysis: Implications for macro forecasting and stock valuation. The Accounting Review, 89(2), pp.669-694.

Lin, H.F., 2014. Understanding the determinants of electronic supply chain management system adoption: Using the technology–organization–environment framework. Technological Forecasting and Social Change, 86, pp.80-92.

Malesky, E.J., Gueorguiev, D.D. and Jensen, N.M., 2015. Monopoly money: Foreign investment and bribery in Vietnam, a survey experiment. American Journal of Political Science, 59(2), pp.419-439.

Murray, A., Skene, K. and Haynes, K., 2015. The circular economy: An interdisciplinary exploration of the concept and application in a global context. Journal of Business Ethics, pp.1-12.

Next.com. 2017. Next Official Site: Online Fashion, Kids Clothes & Homeware. [online] Next.co.uk. Available at: https://www.next.co.uk/ [Accessed 8 Mar. 2017].

?ahin, A., Song, J., Topa, G. and Violante, G.L., 2014. Mismatch unemployment. The American Economic Review, 104(11), pp.3529-3564.

Schröder, P.J. and Sørensen, A., 2014. A welfare ranking of multilateral reductions in real and tariff trade barriers when firms are heterogenous. Review of International Economics, 22(3), pp.423-443.

Tesco.com. 2017. Tesco | Online Groceries, Homeware, Electricals & Clothing. [online] Available at: https://www.tesco.com/ [Accessed 8 Mar. 2017].

Theriault, V., Serra, R. and Sterns, J.A., 2013. Prices, institutions, and determinants of supply in the Malian cotton sector. Agricultural Economics, 44(2), pp.161-174.

Wang, X., Gaustad, G., Babbitt, C.W. and Richa, K., 2014. Economies of scale for future lithium-ion battery recycling infrastructure. Resources, Conservation and Recycling, 83, pp.53-62.