Economics

Economics for Business: Individual Portfolio

1 (a) Marginal and Average (Costs and Revenues)

Output sales volume

Total cost

Total revenue

average cost

marginal cost

average revenue

marginal revenue

0

1

0

1

13

27

13

12

27

27

2

24

53

12

11

26.5

26

3

33

78

11

9

26

25

4

40

102

10

7

25.5

24

5

50

125

10

10

25

23

6

66

147

11

16

24.5

22

7

87

168

12.43

21

24

21

8

104

188

13

17

23.5

20

9

126

207

14

22

23

19

10

150

225

15

24

22.5

18



1(b) Graph of Marginal and Average (Costs and Revenues)

The maximum difference between marginal cost and marginal revenue is at output level of 4, therefore this is the profit maximizing level in terms of output and price.

1(c) Profit maximization

At level 4 the profit maximization amounts to 62.

1(d) Market structure:

By analyzing the trends in the above graph, it can be said that the firm operates in a competitive environment. With an increase in production units, its marginal revenues are declining, whereas its marginal cost is increasing, this trend suggests that the market is moving from being oligopolistic to perfect competition.

2(a) Economic factors: The current financial crisis has shown several similar episodes when compared with previous financial distresses. Following are the two main reasons of the recent severe financial crises: Inflation: The real cause behind the recent financial crises is an uncontrolled inflation. In the last decade, specific characteristics of inflation such as high and rapid growth in stock exchange and high real estate prices have been prominent features of the of the UK economy. In order to keeps the economy moving forward, the British government lifted off the borrowing limits, simply by lowering down the interest rates, these as a result increased borrowing needs of both individual and the State which eventually resulted in increased debt burden (Hall, et al ,1993. p. 637)

Credit crunchThe global credit crunch also contributed much to the financial distress in United Kingdom, when international and domestic lending stopped the financial positions of the financial institutions such as banks and mortgage houses deteriorated. The principal reason behind this was high lending to customers by banks and other financial institutions with poor credit ratings. It is believed that United Kingdom's banking system lied at the heart UK financial crises, as most of the banks and financial institutions in united kingdom operated with high lending ratios and when leading international financial institutions filled bankruptcies, the effect was much worse on the entire financial system of the united kingdom (www.telegraph.co.uk).

2(b) Comparison of Recessions:In financial crises of 1980's and 1990's, rate of Un employment and the rate of redundancies was much rapid and higher than the previous financial crisis of the 1970's.The current economic crises have been prolonged and deep and the un employment has risen sharply. The principal reason behind this is past liberalization of labour market, have made it easier for firms to rid of their staff when the company is in real financial distress.The principal reasons behind the current and previous financial crises have been different. The current recession has been caused by a shock to the availability of credit; a massive build up of debt and the global credit crunch have played an important role in intensifying the current financial situation.Similarly the scale of the fall in output has been predominantly large in the current situation.Although the government has taken major steps to prevent deflation and depression, but it is believed that inflation will increase at a much higher rate once the recession is over ...