Business Economics

Cast study Question 1:

Energy Market

The freezing cold spells not only increased the demand for road salt, but it also increased demand for gas in the UK. Usage reached 454 cubic feet of gas; the previous record was 449cubic feet set in January 2003. The National Grid which is responsible for energy in the UK issued several warnings in a matter of days that demand could outstrip supply and asked supplier to increase the supply. The National Grid also told major gas users, such as power plants, to reduce usage.

Sugar Market

Recently there has been a high increase inthe price of raw sugar due to various reasons. . Growing demand in Brazil for sugar to be turned into ethanol for fuel, coupled with a sharp fall in Indian production have both been factors in the price increase. Sugar production in India fell by 45% year-on-year due to extreme drought damaging a number of agricultural crops. The London-based International Sugar Organisation predicts that global consumption of sugar is likely to outstrip production in next few years, forcing food companies and governments to use some of their emergency reserves.. In the US, snack producers including Mars, Nestlé and Krispy Kreme Doughnuts put pressure on the US government to relax import controls, warning that otherwise they might run out of sugar. Commentators predict that most shoppers will be unaffected because sugar is such a small part of a consumer's typical spending in a week that no one will notice an increase in price.

a) Explain the effect of the cold spell on the price and quantity for gas using a supply/demand curve diagram. On a separate diagram explain why the price of sugar has been increasing recently. Properly label both the diagrams.

b) Excluding weather identify and explain two other factors that you think influence demand for gas.

c) Explain price elasticity of demand. Explain three factors that affect price elasticity of demand.

d) Assume the price of gas increased by 40% per unit consumption but the quantity demanded only decreased by 15%. Calculate the price elasticity of demand. Do you think demand for gas is price elastic or price inelastic? Explain your reasoning.

e) Do you think the demand for sugar is price elastic or inelastic? Justify your choice. What is the significance of price elasticity of demand (PED) to raw sugar suppliers?

f) Using the demand and supply diagram explain how companies such as Mars and Nestlé might react to an increase in the price of sugar.

Case Study Question 2:

Firms in India are losing productivity due to excessive use of social media during working hoursi.e. Facebook. According to The Associated Chambers of Commerce and Industry (Assocham) employees use Orkut, Facebook, Myspace, and LinkedInduring working hours for entertainment and other purposes which affects productivity. On average, employees spend an hour a day on sites like Facebook. This reduces work related productivity by 12.5%. Nearly half of office employees accessed Facebook during work time. Some 83% saw nothing wrong in surfing at work during office hours.

a) What is meant by productivity?

b) Explain the impact of a fall in productivity on costs.

c) Explain 2 possible economic consequences for businesses in India of banning access to Facebook and other social networking sites.

Question 3:

Germany

In Germany in 2009 there was considerable debate about the extent to which the government should be intervening in the economy. Some wanted the government to make sure jobs were saved no matter what. Others, however, were more hesitant and worried about the government becoming too interventionist. Traditionally since the Second World War the German government has seen itself as a referee in market issues and has avoided trying to control parts of the economy. It would regulate anti-competitive behaviour, for example, but not try to run many industries. However in the recession of 2009 when the economy was shrinking the government was forced to spend more to stimulate demand and had to intervene heavily to save the banking sector from collapse. The government also had to offer aid to businesses to keep them alive.

UK

Towards the end of 2009 the pound fell to a six month low of 1.0628 Euros. Figures released by the UK government suggested that demand was still low in the country. The pound was also under downward pressure because of the low value interest rates. Business confidence in general remained frail and there was concern over when the UK economy would start to recover from its negative growth. There was huge excess capacity in the UK. In addition the government had fiscaldeficit which was expected to cause problems with cutbacks and tax increases in the future.

a) What is the main purpose of government intervening in the economy? State with examples three possible benefits of a government intervening in an economy.

b) Identify and explainthree arguments against heavy government intervention in an economy.

c) What prompted greater intervention by the German government in 2009?

d) As an economist what type of demand side policies you would recommend to increase theaggregate demand in Germany? Give proper explanation to support your answer.

e) If the German economy is in recession what would you expect to be the effect on:

i. Inflation?
ii. Unemployment?
iii. Imports?

Explain your answers.

f) Explain what determines the value of a currency.

g) Briefly explain the relationship between interest rate and exchange rate. Why a decrease in interest rate value put downward pressure on pound sterling?

h) How will UK trade be affected due to a fall in the value of the currency?

i) Explain why the reliance on exports makes economic growth of a country vulnerable to changes in other economies.

j) When it's stated‘'deficit was expected to cause problems with cutbacks and tax increases in the future''; what type of demand side policy is expected? Explain two ways in which it will affect the economy.