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Fixed Costs

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(A) - Fixed Costs are costs that remain constant as output changes, for example, lease payments for retail space and fire insurance. Variable Costs are costs that change as output changes, like cost of labor. Explicit Cost is a cost that involves spending money, such as wages of employees. Implicit Cost is a non-monetary opportunity cost, for example cost of funds incurred by investors when they invest in a firm (Hubbard & O’Brien, 2012).

Accounting profit is a firm’s net income, which is measured by subtracting operating expenses and taxes paid from the revenue of the firm. Economic profit is an indication of the firm’s success, and is calculated by deducting all costs of the firm from the revenue. Entrepreneurs enter the market to receive economic profits, as such a firm would stay in business in the long run and could even expand. If economic profits no longer exist, the firm cannot stay in business much longer (Hubbard & O’Brien, 2012).

Marginality – The word ‘marginal’ in economics means ‘extra’ or ‘additional’. The increase in activity or production undertaken by firms has some marginal benefit and some marginal cost. Increasing production or continuing an activity is only profitable to a firm up to the point where marginal benefit is equivalent to marginal cost. Marginal Benefit is the additional benefit to a consumer from consuming one more unit of a good or service. Marginal Cost is the additional cost to a firm of producing one more item of a service/good (Hubbard & O’Brien, 2012).

(B) - The three conditions required for a market to be perfectly competitive are-

There are many buyers and many sellers and all of them are small compared to the market. All firms in the market sell identical products. New firms can easily enter the market as there are no barriers (Hubbard & O’Brien, 2012).

The major differences between a perfect competition and a monopoly are that in perfect competition, there are many firms in the industry, making identical products and new firms can easily enter the market; whereas in a monopoly, there is only one firm in the whole industry, providing a unique product or service and entry of any other firms into that industry is blocked. An oligopoly is an industry with a small number of firms which are interdependent. It is difficult for new firms to enter an oligopoly. An industry cannot change easily from one market system to another as there are certain barriers to entry for new firms, which include economies of scale, ownership of a key input and government imposed barriers (Hubbard & O’Brien, 2012).

(A) - According to UCLA Anderson Forecast’s report for the US (June 20, 2012), the GDP growth will be 2.4% by December 2013 and will rise to 3.4% in 2014. By the end of 2013, the unemployment rate would be 7.7% and the inflation rate is forecasted to be 1.6%. The key interest rate is forecasted to be between 0 and 0.25% in the coming months (“Interest Rates”, Aug 23, 2012). Based on these forecasts, growth is expected to be slow for the next 2 years, although a recession is not predicted. Because of the low interest rates, my organization may take loan for expansion of business and investment in new equipment, which might lead to hiring  more skilled workers.

(B) - Changes in federal taxes and spending  are intended to achieve macroeconomic policy objectives like price stability, higher employment etc are called fiscal policy. Government can use fiscal policy to regulate production and employment in the country, as fiscal policy affects aggregate demand. A change in government purchases and taxes causes changes in aggregate demand. If the real GDP is below the potential real GDP, government can increase purchases or reduce taxes, which will cause an increase in demand. Increased demand will lead to increase in production and more employment.

A contractionary fiscal policy should be implemented to control rising inflation. It involves reducing government purchases or raising taxes. These measures reduce the increase in aggregate demand. As a result, the real GDP and price level falls. An expansionary fiscal policy is implemented during recession. Government increases purchases or decreases taxes, which causes aggregate demand to increase. This leads to rise in real GDP, increased production of goods and more employment (Hubbard & O’Brien, 2012).

In the US, an expansionary fiscal policy is being implemented currently to recover from recent global recession, to promote growth and create jobs. To recover from recession, American Recovery and Reinvestment Act (ARRA) was introduced in 2009. The government increased spending in many areas like healthcare and education and gave tax cuts to individuals and businesses (Hubbard & O’Brien, 2012).

The fiscal policy considerably decreased the severity of recession of 2007-2009 and its after-effects, but the effect was very small compared to the severity of the recession. It checked the rise in unemployment but could not bring about full employment. This is because real GDP and employment are affected by many other factors in addition to fiscal policy, like the monetary policy, typical changes in real GDP and employment during a business cycle, all of which are independent of the government policy (Hubbard & O’Brien, 2012).

(A) - Money is a medium of exchange, a unit of account, store of value and standard of deferred payment. When a customer deposits money in the bank, the bank keeps some of it as loans and assets out what is remained. The person who borrows money uses a check to make a purchase and the seller deposits the check in his bank. The seller’s bank also keeps some of it as reserves and credits out the rest. This goes on until the banks have no excess reserves left. This process increases checking account balances and the cash supply (Hubbard & O’Brien, 2012).

Monetary policy are the actions taken by the Federal Reserve to handle the money supply and interest rates in order to pursue its macroeconomic strategy goals. An expansionary monetary policy is implemented by the Federal Reserve to increase real GDP and employment by increasing money supply and decreasing interest rates. A contractionary monetary policy is implemented by decreasing money supply and increasing interest rates to achieve price stability (Hubbard & O’Brien, 2012).

The monetary policy is conducted independently in the US as it is formed and implemented by the Federal Reserve Bank, which is independent as its decisions do not have to be approved by the government. The intended effect of a given monetary policy may not always be achieved because of the conflict between its various goals and the time lag to achieve the desired effect (Hubbard & O’Brien, 2012).

(B) - If the Federal Reserve sells government bonds, the money supply is decreased as cash is removed from circulation. The prices are pushed down, interest rates increase and there is a slowdown of the economy. If the Federal Reserve buys government bonds, money supply is increased. Interest rates decrease as prices are pushed higher and economic growth is stimulated. When interest rates are reduced, my firm can take more loans and increase investment because of which production and employment are increased (Hubbard & O’Brien, 2012).

(C) - Private goods are rival and excludable, which means that if one person consumes a unit of these goods, it prevents others from consuming that unit. These goods have to be bought in order to be consumed like food. Public goods are nonrival and nonexcludable and one can benefit from it without paying for it like national defense. Common resources are goods that are rival but not excludable, which means that consumption of one unit of that good excludes others from using that unit, but nobody has to pay for it. For example, the air that one breathes. Natural monopoly occurs when one firm can supply the whole market at a lower average total cost than two or more firms (Hubbard & O’Brien, 2012).

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