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Economics in theory. The main purpose of this report is to explain a couple of economic concepts to the business men and women attending the conference held by the investment bank of Bluefoot Securities and to further help them understand how to apply ec

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Economics in Theory Prepared By *** Course Title: Module Title: Tutor: Table of Contents 1.0 Executive Summary 3 2.0 Explanation of Some Key Economic Terms 3 2.1 Scarcity and Choice 3 2.2 Opportunity Cost 4 2.3 Micro versus Macro Economics 4 3.0 Demand and Supply Curves 5 3.1 Individual & Market Demand Curve 5 3.2 A Firm's Output Decision in the Short Run 6 3.3 A Firm's Output Decision in the Long Run 8 3.4 Equilibrium Price and Equilibrium Quantity 9 3.5 Effects of Excess Supply and Excess Demand on Market Equilibrium 10 4.0 Market Structures 11 4.1 Perfect Competition 11 4.2 Oligopoly 14 5.0 Keynesian and Monetarist Schools of Thought 15 5.1 Keynesian Economics 15 5.2 Monetarist Economics 16 6.0 References 18 1.0 Executive Summary The main purpose of this report is to explain a couple of economic concepts to the business men and women attending the conference held by the investment bank of Bluefoot Securities and to further help them understand how to apply economics in their own organisations. This report comprises four different major areas of economics that are to be addressed. Economics is not only a simple theoretical tool but also a useful aid to business decisions if properly applied. To gain a clearer understanding of the subject, this report will look at economics in terms of its use in the business world. To begin with, this report will explain some key economic terms such as scarcity and choice. Following that, this report will examine how demand and supply curves work in detail. Subsequently, it will illustrate different market structures such as perfect competition and oligopoly. The last but not the least, this report will differentiate between Keynesian and Monetarist schools of thought. With the assistance of various theories of economics, the organisations are more ready to link them with practice so as to add to their competition in the business world. ...read more.


Once the scale is confirmed, the output decision turns to be a short-term decision. The Long-run Total Cost is how much the firm costs to produce a certain quantity in the long run, determined by both product quantity and firm scale. Besides, the Long-run Average Cost = LTC / Q, Long-run Marginal Cost = dLTC / dQ. LTC is the envelope of STC and they are tangent in the same shape. In the same way, LAC is the envelope of SAC and they are also tangent in the same shape of U as shown below. In the long run, the market price is moderate and the firm decides its output by applying the LMC = MR principle when there is neither loss nor excess profit for the firm. In this market there are no new firms to enter or current firms to step out, contributing to a relative equilibrium in the market and a long-run equilibrium for the firm. Therefore, in perfect competition, the firm decides its long-run output at the point where MR = LMC = SMC = AR = LAC = SAC as shown below and the equilibrium output is Q1 along the horizontal axle. 3.4 Equilibrium Price and Equilibrium Quantity In Western economics, the equilibrium price of a product is the price derived when the market demand quantity of this product equals its supply quantity, and the equal quantity of demand and supply at equilibrium price is equilibrium quantity (Samuelson & Nordhaus, 2004). Geometrically, the equilibrium of a product is achieved at the intersection of demand curve and supply curve of the product. As shown in the diagram above, when price is P1, the supply quantity Q2 exceeds demand quantity Q1 and the market price is bound to fall. When price falls to P2, the demand quantity Q1 exceeds supply quantity Q2 and the market price will increase. Only when the price is Pe can the market demand equals supply at Qe. ...read more.


5.2 Monetarist Economics Against government intervention, Monetarists think that free market economies are best in the long term even at the cost of unemployment. Secondly, they believe that inflation is the big evil; it is a tax on everyone. Thirdly, government intervention makes the economy worse off in the long run. Following that, available economic data are often inaccurate and too late for useful government inflation. The last but not the least, government spending is believed to crowd out efficient private activity (Frank & Bernanke, 2007). Monetarists believe that monetary policies can accomplish two tasks including preventing money from being a root of economic disorder and providing a sound and stable environment for economy. Therefore, Monetarists claim to adopt a constant growth rate of money when there is no inflation and they hold money supply as the only control indicator of monetary policies which exclude interest rates, credit flow, and reserve fund. Such policy is called unitary policy. Monetarist Economics was once widely accepted and applied in some major capitalist countries such as USA and UK because it could tackle some existing social problems effectively then. For example, it claims to keep policies to be stable and continual so as not to turbulent economy; to emphasise the effect of monetary policies to keep appropriate money supply in the flow and suchlike. These measures contributed to the decrease in inflation degree for both UK and USA in the 1980s. Even in today's world, these measures still play a part in some countries' macro-control. However, it can not be denied that Monetarist Economics has some weak points. For example, it considers money to be the only important policy and promotes unitary policy, which is way too extreme. Besides, this also leads to Monetarist Economics' disregard of fiscal policies, being too one-sided (Virtual Economy Home Page, n.d.). In a word, when applying Monetarist Economics, both its contribution to alleviating inflation and side effects to economy should be considered. Only in this way can Monetarist Economics be applied rationally and reasonably. 6. ...read more.

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