Sarvajanik Education Society

S.R.Luthra Institute Of Management

Module V Case Study

Semester I (805)

Class A/2

Economics for Managers (2810002)

Faculty Delnaz Dastoor

A
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Module V Case Study Presentation

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158050592010
158050592011
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Nilam Bane
Beena Thankachan
Krupal Dixit
Jiten Gheeya
Prachi Patel
Rincy Thomas
Sharon Raju

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Subject: Economics for Managers (2810002)

Submitted to:
Mrs. Delnaz Dastoor

S. R. Luthra Institute Of Management-805

Case-1
Near-Empty Restaurants and Off-season Miniature Golf
Have you ever walked into a restaurant for lunch and found it almost empty? Why, you might have
asked, does the restaurant even bother to stay open? It might seem that the revenue from the few
customers could not possibly cover the cost of running the restaurant.
In making the decision whether to open for lunch, a restaurant owner must keep in mind the
distinction between fixed and variable costs. Many of a restaurants costs-the rent, kitchen equipment,
tables, plates, silverware, and so on-are fixed. Shutting down during lunch would not reduce these
costs. In other words, these costs are sunk in the short run. When the owner is deciding whether to
serve lunch, only the variable costs-the price of the additional Food and the wages of the extra staff are
relevant .The owner shuts down the restaurant in the lunch time only if the revenue from the few lunch
time customers faces to cover the variable cost.
An operator of a miniature-golf course in a summer resort community faces a similar decision.
Because revenue varies substantially from season to season, the firm must decide when to open and
when to close. Once again, the fixed costs-the costs of buying the land and building the course are
irrelevant making this decision. The miniature-golf course should be open for business only during
those times of year when its revenue exceeds its variable costs.

SUMMARY
During lunch time restaurants are almost empty due to this now its the owners decision whether to
keep the restaurants open or close. Owner has to keep a distinction between variable and fixed cost.
Restaurants fixed cost include rent, kitchen equipment, plates that are going to occur even if the
restaurant is closed and variable cost include staff wages, food etc that would be incurred only when
the restaurants are open. By shutting down the fixed cost would not be reduced but the variable cost
can be avoided, the restaurant should be opened up in lunchtime only if the revenue covers the variable
cost. Same problem is being faced by operator of miniature golf course as revenue differs from season
to season as fixed cost include buying land , setting up courses are irrelevant in making this decision,
so here also it should be opened when revenue exceed variable cost.

Fixed cost: - fixed costs are those cost that do not vary with the quantity of output produced. Fixed
costs are incurred even if the firm produces nothing at all. Fixed cost includes rent, advertising,
insurance, equipment, rent etc.
Variable cost: - Variable costs are the cost that varies with the quantity of output produced. Variable
cost change as the firm alters the quantity of output produced. Variable cost includes food and
beverage costs, staffing expenses etc.
Total Cost: - total cost includes fixed cost and variable cost.
TC=TFC+TVC

Conclusion

So here we conclude that the empty restaurants should remain opened only if the revenue is higher
than the variable cost. To maintain the goodwill of restaurant it should be opened for whole day though
even the revenue is less than as compared to the breakfast and dinner time. If the average revenue is
higher than the average variable cost then it should definitely resume his service on whole day basis.
Same way miniature golf course should be open for business only if the revenue of times of year
exceeds its variable cost.

Case-2
Two Big Shifts in Aggregate demand: The Great Depression and World War II

At the beginning of this chapter, we established three factors about economic fluctuations by looking at
data since 1965. Lets now take a longer look at U.S Economic history. Figure shows data since 19100
on the percentage change in real GDP over the previous 3 years. In an average 3 year period, real GDP
grows about 10 per cent a bit more than 3 per cent per year. The business cycle, however, causes
fluctuations around this average. Two episodes jump out as being particularly significant; the large
drop in real GDP in the early 1930s and the large increase in real GDP in the early 1940s. Both of
these events are attributable to shifts in aggregate demand.
The economic calamity of the early 1930s is called the great depression, and it is by far the largest
economic downturn in U.S history. Real GDP fell by 27 per cent from 1929-1933, and unemployment
grows from 3 per cent to 25 per cent At the same time, the price level fail by 22 per cent over these 4
years. Many other countries experienced similar declines in output and crises during this period.
Economic historians continue to debate the causes of the great depression, but most explanations
centre on a large decline in aggregate demand. What caused aggregate demand to contact? Here is
where the disagreement arises.
Many economists place primary blame on the decline in the money supply; From 1929-1933, the
money suppy fell by 28 per cent. As you may we call from our discussion of the monetary system, this
decline in the money supply was due to problems in the banking system. As households withdrew
there money from financially shaky banks and bankers become more cautious and started holding
greater reserves, the process of money creation under fractional reserve banking went in reverse. The
fed , meanwhile, failed to offset these fall in the money multiplier with expansionary open market
operations. As a result,the money supply declined. Many economists blamed the feds failure to act for
the great depressions severity.
Other economists have suggested alternative reasons for the collapse in aggregate demand. For
example, stock prices fell about 90 per cent during this period, depressing house hold wealth and there
by consumer spending. In addition, the banking problems may have prevented some firms from
obtaining the financing they wanted for investment project and this would have depressed investment
spending. It is possible that all these forces may have acted together to contract aggregate demand
during the great depression.
The second significant episode in figure-the economic boom of the early 1940s-is easier to explain the
obvious cause of this event was World War 2. As the Unites States entered the war overseas, the
factorial Government had to devote more resources to the military. Government purchases goods and
services increased almost five fold from 1989-1944. This huge expansion in aggregate demand almost
doubled the economys production of goods and services and led to a 20 per cent increase in the price
level (although widespread Government price controls limited the rise in prices). Unemployment fell
from 17 per cent in 1939 to about 1 percent in 1944- the lowest level in U.S history.

Main Parameters of Case

Depression:
A depression is a sustained, long term downturn in economic activity in one or more economies. It is
more severe downturn than an economic recession, which is slowdown in economic activity over the
course of normal business cycle.
Depressions are characterized by their length, by abnormally large increase in unemployment, falls in
the availability of credit, shrinking output as buyers dry up and suppliers cut back on production and
investment, large number of bankruptcies including sovereign debt defaults, significally reduced
amounts of trade and commerce, as well as highly volatile relative currency value fluctuations.
Aggregate Demand:
Aggregate demand is the total quantity of goods and services demanded in an economy at a given price
level .It is represented by the aggregate-demand curve, which describes the relationship between price
levels
and
the
quantity
of
output
that
firms
are
willing
to
provide.
Aggregate demand is the sum of theconsumption expenditure, investment expenditure,
government expenditure and net exports.
World War II:
(WWII or WW2), also known as the Second World War, was a global war that lasted from 1939 to
1945, though related conflicts began earlier. It involved the vast majority of the world's nations
including all of the great powerseventually forming two opposing military alliances: the Allies and
the Axis. It was the most widespread war in history, and directly involved more than 100 million
people from over 30 countries. In a state of "total war", the major participants threw their entire
economic, industrial, and scientific capabilities behind the war effort, erasing the distinction
between civilian and military resources.

Summary

In this case, it is all about U.S economic history. Three key facts about economics fluctuation have
been lighted:
1.) Economics fluctuations are irregular and unpredictable.
2.) Most macroeconomic quantities fluctuate together
3.) As output falls, unemployment rises.
During 1930s, real GDP dropped largely and in 1940s, the real GDP increase largely. Thus, aggregate
demand attributed to shifts. The Great Depression was the largest economic downturn in US history.
Here, real GDP fell by 27% from 1929 to 1933 and unemployment rose from 3% to 25%. And at the
same time, the price level fell by 22% over these 4 years. Many countries faced these declines during
this period.

A huge debate on the causes of the great depression was continued but the aggregate demands
explanations were declined. And the disagreements arose. Many economists blame on the decline in
the money supply because from 1929 to 1933, the money supply fell by 28%. The decline in money
supply was due to problems in the banking systems. Other economist suggested alternative reasons for
the downfall in aggregate demand. The stock prices fell about 90% during this period, depressing
household wealth and thereby consumer spending. And thus the aggregate demand gets contracted
during the great depression.

Another cause of this event was World War 2. US entered the war overseas; the Federal Government
had to devote more resources to the military. Government purchases many goods and services from
1939 to 1944. The aggregate demand expanded hugely almost doubles of the economys production of
goods and services and led to 25% increase in price level.
Here, unemployment fell from 17% in 1939 to about 1% in 1944 and that was the lowest level in
US history.

Conclusion

The stock market crash of 1929 marked the start of the great depression; the most widespread in
modern history, with effects felt until the start of World War 2.But in World War 2, government buy
many goods and service from military, and then government helps in decreasing the unemploymentrate
at the extent of the 8%.

Case 3
The recession of 2008 to 2009

In 2008 and 2009, the U.S economy experienced a financial crisis and a severe downturn in
economic activity. In many ways, it was the worst macroeconomic event in more than half a century.
The story of this downturn begins a few years earlier with a substantial boom in the housing market.
The boom was, in part fuelled by low interest rates. In the aftermath of the recession of 2001, the
Federal Reserve lowered interest rates to historically low levels. Low interest rates helped the
economy recover, but by making it less expensive to get a mortgage and buy a home, they also
contributed to a rise in housing prices.
In addition to low interest rates, various developments in the mortgage market made it easier for
subprime borrowers- those borrowers with a higher risk of default based on their income and credit
history- to get loans to buy homes. One development was securitization, the process by which a
financial institution (specifically, a mortgage originator) makes loans and then (with the help of an
investment bank) bundles them together into financial instruments called mortgage- backed securities.
These mortgage- backed securities were then sold to other institutions (such as banks insurance
companies), which may not have fully appreciated the risks in these securities. Some economists
blame inadequate regulation for these high-risk loans. Others blame misguided government policy:
some policies encouraged the high-risk lending to make the goal of homeownership more attainable
for low-income families. Together, these many forces drove up housing demand and housing prices.
From 1995 to 2005, average housing prices in the United States more than doubled.
The high price of housing, however, proved unsustainable. From 2006 to 2009, housing prices
nationwide fell about 30%. Such price fluctuations should not necessarily be a problem in a market
economy. After all, Price movements are how markets equilibrate supply and demand. In this case,
however, the price decline had two related repercussions that caused a sizable fall in aggregate
demand. In this case however the price decline had to related repercussions that caused a sizable fall in
aggregate demand.
The first repercussions were a substantial price in mortgage default and home foreclosure. During the
housing boom, many home owners had bought there homes with mostly borrowed money and minimal
down payment. When housing prices declined, this homeowners were under water (they owed more on

there mortgages than their homes were worth). Many of this home owners stopped paying their loans.
The banks servicing the mortgage respondent to this defaults by taking there house away in foreclosure
procedures and then selling them off. The banks goal was to recoup whatever they could from the bad
loans. As you might have expected from your study of supply and demand, the increase in the number
of homes for sale exacerbated the downwards spiral of house prices. As house prices fell, spending on
the construction of housing also collapsed.
A second repercussion was that the various financial institutions that owned mortgage-backed
securities suffered huge losses. In essence, by borrowing large sums to buy high risk mortgages, this
company had bet that house prices would keep rising; when this bet turned bad, they found themselves
at or near the point of bankruptcy. Because of this large loses, many financial institutions did not have
fund to loan out, and the ability of the financial system to channel resources to those who could best
use them was impaired. Even credit worthy customers found themselves unable to borrow finance
investment spending.
As a result of all these events, the economy experienced a large contractionary shift in aggregate
demand. Real GDP and employment both fell sharply. Real GDP declined by almost 4% between the
fourth quarter of 2007 and the 2 quarter of 2009.The rate of unemployment rose from 4.4% in May
2007 to 10.1% in October 2009.
As the crises unfolded, the US government responded in a variety of ways. Three policy actions-all
aimed in part returning aggregate demand to its previous level- are most noteworthy. First, the Fed cut
its target for the funds rate from 5.25% in September 2007 to about 0 in December 2008.The Federal
Reserve also started by mortgage-backed securities and other private loans in open market operations.
By purchasing these instruments from the banking system, the Fed provided bank with additional
funds in the hope that the banks would makes loan more readily available.
Second, in an even more unusual move in October 2008, congress appropriated $700 billion for the
treasury to use rescue the financial system. The goal was to stem the financial crises on Wall Street and
make loans easier to obtain. Much of these funds were used for equity injections in the bank. That is,
the treasury put funds into the banking system, which the bank could use to make loan; in exchange for
this funds, the US government became a part owner of these banks, at least temporarily.
Finally, when Barack Obama became president in January 2009, his first major initiative was a large
increase in government spending .After a relatively brief congressional debate over the form of the
legislation, the new president signed the $ 787 billion stimulus bill on February 17, 2009. This policy
move is discussed more fully in the next chapter when we consider the impact of physical policy on
aggregate demand.
As this book was going to press, the economy was starting to recover from the economy downturn.
Real GDP was again, and unemployment had fallen to 9.5% in June 2010.Which,if any, of these many
policies moves were most important for promoting this economic recovery? ;that is surely a question
that macroeconomic historians will debate in the years to come.

Summary
The Great Recessionis a period of general economic decline observed in world markets beginning
around the end of the first decade of the 21st century.
This case is related to the Recession which was occurred in 2008-2009 in US. This country
experienced a huge financial crisis and a severe downturn in economic activity. A few years later with
a large explosion in the housing market, it was fueled by low interest rate. After 2001, the Federal
Reserve Bank lowered interest rates for the first time and indeed it recovered the economy even but by
making it less expensive to get mortgage and buying a home therefore. They also contributed to a rise
in housing prices. During these low interest rates various expansions in the mortgage market made it
easier for subprime borrowers. The process called securitization were sold to other institution in which
the risk was associated, and due to this some economist blamed uneven regulation for this high risk
loans, others blamed misguided government policy. Few policies encouraged this high risk landing to
the low income families. And thus, housing demand and housing prices went up. High price of housing
thus proved unsustainable. From 2006 to 2009 the housing prices fell about 30% and these fluctuations
should not necessarily be a problem in a market economy. Here the price movements are how markets
equilibrate supply and demand. Thus, the price decline had two consequences that cost a fall in
aggregate demand:1. The first consequence was raise in mortgage default and home foreclosures.
2. The second consequence was that the various financial institutions owned securitization which
suffered a huge losses.
As a result, economy experienced a large reductionshift in aggregate demand. Here real GDP and
employment both fell drastically. Real GDP declined by 4% between fourth quarter of 2007 and
second quarter of 2009. The rate of unemployment rose from 4.4% in may 2007 to 10.1% in October
2009. As the crises unfolded, the US government responded in a variety of ways, three policy actions
were aimed:1. The federal reserves started buying mortgage-backed securities and other private loans aimed
open market operations.
2. The goal was to stop the financial crisis on Wall Street and make loans easier to obtain.
3. First major initiative by Barrack Obama was a large increase in government spending.

The causes of Recession were:

1. Rise and fall of the housing market
2. Effects on the Financial sector
3. Effects on the broader economy
4. Effects on financial regulations
Thus, real GDP wag growing again and unemployment had fallen to 9.5% in June 2010.

How did the Housing Bubble develop?

The increased demand led house price to rise. People lost faith in the stock market and thought
investing in a home would be a much safer alternative.
This led the federal reserve board to cut interest rates in an effort to stimulate the economy.
Thus the price of the typical American house increased by 124%

Conclusion
Since the start of the Great Recession, the U.S. labor market remains extraordinarily weak, with nearly
few million jobs needed just to bring back the labor market. The root of this labor market weakness is
simply weak aggregate demandbusinesses have not seen demand for their goods and services pick
up in a way that would require them to significantly increase hiring. Long-term unemployed workers,
who are almost by definition cash-strapped, are likely to immediately spend their unemployment
benefits. Unemployment benefits spent on rent, groceries, and other necessities increase economic
activity, and that increased economic activity saves and creates jobs throughout the economy. For this
reason, economists widely recognize government spending on unemployment insurance benefits as
one of the most effective tools for increasing economic activity in a period of persistent labor market
weakness. Policies that would spread the total hours of work across more workers could also bring
down unemployment from the supply side. Work sharing would encourage employers who experience
a drop in demand to cut back average hours per employee instead of cutting back the number of
workers on staff