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Midterm Exam

Economic Analysis
MBA 103

Submitted by:

Shirley C. Chuaco
(G18-0332)

Master in Business Administration

Submitted to:

Dr. Edgar M. Moreno

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 Is economics analysis theory a discipline? Take a position and defend it. Does it
require a Universalist approach as many public choice theorists argue or is it nuanced
by things such as culture and religion? Explain both positions and critique the position
you reject and defend your choice of the position you accept. Be sure to make liberal
reference to the literature on development in your answer. Refer to the literature* in your
answer, and use concrete examples to support your answer.

According to the American Economics Association (AEA), “Economics can be

defined in a few different ways. It’s the study of scarcity, the study of how people
use resources and respond to incentives, or the study of decision-making. It often
involves topics like wealth and finance, but it’s not all about money. Economics is
a broad discipline that helps us understand historical trends, interpret today’s
headlines, and make predictions about the coming years.”
Economics can be considered a social science since it deals how the society deals.
Economics is one of several disciplines that apply the scientific method to
the study of human behavior, a social science.
It is an important subject because of scarcity and desire for efficiency. Just like other
social sciences, economics incorporate mathematics in the theoretical and analytical
framework of the discipline. Economic theory and its analysis may be applied
throughout society including business, finance, health care and government.
Economics is a broad discipline that helps us understand historical trends, interpret
today’s headlines and make predictions in the coming years. (Article shared by Nipon S,
Relationship of Economics with Other Subjects)
Economics may seem obtuse in the abstract. However, it has very powerful real
world implications. Specifically, according to the AEA, economics can help us
answer many big questions, such as why some countries are rich while others
are poor; why men earn more than women; how data can help us make sense of
the world; what causes recessions; and why we ignore information that could be
used toward better decision-making. (Why Studying Economics is Vital in
Today’s World, Joanna Hughes, Nov.30, 2018)

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It is clear now that economics covers a lot of ground and it is divided
into two major parts- macroeconomics and microeconomics.
Microeconomics focuses on the actions of individual agents within
the economy, like households, workers, and businesses while
macroeconomics looks at the economy as a whole which focuses on
broad issues such as growth, unemployment, inflation, and trade
balance. Microeconomics and macroeconomics are not separate
objects, they are complementary perspectives on the overall subject of
the economy.
To give a proper relationship between the relationship of macroeconomics and
microeconomics, the micro decisions of individual businesses are
influenced by the health of the macroeconomy—for example, firms will
be more likely to hire workers if the overall economy is growing. In
turn, the performance of the macroeconomy ultimately depends on the
microeconomic decisions made by individual households and
businesses. (https://courses.lumenlearning.com/wmopen-microeconomics/chapter/microeconomics-
and-macroeconomics/)

Whether you are looking at lakes or economics, the micro and the
macro insights should illuminate each other. In studying a lake,
the “micro” insights about particular plants and animals help us to
understand the overall food chain, while the “macro” insights about the
overall food chain help to explain the environment in which individual
plants and animals live. (https://courses.lumenlearning.com/wmopen-
microeconomics/chapter/microeconomics-and-macroeconomics/)

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Universalism indicates a concept, or theory, that is universally applied or applicable,
i.e. valid for all relevant things in any place and at any time. Universalism is likely to
result in more resources devoted to social needs (Korpi and Palme 1998), avoid the
stigmatization characteristic of targeted approaches, increase socioeconomic security
and often contribute to more vibrant economies (Mkandawire 2006). Yet delivering
universal social policies is easier said than done. Insufficient resources, prevailing
informal economies, high inequality, concentration of power and weak institutions have
historically been insurmountable obstacles for most countries in the global South.
In modern times, however, we are facing a universalist claim on the side of science,
including the science of economics. For instance, notions such as “consumer” or
“resource” or “distributive justice”, as well as the policies based on those concepts, are
universally applied or applicable. The workshop interrogates the universalist claim of
economics by addressing questions concerning its origin, its scope and its implications.
(https://www.unibz.it/events/120842-universalism-in-economics)

2.Can those who teach and do research on economic analysis separate theory from
practice? To what extent does the theory you choose influence the economic analysis,
management and planning tools that you advocate? Have there been any advances in
economic analysis theory in the last ten years (since 2009)? Be sure to make liberal
reference to the literature on economic analysis theory in your answer. Refer to the
literature* in your answer, and use concrete examples to support your answer.

For those who are teaching and doing research work on economic analysis, they cannot
separate theory from the practice of economic analysis.
An economic model is a simplified version of reality that allows us to observe,
understand, and make predictions about economic behavior. Its purpose it take a
complex, real-world situation. Sometimes economists use the term theory instead
of model. A good model should be simple enough to be understood and complex
enough to capture key information. Sometimes economists use the term theory instead
of model. Strictly speaking, a theory is a more abstract representation, while a model is
a more applied or empirical representation. Often, models are used to test theories. In
this course, however, we will use the terms interchangeably.

All model builders strive to eliminate elements to get the heart of whatever matter they
are studying Economists use models as the primary tool for explaining or making
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predictions about economic issues and problems. For example, an economist might try
to explain what caused the Great Recession in 2008, or she might try to predict how a
personal income tax cut would affect automobile purchases.

An architect who is designing a major office building will probably build a physical model
that sits on a tabletop to show how the entire city block will look after the new building is
constructed. Companies often build models of their new products that are rougher and
less finished than the final product but can still demonstrate how the new product will
work and look. Such models help people visualize a product (or a building) in a more
complete, concrete way than they could without them.

Similarly, economic models offer a way to get a complete view or picture of an

economic situation and understand how economic factors fit together.
(https://courses.lumenlearning.com/wm-microeconomics/chapter/economic-models/)

To pursue the organizations strategy, Strategic planning is required.

Strategic planning is the organization's process of defining its strategy, or
direction, and making decisions on allocating its resources to pursue this
strategy. It may also extend to control mechanisms for guiding the
implementation of the strategy (Wikipedia). One can use strategic planning to
determine the social, economic and environmental impact/analysis in a certain
organization. Technological development brings economic growth. However it also
enhances social wealth on the one hand by increasing the income levels and wealth
and causes certain social problems on the other hand. Technological
development makes very important contributions to the economic and social-cultural
life.

3. How have some of the more influential schools of thought in organization influenced
economic analysis theory? Discuss this question placing special emphasis on
developments since 2000. Refer to the literature* in your answer, and use concrete
examples to support your answer.

Classical economics or classical political economy is a school of

thought in economics that flourished, primarily in Britain, in the late 18th and
early-to-mid 19th century. Its main thinkers are held to be Adam Smith, Jean-

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Baptiste Say, David Ricardo, Thomas Robert Malthus, and John Stuart Mill.
These economists produced a theory of market economies as largely self-
regulating systems, governed by natural laws of production and exchange
(famously captured by Adam Smith's metaphor of the invisible hand).(Wikipedia)

Markets work best when they are left alone and that there is nothing but the smallest
role for government . This is the main idea of the Classical school. The other approach
is the laissez-faire and a strong belief in the efficiency of free markets to
generate economic development. Markets should be left to work because the price
mechanism acts as a powerful ‘invisible hand’ to allocate resources to where they are
best employed. In terms of explaining value, the focus of classical thinking was that it
was determined mainly by scarcity and costs of production. In terms of the macro-
economy, the Classical economists assumed that the economy would always return to
the full-employment level of real output through an automatic self-adjustment
mechanism.

Neo-classical

The neo-classical school of economic thought is a wide ranging school of ideas from
which modern economic theory evolved. The method is clearly scientific, with
assumptions, and hypothesis and attempts to derive general rules or principles about
the behaviour of firms and consumers.

For example, neo-classical economics assumes that economic agents are rational in
their behaviour, and that consumers look to maximise utility and firms look to
maximise profits. The contrasting objectives of maximising utility and profits forms the
basis of demand and supply theory. Another important contribution of neo-classical
economics was a focus on marginal values, such as marginal cost and marginal utility.

Neo-classical economics is associated with the work of William Jevons,

Carl Menger and Leon Walras.

New classical

New classical macro-economics dates from the 1970s, and is an attempt to explain
macro-economic problems and issues using micro-economic concepts like rational

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behaviour, and rational expectations. New classical economics is associated with the
work of Chicago economist, Robert Lucas.

Keynesian economics

Keynesian economists broadly follow the main macro-economic ideas of British

economist John Maynard Keynes. Keynes is widely regarded as the most important
economist of the 20th Century, despite falling out of favour during the 1970s and 1980s
following the rise of new classical economics.

In essence, Keynesian economists are skeptical that, if left alone, free markets will
inevitably move towards a full employment equilibrium.

The Keynesian approach is interventionist, coming from a belief that the self interest
which governs micro-economic behaviour does not always lead to long run macro-
economic development or short run macro-economic stability. Keynesian economics is
essentially a theory of aggregate demand, and how best best to manipulate it through
macro-economic policy. (https://www.economicsonline.co.uk/Economic_schools.html)

4.You are the general manager in XYZ, and you are introducing new automated
equipment that will increase productivity, decrease scrap and requires fewer employees
to operate. Discuss what factors you will need to consider when planning and
implementing the change. What managerial economics theory and strategy might you
use and why? Refer to the literature* in your answer, and use concrete examples to
support your answer

When planning and wants to implement the change, first you have to consider the
following:

a. Select a design model and develop the automation plan.

b. You need to redesign the process to maximize the scope for automation. The
automation plan should fit the business structure and the process needs in
the company. In that case, usually automation when properly incorporated
and implemented would result to 75% increase in the efficiency.
c. Deploy the pilot phase. Running a pilot project will allow to observe the
effectiveness and overall performance of the automation plan with an actual
process in real time. Take the results of the pilot project and make
improvements accordingly. Moreover, an automation plan needs to be built
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 also in contingency handling depending on the criticality of the process.
Automation is not a one time activity. There will be changes in the process and
systems and there should be change in systems or process and have a ready plan.
Preparation of the change management plan is also needed.

8 Steps to Implementing Change

 Management support for change – it is important that the management shows
support for changes and demonstrates support when communicating and interacting
with employees. Employees develop a comfort level when they see management
supporting the process.
 Case for change- A case for change can come from different sources. There is
a need to use data to identify and justify areas that need to improve through initiatives.
A case for change can come from different sources such as customer comment cards,
business goals, survey and the likes.
 Employee involvement- all change efforts should involve employees at some
level. Organizational change whether large or small needs to be explained and
communicated, specifically changes that affect how employee perform their jobs. Since
employees are typically closest to the process, it is important that they understand they
why behind a change and participate in creating the new process.
 Communicating the change- communicating the change should be structured
and systematic. The management should be proactive in communicating the change
between them and the employees.
 Implementation- once the change is planned, it is important to have good
communication about the roll-out and implementation of the change. There should be
timeline for the implementation and changes should be made in the order of its impact
on the process and the employees who manage that process. For instance, if the
organization is upgrading its software program, employee training should be done
before the software is installed on their computers. An effective timeline will allow for all
new equipment , supplies or training to take place before it is fully implemented.

 Follow –up- Whenever a change is made it is always good to follow-up after

implementation and assess how the change is working and if the change delivered the
results that were intended.

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 Removing barriers- sometimes employees encounter barriers when
implementing changes. Barriers can be in the form of barriers within employees, other
departments, inadequate training lacking equipment or supply needs. Sometimes
management also needs to deal with resistant or difficult employees. It is the
management’s responsibility to ensure that employees can implement change without
obstacles and resistance.

 Celebrate- It is important to celebrate successes along the way as changes are

made. Celebrating the small changes and building momentum for bigger changes are
what makes employees want to participate in the process. When employees understand
why a change is made and are part of the process for planning and implementing the
change, it allows for a better chance for successful implementation.

Theory in managerial economics to be used to be used is the change management.

Change management is the process, tools and techniques to manage the people side
of change to achieve the required business outcome. Change
management incorporates the organizational tools that can be utilized to help
individuals make successful personal transitions resulting in the adoption and realization
of change.

5.Explain the differences between Porter’s there competitive strategies. Give examples
of the type of organization (e.g. Software design company, widget manufacturer) the
might adopt each strategy and explain why the strategy would be appropriate in
managerial economics. Refer to the literature* in your answer, and use concrete
examples to support your answer.
Michael Porter defines three strategy types that can attain competitive advantage.
These strategies are cost leadership, differentiation, and market segmentation
(or focus).

Cost –Leadership Strategies was used by large businesses to achieve the lowest
possible production and distribution cost through economies of scale. Firms that pursue
cost-leadership strategies tend to have strengths in purchasing, manufacturing, and
distribution, which help them manage their costs. Companies with this strategy typically
target value-seeking customers with no-frills, basic products and penetration pricing.
This is the easiest competitive strategy to copy, meaning that other large competitors
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may be able to set lower prices to capture more market share. However, cost-
leadership strategies can help large businesses fight off challenger companies and
brands that may not have the operational strength and size needed to drive prices to
their lowest points.

Example: It uses strategic marketing priority by many big corporations such as Walmart,
McDonalds and Southwest Airlines.

Differentiation Strategies

Companies using differentiation strategies target quality and value-seeking customers

with premium offerings and strong brand equity. Their competitors cannot offer what
they offer.

To pursue a differentiation strategy, you might focus on a smaller part of the current
offerings. Whole Foods and its strategy to offer a large variety of organic products—
rather than one shelf or aisle, like most grocery stores—provides an example of this
strategic option in play. Also, Whole Foods exclusively sells a number of organic
products.

Example: Consumers love getting the same product for less. An example of this is a
lawn-care company that will do weekly maintenance guaranteed to cost less than any
other advertised price. ... Selling the most expensive products in a market is a
counterintuitive differentiation strategy.

Focus Strategies

Some businesses choose to focus on one or more narrow market segments to protect
themselves from competition. A focus strategy helps companies with limited resources
compete.

The first type of focus strategy is to become the cheapest offering in a highly targeted
market segment. For example, you might focus on having the lowest priced coffee in a
particular geographic area. This is similar to a cost-leadership strategy, but more highly
specialized. (Three Competitive Strategies for Your Business, https://www.frog-
dog.com/three-competitive-strategies-business)

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Example:

Such companies include: TOMS, Frog Box, and Ten Tree Apparel. All three of these
companies uses the “Focus Strategy” by targeting a very specific (narrow) market-
consumers that uphold and value the importance of ethics.
(https://www.mindtools.com/pages/article/newSTR_82.htm)

6.What is demand? What are two ways to depict a demand schedule? Refer to the
literature* in your answer, and use concrete examples to support your answer.

Demand refers to the consumer’s desire to purchase goods and services and the
customer’s willingness to pay a price for a specific good or service. Holding all other
factors constant, an increase in the price of a good or service will decrease the quantity
demanded and vice versa. There is an inverse relationship between the price and
quantity demanded.

A demand schedule is a chart showing the number of goods or services demanded at

specific prices. It shows the relationship between the price of goods and amount of
goods consumers are willing and able to pay for them at that price. A demand schedule
can be graphed on a chart where the Y axis represents the price and X axis represents
the quantity. The graphical representation of a demand schedule is called demand
curve. (https://www.thebalance.com/five-determinants-of-demand-with-examples-and-formula-3305706_)

Example: Demand curve for gasoline, when the price of gasoline is $3.5 per liter, its
demand is 50 liters, while when the price of gasoline is $0.5 per liter, its demand is 250
liters.

There are five determinants of demand are:

 The price of the good or service.
 The income of buyers.
 The prices of related goods or services. ...
 The tastes or preferences of consumers.
 Consumer expectations.

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7.Discuss and explain your answer. a. As the price of theater tickets rises, what
happens to the quantity of tickets that people are willing to buy? b. As the price of
theater tickets rises, explain what happens to the quantity of tickets that people are
willing to sell. Explain your answer. Refer to the literature* in your answer, and use
concrete examples to support your answer.
a. As the price of theater tickets rises, what happens to the quantity of tickets that
people are willing to buy?

If the price of the theater ticket rises, the quantity demanded for that ticket will decrease.

b. As the price of theater tickets rises , explains what happens to the quantity of tickets
that people are willing to sell.
In microeconomics, the law of demand states that, "conditional on all else being equal,
as the price of a good increases (↑), quantity demanded decreases (↓); conversely, as
the price of a good decreases (↓), quantity demanded increases (↑)".
(https://www.investopedia.com/terms/l/lawofdemand.asp)

As price of the ticket theater rises, (quantity of x on the market) , increases. When the
price of good is up, suppliers of that good will produce more. Supply is directly
proportional to the price.

Economists call this positive relationship between price and quantity supplied—that
a higher price leads to a higher quantity supplied and a lower price leads to a
lower quantity supplied—the law of supply. The law of supply assumes that all other
variables that affect supply are held constant.

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8. Discuss. A. If market price is above equilibrium price, explain what happens and why.
B. If market price is below equilibrium price, explain what happens and why? Refer to
the literature* in your answer, and use concrete examples to support your answer.

a. If market price is above equilibrium price, explain what happens and why?
If the price is above the equilibrium price, quantity supplied is greater than the
quantity demanded, will create a surplus. A surplus exists when the price is above
equilibrium price. If a surplus exist, price must fall in order to entice additional
quantity demanded and reduce quantity supplied until the surplus is eliminated.

Example: if you are the producer, you have a lot of excess inventory that cannot
sell. Will you put them on sale? It is most likely yes. Once you lower the price of
your product, your product’s quantity demanded will rise until equilibrium is
reached. Therefore, surplus drives price down.

b. If market price is below equilibrium price, explain what happens and why?

If the market price is below the equilibrium price, quantity supplied is less
than quantity demanded, creating a shortage. If a shortage exists, price must rise
in order to entice additional supply and reduce quantity demanded until the
shortage is eliminated.

Example: if you are the producer, your product is always out of stock. Will you raise
the price to make more profit? Most for-profit firms will say yes. Once you raise the
price of your product, your product’s quantity demanded will drop until equilibrium is
reached. Therefore, shortage drives price up.

9.What are the two basic classes of market failure? What would be an example of
each? Refer to the literature* in your answer, and use concrete examples to support
your answer.

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Market failure is the economic situation defined by an inefficient distribution of goods
and services in the free market. In market failure, the individual incentives for rational
behavior do not lead to rational outcomes for the group.
Market failures come in four varieties:
1. Public goods
2. Market control
3. Externalities
4. Imperfect information

Public goods has two features- nonrival and nonexcludable. Nonrival means that
consumption of a good or service by one party does not prohibit consumption of the
same good or service by another party. The broadcast of a TV series is an example
of a nonrival good.
A nonexcludable good is one where nonpaying consumers cannot be prevented
from accessing the good. A classic example is national defense. Taxpayers fund
national defense, but it is impossible to prevent individuals who do not pay taxes from
accessing it.

The delivery of public goods by private companies or organizations can lead to the
“free-rider” problem. The free-rider problem can happen when enough people can enjoy
a good or service without paying for the cost to supply it that there’s a danger that, in a
free market, the good will end up under-provided or not provided at all by a private
company. The assumption is that private companies and organizations won’t supply
something if they know they will lose money on it. In that case, many economists
believe there is a role for government, rather than private companies, to provide or
subsidize those goods or services using taxpayer dollars.

Market control arises when buyers or sellers are able to exert influence over the price
of a good and/or the quantity exchanged. The ability to control the market, especially
the market price, prevents a market from equating demand price and supply price.
Common examples of markets with supply-side or demand-side control include
city-wide electrical distribution (monopoly), automobile manufacturing
(oligopoly), employment in a company town (monopsony), and employment in
professional sports (oligopsony)

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Externalities, sometimes called “spillovers” or “neighborhood effects,” occur when a
transaction generates a benefit (positive externality) or cost (negative externality) on a
party not directly involved in the transaction.

A classic example of a negative externality is pollution that results from the

production of a good in a factory. Individuals living around the factory are exposed to
the pollution and may cause them health issues. An example of a positive externality
may include workplace CPR or First Aid training. This could save lives outside of the
workplace without requiring potential beneficiaries to pay for the training.

Imperfect information can be due to ignorance or uncertainty. If the market participant

is aware that better information is available, information becomes another need or want.
Information may be acquired through an economic transaction and becomes a
commodity that is a cost to the buyer or seller. Useful information is available as a
market product in forms like books, media broadcasts, and consulting services.
Insurance is an example of product where the insurance company assumes the risk of
defined uncertain outcomes for a fee. Insurance is an example of product where the
insurance company assumes the risk of defined uncertain outcomes for a fee.
(http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=market+failures)

10.Explain what comparative advantage is. Make up an example to illustrate this

concept. Refer to the literature* in your answer, and use concrete examples to support
your answer.

Comparative advantage is an economic term that refers to an economy’s ability to

produce goods and services at a lower opportunity cost than that of trade partners. A
comparative advantage is the company’s ability to sell goods and services at a lower
price than that its competitors and realize stronger sales margins.

A good illustration of comparative advantage is the oil-producing nations which have

comparative advantage in chemicals. Their locally produced oil provides a cheap source
of materials for the chemicals when compared to countries without it. A lot of raw
materials ingredients are produced in the oil distillery process. As a result, Saudi Arabic,
Kuwait, and Mexico are competitive with US chemical production firms. Their chemicals
are inexpensive, making their opportunity cost low. (Adam Hayes, Feb.1, 2020)

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