Purpose of Economics and Price Mechanisms

Purpose of Economics and Price MechanismsTask 1Describe economics, the purpose of its activities and identify economic problem.Economic organisation is a system aim for producing, distributing and consuming goods and service. It includes the combination of the various institutions, agencies, consumers, entities that comprise the economic structure of a get hold ofn society or community. Furthermore, it as well as includes how these agencies and institutions be related to each other, how information flows between them and the social relations within the system which including property in good orders and the structure of management. The mode of production go away be the related concept.Every economic system provides solutions to quaternity questions what goods and services will be produced how they will be produced for whom they will be produced and how they will be every(prenominal)ocated between expending (for present use) and enthronization (for future use). In a devolved economic system, these questions atomic number 18 resolved. This lead to economic coordination to achieved finished the price mechanism(Elton, 2014).The basic economic problem is or so scarcity and picking since in that location argon besides a limited amount of resources available to produce the unlimited amount of goods and services which human, people commands and needs. Because of scarcity, various economic stopping points moldiness be made to allocate resources efficiently.ResourcesA resource is a means of support withal fucking be regarded as all feature of our environment that armed services to support our well being. in that location ar three main types of resourceThe premiere Physical or natural resource much(prenominal) as oil, climate, water, minerals, forests and fisheries.The second human resource peoples and their various skills. The third man made resources e.g. machines, equipments.ScarcityScarcity set up be broken down into four key ingredients of factors of productionLand Land includes all natural resources.Labour Labour includes all physical and mental effort.Capital Capital includes machinery and other items that go into further production.Enterprise attempt is the art of combining the other three factors in the production process.Scarce goods and servicesAs notes above, if did not exist, all goods and services would be free. A good is considered scarce if it has a non-zero cost to consume costs something and is scarce. By consuming one good, another good is foregone. at that placefore decisions and switch-offs to be made.(T.Ming, 2014,)The cost of a food is a signal of its scarcity. One good maybe more scare than another, either because of limited resources or superiorer want (demand) for that good.ChoiceBecause resources are scarce and most of our wants are extensive, a choice has to be made ab step up how to use scare resources in the best way. establish on the choice, the highest-value option will be forgone and this is called prospect cost. This rule applies to organisations, society as a whole, and to individuals.Choice and opportunity costChoice and opportunity cost are two fundamental concepts in economics. Given that resources are limited, manufacturers and consumers progress to to make choices between competing alternatives. All economic decisions involve making choices. Individuals must choose how best to use their skill and effort, firms must choose how best to use their workers and machinery, and governments must choose how to use taxpayers money. Making an economic choice creates a sacrifice because alternatives must be given up, which gives in the waiver of benefit that the alternative would have provided. Similarly, land and other resources, which have been used to take a shit a new school could have been used to build a new factory. The loss of thenext bestoption represents the real sacrifice and is referred to asopportunity cost. The opportunity cost of choosing the school is the loss of the factory, and what could have been produced.It is necessary to appreciate that opportunity cost relates to the loss of the next best alternative, and not just whatsoever alternative. The true cost of any decision is always the closest option not chosen. (Bong, 2014)Define the theory of price mechanism by Adam Smith and illustrate by examples(s) to supports yours answer with germane(predicate) issues.Adam Smith is one of the Founding Fathers of economics described the invisible hand of the price mechanism in which the hidden-hand of the market operating in a competitive market through the pursuit of self-interest allocated resources in societys best interest. It was the notion of the invisible hand that enabled Adam Smith to bust the first comprehensive theory of the economy as an interrelated social system. (Tay, 2014)In common, the concept is composed of three logical stepsThe first is the remark that human action often leads to consequences that were u n set aparted and unforeseen by the actors. The second step is the argument that the sum of these unintended consequences over a large function of individuals or over a long period of time may, given the right circumstances, result in an order that is understandable to the human mind and appears as if it were the product of some intelligent planner. The third and final step is the judgments that the overall order is beneficial to the participants in the order in ways that they did not intend but nevertheless find desirable.The price mechanism performs three main functionsRationingThe aim is to ration scare resources when demand in market outstrips supply. When there is a shortage of a good, the price is bid up, leaving only those with the willingness and ability to pay to purchase the product. This can causes supply and demand to reach residue of demand and supply.Signaling functionThey adjust to demonstrate where resources are required or not, via a change in demand.For example, the price of goods which are scarce will increase. This increase in price should provide an incentive for producers to increase production of the good so that can meet the demand.Transmission of preferencesConsumers are able to nimble producers to changes the nature in wants and needs through their choices so that the market provides the right amount of the right goods. When demand is weaker, then the supply will contracts as the producers knap sand on output.Task 2 delineate factors affecting the economics of an organization.There are some types of competition in seam. They are perfect competition, liberal competition, and monopolistic competition.Perfect competitionIt is a low barrier to entry, many choices by consumers, and no business has supremacy. It means that many companies competing and nobody has a stiff lead. For examples, restaurants, grocery stores, barbers shop, shopping mall, professional services such as dentist, doctor, contractor and others. It is a theoretic al state in which not only single purchaser or seller has influence over the any products sold in the market. Sellers are free to enter the market to sell any product and buyers are free to purchase any product wanted. A large number of producers and sellers operate in the perfect competitive market, and the products sold by one producer are easily replaced by a similar product from another producer. Prices for goods or services would be established by the rate in mass of consumers are willing to pay and producers will adjusting the productivity to balance with the price. (ReemHeakal, 2014)Imperfect competitionIt describes a market where many firms offer variations of the same product or multiple products are offered with differences. The difference may be differs in quality, preference, durability, price or utility. However, firm will be forced to departure the market if their products are not purchase by consumers. For example, a hair style cutting may be assisted by more than n umbers of barber shops which all differing in style, price and environment. Consumers are bound only by personal preference and affordability in choosing a barber shop. (Hans, 2014)Monopolistic competitionThe sellers feel they do have some competition. There is one big follow dominating the market with a few medium or smaller sized companies.Identify source of pay.Source of pay several(prenominal) sources of finance areshort margeand must be compensable rearwards within a year. Other sources of finance arelong termand can be paid back over many years.Venture detonating device provides long-term, dedicated partake hood to help unquoted companies grow and succeed. Obtaining bet on capital is significantly distinguishable from raising debt or a loan from a lender. The lenders have a legal right to interest on a loan and re remuneration of the capital depends on the business weather success or failure. Venture capital is the money put into an enterprise which may all be lost if the enterprise fails. A businessman fiting up a new business will invest venture capital of his own, but he will plausibly need extra funding from other source, and can be very successful if he gets very high realises and a substantial parry on the investment. However, there must be a very high risk of losing the investment and it will take some times to get the provide and profits. A venture capitalist will require a high expected rate of return on investments, to recompense for the high risk.Internal sourcesof finance are funds found inside the business. For example, profits can be kept back to finance expansion. Alternatively the business can sell assets that are no longer really needed to free up cash.Internal Sources of finance and growthIt getd as organic growth which is the growth generated through the development and expansion of the business itself. An organic growth can be achieved through generating increasing sales which increase income to influence on overall p rofit levels. Besides that, it can be used of retained profit which used to reinvest in the business. Other than that, the company also can sale their asset which can be a double edged sword so that it can reduce the capacity.External sourcesof finance are found outside the business, eg fromcreditorsor banks.External Sources of finance and growthThis can be categorizing into 3 throngs which are long term, short term, and inorganic growth. Long term may be paid back later on many years or not to be paid. Short term is used to cover variations in cash flow. The growth which generated by gaining is used to define inorganic growth. In long term, there are shares and loans can be practice.Long termThere are few types of shares in long term shares which are ordinary shares, preference shares, new share issues, rights issue and bonus or scrip issue.Ordinary shares (Equities)Ordinary shareholders have the voting to rights in making any decision for companys benefits. The dividend can be d iffering according to their contribution and share capital. Last to be paid back in event of collapse. They share the price varies with trade on stock exchange.Preference shareThe shareholders will be paid before ordinary shareholders. They have the fixed in return. It is accumulative preference shareholders which have the right to dividend carried over to next year in event of non-payment.Rights issueThe present shareholders are given discount on acquire new shares.Bonus or scrip issue- It is the change to the share structure which increase number of shares and reduces value but market capitalization will remain the same.There are few types of loan in long term loan which are Debentures, bank loans and mortgages, merchant or investment banks, and government.DebenturesIt has the fixed in rate of return which first to be paid.Bank loans and mortgages- It is suitable for small to medium sized of corporation where property or some other asset acts as security for the loan.Merchant or Investment BanksIt act depends on clients to organize and underwrite raising finance.Short termThere are some categories in 5 groups including bank loans, overdraft facilities, trade credit, factoring and leasing.Bank loansIt has the necessity of paying interest on the payment. The periods of payment is generally from one year then not longer than ten years.Overdraft facilitiesIt is the right to be able to withdraw funds that do not occurrently have. It provides flexibility for a firm. The interest only paid on the amount been overdrawn. There is an overdraft limit which is the maximum amount allowed to be drawn.Trade creditIt can help the ease of cash flow which commonly can be paid within 90 days.FactoringIt is about the sale of debt to a specialist firm who secures payment and charges a commission for the services.LeasingThe used of capital can be secure without the ownership. It is effectively a hire agreement.Inorganic growthIt is about achievement. The components to gain the external finance of inorganic growth are merger and also takeover.MergerThe Company agrees to join together which both can remain some of the identity form.TakeoverThe firm will be secure falsify by the other, the firm taken over most probability will lose its identity.Task 3Identify and describe types of pay sources which available for the utter projects.On my opinion, this company should base on medium and long terms sources of finance. Medium term sources are normally repaid between 1 5 years. Some sources of finance areshort termand must be paid back within a year. Short term sources are repaid within one tear. Other sources of finance arelong termand can be paid back over many years. Long term sources are usually repaid between 5 20 years.Medium term deal purchaseIt involves purchasing an asset paying for it over a period of time. Usually a percentage of the price is paid as down payment and the rest is paid in installments for the period of time agreed upon. The business has to pay an interest on these installments.LeasingLeasing involves using an asset, but the ownership does not overtaking to the user. Business can lease a building or machinery and a periodic payment is made as rent, till the time the business uses the assets. The business does not need to purchase the asset.AdvantageDisadvantageThe business can benefit from the asset without purchasing it.Usually the maintenance of the asset is done by the leasing firm.The total cost of leasing may end up higher than the purchasing of assetMedium term loansThe business borrows an agreed amount, which is advanced at the start of the loan. A repayment schedule between one and quintuple years is agreed. Interest is charged in line with general interest rates and the class of the borrower is taken into consideration. The business will normally have to provide security for the loan but, with the cash raised, they can avail of cash discounts when buying assets.LeasingThis form of finance allows a bu siness to use an asset without having to raise the full price. In essence, the business rents the asset from a financial institution. The advantage to the business is that it allows the business aver a tax deduction for the full leasing payments over the life of the lease. The downside is that the asset is not owned unless the business decides to buy out the lease. Leasing is appropriate for IT equipment, which may have to be changed every two to three yearsLong termOrdinary sharesmay be issued to finance a major expansion such as the building of a factory overseas. The board of directors must convince the existing shareholders or attract investors to subscribe to the new issue. The shareholders will expect a dividend and a capital gain on their investment. The proposed expansion must therefore be profitable or else the investors will be disappointed.Retained earningsare profits, which are ploughed back into the business to create growth. This form of finance is suitable for organi c growth as the pace of the expansion can be matched to the funds available. The shareholders have to give up some or all of their dividends but, if growth is a success, the value of their shares will increase.Long-term loansare borrowed from financial institutions and must be repaid with interest within five to twenty years. If repayments can be met, borrowing allows the business to grow without introducing any new owners who would have a share of all future profits. Dunes Stores, one of Irelands lead story retail chains, remains a private company and does not look for shareholder funds when expanding. Instead it uses borrowings and retained earnings. This means that a small family group retain absolute control of the business.Venture capitala special type of financial institution has been formed to help firms grow. Venture capital companies provide money for a limited period of time, usually in the form of a minority fair-mindedness stake. It is hoped that at the end of this tim e the company will have bounteous large enough to achieve a stock exchange quotation. This allows the venture capital company to sell its shares for a large profit.Propose a financing source which is suitable for given project. Justify the reason of the chosen option.Some sources of finance are medium term and must be paid back within 5 10 years. Other sources of finance arelong termand can be paid back over many years. Long term sources are usually repaid between 5 20 years.Long termThe term venture capital is more specifically associated with putting money, usually in return for an equity stake, into a new business, a management buy-out or a major expansion scheme.The institution that puts in the money recognizes the gamble inherent in the funding. There is a serious risk of losing the entire investment, and it might take a long time before any profits and returns materialize. But there is also the prospect of very high profits and a substantial return on the investment. A vent ure capitalist will require a high expected rate of return on investments, to compensate for the high risk.A venture capital organization will not want to retain its investment in a business indefinitely, and when it considers putting money into a business venture, it will also consider its exit, that is, how it will be able to pull out of the business eventually and realize its profits. Examples of venture capital organizations are Merchant Bank of Central Africa Ltd and Anglo American Corporation Services Ltd.When a companys directors look for help from a venture capital institution, they must recognize thatThe institution will want an equity stake in the company.It will need convincing that the company can be successful.It may want to have a representative appointed to the companys board, to look after its interests.The directors of the company must then contact venture capital organisations, to try and find one or more which would be willing to offer finance. A venture capital o rganisation will only give funds to a company that it believes can succeed, and before it will make any definite offer, it will want from the company managementA business planDetails of how much finance is needed and how it will be usedThe most recent trading figures of the company, a balance sheet, a cash flowforecastA profit forecastDetails of the management team, with evidence of a wide range of management skillsDetails of major shareholdersDetails of the companys current banking arrangements and any other sources of financeAny sales literature or publicity material that the company has issued.A high percentage of requests for venture capital are rejected on an initial screening, and only a small percentage of all requests survive both this screening and further investigation and result in actual investments.1