Business Economics Transforming Modern Macroeconomics

Question: Discuss about the Business Economics for Transforming Modern Macroeconomics? Answer: Introduction: The stringent concern of the report is to analyze the understandings of business. The structural framework of a business can be explained with the help of economic theories. Here in this report a microeconomic and a macroeconomic theory have been selected in order to explain the underlying facts of the business structure. It is necessary to note that the profitability and operability of a business structure can also be explained with the help of these economic concepts. Here, as the microeconomic theory, the theory of monopoly market has been selected while on the other hand the IS-LM model has been selected as the macroeconomic theory. The theory of monopoly market is efficient enough to address the structure and operability of a particular market structure. IS-LM model on the other hand, can explain the major macroeconomic factors that influence the macro economic factors of the economy. Microeconomic theory: In this portfolio, the theory of monopoly market is selected as the microeconomic theory. A monopoly market is defined as the market where there is a large number of a buyer but a single seller (Rubinfeld and Pindyck 2012). Causes of monopoly: There are a number of causes that may give rise to monopoly market. These causes are explained briefly below, When a firm owns the exclusive rights of a scarce resource then it is quite evident that it will be the only firm to produce by using the resource as input. For example, Microsoft is the owner of Windows operating system; therefore, the firm can exploit this resource, as it possesses a monopoly power over this resource. Sometimes, the government of a particular country may grant monopoly power to a specific firm. For example in some countries, only the government and some government granted companies could produce arms and ammunitions (Fishback 2013). The producers of particular product may own patent rights over the design or may own copyright regarding the ideas, images or the names that are associated with the product. The monopoly market is based on the following assumptions, There is a single seller in the market selling the entire output. Therefore, the seller is the price maker in the market. Monopoly can only be achieved if the product is unique in nature. Therefore, it is assumed that the in monopoly market the firm is selling a unique product. There are barriers to entry in the market. Under monopoly, only one firm can operate in the market. This is due to the ownership of scarce factor, patents, copyrights etc. A monopolist has access to the specialized information, which is not available to others. This information is about the patents, government contracts and the trademarks. Revenue and Demand under monopoly: According to Baumol and Blinder (2015) as there is a single seller in the market, the monopolists demand curve is a negatively sloped demand curve. The market demand curve is represented by the demand curve of the monopolist. As depicted in the figure below, the upper curve (DD) is representing the demand curve faced by the monopolist. On the other hand, the curve lying below is representing the marginal revenue curve of the monopolist. Figure 1: Demand curve and Marginal Revenue curve of the Monopolist (Source: Created by Author) As the monopolist is the price maker in the market the demand curve of the monopolist slopes downward. Therefore, it is evident that to sell a higher amount of products, the monopolist will have to decrease the price of its product. This is responsible for generating lesser and lesser amount of marginal revenue (Moulin 2014). This means that the revenue gained by selling an extra amount of output is less than that of the price. The short run equilibrium analysis of the monopolist firm helps to gain a better insight about the efficiency and inefficiency of the firm. The problem before the monopolist firm is to maximize profit. Therefore, the firm will definitely choose to operate at the point where the quantity of output produced generates the highest level of profit possible, given that the price level, demand, cost structure and level of production remain the same. Figure 2: Monopoly Equilibrium (Short-Run) (Source: Created by Author) The short run equilibrium of the monopolist is depicted by the figure above. At the top panel of the figure, the total cost curve and the total revenue curve of the monopoly is depicted. The total revenue curve is hump shaped as the price level depends on the level of quantity demanded. In this case at first total revenue will increase but in the later stage it will rise at a lower rate (Washington 2013). The red line depicts the total cost curve. Therefore, the upper panel of the diagram has presented the cost as well as revenue of the monopolist. The dotted red line represents the difference between these two, which is the level of profit. This represented in the lower panel by the inverted-U shaped curve, the monopolist will be in equilibrium where the level of profit is highest. That is at the point Q. Macroeconomic Theory: Here the IS-LM model is the chosen macroeconomic theory in this assignment. The basic understanding of the model will help to analyze the some key macroeconomic factors such as the rate of interest, savings, investment and money supply. IS-LM Model: The IS-LM model is one of the most popular concepts in macroeconomics. It represents two curves graphically that intersect each other. The IS curve also known as the Investment-savings represents all the combinations of income (Y ) and rate of interest (r) for which the commodity market will be in equilibrium. This means that, IS curve represents the set of Y and r for which the total demand for a given level of income and the total cost of borrowing e must be equal to the total amount of supply (Mankiw 2014). Yd(Y, r) = Y As according to the national income accounting identity, the quantity supplied yields the same amount of income. Therefore, in the equation above the Y in the left hand side represents the total demand while in the right hand side represents the quantity supplied. LM Curve: According to Scarth (2014), the LM curve represents all the possible combinations of income (Y) and rate of interest (r) for which the money market will be in equilibrium. The LM curve is upward rising this is because with the increase in the level of output the demand of money will rise then the interest rate is required increase in order to lower the demand of money to the initial equilibrium level. The equilibrium condition in the money market is represented by the equation, Md (Y, r) = M/P From the equation above, it can be stated that the right hand side of the equation represents the real money supply. A change in the real money supply will shift the entire curve ((McDonald 2012). Figure 3: IS-LM equilibrium (Source: Created by Author) Therefore, where the IS curve intersects the LM curve, the equilibrium income level and interest rate is determined, for which the money market as well as the commodity market will be in equilibrium (Tinkler and Woods 2013). How lower interest rate has affected the British economy: With a significantly low interest rate, the cost associated with borrowing will also be low. This will in turn indulge people to raise their spending rather than increasing investment (Kamenica 2012). This results in an increase in the amount of the aggregate demand along with the economic growth. However, in increase in the level of aggregate demand may also lead to cause inflationary pressure. With a lower rate of interest, people will receive fewer incentives for savings and thereby people will spend more and save less. In such a situation, people can borrow more as the cost of borrowing is low (Backhouse and Boianovsky 2014). This as a result will give rise to a situation when the people will not be able to repay the debts. The Central Bank of England is expected to raise the supply of money in the economy. The bank can also control the situation by raising the cash reserve ratio with the banks, so that the banks could not lend more to the people. Conclusion: In order to conclude it can be said that the report has successfully focused on the two key economic models. The monopoly market structure however, may be rare to experience in the real life, but it presents a clear outline of the concerned market. On the other hand, the IS-LM model will help to get a better insight about the key operability of the money market variables such as money demand and money supply etc. Therefore, as a concluding note it can be stated that the objective of the assignment has become successful. Reference List Backhouse, R.E. and Boianovsky, M., 2014. Transforming Modern Macroeconomics. Cambridge Books. Baumol, W. and Blinder, A., 2015. Microeconomics: Principles and policy. Cengage Learning. Fishback, P., 2013. The Microeconomics of New Deal Policy. NBER Books Kamenica, E., 2012 Macroeconomics and Monetary Economics. Economic Review, 100(1), pp.130-63 Mankiw, N.G.R.E.G.O.R.Y., 2014. Principles of macroeconomics. Cengage Learning. McDonald, I.M., 2012. Behavioural Macroeconomics. Edward Elgar. Moulin, H., 2014. Cooperative microeconomics: a game-theoretic introduction. Princeton University Press. Neuefeind, W. and Riezman, R.G. eds., 2012. Economic theory and international trade: essays in memoriam J. Trout Rader. Springer Science Business Media. Rubinfeld, D.L. and Pindyck, R.S., 2012. Microeconomics Scarth, W., 2014. Macroeconomics. Books. Tinkler, S. and Woods, J., 2013. The readability of principles of macroeconomics textbooks. The Journal of Economic Education, 44(2), pp.178-191. Washington, A.B.M.S.B., 2013. D Microeconomics. Journal of Economie Literature, 51(2), pp.544-578