The concept of the multiplier effect is closely related to the concept of marginal propensity to spend and consume. Marginal propensity can be understood as the increase in personal consumer consumption and saving that occurs with an increase in disposable income. When fiscal policy creates more disposable income for a family, the concept of marginal propensity predicts how much more they would be save and spend. Thus marginal propensity predicts the actual impact of fiscal policy when it is enacted and thus it can calculate the multiplier effect.
Prepare an essay describing Keynesian economic theory. Be sure to fully explain what is being critiqued and why. You should also be clear on why you find this particular critique so compelling. (600 words).
Keynesian economic was developed in the 20th century by the British economist John Keynes. Keynesian economics is basically a reinvention of classical economic theory, it focuses upon a reassessment of the "classic" interpretation of free market economies developed by Adam Smith and instead focuses upon relevant economic theory in the modern era. Keynes argues a concept known as mixed economics where both the state and the private sector contribute to the overall economy. The classical theory of economics is based upon the concept of free market economics where economics is predicated upon "lasses-faire" where there is no active player that restricts the government. During the era of Adam Smith and Classical economics, the argument that economies act in the most efficient way when there is no interference and companies and individuals have complete freedom. However, Keynesian economics dictates that this model is very flawed.
Keynes argued that classical economics ignored the power of aggregate demand for goods. Classical theory focused on the concept of continuous improvement in potential output. Aggregate demand is influenced by many different factors that are both public and private. Public decisions such as fiscal and monetary policy will have a significant impact upon the aggregate demand for goods. Unlike the classical model, Keynesian economics dictates that changes within the aggregate demand has the greatest short run impact on real output and employment rather than prices. Using the concepts of Philips curves it is evident that inflation changes very slowly when unemployment changes. While in classical economics, the short run has very little bearing upon long run economics, Keynesian economics notes that the short run effects on aggregate demand impacts both the medium and long run effects of the economy. The anticipated effects of policy making can produce real effects on output and demand only if these prices are rigid. Therefore Keynesian economics is focused on the impact of policy making in the public and private sector that impacts the aggregate demand for goods.
Keynesian economics further argues that prices do not instantly fluctuate based upon supply and demand, rather wages respond slowly to changes in equilibrium shifts. Thus there are consistently shortages and surpluses within markets, especially in labor because there is a time lapse when price adjust to supply and demand. Unemployment therefore is not ideal at the established levels according to classical economics. Since unemployment usually adjusts very slowly to changes within market equilibrium it is typically too high and too variable. Therefore depressions are caused not by efficient market responses to unattractive opportunities but rather because of economic maladies and abnormalities. Keynesians use this analysis to advocate for active stabilization policy that will reduce the amplitude of the business cycle, which is one of the biggest economic problems. Such stabilization mechanisms would ensure there would be dramatic depressions or recessions that results from a downturn within the business cycle. Finally, under this model of time lapse within market equilibrium, Keynesian economics argues that unemployment is much more important than inflation. The costs of low inflation is very small, where as high unemployment can have a dramatic detriment on the overall economy. Keynesians advocate a policy that is geared towards more aggressively expansionist policies that will keep unemployment consistently low in order to challenge the market adjustments necessary during shifts within market equilibrium.
In general Keynesian economics differs significantly from classical economics because it changes the nature of economics away from conceptions of free market actions, but rather the actual concerns of a market that is moved by government actions as well as private sector decision making. Thus the state of the economy and shifts within it are not market responses, but influenced by all the collective factors which contribute to the aggregate demand of goods.
Select an industry, other than the one you are professionally involved in, and prepare an essay that discusses the market structure of the industry, and what the implications are for firms operating in that industry, particularly with regard to barriers to entry. In addition discuss the price elasticity of demand for the products produced by firms in the industry. (600 words).
The computer manufacturing industry is one of the most successful and contested markets in the domestic United States. There are many large competitors who are the price setters and industry gold standards, while there are many different niche players who are small in size and production but still profitable within this particular sector.
The market structure of the computer manufacturing industry is segmented into many different niches as well as the general market. The general consumer base demand cheap computers that have high quality and durability. Within the general populace, two companies are the clear frontrunners, Dell Computers and Hewlitt Packard. Both of these major companies compete on price and quality by attempting to build the best desktops for consumers at the cheapest price. Besides the general consumer market, there are many smaller niche markets that are dominated by other smaller players. For multimedia design and professional computer users for instance, Apple computers is the leader within this particular segment. Although in terms of total market share of computers they only have 3%, in terms of overall share of multimedia and high end computer purchases they capture almost 40% of the market. There are other specific niches that make up the market structure, for instance, high performance video game computers are dominated by companies such as Alienware Inc. Although large market players such as Dell and HP attempt to compete within niche spaces they can only capture a small percentage of such sales because specialty companies have a niche advantage in both brand recognition and technology advantage.
There are significant barriers to entry for this industry. The principle barrier is the establishment of a supply chain that can effectively deliver products to consumers at a reasonable price. Having a strong national level supply chain is very difficult because it involves cooperating with third party retailers such as Wal-Mart, Best Buy and CompUSA in order to distribute computers while constructing a supply chain that will allow computers to be seamless manufactured and delivered. The costs of establishing a national level supply chain are tremendous and is almost impossible unless significant infrastructure investment is made. Another major barrier to entry is technology, since the majority of innovations within this particular demographic are already high end, it takes tremendous innovation within both design and basic hardware technology for a product to compete with market players. Both of these barriers to entry prevents many entrants from being in the field and therefore it influences the level of competitive among the major players. Both of these problems however are being mitigated by the growth of the internet. This has allowed smaller retailers and manufacturers to effectively distribute their products without the aid of significant supply chain mechanisms.
Since there is currently much more competition within the market than a decade ago, the price of elascity of demand is very high. There are significant alternatives depending on what types of computers the individual consumer is hoping to purchase. Not only does consumers have the option to chose between many different computer models, makes and manufacturers, but they also have the option of building their own computer. Thus overall there are many different options that individuals have in choosing the type of computer that they are interested in. High end computers are less elastic than lower end computers. The influx of international competition as a result of globalization has made it a much more competitive marketplace.
Overall the computer manufacturing industry is very competitive and growing ever more so since it is becoming easier to distribute computers through the virtual business environment. However, large tier companies still have a significant advantage when accessing the general…