Long Term Investment Decisions

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Abstract

Inelastic products are those whose prices are not affected by demand and supply. For companies to ensure that their products are as inelastic as possible, they must differentiate them. The government can intervene in a free market economy through regulation of taxes and establishment of policies which govern such things as minimum wage, licensing of businesses and provision of subsidies for particular products or services. For companies to deal with the complexities of capital projects, they must take insurance cover for their businesses. In order to realize a convergence of the interests of shareholders and managers, companies may come up with a policy to ensure that managers’ pay is based on the profits made by the companies.

Keywords: Inelastic, Minimum Wage, Capital Projects.

For managers in the low-calorie microwaveable food company to ensure that their products are as inelastic as possible, they must choose a pricing strategy which keeps their customers attracted to their products. At the same time, the pricing strategy should also discourage the customers from going for substituting products. But before the pricing strategy is put in place, the managers of the company must ensure that their products are highly differentiated or there are very few companies dealing with the same products.

Once the managers succeed in this, they should settle for a price which is commensurate to the levels of the income of the customers. They should also consider the demand of the products as well as the cost of production. Once they have considered all this, they should set a fixed price for the products. This would ensure that the price does not affect the demand of the products. To achieve this, however, the managers must ensure that they have reliable supplies of raw materials so that the company would not face shortage of raw materials for the products at any given time. The company also needs to have a low employee turnover so as to ensure that the cost of production would not increase at any given time due to reliance on part-time labor which is more expensive than permanent labor.

In a free market economy, the government plays very minimal roles. The market is usually left to regulate itself through the forces of demand and supply. This happens mostly in capitalistic economies where economic development is based on the cost of production which constitutes labor, raw materials and time required for the production process. Sometimes, the government may intervene by imposing price controls. However, these may not be attractive to the government because they compel it to cater for some costs in the production of certain products and services.

Another policy, which the government may have in the regulation of a market economy is the regulation of the amount of tax levied on products and services. The government can also have policies on minimum wage, the number of hours which employee should work in a day and the number of days which employees should take off from work. Some governments may propose a 24 hour economy where businesses operate day and night. Others may have policies which require businesses to operate only during the day. Governments can also have policies on provision of goods and services through subsidies which help in reducing the price of some targeted products and services (Rowley & Schneider, 2004).

One effect that government policies have on production is the increase in the cost of producing goods and services. If, for example, the government decides to increase the taxes levied on products and services, then the businesses are compelled to roll out the increased taxes to the consumers through increasing the price for the affected products or services (Welch & Welch, 2009).

Government policies can also accelerate or slow down the production process for particular products and services as well as reduce or increase the cost of doing business in a country. If the government streamlines the procedure of getting a businesses permit, then it becomes easy to establish businesses in that country. If, on the other hand, the licensing of businesses is bureaucratic, then it takes longer to establish a business thus increasing the cost of doing business in that particular country.

In terms of employment, government policies can affect the number of employees in businesses. If the government comes up with a policy on minimum wage, then businesses may be forced to reduce the number of employees so as to reduce the cost of labor. In situations where there are no policies on minimum wage, businesses can benefit from cheap labor, which is also regulated by the forces of demand and supply.

If there are many unemployed people in a country, then labor is likely to be cheap and this is where a policy on minimum wage can negatively affect businesses because they must pay the employees according to the minimum wage set by the government. If, on the other hand, the supply of labor is low, the cost is likely to be high and therefore, the policy on minimum wage may not be applicable for businesses in that country.

One potential effect that government policies could have on my company is the increase in the cost of production through increased taxes levied by the government. This could affect the company’s profit margins because the prices for the differentiated products could not be increased as mentioned earlier. What the company can do in such a scenario is to open branches in other countries, where there are little or no political, economic and social risks.

I think that it is not necessary for the government regulation to ensure fairness in the low-calorie microwavable food industry. The reason is that such an industry is capable of regulating itself, because the issue of diet is a matter of lifestyle and personal choices, but not a matter of uniformity. Each individual has his or her own lifestyle and therefore, the government should not regulate the amount of calories in food stuffs, but it should leave the people to decide the amount of calories they need in their food stuffs.

If people do not prefer low calorie food stuffs, then those companies which sell them would be out of business by default. If, on the other hand, people prefer food stuffs with low calories, then those companies which deal with high calorie food stuffs would be out of business and for these reasons, the industry would attain self regulation and there would be fairness.

The major reason for the government’s involvement in a market economy is to ensure that there is equity and social efficiency. In order to ensure equity, the government can intervene to ensure that resources are distributed equally within the entire population. In a market economy, the supply of certain products and services can be skewed. Such products and services may include health, education and emergency preparedness and response products or equipment. Even though these products and services can be offered in a free market economy, the government may come up with a policy to regulate the provision of such services and products to ensure that all people are able to access them irrespective of their social and economic status (McGuigan, Moyer, & Harris, 2014).

In order to ensure social efficiency, governments may intervene to ensure that the marginal benefits of a business to the society are commensurate with the marginal cost of production. This is done to ensure that businesses give back to the society. For example, a mining company must ensure that it gives people enough compensation for social and economic impacts of the miming project. Another example is an irrigation project. The government can intervene to ensure that the company which undertakes the irrigation project does not import labor from other areas but it employs the local people so that they may benefit from their proximity to the irrigation scheme.

Capital projects are those which require huge amounts of financial capital and labor to start or maintain. Their defining characteristic is the intensive use of resources and time. One major complexity associated with expansion through capital projects is the allocation of resources for the project activities. Sometimes, it can be very hectic to allocate resources accurately for the project without leaving some important activities unfunded (Morris & Pinto, 2011).

Another complexity is the management of risks associated with such projects because of their magnitude. If a mistake happens and the projects do not succeed, then the impacts of such failure may be very detrimental to the owners of the projects.

In order for the low-calorie microwaveable food company to address these complexities, it needs to invest a lot of resources in the planning of the capital projects. Having a clearly thought out plan can ensure that everything is done in the right way. Proper planning would also ensure that all stakeholders are involved in the project design and are also given sufficient details about the projects.

The other way is taking insurance for such projects. This ensures that in case the projects do not succeed, the company could recover some of its financial capital invested in the projects.

In many companies, the interests of the stockholders and the managers are always divergent. While the stockholders are mainly interested in more profits and dividends, managers are interested in increasing revenue so that they could enjoy more benefits.

The best way to create a convergence between the interests of stockholders and managers is by coming up with policies which require managers to be paid based on the profits generated by the company. The stockholders could set profit targets for their company which it must attain so that the managers could be paid certain amount of salary and benefits. In the policies it should be stated that if the managers do not meet the targets, they should receive less pay and enjoy few benefits. This would ensure that the managers focus on increasing profits, but not revenue. Consequently, the company would have higher profits. If the managers do not meet the set targets, they could also be threatened with termination of employment or with threats of selling of the company.

For example, the chairman of Shell Oil Company was threatened with dismissal in 2004. As a result, the company was brought back on track and started generating more profits. The other example is that of a planned takeover of P&O Princess by Carnival. This takeover is aimed at threatening the directors of P&O Princess to ensure that the company increases its profit margins (Ujsme, 2007).

References

McGuigan, J. R., Moyer, R. C., & Harris, F. H. (2014). Managerial economics: applications, strategies and tactics, (13th ed.). Stamford, CT: Cengage Learning.

Morris, P., & Pinto, J.F.(2011). The Wiley Guide to Project, Program, and Portfolio Managemen. Hoboken : John Wiley & Sons.

Rowley, C. K., & Schneider, F. (2004). The encyclopedia of public choice. New York, NY : Springer Science and Business Media LLC.

Ujsme, K. (2007). Conflict of Interest between Managers and Shareholders. Web.

Welch, P. J., & Welch, G.F. (2009). Economics: theory and practice. Hoboken, N. J.: John Wiley.

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Long Term Investment Decisions

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