The Economy, Monetary Policy and Monopolies

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Table of Contents

Economic situation
Improving spending
Anti-trust laws
Economic efficiency in a monopolistic sector
Discounts
References

Economic situation

The interest rate, the unemployment rate and inflationary pressures are key economic indicators. These parameters elaborate how well the economic is performing. The interest rate denotes the cost of credit services; the employment rate is an indicator of the percentage of the population that is employed while the inflationary rate is an indicator of the ratio of production (output) and the money in circulation. In the last five years, these parameters have changed massively. In 2008, which was the climax of the depression the interest rate was about 1.5 %. In the subsequent years, the rate has decreased significantly below zero. This is an indication that the federal fund interest rate is lower than the inflation rate. The overall impact of this scenario is a negative lending rate.

The federal bank may lower the interest rate to encourage lending. Lending results in more money circulating triggering additional consumption, which is a key driver of the American economy. The unemployment rate has also been changing over the last five years. In January 2008, the interest rate was about 5%. However, by June 2009, it was well above nine percent. This was attributable to the recession, which had taken a toll on most organizations. As such, many companies were opting to downsize or close down. This resulted in retrenchment of numerous people. The highest unemployment rate was 10.1% in 2010. The inflationary rate has also been changing irregularly over the years. However, it has not formed any clear pattern even under the economic crisis (Schiller, 2003).

Currently, the economy is better. The inflation rate, unemployment rate and inertest rates are relatively lower. In an economy, which is driven by speculation and consumption, decreases in the above rates are likely to trigger additional investment. There has been a return to normalcy with respect to international trade, but investors remain sceptical. Overall, there are some fundamental improvements, which have occurred (Schiller, 2003).

Improving spending

For spending to increase, the public should have additional resources at their disposal. One way of improving spending is by boosting the availability of credit facilities. The government can accomplish this by lowering the lending rates. Lowering the lending will result in people paying lower rates for credit offered. Consequently, many people will take up loans. Taking up of loans will result in people having more cash that they can expend. This will trigger additional consumption. Increase in consumption will trigger additional production. The additional production triggered by the extra spending will require labour boosting employment in the economy. This idea normally results in more funds circulating in the economy. If there is no production to match the increase in funds, then inflationary pressure may rise (Taylor, 2010).

The second strategy the federal government can utilize to increase spending is through lowering taxation on commodities. Taxation on commodities and services increases the cost of goods and services. As a result, it reduces a consumer’s disposable income. The federal bank can boost the consumers’ disposable income without increasing the actual income earned. However, this strategy would result in minimal increases in spending. This strategy should be completed by other strategies such as reduction of income tax. The combination of these two strategies will result in substantial increases in expenditure. Increased spending triggers additional production. The additional production requires factors of production such as labour, which culminates in higher levels of employment (Schiller, 2003).

Anti-trust laws

Monopolies occur when one entity dominates an industry. Consequently, other firms have no chance of competing effectively with a monopolistic entity. There is minimal competition in a monopolistic industry. As such, the dominant entity sells to most of the clients in such an industry. Many monopolies make super profits since they can raise their prices as they wish. In the defence industry, there are three large firms, which are Lockheed martin, Northrop Grumman and Boeing. Lockheed martin is the most powerful followed by Northrop Grumman and Boeing respectively. The proposed merge involved Lockheed martin and Boeing.

This would have resulted in monopoly since Northrop Grumman could not match the resultant entity in terms of sales and resources. The US department of defence halted this merger citing ethical concerns such as competition. The defence department is the companies’ biggest customer. Consequently, the merger would have denied the department a choice when it comes to the vital defence contracts. The merger would have resulted in the largest defence entity globally. Subsequently, the entity would have dominated in terms of contracts bids and sales.

Defence contracts would encounter a monopoly since Northrop Grumman could not match the entity that would have resulted from the merger of Lockheed martin and Boeing. A merger of this magnitude would have had many positive impacts in the two entities. First, it would increase efficiency in both entities after merging operations. Additionally, the resultant entity would have best technology in the sector. The merger would also increase the capacity of the resultant organization, which would surpass that of the two constituent entities.

Economic efficiency in a monopolistic sector

Economy efficiency is only achievable in a perfect market. A perfect market is an industry in which there is fair competition and the forces of demand and supply set prices. In such a market, customers buy products whose value is equal to the price. Nevertheless, monopolies sell commodities at prices, which by far exceed the value in the commodities. As such, customers pay amounts, which exceed the values they are receiving. This signifies that monopolistic tendencies are the key cause of economic inefficiency. Raising prices unreasonably results in the efficiency. Monopolies also prevent the entry of other firms in an industry. Thus, denying the clients variety form they would choose the best product. This is a key undoing of monopolies, which deter production of a variety of goods with the best value possible. With time, monopolies develop complacency, which reduces innovation.

As such, the entity fails to offer any additional value for excising its dominance over the industry with regard to pricing and the clientele base. Monopolistic entities predominately focus on controlling the industry. Hence, the entry of a competitor will likely trigger a price war. This kind of an economic conflict will have many repercussions. The entity with more resources may undercut its prices. Consequently, most of the customer will buy form the entity which undercuts its prices. The other entity competing cannot sustain such a strategy so it will maintain it prices. The entity, which fails to undercut its prices, will have fewer clients and will eventually run out of business. This will leave the other entity, which will later raise it prices to recoup it losses (Kahn & CESifo, 2003).

Discounts

Discounts are a vital aspect of increasing clientele. A discount denotes a reduction in the price of a commodity or addition of quantity for the same price. Companies offer discounts to boost sales or as a reward to their clientele. The discount could entail additional quantity of a good. In case of services, discount will entail reduction of prices. A business, which is offering discounts, must undertake proper planning. This will ensure that the entity finances do not diminish to unsustainable levels. Entity offer discounts in the festive period since customers make massive purchases. During such periods, an entity can offer discounts since there are high volumes of sales. Determining the discounts to offer is not an easy undertaking. The firm has to consider the clientele and its corporate ambitions.

One means of determining the interest to offer entails using rates. A rate denotes a percentage of the entire price. Members of a company who have access to appropriate data should make this managerial decision, which entails determining the best discount rate. Most of the discounts rates are below ten percent. The marketing department should have the capacity to determine the appropriate percentage. The department should consider all the entity’s corporate target. The entity must earn a certain level of profit to support its operations. Most entities prefer a discount rate that ranges between five and ten percent.

The second method of establishing discounts entails offering quantity discounts. The customer will pay the old price, but he/she will get extra quantity of the product. This is exceedingly common in cosmetic products. This method is applicable on smaller goods, which have lower prices. The application of this method is limited to certain commodities. Discounting based on rates is more applicable than the latter.

References

Kahn, L., & CESifo. (2003). Sports league expansion and economic efficiency: Monopoly can enhance consumer welfare. Munich: CESifo.

Schiller, B. (2003). The macroeconomy today. Boston: McGraw-Hill/Irwin.

Taylor, L. (2010). Capital, accumulation, and money: An integration of capital, growth, and monetary theory. New York: Springer.

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