Management Science Featuring Micro-Macro Economics and Management of Information Technology: Enhancing Management in It

By W.Y. Dornyo

This book is one of a series of various doctoral research project papers and has been further refined and converted into a book. The book has been deemed one of further versions of management science that are to come. These further versions focus more on information technology and its effects as agile tools for management, including software engineering, algorithms and data structures, computer architecture and electronics, systems science, artificial intelligence and robotics, quantum science, statistics, and web-internet and multimedia design and building.

Managers are usually multifaceted with multiple disciplines even though they have one or two areas as majors, specialties, or experience. It is in the light of this that Management Science Featuring Micro-Macro Economics and Management of Information Technology was designed in this context to contain economics with IT as a course of study. In the future, further versions will be pure courses instead of combinations.

The world has changed gear for the better due to the advanced mysteries of information technology innovations so that we could even conduct scientific laboratory experiments, medical diagnoses, and rule of law adjudications online. That means we could not forget information technology as one major tool in hand that should be a pivot on and around which all other areas in management should dwell and revolve, and this was one of the sole reasons of this book. It is therefore worthy of note for readers aspiring as systems analysts, managers, and professionals to accustom themselves to the subject areas in the book to instill understanding of numerous important terms and points in economics and IT. This will help to build further courage and understanding toward advancement in these fields.

All topics indicated in the table of contents have been made reader friendly and treated to focus easy understanding. We highly acknowledge all the intellectual materials used.

• Language: English
• Publisher: AuthorHouse UK
• Release date: Oct 9, 2020
• ISBN: 9781496993137

W.Y. Dornyo

The world goes innovative, and my approaches to materials in the book were rather innovative. For instance, the acronym STYLE, which has been referred, could show how a system (S) links up its economy (E) through trends (T), yields (Y), and light (L) (i.e., information). For instance, SKOG implies system, knowledge, organization, and government, and these are among the main elements if a system/organization/community is to function progressively. E.g., SCIENCE has been referred as that which could be used to scientifically probe systems, seek (S), compare (C), innovate (I), exchange (E), network (N), conclude (C), and expatiate (E). E.g., REVAMP has been referred to as a means of revamping a system. Systems need to be continuously revamped into an advanced economy: research (R), enhanced (E), value (V), achievement (A), motivation (M), and performance (P). For instance, a model was developed and has been thought of as worthy to analyze complicated systems into four simple blocks. This model named the buffer model of x is also known as the perpetual model. It is v + b <= u + s—value (v), basic (b), valuable (u), and slack (s). It was more highlighted in one of the doctoral projects entitled “Doctoral Seminar in Digital Economics and Management Research.” The model awaits further research work. Also enormous knowledge was gathered from diversified sources, and I believe readers will be fine to acquire knowledge put together from different sources. I have completed the PhD in IT and finance in a US university and awaiting conferment. I hold an MBA in finance in a US university, an HND in engineering, and a PGCE. I am also a university-trained instructor.

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© 2014 W. Y. Dornyo. All rights reserved.

No part of this book may be reproduced, stored in a retrieval system, or

transmitted by any means without the written permission of the author.

Published by AuthorHouse    10/10/2014

ISBN: 978-1-4969-9310-6 (sc)

ISBN: 978-1-4969-9311-3 (hc)

ISBN: 978-1-4969-9313-7 (e)

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and such images are being used for illustrative purposes only.

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this book may have changed since publication and may no longer be valid. The views

expressed in this work are solely those of the author and do not necessarily reflect the

views of the publisher, and the publisher hereby disclaims any responsibility for them.

TABLE OF CONTENTS

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Preface and Acknowledgement

Chapter 1   1.00 Preliminaries in the Form of Questions nd Project Style Answering Approaches

Chapter 2   Some Abbreviations or Acronyms in this Paper

Chapter 3   Management of Information Systems Technology

Chapter 4   Security (Securing the System: That is Fortifying Privacy, Ethics, and Security)

Chapter 5   A Perfect Knowhow of the Systems of the House

Chapter 6   Environmental considerations

Chapter 7   Advanced Database Management, Mining, and Warehousing

Glossary

About the Author

PREFACE AND ACKNOWLEDGEMENT

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In chapters 1 and 2 of the paper some economics questions were solved and topics treated. Chapters 3 to 6 covered some important topics in Management of Information Technology. All topics were treated such as to focus clear understanding in even a fundamental learner of the subject although some of the treatments were deeper up to an advanced approach. The economics questions in chapter 1 and the answering approaches were project essay answering approaches and mostly based on materials of Economics for Managers written by Paul G. FARNHAM (2008 and 2010), and also on materials of Economics of Money Banking and Financial Markets written by Frederic S. MISHKIN (2006), and the rest based on other books [mostly in chapter 2: Robert S. PINDYCK and Daniel L. RUBINFELD (1998). Microeconomics, Karl E. Case and Ray C. Fair (2007). Principles of Economics, and so on] and on internet based materials. The approaches were rather innovative using terms such as motivation, gravity, and can-water drain systems to explain diminishing marginal utility of consumption using as well as seven assumptions in the first question answered. The usefulness of the term ‘motivation’ applied, was by way of further showing that the term ‘speculation’ is simply affected by a societal force affecting social engineering when that force is affected by this motivation either in the positive or the negative direction. That means speculation arises when motivation is in the negative direction. Speculation tends lower towards zero when the negativity in motivation is reduced towards zero, and probably towards positive motivation. This offers a more stylish advantage of further power in the use of the term ‘speculation’.

The can-water drain systems used to explain the Law of Diminishing Marginal Utility is an added advantage leaving a mental picture of an object of ‘can-water drain systems’ in somebody’s mind. In chapter 2, THE system engineering structure (SES) in which the subject was based was introduced briefly. This is pending expansion in order to develop and cover all topics in microeconomics and macroeconomics in a further future project paper. The benefit of the SES is that, it outlines a structure and a path along which the paper is built and followed in order to fulfil the organization theory aspect on which that part of the paper is organized. The treatment as such in chapters 1 and 2 were of the objective of fulfilling the subject matter Micro-Macro Economics since they touch both on microeconomics and macroeconomics approaches. In chapter 2 the term CIV=CIS- Consumer Impressed Value was innovatively used together with the buffer model ‘v+ b < V + s’ to explain elasticity of demand and supply and used to expatiate certain aspects of the theory of consumer behavior, where CIS= Consumer Impressed slack.

An acronym p53, STYLE- System, Trend, Yield, Light= Information, and Economics was used to explain the way systems get linked-up with the system’s economy. This offers the advantage of viewing and expressing in a simple way and terms, an economic system. One usefulness of the use of the CIS, P76-77, was where it hypothetically seem to estimate the idea that preferences are intransitive which is being spelt out by other economists. Some of the explanations of v+ b <= V + s is on p75, and this model expressed an idea of universality that is, everything basic or valuable could be enhanced in value innovatively using continuous strategies (slack) and continuously. Where v = value, b = basic, V = valuable, and s = slack. This innovative model has been used throughout the paper to express comprehensive analogies of the importance of value addition in all performances, and to trends and valuable items both in economics and information systems and other subjects.

We have also used other acronyms such as REVAMP, SCIENCE, CUE, SKOG, POLC, and GEARING to expatiate on and expressed items throughout the paper. These acronyms offer excellent ways of expressions with a quite high flexibility and fluency. Where, REVAMP is research, Enhancement, Value, Achievement, Motivation, and Performance. SCIENCE is Seek, Compare, Innovate, Exchange, Network, Conclude, and Explain= Expatiate, CUE is Corporate, Unit, and Element, SKOG is System, Knowledge, Organization, and Government, POLC is Planning, Organizing, Leading = Direction, and Coordinating/Controlling, GEARING is Gender, Ethnicity, Age, Race, Income level, Newness-to-place/product, and Genius.

Chapters 3 to 7 covered most of the paper style topics needed in the Management of Information Systems Technology. The topic is very technical therefore, the treatment was based mostly on the field’s terms which were a lot referenced based, right from definitions down to explanations. Among the numerous literature used in chapters 3 to 7 included: Timothy J. O’Leary & Linda I. O’Leary, (2011). Computing Essentials, Stephen G. Powell & Kenneth R. Baker, (2011). Management Science, Kenneth C. LAUDON & Jane P. LAUDON, (2009) Essentials of Management Information Systems, Alan Evans, Kendall Martin, & Mary Anne POATSY, (2008). Technology in Action, and so on, and internet based materials. There are still materials pending further development in the paper and the last chapter 7 touching on advanced database management, data mining, and data warehousing was made concise. This chapter 7 still pends further development in the future to include data querying and reporting skills. We wish to acknowledge all brains and intellectual materials used.

CHAPTER 1

1.00 PRELIMINARIES IN THE FORM

OF QUESTIONS ND PROJECT STYLE

ANSWERING APPROACHES

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ASSIGNMENT 1, QUESTION 2.

Assume there is an improvement in the technology used to produce frozen yogurt, and that there is a simultaneous increase in tastes and preferences for frozen yogurt relative to ice cream. Use the model of supply and demand to analyze the effect these two changes would have on equilibrium price and quantity in the market for frozen yogurt. Note what you can say, with certainty, about the change in each variable. In addition, explain your reasoning.

1.01. INTRODUCTION

Substitute goods are influenced by a lot of factors that influence demand and supply, however, this factors interlink each other as they affect the demand and supply of goods and services,¹ and there is interaction among these factors which in turn affect elasticity of demand, supply, marginal utilities and the budgets of consumers, owing to various levels of incomes of individual consumers.

This assignment was to use the model of supply and demand to analyze the effect of improvement in technology of production on one of two substitute goods thus frozen yogurt and its simultaneous increase in tastes and preferences versus ice cream. In the write up we would see how that is analogous to a stringed-up draining (feed) system of water from one container to the other, where the containers were placed at various heights one under the other, as they got filled up in turn, this would be explained further in the literature. It was assumed that there is a force that arises with speculations in society and this is motivation. Motivation could be in the positive or the negative direction. It is the psychological force that moves the society into drifting in a certain direction to affect the economy of society². In short factors that influence demand and supply of good and services in this case, substitute goods and services like frozen yogurt and ice cream, are linked up in a way and affect each other in an economy and give rise to motivation to move society in a given economic direction e.g. decrease in demand or supply and increase in demand or supply for goods and services. To set the ball rolling, let us look at these factors of demand and supply.

1.02. FACTORS INFLUENCING DEMAND AND SUPPLY

Before coming to the subject matter in the question above, let us look at the factors that influence demand and supply. According to FARNHAM, the factors influencing demand are; prices of products (i.e. goods and or services), consumer tastes and preferences, consumer income (normal goods or inferior goods), prices of goods related in consumption (substitute goods, complementary goods), future expectations and number of consumers.

Now the factors influencing supply are; prices of the products (i.e. goods and or services), state of technology, input prices, prices of goods related in production (substitute goods, complementary goods), future expectations, and number of producers.

Before pointing to the above factors influencing demand and supply, let us first look at according to FARNHAM (2010), the precise and concise answer to the main question 2 in assignment 1, and how we can expand on it with diagrammatic illustrations since this is the main reason for this whole write up.

1.03. ANSWER TO Q2 ASSIGNMENT 1

³

According to FARNHAM (2010), "An improvement in the technology used to produce frozen yogurt would result in reduced cost of production for the firm. This would cause the supply of frozen yogurt to increase, i.e. the supply curve would shift right. All else constant, this would cause equilibrium price to decrease and equilibrium quantity to increase. The increase in tastes and preferences for frozen yogurt would cause demand to increase as well, i.e. the demand curve would shift right. All else constant, the increase in demand would cause the equilibrium price and quantity of frozen yogurt to increase. Combining the two changes, we can say with certainty that equilibrium quantity would increase". However, because the increases in supply and demand have offsetting effects on the price, the net effect on the equilibrium price is not certain without more specific information on the relative magnitudes of the two shifts, considering the short-run.

In order to bring this answer to the lame man’s point of view, we need to illustrate and expatiate with some diagrams of demand and supply.

1.04. DIAGRAMATIC ILLUSTRATION TO THE ABOVE ANSWER TO ASSIGNMENT 1, Q2, TO THROW MORE LIGHT INTO DEMAND AND SUPPLY DUE TO THE INFLUENCIAL FACTOR (i.e. TECHNOLOGICAL IMPROVEMENT USED TO PRODUCE FROZEN YOGURT WHICH ENHANCED ITS TASTE AND THEREFORE ITS PREFERENCES RELATIVE TO ICE CREAM)

Recalling from section 1.02 above are factors influencing demand and supply and these as well as include price. Now, all other factors apart from price, are known as non-price factors influencing demand and supply respectively⁴. See figure 1, p23. Other non-price factors e.g. improved technology cause shift of, or movement of the line or curve. Demand curve is a negatively sloped or downward sloped line, whereas, supply curve is upward sloping, and with these basics, we can now study the diagrams that we wish to use to throw light into the above answer of the assignment 1, Question 2, on the effect of the two changes on equilibrium price and quantity in the market (trading) of frozen yogurt. This diagram, the equilibrium diagram for demand and supply is shown below in figure 2, p24.

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From the figure 2 above, we can see that an improvement in technology caused production to increase to Q1 above the equilibrium quantity QE as cost of production was reduced and price increased to P1. Technological improvement in the production of items resulted in reduction in cost because mass production became very effective and as a result, labor cost was reduced drastically in certain areas and the capacity of the firm to turn out massive multiples of the same product in this case frozen yogurt was very high due to high efficiency in mechanization (it could be a computerized system as well) or biochemical technology coupled with just minimal human interaction. However, the firm could not have turned out frozen yogurt in larger quantities if it had been faced with poor demand for it, according to the question, the improved technology in the production of this frozen yogurt improved taste and as taste was improved it gave rise to consumer preferences for it. This is incredible since in the earlier assertion in the introduction of this work, it was stated that [read footnote first before you continue]⁵, thus, about the link among factors such as in figure 3 below;

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Figure 3. An illustrated economic interaction (chain reaction) among the factors influencing demand and supply.

This is a real economic chain reaction! At point (x), that is continuous mass production of frozen yogurt by the firm, there is something interesting to note here. This is the point where other factors influencing demand from the consumer side set in either positively (continuous consumption depending on whether extra efforts over time short-run or long –run, are made towards further improved technology and innovations) or negatively (depending on whether in the long-run the technology remains at the same level without improvement or innovations, and consumers are becoming fed up with already enough of the frozen yogurt having been consumed and are looking forward to a change where it is not coming in the long-run). We should ask ourselves what will then happen. Satisfaction (fed-up) could set-in to the highest degree and this was where diminishing marginal utility would begin on the side of the consumers. Also, recall that we made mention of motivation as a driving force in the introduction and we could see it inside the chain drawn in figure 3 above.

When we get to figure 4 below, we will see that this will start to affect income and budget, surplus, opportunity cost, and even reflect on the second substitute good in this case the ice cream mentioned in the question number 2 of assignment 1, and causing price of yogurt to fall back to the same or almost the same level vs. this ice cream in the long-run. Remember that the precise answer to the question only touched on what happened to yogurt, according to the demand of the question. This is because the questioning is within the assumptive framework of the short-run therefore, more specific information could not be supplied by the question and the answer, more than it was given. Combining the two changes, we have increase in improved technology = decrease production cost = increase supply, and this is the first change. The second change is that the improved technology => increased taste => increase preferences => increase demand. Firstly, supply increased, and secondly, demand increased, or vice versa. We can say here with certainty that equilibrium quantity will increase. However, because the increases in supply and demand have offsetting effects on the price, the net effect on the equilibrium price is not certain without more specific information on the relative magnitude of the two shifts⁶. That implies that, there is a missing link since the subject matter due to the question and the answer, was considered as though it were within the assumptive frame work of the short-run, and this missing link would be considered in this write up, considering the long-run. However, two substitutes have been mentioned, that is frozen yogurt and ice cream, because in the short-run the ice cream became unimportant in the face of booming taste of new technologically improved yogurt, but in the long-run, consumers would already have started to consider the importance of ice cream too, all things else equal.

Now, we’ve only expanded so far on where improved technology caused taste of frozen yogurt to increase hence giving rise to demand and demand in turn gave rise to quantity produced of the product, since consumers’ preferences are increased, this is where it was stated in the answering above that, [read footnote first before you continue]⁷. Quantity (supply) increased because labor cost was reduced due to improved technology and this is in agreement with what STIMPSON et al (2002), stated that, [read footnote first before you continue]⁸.

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When we get back to the answer to the question, we would see that it was stated there that the supply curve would shift right because of improved technology used to produce frozen yogurt and we can see this in figure 4 above where the supply curve S0 shifted to S1 giving a new equilibrium position P1 and Q1 instead of the original equilibrium price PE and the original equilibrium quantity QE.

There was an extra information given that, taste increased as well as preferences and this should certainly be the effect of the improved technology used in the production. Therefore, this can cause the demand to increase shifting right-ward from D0 to D1 giving a second new equilibrium position of P2 and Q2, and the new equilibrium price P1 skyrocketed over PE to P2, whereas, the quantity Q1 is still an increase and not a decrease. Again, according to the answer, there it was stated that combining the two changes, we can say with certainty that equilibrium quantity would increase, hence, we can see that the new equilibrium quantity Q1 is unchangeable, it is stable (this is because producers still believe that consumers still have the original demand level among themselves since it is difficult to predict the level of their marginal utility, and in their quest to increase revenue, would continue to produce more of the product at that same level or quantity. However, consumers utility would change with time and this is where it would affect price), but price already changed to P1 and returned to P2 but supply and demand have offsetting effect on the price, the net effect on the equilibrium price is not certain without more specific information on the relative magnitudes of the two shifts that is in the short-run.

This work assumed that the long-run, assumptions might be true and this assumption could replace the missing specific information on the relative magnitudes of the two shifts. The answer to the question in the assignment was now reviewed from the first to the last word. Now, let us see what would further happen in the long-run to the simple issue that, technology caused demand and quantity supplied to increase simultaneously with price falling and increasing again as analyzed above in figure 4.This would only be briefly touched on in section 1.05 below.

1.05-LOOKING AT WHAT HAPPENS IN FIGURE 4 IN THE LONG-RUN

If we look at the figure 4 again in fact, it would be seen that the combined effect of the two equilibrium positions P1, Q1 and P2, Q2 will result into the equilibrium position P3, Q3. Here, it is seen that as price skyrocketed to P2 due to the high demand that resulted, it induced the driving force MOTIVATION mentioned in section 1.01, to agitate the suppliers to produce and supply more to the market, in this case an increase from Q1=Q2 to Q3, i.e. another equilibrium position between S1 and D1 and at this quantity Q3, the market was sensitive therefore there would be an automatic price determined by the market and this was P3 i.e. a fall back to the original equilibrium price of the market where, PE = P3.

However, in the long-run, consumers would already have been limited here by the factors that influence demand and supply and cause the price to drop further downward than PE = P3. Let’s look at how this happens using the following assumptions:

1.06-INCOME AND ITS EFFECT ON CONSUMERS DEMAND SATISFACTION

ASSUMPTION I: High and middle level income earners would rush in to consume the product but low level income earners would be eliminated. However, at a point in time some middle level income earners would also fall out by the road side of the path and the consumption would be continued by the high level income earners.

ASSUMPTION II: Some middle level income earners would not completely drop out in consuming the product but their opportunity cost relating to it bearing in mind substitute goods, would increase with time therefore they would drastically reduce their frequency of consuming it and go in for a cheaper substitute as well e.g. the ice cream so that they would maximize their utility by this combination.

ASSUMPTION III: Low level income earners would be eliminated from consuming the product since the opportunity cost of consuming this product, thus improved frozen yogurt would be too high, and they could not simply afford to forgo the consumption of a cheaper something else e.g. cheaper substitute, ice cream for this expensive yogurt, so they would rationally consume ice cream instead of the yogurt.

1.07-TASTE AND ITS EFFECT ON CONSUMERS DEMANDC AND SATISFACTION

ASSUMPTION IV: Consumers are rational, they like mixed tastes therefore, the high income earners could not infinitely continue with improved yogurt consumption without mixing it with something else, in order to maximize their satisfaction, they would therefore reduce consumption of the improved frozen yogurt even though they could afford it and perhaps go in for something cheaper as well like ice cream, (let us here assume that the particular ice cream is not an inferior commodity only that it is lower in price because of its counterpart improved yogurt), however, their income status made them to shift into a class of consumers but some might not hate ice cream forever, therefore they would also begin to mix up their taste in order to derive maximum utility from that.

ASSUMPTION V: Producers not being sensitive to the market in the interim of the long-run would not reduce production but would continue to produce at the same rate and at a point in time there would be an instantaneous reduction in consumption due to the above assumptions, there would be surplus left, in the market and the patronage would be low.

ASSUMPTION VI: Price must reduce for the surplus to be patronized by the low income earners who had forgone the improved frozen yogurt consumption for ice cream since its (improved yogurt) opportunity cost was too high for them earlier.

ASSUMPTION VII: This could/can cause the price of improved frozen yogurt to come to the level of ice cream if nothing was/is done in the form of advert, innovations, change in packaging etc. to sustain its value. There is frequent need for changing and improvement in technology coupled with other innovations to sustain consumers’ interest in the face of competition and substitution of commodities.

The above assumptions and analogies could be suitably applicable to a literature on CDs, found on the internet, [read the literature at footnote]⁹.

The satisfaction of some high income earners was achieved in the long-run as they finally decided according to the ASSUMPTION VI above to mix up their taste with other substitutes, price gradually started to fall therefore middle level income earners could now consume more according to ASSUMPTION II above until they also started to get fed up and started to fall back on substitutes to mix up their taste for maximum satisfaction and forgoing more of the yogurt now. The combined effect lead to a sort of diminishing marginal utility and the demand instantaneously fell, hence the price later as well fell and the low income earners were now able to afford it.

Now, looking at the above it is just analogous to the containers in figure 5 below

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Where container 1 represents high level income earners, container 2 middle level income earners, and container 3 low level income earners.

Assume there is water flowing into the top container 1, for a long time (at the long-run), it gets filled-up (above normal satisfaction: fed-up) and the water passes at this point, down through the overflow tap to container 2 and the cycle continued to container 3. This was where the price gradually fell after higher level income earners had enough of their fill, making it possible for some middle level income earners to also consume (container 2) and who also later got enough of their fill and therefore further reduction in demand caused further fall in price making it possible for low level income earners (container 3) to consume now, as there is surplus which could only be bought after the surplus’s price fell/should fall.

The overflow could be imagined as the fall/falling in price (or surplus, or due to surplus) as containers at the top got filled up (fed up) and should therefore flow downward by gravity to the next container until the last container 3. The price fell automatically in the market (market determined, in the long-run) just like the water falling from a high to a low level by gravity a natural phenomenon like the market which determined the level and direction towards which the water should fall i.e. the price should fall.

This is just the principle of diminishing marginal utility where diminishing marginal rate of substitution reflects the above explanations that, [read at footnote]¹⁰. A mixture of constrains i.e. income constrains, taste constrains, time constrains, etc. occur to cause the diminishing marginal utility to set in.

1.08-CONCLUSION

It was intended to satisfy the requirement of the question in section 1.00 by using the model of supply and demand in doing the analysis of improved technology used to produce frozen yogurt, its simultaneous increase in tastes and preferences relative to ice cream and this effect on equilibrium price and quantity in the short-run and the long-run. In fact, innovatively, some assumptions were made which made it possible to extend the analysis into the long-run from the short-run. Innovatively, there was also, this idea of the feeding system of water which was used as an analogy to make clear in the scientific point of view, what happens to marginal utility and price during the continuous consumption of something into the long-run.

Attempt was also made to innovatively use motivation as an active element or catalyst which comes into play to agitate a drift of the behavior of producers and suppliers in an economy. This motivation usually comes from the extent of demand by consumers. In the work, attempt was made to point out how the factors influencing demand and supply can interact react with each other in a linkage during economic activities involving the demand and supply of goods and services. It is therefore hoped that the above attempts have been successful and would serve as a good resource material for learners. The question above is herein referred to in this paper as, opening project-question one

TERMS USED IN THE PAPER

Negatively sloped or downward sloped line, market (trading), mass production, labor cost, turn out, massive multiples, high efficiency in mechanization, computerized system, biochemical technology, minimal human interaction, improved-taste, economic interaction (chain reaction), short-run, long –run, innovations, Satisfaction, diminishing marginal utility will begin on the side of the consumers, affect income and budget, surplus, opportunity cost, assumptive framework, offsetting effects on the price, and, missing link left.

APPENDIX

1. FARNHAM P.G. (2005 & 2010), Economics for Managers, 1st & 2nd Editions, USA, Pearson

2. INVESTOPEDIA (2013), Economics Basics: Supply and Demand, Date revisited the website (23rd August, 2013), Website: www.ivestopedia.com/university /economics/economics3.asp

3. STIMPSON et al (2006), AS and A level business studies, Sixth Edition, UK, Cambridge University Press. Page 102.

4. The Oxford Advanced Learner’s Dictionary (200X), 7th Edition, UK, Oxford University Press.

1.0-ASSIGNMENT 2, QUESTION 1

In the short-run what is the policy dilemma when the economy is experiencing stagflation?

1.01-INTRODUCTION

[NOTE: SRAS=> SAS, LRAS=> LAS THROUGHOUT THE PAPER]

The policy dilemma in a stagflation economy is simply the perspective of the policy about an acute economic situation within a time frame where at least one factor of production is fixed i.e. in the short-run, where authoritative institutions perceive and study the circumstances and make monetary adjustment with the aim of achieving some checks and balances, to edge on the economy. It was intended to break down the materials into the barest digest to the understanding of the lame man in order to focus to the point of destination, the tackling of the question above, as it was supposed to land as an answer. Therefore, the introduction tackles on some of the basic definitions of the terms used in the above question frame. Too much diagrams have not been included but vivid explanations have been made to focus and illustrate the mental picture of situations to the reader.

On the internet, it is stated at en.wikipedia.org/wiki/short-run [reference below in appendix], that, in economics, the concept of the short-run refers to the decision making time frame of a firm in which at least one factor of production is fixed, e.g. labor, capital, land, technology, and entrepreneurship abbreviated according to this paper as TELL/ CELL. This implies T.C.E.L.L.

According to en.wikipedia.org/wiki/Policy [reference below in appendix], on the internet, a policy is a deliberate plan of action to guide decisions and achieve rational outcome(s). The term may apply to government, private sector organizations and groups, and individuals, e.g. Presidential Executive Orders, Corporate Privacy Policies, Parliamentary Rules of Order, the Federal Reserve Monetary policy, Central Bank Monetary policy etc.

The Oxford Advanced Learner’s Dictionary (International Students’ Edition) 7th Edition, UK, Oxford University Press, defined dilemma, that is, dilemma is a situation which makes problems, often one in which you have to make a very difficult choice between things of equal importance

Stagflation is made up of two words joined together and these are stagnation and inflation. Here, according to FARNHAM et al (2010), stagflation refers to higher price levels and increased prices and then the two meanings are combined and we then derived the meaning of the term stagflation, (FARNHAM, 2010, p417). Stagflation is therefore, an economic situation of an entity where higher prices and price increases (inflation), combined with Lower real output and income (stagnation), resulting from a major increase in input prices in the economy, (FARNHAM, 2010, p520).

Now again according to FARNHAM (2010),¹¹ on change in short-run aggregate supply, "the short-run aggregate supply curve Shifts up due to major increases in the cost of production input unrelated to demand, such as increases in the price of oil [referring to OPEC oil embargo during the 1970s to have an influence in the absolute price levels (FARNHAM, 2010, p416)], resulting in a higher price level and a low level of real output".

1.02-A LOOK AT THE SHORT-RUN AGGREGATE SUPPLY FUNCTION OR EQUATION

We have read in introduction above that inflation and low income levels and output (stagnation) which causes stagflation, also, depends on the price levels of commodities and services in the short-run therefore, let us look at what factors, constants and variables that influence macroeconomics price in the short-run are, since prices of goods and services are very sensitive to economic situations of an entity e.g. countries, firms, or in the circumstances of individuals and households that make up the pool of consumers and for that matter the populace to interact in the circular flow model¹² where expenditure flows from the households to business, and the flow then returns to consumers or households, and from consumers or households it flows back to business or firms in the form of factors of production which are yet ploughed into the business for yet another return.

Under macroeconomics in the short-run, the short-run aggregate supply curve can be expressed as an equation that is According to FARNHAM (2010),

P = f (Yf, Resources costs)

Where,

P = price level,

Yf = full-employment (according to Wikipedia (2013), thus, "this means everybody looking for a job can get it) or potential output (the highest level of real GDP)

Resources costs = costs of the resources or inputs of production i.e. raw materials, land, labor, capital, entrepreneurship [M-CELL].

Source of the above equation, (FARNHAM, 2010, p415).¹³

In the above equation, GDP (Yf) does not change because (resources, efficiency and technology) which are the factors that determine potential output are fixed in the short-run but resources costs are variable because at least one of the inputs of production could be varied within the short-run. As noted in the introduction we want to grip on the dilemma simplified and clearly point it out to the lame man’s (educated person) understanding, and to do this, we need to fish out the alternative choices between which decision is to be made in the dilemma in the light of this, it would be better to partition the analysis into cases i.e. case I, case II, etc. for onward easy reference. Let us first look at the above equation again but this time in parts as in case I below.

CASE I

Now the above equation could help us to easily remember what is fixed and what is variable here.

Now,

CASE II

Shifts in the short-run aggregate supply (curve) would also be used to explain the policy dilemma in the face of economic stagflation but then, it would be important to first consider the Keynesian model ¹⁴ (FARNHAM, 2010, p414) and then continue from there.

NOTE: Let short-run aggregate supply (curve) = SRAS or SAS, then, as already noted above, SAS is considered in this write up as the key to the explanation of the policy dilemma during stagflation in the economy in the short-run, and it is an upward sloping curve which bent into asymptotes¹⁵ with another curve called the long-run aggregate supply curve (LRAS or LAS) in figure 1 below. The LRAS would not be considered (not explained) in this write up, this was in the direction to help avoid complicated text. We will treat