The impact of macroeconomic decision rates

Generally, there are two broad areas of economics study; they are microeconomics and macroeconomics. Macroeconomics, at one hand, observe the big picture of economy since the study focuses on the discussion of national economy as a whole while providing a fundamental knowledge of how things work in the business world. For instance, scholars who deal with macroeconomics would discuss the impact of wages, interest rates, inflation to the business world. Concerning the macroeconomic issue, there is a relation between several factors.

Recession, for example, is a weird economy activity that happens not only to developing countries but also to superpower countries like United States. Consider the 1990’s situation. During the whole one-year period, the U. S. economy experienced undulating unemployment rates. In May, the country counted over 119. 9 million of job vacancies available throughout the nations. Five months later, in October, the situation turned upside down when more than 500,000 workers lost their jobs. Within the same period, after the eight years of steady growth, the real output declined for some time until the end of the first quarter in 1991.

In addition, U. S. also experiences high inflation in 1979 (11. 3%) and 13. 5% in 1980. Unemployment and inflation are not solely the matter of U. S economy since other countries also experience these phenomena. The great depression in 1930 was a good example of worldwide impact on unemployment. While in 1970, most countries experienced a high inflation due to the increase in the oil price. The vast availability of unemployment is one of countries’ major enemies besides inflation since they both are potential to increase the growth of criminal actions.

At the other hand, microeconomics consider smaller picture of economy in a country and is likely to focus on the discussion of supply and demand theory and the underlying facts behind the pricing strategy of particular products and services. However, to understand how entire economy works comprehensively, people need to consider both macro and micro level of economics. In line with this suggestion, this paper will discuss the impact of macroeconomic decisions concerning social security and microeconomic choices of the individual.

Macroeconomic Decision and Social Security By definition, social security is “the comprehensive federal program of benefits providing workers and their dependents with retirement income, disability income, and other payments. The Social security tax is used to pay for the program” (WebFinance, 2005). There is strong relationship between macroeconomics and social security. This is because social security relates to government budget. When a government experienced a crisis, it is likely that social security will experience a large cutback as well.

In 1990s, for example, the 1990s, Sweden encountered the most acute macroeconomic crisis since the great depression in 1930s. The economy data was also pathetic in which within the period 1990 – 1993, Sweden faced the decreasing unemployment by 13 percent and the open unemployment increased into 1. 7 to 8. 3 percent. In addition, Sweden also experienced the proportion of the labor force affected by active labor force affected by active labor market policy measures increased from 2. 9 per cent to 6. 1 per cent.

Moreover, the country also recorded a consecutive negative GDP growth rate within three years (Palme, 2002) The situation immediately gives forceful impacts on public finances since the decreasing employment in the country might lead to a massive increase in public expenditure as well as to drastically eroded revenues. Therefore, the situation will cause the budget deficit, which in turn will put heavy pressure on social security. For this reason, macroeconomic decision has great impact on social security. For example, a government might decide to conduct training in order to improve the skills of workers.

However, Palme (2002) said that, “Successful strategy to strengthen social security has to be based on successful macroeconomic policy making […] although successful macroeconomic policies are not likely to be enough, either, if the skills of the unemployed persons do not match what the new vacant jobs demand. ” It means that even the labor forces have increased skills and high marginal taxes are avoided, still good skills might not be enough to get employment. III. Macroeconomic Decision and Microeconomic Choices of the Individual III. 1    Reflationary policies

Keynes, in his book, The General Theory of Employment, Interest, and Money, explains that in the short run, interest rates were determined not by the balance between savings and investment at full employment but by “liquidity preference”--the public’s desire to hold cash unless offered a sufficient incentive to invest in less safe and convenient assets. Savings and investment were still necessarily equal; but if desired savings at full employment turned out to exceed desired investment, what would fall would be not interest rates but the level of employment and output.

In particular, if investment demand should fall for whatever reason--such as, say, a stock-market crash--the result would be an economy-wide slump. Moreover, Keynesians policies or demand management means adjusting the level of demand to try to ensure that the economy arrives at full employment equilibrium. If there is a shortfall in demand, such as in a recession (a deflationary gap) then the government will need to reflate the economy. If there is an excess of demand, such as in a boom, then the government will need to deflate the economy. Reflationary policies to boost the level of economic activity might include:

Increasing the level of government expenditure 2. Cutting taxation (either direct or indirect) to encourage spending 3. Cutting interest rates to encourage saving 4. Allowing some money supply growth The first two policies would be considered expansionary fiscal policies, while the second two are expansionary monetary policies. Therefore, looking back at the Great Depression and the failure to provide a clear solution for the series of recessions that occurred in the wake of the oil crisis in 1973, a government should consider both supply-side policies for short run results and demand side policies for long run results.

This situation immediately influences the microeconomic choices of individual. Consider the case on Pepsi Co supply and demand. III. 2    Microeconomic Choices of Individuals: Supply and Demand of Pepsi Cola Pricing is an important issue for retailers since it predicts and determines the destiny of our merchandise whether it is salable like a glass of coke in the summer or slump like ice corn in the winter. No wonder if those retailers then decide to cut the price at the slowing down period.

That is an ordinary action, but it is not when companies turn out to have exact decision on what kind of merchandise, when to do, at which store, and how big the discount factor in order to boost sales the fading merchandises. In short, there are many factors influence the pricing of a product or services; the factors include demands for the product and the availability of the product in the market (supply). Long time before sophisticated pricing techniques comes alive; vendors set the price of a product merely based on supply and demand theory.

Since then, people know the theory of supply and demand are only the first steps towards understanding how setting up the market prices of a product. Furthermore, the theory also helps people to understand the way in which these prices help shape production and consumption decisions. At any given moment, where the market price is too high, we might expect that consumers will leave would-be seller with unsold goods since they are already have other options having the same characteristics, size, and the tastes with lower price.

Meanwhile, at other moment, if price is too low, it will leave disappointed would-be buyers without the goods they wish to buy. Again, the reason is that consumers might ponder over what is the disadvantage of the product or they think it is used and broken product. Therefore, according to Kirzner, “there exists a right price, at which all those who wish to buy can find sellers willing to sell and all those who wish to sell can find buyers willing to buy. The right prices therefore often called the market-clearing price”. III. 2. 1    Pepsi Cola’s Demand

The law of demand states that buyers of a good will purchase more of the good if its price is lower (and vice versa). At one time, according to Consumerguide. com, “the price of 2-liter bottle of Pepsi cola is $1. 89. According to law of demand, if the price of the 2-liter bottle of Pepsi Cola decreases from $1. 89 to $1. 6, consumers will buy more Pepsi” . According to the author of “Supply and Demand,” he says that the law of demand assumes other relevant variables remain constant. Therefore, it is possible that as the price of 2-liter bottle of Pepsi decreases from $1.

89 to $1. 6, consumers purchase fewer Pepsi. The reason explaining this phenomenon is that buyers’ real incomes decline, so that, even though the price of a bottle of Pepsi is lower , they just can’t afford  to buy as many as they want. However, the situation does not infringe the law of supply and demand theory since in the latter example assumes that other variables are not held to be constant. If all variables are constant, then according to the theory we might see that consumers will buy more Pepsi as the result of a price decrease.

Demands Determinants of Pepsi Cola As stated in the previous sections, we found that law of demand reveals that any declining market price of a product does not have to result in the increase of demand for the product. In U. S. market, both Cola producers, Coca Cola and Pepsi, are having good times since Americans have increased the consumption of soft drinks within the last three decades. In 1970, Americans consumed 23 gallon of soft drinks a year, while in 1998, the number increased into 55 gallons a year .

This situation appears since there are several factors that influence and determine the demands of soft drink, especially, Pepsi Cola. One of them relate to the macroeconomic decision, the change in buyers’ incomes and wealth. According to Howard Community College, “the demand for most products will go up of buyers’ real incomes or real wealth, i. e. , their purchasing power rises. ”  In the case of Pepsi, if a costumer of the Pepsi Cola manage to earn $25,000 next year instead of $10,000 this year (and assuming there is no increase in the price level), it means that the costumer’s real income increases.

This situation will affect the customer’s spending such as consuming more bottles of Pepsi cola, buying more clothes, buying new wash machines, and other electronics gadgets. Consequently, the demand for these products increases. III. 2. 3    Pepsi Cola’s Supply In addition to the law of demand, another factor that explains the market price of a product is the law of supply. This law states that product suppliers offer more product at a higher than at lower prices. This law is simply the opposite of the law of demand.

If the product price is high, the firm can make the greater profits by selling more. Therefore, it assumes that the cost of production remains constant and the demand for the product is still high. In the case of Pepsi Cola, during the fever of Michael Jackson concerts, the price of Pepsi Cola in the concert venues might increase as well. This is due to the fact that producer will supply more Pepsi Cola since the demands for the soft drinks during the concerts are high.

In addition to demand determinants, there are also several macroeconomic decisions that determine the supply situation as follows: 1. Prices of Inputs Necessary to make the product This factor appears when input prices (raw materials, labor cost, machines etc. ) decline. This will drive the Pepsi Cola Company to increase the company’s profit by increasing the supply of the product (and vice versa). 2. Taxes and Subsidies The more taxes applied to a product, the more company likely to lower the supply of a product since the cost of bottling Pepsi Cola increases.

In contrast, when a subsidy exists, it is likely that company will increase the supply of a product since the cost is lower.

References

Case, Karl E. and Ray C. Fair. Principles of Economics, (New Jersey: Prentice Hall, 1999) Economic Growth. Retrieved May 25, 2006 from web. nps. navy. mil/~brgates/documents/ macronotes/growth. rtf Farlex. (2005). Microeconomics. Retrieved May 24, 2006 from http://financial-dictionary. thefreedictionary. com/Microeconomy Keynesian Theory of Economics. Retrieved May 24, 2006 from http://interzone. com/~cheung/SUM. dir/econthyk1. html