ECW2731

1
Weeks 12 Business and current economic
situation
ECW2731
Managerial Economics
2
Structure
Weeks 7-8 Competition, market structures and
business decisions
Week 9 Pricing strategies and practices
Week 10 Business and Government.
Weeks 5 - 6 Production and Costs
Managerial Economics
Weeks 3-4 Demand analysis and estimation
Week. 12 Research question Business and current
economic situation.
Week 2 Basic economics principles demand and
supply.
Week1 Introduction. The nature of managerial
economic decision making
3
Discuss advantages and disadvantages of low
interest rates for manufacturing in Australia
Or Apply this question to a country of your
choice.
4
Impact of interest rates on manufacturing company
Macroeconomic perspective
Demand side
Supply side
Open economy perspective
Sectoral specifics
5
Impact of interest rates on manufacturing company
Macroeconomic perspective
Low interest rates a reason or a consequence?

• Interest rates are determined by market forces
• Equilibrium price for capital
• Demand for capital is described by conventional
  sloping downward curve.
• Supply of capital is described by conventional
  sloping upward curve.

6
Impact of interest rates on manufacturing company
Macroeconomic perspective
Low interest rates a reason or a consequence?

• The interest rate base is determined by the
  central (reserve bank)
• Low interest rates may be initiated for increase
  in borrowing
• To accelerate consumer demand
• To accelerate investments in production
  facilities

7
Impact of interest rates on manufacturing company
Macroeconomic perspective
Low interest rates in an open economy

• May be a reason for decrease in foreign
  investments, if interest rates a below the world
  level
• Can, relatively, decrease demand for local
  currency, and therefore, may be a factor of
  depreciation
• In relative terms, may be a reason for more
  expensive import and
• Cheaper export

8
Impact of interest rates on manufacturing company
Demand side

• Decrease in cost of borrowing
• Increase in discretionary income due to decrease
  in the costs of servicing accumulated debt
• A factor of increase in consumer spending for
  expensive/durable goods
• may be a factor of local currency depreciation
• In relative terms, may be a reason for more
  expensive import and therefore
• Increase in demand for locally produced goods

9
Impact of interest rates on manufacturing company
Demand side

• From the producers/managerial perspective
• What kind of good is it?
• Durable/expensive or
• a part of every day shopping (the latter is also
  indirectly affected)
• Targeting
• domestic market or
• export
• Has company a capacity to redirect sales from
  export to domestic market?

10
Impact of interest rates on manufacturing company
Supply side

• Decrease in the cost of borrowing
• Relative increase in production capabilities and,
  eventually, in supply
• Relative decrease in the costs of production due
  to decrease in the cost of service of accumulated
  debt
• Relative increase in the costs of production due
  to increase in prices for imported components
• Has company a capacity to rearrange supply with
  components from import domestic supplier ?

11
Impact of interest rates on manufacturing company
Open economy perspective

• From the producers/managerial perspective
• Where the market is?
• Where supply with components is coming from?
• Is it a domestic or multinational company
• What is the percentage of repatriated profit, and
  what is the proportion of reinvestment?

12
Impact of interest rates on manufacturing company
Sectoral (and regional) specifics

• From the producers/managerial perspective
• Export or domestic market
• Local or imported components
• Durable of everyday goods
• Discretionary spending or necessity
• Locally owned or foreign investment based
• Portfolio of direct foreign investment
• Flexibility possibility of adjustment

13
Impact of interest rates on manufacturing company
Sectoral (and regional) specifics

• From the producers/managerial perspective
• Export or domestic market?
• Local or imported components?
• Durable of everyday goods?
• Discretionary spending or necessity?
• Elastic or inelastic good?
• Normal or inferior good?
• Locally owned or foreign investment based?
• Portfolio of direct foreign investment?
• Flexibility possibility of adjustment?