Jenny needs to understand/decide if she should enter the field of doctors Answer
SCENARIO A
INTRODUCTION:
Jenny needs to understand/decide if she should enter the
field of doctors. She must consider the high costs of pursuing this line and
must try to recover her costs quickly. If the income of doctors is taken as a
measuring rod then she needs to understand if she can earn enough to recover
the costs of tuition and be adequately compensated for the time she spent
studying with the expected income.
RELEVANT INFORMATION:
We need information on income of doctors; the price of
physician services isa good proxy for income. This price is based on demand and
supply of doctors; any changes in demand and/or supply wil be reflected in
changes in price.
The article tells us that physicians are becoming more
stable, in terms of staying in the same place over two consecutive years. They
do not change their profession or the place of their workplace. This would
imply that they are satisfied with where they are or that they have no better
options. This can be translated into a
stable / rising supply of doctors as compared to last few years. Demand for physicians is stable, as we do not
expect any major health epidemics that increase the demand for them. So we use
demand suppy graph to show the rise in supply of doctors over time.
The supply curve shifts to right as supply increases. This reduces the price for physician services, while the amount of services used rises.
RECOMMENDATION:
As shown the price of physician services can be expected to
fall, which implies lower projected incomes for future doctors. This means that
Jenny must not choose to a doctor as her income will only reduce, and it will
take her longer to recover the costs of education.
REFRENCES:
Situation B
INTRODUCTION:
Cindy is looking to invest in a new business that involves
installation of solar panels. She needs to review the possible loss/ profit in
this business in the future by considering the future prospects for this line
of business. She also needs to choose between putting her own funds or to
borrow if she plans to start the business.
RELEVANT INFORMATION:
The article is well written, giving a clear analysis of the
solar power industry and the solar panel market that is a part of the industry.
It informs us that the government is fully behind the concept of solar power
and aims to make it a major energy source in the future. For this it has given
generous subsidies to this industry. The high cost of panels is one area that
is an obstacle to growth of this industry, for which the government is doling
out subsidies. It has given ‘ a $150 million loan guarantee to 1366
Technologies, a Lexington, Mass.-based solar wafer manufacturing company that
has a great new technology’. DOE has also offered $12 billion as guarantees for
loans to 16 solar projects. The imminent growth of this sector is almost
certain.
The government also recognizes that it needs to reduce the
cost of a solar cell to less than $1, for which it is promoting research and
developments in this sector. If this happens then the cost of solar power will
be much lower and even comparable to coal by 2012 (as per DOE estimates).
RECOMMENDATION:
Cindy must be encouraged to take up this business. This is
because this sector is set to grow exponentially in the future. The projected
fall in solar cell prices will cause higher demand for solar power cells
installation. This translates into more business and high prices for
installation services.
Since the price is set to fall, her input costs will also
decline, leading to greater profits in future. We can show this in a demand
supply figure where demand curve shifts up to raise price of installation
services. We assume that supply of these services does not keep step with rise
in demand.
It also makes sense to borrow money for this venture as the
government is giving subsidies to firms involved in encouraging solar energy. A
subsidy implies that she will be able to get loans at possible lower rates
compared to other business ventures.
REFERNCES:
www.tutor2u.uk
Situation C
INTRODUCTION:
Edgar wants to review the business of opening a new gas
station. He must consider the costs of operating it and the possible revenues
he can obtain. This will help to arrive at profits expected. A positive
expected profit will imply a thumbs up to the new venture.
RELEVANT INFORMATION:
The article tells us the gas prices are expected to touch a
high of$4. It also states that this high price has forced consumers to
squeeze non-gas spending and even cut
back on gas consumption. . ‘ the hike at the pump is beginning to push drivers
off the road’. So we have rising prices and declining consumption. This means
lower expenditures by consumers that implies lower revenues for gas station
owners.
The article also mentions irregular supplies that can play
havoc with short run supplies. But high level of inventories are expected to keep
prices lower than expected due to supply problems.
So we have a situation here high prices cause lower revenues
due to lower consumption levels. This is seen in left shift in demand for gas.
Larger capacities and high inventories will affect supplies- the supply curve
may shift to right/ remain stable. Both situations imply lower prices for gas,
and more volatile revenues stream.
However the demand for gas is inelastic due to the nature of
the good itself. This could imply that revenues do not dip as prices rise.
However the prices of gas are very volatile, as seen in the past. This volatility is not a good sign for a
stable revenue flow. Also the inelasticity is coming under scrutiny as surveys
show people changing their habits and lifestyle to reduce consumption, making
demnd more elastic than expected. An elastic demand is not good for business.
RECOMMENDATION:
I would not recommend Edgar to start a new gas station. This
is because of high level of uncertainty associated with supply of gas that
determines its price as well as changing lifestyles and preferences that make
demand more elastic.
The figure shows falling prices with decline in demand and
abundant inventories. As lower prices translate into lower revenues when demand
is elastic, we expect lower profits as well. The volatility in prices and
therefore, revenues in another source of concern.
REFERENCE:
Situation D
.
INTRODUCTION:
Dan would like to consider future prospects of entering
organic farming. He needs to consider future prices that such products can get
and the costs of shifting from conventional to organic farming.
RELEVANT INFORMATION:
The article tells us that demand for organic products has
been falling. This has led to many farmers shifting back to old farming
methods. This exit has allowed existing firms to make more money as supplies
dried up to increase prices. This rise in prices can be termed short run if
demand continues to fall due to high prices. Some of the existing firms like
Abel& Cole are happy with these exits.
It is not clear what caused demand to fall in first place.
It could be due to supermarkets abandoning organic products for cheaper alternative
products. As organic products were unavailable, it reflects in lower demand and
expenditure on them.
RECOMMENDATION:
Dan must understand the cause of high prices. It seems that
unavailability on shelves has shown as lower spending on organic products,
there is ample demand among consumers. This demand must be satisfied with new
channels of selling like online or direct selling. This will help to sell at
lower costs. Since many firms have already exited, the market can mature to be
an oligopoly or monopolistic competition structure. This is good as profits are
possible.
Dan can enter the business if he wants to work in long term.
He needs to find attributes /ways to differentiate himself from competitors to
get profits. It seems that demand is not
really low but other factors like withdrawl of policy support has led to low
supply, fuelling a price rise. This is seen in the diagram as left shift of
supply curve. Lower quantity in use is showing as low spending on organic
products.
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