1. What is the economic theory of the firm? How would you manage according to this theory if your goal is purely economic profit?
The company plays the role of the central mechanism of self-regulation and self-development of the society. Meanwhile, it is also a complex economic phenomenon, and there are several concepts of company’s interpretation in an economic theory. One of the most common is the neoclassical theory of the firm, which considers the company as a production unit, the activity of which depends on the production function. According to this theory, the main goal of the firm is to maximize profits and find the ratio of resources that would ensure the minimal production costs. The next is an institutional theory of the firm, which sees the company as a complex hierarchical structure, acting under the conditions of market uncertainty (Ceseratto, 2014). Another premise of this notion rests on the understanding that the firm is a set of relationships between the owners of the resources involved in the organization. The final concept is the behaviorism theory of the firm, which focuses on the active role of companies in the economy and their ability to adapt and change the market environment. Besides, this concept pays attention to the study of the internal structures of organizational functioning and decision-making problems (Ceseratto, 2014).
Features of increasing economic profit are tightly connected with the neoclassical theory of the firm. If the goal is purely economic profit, a manager should provide a special policy of the economic growth. To perform the efficient policy of the company, the administration should find the source of the highest possible profit and form the right pricing decisions. Besides, the organization should choose correct economic models and work out the marginal cost and revenue. Finally, company executives should analyze internal and external factors and implement optimal development criteria in accordance with the organizational characteristics.
2. Blinder’s study what does this show as concerning Economic theory? What implications does this have in managing business?
According to the Blinder’s study, the economic theory is the contradiction between the limited resources and unlimited human needs (Baumol & Blinder, 2012). Furthermore, this concept made people use scarce productive facilities, labor, and elements of non-human production. In accordance with the Blinder’s study, there are some general implications in the business management. Firstly, the company must attempt to increase the profits and develop the marginal revenue and cost. Next, organizations must produce their output level and establish the effective game theory. Finally, firms must form the efficient pricing policy that will help them to survive for a long time in the world trade market (Baumol & Blinder, 2012).
3. What is the function of financial markets? What are the types? What is their purpose? How do they work?
The financial market is the set of all financial resources in their movement (Burton, Nesiba, & Brown, 2015). Its main function is to ensure the flow of funds from the one entity to others that need the financial resources. The second important task is the organization of the process of bringing financial assets to consumers, manifested through the creation of a network of various institutions for the implementation. The last primary function is the creation of conditions for the continuous movement of money in the process of committing different payments (Burton et al., 2015).
There are common types of financial markets. The first is the capital market, a system of sustainable organizational and economic relations that specialize in the purchase and sale of foreign currency and payment documents. This type provides an exchange of the currency of one country for a currency of another. Another type is the money market, which is a set of uniform national credit and deposit markets in which banks carry out transactions in short-term securities. The third type is the insurance market, which presupposes that the insurance cover is a general object of sale. One more type is the stock market, which has the redistribution of funds by means of financial instruments such as securities. The joint stock companies, enterprises, banks, and different financial institutions occupy a principal place in the propagation of securities. The last primary economic system is the precious metals market. In this type, companies use gold and other financial instruments as the manufacturing process or asset accumulation (Burton et al., 2015).
4. Describe the function of financial intermediation what are the benefits and problems with it?
Financial intermediation is an activity on the attraction of temporarily free funds and the provision of temporary use. Moreover, people involved in this process perform the role of borrowers and take on financial risks by putting forward the financial requirements to creditors. There are a few general functions of the financial intermediation. The first is the reduction of assets and liabilities in line with customer needs. The next one is the risk reduction through the diversification. The essence of this method is the purchase of a large number of financial assets with different issuers by the financial intermediaries. The last function is the reduction of distribution costs for different transactions. Therefore, financial intermediation is an essential entity of the financial market. The work of this institution contributes to the efficiency of various segments of the market (Greenbaum, Thakor, & Boot, 2015).
Nevertheless, the financial intermediation faces some challenges. The first is the problem of quality control. In fact, in some firms, a lack of coordination and comprehensiveness hinders a problem resolution. Another challenge is the shadow economy, which causes the transaction costs and information asymmetry. The last challenge of the financial intermediation functioning is the confidence in the future. Without this factor, the company will be unable to conduct the effective financial intermediation (Greenbaum et al., 2015).