Report To The Board Of Directors Of Schmeckt Gut On Tariffs, Inflation, And Income Growth

Impact of Tariffs, Inflation, and Income Growth on Demand

It is important for Schmeck Gut to put into consideration a number of factors such as import tariffs, inflation and income growth. The above factors will be vital in enabling the organization attain a relatively larger market share, increase her levels of sales and profitability thus be able to succeed in a complex business environment.  The company as per the available data will be operating in a monopolist market structure meaning that a strong awareness of such factors will be very important for its growth and development (Afonso & Kazemi, 2017).

Schemeck needs to put into considerations the impacts of the various projections and how the impact one another (Parenti e tal.,2017). In simple terms a tariff refers to a tax levied on imported goods. Tariffs are levied for purposes of attaining specific objectives such as infant industry growth, consumer protection and others. Inflation is defined as the persistent increase in the prices of goods and services (Akimaya & Dahl, 2018). Inflation affects the overall purchasing powers of a country currency due to the poor exchange rate (Parenti e tal.,2017). Increase income is defined as the improvement in the consumer’s disposable income (Parenti e tal.,2017). High incomes mean high levels of purchasing powers depending on whether it is a normal, inferior or giffen good (Blinder, 2008).

Therefore it can generally be asserted that the movement of Laffer curve, Phillip’s curve, demand, supply, aggregate and supply curves base on the levels of tariffs, income growth and inflation growth (Parenti e tal.,2017). Thus a percentage increase in the level of income leads to arise in demand when there is no increase in tariffs and inflation. Also arise in the level of income depending on whether it is large or small results into increase in tariffs. Also an increase in inflation affects the overall levels of income and tariffs (Bolshaw, 2012).

Supply and Demand

 Arise in income by 5 percent may be accompanied by high levels of demand of a given product which may result into shortages (Blinder, 2008). Therefore for the company to effectively supply enough to the market, it is forced to employ more factors of production like labor and at the same undertake various improvements in incentives such as wages in order to boost production. Where demand is increased without being accompanied by high production or supply there will be reduced supply thus raising the prices of the goods and services (Blinder, 2008).

Meaning that an increase in five percent   in the levels of incomes results to a rise in the levels of inflation by two percent (Baumol, 2016). Whereas a ten percent raise in the level of tariffs results into an increase in the levels of income by five percent due to raises in imported goods prices. Also, a rise in the levels of tariffs by ten percent results to a fall in demand of imported products and high demand for locally produced products (Burke & Abayasekara, 2018).

 High tariffs make importation expensive. In other words, domestic importers have to incur high costs while importing particular goods and services. Also with an increase in the levels of tariffs, imported products will be expensive for consumers to buy due to high prices meaning that   the overall levels of demand on imported products will be low.

Supply and Demand

As illustrated in the Diagram above an increase in the tariff rate say by 10 percent results into increased prices of imported products thus lower levels of demand (Cole e tal., 2017)

 Agg dd/Aggss (aggregate demand/ aggregate supply

There exists two kinds of equilibrium, short and long run equilibrium. When there is no match between prices and wages plus the prevailing economic situation, the short run arises (Diaz, 2012). The level of equilibrium may not be effectively attained in cases where there are changes in the prevailing economic conditions given that product prices are not able to rise quickly to maintain the market stability. Irrespective of the economic conditions, prices and wages are flexible in the long run period (Parenti e tal.,2017).

The total supply and demand of a particular economy are illustrated by the total supply and demand. Therefore, when the overall productivity levels increases, there is a right word shift of the aggregate supply curve leading to high levels of growth in income and lower inflation rate (Dimopoulos & Sacchetto, 2017).

In this case the aggregate supply curve moves left wards mainly due to higher prices, high rates of inflation and rising tariffs that lowers importation(Blinder, 2008). Hence forth a ten percent increase in tariff results into a 5 percent increase in income thus leading to a 2 percent inflation rate due to economic stagnation. A rise in income results into more profits earned by the organization (Hayn etal., 2018). When there is an increase in the levels of income, a firm increases her production capacity in order to increase the level of profits. Thus an increase in the level of tariff by ten percent and income by 5 percent results into a 2 percent inflation rate emanating from the desire by firms to expand the overall level of output (Jungherr e tal., 2018)

A ten percent rise in the levels of tariffs results into increased production by the domestic firms.  Increased production by local firms is mainly due to reduced importation; this in the long run results into demand pull inflation (Blinder, 2008). A ten percent rise in the tariff rate results into monopolism given those domestic products becomes cheaper than imported goods and services (Blinder, 2008). Also a 5 percent rise in the level of income results into an increase in the total demand of goods and services leading to a two percent increase in prices (Labandeira e tal., 2017).

From the figure above as aggregate demand of goods and services increases, prices of products also raise (Blinder, 2008).  A rise in the tariff rate leads to an increase in the prices of imported goods which discourages importation. Prices of domestic products may also rise due to high tariffs thus causing a general increase in the price level of goods and services (Labandeira e tal.,2017).

Aggregate supply shocks

A ten percent increase in the tariff rate results into stagflation in the economy. This is due limited imported products that can effectively compete with locally produced goods and services (Parenti e tal.,2017). Therefore an increased tariff brings about various supply shocks and disturbances in the economy (Labandeira e tal.,2017). A ten percent increase in the tariff rate discourages imports making domestic firms monopolists. This can bring about inflation due to the limited supply compared to the total demand available. It is important to note increased tariffs results into cost push inflation given that it results into a fall in imports and the GDP of the economy (Parenti e tal.,2017).

Aggregated Demand and Aggregated Supply

From the figure above initially the price of energy bars was at P0, upon the rise of the tariff, the overall prices raised to Leading to inflation or price increases thus affecting the overall total quantity supplied. It is important to note that tariffs are defined as taxes imposed in imports by the Government. The imposition of tariffs discourages importation by making imports very expensive which affect the total demand of goods and services.

Following the imposition of the tariff, the economy overall  imports declines  and the total domestic production increases, However in the short run the impacts of reduction importation as a result of a high tariff are felt leading to supply shocks in the economy. This leads to inflation thus affecting the overall welfare of the population. Therefore when Government imposes a ten percent tariff, there is likelihood that the prices of imported energy bars will raise meaning that less of the imports will be demanded.

With an increase in the tariff rate, there is a left ward shift of the aggregate supply curve. Meaning that the total aggregate demand is higher than the aggregate supply. This leads to stagflation in the economy (Labandeira e tal.,2017).

Phillips curve

All the Keynesian theories pertaining inflation are clearly explained in the Phillip’s curve. Demand pulls inflation and unemployment in the economy results from a fall in the total demand of goods and services (Eun Resnick, 2011). Therefore a ten percent rise in the tariff rate results into a fall in the supply of imports which brings about shortages in the economy thus leading to a 2 percent rise in the level of inflation(Lichter e tal.,2017). With increase inflation also unemployment arises. Therefore two percent raise inflation also results into unemployment (Blinder, 2008).

Laffer curve

As per the Laffer curve, high taxes are significant in generating more revenue to the economy however; it may be a bad motive. For instance a ten percent increase in the tariff rate discourages importation and facilitates domestic production (Mumbower e tal., 2014)

However, due to limited importation the overall levels of revenue generated inform of taxes reduces. Therefore with reduced importation and increased domestic production, in the short run there is a fall in the level of revenue. Therefore due to limited supply of imported goods due to high tariffs, supply shocks emerge in the economy leading to a 2 percent increase in the level of inflation (Mankiw, 2014).

Effect on inflation rate, tariff rate, income growth on schmeckt demand

The three variables strong impact the overall demand of schmeckt(Mumbower e tal.,2014. The impact of changes in the level of incomes on the demand of schemeckt will depend on the nature of goods being supplied in the bar depending on whether they are necessities, inferior, luxuries, normal or giffen goods(McConnell, 2009). Therefore for the case of normal goods an increase in the consumer’s income will result into more quantity of the product being demanded. In other words the demand of the products will effectively be based on the nature of the product(Mumbower e tal.,2014).

Phillips Curve and Laffer Curve

Also for the increase of an inferior good, arise in the level of income may not necessitate an increased in the demand of a particular product. Inferior goods are bought more when the consumer’s income is low and less when the consumer’s income increases. Therefore for an increase in the income for the case of an inferior good, will results into an increased in the demand of superior products. Therefore for the case of an inferior good there exists   a negative correlation between the consumer’s income and the demand for a particular commodity. For the case of a normal good, an increase in the levels of income will not have a much impact in the overall quantity of goods and services demanded (Zhao e tal.,2018).

The impact of tariffs varies basing on whether it is a high or low tariff (Mumbower e tal.,2014). With a low tariff there will be lower prices of schemeckt gut produced since they will be open to competition with imported products. It is important to note that the main objective of high tariffs is to protect domestic industries but limiting the inflow of imports from outside countries (Mumbower e tal.,2014). Tariffs impact greatly the overall demand of goods and services. With a low tariff, there will be reduction on the schemeckt Gut prices which may affect the overall revenue earned by the bar due to competition from international producers (Mumbower e tal.,2014).

Therefore given that the company will be new in the market, it will be affected by low tariffs (Parenti e tal.,2017). With high tariffs, the bar will benefit from increased demand due to limited competitors which results into high levels of market share, sales and revenues (Free, 2010).

Higher levels of inflation will affect the demand of the bar products and services. It is important to note as per Keynes understanding of economics, inflation usually arises from supply side disturbances within the economy (Mumbower e tal.,2014). In other words, demanding exceeding supply (Mumbower e tal.,2014). Therefore with high levels of tariffs, the production will be low which will lead to demand pull inflation. Therefore the prices of the bar products will be high as the prices of goods and services increases which may result into unemployment so as to cut production costs (Free, 2010). It is important to note that high levels of inflation forces firms to lay off workers for purposes of reducing the costs of production (Free, 2010).

Regression analysis

The independent variables in this case are tariff on imports, number of stores and individual income. The dependent variable is the annual demand of energy bars per individual

From the regression analysis, below are the results

From table, it is clear that overall P- value per variable is below 0.05 meaning that the above variable has an impact on the dependent variable. Therefore the annual demand of energy bars is affected by each of the variables significantly (Free, 2010).  The degree of volatility can be effectively determined basing on the variations of the coefficient. From the table, there a strong positive relationship between number of stores, income and the overall demand on energy bars on annual basis (Free, 2010). Also compared to other variables the number of stores significantly affects the overall annual demand of energy bars (Free, 2010). Further, there is a negative relationship between tariff rates on imports with the dependent variable annual demand of energy bars (Roth, 2012). 

Multiple Regression Analysis

Meaning that a high tariff has a negative impact on the overall demand of energy bars. High tariffs affect importation of goods and services which results into limited supplying driving the prices of goods and services (Roth, 2012). Meaning that consumers the overall demand of energy bars will be limited due to high prices thus affecting the company significantly (Silverman, 2018).  As per the analysis 0.955933 is the overall resultant correlation between the independent and the dependent variable. R- squared as per the results is 91.38 percent meaning that the variables are close to the dependent variable (Roth, 2012).

Recommendations

 To effectively promote the overall running and development of the Bar, a number of strategies and tactics need to be undertaken by schmeckt Gut research department. First the company should undertake various research initiatives targeting the current organizations that produce similar products and services (Parenti e tal.,2017). Market analysis is very important for the success of any strategic investement whether big or small. Therefore, before the product lunch, much efforts and resources should be put centered on understanding the market of operation better

Proper analysis of the market will pave way for understanding what affects the price and demand of energy bars drinks throughout the area (Roth, 2012). The organization should also understand the elasticity of demand of its various products (Parenti e tal.,2017). In economics there exist three elasticity’s such as cross price elasticity, income elasticity and its own price elasticity(Roth, 2012). Therefore strong awareness of the elasticity’s of demand will be important in developing or strategies and tactics aimed at facilitating the overall sustainability of the organization in the market (Parenti e tal.,2017). Proper awareness of inflation rates, tariffs and consumers income will help in estimating the overall demand of energy bars products (Parenti e tal.,2017).

With proper awareness of consumers income while undertaking pricing decisions, it will be easy for the for company to put into consideration the various incomes of the consumers in the market. This will not affect the demand of products in periods of low income (Oladosu e tal.,2018).

Further, the organization should undertake cost-plus pricing strategies in the mean time to ensure that it fetches minimal profits without affecting the consumer’s income significantly (Parenti e tal.,2017). Also, the company should consider undertaking various customer attraction and retention strategies such advertising, product differentiation and customer service if is to success attain its objective in a complex business environment (Parenti e tal.,2017). It is important to note that the company will be operating in a monopolistic market structure where there is sale of products which may be closely related substitutes, therefore to increase demand for the company products in such a market adverting is critically relevant (Parenti e tal.,2017).

Also, the organization should consider adopting a new and unique technology. Technology is very important in encouraging efficiency and effectiveness in the production process. With the utilization of new technology there will be a fall in the total costs of production, improved quality of the company products and high levels of efficiency due the product delivery mechanisms.

Recommendations for the Board of Directors

Division and specialization of labor can also be undertaken by the organization to increase efficiency and effectiveness in its overall operations. With the division of labor and specialization, redundancy will be reduced and high quality production encouraged in the organization. It is should be realized that the aspect of specialization will make the company employees very productive in there day to day tasks meaning that high levels of production will be achieved with limited costs on supervision and others (Eun and Resnick, 2011).   

This will enable the company to remain very competitive in spite of the market changes (Oladosu e tal.,2018). Also the company should consider developing new production techniques that are cost efficiently. The use of new techniques of production which are unique to the company will make it easier to low the costs of production and thus charge friendly prices (Oladosu e tal., 2018).

Conclusion

Conclusively, the company needs to effectively understand the market before launching its product. Proper awareness of the tariffs, income levels and inflation will be vital in ensuring that the company attains its objectives both in the short and long run period. The main reason why most companies charge high prices are the high costs incurred at each and every stage of production. 

Therefore, cost saving techniques, better pricing strategies and technology will enable the demand of the company products remain constant in spite of inflation and fall in income. It should be realized that as income rises and decreases, the overall demand of goods and services tend to be affected depending on whether it is a normal, inferior and given good. Hence the adoption of such strategies will be vital in addressing such cases both in the short and long run period. 

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