APPLIED ECONOMICS 4.
MARKET POWER OF THE FIRM
FRAMEWORK FOR SOCIOECONOMIC IMPACT ANALYSIS
- In the production and distribution activities of the firm,
whether the firm is a buyer of inputs or a seller of its
outputs, the firm creates an impact on its sellers and
buyers.
- These activities involve commercial transaction
between the firms and its supplier and buyers
- However, there are spillover effects of these
transactions that may accrue to third parties that are
not part of these commercial transactions.
Externalities: (spillover effects) benefits and
costs incurred by parties outside the transactions
between firms and its suppliers; and firms and its
buyers.
TRACING THE IMPACTS THROUGH THE SOURCING OF INPUTS
OF A BUSINESS FIRM
- A firm will need two main categories of inputs in
production process:
*INTERMEDIATE INPUTS - raw material can
be unprocessed primary products or semi-
processed materials that need further
processing or transformation by the firm.
*FACTOR INPUTS - are the processing inputs
(labor, management, capital, land, and
technology)
INTERMEDIATE INPUTS
1. INTERNAL vs. EXTERNAL SOURCES
- the impact on sourcing raw materials from domestic
suppliers may have greater positive effects on the local
economy than sourcing it externally. - sourcing
intermediate inputs from foreign suppliers will have
directly effect on foreign economy and may involve the
use of foreign exchange for these external
transactions.
2. INDEPENDENT SUPPLIERS vs. SUBSIDIARY
CONGLOMERATE
- usually, independent suppliers are small and medium
scale companies that employs numerous laborers. -
sourcing intermediate inputs from a subsidiary of a
highly integrated conglomerate may displace
traditional independent domestic suppliers.
3. RAW vs. SEMIPROCESSED RAW MATERIALS
- it is the basic input material which you use for
production of your desired product SEMIPROCESSED
GOODS- are partly finished goods, used as an inputs in
the production of other goods including final goods.
- sourcing intermediate inputs that are still very raw in
product transformation will have limited multiplier
effects unlike sourcing them under semi-processed
state especially if these intermediate inputs were
sourced domestically.
- as a sole buyer of the raw materials, the firm can bid
the lowest price to maximize its profit.
- on the other hand, if the purchasing power is small and
has limited market power, it cannot ask for special
discounts more than what is normally given to ordinary
customers.
FACTOR INPUTS
1. SOURCING FOR LABOR SERVICES
- For labor services:
*the source of labor services
*nature of engagement
*basis of compensation
*degree of unionization of laborers
*presence of human development plan
*working conditions
2. WITHIN THE COMMUNITY vs. OUTSIDE THE
COMMUNITY
- it is beneficial to the laborers, firm and the community
if labor services are drawn from the community where
the firm is located.
- there are some large companies that are willing to
establish dormitories for their workers, housing
facilities for their staff, and provide handsome
transportation allowance for their managers just to
reap the productivity benefits of proximity between
factories and residence.
3. DIRECT EMPLOYMENT vs. SUBCONTRACTING
- Direct hiring can give laborers security of tenure,
higher compensation, and a number of monetary and
nonmonetary benefits.
- Sourcing labor services through subcontractors creates
greater income for manpower services companies.
4. MINIMUM WAGE vs. MARKET RATE
- The compensation package for professional staff is
determined by the prevailing market rate and not
mandated by the government regulation.
- some firms give professional personnel number of
additional benefits including car plans, housing plans,
education for children and medical insurance coverage
of members of the family.
5. ORGANIZED vs. NONORGANIZED
- in large companies, laborers are highly organized and
have strong unions.
- nonorganized laborers do not mean that they have
lower compensation (it is usually dependent on the
generosity of their employers determined upon
employment)
6. HUMAN RESOURCE DEVELOPMENT
- General training given to personnel enhances their
skills that can be used in other companies and
industries.
7. TEMPORAL and SPATIAL WORKING CONDITIONS
 - Temporal working conditions refer to the shifts in
duration of work
- Spatial Working Condition refer to situation where the
workers are assigned in fields and places other than
the normal business office.
SOURCING FUNDS FOR CAPITAL FORMATION
1. OWN SAVINGS vs. CAPITAL MARKET
- CAPITAL MARKET including banks, bond, and equities
market
- Many small companies and business ventures source
their funds from their own resources including savings
and retained earnings.
2. FOREIGN BORROWING vs. FOREIGN DIRECT
INVESTMENT
- there are number of large domestic firms that source
their funds from abroad. They can do this by borrowing
or by inviting foreign partners through Foreign Direct
Investment (FDI)
3. MARKET DETERMINED vs. REGULATED RATES OF
RETURN
- the return of investment can be determined by market
forces or it can be regulated.
SOURCING FUNDS FOR LAND INPUTS
1. LAND INTENSITY OF BUSINESS
- for those with concessions with the government to
exploit natural resources, they pay royalties or rents
based on the amount of minerals extracted and trees
harvested from the natural resources
2. LOCATION OF BUSINESS and OPPORTUNITY COST OF
LAND USE
- agricultural plantations, forest, mining concessions
which are mostly located in remote nonurban areas.
- in urban areas, where industrial and services industries
are situated the payment for the use of land is usually
determined by the opportunity cost of land.
SOURCING MANAGERS AND PROFESSIONALS
1. INSIDERS vs. OUTSIDERS
- In small companies, the management team is
homegrown sometimes drawn from the owners or
relatives of family-owned enterprise
- These homegrown managers are known for their
loyalty and are knowledgeable of the ins and outs of
the organization
- but they may lack the dynamism and creativity of
managers drawn from other firms and industries,
- “headhunters” are always on the lookout for skilled
talents within the industry resulting in fast turnover of
skilled professionals in many companies.
2. IN-HOUSE vs OUTSOURCED TRANING
- the training can be done within the corporation or with
universities and other training institutions.
- Singapore are able to hire professional and technical
staff from all over the world by paying them
handsomely and providing with favorable working
conditions.
PAYMENT OF TAXES
- Taxes are paid at different levels of government from
barangay level to the national government.
*LOCAL GOVERNMENT UNIT- business tax,
business permits, municipal sales taxes, real estate
taxes
*NATIONAL GOVERNMENT- value added-
tax, import duties, export taxes, and income taxes
including royalties
- there are micro business ventures that do not pay
taxes since they operate in the informal sector.
- These micro enterprises do not issue receipts on their
commercial transactions.
OUTPUT AS INTERMEDIATE INPUTS
1. CONTRIBUTIONS ON INDUSTRIAL INTEGRATION
- This integration made possible through the forward
and backward linkages of industries that creates
additional income and employment to various sector
of the economy.
2. CONTRIBUTIONS TO PRODUCTIVITY OF OTHER
INDUSTRIES
- This made possible if the selling firm produces quality
intermediate inputs whose price are affordable and
competitive.
OUTPUT AS FINAL DEMAND
1. PERSONAL CONSUMPTION
- An output of a business enterprise can affect
households as consumers of these goods and services.
- Many consumers consider the affordability of the
commodity as the primary consideration in their
demand for the product.
- However, there are goods and services that are in
demand even if they are very expensive. In this case,
the satisfaction of the consumer is no longer based
primarily on the price but on the quality of the good
and service.
- Aside from quality, producers can target the specific
wants of customers.
- The firms will need the socioeconomic and
demographic background.
- In the light of limited information on the part of the
customers, responsible producers should disclose the
information on the contents and quality of products
they are selling.
*expiry date
*nutritional value
*warnings on cigarette package
2. INVESTMENT
- A firm producing quality equipment, implements, and
tools can contribute in the improvement of the
productivity of the purchasing firm of these capital
goods.
3. GOVERNMENT CONSUMPTION
- with the tax revenues, the government can provide a
variety of public services.
- GOVERNMENT CONSUMPTION - refers to the product
disposition as a combination of household
consumption and purchase of capital goods by firms.
4. EXPORTS
- not all the outputs of firms or industries are disposed
in the domestic markets. There are firms that sell a
portion of its output to the rest of the world as
exports.
- It can increase the foreign exchange reserves of the
country
- It contributes to the stability of the economy