Economics


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Coca - Cola

On the 14th of June Coca-Cola’s soft drinks were banned from the markets in Belgium and later also in Luxemburg and France. Two failures in the bottling system were the cause for the nausea that the people suffered. According to the article it would have been better if they would have acted fast and told the whole truth. Coca- Cola is in an ologopolistic market and therefore branding plays a great role. It is possible that the company ha lost market shares, due to this accident. In the ologopolistic market the firms don’t compete with price, but rather with advertising and other non-price strategies. Therefore one can predict that this scandal has shifted the demand curve to the left. This accident can be seen as a negative externality. The government should make Coca Cola increase their health controls (internalise their externalities), if scandals of this sort happen again. They can enforce this by either subsidies (reward) of in this case taxation (punishment). People who would usually only buy Coca Cola due to the heavy advertising might try a substitute during the time of the ban. This can be seen as a sort of free promotion for the others in the market. According to the zero sum game, the lose that Coca Cola is making right now is directly proportional to the profits the other firms are making in the respected market. Coca Cola will need to take further actions to restore their brand name that they have established throughout all these years. This will significantly influences their total added costs. A strong brand has very few goods substitutes and it is very difficult for competitors to challenge the supremacy of the brand. This health scandal might have opened the doors fro new competitors. In the long run this can lead to Coca Cola’s costs for advertising to increase or furthermore they could lose control of the market and fall into a disequilibrium. The accelerator theory suggests that the level of planned investments varies with the rate of change of income or output rather than with the rate of interest. It will be hard for the big American company to fulfil their expectations of expansion in Europe with no investors being pleased with their progress.

Best Foot forward at Reebok
On October 18th Reebok published a 41 page report on how it is dealing with its workers in Indonesia.

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Its report was a critical analysis done by an independent firm. Consumers want low prices, the shareholders are looking for high profits and capital gain, but at the same time non government organisations protest against exploitation. It is however a very difficult task to please the consumer with low prices and at the same time to keep the costs of production at a low level without exploiting the workers. In my opinion the prices won&#8217;t affect Reebok significantly because they are in an ologopolistic market. Firms like Nike are in the same situation and therefore will have higher costs of production as well. They will have to use non pricing strategies to compete with each other. Through advertising they can try to differentiate their product, making it seem more favourable to the customer. The Firms could stay at the same price and lose profits or they could charge the customer more. They would have to find the right balance. Also if Reebok would stop exploiting the Indonesian suppliers, they would help strengthen their economy and therefore creating a new potential market. Reebok would inject money into the circular flow of money in Indonesia if the would raise the wages. This would raise the employment and help to stabilize the prices. If the labour earns more then their buying power will increase and therefore they would demand more goods. Then more people would be employed to produce these goods. It would have an accelerating effect on the developing economy. NGOS could actually provoke the exact opposite effect. A result of the protesting could be that Reebok would fire all the labour in Indonesia and employ more workers in the USA. This would lead to an increase in the buying power of American citizens. The two Indonesian contractors have spent 250,000 dollars to meet the reports mild criticism. The price varies inversely with the buying power. This means that if Reebok increased their prices, due to and increase in the costs of production, people wouldn&#8217;t be able to purchase the same quantity. &#8220;America&#8217;s lucky athletes can thus buy shoes produced by Indonesians working in safer and more politically correct conditions &#8211; and at no extra expense.'; This statement doesn&#8217;t sound very realistic to me. If the Indonesian workers gained benefits then the firms&#8217; cost of production would increase. Also since the labour would be more expensive now some of the labour might lose their job. Reebok might also atomise and this would result in technical unemployment. As a result American athletes would either have to bay more or the firms&#8217; profits would decrease.

The gap between the rich and the poor is widening. The poorest quintile of the population is shown to earn 9 % less in real terms than in 1977, while the rise in the income of the top 1 % since 1977 exceed the total income of the bottom 20 % this year. The economic theory predicts that the consumption of the household will rise. The marginal propensity to the consumer measures the proportion of a change in income that is spent or saved. Even though the poorest quintile might be spending more money they are getting less back in real value, due to inflation. The stockmarket boom in the 1990s has contributed a great deal to throwing the distribution of wealth of balance. One can predict that a rise in income will lead to more spending, but some saving too. Usually only the wealthier have a marginal propensity to save or to invest. The poor are the ones that put their money right back into the circular flow of the economy to buy the current G.N.P. Meaning that there are no withdrawals. When withdrawals exceed injections, output, employment and national income fall. Much of the income is going from the poor to the rich. Unlike the poor the rich aren&#8217;t always injecting the money into the current circular flow. They are more likely to withdraw the money from the economy. When injections exceed withdrawals output, employment and national income rise. Injections and withdrawals produce a disequilibrium in the economy. If the rich would save a substantial amount of money and thereby withdraw a significant amount of money from the circular flow they could trigger a so called &#8220;ripple effect';. It can be said that one person&#8217;s spending becomes the others income. Due to this inequality it will be hard for the economy to grow. The poor will be limited to only buying necessities. The government could redistribute the incomes, by taxing the very few, extremely rich extensively. This would push more money into the circular flow. The poor could purchase goods and as a result this would become the income of others. The industry would then increase output due to the increase in demand.


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