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Macroeconomics Questions

Macroeconomics Questions

Question 1

Over the past two decades, the United States has persistently had a trade deficit.

Question 2

In an open- economy macroeconomic model, the market for loanable funds identity can be written as, S=I+NCO

Question 3

In reference to the figure, which of the following shifts show the effects of an import quota?

None of the above is correct.

Question 4

In reference to the figure, if the interest rates were initially at r2 and import quota was imposed, the interest rate would decrease because demand would shift to the left.

Question 5

In reference to the figure, if the economy were initially in equilibrium at r2 and the government removed import quotas, the exchange rate would appreciate to E4.

Question 6

Suppose that U.S citizens start saving more. What does this imply about the supply of loanable funds and the equilibrium real interest rate? What happens to the real exchange rate?

This would imply an increase in the supply of loanable funds since loanable funds consist of bank loans and household savings. This would also imply a fall in interest rates due to excess supply of loanable funds. The real exchange rate will decline since lower interest rates will attract investors from abroad thereby increasing net capital outflow. This in turn causes the supply of the US dollar to rise.

Question 7

Aggregate demand shifts to the left if the money supply decreases

False

Question 8

Which of the following adjusts to bring aggregate supply and demand into balance?

The price level and real output

Question 9

Other things the same, the aggregate quantity of goods demanded decreases if

All of the above are correct

Question 10

State at least four variables besides real GDP that tend to decline during recessions? Give the definition of real GDP, argue that decline in these variables are to be expected.

Employment

Investment spending

Household income

Inflation

GDP is the money value of all goods and services that are produced within the borders of a country within a specific period of time. It comprises all public and private consumption, investments, government outlays, and exports less exports within a defined territory.

Question 11

Make a list of at least 5 things that would shift the aggregate demand curve to the right.

Increase in consumption spending.

Increased investment.

Increased government spending.

Net exports.

Aggregate expenditure.

Question 12

In reference to the figure, an increase in the money supply would move the economy from C to B in the short run and A in the long run.

Question 13

In reference to the figure, if the economy is at A and there is a fall in aggregate demand in the short run, the economy moves to D

Question 14

During recessions which type of spending falls?

Consumption and investment

Question 15

According to the theory of liquidity preference, the money supply and money demand are positively related to the interest rate.

Question 16

The multiplier is computed as MPC/ (1-MPC)

False. The multiplier is given by 1/ (1-MPC)

Question 17

In the figure, which of the following sequences shows the logic of the interest rate effect?

1,2,3,4

Question 18

Other things the same, which of the following responses would we expect from a decrease in U.S interest rates?

People chose to hold more currency

Question 19

What is the difference between monetary policy and fiscal policy?

Monetary policy relates to lowering and raising interest rates by the central bank to maintain the economy at equilibrium while fiscal policy relates to tax and spending policies of the government.

Question 20

Suppose there is no crowding out effects and the MPC is 9. By how much must the government increase expenditures to shift the aggregate demand curve to the right by $10 billion?

Question 21

When the Fed increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand so the aggregate demand curve shifts to the right. (True or False).

True

Question 22

The misery index is calculated as the inflation rate plus the unemployment rate

Question 23

In the long run, there is a tradeoff between the inflation rate and the natural rate of unemployment.

Question 24

In the short run, policy that changes aggregate demand changes both unemployment and the price level

Question 25

In reference to the figure, if the economy starts at c (left graph) and 1 (right graph), then in the short run, an increase in government expenditures moves the economy to b and 3

Question 26

In reference to the figure, if the economy starts at c (left graph) and 1 (right graph), then in the short run, a decrease in aggregate demand moves the economy to d and 3

Question 27

If macroeconomic policy expands aggregate demand, unemployment will fall and inflation will rise in the short run. (True or False).

True

Question 28

Suppose that the Fed unexpectedly pursues contractionary monetary policy. What will happen to unemployment in the short run? What will happen to unemployment in the long run?

Contractionary monetary policy has an effect of causing more unemployment in the short run since employers will realize that wages have risen and thereby cut back on the demand of labor. In the long run monetary policy can only affect the rate of inflation but not the rate of unemployment.

Question 29

President George W. Bush and the congress cut taxes and raised government expenditures in 2003. According to the aggregate supply and aggregate demand model only the increase in government expenditures would tend to increase output.

Question 30

If the unemployment rate rises, which policies would be appropriate to reduce it?

Increase money supply, cut taxes

Question 31

Explain the in arguments in favor of economic stabilization

Economic stabilization is very important in the economy since it eliminates excessive fluctuations in the economy. A stable economy is one that has constant output growth and low inflation. An economy that is not stabilized is characterized by frequent recessions, financial crisis, and high levels of inflations. A stable economy makes essentials like shelter and food affordable and available to the citizens.

Question 32

Which of the programs below would transfer wealth from the young to the old?

Taxes are raised to provide more generous social security benefits

Question 33

Some countries have had high inflation for a long time. Which of the following at least in theory could explain why some countries would continue to have high inflation?

High inflation countries have relatively small sacrifice ratios and so see no need to reduce inflation.

Question 34

A consumption tax is a tax strictly on spending, while an income is a tax on salary paid for work.

It is advisable to replace income tax with consumption because when a tax on income is reduced, it gives people more disposable income. This increases their level of expenditure and at the same time promoting investment, which would promote economic growth. A tax cut on consumption only reduces the prices of commodities but do not give the citizens the ability to get money to buy the commodities.

macroeconomic-theory

Macroeconomic Theory

Name

Institution

Course

Q1a

When the interest parity condition holds and the domestic interest rate is greater than the foreign interest rate then the domestic currency is expected to decrease in value alongside the foreign currency thus a high inflation is expected in the country.

Q 1b

If the nominal interest rate is 2% in the United States and 5% in Canada one is expected to hold the United States bonds than the Canadian bonds since the high interest rate in Canada indicates expected inflation rate in the country to be high. Thus the Canadian dollars is expected to decrease in value against the United States dollar by 3% in regard to international Fisher effect.

E(e) = i$US -i $C

2% – 5% = -3%

Qc i

The market conditions may be summarized as follows:

I $= 5%, I UK pounds= 2%, S =$1.68per US pound, F= $1.55 per US pounds.

If $100 million is invested in United States, maturity value in one year will be

$100 M ( 1+0.05) = $ 105 million or

$100M may be converted to the UK pounds and be invested at the UK interest rate, with pounds maturity value sold forwarded.

($100 M *1.68)(1+.02)(1/1.55) = $109.8 M

This clearly indicates that it’s better to invest $100M in the UK.

Q C ii

Because the rate of inflation is high in the U.S, we can apply the buying power parity to estimate the exchange rate in pounds today.

E (e) = E pounds$ – E$

= 2% – 5% = – 3%

E(St) = So(1 + E(e))

= ( $1.68 per pound) (1+0.03)

= $1.68504

= $1.69 per pound.

Q2 a

Effect of reduction in taxes on output, exports, imports and net exports

A reduction in lump sum taxes may improve the economy through increased output, exports and net exports. The IS curve shifts to the right from IS to IS2. The LM curve also shifts to the right from point LM to LM1. This is illustrated in the graph below.

118554517081500203204064000

18186402597150090424015938500472440159385003816351841500IISIS2LM

106489519812000LM1

7048530543500

Y

Q2b

704857105650047244089217500 When there is a reduction in the foreign trade by one unit, but the domestic government increases spending by one unit. The will be a reduction in the domestic output, exports, net exports and imports. This is due to the changes in foreign exchange rates that affect also the domestic market. The effect tend to shift the IS curve to the left Ss1 toS2 and equilibrium point moves from E0 toE1.

7931158001000 LM

21082021971000S1

69342027940000E0

-40005107188000S2E1

Q2143700512128500783590281940007048512128500pADAS

111506099695001905002400300030746709969500

1326515-254000-7048522860000

P

2032025590500237109025590500

204978029464000P2

13265152159000

AD0

-19050073723500

Full employment curve

As the aggregate demand (AD) curve moves in, expansionary monetary policy may be implemented for AD to shifts back to starting point, output is now restored.

Q2d

The rise in government expenditure results in the curve of IS to shift to the right and an economy moves from point A to B. at this point there is a deficit in balance of payments leading to depreciation in the exchange rate. Net Exports rises as the relative rate of domestic products on global market has reduced.

1868805-203200091440026098500501655016500ISIS1

160782022606000

I

ABBOP5016527368500

50165317500Q3aY

When the domestic interest rates remain constant at 4% while the foreign interest rate increase to 6% the expected exchange rate for the domestic currency will appreciate against the foreign currency because inflation rate in the foreign market is high. The interest parity may be restored when domestic market sells its foreign reserves in order to move to 4% exchange rate or equilibrium.

Q31557655635000008064570548500bAn increase Government spending will shifts the curve of IS to the right IS- IS1. The shift leads to an increase in rate of interest. A rise in government expenditure forces the fiscal policy to provide the market with local exchange to uphold the rate of exchange constant.

49212516065500501656032500IISIS1LM

26727152997200010045701841500133667524955500 LM1

247205522860000

5016524511000IWFE

-34163057340500

Y

Q3 c

An expansionary monetary authority will move the LM curve to LM1 thus making the equilibrium to shift from point E to E1. And because the trade rates are flexible, the deficit in balance of payments will devalue the domestic money. This will results to rise in the net exports moving the IS curv

1296035773430001606551216025004000569342000IS1LMLM1IS

2582545414655001125220193167000272288012319000152717541465500-1016012319000110490149542500

-6032545085000IE1Y

Q3d

In order to maintain the pegged exchange rate when foreign interest falls. The fiscal policy makers must purchase the foreign assets through home currency. And these increase the supply of domestic money that shifts economy to its final equilibrium. There will be enhanced output through buying of domestic assets and low exports.

Q3e

The effect of increased consumer confidence in domestic economy in a fixed exchange rate. There will be increased government spending, increase in aggregate demand resulting to shift of DD1 to DD2 while the original appreciation falls from E1 to E2. The central bank is forced to acquire foreign assets by home currency. This moves the economy to equilibrium E3 at a higher output.

Q4a

A country which is in a fixed exchange rate such as China might be expected to depreciate its currency due to the following factors: the government has to invest a lot of resources in order to get foreign reserves to grow up so as to defend the fixed exchange rate. And also there is monetary ineffective as the only option in the independent fiscal policy is the exchange controls that avert traders from selling or buying domestic currency. But these exchange controls decrease trade and direct investment in foreign and encourages essence of corruption.

Q4b

The actions that policy makers may choose in response to expected currency devaluations. They can opt to reduce exchange rate and sell foreign reserves. The government can also purchase domestic assets. Taxes should be reduced to raise aggregate demand to increase appreciation in the currency.

Q4C

When the economy is operating below the natural level of output. The labor supply falls with unemployment going back to its normal rate. This only results in reduced output and the only option are to increase inflation in order reduces unemployment. Devaluation of currency will rise the inflation further other creating of employment. An increase in aggregate demand only causes to rise.

Q 4d

An economy that is operating above the natural level of output in a fixed exchange rate regime can adjust to this situation through a decrease in the domestic currency to enhance a rise in output as net export increase.

Macroeconomic Analysi, Bank of America

Macroeconomic Analysis: Bank of America

Student’s name

Institution Name

Course name and number

Due date

Executive summary

This paper gives a chronological history of the Bank of America particularly related to its formation and current position as far as the financial market is concerned. It also looks at the parameters that the bank uses to determine its success. These parameters are earnings per share and bottom-line objective (profitability).The paper also describes the business model adopted by Bank of America to ensure efficiency and effectiveness in its operations in both the domestic market and global market.

The paper also gives a description of the country of importance to Bank of America, in this case, Pakistan and its economic trend of the past five years. It gives an overview of the state of the market and economic conditions in the aforementioned country and how it provides opportunity to the company in the financial sector.

The forecasted economic conditions are also detailed in this report to enable the company adopt correct strategies and actions that can enable it succeed in the ever dynamic financial market. The specific conditions have been highlighted in this paper and an insight of their impact on the company’s operations.

The paper finalises by giving the most probable actions by the Bank of America to counter the risks identified. These actions touch on the social, environmental and ethics areas, which are perceived to be effective.

Macroeconomic Analysis

Company profile

The history of Bank of America dates back to nearly 200 years ago when the Paris Treaty formally recognised the independence of the Americans, consequently abolishing the British prohibition against America-owned Banks. Moses Michael Hayes, together with other Boston leaders took advantage of this freedom and formed Massachusetts Bank, a predecessor of Bank of America. The bank started its operations in the year 1784 with a branch in Maryland that later embarked on providing financial services to farmers including deposit taking at an interest. The bank is headquartered in Charlotte, North Carolina. The bank introduced BankAmericard in the year 1958.This was the first licensed generally accepted user card across all other banks in the United States.In 1998,

NationsBank acquired the Bank of America; however, the company never changed its name. This enabled the creation of a coast –to- coast retail banking franchise. In 2004, with its objective of extending its market share throughout the northeast and beyond, the bank purchased FleetBoston Financial. The Bank of America did again extended its market share and operations in the subsequent years by buying MBNA in 2006, Countrywide in 2008 and Merrill Lynch in 2009.

Below is a chronological table of key events in the history of Bank of America

Date Event

September 1783 Moses Michael Hayes, together with other Boston leaders, founded the Massachusetts Bank, a predecessor of Bank of America.

1784 The bank opened its doors for its customers.

1804 The bank opens a branch in Maryland to serve the farmers by accepting deposits from them and paying interest on deposits to customers.

1958 The bank introduced BankAmericard that was licensed and generally accepted credit card across all the banks in America.

1998 Bank of America is acquired by Nationsbank, but still retains it original name

2004 Bank of Africa acquires FleetBoston Financial to extend its presence in the northeast.

2006 Bank of America acquires MNBA

2008 The bank enters into an agreement rescue deal to buy Countrywide.

2009 Merrill Lynch is acquired by Bank of America at a cost of $ 50 bn

Bank of America’s business model

The bank has a simple business model that incorporates mergers and acquisitions, together with a combination of related consumer products and services that it offers.

These series of acquisitions and mergers, which is one of its business models, has made the Bank to grow outside of its home state and also enabled it expand the breadth of its products and services to the customers across the world. The bank has combined consumer products, consumer banking and small business into one business line, and also incorporating Premier Banking into the Wealth and investment Management organisation so as to simplify its business model to achieve efficiency in operations.

Bank of America’s measure of success

The bank measures its success through returns to its shareholders (Earnings per share) and the amount of profit it makes compared to the other largest 25 Public US Banks such as JPMorgan Chase, Citigroup Inc., and Wells Fargo &Co. According to SNL Financial (2014) the comparison of the fourth quarter of 2013 in terms of EPS performance of the 25 largest public US banks, Bank of America managed to move to the second position behind JPMorgan Chase.

The Bank’s country of importance

The Bank of America intends to expand its presence in the Asian market particularly in Pakistan. After divesting in China, the company hopes to return to the Asian continent to still fulfil its vision of being a global financial product and service provider. Banking sector plays a pivotal role in the economic development and financial growth of a country, as a result, rapid changes has been observed in the banking sector of Pakistan for over 62 years. Initially, Pakistan had inadequate capital and indecision due to some underlying calamities both in the political and socioeconomic arena.

The favourable amendments which were made to the State of Bank of Pakistan Act 1956, has led to tremendous improvement of this industry as it encouraged the private sector to set up financial institutions and banks. The monetary policy of Pakistan is in the hands of an independent central bank that keeps the objectives of financial stability, price stability and growth at the forefront. It is committed to adopt a monetary policy that keeps inflation under check. Interest and exchange rates are market determined and credit allocation decisions are left to individual banks based on objective measures but guided by prudential regulations. With the success of Bank of America being pegged on profitability, a closer look at the relationship between profitability and economic growth of Pakistan, shows a positive trend. This favourable macroeconomic variable (economic growth) is evidenced by the massive investment by banks in this country so as to meet the financial needs of their customers. Pakistan’s investment growth rate rose to 23% in the 2007 fiscal year, despite having lagged at approximately 18.6% in the preceding three years. This show a 4.4% growth in investment/GDP ratio. Similarly, there has been a significant growth in the foreign capital inflows, cumulatively estimated to be approximately $13.5bn over this period, with the banking sector contributing $2.7 billion.

The investment significantly empowers the bank to build a strong position in the market. The upgrading that has taken place in Pakistan’s credit worthiness by S&P and Moody’s between 2000 and 2007, incorporation of Pakistan in the emerging markets by the Economist in London and other emerging market indices are an indication of the growing importance of Pakistan’s economy.

Changes in key macroeconomic indicators 2003/04-2008/09

Macroeconomic indicator June 2004 June 2009 Change in

the

Indicator

GDP Growth Rate 3.1% 7.0% Positive

Inflation 3.5% 7.8% Negative

Fiscal Deficit /GDP -4.3% -4.3% None

Current Account /GDP 3.8% -4.9% Negative

Public Debt / GDP 82.91% 55.7% Positive

External Debt/GDP 46.6% 27.8% Positive

Rupees-Dollar Parity Depreciating Stable Positive

Foreign Exchange Reserves US $6.4bn US$16.5bn positive

Poverty Incidence 34% 24% positive

Another crucial macroeconomic variable is the interest rates. State Bank of Pakistan has, in the past two years, applied an expansionary strategy for reduce interest rates. The policy rates have drastically been reduced to 9.5 percent in 2013 from 13.5 percent in 2011 through reduction of 400 basis point cumulatively. These changes positively affect the bank’s operations as more people will be willing to apply for credit and loans hence increasing the bank’s revenue from interest income. An increased access to loans due to reduced interest rates translates to high interest income that consequently improves the profitability of the Bank, a key measure of its success.

The significance of profitability of a bank such as Bank of America is usually valued at both the micro and macro stages of economy. On the micro level, profit is indispensable condition of cutthroat banking institution and the resource of funds, especially during a period of fierce competition in the financial market. While on the macro level, a viable, profitable and promising banking sector is better capable to overcome negative conditions and distress and consequently, leads a strong economic system. The table below shows some of the macroeconomic conditions and risks and opportunities associated with each of them.

Growth in GDP Indicates increased/potential market for the company. The increased market might to stiff competition as a result of attraction of new entrants.

Static global inflation rate Stability in the market growth Unimproved company performance or success.

Shift in customer trend May lead to increased business operation. Might result into decline in business operations.

Set of economic conditions in 2014

The following are the sets of economic conditions expected to prevail in 2014:

An outlook of the market in 2014 by BofA Merrill Lynch Global Research shows that a rising value of the U.S. dollar, rising rates, as well as rising rate volatility will impact negatively on the world financial institutions and markets as the credit cycle also diverges.

The United States of America and global economic GDP growth is expected to improve in 2014.It is approximated that the U.S GDP will accelerate to 2.6 percent. This is due to the fiscal austerity measures taken by the government and pent-up demand for capital goods.

The global inflation rate is also anticipated to stabilise at 3 percent. However, this is not the case to emerging markets as this rate is expected to rise from 4.7 percent in 2013 to 5.3 percent in 2014.Similarly, the ongoing improvement of the U.S economy is expected to increase the real estate value by 5 percent.

A shift in the market is also expected in 2014, with each market outperforming the other: stocks over bonds, developed market over emerging markets, real estate over commodities, cyclical over defensives and high yield over investment grade. Similarly, an institutional reverse is expected in 2014, whereby institutional investors such as insurers, central banks, insurers, sovereign wealth funds and also U.S. pension funds would to selling stocks and buying bonds.

All these macroeconomic conditions pose both risk and opportunities to the financial institutions, including Bank of America.

Implications of the economic conditions to the Bank of America’s performance

As aforementioned, the rising interest rates and increasing value of the U.S. dollar in the foreign markets will impact negatively on the Bank of America and other financial institutions. This is because fewer customers will be willing and/or able to access the financial products, especially the loans and therefore leading to a reduction in the company’s revenue. This will affect the company’s performance in terms of profits earned in the coming first quarter of 2014.

The expected rise in global economic GDP gives some reprieve to financial institutions. The growth in GDP reveals increased economic activities in the various countries of the world including Pakistan. This in turn shows that most customers including institutional investors will be willing and actually able to source for funds from financial institutions and at the same time deposit with these banks as they keep their businesses in operation. It is believed that growth in economy entails expansion of economic activities such as businesses, manufacturing industries and other forms of commercial activities. All these needs some source of finance as well as a custodian of their cash, not forgetting some technical advisory services that form the core businesses of financial institutions.

Actions to be taken to counter risks posed by the economic conditions

The expected increase in the global inflation rate poses a risk to the financial markets. This risk will be countered by the financial institution through social forums in which they are expected to educate the customers and potential customers on the correct and valuable investment ventures and the risk associated with each investment venture as well as how to curb these risks.

Similarly, the company has set aside $50 million to be used in the coming ten years to fast track a low-carbon economy through investing, lending capital market activity and addressing its own environmental impact. This will ensure that cost push inflation to most of investor companies as a result of levies by government to counter environmental damage is reduced.

In addition to the above measures, the company intends to ensure that they sensitize their customers on ethical ways of doing business and the benefits associated with it in order reduce penalties as a result of not acting ethically.

References

www.bankofamerica.com

MACRO AND MICRO ECONOMICS

MACRO AND MICRO ECONOMICS

By (Name)

Course/Class

Instructor

University

City/State

Date of Submission

Macro and Micro Economics

Money can be defined as an asset used as a means of exchange. Money has a narrow and broad definition. Narrow definition includes checking deposits, currency in circulation, and debit card accounts while broad definition of money includes deposits of currency. Money is also a liquid asset used to pay for goods and services or used to settle down debts. According to Murphy, (2009, 102-3), assets can be grouped into liquid assets and illiquid assets. Assets such as checking deposits, currency in circulation, savings deposits, debit card accounts, and time deposits are more liquid than assets such as loans, bonds, real estate, stocks, and other assets. The circulation of money in the economy is controlled by the central bank. In the United States, the central bank is a Federal Reserve System charged with the responsibility of regulating the circulation of money in the economy. The central bank influences the amount of debit card accounts, checking deposits, and other monetary assets.

Monetary demand refers to the amount of monetary deposits that individuals are willing to hold instead of non-liquid assets (Murphy, 2009, 78-9). Demand for money is the desire to hold financial assets in monetary forms; in the form of cash or monetary deposits. Money is required for purposes of carrying out transactions (provides liquidity). This brings about a trade-off between the advantage of holding money (liquidity advantage) and the advantage of holding other assets (interest advantage). The demand for money comes about because of such kind of trade-off with regards to where an individual chooses to place his wealth. An individual’s motivation to hold his wealth in monetary form can be divided into asset motive and transaction motive.

There are several factors that influence people’s demand for money. This aspect can be considered in terms of aggregate demand for money and individual demand for money. The first factor that influences individual demand for money is interest rates or the expected rate of return on money. The next factor is the risk involved in holding money arising from unexpected inflation; thereby reducing the purchasing power of money (Cesaran, 2007, 89). The last factor that influences individual demand for money is the aspect of liquidity, which occurs when transaction prices increases. On the other hand, the factors that influence the aggregate money demand include interest rates or rates of return associated with holding monetary assets. The next factor in this aspect is the price, which involves the cost involved in purchasing of goods and services. Such prices will dictate people’s willingness to hold or not hold money. Higher prices would mean a greater need to hold more money for transaction purposes. The last factor in this aspect is income. High income means that more goods and services can be purchased; thereby implying that more money is required for transaction purposes. Higher real national income implies that there is more production of goods and services, thereby increasing the demand for money for transaction purposes. The other factor influencing the demand for money is the aspect of consumer spending. It is often observed that when consumer spending is high; such as during Christmas, individuals prefer to cash in other forms of their wealth like bonds and stocks in exchange for cash. They need money to buy goods and services. This implies that if consumer spending increases, there would be a likely increase in the money demand. The other factor is the transaction costs for bonds and stocks. If it becomes expensive or difficult to buy and quickly sell bonds and stock, they become undesirable thus making people to desire to hold more of the wealth in form of money (Cesarano, 2007, 78-9). This leads to increase in the demand for money.

The equations representing aggregate demand for money can be represented as:

Md= P x L (R, Y)

Where:

P-Price level

Y-Real national income

R-Interest rates for non-monetary assets

L (R, Y) – Aggregate demand for monetary assets

Alternatively:

Md/P=L(R, Y)

Aggregate demand for money is a function of interest rates and national income

Graph showing the relationship between interest rate and the aggregate demand for money

From the diagram above, it is observed that there is an inverse relationship between the aggregate real money demand and the interest rates. At lower interest rates, there is high demand for monetary assets since individuals would demand more money for transaction purposes. On the other hand, at high interest rates, few individuals would be willing to hold money for transaction purposes thereby lowering the aggregate real demand for money.

Graph showing the effect on the aggregate demand schedule of an increase in real income

From the graph above, it can be observed that increase in income levels would result into a shift in the aggregate demand for money from point L (R, Y1) to point L (R, Y2). This is because increase in the levels of income for individuals will increase their purchasing power, thereby leading to increase in the aggregate real demand. On the other hand, increase in income levels would also lead to increased interest rates (Kaushik, 1987, 78-9). This results in the positive shift of the graph as shown in the diagram.

References

Cesarano, F., 2007. Monetary theory and Bretton Woods: The construction of an international monetary order. New York: Cambridge University Press.

Kaushik, S. K., 1987. International banking and world economic growth: The outlook for the late 1980s. New York [u.a.: Praeger.

Murphy, A. E., 2009. The genesis of macroeconomics: New ideas from Sir William Petty to Henry Thornton. Oxford: Oxford University Press.

MA Case Report A Bite in the Night

MA Case Report: A Bite in the Night

Author

HRTM 740

5/5/2021

Introduction

Service operations in the hospitality, travel, and tourism industry are a sensitive area that requires professionalism and meticulous efforts in execution of duties and responsibilities. In Allman and Schrier’s (2016) Bite in the Night case study, a scenario of service failure leads to notable recovery efforts at Mountain Peak Inn. The present report presents an analysis of the staff’s service recovery efforts, looks at what was done correct and what needs improvement, offers a predictive assessment of the customer’s next steps, suggestions to reduce customer dissatisfaction, and recommendations on future service recovery effort improvements. Ultimately, service failure may lead to loss of business and a poor reputation, especially in the current age of electronic word of mouth through social media and digital platforms.

Analysis of Mountain Peak Inn Employees’ Service Recovery Efforts

In the course of providing services, dissatisfaction is likely to occur due to intentional or unintentional actions. Service recovery efforts, defined by Ruiz-Molina Fayos-Gardo, and Moliiner-Velazquez (2020) as a correctional process to try appease dissatisfied customers, attempt to identify and fix the issue or make amends to the best of management’s abilities and for the benefit of the customer. The hotel staff, led by Craig and Hannah, attempted a service recovery plan relating to the bedbug issue encountered by Charlie during his overnight stay. Upon reporting the issue, Hannah’s response was interpreted by the customer as passive and lacking compassion. Her decision to contact the manager, keep Charlie waiting (albeit for five minutes), and to continue serving other guests further escalated the issue. Hannah’s actions further aggravated the situation leading to more dissatisfaction from Charlie’s point of view. Craig’s quick thinking and the decision to remove all charges from Charlie’s hotel folio and to pay for dry cleaning services eased the situation, but the customer was not satisfied. The service recovery efforts were not as effective from the customer’s standpoint.

Craig’s decision and show of compassion were done correctly because they assured Charlie that the issue was being taken seriously. Additionally, Hannah’s decision to involve top management was also done correctly because it served to show the customer that the issue needed more attention. However, the above actions were the only actions that were done correctly. According to Xu, Liu, & Gursoy (2019), effective service recovery actions are aimed at turning furious, disgruntled, and frustrated customers into loyal and happy ones, assuring them of the issue as an isolated case and a regrettable mistake, and taking actions that are reflective of their valued contribution to the organization. Hanna’s passive attitude was not proper in the situation because it increased the customer’s dissatisfaction. By attending to other customers while Charlie waited, Hannah showed no compassion and somewhat diminished the concerns of the customer. She failed to anticipate Charlie’s needs, acknowledge the current feelings, apologize and own up to the issue, offer a conversation to reassure the customer, and attempt to explain that the manager was going to look into the issue and make amends. In addition, Craig’s efforts need improvement because the Charlie was left dissatisfied with the actions taken. A better approach would have been to offer Charlie the three options that Craig was considering; assistance with his medical treatment, removing the room charges and providing a gift voucher for a future fully paid stay and a fully paid meal, and removing the fines and a catering for dry cleaning services. By allowing Charlie to choose the best option for himself, he would have felt more involved in the process and taken what was best for him. Therefore, these areas need improvement.

Predictive Assessment of the Customer’s Next Steps

Dissatisfied customers feel that the services received were not up to expected standards. For recovery efforts, continued dissatisfaction indicates poor quality and may lead to strong customer responses in retaliation (Mody, Lu, & Hanks, 2020). Assuming the customer remains dissatisfied with Mountain Peak Inn’s service recovery effort, there are a number of steps. The most likely step is that Charlie would take the deal and quietly decide never to use Mountain Peak Inn again. The decision would mean that he takes no further action. Often, this step is indicative of minimal dissatisfaction without a desire to follow up. The only consequence would be a decision to discontinue using the services provided. However, Charlie may decide to not only never use Mountain Peak services again, but also give a poor review followed by a strong narration of what happened online. This decision would involve engagement with negative word of mount communication to other customers. The customer may decide to use popular digital platforms such as TripAdvisr, Facebook, and Google’s Explore. It is also likely that Charlie would use all of the three digital platforms and also leave a negative review on Mountain Peak’s website for other customers to see. In an industry that relies on recommendations to gain more customers, negative reviews on digital platforms would negatively impact Mountain Peak’s ability to attract first-time patrons. Charlie may also choose to complain to the consumer court and report the issue as a health hazard to the relevant authorities and bodies setup for such issues. A decision to involve other regulatory bodies would often lead to legal proceedings, including suing the organization in regard to the issue. Lastly, Charlie may decide to use all of the above strategies to include a decision to avoid the establishment in the future, negative communication on social media and other digital platforms, and reporting the matter to the authorities for relevant actions. Charlie has a lot of options available to air his dissatisfaction and may decide to use either of the above to make sure that Mountain Peak Inn understand the extent of his dissatisfaction.

Reducing the Likelihood of Elevating Dissatisfaction

From the foregoing section, it is very likely that Charlie’s next steps will include elevating his dissatisfaction and taking actions that may hurt the organization. To reduce this likelihood, Craig must track the complaint by following up on the customer. By making a follow up call to Charlie, Craig would convey a message of genuine concern. The phone call should indicate the steps taken after Charlie’s departure, including a truthful confession of the reasons leading up to the event, a breakdown of the measures taken to eliminate the problem, and a suggestion for the customer to go through a list of possible compensatory alternatives. Kim and Oh (2012) assert that customers want to see an assurance of real effort to meet their demands, and in case of a complaint, they need to see real efforts to bring about satisfaction. Therefore, Craig task is to ensure that Charlie not only receives what was promised, but also gets an explanation on how the issue was resolved to avoid future issues. Craig can invite Charlie for a free stay as a way to assure him of the confidence that the management of Mountain Peak Inn has on the mitigation of the issue. Additionally, a package that includes a free medical checkup, a free meal, and a combination of these would develop a relationship with the customer. It would also help if Craig is involved in the entre process to show the seriousness and value of customer satisfaction to the establishment.

Mountain Peak Inn has the opportunity to resolve the matter before it escalates and stand a chance to establish a relationship with Charlie. Customers who have had satisfactory resolution to an issue are likely to be loyal to a business in comparison to those that have had no problems (Morgeson, Hult, Mithas, Keiningham, & Fornell, 2020). Charlie’s problem, once effectively resolved, would not only eliminate the chance for escalation but also bring deep satisfaction to the customer. With this perspective in mind, Mountain Peak Inn should follow up on the problem, by engaging the customer and providing the recommendations made earlier to ensure that they are fully satisfied. I tis important that the packages chosen do not appear as a bribe for Charlie to quiet down. Instead, they should complement a genuine effort to resolve the matter, not just for Charlie but also for other customers using Mountain Peak Inn’s services. In the follow up communication, Craig must ensure that this position is properly conveyed, allowing Charlie to see that the hotel was unaware of the problem and that it has done everything possible to ensure that it does not reoccur. The emphasis must be on creating a relationship with Charlie to guarantee that he becomes a repeat customer, and that he gives positive feedback to other customers. Therefore, Craig has a series of decisions to make in an effort to create a relationship with Charlie, including providing an explanation on what occurred, a description of the measures taken to resolve it, a follow up on Charlie’s satisfaction, and the package deals to complement the efforts.

Recommendations on Future Service Recovery Effort Improvements

No matter the processes and efforts put in place by an organization to provide service recovery, the actions are implemented by employees, whether in the management or subordinate levels. Service recovery efforts are executed by employees and, therefore, there is a need to ensure that improvement efforts begin in the hiring process (Boukis, Gounaris, & Lings, 2017). Mountain Peak’s hiring process requires an overhaul to ensure that their staff are well-informed and trained on how to handle customer complaints and effectively perform service recovery with effectiveness. The advantage of equipping the employees to handle service recovery is that they would understand the benefits of recovered clients, improved service recovery efforts, and other internal gains. Improvement of the hiring process goes hand in hand with internal marketing, a process that promotes the objectives of a project to the employees. Internal marketing for Mountain Peak Inn should involve promoting the service recovery objectives to all employees, with a goal to ensure that future service recovery efforts are improved to effective levels. Scholars recommend best practices for hospitality payers to improve internal marketing such as performing training and education for employees in regard to handling of situations, simulating incidences, and crafting strategies related future service recovery efforts (Morgeson et al., 2020; Boukis et al., 2017). Emphasizing on the values and goals of service recovery efforts, boosting employee input on customer satisfaction, and allowing innovative strategies would help the future of service recovery efforts for Mountain Peak Inn.

Conclusion

In summary, service failure leads to loss of business and a poor business reputation for businesses in the hospitality, travel, and tourism industry. The customer has a number of tools at their disposal to bring about negative consequences. For example, electronic word of mouth through social media and digital platforms, can be used to spread the word on poor customer services. Mountain Peak Inn has a responsibility to make selective hiring, train all employees, and utilize internal marketing to ensure that service recovery efforts are improved to create loyalty and satisfaction.

References

Allman, H., & Schrier, T. (2016). A Bite in the Night: The Case of Bed Bugs at the Mountain Peak Inn.

International CHRIE. https://doi.org/10.4135/9781529715569Boukis, A., Gounaris, S., & Lings, I. (2017). Internal market orientation determinants of employee brand

enactment. The Journal of Services Marketing, 31(7), 690–703. https://doi.org/10.1108/JSM-07-2016-0272

Kim, S., & Oh, J. (2012). Employee emotional response toward healthcare organization’s service

recovery efforts and its influences on service recovery performance. Service Business, 6(3), 297–321. https://doi.org/10.1007/s11628-012-0137-yMody, M., Lu, L., & Hanks, L. (2020). “It’s not worth the effort”! Examining service recovery in Airbnb

and other homesharing platforms. International Journal of Contemporary Hospitality Management, 32(9), 2991–3014. https://doi.org/10.1108/IJCHM-03-2020-0184Morgeson, F., Hult, G., Mithas, S., Keiningham, T., & Fornell, C. (2020). Turning Complaining

Customers into Loyal Customers: Moderators of the Complaint Handling–Customer Loyalty Relationship. Journal of Marketing, 84(5), 79–99. https://doi.org/10.1177/0022242920929029

Ruiz-Molina, M., Fayos-Gardo, T., & Moliner-Velazquez, B. (2020). Can the Retailer’s ICT Enhance

the Impact of Service Recovery Efforts on Customer Satisfaction? Journal of Relationship Marketing (Binghamton, N.Y.), 19(4), 329–354. https://doi.org/10.1080/15332667.2019.1705744Xu, X., Liu, W., & Gursoy, D. (2019). The Impacts of Service Failure and Recovery Efforts on Airline

Customers’ Emotions and Satisfaction. Journal of Travel Research, 58(6), 1034–1051. https://doi.org/10.1177/0047287518789285

MA 3 Article Search & Selection

MA 3 Article Search & Selection

“Think Sheet”

Goal:

For the MA 3 Article Review, you will search for and select an article online that is related to the topic of television and its impact on viewers/the world. Make sure that the article is an argumentative or opinion piece. You will evaluate your chosen piece with the goal of explaining its impact on you as a reader, and whether it should be included in future iterations of ENL 101. In other words, did the author of your chosen article achieve their goal of persuading you? Did you buy into their argument? Explain how & why (or why not). This is a chance for you to contribute to future versions of this course by telling me what to (or what not to) read!  

To get started, run an internet search for articles about shows that you find interesting! If you are not someone who watches shows or movies, try searching topically for articles that make claims about the human hobby of tv-watching/ value/lack-of value in watching television etc.

Complete this worksheet using your top three choices. It will help you focus and narrow your search before settling on the article that you will use to write your essay.

OPTION 1

Title of the Article:

Web address:

What’s the conversation or broad debate that the author is attempting to enter? What’s the line of inquiry?

What is the main point the author is trying to prove? What is the thesis of their argument? How do you now? Copy/Paste 1-2 quotes What kinds of support does the author provide? What kinds of strategies do you notice that help structure the argument? Did you find the piece interesting / compelling to read? Why/why not? Would you recommend for students to read this in future classes? If so, what critical reading concepts would you link to it? OPTION 2

Title of the Article:

Web address:

What’s the conversation or broad debate that the author is attempting to enter? What’s the line of inquiry?

What is the main point the author is trying to prove? What is the thesis of their argument? How do you now? Copy/Paste 1-2 quotes What kinds of support does the author provide? What kinds of strategies do you notice that help structure the argument? Did you find the piece interesting / compelling to read? Why/why not? Would you recommend for students to read this in future classes? If so, what critical reading concepts would you link to it? OPTION 3

Title of the Article:

Web address:

What’s the conversation or broad debate that the author is attempting to enter? What’s the line of inquiry?

What is the main point the author is trying to prove? What is the thesis of their argument? How do you now? Copy/Paste 1-2 quotes What kinds of support does the author provide? What kinds of strategies do you notice that help structure the argument? Did you find the piece interesting / compelling to read? Why/why not? Would you recommend for students to read this in future classes? If so, what critical reading concepts would you link to it?

M4.1 Assignment Final Project Proposal

M4.1 Assignment: Final Project Proposal

 

Previous Next Instructions

Guidelines 

Note: Please be aware that you cannot move forward with the final project until this proposal is graded.

First, pick from the following options (Options 1 – 2) for your final project proposal. Please do not “cut & paste” the entire description of that Option in your proposal, but briefly indicate which option you chose.

Next, based on your option:

Provide a brief background of the company you wish to evaluate or a brief description of how you will address the topics (2-4 sentences).

Identify the Training and Development concept or concepts that you plan to apply or explore in your final project (2-4 sentences). 

Then, write an annotated bibliography with 3 entries that will further support your proposal (review the Library resource on annotated bibliographies). For the final project, it is expected that you will use materials from the course and texts to support your paper beyond the three annotated bibliography entries listed in the proposal. However, for the proposal we only need three annotated bibliography entries. Out of the three required entries, two entries should be academic sources (textbook or peer-reviewed journal articles), and one should be a popular source (news articles, for example). These sources must be published within the last ten years. 

For each annotated bibliography entry:

describe the book or article’s content (2-3 sentences)

demonstrate the book or article’s relevance to your research (2-3 sentences)

discuss the reliability or validity of the book or article’s content (2-3 sentences)

Summary: There should be a total of 3 annotated bibliography entries indicating the 3 resources you will use for your final project.

Formatting

Your proposal should not be more than two pages long, not including the cover and reference pages with 1-inch margins (on all sides), lines double-spaced, with 12-size fonts. All references must follow the APA format (review the APA section of the Citing Your Sources).

Please submit the proposal only as a Word (.doc, .docx) or Rich Text Format (.rtf) attachment. Please include your name and title of this assignment.

Evaluation

Review the written assignment rubric to determine how you will be evaluated. Please note that you cannot move forward with your final project until you receive a grade and feedback on this proposal from your instructor.

Options

Please choose one of the following options, and indicate your choice in your proposal:

Option 1

Design a program to address a specific training need in an organization (e.g. a program to help the employees become competent in learning to use a new software, or helping employees enhance skills in their current role etc). Your program design should include an explanation of what the training needs and training gaps are, along with a description of why the training program is important, and how it helps to support the organization. Your program should also discuss the implications of diversity of adult learners (race, age, generations, learning styles and differences, motivation and barriers, etc.) as they relate to training in the workplace.

Option 2

Advise the Management team of the present and future trends that will influence how training is developed in an organization. Discuss what are some of the economic, social, political or technological factors that affect training today. Then, examine two future trends that you believe will influence training, and provide evidence of these impending trends. As the Management team is interested in performance improvement, indicate which trend(s) you believe are ideal for the organization, to ensure effective training outcomes? (see The Top Ford Future Trends 2018, 15 Trends that are Shaping the Future, 10 Trends in Training and Development, etc.).

Employee training and development

Noe, R. (2020). Employee Training & Development (8th ed.). McGraw-Hill Higher Education (US). https://mbsdirect.vitalsource.com/books/9781260140279

M. Revlon Alice, Systematic thinking of social action. 1971.

M. Revlon Alice, Systematic thinking of social action. 1971.

Thesis: The chapter deals with appropriate techniques that should be utilized to offer socials services in a better manner the services are in the health sector and education they are basically three in number, decentralization, community control and market model. The methods have been said to have the capability to resolve the issue of incentives and reduce the task of trying to discover new efficient ways but the chapter emphasizes that the models cannot resolve all service producing matters the accomplishment of the methods can only be achieved if certain conditions are fulfilled these include systematic and vigorous efforts to test and find more efficient methods use of enhanced well established social service.

Decentralization involves breaking down central administration like systems of government and education sectors into units that can be easily managed this is because the country is too diverse and big with very many schools which have a wide range of different capacity,needs and problems that contrast universal rules would cause extreme harm.

Community control is another approach where social services offered to the people are actually controlled by the community itself in order for consumers to be more aggressive the move seems to benefit the minority such as the poor and the blacks, the move aims to offer the community more power and relevance especially where ghetto education is involved.

Market model is a thrilling method of decentralization and concentrates on the individual consumer. Huge arguments have developed on who should offer social services between the private sector and the public sector, those supporting the private sector claim that they are efficient since they seek to gain profit by attracting and pleasing the consumer and hence the voucher idea was established.

Pressman Jeffrey and Wildavsky, Implementation, 1973.

Thesis: The employment effort by the employment development sector in Oakland at the end of the 1960s drew a lot of attention by offering minority employment that was publicly uncovered by an individual who participated fully in the economic development administration indicating that the federal government almost suffered an economic blow from ruins and damages from riots on average about 3€ million had been used to create jobs so as to avoid riots by keeping them busy and job occupied and the Hegenberger overpass was built with the rest of the money being used to pay the architects.

The national performance review, red tape to results; creates a government that works better and costs less, 1993.

Thesis: This set deals with peoples level of trusting the government concerning its strategies of solving issues since most federal programs don’t work.Bill Clinton made effot by creating the national performance assessment to monitor the progress of many programs and make recommendations so as to ensure the government reduces unhealthy bureaucracy, make the government productive and improve service to the tax payers.

The industrial sector is also facing the same problems both the public and private firms, however afew solutions have been identified they include reducing red tape by ensuring the government streamlines their budject,procurement systems ,personnel and eradicate any regulation or law that inhibits development of innovations another way is to put your customers on the forefront by ensuring total customers satisfaction by listening to them through focus groups and surveys where necessary developing incentives that make sure workers put customers on the forefront. Also enabling workers to acquire results where the labor management group offers training to ensure workers are efficient and hold meetings that analyses the results, entrepreneurial governments are responsible for all this activities.

The last one involves producing better government for less where the cost is reduced but the effectiveness of the government is still maintained by loan funds, greater productivity and advanced modern technology is adapted to reduce on cost.One quote from Bill Clinton says that “our goal is to make the entire federal government both less expensive and more efficient ,and to change the culture of our national bureaucracy away from complacency and entitlement toward initiative and empowerment.We intend to redesign , to reinvent,to reinvigorate the entire national government”(52)

Each article is unique giving a wide variety of rich information some of which is secretely held by the government , while some other information actually helps boost the federal government itself,the first article by Alice is very important since it offers to help the minority and gives other modes of ensuring people acquire social services in an equal and effective way.The second article by Aaron Wildavsky and Jeffrey L.Pressman aims to inform people about a the threat that the federal government narrowly evaded due to the high rate of unemployment the author discloses content that was not available to the public .The last article by the national performance review aims at ensuring problems facing the federal government and the industrial sector are solved by giving a variety of solutions .

References

Alice .M. (1971).”Systematic thinking of social action. “. The Brooking institution.

(1993). “from red tape to results; creating a government that works better and costs less.” Washington. Government printing office.

Pressman .l and Wildavsky .A (1973) “Implementation.” California .University of California press.

Lynching As Used By Supremacists

Lynching As Used By Supremacists

Introduction

Lynching was an essential thing was used by the white supremacists so as to have absolute power over black in early 20th and late 19th century Lynching was popularized by many reasons, much of which included terrorism so as to make the whites a more feared society .among the difficult things was the black resistance against the whites although the whites found it easier to resist because they were more powerful communally. However, all through the lynching history the whites used different ways to control the life of the black’s .Politically, socialy, economically and later lynching to crash the black uprisingA major factor that lead to the increase of lynching was the fear among the white male who saw the blacks as being danger to their families. False accusations was one major way the whites used against the black male, the crimes varied and most of the time the black male would be charged with rape and many men were convicted without any concrete evidence and at times even without being taken to court Such like act s of killing without approval most of time was viewed by the whites as an acceptable behavior as it was a way of eliminating wrong doers who most of the time were innocent Most of the sentences were be carried out by hanging, or sometimes worse disfigurement such as being set ablaze alive and also castration. The most ridiculous thing was that no white man was ever accused of such crimes the white society perfected the act of depriving the blacks all of the basic human right like even the right to life the men even went further to portray the black man as rapists that would rape the white women unless away devised on how the white woman would be protected. The reason the white man portrayed the black man as rapist was a way for the whites to gain total control over the black man and also to give the white society al the reasons to lynch the black man without raising eye brows and it worked as the rest of the world had been made to believe the black man was very bad.

Another reason why lynching becomes established was because of the ending of the Civil War, once it ended. As the fact that slavery had come and the slaves given freedom to make a living on for themselves some white people still felt the black society had to be controlled in someway coupled with fact that the black movement that already furthermore some whites had personal problems with the black especially towards the black man .After the civil war came to an end some whites agitated by the fact the black society could now live amongst them and do anything just like the whites, some were just disappointed that they had no more power over the blacks some whites also felt the blacks had no right to live among the whites, black society also was rising fast and the more reason the white man hated the black man more and the Blackman had to be controlled before the numbers became unbearable, still others just the black society as a threat for could now make own decisions and some whites thought the black man could not argue out to an extent of saying what is right and wrong and to suppress the black the whites resulted to lynching. The support of the society was another cause why lynching became ever more fashionable, and the absence of opposition from the blacks encouraged the white to continue terrorizing the black. The entire white community was in support of social accord, which allowed the blacks to receive punishment as well as becoming subdued. Considerably different from the usual public mobs giving their views openly, the medium was also contributed helped to the rising figure of lynching.   They focused on cases involving black offenders against a white, sometimes they would speak to the community and offer suggestions to the community, recommending what actions needed to be imposed to ensure white power.   The media would give comments as powerful as saying that lynching ought to happen for the reason of revenge and to discourage the black beasts against committing such an act again. Some politicians in most cases would promote lynching and racial violence.     The political factors contributed to the increase of lynching during these two centuries. The three elections in 1892, 1894 and 1896 which brought on average of 17 lynching every year during the campaigns. And also Louisiana which was a famous state encountered increased numbers during the campaigns. Political parties that seemed to be perceived as detrimental to the dominance of the white race did not receive any recognition, Conservatives were worried about the black power which was fighting against the mistreatment of blacks so once more lynching became common and rose to even more terrorizing owing to the reality that the black political movement never achieved much furthermore they were punished for making efforts. The African repression continued to reign with the predominance of lynching, the blacks now started becoming violent despite the fact that lynching was on the rise and the blacks were also been weakened.   Racial injustices is another immense cause why lynching thrived as well, the white people concerned for killing the blacks knew they would go scot free even if they killed a black man even when a black man acted in self defense and ended up injuring or sometimes killing a white man the guilty was always the black man be punished for accusing a black man or putting him to death. Lynching became more common as a communal show; people were accepting the brutal killing of a black man in public. The terror that the black faced was brought about by lack of social protection from police.  

Conclusion

Lynching that took place in the 19th and 20th centuries was never studied properly to understand the impact it had in the lives of the blacks who lived during that period, while there are numerous instances where life become unbearable. Obviously being in a state of regular fear, experiencing the sense of denial, lack of one civil rights and importantly the taking of life. The predominance of lynching was at times because of support of the very people who were supposed to stop the terror, who would have thought that one of could stoop so low, to the extent judging people because of biological characteristics instead of seeing what they have to offer. The past is behind but power is still an issue which elicits emotions.

Luxury Pricing Strategy

Luxury Pricing Strategy

The decision on what to charge for products goes beyond a simple calculation of costs and a mark-up inclusion. Today, companies must also consider how much the consumer is willing to pay and how they value products. There are various pricing strategies that firms can apply to complement their overall strategies, key among them being a value-based approach that sets the price on the basis on how much consumers believe the product is worth (Rao, Bergen, and Davis, 2000). A luxury or premium price implies that customers are able and willing to pay for the products due to a perception of value. Therefore, luxury pricing strategies tactically and intentionally places products higher than the competition, cultivates a sense of higher quality, absorbs perceptions of value from customers, and complements the marketing mix variable employed in a strategy.

The underlying rationale of the luxury pricing strategy is creating favorable perception regarding the quality of products and generating a sense of customer value. With a premium pricing, consumers already have the perception that the quality of the product sold is good, the high costs makes people pay with the ideation that the value is reasonable. By setting premium prices for a product, a company is announcing to the consumers that their products have better quality than the competition and that their pricing is evidence enough (Anderson and Simester, 2003). These strategies apply in dictating the direction of customer value. By using premium pricing, the customer is meant to see that the product is worth more as compared to the available alternatives.

Premium pricing works under certain market conditions that are appropriate for implementation, including high brand loyalty, where competition is low, and where not many substitute products or alternatives are available for the consumer. Premium pricing is based on striking a balance between availability and exclusivity. A premium price must always reflect the main message of high quality, exclusivity, and heritage. The product must always be freely available to those that are willing to pay the luxury price. According to Rao, Bergen, and Davis (2000), it creates a perception of value and also generates exclusivity that separates high end products from the rest. For premium pricing to be effective, the consumer must feel that the product has noticeable selling points over other products or services in the same category and market. The capacity to sell at premium prices is short-lived when firms fail to counter responses from other firms in creating similar goods. For example, it is likely that Apple will lose the ability to sell at luxury prices for its iPhone market if Samsung consistently delivers and creates a reputation of good quality. Therefore, for the luxury pricing to work, issues of exclusivity, consistency, value, competition, availability of substitute and alternatives, and brand loyalty must work together to shape the perceptions of value to a consumer.

Premium pricing strategies have the advantage of gaining higher profit margins, increasing the value of a brand, and generating tougher entry barriers for competitors and new market entrants. In the marketing mix, the individual variables, product, price, place, and promotion affect each other and must be tailored to suit a target consumer group. premium pricing requires that the products be of higher quality, better distribution, and the promotion to emphasize on the features of the product that separate it from the competition (Anderson and Simester, 2003). For example, a luxury price for an electronic device would require the product to be differentiated from the available competition, the distribution channel to be extremely efficient, and the promotion strategy to be extensive in order to reach the target market. The marketing mix variables including product, place, and promotion are affected by a premium price in that they must support the perception of high quality in appearance, distribution, and promotion.

In conclusion, premium pricing is an important value-based strategy that creates and accelerates product demand on the basis of perceived customer value. The luxury pricing strategy operates with the hope that the customer will blindly assume that the product has higher value than the competition. Therefore, companies seek premium pricing when introducing new products, advertising uniqueness, selling luxury products, and to create barriers to entry.

References

Rao, A. R., Bergen, M. E., & Davis, S. (2000). How to fight a price war. Harvard Business

Review, 78(2), 107-120.

Anderson, E., & Simester, D. (2003). Mind your pricing cues. Harvard Business Review, 81(9),

96-103.