Tutor profile: Panagiotis K.
3. Is a high Degree of Operating Leverage (DOL) always desirable?
DOL is the coefficient by which sales profits increase for every extra unit of sales. It may be erroneously concluded that a high DOL is always desirable as it leads to faster and greater profits. However, businesses that are operating in industries susceptible to economic conditions such as steel, automotive, high tech, top brand clothes or businesses susceptible to seasonality may face big changes in net operating income when the market is tumultuous thus facing significant losses when sales are reduced.
Kenya just reported that its GPD is 20% higher than previously thought. Give some reasons for how this could have happened. What does this tell you in general about the measurement of GDP? Is GDP a good measure of country-level welfare?
Mis-measurement in economic activity, where the weights attached to specific sectoral growth are outdated (e.g. underestimate of weight in GDP of faster-growing sectors). If growth in the faster-growing sector is under-estimated for longer periods, this implies under-estimate of their weight in GDP. In general: GDP numbers are estimates, and not exact!
On 15 January 2015, the Swiss Franc appreciated by 20 per cent, making ski holidays for non- Swiss suddenly 20 per cent more expensive. What effect do you expect from this appreciation on demand for Swiss ski holidays in the short-run (for ski holidays 2015) and in the long-run? Use this example to illustrate the difference between short- and long-term price elasticity.
In short-term, little change in demand, as most tourists will already have booked their holiday. In short-run In the short run, demand is likely to be more inelastic as consumers don't have time to find alternatives. However, in the long-term, there will be a reduction in demand consumers become more aware of alternatives and may find substantial goods. To sum up, Short-run: low price elasticity; long-run: high price elasticity.
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