One cause of inflation is due to the wage rate increasing at a faster rate than output. The cost of production for firms increases and to maintain profits they are likely to raise prices. When the prices rise, wage increases are demanded by employees to maintain their standard of living. This subsequent increase in wages … Read More
Smoking, specifically tobacco, is an example of a negative externality in that it harms negatively those outside of the original transaction. For example, a person walking down a high street inhaling second hand smoke was not part of the original transaction yet is still receiving the costs of the use of cigarettes. Another example of … Read More
(In session this would be drawn by myself).In a free market, we get Q1 output. But at this output, the social marginal cost is greater than the social marginal benefit.Social efficiency occurs at a lower output (Q2) – where social marginal benefit = social marginal cost.The red triangle is the area of dead-weight welfare loss.
[This is an exam style essay question, with the response being just one paragraph of multiple the student would have to write]One significant advantage to UK consumers of nationalising railway services could be that greater levels of economic efficiency, and in particular dynamic efficiency, would be achieved, allowing for lower prices and consumer welfare gain. … Read More
First of all let’s define Marginal Cost:-It is the cost to a firm to produce one additional unit of output e.g. the cost of Volkswagen to produce an extra carInitially due to the law of increasing marginal returns (extra unit of input produces a more than proportional amount of output) the MC curve dips. However, … Read More
Both the Consumer Price Index (CPI) and Retail Price Index (RPI) are ways of measuring inflation which is the average change in price of a basket of goods. The RPI, however, includes the costs of housing such as mortgage mortgage repayments, rent and council tax, which take up a large proportion of someone’s income. The … Read More
First, it is important to understand the difference between own price elasticity and cross-price elasticity.Own price elasticity concerns about the responsiveness of the the quantity demanded of good X to a change in its own price; while cross-price elasticity concerns with the responsiveness of demand of good X to a change in price of good Y.So the size of cross-price … Read More
If there exists a negative externality in the production of a good or service (eg. coal power station emitting greenhouse gases) the Marginal Social Cost (MSC) to society of producing the good will exceed the Marginal Private Cost (MPC) paid by the producer. This is due to the fact that the producer is does not … Read More
A public good is a good or service which is both non-rival and non-excludable. Non rival means that one person consuming the good does not stop somebody else from consuming it. For example, cake is rival, as if I eat a particular cake, nobody else can eat that same cake. Non-excludability refers to an inability … Read More
A balance of payments deficit is when a country spends more on imports than it earns from exports.One possible policy could be to increase spending on education and training. This will increase the quality of goods and services produced in Britain, which would increase the value of exports. There are however time lags involved as … Read More
An externality is the cost or benefit of an economic transaction to any party that was not part of the economic transaction. Examples would be the negative cost on society of smoking through second hand smoke inhalation, or the positive externality of herd immunity from getting a vaccine. An externality is a market failure because … Read More
The price elasticity of demand, also known as PED for short, is a measure of how responsive consumers of a product are to a change in price. In a competitive business market, its important for producer to be aware of the PED of their product, so that they can make decisions that will maximise their … Read More
Firstly, a depreciation of a currency; such as the ‘pound sterling’ in the United Kingdom, can be defined as a fall in the external value of the currency in relation to another currency of another country. This was seen recently as a result of the Brexit referendum of June 2016, in which the British population … Read More
Interest rates are the cost of borrowing money expressed as a percentage of the amount borrowed. A reduction in the bank rate by the MPC (Monetary Policy Committee) would result in banks offering lower interest rates to consumers as the cost of them borrowing money would decrease. As such, this would decrease the cost of … Read More
Aggregate demand can be defined as the total demand to the output a country’s economy at a given time interval and given price level. It is calculated through the formula AD=Consumer Spending (C)+ Investment (I)+ Government Spending (G)+ Exports (X) -Imports (M). Similarly, aggregate supply refers to the total supply of all goods and services … Read More
Government Expenditure is an injection into the circular flow of income and can be represented in an Aggregate Demand/Aggregate Supply Diagram as an increase in aggregate demand. (Shows on diagram shift in aggregate demand). This increase, can simultaneously be shown by looking at the components of the aggregate demand equation, AD = C + I … Read More
A firm competing in a perfectly competitive market is considered a price taker and is unable to set their own prices due to characteristics such as selling homogeneous goods with many buyers and sellers , therefore they must set the price of goods/services equal to the markets demand, which is a perfectly elastic curve meaning … Read More
Here is how I would set out an answer for this question:Define the term globalisation, and the word everybody (put it into economic terms, e.g. individuals, large/small firms, developed/developing countries)Choose one of the following above (e.g. large vs. small firms), and say how it benefits them and how it does not. e.g. Globalisation has enabled … Read More
Fiscal policy is the use of government spending and taxation to control the levels of aggregate demand and aggregate supply in an economy.When an economy is recovering from a recession, the real rate of GDP growth is likely to be lower than the long run trend rate of GDP growth. This suggests the economy is … Read More
The market based policies aimed at reducing the unemployment include reducing the unemployment benefits, which should motivate the unemployed to take up the already existent vacancies, or removing legislations businesses must follow while employing workers, helping companies employ people more freely and increasing the general “labour market flexibility”. While effective to some extent it is … Read More
Interest rates have been relatively low in the UK since the financial crisis in 2008 but have lately been on the rise as the Bank of England recently increased the base rate from 0.5% to 0.75%. One impact of a rise in interest rates could be that loans become more expensive for firms; this could … Read More
This would be a perfect opportunity to use a diagram to demonstrate how with the imposition of a subsidy, the supply curve will shift to the right to show the fact that more firms can now sell the product once the government has provided them with a subsidy to lower the cost of production for … Read More
An increase in interest rates would impact aggregate demand (AD) by impacting consumer spending, business investments and exports-imports. When interest rates rise borrowing becomes more expensive and saving become more profitable. Therefore, if interest rates were to increase we would expect to see both businesses and consumers borrowing less and spending more. This in turn … Read More
Consumer surplus can be thought of as the feeling of getting a really good deal or a bargain. It happens when you would have been willing to pay an amount for something but the price was actually lower. What happens here is that your value of the good (what you were willing to pay) is … Read More
I would firstly begin through making a reference to the assumptions of a perfectly competitive market and explaining how these assumptions help in deriving the graph. For instance, the fact that goods are homogenous means that firms are price takers and are forcer to have a vertical demand curve (because any price charged higher than … Read More
In order to answer, one should consider the benefits of profit maximisation. These may include: satisfying shareholders, using money for savings in order to stay afloat, reinvesting profits into technology (among others). In addition, one should also consider alternative objectives which major businesses instead employ, such as sales maximisation (this is Amazon’s stated goal)or revenue … Read More
In the short run at least one of the factors of production (Land, Labor, Capital and Enterprise) is fixed. Due to this there are short run fixed costs relating from the fixed factors of production. In Economics it is normally capital and land that are seen as fixed in the short run as the sale … Read More
Marginal revenue product is the additional revenue a firm gains by having a unit of labour produce an addition unit of the good being sold. The UK and Greece will have different minimum wage rates for the same age groups because of the productivity of their labour with respect MRP. It can be concluded that … Read More
Aggregate Demand or AD is the total cumulative demand of an entire economy. This comprises demand for all goods and services that are sold within this economy.It is calculated using the formula AD = C+I+G+(X-M)C represents the consumption component of AD, this is the entire level of consumption of an economy i.e. goods and services … Read More
I’d start by using the acronym SPICED (Strong Pound Imports Cheap Exports Dear). If you have an increase in the value of the pound you can buy more of another currency with £1. This implies that the pound has become stronger. If the pound is strong we know that imports have become cheaper and exports … Read More
I’d start by using the acronym SPICED (Strong Pound Imports Cheap Exports Dear). If you have an increase in the value of the pound you can buy more of another currency with £1. This implies that the pound has become stronger. If the pound is strong we know that imports have become cheaper and exports … Read More
Globalisation could create more employment opportunities as globalisation opens up the global market and jobs. Workers can take advantage of job opportunities across the globe, rather than just in their home country. Many MNCs have different divisions all over the world. This is especially the case in financial sector, banks such as HSBC have branches … Read More
An externality is the cost or benefit a third party receives from an economic transaction outside of the market mechanism. In other words, the spillover effect of the production or consumption of a good or service. Externalities can be positive (external benefits) or negative (external costs)Negative externalities are caused by demerit goods. These are associated … Read More
Higher interest rates affect economic growth in several ways. It is important to note that interest rates fall into the category of monetary policy, that is policy that is set by the central bank. It is the primary policy tool that the central bank (e.g. the Bank of England or Federal Reserve) have of driving … Read More
Division of labour is a kind of specialisation in relation to employees, involving splitting the process of production into various different tasks, with an employee assigned to each one. These workers combine to make the final product. In the area of services, the same idea applies – for example, when you go to a restaurant … Read More
Globalisation is the process in which economies have become increasingly interconnected and interdependent.One benefit of globalisation for Uk consumers is the availability of a larger and cheaper range of imported goods and services. Therefore consumers will have a larger purchasing power parity due to the lower prices and consequently have a higher standard of living.On … Read More
Stagflation occurs when there is a raise in prices (inflation) at the same time as a stagnating economy. It can be demonstrated on the Aggregate supply/ aggregate demand graph by a leftward shift of the short-run aggregate supply curve. The most common cause of stagflation is a “supply shock” when the supply of a material … Read More
One pricing strategy that could be used is predatory pricing. This is a short run pricing strategy where a firm prices below their AVC to drive out new competitors. By pricing below their AVC and having a loss, the new competitor will also have to lower their prices to a similar level. This will also … Read More
This is a classic higher economics question.Economic growth is an increase in the value of goods and services produced in an economy within a period of time.Fiscal policy is the use of government spending and taxation to achieve government aims.first examine final policy through an increase in spending: Increase spending would increase circular flow of … Read More
The basic economic problem finds that demand is infinite whilst resources are scarce:Infinite Demand + Scarce Resources = The Basic Economic Problem Demand refers to a consumer wanting to buy a particular good/service. Total demand (in an economy) is often infinite due to consumers’ infinite wants. We always seem to want more. Scarcity is the … Read More
Perfect competition refers to a theoretical market structure that contains the following characteristics: a large number of small firms; no control over price; all firms sell a homogeneous product; no barriers to entry; perfect information. Economic profit occurs when total revenue is greater than the total economic costs, which comprises of implicit and explicit costs. … Read More
Fiscal policy concerns changes in levels of taxation and government spending, whilst monetary policy concerns changes in the interest rate. These are both tools used by the government/ central bank to influence key macroeconomic indicators.The purpose of fiscal policy may be to influence aggregate demand, since taxation affects aggregate demand through consumption and investment, and … Read More
The components of aggregate demand are: consumption, investment, government spending and net exports. An increase in interest rate makes it more attractive to save money (not spend) and less attractive to borrow as the payback rate will be higher; therefore consumption in the economy falls. A higher interest rate will also decrease investment in the … Read More
Internal economies of scale are when a firm’s long run average costs (LRAC) decrease due to increase in output/production.*This will then be shown via the LRAC decreasing and then increasing diagram.Internal economies of scale are usually of 6 types: Risk-bearing, Managerial, Financial, Purchasing, Technical, and Marketing. (I make this easy to remember by using Richard’s … Read More
Using a diagram, I would show demand and supply for labour, as well as a line for where the minimum wage is. This should show that the minimum wage is above the market wage.The diagram shows that with the wage rate now higher, more people wish to enter this job market whereas firms wish to … Read More
Firstly, a rise in interest rate could negatively impact investment within an economy. This is because the interest rate would increase the cost of borrowing and thus deter firms from taking out loans to finance/subsidise various R & D initiatives within the company. This fall in investment would result in a fall in aggregate demand … Read More
