Thursday 30 December 2010
Tuesday 28 December 2010
Unit 3: Barriers to Entry & Brand Loyalty
There are lots of excellent reports coming out at the moment focusing on the strategic issues facing businesses as they prepare for the new year. I was interested to pick up on one part of a report from MORI which highlights the variation in levels of customer loyalty in different consumer markets.
A chart from this report is highlighted below and it generates some interesting comparisons that students might analyse as they consider the relative importance of customer loyalty as a barrier to entry:
Why?
*Hotels are listed at the bottom of the table, yet they are active in promoting use of customer loyalty schemes?
* To what extent does high customer loyalty present an insurmountable barrier to entry for a new entrant wanting to build a viable scale in a new market?
* Is the best way to overcome entrenched customer loyalty to enter a market through acquisition?
The above are just some of the questions you should think about when discussing the competiton strategies of firms.
A chart from this report is highlighted below and it generates some interesting comparisons that students might analyse as they consider the relative importance of customer loyalty as a barrier to entry:
According to the data, sectors such as grocery retailing and financial services enjoy much higher consumer
loyalty than hotels, department stores or clothing retailers.
*Hotels are listed at the bottom of the table, yet they are active in promoting use of customer loyalty schemes?
* To what extent does high customer loyalty present an insurmountable barrier to entry for a new entrant wanting to build a viable scale in a new market?
* Is the best way to overcome entrenched customer loyalty to enter a market through acquisition?
The above are just some of the questions you should think about when discussing the competiton strategies of firms.
Friday 24 December 2010
Unit 1: An excellent exam technique to help solve market failure!
A handy mnemonic to help remember different the four different ways that the government could intervene when faced with market failure is:
'LETS' intervene
Legislate - Banning stuff, age limits, restrictions on use etc
Educate - advertise duscuss in school etc
Tax - indirect (both specific and ad valorem)
Subsidise - spend money encouraging producion of merit goods (see article below)
You all should remember this for the exam, it will really help you solve problem of market failure....and remember, you must evaluate each policy!!! Look at the article below and think about the questions asked. (the post on China and congestion is also an interesting topic)
Government to Sunsidise Electric Cars
Click here to see short video describing one way of reducing the negative externalities produced by cars. The government is planning to spend £43 million to subsidise specific models of electric cars. This will reduce the cost by around £5,000 per car.
Do you think this is the best way of reducing pollution caused by cars?
Can you think of any other ways?
Remember, 'LETS' intervene (have you forgotten it already Freddie!!!!)
'LETS' intervene
Legislate - Banning stuff, age limits, restrictions on use etc
Educate - advertise duscuss in school etc
Tax - indirect (both specific and ad valorem)
Subsidise - spend money encouraging producion of merit goods (see article below)
You all should remember this for the exam, it will really help you solve problem of market failure....and remember, you must evaluate each policy!!! Look at the article below and think about the questions asked. (the post on China and congestion is also an interesting topic)
Government to Sunsidise Electric Cars
Do you think this is the best way of reducing pollution caused by cars?
Can you think of any other ways?
Remember, 'LETS' intervene (have you forgotten it already Freddie!!!!)
Unit 1: Market Failure: Unique solution to congestion in China
This article highlights that there are many ways to solve the problem of car use other than by taxing cars. Possible questions to think about are;
1. What is the main reason for the increase in congestion in China? (Use a S & D diagram, discuss income elasticity etc)
2. How will this policy effect the supply/demand for cars in China?
3. How effective will it be?
4. How effective will the other methods discussed be in reducing car use?
New cars in Beijing cut by two-thirds to battle traffic
New rules have taken effect in China that restrict car purchases in an effort to combat serious traffic problems in the capital, Beijing.
The city authorities will allow only 240,000 vehicles to be registered for 2011 - one third of this year's total.
Car buyers have been swamping dealers in anticipation of the new rules, which will still leave about five million cars on the road in the capital. Traffic and air pollution in Beijing is among the worst in the world.
Beijing officials are trying to balance the desire of a growing middle class to have the convenience and status of car ownership, with a huge congestion problem. Officials said the new rules would not solve the full extent of the city's problems, only slow the down the rate at which they are worsening.
"It will be difficult to dramatically improve the traffic situation in a short time," said Liu Xiaoming, deputy director of the Beijing Traffic Management Bureau.
"But it can slow down the pace of worsening traffic congestion."
Car registrations will be allocated by a license plate lottery system from Friday.
Under the new rules, government departments will not be allowed to increase the size of their fleets for five years. About 750,000 new cars appeared on Beijing's streets this year, raising the total of registered vehicles for the city 4.8m. China overtook the US as the world's biggest car and van market in 2009, with 13.6 million vehicles sold within the country.
Other solutions are being discussed.
The authorities have delayed the imposition of a congestion charge - a fee for cars to enter specified zones - saying the idea needed more study.
In anticipation of the new ruling, 30,000 new vehicles were registered in the past week, at least three times the normal rate, Xinhua state news agency reported. (this could be an example of Govt failure...the policy causing a huge 'spike' in demand)
"I heard that they were going to change the policy, so I wanted to buy a car before the year was over," one buyer named Mr Yang told the BBC.
"We rushed to buy a car, because I need it for work. But it will be really inconvenient for me to drive a car when the streets become so congested," he said.
Residents say that Beijing's roads sometimes resemble car parks; a record 140 traffic jams were recorded on one evening in September.
A spectacular 120km (75-mile) long traffic jam formed on the Beijing to Tibet route in early September, only a week after another 100km (62-mile) jam had been cleared in the same area.
There remains a high level of scepticism about how well the new measures will work however.
"I think we should learn from other countries and make the parking fees even higher, that is certainly a method. And these cars, we can't just allow the number of cars to grow. We must control them," said Beijing resident Wu Ning Juan.
1. What is the main reason for the increase in congestion in China? (Use a S & D diagram, discuss income elasticity etc)
2. How will this policy effect the supply/demand for cars in China?
3. How effective will it be?
4. How effective will the other methods discussed be in reducing car use?
New rules have taken effect in China that restrict car purchases in an effort to combat serious traffic problems in the capital, Beijing.
The city authorities will allow only 240,000 vehicles to be registered for 2011 - one third of this year's total.
Car buyers have been swamping dealers in anticipation of the new rules, which will still leave about five million cars on the road in the capital. Traffic and air pollution in Beijing is among the worst in the world.
Beijing officials are trying to balance the desire of a growing middle class to have the convenience and status of car ownership, with a huge congestion problem. Officials said the new rules would not solve the full extent of the city's problems, only slow the down the rate at which they are worsening.
"It will be difficult to dramatically improve the traffic situation in a short time," said Liu Xiaoming, deputy director of the Beijing Traffic Management Bureau.
"But it can slow down the pace of worsening traffic congestion."
Car registrations will be allocated by a license plate lottery system from Friday.
Under the new rules, government departments will not be allowed to increase the size of their fleets for five years. About 750,000 new cars appeared on Beijing's streets this year, raising the total of registered vehicles for the city 4.8m. China overtook the US as the world's biggest car and van market in 2009, with 13.6 million vehicles sold within the country.
Other solutions are being discussed.
The authorities have delayed the imposition of a congestion charge - a fee for cars to enter specified zones - saying the idea needed more study.
In anticipation of the new ruling, 30,000 new vehicles were registered in the past week, at least three times the normal rate, Xinhua state news agency reported. (this could be an example of Govt failure...the policy causing a huge 'spike' in demand)
"I heard that they were going to change the policy, so I wanted to buy a car before the year was over," one buyer named Mr Yang told the BBC.
"We rushed to buy a car, because I need it for work. But it will be really inconvenient for me to drive a car when the streets become so congested," he said.
Residents say that Beijing's roads sometimes resemble car parks; a record 140 traffic jams were recorded on one evening in September.
A spectacular 120km (75-mile) long traffic jam formed on the Beijing to Tibet route in early September, only a week after another 100km (62-mile) jam had been cleared in the same area.
There remains a high level of scepticism about how well the new measures will work however.
"I think we should learn from other countries and make the parking fees even higher, that is certainly a method. And these cars, we can't just allow the number of cars to grow. We must control them," said Beijing resident Wu Ning Juan.
Thursday 23 December 2010
Unit 1: Buffer Stock Schemes: an evaluation
Buffer Stocks - Georgia e mailed me about Buffer Stock schemes, here is a brief summary, with evaluation.
The prices of agricultural products such as wheat, tea and coffee tend to fluctuate more than the prices of manufactured products and services. This is largely due to the volatility in the market supply of agricultural products coupled with the fact that demand and supply are price inelastic.
One way to smooth out the fluctuations in prices is for the government to operate price support schemes through the use of buffer stocks. But many of them have had a chequered history.
Buffer stock schemes seek to stabilize the market price of agricultural products by buying up supplies of the product when harvests are plentiful and selling stocks of the product onto the market when supplies are low.
The problems with buffer stock schemes
In theory buffer stock schemes should be profit making, since they buy up stocks of the product when the price is low and sell them onto the market when the price is high. However, they do not often work well in practice. Clearly, perishable items cannot be stored for long periods of time and can therefore be immediately ruled out of buffer stock schemes.
Setting up a buffer stock scheme also requires a significant amount of start up capital, since money is needed to buy up the product when prices are low. There are also high administrative and storage costs to be considered.
The success of a buffer stock scheme however ultimately depends on the ability of those managing a scheme to correctly estimate the average price of the product over a period of time. This estimate is the scheme’s target price and obviously determines the maximum and minimum price boundaries.
But if the target price is significantly above the correct average price then the organization will find itself buying more produce than it is selling and it will eventually run out of money. The price of the product will then crash as the excess stocks built up by the organization are dumped onto the market.
Conversely if the target price is too low then the organization will often find the price rising above the boundary, it will end up selling more than it is buying and will eventually run out of stocks
The European Union Common Agricultural Policy has come under sustained attack for many years and there have been several attempts to reform the system.
The prices of agricultural products such as wheat, tea and coffee tend to fluctuate more than the prices of manufactured products and services. This is largely due to the volatility in the market supply of agricultural products coupled with the fact that demand and supply are price inelastic.
One way to smooth out the fluctuations in prices is for the government to operate price support schemes through the use of buffer stocks. But many of them have had a chequered history.
Buffer stock schemes seek to stabilize the market price of agricultural products by buying up supplies of the product when harvests are plentiful and selling stocks of the product onto the market when supplies are low.
The problems with buffer stock schemes
In theory buffer stock schemes should be profit making, since they buy up stocks of the product when the price is low and sell them onto the market when the price is high. However, they do not often work well in practice. Clearly, perishable items cannot be stored for long periods of time and can therefore be immediately ruled out of buffer stock schemes.
Setting up a buffer stock scheme also requires a significant amount of start up capital, since money is needed to buy up the product when prices are low. There are also high administrative and storage costs to be considered.
The success of a buffer stock scheme however ultimately depends on the ability of those managing a scheme to correctly estimate the average price of the product over a period of time. This estimate is the scheme’s target price and obviously determines the maximum and minimum price boundaries.
But if the target price is significantly above the correct average price then the organization will find itself buying more produce than it is selling and it will eventually run out of money. The price of the product will then crash as the excess stocks built up by the organization are dumped onto the market.
Conversely if the target price is too low then the organization will often find the price rising above the boundary, it will end up selling more than it is buying and will eventually run out of stocks
The European Union Common Agricultural Policy has come under sustained attack for many years and there have been several attempts to reform the system.
Unit 4: Money and Zimbabwe
This is just wrong!
Click here to witness desperate times in Zimbabwe. The article illustrates what can happen when people lose total confidence in their currency. The image below is a Barter Exchage Rate List placed outside a hospital where “where patients barter goods from their farms for medical treatment.”
Click here to witness desperate times in Zimbabwe. The article illustrates what can happen when people lose total confidence in their currency. The image below is a Barter Exchage Rate List placed outside a hospital where “where patients barter goods from their farms for medical treatment.”
Monday 20 December 2010
Unit 1: Market Failure and xmas shopping!!!!
Economists stole Christmas!
Every year around this time economics students and teachers alike begin looking forward to the long Christmas holiday right around the corner. Two or three weeks of yuletide cheer, mistletoe, snow men, caroling, food, family and… dead weight loss. That’s right, what’d you think this post would be about, the efficiency of Christmas? Come on… Economics is the DISMAL science!
The tradition of giving Christmas presents has long fallen under the scope of economic researchers who seek to understand more about the rational, or as it turns out, irrational behavior of individuals in society. From an economic standpoint, many of the things that Christmas traditionalists believe are bad, are actually good, while the traditions many believe are good are in fact quite bad from an economist’s viewpoint.
Basically, economists are grinches. So prepare to be grinchified…
Are you the kind of person who thinks doing all your Christmas shopping online is cold, impersonal, and against the holiday spirit? Well, Stephen Dubner, co-author of Freakonomics, argues that shopping online is far more efficient than spending days roaming the malls and shopping centers searching for the right gift for your loved ones. Says Dubner about “clicking and gifting” (i.e. shopping online):
'See here’s the thing: I like the sound of clicking and gifting, that sounds efficient to me. That’s what we need to bring to the holidays, is more efficiency, less emotion. Let’s get rid of that'.
Economists’ disdain for Christmas shopping is not limited to criticizing the inefficiency of spending hours shopping for gifts, in fact the tradition of giving gifts itself is considered economically irrational and inefficient.
Sure, you say, it’s the thought that counts. Well, that’s just stupid. A gift giver can think all he wants about what a friend or a loved one may want for Christmas, and end up buying the thing they think the other person wants. But when it comes down to it, each of us only really knows what one person in this world wants, and that is ourselves, that’s right, as I am sure you realised, it's all about ME!
So basically, any gift you can buy for someone else will bring them less benefit than a purchase they themselves make; so WHY BOTHER? What it comes down to is self-interest in the end. When we buy a gift for another person, it is ultimately for our own benefit, which as we will see soon, most often exceeds the benefit of the receiver of the gift.
This is what’s known as the dead weight loss of Christmas. From an economic standpoint, Christmas is not “the most wonderful time of the year”, rather it’s “the most inefficient time of the year” (not so catchy as a song lyric, I’m afraid). Dead weight loss is like when,
…my partner’s great-grandma buys me a sweater at $85 and to me it’s worth like $1.50. Because I don’t like it… so that’s $83.50 deadweight loss…
And the holidays are jam-packed with that kind of waste.
We’ve all been there, as both the gift giver and the unfortunate receiver of a gift we don’t like or even want. In fact, this phenomenon can be graphed using the basic diagram you all need to learn: the marginal benefit, marginal cost diagram.
Look at the graph below and see if you can figure out what it shows, then scroll down and read the explanation.
What the graph above shows is that the act of giving gifts brings benefits to the gift giver that are not enjoyed by the gift’s receiver. From the ultimate consumer’s standpoint (i.e. from the perspective of the gift receivers), many of the gifts received for Christmas will be valued far less than the amount of money, time and energy that went into choosing and buying them by the gift giver.
In other words, the marginal cost of shopping for and buying Christmas presents exceeds the marginal benefit of those who receive them, hence, the market for Christmas gifts fails since the behavior of private individuals results in a level of Christmas shopping that exceeds the socially optimal efficient level, at which the marginal benefit of the give receivers intersects the marginal cost of gift production. Resources are over-allocated towards Christmas present shopping because it is simply impossible for gift givers to know the precise preferences of those for whom they shop.
That $85 sweater, for instance, may have only been “worth” $1.50 to the poor fellow who received it. The dead weight loss, therefore, is the resources that went towards producing and purchasing a sweater for someone who doesn’t even like it, and all the other possible ways those resources and that money could have been allocated.
Have I ruined your Christmas yet? Well, fear not, there is an economically efficient way to approach the Christmas season and to maintain the beloved tradition of gift giving! That’s right, even the Grinch economists have a solution to this wasteful problem! And it is so simple… it is… CASH! Cash is the ultimate gift, perfect in every way. No time whatsoever is wasted in the process of deciding what to give someone. Simply put your debit card in the ATM machine and your entire season of shopping is done!
Cash is the perfect gift to receive too. There is no chance you will be unsatisfied with what you ultimately “get” for Christmas. Cash can be spent on the goods from which the receiver himself enjoys the greatest marginal utility per dollar he spends. The dead weight loss above is completely eliminated when cash is given instead of other presents. The marginal benefit of the giver and the marginal benefit of the receiver are the same since the giver can rest assured that the receiver will spend it on something that provides him with the greatest possible benefit.
So there is a happy ending to this story after all! Maybe someday when economic education has truly succeeded we can once and for all do away with the wastefulness and inefficiency of Christmases past and form new traditions rooted in the efficiency of cash gifts. So, students of economics, if you want to make your loved ones happy this Christmas, you now know what to do. In the process, you’ll help make the world just a little bit more efficient!
Wherever you lot are, hope you have a great xmas, see you all in gthe new year......rememember, do some work!!!!!!
Mr B
Every year around this time economics students and teachers alike begin looking forward to the long Christmas holiday right around the corner. Two or three weeks of yuletide cheer, mistletoe, snow men, caroling, food, family and… dead weight loss. That’s right, what’d you think this post would be about, the efficiency of Christmas? Come on… Economics is the DISMAL science!
The tradition of giving Christmas presents has long fallen under the scope of economic researchers who seek to understand more about the rational, or as it turns out, irrational behavior of individuals in society. From an economic standpoint, many of the things that Christmas traditionalists believe are bad, are actually good, while the traditions many believe are good are in fact quite bad from an economist’s viewpoint.
Basically, economists are grinches. So prepare to be grinchified…
Are you the kind of person who thinks doing all your Christmas shopping online is cold, impersonal, and against the holiday spirit? Well, Stephen Dubner, co-author of Freakonomics, argues that shopping online is far more efficient than spending days roaming the malls and shopping centers searching for the right gift for your loved ones. Says Dubner about “clicking and gifting” (i.e. shopping online):
'See here’s the thing: I like the sound of clicking and gifting, that sounds efficient to me. That’s what we need to bring to the holidays, is more efficiency, less emotion. Let’s get rid of that'.
Economists’ disdain for Christmas shopping is not limited to criticizing the inefficiency of spending hours shopping for gifts, in fact the tradition of giving gifts itself is considered economically irrational and inefficient.
Sure, you say, it’s the thought that counts. Well, that’s just stupid. A gift giver can think all he wants about what a friend or a loved one may want for Christmas, and end up buying the thing they think the other person wants. But when it comes down to it, each of us only really knows what one person in this world wants, and that is ourselves, that’s right, as I am sure you realised, it's all about ME!
So basically, any gift you can buy for someone else will bring them less benefit than a purchase they themselves make; so WHY BOTHER? What it comes down to is self-interest in the end. When we buy a gift for another person, it is ultimately for our own benefit, which as we will see soon, most often exceeds the benefit of the receiver of the gift.
This is what’s known as the dead weight loss of Christmas. From an economic standpoint, Christmas is not “the most wonderful time of the year”, rather it’s “the most inefficient time of the year” (not so catchy as a song lyric, I’m afraid). Dead weight loss is like when,
…my partner’s great-grandma buys me a sweater at $85 and to me it’s worth like $1.50. Because I don’t like it… so that’s $83.50 deadweight loss…
And the holidays are jam-packed with that kind of waste.
We’ve all been there, as both the gift giver and the unfortunate receiver of a gift we don’t like or even want. In fact, this phenomenon can be graphed using the basic diagram you all need to learn: the marginal benefit, marginal cost diagram.
Look at the graph below and see if you can figure out what it shows, then scroll down and read the explanation.
What the graph above shows is that the act of giving gifts brings benefits to the gift giver that are not enjoyed by the gift’s receiver. From the ultimate consumer’s standpoint (i.e. from the perspective of the gift receivers), many of the gifts received for Christmas will be valued far less than the amount of money, time and energy that went into choosing and buying them by the gift giver.
In other words, the marginal cost of shopping for and buying Christmas presents exceeds the marginal benefit of those who receive them, hence, the market for Christmas gifts fails since the behavior of private individuals results in a level of Christmas shopping that exceeds the socially optimal efficient level, at which the marginal benefit of the give receivers intersects the marginal cost of gift production. Resources are over-allocated towards Christmas present shopping because it is simply impossible for gift givers to know the precise preferences of those for whom they shop.
That $85 sweater, for instance, may have only been “worth” $1.50 to the poor fellow who received it. The dead weight loss, therefore, is the resources that went towards producing and purchasing a sweater for someone who doesn’t even like it, and all the other possible ways those resources and that money could have been allocated.
Have I ruined your Christmas yet? Well, fear not, there is an economically efficient way to approach the Christmas season and to maintain the beloved tradition of gift giving! That’s right, even the Grinch economists have a solution to this wasteful problem! And it is so simple… it is… CASH! Cash is the ultimate gift, perfect in every way. No time whatsoever is wasted in the process of deciding what to give someone. Simply put your debit card in the ATM machine and your entire season of shopping is done!
Cash is the perfect gift to receive too. There is no chance you will be unsatisfied with what you ultimately “get” for Christmas. Cash can be spent on the goods from which the receiver himself enjoys the greatest marginal utility per dollar he spends. The dead weight loss above is completely eliminated when cash is given instead of other presents. The marginal benefit of the giver and the marginal benefit of the receiver are the same since the giver can rest assured that the receiver will spend it on something that provides him with the greatest possible benefit.
So there is a happy ending to this story after all! Maybe someday when economic education has truly succeeded we can once and for all do away with the wastefulness and inefficiency of Christmases past and form new traditions rooted in the efficiency of cash gifts. So, students of economics, if you want to make your loved ones happy this Christmas, you now know what to do. In the process, you’ll help make the world just a little bit more efficient!
Wherever you lot are, hope you have a great xmas, see you all in gthe new year......rememember, do some work!!!!!!
Mr B
Wednesday 15 December 2010
Unit 1: External Benefits & Govt Subsidies
UK drivers who decide to buy specific models of electric cars will now be eligible for grants of up to £5,000 in a government subsidy scheme. The £43m initiative starts on 1 January 2011 and could help cut the price by as much as 25%. See the news click here.
Monday 13 December 2010
Unit 3: Business Objectives
Do all firms seek to maximise profits?
Students should understand that the models that comprise the traditional theory of the firm are based upon the assumption that firms aim to maximise profits. They need to understand the usual profit maximising rule (MC=MR). They should also understand the satisficing principle and know that firms have a variety of other possible objectives.
The conventional theory of the firm is built upon the assumption that businesses seek to maximise profits from producing an output and then selling it in product markets. Profits are maximised when marginal revenue equals marginal cost (MR=MC). The price, output and profits for a firm operating in an imperfectly competitive market (e.g. a monopoly) are shown in the diagram opposite;
In an exam you might be asked to consider and analyse how changes in revenues and costs might affect the profit maximising price and output. It might be worth drawing onto the diagram above to show the effects of a rise in demand and / or a fall in production costs. It is important to question the assumption that profit maximisation is the dominant objective in the day to day decisions of businesses in real world markets be they competitive or oligopolistic / monopolistic.
Why might firms depart from profit maximisation?
•Imperfect information about a firm’s demand and cost conditions – a business may not have enough information to accurately calculate marginal revenue and marginal costs. Often, pricing decisions are taken on the basis of “estimated demand conditions”. A business that is new to a market is unlikely to know the price elasticity of demand for a new product or the reactions of rivals to a change in price
•Alternative objectives of the managers of a business – managers, employees and shareholders within a large and complex business organisation may each have different objectives as stakeholders in a business enterprise. Much work for example in the new behavioural theories of the firm suggests that managers operating with some autonomy from the shareholders, might pursue strategies that depart from pure profit maximisation
For the exam you need to be aware of different objectives and also understand how this might affect the conduct and behaviour of a business operating in a market. Here are four different objectives:
•Satisficing:
Satisficing behaviour involves the owners setting minimum acceptable levels of achievement in terms of business revenue and profit e.g. a target rate of growth of sales, or an acceptable rate of return on capital (a measure of profitability)
•Sales Revenue Maximisation :
Baumol argued that annual salaries and other perks might be more closely correlated with total sales revenue rather than profits. Revenue is maximised when marginal revenue (MR) = zero
•Managerial Satisfaction :
An alternative view was put forward by Williamson, who developed the concept of managerial satisfaction (or utility) achieved for example by success in raising a firm’s sales revenue, market share or meeting an output growth target
•Constrained Sales Revenue Maximisation -
Shareholders of a business may introduce a constraint on the decisions of managers. For example hey may introduce a minimum profit constraint designed to underpin the valuation of their shares and maintain a dividend.
No business is exactly the same – but there are plenty of reasons to believe that in the short-term a business may not be setting price at what it perceives to be a profit maximising level. In summary:
•Firm’s must consider the reactions of rival businesses to their decisions (especially in an oligopoly)
•Managers in a business will have freedom in setting price to suit local demand and competition
•How can multi-product firms hope to have enough information to profit maximise in every market?
•The strategies of a business evolve over time – profitability is important but so too might be the aim of surviving in a business during a recession, or an attempt to achieve market dominance by under-cutting rival firms for a time period, accepting that this will eat into profits in the short term
•Shareholders rarely have the day to day control of what managers are doing and the stock market is an imperfect instrument of controlling corporate performance
In our second diagram we show how a change in objectives (from profit maximisation to revenue maximisation) affects the price and output of a business. Think about how this affects economic efficiency and welfare (e.g. the balance between consumer and producer surplus).
Students should understand that the models that comprise the traditional theory of the firm are based upon the assumption that firms aim to maximise profits. They need to understand the usual profit maximising rule (MC=MR). They should also understand the satisficing principle and know that firms have a variety of other possible objectives.
The conventional theory of the firm is built upon the assumption that businesses seek to maximise profits from producing an output and then selling it in product markets. Profits are maximised when marginal revenue equals marginal cost (MR=MC). The price, output and profits for a firm operating in an imperfectly competitive market (e.g. a monopoly) are shown in the diagram opposite;In an exam you might be asked to consider and analyse how changes in revenues and costs might affect the profit maximising price and output. It might be worth drawing onto the diagram above to show the effects of a rise in demand and / or a fall in production costs. It is important to question the assumption that profit maximisation is the dominant objective in the day to day decisions of businesses in real world markets be they competitive or oligopolistic / monopolistic.
Why might firms depart from profit maximisation?
•Imperfect information about a firm’s demand and cost conditions – a business may not have enough information to accurately calculate marginal revenue and marginal costs. Often, pricing decisions are taken on the basis of “estimated demand conditions”. A business that is new to a market is unlikely to know the price elasticity of demand for a new product or the reactions of rivals to a change in price
•Alternative objectives of the managers of a business – managers, employees and shareholders within a large and complex business organisation may each have different objectives as stakeholders in a business enterprise. Much work for example in the new behavioural theories of the firm suggests that managers operating with some autonomy from the shareholders, might pursue strategies that depart from pure profit maximisation
For the exam you need to be aware of different objectives and also understand how this might affect the conduct and behaviour of a business operating in a market. Here are four different objectives:
•Satisficing:
Satisficing behaviour involves the owners setting minimum acceptable levels of achievement in terms of business revenue and profit e.g. a target rate of growth of sales, or an acceptable rate of return on capital (a measure of profitability)
•Sales Revenue Maximisation :
Baumol argued that annual salaries and other perks might be more closely correlated with total sales revenue rather than profits. Revenue is maximised when marginal revenue (MR) = zero
•Managerial Satisfaction :
An alternative view was put forward by Williamson, who developed the concept of managerial satisfaction (or utility) achieved for example by success in raising a firm’s sales revenue, market share or meeting an output growth target
•Constrained Sales Revenue Maximisation -
Shareholders of a business may introduce a constraint on the decisions of managers. For example hey may introduce a minimum profit constraint designed to underpin the valuation of their shares and maintain a dividend.
No business is exactly the same – but there are plenty of reasons to believe that in the short-term a business may not be setting price at what it perceives to be a profit maximising level. In summary:
•Firm’s must consider the reactions of rival businesses to their decisions (especially in an oligopoly)
•Managers in a business will have freedom in setting price to suit local demand and competition
•How can multi-product firms hope to have enough information to profit maximise in every market?
•The strategies of a business evolve over time – profitability is important but so too might be the aim of surviving in a business during a recession, or an attempt to achieve market dominance by under-cutting rival firms for a time period, accepting that this will eat into profits in the short term
•Shareholders rarely have the day to day control of what managers are doing and the stock market is an imperfect instrument of controlling corporate performance
In our second diagram we show how a change in objectives (from profit maximisation to revenue maximisation) affects the price and output of a business. Think about how this affects economic efficiency and welfare (e.g. the balance between consumer and producer surplus).
Thursday 9 December 2010
Unit 1: Agriculture and price volatility.
Unit 1 questions often focus on price volatility in world markets. See below for an example;
“The value of banana exports for developing countries depends critically on the world price of bananas. The price is volatile in the short term, yet there are distinct trends in price over the medium term.”
Banana prices have been volatile in recent years and this is due to a mix of demand and supply-side factors
Demand causes include:
1. Cyclical demand (i.e. high income elasticity of demand) Many commodities are used in producing other goods and services
2. Peak/off-peak demand differences and seasonal changes in demand
3. Speculative demand from investors who treat commodities as financial assets
4. Low price elasticity of demand (Ped) – e.g. when there are few close substitutes and where the raw material is essential in providing other products
Supply causes include:
1. Unstable conditions of market supply including uncertain yields in farming because of volatile climate. This leads to changes in actual versus planned supply and thus changes in stock levels
2. Artificial limits on supply e.g. Export quotas / bans introduced by a government
3. Low price elasticity of supply e.g. due to limited capacity or a low level of stocks. Fresh fruits are expensive to store and refrigerate and may deteriorate if held as part of a buffer stock scheme
Here are some links for further reading on this topic:
Revision Presentation on Price Volatility
Price Volatility Chart (Bananas)
“The value of banana exports for developing countries depends critically on the world price of bananas. The price is volatile in the short term, yet there are distinct trends in price over the medium term.”
Banana prices have been volatile in recent years and this is due to a mix of demand and supply-side factors
Demand causes include:
1. Cyclical demand (i.e. high income elasticity of demand) Many commodities are used in producing other goods and services
2. Peak/off-peak demand differences and seasonal changes in demand
3. Speculative demand from investors who treat commodities as financial assets
4. Low price elasticity of demand (Ped) – e.g. when there are few close substitutes and where the raw material is essential in providing other products
Supply causes include:
1. Unstable conditions of market supply including uncertain yields in farming because of volatile climate. This leads to changes in actual versus planned supply and thus changes in stock levels
2. Artificial limits on supply e.g. Export quotas / bans introduced by a government
3. Low price elasticity of supply e.g. due to limited capacity or a low level of stocks. Fresh fruits are expensive to store and refrigerate and may deteriorate if held as part of a buffer stock scheme
Here are some links for further reading on this topic:
Revision Presentation on Price Volatility
Price Volatility Chart (Bananas)
Wednesday 8 December 2010
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Friday 3 December 2010
Unit 1: Excellent Elasticity piece on xmas trees and bad weather!
The bad weather is not just affecting my ability to have fun in UK this week.......
There are lots of aspects of economics this story in from the Independent on Wednesday 1st December. The final section of the report into the effects of the early snow falls is about Christmas tree shortages, and links to this BBC story about Nordmann fir trees, and the two together contain several references to the A level syllabus:
Questions you should be able to answer.....
1. The suppliers are affected by poor weather conditions which mean that they cannot supply the goods to market - with the aid of a diagram explain what happens to market equilibrium and why.
2. Consumers in the UK have become very fond of convenient, attractive and non-needle-dropping Nordmann fir trees - with the aid of a diagram explain likely price elasticity of demand, what happens market equilibrium, and why.
3. The EU withdraws a subsidy previously paid to producers in Denmark - with the aid of a diagram explain what happens to market equilibrium and why.
4. How can these reports be used to illustrate the rationing function of price?
5. Distinguish between the likely short-run and long-run effects on the market.
There are lots of aspects of economics this story in from the Independent on Wednesday 1st December. The final section of the report into the effects of the early snow falls is about Christmas tree shortages, and links to this BBC story about Nordmann fir trees, and the two together contain several references to the A level syllabus:
Questions you should be able to answer.....
1. The suppliers are affected by poor weather conditions which mean that they cannot supply the goods to market - with the aid of a diagram explain what happens to market equilibrium and why.
2. Consumers in the UK have become very fond of convenient, attractive and non-needle-dropping Nordmann fir trees - with the aid of a diagram explain likely price elasticity of demand, what happens market equilibrium, and why.
3. The EU withdraws a subsidy previously paid to producers in Denmark - with the aid of a diagram explain what happens to market equilibrium and why.
4. How can these reports be used to illustrate the rationing function of price?
5. Distinguish between the likely short-run and long-run effects on the market.
Unit 3: Efficiency and when to use it in exams.
What are the main types of efficiency and when should I use them in the exams? Below is an excellent piece on how ...
If you are stretching for a high grade at AS and/or A2 you will need to use efficiency concepts in your exam answers – so these notes should be useful!
Economic efficiency is about making the best or optimum use of our scarce resources among competing ends so that economic and social welfare is maximised over time. Download this two page revision note - covering some of the issues for AS and A2 exams.
Revision note:
If you are stretching for a high grade at AS and/or A2 you will need to use efficiency concepts in your exam answers – so these notes should be useful!
Economic efficiency is about making the best or optimum use of our scarce resources among competing ends so that economic and social welfare is maximised over time. Download this two page revision note - covering some of the issues for AS and A2 exams.
Revision note:
Revision Efficiency: types & exam uses
View more documents from mattbentley34.
Thursday 2 December 2010
Unit 2: Recession (amusing Vid)
Read on for a brilliant and amusing video explaining what a recession actually is…
When I introduce the concept of economic growth to you lot, I will use this amusing video from down under to introduce the topic!
Enjoy.
Of course, this is made even more ironic by the fact that Australia was one of the few countries to avoid the recession, largely thanks to China’s massive demand for the country’s abundant raw materials.
When I introduce the concept of economic growth to you lot, I will use this amusing video from down under to introduce the topic!
Enjoy.
Of course, this is made even more ironic by the fact that Australia was one of the few countries to avoid the recession, largely thanks to China’s massive demand for the country’s abundant raw materials.
Unit 1: Labour Market Failure
Click here for a revised streamed presentation on market failure in the labour market.
There are many ways in which labour markets can malfunction and these market failures have serious economic and social consequences both at a micro and a macroeconomic level.
The presentation briefly covers
Labour immobility
Discrimination
Disincentives
Monopsony power in the labour market
It also flags up some examples of government intervention.
There are many ways in which labour markets can malfunction and these market failures have serious economic and social consequences both at a micro and a macroeconomic level.
The presentation briefly covers
Labour immobility
Discrimination
Disincentives
Monopsony power in the labour market
It also flags up some examples of government intervention.
Wednesday 1 December 2010
Unit 1: Welfare Loss (deadweight Loss) definition
Hello all from freezing cold, everything at a standstill, airports and roads closed UK...what rubbish country!!!
Anyways, I have had a request for a definition of 'Werlfare Loss' otherwise known as 'Deadweight Loss', so here it is:
Enjoy the perfect Dubai weather this weekend...gggrrrrrrrr!!
Welfare is the benefit to society that the production/consumption of a good brings.
Explanation:
The issue is that the free market does not take into account all the benefits (positive externalities) or the loss (negative externalities) that a product brings to society. You can show this using the market failure diagrams below....
Negative externalities:-
Positive Externalities:-
I cant find one to upload and am in a rush, but you guys know the one, when D (PMB) is lower that D1 (SMB)
Have a good weekend....do some work!!!
Anyways, I have had a request for a definition of 'Werlfare Loss' otherwise known as 'Deadweight Loss', so here it is:
Enjoy the perfect Dubai weather this weekend...gggrrrrrrrr!!
Welfare is the benefit to society that the production/consumption of a good brings.
Explanation:
The issue is that the free market does not take into account all the benefits (positive externalities) or the loss (negative externalities) that a product brings to society. You can show this using the market failure diagrams below....
Negative externalities:-
Positive Externalities:-
I cant find one to upload and am in a rush, but you guys know the one, when D (PMB) is lower that D1 (SMB)
Have a good weekend....do some work!!!
Tuesday 30 November 2010
Unit 2: AS/AD Revision Presentation
With January 2011 AS macro module exams in mind, here is a streamed revision presentation which examines how AD-AS analysis can be used in an AS macro economics exam
Click here for AS/AD Presentation
The presentation covers shifts in AD and AS curves and also considers some of the demand and supply-side shocks that can affect an economy.
Common applications of AD-AS analysis at AS level include some of the following:
How changes in interest rates affect AD and inflation
How changes in taxation might impact on LRAS
How movements in the exchange rate affect AD & AS
Impact of supply-side policies to stimulate enterprise
Economic consequences of labour migration
Effects of changes in import tariffs and quotas
Multiplier effects from economic stimulus policies
Analysing the impact of the credit crunch / recession
Analysing the causes of higher cost-push inflation
Click here for AS/AD Presentation
The presentation covers shifts in AD and AS curves and also considers some of the demand and supply-side shocks that can affect an economy.
Common applications of AD-AS analysis at AS level include some of the following:
How changes in interest rates affect AD and inflation
How changes in taxation might impact on LRAS
How movements in the exchange rate affect AD & AS
Impact of supply-side policies to stimulate enterprise
Economic consequences of labour migration
Effects of changes in import tariffs and quotas
Multiplier effects from economic stimulus policies
Analysing the impact of the credit crunch / recession
Analysing the causes of higher cost-push inflation
Monday 29 November 2010
Unit 3: Economic Efficiency
1. Productive efficiency.
This occurs when the maximum number of goods and services are produced with a given amount of inputs. This will occur on the production possibility frontier. On the curve it is impossible to produce more goods without producing less services.
Productive efficiency will also occur at the lowest point on the firms average costs curve
2. Allocative efficiency
This occurs when goods and services are distributed according to consumer preferences. An economy could be productively efficient but produce goods people don’t need this would be allocative inefficient.
Allocative efficiency occurs when the price of the good = the MC of production
3. X inefficiency:
This occurs when firms do not have incentives to cut costs, for example a monopoly which makes supernormal profits may have little incentive to get rid of surplus labour. Therefore a firms average cost may be higher than necessary
4. Efficiency of scale
This occurs when the firms produces on the lowest point of its Long run average cost and therefore benefits fully from economies of scale
5. Dynamic efficiency
This refers to efficiency over time for example a Ford factory in 1920 would be very efficient for the time period but would now be inefficient by comparison therefore it is necessary for firms to constantly introduce new technology and reduce costs over time.
This occurs when the maximum number of goods and services are produced with a given amount of inputs. This will occur on the production possibility frontier. On the curve it is impossible to produce more goods without producing less services.
Productive efficiency will also occur at the lowest point on the firms average costs curve
2. Allocative efficiency
This occurs when goods and services are distributed according to consumer preferences. An economy could be productively efficient but produce goods people don’t need this would be allocative inefficient.
Allocative efficiency occurs when the price of the good = the MC of production
3. X inefficiency:
This occurs when firms do not have incentives to cut costs, for example a monopoly which makes supernormal profits may have little incentive to get rid of surplus labour. Therefore a firms average cost may be higher than necessary
4. Efficiency of scale
This occurs when the firms produces on the lowest point of its Long run average cost and therefore benefits fully from economies of scale
5. Dynamic efficiency
This refers to efficiency over time for example a Ford factory in 1920 would be very efficient for the time period but would now be inefficient by comparison therefore it is necessary for firms to constantly introduce new technology and reduce costs over time.
Sunday 28 November 2010
Unit 1: Capturing consumer surplus...by mistake!!!
Hilarious.....well, quite amusing
Some retail research finds that customers spend less than six seconds sizing up anyone single offer thrust in front of them as they struggle around a supermarket. Shoppers who allow their concentration to slip are prone to caught out by frequent price label errors in many of the main supermarkets as this BBC Video explains.
Shop prices tend to be set centrally and the sheer volume of price discounts - 25% off, 3 for 2, 4 for 3, buy one get one free inevitably invites logistics errors in store and confusion among customers. Here is a selection of images of pricing errors some of which are comic all of which put extra money into the hands of the retailers.
Some retail research finds that customers spend less than six seconds sizing up anyone single offer thrust in front of them as they struggle around a supermarket. Shoppers who allow their concentration to slip are prone to caught out by frequent price label errors in many of the main supermarkets as this BBC Video explains.
Shop prices tend to be set centrally and the sheer volume of price discounts - 25% off, 3 for 2, 4 for 3, buy one get one free inevitably invites logistics errors in store and confusion among customers. Here is a selection of images of pricing errors some of which are comic all of which put extra money into the hands of the retailers.
Unit 3: Short Run Shut Down Position
The standard theory of the firm assumes that a business needs to make at least normal profit in the long run to justify remaining in the industry but this is not necessarily a strict requirement for a firm in the short term. Indeed many businesses make operating losses when there is a fall in market demand causing prices to fall and revenues to dip below costs.
In industries with a high income elasticity of demand the market is likely to be sensitive to changes in the economic cycle so that firms are likely to see significant changes in profitability at various stages of the business cycle.
The Shut-Down Condition: Price and Variable Cost
In the short run the firm will continue to produce as long as total revenue covers total variable costs or put another way, so long as Price per unit > or equal to Average Variable Cost (AR = AVC). The reason for this is as follows. A business’s fixed costs must be paid regardless of the level of output. If we make an assumption these costs are sunk costs (i.e. they cannot be covered if the firm shuts down) then the loss per unit would be greater if the firm were to shut down, provided variable costs are covered.
Consider the cost and revenue curves facing a business in the short run shown in the diagram below. The market equilibrium price is P1 which means that the equilibrium output for the firm (where MR=MC) is at output Q2. The business is making an economic loss at this price (AC > P1) but the price is high enough for the business to cover all of its variable costs and also make some contribution to its fixed costs. If we assume that most of the fixed costs are lost if the firm shuts down, then the firm can justify continuing to produce in the short run, losses will be greater if they close down.
The shut down price for a business in the short run is assumed to be the price which covers average variable cost. Therefore if price < AVC then the supplier is better off closing down a plant. We can use the concept of the shut down price to derive the competitive firm’s supply curve. The supply curve is the marginal cost curve above the shut down point
Example of the Shut-Down Price – The UK Electricity Market
Powergen announced in October 2002 that it planned to shut-down more than a quarter of its UK power stations, mothballing sufficient capacity to provide electricity for the whole of London. The company said the electricity market was “bust” after a price slump. Powergen will close the power station on the Isle of Grain in Kent and the Killingholme plant in Lincolnshire. UK electricity prices have fallen by almost 40 per cent since 1998 as a result of intense competition and the introduction of new trading arrangements, which have coincided with a decline in industry demand.
Powergen said that it was receiving between £13 and £15 per megawatt hour, compared with a cost of about £18 for gas-fired plant and costs of £40 per MWh for older, inefficient oil-fired plant. The decline in electricity prices has pushed British Energy, the nuclear generator, to the brink of insolvency, forcing the Government to grant a £650 million emergency loan facility.
In industries with a high income elasticity of demand the market is likely to be sensitive to changes in the economic cycle so that firms are likely to see significant changes in profitability at various stages of the business cycle.
The Shut-Down Condition: Price and Variable Cost
In the short run the firm will continue to produce as long as total revenue covers total variable costs or put another way, so long as Price per unit > or equal to Average Variable Cost (AR = AVC). The reason for this is as follows. A business’s fixed costs must be paid regardless of the level of output. If we make an assumption these costs are sunk costs (i.e. they cannot be covered if the firm shuts down) then the loss per unit would be greater if the firm were to shut down, provided variable costs are covered.
Consider the cost and revenue curves facing a business in the short run shown in the diagram below. The market equilibrium price is P1 which means that the equilibrium output for the firm (where MR=MC) is at output Q2. The business is making an economic loss at this price (AC > P1) but the price is high enough for the business to cover all of its variable costs and also make some contribution to its fixed costs. If we assume that most of the fixed costs are lost if the firm shuts down, then the firm can justify continuing to produce in the short run, losses will be greater if they close down.
In the second example in the diagram below, the market price is so low that the firm is not covering its variable costs let alone the fixed costs. Losses can be cut if the firm shuts down some of their productive capacity.
The shut down price for a business in the short run is assumed to be the price which covers average variable cost. Therefore if price < AVC then the supplier is better off closing down a plant. We can use the concept of the shut down price to derive the competitive firm’s supply curve. The supply curve is the marginal cost curve above the shut down point
Example of the Shut-Down Price – The UK Electricity Market
Powergen announced in October 2002 that it planned to shut-down more than a quarter of its UK power stations, mothballing sufficient capacity to provide electricity for the whole of London. The company said the electricity market was “bust” after a price slump. Powergen will close the power station on the Isle of Grain in Kent and the Killingholme plant in Lincolnshire. UK electricity prices have fallen by almost 40 per cent since 1998 as a result of intense competition and the introduction of new trading arrangements, which have coincided with a decline in industry demand.
Powergen said that it was receiving between £13 and £15 per megawatt hour, compared with a cost of about £18 for gas-fired plant and costs of £40 per MWh for older, inefficient oil-fired plant. The decline in electricity prices has pushed British Energy, the nuclear generator, to the brink of insolvency, forcing the Government to grant a £650 million emergency loan facility.
Saturday 27 November 2010
The cigar gave off a pleasant vanilla smell and several people commented on how nice it was. When I thought about it, I realised that I know quite a few people who like the smell of cigars, even if they do not smoke or like the smell of cigarettes.
Then an intriguing and somewhat counter-intuitive idea entered my head: could there be positive externalities from this man smoking his cigar?
We were outside so the passive smoking side of things was minimised to say the least and there was no one there that did’t like the smell. This is a good example of seeing market failure from a different perspective.
Of course, there is also some good evaluation in that the negative externalities are not limited to passive smoking (cost of healthcare for smokers, etc) but is there an argument here for subsidising (or at least reducing the tax rate on) cigars?
Unit 3: Contestable Markets
A Lincolnshire village has defied the big broadband companies and built its own broadband network.
Click here for article.
Click here for article.
Unit 3: Energy Oligopoly & price fixing
The industry regulator Ofgem has announced a fresh investigation into the pricing policies of the oligopolistic electricity and gas market - for consumer lobbying groups the wait has been too long but many analysts point to data that shows that many gas supply businesses for example have been operating at a loss for much of the last decade. And that net profit margins are pretty thin compared to the total fuel bill for household customers.
Click here for more details.
Everyone gets hot under the collar about energy prices but the reality is that gas and electricity is no longer cheap and too little progress has been made in ways to reduce our energy consumption.
Click here for more details.
Everyone gets hot under the collar about energy prices but the reality is that gas and electricity is no longer cheap and too little progress has been made in ways to reduce our energy consumption.
Thursday 25 November 2010
Unit 3: Facebook & Barriers to entry
(Although its not clear how this will impact Apple with their “FaceTime” application).
Click on this link to access full article.
Q) What would be the implications of this patent for other businesses?
Q) What are the advantages to Facebook of getting this patent?
Wednesday 24 November 2010
Unit 2 & 4: Trade off, Unemployment & Inflation
Question “Discuss the view that the Phillips Curve is irrelevant in explaining relationships between unemployment and inflation in the UK”
If you take the 1950s and 60s you could argue there was a trade off between unemployment and inflation.
As AD increased, it caused higher output, this lead to inflation as the economy came close to full employment. However, as output increased unemployment (demand deficient unemployment) fell.
This Keynesian view of the AS curve suggests there can be a trade off between inflation and demand deficient unemployment.
However, this view is criticised by the Monetarist view, which argues increased AD only causes inflation and no increase in Real GDP in the Long term.
Monetarists argue LRAS is inelastic and therefore Phillips Curve looks like this:
Another Criticism of the Phillips curve is that in the UK, we have witnessed falling unemployment and low inflation. During the 1990s and early 2000s supply side improvements enables lower unemployment and lower inflation. This suggests that it is possible to reduce unemployment without causing inflation.
However, you could argue there is still a potential trade off except the phillips curve has shifted to the left, because there is now a better trade off.
Also the fact that both have fallen doesn’t mean we can’t go back to the 1950s and 1960s.
It also depends on the role of Monetary policy. If monetary policy is done well, you can avoid some of the boom and bust economic cycles we experienced before. However, if you allow AD to increase too much there will be a trade off between inflation and unemployment
If you take the 1950s and 60s you could argue there was a trade off between unemployment and inflation.
As AD increased, it caused higher output, this lead to inflation as the economy came close to full employment. However, as output increased unemployment (demand deficient unemployment) fell.
This Keynesian view of the AS curve suggests there can be a trade off between inflation and demand deficient unemployment.
However, this view is criticised by the Monetarist view, which argues increased AD only causes inflation and no increase in Real GDP in the Long term.
Monetarists argue LRAS is inelastic and therefore Phillips Curve looks like this:
However, you could argue there is still a potential trade off except the phillips curve has shifted to the left, because there is now a better trade off.
Also the fact that both have fallen doesn’t mean we can’t go back to the 1950s and 1960s.
It also depends on the role of Monetary policy. If monetary policy is done well, you can avoid some of the boom and bust economic cycles we experienced before. However, if you allow AD to increase too much there will be a trade off between inflation and unemployment
Unit 4: If UK had joined the Euro....
Bigger Boom and Lower Interest Rates.
Between 2003-2005, ECB interest rates were 2% (ECB Rates), UK interest rates were above 4% (UK rates). Many suggested that lower interest rates would have been good (cheaper mortgages e.t.c). But, with hindsight, those years were a period of unsustainable bank lending and an unsustainable asset bubble. If the UK had been in the Euro, there would have been an even bigger boom and bust in house prices. If we had ECB rates, Bank lending would have been even greater, exposing banks to more bad debts. (like Ireland experience).
In other words, ECB interest rates were too low for the UK at that stage in the cycle. In hindsight, the MPC should have had higher interest rates to dampen the housing and asset bubble, not lower.
Response To Recession.
When the economy appeared to be heading towards recession, the Bank of England cut interest rates quickly and sharply. The ECB followed the B of E in cutting interest rates. The ECB were slightly more cautious in cutting rates, I don't think it would have made a huge difference as the Bank of England rate cut struggled to stimulate bank lending because of the nature of the credit and financial crisis.
No Quantitative Easing.
The recession hit the UK more than any other country. This was because our economy was heavily reliant on the banking and financial sector. The credit crisis hit the UK economy more than other Euro members. In response to the unprecedented downturn in the economy, the MPC embarked on an unprecedented round of quantitative easing. (creating £150bn of money). This was necessary because even interest rates of 0.5% weren't helping economy. The quantitative easing led to a depreciation in the value of the pound - a 25% depreciation.
Even with zero interest rates, quantitative easing, fiscal stimulus, bank bailouts and large depreciation the British economy struggled to get out of recession. This indicates how much the economy was affected by the financial crisis and balance sheet nature of recession. If we had less options to stimulate economy and if the asset boom and bust had been bigger, we would have faced a deeper recession.
The depreciation in the exchange rate helped make UK exports more competitive, it also made UK assets like London house prices appear more competitive to foreigners.
Though exports were slow to grow, it did reduce the size of the downturn.
The greater attraction of UK assets (due to depreciation) helped prevent house price falls of 20% becoming more like 30% or 40% like in Spain and Ireland. Though the main reason the UK property collapse was less than in other Euro countries was the fact that in the boom we didn't build many houses (due to planning restrictions). The UK doesn't have a surplus of housing stock driving prices down like in US, Spain and Ireland.
Inflation.
There are people in UK worrying that inflation is slightly above the government's target. But, we are lucky to have positive inflation and are avoiding the debt deflation which gives the likes of Ireland and Greece and unenviable situation.
The great dilemma for Greece and Ireland is that they have to cut their budget deficit, but, they don't have any alternatives for boosting growth. It is this combination of austerity plus lack of economic growth that makes bond investors take fright at prospect for debt to GDP ratio.
UK Debt
If the UK had been in the Euro, there would have been a much greater chance of debt default. I doubt we would be having bond yields of less than 3%.
In 2007, Ireland had public sector debt of only 25% of GDP, the UK had debt of 40% of GDP. In 2009, the UK had one of the largest annual debts.
Firstly, the boom and bust would have been bigger.
Secondly, we would have less potential to boost economic recovery through independent monetary policy.
This would have led to a sharp rise in government borrowing costs and debt to GDP ratio.
Given constraints of being in Euro, bond markets would have placed much greater pressure to cut budget quicker and earlier,
Tuesday 23 November 2010
Unit 1: Mark Schemes
Unit 1 Jun 09
View more documents from mattbentley34.
Unit 1 Jan 10
View more documents from mattbentley34.
Unit 1: Carbon Emmissions Trading
Unit 2 & 4: Why is the UK helping Ireland?
A key argument could be the close inter-relatedness of our economies, a key point touched on in this video,
Evaluation points could be the opportunity cost of doing this, ie what could we do with this money instead? (although, of course, this is only a loan so long term the UK should benefit through interest payments!)
Hugh Pym from the BBC points out that UK exports to Ireland include financial services, food, paper, petrol and gas. And 40% of Northern Ireland exports go south of border. Ireland is the UKs fifth largest export market, above Spain, Italy and China.
Interesting stuff, which you may want to think about in prearation for next terms macro-economics stuff! See the issues facing Ireland in the charts below....
Unit 1: Mistletoe & Cider an example of Joint Supply!
This article in The Daily Mail suggests that the booming cider sales of recent years led to a big increase in demand for apples (derived demand) and the widespread replanting of apple trees. Now that we are reaping the bumper apple harvests we find that we have bumper harvests of mistletoe too...why? Because mistletoe is a parasitic plant that loves to grow on the soft bark of apple trees. You learn a new thing every day!
Q Think about how the demand for Cider would effect the price of misteltoe (ie how would it change mistletoes demand or supply conditions)
Monday 22 November 2010
Wednesday 17 November 2010
Unit 1: Government failure - ethanol subsidies
Excellent example of government failure and the law of unintended consequences from the FT.com .
US ethanol, subsidised as a homegrown alternative to foreign oil, is being exported in record volumes.
The exports stand in contrast to the goals of US biofuels policy, which seeks to reduce dependence on imported fossil fuels in part by offering tax credits to companies that blend ethanol with petrol.
Rob Vierhout of ePure, a European ethanol trade association, said: “The blender’s credit was not set up with the intention to facilitate exports”. Government data last week showed 251m gallons in fuel ethanol exports in the nine months to September 30, more than double the 2009 total, with the US becoming a net exporter this year.
Whoops, not want the govt wanted!
US ethanol, subsidised as a homegrown alternative to foreign oil, is being exported in record volumes.
The exports stand in contrast to the goals of US biofuels policy, which seeks to reduce dependence on imported fossil fuels in part by offering tax credits to companies that blend ethanol with petrol.
Rob Vierhout of ePure, a European ethanol trade association, said: “The blender’s credit was not set up with the intention to facilitate exports”. Government data last week showed 251m gallons in fuel ethanol exports in the nine months to September 30, more than double the 2009 total, with the US becoming a net exporter this year.
Whoops, not want the govt wanted!
Monday 15 November 2010
Unit 1: Agricultural subsidies: Arguments for & against
Click here for article
Q Are the subsidies helping to improve the lives of poor farmers in Greece and Spain, therefore helping improve social welfare, or is it another example of government intervention creating too much supply and causing more market failure.
You decide!!!!
Saturday 13 November 2010
Unit 1: Government Policy and Market Failure.
But is banning sales of Christmas crackers to under-16’s also necessary? Apparently so, according to this article from the Daily Telegraph.
Households up and down the land had better review the Health and Safety implications of their Christmas lunch tables, and decide whether the crackers represent a demerit good that they should avoid. Or is this an example of the Law of Unintended Consequences taking effect?
The Law of Unintended Consequences is a great way to evaluate unit 1 questions, so get reading!
Happy holidays!!! (Georgia, hope you are feeling OK)
Friday 12 November 2010
Unit 1: Market failre and 'Chips'; a de-merit good
Planning permission & chip shops
This failure to secure planning permission shows that prohibition or regulation by the state, can be used to lower the supply of a demerit good. The external costs might include litter, obesity. However, the schools could have countered this by not allowing children to leave the premises, actions which would have lowered demand during lunchtime.
Earlier this year, Jamie Oliver’s campaign for better school food, appeared to run out of steam and government support, but does this issue highlight information failure, and the reluctance of some children to eat a more varied diet.
Some schools have stopped sales of other demerit goods, crisps, colas, lemonades and chocolate citing health reasons, countered by some enterprising pupils who then smuggled packets and cans for resale at break.
Thursday 11 November 2010
Year 12: Eid Homework
Complete the following;
The question on the blog about cocoa.
One question from the 'How markets work' pack (thats 8 multi choice and a data question)
Two questions from the 'Why markets fail' Pack. One merit and one de-merit Q
YOU CHOOSE WHICH QUESTION!
Happy holidays!!
The question on the blog about cocoa.
One question from the 'How markets work' pack (thats 8 multi choice and a data question)
Two questions from the 'Why markets fail' Pack. One merit and one de-merit Q
YOU CHOOSE WHICH QUESTION!
Happy holidays!!
Unit 1: Public Goods & Market Failure
However, some local councils have decided to not use scarce grant or ratepayers’ funds to pay for street lighting, instead the lights will be turned off or dimmed. Given that there is no statutory requirement for the provision of street lights, the policy appears to highlight the economic problem of limited resources and unlimited wants as well as opportunity cost.
Street Lighting in Nottinghamshire Click here for article
Nottinghamshire County Council proposes to switch off the lights between midnight and 5.30 in the morning. External benefits might include lower energy use, protection of nocturnal wildlife and their habitats and the creation of a clearer view of the galaxies, but these are offset by possible increases in external costs (accidents or crime). Placing a monetary value on such external costs and benefits of the proposed policy will depend on the assumptions used by the Council’s economists.
The current proposals to reduce state spending may hint at a rethink of what constitutes merit goods and public goods, and whether a partial market failure can be tolerated.
Wednesday 10 November 2010
Unit 1: Agriculture, buffer stock and cocoa
Will a collapse in global cocoa production bring an end to chocolate as an affordable treat and giver of blood sugar? This article from the Independent describes the issues faced by the cocoa producers.
Price volatility in commodity markets is an important part of the Unit 1/market failure syyllabus and something we will be covering inb detail after the Eid break. You guys must understand how price intervention strategies such as maximum prices / buffer stock schemes work in the real world and the problems they can cause.
Below is one of the things I would like you to complete over the holiday. This will be an extremely useful introduction to the issues faced in agricultural markets and the government intervention that can actually make things worse.
Yours task will be to read, research and complete the questions from the worksheet. You will need to refer to your textbook and any other noted you can find on the topic!
Price volatility in commodity markets is an important part of the Unit 1/market failure syyllabus and something we will be covering inb detail after the Eid break. You guys must understand how price intervention strategies such as maximum prices / buffer stock schemes work in the real world and the problems they can cause.
Below is one of the things I would like you to complete over the holiday. This will be an extremely useful introduction to the issues faced in agricultural markets and the government intervention that can actually make things worse.
Yours task will be to read, research and complete the questions from the worksheet. You will need to refer to your textbook and any other noted you can find on the topic!
Unit 3: Cartels and Collusion, it's everywhere!
The EU has boosted its revenue for the year by fining 11 airlines almost 800m euros for fixing cargo prices between 1999 and 2006. AirFrance-KLM are hit the hardest, at 340m, followed by BA at 104m - but Lufthansa, who blew the whistle on the other airlines involved, are not fined at all.
This gives yet another example of game theory, and the mind-games that colluding companies must engage in as they try to second-guess which fellow cartel member is most likely to alert the authorities in order to escape a fine, and exactly when that will happen.
The maximum possible fine, of 10% of a companies world-wide revenues for the year, sounds as it is enough to deter businesses from entering into cartels. Yet a look through a number of examples at the botton of this piece.
It makes me wonder if the potential benefits to the colluding firm, over the years that they manage to get away with it, are greater than the fine that they risk when, or if, they are found out. Do they see the potential fine as a legitimate expense of running the business, which is unfortunate but worth the risk?
The BBC report that “BA said it had already made a £350m provision for any possible fines over the cargo price fixing. A BA spokesman said the airline’s fine fell “within the provision made by the company in its 2006/7 report and accounts"." - almost as if it was depreciation.
Q) Surely this suggests the fines should be higher?
Check out some of the links below. I hope that you are as scandalised as me, by the way that the firm that betrays other cartel members to the authorities gets away without a fine!
BA & Virgin Price fixing
Auction Houses and Price Fixing
Billionnaire in Cardboard price fixing cartel
Firm tries to fix prices by text!
Fine for cigarette price fixing
Probe into chocolate price fixing
LCD manufacturers screened for price fixing.
Tuesday 9 November 2010
Unit 1: Free market Vs Mixed Economy
Venezuelan government intervention
On the continuum of the mixed economy, the government continues to move the Venezuelan economy towards the planned side of things. And they are not averse to letting the population know that it is for the better either!
The picture shows the price for a certain type of oil in Mercado Bicentenario, the new name for a chain of private shops that have been nationalised by the government.
There is the “fair” price of 4.73 Bfs and then the capitalist price of 7 Bfs along with the saving of 32% that Venezuelan citizens can thank their government for!
On the continuum of the mixed economy, the government continues to move the Venezuelan economy towards the planned side of things. And they are not averse to letting the population know that it is for the better either!
The picture shows the price for a certain type of oil in Mercado Bicentenario, the new name for a chain of private shops that have been nationalised by the government.
There is the “fair” price of 4.73 Bfs and then the capitalist price of 7 Bfs along with the saving of 32% that Venezuelan citizens can thank their government for!
Questions:
How can the givernment charge a lower price than the market price?
How will this benefit society (if at all)?
Unit 3: The differing roles of the CC & OFT
Useful definitions of the main competition authorities in the UK.....
The CC is an independent public body which conducts in-depth inquiries into mergers, markets and the regulation of the major regulated industries. All of the CC’s inquiries are undertaken following a reference made by the Office of Fair Trading (OFT).
The Office of Fair Trading has statutory powers within UK law. Its main aims are to ensure choice and competition within markets, investigate allegations of restrictive practices and abuse of dominant market positions and finally to maintain standards and codes of practice within industries.
If firms are found guilty of the above, they can be fined up to 10% of yearly revenue. Recent examples have included ‘Warranties on electrical goods’ and the price fixing of toys.
The CC is an independent public body which conducts in-depth inquiries into mergers, markets and the regulation of the major regulated industries. All of the CC’s inquiries are undertaken following a reference made by the Office of Fair Trading (OFT).
The Office of Fair Trading has statutory powers within UK law. Its main aims are to ensure choice and competition within markets, investigate allegations of restrictive practices and abuse of dominant market positions and finally to maintain standards and codes of practice within industries.
If firms are found guilty of the above, they can be fined up to 10% of yearly revenue. Recent examples have included ‘Warranties on electrical goods’ and the price fixing of toys.
Unit 1: Revision Videos
Lots of clips explaining the key topics for Unit 1, enjoy.....
Production Possibility Curves
Supply and Demand
Supply and Demand Shifts
Consumer and Producer Surplus
Elasticity and Total Revenue
Price Elasticity of Demand (PeD)
Income Elasticity of Demand (YeD)
Cross Elasticity of Demand (XeD)
Price Elasticity of Supply (PeS)
Production Possibility Curves
Supply and Demand
Supply and Demand Shifts
Consumer and Producer Surplus
Elasticity and Total Revenue
Price Elasticity of Demand (PeD)
Income Elasticity of Demand (YeD)
Cross Elasticity of Demand (XeD)
Price Elasticity of Supply (PeS)
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