Aggregate Demand - Consumer Expenditure (Macroeconomics)

As stated in the previous post, consumer expenditure makes up part of aggregate demand. It is also referred to as consumption. There are many factors that affect the size of consumer expenditure in an economy:

• Disposable income. This makes up the largest part of consumption. If people's real disposable income is high then you'd likely see high consumption, if real disposable income is low then you'd expect to see low consumption. 
• Wealth. The wealthier people are, in the form of things such as their home and cars, the more likely people are to buy and consume goods - thus increasing consumption.
• Confidence. The confidence of consumers also plays a big part in consumption. If consumers are confident with spending and have high expectations for the future - maybe they feel safe in their job, then they are likely to purchase  more, boosting consumption. If consumers aren't confident then they are more likely to save their money than spend and consumption will fall.
• Interest rates. Generally, a lower interest rate will mean more consumption. This is because it is cheaper for consumers to take out loans to pay for expensive items such as houses or cars and also because they won't be earning much money on savings so it is beneficial to spend. 
• Inflation. High inflation, means higher prices and thus lower consumption. Vice versa as well, of course.

Obviously, there are other factors that will have a minor effect on consumption other than these ive stated. Next up will be investment, stay tuned. Thanks!

Aggregate Demand (Macroeconomics)

Well, the first post on a macroeconomic topic. I'll start with the very basics - aggregate demand.

Aggregate demand, often shortened to just AD, is the total demand for goods and services in an economy at a given price level. No longer are we looking at just individual markets, but the demand in the economy as a whole. When we say price level, we are referring to the average price of products produced in the economy. Price levels go up and we have inflation, which will be explained in a later post.

Aggregate demand is made up of 5 components. These 5 components are consumer expenditure (C), investment (I), government spending (G) and net exports [exports (X) - imports (M)]. Therefore, aggregate demand equals C + I + G + (X - M). Each component will be detailed individually in later posts, but i'll give a brief description of each here.

• Consumer expenditure - This is often called consumption, it is spending by households on products and generally makes up the biggest proportion of aggregate demand. 
• Investment - This is spending on capital goods, such as machinery and delivery vehicles. It's the most volatile component. 
• Government spending - This is government injecting money into economy through spending on things such as the NHS. 
• Exports - Simply put, the value of goods we sell abroad.
• Imports - The opposite of above, the value of goods we buy from abroad.

So, each of these components make up the overall value of aggregate demand. The next post will look at consumer expenditure. Thanks. 

Government Intervention - Tradable Pollution Permits (Microeconomics)

Tradable pollution permits are another option the government has to correct certain types of market failure. A pollution permit allows the owner to pollute up to a specific amount of pollution. These permits can also be traded, as the name gives away. The total number of permits available is strictly controlled by the government, so that they can limit the maximum pollution level to whatever they want it to be. Companies have to buy they permits in order to pollute, therefore the incentive is for companies to invest in greener technology to reduce pollution and overall reduce their costs by cutting out the need to buy permits. Any permits that are unused by companies can be sold on to other companies to generate some money. Companies exceeding their limit of pollution will face legal action and prosecution.

The theory is that a fixed supply of pollution permits will be allocated. Then, if demand for these permits rise because companies need to pollute more then the price will rise. This price rise will increase the incentive for companies to invest in green technology so their costs are lower.

Tradable pollution permits do come with their drawbacks, as with all methods of government intervention. The first problem is calculation what price to put the permits at initially. If the price is too high then companies won't be able to afford them and production will fall. If the price is too low then it will have no effect on the market failure of too much pollution. Another problem will be the additional cost to the government of policing and enforcing the scheme, it will be a costly affair and thus may not be the most effective method of fixing market failure.

That's the lot, next post may be delayed as i'm busy with exams. Thanks.

Government Intervention - Subsidies (Microeconomics)

Subsidies work in sort of the opposite way to taxation. They are direct payments from the government to firms and businesses, or in some cases consumers. The aim of a subsidy is to reduce the overall cost of producing the good/service so that more can be made and sold at a cheaper price. These subsidies are normally given to produces of goods with positive externalities, so that the market failure can be fixed by increasing the production and consumption.

Lets have some examples of subsidies:

• The government may give subsidise local bus companies so they can run bus routes in rural areas without making a loss. This fixes the market failure of under-production of public transport. This is an example of a subsidy to the producers.
• The government also give subsidies to the over 60's so they can pay for fuel during the Winter. This means they can now afford to pay for the fuel to keep them warm, fixing the under-consumption there.

In both of these cases, if they were left to the free-market there would be under-consumption. In a way, a subsidy works in the opposite way to an indirect tax. It increases the supply of the good so that the price decreases and thus the quantity demanded increases.

That's about all for basic subsidies to correct market failure. Thanks.

Government Intervention - Taxation (Microeconomics)

Another way the government can intervene to correct market failure is through taxation. Basically, the government will try to tax goods with lots of negative externalities to attempt to discourage consumers from buying them, thus lowering consumption and somewhat correcting the market failure.

The government has two forms of taxation at its disposal, these being direct and indirect.

1. Direct Taxes - These are taxes off the incomes of individuals and firms. So examples of these would be income tax and corporation tax. Direct taxes cannot be avoided.
2. Indirect Taxes - These are taxes charged locally on goods and services. Examples would be VAT (Value added tax) and council tax (Tax on your house).

The aim of the tax is to try to reduce the consumption of the good by raising the price. So, the tax shifts the supply curve leftwards, moving the equilibrium point to a higher price and lower quantity. The tax that is imposed should equal the value of the negative externality. The price rises and the price then takes into account the full cost of the negative externality, this is known as the polluter pays principle. Basically, the polluter is now paying for all the pollution caused. 

There are problems with taxation however. Firstly, the amount to tax is difficult to workout. As it is hard to estimate the exact cost of a negative externality it means it is difficult to tax the absolute correct amount, most of the time its either too much or too little. Price elasticity of demand comes into play too. A rise in price caused by the taxation may not cause a big enough fall in demand because the goods PED may be inelastic. This is another problem. 

That's all for this topic, next is 'Government Intervention - Subsidies'. Stay tuned. :-)

Government Intervention - Regulation (Microeconomics)

Government intervention is when the government intervenes in the market to attempt to correct the market failure. This post will be on a specific type of government intervention - regulation.

Regulation comes in three different forms, these being laws/legislation, price controls and control of monopoly powers.

Laws and legislation is pretty self explanatory, passing laws or introducing legislation as an attempt to fix the market failure. An example of this would be passing the law meaning you have to be 18 to purchase alcohol. Alcohol is a good with negative externalities, thus is causing market failure. So passing the law means that the consumption of alcohol is limited somewhat and the market failure should be lessened.

Price controls is also a fairly self explanatory form of government regulation. It involves setting a minimum or maximum price for the good to affect the consumption. An example is the minimum wage, that is classed as a minimum price. This reduces the consumption of low paid workers, and corrects that market failure to a certain extent.

Finally, control of monopoly powers. This is the government intervening in a market where a monopoly exist to try and stop consumers being ripped off so to speak. In a monopoly market, one firm/business/individual has a large majority of that market, meaning they are pretty much in control and can set prices to whatever level they like whilst offering a poor service and still receive customers. Controlling these monopoly powers means the government will get involved to limit how much power the monopoly business has to protect the consumer, thus correcting the market failure.

That's about it, but ill list a few more examples of goods/services that have regulations imposed on them.

• Tobacco - Required to be 18 to buy it, shops need a license to sell it.
• Education - Law makes it compulsory. Not relevant anymore, but there used to be price controls with the maximum tuition fees.
• Driving - Law to wear a seatbelt.

Thanks for reading, up next is government intervention - Taxation!

Public Goods (Microeconomics)

A public good is a good that, as the name suggests, is consumed by the public as a whole therefore it is almost impossible to charge people for using them. Because of this, they have to be provided by the government using tax revenue rather than being privately supplied. If left to the free-market, most public goods would not be supplied, despite the benefits they give to people who consume them. An example of a public good would be street lights.

For a good to be classed as a public good it must fit into two categories, these being:

• Non excludable - This means that individuals cannot be excluded from consuming the good. Using the street lights example, it's virtually impossible to stop people consuming them once they have been provided, thus they can be classed as non-excludable.
• Non rival - This means that consumption by one individual does not affect the consumption of others. With street lights, if one person is using the light it isnt stopping others using it as well, thus they are non rival as well. 

If a good has both of these characteristics then it can be seen as a pure public good. If a good fits into one category, but not the other then it is said to be a quasi-public good. So, if a good is non excludable, but not non rival it would be a quasi public good. An example could be a beach. There's no way of stopping someone coming and sitting on the beach, therefore it is non excludable. However, if hundreds of people swarm to the beach and leave litter the consumption of that good is affecting other peoples consumption, so the good is rival. A beach posses's only one of the characteristics, thus is a quasi-public good.

Tied in with public goods are free riders. This is the term given to people who directly benefit from the consumption of a public good, yet do no contribute to its provision. So, these are normally holiday-makers from abroad who don't pay taxes in the UK, and thus aren't paying for street lights, beaches etc.

Public goods is a very subjective theory, some people may see a good as both non excludable and non rival whereas another person may see it as only non excludable, so use it cautiously. 

Thanks for reading!