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.