Causes of Long-Run Economic Growth (Macroeconomics)

I'm fully aware that there is already about a post about economic growth, however i want to use this one to focus in specifically on economic growth in the long run. Long run economic growth isn't so dependent on aggregate demand changes, but a lot more dependent on changes to the long run aggregate supply curve. A shift the the right of the LRAS curve is a sign of long run economic growth.

Increases in LRAS on a diagram resemble an increase in the economies capacity to supply goods and services, and for this increase to happen there needs to be there needs to be either an increase in the quantity of the factors of production or an increase in the quality of them. The most important factor of production is undoubtedly the labor force, so therefore these are what i'll focus on.

There are few ways to increase the quantity of the labor force. First, increasing the size of the population. This is difficult to achieve artificially as it is influenced a lot by social and cultural factors. The second way is to increase the labor force participation rate. This is a measure of the proportion of the population able to work and either in employment or actively seeking it. Changes to the taxation and benefit system can influence this by making it more appealing for people to actually start seeking work and get into employment. The final way is to increase the flow of migrant workers, better known as immigration. Joining groups such as the EU allows free-er movement of labor among countries which can increase the population. However, immigration may only be temporary and therefore there may be no long-term increase in the productive capacity.  

It is also possible to improve the quality of the labor force. The first method is through education and training. It improves each workers productive potential allowing each worker to make more due to the better knowledge and skills gained through the education. As economic growth occurs, economies tend to move away from primary and secondary industries and onto tertiary industries. It is important to equip the population with the skills to take part in the tertiary sector so the economy can complete the transition away from primary and secondary sector industries.

There we go.. to summarize: The quantity or the quality of the factors of production are required to increase for the economies productive capacity to increase which then causes economic growth in the long run. Thanks for reading.

Absolute and Comparative Advantage (Macroeconomics)

Today we come to the theories of comparative advantage and absolute advantage. Lets start with 'text-book' definitions:

• Absolute advantage - A country is said to have an absolute advantage over another country when it can produce a good at a lower cost (using less resources).
• Comparative advantage - A country is said to have a comparative advantage over another country with regard to a product which it can produce at a lower opportunity cost expressed in terms of alternative goods forgone. 

An example now. Take two countries, country A and B and lets look at their production of apples and televisions (crazy examples, but hey ho!). When both countries use 50% of their resources producing each good, country A can produce 5 apples and 15 televisions and Country B can produce 3 apples and 12 televisions. The opportunity cost of country A producing bananas in terms of televisions is 3. For every banana they are giving up the chance to produced 3 televisions. For Country B the opportunity cost is 4. The opportunity cost of country A producing televisions in terms of bananas  is 1/3 and the opportunity cost for country B is 1/4. 

Looking at these figures, Country A has the lowest opportunity cost for producing bananas, therefore they have the comparative advantage in producing bananas, leaving country B to produce television.  

Simple eh? Nope, it's a difficult concept to get your head around, but that is the basics. Thanks for reading and sorry about the delay. 

Exchange Rates (Macroeconomics)

Exchange rates are something that affects all of us, be it directly or indirectly. Exchange rates are basically the value of a currency compared to that of another currency. They fluctuate a lot, which leads to price changes.

I'll be using the Sterling (£) in my examples throughout. Firstly, let's look at what determines the value of a currency. The value of the £ is determined by the free market, so therefore the powers of demand and supply dictate the value of the £. The majority of the demand for the £ will come from trading partners demanding the U.K's exports and therefore needing the £ to buy them. The majority of the supply of the £ comes from us demanding foreign imports, and needing to sell the £ to get foreign currency to buy the imports.

An increase in the demand for the £ will increase the value compared to other currencies. This is often referred to as a "strengthening of the £" or an "appreciation". Obviously, a fall in demand for the £ will have the opposite effect. An increase in the supply of the £ will decrease the value compared to other currencies. This is often known as a "weakening of the £" or a "depreciation". A decrease in supply will have the opposite effect, raising the value.

Another key factor that influences the demand and supply of the £ is interest rates. If interest rates in the U.K. are high, then we will see a high demand for the £ as people will make a better return off of it in U.K. banks. This will increase the value of the currency. A decrease in interest rates will see money flow out of the U.K. in search of a better return on their investment and therefore demand and the value of the £ will fall.

There are two different exchange rate mechanisms. The first one is the floating mechanism. This is when the value of the currency is determined by the free market - the powers of demand and supply. The advantage of this mechanism is that theoretically the exchange rate should automatically adjust which will eliminate any imbalances withing the Balance of Payments. The other is the fixed mechanism. This is when the exchange rate is fixed and determined by the government or central bank of a country. The bonus to this is that it gives more stability to the value of the currency but runs the risk of goods becoming to un-competitive if it's too high or the market can be flooded if it's too low.

That's the lot for exchange rates, thanks. Also, any requests for what to come next? Post it in comments and ill see what i can do. Thanks for reading, follow the blog if you enjoy!

Monetary Policy (Macroeconomics)

Monetary policy, liked with fiscal policy is another tool the government can use to control the economy. Monetary policy involves the use of exchange rates, interest rates and the money supply to manage the economy.

Firstly, interest rates. These are set by the MPC and are mainly used in the U.K to try and achieve the inflation target of 2.0%. The theory is that a reduction in interest rates will give consumers more disposable income through lower loan repayments and this will boost the consumption factor of Aggregate Demand. Also, it should make businesses take out loans more willingly as borrowing money becomes cheaper and thus the investment factor of Aggregate Demand will rise also. Overall, a fall in in interest rates should create a rise in the real GDP of the country. It works the opposite way with a rise in interest rates, this should reduce the real GDP of the country as well as control inflation.

Interest rate changes also effect the Balance of Payments. Interest rates in the U.K. rising will cause a flow of 'hot money' into the economy as people will benefit from the higher returns of putting their money in the U.K. This flow will increase the demand for the pound, so the value will appreciate. The knock on effect of an appreciation in the value of the pound is that our exports become more expensive and it becomes cheaper for us to import goods. This will worsen the Balance of Payments. Obviously, the opposite will occur with a fall in interest rates.

Exchange rates was another tool under the title of 'Monetary Policy'. By managing the exchange rate, the Bank of England can buy and sell pounds to influence the exchange rate. This will control the competitiveness of U.K. exports and therefore help control the Balance of Payments. However, the government doesn't generally take this approach as they let the free market determine the value of the pound. One instance where this is sometimes done is in China.

The final tool under the 'Monetary Policy' heading was the money supply. This is where the government can increase or decrease the amount of money in the economy. The idea behind increasing the money supply is that it should stimulate Aggregate Demand as people have more money to spend and businesses have more money to invest. However, this method is very inflationary and is widely avoided. Decreasing the money supply will have the opposite effect to the above.

That's it, the three parts involved in the 'Monetary Policy' tool the government has at its disposal. Thanks for reading.

Fiscal Policy (Macroeconomics)

Right, this post will discuss the basics of fiscal policy. Basically, fiscal policies are any policies that relate to government spending and government taxation - the government uses these two tools to manage the economy and redistribute resources.

The budget plays a big part in fiscal policies. Depending on what fiscal policies have been employed by the government depend on the position of the budget. If the government spends more than it receives through tax receipts then it will have a budget deficit. If it receives more than it spends then there will be a budget surplus.Two other terms that come about when talking about the budget are the following:

• Public Sector Net Cash Requirement (or PSBR) - This is an account of how much the government has to borrow in order to balance the budget.
• Public Sector Debt Repayment (or PSDR) - This is when the budget is in surplus and the government can pay back some loans.

When using taxation as a fiscal policy, the government can change the rates of direct taxation or indirect taxation. Direct is tax paid straight from the income, wealth or profit of individuals or firms (income tax or corporation tax). Indirect is tax paid on goods and services (VAT or council tax).

The effects of fiscal policies are as follows, generally:

• A rise in taxes / a cut in government spending leads to a fall in aggregate demand.
• A cut in taxes / a rise in government spending leads to a rise in aggregate demand.

Now for the rules. "The Golden Rule" is a rule relating to the Labour parties thoughts that fiscal policy should be stable and consistent. This rule states that tax receipts should cover all government spending and that borrowing by the government should only be done for investment purposes. This rule applies over an economic cycle, not on an annual basis.

Another rule is the "Sustainable Rule". This states that government debt should be kept at a stale level. This means that debt shouldn't rise above 40% of GDP, this target is to be met every year.

Fiscal policy basics complete. Thanks. 

Unemployment (Macroeconomics)

So, unemployment - another well known phrase.

The definition of unemployment is the number of people in the workforce who are willing and able to work and actively seeking employment, but are not currently employed. It is measured in two ways: The Claimant Count and The Labour Force Survey.

The Claimant Count measures the number of people that are in receipt of unemployment related benefit. It's the cheapest way for the Government to measure unemployment, but not the most accurate method. The measure doesn't include anyone under 18 or anyone over 60, as well as many other social groups.

The Labour Force Survey is a survey of 60,000 people taken every 3 months. You are classified as unemployed if you are out of work, of working age, available to work in the next two weeks and in search of paid employment. This is more accurate than the Claimant Count and allows for European comparison as it's the method used in the rest of the continent.

The main types of unemployment are as follows:

• Structural/Occupational - Caused by changes in an industry.
• Frictional - Caused by people leaving their job ready to start a new one.
• Seasonal - Caused by the seasonal nature of some jobs.
• Cyclical - Unemployment caused by the economy, bust periods mainly in which there is low consumer demand.
• Regional/Geographical - Job vacancies in different locations to the people actually seeking jobs.

There are many consequences of unemployment. Firstly, tax receipts for the government fall, meaning they get less income and have less available to spend on public goods. Also, unemployment leads to a fall in demand levels in the economy and because of this businesses suffer a fall in revenue and profit. The Government, during periods of unemployment, has to spend more money on welfare benefits - leaving even less money to be spent in the economy. Finally, it can lead to an overall fall in peoples living standards. 

Unemployment, in a nut shell. Thanks.

Inflation (Macroeconomics)

Inflation is a term that is thrown around a lot, so therefore it's a well known term. However, i'll still write this post to add some details and other information.

Inflation is defined as a rise in the general level of prices over a period of time. It is measured using The Harmonized Index of Consumer Prices (HICP). It measures the average weighted increase in the prices of a typical basket of goods. Inflation was previously measured using the Retail Price Index (RPI).

Inflation can be caused by either demand-pull or cost-push factors. Demand-pull inflation occurs when there has been an increase in the level of demand in an economy - basically there are too many people chasing too few goods. This is illustrated by a rightward shift of the AD curve on an aggregate demand/supply graph.

The other type of inflation, cost-push inflation, is caused by firms raising their prices because of increased wage costs, cost of raw materials or components. Basically, anything that makes production more expensive and causes the firms to raise prices. This type of inflation may be down to imported inflation, which is when we import from abroad a good that's price has risen because of inflation in the country it came from.

To summarize: Inflation is when prices of goods rise over time, caused by either demand-pull or cost-push factors. That is all, in brief.

Thanks for reading.

The Trade Cycle (Macroeconomics)

In the economy, there are times in which people spend more and manufacturers produce more. There are also periods in which the opposite occurs.. telling us that the amount of economic activity fluctuates over time. Economic activity refers to the level of spending, production and employment in the economy at any given time. More economic activity normally means increased economic growth.

Economic activity is measured by GDP, which stands for Gross Domestic Product - the value of all goods and services produced within the economy in a given time period. The trade cycle describes the fluctuation in economic activity over time.

Here we have a diagram that maps out the fluctuation in economic activity. At the peak of the trade cycle there is high levels of demand and investment, pay increases, profits are high, increased house prices and strong inflationary pressures. 

In the recession period there is negative growth, meaning GDP is falling.. for two successful quarters (6 months). In this time there is normally falling demand, low investment, rising unemployment and a fall in profits and confidence. 

The slump is when the economy has hit the bottom of the trade cycle.. The only way is up after that (hopefully!). Here we have high unemployment, very low levels of demand and investment and low inflation. 

Finally, the recovery period. This is when the economy starts growing again - GDP rises again. We'd expect a rise in incomes, output and employment here. Also, there should be increases in demand and investment as the economy starts to grow again. 

One of the government macroeconomic goals is to achieve stable economic growth - meaning these fluctuations aren't desirable. Therefore the government takes measures to try and avoid the worst effects of the trade cycle - these are called counter-cyclical policies. They are: 

• Changes in the tax levels.
• Changes in public spending.
• Interest rate changes. 

That is the lowdown on the trade cycle, hope it helps. Thanks for reading. 

Economic Growth (Macroeconomics)

Economic growth is when an economies Real GDP increases, so a sustained increase in real output and income in a period of time. It can be shown by an outward shift on a PPF curve or a rightward shift of AD on an AD/AS diagram, providing there's enough spare capacity in the economy.

Economic growth is caused by anything that increases AD, providing there is enough spare capacity available. What also causes it is increases in the efficiency in using factors of production. What can cause this is improvement in education and training, improving labour mobility, increasing competition and obtaining more factors of production.

The benefits of economic growth include:

• Increased output, employment and income.
• Improved standard of living.
• Improved health, education and public services.

However, there also costs of economic growth. These are:

• Degrading of the environment by using up resources and creating waste.
• Increased stress and a faster pace of life.
• Increased inequality, difference between rich and poor.

That's the basics of economic growth, you can come to your own conclusion about whether it is desirable in large quantities etc. Thanks.

The Circular Flow of Income (Macroeconomics)

The circular flow of income is basically exactly what it says it is, it shows the flow of income around the economy. It is best shown visually using this diagram:

This diagram shows the circular flow of income around the economy, as well as the flow of goods and factors of production. We can see "Rent, wages and profit" travelling from the firms to households. These are all payments for the factors of production you can see flowing in the opposite direction, from households to firms, next to the arrow. "Payment for goods and services" is flowing from households to firms and as you can see on the arrow next to that, goods and services are travelling in the opposite direction. So from this we can see that money flows around the economy in a circular motion, from firms to households and back to the firms again.

However, this would assume that no more money ever enters or leaves the economy, which we know is almost always untrue. So therefore, we can add a few more things to the diagram. Firstly injections into the economy. Injections means money being put into the economy from an external source. The three main types of injection and government spending, exports and investment. All three of these add additional money into the circular flow of income. Secondly leakages from the economy. This means money that exits the economy for one reason or another. The three main types of leakages are taxation, imports and savings. All these three factors reduce the amount of money in the circular flow of income.

That's it for the basics on the circular flow of income. Thanks for reading, sorry about the delay.

The Multiplier (Macroeconomics)

The Multiplier is a concept developed by John Maynard Keynes. He was a famous economist born in 1883, he passed away in 1946. His concept said that "any increase in injections into the economy (investment, government expenditure or exports) would lead to a proportionally bigger increase in National Income." Basically, this translates to any new money being pumped into the economy will have a larger effect on GDP than the initial injection.

Why is this? Well, because one persons spending is another persons income, and that income will increase their purchasing power and hence their spending.

Lets try an example. Say i had £100 in my pocket. I gave all that money to my friend for looking after my dog for the day. Then, that person puts £25 into savings and spends the remaining £75 on a new TV from a guy they met. This guy then saves £25 and uses the remaining £50 to pay a neighbor to wash his car. This cycle could go on and on, but lets leave it there and say the neighbor puts all £50 into savings. The initial £100 has now exited the economy. However, on its way through the economy it has had a larger effect on GDP. The £100 turned into (100+75+50) £225 worth of spending in the economy.. and thus shows that the multiplier is a true theory.

The multiplier has a few equations related to it:

• The Multiplier = 1 ÷ MPW
• Change in GDP = Initial injection x (1 ÷ MPW)

MPW stands for marginal propensity to withdraw. This is the proportion of any extra income that we save, spend on imports or is taxed. 

That's the theory behind the multiplier effect, briefly put. Thanks for reading. 

Aggregate Demand & Supply (Macroeconomics)

A classic AD/AS diagram has two axis. On the y axis (vertical one) we have price levels. Reading of this axis we will be able to see if the price levels in the economy have increased or decreased, thus seeing if there's been inflation or deflation in the economy. On the x axis (horizontal one) we have real GDP. The real part just means the figure has been adjusted slightly so it's in line with inflation. From the axis we will be able to read off the GDP of the economy so we can determine whether the economy has grown or shrunk. Also, we can determine from this axis whether unemployment has risen or fallen.

When we bring both aggregate demand and aggregate supply together and model them on the same diagram the two curves cross. This point is know as the macroeconomic equilibrium. This means both aggregate demand and aggregate supply are equal. 3 of the Governments's main objectives are to achieve full employment, low and stable inflation and to achieve steady economic growth. All of these can be viewed on an AD/AS diagram. Here is a standard AD/AS diagram:

As you can see, the AD curve hits the LRAS curve at the point where the LRAS curve begins to become vertical. This means that full employment has been achieved, or thereabouts. If AD was to shift to the left, it would mean unemployment has increased and the government would have to attempt to stimulate aggregate demand again to increase employment. It would do this by increasing any of the factors... (AD = C+I+G+(X-M)).

The government set the Bank of England the objective of stable prices (a target of 2% inflation). For this to be achieved, aggregate demand must not exceed the point of full employment on the diagram. If this would happen, you can see that price levels would increase dramatically and price levels rising is inflation.

To achieve economic growth, the AD curve would need to shift to the right - meaning Real GDP will have increased. To achieve this growth without inflation, the LRAS curve would need to shift to the right as well as the AD curve if the economy was operating at full employment. This would create some extra capacity for the economy to expand into.

There you have the three government objectives displayed and explained on a diagram. That's it for AD/AS diagrams.. Refer back to the individual posts about aggregate demand or aggregate supply if you're confused. Next up will be a short introduction to the multiplier effect. Thanks.

Aggregate Supply (Macroeconomics)

So, what is aggregate supply?
Well, aggregate supply is the total output of goods and services that producers in an economy are willing and able to supply at different price levels in a given time period. Aggregate supply can be modeled on a diagram in two ways: the long run and the short run.

In this diagram we have a long run aggregate supply curve, sometimes shortened to just 'LRAS'. We can see that initially supply increases as the price level increases as businesses stand to make more profit. The curve then hits at vertical point. This point is know as full employment. What this means is that all factors of production are fully employed so there can be no more growing. So, after this point the only change that occurs is the increase in price levels. The point of full employment is similar to operating on the edge of the PPC which was described in a previous post. The next post will go into further detail about the long run diagrams. 

Another way aggregate supply can be modeled is in the short run. 

Here we have aggregate supply in the short run, sometimes referred to as just 'AS'. In this the curve is simply sloping upwards as factors of production ca easily be increased or improved in the short run. The AS may increase (shift to the right on the diagram) if there are falls in production costs or a fall in wages. It may decrease (shift to the left on the diagram) if production costs increase or something like the price of oil increase. 

Going back to the long run aggregate supply curve now. It has the potential to shift if aggregate supply changes. 

The causes of changes in the LRAS curve are:

• A fall in interest rates. This will encourage businesses to invest therefore allowing them to expand and increase supply. This will shift LRAS to LRAS 1 on the diagram. If interest rates rose the opposite would happen and we could end up at curve LRAS 2 on the diagram.
• Unemployment related benefits could be reduced. This would encourage more to try and get back into work, thus giving more potential labour for firms. This will increase LRAS to LRAS 1. The opposite would happen if unemployment related benefits were increased.
• Education and training will improve the productivity of the workforce.. pushing LRAS out to LRAS 1. If funding for education and training was cut then LRAS may fall to curve LRAS 2.

That's pretty much it for a brief overview of aggregate supply. In the next post i'll be looking at aggregate supply and aggregate demand together and how these can be modeled on one diagram. Thanks for reading!

Aggregate Demand - Net Exports (Macroeconomics)

Right, the last component of aggregate demand: net exports. Net exports is the result of subtracting the value of imports from the value of exports. Imports is the value of goods bought from abroad by a country, exports is the value of goods sold abroad.

Both exports and imports are influenced by the same things, so therefore they can be grouped together into net exports. These are the influencing factors:

• Disposable income abroad. This refers to how much money people in other countries have available to spend. Therefore, if people have more money then they are likely to purchase more goods - potentially ones from our country, thus exports will rise and the value of net exports will increase. If disposable income abroad is low then exports will fall and the value of net exports will fall. 
• Disposable income at home. This refers to how much money people at home have available to spend on luxuries. The more money people have at home, the likelier they are to spend - which can result in a rise in imports. Rising imports will have a negative effect on net exports on the overall aggregate demand. Vice versa.
• Protectionism. Protectionism will be explained in depth in a later post, but i'll briefly mention it here as it's relevant. This is measures taken by a government to restrict trade. Normally these limit imports, so lots of protectionism at home may have a positive impact on net exports as imports will fall. However, lots of protectionism in countries abroad may limit exports and thus net exports will fall. 
• Exchange rates. These play a large part in the value of net exports. A fall in a countries exchange rate will reduce the price of exports and raise the price of imports, thus exports should rise and imports fall - resulting in an increase in net exports. A rise in a countries exchange rate will raise the price of exports and make imports cheaper, therefore making exports fall and imports rise. The overall effect will be a fall in net exports. 

These are the main influencing factors on net exports. And with that comes the end of the posts about the components of aggregate demand. Next up i'll move on to aggregate supply. Thanks. :-)

Aggregate Demand - Government Spending (Macroeconomics)

Government spending, another component that makes up aggregate demand. It is often referred to as just (g). As with the other components of aggregate demand, there are a lot of factors which influence it, these factors will be discussed in this blog post.

So, the influencing factors are:

• The type of government. This is key to how much government spending there is. If the government is a 'high tax, high spend' government, such as Labour in the UK then we can expect government spending to be generally quite high. If the government is the opposite and doesn't interfere with the market as much we can expect government spending to be lower.
• Time of year/Time in power. Governments seem to spend a lot more in the run up to elections as an attempt to please the public and boost the chances of re-election. So, around these times government spending may be higher, and lower in times away from elections.
• War or threat of war. The government will look to spend if the country is in war or is threatened by war. Defence spending will rise in an attempt to prepare. This is the same for crime as well. If the crime rate is high, or there is a threat that crime may rise then the government may increase spending to solve the issue. 
• Current economic situation. Unemployment is probably the biggest factor here. If unemployment is high then the government need to attempt to create jobs. To create jobs, they increase spending which will boost aggregate demand and hopefully expand the economy - creating jobs. This theory will be explained in greater detail in a later post. If there is high inflation, the government may reduce spending to try and dampen down the rising price levels. 

Government spending is the least influenced of the components of aggregate demand, it generally stays fairly constant and doesn't vary that much. That is all. Next up is the influences on net exports... Stay tuned. 

Aggregate Demand - Investment (Macroeconomics)

Right, investment is another of the components that makes up aggregate demand as a whole. It is often referred to as just (I). It basically takes into account firms investing money into their business, which normally occurs when they expect that return of their investment to be larger than the investment itself - or more basically put if there is profit available to be made.

There are many influences on this factor, it is also the most volatile component and therefore fluctuates a lot depending on the economic climate and other factors. Here are the influences:

• Corporation Tax - This plays a major part in how much investment is made. Corporation tax is a tax on business' profits. So, the lower the tax the more likely firms are to invest as they will be likely to keep a larger percentage of the profit created from the investment. 
• Interest Rates - This is also a large influencing factor. Interest rates generally dictate the amount paid back on loans. So if the interest rates are low then firms can expect to take out a loan without having to pay as much back in comparison to if interest rates were high. This would be an incentive for firms to increase their investment. Obviously, if interest rates were higher then firms would be discouraged from investing as much.
• Price of Capital Equipment - Investment is all about firms spending money on capital equipment to expand their output. If the capital equipment is cheap, then firms are more likely to invest in it knowing that they will be able to increase profits potentially at a lower cost. 
• Profit Levels - This may influence a firms willingness to invest. If a firm has a high profit level already, they will feel more comfortable investing as they have more money to throw around. However if profit levels are very low then the firm will be taking more of a risk investing money and may be discouraged from doing so.

These are the main factors that influence the level of investment in an economy. Other minor factors include changes in real disposable income, expectations and advances in technology. 

That's the lowdown on investment.. Next up will be government spending. Thanks for reading. 

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!

Externalities (Microeconomics)

An externality, in the economic world, occurs when people not directly involved in a decision are affected by it. Some examples of this are fishermen may not be able to fish in a river if someone has contaminated it with rubbish or a new hospital being built will benefit all people in the local area. The term given to those not directly involved in the decision is third party. The third parties in the two examples I've given are the fishermen and the people in the local area.

Linked in with the externalities theory are the costs and benefits that come about from someones decision. The three types are private, external and social. Private costs/benefits are the costs and benefits to the person actually making the decision. Say i decided to pave over my front garden, the private cost would be me losing garden space but the private benefit would be extra parking space. External costs/benefits are the costs and benefits of a decision that someone makes that fall onto the third party. Continuing my example, the external cost of me paving my garden would be the street wouldn't like as nice to the neighbours and passers-by. The external benefits would be a clearer road for the neighbours to drive down because i could then park my car on the new paved area rather than in the street. Finally, the social costs/benefits are the total costs and benefits to society as a whole of the decision. The social cost equals the private costs plus the external costs.

External costs = Social costs - Private costs.
External benefits = Social benefits - Private benefits.

When the social cost is higher than the private cost it means there are external costs in play, these are known as negative externalities. Binge drinking, chewing gum and fly tipping all have negative externalities. The situation of a negative externality can be illustrated on a diagram...

The diagram represents our negative externality. The current equilibrium point is PQ, at this price we are at supply curve 'Supply' but this is only taking into account the private costs of the good. If the external costs are taken into account then the supply curve should shift leftwards to 'Supply 1'. This would raise the price to pay for the extra external costs, as well as lower the supply. The problem with negative externalities is that there is over-production of Q-Q1 and price is lower than it should be. Too many scarce resources are being used, so there is market failure.

Positive externalities work in the same way, this is when the social benefit of a decision is higher than the private benefit.Examples are vaccinations and education. They are the opposite of negative externalities, goods with positive externalities tend to be under-produced. If the external benefits were taken into account then the supply curve would shift to the right, lowering price and increasing production. The under-production here is another form of market failure.

Enjoy. :)

Information Failure (Microeconomics)

Information failure is something that can cause market failure. There isn't really much to information failure, the name says it all really, so this post will remain relatively short. Basically, information failure is when consumers do not receive the correct/enough information before making decisions. I could reel off many examples of this, a few being:

• When consumers aren't aware of the benefits of a good, such as fruit or vegetables, and thus the good is under-consumed.
• When consumers aren't aware of the drawbacks of a good, such as alcohol, and thus the good is over-consumed.

Causes of this lack of awareness stated above is usually things such as persuasive advertising leading to high consumption levels of 'bad' goods or inaccurate product packaging.

One particular type of information failure is asymmetric information. This occurs when information isnt shared equally between two parties. An example of this is visiting the dentist; the dentist has more medical knowledge as you, so you rely on them to pass the information on to you - which they may or may not do.

In brief, information failure is the lack of accurate information given out which leads to mis-allocation of resources, thus market failure! 

Market Failure (Microeconomics)

Market failure is what occurs when the free market economy is left to run itself and resources are allocated inefficiently and not used correctly. For a market to be successful, it must be efficient.A few examples of market failure are the overconsumption of alcohol and tobacco or the underconsumption of health and education. These are examples of market failure because they occur when the economy is left to the free market mechanism and resources aren't being used efficiently or correctly.

Efficiency in an economy can be broken down into two different types: production efficiency and allocative efficiency.

Productive efficiency is achieved when everything that is produced is produced using the least amount of scarce resources. In other words, any point on the PPC curve (Refer to this post on the blog for more about PPC curves). If goods aren't being produced using the least amount of scarce resources then it is said to be productively inefficient and the market's failing.

Allocative efficiency is achieved when customer satisfaction in a market is maximised. So, the quantity supplied must be equal to the quantity demanded - in other words the market must be functioning at the equilibrium position for the market to be allocatively efficient.

There are many causes of this market failure, which will be discussed further in later posts, so stay tuned. Thanks.

Price Elasticity of Supply (Microeconomics)

This will be the last elasticity post for a while, i promise...

Right, so price elasticity of supply is sometimes referred to as PES. It measures the responsiveness of supply to a change in price. Basically, it indicates the amount a supplier is willing to to provide to a market after a change in price. The aim of a supplier is to maximise profits, so therefore the price elasticity of a supply should always be positive (If the price of a good increase so should supply, and vice versa.)

The formula for PES goes like this:

PES = % Change in quantity supplied ÷ % Change in price

As stated previously, the result will almost always be positive as it's highly unlikely that if price falls then suppliers will supply more of a good to the market. The figures gained from the formula are once again important:

• Greater than 1. If the result is over 1 then it tells us that the goods price elasticity of supply is elastic. So a price rise will lead to a more than responsive rise in supply.
• Between 0 and 1. If the result is between 0 and 1 then the goods price elasticity of supply is inelastic. This means a price rise will lead to a less than responsive rise in supply.
• Exactly 1. If the result is 1 then the goods price elasticity of supply is unitary. A change in price leads to an exactly proportional change in supply.

There are three main determinants of the price elasticity of supply of a good. The first is time period. If it takes a lot of time to adjust the supply of a good then it's likely the goods PES will be inelastic. An example of this would be Christmas trees with the long growing period. The next determinant is availability of factors of production. If there is no spare resources or labour to increase production then the PES is likely to be inelastic, and vice versa. Finally, availability of stocks of a product. If a supplier has plenty of goods stored away that can be added to the market should price change then the PES will likely be elastic. If there is no way of storing, or isnt any stored, PES will likely be inelastic. 

An example as usual. The price of shampoo increases by 22% over a period of time, over the same period suppliers supply 15% more shampoo to the market.

PES = 15% ÷ 22% = 0.68

This tells us that the PES of the shampoo is inelastic, suggesting that maybe it takes a long time to produce, there was no extra stored away or there is no spare factors of production. 

That's all for price elasticity of supply. 

Cross Elasticity of Demand (Microeconomics)

Cross elasticity of demand, sometimes referred to as XED, measures the responsiveness of demand for one good after a change in price of another good. The theory assumes that all other factors stay the same and that only the price of one good is what's affecting the demand for another good.

As with the previous elasticity theories, there is a formula involved here too, that being:

XED = % Change in quantity demanded of product A ÷ % Change in price of product B.

The sign and size of the result given after the formula is vital:

• A positive result means that the two goods are substitute goods, so the price of one good rises then the demand of the other good also rises and vice versa. These goods tend to be bought instead of each other.
• A negative result means that the two goods are complimentary goods. Meaning if the price of one good rises then demand for the other will fall and vice versa. The two goods are normally bought together.
• If the result is 0 it means there is no relationship between the two goods.

The size of the result indicates how strong the relationship between the two goods is. If the figure is a high one (or very low if the result is negative) it shows to us that the two goods are close substitutes or have a high degree of complementarity. 

An example is in need i think. So, say the price of Audi cars increased by 10%, which caused a demand increase for BMW cars of 15%. Lets work this out...

XED = 15% ÷ 10% = 1.5

Thus, with this answer we can see that these two goods are substitute goods (positive value), and quite close substitutes at that because the figure is fairly high.

Short but sweet, that's the basics. Thanks!

Income Elasticity of Demand (Microeconomics)

The theory of income elasticity of demand measures the responsiveness of demand to a change in income levels. It is assumed that all other factors affecting demand are unchanged, the only thing that may change it is income.

The formula for income elasticity of demand (YED) is:

YED = % Change in quantity demanded ÷ % Change in income.

The result of the formula will tell us one key thing, and the positive or negative sign is vital as it tells us whether the change in income has caused an increase or a decrease in demand levels. Goods with a positive income elasticity of demand are known as normal goods. Meaning a rise in comes causes demand for these goods to rise as well. Examples of these normal goods are holidays, eating at restaurants, flat-screen TVs and home improvements. As with PED, if the figure given by the formula is between 0 and 1 then the good is seen as income inelastic, if the result is greater than 1 then the good is seen as income elastic.

Goods that have a relatively large income elasticity of demand are sometimes referred to as 'superior goods'. These are normal goods in theory, but as demand for them rises considerably after an income rise then they are seen as more superior. It's difficult to offer examples as what may be a normal good for a well off family may be a seen as a superior good by a poorer family.

However, if the result of the figures entered into the formula is negative then the good in question is known as an inferior good. This means that a rise in income levels will cause a fall in demand for these goods, and vice versa. Examples of these inferior goods would be supermarket own brand food and second-hand items.

Lets try an example. Say incomes rose by 5%, creating a rise in demand of 10% for Ford cars. (These figures are made up)

YED = 10% ÷ 5% = 2. So therefore these Ford cars are a normal good which are income elastic, meaning a rise in incomes has a more than proportionate rise on demand.

Just remember when using the formula that if demand or incomes fall then a minus sign needs to go before the percentage. That's all for income elasticity of demand, cheers.

Price Elasticity of Demand (Microeconomics)

Price elasticity of demand can be a difficult to concept to get to grips with, so i'll attempt to keep this simple and easy to understand.

Firstly, what do we mean by elasticity? Well, the elasticity is the extent to which demand responds to a change in market conditions... in this case the market conditions are price. So, price elasticity of demand measures the responsiveness of demand to a change in price.

There is a special formula for calculating the price elasticity of demand (PED) of a good...

PED = % Change in demand ÷ % Change in price.

The result of this formula will always be a negative value. Now, this figure will tell us how elastic the good is.

• When PED = -1 .... Demand has unitary elasticity. Meaning that a rise in price will cause a fall in demand of equal amount. And vice versa if price falls.
• When PED = 0 .... Demand is perfectly inelastic. Meaning that any change in price will have no effect on demand what-so-ever.
• When PED is between -1 and -Infinity .... Demand is elastic. Meaning a change in price will have a more than proportionate effect on demand.
• When PED is between -1 and 0 .... Demand in inelastic. Meaning a change in price will have a less than proportionate effect on demand.

The price elasticity of demand of a good dictates how steep the demand curve will be on a supply and demand diagram for that particular good. If a good is perfectly inelastic the demand curve will be vertical, because demand is the same at any given price. If a good is very elastic then the demand curve will be virtually horizontal because a small change in price will have a large effect on the demand for the good. 

Generally, if a good is considered a necessity... such as petrol, cigarettes or insulin then its PED will always be very inelastic because people need these items, no matter the price they have to buy them. On the flip side, if a good is considered a luxury good... such as holidays abroad, new cars and CDs then its PED will be very elastic because they aren't needed and people can stop buying them even if the price rises a little.

There are three main determinants of price elasticity of demand:

1. Availability of substitute goods. If there are plenty of substitute goods available then it is highly likely that the PED of this product will be elastic because there are plenty of alternatives for consumers if prices rose. Also if there are no substitute goods, then the chances are the product will be inelastic.
2. The price of the product compared to peoples income. If the good takes up a very small amount of peoples income then price is likely to be inelastic as people don't worry about price rises as they will only be tiny. However, if the good is a large percentage of peoples income then price is likely to be elastic because a price rise will have a large effect and stop people purchasing.
3. Time. If people find it difficult to change spending habits on goods then those goods will be inelastic as people cannot change what they buy quickly, even if prices rise. However, if people can change there spending habits for goods quickly then those goods will be elastic.

Lets do a little example of working out the price elasticity of demand. Remember these figures are made up! Say the cost of a book rises from £10 to £12, causing a fall in demand from 5000 to 4500.

The % change in demand would be -10% (-500÷5000 x 100)

The % change in price would be 20% (2÷10 x 100) 

So, we have -10% ÷ 20% = -0.5. This result tells us that this books price elasticity of demand is inelastic, a 20% rise in price only caused a 10% fall in demand. Must be one good book!

Thanks for reading!

Complimentary and Substitute Goods (Microeconomics)

Complimentary and substitute goods are two different types of product which affect the demand for other goods...

Firstly, substitute goods. These, as the name suggests, are goods that can be classed as a substitute for another good. They occur when a good or service faces competition from another product. I could reel off a list of hundreds of substitute goods, but ill keep it short:

• A holiday in Spain could be seen as a substitute for a holiday in the South of France.
• A Ferrari could be seen as a substitute for a Lamborghini.
• A meal at an Italian could be a substitute for a meal at a Chinese restaurant.

There is a relationship between the price of one product and the demand for its substitute. If the price of a good increases, then it is more than likely the demand for the substitute will increase as well as more consumers will move to purchasing it. It works both ways too, the price of a good decreases then you'd expect the demand for its substitute to also decrease as more consumers are attracted to the lower priced good.

Now complimentary goods. These are goods that tend to be jointly demanded, goods that go together is probably a better definition. Some examples of these would be:

• Cars and petrol.
• DVDs and DVD players.
• Laptops and laptop carry-bags.

In these cases, there is also a relationship between the price of a good and the demand of its complimentary. Generally, if the price of a good goes up, then the demand for its complimentary good will fall as it becomes more expensive to buy them, thus discouraging consumers. Obviously, the other way round is the same... The price falls for a good then demand for the complimentary increase.

Tadaa.. That's all. Cheers.

Demand and Supply (Microeconomics)

This post will broken down into demand, supply and then demand with supply. Lets go...

Firstly, demand. Demand is the willingness and ability to buy a good at any given price. It is shown by a demand curve on a supply and demand diagram, and it shows the relationship between quantity demanded and price. There are two types of demand, effective demand and notional demand. Effective demand is the willingness and ability to buy a good, whereas notional demand is the desire for a good. The relationship between price and demand is inverse... so the lower the price - the higher the demand. There are many factors that determine the demand of a good, they are:

• Tastes or preferences - If a good is currently 'in', or the taste for a product increases then demand will increase. If it's out of fashion or the taste for it decreases then demand will decrease.
• The number of consumers - Simply put, more consumers will generally increase demand... less consumers will decrease demand.
• The income of consumers - If income increase then demand for superior goods such as Bentleys or TVs increases and vice versa. For inferior goods, such as tesco value food, as income increases demand decreases as consumers move to better quality goods. 
• Price of related goods - Using phones as an example, if Nokia phones are really expensive then demand for Samsung phones may increase. Opposite will happen if Nokia phones and really cheap. 

Now onto supply. Supply is the quantity of a product that producers are willing to provide at different market prices over a period of time. The relationship between price and supply is fairly obvious, the higher the price - the more producers are willing to supply to the market (higher supply). The determinants of supply are:

• Production costs - If production costs rise you'd expect a fall in supply, if they fall you'd expect a rise in supply. If its cheaper to make a good, then more will be produced.
• Size and nature of industry - In a competitive industry, any changes in cost will effect supply, however in a market with only one or two major players, any changes in cost can be passed onto the consumers without having to change supply.
• Government policy - Governments may change taxes, or introduce legislation restricting supply. Each would have an effect on supply.
• Natural disaster - Something such as a hurricane may wipe out workers or factories, thus decreasing supply.

When you combine a supply curve and a demand curve onto one diagram, we get presented with a price. The supply and demand diagram is usually set up with price up the y axis and quantity along the x axis. Here is an example...

This is a simple demand and supply diagram, which shows us how prices are determined. The point 'PQ' on the diagram is where the supply curve and the diagram curve meet, meaning the position where both buyers are willing to buy and sellers are willing to sell -  both parties are satisfied. This point is referred to as the market equilibrium price or the clearing price. 

The equilibrium point isn't set in stone and changes as either the demand or supply curve changes. The next image will show this... 

In this new diagram we can see that supply and demand have both changed. Supply has increased, so the curve has shifted to the right from "supply" to "supply 1". Demand has also increased, and thus the curve has shifted to the right from "demand" to "demand 1". The result of this is a new market equilibrium point of 'P-Q1'. What this shows is that any changes in supply or demand will result in a new equilibrium price.

That's all the basics for supply and demand, the next post will be about complimentary and sustitute goods. Thanks for reading!

News Story - Scrapping Price Controls on Postage Stamps?

News today in an article in the Daily Mail suggest that current controls on the price of stamps could be scrapped, leaving Royal Mail to set their own prices without any challenge. Now, this post will be a discussion about whether this is beneficial to us, the consumers, and to Royal Mail itself.

The price of stamps are to rise on Monday anyway: first class stamps will rise by 12.2%ish and second class by 12.5%, meaning postage is getting more expensive anyway. But with the latest news, it could get worse. However, the real question is will this have any effect on consumers or on the Royal Mail itself?

A natural course of events should take place; price rises so demand will fall, probably at a lesser rate because stamps are currently still a necessity so the price of them will be very much inelastic. The families on lower incomes will be hit the hardest as it's a larger percentage of their income being spent on the stamps. But with  technology nowadays, the internet mainly, i question whether the price rises will be of any good to the Royal Mail. In 2010, 60% of adults accessed the internet every day - using the internet means access to e-mail, which means information can be sent in an alternative way to the mail... cutting out the need for letters to be sent. Plus, whats more, the internet can be seen as more reliable, quicker, easier and cheaper than the post anyway, leaving the Royal Mail in a sticky situation. I mean, come-on, if you have the choice out of sending an email (from the comfort of your own home, with no direct charge and knowing it will reach the destination almost instantly) or sending the same message in a letter (by leaving the house and heading to a post-box, paying directly for a stamp and knowing it will be at least a few days before it reaches the destination), it's not a hard choice.

Parcels and packages are where the Royal Mail might get lucky. As is fairly evident, you cannot send a parcel over the internet - for the not so bright ones out there. This means they have to be sent in the mail, 'ca-ching' for Royal Mail (you'd think)! Oh, but maybe not so lucky if you see the competition in this market.. plenty of other firms offer the package sending service cheaper and more efficiently than Royal Mail do. Ouch!

Last year, the Royal Mail lost £163 million on stamped mail, equivalent to 6.4p for every item handled, so therefore the price rises are justified. But from my point of view, it seems to be a dying industry... The internet is taking over and i feel that raising prices further will just encourage more people to seek alternative methods of communication and make the position of Royal Mail worse. What's more, they don't seem to do themselves any favors anyway - the service is still annoyingly adequate with mail going missing, late post and other such things. So, maybe if they sorted out  their current issues and restored the publics faith in the mail service first, they may have success increasing prices!

Full article at: dailymail.com... Got a view on this issue? Comment away. Thanks for reading.

Opportunity Cost and the Production Possibility Curve (Microeconomics)

The term opportunity cost refers to the cost of one good in terms of the next best alternative. A very basic example is Tommy has £100 to spend and decides to use it to buy a new television, meaning he cannot spend the money on anything else. The opportunity cost of buying the television is the two pairs of jeans he could have bought with the money.

A production possibility curve (PPC) shows us the maximum quantities of different combinations of two goods that can be produced with the current resources, labour force and technology available. The theory of opportunity cost can be applied using one of these production possibility curves.

This is a basic PPC curve in action. This one is resembling the number of cars produced against the number of bikes produced with the given resources, labour and technology. Any point that lies on the curve itself shows a combination of the two products that maximises output. Take point A on the diagram, at this point 750 cars and 1000 bikes can be produced. Now take point B, here only 500 cars can be produced but 1500 bikes can now be made. So, the opportunity cost of operating at point A on the diagram and producing 250 more cars is 500 bikes. The production forgone of these bikes is the opportunity cost. The opportunity cost of operating at point B and producing 500 more bikes is 250 cars.

Finally, we can analyse point C on the diagram. This point is well above the PPC, and thus is impossible to achieve with the current resources available. Hence point C resembles a position of scarcity. 

But, the position of the curve isn't set in stone and it can fluctuate... shifting outwards as well as in. If the curve were to shift outwards it would show us that the firm/individual/economy has expanded and thus is able to produce more. Reasons for this shift could be an increase in available resources, an increase in labour available or a technological advancement. If the curve shirts inwards, it means less of each good is able to be produced. Reasons for this could be a decrease in available labour (natural disaster may have reduced the population) or less available resources. 

This is a very basic look at the PPC curve, to give you the general idea of how it works. I will do a more detailed post sometime in the future. Thanks for reading. 

Specialisation - Division of Labour (Microeconomics)

Specialisation is the broad term given to a country, region or individual when they concentrate on making just 1 good. It can be broken down into many different types...

The division of labour is a type of specialisation. In basic terms, it is when the production of a good is broken up into many smaller tasks and these tasks are divided up among the workforce, each worker/group of workers concentrates on a different task. An example of division of labour could be production in a car factory. The workers at the factory are split up into their specific task groups and trained to complete their bit of the production process. Then, one group will put together the engine, one group the bodywork, another group on the braking and so on and so forth until all the parts to the car are created and assembled.

There are both good and bad points to the division of labour. Advantages first...

• Workers become more practised at the task in hand - The workers will be doing the same small task over and over again and will naturally become better at performing that task.
• Increased efficiency - Splitting the production task amongst a group of workers results in a greater output and higher productivity than if the each worker is making the whole good alone. 

Disadvantages...

• Workers become bored - Repeating the same task over and over again will no doubt cause workers to become bored, which will lead to inefficiency and lower output.
•  One section failing could limit production - If the workers concentrating on a certain task begin to slack, or stop working altogether through problems such as faulty machinery, then the whole production line grounds to a halt and no/smaller amounts of finished goods are produced.
• Workers receive a very narrow training, limiting future job opportunities - The workers will receive training in that particular task, which may not be a skill needed in other industries/jobs, and at the same time they may be losing important job skills such as communication or administrative skills.

That's about it for the division of labour folks, Thanks for reading. 

The First Post...

Right, i thought i'd start things off with a little 'welcome' post, so to speak. As is probably quite evident, i'm new to the world of blogging - but have been contemplating starting a blog for a few months now. The main reason it took so long for me to get started was choosing a topic to blog about. I read a few standard blogging guides giving the usual hints and tips, "choose something you enjoy", "choose something you're passionate about". With these points in mind, i could cross off virtually all ideas i had previously thought of - leaving me with economics.

I'm currently studying economics and do enjoy it a lot, so much in fact i'm looking to take it forward and study it at university. I'm still learning the subject, but would like to put forward what i currently know, as well as writing posts about the current economic activities - namely ones that make the news headlines. The more controversial, the better.

Okay, enough rambling about nonsense..