Perfect Competition

Perfect competition is a very unrealistic market structure. We'll discuss the characteristics of it later, but for now we have to understand that it is a theoretical concept. If the world was perfect then in most cases we'd have markets operating 'perfectly'. The world isn't perfect and therefore actually seeing perfect competition in reality is a long shot. The major assumption we make is that firms are price takers. By this we mean that each firm alone has no influence over the market price because of their relative size. They take the price they can get as given and perceive it to be constant. Therefore the demand curve for a firm in perfect competition is horizontal - the can sell as much as they want but only at the market set price. Any higher and they wouldn't sell a thing, any lower and they'd make a loss in the long run.

Here we have a typical perfect competition scenario in the short run. On the left is the market where the market price is determined by the supply and demand for the good. The firm, on the right, takes the market price as given and as their price. Average revenue and marginal revenue is the same as the demand curve because we are looking at a constant price for the good. Production takes place at the point where MC = MR, anywhere before this point and more profit can be made, anywhere after this point and profit falls. If you look at the diagram, at the point MC = MR, the average cost is below the average revenue. This means profit is available, which is shown by the yellow area. In the short run the supernormal profit will be (AR-AC) x Qe.

Now, above I've just said that AR and MR are the same as demand because price is constant. You want proof I hear? Sure thing. Average revenue = Total revenue / Quantity. Total revenue is actually price x quantity. Therefore average revenue can be re-written as (price x quantity) / quantity. Quantity cancels out leaving price ~ average revenue = price. Marginal revenue = the change in total revenue / the change in quantity. Substituting in what total revenue actually is we have the change in (price x quantity) / change in quantity. The change in quantity cancels out leaving price ~ marginal revenue = price. Boom!

But, we have only discussed the short run. These supernormal profits don't go unnoticed - they attract new firms into the industry. Supply now shifts out.

The price falls due to the increase in supply. On the right diagram we can see that it's fallen to the point where MC = MR = AC. This means that supernormal profit is no longer being made, it has been competed away. At this point no more firms will enter the industry because there won't be the pull of supernormal profits. Therefore, in the long run there is no supernormal profit to be made in a perfectly competitive market.

It seems risky to the normal person, producing right on the point of breaking even. This is true to a certain extent. Shocks to the system could cause demand to fall, what would happen to the firm then?

Here we have the case of a fall in demand in the market causing a fall in price. The firm was initially producing where MC = MR = AC, but now the fall in price means that if they produce at MC = MR they will actually be making a super-normal loss. This point would be below average costs and therefore the enclosed area on the right hand diagram would be loss. Would they carry on producing? Surprisingly, yes, in this case the firm would. To understand this we have to look at the breakdown of the costs. In the short run we know capital is fixed and labour is variable. Therefore the average variable cost for the firm in a simple world would be labour costs / quantity. As long as the average revenue (demand curve) is greater than the average variable costs then the firm will continue producing. This means they can cover the costs of labour and make some contribution to the fixed costs. If they couldn't cover the average variable costs it would be better for the firm to stop producing, lay off all the workers and only lose the fixed costs.

Some other things we can state is that the short run supply curve for a firm in a perfectly competitive market is the marginal cost curve until the point where price equals average variable cost. As we said above, below that point the firm will stop supplying the market. In the long run the firms supply curve is horizontal at the minimum average cost.

All we need to do now is sum up whether perfect competition is a good thing. It definitely has its advantages, they are as follows:

·         It's efficient - production occurs at the lowest average cost which is the most efficient point.

·         Competition - competition in an industry forces firms to be more efficient.

·         Price is influenced by demand - the market is essentially run by consumers, it responds to their behaviour.

·         No supernormal profits in the long run.

It really has few disadvantages though. You could state the fact that it isn't realistic as a disadvantage, I guess. In real life it would be rare to find a market with freedom of entry/exit, identical products, price taking firms, etc. One point that could be made about the lack of super-normal profit is the lack of innovation. Innovation tends to be fueled by profit, without profit there is little room for firms to innovate. Innovation is one thing that can lead to a more efficient market, so in perfect competition once the efficient point is reached it will not be made any more efficient. Comprende?

Sam.

Firms and Isoquant Maps

If you read the previous post about indifference analysis then you'll notice a lot of similarities when studying this topic. Isoquant analysis is essentially the same as indifference analysis but from the point of view of a firm. Each isoquant measures the combinations of capital and labour a firm would need to produce a constant output. They follow the same shape as indifference curves, sloping downwards, as you can see below.

  

The downwards sloping shape is due to the diminishing marginal rate of technical substitution (MRTS). It's the rate at which we can substitute capital for labour and still end up with the same level of output. We have to give up capital to add more labour, hence why there is a negative slope.

An isoquant map is a series of isoquants showing combinations of capital and labour that give different levels of output. It looks very similar to an indifference map. 

Each isoquant represents a different level of output. The further up and to the right you go, the higher the production. From these maps we can see what returns to scale the firm in question is facing. By returns to scale we are talking about the increase in output given an increase in capital and labour. If we doubled both capital and labour and saw a doubling of output then the firm would be facing constant returns to scale. On the isoquant map this is shown by the isoquants being evenly spaced. If we doubled the inputs and received more than double the output then we'd say the firm is facing increasing returns to scale. The isoquants would get closer together when increasing returns to scale was present. Finally, if the firm doubles the inputs and receives less than double the output then the firm is facing decreasing returns to scale. On an isoquant map this would be shown by the isoquants getting further apart. 

 We move on now to isoquants and marginal returns for firms. A marginal return measures the change in output the firm gets when one variables is changed and the other is held constant. Look at the diagram below this paragraph - we'll hold capital constant at 25.

 So, to achieve output of 5000 with capital held at 25 we need 10 units of labour. To get from 5000 to 10000 production we need to add an additional 20 units of labour (30-10). To get from 10000 to 15000 production we need to add an additional 35 units of labour (65-30). We can see that the more labour we add the less productive they become - this shows the principle of diminishing marginal returns. Each additional worker will add less production than the previous one.

Right, now for firms to choose their optimal level of production we need to include their budget into the analysis. This works the same as a budget line. Anywhere along the line gives us combinations of the two inputs with equal costs.

The dotted line above shows an example of changing factor costs and what would happen to the isocost line. Here, the price of labour (wages) have fallen and therefore the firm can afford more of them with a given budget. The line swings out, pivoting around the point on the y axis. If the price of labour rose the line would swing in. If the firm's overall budget increased/decreased then the whole isocost line would shift out/in. 

 Now, firms choose their production in one of two ways. They either go down the route of getting the least cost combination of factors for a given level of output or they aim to maximise output for a given production cost. The two examples can be seen in the diagram below. 

Time to get a bit mathematical now. We are going to work out the equilibrium point of production and what occurs at this point. So, the slope of an isoquant is as follows: If we reduce capital (K) then the loss of output will be: (MPP being the marginal physical product).

 And if we increase labour at the same time, the gain in output will be :

Now, at any point on the isoquant the change in quantity is 0, therefore these two terms must equal each other:

A simple rearrangement and we are left with the following formula for the slope of the isoquant,which equals the marginal rate of technical substitution:

 The slope of an isocost now. The reduction in cost should we reduce capital would be: (- the price of capital times the change in capital). 

The rise in cost if we increase labour will be: 

 Once again, the change in cost along the line is 0 therefore these two will equal each other at all times. Equating these two together and rearranging we get the slope of an isocost as: 

In equilibrium, the slope of the isoquant will equal the slope of the isocost:

 The final rearrangement now, I promise. We can derive this sneaky formula: 

What's interesting about this is that it tells us that money spent on each factor at the margin should yield the same level of additional output for the firm. Interesting. 

 We can map out the firm's costs in the long run on an isoquant map. It is called the expansion path as you can see below. 

 Typically, in the long run the firm will experience a varying level of costs. At low levels of output they will experience economies of scale. Then as output increases there will come a time when costs become constant. As output increase further still they will eventually reach a point of diseconomies of scale - where being a mass producer actually makes things costlier. In the short run costs are always higher than in the long run, always. Why? Because capital stock is fixed, we can only vary the amount of labour we employ. 

 That's it, the firm and isoquants covered. As usual post a comment if something doesn't make sense or you need further clarification - I'd be happy to help. Share the blog if you find it helpful, please. Cheer guys. 

Sam.

The Short-run Macroeconomic Equilibrium

A very simplified Keynesian model is used to show the short-run macroeconomic equilibrium. For example, the rate of interest is fixed to simplify the model by keeping constant money in the economy. It is also assumed that production and employment depend on the amount of spending. In that we mean that if people buy more then firms will produce more, providing that they have the spare capacity available. The basic formula we use is that the level of National Income is equal to the domestic consumption plus the three withdrawals from the circular flow of income. Or, in shortened terms: Y = Cd + W. In this model, aggregate demand is actually known as aggregate expenditure (E) and relies on the amount of domestic consumption and the injections into the circular flow of income (J). Also written as AD = E = Cd + J. We reach a point of equilibrium when withdrawals equal injections and at this same point National Income will equal aggregate expenditure. If injections were to be higher than withdrawals then National Income would rise and the withdrawals would rise until withdrawals is once again equal to injections. Now enter the 45 degree line.

The 45 degree line shows the relationship between National Income and consumption, withdrawals and injections. Consumption and withdrawals are endogenous - their value is determined by the model. However injections are exogenous, meaning their value is determined independently of the model.

At ever point on the 45 degree line (Y), the items on each axis equal each other. The C line is consumption. It differs from Cd because it doesn't contain taxes and export spending. Consumption is a function of National Income: C = f(Y). As National Income rises, so does consumption - hence the upwards slope. It crosses the 45 degree line because poorer people may be required to spending above their earnings to survive where as richer people spend less than they earn, therefore at the end of the line it is below the Y line. The slope is given by the marginal propensity to consume - the proportion of any increase in National Income that goes on consumption. It is the change in consumption divided by the change in National Income. 

Consumption is determined by a whole bunch of different things: 

• Taxes
• Expected future incomes
• Expected future prices
• Consumer confidence
• Household wealth 
• Attitudes of the lenders
• Age of 'durables'
• Distribution of income

Any changes in these cause a shift in the consumption function whereas a change in National Income causes a movement along the consumption function. 

Now onto the withdrawals. The amount saved depends on the marginal propensity to save (mps). The proportion of an increase in National Income that is saved. Mps = Change in savings / Change in N.I. Taxes is pretty much the same - it depends on the marginal propensity to tax (mpt), or changes in tax / changes in N.I. It tends to rise as National Income rises because income tax is progressive. Finally imports - depending on the marginal propensity to import. Or, mpm = change in imports / change in National Income. 

Total withdrawals will look something like this: 

Injections now and we'll start with investment. It is determined by the following things: Consumer demand, expectations, interest rate, availability of finance and cost/efficiency of capital equipment. Replacing new equipment will rely on National Income. Government spending is independent of National Income in the short term, Exports is also classed as independent on National Income to keep the model simpler.  

That's it for the background on the theory. Next we'll be moving on to how National Income is determined from all of this. Stay tuned.

Sam. 

Principles of Economics: Profit Maximisation (Microeconomics)

Today's post will look at the profit maximisation for a firm. There really isn't that much too this, but I'll dedicate a post to it none the less. If you refer back to the post relating to a firm's revenue it will make what's about to be explained a lot easier. The main rule to remember here is that the profit maximising point for a firm is where the marginal revenue and marginal cost are equal. Why this point? Well, as long as marginal revenue is greater than marginal cost more profit can be made by increasing production. At the point where marginal revenue equals marginal cost, no more profit can be made and therefore this point will be the profit maximisation point.

Diagram time!

Profit maximisation is shown on this diagram here. We've set up a simple model of a firm's revenue and costs. Then, at the point MC = MR we have drawn a line up. This gives us two prices, P1 and P2. P1 is the actual market price for the good or service. P2 is the cost to produce that certain good. Therefore, using simple logic we can work out the actual price. P1 - P2 will give us the profit made on each good produced and then if we multiply this by the quantity we will have total supernormal profit. Or, visually it's the gold area on the diagram.

Notice I used the phrase supernormal profit. There are actually two levels of profit, normal profit and supernormal profit. Normal profit is the cost of staying in the industry; so this is essentially the minimum amount the firm needs to make in order to stop them leaving the industry. It will include such things as the pay for the entrepreneur. Supernormal profit is anything above this level, any additional income for the firm. A situation can also occur when the average cost curve is higher than the average revenue curve, if you picture this in your head and you'll see it'll result in a loss. In the short term some firms will not worry about this if they are using it as a technique to reduce competition or something similar. In this case nothing changes, the firm will still produce at the point MC = MR, however the only change is this time we'll call it the loss-mining position/quantity. 

Sorted! Profit maximsation and loss minimisation for you! Hope it helps, feedback and comments are of course always welcomed! Thank you guys, have a good evening.

Sam. 

The Role of the State and the Challenges of WWI, 1870 - 1921

This post will go into a little bit more depth about how the government ran the economy and the challenges it then faced as Britain went through the First World War. Prior to WWI, Britain was referred to as a 'night watchmen' state. This means the state didn't try and an direct or manage the economy, they only intervened when it came to necessities such as health and safety, company law, basic education and the provision of welfare.

The aim was to maintain a balanced budget and fund any spending through taxation. Due to this, not much really was spent because it would only be justified if the taxpayer paid for it, and to avoid a backlash from high taxes the tax rate remained constant. After 1890 strain on the budget begins to show. Higher grants were needed for welfare and education and defence spending, especially for the navy began to rise. Spending as a percentage of GNP grew. Government spending in 1913 was roughly £305 million, compared to £130 million in 1890. Due to this increase in spending, taxes had to rise to fund it all. A super tax on incomes was introduced in 1909 and income tax for the better off increase to 6% in the same year.

However, despite all this government activity was still relatively constrained. Rules were still in place to make sure the budget remained balanced and spending was only at 13% of GDP in 1913. Some economists believed that the limits on taxation had been reached.

When the war begins in 1914 the government take a 'business as usual' approach. The assumption was that the war would be a short one and that Britain's main role would be more financial than military. Things have to change, though, as the government begins to realise that the war isn't going to be a short one. The railway and sugar industries are a few industries that were controlled at the start of the war and a large army had to be raised, needing to be fed and armed.

This leads us onto the munitions crisis. Arms factories cannot cope with the demand for munitions and shell shortages begin to develop. The reply from the government is to set up the Ministry of Munitions in 1915. This controlled over 2 million workers by 1916 and started to spend a lot of money on the production of more ammunition. Between the years of 1916 and 1917 a lot more industry came under government control, including: shipping, mining and food and raw material imports.

One of the big issues that comes up during war is labour, and it's no different in this case. Women and unskilled male labour are brought in to work in the factories. Unions agree that unskilled workers are allowed to now do tasks that were previously only allowed to be done by skilled workers. Strikes are banned (in theory), but this essentially fails as 11 million working days were lost between 1917 and 1918 due to strikes. As incentives to direct workers into the essential industries, better pay is offered.

The war has to be financed, of course. This meant a massive increase in government spending; up to 59% of GDP which was roughly £2,800 million. 72% of the money is funded through borrowing, leaving to a large national debt being racked up. This is very problematic, the national debt reaches the level of £6.1 billion in 1919 and of course servicing the debt with interest payments because a massive drain on the economy.

Let's move on to the post war stage now. Things look good and bad in a sense, there is a post-war boom due to a lot of money being in circulation. This could be seen as a good thing, however the massive demand outstrips output and this leads to runaway inflation. The other issue at the time was demobilization. This all gets too much and we enter into a slump between 1920 and 1922, by 1921 this is a recession. GDP falls by 7% and unemployment is up at 2.2 million. The big debate is whether this was avoidable or not? Some say it was unavoidable, world conditions were awful and it was impossible to avoid the effects. However, government policy could be said to have worsened things. Policy was too lax in 1919 yet too tight in 1920 and 1921, which didn't help the economy.

Have your own say! That's it for this part of the economic history of Britain, thanks for reading.

Sam.

Preferential Trading Arrangements

Preferential trading arrangements refer to such things as trade blocs. Trade restrictions are held with the rest of the world but lower restrictions or none with member states. There are three types of preferential trading arrangement:

• Free Trade Area - This is when member states remove tariffs and quotas with one another. However, restrictions on trade with non-member states are kept individual to each nation.
• Customs Union - This is the same as above, but in addition there are common external restrictions on trade with non-member states. 
• Common Markets - This takes it one step further and the members operate as a single market. This means as well as the features of the above arrangements there is also a common taxation system, common laws regarding production, employment and trade, free movement of labour and capital and no special treatment by governments to their own domestic industries. Additionally to this, we sometimes see fixed exchange rates between members and common macroeconomic policies. 

Next we move on to trade creation and trade diversion, which come as a result of preferential trading arrangements. First, trade creation. This is when consumption shifts from a high-cost producer to a low-cost producer as a result of of joining the customs union. Normally this is due to obtaining the goods cheaper from other members of the union. As with most things, this can be modeled on a diagram! 

Trade Creation Diagram

This is it, the trade creation diagram. Let's explain it a bit. SDom and DDom are the domestic supply and demand of a good. Before the EU, the country had to pay at the 'PEU + tariff' price so domestic production was at Q2 and domestic demand was at Q1. The imports here were the difference between Q1 and Q2. With the joining of the EU, the price was now the PEU price, lower than before. This meant domestic supply had fallen to Q4 and domestic demand had risen to Q3. So the new imports level is the difference between Q3 and Q4, which is higher than before. Thus, trade has been created. 

Trade diversion works in very much the opposite way. This is when consumption shifts from a lower cost producer outside the customs union to a higher cost producer inside it. There is a net loss in world efficiency now the higher cost producer is being used. 

Trade Diversion Diagram

This is the trade diversion diagram. The country was initially paying price P1 for the good, meaning they consumed at Q1 and produced at Q2. Price falls to P2 because of the joining of the EU. We can see here, that consumer surplus has improved. The original consumer surplus at price P1 has now increased to include the areas 1, 2, 3 and 4 on the diagram. We also notice a loss of producer surplus by area 1 which will be the fall in profits. No tariffs are paid out anymore, so the areas 3 and 5 are lost to the government in terms of revenue. This leaves an overall net gain of areas 1 + 2 + 3 + 4 - 1 - 3 - 5 = 2 + 4 - 5. Here we can decide whether the trade diversion has been beneficial or detrimental. If the size of area 5 which we have lost is greater than the size of areas 2 plus 4 which we've gained then there is a net loss, otherwise we've achieved a net gain. 

If there are high external tariffs or a small cost difference between goods produced inside and outside of the union then a customs union is likely to lead to trade diversion.

In the long term, a customs union could have advantages and disadvantages, I'll name a few of both:

• Advantages:
• Increased market size - allows firms to potentially exploit economies of scale to lower costs.
• Better terms of trade with world markets because of the power of the customs union.
• Increased competition which will stimulate efficiency and bring costs down.
• Disadvantages:
• Resources may flow to the geographical centre for the lower transport costs leaving depressed regions on the edge of the union.
• Mergers will be encouraged which will boost monopoly powers.
• Diseconomies of scale.
• The administration costs of maintaining the union.

The basics of preferential trading arrangements in one blog post, tadaaa! Thank you for reading, keep sharing and following the blog! Thanks guys, have a good day.

Sam.

Principles of Economics: Supply (Microeconomics)

*Disclaimer: I'm fully aware of the fact that I've already written a post on supply. However, I've decided to cover it again now I know more on the subject and can give a better coverage.* 

Okay, I'll dive straight into this one with the main principle of supply: 'When the price of a good rises, the quantity supplied will also rise'. Now, it's all well and good just stating that, however we need to know the reasons why this happens. Let's look at three of them:

• Beyond a certain level of production for the producer costs are likely to rise at a quicker rate than previously. This could be due to having to pay overtime to staff members or increased maintenance costs for machinery. Either way, the quantity supplied by producers will only rise if the price rises so that it becomes efficient for them to raise their costs.
• A more basic reason now: The higher the price of the good, the more profitable it is for the firm. In general terms this theory holds true. Most firms have an aim of profit maximisation, so therefore they'll increase supply when the price rises to maximise profits.  Both of these two points are short term reasons as to why supply rises when price increases.
• A long term reason is because when price rises in an industry new firms are encouraged to join the market with the hope of profit. This increase in firms will increase the supply to the market. 

Here we have a very basic graphical presentation of the supply curve. A supply curve shows us the supply schedule. Supply schedule refers to the amount producers are able to and willing to produce at different prices at a set point in time, it is normally shown in a table and can then be presented in a graph like the one above. The supply curve will generally slope upwards from left to right, to show that the higher the price the higher the supply will be. Obviously, price elasticity of supply plays a part in the steepness of the slope but I'll get on to that point in a few blog post times, I'm keeping it very basic here. 

As with demand, there are many factors apart from just price that affect the supply of a good to the market. These are the main ones:

• Production cost - Higher costs mean less profits means less supply and vice versa. This can be because of a change in the input prices (wages, raw materials), government policy (subsidies, taxation), organisation changes or technology changes.
• Nature - This can include the weather, disease, natural disaster. Basically things that are out of human control.
• Aims of the producer - The supply of a firm aiming to maximise profit will be different to a firm aiming for sales maximisation. Therefore different producer aims will cause varying levels of supply. 
• Expectations - If prices are expected to rise, producers will hold onto stock in anticipation of this rise meaning supply will fall. This works the opposite way for if prices are expected to fall.
• Number of suppliers - Simply put, more producers means more supply, less producers means less supply. 
• Profitability of alternatives - If a substitute in supply is more profitable, supply for the good in question may fall. Alternatively, if a substitute in supply is less profitable, the good in questions supply may rise as the producer re-diverts resources. 
• Profitability of goods in joint supply - Goods that are produced together mean if the profitability of the joint good rises then the supply of the good in question may also rise. Works the opposite way too.

As with demand, there can either be a movement along the supply curve or a shift in the supply curve. 

A change in price will mean a movement along the supply curve. So, the supply curve will stay at the initial place of 'Supply 1' on the diagram and the point supplied will just move up or down that curve. If any of the other determinants of supply stated above change then we can expect a shift in supply. A shift to the right, 'Supply 1' to 'Supply 2' on the diagram, shows an increase in supply. A shift to the left, 'Supply 1' to 'Supply 3' on the diagram, shows a decrease in supply. A movement along the curve is known as a change in the quantity supplied whereas a shift in the supply curve is known as a change in supply.

There we have it, a recap on the basics of supply. Next to come in terms of principles of economics will be marginal utility theory, so stay tuned for that! Thanks for reading and have a good day.

Sam. 

Britain's Victorian Economic Dominance

Back in 1870, Britain still held the position as the top economy in the world. We were producing more than 50% of the worlds cotton cloth, iron, steel and coal in 1851 and 20% of the worlds trade was conducted through British ports. We were dominating after being the first economy to go through the industrialisation phase.

However, after 1870 the British economy has gained an association with decline, despite still growing in absolute terms. There are two reasons for gaining this reputation: the rate of growth was less than in previous years and other countries were growing at a faster rate. So comparatively, the era following 1870 was a time of economic failure for Britain. An example of this slowing of economic growth can be seen by the British manufacturing output statistics for the time. From 1856-1873, the annual growth of British manufacturing output was 2.6%. From 1873 to 1913 this annual growth had fallen to 2.0%. Britain's competitors were growing at a faster rate as well, as i said, which made the British economy look like it was failing even more.
The 1870 - 1913 figures for annual growth of output look like this:

• Britain - 1.9%
• Netherlands - 2.1%
• Germany - 2.8%
• USA - 4.2%

As can be seen from these figures, Britain was growing a lot slower than it's competitors and due to this the USA and Germany overtook Britain's economy by the time the First World War came around. The U.S now had the biggest economy with Germany close behind. The share Britain held on world manufacturing exports also declined from 37.1% in 1883 to 25.4% in 1913 whilst at the same time the U.S's and Germany's grew. 

Some economists came to the conclusion that this relative decline of Britain was inevitable as other countries began to make their way through the industrial revolution phase. On the other hand, some economists blamed the United Kingdom's internal weaknesses for this decline. These weaknesses include a failure to adopt the latest machinery, too much focus on older industries (coal, steel, etc) and not good enough commercial and technical education. But, nowadays this view has pretty much been dismissed as more data and evidence has come to light. British firms were still maximising profit and production at the time, which suggests that there wasn't a need to adopt new machinery. Technology from the U.S wasn't always suitable for the British market. An example of this is the ship building industry. The U.S were more technologically advanced when it came to building ships yet Britain could still produce them cheaper and therefore more efficiently. Finally, the main causes of this relative decline were external. Britain was losing out to countries with more raw materials and larger markets. The U.S, for example, had a lot of land, oil and coal and a massive internal market which benefited them greatly. This is known as the 'Factor Supply Thesis'. This also leads onto the 'Early Start Thesis'. This is basically the principle that because Britain had industrialised first, other countries could learn from Britain's mistakes during the process and catch up much quicker. Also, because of Britain's early start, many aspects of the economy had become very outdated and difficult to change. The railway system is a good example of this. The Victorian railway system which Britain was left with was not as efficient as it could have been.   

Overall though, the structure of the British economy in 1913 was still good. There was a small agricultural sector, taking up an 11.5% share of employment. This differed from the U.S and Germany who's agricultural sectors were much larger. The U.S's took up 25% of employment and Germany's took up 33%. Britain had many large firms operating in many sectors of the economy. There was a very sophisticated service sector holding a share of 44% of Britain's employment. Manufacturing held steady at 32.1% of employment. Britain even had the highest level of output per head in Europe in 1910. It lead the way with $1,302 per head compared to $958 per head from Germany. 

In summary, up to 1870 the British economy was dominating the world due to it being the first economy to industrialise. After 1870, other economies started to industrialise too and this meant they caught up the British economy, leading to doubts about the economy. However, these doubts were pretty much out of the control of Britain and despite these problems, in 1913 the outlook for Britain was still good as they were producing more per head in Europe than anyone else. The position of the economy of Britain was made to look worse because all the other economies were doing so well. 

A brief insight into Britain's Victorian economic dominance and the period from 1870 up to 1913. Thanks for reading, have a good day!

Sam. 

Principles of Economics: Demand (Microeconomics)

*Disclaimer: I'm fully aware of the fact that I've already written a post on demand. However, I've decided to cover it again now I know more on the subject and can give a better coverage.*

Basically, I'm back to cover a very basic principle of microeconomics: Demand. Demand refers to the amount consumers can and are able to purchase of a good or service, 'can and able' being a very important part. Note that a consumers want for a good should not be included in demand. I'm sure everyone wants a flashy sports car on their drive yet the true demand of that good will be very small. Glad we got that out of the way. The demand of a good in a market plays a pivotal role in determining the price. For this, demand must interact with supply and the point at which they meet can be called the 'market output' or the 'equilibrium output'. This is displayed on a graph which I'll do a post about in a few days. The price at this 'equilibrium output' is called the 'market price' or the 'equilibrium price' which is essentially the price consumers have to pay for the good and the price suppliers are selling at.

It's important for me to point out here also that when looking at demand we assume that we're operating in a market of perfect competition. This basically means that in the market there are an abundance of consumers and producers and therefore they have no control over prices. We call them price takers. The size of each producer is too small and there is too much competition from other firms that it would be impossible for them to raise prices and still make sales. Perfect competition is the closest theoretical example to most real-world markets and therefore we use it in our examples.

Let's now look at the relationship between the demand and the price of a good or service. The law of demand is as such: 'When the price of a good rises, the quantity demanded will fall'. This occurs for two reasons:

1. The good/service will cost more than substitute goods. Other similar products will be comparatively cheaper and therefore demand for the good will fall as consumers start to purchase the substitute. For example, a Playstation 3 could be said to be a substitute good for an Xbox 360. Therefore, if the price of the Xbox 360 were to rise then the demand for it would fall as consumers move over to purchase the comparatively cheaper Playstation 3. This is called the 'substitution effect' of a rise in price.
2. People will feel poorer. A rise in the price of a good means people will effectively be able to afford less of the good which makes them seem less well-off, or poorer. This is known as the 'income effect' of a price rise. 

Obviously it occurs the other way also; if the price of a good falls then the quantity demanded will rise. We'll consider the following example, theoretical figures for the monthly coffee demand:

Now, if we were to plot the demand curve for this data it would look something like this:

A typical demand curve would look like this, if real data is being used. The curve you can see slopes downwards from left to right, also called a negative slope, as when the price falls the quantity demanded rises. In most cases, however, real figures aren't used, it's just theoretical. In these cases the demand curve will just be a straight line sloping down from left to right. Remember that we still use the term 'curve' when the line is straight. 

Apart from the price of a good, the demand for a product is also determined by other factors. These are as follows:

• Tastes - The more desirable a good the more it will be demanded and vice versa. This is often affected by advertisements, fashions and what other consumers are purchasing. 
• Quantity and Price of Substitute Goods - If a substitute good has a higher price then demand for the good in question will be higher. If the substitute good has a lower price then the demand will be lower for the initial good.
• Quantity and Price of Complimentary Goods - This works in the opposite way to above. Complimentary goods are products that are consumed together, examples would be cars and petrol or DVD players and the actual DVDs. If the complimentary good's price rises you can expect the demand for the good in question to fall and vice versa. 
• Income - This one is fairly obvious. As people's incomes rise, so does their spending power and therefore demand for 'normal' goods will rise. With this, demand for 'inferior' goods will fall. When we say 'inferior' goods we are talking about things such as supermarket own brand foods. 
• Distribution of Incomes - This determinant is a little more ambiguous. If wealth was re-distributed from the rich to the poor, then demand for luxury items would rise as the poorer people would be able to buy these goods for the first times. It works in the opposite way too, if the poor in society get poorer then the demand for 'normal' goods will fall as the demand for 'inferior' goods should rise. 
• Expectations - Last but not least, people's expectations. Everyone speculates, and if the speculation is that the price of a good is set to rise in the near future then we can expect demand to rise in the short term. If the price is expected to fall we'd expect demand to fall as people hold out until the lower price arrives. 

When we put together a demand curve, we do it assuming that all other things are remaining equal and this is known as ceteris paribus. Nothing but the price changes and when the price changes it results in a movement along the curve. A movement along the curve is different to a shift of the curve, which is very important to remember. When any other determinant of demand changes the curves will shift. A movement along means the demand curve remains the same but the demand just moves to a different point on that curve. A shift means a new demand curve, where at each price a different amount is demanded. 

This is the same demand curve we used earlier, but here we can see that the demand curve has shifted. At each price a different amount of coffee is being demanded. This occurs when a non-price determinant of demand changes. That's probably the hardest basic principle of demand to grasp, but here it is summed up:

• A change in price results in a movement along the demand curve.
• A change in a non-price determinant results in a shift  of the demand curve.

If the change in the determinant of demand causes a rise in demand then the demand curve will shift to the right. If the change in the determinant causes a fall in demand then the demand curve will shift to the left.
The proper names for these two principles are as follows:

• A shift in the demand curve is called a change in demand.
• A movement along  the demand curve is called a change in the quantity demanded.

And that is pretty much that, the principles of demand. The hardest part here is probably differentiating between a movement a long and a shift in the demand curve, however you can pick it up rather quickly. Feel free to comment if you feel i missed something out or something is incorrect. Thanks for reading!

Sam.

The World Coffee Market

As i was sort of on the theme of the world economy, imports and exports and that sort of thing i thought i'd bring you this little snippet which i found quite interesting. Basically it's a bunch of facts about the world coffee market. Roughly 10 years ago the world coffee economy was worth $30 billion, $12 billion of this the producers received. However, nowadays the world coffee economy has grown and is worth roughly $50 billion, yet only $8 million goes to the producers. I sense some injustice here. It just goes to show how these big multi-national companies who have expanded globally have effected the lives of the basic producers. Obviously a lot is being done with 'fair-trade' and the like, but it will still take a lot to return the coffee market back to how it was with the producers, the ones putting the most effort into making the coffee, getting a larger cut of the proceeds.

Coffee is the worlds second most traded commodity, falling just behind oil. I thought that was staggering, very unexpected from my point of view. 60% of the coffee is produced in Latin America and 70% of the coffee is produced on farms of less than 12 acres. We can infer from this that the majority of coffee is produced by small time farmers working small plots of land, and this just adds to the frustrations regarding the pay for the producer. If the majority of coffee was produced by large scale companies it wouldn't matter so much as earning less isn't the end of the world for them. But when it comes to a poor farmer in Latin America, it makes all the difference!

Over 60 developing countries are involved in the production of coffee, with over 100 million being employed in the industry. Just makes you wonder whether if the producers received even something like 10% more than they currently are, how much the economies of these less economically developed countries would improve. It's not even a stable market either, making it all the more worrying and fascinating at the same time. The price of raw coffee can fluctuate by up to 40% in one year. Worrying from the point of view of the farmers in Latin America who have no stable income, but fascinating from the point of view of a market economist looking at how and why the price fluctuates and why by so much! Interesting. What are your thoughts?

Little ramble with something that was on my mind, i found the coffee market very interesting so expect a longer, more thought out post in the near future when i find time. Think about where your money is going next time you buy your coffee beans too! Thanks for reading.

What Is Economics?

Since I'm reviving this blog, I thought I'd start a fresh in some ways. I therefore have decided to open up this new era of the blog with the simple, yet very difficult to answer question of what economics actually is.  It's a very ambiguous subject in regards to how you'd define it, the study of what exactly? I've encountered a good example of just how difficult it is to define the subject recently during my search for a university. The fact that different universities place the subject in different areas is the said example. The University of Birmingham, for example, place the study of economics within the business school - giving the subject a more monetary focus. However, this contrasts from the University of Warwick whom place economics within the faculty of social sciences - looking more at wants and scarce resources. This differentiation from the universities suggests that Economics is a broader subject than some may have first imagined.

Let's look at a few potential ways of defining economics. One definition could well be 'the human science which studies the relationship between scarce resources and the various uses which compete for these resources'. If we analyse this definition somewhat we could agree that this definition holds true. Economics could most definitely be classed as a human science. It's not an art and studying it will almost always involve looking at the action of humans. The relationship between scarce resources and the uses of resources is also looked at in the study of Economics. One of the first things you learn about as a beginner economist is the basic economic problem of scarce resources and unlimited wants. So, you wouldn't be wrong to define economics in this particular way.

Another definition I've come across is that 'economics is the science of production and consumption, or the use of goods and services'. Production and consumption are definitely involved in the study of economics, these link back to the scarce resources problem that occurs due to consumption being higher than production. However, I feel using 'the use of goods and services' in a definition for the subject is a bit lacklustre and doesn't quite do it justice. But that isn't to say this definition is wrong, as it most certainly isn't. Along with the likes of 'economics is the study of how to improve society'. Economics does look at how best to allocate scarce resources to improve society partly, but not all for that reason. These two definitions aren't incorrect, I just think they don't get the whole point of the subject across.

This debate wouldn't be complete without a token definition relating somehow to money! 'Economics is the study of wealth'. Well, there it is, the study of wealth. Somewhat true of course, the economy is measured in terms of money, goods and services are normally purchased using money and a lot of people evaluate their position in life by how much wealth they have. But what actually is money? It's a medium for exchange when buying goods, a unit of account for placing a value on things and a store of value when saving. So technically, anything could have ended up being money instead of coins and notes as long as it was in scarce and controlled supply, stable and able to keep its value, divisible without loss of value and portable.  Money does play a big part in the economy, some would even say the economy revolves around money with the flow of income and what not, but I'm still not entirely convinced the subject can be classed as the study of wealth.

I could go on and on, reeling off lists of different definitions of 'Economics', but I won't of course, you have better things to do than read that. I'll leave it there and hope I've successfully got the point across that I was trying to make -Economics is a very broad subject and therefore very difficult to define whilst accurately including everything the subject covers. If i was being asked, I'd class it as the study of scarce resources. I question you to have a think about how you'd define the subject!

That's all from me for now, thank you for reading!