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Saturday, 18 February 2012

Profit Maximisation Point

The profit maximisation point is MR=MC. Below are the diagrams for the profit maximisation point for both monopoly and perfect competition markets. The profit maximisation point is the quantity and price level that the firm will produce at to ensure the most benefit. Before point X, MR is greater that MC thus profits will rise and rise. After point X, MC is greater than MR, thus firms do not see it profitable to produce after that point because they lose money.


For a monopolist, firms charge a price level higher than profit maximisation because it maximises producer surplus and consumers are still willing to purchase at that price level (See notes here). The quantity produced remains at Q1. For a firm in perfect competition, the level of output produced is at X and the price charged to consumers is P1, making the firm productively and allocatively efficient. For more notes, see here.





For more notes on perfect competition and monopoly markets, see here and here, respectively.

Tuesday, 14 February 2012

Inflation for January 2012

Inflation fell to 3.6% in January, as forecasters predicted. Read more on the Financial Times. The ease in inflation may give signs that this 'stagflation' that the economy has been experiencing may be shifting away. The coming months will tell how unemployment will change in response (Phillips Curve). Inflation faces downward pressure from the effects of higher unemployment, slow exports markets (due to the Eurozone) and lower energy prices (causing a rise in imports).

A further £50bn Quantitative Easing that the MPC authorised earlier this month shows that there is still deficient demand in the economy and it may continue to stay low. Thus economists are predicting more QE to keep inflation from falling below the government's 2% target.



Sunday, 5 February 2012

Fiscal Policy video

Paj Holden's video on fiscal policy is a great material for revision or learning fiscal policy from scratch.

Key points/summary of topics explained

Fiscal policy - manipulating government spending and taxation levels in order to manage the level of AD in the economy.

Definition of AD (C+I+G+X-M)

In a weak economy (low AD), the government might consider loosening fiscal policy - lower taxes (boost consumption) and increasing government spending. Disadvantage of loose fiscal policy, if spending becomes too high, deficits rise, creating problems, such as the Eurozone crisis.

Explains the Euro crisis

Business cycle and output gaps

Note: The AD/AS diagram he uses shows the Keynesian LRAS (notes to come!)

Case Study: Greece

---> GDP growth of -6.6%

---> Budget deficit (2009) was 15% of GDP. In 2010, it was 11% of GDP and in 2011 it was 8% as a result of increased taxes and lower government spending (austerity measures). However the Greek government is still spending 8% more than revenues gained from taxation. There is also interest gained from the additional spending, demonstrating the importance of their fiscal constraints.


Quantitative Easing