Perfect Competition
A type of market structure where there are many firms in the market selling a homogenous product. See perfect competition notes short run and long run to learn a more detailed view of perfect competition.
Friday, 19 August 2011
Thursday, 18 August 2011
Word of the Day
Deregulation
The removal of regulations that restricted competition and freedom of market activity. In the last 30 years, the UK government has deregulated the following markets: airlines, radio stations, bus companies, televisions and telecommunications. The coalition government recently introduced 11 enterprise zones in the UK whereby these regions would be subjected to fewer planning regulations (as well as tax breaks), thus are an example of deregulation policies in the current government. For more on the enterprise zones, click here.
The removal of regulations that restricted competition and freedom of market activity. In the last 30 years, the UK government has deregulated the following markets: airlines, radio stations, bus companies, televisions and telecommunications. The coalition government recently introduced 11 enterprise zones in the UK whereby these regions would be subjected to fewer planning regulations (as well as tax breaks), thus are an example of deregulation policies in the current government. For more on the enterprise zones, click here.
Wednesday, 17 August 2011
Word of the Day
Negative output gap
Occurs when the economy is performing below its trend rate of growth. For more detail, click here.
Occurs when the economy is performing below its trend rate of growth. For more detail, click here.
Tuesday, 16 August 2011
Word of the Day
Money Supply
The total amount of money in circulation in the economy at any given time. See the quantity theory of money for more.
The Quantity Theory of Money
The quantity theory of money
· Explains that a rise in the money supply leads to excess demand, leading to a rise in prices, inflation. To put it simply, too much money chasing too few goods.
· The quantity theory is a special case of demand pull inflation.
· The Fisher Equation of Exchange provides evidence for the quantity theory of money.
MV = PT
M = money supply
The total amount of money in circulation in the economy at any given time.
The number of times the money circulates around the economy at any given time. V is influenced by methods of payments such as cash, bank overdrafts, credit or debit. Methods of payments are limited therefore V remains constant.
P = price level
T = total transactions
The measure of all the purchases of goods and services in the economy. T remains constant because the theory assumes money is a medium of exchange, not a store of value, therefore people spend quickly any money they receive.
If V and T remain constant, they cancel each other out and thus a M = P. This means that a rise in M will create a rise in P, therefore explaining the theory.
Criticisms
Keynesians generally reject the theory because….
1. There are too many assumptions that the theory relies upon. They don’t believe that people quickly spend any money they receive. Instead, people hold money balances if share prices/bonds are likely to fall for example, thus V and T cannot remain constant.
2. If there is spare capacity in the economy, Keynesians believe that real output and employment will increase, not the price level. However a counter-argument for that would be the Phillips Curve (more on that to come!).
3. If M has increased, the effect it can have on P is limited if V balances out the increase in P. Reflation of the economy can further limit the effect of a rising money supply on the price level.
4. Reverse causation: Inflation causes an increase in the money supply, not the other way round. Cost push inflation occurs and the money supply adapts (by rising) to finance a higher price level set for consumers to pay.
Monday, 15 August 2011
Word of the Day
Automatic Stabilisers
A factor that changes in such a way as to automatically stabilise AD and the economic cycle.
They reduce the contractionary multiplier effects from changes in AD. This happens because when the economy is in a recession, there is lack of AD and unemployment tends to rise. Unemployment benefits are automatic stabilisers used when the economy is in a recession. Spending on unemployment benefits increase because more people are unemployed and this causes government borrowing to rise, injecting demand into the economy/circular flow of income.
In a boom, automatic stabilisers reduce the expansionary multiplier effects on the economy. Progressive taxation is used as the automatic stabiliser. As employment and incomes rise, tax revenues increase as a faster rate than income is rising, taking out demand from the economy and preventing it from overheating.
Automatic stabilisers help reduce volatility of the economic cycle.
A factor that changes in such a way as to automatically stabilise AD and the economic cycle.
They reduce the contractionary multiplier effects from changes in AD. This happens because when the economy is in a recession, there is lack of AD and unemployment tends to rise. Unemployment benefits are automatic stabilisers used when the economy is in a recession. Spending on unemployment benefits increase because more people are unemployed and this causes government borrowing to rise, injecting demand into the economy/circular flow of income.
In a boom, automatic stabilisers reduce the expansionary multiplier effects on the economy. Progressive taxation is used as the automatic stabiliser. As employment and incomes rise, tax revenues increase as a faster rate than income is rising, taking out demand from the economy and preventing it from overheating.
Automatic stabilisers help reduce volatility of the economic cycle.
Sunday, 14 August 2011
Word of the Day
GDP
Gross Domestic Product measures the value of all the goods and services produced within the economy.
Gross Domestic Product measures the value of all the goods and services produced within the economy.
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