Inferior Good

A good whereby demand for the good decreases as income increases. It goes against the normal law of demand where increasing income should lead to higher demand. An example of this type of good is demand for public transport. As income rises, more people can afford to buy and use cars, thus demand for public transport should fall.

Merit Good

A merit good is one where the marginal social benefit is greater than the marginal private benefit of consumption. Merit goods lead to market failure because the wrong quantity of goods is sold at the wrong price. The diagram below explains more.

Consumption of a merit good leads to a positive externality. Remember that social benefit maximisation is when MSB = MSC and private benefit maximisation is when MPB = MPC. Therefore if the free market were to provide merit goods, it would provide at Q1 to maximise private benefit. However, the socially optimum level of consumption is at Q2 thus leading to under-consumption and under production of merit goods (hence market failure).

Marginal External Benefit is MSB – MPB. It is the extra benefit incurred from producing the positive externality.

Video on Comparative Advantage and PPF

There is a fantastic video which thoroughly explains the comparative advantage using the PPF curve. Using and linking the two in your exam can show the examiners your ability to use micro and macroeconomics in one argument. The link is here. Enjoy!

To learn more about PPF, click here and here. To learn more about comparative advantage, click here!

Public Bad

A good that people want to remove (e.g. rubbish). Society would rather pay to remove the good rather than leave it there.

Global Economy

For those of you who have been watching the news recently, you should know that there is fear that the global economy could double-dip which the USA in serious risk. Below is a summary of the main uncertainties the global economy faces.

The IMF says…

· There is sluggish economic growth

· Governments need to rethink their policies

· The UK growth forecast needs to be reduced (and George Osborne said so too). Economic growth in the UK has been revised to a mere 1.1%

· Deficit reduction plan needs to be delayed

Eurozone

· Italian credit rating degraded

· Protests in Greece

· 40% of our exports go to the eurozone.

All advanced economies are facing tough times.

The UK government should focus more on capital spending (spending on infrastructure). This will stimulate the economy because infrastructure provides the correct conditions for business and enterprise to flourish. It will create jobs in the short run and long run, and should increase economic growth in the long run.

It's good to be on the ball with all the latest economic news.

The J Curve Effect

When imports and exports are less elastic, devaluation of the currency can lead to a worsening effect on the balance of payments (BoP). This is because as the exchange rate falls, imports are more expensive, thus spending more on imports results in a larger deficit. Demand for imports does not fall immediately after devaluation because:

·     There may be lack of substitutes available (e.g. raw materials, oil…)

·     Deals already agreed have to be fulfilled

·     Manufacturers of substitutes need time to adjust their manufacturing process/production.

After T1, spending on imports fall and the BoP deficit starts to improve. However this improvement may be short lived because higher import prices can lead to greater inflation, decreasing the country’s export competitiveness.

Seasonal Unemployment

A type of short term unemployment whereby fluctuations in climate affect demand for a good/service thus in turn affecting demand for labour. Industries affected include tourism, agriculture, catering building/construction...etc.

Also called casual unemployment