The Economics of Valentine's Day

Happy Valentine's Day everyone!

Have you ever wondered about the economics of Valentine's Day? What does it mean?

This video (strangely) puts into context for us:

http://www.learnliberty.org/videos/economics-valentines-day

It explains three economic principles associated with Valentine's Day:
1. Free markets
2. Signalling
3. The seen and unseen

This video puts these key principles into context for us, hopefully you will understand them clearer after watching it.

Government Policies to Reduce Unemployment

For government to use the correct policy to reduce unemployment, they must first recognise the cause of unemployment (see here). Using Keynesian fiscal policy to increase AD may be ineffective if structural unemployment is taking place, for example, since this will simply result in inflation.

Free market view

Government policies should only be aimed at reducing structural, frictional and real wage unemployment. Cyclical and seasonal unemployment can be resolved through the market mechanism. Setting markets free can encourage competition and enterprise culture, creating more jobs. Supply can create its own demand.

Keynesian view

The government should intervene to correct the market failure that causes unemployment. They should try to make markets function better, giving them a greater role that the free market economists believe.

Case Study – Government ‘Work Programme’

·       Aimed at reducing long term unemployment and tackling youth unemployment

·       It is a partnership with private companies

·       More information: http://www.dwp.gov.uk/policy/welfare-reform/the-work-programme/

Tuition fees

Hi everyone, I would first like to apologise for the inactivity on my blog.

Second, I've just read something intriguing about universities and tuition fees. This article here, from The Independent, explains that universities have appealed to the Offa (Office for Fair Access), the universities watchdog, to try and amend the agreement they made earlier this year, to try to reduce their fees.

27 universities have appealed, possibly suggesting a price war in the higher education market. Is this a case against the market provision of higher education?

This is a good example of a possible price war that is currently occurring and a good example to use in the exam.

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.

Keynes vs Hayek (free market)

The greatest economic debate has been between the Keynesian views about government intervention in the economy and the Hayek views that markets should be left alone.

These two videos put some fun into the fact that these opposing views will always battle it out to be the best option. In your exam, it is important to form your own opinion about the economic issues you are discussing.

http://econstories.tv/2010/06/22/fear-the-boom-and-bust/

http://econstories.tv/2011/04/28/fight-of-the-century-music-video/

So which are you?