The study of economics focuses on the study of the production, consumption, and transfer of wealth. Because wealth is defined in a wide variety of ways, the study of economics can be construed narrowly or broadly, and is interrelated with the study of sociology, philosophy, history, psychology, and culture. Economics is viewed, by some, as the study of scarcity, but economic principles apply even when resources are not scarce. It is also considered the study of resources. Many people believe that economics is primarily about money or financial resources because economic study focuses on topics like banking, wealth, and finances. However, economics is not synonymous with finance. Finance refers to the management, creation or study of money, banking, credit, investments, assets and liabilities. It consists of financial systems and financial instruments and is divided into three sub-categories: public finance, corporate finance, and personal finance. Economics includes those areas, but is not limited to them. Furthermore, an education in economics is not only useful in economics-specific careers such as accountant, economist, financial risk analyst, investment analysis, and statistician, but also teaches skills that are transferable to other areas and industries. Macroeconomics examines the economy from the broader perspective. It looks at economic trends including: inflation, deflation, recession, depression, price levels, wage levels, employment, unemployment, gross domestic product, national income, and rate of growth. Macroeconomics is concerned with monetary policy, which, in the United States, is set by the Federal Reserve, often referred to as the Fed; international trade policies; tax policies; aggregate demand; and aggregate supply. Microeconomics examines the economy from a narrower perspective. It looks at how individuals, whether people or firms, interact in the market, and at specific buyer-seller transactions. However, in an increasingly global economy, with large firms dominating some areas of industry, it can become difficult to separate microeconomic and macroeconomic studies. Elasticity refers to the change in consumer demand. Demand for some products remains fairly stable, regardless of fluctuations in price. For example, the demand for water is fairly non-elastic. However, when there are substitute goods available, demand for a product may be very elastic. Microeconomics also examines income distribution, particularly income inequality. It also looks at how different types of ownership can alter the basic rules of supply and demand. For example, monopolies and oligopolies, where either a single or a small number of companies control all of a product, can artificially inflate prices. Another critical component of economic studies is an understanding of supply and demand. Demand refers to how willing people are to purchase a particular product. In other words, what is the desire or need for that product. Supply refers to how much of the product is available. Supply does not refer only to the total amount of the good or resource that is available, but to the amount of the resource or good that is accessible. Generally, as demand rises, prices also rise, and sellers are likely to make a greater supply available at that cost. However, as supply rises, then the price that can be charged for the item tends to drop, even if there is no decrease in overall demand, because consumers can search for a less expensive option. Market equilibrium refers to the market price at which buyers will buy the same number of goods that sellers are willing to sell at a particular market price.
The production possibilities curve represents the maximum level at which a country can produce. Freer trade, such as what the EU has promoted since its inception, allows countries to do two things. The first is that it allows them to produce at their production possibilities curve. This occurs because the country under free trade conditions is going to produce those goods in which it has a comparative advantage. This improves the efficiency of production because the country is producing goods at which it is better at producing, and as it produces more of those goods than it otherwise would the country will also have better economies of scale. A country will produce at a higher level of efficiency after free trade than it did before, bringing it closer to the production possibilities curve.
The other thing that happens under free trade is that the production possibilities curve is that it gets pushed outward. The improved efficiency from free trade is likely to increase the production capacity of the nations engaged in the trade. As a result, not only with the countries involved meet their old production possibilities curve, but they will see their production possibilities curves move as well.
2. An economy that is operating inside its production possibilities frontier is not operating at its capacity. There are issues within that economy with respect to efficiency. This economy should be able to increase production of any good at this point, a new good or existing one, because there is unused productive capacity in the economy. The country has resources that are being unused (Investopedia, 2011). If those resources are used, then the country will be in a position to experience economic growth up until the point where the production reaches the production possibilities frontier.
3. There are a number of reasons that the production possibilities frontier is pushed outward. Two of the main ones are improvements in technology and the exploitation of more resources (Riley, 2006). The first of these, improvements in technology, will push the production possibilities frontier outward by allowing the country to make better use of the resources that it has. The production possibilities frontier is a function of both the resources that the country has available and the ability of the country to leverage those resources. So if the country has increased its ability…… [Read More]
Economic Principles and Purchasing a House
Economics Principles and Purchasing a House
This essay discusses principles of economics as they apply to making decisions about purchasing a home. The essay also reviews the decision making process and how it is affected by marginal benefits and marginal costs. The health of the economy and also international trade are factors to think about too, along with looking at conditions which could have lead to making a different decision.
Supply and Demand
Buying a home is one of the single most important economic decisions that most people make. Because it is such a big decision, it is important to look at all the right considerations. The way to do this is to understand how economic principles apply. One principle that affected my decision was the law of supply and demand.
The number of homes available for sale is influenced by supply and demand. On the supply side, how many homes are for sale is influenced by the selling price of homes. If people see that they can sell their homes for higher prices, more of them are willing to sell, with all other things being equal. The converse is also true; more people are discouraged from selling when prices are low, as they are today.
The unemployment rate also affects the supply of homes. The more people there are out of work, the more people there are who fall behind on their mortgages and cannot afford to keep their homes. These homes add to the overall supply either through voluntary short sales or through involuntary foreclosures. The U.S. currently has a high number of homes available for sale. As of January 2012, the total existing-home inventory in the U.S. amounted to a 6.1 month supply at the current sales rate (RealEstateABC.com, 2012). This rate does not take into account what analysts call the shadow inventory, which includes distressed inventory that is being kept off the market. Experts believe that shadow inventory will continue to keep prices low for years to come (Time, 2012). Knowing that home prices will not increase significantly in the…… [Read More]
Economics: Application of Concepts
An Analysis of the Economic Situation in the U.S.
In the last five years, we have seen the U.S. economy expand but at a pace that is seen as being relatively moderate. In conducting an analysis of the current economic situation in the U.S., I will largely limit myself to inflation, interest rates, and unemployment.
Although the current economic situation is better than it was five years ago, there are signs of uncertainty that continue to suppress economic activity. This is more so the case taking into consideration the prevailing unemployment rates. For the most part of year 2008, the unemployment rate was stuck between 5% and 6% (Bureau of Labor Statistics, 2013). As at January this year, the nation's unemployment rate stood at 7.9% (Bureau of Labor Statistics, 2013). This is an indication that in comparison to five years ago, the total unemployed labor force increased significantly.
Standing at 1.6% on January 1st of this year, the U.S. inflation rate during a similar period five years ago stood at 4.3% (Multpl, 2013). The relatively high inflation rate five years ago can be attributed to the adverse effects of the 2007 -- 2010 financial crisis. It is however important to note that in the recent past, the cost of imported raw materials has fallen and labor costs have stabilized. This has helped rein in inflation.
When it comes to interest rates, it should be noted that in an attempt to stir economic activity and neutralize the effects of the recent downturn in economic activity, the Federal Reserve has in recent times attempted to keep interest rates low through the maintenance of near zero interest rates (Board of Governors of the Federal Reserve System, 2012). In comparison to five years ago, the current performance of the stock market as well as GDP growth can be regarded impressive.
Strategies the Federal Government Could Implement to Encourage People to Spend More
The federal government could make use of a number of monetary and fiscal policy tools in an attempt to encourage individuals to expand their spending. In this scenario, I propose two fiscal…… [Read More]
Economics of Alcohol Abuse
Econcs Of Drugs & Alcohol
How an Economist Might Approach Alcohol Abuse
One answer would be to raise price by decree. Holding all other factors the same, this artificial price increase would initially reduce quantity consumed, but there would still be demand that went unfulfilled, which implies foregone profit at the new lower quantity and higher shelf price. Were supply restricted, say through a fixed number of licenses, this triangle would represent profits producers would want to capture but could not under the artificially high price. Were the price rise caused by say input costs, in the long run producers who could achieve economies of scale would increase production, so price would fall back to the original at higher quantity (Chen, 2007, p. 1), but this would be impossible were supply artificially limited, and if the profits were taxed away there would be no incentive to increase supply. In the case of a tax, the result would be a transfer from the producers to the state with unfulfilled consumer demand at a new artificial lower quantity and higher price, which would normally be a deadweight loss to society. If there were social costs to alcohol abuse, the artificial restriction of demand would offset some of that loss and if the tax went to the same general fund it would also offset that cost.
But this story above assumes all consumers can quit. Were alcohol addictive, the addicts would consume at any price regardless of supply after all the casual consumers had been priced out. The market solution might just reduce the personal income of the lowest-earning abusers, cause them to commit crime, or if they had to work more to support the higher price of their habit, this assumes there was work to be had. One way to deal with this element would be to offer difficult rehabilitation in exchange for controlled dosages for those who couldn't afford the new higher cost. As more alcoholics gave up, total social cost from enforcement and damages would fall, workforce productivity might increase, and any remaining program costs could perhaps be shifted…… [Read More]
economy has recently emerged from recession. During 2009, real GDP declined 2.6%, the largest drop during the study period beginning in 2009. This came following flatlined GDP in 2008. The only similar instance on record was in the early 1980s when GDP declined 0.3% in 1980, rebounded slightly and then declined again in 1982 by 1.9% (BEA, 2011). The most recent recession was, because there was no rebound in the middle and because it was deeper in intensity, the most serious decline in economic output in the last thirty years. Whereas the recovery post-1982 was strong (4.5% growth in '83 and 7.2% growth in '84) this has not been the case now (2.9% growth in 2010 and forecasts for 2011 are not much better). The unemployment situation at present roughly mirrors that of the early 1980s recession. During that recession, unemployment moved to 9.7% in 1982 and 9.6% in 1983. During the current recession, unemployment moved to 9.3% in 2009 and 9.6% in 2010. This rate moved down quickly starting in 1984 and has begun to move down today, where it currently sits at 8.8%. It can be argued therefore that the impacts of the current economic slowdown have been at least somewhat stronger than those of the early 1980s recession, and that prospects for recovery are perhaps more challenging.
While the recovery in the mid-1980s was relatively strong, the current recovery seems to be weaker in intensity, especially with respect to the GDP figures. There are significant differences between the two recessions that makes direct comparison only somewhat useful. The early 1980s recession was caused primarily by Federal Reserve policy that raised interest rates sharply in the face of high inflation, the latter being caused in part by skyrocketed oil prices. The high interest rates, therefore, were deemed necessary to cause a recession and bring inflation under control (TCU, no date). The more recent recession has a number of causes including instability in the banking system that led to a credit crunch. Whereas the early 1980s recession was…… [Read More]
Jim Hargrove, CEO
Neptune has over 60 days' worth of inventory and is faced with some interesting solutions to address this issue. This memo will analyze the issue and the proposals put forth by the management team. The memo will conclude with a recommendation for action.
New fishing rules and new technology investments have allowed Neptune to take bigger catches. Despite record sales, the company is still accumulating inventory. There are two proposals on the table for addressing the inventory issue: launching a budget brand and decreasing fleet size.
Analysis of Underlying Issues: The solution should reflect the underlying problem. The company has increased its fleet with new additions. This increase in capacity is permanent. The government's new regulations are also pushing us into richer fishing grounds, again representing a permanent increase in capacity. Other firms in the industry are also facing a long-term increase in capacity.
Recommendation: The company should decrease the size of its fleet, rather than launching a budget brand. A price war is not sustainable and there is no evidence to support that price reductions will dramatically increase consumption, particularly if those reductions are matched by other firms within the industry.
The two main factors affecting supply have both been discussed. Each of these factors can be considered to be a long-run issue, and will be shared by other firms within the industry. The industry is characterized by monopolistic competition, so the price is expected to decrease somewhat, to a new equilibrium point. In order to maintain a higher price, the industry as a whole must cut production. Demand is impacted in part by the price of fish, but also in part by the desirability of fish products in the marketplace (consumer habits and preferences). Recent evidence shows a social trend towards healthier eating, but this has not had a significant impact on fish sales. Fish is typically a premium-priced source of protein and many consumers have responded by simply not incorporating fish…… [Read More]
The situation in the European air cargo industry bears many hallmarks of a cartel, and this was the finding of the European Commission. The OECD (2002) defines a cartel as "a formal agreement among firms in an oligopolistic industry…on matters such as price, total industry output, market shares, allocation of customers, allocation of territories, bid-rigging, division of profits or the establishment of common sales agencies." The main difference between this definition and the behavior of the airlines in question is that the industry is not oligopolistic in the true sense of the word. In an oligopoly, there are only handful of industry players, so any such collusion as indicated in the definition of a cartel would serve to disrupt market forces to the benefit of the companies within the oligopoly. In air freight, however, the prevailing market condition was that of monopolistic competition. This makes is harder to prove a case of cartel behavior -- effectively the members of the cartel would need a collective market share so high that their behavior dominated the market. Thus, the main assumptions of a cartel are that it will control the terms of trade in the market, and that this will serve to benefit the members of the cartel.
The European air freight industry is interesting in that for the most part any individual route will only be served by one or two airlines, thereby created oligopolistic conditions. For the continent as a whole, no such conditions exist but for most point-to-point matches such conditions do exist. However, there are other competitors including discount airlines, courier services such as DHL, FedEx and UPS, domestic postal services and other forms of transportation. The issue, however, is that some of the courier and postal services may use air freight space on commercial airlines in order to ship the goods, meaning that on some route combinations there is little alternative to break the oligopoly. It is also worth considering that while land-based options are…… [Read More]
Economics a Powerful Determinant Rate Direction
Economics and entrepreneurship play significant roles in carrying out social change. The two are effective tools to change the economic fates of the unfortunates. Social change is defined as 'the structural transformation of political, social and economic systems and institutions to create a more equitable and just society' (fundforsouth). Social change organizations are described as an alliance of people working jointly for a cause sometimes challenging service providers, institutions and government agencies through activism. But it's hard to implement change without the funds that are sometimes controlled by the chosen few such as in the case of World Bank and World Trade Organizations. On the other hand, there are entrepreneurs who are up to provide change through their humanitarian deeds, such as the entrepreneurs who are in the business not just for profit but for their advocacy.
These entrepreneurs' main objective is to make the world a better place for everybody. This goal shapes how they determine their success and how they form their enterprise. 'The best measure of success for such entrepreneurs is not how much they make but the extent to which they create social value' (Dees et al. 2002). They are called as social entrepreneurs and they act as 'change agents' (Dees et al. 2002) of the society. They implement change by considering every problem an opportunity to make their vision work. Social entrepreneurs are skilled in doing more with less and do not settle for a quick remedy but adhere to find ways to create lasting improvements.
As a determinant of social change, social entrepreneurs look for probabilities to perk up society and they take action. 'They attack the underlying causes of problems and their actions stimulate worldwide improvements in the fields of education, health care, job training and development, the environment, the arts and any other social endeavor' (Dees et al. 2002)
One concrete action that is taken with economics and entrepreneurship to further change is the measure taken by Bill Strickland, Jr., founder of the Manchester Craftsman's Guild. He has 'implemented…… [Read More]
The moral of the story is that even though sticky prices are in no one's interest, prices can be sticky simply because price setters expect them to be" (para. 18). This real life scenario is what Wolfgang Munchau suggests is leading to the global economic crisis. Munchau argues that the world leaders' failure to act has resulted in a global coordination failure, and the global recession that is currently in full force. Indeed, Munchau says, "Not one of [the London summit's] resolutions move the world a small step closer to resolving the global economic crisis" (para. 1). The reason for this, according to Munchau, is because they have waited to make crucial decisions, decisions that they are still waiting to make (para. 1).
Munchau's argument offers a commentary on why some consider governments a part of the coordination failure problem instead of the solution. Governments, at least democratic ones, are traditionally slow to act, since they have a two-level game that requires they both get the approval of their own legislative bodies and that of the global community before they can implement a policy. Furthermore, governments tend to be more hesitant and less likely to act with business savvy than are private corporations. This does not necessarily mean that governments will always be a part of the communication failure problem. However, it does suggest that they must learn to act with more efficiency in order to avoid compounding coordination failure problems. Instead, governments must make decisions -- even risky ones -- efficiently. When economic crises occur on a global level, it is even more pertinent for governments to act quickly in order to be part of the solution rather than part of the problem.… [Read More]
" (Kee, 2001, p. 139)
To further this discussion of short- and long-term production and cost one must at least briefly understand the just-in-time model. This model was developed by the Toyota Motor Corporation to mirror the ability of certain suppliers to provide just the amount of a product that a market demanded at the time it was demanded. To apply this model to manufacturing one must have a careful set up for short- and long-term goals of production, and potentially this model can effect short run production and be ignored by cost cutting that attempts to buy raw materials in bulk to meet the demand of a bottleneck in the early life of a product. (Ohno, 1988, pp.26-33) Just-in-time has become a goal of many in manufacturing, as they seek to carefully organize short-term and long-term production and cost issues. In the short-term, procurement is lower and waste is less, and in the long-term the firm is not left with surplus with regards to either raw materials or unwanted or slow selling finished products.
Short-term goals of production and cost often revolve around the idea that the most important job of the manufacturing team revolves around how to procure the most raw materials at the lowest price and how to effectively cut costs of production of a product while retaining or even raising its market price. Long-term goals on the other hand have to do with assessing the quality of a product and attempting to prevent product failure in the future, so as to reduce long-term loss from attrition and/or in the worst case scenario recalls. ("Value, in Economics," 2004) Both sort and long-term decisions and plans must be in place and balanced for a product to meet the demands of profit, no matter the industry or the size of the firm. (Hegji, 2001, p. 17)
Short-term production and cost goals, revolve around the attempt to most immediately recuperate the cost of research and development as well as the cost of bringing a product to full production. These costs include both fixed and variable costs, where variable costs are sought at lower rates and fixed costs are fixed. Short-term production and cost may be influenced heavily by attempting to bottleneck the market while long-term production and cost models attempt to sustain the longevity of demand through the application of investment in resources that best meet quality assurance to…… [Read More]
The English premier league has a large television audience and inspires a large amount of devotion among fans that might not have the interest of the sporting world. The English premier league is well-known from London, to other parts of the world.it is very hard to find someone who does not have a favorite football team within the English premier league. Despite all this the we4alth that has come with the famous competitions does not go down to the fans. For instance the lucrative TV deals do not trickle down to the fans. There exists a situation that is very troubling when it comes to the ticket prices. The ticket prices a have gone so high such that even the most loyal fans are no longer able to afford them. For example a ticket for an Arsenal match costs a whooping 126 pounds and there are instance it can go up to $200.the English premier league was once a workingman's game but from the trend it is slowly becoming a form of entertainment that is excluding people.
There is a large income gap that exists between fans and teams which goes ahead to clearly show the financial inequality that exists around the world. The worst part of the situation is that fact that the reasoning behind these exorbitant tickets does not add up.as a matter of fact the fans across England are now demanding a stop to the increasing costs of tickets. Something should be done to this increasing prces.in economics we can look at this situation with the income elasticity of demand. This measures how responsive demand of a particular thing is to a change in the income of those who are in demand of the good. When we look at the income of people around the world we can say that du to the economic changes the incomes are slowly going down. People are now earning less compared to before. If the ticket prices continue to go up then no one will be bale to afford them and hence no one will buy the tickets. Price elasticity of supply shows…… [Read More]
Even searching the Internet for information has a cost, the opportunity cost of one's time. Thus, one will consider the cost of obtaining information before seeking it out to make a decision.
The remaining three assumptions of the economic way of thinking deal with the notions of time, personal preferences and predictability. Assumption six makes the point that there are short-run effects and long-run effects for any decision that ought to be considered. For instance, a tariff may increase employment and income in an industry in the short-run, but consumers will decrease their spending on other products in the long-run. Assumption six states the value of a good is subjective and preferences will, therefore, differ between individuals. The final assumption of the economic way of thinking asserts that the test of a theory's validity is its ability to predict how the real world operates. Thus, theory's with greater validity should be given more weight than those with unproven accuracy.
In summary, the economic way of thinking is a form of abductive reasoning that starts from a set of accepted facts (identified with the eight key assumptions contained in this paper) and infers the best decision. According to one economist, Heyne (Limitations of the economic way of thinking), the economic way of thinking is a "view that emerges from the presupposition that all social phenomena result from interactions among the choices that individuals make after calculating the expected benefits and costs to themselves. This perspective is very useful when employed to explain the working of the largely impersonal network of transactions that we call the market system or simply the economy."… [Read More]
We analyze the economy's productivity by calculating the Gross National Product, which is "the market value of the sum of all the goods and services produced in the economy." The economy's productivity should have a constantly growing figure in order to ensure the fact that that country is currently developing at its fullest potential.
The fiscal policy is the "means by which a government adjusts its levels of spending in order to monitor and influence a nation's economy." It comes together with the monetary policy by which a central bank controls a nation's capital supply. Fiscal and monetary policies are used in different arrangements in an attempt to direct a state's economic objectives.
Global Economic Growth and Development is the global raise in value of the commodities and services manufactured by an economy. In economics, the terms "economic growth" or "economic growth theory" usually refer to augmentation of "potential output, i.e., production at 'full employment', which is caused by growth in aggregate demand or observed output." Among the most important theories concerning the economic growth were the mercantilist theory and the absolutist one, or connected to important events in the world's history such as the enlightenment, the industrial revolution etc.
US are the biggest trading country in the world at an international level. However, Americans are happy and at the same time unhappy about how much importance U.S. trade policymakers put on money-making benefit and devastatingly favor including other facilities-"protecting American workers, protecting the environment, preserving international labor standards-into the process of furthering trade." If needed Americans are prepared to diminish the enlargement of trade in order to tackle these additional priorities.… [Read More]
In basic terms, microeconomics and macroeconomics are both branches of economics. While one concerns itself with economic decisions undertaken at the household or individual level, the other explores the functioning of the economy in overall terms. In this discussion, I take into consideration the key differences between these two branches of economics. In so doing, I will give an example of each phenomenon and later highlight decisions made under both the microeconomic and macroeconomic context.
The Key/Main Differences between Microeconomics and Macroeconomics
Derived from the word "micros" which is essentially a Greek name for "small," microeconomics' primary focus remains on small individual groups or units. Derived from the word "macros" which is a Greek term literally taken to mean "large" or "long," macroeconomics concentrates on the analysis of the aggregate economy (Mishra, 2010). According to Miles and Scott (2005), the primary concern of microeconomics is the decisions a limited number of agents make. However, macroeconomics comes in with a view of decisions (in totality) of all the agents in aggregation.
To begin with, the behavior of individuals in economic terms is the main concern of microeconomics. In this case, microeconomics seeks to chart the behavior of individual industries, markets, firms or producers. Thus in this regard, this branch of economics focuses on a particular segment of the entire economy. However, macroeconomics on the other hand has its attention focused on the economy as a whole. Thus in regard to income, macroeconomics looks at the national income as opposed to individual incomes. Further, when it comes to prices, macroeconomics concerns itself with general price levels as opposed to particular prices.
Secondly, when it comes to objectives, optimum resource allocation remains a key objective of microeconomics. On the other hand, Hussain (2010) is of the opinion that economic resources development and full employment is the main objective of macroeconomics.
Next, it can be noted that in both cases; demand and supply is dependent on different factors. In regard to microeconomics, demand depends on a particular market's price and expectations of consumers. Further, supply in this case is dictated upon by the individual price of a certain good and the expectations of firms in terms of profits, returns or otherwise. On the other hand, demand when it comes to macroeconomics is largely dependent on the expectations of households coupled with the…… [Read More]
This negative motivation technique was mostly used in the 1930's, while nowadays it is rarely used.
Another advantage of unemployment is that it helps limiting an accelerated growth of the Gross Domestic Product (GDP) that cannot be supported for extremely long periods of time because of the resource constraints and environmental impacts also. If the employment rate is high, human resources are not used at their best capacity, which leads to wasting opportunities to produce goods and services, causing problems for the economy on a long-term.
Unemployment also encourages certain people to start their own business. Most of these people are former employees previously trapped in dead-end jobs with no future, that after being fired from their jobs found the courage and the motivation so start a business of their own. This way, many little companies are coming along quite nicely. These small companies create labor demand that is satisfied by unemployed workers, therefore diminishing the unemployment rate on a medium term.
Unemployment determines a better prepared labor supply. Inactive professional periods determine unemployed people to take certain classes to qualify for another job, unemployment providing them the time and motivation for taking classes to improve their professional skills. On a long-term, the labor market will enrich itself with highly trained professionals.
Unemployment may also be responsible for the migration of unemployed population to under populated areas, where the work supply is very low. This creates a balanced population distribution on a territory, influencing in a positive way the economic life of certain regions.
The natural functioning of the labor market can only be attained with natural unemployment, whose rate corresponds to full employment. Therefore, the rate of natural unemployment ensures macroeconomic balance.
Each unemployment type affects the economy in a different way and has a different impact. Cyclical unemployment appears when there is not enough aggregate demand for the labor. This causes professional reorientation. Workers found in this situation will change their professional profile by orienting towards other jobs for which the labor market is not saturated, therefore…… [Read More]
The Canadian government seeks to have a positive balance of payments with the United States. This is, in effect, a wealth transfer. Tracking the balance of payments vs. The exchange rate, we can see the impact of exchange rate shifts on the BOP. The Canadian balance of payments in 2004, when the exchange rate ranged from 1.17 to 1.37, was $29.8 billion. In 2008, when the exchange rate was between 0.97 and 1.29, the balance of payments was $8.1 billion. Tracked against the forex chart, the trend holds for the interim years as well -- when the Canadian dollar is strong, the balance of payments shrinks. This reflects the reduced competitiveness of Canadian goods in the U.S. market when the Canadian dollar's value is high. It also reflects the increased value of U.S. imports. In the U.S.-Canada trade relationship, however, there is an offset, which is oil. Increased strength in the Canadian dollar in recent years has typically reflected strength in crude oil prices. While this reduces the value of Canadian non-oil exports to the U.S., it increases the value of oil exports. The demand for oil in the U.S. has low price elasticity, in contrast to other Canadian exports. The increase in oil price elasticity and increased volatility in oil markets have contributed to the increase in influence that oil prices have on the USD-CAD price fluctuations.
Recent years have seen a seismic shift in the demand drivers for the Canadian dollar. In the long-run, the strength of the U.S. dollar has been the most important driver, with a secondary driver being the monetary policy of the Canadian government, which has for several decades been designed to support Ontario and Quebec-based exporters to the U.S. An analysis of recent data shows that these factors have been less important in recent years. The defining moment for the Canadian dollar in this decade came when analysts realized that advances in technology and rising oil…… [Read More]
Higher interest rates, more capital invested
During the 1980s, when President Reagan was attempting to stimulate the economy, he radically lowered taxes. The U.S. was in the grips of 'stagflation,' or high unemployment and high inflation, a combination which historically is not supposed to occur together. The lower corporate taxes and lower taxes for wealthy individuals eventually encouraged more investment in business. "The Fed was resolved to stop inflation…[and] kept raising rates in 1980 and '81, eventually bringing both the economy and inflation to a standstill" (Solomon 2009). By the mid-80s, interest rates were still high, but investment capital in the economy had increased.
Lower interest rates, less capital invested
Low interest rates and low rates of capital invested in the economy are usually characteristic of a recession. This occurred very recently, during the Great Recession of 2008, when the Fed slashed interest rates to historically low levels to stimulate growth. "The Federal Reserve surprised Wall Street…by cutting its fed funds short-term interest rate target by three-quarters of a percentage point…The move had the effect of reducing rates on mortgages and home equity loans, and reassured investors that the Fed will do what it can to spur economic activity as long as the threat of recession looms" (Barr 2008). However, despite this encouragement to banks to lend money, there has been a widespread reluctance amongst many businesses to expand and hire more workers.
Lower interest rates, more capital invested
In the 1990s interest rates were much lower than they had been in the 1980s, but the economy was booming and more capital was being invested in the economy, partially as a result of the revolution in technology that came to be known as the dot.com boom (and bust). After the economic bubble began to deflate in 2001, the Fed lowered interest rates so much that a housing 'bubble'…… [Read More]
This situation is perfectly illustrated by the figures. As one may observe, as the units of produced goods increases, the number of units of produced services decreases. The maximum number of units of goods can be produced only if no units of services are produced at the same time.
A d) if the country's economy is producing on its production possibility frontier, the opportunity cost cannot be increased, it cannot be exploited in order to increase the production of goods and services. Therefore, in order to increase production, the country's production possibility frontier must be changed. This could take place by increasing the country's production capacity.
This situation can be influenced by quantities of available resources, on the one hand, and by technological progress, on the other hand. In our case, the situation is influenced by technological progress, which determines increased production with a given quantity of resources.
The dotted lines represent the new values of units of produced goods and the new production possibility curve. The number of units of produced services has remained unchanged.
2. a) the most important ingredients used in producing bread are flour, produced from processed wheat, and butter or margarine. If the price of wheat increases, this will lead to increased production costs, which will also determine the price of bread to increase. Bread is a good for which no substitute exists. Of course, there are other goods with similar qualities, like nutritive value or protein composition, for example rice, pasta and potatoes, but the competition between these goods can be considered indirect. For example, one cannot eat gem and butter with pasta or potatoes, but only with bread. For such goods, the demand is relatively inelastic. In other words, if the price of bread increases, the demand will remain generally constant, and people who usually eat bread will continue to buy it, no matter how high levels the price reaches.…… [Read More]
Discuss the alternative theories to profit maximization ranging from perfect competition to strict monopolies and discuss how these two special conditions are theoretical limits
In economics, profit maximization is the process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem. The total revenue -- total cost method relies on the fact that profit equals revenue minus cost, and the marginal revenue -- marginal cost method is based on the fact that total profit in a perfect market reaches its maximum point where marginal revenue equals marginal cost. Economists identify four basic types of markets based on the number of firms relative to the size of the market (The size of the market is determined by what the buyers believe to be good substitutes for a firm's product. For example, the market for long-distance calls is national: people consider any U.S. long-distance supplier to be a good substitute. However, the market for funerals is very local: you are unlikely to consider a funeral parlor even in another neighborhood to be a good substitute.), the ease of entry (are there barriers such as economies of scale or government regulation?) and the degree of competition (do firms ignore each other's choices or compete actively?) And product differentiation (Do consumers consider the product to be the same regardless of who produces it, or not?) Perfect competition: This is a market in which there are large numbers of buyers and sellers of a homogeneous product (e.g., wheat is wheat), none of which can influence price; easy entry (small economies of scale and no other barriers); and essentially no competition (they ignore or even help each other). E.g. include most basic commodities: agricultural products, minerals (oil, etc.), etc. The alleged unique attribute of a perfectly competitive industry is that the market price equals the marginal cost of production, as a consequence of the competitive profit maximizing behavior of myriad…… [Read More]
Economics and Market Competition
Companies influence and are influenced by market conditions. The competitiveness on the market, the supply and demand determine how companies develop their strategies. There are also other factors that determine their strategy, like market price, average revenue, and marginal revenue. The evolution of these factors and their influence on the market determine companies' behavior.
Market Price, Average Revenue, and Marginal Revenue
The market price is determined by supply and demand. When the supply of a certain product is high, its price is lower, and when the supply is low, this increases the product's price. In markets with high levels of supply there is usually intensified competition. When the demand for a certain product is high, the price tends to increase. In markets with reduced demand, the prices are lower, and the level of competition is reduced.
Marginal revenue is represented by the extra revenue gained when a perfectly competitive company sells one more unit of output. This is an important factor that is analyzed in relationship with marginal cost in situations where perfectly competitive companies make decisions about increasing their profits (Hubbard & O'Brien, 2009). Companies' market control abilities are reflected by the marginal revenue. If marginal revenue is constant, it means the company can control the market in case. The profits can…… [Read More]