Entries Tagged 'concepts' ↓

Readers Question: How The Economies Of Scale Can Bring Benefits To The Market.

Economies of scale occur when increased output leads to lower unit costs (lower average costs)

Diagram Economies of Scale

Examples of Economies of Scale include

Tap Water – High Fixed Costs of a national network.

Continue reading →

Readers Question: What is the benefits of monopoly. Identify and explain these benefits that brings to the market.

I need examples related to the benefits too.

I have written a few posts about the benefits of monopoly’s and mergers in the past

• Benefits of Mergers
• Are Monopolies always bad?
• Does Microsoft have too much market power?

Continue reading →

Readers Question: Can price discrimination be benefit to consumers?

Price Discrimination involves charging a different price to different groups of consumers for the same good. Price discrimination can provide benefits to consumers. However, the advantages of price discrimination will be appreciated more by some groups of consumers.

Benefits of Price Discrimination

1. Allows an unprofitable business to avoid going bankrupt. In some cases, it may be possible that there is no one price that would enable a firm to make normal profits. (i.e. average costs would always be higher than demand curve) However, price discrimination may enable the firm to turn a loss into a small profit. This means that a business activity can keep going, rather than closing down. This is obviously beneficial for consumers because it increases their choice of goods and services. An example might be train services. Without price discrimination (off peak, peak) train companies would make a bigger loss and may be discontinued. Continue reading →

Readers Question: I need help with elasticity I don’t quite understand it thanks

Elasticity is a concept which involves examining how responsive demand (or supply) is to a change in another variable such as price or income.

The Most common elasticity is Price Elasticity of Demand. This measures how responsive demand is to a change in price.

Inelastic Demand 

For example, if the price of rice increased by 10%, your demand may only fall by 1%. Therefore your PED would be -1/10 = -0.1. We say that your demand is Inelastic. In other words the higher price does little to reduce your demand. Other inelastic goods might involve:

Continue reading →

Readers Question: Explain how a change in the rate of income tax is likely to affect the size of the national income multiplier ?…………..

…..would appreciate if you can give me the main points i should include ..thank you

The National Income Multiplier says that an initial increase in spending can cause further rounds of spending. Therefore, the final increase in National Income is greater than the initial spending (or injection of Money)

e.g if Government increase spending on the wages of nurses by £2billion. That means National Income increases by £2billion. However, if nurses spend part of their extra wages, additional output and incomes will be generated. The final increase in National Income may be £3 billion. Therefore, there is a multiplier effect of 3/2 = 1.5 Continue reading →

• Economies of scale occurs when increased output leads to lower long run average costs.

Diagram of Economics of Scale

Note Economies of Scale occurs upto Q2. After Q2 dis-economies of scale starts to occur

Basically as a firm expands it receives increasing returns to scale. To understand why economies of scale occur it is useful to think about large companies and how they benefit from their size. Continue reading →

Believe it or not, these are actually economic terms.

To cannibalise your assets means that you create a new product which eat into sales of your old products.

For example, suppose Microsoft have good sales for its X Box. If it introduced a new superior product, like the ‘X box mark 2′. Nobody would want to buy the old X Box. Therefore, sales of the existing X box would plummet. So although its sales of the X Box mark 2 might increase, they are at the expense of the original. This is what we mean by ‘cannibalise’ in business.

In the world of technology, firms would probably see it as essential to release new products. In time the X Box would become less attractive compared to its rivals. Mobile phone companies are doing it all the time. Most phones have a life span of 6 months before becoming redundant.

This evolution of brands and technology is sometimes referred to as ‘Creative destruction’. Creative destruction is a term popularised by the economist, J.Schumpeter. Schumpeter argued that to make progress, in a modern economy, it was often necessary to brush away the old, outdated technology. Thus Schumpeter would argue that if some old inefficient business went bust creating unemployment, it may be bad in the short term, but necessary in the long term.

More Economic Concepts explained

Economists describe both short run and long run average cost curves as u shaped. Provide a brief explanation  why each of these curves might be considered u shaped.

Short Run Cost curves are U shaped because of diminishing returns. In the short run capital is fixed. After a certain point, increasing extra workers leads to declining productivity. Therefore, as you employ more workers the MC increases. Continue reading →

Readers Question: what is meant by consumer surplus? Can firms reduce or eliminate consumer surplus?

Consumer Surplus is the difference between the price that consumers pay and the price that they are willing to pay. It is the area between the equilibrium price and the demand curve

For example, if you would pay 76p for a cup of tea, but can buy it for 50p – your consumer surplus is 26p

Diagram of Consumer Surplus

Can Firms Reduce Consumer Surplus?

1. Firms can reduce consumer surplus if they have market power. – This enables them to raise prices above the competitive equilibrium. Continue reading →