It is pretty difficult to predict the future price of oil. There are many factors at work and it is hard to isolate any particular economic fundamentals that will determine the future price. Nevertheless in response to a readers question I posted a few factors which might keep oil prices above $100 for the next 12 months.
1) You say depreciation causes inflation for the three reasons you mention, but later, that in the long run, a higher rate of inflation will cause depreciation. So my first question is how are these two phenomena linked? Is ‘long run’ the key; i.e. it takes a prolonged high inflation to cause a devaluation, but devaluation causes inflation sooner? How long does it take for those three reasons to really kick in?
It depends, there is no straight answer. The two phenomena may occur simultaneously. Also it is complicated by the fact that many factors affect the exchange rate apart from just inflation. (e.g. short term interest rates)
2) My next question is that I’m aware that factors such as rising commodity prices can exert upward inflationary pressure, but are there any other factors that affect the devaluation of a currency – or is it purely down to inflation?
Many factors can affect exchange rates. These include:
- Interest Rates – lower interest rates cause less hot money flows and depreciation.
- Expectations – If investors expect a currency to devalue they will sell less. Confidence and market expectations are important in determining exchange rate
- Current account deficit. A large current account deficit may put downward pressure on exchange rates Continue Reading →
Readers Question Explain with the help of diagrams the equilibrium of a firm having monopoly power in the market in the short-run and long-run?
The diagram for a monopoly is generally considered to be the same in the short run as well as the long run.
Profit Maximisation occurs where MR=MC. Therefore equilibrium is at Qm, Pm.
Features of this diagram
- There are barriers to entry in Monopoly. Firms are price makers. The industry demand curve is the same as the firms demand curve.
- Profits are maximised at output where MR=MC. This means they set a price greater than MC which is allocatively inefficient.
- In this diagram the firms makes supernormal profits because AR is greater than AC.
Monopoly Diagram and Welfare Loss to Society.
- In a competitive market, output will be at P1 and Q2.
- In a monopoly, output will be QM and PM.
- A monopoly causes a fall in consumer surplus and a fall in producer surplus. Some of the consumer surplus is captured by firms.
- The red triangle shows the net loss of consumer and producer surplus to society.
Long Run Average Costs
It is assumed monopolies have a degree of economies of scale, which enables them to benefit from lower long run average costs.
Note: In monopolistic competition the short run equilibrium is different to the long run equilibrium
More on Monopoly
Readers Question: If long term Interest rates in the US do not fall, how will this impact the US economy?
Short Term Interest rates are governed by the Fed’s Current monetary Policy. These have fallen sharply in recent months from 4.25% to 2.25%. This reflects the Feds desire to avoid an economic downturn. The sharp cut in rates is an attempt to reflate an economy reeling from falling house prices, financial insecurity and lower economic growth.
Long Term Interest Rates involve interest rates on securities such as 30 year bonds. With long term bonds, the interest rate tends to reflect the markets long term expectations of inflation. They tend to be less volatile than short term rates.
If markets expect inflation to rise, bonds become less attractive to hold and therefore investors require a higher interest rate to make it attractive to buy.
Difference between Short Term and Long term interest rates in the US.
To see the difference between short term and long term interest rates view this table at the US Treasury
Hi, I am 15 at the moment at currently doing my GCSE’s. I am considering taking a-level economics along with maths, biology and chemistry. I am yet undecided as to what career i would like to pursue and think that the mentioned choice of subjects would keep my options open.
Could you tell me the ratio between coursework and exam for Edexcel board please? I cannot seem to find this information.
There is no Course work for Edexcel Economics.
There is an option to do coursework for AQA, but, I’m not sure whether it is in the new syllabus starting next year. The main change for the new syllabus is that students will do 4 exams (2AS and 2A2) instead of 6. I think this is a good change.
Personally, I do not like coursework. Students usually either:
- Spend a disproportionate amount of time on coursework
- Expect their teacher is going to get them a good grade.
The questions on this blog give an indication of the type of topics involved in A level economics.
Readers Question I’ve been told that when Edexcel write there exam papers they are roughly 12 to 18 months before the examinations are actually sat, and the topics that they are on are dependent on what were major economic news at the time. Is this likely? and if so would you mind advising me on what major economics issues happened around that time or just generally what are key and important economics issues that would be useful to know about that relate to the the A2 modules
Personally I wouldn’t put too much emphasis on the topical events of 2007. You can get 100% in an exam without knowing exactly what happened. However, I would still encourage you to read newspapers and have an idea of what is going on it; it will definitely help you studies, but it is not essential. It is true that exam questions are set about 12-18months before exam. So don’t spend hours revising why Northern Rock collapsed.
Some of the topical issues which are worth knowing about for A2 Economics
- Discuss impact of a housing crash on UK economy
- Discuss how a slowdown in US economy could affect the UK economy
- Discuss implications of a depreciating dollar and rising oil price on the global economy
- Discuss impact of Chinese economic growth on global inflation and economic growth
- Discuss the role of the MPC in keeping inflation low.
Readers Question: Evaluate the strength of Malaysia to attract foreign investment based on the performance of Malaysia’s economic variables.
A few years ago, I had a very nice holiday in Malaysia; 2 nights in Kuala Lumpar and 3 weeks in Kuantan. However, I can’t claim to be an expert on the Malaysian economy. This is some of the more theoretical ideas based on a cursory knowledge of the economy.
From 1988 to 1997, the economy experienced a period of broad diversification and sustained rapid growth averaging 9% annually.
Growth of 9% a year suggests a very good economic performance. It helped Malaysia to become the 34th ranked country in terms of GDP in PPP. Broad diversification means the economy was able to branch out into new sectors. For example, there has been a boost in the manufacturing sector. Manufacturing share of GDP has increased to 30%. Agriculture and mining dropped as a % of GDP. Foreign investment tends to focus on manufacturing rather than agriculture which has less chance of growth
By 1999, nominal per capita GDP had reached $3,238. New foreign and domestic investment played a significant role in the transformation of Malaysia’s economy. Manufacturing grew from 13.9% of GDP in 1970 to 30% in 1999 , while agriculture and mining which together had accounted for 42.7% of GDP in 1970, dropped to 9.3% and 7.3%, respectively, in 1999. Manufacturing accounted for 30% of GDP (1999). Major products include electronic components — Malaysia is one of the world’s largest exporters of semiconductor devices — electrical goods and appliances.
Factors That Affect Investment Levels
- Wage Costs – Malaysia relatively low
- Infrastructure – Have been many infrastructure improvements such as new international airport
- Privatisation of Industries
- Skills of workforce
- Malaysian economy at Wikipedia
OK, I have a question for you. This was the example which popped to mind as I was reading your entry. (price elastic products)
Here in my Middle Eastern country, sheep are sold for meat. Each year, prior to the Festival of the Sacrifice (Muslim holiday where every family buys a sheep to butcher at home in the house), families go shopping for their sheep. In the weeks prior to the Festival, the price of sheep goes UP, UP, UP. Sometimes the prices seem to reach scandalous levels. Of course, after the Festival, the price falls back to normal.
It appears that according to your explanation, this would be a PRICE INELASTIC good. However, this is NOT a monopoly, as there are MANY, MANY sellers of sheep in the market-place. It looks more like a collusion of price-fixing among the many sellers, to me. What do you think about this?
Thanks for question, it is interesting. I feel that the increase in price is due to an exceptional increase in demand, but a relatively inelastic supply of sheep at this particular time.
What seems to happen at this particular point in time, is that demand for sheep may increase by, say 1000%. However, in this festival week the supply cannot increase by 1000%? I assume that farmers will try and predict the increase in demand. However, it may be that they can only increase the supply of sheep on the market by say 500%. Therefore, despite an increase in supply of sheep, the increase in demand for sheep is far greater and therefore prices rise.
Since buying a sheep, at this time, is seen as an essential purchase, demand is very inelastic for sheep during this week. Therefore, consumers are willing to pay the higher price (a price they wouldn’t pay at other times of the year, when other types of meat would be seen as a substitute.)
Inelastic Demand and Monopoly
A good can still have an inelastic demand even if markets are competitive. Demand for sheep is inelastic because consumers don’t see any alternative to buying sheep. In the UK, demand for tobacco is inelastic because smokers don’t see any alternative to smoking
However, because there are many sellers, demand for individual farmers may be elastic. E.g. if one farmer sold cheaper sheep he would see an increase in demand. Similarly a particular brand of cigarettes may be elastic despite overall demand for cigarettes being inelastic.
Collusion and High Prices?
Perhaps the farmers could try harder to increase supply at this time, but, you can see the temptation to avoid doing this. This week offers a chance to make a very high profit. My feeling is that farmers are not actively colluding to set high prices. But, they don’t have much incentive to try and increase supply and avoid prices rising. In other words it is easy for farmers to tacitly collude and allow prices to rise each year. Farmers have little to be gain from working out how to avoid the shortages which benefit them so much.
Readers Question: I have question to ask. Its about the monopoly power. The dominance of a monopoly power in the market worries the government and groups that promote consumers interests. However, these companies with monopoly power have argued that they bring benefits to the market. So,what is the benefits from monopoly power brings to the market?
Some of the benefits of monopoly power include:
1. Economies of Scale.
If the firms produces in an industry with very high fixed costs, consumers can benefit from a large firm which can exploit economies of scale. Economies of scale lead to lower long run average costs and therefore give the potential of lower prices. Example:
Would you want several firms providing tap water? Would it make sense to have 2-3 companies laying a network of water pipes and sewage systems across the country? No. It is better to have 1 firm. This is an example of an industry which is a natural monopoly because of the extensive fixed costs.
Industries like car production and airline production also have significant economies of scale so it makes sense for firms to have some degree of market power.
- However, just because a firm has monopoly power doesn’t mean that the industry necessarily has economies of scale or that lower average costs lead to lower prices.
Readers Question: When would you want to own a business that sells price-elastic products? Why?
Price elastic products mean that if there is an increase in price, there will be a bigger % fall in demand. Therefore, with elastic goods, there is little incentive to increase price because there will be a bigger % fall in demand. Elastic products suggest the good is in a competitive market and therefore it is more difficult to make profits. If demand was price inelastic a firm could put up prices and make profits, for example, a firm with monopoly power is likely to have inelastic demand.
When Price Elastic products are Beneficial
1. For a Sales Maximising Firm.
If a firm wishes to increase market share and increase its sales then price elastic means that cuts in price will beneficial in increasing sales.
- However, it depends on how other firms react. If one firm cuts its price, demand may be elastic, but if all the other firms follow suit demand is likely to be inelastic and the price war only causes a small increase in sales (see Oligopoly Kinked demand curve)
Tejvan R Pettinger
Tejvan studied PPE at LMH, Oxford University and works as an economics teacher and writer.