Inflation: advantages and disadvantages

Inflation: advantages and disadvantages

Readers Question: what are the advantages and disadvantages of inflation? Inflation occurs when there is a sustained increase in the general price level. Traditionally high inflation rates are considered to be damaging to an economy. High inflation creates uncertainty and can wipe away the value of savings. However, most Central Banks target an inflation rate of 2%, suggesting that low inflation can have various advantages to the economy. Some economists even argue we should target a higher inflation rate during periods of economic stagnation.

Pros and Cons of Mergers

Pros and Cons of Mergers

A merger involves two firms combining to form one larger company; it can occur due to a takeover or mutual agreement. The pros and cons in summary: Advantages of mergers Economies of scale – bigger firms more efficient More profit enables more research and development. Struggling firms can benefit from new management. Disadvantages of mergers Increased market share can lead to monopoly power and higher prices for consumers A larger firm may experience diseconomies of scale – e.g. harder to communicate and coordinate. When looking at mergers it is important to look at…

Applying economics in everyday life

Applying economics in everyday life

At the start of the academic year, I always feel a little pressure to justify the study of economics. Students come up asking things like, should they do economics or history? It’s hard to know what to say, but to get people excited about economics, it’s good to try and think how economics can be applied in everyday life. Some of this is just common sense, but economics can put a theory behind our everyday actions. Buying goods which give the highest satisfaction for the price

Should the government intervene in the economy?

Should the government intervene in the economy?

One of the main issues in economics is the extent to which the government should intervene in the economy. Free market economists argue that government intervention should be strictly limited as government intervention tends to cause an inefficient allocation of resources. However, others argue there is a strong case for government intervention in different fields. This is a summary of whether should the government intervene in the economy. Arguments for government…

Policies for Economic Growth

Policies for Economic Growth

Government policies to increase economic growth are focused on trying to increase aggregate demand (demand side policies) or increase aggregate supply/productivity (supply side policies) Demand side policies include: Fiscal policy (cutting taxes/increasing government spending) Monetary policy (cutting interest rates) Supply side policies include: Privatisation, deregulation, tax cuts, free trade agreements (free market supply side policies) Improved education and training, improved infrastructure. (interventionist supply side policies) Demand side policies are important during a recession or period of economic stagnation. Supply side policies are relevant for improving the long run growth in…

UK Inflation Rate and Graphs

UK Inflation Rate and Graphs

Current UK Inflation Rate CPI inflation rate:  2.6% (headline rate) CPI – D7G7 at ONS (page updated 18 July 2017) Source: Raw data General inflation tables | CPI annual % change D7G7 at ONS Other measures of inflation (CPIH) CPI including owner occupiers’ housing costs – 2.6% (CPIH – L550) Factory gate prices (Output prices) 3.3% June 2017 (output prices) ONS See: Measures of inflation Cost push inflationary factors In 2017, UK has seen a…

The importance of economics

The importance of economics

Readers Question: What is the importance of economics? Economics is concerned with the optimal distribution of resources in society. The subject involves Understanding what happens in markets and the macroeconomy. Examining statistics about the state of economy and explaining their significance Understanding different policy options and evaluating their likely outcomes. Examples of the importance of economics Dealing with a shortage of raw materials. Economics provides a…

Profit Maximisation

Profit Maximisation

An assumption in classical economics is that firms seek to maximise profits. Profit = Total Revenue (TR) – Total Costs (TC). Therefore, profit maximisation occurs at the biggest gap between total revenue and total costs. A firm can maximise profits if it produces at an output where marginal revenue (MR) = marginal cost (MC)   Diagram of Profit Maximisation To understand this principle look at the above diagram. If the firm produces less than Q1, MR is greater than MC. Therefore,…