economics

regulatory-capture

Regulatory Capture

Regulatory capture is a form of government failure where those bodies regulating industries become sympathetic to the businesses they are supposed to be regulating. Regulatory capture can mean monopolies can continue to charge high prices The opposite of regulatory capture is ‘public interest theory’ – the idea that government regulation can influence monopolies to behave in the public interest. How does regulatory capture occur? 1. Regulators become friendly with the firms they are dealing with. Spending time with people makes you more…

maximum-price

The invisible hand

The invisible hand is a concept that – even without any observable intervention – free markets will determine an equilibrium in the supply and demand for goods. The invisible hand means that by following their self-interest – consumers and firms can create an efficient allocation of resources for the whole of society. How does the invisible hand work? Suppose, a firm was charging a very high price for bread – £4 a loaf. This creates an incentive for another baker to sell at a lower price, say £2. Consumers will then switch…

laffer-curve-2018

The Laffer Curve

The Laffer Curve states that if tax rates are increased above a certain level, then tax revenues can actually fall because higher tax rates discourage people from working. Equally, the Laffer Curve states that cutting taxes could, in theory, lead to higher tax revenues. It starts from the premise that if tax rates are 0% – then the government gets zero revenue. Equally, if tax rates are 100% – then the government would also get zero revenue – because there is no point in working. If tax rates are very…

cost-push-inflation-2018-actual-cpi

What are the effects of a rise in the inflation rate?

The inflation rate measures the annual percentage rise in the cost of living. (CPI) A rise in the inflation rate – means prices are rising at a faster rate. Summary In the short-run, it is more likely the Central bank will increase interest rates to moderate the inflation rate. Savers who have fixed income may become relatively worse off. Borrowers, by contrast, are likely to find it easier to pay back their debts. A higher inflation rate could cause greater uncertainty amongst business leading to lower investment.  Inflation may also cause a…

wealth-effect

The wealth effect

The wealth effect examines how a change in personal wealth influences consumer spending and economic growth. Rising wealth has a positive impact on consumer spending. Wealth is a stock concept. At a particular time, your wealth is fixed. Wealth is comprised of savings, bonds, property and assets. A major form of wealth in the UK is the value of your house. If house prices, increase, then it tends to cause a positive wealth effect. Similarly, a fall in the value of wealth…

us-economic-growth-1930-2017

How long do economic cycles last?

The economic trade cycle shows how economic growth can fluctuate within different phases, for example: Boom (A period of high economic growth usually causing inflation) Peak (top of the trade cycle, where growth rates may start to fall) Economic downturn/recession (where the growth rate falls and may become negative – leading to a fall in national output) Economic recovery (economic growth becomes positive and growth rates pick up.)   The economic cycle can also be referred to as the ‘trade…

multiplier-effect

How does the multiplier effect influence fiscal policy?

The fiscal multiplier effect occurs when an initial injection into the economy causes a bigger final increase in national income. Suppose the government pursued expansionary fiscal policy. The aim of expansionary fiscal policy is to increase aggregate demand (AD) and boost the rate of economic growth. This could involve the government increasing public sector investment (e.g. £3bn of money to invest in building new roads) or it could involve tax cuts – financed by higher borrowing. Effect of expansionary fiscal policy …

Monetary Policy vs Fiscal Policy

Monetary Policy vs Fiscal Policy

The aims of fiscal and monetary policy are similar. They could both be used to: Maintain positive economic growth (close to long-run trend rate of 2.5%) Aim for full employment Keep inflation low (inflation target of 2%) The principal aim of fiscal and monetary policy is to reduce cyclical fluctuations in the economic cycle. In recent years, governments have often relied on monetary policy to target low inflation. However, in recessions, there are strong arguments for also using fiscal policy to achieve economic recovery. Fiscal policy involves changing government spending…