Price skimming

Price skimming is a business strategy to set a high price on entry to the market and then reduce the price over time. The logic of price skimming is to take advantage of customers who have inelastic demand and are willing to pay the high price. When these consumers have bought the good, the firm can then reduce the price to attract a wider group of consumers who are more price sensitive (elastic demand) Price skimming can enable a firm to increase its overall profits – though there is a risk…


Impact of cutting government spending

Readers Question: Discuss the impact of a decrease in government spending? If the UK government cut government spending, it would have a significant impact on both aggregate demand (AD) and the supply side of the economy – depending on which areas of public spending were cut. Firstly, government spending (G) is a component of Aggregate Demand (AD). In 2013/14 the UK government was forecast to spend a total of £722.9 billion – So (G) is a significant component of AD.  Government spending is approx. 42% of GDP. Of this government spending,…


Factors affecting economic development

Economic development implies an improvement in economic welfare through higher real incomes and other welfare indices such as improved literacy, better infrastructure, reduced poverty and better health care. Economic development requires a degree of political stability, investment and mixture of public and private initiatives to increase economic potential.The main factors affecting economic development includeLevels of infrastructure – e.g. transport and communication. In recent years, economic development in Central Africa has been improved due to increased investment in roads, railways and seaports….

Factors affecting investment

Factors affecting investment

Investment is expenditure on capital goods – for example, new machines, offices, new technology. Investment is a component of Aggregate Demand (AD) and also influences the capital stock and productive capacity of the economy (long-run aggregate supply) Summary – Investment levels are influenced by:Interest rates (the cost of borrowing) Economic growth (changes in demand) Confidence/expectations Technological developments (productivity of capital) Availability of finance from banks. Others (depreciation, wage costs, inflation, government policy)Main factors influencing investment by firms 1. Interest rates Investment is financed…


Why is capitalism the dominant economic system?

  Capitalism is an economic system where individuals and firms have considerable freedom to decide what to produce and how to produce. It is an economy dominated by free markets, private property and limited government regulation. There are many varieties of capitalism from very free-market economies like Singapore to economies which have elements of capitalism but also a greater degree of state intervention in the economy. For good or bad, capitalism and market-based economies are the dominant form of economic system. Why have nearly all global economies converged onto this particular…


“Nothing is so permanent as a temporary government program” – Milton Friedman

“Nothing is so permanent as a temporary government program.” Milton Friedman, “Tyranny of the Status Quo,” (1984) p. 115 Friedman was a free-market economist critical of government intervention. With this quote, he was making the point that government intervention can invariably lead to government failure and inefficient use of resources. One example, Friedman used was the introduction of agricultural subsidies by the US government. During the 1930s and the Great Depression, farmers were struggling with low prices and low incomes. There was widespread poverty within rural areas. To combat this temporary decline…


Benefits of being a multinational company

A multinational company is a global operation with the production and distribution of its goods located in numerous countries. Typically multinationals have different stages of the supply chain located in different countries. This enables the firm to specialise production in countries where it has a comparative advantage. The firm gains many benefits of being global –  economies of scale in production, a global brand recognition and the ability to hire skilled labour from across the world. The main benefits of being a multinational company Specialisation in production. The scale of many…


Advantages and disadvantages of monopolies

What are the advantages and disadvantages of monopolies? Monopolies are firms who dominate the market. Either a pure monopoly with 100% market share or a firm with monopoly power (more than 25%) A monopoly tends to set higher prices than a competitive market leading to lower consumer surplus. However, on the other hand, monopolies can benefit from economies of scale leading to lower average costs, which can, in theory, be passed on to consumers.Disadavantages of monopoliesHigher prices than in competitive markets…