Archives

Variable Costs

Variable Costs

Variable costs are costs which change with output. As output increases the firm needs to use more raw materials and employ more workers. These costs vary with changes in the output. Variable costs exclude the fixed costs which are independent of output produced. Examples of variable costsRaw materials. Aluminium, plastic, rubber, coffee beans. All the materials used in the productive process are variable costs Labour costs. If a firm increases output, it will need to employ more workers to produce more. If a taxi firm takes on more drivers to…

placeholder

Working Out Compound Interest  

Compound interest is when the interest from a loan is added to the initial amount causing ever higher levels of interest to be charged. The principles of compound interest can also be applied to savings If the interest rate is 100r % per period. After 1 periods an original loan of A amounts to A(1+r) After 2 periods the loan amounts to A(1+r) 2 After three periods the loan amounts to A (1+r) 3 After N…

x-inefficiency

X Inefficiency

X Inefficiency occurs when a firm lacks the incentive to control costs. This causes the average cost of production to be higher than necessary. When there is this lack of incentives, the firm will not be technically efficient.In theory, the firm could have an average cost curve at “Potential AC” but due to organisational slack, it’s actual average costs are higher. The difference between actual and potential costs is the x-inefficiency. X Efficiency would occur be when competitive pressures cause firms…

placeholder

Yen carry trade

A currency carry trade occurs when people borrow in one currency and invest in another country. For example, suppose Japanese interest rates are 0% and US interest rates are 5%. In this case an investor can buy Yen and borrow from a Japanese bank at 0% interest. He can then exchange Yen for Dollars and put the money in a European bank, gaining 5% interest on his savings. Therefore, in theory, he can make a profit of 5% on the difference between Japanese and European interest rates. Many investors took part in…

Yen carry trade unwinding

Yen carry trade unwinding

To understand the impact of an unwinding Yen carry trade and its impact on the global economy, it is important to understand why the Yen carry trade occurs in the first place.For several years Japan has had 0% interest rates. Recently they were increased to 0.5% but, they are much lower than other economies. For example, ECB have had interest rates of 3.5-5% Japan has very high levels of savings – a pool of $15,000bn. This pool of savings is worth more than the total GDP of the US economy….

placeholder

Zombie firm

A zombie firm is a company that is currently able to stay in business but is loaded with bad debts and needs bailouts to survive. For example, a company which took on large debts but then a rise in interest rates makes these form debt repayments unaffordable and it would go under – without support from banks or governments. In this sense, a zombie firm is a going concern but fundamentally broke. There is a chance that a Zombie firm could restructure and save its business. For example, in the 2009…