Economics help blog – Page 135

Problems of Agriculture – Market Failure

5 January 20181 November 2016 by Tejvan Pettinger

Agriculture often appears to be one of the most difficult industries, frequently leading to some form of market failure. In the EU and US, agriculture is the most heavily subsidised industry, yet despite the cost of the subsidy it fails to address many issues relating to agriculture. Types of market failure in agriculture Volatile Prices …

Why does the cost of living keep rising?

15 August 202229 October 2016 by Tejvan Pettinger

Readers’ Question: Why does the cost of living keep rising? [See updated page Cost of living crisis 2022] This is due to inflation – the persistent increase in the average price level. In modern economies, inflation is a common feature. In fact, most Central Banks target a low rate of inflation of 2%. Central banks …

Tragedy of the Commons

21 February 202028 October 2016 by Tejvan Pettinger

Port Meadow in Oxford The tragedy of the commons is a situation where there is overconsumption of a particular product/service because rational individual decisions lead to an outcome that is damaging to the overall social welfare. The tragedy of the commons theory assumes that when making decisions, people take the course of action that maximises …

Foreign Currency Reserves

9 January 201827 October 2016 by Tejvan Pettinger

Readers Question: What is the main purpose of foreign reserves? Who decides what amount to be kept as reserve and how this reserve is financed? Could be please explain in detail? Definition of: Foreign Currency Reserves (Forex Reserves). This is the amount of foreign currency reserves that are held by the Central Bank of a …

Impact of Brexit on public finances

17 November 201726 October 2016 by Tejvan Pettinger

Question: How will Brexit affect the UK budget deficit / national debt / public finances? One of the low points of the Brexit campaign was when the chancellor of the exchequer George Osborne announced a vote for Brexit would lead to higher taxes and lower spending straightaway. Dubbed the ‘punishment budget’ it probably had the …

Why do monopolies occur in industries with economies of scale?

8 March 201822 October 2016 by Tejvan Pettinger

Readers Question: Why do monopolies occur in industries with substantial economies of scale?

monopoloy

Question: As a result of large-scale production, the long-run average cost of production falls. This means that a monopoly can emerge in time naturally because of the relationship between average cost and the scale of an operation (Why? I don’t understand)

The diagram above shows an industry with economies of scale. This means as output increases, the long run average cost falls.

steel-mill- — The huge scale of the steel industry.

Imagine the steel industry. Suppose it costs £10 million to build a steel factory. With this high fixed (capital) cost, the more you produce, the lower the average cost per unit of steel.

If a firm increases output to Q1, it will have a low average cost of AC1 (e.g. £3). This means that smaller firms producing Q2 will have a higher average cost AC2 (e.g. £6)

This means the smaller firm is facing much higher average costs and is unlikely to be able to survive. The biggest firm producing at Q1 could sell goods for £4 – leaving a profit margin of £1. But, if the smaller firms face average costs of £6 when the price is £4 – it will make a loss, and therefore leave the business.

Problems of external debt

10 January 201822 October 2016 by Tejvan Pettinger

Foreign or external debt represents the amount a country (both public and private sector) owe to other countries. Foreign debt can involve: Outstanding loans to foreign private banks (both principal and outstanding interest) Due payments to international organisations like the IMF Outstanding payments for a current account deficit, with country owing money for imports Debt …

Should the UK Join The Euro?

10 January 201815 October 2016 by Tejvan Pettinger

There was a time when joining the Euro was a big issue, frequently debated in the UK. With Brexit referendum, it has become almost irrelevant. However, if leaving the EU proves disastrous and public opinions changes – rejoining the EU, may well involve signing up to the Euro – as new members may not get the opt-out, the UK received.

Reasons not to Join The Euro

1. No Devaluation. In the Euro, you can’t devalue if your currency becomes uncompetitive. This has been a significant problem for Euro countries like Spain, Italy and Greece. Compared to Germany, these countries have seen higher wage growth, higher inflation and lower productivity growth. This means their exports become uncompetitive leading to lower demand and lower growth.

This is reflected in large current account deficits in these southern EU economies. Greece, Portugal and Spain all had a current account deficit of 10% of GDP or more – a very serious economic imbalance.
By contrast, the UK has been able to devalue, restoring our competitiveness and giving our economy more flexibility.