Economics help blog – Page 231

What is a Keynesian Stimulus?

3 February 20204 March 2009 by Tejvan Pettinger

Readers Question: Explain why Keynesians would argue that demand management policies are the most effective way of increasing the equilibrium level of output. Keynesian fiscal stimulus is a decision by the government to increase government spending financed by government borrowing. Keynes advocated fiscal stimulus when the economy was stuck in a recession. In this situation, …

Inflation Trends in Short and Long Term

10 March 202027 February 2009 by Tejvan Pettinger

Readers Question: I have been learning about inflation for AS at the moment. I would like to know about whether inflation would be a short-term phenomenon as we were told inflation takes place when there is excess demand and price will rise, it will also encourage the company to produce more. Therefore, shouldn’t it be …

Threat of Car Plant Closures in Oxford 2009

23 January 202026 February 2009 by Tejvan Pettinger

There is an oft repeated quote: “A recession is when you’re neighbour loses his job. A depression is when you lose your job. “ It is one thing to write about recessions, but, when you see job lay offs near where you live and when you hear about friends who are without work, it makes …

Question: Why set price of goods close to the market price?

10 March 202026 February 2009 by Tejvan Pettinger

Readers Question: I would like to know why it isn’t advisable to price your goods or product with the market price. It depends on the market, product and state of economy. In a competitive market, you may have to sell your good at the market price. If you sold at a higher price, you wouldn’t …

Blame for 2009 Recession

22 January 202015 February 2009 by Tejvan Pettinger

Readers Question: Actually, I would like to know if the current UK’s recession is caused whether economic policies which have been practised or the UK has been affected from outside the country? The recession is caused by a mixture of domestic and international factors. For more detailed explanation see: Economic crisis explained Who is to …

Why are Banks not Lending 2009?

16 January 202015 February 2009 by Tejvan Pettinger

Readers Question: why are banks still not lending despite the bail out and increase in money supply? If all this time they have taken risk, why cant they take risk anymore? They should have more borrowers now due to low interest rates,if they can help small business who need the money then growth can increase …

Neo Classical Theory of Firms

28 January 202013 February 2009 by Tejvan Pettinger

The Neo-Classical Theory of Firms makes the following assumptions

Firms are profit maximisers. Firms will maximise profits where MR=MC
In the short run, firms are subject to diminishing returns. In the short run, capital is fixed, therefore MC is upwardly sloping after diminishing returns sets in.
Prices are flexible. If there is a shortage of the good, the price mechanism will lead to higher prices.
There is an assumption that many markets are competitive and close to the model of perfect competition, therefore, prices will be determined by competitive pressures.
Firms employ labour like any other factor of production. Therefore wages and quantity of labour are determined by marginal revenue product theory (MRP)
Neo-classical economics also assumes wages are flexible. For example, if there is a fall in demand for workers, this will lead to a fall in wages to maintain equilibrium

Wage determination in neo-classical theory.

Criticism of Neo-Classical Theory of Firms

Firms often seek to maximise the size of the firm and market share, rather than profit.
Profit satisficing. Firms have a principle-agent problem. The owners may wish to maximise profits, but the workers don’t. Therefore, the workers do enough to keep the owners happy, but then pursue other objectives such as enjoying themselves at work. This is also known as a problem of separation of ownership and control
Other objectives such as environmental, cultural and social objectives. Humans are not just profit maximisers but consider other non-financial objectives.
Wages may not be flexible. For example, unions may resist nominal wage cuts.
Labour cannot always be treated like a commodity like say capital. This ignores the human psychology of workers getting frustrated or de-motivated.
Behavioural economics suggests there is a range of factors that determine business and consumer behaviour other than utility maximisation theory. Firms may wish to become more prestigious. They may take risks for non-economic reasons or they may want to avoid losing what they already have.

Outlook for UK Interest Rates 2009-2010

16 January 202012 February 2009 by Tejvan Pettinger

This graph shows how much interest rates have fallen in the UK. The Bank of England base rate is the main ‘official interest rate’ The 3 month libor rate is the rate at which banks lend to each other. It is important for determining interest rates set by the commercial banks. Interest Rates are likely …