Basic questions of economics

The fundamental economic problem is one of scarcity. The basic questions of economics become: What to produce? How to produce? For whom to produce? You could also add When to produce?   What to produce? Given limited resources of labour, raw materials and time, economic agents have to decide what to produce. Most primitive economies …

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Impact of Expansionary Fiscal Policy

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Definition of expansionary fiscal policy. This involves the government seeking to increase aggregate demand – through higher government spending and/or lower tax. Expansionary fiscal policy is usually financed by increased government borrowing – and selling bonds to the private sector. Keynes said expansionary fiscal policy should be used during a recession – when there is …

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Monopoly diagram short run and long run

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Readers Question: Explain with the help of diagrams the equilibrium of a firm having monopoly power in the market in the short-run and long-run? The diagram for a monopoly is generally considered to be the same in the short run as well as the long run. Profit maximisation occurs where MR=MC. Therefore the equilibrium is …

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Inflation: advantages and disadvantages

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Readers Question: what are the advantages and disadvantages of inflation? Inflation occurs when there is a sustained increase in the general price level. Traditionally high inflation rates are considered to be damaging to an economy. High inflation creates uncertainty and can wipe away the value of savings. However, most Central Banks target an inflation rate …

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Pros and Cons of Mergers

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A merger involves two firms combining to form one larger company; it can occur due to a takeover or mutual agreement.

The pros and cons in summary:

Advantages of mergers

  • Economies of scale – bigger firms more efficient
  • More profit enables more research and development.
  • Struggling firms can benefit from new management.

Disadvantages of mergers

  • Increased market share can lead to monopoly power and higher prices for consumers
  • A larger firm may experience diseconomies of scale – e.g. harder to communicate and coordinate.

pros-cons-mergers

When looking at mergers it is important to look at the subject on a case by case basis as each merger has different possible benefits and costs – depending on the industry and firms in question.

Pros of mergers

1. Network Economies. In some industries, firms need to provide a national network. This means there are very significant economies of scale. A national network may imply the most efficient number of firms in the industry is one. For example, when T-Mobile merged with Orange in the UK, they justified the merger on the grounds that:

“The ambition is to combine both the Orange and T-Mobile networks, cut out duplication, and create a single super-network. For customers, it will mean bigger network and better coverage, while reducing the number of stations and sites – which is good for cost reduction as well as being good for the environment.”

2. Research and development. In some industries, it is important to invest in research and development to discover new products/technology. A merger enables the firm to be more profitable and have greater funds for research and development. This is important in industries such as drug research, where a firm needs to be able to afford many failures.

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Types of Capitalism

Capitalism is an economic system dominated by free markets and private ownership of wealth, assets and business. Within the broad church of capitalism, there are different forms – from unregulated ‘Turbo-capitalism’ to ‘responsible or ‘social welfare capitalism.’ In practice, all ‘capitalist economies have a degree of government intervention.

types-of-capitalism

Turbo Capitalism

This refers to an unregulated form of capitalism with financial deregulation, privatisation and lower tax on high earners.Turbo-capitalism involves:

  • The absence of regulation for banking /finance system. This encourages banks to take risks and pursue profit through complex financial derivatives rather than basic principles of attracting deposits and lending.
  • Less regulation on abuse of monopoly power.
  • Lower income tax and lower capital gains tax giving greater rewards to high income earners.
  • An unregulated labour market, where it is easy to hire and fire workers, and very limited regulation about working conditions.

The term ‘turbo capitalism’ was coined in 1989 by Edward Lattwak, a senior fellow at the Center for Strategic and International Studies, in his book “Turbo-Capitalism: Winners and Losers in the Global Economy“, (New York, 1999). It reflected on the changes to capitalist societies such as US and UK since 1980. The 1980s were a period of financial deregulation, privatisation and tax cuts for the wealthy. Arguably, this led to rising income inequality and also the financial deregulation played a key role in the unsustainable credit bubble of 2001-2007.

  • Turbo capitalism could also be referred to as Unrestrained capitalism or free market capitalism

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Economic Growth UK

Economic growth measures the change in real GDP (national income adjusted for inflation; ONS call it chained volume measure of GDP) Since the end of the great recession (2008 – 2009) the UK economy has grown in fits and starts. It has been a relatively weak economic recovery compared to previous recessions. 2019 has seen …

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Inflation and Exchange Rates

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Readers Question: Why is it that the value of the exchange rate falls when there is higher inflation? How inflation affects the exchange rate A higher inflation rate in the UK compared to other countries will tend to reduce the value of the Pound Sterling because: High inflation in the UK means that UK goods …

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