Definition: The natural rate of unemployment is the rate of unemployment when the labour market is in equilibrium. It is unemployment caused by structural (supply-side) factors. (e.g. mismatched skills) Diagram showing the natural rate of unemployment The natural rate of unemployment is the difference between those who would like a job at the current wage …
An assumption in classical economics is that firms seek to maximise profits. Profit = Total Revenue (TR) – Total Costs (TC). Therefore, profit maximisation occurs at the biggest gap between total revenue and total costs. A firm can maximise profits if it produces at an output where marginal revenue (MR) = marginal cost (MC) Diagram …
A look at the main macroeconomic objectives (economic growth, inflation and unemployment, government borrowing) and possible conflicts between these different macro-economic objectives. The main macro-economic objectives Economic growth – positive and sustainable growth (The UK, long-run trend rate is around 2.5%) Low inflation (UK target 2% +/-1) – Low unemployment / Full employment (e.g. around …
Readers Question: Could you give a summary of Keynesian and Classical views? Summary Classical economics emphasises the fact that free markets lead to an efficient outcome and are self-regulating. In macroeconomics, classical economics assumes the long run aggregate supply curve is inelastic; therefore any deviation from full employment will only be temporary. The Classical model …
Subsidies involve the government paying part of the cost to the firm; this reduces the price of the good and should encourage more consumption. A subsidy shifts the supply curve to the right and can be justified for goods which offer benefits to the rest of society. What is the justification for subsidising goods with …
Definition of efficiency Efficiency is concerned with the optimal production and distribution of scarce resources. Different types of efficiency Productive – producing for the lowest cost. Allocative – distributing resources according to consumer preference P=MC Dynamic – Efficiency over time. X-efficiency – incentives to cut costs. Efficiency of scale – taking advantage of economies of …
Definition: Scarcity refers to resources being finite and limited. Scarcity means we have to decide how and what to produce from these limited resources. It means there is a constant opportunity cost involved in making economic decisions. Scarcity is one of the fundamental issues in economics. Examples of scarcity Land – a shortage of fertile …
Definition of a Giffen Good. A good where a higher price causes an increase in demand (reversing the usual law of demand). The increase in demand is due to the income effect of the higher price outweighing the substitution effect. The concept of a Giffen good is limited to very poor communities with a very limited …