Readers Question: What is the relationship between inflation & economic growth? If economic growth is caused by aggregate demand (AD) increasing faster than productive capacity (LRAS) – if economic growth is above the ‘long-run trend rate‘ then economic growth is likely to cause inflation. If economic growth is caused by increased productivity (LRAS), then the …
Demand deficient unemployment occurs when there is insufficient demand in the economy to maintain full employment. In a recession (a period of negative economic growth) consumers will be buying fewer goods and services. Selling fewer goods, firms sell less and so reduce production. If firms are producing less, this leads to lower demand for workers …
Demand for labour is a derived demand. This means it depends on demand for the product the worker is producing. If there is an increase in demand for visiting coffee shops, it will lead to an increase in demand for baristas (people who make coffee) The demand for labour will also depend on labour productivity, …
The main macroeconomic objectives of the government will include: low inflation, increasing the sustainable rate of economic growth full employment and balance of payments equilibrium. Full employment involves zero or very low unemployment. In practice, there will always be some frictional unemployment as people are looking for new jobs or leaving school. Economists suggest an …
A key factor in determining inflation is people’s expectations of future inflation. If firms and consumers expect future inflation then it can become a self-fulfilling prophecy. If workers expect future inflation, they are more likely to bargain for higher wages to compensate for the increased cost of living. If workers can successfully bargain for higher …
Readers Question: Identify and explain clearly the determinants of a nation’s productive capacity. How does the concept of productive capacity differ from a nation’s actual GDP? A production possibility frontier shows potential output. Here an investment in capital goods enables the PPF curve to shift to the right. Factors that affect productive capacity A nation’s …
In economics, marginal analysis means we look at the last unit of consumption/cost. It gives a different picture to the total cost. For example, the total cost of flying a plane from London to New York will be several thousand Pounds. However, with a plane 50% full, the cost of carrying one extra passenger is …
Readers Question: Why do we Study Economics In School? 1. It’s good to study and improve the mind. At least, that is what I was told when I was learning ancient Greek and Latin. Many employers are not looking for a specific degree but, the ability to learn, write and understand relevant ideas. I guess …