Definition of asymmetric information: This is a situation where there is imperfect knowledge. In particular, it occurs where one party has different information to another. A good example is when selling a car, the owner is likely to have full knowledge about its service history and its likelihood to break-down. The potential buyer, by contrast, …
A look at the economic impact of a fall in the exchange rate (termed depreciation or devaluation) A fall in the exchange rate is known as a depreciation in the exchange rate (or devaluation in a fixed exchange rate system). It means the currency is worth less compared to other countries. When there is a …
Readers question: What are the functions of government in a capitalist economy? In summary, the economic functions of a government include: Protection of private property and maintaining law and order / national defence. Raising taxes. Providing public services not provided in a free market (e.g. health care, education, street lighting) Limit market failure through the …
Free trade means that countries can import and export goods without any tariff barriers or other non-tariff barriers to trade. Essentially, free trade enables lower prices for consumers, increased exports, benefits from economies of scale and a greater choice of goods. In more detail, the benefits of free trade include: 1. The theory of comparative …
A public good has two characteristics: Non-rivalry: This means that when a good is consumed, it doesn’t reduce the amount available for others. – E.g. benefiting from a street light doesn’t reduce the light available for others but eating an apple would. Non-excludability: This occurs when it is not possible to provide a good without …
A devaluation means there is a fall in the value of a currency. The main effects are: Exports are cheaper to foreign customers Imports more expensive. In the short-term, a devaluation tends to cause inflation, higher growth and increased demand for exports. A devaluation in the Pound means £1 is worth less compared to other …
Definition – A mixed economy means that part of the economy is left to the free market, and part of it is managed by the government. Mixed economies start from the basis of allowing private enterprise to run most businesses. Then the governments intervene in certain areas of the economy, such as providing public services …
Negative externalities occur when the consumption or production of a good causes a harmful effect to a third party. Examples of negative externalities Loud music. If you play loud music at night, your neighbour may not be able to sleep. Pollution. If you produce chemicals and cause pollution as a side effect, then local fishermen …