Sunday 22 November 2009

Market failure and government intervantion

Market failure:where the free market mechanism fails to achieve economic efficiency.
It mens that resources are not being used in a way that produces the best allocation for consumers.
Efficiency: where the best use of resources made for the benefit of consumer.
There are two types of efficiency that recognised in
economics:

Allocative efficiency: where consumers satisfaction is maximised.
Scarce resources are used to produce those goods and services that consumers actually demand.To ahieve this the quantity supplied mast be equal to the quantity that is demanded-equilibrium position.
Productive efficiency: where production takes place using the least amount of scarce resources.It can be explained in terms of production possibility curve (PPC).
When scarce resources have been used in the most efficient way it is
economic efficiency.
Economic efficiency:
when both allocative and productive efficiency are acheived.
Therefore,
inefficiency-is market in which resources are not being used in the best possible way.So,
Inefficiency: any situation when economic efficiency is not achieved.
Free market mechanism: the system by which the marcet forces of demand and supply determine prices and the decisions made by consumers and firms.

Information failure.

The definition of economic efficiency made clear that the free market is producing the best allocation of resources when consumers are maximising their walfare.But in practice the ability of consumers to benefits in these terms is depended upon them having accurate, up-to- date information about the product that they want to consume.It is lack of this information that underpins most instances of market failure.
Information failure: a lack of information resulting in consumers and producers making decisions that do not maximise welfare.
In some situations
,the problem of information failure is known as asymmetric information.

Asymmetric i
nformation: information is not equally shared between two parties.

Externalities.
Externality: an effect whereby those not directly involved in taking a decision are effected by the action of others.
Third party: those not
directly involved in making a decision.

Costs and benefits.

Private costs: the costs incurred by those taking a particular action.
Private benefits: the benefits directly accruing to those taking a particular action.
External costs: the cos
ts that are the concequence of externalities to the third parties.
External benefits:
the benefits that accrue as a concequence of externalities to third parties.
Social costs: the total costs of the particular action.
Social benefits:
the total benefits of the particular action.

Negative externalities.

Negative externality: when the social cost of an activity is greater than the private cost.

Negative externality in consumption.
Negative externality in production.


















Positive exte
rnality: this exist when the social benefit of an activity exceeds the private benefit.

Positive externality in consumption.



Thursday 22 October 2009

Obesity-as the important problem in economic.


It happened two days ago:
The thickest inhabitant of the Earth does not wish to lay down in hospital.


"Hard work - to carry to the hospital the thickest inhabitant of a planet. Employees of British "first aid" had faced with this problem. .They should take the person in weight of almost 500 kgs up to destination,it is about 250 kilometers. By the way, the person itself does not wish to grow thin,and considers itself as a man pleasant in every aspect.

For this purpose militarians offered helicopter " Chinuk" which usually carries tanks. But it costed 200 thousand pounds per flight.

Physicians chosed a budgetary variant - special car (it is one of the few in the country, if not unique machine which is specially equipped for transportation of patients with excess weight) that costs 90 thousand pounds.

The carriage of "first aid" for the patient who did not want rescue. He dreamed to become the thickest person on the Earth. And he had known, that it was dangerous for his life.
Also his sister is in clinic of neurosises now.She had a nervous failure because doctors have forced her brother to grow thin for 127 kgs, but he typed 160 kgs for only 1 year.

He had not left the house for 8 years - the big person in the small world in size of a bed laid and played a computer. He had received physical inability with a big pleasure -and now the state pays to seven people who serve him.Total 100 thousand pounds a year from the budget.

Mason usually eats four packs of the tinned beans, a pack of sausages in the dough,the big fish pie, the fat tinned chicken, six packings of chips and sweet aerated water. So, 20 000 calories in a day."


Now Britain takes the first place in the Europe on obesity:each fourth adult and each third child are suffering from it.The government tried to forbid to sell fast food near to schools.It is considered that unhealthy food kills the nation. But parents have submitted the protest to parliament - " you break our right to feed children with chips and chocolates ".

Mardje Applegame, the dietitian : " This problem is more psychological -this people need help, but some of them are so
happy with they life that it is impossible to convince them to grow thin ".

Obesity became the main reason of falling of work capacity of americans, and its treatment costs more than struggle against the consequences of smoking and an alcoholism.
But nobody represents its economic consequences:

According to the World organization of public health services, today 1 billion inhabitants of a planet suffer from excess of weight, and 300 million of them - from obesity. The basic impact of disaster was taken up with the developed countries. In the USA excess of weight is fixed at a greater part of adult population, obesity - at each third representative. In Britain they are noted at a three from each four adults. The quantity of suffering from obesity in England has grown in 5 times for the last 25 years .

As Rand corporation affirms in the recent report of the research , there are two reasons for that. The first - computerization and automobilization which assume sedentary office work, absence of the time for independent cooking.The second - movement of the prices for food stuffs: for the last 10 years cost of the fresh fruits and vegetables grew more quickly, and sweets and soft drinks - more slowly, than a consumer price index.
Therefore people prefer cheap fast food to healthy meal.
That it is a question of epidemic, became clear even in 80th years. However obesity involved much less attention than to the smoking and an alcoholism. Until it was not founded out that it manages more expensively than traditional bad habits.

However the most menacing consequence of epidemic - mass invalidity. Especially among 30-40 years old persons. Almost the same picture is in other age groups. Notwithstanding that the prevailing reason of invalidity of Americans-mental diseases, obesity develops in such rates which can explain growth of invalidity.

The greatest contribution to the growth of invalidity connected with obesity, bring a diabete. The committee on public health services of the English House of Commons expects that by 2020 half of British children will suffer from obesity - the first generation of which will start to die before their parents.

Today the general burden, which obesity imposes on economy of the United Kingdom in the form of charges on medicine and the earnings lost because of illness,estimated in 7,4 billion pounds ($13 billion) a year - the sum which equal to a half of British transport budget.

Struggle with this epidemic, stimulated by such forecasts, covers almost whole branches and even the food-processing industry in the Europe and America. A conclusion from the report of the British parliamentary committee became the requirement to enter marking of all food stuffs by red, yellow and green labels depending on their potential danger. In the United States similar projects do not go further supply by similar indexes of restaurant menus yet. But some states have already imposed the taxes for the unhealthy food, called "twinkey" - under the name of the cheap vanilla cakes which were extended in hungry years for the USA of the Second world war. But the American sugar industry struggles for a survival, demanding from the congress to stop financing the CART which calls to limit a share of sugar in caloric content of each product in ten percent.

Saturday 17 October 2009

Elasticity

Elasticity-the extent to which buyers and sellers respond to a change in market condition.
There are 4 types of elasticity:

1)Price elasticity of demand (PED):
the responsiveness of the quantity demanded to a change in the price of the product.
PED is measured by the following formula:
PED=% change in quantity demended/% change in price
Example: suppose a tour operator sells 5.000 holidays per month to Majorka for a price of 400 pounds.When the price is increased to 440 pounds, demand falls to 4000 holidays per month. So,

PED= -1000/5000 divided by 40/400 multiply to 100% = -20/10 = -2
The estimate of -2 indicates that the demand for holidays is responsive to a change in the price of these holidays. This known as a price elastic or price sensitive situation.
Not all products we buy are very responsive to a change in their price.This is price inelastic or price insensitive,indicating that the quantity demanded is not responsive to a change in price.So:

Price elastic:
where the percentage change in the quantity demanded is sensitive to a change in price.
Price inelastic: where the percentage change in the quantity demanded is insensitive to a change in price.
If PED>1 - elastic, if PED<1 red="1">
What determines the price elasticity of demand for a product or group of products?
There are three main determinants:
  • The availability and closeness of substitutes
A substitute is the alternative to a particular product.The greater the number of substitutes and the greater their closeness to a given product, then the likelihood is that such product will be price elastic.
  • The relative expence of the product with respect to income.
If a product takes up a very small proportion of a person`s income,then doubling in the price will not result in much change in the quantity demanded.In such situation demand is price inelastic.(Examples: bus fares,newspapers,cheap food).
Where a product takes up a larger proportion of income (a holiday or eating out),then it is more likely that demand will be more sensitive to a change in price and so will be more price elastic.A possible exception is the case of habit-forming items, such as cigarettes and certain types of alcohol.
  • Time
In the short term, most consumers find it difficult to alter their spending habits. This means they are quit likely to continue to purchase a product despite a price increase.Over time, as consumers find out more about possible substitutes, demand for a product is likely to become more price elastic.

2)Income elasticity of the demand (YED): the responsiveness of demand to a change in income.
Formula: YED = % change in quantity demanded/% change in income
Most products have a positive income elasticity of demand and are known as normal good. This means that, as real disposable income increases, demand for this product will also increase.
The extent of the response of demand to the change in income can vary:
  • where the estimate of income elasticity of demand is less than 1. For such a product, demand is said to be income inelastic.
  • where the estimate of income elasticity of demand is greater than 1.For such a product, demand is said to be income elastic.

Normal goods: goods with a positive income elasticity of demand.
Income inelastic: goods for which a change in income produces a less than proportionate change in demand.
Income elastic: goods for which a change in income produces a greater proportionate change in demand.
A small number of products have a negative income elasticity of demand.There are known as inferior goods.
Inferior goods:
goods for which an increase in income leads to a fall in demand.
Normal goods have a positive YED.
Inferior goods have a negative YED.

Cross elasticity of demand (XED):
the responsiveness of demand for one product in relation to a change in the price of another product.
Formula: XED= % change in quantity demanded of product A/% change in price of product B.
  • A positive estimate indicates that the two products are substitutes.A negative estimate means that they are complements.A zero estimates means there is no particular relationship.
  • The size of the cross elasticity of demand indicates the strength of the relationship between a change in the price of one product and a change in demand for another product.Where products are good or close substitutes, the value of the cross elasticity of demand will be higher than if they are only modest substitutes.Similarly, for complements, a high value of cross elasticity of demand is indicative of products with a high degree of complementary.
Substitutes have a positive XED
Complements have a negative XED

Price elasticity of supply (PES): the responsiveness of the quantity supplied to a change in the price of the product.
Formula: PES= % change in quantity supplied/% change in price.
Price elasticity of supply indicates how much additional supply a producer is willing to provide for the market following a change in price of the product.
The size of the price elasticity of supply can take the following values:
  • between 0 and 1.This means that the elasticity of supply is inelastic.
  • greater than 1.In this case supply is elastic.
  • equal to 1.Here the change in price causes an exactly proportional change in quantity supplied.
So, what determines the price elasticity of supply?There are three main factors:
  • Availability of stock of the product.
  • Availability of factor of production.
  • Time period



Sunday 11 October 2009

Chapter 2-Revision

Market-where or when buyers and sellers meet to tradeor exchange product.
There are many types of markets:
  • foreign exchange market
  • stock market
  • holiday market
  • housing market
  • retail market
  • commodity market
  • labour market
  • eBay
Each of these markets has the same basic characteristics:
  • a physical place where, or some mechanism whereby, buyers and sellers can meet or contact each other.
  • a willigness to trade or exchange goods and services.
Sub-market: a recognised or distinguishable part of a market.Also known as a market segment.
Demand
In simple terms, demand is what consumers want.However,what consumers want and what they actually demand are not the same thing for two reasons:
  • Whants are unlimited
  • The point about demand is that to consume a product,consumers nast have the ability to pay.
So:
Demand:the quantity of a product thet consumers are able and willing to purchase at various prices over a period of time.
National demand: the desire for a product
Effective demand: the willigness and ability to buy a product
Ceteris paribus: (Latin: other things being equal): assuming other variables remain unchanged.

Relationship between price and quantity demanded
The relationship between price and quantity demanded of a product is in certain respects obvious.From our own experience, we know that in general if there is a sale and the price of something we want falls,then we are more likely to purchase it.Conversely, if there is an increase in price of a particular product, the usual reaction from consumers is to by less of it.

Thise relationship is a key consideration in microeconomics.In other words, it means that:
  • there is an inverse relationship between the price of a product and quantity demanded
  • the lower the price, the more that will be demanded
  • the higher the price,the less that will be demanded
The demand curve
The demand curve is a simple representation of the relationship between the price of a product and the quantity that is demanded.It is usually represented in the form of the simple graph; price is plotted on the vertical (y) axis, the quantity on the horisontal (x) axis.
The data from which a demand curve is derived is taken from what is known as a demand schedule.

Demand curve:
this shows the relationship between the price of a product and the quantity demanded.
Demand schedule: the data that is used to draw the demand curve for a product.
Movement along the demand curve: this is in response to a change in the price of a product.





An extention in demand is where a fall in price results in a greater quantity demanded.

A contraction in demand is where a higher price results in a lesser quantity demanded.







Consumer surplus.

Consumer surplus: the extra amount that a consumer is willing to pay for a product above the price that is actually paid.
For example, a persone prepared to pay 4 pounds for the first cinema trip, 3 pounds for the second and 2.25 for the third.If the actual price of admission is only 1.50,thise person will go to the cinema five times per month.The consumer surplus therefore is 2.50 pounds for the 1-st,1.50 for a second and so on. When demand is five times rer month , this individual has received a consumer surplus of 5.05 pounds.




Prise it is not the only reason or factor that affects the demand for a product.There are three non-price factors, recognised by economists as influencing the demand for most types of product.
  • consumer income
  • the prices of other products
  • tastes and fashion
Consumer income
It is almost stating the obvious to say that income,our ability to purchase a product, has an important influence on whether we actually by a good.To be more specific, income is best seen in terms of what is left in our pockets once direct tax has been deducted and any state benefits have been added and the effects of inflation have been taken into account.This is referred to in economics as real disposable income. Example, if the money you receive increases by 5 per cent but prices rise by 3 per cent, then real income has increased by 2 per cent.

Disposable income: income after taxes on income have been deducted and state benefits have been added.
Real disposable income:
income after taxes on income have been deducted and state benefits have been added and the result has been adjusted to take into account changes in the price level.

There are two types of goods: normal goods and inferior goods.

Normal goods:
goods for which an increase in income leads to an increase in demand.
Inferior goods: goods for which an increse in income leads to a fall in demand.

The demand for many products we buy is mainly determined by our real disposable income.


The price of other products
The demand for a particular product can also be affected by a chage in the price of another,different product.Two possible cases are recognised:
substitute and complements

Substitute: competing goods (BMW and Audi cars are top of the range substiutes )
Complements: goods for which there is joint demand. (Car prices and petrol prices)

Tastes and fushion

Over time, consumer tastes change.That is why in our fast-moving world, the life cycle of many products may be quite limited.

















Saturday 10 October 2009

DEMAND AND LAW OF DEMAND - Continuation

2)Government policy.Government policy also affects demand.When the government wants to reduce the demand for a commodity it imposes a tax on this coomodity.After that the price for commodity goes up and its demand decreases.
3)Climet and season.They also affects demand.For example,the demand on ice will increase in summer,but there will not mutch demand during the winter.Or, the demand on woolen garments wil be higher at the places with cold climet.
4)Distribution of income.Market demand is also influenced by chang in the distribution of income in the society.If income is equitable distributed there will be more demand.In case if income is not equitable distributed then more income will consentrate with the rich,then large number of people will be poor and so market demand will be low.

The law of demand.
The law of demand suggests an inverse relationship between the price of the commodity and its quantity demanded.
So, when the price falls the demand for the commodity goes up,when the prise rises demand comes down.
Definition:
"According to the Law of Demand, the quantity demanded varies inversely with the prise."-Ferguon.




Thursday 8 October 2009

DEMAND AND LAW OF DEMAND

Demand is defined as the quantities of a product which a consumer is not only desiring to purchase and able to purchase at given price an at the given point of time.

There are five essential elements of the demand for a good:
  1. Desire to perchase a good
  2. Money to satisfy that desire
  3. Willigness to spend money
  4. Relationship between the quantity demanded of goods and their prices
  5. Relationship between the quantity demanded and the period of time
Definitions of demand
  1. In the words of Miller,"Demand is the willigness and ability of consumers to purchase commodity at a given price over a particular period of time"
  2. According to Vera Anstey, "The demand for a particular good is the amount that will be purchased at a given price at a given time" etc.
There are many economic,social,political factors which greatly influence the demand for commodities.This factors are classified on the basis of: 1)individual demand,2)market demand.

Wednesday 7 October 2009

unit 1 - continuation

Definitions:
Choice:
the selection of appropriate alternatives
Opportunity cost: the cost of the next best alternative.
Specialisation: the concentration by a worker or workers,firm,region or whole economy on a narrow range of goods and services.
Exchange: the process by which goods and services are traded.
Subsidy: a payment by a governing body to encourage the production or consumption of a product.
Division of a labour: the specialisation of labour where the production process is broken down into separate tasks.
Productivity: output, or production of a good or service, per worker.
Production possibility curve: this shows the maximum quantities of different combination of output of two products, given current resources and the state of technology.
Developed economy: an economy with a high level of income per head.
Developing economy: an economy with a relatively low level of income per head.
Trade-off: the calculation involved in deciding on whether to give up one good for another.
Economic growth: change in the productive potential of an economy.
Productive potential
: the maximum output that an economy is capable of producing.
Economic system: the way in which production is organised in a country or group of countries.
Market economy:
an economic system whereby resources are allocated through the market forces of demand and supply.
Price system: a method of allocating resources by the free movement of prices.
Supply: the quantity of a product that producers are willing and able to provide at different market prices over a period of time.
Demand:the quantity of a product that consumers are able and willing to purchase at various prices over a period of time.
Command economy: an economic system in which most resources are state owned and also allocated centrally.
Mixed economy: an economic system in which resources are allocated through a mixture of the market and direct public sector involvement.

Tuesday 6 October 2009

"Financial crash"



Today on tutor groups assembly we discussed this theme. Personally for me it was interesting, and I decided to write about it.
First we need to know what does a credit means.Credits - the money borrowed for some time under percent{interests}.It was practised even in ancient Sumer. Europeans can not imagine a life without credits.Because now there is no need to wait for accumulation of the necessary sum of money, practically any goods can be bought on credit.

So, what is the reasons of so-called "Financial crash"?
Economists are unanimous in opinion, that modern financial crisis is a direct consequence of crisis of hypothecary crediting in the USA (the share of the given sector in a national economy makes 1.4 %). Private American banks was so interested in a pursuit of enrichment, distributing to the right and on the left hypothecary credits, that in a category of happy proprietors of hypothecary habitation have entered also those Americans who were simply not in a condition on a regular basis to pay percent{interests} under credits. As a result the habitation almost in the mass order carried over banks, and there was not enough of people which would like to buy this habitation. The outcome of a similar state of affairs is quite predicted: bankruptcy of banks.

There is quite natural question: « How did they allowed occurrence of such situation? ». All is simple: the share market was occupied by players-speculators who were engaged in sale and purchase highly remunerative, but risky tools, creating financial pyramids. Roughly speaking, they put 1 dollar, and received 9, but that was a very big risk. In fact even small reduction of cost of securities could cause huge losses.

As a result the financial system of the USA has given failure - billions and billions dollars which have been involved in financial operations of the increased risk,simply, are illiquid. And then the investment companies and banks incur losses and become bankrupts. A situation become worse in the global financial market. In fact the American economy is similar to the huge octopus, shrouded with his feelers all planet : branches of the American corporations are opened almost worldwide, the American dollar, securities of the USA traditionally represent itself as the financial guarantor for other countries which with their help are protected from a various sort of risks. Therefore it is no wonder, that crisis of hypothecary crediting in the USA has responded financial "pain" to all world.

Monday 5 October 2009

if demand increases, supply extends
if demand decreases,supply contracts
if supply increases, demand extends
if supply decreases, demand contracts

elastic-
responsive to a change in market conditions
elasticity-the extent to which buyers and sellers respond to a change in market conditions.
elasticity>responsivness

1.price elasticity of demand when a percentage change in quantity demand respondes to a percentage change in price.

2.income elasticity of demand when a
percentage change in quantity demand respondes to a percentage change in income.

3.cross
elasticity of demand when a percentage change in quantity demand respondes to a percentage change in price.

4.change in quantity of supply
when a percentage change in quantity demand respondes to a percentage change in price.
Formulas:
1) % change QD/% change P=PED
2)
% change QD/% change income=YED
3)
% change QDA/% change PB=XED
4)
% change QS/% change P=SED

Thursday 1 October 2009

Factor endowment it is the stock of factors of production
Production it is the output of goods and services.
So, now is clear that the main economic problem is that our needs or wants (the economic term) are growing but at the same time there is a deficiency of resourses.Such situatin involves three concepts, scarcity, choise and opportunity cost.
Wants - everything that we would like to have.
Scarcity it is relationship between how much there is of something and how much of it is wanted.So if we want more than it is possible it is scarce.That is why we must choose how to use our scarce resources.For example, we have a 100 pounds,we could bought new computer or DVD player or may be new clothes,but we can not bought all of them,so we have to make a choise according to the opportunity cost.

unit 1

So what does the ecnomics means?
Well, the economy is so general concept that to define its by one phrase is not obviously possible.But I think that the purpose of economy it is growth of well-being of members of a society.So economics it is a science that studies how to allocate resources.It has its own language of terms.Depending on scales the economy is subdivided on micro- and macroeconomics.
The micro-economics covers economics of separate economic subjects (the enterprises, firms, consumers, businessmen, dealers, etc.).
The macroeconomics describes functioning of a national economy as a whole, studies economic processes at a level of the society (manufacture of the national income, unemployment, inflation, etc.)
Also at economy there is such term as factor of prodaction which means the resource input that are available in economy for the production of goods and services.
Goods -is something that satisfies wants. So it is tangible product (food,cars,computers etc.)
Services-intangible product (banking,medical care or education etc.)
Satisfaction could only be reached by using up resources whitch can be classified as land,labour,capital and entepreneurship.
Land-it is the land itself and anything that could be taken from it.
Labour-is physical and mental human effort.
Capital-man-made aids to production.
Entepreneurship-the readiness of an entrepreneur to take risks and organise production.
Entrepreneur-someone who organise production.