Friday, March 17, 2017

221. Trade Barriers

Trade barriers are extremely detremental to the economic health of a country. When at war countries normally embargo exports to the enemy in order to hurt and damage the other country. Why then in peacetime would a country want to limit imports and in so doing damage their own countries? One reason (maybe the only reason) would be to generate revenue for the fiscus. To obtain a fuller understanding of the type of measures governments use to control trade can be found here:

Wednesday, March 8, 2017

221. Economics 1A Assignment

Saturday, March 4, 2017

220 Why governments regulate the market.

Steiner & Steiner (2014, p 319) state that there are two circumstances why regulation of the private sector is warranted. The first that is indicated by them is when certain "flaws" result in what they call "undesirable consequences; and the second is when there are "sufficient social or political reasons" for this to happen.

They admit that free markets yields the most optimal results, but maintain that some regulation is necessary.

The first reason according to them is when a natural monopoly exists. A natural monopoly exists when "a firm can supply the entire market for a good or a service more cheaply than a combination of a number of smaller firms". They then use the example of public utilities that are able to restrict output and raise price.

In this case did the market fail? The answer is no! If a utility raises its prices in order to maximise prices it does not matter that its costs are lower than possible competitors - it is the price that consumers are paying that will determine whether it is profitable for an alternative producer to enter if no regulation exists to prevent such action. So the threat of competition will keep prices low if no entry barriers exist. A regulator is not required. A free market is.

The second reason according to them is "destructive competition". Through cutting of prices large dominating form can eliminate their competition. Though this may theoretically be possible - what will happen is that the products will have to be sold under the cost of production (of the cost of competitors) to be effective. This will be a benefit to consumers. If the large firm raises prices after eliminating their competition, competitors will simply enter the market again if there are no regulatory constraints. Laws are not necessary to eliminate predatory prices or price fixing if entry into the market is completely free.

The last reason for governments to intervene are the existence of externalities. An externality is where apart of the cost of production is borne not by the business itself, but by another party. The damage caused by pollution is the best example of this.

Thursday, March 2, 2017

219 Can you beat the market?

Thursday, February 23, 2017

218 Opportunity cost

Let's say the two things we produce are corn and beef. We can use land to either produce corn or produce beef.

The next thing we need to know in order to calculate opportunity cost is how much corn could we produce compared to how much beef we could produce. And remember that we're using the same amount of resources, so this kind of problem really is going to give us a basis for comparing two alternative choices.

Let's say that in Country A, we can either produce 50 tons of corn, or as an alternative, we can produce 25 tons of beef. This is our tradeoff between producing these two things. Now we have all the information we need to calculate opportunity cost, but we need to know which opportunity cost we're trying to measure based on which possibility we want to choose.

Let's start by looking at it from the corn perspective. The opportunity cost of producing 50 tons of corn is equal to how many tons of beef we could have produced, which of course is 25 tons. Therefore, the opportunity cost is found by solving this equation:

50 tons of corn = 25 tons of beef

What we really want to know is how much beef we could have produced if we choose to produce 1 ton of corn, but the question gave us 50 tons. To reduce this equation down, we divide each side by 25 and this gives us:

2 tons of corn =1 ton of beef

And then reducing it down one more time, gives us:

1 ton of corn = ½ ton of beef.

That's our answer. The opportunity cost of producing a ton of corn is ½ a ton of beef.

217. Keynesian cross diagram

The Keynesian cross diagram demonstrates the relationship between aggregate demand (shown on the vertical axis) and real GDP (shown on the horizontal axis, measured by output). ... The intersection gives the equilibrium output, Y.