Yesterday, I posted about the benefits of private health care. Today there are the problems of relying on Private health care insurance. These arguments are particularly relevant with regard to the US health care vs the Current UK system.
If health care is not universal and free at the point of use people will be require to take out private health care insurance. There are several disadvantages to relying on Private health care.
1. Inequality.
It will be a bigger burden for those on low incomes to take out health care insurance. Those on low incomes may not be able to afford certain types of treatment. High income earners can afford to have privileged health care.
2. Health Care is a Merit Good.
People may forget, be unwilling or be unable to take out private health care insurance. A merit good means people underestimate the benefits. Therefore, the government should intervene to prevent this market failure of under-consumption.
3. Positive Externalities.
A good health care system can contribute to a successful economy. If people are treated quickly and efficiently it will help improve labour productivity. In a free market these positive externalities are ignored leading to under-consumption.
4. More Expensive.
Private Health care firms require a profit motive to make it worth while. Therefore, consumers must pay for not just health care but also the necessary profit margin. The US spends the highest
5. Bureaucracy
In US govt subside health care for people on low incomes through programs like Medicare. However, this procedure is very bureaucratic. It takes a long time to fill in the forms and get
6. Difficult to get money back.
Can be difficult to get Private insurance firms to Pay for the cost of treatment
If you watch Michael Moore's new film - Sicko, you will probably get more examples of the inefficiency and inequities of the current US health care system
Friday, September 28, 2007
Net Interest Margin For UK Banks
How has Net Interest Margin performed for UK banks since 2000?
(not A Level)
The Net Interest Margin is basically related to the difference between interest on borrowing accounts and interest from savings account.
Net interest Margin is net interest income (interest earned minus interest paid on borrowed funds) as a percentage of earning assets (any asset, such as a loan, that generates interest income).
The net interest margin thus depends upon:
- Net interest spread expresses the average difference between borrowing and lending rates. It does not take into account that the amount of earning assets and borrowed funds may be different.
- Liquidity The amount of funds which have to be kept in non interest bearing accounts such as cash deposits at banks.
1. Less Competition between banks
If there is less competition between banks they can charge more for borrowing and pay less for savings account.
However, in the UK, there has if anything been an increase in bank competition due to the rise of internet banking such as Egg, offering better interest rates on savings
2. Lower Liquidity ratio.
A lower liquidity ratio means more funds can be used to earn interest, rather than being kept in non interest bearing cash reserves.
For example, the concern over Northern Rock's liquidity means that Banks may have to increase their liquidity ratio and the amount of cash balances for immediate withdrawals.
3. Increased Use of Credit Cards and Bank Transfers
This may reduce demand for cash withdrawals. This will allow banks to have a lower liquidity ratio and therefore increase the net interest margin.
4. % of loan defaults.
If there is an increase in loan defaults then the interest earned will fall dramatically. The % of loan defaults in the UK has been relatively low because of the long period of economic expansion and stability.
Risk Premium
A risk premium on borrowing enables a bigger profit margin. See: Interest rate changes and risk
Thursday, September 27, 2007
Benefits of Private Health Care
Private Health care can arouse strong emotions. In the US, private health care is often criticised for being bloated, inefficient and inequitable; - designed primarily for the benefit of private health insurance companies.
I actually included US health care in a post - 3 of the Worst economic policies of all time
Nevertheless, we need to be aware of the economic arguments in favour of private health care. This enables us to make a more rounded judgement about the best approach for health care provision in the UK and US. Tomorrow I will look at disadvantages of private health care and consider the best way forward for the UK and US.
Advantages of Private Health Care
1. Greater Efficiency and Quality of Service.
Private firms have a profit incentive to cut costs and maintain a good service, which is essential to attracting customers.
Private firms also face competition which is another incentive for better quality services. These factors are absent in government public services.
However, It can be argued health care is not like a private business. E.g. Doctors and nurses don't need a profit incentive to do a good job.
2. Provides greater choice for consumers.
We can choose most goods, why not choose health care?
3. Reduce burden on Government Spending.
If more people go private, less will use the NHS, therefore, the government can spend less
4. Reduce Waiting Lists.
If people go private it will reduce waiting lists.
5. Government Services can become very bureaucratic and experience diseconomies of scale. Arguably the NHS is overstaffed with too many administrators. Private health care can avoid these tendencies to bureaucratic inefficiency.
I actually included US health care in a post - 3 of the Worst economic policies of all time
Nevertheless, we need to be aware of the economic arguments in favour of private health care. This enables us to make a more rounded judgement about the best approach for health care provision in the UK and US. Tomorrow I will look at disadvantages of private health care and consider the best way forward for the UK and US.
Advantages of Private Health Care
1. Greater Efficiency and Quality of Service.
Private firms have a profit incentive to cut costs and maintain a good service, which is essential to attracting customers.
Private firms also face competition which is another incentive for better quality services. These factors are absent in government public services.
However, It can be argued health care is not like a private business. E.g. Doctors and nurses don't need a profit incentive to do a good job.
2. Provides greater choice for consumers.
We can choose most goods, why not choose health care?
3. Reduce burden on Government Spending.
If more people go private, less will use the NHS, therefore, the government can spend less
4. Reduce Waiting Lists.
If people go private it will reduce waiting lists.
5. Government Services can become very bureaucratic and experience diseconomies of scale. Arguably the NHS is overstaffed with too many administrators. Private health care can avoid these tendencies to bureaucratic inefficiency.
Cobb Douglas and Elasticity of Demand
I am a high school student in Canada taking an Economics course. This really all new to me and I have absolutely no clue how to answer this question.
Derive the income, cross price and own price elasticiticies for a Cobb Douglas utility function. What general feature of Cobb Douglas means that the demand curves must always be unit elastic?
- I'm afraid Cobb Douglas function is not on the UK syllabus, I don't even remember doing it at University. These are just a few points, but, I'm afraid you will need to look elsewhere
- Unitary elasticity of demand means the % change in Q.D equals the % change in Price. Therefore, to have unitary elasticity of demand it is necessary to have a bowed demand curve and not a straight line. The elasticity of demand will vary on a straight demand curve.
- The other way is to measure elasticity of demand by measuring the slope of a demand curve. This can be done by differentiating the demand equation.
Why Do Firms Give a 10% Student Discount?
Many firms such as: HMV, Top Shop, Virgin give students a 10% discount.
Is this discount an act of charity for poor students? Or is it a very clever strategy to increase profits?
The first thing to consider is the price elasticity of demand by students. Generally students have lower incomes, therefore, they are more sensitive to changes in price. Demand for CDs, and clothes are likely to be price elastic. This means a cut in price causes a bigger % increase in demand. If this is the case, a fall in price can increase a firm's revenue.
Diagram for Elastic Demand
However, the general market for CDs is likely to be more inelastic. - Working adults have more disposable income, therefore, they are less sensitive to reductions in price. If you reduced price for this group of consumers demand is likely to be inelastic, with only a small increase in demand.
Therefore, the best strategy for a firm is to cut prices for the student group (with elastic demand) but keep prices high for the other group.
This of course is an example of Price discrimination and is a way for firms to increase profits.
Cutting prices for students is also a good advertising strategy. It gives a reason to attract students into the shop, it may create brand loyalty over time. But, the main reason is due to the different elasticities of demand.
Is this discount an act of charity for poor students? Or is it a very clever strategy to increase profits?
The first thing to consider is the price elasticity of demand by students. Generally students have lower incomes, therefore, they are more sensitive to changes in price. Demand for CDs, and clothes are likely to be price elastic. This means a cut in price causes a bigger % increase in demand. If this is the case, a fall in price can increase a firm's revenue.
Diagram for Elastic Demand
However, the general market for CDs is likely to be more inelastic. - Working adults have more disposable income, therefore, they are less sensitive to reductions in price. If you reduced price for this group of consumers demand is likely to be inelastic, with only a small increase in demand.
Therefore, the best strategy for a firm is to cut prices for the student group (with elastic demand) but keep prices high for the other group.
This of course is an example of Price discrimination and is a way for firms to increase profits.
Cutting prices for students is also a good advertising strategy. It gives a reason to attract students into the shop, it may create brand loyalty over time. But, the main reason is due to the different elasticities of demand.
Tuesday, September 25, 2007
Predictions for US Dollar 2008
How Low can the dollar go? With the dollar recently reaching parity against the Canadian dollar and reaching a record low against the Euro, it seems the Dollar is on a permanent downward slide.
These are some previous entries about why the dollar is falling
Throughout the year I have posted a few times on the prospects of the US dollar, the prospects for 2008 don't look much better. These are various reasons why the dollar is likely to remain weak in 2008
These are some previous entries about why the dollar is falling
- Reasons for the Fall in the US dollar
- When will the dollar stop falling?
- The Effects of a devaluation of the dollar
Throughout the year I have posted a few times on the prospects of the US dollar, the prospects for 2008 don't look much better. These are various reasons why the dollar is likely to remain weak in 2008
- Recession in the Housing Market. The problems in the US housing market is threatening to reduce consumer spending and push the US economy closer to recession. This is why the FED recently cut interest rates by 0.5%. However, by cutting interest rates the dollar is further weakened. (Less demand for holding assets in the dollar - less hot money flows)
- Current Account Deficit Still Big. Although the US current account deficit has fallen a little, it is still close to 6% of GDP. This puts downward pressure on the dollar because more currency is leaving rather than entering.
- Less Confidence in the Dollar. The problem is that the more the dollar falls, the less confidence people have. Therefore, foreign investors are increasingly looking to diversity out of dollar holdings and into other currencies.
- Twin Deficit
As well as a current account deficit the US has a large budget deficit. This has been boosting consumption and demand for imports, but, it has not been used for investment purposes
- American Goods are becoming very cheap. European and Japanese exports are becoming more expensive.
- The US is not the only country to have a large current account deficit
- A slowdown in the economy will reduce consumer spending on imports, combined with the devaluation the current account deficit is likely to fall.
Benefits of Smoking Bans in UK
Recently, the smoking ban came into affect in England. However, in Scotland the ban on smoking in public places has been in force since March 2006.
Statistics recently released suggest that this is the primary reason for the dramatic 17% fall in heart attacks.
Experts suggest that even a small amount of passive smoking can seem to be a trigger which causes heart diesease.
This suggests that the smoking ban is an effective method of government intervention and is perhaps more effective that raising taxes on cigarettes.
Other advantages of Smoking bans in Public Places.
Good air - good health - article on smoking ban in Scotland
Statistics recently released suggest that this is the primary reason for the dramatic 17% fall in heart attacks.
Experts suggest that even a small amount of passive smoking can seem to be a trigger which causes heart diesease.
"The correlation between passive smoking and heart attacks is now excellently documented," says Tobias Raupach, the scientific director of an center for people who want to quit smoking at the University Medical Center Göttingen. The peculiar thing is that, both with passive and active smoking, a minimal change can already lead to a large effect. Much as with an avalanche, a small stimulus can lead to a cascade of eventsThe evidence of Scotland is also backed up by studies in other areas which have introduced a smoking ban such as Italy and Ireland.
This suggests that the smoking ban is an effective method of government intervention and is perhaps more effective that raising taxes on cigarettes.
Other advantages of Smoking bans in Public Places.
- Discourages people from starting smoking in the first place
- Provides an incentive for people to stop.
- Much harder to evade this law. For example higher taxes often lead to people buying from abroad.
- You clothes don't smell really bad when you come back from a pub.
- I can't think of any, although smokers probably could.
Good air - good health - article on smoking ban in Scotland
Monday, September 24, 2007
How the MPC Set Interest Rates
- The MPC's primary objective is to keep CPI inflation close to the government's target of 2% +/- 1
1. The MPC try to predict future inflation trends. They look at various economic indicators to see whether the economy is growing too fast. For example if the economy is approaching full capacity then inflation is likely to increase. Therefore they look at statistics such as:
- GDP growth (If GDP growth is above LRTR inflation is likely to occur.
- Inflation
- Unemployment, (low unemployment indicates potential for wage push inflation)
- Exchange Rate (devaluation increases inflationary pressure)
- Cost of Raw Materials
- Consumer Confidence
- House Prices
- Stock Market Levels
2. Set Interest Rates.
If inflation is likely to go above the inflation target. The MPC will increase interest rates.
3. How Interest Rates Affect Inflation.
Higher interest rates help reduce the rate of economic growth and therefore reduce inflation because:
- Higher interest rates increase the cost of borrowing. Therefore consumers are less willing to buy on credit. Firms are less willing to borrow to invest.
- Higher interest rates increase the return from saving. Therefore consumers may spend less and save more.
- Higher interest rates increase monthly mortgage repayments. Therefore, homeowners have less disposable income after paying their mortgage. This point is increasingly significant given the levels of debt in the UK.
- Higher interest rates increase the value of the Pound. (more attractive to make deposits in the UK, causing hot money flows). The stronger pound reduces exports and increases quantity of imports. Therefore, AD falls.
4. If inflation is forecast to fall below target, or if the MPC is concerned about a slowdown in the economy then the MPC will cut interest rates.
5. The MPC meet once a month to set rates.
6. If inflation goes above or below target the MPC have to write a letter of explanation to the Chancellor of the Exchequer
See also:
Should Drugs Be Legalised?
Of course, many dangerous and lethal drugs are already legal.
The number of deaths from "illegal drugs" is correspondingly much smaller. Although, this is partly due to the fact less people take the drugs.
Arguments for Legalising Drugs
1. Government could regulate the quality of the drugs. This would prevent dangerous varieties of drugs being offered to unwitting consumers.
2. It would Reduce criminal activity. Organised criminals can make profit from the trade in illegal drugs
3. Government can collect tax revenue from the sale of drugs. It will also save money from vainly trying to stop the illegal sale of drugs
4. The government have been helping to reduce tobacco consumption over the past 2 decades, even though it is legal. Illegal drug consumption, however, has been continuing to grow.
Arguments against legalising drugs
1. Making them Legal would encourage consumption.
2. People still underestimate the dangers of illegal drugs. Legalising drugs may give wrong signals. See ecstasy dangers for just 1 example
3. If it was legalised in the UK, drug addicts may be attracted to the UK. Like, for example, the cannabis tourists in holiday. - This is a strong argument against legalising drugs.
- Tobacco is one of the UK's biggest killers Between 1950 and 2000, 42 per cent of deaths in middle age (35-69) in UK men were caused by smoking, peaking in the 1960s when tobacco caused half of all deaths in middle-aged men.
- The Number of alcohol related deaths in the UK has doubled in the past 20 years, In 2005, the number of deaths reached 8356, [source 1]
The number of deaths from "illegal drugs" is correspondingly much smaller. Although, this is partly due to the fact less people take the drugs.
Arguments for Legalising Drugs
1. Government could regulate the quality of the drugs. This would prevent dangerous varieties of drugs being offered to unwitting consumers.
2. It would Reduce criminal activity. Organised criminals can make profit from the trade in illegal drugs
3. Government can collect tax revenue from the sale of drugs. It will also save money from vainly trying to stop the illegal sale of drugs
4. The government have been helping to reduce tobacco consumption over the past 2 decades, even though it is legal. Illegal drug consumption, however, has been continuing to grow.
Arguments against legalising drugs
1. Making them Legal would encourage consumption.
2. People still underestimate the dangers of illegal drugs. Legalising drugs may give wrong signals. See ecstasy dangers for just 1 example
3. If it was legalised in the UK, drug addicts may be attracted to the UK. Like, for example, the cannabis tourists in holiday. - This is a strong argument against legalising drugs.
Why Are Drugs like Heroin so Expensive?
By making drugs illegal, it ironically, makes it more attractive to supply them. If it is was a competitive market with no government interference, the supply of cannabis would be very high. (apparently, it is easy to grow in a greenhouse) and therefore the price low.
However, the government has sought to restrict supply - make it illegal. Therefore, the price is pushed up by the lack of supply. This makes the good more attractive to supply. Remember also, that the demand is inelastic, therefore a fall in supply causes a correspondingly larger increase in price.
Demand for addictive drugs is so inelastic because when you are addicted, the drug becomes a necessity with no close substitutes
When governments say they are going to fight the criminals and try and destroy the supply of the drug. They often fail to point out that such schemes never actually work. What happens is that they reduce the supply a little by say 10% This just makes the drug more profitable.
This is not to say the government and police shouldn't try to catch criminals supplying drugs. They certainly deserve to be caught and imprisoned. But, it is just to point out that such operations do not address the underlying problem that illegal drugs are very attractive to supply.
Actually, for some drugs the price has fallen because even the illegal supply of drugs has been increasing.
See: ecstasy price falls to record lows - This shows the government are completely failing to stop the supply
However, the government has sought to restrict supply - make it illegal. Therefore, the price is pushed up by the lack of supply. This makes the good more attractive to supply. Remember also, that the demand is inelastic, therefore a fall in supply causes a correspondingly larger increase in price.
Demand for addictive drugs is so inelastic because when you are addicted, the drug becomes a necessity with no close substitutes
When governments say they are going to fight the criminals and try and destroy the supply of the drug. They often fail to point out that such schemes never actually work. What happens is that they reduce the supply a little by say 10% This just makes the drug more profitable.
This is not to say the government and police shouldn't try to catch criminals supplying drugs. They certainly deserve to be caught and imprisoned. But, it is just to point out that such operations do not address the underlying problem that illegal drugs are very attractive to supply.
Actually, for some drugs the price has fallen because even the illegal supply of drugs has been increasing.
See: ecstasy price falls to record lows - This shows the government are completely failing to stop the supply
Ecstasy - An example of a De Merit Good.
The man who took 40,000 ecstasy tablets. at Guardian
- I just wonder how he managed to count them all...
The two characteristics of a demerit good are:
1. People underestimate the damage they can do. Basically this is a normative statement that people make irrational (bad) choices. In this case, the man choose to ignore the likely mental health problems arising from excessive consumption of drugs.
2. Usually cause negative externalities. In this case the negative externality will include the cost to the NHS of treating his mental health problems.
"Though the man, who is now 37, stopped taking the drug seven years ago, he still suffers from severe physical and mental health side-effects, including extreme memory problems, paranoia, hallucinations and depression. He also suffers from painful muscle rigidity around his neck and jaw which often prevents him from opening his mouth. The doctors believe many of these symptoms may be permanent."
- I just wonder how he managed to count them all...
The two characteristics of a demerit good are:
1. People underestimate the damage they can do. Basically this is a normative statement that people make irrational (bad) choices. In this case, the man choose to ignore the likely mental health problems arising from excessive consumption of drugs.
2. Usually cause negative externalities. In this case the negative externality will include the cost to the NHS of treating his mental health problems.
Friday, September 21, 2007
Formula's for Elasticity
Help With Elasticities.
Elasticity is an important concept in Economics. It is used throughout the A Level course and can be used in many different aspects.
These are a few suggestions for understanding Elasticity
Formula's
We always put Quantity on the top. and Price or income on the bottom. If you forget, imagine a QUeen standing on top of a Poor person. This will help you remember it is Quantity / price.
Price Elasticity of Demand PED
Cross Elasticity of Demand XED
Income Elasticity of Demand YED
Price Elasticity of Supply
Question on Elasticity
If PED = - 0.5
If Price increases from 30 to 36.
If Quantity was 2,000. What is new Quantity
- 0.5 = % change in quantity demand / % change in price
% change in price = 6 (36-30) / 30 = 0.2 = 20%
Therefore
-0.5 = X / 20
Therefore X (% change in QD) = 20* -0.5 = - 10
Therefore new quantity = 2,000 * 10% = 1,800
Elasticity is an important concept in Economics. It is used throughout the A Level course and can be used in many different aspects.
These are a few suggestions for understanding Elasticity
Formula's
We always put Quantity on the top. and Price or income on the bottom. If you forget, imagine a QUeen standing on top of a Poor person. This will help you remember it is Quantity / price.
Price Elasticity of Demand PED
- PED = % change in Quantity Demanded / % change in Price
Cross Elasticity of Demand XED
- XED = % change in Quantity Demanded / % change in price of other good.
Income Elasticity of Demand YED
- YED = % change in Q.D / % change in income.
Price Elasticity of Supply
- PES = % change in Q.S / % change in Price.
Question on Elasticity
If PED = - 0.5
If Price increases from 30 to 36.
If Quantity was 2,000. What is new Quantity
- 0.5 = % change in quantity demand / % change in price
% change in price = 6 (36-30) / 30 = 0.2 = 20%
Therefore
-0.5 = X / 20
Therefore X (% change in QD) = 20* -0.5 = - 10
Therefore new quantity = 2,000 * 10% = 1,800
Help With Answering the Question
hi. i am a student taking A2 economics. i can memorise all the facts but i'm always not answering the questions in the essay. i always put down irrelevant information even thou i have identified the correct keywords and cue words. i appreciate your help.
This is a common problem amongst students and is one of the most common reasons for students failing their exams.
Some Strategies that may help
- At the end of every paragraph write a sentence to answer the question directly. Even if this means repeating the question a little, no harm. This forces to answer the question set. It also makes sure you don't start answering a different question.
- Stylistically it may be rather basic. But from an examiners point of view all they care about is whether you have answered the question.
- Also, remember you are not rewarded for writing quantity. You are rewarded for being specific to the question set.
- Try writing an essay plan. This enables you to put your ideas down on paper. As you write the plan never lose sight of the question.
- Keep it simple. To answer a question don't worry about lots of complicated detail. Answers which get high marks are often just focused on answering the question.
How To Calculate a Percentage %
Why is it that Maths students, even those doing Further Maths, can never calculate a %? Every year I realise that very few students know how to calculate a %. Maybe it is not on the A Level maths syllabus?
% are one of the few maths learning of great practical use. When shopping, you won't have to differentiate a complex equation, but, you may need to work out the 20% discount of a good costing £40.
Anyway rant aside.
How to calculate a Percentage %
20% 20/100 is the same as 0.2
If quantity was 3,000 and the Q.D increases by 20%. What is the new quantity?
we can times 3,000 * 120/100 = 3,600
Alternatively we can find 20% of 3,000 and then add it to 3,000
20% of 3,000 = 20/100 (0.2) * 3000 = 600
% are one of the few maths learning of great practical use. When shopping, you won't have to differentiate a complex equation, but, you may need to work out the 20% discount of a good costing £40.
Anyway rant aside.
How to calculate a Percentage %
- 20% of £40
- 20% means 20/100. Therefore we multiply £40 * 20/100 = £8
20% 20/100 is the same as 0.2
- If price increases from £40 to £44. What is the % increase?
- We divide the difference (44-40) by the initial amount. * 100
- Therefore it is 4 / 40 = 0.1
- 0.1 * 100 = 10%
- If price increases from 70 to 84. The % change is 14/70 *100 = 20%
If quantity was 3,000 and the Q.D increases by 20%. What is the new quantity?
we can times 3,000 * 120/100 = 3,600
Alternatively we can find 20% of 3,000 and then add it to 3,000
20% of 3,000 = 20/100 (0.2) * 3000 = 600
Supermarkets Fixing Prices of Butter and Milk
The OFT has launched a 'serious' investigation into the major supermarkets. It is alleged the supermarkets have been fixing the price of milk and cheese for many years.
Supermarkets like to give the impression it is a cut throat industry, with each supermarket trying to outdo the others with price cuts. However, these price cuts are very selective and in recent years the main supermarkets like Sainsbury's and Tesco have been able to make very significant profits.
At the moment the allegations have not been proved, but, if they are found guilty they could be fined millions of pounds.
In the UK price fixing is illegal. The supermarkets have apparently been communicating in various ways to keep the price of cheese and milk high to consumers.
The supermarkets have also been apparently colluding to keep the purchasing power of milk low. Farmers have long complained that the price they receive for milk is barely enough to make any profit.
The investigation may spread to other areas.
Supermarkets like to give the impression it is a cut throat industry, with each supermarket trying to outdo the others with price cuts. However, these price cuts are very selective and in recent years the main supermarkets like Sainsbury's and Tesco have been able to make very significant profits.
At the moment the allegations have not been proved, but, if they are found guilty they could be fined millions of pounds.
In the UK price fixing is illegal. The supermarkets have apparently been communicating in various ways to keep the price of cheese and milk high to consumers.
The supermarkets have also been apparently colluding to keep the purchasing power of milk low. Farmers have long complained that the price they receive for milk is barely enough to make any profit.
- This is an example of supermarkets using their monopsonistic purchasing power.
The investigation may spread to other areas.
Thursday, September 20, 2007
What would you do with a Billion Dollars?
I came across an interesting story about an American billionaire, Chuck Feeney. According to Forbes he is worth $1.3 billion and is the 23rd richest American. Yet, despite his overwhelming wealth he has secretly been giving most of his money away throughout his life.
Apparantely Chuck wears a $15 watch, flies economy class and does not own a house or car.
Chuck wanted to keep his philanthropy secret because he felt there was "no need to blow his own horn" or discourage people from giving to same charities. His philanthropic activities became know in 1997 only when he sold his shares in his duty free company, DFS
The thing I like about Chuck is that he is committed to giving his money away now, whilst he is still alive, rather than waiting until he is dead.
I love people who don't conform to the economist model of profit and utility maximisation.
Apparantely Chuck wears a $15 watch, flies economy class and does not own a house or car.
Chuck wanted to keep his philanthropy secret because he felt there was "no need to blow his own horn" or discourage people from giving to same charities. His philanthropic activities became know in 1997 only when he sold his shares in his duty free company, DFS
The thing I like about Chuck is that he is committed to giving his money away now, whilst he is still alive, rather than waiting until he is dead.
I love people who don't conform to the economist model of profit and utility maximisation.
Is Economics Difficult?
Which is easiest Economics or Business Studies?
This is a question I often get asked by students. - Is economics easy or difficult?
To be honest it's hard to answer. It's a bit like saying which is more difficult - running a marathon or cycling 100 miles. Both are difficult if you don't prepare for the event. But, if you do prepare, you can do well in either.
Sometimes students find Economics difficult in the beginning because there are many new concepts to learn. Business studies perhaps deals with more concepts that are general knowledge. But, I don't think we can say one is easier than the other. A lot may depend on how the subject is taught and whether you work at the subject.
When choosing subjects at A Level or university, it is a mistake to look for the "easiest one" It is best to choose a subject that you have an interest in and think you will be committed to studying. If you have an interest in the subject then you will be able to work through any difficulties.
If you find Economics difficult in the first month, don't despair. You will probably find it makes more sense over the course of the year. Once, one of my economics teachers said 70% of economics is about supply and demand, so it's really quite easy when you've mastered that.
Wednesday, September 19, 2007
Predictions for US Interest Rates 2008
The Fed recently cut interest rates from 5.25% to 4.75% (sept 18th) The half percent cut took the markets by surprise because they had not been expecting such a large cut.
This also changes many predictions about the future of US interest rates. It suggests the Fed are now concerned about the state of the US economy, and in particular, the US housing market. This suggests they may be willing to cut interest rates further before the end of 2007 and 2008 could see a return to periods of low interest rates.
See: Why the Fed cut interest rates?
A lot will depend on how much this half percent cut in interest rate boosts confidence spending and prevents further falls in US housing prices. My feeling is that it will be insufficient. There will certainly be a time delay before the US housing market returns to steady house price growth.
Also see: problems in cutting interest rates further
This also changes many predictions about the future of US interest rates. It suggests the Fed are now concerned about the state of the US economy, and in particular, the US housing market. This suggests they may be willing to cut interest rates further before the end of 2007 and 2008 could see a return to periods of low interest rates.
See: Why the Fed cut interest rates?
A lot will depend on how much this half percent cut in interest rate boosts confidence spending and prevents further falls in US housing prices. My feeling is that it will be insufficient. There will certainly be a time delay before the US housing market returns to steady house price growth.
Also see: problems in cutting interest rates further
Problems of Cutting US interest Rates
See also: Why Fed cut interest rates
1. Weak Dollar.
The dollar has been very weak against the Euro, Yen, and Canadian dollar for several months. Reducing interest rates will further weaken the strength of the US dollar.
As US interest rates fall, it becomes less attractive to save money in the US. Therefore, there is an outflow of hotmoney from the US to other countries. This further weakens the dollar, and increased the cost of importing raw materials
2. Inflation
Reducing interest rates may cause inflationary pressures to increase. This is because it increases consumer spending and weakens the dollar. Both of which have inflationary pressure. However, others argue that if the economy is heading towards recession, inflation is not the primary problem.
3. Rewards Bad Lending.
The argument is that in recent years credit markets have performed poorly. Basically, too many bad loans have been given out. In particular, the sub prime mortgage market has helped to give mortgages to those who couldn't really afford the mortgage. By cutting interest rates aggressively it is responding to the failures of these credit markets. If interest rates are cut, the banks and consumers may not learn their lesson. Some argue that it is better to have some short term pain so that markets learn the lesson of irresponsible lending and so the crisis is not repeated in the future.
Of course, this is a more controversial argument and you are unlikely to see it repeated by many leading US politicians.
1. Weak Dollar.
The dollar has been very weak against the Euro, Yen, and Canadian dollar for several months. Reducing interest rates will further weaken the strength of the US dollar.
As US interest rates fall, it becomes less attractive to save money in the US. Therefore, there is an outflow of hotmoney from the US to other countries. This further weakens the dollar, and increased the cost of importing raw materials
2. Inflation
Reducing interest rates may cause inflationary pressures to increase. This is because it increases consumer spending and weakens the dollar. Both of which have inflationary pressure. However, others argue that if the economy is heading towards recession, inflation is not the primary problem.
3. Rewards Bad Lending.
The argument is that in recent years credit markets have performed poorly. Basically, too many bad loans have been given out. In particular, the sub prime mortgage market has helped to give mortgages to those who couldn't really afford the mortgage. By cutting interest rates aggressively it is responding to the failures of these credit markets. If interest rates are cut, the banks and consumers may not learn their lesson. Some argue that it is better to have some short term pain so that markets learn the lesson of irresponsible lending and so the crisis is not repeated in the future.
Of course, this is a more controversial argument and you are unlikely to see it repeated by many leading US politicians.
Why Did the Fed cut US interest rates by 0.5%?
1. They are concerned about the economy slowing down and possibly heading into recession. - Is US economy heading towards recession?
2. The main concern in the US economy at the moment is the state of the Housing Market and sub prime mortgage industry. Mortgage defaults are on the rise and US Housing prices are falling. The Fed is concerned that problems in the Housing market will spread to the rest of the economy. If house prices fall, people feel less wealthy and less confident. Therefore, there is a reduction in consumer spending. - Boom and Bust in US Housing Market
3. By cutting interest rates, they have reduced the cost of mortgage payments. This should help to increase disposable income of homeowners. It will also help reduce the number of mortgage defaults, which are causing severe problems for the US banking industry (and indirectly causing problems for UK banks like Northern Rock.
4. Economic Growth has slowed down in the US, inflation is below target.
5. Current Account deficit may improve. The US has a very large current account deficit (just under 7% of GDP) cutting interest rates will weaken the dollar, helping US exports become more attractive. This may reduce the current account deficit. Although, it is worth pointing out this is not the main reason that the FED cut interest rates (the deficit has been large for a long time)
2. The main concern in the US economy at the moment is the state of the Housing Market and sub prime mortgage industry. Mortgage defaults are on the rise and US Housing prices are falling. The Fed is concerned that problems in the Housing market will spread to the rest of the economy. If house prices fall, people feel less wealthy and less confident. Therefore, there is a reduction in consumer spending. - Boom and Bust in US Housing Market
3. By cutting interest rates, they have reduced the cost of mortgage payments. This should help to increase disposable income of homeowners. It will also help reduce the number of mortgage defaults, which are causing severe problems for the US banking industry (and indirectly causing problems for UK banks like Northern Rock.
4. Economic Growth has slowed down in the US, inflation is below target.
5. Current Account deficit may improve. The US has a very large current account deficit (just under 7% of GDP) cutting interest rates will weaken the dollar, helping US exports become more attractive. This may reduce the current account deficit. Although, it is worth pointing out this is not the main reason that the FED cut interest rates (the deficit has been large for a long time)
Monday, September 17, 2007
What determines whether a Merger is in Public Interest?
- What is the market share of the new firm at a local, regional, national, and european level? e.g. Tesco not allowed to merge with Safeway, but Morrisons could merge. This was because Tesco / Safeway would have had too much national market share.
- Are consumers likely to face less competition and higher prices as a result of the increased market share? - Too much market power enables firms to set higher prices
- Can the new firm exploit monopoly power in paying suppliers less? - A concern over the merger of Tesco and Safeway was that Tesco's could have squeezed farmer's profit margins even more.
- To what extent does the merger create economies of scale? Are their significant fixed costs in the industry? Is there potential for diseconomies of scale, - firms gets too big and inefficient.
- Does the industry require risky investment in new technologies and products? E.g. oil exploration and development of medicinal drugs
- Is the industry competitive on a global scale. E.g. a national monopoly may face competition from other countries. This may be relevant in the steel industry.
Northern Rock and Effect on the Economy
Northern Rock is one of the UK's biggest mortgage lenders. Recently it has experienced difficulties because it had a shortfall of credit. It was unable to borrow from the financial sector and ignominiously had to borrow from the Bank of England. It borrowed from the Bank of England in its capacity as lender of last resort.
Northern Rock suffered a shortfall of credit because
It has built its business on mortgage lending. It has not secured these mortgage debts againts saving accounts.
This year many US mortgage lenders (especially sub prime lenders) have gone bankrupt causing a fall in confidence and shortage of willing lenders. This global credit crunch has hit Northern Rock.
What is the Effect of Northern Rock's problems on the Rest of the Economy?
Directly there is no effect on the economy. Many savers are withdrawing their money; but, it is unlikely that the Bank will go under. Other banks like HSBC are said to be considering taking over Northern Rock.
However, there may be a knock on effect on the UK Housing Market. This episode has dented people's confidence in getting unconventional mortgages. It may be a factor in reducing demand for housing, especially speculative demand. Therefore, it will help reduce the growth of house prices and possibly cause house prices to fall in 2008-09
Northern Rock suffered a shortfall of credit because
It has built its business on mortgage lending. It has not secured these mortgage debts againts saving accounts.
This year many US mortgage lenders (especially sub prime lenders) have gone bankrupt causing a fall in confidence and shortage of willing lenders. This global credit crunch has hit Northern Rock.
What is the Effect of Northern Rock's problems on the Rest of the Economy?
Directly there is no effect on the economy. Many savers are withdrawing their money; but, it is unlikely that the Bank will go under. Other banks like HSBC are said to be considering taking over Northern Rock.
However, there may be a knock on effect on the UK Housing Market. This episode has dented people's confidence in getting unconventional mortgages. It may be a factor in reducing demand for housing, especially speculative demand. Therefore, it will help reduce the growth of house prices and possibly cause house prices to fall in 2008-09
Rude Exam Answers
A-level French examiners were taken aback by students using aggressive and rude remarks in French in their oral examinations this summer. They responded to questions from examiners by saying: “tu es fou ou quoi?” (are you mad or what?), “sur quelle planète tu vis?” (what planet do you live on?), or “tu racontes des bêtises!” (you are speaking nonsense!). Edexcel examiners did not publish the more extreme examples of the insults.
from: Times
from: Times
- See also: Funny Exam Answers
- Smart Exam Answers
Thursday, September 13, 2007
Does Microsoft have too much monopoly power?
Hi I found your blog really useful and it helped improve my grades! So thanks alot! You're doing a really great job here:)
I would like to ask you a question,
What are the merits and demerits of breaking up a monopoly? i.e Microsoft
Would really appreciate it if you could give me some help here.
Looking forward to ur response:)
Hmm... why does this question sound so familiar? Is it because I perhaps set this exact question for one of my students today?... :)
Anyway, it is of course an interesting question.
At one stage the US Justice department had nearly succeeded in getting Microsoft broken up into 3 smaller companies. They argued that Microsoft had abused its monopoly power to engage in illegal activities.
These illegal activities included:
- Combining Internet Explorer browser with the Windows operating system - This had violated anti-trust laws.
- Note this is an example of a monopoly using its power in one area to gain market share in another. Because it had a monopoly in operating systems. It was able to use this to gain a monopoly for web browsers. It is a kind of vertical integration. - Controlling different stages of production. New web browsers were at a disadvantage because it was too much effort to change from the default web browser.
- Microsoft breakup repealed at BBC
Points to Consider
- Is the monopoly abusing its market power? - setting higher prices being inefficient?
- To what extent does Microsoft need Profit for Research and development. To what extent do Microsoft benefit from economies of scale?
- Do these benefits justify the higher prices and inefficiency associated with Monopoly power.
- Is Microsoft inefficient because it is a monopoly, or is it a monopoly because it is innovative and efficient?
- Price of operating systems is coming down in real terms. Internet provides greater competition over time. e.g. growth of Mozilla Browser
- Are there alternatives to breaking up a monopoly. For example, the government could regulate the monopoly like Privatised water companies.
Useless but interesting information
Does A Falling Dollar Cause a US recession?
Will the falling dollar cause a recession in the US?
No, generally a falling dollar can actually help to increase economic growth.
When the dollar falls, US exports will appear cheaper. Therefore this will help boost exports and therefore economic growth. It will also help reduce the US current account deficit.
However, the falling dollar is connected with some of the economic problems associated with a potential recession.
1. Lack of confidence in the American Economy.
The falling dollar is partly due to the lack of confidence in the US economy. People are no longer willing to purchase dollar assets at low interest rates. Therefore, to finance American debt, interest rates need to be higher than previously. The higher interest rates contribute to lower growth.
2. Imbalances in the US economy.
The US has a twin deficit. A deficit on the current account (importing more than exporting) and a government deficit. This outflow of money is putting downward pressure on the dollar. To reduce the current account deficit. It may be necessary to slow down consumer spending. Consumer spending has been the backbone of economic growth in the US. But, with a declining housing market consumer spending is slowing.
See also:
Rising Petrol Prices help reduce Obesity
Recently I wrote a piece arguing for higher taxes on unhealthy foods. This obesity tax has several main justifications including:
Rising Petrol Prices hit Obesity
This is great news and these kinds of trends should be encouraged by government intervention.
What do you think? - Should the government tax certain activities? Is it the government's responsibility to tackle obesity?
Related
- Help to encourage healthy eating
- Pay for the externalities of obesity
- Raise revenue for government.
- Help save lives and improve quality of life.
- See: Fat tax on unhealthy foods
Rising Petrol Prices hit Obesity
This is great news and these kinds of trends should be encouraged by government intervention.
What do you think? - Should the government tax certain activities? Is it the government's responsibility to tackle obesity?
Related
Wednesday, September 12, 2007
Essay on Free Trade
I would like to using economics argument to write about free trade. My standpoint is Free trade is not fair and is not helpful for development in developing countries.
From your point of view, I should apply economic theory, application to real world, economic data and evaluation of data/theory. Therefore, my essay should write the development in developing countries and the standard of living in developing countries, e.g. are these countries getting better because free trade? Economic data about GDP, average wages in people, export and import in developing countries. These data to explain or to prove that is free trade works. It is right? In additional, I would like to ask should I using Keynesian Economic or Money Theory in my essays, or have another ecomoic theory is more stiuable to explain Free Trade.
- For Free Trade it is not necessary to use Keynesian Theory.
- If you can add data, your essay will be stronger. It depends on the level you are writing for. At A Level it would not be necessary to look into indepth statistics analysis.
- These essays and notes offer a short explanation of the key arguments
Tuesday, September 11, 2007
What does it mean to Be in Recession
There is much talk about the US economy entering into a recession. I notice on my statistics that quite a few people are searching. "What does it mean to enter a recession?"
A recession means a period of negative economic growth. This means there is a fall in National Output.
The official definition of a recession is when there is negative economic growth for two consecutive quarters. (i.e. for 6 months)
However, in practise people may talk about recession, even when the economy is growing very slowly. In economics we sometimes refer to this as a growth recession. This is because when economic growth is very low it means that we usually see many of the common features of recession.
In a recession the following usually occurs.
1. Lower Incomes
2. Rising Unemployment
3. Lower inflation
4. Higher Government Borrowing
5. Fall in sales of houses.
6. Fall in Business and consumer confidence
7. More spare capacity in the economy.
Note, the US economy is still someway off recession. Economic Growth is less than 2%, but, there is no immediate danger of leading to negative growth.
The problem in the US is that:
1. The Housing Market is in decline. In many cities house prices are falling.
2. The Stock market is falling, Partly due to the sub prime mortgage lending problems.
3. There are fundamental imbalances in the US economy
People are concerned that the combination of falling house prices, falling share prices and rising interest rates are likely to cause a recession.
If people fear a recession is about to occur, this fear can often make it happen. If you feel there may be a recession in the future then you will cut back on spending and this can cause a further fall in AD.
Related
A recession means a period of negative economic growth. This means there is a fall in National Output.
The official definition of a recession is when there is negative economic growth for two consecutive quarters. (i.e. for 6 months)
However, in practise people may talk about recession, even when the economy is growing very slowly. In economics we sometimes refer to this as a growth recession. This is because when economic growth is very low it means that we usually see many of the common features of recession.
In a recession the following usually occurs.
1. Lower Incomes
2. Rising Unemployment
3. Lower inflation
4. Higher Government Borrowing
5. Fall in sales of houses.
6. Fall in Business and consumer confidence
7. More spare capacity in the economy.
Note, the US economy is still someway off recession. Economic Growth is less than 2%, but, there is no immediate danger of leading to negative growth.
The problem in the US is that:
1. The Housing Market is in decline. In many cities house prices are falling.
2. The Stock market is falling, Partly due to the sub prime mortgage lending problems.
3. There are fundamental imbalances in the US economy
- low savings ratio,
- high debt levels,
- trade deficit and
- government fiscal deficit.
- Weakness of the dollar (related to trade deficit)
People are concerned that the combination of falling house prices, falling share prices and rising interest rates are likely to cause a recession.
If people fear a recession is about to occur, this fear can often make it happen. If you feel there may be a recession in the future then you will cut back on spending and this can cause a further fall in AD.
Related
Monday, September 10, 2007
Irrational Behaviour and the Economics of Football
Economists like to make assumptions such as:
1. Economies of Scale and Mergers
Bristol City and Bristol Rovers have been languishing in the lower divisions for many years. If they combined their resources they may have a chance of hitting the big time. There are clear economies of scale in football. If their support doubled they would have more money to buy players and may have a chance of competing against the top clubs. From an economic perspective this merger would make sense, however, from a Bristol Rovers fan's you might as well as ask England to Merge with France. In other words, sense of a clubs identity is more important than achieving success.
2. Setting Low Ticket Prices.
Rather than setting profit maximising prices, clubs set prices lower so that supporters can afford to go. This doesn't increase the number of spectators who go to a game. It could be a full house at a higher price. It also means the club gains less revenue to spend on players. However, if they increase prices too much then they will get criticised by their own spectators. The football club has monopoly power but it chooses not to use it.
3. Supporting losing Sides
Why do people stick with losing sides. Why go to watch Bury, when you could go a few miles and watch Manchester United play at a higher standard. Usually if we buy a good and it under-performs we switch to an alternative. However, football is not likely this. Brand loyalty is very high. No matter how bad the good becomes - people still stick to the same team (good)
4. Unrealistic Business Models.
With the exception of Manchester United, if you want to invest money on the stock market, don't buy shares in Football clubs. Football clubs are notorious for having over optimistic business plans. The problem is that to do well, you have to invest in good players. However, to invest in good players you need money. Money comes from doing well and winning competitions. Therefore, it is a vicious cycle. If you can't get good players you can't win and get the money to buy them. Therefore, clubs have to borrow against expectations of good results in the future.
One example, was Leeds United. In one season Leeds United were in the semi finals of the Champions League, with the potential huge pay out of winning the competition. Greedy for success the club overstretched itself in buying new players. Unfortunately the club didn't quite meet their expectations. The income was not as high as hoped and they realised they couldn't afford to keep paying the players. Therefore, they had to start selling their best players just to stave off bankruptcy. As a result their form fell and the team was relegated from their premiership. They are currently languishing in the third division (called 1st division) starting the season with a 15 point penalty for bad book keeping. How the mighty have fallen. - from playing A.C.Milan to the likes of Doncaster Rovers.
There are probably 10 clubs basing their spending on being in the top 4 of the premiership. 6 clubs are bound to be disappointed.
- People seek to maximise profit
- People seek to maximise utility.
- Consumers will seek to choose goods which give best value for money
- Firms will produce in the most efficient ways
- e.t.c.
1. Economies of Scale and Mergers
Bristol City and Bristol Rovers have been languishing in the lower divisions for many years. If they combined their resources they may have a chance of hitting the big time. There are clear economies of scale in football. If their support doubled they would have more money to buy players and may have a chance of competing against the top clubs. From an economic perspective this merger would make sense, however, from a Bristol Rovers fan's you might as well as ask England to Merge with France. In other words, sense of a clubs identity is more important than achieving success.
2. Setting Low Ticket Prices.
Rather than setting profit maximising prices, clubs set prices lower so that supporters can afford to go. This doesn't increase the number of spectators who go to a game. It could be a full house at a higher price. It also means the club gains less revenue to spend on players. However, if they increase prices too much then they will get criticised by their own spectators. The football club has monopoly power but it chooses not to use it.
3. Supporting losing Sides
Why do people stick with losing sides. Why go to watch Bury, when you could go a few miles and watch Manchester United play at a higher standard. Usually if we buy a good and it under-performs we switch to an alternative. However, football is not likely this. Brand loyalty is very high. No matter how bad the good becomes - people still stick to the same team (good)
4. Unrealistic Business Models.
With the exception of Manchester United, if you want to invest money on the stock market, don't buy shares in Football clubs. Football clubs are notorious for having over optimistic business plans. The problem is that to do well, you have to invest in good players. However, to invest in good players you need money. Money comes from doing well and winning competitions. Therefore, it is a vicious cycle. If you can't get good players you can't win and get the money to buy them. Therefore, clubs have to borrow against expectations of good results in the future.
One example, was Leeds United. In one season Leeds United were in the semi finals of the Champions League, with the potential huge pay out of winning the competition. Greedy for success the club overstretched itself in buying new players. Unfortunately the club didn't quite meet their expectations. The income was not as high as hoped and they realised they couldn't afford to keep paying the players. Therefore, they had to start selling their best players just to stave off bankruptcy. As a result their form fell and the team was relegated from their premiership. They are currently languishing in the third division (called 1st division) starting the season with a 15 point penalty for bad book keeping. How the mighty have fallen. - from playing A.C.Milan to the likes of Doncaster Rovers.
There are probably 10 clubs basing their spending on being in the top 4 of the premiership. 6 clubs are bound to be disappointed.
Economics of Ticket Prices
Ticket prices is an emotive issue, particularly in the past 10 years, which have seen ticket prices increase faster than the rate of inflation. A top price ticket at Manchester United will cost £38. At Chelsea £48.
Listen to any football supporter and it will not be too long before talk of the "real supporter" being priced out of the game by a "new breed of supporter" - This new supporter is characterised as preferring champagne and salmon, rather than standing on the terraces, eating meat pies, and shouting obscenities at the opposition.
Football clubs have a conflict between charging the maximum price they can and keeping prices low for their "real supporters". As a consequence we see many top clubs regularly sold out with long waiting lists to get tickets.
From an economic point of view, this is not rational. If demand is greater than supply and there is a shortage, the firm(football club) should put up prices to increase revenue. Furthermore to maximise profit, it may not be necessary to fill the stadium. If demand is inelastic profit may be maximised at a price which leads to empty seats.
Profit is maximised where MR=MC. The MC of an extra supporter coming to the game is quite low. Therefore ticket prices should be set at a price to where revenue is maximised and this is not necessarily where the stadium is full.
External Links
Listen to any football supporter and it will not be too long before talk of the "real supporter" being priced out of the game by a "new breed of supporter" - This new supporter is characterised as preferring champagne and salmon, rather than standing on the terraces, eating meat pies, and shouting obscenities at the opposition.
Football clubs have a conflict between charging the maximum price they can and keeping prices low for their "real supporters". As a consequence we see many top clubs regularly sold out with long waiting lists to get tickets.
From an economic point of view, this is not rational. If demand is greater than supply and there is a shortage, the firm(football club) should put up prices to increase revenue. Furthermore to maximise profit, it may not be necessary to fill the stadium. If demand is inelastic profit may be maximised at a price which leads to empty seats.
Profit is maximised where MR=MC. The MC of an extra supporter coming to the game is quite low. Therefore ticket prices should be set at a price to where revenue is maximised and this is not necessarily where the stadium is full.
External Links
Economics of Football - Players Wages
Why do the top footballers get paid Over £50,000 a week, when in all probability they would be willing to play football for £200 a week. The first thing to remember is that it is only a very small % of footballers who get these astronomical wages. The Wages are determined by the two basic factors of supply and demand. The supply of top strikers is very limited. If you want to get the best striker in the world. The supply curve for this commodity (best player) is perfectly inelastic. When you have a supply curve that is perfectly inelastic, the wage will be determined by the demand curve; any increase in demand for that player will result in an increase in price.
Note it is not just the supply curve that affects wages. The supply of the best lacrosse players is similarly inelastic, but you don't get £50,000 for playing lacrosse.
The theory of MRP suggests that demand for labour depends on two things. MR of the last good sold and MPP - the productivity of the worker.
The MR is basically the price people are willing to pay to consume the good. In the case of football this is the price people are willing to pay to watch the game, live or on TV. It is also includes sponsorship and prize money. In the past 2 decades the amount of money in football has increased significantly. Mainly due to factors such as cable TV paying a premium to broadcast live games. For all the money coming into a game, there is a relatively small number of workers (players) who need paying. Manchester United may generate £1 million per game, yet the number of people they have to employ is relatively low. Therefore, there is a high amount of money for players.
The MPP of players cannot be exactly measured. However, if a good player makes the difference between a team finishing 5th and 4th in the premiership, it can be worth several million pounds to the club (qualification to champions league) Even one kick can be worth upto £10 million. This gives footballers a potentially very high productivity. This is why clubs are willing to pay so much on transfer fees and wages. At the other end of the football league, the money in the game is lower and so effectively the MRP of lower division players is lower.
Furthermore the demand for the top players is very competitive. The market for the top players is wide open, British clubs face not only face competition from each other, but also Spanish and Italian clubs. The competitive nature of the bidding means that the clubs often have to bid the maximum that they are willing to pay in order to get the player.
See also
Note it is not just the supply curve that affects wages. The supply of the best lacrosse players is similarly inelastic, but you don't get £50,000 for playing lacrosse.
The theory of MRP suggests that demand for labour depends on two things. MR of the last good sold and MPP - the productivity of the worker.
The MR is basically the price people are willing to pay to consume the good. In the case of football this is the price people are willing to pay to watch the game, live or on TV. It is also includes sponsorship and prize money. In the past 2 decades the amount of money in football has increased significantly. Mainly due to factors such as cable TV paying a premium to broadcast live games. For all the money coming into a game, there is a relatively small number of workers (players) who need paying. Manchester United may generate £1 million per game, yet the number of people they have to employ is relatively low. Therefore, there is a high amount of money for players.
The MPP of players cannot be exactly measured. However, if a good player makes the difference between a team finishing 5th and 4th in the premiership, it can be worth several million pounds to the club (qualification to champions league) Even one kick can be worth upto £10 million. This gives footballers a potentially very high productivity. This is why clubs are willing to pay so much on transfer fees and wages. At the other end of the football league, the money in the game is lower and so effectively the MRP of lower division players is lower.
Furthermore the demand for the top players is very competitive. The market for the top players is wide open, British clubs face not only face competition from each other, but also Spanish and Italian clubs. The competitive nature of the bidding means that the clubs often have to bid the maximum that they are willing to pay in order to get the player.
See also
Economics of Football
The Economics of Football
Football is big business, we only have to look at the wages of the top players to see the amount of money in the game. Football is also an interesting topic for economists because it arouses emotions and passions that often don't fit into neat economic models. I have an uncle who has supported Morecambe F.C. for the past 57 years. He is passionate about football, but, he also tells me he wouldn't watch the premiership because the players get paid "too much money" This is not a unique view, many feel it is obscene how much players earn. However, you wouldn't hear people say I'm not going to buy from Tesco's - it's obscene how much the directors get paid.
This week we will have a series on different aspects of the economics of football. If you have any questions or suggestions feel free to leave comments.
Essays on Football
- Players Wages
- Ticket Prices
- Irrational Economic decisions in Football
Picture from: Manchester premier action
What to use in an economic Essay
However, when I want to bring economic analyise into political filed, I still confuse that what is appropriate way to use "the economic arguement"? Is it theory in economic e.g. Human Capital Theory? Or data of country such as exchange rate, import/export data etc? What is exactly "the economic arguement" means? Thank you for your kindly answer.
When writing economic essays it is important to use the following items in answering the question.
1. Economic Theory. e.g. Wages are determined by MRP theory. MRP = MR*MPP. The theory also needs to be explained
2. Application to real World. We see the implication of MRP theory to explain why Lawyers get higher wages than street cleaners. - Lawyers can make a big difference to a firms profit and therefore have a high MPP.
3. Economic Data. For longer essays you may wish to back up the answer with data. E.g. average wage of lawyers is $89,000 a year. Average wage of street cleaners $16,000. For university essays / dissertations it is important to include footnotes for the source of your data.
4. Evaluation of data / theory. MRP can be used to determine wages. However, for many jobs in the service sector it is difficult to measure a workers productivity.
I would be wary of using political arguments for an economics essays. For example, if you have a question about fiscal policy. You will not get any marks for saying things like
- Higher taxes will cause the government to be unpopularity.
- This kind of political argument is not relevant in an economics essay.
See also:
Friday, September 7, 2007
Schools and House Prices
The perceived quality of public funded schools varies tremendously. Increasingly parents are sending children to private schools. However, it is unsurprising that parents have been willing to spend a premium to move to an area which can guarantee entry into a "good school".
It is not surprising if you consider that the alternative to going to a good public sector school is spending £5,000 a year on private education.
For parents with this choice, living in an area of a very good school could be worth upto £5,000 * 7 = £35,000.
A university study examined links between house prices and state schools and found that
Research, carried out by the University of Warwick's Department of Economics, said parents were willing to pay up to £20,000 extra to buy into areas with the best schools. - link at BBC
Good schools raise House prices at BBC
If you live in the catchment area of a good school, but have no children of school age, it might be worth moving and cashing in on the school premium.
See also: What determines house prices
It is not surprising if you consider that the alternative to going to a good public sector school is spending £5,000 a year on private education.
For parents with this choice, living in an area of a very good school could be worth upto £5,000 * 7 = £35,000.
A university study examined links between house prices and state schools and found that
Research, carried out by the University of Warwick's Department of Economics, said parents were willing to pay up to £20,000 extra to buy into areas with the best schools. - link at BBC
Good schools raise House prices at BBC
If you live in the catchment area of a good school, but have no children of school age, it might be worth moving and cashing in on the school premium.
See also: What determines house prices
What Determines House Prices?
What supply and demand factors affect the price of houses and do schools with a decent reputation have any affect on the prices? Thanks! Nikhil
House prices are determined by a combination of supply and demand.
In the short term supply is fixed. Therefore, it is demand that has the most effect on short term fluctuations.
However, the long term rise in UK house prices is closely related to the fundamental shortage of supply.
The most important demand side factors are:
- Real Interest Rates - Higher interest rates make the cost of mortgage payments more expensive therefore reduce demand for buying a house
- Population - Growth in immigration has been a significant factor in increasing demand for houses, especially in the South East of England
- Incomes - Rising income enables more people to spend on housing. However, house prices in the UK have been rising at a much faster rate than income, suggesting other factors are important
- Confidence. - In the past 10 years people have had confidence in the future of the UK Housing market and so have continued to buy. However, in the US, people's confidence in the market has changed drastically. This has caused US house prices to fall.
- Availability of Mortgages - To get on the property ladder, an increasing number of people have been getting unconventional mortgages. This makes it easier to borrow large amounts. Therefore, the high prices are sustained.
Monday, September 3, 2007
Problems of Keeping interest Rates too High.
It is very well for economists to talk about the benefits of recessions - "creative destruction" but, recessions do create real personal hardships for individuals affected by unemployment, bankruptcy and falling incomes.
Problems of Recessions
Recessions don't necessarily weed out just the inefficient. Recessions can cause the bankruptcy of many good companies who just can't cope with the temporary downturn. This particularly applies to new companies.
Uncertainty
Recessions create uncertainty which discourages investment. People dislike the uncertainty of fluctuations in the business cycle. Moderate steady growth helps encourage investment.
Hysteresis.
This suggests that high periods of unemployment tend to lead to higher unemployment rates in the future. Basically, if people are unemployed it becomes more difficult to get work in the future. This is because they become demotivated e.t.c.
High Interest Rates do not affect people equally.
Higher interest rates may be needed to discourage excess borrowing and inflationary pressures. However, people often forget that interest rates are an imperfect mechanism. They do not affect consumers equally. For example, new homeowners with a large mortgage will be heavily affected by a small rise in interest rates. The older generation who have paid off their mortgage may actually welcome rising interest rates. This is because it increases the income from their savings.
Problems of Recessions
Recessions don't necessarily weed out just the inefficient. Recessions can cause the bankruptcy of many good companies who just can't cope with the temporary downturn. This particularly applies to new companies.
Uncertainty
Recessions create uncertainty which discourages investment. People dislike the uncertainty of fluctuations in the business cycle. Moderate steady growth helps encourage investment.
Hysteresis.
This suggests that high periods of unemployment tend to lead to higher unemployment rates in the future. Basically, if people are unemployed it becomes more difficult to get work in the future. This is because they become demotivated e.t.c.
High Interest Rates do not affect people equally.
Higher interest rates may be needed to discourage excess borrowing and inflationary pressures. However, people often forget that interest rates are an imperfect mechanism. They do not affect consumers equally. For example, new homeowners with a large mortgage will be heavily affected by a small rise in interest rates. The older generation who have paid off their mortgage may actually welcome rising interest rates. This is because it increases the income from their savings.
- Benefits of High interest rates - Why recessions are not so bad after all
- Causes of Recessions
- Why Do recessions last a long time?
Why Interest Rates may not Fall
The economist carried an interesting article recently "Does America Need a recession?" August 25th 2007. They suggested that recessions can have certain benefits for economies. Furthermore Central Banks should not always seek to prevent mild recessions.
The main role of central banks should be:
1. Create a low inflationary environment
2. Create financial stability
3. Prevent Mild downturns turning into full blown recessions.
Therefore, there are many arguments against cutting interest rates at the first sign of panic. If necessary Central Banks should allow a moderate recession. These are some of the benefits of not cutting interest rates aggressively.
1. Moral Hazard.
The argument is that people have been borrowing recklessly. This explains alot of the problems with the US sub prime mortgage market. As a consequence of reckless borrowing banks are suffering defaults, writing off debts and this is a contributing factor in the recent downturn in the stock market. However, if the central bank aggressively cuts interest rates, this merely encourages people to keep borrowing recklessly. If interest rates are kept high, people will think twice before undertaking imprudent borrowing.
Basically, the concern is that if interest rates are cut at the first sign of trouble, people will think it is fine to borrow beyond their means, - because the Central Bank will always help out debtors by cutting interest rates.
2. Financial Boom and Bust.
we can see two examples of Central Banks cutting interest rates too aggressively.
1987 saw a stock market crash of 25% in one week. Many felt this heralded a recession (like the great depression, following the wall street crash of 1929). As a consequence Central banks cut interest rates so that real interest rates were very low. This had the effect of pumping money in to the economy. In the UK particularly, this led to an economic boom and inflation. The result of this Lawson boom (high inflationary growth) was the need to raise interest rates aggressively to 15% in 1992. This caused a severe recession in the UK. Arguably the Central Banks should not have panicked because of the stock market crash. It was a mistake to make monetary conditions so loose.
A similar event occured in 2001 after the dot com bubble burst, and in response to the events of 9/11. The years following 2001 led to an era of very cheap credit. This underpined much of the boom in borrowing and the later problems of the sub prime market. If interest rates had been kept higher in 2001, it would have caused a little more pain then. But, it would have avoided many of US's current financial ills.
3. Deal with Fundamental Imbalances.
A downturn in the economy is usually the consequence of fundamental imbalances in the economy. For example, the US is experiencing a large current account deficit; which in turn is contributing towards a devaluing dollar. This deficit is mainly as a consequence of cheap credit and high consumer spending. Much of this spending goes on imports, especially from China. A period of high real interest rates would help reduce this imbalance in spending and saving.
Higher levels of spending would help in the long term lead to more investment and sustainable economic growth.
4. Creative destruction.
The economist J. Schumpeter, argued that recessions had many benefits for the long term success of the economy. In particular, recessions were an opportunity to weed out the inefficient firms and encourage firms to be more efficient. Although this may be painful in the short term it does have long term benefits.
More on Recessions
The main role of central banks should be:
1. Create a low inflationary environment
2. Create financial stability
3. Prevent Mild downturns turning into full blown recessions.
Therefore, there are many arguments against cutting interest rates at the first sign of panic. If necessary Central Banks should allow a moderate recession. These are some of the benefits of not cutting interest rates aggressively.
Benefits of Recessions.
1. Moral Hazard.
The argument is that people have been borrowing recklessly. This explains alot of the problems with the US sub prime mortgage market. As a consequence of reckless borrowing banks are suffering defaults, writing off debts and this is a contributing factor in the recent downturn in the stock market. However, if the central bank aggressively cuts interest rates, this merely encourages people to keep borrowing recklessly. If interest rates are kept high, people will think twice before undertaking imprudent borrowing.
Basically, the concern is that if interest rates are cut at the first sign of trouble, people will think it is fine to borrow beyond their means, - because the Central Bank will always help out debtors by cutting interest rates.
2. Financial Boom and Bust.
we can see two examples of Central Banks cutting interest rates too aggressively.
1987 saw a stock market crash of 25% in one week. Many felt this heralded a recession (like the great depression, following the wall street crash of 1929). As a consequence Central banks cut interest rates so that real interest rates were very low. This had the effect of pumping money in to the economy. In the UK particularly, this led to an economic boom and inflation. The result of this Lawson boom (high inflationary growth) was the need to raise interest rates aggressively to 15% in 1992. This caused a severe recession in the UK. Arguably the Central Banks should not have panicked because of the stock market crash. It was a mistake to make monetary conditions so loose.
A similar event occured in 2001 after the dot com bubble burst, and in response to the events of 9/11. The years following 2001 led to an era of very cheap credit. This underpined much of the boom in borrowing and the later problems of the sub prime market. If interest rates had been kept higher in 2001, it would have caused a little more pain then. But, it would have avoided many of US's current financial ills.
3. Deal with Fundamental Imbalances.
A downturn in the economy is usually the consequence of fundamental imbalances in the economy. For example, the US is experiencing a large current account deficit; which in turn is contributing towards a devaluing dollar. This deficit is mainly as a consequence of cheap credit and high consumer spending. Much of this spending goes on imports, especially from China. A period of high real interest rates would help reduce this imbalance in spending and saving.
Higher levels of spending would help in the long term lead to more investment and sustainable economic growth.
4. Creative destruction.
The economist J. Schumpeter, argued that recessions had many benefits for the long term success of the economy. In particular, recessions were an opportunity to weed out the inefficient firms and encourage firms to be more efficient. Although this may be painful in the short term it does have long term benefits.
More on Recessions
Economic Systems - Free Market
The free market means that economic decisions are taken by private individuals and firms. Everything is owned and operated by private individuals. In a pure free market there would be no government intervention in the economy. However, in practise governments usually involve themselves in the implementation of certain laws and certain public services, even if only national defence. We often speak about America having a free market economy because most businesses are left to private enterprise. But, even in America the government spends about 35% of GDP.
Theoretical support for a free market was strongly supported by Adam Smith in his book, The Wealth of Nations. The wealth of nations tried to explain that; when people try to maximise their individual utility it actually leads to the best outcome for the rest of society.
Adam Smith was aware of some limitations of the free market. For example, he was aware of how monopoly power could be abused. But, basically his theories crystalised the theoretical underpinnings of a free market approach. Many of his arguments remain relevant today.
Problems of a Free Market
A free market has various problems. This is a silly mnemonic to help you remember them. PIMM FACED.
P - Public Goods are not provided in a free market. A public good is a good with the characteristics of non rivalry and non excludability. Examples include street lighting and national defence.
I - Inequality. A free market provides no social security net for those who are unemployed or on low income. Furthermore the nature of a free market is that the benefits tend to accrue to a small number of people who have the advantage of property and monopoly power
M - Monopoly. In an unchecked free market, monopolies can easily develop. This means the owners are in a position to set high prices and exploit both consumers and workers.
M - Merit Good - Education and health care. Under-provided because people underestimate the benefits of going to school e.t.c.
F - Factor immobility. Geographical unemployment. Occupational unemployment through lack of skills
A - Agrictulture. - Agriculture is prone to market failure e.g. weather can harm crops
C - Cyclical Instability - economic recessions and the corresponding unemployment
E - Externalities - Over-consumption of goods like tobacco with negative externalities
D - De merit goods - Overconsumption of goods like alcohol, where people overestimate the personal benefits, underestimate the costs of getting drunk.
Theoretical support for a free market was strongly supported by Adam Smith in his book, The Wealth of Nations. The wealth of nations tried to explain that; when people try to maximise their individual utility it actually leads to the best outcome for the rest of society.
Adam Smith was aware of some limitations of the free market. For example, he was aware of how monopoly power could be abused. But, basically his theories crystalised the theoretical underpinnings of a free market approach. Many of his arguments remain relevant today.
Problems of a Free Market
"Capitalism is the astounding belief that the most wickedest of men, will do the most wickedest of things for the greatest good of everyone."
- John Maynard Keynes, as quoted in Moving Forward: Programme for a Participatory Economy (2000)
A free market has various problems. This is a silly mnemonic to help you remember them. PIMM FACED.
P - Public Goods are not provided in a free market. A public good is a good with the characteristics of non rivalry and non excludability. Examples include street lighting and national defence.
I - Inequality. A free market provides no social security net for those who are unemployed or on low income. Furthermore the nature of a free market is that the benefits tend to accrue to a small number of people who have the advantage of property and monopoly power
M - Monopoly. In an unchecked free market, monopolies can easily develop. This means the owners are in a position to set high prices and exploit both consumers and workers.
M - Merit Good - Education and health care. Under-provided because people underestimate the benefits of going to school e.t.c.
F - Factor immobility. Geographical unemployment. Occupational unemployment through lack of skills
A - Agrictulture. - Agriculture is prone to market failure e.g. weather can harm crops
C - Cyclical Instability - economic recessions and the corresponding unemployment
E - Externalities - Over-consumption of goods like tobacco with negative externalities
D - De merit goods - Overconsumption of goods like alcohol, where people overestimate the personal benefits, underestimate the costs of getting drunk.
Saturday, September 1, 2007
The Fundamental Economic Problem
The fundamental economic problem is related to the issue of scarcity. Because of limited resources and infinite demands, society needs to determine how to produce and distribute these relatively scarce resources. Of course, it is possible humans could limit their demands and be satisfied with the basic necessity's of life. In some tribal society's / spiritual communities you could argue there is no economic problem because the limited resources are more than adequate to meet all their wishes. However, society is mostly dominated by people wishing to consume more goods and services than are available. Because their is a shortage of resources, economics considers:
Free market economies - Basically, some economists suggest the free market is the best way to proceed. However, other argue that a free market creates many problems; notably inequality of distribution. Therefore, because of this it is necessary for the government to intervene in the economic decision making process.
Capitalist v Socialist economies
In this diagram above, the good becomes more abundant. This causes the supply curve shifts to the right. This leads to a lower price and increase in quantity.
Therefore, if a good becomes more abundant, the market mechanism makes it cheaper and people buy more. For example, when steel became cheaper in the nineteenth century, it started to be used in many more applications
In this diagram we have a fall in supply. In this case the opposite happens. Because this good is in shorter supply, the price goes up. This increase in price causes a fall in demand.
For example, as we run out of oil, we should expect the price to go up. This increase in the price of oil will cause demand to fall and people to look for alternatives.
In this diagram, we have rising demand (D1 to D2) but also a fall in supply. The effect is to cause a large rise in price. For example, if we run out of oil, supply will fall. However, economic growth means demand continues to rise.
- What to Produce
- How to Produce
- For Whom to Produce
Free market economies - Basically, some economists suggest the free market is the best way to proceed. However, other argue that a free market creates many problems; notably inequality of distribution. Therefore, because of this it is necessary for the government to intervene in the economic decision making process.
Capitalist v Socialist economies
Examples of Market Forces in Action
Good becomes more availableIn this diagram above, the good becomes more abundant. This causes the supply curve shifts to the right. This leads to a lower price and increase in quantity.
Therefore, if a good becomes more abundant, the market mechanism makes it cheaper and people buy more. For example, when steel became cheaper in the nineteenth century, it started to be used in many more applications
Fall in supply
In this diagram we have a fall in supply. In this case the opposite happens. Because this good is in shorter supply, the price goes up. This increase in price causes a fall in demand.
For example, as we run out of oil, we should expect the price to go up. This increase in the price of oil will cause demand to fall and people to look for alternatives.
Diagram Showing Increase in Price
In this diagram, we have rising demand (D1 to D2) but also a fall in supply. The effect is to cause a large rise in price. For example, if we run out of oil, supply will fall. However, economic growth means demand continues to rise.
Related
Buying Shares as Gifts.
Given the recent turbulence in the stock markets, buying shares may seem a risky business. However, despite the short term volatility of the stock markets, buying shares provides an excellent opportunity to increase your long term capital. Historically, investing in the stock market has given greater returns than other investments such as saving in a bank.
Furthermore, the stock market gives you the potential to pick out shares which can easily outperform the market. For example, investing in a blue chip company like Disney shares, would have given an increase of 13% in the past 12 months. (despite the recent setbacks associated with general falling share prices.)
Which ever stock you decide to buy the best attitude is to see it as a long term investment. Therefore, even if there are temporary setbacks in the value of the share you can remain detached. For example, the disney stock we used as an example, has fallen by 5% in the past 2 months. But, this kind of short term volatility is inevitable. The successful investor will not worry about short term fluctuations.
Share in a frame are a company who offer an opportunity to buy a framed share certificate. It would make a good long term investment / present. As a gift there will be no disappointment of gaining an unwanted present. It also enables the chance to significantly increase the value of the gift over the long term.
Other Recommended products:
Harley Davidson Stock
This is a sponsored post:
Furthermore, the stock market gives you the potential to pick out shares which can easily outperform the market. For example, investing in a blue chip company like Disney shares, would have given an increase of 13% in the past 12 months. (despite the recent setbacks associated with general falling share prices.)
Which ever stock you decide to buy the best attitude is to see it as a long term investment. Therefore, even if there are temporary setbacks in the value of the share you can remain detached. For example, the disney stock we used as an example, has fallen by 5% in the past 2 months. But, this kind of short term volatility is inevitable. The successful investor will not worry about short term fluctuations.
Share in a frame are a company who offer an opportunity to buy a framed share certificate. It would make a good long term investment / present. As a gift there will be no disappointment of gaining an unwanted present. It also enables the chance to significantly increase the value of the gift over the long term.
Other Recommended products:
Harley Davidson Stock
This is a sponsored post:
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