EconomicsNotes

  Profit is a positive difference between revenue and cost. Firms maximise profit where they neither make nor lose money on the last item produced and sold. This is the level of production where marginal cost is equal to marginal revenue. The actual amount of profit in such circumstances will be defined by the difference between average cost and average revenue at that level of production.   Economics also makes a distinction between normal, break-even, and abnormal (sometimes called supernormal) profits. Normal profit is the level of profit at which a firm covers its opportunity cost, usually defined as what it could have earned by doing something else with its money in the same time period. Break-even is an accounting concept in which a firm’s revenues are equal to its costs and is usually treated as the same thing as normal profit by economists. Abnormal profit is what most people understand as profit, which is a surplus of cash over spending. Economic theory does not a...

Strangely enough for something which has long been characterised as a dismal profession, there are quite a few jokes and wry observations which originate with economists or economic historians, and more which have been enjoyed by them. Many of these observations have a ring of truth about them. One I like is adapted from psychiatry; economics has physics envy.   That is to say, economists have often been characterised as people who would like to be like physicists, with ‘laws’ like those of Thermodynamics, and verifiable Bolzmann constants and so forth. Some economists have taken this approach further and have embraced Quantum economics, claiming, like Paul Ormerod, that this is a helpful perspective from which to try to understand money. People who are this certain about economics often end up so entangled in their own theories and arguments, and so disassociated from the world, that one wonders if they have any understanding of physics at all.   These circumstances are somew...

  There are a variety of policies which authorities could use to intervene when the market fails (that is, when the market price does not reflect the 'true' cost or benefit of a good or service, and where the price mechanism cannot therefore work.)  Different policies are suited to different failures. Below, I have set out the types of intervention, and then suggested which situations they fit. Type of Government Intervention Market Failures which the intervention is directed at Examples Indirect Taxation Indirect taxes function well to raise the price and lower the supply of a demerit good. They punish producers and discourage demand where demand is inelastic, and make the consumers pay for externalities when the consumer is inelastic. They are therefore widely used to cope with negative production and consumption externalities, though they may be subject to various forms of government failure. ...