EconomicsNotes

  1.   Horizontal mergers occur when businesses at the same stage of the supply chain join, either because of an agreed merger or a takeover. In doing so, they could be lowering long-run average costs, and thus gain economies of scale. If the new combined business moves nearer to, or is afterwards at, minimum efficient scale, this could also improve the efficiency of the economy. Businesses could also gain several advantages, not least of which would be a lower overall debt, and a greater ability to spread risk across the firm’s operations. Ideally, an horizontal merger will result in a lowering of duplication of administration in the industry, increased productivity because of the ability to specialise and to increase the division of labour, and the creation of more secure specialised supply chains and business divisions than existed previously. Firms could gain physical economies in terms of larger offices and warehouses for the combined firm than for any single one, and...

  1.   Monopolistic competition as an idea is associated with Edward Chamberlin and Joan Robinson, who posited a realistic model of firms which operate in markets that change over time. Monopolistic competition has little to do with monopoly, except the monopoly of branding, patent, and trademark. Monopolistic competition describes a situation in which firms offer differentiated products, which do not initially have substitutes in the minds of consumers. This allows for abnormal profits, because firms can control price or supply in such a way that production occurs where marginal revenue equals marginal cost, maximising profit because firms sell at a level of average revenue above average cost.   In a monopolistically competitive market, however, barriers to entry for similar products are low and, whilst not perfect, knowledge and information cannot be fully restricted. Other firms therefore enter, with differentiated products or services that cater for the same nee...

  1.   A merit good is one with positive externalities which is excludable, but which will be under produced and overpriced in the market. The socially optimum level of such a good will therefore not be provided, leading to a welfare loss. This might be because of the nature of the good but could also be because people might not recognise the benefits which arise from use of the good. This could be because the good has a long-term advantage for people which is difficult to compute. A liberal arts degree which gives rise to a love of and familiarity with literature, poetry, philosophy, history, or art, for instance, might enrich a life, encourage mental health benefits such as patience and resilience, and allow for greater productivity and problem-solving over time than, for instance, an MBA Some industries could be subject to this type of information failure. The education, healthcare, and insurance industries are all predicated upon the possibility of future loss and fu...

1 It is sensible to be guided by analysis of markets, whilst remembering that there is always a margin of error in predictions, and that unlikely or unexpected events are not impossible. As with cyclical analysis of the economy, it is also sensible to be aware of the projected length of forecasts, and that economic analysis is often limited by assumptions about rationality and marginality which economic actors might not share. A final caveat is that the ‘map paradox’ applies; no representation is perfectly accurate because, if it were, it would be the thing represented itself and not a representation. Forecasts of trends help economic agents, governments, and monetary authorities make decisions about the allocation of resources and cash, and for example, central lending rates. In doing so, they might help eliminate waste, in the case of suppliers, which helps an economy move towards allocative efficiency. Acting because of forecasts might also reduce or eliminate decision lag, i...

  Economics is a term for a variety of disciplines which are now so specialised that they could be separate subjects. At its core, it describes the systems and methods by which people choose to allocate resources, and the signals and incentives that they get to do so. Economics would not therefore exist in the same way if we lived in a world of absolute abundance where every need and want was met and there was no cost to doing anything. It fails when there are abundant goods whose use does not stop anyone else using them. That is why it describes such goods as ‘non-economic.’ Instead, economics begins from the idea of choices based on opportunity cost. An opportunity cost is the cost of what was not done, of the ‘next best alternative’ to quote the textbooks. For example, if you had a choice of using your money and time for a birthday meal, or a walk, and you chose the walk, the meal would be the ‘alternative foregone.’ It would be the opportunity cost. This is quite a narrow...

    Domestic Demand refers to the accumulated (that is, aggregate) demand within all the markets of an economy. As such, it can be handily summed up in a formula, C+I+G+X-M, where C is consumption, I is investment, G is net government spending, and X-M is net exports. This is usually referred to as ‘AD.’ Consumption is the largest part of AD. All the consumption decisions within the economy, including all non-investment purchases by households, individuals, and firms, add up to around two thirds of AD. In addition, the Keynesian economic theory asserts that there is a link between consumption and investment, which can drive AD upwards, as firms invest more when they see that consumers are purchasing more goods and services. Investment is a sustained addition to long-run aggregate supply, or capital for short. AD can be plotted against LRAS on a two-dimensional graph. If AD and LRAS meet at the point where there is maximum real GDP/GNI with no tendency for the price level t...

 This post is a little less objective than usual, but might be of interest to those doing OCR, pre-U, or CIE-style argumentative essays on economics, as well as of general interest. It will be available as a podcast on one of my other blogs soon.   A working knowledge of economic theory (and practice) would be useful to policy stakeholders such as executives, legislators, the media, and the political classes, in three ways. Firstly, economics conveys a sense of the contingency of economic prescriptions, and therefore would help to illuminate policy choices, which could then be made on an informed, balanced, and persuasive basis. Secondly, a knowledge of microeconomic realities could benefit policymakers in dealing with supply-side matters and labour markets and help to stabilise and improve long-term growth. Thirdly, a great many economic problems are systemic and cyclical, and yet steady and long-term policies to expand aggregate supply, maintain real interest rates, and impr...