Opportunity cost is.....

Revision Video V2

Real Ale & Binge Drinking!

a. summarise the article in your blog

“Real ale is the only type of beer now seeing its sales grown in the UK pubs, helped by an increasing number of women enjoying the drink, a study has said. While all other beer types, such as lager and keg bitters, saw their sales fall in the first half of 2009, sales of real ale grew 1%, it said. The independent study, which is backed by a host of brewers, said the number of women drinking real ale has doubled. The increase in real ale sales might come as a lifetime opportunity for pub-owners. Most pubs are currently facing harsh times (as a result of the recession) and more pubs are going out of business every day. The sale of real ales could be a turning point for them.”

b. link to the article

http://news.bbc.co.uk/1/hi/business/8290264.stm

c. list the determinants of demand and the determinants of supply

The determinants of demand are: disposable income, taste & preferences, the prices of substitutes and complements, expectations of the future and, finally, population.

The determinants of supply are: technology, factor prices, the number of suppliers, expectations of the future and, finally, environmental conditions.

d. draw the demand curve for real ale

(The demand is rather steep as the demand is quite inelastic.)

e. explain whether the demand for real ale is elastic or inelastic

The demand for real ale is inelastic, as the recession did not affect the demand for real ales in a negative way.

f. explain why the demand for real ale has increased

The article describes that woman prefer to drink real ale above other beers. This is a question of taste (one of the determinants of demand). Because the amount of women drinking in pubs has increased, the demand for real ales has increased as well.

g. explain - with diagrams - whether binge drinking is a positive or negative externality

I think binge drinking is a positive externality, as alcohol brings people together. When someone is under influence of alcohol (read: extremely drunk), he or she has contact with other people very easily, as the alcohol takes away any form of hesitation or shyness. This causes people to broaden their social network. This would mean more and more people will become good friends. This would not only improve transfers on the job market, as people find new jobs because of their new friends. For example: person A says: “Oh man I got fired, I really need to find a job!”. Person B (a friend of person A which he met when he was really drunk as a result of binge drinking) says: “Oh man I know that my mate (Person C, also met as a result of binge drinking) is looking for someone to work in his shop!”. It also increases productivity of the employees. Someone might not be willing to do that extra work for his ‘boss’, but he might just be willing to do it for his ‘friend’ (his boss who became his friend as a result of binge drinking). You can conclude that binge drinking is a positive externality. This is because binge drinking causes some good social advantages (new friends and a loose atmosphere) which will result into lower unemployment and bigger output! In a diagram this would be shown as following:

MPC = Marginal Private Costs = The person putting effort, time and money into getting drunk.

MPB = Marginal Private Benefit = The person having a good time from binge drinking!

MSB = Marginal Social Benefit = The benefits to society and the economy from binge drinking: better productivity & faster transfers on the job market.

Green area = Profit.

P1/Q1 = Social Optimum

P/Q = Market Outcome

h. advise on government policy in the light of your answer to (g)

The government should encourage binge drinking by decreasing the taxes on alcohol and by giving subsidies to people who take part in binge drinking. The government could also stimulate binge drinking by having campaigns in order to promote it!

Homework: Output Gap & Declined Demand

This post contains my answer to the following question:

“The immediate problem facing the UK economy is a large output gap and decline in aggregate demand. So - what can be done? ”

If I interpreted the given source correctly, an output gap occurs when the actual output is not equal to the potential output. We speak of a negative output gap if the actual output is bellow the potential output and we speak of a positive output if the actual output is above the potential output. In a production possibility curve, this would be shown as the following:

In this diagram, point C would be indicating a negative output gap and point D would be indicating a positive output gap. It seemed worth mentioning that points A and B are indicating cases of potential output (the line on which they are situated).

Once again, If I interpreted the given source correctly, I don’t see any problems to our economy if there is a negative output gap combined with a decline in aggregate demand. As the aggregate demand declines, people consume less. If that’s the case, there is no need for an optimal efficiency in output. As long as the total output meets the aggregate demand, things are fine!

When a positive output gap occurs in combination with a decline in aggregate demand, we are producing more than we need. This could cause problems. If the producers have a surplus of their product and are not able to sell them (as the aggregate demand goes down) the supply is too big. This could cause major deflation. Unless the economy is operating near full employment (which seems barely plausible when demand is declining), a deflation as result of demand pull goes hand in hand with an decrease in real GDP. This means the economy faces a negative economic growth, if the decrease sustains for two consecutive quarters. There is no need to tell that this is dangerous / bad for an economy.

One of the solutions I’ve come up with is for the government to stimulate the exports of its’ nation. That way, the surplus in products can be resolved, even though it’s combined with a decline in aggregate demand. The government can stimulate exports by giving subsidies on exporting companies, or by reducing taxes on exports. If the government stimulates exports, the problem might be resolved.

Revision Video V2 & More

I have finished my revision video on supply & demand, increase & decrease, extension & contraction. However, the WiFi is terribly slow right now! The uploading is stuck at 10% and the time remaining is 7 hours and 3 minutes! Please bare with me, the video is coming!

Also, as of tomorrow, I will be starting on the 29 topics you provided me with.

Thanks,

Have a nice weekend!

Demand & Supply: Again and again and again!

So I decided to write some more on demand and supply, as apparently some people still find it a bit difficult! Read this and stuff it in your minds. It is really easy if you JUST REMEMBER:

If demand increases, supply extends.

If demand shifts to the right, supply extends.

If demand decreases, supply contracts.

If demand shifts to the left, supply contracts.

If supply increases, demand extends.

If supply shifts to the right, demand extends.

If supply decreases, demand contracts.

If supply shifts to the left, demand contracts.

PLEASE PEOPLE, REMEMBER:

Increase = Shift to the right --> EXTENSION

Decrease = Shift to the left --> CONTRACTION

PRACTICE THIS AS OFTEN AS YOU CAN!

-xxx- Tom

True or False? My answer!

I could not respond to the post without authorization, so here's my answer!

It's true, I think.. =)

The angle that is formed by the line of Demand and the line that indicates price A will be 90 degrees for a perfectly inelastic demand (vertical line) and would be 0 degrees for a perfectly inelastic demand (horizontal line). Therefore, I think, if the angle being formed between price line A and Demand is smaller than 45 degrees, the demand is elastic. If the angle is bigger than 45 degrees, the demand is inelastic.

Demand 1 is inelastic. The angle formed between line A and Demand 1 is bigger than 45 degrees, as line AC is bigger than line Q1Q2. Because the angle is bigger than 45 degrees, Demand 1 is inelastic.

Demand 2 is elastic, for sure. The angle formed between line A and Demand 2 is smaller than 45 degrees, as line AB is smaller than line Q1Q2. Because the angle is smaller than 45 degrees, Demand 2 is elastic.

Therefore it's true!

This is a mathematical explanation to this question I came up with.. I hope it makes sense!

My Revision Vid (First Attempt)

AS REVISION: Chapter Four

Aggregate demand is the total demand for a country’s goods and services at a given price level and in a given time period.

AD = C + I + G + (X-M)

Price level is the average of each of the prices of all the products produced in an economy.

Consumer expenditure is the spending by households on consumer products.

Investment is spending on capital goods.

Government spending is spending by central government and local government on goods and services.

Exports are products sold abroad.

Imports are products bought from abroad.

Net exports is the value of exports minus the value of imports.

Transfer payments is money transferred from one person or group to another not in return for any good or service.

Job seeker’s allowance is a benefit paid by the government to those unemployed and trying to find a job.

Trade surplus is the value of exports exceeding the value of imports.

Trade deficit is the value of imports exceeding the value of exports.

Consumer confidence is how optimistic consumers are about future economic prospects.

Rate of interest is the charge for borrowing money and the amount paid for lending money.

Average propensity to consume (APC) is the proportion of disposable income spent. It is consumer expenditure divided by disposable income.

Net savers are people who save more than they borrow.

Wealth is a stock of assets, e.g. property, shares and money held in a savings account.

Distribution of income is how income is shared out between households in a country.

Inflation is a sustained rise in the price level.

Saving is real disposable income minus spending.

Average propensity to save (APS) is the proportion of disposable income saved. It is saving divided by disposable income.

Target savers are people who save with a target figure in mind.

Dissave is spending more than disposable income.

Savings ratio is savings as a proportion of disposable income.

Capacity utilization is the extent to which firms are using their capital goods.

Corporation tax is a tax on firms’ profit.

Retained profits are profits kept by firms to finance investment.

Unit cost is the average cost per unit of output.

Real GDP is the country’s output measured in constant prices and so adjusted for inflation.

Gross Domestic Product (GDP) is the total output of goods and services produced in a country.

Exchange rate is the price of one currency in terms of another currency.

Tarrif is a tax on imports.

Government bond is a financial asset issued by the central or local government as a means of borrowing money.

Aggregate supply is the total amount that producers in an economy are willing and able to supply at a given price level in a given time period.

Productivity is output, or production, of a good or service per worker per unit of a factor of production in a giver time period.

Privatisation is the transfer of assets from the public to the private sector.

Macroeconomic equilibrium is a situation where aggregate demand equals aggregate supply and real GDP is not changing.

Circular flow of income is the movement of spending and income throughout the economy.

Factor services are the services provided by the factors of production.

Leakages are withdrawals of possible spending from the circular flow of income.

Injections are additions of extra spending into the circular flow of income.

Multiplier effect is the process by which any change in a component of aggregate demand results in a greater final change in real GDP.

Overheating is the growth in aggregate demand outstripping the growth in aggregate supply, resulting in inflation.

Output gap is the difference between an economy’s actual and potential real GDP.

Trend growth is the expected increase in potential output over time.

AS REVISION: Chapter Three

Market failure occurs where the free market mechanism fails to achieve economic efficiency.

Productive efficiency is where production takes place using the least amount of scarce resources.

Economic efficiency is where both allocative and productive efficiency are achieved.

Inefficiency is any situation where economic efficiency is not achieved.

Free market mechanism is the system by which the market forces of demand and supply determine prices and decisions made by consumers and firms.

Information failure is a lack of information resulting in consumers and producers making decisions that do not maximise welfare.

Asymmetric information is information not equally being shared between two parties.

Externality is an effect whereby those not directly involved in taking a decision are affected by the actions of others.

Third party are those not directly involved in making a decision.

Private costs are the costs incurred by those taking a particular action.

Private benefits are the benefits directly accruing to those taking a particular action.

External costs are the costs that are the consequence of externalities to third parties.

External benefits are benefits that accrue as a consequence of externalities to third parties.

Social costs are the total costs of a particular action.

Social benefits are the total benefits of a particular action.

Negative externality exists where the social cost of an activity is greater than the private cost.

Positive externality exists where the social benefits of an activity exceeds the private benefit.

Merit goods are goods that have more private benefits than their consumers actually realise.

Demerit goods are goods that have a more harmful consumption than is actually realised.

Public goods are goods that are collectively consumed and have the characteristics of non-excludability and non-rivalry.

Non-excludability is the situation existing where individual consumers cannot be excluded from consumption.

Free rider is someone who directly benefits from the consumption of a public good but who does not contribute towards its provision.

Non-rivalry is the situation existing where consumption by one person does not affect the consumption of all others.

Quasi-public goods are goods having some but not all of the characteristics of a public good.

Direct tax is one that taxes the income of people and firms and that cannot be avoided.

Indirect tax is a tax levied on goods and services.

Polluter pays principle is any measure, such as a green tax, whereby the polluter pays explicitly fro the pollution caused.

Subsidy is a payment, usually from the government, to encourage production or consumption.

Tradable permit is a permit that allows the owner to emit a certain amount of pollution and that, if unused or only partially used, can be sold to another polluter.