A free market is an economic system where the prices of goods and services are determined by unrestricted competition between privately owned businesses.
A free market is an economic system where the prices of goods and services are determined by unrestricted competition between privately owned businesses. Scarce resources are allocated through the price mechanism where consumer demand and preference and the supply decisions of businesses come together to determine equilibrium prices. The limitations of a free market are set by the business cycle and include: Failure to provide public and merit goods, inequality of income, negative externalities, monopoly power abuse and fluctuations in economic activity. All these limitations contribute to market failure. Public goods cannot be provided in a free market economy because these goods have to provide publicly, and have to be non-excludable. An example of a public good would be a park, where a business would not be able to charge a usage fee to those who use it, as it is non-excludable. A privately owned business firm would not be benefitted by providing public goods, as they would not receive sufficient funding to continuously provide public goods. There is also a problem with merit goods like healthcare and education, which tend to be under provided in a free market. Unlike public goods, merit goods are excludable. With merit goods such as healthcare, only those with sufficient income would be able to access the service and those who have insufficient income would not be able
Supermarkets in UK - An oligopily
Introduction to super markets The "normal" way to buy food has changed dramatically over the last half century, with the small independent shops such as butchers, greengrocers, fishmongers and bakers which dominated the High Street in the 1950s disappearing and being replaced by the ubiquitous supermarket. Today, 60% of British shoppers purchase most of their groceries in one weekly shop. The growth of the sector over the last fifty years has been remarkable. In 1950 the multiple supermarkets represented just 20% of the food retail market. By 1961 this had risen to 27%; by 1971 to 44%. As the trend continued, a generation has grown up relying on the convenience and choice of supermarket food. Of course some independent retailers went out of business, but the consumer is king - and consumers felt that the price was worth paying. But the price tag got higher. Between 1997 and 2002 more than 13,000 specialist stores around the UK - including newsagents, Post Offices, grocers, bakers, butchers - closed, unable to cope with the competition from the multiples. A recent study by the Institute of Grocery Distribution revealed that 2,157 independent shops went out of business or became part of a larger company in 2004, compared with a previous annual average of around 300 a year. Traffic congestion rocketed as more large stores were constructed out of town. Tales abounded of the
Analyse and Evaluate the significance of Fiscal Policy rules and Fiscal Policy targets and constraints in promoting Economic Growth, Economic Stability and International Competitiveness
Analyse and Evaluate the significance of Monetary Policy rules and Monetary Policy targets and constraints in promoting Economic Growth, Economic Stability and International Competitiveness L1. Monetary policies are where the government use changes in the base rate of interest to influence the rate of growth of aggregate demand, the money supply and ultimately price inflation. In the short run economic growth is an increase in real GDP, In the long run economic growth is an increase in productive capacity (the maximum output an economy can produce) Economic Stability - the avoidance of volatility in economic growth rates, inflation, employment and unemployment and exchange rates. International Competitiveness - The ability of an economy's firms to compete in international markets and, thereby, sustain increases in national output and income. L2. Monetary policies can be used to promote economic growth, Economic (this stability reduces uncertainty, promotes business, consumer confidence and investment) and International Competitiveness. This causes an ? in AD, which can be good for an economy. For example if a Government ? interest rates, people will have an ? in disposable income, because payments on credit cards will ?, mortgage payments will ? and it is not worth saving due to the reduced rate of interest, meaning they have more to spend on goods and services, thus
Explain how the equilibrium level of output is determined in perfect competition. Both for the whole market and one firm within the market
Explain how the equilibrium level of output is determined in perfect competition. Both for the whole market and one firm within the market: The equilibrium is the point where economic forces are balanced and there are no external influences. The equilibrium is the condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. Perfect competition describes a market in which no buyer or seller has market power. Such markets are usually allocatively and productively efficient. In general a perfectly competitive market is characterized by the fact that no single firm has influence on the price of the product it sells. A perfectly competitive market has many distinguishing factors. A market in perfect competition has many people who are willing and able to buy a product as well as a many buyers who are willing and able to produce the products. The products the firms supply are exactly the same. Another distinguishing characteristic in a perfectly competitive market is that there are low entry and exit barriers to the market, and it is relatively easy for a firm to enter or exit the market. There is also perfect information for the consumers and producers. Most importantly, in a perfectly competitive market, the firms aim to maximize profits, firms aim
To what extent is economic growth desirable
To what extent is economic growth desirable? In economics, short term economic growth translates to a rise in real GDP, and in the long term an increase in the maximum output (aggregate goods and services) an economy can produce. Growth is caused by an increase in aggregate demand; this may be as a result of higher consumer expenditure, more investment or as seen recently in BRIC, a substantial increase in exports which all form a component of AD. Economic growth is seen to be extremely desirable by all governments as it solves many problems of modern life; there are of course many consequences but this is a small price to pay compared to what could be gained, so economic growth is desirable. The benefits of economic growth for all economies and especially LEDCs are increased employment, reduced poverty and a higher standard of living. These events occur because as AD increases, more factors of production, most notably labour are needed to produce goods and services for the economy. When this occurs on a large scale unemployed workers shift into employment. This is beneficial as governments provide less social security for the population, so they can spend money on public services. As a result of increase government spending, the quality of services such as education, health and shelter will become better hence improving the standard of living. Previously unemployed workers
An Introduction to Aggregate Demand
Macroeconomics H/W 3 - An Introduction to Aggregate Demand The formula for AD is C + I + G + (X-M) a) C - Consumer expenditure - spending by households on consumer products (e.g. clothing, food and insurance). I - Investment - spending on capital goods. G - Government spending - spending by the central government and local government on goods and services. X - Exports - products sold abroad. M - Imports - products bought from abroad. (X-M) - Net exports - the value of exports minus the value of imports. b) Consumer expenditure, or consumption, is the largest component in most countries. It is basically spending by households on consumer goods and so tells us how much vaguely how much demand there is for these certain goods. Investment is similar, except capital goods are bought instead of consumer. It is the most volatile component of AD, as it may rise by 60% on year, but fall by 20% the next year. Government spending does not include transfer payments or job seeker's allowance as they do not involve the government itself buying goods and services.Net exports add foreigners' spending on the country's goods and services and deduct spending by the country's population on imports. This component can be positive or negative. c) 3 determinants of Consumption (C):- - Real Disposable Income: main influence on consumer expenditure. The rich tend to spend more than the
Fiscal and monetary policy - a comparison
fiscal and monetary policy - comparison Introduction Fiscal policy should not be seen is isolation from monetary policy. For most of the last thirty years, the operation of fiscal and monetary policy was in the hands of just one person - the Chancellor of the Exchequer. However the degree of coordination the two policies often left a lot to be desired. Even though the BoE has operational independence that allows it to set interest rates, the decisions of the Monetary Policy Committee are taken in full knowledge of the Government's fiscal policy stance. Indeed the Treasury has a non-voting representative at MPC meetings. The government lets the MPC know of fiscal policy decisions that will appear in the annual budget. Impact on the Composition of Output Monetary policy is seen as something of a blunt policy instrument - affecting all sectors of the economy although in different ways and with a variable impact Fiscal policy changes can be targeted to affect certain groups (e.g. increases in means-tested benefits for low income households, reductions in the rate of corporation tax for small-medium sized enterprises, investment allowances for businesses in certain regions) Consider too the effects of using either monetary or fiscal policy to achieve a given increase in national income because actual GDP lies below potential GDP (i.e. there is a negative output gap)
Explain the possible impact of a world-wide recession on the components of the circular flow of income for a small and open economy such as Singapore.
Song Teck 023A 4a.) Explain the possible impact of a world-wide recession on the components of the circular flow of income for a small and open economy such as Singapore. [10m] The circular flow of income for an open economy is a model that shows the flows of goods and services and factors of productions between firms and household and in the process injections and withdrawals are made by the government and the rest of the world. This model shows that household provides the factors of production for firms who produce goods and services. In return the factors of production receive the factor payments (such as wages, dividend, and profits) which are in turn spent on the firm's output. The circular flow of income can be expanded by injections (addition to the circular flow which does not come from the domestic expenditure of the household in the form of investment, government expenditure, export revenue) and reduced by withdrawals (any part of income not passed on within circular flow of income in the form of savings, taxes, imports). Being a small and open economy, Singapore have place a strong emphasis on export orientated growth due to our small domestic market, thus resulting in a strong dependence on export revenue to sustain our economic growth. Moreover, with limited domestic investment and the openness to international capital flow, we are more dependent on foreign
'The trade deficit on goods in the first three months of the year was £7.1bn.' Explain the meaning of this statement.
Bernice Berschader 'The trade deficit on goods in the first three months of the year was £7.1bn.' (a) Explain the meaning of this statement. The above statements states that between January and March 1999 the UK lost £7.1 billion on trade, as a result of a trade deficit or current account deficit on the Balance of Payments. A Current Account deficit is where imports into a country exceed exports. This leads to a disequilibrium of injections and withdrawals. Withdrawals from the circular flow of income exceed injections into the circular flow of income. Though the current account consists of 4 elements, visible goods, invisible services, net income and investment income, the statement above discusses the deficit of an element of the current account, the visible goods element Even though a current account deficit results in the value of imported goods exceeds the value of exported goods, the demands for exports and imports will not be affected in the short run due to the Martial Lerner Conditions. Though eventually this will result in the foreign currency price of UK exports to decline, it will take some time for countries to react to these changes. In the short run the volume of exports will remain the same before it increases as a result of devaluation in the long run. This is illustrated by the J-Curve effect below. (b) Examine the possible causes of
How can inflation be reduced?
How Can Inflation Be Reduced? Inflation is a persistent rise in average price level over a year, it is measured through CPI (Consumer Price Index). CPI takes a basket of goods ,which are weighted due to expenditure in a household budget (so you spend more money on food then shoes therefore food has a higher weight). CPI then looks at how the prices have changed and dictates a rate in accordance to the statistics. Inflation usually carries negative connotations as it usually comes in conjunction with economic instability therefore many different methods have been devised in order to avert the problems of inflation and reduce it. An example of high inflation which was reduced is in Britain. In the 1970's inflation was phenomenal and peaked at over 20%, through successful monetary policy however this was mitigated. By raising interest rates it reduces the growth of aggregate demand it encourages saving (which would stifle consumer spending and investment) as well as reducing disposable income. Monetary policy is a proven technique used to reduce inflation. Favoured by the US and UK it looks at the modification of interest rates in order to control inflation (and reduce) this is know as tightening monetary policy. Monetary policy is the control of money supply by the central bank (so in Britain it is the Bank of England and in the US it's the Federal Reserve). Inflation can
