Why Don't Prices Decline During A Recession?

According to my idea, it's because the demand is more than the supply. People wanting more, and not getting that. So the decline in supply causes the prices to rise. But if prices rise, it causes people to save more. So the savings are gonna be more. This leads to the shortage of income. Prices won't decline during recession because money supply is less. If the prices will decline money supply will be more less than before, because demand is much more then the supply.

Economies of scale HW

The idea of economies of scale is that the more you produce, the cheaper becomes the product you have produced. And the the cost of production increases when there are massive amount of supply. Producing becomes expensive.

And here is the graph:


Output is the stuff produced( e.g look at the graph, look at the level of production) and cost per unit is the cost of the stuff per unit.
Long run is the average cost of producing, whatever you make: shoes, drugs, food.
If we look at the graph there is 0 in the beginning, according to this output can be whatever even one million.
Also we can see the point Technical optimum, it's the point where the businesses wanna be. Internal economies of scale is when people save money, cost per units going down. Internal diseconomies of scale, it's the cost of more money that their making for each thing.
If you look at the arrow which goes right, it shows that, the higher the output, lower the cost per unit gets. Every extra output you make, the cost decreases little bit. And the reason for this is firms getting bigger, they are taking more people and training them to do one thing and that person gets really good at it. So you make more money you can afford better technology's, assets.

As you can see when we pass the technical optimum cost per unit goes up. Because of overproducing. Everything will cost you more per unit. And the reason for this is when business get's really huge there are lot's of workers, lot's of staff, managers. And they all get confused, they make a mistake. They make wrong estimations and etc. This can cause overproduction.

And here is another graph:


The arrow shows that we can shift the curve downwards. It's because people are Learning by doing. So when we shift it down every point i that line is the cost per unit is less than before.
And this is done by Learning by doing, the more you do something, better your gonna be at it.


b-) For example if people grow less tomatoes, it means the output of tomato juice will be less, because cost per unit will increase. If people grow more tomatoes, economies of scale for tomato juice may reach technical optimum because the output increases. But if the business is careless it can cause overproduction and the cost per unit increases again.

HW- The immediate problem facing the UK economy is a large output gap and decline in aggregate demand.

I did 2 hours of research to come up with this idea. But i'am a bit concerned about it.(

I think UK needs to lower the prices for goods. But the prices are already low, but they should be lowered a bit more. I think tightening monetary and fiscal policies wont work. If we'll think of this, in a business way.... We should do more advertising, UK needs to supply their product to other countries, so the exports will be more. For example if firms and enterprises will do more advertisements(for example offering 1 supply for the price of 3, this should help). People would buy more products and goods and the cost of labor should be decreased which will make the goods and services much more cheaper.

This is not all, i think we should use Keynesians theory to accomplish the goals. Fixed investment should fall. People needs to invest less. And excess of savings causes interest rates to fall and then we will get rid of excess supply. So the savings will be equal to investment. The interest-rate fall prevents that of production and employment. People are gonna spend more. If we don't wanna cause recession again we should stabilize government spendings, cunsumption, Investment, and exports. While getting rid of execc supply we can improve the economy too.

Blog topic 2:What has caused the significant productivity gap between UK and the US?

In 2005, Britain’s output per hour worked rose by 0.9 per cent, according to the Conference Board. But before that, it was just falling. Because productivity was less.

The answer to this question is Labour productivity, since labour came to power in 1997 Britain's output has fallen, because the cost of labour has increased, which means the quantity of labours are decreased. Since the cost of the labour is high, labours will spend less hours working than usual. Because their salary's will be higher. These facts will cause the productivity to decrease.
And here is a little graph for better understanding. I tried to draw it, unfortunately i couldn't(for some reasons :(.... I have snatched this graph from internet, but it's a nice one.





The difference beween US and UK's productivity is high. Because US uses computers better and by adopting more aggressive management of staff.Almost 80 % of the productivity difference between Britain and the US in this study came from the use of computers.

With low unemployment, long hours and high numbers of people in work, Britain must improve productivity growth if the economy and living standards are to rise rapidly.

But, Britain is in recession and there are loads of unemployed people. Britains economy is falling, it will be tough for britain to make a stability, but they have a chance to make it in 2012 Olympic games. ( only if britain doesnt explode :) )) joke

What would you understand by the term “Keynesian Economics

It's an economic theory named after John Maynard Keynes (1883 - 1946), who was a British economist. He is well-know because of his simple explanation of the Great depression causes. The theory was mainly based on a circular flow of money. His ideas got a major amount of interventionist economic policies during the Great Depression.

In this theory, one person's spendings goes towards anothers earnings, and the spendings of the earnings for another person, it effects, anothers earnings. This cycle continues and helps to support, normal functioning economy. The Great depression hit caused people to save up their money, for future uses. Under Keynes' theory this stopped the circular flow of money, economy stayed still.

Ans Keynes solutions to this was to prime the pump. By saying prime the pump he argued that government spendings should be increased, either by increasing money supply or by buying things on the market.But this was not a popular solution, during the depression.


Keynesian economics warns that people musnt't save too much, or underconsumption, and not enough consumption, or spending, in the economy. It also supports large redistribution of wealth, when needed. Keynesian economics says that there is a practical reason for the massive redistribution of wealth: if the poorer sections of society are given sums of money, they will likely spend it, rather than save it, therefore pushing economic growth. Another main idea of Keynesian economics is that trends in the macroeconomic level can unbalancly effect consumer behavior at the micro-level. Keynesian economics, also called macroeconomics..

We can see that fixed investment in plant and equipment falls from "old I" to new I(which is (a) Second(step (b), excess of saving causes interest-rate to fall, getting rid of the excess supply: so we have saving (S) equal to investment. The interest-rate fall prevents that of production and employment.

Formulas and some definitions

There are some student's who started economics, a week before. These are formulas for 4 types of Elasticity and some definitions as well.

Price elasticity of demand: Percentage change in Quantity demand / Percentage change in Price

Income elasticigty of demand: Percentage change in Quantity demand / Percentage change in income

Cross elasticity of demand: Percentage change in Quantity demand A / Percentage change in Price B

Price elasticity of supply: Percentage change in Quantity Supply/ Percentage change in Price

Or simply:
PED = %Ch. Q D / % Ch. P

YED = %Ch. Q D / % Ch.Y

XED= %Ch. Q DA/ % Ch. PriceB

PES= %Ch. Q S/ % Ch. Price


Price elasticity of demand -->>>> how demand responds to a change in price

Income elasticity of demand ----->>>> how demand responds to a change in income

Cross elasticity of demand ---->> how demand A responds to a change in price B

Price elasticity of supply ----->> how supply responds to a change in price

When PED= negative, prices go down and demand extends also Quantity is decreased

When YED = negative it's an inferior good. When YED= Positive it's a normal good

When XED = Positive it's a substitute. When it's negative it's a complement.
For example: when XED is +0.1 it's just a substitute or when it's -0.1 it's just a complement.
Also whent it's +15 it's close substitudes but if it's - 15 it's close complements.

PES: For example the price of the good increases by 10% and Quantity supplied increases by 20% then PES= 20/10 which is 2.


Also:

If Demand/supply curve is Horizontally lined it's called Perfectly elastic.

If Demand/supply curve is Vertically lined it's called Perfectly inelastic.

VIDEO

I was so nervous)) Also i couldn't rotate the video((

Economics HW ( pictures)

I think those pictures are related with externalities... The picture with the cars on it, shows the negative externality, because cars pollute the atmosphere, which effects entire world. But the picture without cars in it demonstrates positive externality, because there are no cars , the atmosphere is clear, it,s not polluted, this is a benefit to entire world. This decreases the Global warming effects.

Summary chapter 1

The word Scarcity, explains the entire economics. Economics is the study of how to allocate scarce resources in the most efficient way. We face economics all around the world. For example: you have 2 pounds, you have a choice to buy bread or to buy a bottle of coke, but you can't buy both. If you buy bottle of coke you'll be hungry, but if you'll buy a bread you'll be thirsty. This is opportunity cost- the cost of the next best alternative foregone.

Choices have to made among options that are available. This is called economic problem. Economic problems can be studied at different levels. We can study decisions made by households, small firms. Household is a group of people whose expenditure decisions are linked.

We have two types of economics:

- Macro economics- Government policies

- Micro economics- individual decisions

In economics we have 4 factors of production(economy produces a whole range of goods and services to accomplish the needs of it's population) which are:

- Land -- it's rewarded by Rent

- Labor-- it's rewarded by Wages

- Capital-- it's rewarded by interest rates

- Enterprise-- it's rewarded by profit

When individual workers, firms, regions, or a whole economy concentrates on producing goods and services and not others. This is called Specialisation. Specialisation lies at the heart of the modern economy. We trade, which involves exchange of goods and services. For example we exchange goods for other goods. Also we exchange goods or we provide services for other goods, but no money is involved, this is called barter.

Benefits of Specialisation:

- an increase in the output's of goods and services -->> country provides everything it needs. Raising living standards -> more output from resources.

- Widening the range of goods.( For example bananas or another types of fruit, that cannot be grown in UK) After the banana sales more bananas can be purchased.

- Exchange between developed and developing economies. Country's like china does the most of exports.

Why trade?

Because trade allows countries to specialise in products which they are able to make or grow properly.(factors of production)

Risks of Specialisations :

- Finite resources -> such as oil, copper -> economy suffers-> unless revenues from exports are invested sagely.

- De- industrialisation -> loss of manufacturing capacity and jobs -> Many jobs are lost.

- Bad weather -> Bad crops -> reduces incomes -> economic chaos

- Taste or needs -> less exports

- Political side of economy -> like tsunami, hurricane etc.

Division labor- it's when the production process is broken down into seprate jobs.

For example Producing knits, in the textile industries are more efficient if the production process was split up into different tasks.

We use an economic model, which is production possibility curve to show how resources are allocated. PPC shows the maximum quantities of different combination's of output.

If we produce more of product A, we should sacrifice the production of pruduct B.

A to B is sacrificing the product A and producing more of the product B.

Also a trade-off is involved here. Trade- off means weather to give up a product for another product.

As you can see in point D, we are producing the same amount of Consumer goods as in point C. We have increase in ability to produce consumer goods.

This graph shows us the Productive potential, which means the maximum output that economy can produce.

Change in Productive potential causes Economic growth.

lity to produce consumer goods.

The market economy

In the market economy resources are allocated by the forces of demand and supply. We have price system, it's a method of allocating resouces by the free movement of prices. Government has little involment in this process.

For example:

Excess supply -> fall in price -> firms less willing to pay -> Increase in price -> More firms willing to pay -> Increase in supply -> Fall in price -> firms less willing to pay and cycles around.

We have command economy and mixed economy

Command economy is when most resources are state owned nad allocated centrally. Government has a central role in all decisions that are made. Government and it's organisations are responsible for the allocation od resources. Government intervention. For example meat and bread, are heavily subsidised to keep it's price level low.

Mixed economy- it's when resources are allocated by mixture of markets and public sector involvement. Decisions involve an interaction between firms, labor and the government, mainly through the market mechanism.

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This is to improve your knowledge( let's see how smart you are) comment me the answers please))

Cost push and Demand pull Inflation

This post may help for the ones who are really behind from others..... (and for the ones who are not able to watch the video for aggregate demand)

Inflation is caused by combination of 4 . Those are:

* Supply of money goes up .

* Supply of goods goes down.

* Demand for money goes down.

* Demand for goods goes up.

Now we'll see the of cost-Push inflation and Demand-pull Inflation and we'll try understand them by using those .

of Cost-Push Inflation

If aggregate supply decreases it may cause inflation. Aggregate supply is decreased by those two main :

* An increase in wage rates

* An increase in the prices of raw materials

The decrease in aggregate supply engage(carry on) by increasing costs, and this inflation is called cost-push inflation.

Other things remaining the same, the higher the cost of production, the smaller is the amount produced. Because of the price level, rising wage rates or rising prices of raw materials such as oil causes firms to decrease the amount of employed and to shorten production.

Aggregate supply is the the total value of the goods and services produced in a country or simply 2 , "The supply of goods". The supply of goods can be shaped by other than an increase in the price of inputs , so not all 2 inflation is cost-push inflation.

What caused the price of inputs to rise?. Any combinations of the four could cause that, but the two most likely are 2 (Raw materials such as oil have become more scarce, which means quantity is less.), or 4 (The demand for raw materials and have risen). This is how we understand cost push inflation and demand-pull inflation by using 4 .

And this is the diagram: it shows that the price of the supply has increased(because supply has decreased, and demand has .

of Demand-Pull Inflation

The inflation caused from an increase in aggregate demand is called demand-pull inflation. Such an inflation may rise from any single that increases aggregate demand, but the main ones that increases the aggregate demand are:

1. Increases in the money supply(factor 1)

2. Increases in government purchases(more goods, supply increases)

3. Increases in the price level of the rest of the world.

Inflation caused by an increase in aggregate demand, is inflation caused by 4 ( which is an increase in the demand for goods, (which means Supply extends)). The three listed above, which increases the aggregate demand will also tend to increase inflation, for example:

1. Increases in the money supply, 1 inflation.

2. Increases in government , The increased demand for goods by the government causes 4 inflation.

3. Increases in the price level in the rest of the world, Suppose you are living in the UK. If the price of chocolate rises in Ireland, we should expect to see less English people buying chocolates from Irish and more Irish the cheaper chocolate from UK . From the UK's view the demand for chocolate has risen causing a price for chocolate to rise ( 4 inflation)

Inflation in

Cost-push inflation and demand-pull inflation can be explained using four inflation . Cost-push inflation is inflation caused by rising prices of inputs ,that causes 2 . Demand-pull inflation is 4 inflation, which can have many causes.

This is the diagram for Demand-pull inflation: Here we can see that Real National has increased and the prices are going up, so the demand for goods is rising, more goods needs to produced, supply is extending.

Now on this graph: Demand-pull inflation caused the demand for goods to and supply to decrease. And the point LRAS is Full unemployment. When aggregate demand increases from AD1 to AD2 this will lead the to full employment, many firms will widen their profit, they'll increases the prices, the production will be more. As employment in the will rise, the demand for goods and services will be more inelastic. And this will allow firms to increase their prices(p1 to p2)