Demand and Marginal Revenue

In this chapter, we will assume that the monopolist charges all customers the same price. The monopolist faces the whole demand of the market. We can compare with a perfectly competitive market by looking again at Figure. The individual firm in a competitive market only faces a small part of the market. Therefore, it can be represented as in the right-hand side of the figure. A monopolist is the whole market. Therefore, it looks like the left-hand side of the figure. In order to sell more goods, the monopolist has do reduce the price, and the demand curve it faces will therefore slope downwards.

Now. note that the demand curve is decided by the consumers and not by the firm. It answers the question: if we would offer a certain price, how many units would we then be able to sell? In the perfectly competitive market, marginal revenue was equal to the price. That is not the case for a monopolist. For the monopolist to be able to sell an additional unit of the good, she must lower the price of all units. The total effect of selling one more unit then consists of both what she is paid for the last unit and of the reduction of revenue from all the other units that she now has to sell at the lower price. Consequently, the marginal revenue will be lower than the price.
Let us see what this means for a good with linear demand. If the demand curve is a straight lme. the MR curve will also be a straight line with the same intercept on the Y-axis as the demand curve. However, it will have a slope with twice the magnitude. (To show that, we need to use the derivative, but this, again, is outside the scope of this book.)

We will use the demand curve Od = 30 - p. or if we solve for p: p = 30 - Od . If the MR curve is to start in the same point and have a slope that is twice as large, its functional form must be MR = 30 - 2*Od. (The constant is the same, 30. and the slope is changed from -1 to -2). In Figure the curves are drawn as D and MR. We have also drawn a marginal cost curve, MC (= 2*0), an average cost curve. ATC. and an average variable cost curve, A VC (= Q). and. in the lower part of the figure, total revenue. TR. and profit, n.

Monopoly

Monopoly can be viewed as the opposite of perfect competition. Instead of many firms, there is only one: the monopolist. This has important conse­quences for both price setting and the quantity produced.

Barriers to Entry

Why do monopolies arise? There are many different reasons, but all of them have to do with barriers to entry in the market. The reasons for these barriers could be

• Structural.
There are properties of the market that automatically shut competitors out:

• Economies of scale.
If there are economies of scale, large-scale advantages, the size of the firm is crucial for average cost. A situation can then arise in which only one firm can recover its costs. This is called a natural monopoly and an example of this is rail­roads.

• Cost advantages.
If the monopolist has access to a cheaper way of producing the good, for instance if she has a patent on a cheap­er technology, she can push competitors out of the market.

•  Strategic limitations. The monopolist can create barriers to entry. An example is limit pricing, where the monopolist sets the price so low that it becomes unattractive for competitors to enter.

•  Political. The government may decide to grant a firm a monopoly in a certain market. A common example is for pharmaceutical goods.

•  Patents and exclusive rights. If a firm has a patent on a certain good, other firms are shut out during the life span of the patent. It is also possible to have exclusive right to extracting, for instance, oil or met­als.

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Americas unemployment

Most valuable global brands

Economic crysis (part 3)

Lets go a bit back into the history and talk about the Monte Carlo hypothesis:
Fisher (1925) argued that business cycles could not be predicted because they resembled cycles observed by gamblers in an honest casino in that the periodicity, rhythm, or pattern of the past is of no help in predicting the future. Slutsky (1937) also believed that business cycles had the form of a chance function.

The Monte Carlo (MC) hypothesis, as formulated by McCulloch (1975), is that the probability of a reversal occurring in a given month is a constant which is independent of the length of time elapsed since the last turning point. The alternative (business cycle) hypothesis is that the probability of a reversal depends on the length of time since the last turning point.
The implication of the MC hypothesis is that random shocks are sufficiently powerful to provide the dominant source of energy to an econometric model which would probably display heavy dampening in their absence. The simulations with large scale econometric models in the early 1970s showed that random shocks are normally not sufficient to overcome the heavy dampening typical in these models and to produce a realistic cycle. Instead serially correlated shocks are required.12 If shocks were in fact serially correlated the gambler (forecaster) could exploit knowledge of the error process in forming predictions and we would move away from the honest MC casino. The need to use autocorrelated shocks could alternatively indicate that the propagation model is dynamically misspecified.

McCulloch (1975) notes that if the MC hypothesis is true then the probability of a reversal in a given month is independent of the last turning point. Using as data NBER reference cycle turning points, McCulloch tests to see if the probability of termination is equal for ‘young’ and old’ expansions (contractions). Burns and Mitchell (1946) did not record specific cycle11 expansions and contractions not lasting at least fifteen months, measured from peak to peak or trough to trough. The probability of reversal is therefore less for very young expansions (contractions) than for median or old expansions (contractions), and McCulloch (1975) disregards months in which the probability of reversal has been reduced.

Exams

Sorry people, I`m having exams at the present, I`ll continue in the nearest future explaining to you economics I`m in love with

Economic crysis (part 2)

The term crisis is used to a high variety of economic, financial, health and sycological problems. But we'll talk about economic crisis. Sometimes it`s refereed to a situation in which the economy of a country experiences some kind of troubles brought on by a financial crisis. An economy facing an economic crisis will experience a falling GDP, a drying up of liquidity and rising/falling prices due to a inflation/deflation which in the worst cases can turn into galloping inflation. An economic crisis can take the form of a recession or a depression sometimes can be also called real economic crisis.

There are two types of crisis:

-crisis of underproduction (also called deficit) situation when supply isnt enough to provide enough goods and services to demand. Usually occurs due to of not detecting the aggregate demand and the inability of the free market aggregate production planning. As a result, for a particular manufacturer usually knows what and how much goods and services market demands. The first major crises of this kind appeared in England in the XVII century.

-crisis of overproduction; situation when demand is too low with the development of the industrial economy of the market crises of overproduction become cyclical and today represents one of the phases of the economic cycle.

Some scientists believe that the first in the history of the world crisis has erupted in the Roman Empire in 88 BC. Other scientists call the first economic crisis the crisis in 1825 in England, which is alsopartially affected the economy of the United States and France, because it was the first crisis that has gripped several industries

Economic crisis (part 1)

This is very easy to understand film about what has actually happened, but it has lots of false info and misunderstandings. This will be a small preview for my next topic: economic crisis

Money and banks (part 8)

How commercial banks "create money"

Commercial banks obviously cannot influence the amount of currency in the economy or the monetary base, since they are not allowed to print money. They can, however, influence the money supply through the second component of the money supply - the deposits. A bank will increase the money supply simply by lending money to a customer. In the same way, when a loan is repaid or amortized, the money supply decreases.

It may sound odd that the money supply increases by 1 million the same instant a bank agrees to lend this amount. The bank has created money but no wealth (keep in mind that these are different concepts). The bank has simply converted one asset (cash) into another (the promise of repayment), while there is no change in the individual’s net wealth. However, after the loan, there is an additional one million available for immediate consumption. It makes no difference if the borrower keeps the money in her account or withdraws them in the form of currency.

If, for example, the borrower uses the money to buy an apartment, the fluids are transferred to the seller of the apartment. Tins will not affect the money supply - now it is the seller of the apartment that has a million available for consumption. If the seller uses the funds to repay the loan he got when he bought the apartment, the money supply will again decrease.

How much money can banks create?

Does tins mean that banks can create an unlimited amount of money? The answer is no - that would require them to lend an unlimited amount of money and that is not possible.

Banks use deposits to create new loans but there is an important difference between deposits and loans. When individuals deposit money in a bank, they can withdraw the money whenever they like. A bank, on the other hand, has no right to cancel a loan and get then money back whenever they like. Banks therefore need reserves so that they can deal with large withdrawals. A bank with small reserves will therefore be less inclined to lend money.

That`s all folks! I`m proud to be ending this story and hoping you`ve got some good and useful iformation about money and banks.

Money and banks (part 7)

Commercial banks

Currency inside banks is not money

The fact that currency inside commercial banks is not money may strike you as odd, but it is an important principle. The 100 dollar bill in the ATM will become money only at the instant you withdraw it. The reason is this. We want the money supply to measure how much is available for immediate consumption. But currency inside a bank cannot be used for consumption and this is why it is not counted in the money supply. Cash in the bank is not money, but the binary bits in the bank's computer system representing the balance in your checking account are!

An example may also illustrate this important fact:

• Eric has 100 euro - this amount is obviously part of the money supply as it is immediately available for consumption.

• Eric deposits 100 euro into his checking account. He still has 100 euro available for immediate consumption using Ins debit card and the money supply should not be changed by tins deposit (it is not - deposits are included in the money supply).

• Eric’s bank now has 100 euro more than before deposit. If we count currency inside the bank as money, the money supply would have increased by 100 euro by his deposit. This does not make sense as the amount available for immediate consumption has not changed.

• In the same way, withdrawing money from the ATM does not affect the money supply. When you withdraw money, currency outside banks increases while your checking balance decreases by the same amount.

Even though currency inside a bank is not money, it is still part of the monetary base. 100 euro inside the bank is obviously still worth 100 euro to the bank even though we do not include it in the money supply.

Money and banks (part 6)

Monetary base

The monetary base is defined as the total value of all currency (banknotes and coins) outside the central bank and commercial banks' (net) reserves with the central bank. The monetary base is a debt in the balance sheet of the central bank. Its assets are mostly comprised of the foreign exchange and gold reserves and bonds issued by the national government. Currency inside the central bank has no value - it is comparable to an “I owe you” written by yourself and held by yourself.

Since the central bank has a monopoly on issuing currency, it is in complete control of the monetary base. Soon i will describe exactly how they change the monetary base. However, the central bank does not completely control the money supply. This is due to the second component of the money supply - bank deposits - which it cannot control. Fortunately, it has methods of influencing the total money supply and these methods will be discussed in the nearest future.

In many countries, the central bank imposes reserve requirements. Tins means that commercial banks are obliged to hold a certain percentage of deposits as reserves either as currency in their vaults or as a deposit at the central bank. Reserve requirements are usually rather small (typically between 0% and 10%) which means that the monetary base is quite close to the value of all currency outside the central bank.

Money and banks (part 5)

Central banks

Introduction

A central bank is a public authority that is responsible for monetary policy for a country or a group of countries. Two important central banks are the European Central Bank (for countries that are members in the European Monetary Union) and the Federal Reserve of the United States.

Central banks have a monopoly on issuing the national currency, and the primary responsibility of a central bank is to maintain a stable national currency for a country (or a stable common currency for a currency union). Stability is sometimes specified in terms of inflation and /or growth rate in the money supply.

Other important responsibilities include providing banking services to commercial banks and the government and regulating financial markets and institutions. In this sense, a central bank is the “bankers’ bank'' - other banks can borrow from or lend money to the central bank. Therefore, all banks in a country have an account in the central bank. When a commercial bank orders currency from the central bank, the corresponding amount is withdrawn from tins account. Tins account is also used for transfers between commercial banks. Central banks also manage the country’s foreign exchange and gold reserves.

Money and banks (part 4)

Economic functions of money

Money is generally considered to have three economic functions:

• A medium of exchange. This is its most important role. Without money we would live in a barter economy where we would have to trade goods and services for other goods and services. If I had fish but wanted bread, I would need to find someone who was in the precise opposite situation. In a monetary economy I can trade fish for money with one individual and money for bread with another. Money solves what is called the double coincidence of wants.

• A unit of account. In a monetary economy, all prices may be expressed 111 monetary units which eveiyone may relate to. Without money, prices must be expressed in units of other goods and comparing prices are more difficult. You may find that a grilled chicken costs 2 kilos of cod 111 one place and 4 kilos of strawberries in another. Finding the cheapest grilled chicken is not easy.

• Store of value. If you are a fisherman and have a temporary surplus of fish that you want to store for the future, storing the fish might not be a sreat idea. Money, 011 the other hand, stores well. Other commodities, such as gold, have this feature as well.

Money and banks (part 3)

Money, wealth and income

Money is not the same as wealth. An individual may be very wealthy but have no money (for example by owning stocks and real estate). Another individual may have a lot of money but no wealth. This would be the case if prices are very high, e.g in Uganda, where u have to pay more than a million to eat in a restaurant or

an individual with no wealth borrows money from a bank. She will have money (for example in the form of a deposit in the bank) but no wealth since this deposit exactly matches the outstanding debt. Be careful with this distinction: do not say “Someone has a lot of money” if you mean that Anna is wealthy.

Money is not the same as income and income is not the same as wealth. Income is a flow (for example is currency units per month) while money or wealth is a stock (measured at a particular point in time). Again, it is very possible to have a high income but no money and no wealth, or to be very wealthy and have a lot of money but no income. This is another distinction to be careful with. Do not say that “Sam makes a lot of money” if you mean that Sam has a high income. Money has a very precise definition in economics!

Money and banks (part 2)

What is money and what is not money

What is money? It is a medium of exchange. What does it do? It ensures the success of exchange by being the one item on offer that is ALWAYS acceptable. Why is it necessary? Because human beings must exchange to live together in peace, and to prosper. How important was the discovery of the idea of money? Look around you.

That covers the concept or idea of money. But an idea, as such, does not exist as a physical entity. Money must be a physical entity. Neither the "electronic" money of today nor the notes and coin which circulate as cash has any official or legal connection with Gold and Silver. But they once did, and most people think that they still do. As long as that situation persists, the modern monetary system will function.

If you are trying to determine if something is money, simply consider whether it would be accepted in most stores as payment. You then realize that stocks, bonds, gold or foreign currency are not money. These must frsst be exchanged for the national currency before you can use them for consumption. Note that in some cases, foreign currency will be money. For example, in some border towns, the currency of the bordermg country may be accepted virtually everywhere.

You also realize that some bank deposits are money. If you have money in an account in a bank and a debit card, you can pay for goods and service using the card in most places. Funds are withdrawn directly from your account when you make the purchase, which makes the deposits as good as cash in your pocket. Counting deposits as money is also consistent with the idea that money measures how much is available for consumption.

Not all deposits can be counted as money. With most savings accounts, you cannot connect the account to a debit card and these deposits should not be counted as money. We also note that what is money has nothing to do with the commodity or token itself:

Money and banks (part 1)

Money

Everybody knows what money is. People think this is so easy. To make sure you know everything you should read this post. 

In fact money has a long and interesting history and an understanding of how we came to use money is useful for anyone. Soon I’ll give you more info describing how money was “invented” and how it evolved over time. But if you are curious, there are many excellent descriptions on the Internet.

“Money” in economics is actually not as simple to understand as you may think and many use the term money in a way inconsistent with how it is defined in economics. Money is defined as any commodity or token that is generally accepted as payment of goods and services.

·         Ther`re two types of money:

In most countries, one can identify two "types of money”:

•                     Currency and coins

•                     Bank deposits

The total value of all the money in a country at a given point in time is called the money supply and this is an important macroeconomic variable. The reason for the importance of the money supply is that it measures how much is available for immediate consumption. There is an important relationship between the supply of money and inflation, which will be investigated later on.

Consumer Price Index

The Consumer Price Index (CPI) gives data on changes in the prices paid by urban consumers for a representative basket of goods and services. The CPI-basket contains basically all the goods and service consumed in a country - food, gas, medicine, haircuts, transportation, house rent and so on. The composition of the CPI basket is determined by the value of what is consumed in the country - the larger the value of total consumption of a good or service, the larger the weight in the basket. For example, if we spend twice as much on apples as on pears, apples will have twice the weight in the basket. The exact details of the composition of the basket and how the CPI is calculated are complicated and vary somewhat between countries. Here you can see  CPI for Germany after the reunification starting at January 1991. This data has 2005 as the reference year. Tins means that the CPI is constructed in such a way that CPI is exactly equal to 100 on average during 2005.

Problems with CPI

To illustrate the problems involved in calculating the CPI we consider phones. If you measure the average price of phones at two points in tune, say one year apart, you may find that the average price has not changed.

However, this is not the whole story since the products on the market will have changed. Typically, the products at the later measurement are more advanced than the products at the first measurement. If you were to compare prices of phones with the same performance, you would probably find that prices have fallen. Without adjusting for changes in performance and quality, you will usually overestimate the rise in the price index.

Break-even point

In economics, cost accounting and business break-even point refers to point at which you get not losses nor gains, your expenses are even to your revenue. A profit or loss hasn’t been made, but you’ve paid opportunity cost and risk-adjusted, expected return. All you need to know that when your business meets break-even point, you shouldn’t worry that much, this means that you, owner, won’t get profit from your capital, but all your costs were paid.  Here you need to start thinking on how to increase your income; this can be achieved by increasing sales or decreasing costs. But lets get closer to BEP.

Imagine your business sells computers, your expenses: fixed costs $10000, variable costs 7000$. From selling each computer you get net income $100

BEP=FC+VC/C.

BEP=10000+7000/100=170

So to meet break-even point you need to sell 170 computers every month, when you sell more, you’ll get gains.

If you increase selling price and will still sell 170 computers you’ll get gains.

Limitations of break-even analysis:
It’s hard to analyse when you have many products;
You need to know the difference between FC and VC;

There may be a tendency to continue to use a break-even analysis after the cost and income functions have changed

Spain or how colonies repay kindness

While Europe forces yet more privatisation on Greece and Spain under the Orwellian name of "liberalisation", Latin America in 2012 is challenging the orthodox view that private always is better than public. On 1 May Bolivia seized the Spanish company that controlled its electricity grid, just after Argentina, on 14 April, effectively renationalised YPF, its main oil company, expropriating 51% owned by Spanish firm Repsol. Both critics and supporters have understood Cristina Fernández Kirchner's and Evo Morales's actions in terms of energy nationalism and populist demagoguery                                                          

                                                                                                          The Guardian 

Today I`d like to go a little bit offtopic and tell you a story. This is a true story of kindness, call of duty, revanchism and economics. At the present time Spain experiences almost the worst times in their history after general Franko, unemployment rate is one of the biggest in Europe- 22.7%, public debt 68.2% of GDP (2011 est.). 
Actually, it hasn’t come as a surprise; furthermore we should actually wait for more actions like this. On the decline of formerly powerful country, every one of their former vassals will try to take revanche, striking a sore spot.  But what we need to understand is that the economy as a whole is not the place for the weak, only the strongest wins, choosing this path, you will never be the same, the path of enlightenment.

Credit amortization

Since crisis has started many families have lost their homes because they couldn’t repay their loans. Furthermore when property was sold people wouldn’t have gotten all the funds they have paid to bank. Today I`ll explain you, my dear reader, how and why such things actually happen. Firstly because of the contract and secondly, because of features of credit repayments. Today I`ll explain you, my dear reader, how and why such things actually happen.

As I’ve already mentioned, there`re two types of credit repayments:

·         Annuity;

·         The Sinking Fund Method.

The Sinking Fund Method:

We assume that the payments made prior to the end of the loan term do not contain any portion of the principal, i.e., they only go toward the interest;

• Hence, a single “lump-sum” payment should repay the entire loan at the end of the loan term.

• In order to finance this final payment, the borrower might wish to make deposits on a separate savings account during the life of the loan. This account is called the sinking fund account.

As u can see, your first payment is 36% bigger than the fifth. That`s why this method is so uncomfortable for both sides: bank and you. You will have to pay different sums, it`s harder for you to pay at the beginning, and that`s not quite comfortable for bank, because it makes him more everyday trouble.

Annuity:

When a loan is an amortized loan, each payment is understood to consist of:

1. the interest due on the outstanding loan balance;

2. the rest of the payment which goes towards reducing the outstanding loan balance and which is referred to as the principal payment.

Here you can see that all your total payments are the same, but first payments consist more of interest than from part of loan principal repayment. This method is good because it brings stability into chaos economic system. This is why you won`t get all the money you`ve already paid to a bank, because you paid interest, not principal.

Opportunity cost

Opportunity cost -  is the cost that is being lost to the benefit of limited resources to achieve one goal instead of another, the best of options.  It is the sacrifice related to the second or third choice available to someone who has picked among several mutually exclusive choices. Because the opportunity cost is expressed by any measure, it sometimes has the name "shadow price", "price of lost chance", "price of economic efficiency."

For example you own a car, you can use it for your own purposes, you can rent, lease or even sell. Every time opportunity cost will be different.

For some products to determine opportunity cost is difficult because virtually no active competitive market sells this kind of products. These products primarily include land which value is usually inadequately estimated by market. In many countries the value of the land affects non-economic factors:

·                  safeness

·                    traditions

·                    family relationships

·                    etc.

Methods of determining alternative land value:

·               rents under the conditions of the developed land lease market

·        direct assessment of land productivity by evaluating agricultural crops that are grown on it, and determine the contribution of land value of total production"

·    "remaining" method of determining the impact fee land on the basis of surplus value,which can be obtained from its use

Thus, you shouldn`t always seek for the actual value of the goods, which we view and value of the goods or services from which we refuse.

Beginning

Every blog has it`s beginning, mine has one too. I have been thinking how I can help society and came up with the idea to tell about thing I know the best-economics. In this blog I am going to write about wide range of economic fields like microeconomics, macroeconomics, finances, general questions, etc.

 Enjoy your stay.