Economies of Scale The term economies of scale refers to a situation where the cost of producing one unit of a good or service decreases as the volume of production increases. Economies of scale arise when the cost per unit falls as output increases. Economies of scale are the main advantage of increasing the scale of production. Alfred Marshall made a differentiating concepts of internal and external economies of scale. That is that when costs of input factors of production go down, it is a positive externality for all the firms in the market place, outside the control of any of the firms. Internal Economies of Scale Internal economies of scale relate to the lower unit costs a single firm can obtain by growing in size itself. This means that the internal economies are exclusively available to the expanding firm. Internal economies of scale may be classified under the following Continue reading
Economics Concepts
What is Market Failure? Meaning, Causes and Recovery Strategies
Market failure can be defined as the situation in which the allocation of goods and services by free market is not efficient. It occurs as market fails to fulfill its obligation the most common failures involve cases of inadequate competition, inadequate information, resources immobility, public goods and imperfect competition. These failures occur on both the demand and supply sides of the market. Government failure occurs when the government intervenes in the market to improve the market failure actually makes the situation worse. When market failure exist there is a reason for possible government intervention to improve the outcome, but it`s not clear that government action will improve the result since the politics of implementing the solution often lead to further problems. Government can intervene to the market through subsidies, bailouts, wage and price controls, taxes and regulations. Attempts to correct market failure may also lead to an inefficient allocation of Continue reading
The Role of Government in a Market Economy
In a market economy, commerce and customers make a decision of their own decision what they will consume and manufacture, and in which conclusions on the allotment of those sources are without government interference. Hypothetically this denotes that the manufacturer is required to decide what to produce, how much to produce, what prices to set up for consumers for those productions, what to pay workers, and so on. These conclusions in a market financial system are impacted by the forces of competition, supply, and demand. This is frequently distinguished with a premeditated economy, where central government concludes what will be manufactured and in what amounts. A market economy is also compared with the mixed economy where there are market processes through the system of markets that is not completely free but under some state control that is not widespread enough to comprise a deliberate financial system. In reality, there is Continue reading
The Diamond-Water Paradox in Economics
The concept of the value of goods was one of the most actively discussed topics by economists in the 18-19th century. In “A Study of the Nature and Causes of the Wealth of Nations,” published in 1776, Adam Smith voiced the question that would later become known as the diamond-water paradox. It sounded like this: “There is nothing more useful than water: but you can hardly buy anything with it… Diamond, on the contrary, has almost no use-value; but a very large number of other goods can often be obtained in exchange for it”. The classical economists Adam Smith and Karl Marx considered a product’s value concerning how it satisfies a human need. The price was associated with the effort and labor expended to meet a specific demand. Besides, classical economists used the concepts of use-value and exchange-value, which determine the nature and exchange value of products. Later, in the Continue reading
Econometric Forecasting Models
Econometric model building holds considerable promise as a method of forecasting demand. The best starting point towards an understanding of the basis of econometric forecasting is regression analysis. But the difficulty with regression analysis is that it is used to forecast a single dependent variable based on the value and the relations between one or more independent variables and each of these independent variables is assumed to be exogenous or outside the influence of the dependent variable. This may be true in many situations. But unfortunately, in most broad economic situations an assumption that each of the variable, is independent is unrealistic. For example, let us assume that demand is a function of Gross National Product (GNP), price and advertising. In regression terms we would assume that all three independent variables are exogenous to the system and hence are not influenced by the level of demand itself or by one Continue reading
Keynesian View of Inflation
John Maynard Keynes, one of the most influential economists of the 20th century, relates inflation to a price level that comes into existence after the stage of full employment. While, the quantity approach emphasizes the volume of money to be responsible for rise in the price level. Keynes distinguishes between two types of rise in prices (1) rise in prices accompanied by increase in production, and (2) rise in prices not accompanied by increase in production. If an economy is working at a low level, with a large number of unemployed men and un-utilized resources then expansion of money or some other factors leading to an increase in demand will result not only in a rise in the price level but also rise in the volume of goods and services in an economy. This will continue until all unemployed men find employment and capital and other resources are more Continue reading