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Be As Enthusiastic About Ohters Success As You Are About Your Own

The Benefits Of Becoming An Economist Are As Follows:

1. Understanding The World Better
2. Bringing Social Changes
3. Becoming An Economist

Economics (from the Greek οإ²آƒκος [oikos], 'family, household, estate', and νομος [nomos], 'custom, law', hence "household management" and "management of the state") is a social science that typically studies the production, distribution, and consumption of goods and services. Since the early part of the 20th century, economics has focused largely on measurable variables, and employed both theoretical models and empirical analysis^[1]. Economic logic is increasingly applied to any problem determining economic value (such as politics, religion, psychology, history and social interaction). A professional working in economics or having an academic degree in the subject is an economist.

The subject is broadly divided into two main branches: microeconomics, which deals with individual agents, such as households and businesses, and macroeconomics, which considers the economy as a whole. An alternate division of the subject distinguishes positive economics, which tries objectively to predict and explain economic phenomena, from normative economics, which recommends one choice over another—such recommendations often involve subjective value judgments.

The mainstream economic paradigm is a combination of neoclassical economics and Keynesian macroeconomics. Crucial assumptions of this paradigm include the idea that resources are scarce while wants are unlimited, which is sometimes characterized as the economic problem, and an understanding that the value of most goods can be represented in terms of their open-market price. Various schools of heterodox economics, for instance socialist economics, green economics and associative economics, seek to explain economic phenomena using different basic assumptions, for example by emphasising that economics is primarily concerned with exchanges of values.

What is ‘macroeconomics’?
You may have already studied microeconomics, which looks at supply, demand and prices for individual goods. Macroeconomics looks at the bigger picture and involves the study of the economy as a whole.

National income
Let us start by looking at a simple example — a ‘two sector’ economy made up of households (consumers) and firms (producers) —and use this to develop the idea of national income. To start with we will ignore the impact of government policy and overseas sectors.

Microeconomics

From Wikipedia, the free encyclopedia

Microeconomics is one of the main fields of the social science of economics. It considers the behaviour of individual consumers, firms, and industries. (Contrast macroeconomics.)

One of the goals of microeconomics is to analyze market mechanisms that establish relative prices amongst goods and services and allocate society's resources amongst their many alternative uses. Microeconomices analyses market failure, where markets fail to maximise welfare, as well as describing the theoretical conditions needed for perfect competition. Significant fields of study in microeconomcis include markets under asymmetric information, choice under uncertainty, and economic applications of game theory.

Assumptions and definitions

The theory of supply and demand usually assumes that markets are perfectly competitive. This implies that there are many buyers and sellers in the market and none of them have the capacity to significantly influence prices of goods and services. In many real-life transactions, the assumption fails because some individual buyers or sellers or groups of buyers or sellers do have the ability to influence prices. Quite often a sophisticated analysis is required to understand the demand-supply equation of a good. However, the theory works well in simple situations.

Mainstream economics does not assume a priori that markets are preferable to other forms of social organization. In fact, much analysis is devoted to cases where so-called market failures lead to resource allocation that is suboptimal by some standard. In such cases, economists may attempt to find policies that will avoid waste; directly by government control, indirectly by regulation that induces market participants to act in a manner consistent with optimal welfare, or by creating "missing" markets to enable efficient trading where none had previously existed. This is studied in the field of collective action.

The demand for various commodities by individuals is generally thought of as the outcome of a utility-maximizing process. The interpretation of this relationship between price and quantity demanded of a given good is that, given all the other goods and constraints, this set of choices is that one which makes the consumer happiest.

Modes of Operation

It is assumed that all firms are following rational decision-making, and will produce at the profit-maximizing output. Given this assumption, there are four categories in which a firm's profit may be considered.

A firm is said to be making an economic profit when its average total cost is less than the price of the product at the profit-maximizing output. The economic profit is equal to the quantity output multiplied by the difference between the average total cost and the price.

A firm is said to be making a normal profit when its economic profit equals zero. This occurs where average total cost equals price at the profit-maximizing output.

If the price is between average total cost and average variable cost at the profit-maximizing output, then the firm is said to be in a loss-minimizing condition. The firm should still continue to produce, however, since its loss would be larger if it was to stop producing. By continuing production, the firm can offset its variable cost and at least part of its fixed cost, but by stopping completely it would lose equivalent of its entire fixed cost.

If the price is below average variable cost at the profit-maximizing output, the firm is said to be in shutdown. Losses are minimized by not producing at all, since any production would not generate returns significant enough to offset any fixed cost and part of the variable cost. By not producing, the firm loses only its fixed cost.

In economics, a market failure is a situation in which markets do not efficiently organize production or allocate goods and services to consumers (for example, a failure to allocate goods in a way some see as socially or morally preferable). To economists, the term would normally be applied to situations where the inefficiency is particularly dramatic, or when it is suggested that non-market institutions would provide a more desirable result. On the other hand, to many, market failures are situations where market forces do not serve the perceived "public interest". Here, the focus is on the economists' theories of market failure.

Economists use model-like theorems to explain or understand such cases. The two main reasons that markets fail are:

• the inadequate expression of costs or benefits in prices and thus into microeconomic decision-making in markets.
• sub-optimal market structures

In economics, information asymmetry occurs when one party to a transaction has more or better information than the other party. (It has also been called asymmetrical information and markets with asymmetrical information). Typically it is the seller that knows more about the product than the buyer, however, it is possible for the reverse to be true: for the buyer to know more than the seller.

Examples of situations where the seller usually has better information than the buyer are numerous but include used-car salespeople, stockbrokers, real estate agents, and life insurance transactions.

Examples of situations where the buyer usually has better information than the seller include estate sales as specified in a last will and testament.

This situation was first described by Kenneth J. Arrow in a seminal article on health care in 1963 entitled "Uncertainty and the Welfare Economics of Medical Care," in the American Economic Review.

George Akerlof later used the term asymmetric information in his 1970 work The Market for Lemons. He also noticed that, in such a market, the average value of the commodity tends to go down, even for those of perfectly good quality. It is even possible for the market to decay to the point of nonexistence.

Because of information asymmetry, unscrupulous sellers can "spoof" items (like software or computer games) and defraud the buyer. As a result, many people not willing to risk getting ripped off will avoid certain types of purchases, or will not spend as much for a given item.

Opportunity cost

Main article: Opportunity cost

The simplest way to estimate the opportunity cost of any single economic decision is to consider, "What is the next best alternative choice that could be made?" (This is even though most economic decisions involve multiple alternatives.) The opportunity cost of paying for college this semester could be the ability to make car payments. The opportunity cost of a vacation in the Bahamas could be the down payment money for a house.

Note that opportunity cost is not the sum of the available alternatives, but rather of benefit of the best alternative of them. The opportunity cost of the city's decision to build the hospital on its vacant land is the loss of the land for a sporting center, or the inability to use the land for a parking lot, or the money that could have been made from selling the land, or the loss of any of the various other possible uses -- but not all of these in aggregate.

Although opportunity cost can be hard to quantify, its effect is universal and very real on the individual level. The principle behind the economic concept of opportunity cost applies to all decisions, not just economic ones. Since the work of the Austrian economist Friedrich von Wieser, opportunity cost has been seen as the foundation of the marginal theory of value.

Consumer surplus

Supply curve shift

Consumer surplus or Consumer's surplus (or in the plural Consumers' surplus) is the economic gain accruing to a consumer (or consumers) when they engage in trade. The gain is the difference between the price they are willing to pay (or reservation price) and the actual price. If someone is willing to pay more than the actual price, their benefit in a transaction is how much they saved when they didn't pay that price.

The aggregate consumers' surplus is the sum of the consumer's surplus for each individual consumer. This can be represented on a supply and demand figure. If demand is as given as the diagonal line from the price axis to the quantity axis, consumers' surplus in the case of a the initial supply curve (S₀) is the triangle above the line formed by price P₀ to the demand line (bounded on the left by the price axis and on the top by the demand line). If supply expands (to S₁), the consumers' surplus expands, to the triangle above P₁ and below the demand line (still bounded by the price axis). The change in consumer's surplus is difference in area between the two triangles, and that is the consumer welfare associated with expansion of supply.

Distribution of benefits

The benefits can be thought to accruing to two groups.

The first, those who were willing to pay the higher price P₀, benefit because of a price reduction. Their benefit is the area in the rectangle formed on the top by P₀, on the bottom by P₁, on the left by the price axis and on the right by line extending vertically upwards from Q₀.

The second set of beneficiaries are new consumers, those who will pay the new lower price (P₁) but not the higher price (P₀), and are measured as the difference between Q₁ and Q₀. Their benefit is the triangle formed by on the left by the line extending vertically upwards from Q₀, on the right by the demand line, and on the bottom by the line extending horizontally to the right from P₁.

Rule of one-half

The rule of one-half estimates the change in consumers' surplus for small changes in supply with a constant demand curve. Following the figure above,

where:

• CS = Consumers' Surplus
• Q₀ and Q₁ are the quantity demanded before and after a change in supply

What is the Philips Curve? Explain why critics believe the relationship no longer holds.

Different macroeconomic policies can be implemented in order to achieve government’s main objectives of full employment and stable economy through low inflation. Philips Curve can be use as a tool to explain the trade-off between these two objectives. This essay will first explain the Philips Curve and its relation to inflation and unemployment. Then, the breakdown of Philips Curve will be analysed. Followed by an evaluation of short-run and long-run Philips Curve. Finally, it considers whether the Philips Curve still exists and is therefore relevant to policy makers.

Philips Curve illustrates the relationship between inflation and unemployment in an economy. Inflation is a sustained increase in the average price of goods over time. When there is inflation, value of money falls. In the UK it is mainly measured through retail price index. A low inflation rate indicates that average price of goods would not rise as high.  Furthermore, unemployment exist when someone are available and actively seeking for work but unable to find any despite their willingness to accept the going wage rate.

The economist A.W Philips that was first put this theory forward in 1958 gathered the data of unemployment and changes in wage levels in the UK from 1861 to 1957. From the observation, he found that one stable curve represented the trade-off between inflation and unemployment. In other words, if unemployment increases, inflation will decrease, and vice versa.

    Fig.1 The original Philips Curve: wage inflation against unemployment

Inflation (%)

                                                                      Unemployment

Source: Griffiths and Wall, p.514

The downward sloping Curve in fig.1 shows that, in theory, there is an inverse relationship between inflation and unemployment. For example, after the economy has just been in recession, the unemployment level will be fairly high. This will mean that there is a labour surplus. As the economy grows, the aggregate demand (AD) will increase and therefore leading to an increase in employment. In the beginning, there will be little pressure for a raise in wages. However, as the economy grows faster and more people are employed, wages will slowly rise. This will increase the firm’s cost of production and the high costs are usually passed on to the customers in a form of higher prices. Therefore a decrease in unemployment has led to an increase in inflation and vice versa. Moreover, unemployed might suffer from money illusion as they thought the increase in wages offered to them represented a real wage (Sloman 2000). They underestimate inflation by not realizing that higher wages will be eaten up by higher prices. Thus they will accept job more readily and this will reduce the frictional unemployment in the short run.

Keynesian demand management approach was fashionable in the UK government policies from 1945 up to mid 1970 (Sloman, 2000).  It believes that business cycle is being driven by aggregate demand shocks and it encourages active government intervention in the economy.  The theory suggest that policy makers can either expand AD in order to lower unemployment in the short term at the cost of higher inflation, or they can contract AD in an attempt to lower inflation at the cost of higher unemployment. Trade-off between inflation and unemployment can be seen as the core of Keynesian theory. This idea was empirically justified in the Philips Curve relationship between the wage rate or inflation rate and the unemployment rate. Furthermore, Keynesian suggests that government can decide how much extra inflation to accept in order to bring the unemployment down. This can be done by choosing a point in the Philips Curve and set fiscal or monetary policies to achieve the desired level of AD and thus unemployment level.

Using the data from the 1950s and 1960s where the world economy tend to be stable, Philips Curve relationship proved to be true for many economies such as United States and not just UK (Griffiths and Wall, 1999). However during 1967-1970 most countries such as US, Britain and France had doubled their inflation (Ormerod, 1995). This was the first sign that the downward relationship in Philips Curve was not always true.  In 1970’s the concept of a stable Philips Curve shows a break down as the economy suffered from high inflation and high unemployment simultaneously. The economists refer this situation as stagflation where stagnant economies and rising inflation occurs together.

The reasons for this break down was partly due to the weak theoretical foundation on which it was based, as it ignored the role of expectations and role of supply shocks in the economic system. Adverse supply shock such as the increase in world oil price in 1974 and 1979 had resulted in output reductions, increase in costs and prices, which led to cost-push inflation, irrespective to demand pressure. The impact on Philips Curve was that any level of unemployment would be associated with higher levels of inflation than it would have predicted before. Thus this period of increased inflation were not followed by the reduction in unemployment, as Keynesian demand-side theory would have said (Griffiths and Wall, 1999).

The emerging instability of the original Philips Curve relationships initiated Milton Friedman and Phelps in developing Expectations-Augmented Philips Curve (see Fig.4), which combined inflationary expectations theory with the concept of natural rate of unemployment (Griffiths and Wall, 1999). Unlike Keynesian, Friedman was not assuming any money illusion. He argued that individuals and companies have learned that inflation would continue to rise and they have formed expectations that inflation would increase if unemployment began to fall (Ormerod, 1995). Thus, people asked for a higher wage rise once unemployment is falling because they anticipated a rise in inflation due to this fall.

Furthermore, Friedman and Phelps claimed that the trade-off in the Philips Curve was only temporary. In the long-run, expected inflation adjusts to changes in actual inflation, and the short run Philips Curve shifts. As a result there would be no trade-off in the long-run and Philips Curve is vertical at the natural rate of unemployment (see Fig.2). The natural rate of unemployment (U1) is the unemployment rate when the labour market is in equilibrium in other word, full employment. It includes frictional unemployment, where people are between jobs and structural unemployment, which arise from mismatch of skills and job opportunities due to changes in production pattern.

Fig.2 Expectation Augmented Philips Curve

Source: Graph from www.tutor2u.net

Friedman argued that there is a specific short-run Phillips Curve (SRPC) for each level of expected inflation (Ormerod, 1995).  For higher expectation, Philips Curve moves northeast, thus the movement of the SRPC was explained in terms of ever-higher inflationary expectations. This is shown in Fig.3. Supposed economy begins at zero inflation (A) and unemployment at the natural rate (U1) when the government increases money supply in attempts to increase output beyond the natural rate, more jobs would be created and unemployment would fall to U2. However this would increase the inflation to p1 as the economy moves along the SRPC to B. If the inflation rate was to stay at p1, workers would adjust the inflationary expectation accordingly and would asked for a higher wage rise. This would shift up the SRPC to the right (SRPC2) and the economy would adjust back to the natural rate but with continuing inflation at C. 

Fig.3 Philips Curve and an increase in aggregate demand

Inflation                                                    Inflation                            LRPC

                                                                                              B           C        

            p1               B                                         p1                                          SRPC2

                                                 A                                                         A 

                             U2             U1    SRPC1                            U2       U1       SRPC1

                       Fig.3.1     Unemployment                      Fig.3.2      Unemployment

                       Source: Lecture 6 Unemployment and Inflation

Moreover, Friedman's view was that governments could not permanently attempt to drive unemployment down below the natural level. The result would be higher inflation, and eventually a return to higher unemployment but with inflationary expectations increased along the way (Begg, 2000).

It can be seen from Fig.4 that there seems to be no fixed relationship between inflation and unemployment as Prof. Philips once argued. Although there was no overall relationship between inflation and unemployment, we can see from the graph that there are several little curves over the past thirty years, which were shifting. A look at the evidence for the UK economy over the last ten years would suggest that the Philips Curve has changed. We have had almost a decade of falling unemployment together with stable inflation, suggesting a flat curve. Inflation expectations have also fallen which would lead to an inward shift of the expectations- augmented Phillips Curve.

The forecast of the UK economy over the next decade showed that there is evidence of Philips Curve relationship between unemployment and inflation (Fig.5).  However the flat and slightly upward sloping curve suggests that there might not be a trade-off. It also implies that it is possible to have low inflation and low unemployment simultaneously in the economy.

Data: see appendix 1

.

In conclusion, there has not been one steady curve showing the relationship over the past thirty years. However, it appears that there are a number of curves showing a trade-off at individual periods. Philips Curve relationship nevertheless exists temporarily in the short-run despite the criticism on its break down in the 1970s. The length of short-run Philips Curve depends on inflation expectation and money supply. It is interesting to note that the curves becoming flatter in the recent period. This suggests that inflation is less volatile now therefore, for a given fall in unemployment, inflation rate would not increase as much compare to say, twenty years ago.  As a result, it allows the economy to grow at a faster rate without experiencing inflationary acceleration.

Word Count: 1519

Appendix

Forecasting the UK economic model for the next 6 years

             Year                           Inflation                      Unemployment