UK GDP Growth Shrinks in Q4 2012

The UK economy has shrunk by 0.3% in line with many economists’ predictions. The fall is mainly due to a slowdown in North Sea oil extraction, excluding oil and gas extraction the economy shrank 0.1%. This comes after a previous 0.9% growth in GDP during Q3.

Nick Clegg has blamed a lack of capital investment (investment in infrastructure) by the government as an explanation to why GDP is still lacklustre 5 years after the onset of the global financial crisis ( Increased capital spending would result in a rightward (positive) shift of the long run average cost curve. [...]

Network Rail Investment

The article shows plans by Network Rail (the government owned firm which is responsible for maintaining the railway networks in the UK) to invest £37.5 billion in infrastructure over the next 5 years.

The effect of investment is to shift long run average supply curve rightwards. Investment should improve the speed and capacity of the network, this is good for businesses and should be good for the aggregate economy. However the current investment plans are going to mean a rise in train fares (prices are assumed to rise above inflation) which will reduce consumer surplus. This also indicates that price elasticity of demand for rail travel is relatively inelastic (train firms can also use price discrimination based on peak and off-peak travelling times) to allow for a higher price. [...]

Why is Competition Good?

Firms have to be competitive in order to keep profits up and to remain in business. If they didn’t keep prices low then other firms could enter the market and undercut the incumbent firm, thus taking away its market share and supernormal profit. Alternatively rivals may do the same. These low prices benefit consumers and should result in more consumer surplus. Because prices are lower more of the good is demanded and hence the firm will produce more, this reduces allocative inefficiency as more resources are going towards the production of goods and services demanded by consumers (a definition of allocative efficiency). [...]

Big Mac Index

The Big Mac Index is published by the Economist and is used to demonstrate the idea of Purchasing Power Parity (PPP) and is a method of showing whether a currency is under or overvalued in relation to the US Dollar.

The theory behind PPP is that all currencies should be equal, not in nominal terms, but in purchasing terms. So I should be able to purchase a good in the UK using Pound Sterling for the same price as if I were to change my money into Euros and purchase the exact same good in France (ignoring transaction costs). Why is this? [...]

Pension Deficit Falls

The article above shows the effect that the BoEs Quantitative Easing (QE) policy has had for pension funds. By undertaking QE the yield on government bonds (Guilts) has fallen. This is because the Bank of England purchases Guilts off of financial institutions (banks, insurance firms, pension funds, hedge funds, private investors, equity funds etc) which then go and buy other assets, which may include more Guilts (the reason institutions like buying government debt, despite the yield being so low, is because they are considered very safe, the UK Government currently has an AAA credit rating, and because if necessary it can print money, as it has its own central bank, the risk of it defaulting is considered low). [...]

Limitations of the Concentration Ratio

An evaluative point to the use of the concentration ratio is that there may be problems defining the market. If a competition watchdog used the ratio to measure whether or not a firm is defined as a monopoly (if the ratio produces a result greaterthan 25%) how does it decide the width and depth of the market.

For example when trying to identify the market that Facebook lies in, would the watchdog include photo-sharing websites (as Facebook owns Instagram), does it also include phone apps. Calculating the size of the market may not be as simply as it first seems!

Also concentration ratios may provide a misleading result. [...]

Marginal Costs

Marginal cost is the rate of change of the total cost (ΔTC/ΔQ) and is dependent on the variable cost. This is because fixed cost is a constant and doesn’t affect the rate of change (remember, rate of change is effectively the differential of a function, in this case it would be the differential of the total cost function). Therefore any increase in fixed costs will have a 0 effect on Marginal Cost.

This can be shown in the tables below:

A firm’s fixed costs increase by 20%, what will marginal costs increase by?

Before FC Rise:

0 10 5 15
1 10 7 17 2
2 10 9 19 2

After FC Rise:

0 12 5 17
1 12 7 19 2
2 12 9 21 2

As we can see the 20% increase in fixed costs has no affect on the marginal costs. [...]