Category: MicroEconomics

Perfect Competition or Collusion?

Posted on by Rhys Williams

    I recently interviewed for a Cambridge college as part of the undergrad admissions process and one of the questions I asked was as follows:

    “We have a scenario where two shops (e.g. supermarkets) are selling the same product (e.g. chocolate bar) at the same price, does this necessarily mean that collusion is occurring? What other factors might the authority want information on?”

    I find this to be an interesting question, as there isn’t a right or wrong answer and so it allowed applicants to discuss a wide range of economic phenomena, from market structure to pricing decisions and I wanted to elaborate upon a few of these points here. [...]

    Theories of Capital Structure

    Posted on by Rhys Williams

    I don’t normally venture in to discussions of financial topics but I have recently taken a course on Corporate Finance and whilst it isn’t my normal cup of tea it was quite interesting and I learned a lot! In today’s article, I therefore want to summarise some concepts around capital structure and discuss the various theories I learned which go some way to explain observed differences in leverage ratios of companies (although, there is no universal theory of debt, there are instead theories which may apply in different circumstances).

    To start, the capital structure of a company refers to how it finances its operations and growth. [...]

    Investment Functions

    Posted on by Rhys Williams

    In this article we explain the fundamental factors determining investment decisions of firms, which comprise the investment function. By determining the structure of the investment function we can hypothetically estimate this and thus predict how much a given firm ought to be investing, given economic fundamentals. This is interesting because we could then aggregate such functions – i.e. add up each firm-specific investment equation – to get a measure of what total investment by private firms in the economy ought to be investing. By comparing this amount with actual levels of investment we can derive a measure of the investment gap. [...]

    Marshallian Industrial Districts and the Rise of the Internet

    Posted on by Rhys Williams

    Recently I attended a Conference for the 40th Anniversary of the Cambridge Journal of Economics where a talk was given on “Industrial Districts, Organisation & Policy”. This article is a summary of some of the discussion from this talk as well as my further thoughts on extending Marshallian Industrial Districts to incorporate the internet.

    What is a Marshallian Industrial District?
    A Marshallian Industrial District is normally considered a clustering of firms in a similar industry operating from a certain geographic area. Being close to many other firms in the same industry allows a number of benefits, sometimes called benefits of agglomeration or Marshallian atmospheric externalities. [...]

    What is the WACC?

    Posted on by Rhys Williams

    The weighted average cost of capital (WACC) is simply an average cost of the two types of capital: debt and equity. It tells us the amount an investor would need in compensation to invest in a project. Therefore if we were to offer a lower return than the WACC, we would find that we have no investors; a return greater than WACC would lead to a situation where we have excess demand for our project.

    To theoretically calculate the rate of return on a project we would need to compare it with existing returns on projects which have similar risk characteristics, and then set the return similar to these projects to ensure that we can attract finance. [...]

    Efficiency

    Posted on by Rhys Williams

    Economists have an affinity for the concept of efficiency, but often this is quite a vague concept. In this article we attempt to explain a few different types of efficiency/inefficiencies and show the different situations in which the word “efficiency” should be used.

    Before we start it is important to remember why inefficiencies are bad and why a healthy economy should strive to be efficient. Lionel Robbins defined economics as the study of the allocation of scarce resources. Therefore an economist’s job is to ensure that these scarce resources are used to their best potential, therefore waste should be minimised and this can be achieved through efficient use of materials. [...]

    What is a Cobb-Douglas Function?

    Posted on by Rhys Williams

    The Cobb-Douglas function has many applications in economics; from being a well-behaved preference in microeconomics to a production function in macroeconomics. It is named after Paul Douglas, an American Congressmen who was researching labour and capital shares and asked Charles Cobb, a mathematician, for help in formulating this into a function. In this article we will explore its use as a production function.

    Functions

    In its simplicity, a CD (Cobb-Douglas) function is just a function. A function, in mathematical jargon, transforms an input into a single output: it is a one-to-one mapping. For example Y=2X is a simple function. X is the independent variable and Y is the dependent variable, because Y is determined by whatever the value of X is. [...]

    Predictably Irrational

    Posted on by Rhys Williams

    I have just finished reading Predictably Irrational, a book by Dan Ariely on why economic thinking is flawed due to its failure to include behavioural economic concepts. In economics the actions of people are summed up by Homo Economicus, an imaginary figure that is completely rational and bases all its actions upon these rational foundations. Obviously not all humans are as rational as Homo Economicus, and this causes inconsistencies in economic models.

    Dan Ariely argues that if we use findings from behavioural economics (a branch of economics that incorporates psychology) and mould these into our economic models, then we will improve our models and will thus have a better understanding of how the economy actually works. [...]