Vincent Kao: Market Failurererere

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6.2 Causes of inflation

There are many causes of inflation, including a general rise in prices at the same time. However, they are all categorized into two categories: cost-push factors and demand-pull factors.

Cost-push factors refers to the costs that a business has to meet. As costs rise, the the business will often pass these onto consumers by increasing the prices for the product they are selling.

Cost include:

Food costs

Raw material costs

Wage costs

Land costs

Exchange rate costs

Demand-pull inflation

Demand-pull inflation happens when the rise in demand pushes up the price of goods. This occurs when people have more to spend. This is most likely when an economy is near to full employment.

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Output and costs

Total fixed cost

The sum of all of the different types of fixed costs at different outputs.

Total variable cost

The sum of all of the variable costs at different outputs

Total cost

The sum of total fixed cost and total variable cost at different outputs.

Average fixed cost

The total fixed cost divided by the level of outputs.

Average variable cost

The total variable cost divided by the level of output.

Average  total cost

The total cost divided by the level of output.

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Motives for spending, saving and borrowing

Spending

Motive: to buy goods and services that you can consume now. some on necessities, such as basic foodstuff, some on non-essential goods, like a computer game.

Saving

Motive: putting money aside in order to purchase at a later date. (Might be very expensive or does not occur regularly).

e.g. holiday, school fees, retirement when there is no earning. Saving ratio: refers to the proportion of income that consumer saves. Borrowing

Motive: spending more than you receive in income in order to meet your wants and needs. When interest rate are low, people are encouraged to borrow because the cost of future repayment has been lowered. If prices are expected to rise in future, people tends to borrow more and spend the money rather than saving.

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Motives for spending, saving and borrowing

Spending: is exchanging money for goods Goods may be for immediate consumption, or they may be consumer durable. They are items such as radios, bicycle and furniture.

Saving is getting money aside indtead of spending it.

Borrowing is when an individual receives money from another individual or financial institution, with the intention of paying back.

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Not producing public or merit goods

Merit Goods

Can be provided by both the public and private sector

Consumers may need to pay to enjoy the goods.

Limited in supply, resulting in high opportunity cost

Examples:

-Lighthouse

-Education

-Health Services (May be public good in some countries)

-Work training programs

-Libraries

Public Goods

Normally funded and provided by the government through tax

Cost close to free

Can be had by all consumers

Examples:

-Police force

-Fire Fighter

-Vaccine

-Wilson Fu

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What is market failure?

Markets fail when they are inefficient. This would occur when:

they fail to produce goods that consumers want

they fail to produce the quantities of foods required

they fail to produce goods at acceptably low price

Criticisms can be leveled in two main ways:

The market system does not always produce "desirable" outputs.

The market system does not always work.