•Prices of other factors of production.
An increase in the price of, say, hops, will increase the costs of a brewing firm and so for any given price the firm will not be able to brew as much beer. Hence, the firm's supply curve will shift to the left. The same would be true for changes in wage costs or fuel costs.
•Technology.
The supply curve drawn above assumes a 'constant' state of technology. But as we know, there can be improvements in technology that tend to reduce firms' unit costs. These reduced costs mean that more can be produced at a given price, so the supply curve would shift to the right.
•Indirect taxes and subsidies.
When the chancellor announces an increase in petrol tax (again!), it is the firm who actually pays the tax. Granted, we end up paying the tax indirectly when the price of petrol goes up, but the actual tax bill goes to the firm. This again, therefore, represents an increase in the cost to the firm and the supply curve will shift to the left. The opposite is true for subsidies as they are handouts by the government to firms. Now the firm can make more units of output at any given price, so the supply curve shifts to the right.
•Labour productivity.
This is defined as the output per worker (or per man-hour). If labour productivity rises, then output per worker rises. If you assume that the workers have not been given a pay rise then the firm's unit costs must have fallen. Again, this will lead to a shift to the right of the supply curve.
•Price expectations.
Just as consumers delay purchases if they think the price will fall in the future, firms will delay supply in they think prices will rise in the future. It's the same point but the other way round.
•Entry and exit of firms to and from an industry.
If new entrants are attracted into an industry, perhaps because of high profit levels (much more on this in the topic 'Market structure'), then the supply in that industry will rise at all price levels and the supply curve will shift to the right. If firms leave the industry then the supply curve will shift to the left.
Wednesday 28 May 2014
Wednesday 14 May 2014
Factors Affecting Economics
The economy is a central domestic policy for all governments, regardless of political views. Ensuring the economy is growing, keeping unemployment down and inflation at a manageable level can easily make the difference between political rejection and re-election. There are numerous factors that affect economics and are closely monitored by governments, banks and businesses to guide them.
Inflation
Inflation is the average amount by which products go up in price. It is measured by the retail price index (RPI) and the consumer price index (CPI). Both consider the average basket of goods, which includes food, clothing and utility bills, but the RPI also factors in mortgage repayments. A certain level of inflation is to be expected and is, in fact, desirable, but long-term, high inflation is a major economic worry as wages will not rise at the same level, meaning average income in real terms goes down.
Growth
Economic growth is the most closely followed economic measurement as it is a clear indication of how well an economy is performing overall. This is measured by the gross domestic product (GDP) and is a calculation of how much money there is in the economy overall. Prolonged negative growth leads to recession, unemployment and other problems; however, it is also important that economic growth rises gradually. This is because, if an economy expands too fast, the country's infrastructure will not be able to cope.
Unemployment
Keeping people employed is vital for governments for several reasons. The unemployed can claim benefits that cost the government money and also have less cash to put into the economy. Rising unemployment also leads to a fall in consumer confidence as people start to worry about job security. This can lead to an unexpected increase in saving which can lead to rising inflation as businesses try to compensate for loss of earnings.
Business Confidence
Governments do not create jobs; businesses do. The most important job for any government in this area is to create the most attractive conditions possible for businesses to invest. This will reduce the unemployment rate, pump money into the economy and increase tax revenue through income and corporate taxes.
Consumer Confidence
Making sure people are willing to spend money is also very important as this is the life line for the majority of businesses. Consumer confidence is an issue that is unquantifiable and, as such, unpredictable. It can be affected by job security, faith in the government and even the weather. There is no tool that can be used to improve consumer confidence on its own, but it must be monitored closely to try and predict future trends.
Interest Rates
Interest rates are the only tool available to try and move an economy. This is set by a central bank in most developed countries and is the rate by which money is paid back on a loan or gained through savings. To encourage people and businesses to spend, interest rates are kept down in an attempt to grow the economy. High interest rates are designed to encourage people to spend to stop the economy from getting out of hand.
Inflation
Inflation is the average amount by which products go up in price. It is measured by the retail price index (RPI) and the consumer price index (CPI). Both consider the average basket of goods, which includes food, clothing and utility bills, but the RPI also factors in mortgage repayments. A certain level of inflation is to be expected and is, in fact, desirable, but long-term, high inflation is a major economic worry as wages will not rise at the same level, meaning average income in real terms goes down.
Growth
Economic growth is the most closely followed economic measurement as it is a clear indication of how well an economy is performing overall. This is measured by the gross domestic product (GDP) and is a calculation of how much money there is in the economy overall. Prolonged negative growth leads to recession, unemployment and other problems; however, it is also important that economic growth rises gradually. This is because, if an economy expands too fast, the country's infrastructure will not be able to cope.
Unemployment
Keeping people employed is vital for governments for several reasons. The unemployed can claim benefits that cost the government money and also have less cash to put into the economy. Rising unemployment also leads to a fall in consumer confidence as people start to worry about job security. This can lead to an unexpected increase in saving which can lead to rising inflation as businesses try to compensate for loss of earnings.
Business Confidence
Governments do not create jobs; businesses do. The most important job for any government in this area is to create the most attractive conditions possible for businesses to invest. This will reduce the unemployment rate, pump money into the economy and increase tax revenue through income and corporate taxes.
Consumer Confidence
Making sure people are willing to spend money is also very important as this is the life line for the majority of businesses. Consumer confidence is an issue that is unquantifiable and, as such, unpredictable. It can be affected by job security, faith in the government and even the weather. There is no tool that can be used to improve consumer confidence on its own, but it must be monitored closely to try and predict future trends.
Interest Rates
Interest rates are the only tool available to try and move an economy. This is set by a central bank in most developed countries and is the rate by which money is paid back on a loan or gained through savings. To encourage people and businesses to spend, interest rates are kept down in an attempt to grow the economy. High interest rates are designed to encourage people to spend to stop the economy from getting out of hand.
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