A Primer on Endogenous Credit-Money - Assignment Example

A Primer on Endogenous Credit-Money Question 1 (a) Revenue = output * price Accordingly, the revenue generated by the firm in each of the output level is reflected in the table below. Output Price (£) Total Revenue (£) 0 20 0 1 18 18 2 16 32 3 14 42 4 12 48 5 10 50 (b) Profit = revenue – cost Accordingly, the profit derived at each production level for the firm is reflected in the table below. Output Revenue (£) Total cost (£) Total Profit (£) 0 0 10 -10 1 18 15 3 2 32 18 14 3 42 20 22 4 48 27 21 5 50 41 9 (c) The table above depicts that the firm maximizes the profit at the output level of three units since it has the highest profit amount compared to the other output levels. (d) Profit maximization is achieved at the point where marginal cost is equal to marginal revenue (Tucker, 2011). Thus, the maximization of the profit reflected in the table above should derive a marginal cost and marginal revenue that are equal. The table below demonstrates the marginal revenue and marginal cost at each level of output to test if the profit maximization reflected in the table above is correct. In addition, the formula employed in calculating marginal revenue and marginal cost is reflected below. Marginal revenue = change in total revenue/ change in output Marginal cost = change in total cost/ change in output Output Revenue (£) Total cost (£) Marginal Revenue (£) Marginal Cost (£) 0 0 10 1 18 15 (18-0)/ (1 – 0) = 18 (15 – 10)/ (1 – 0) = 5 2 32 18 (32 – 18)/ (2 – 1) = 14 (18 – 15)/ (2 – 1) = 3 3 42 20 (42 – 32)/ (3 – 2) = 10 (20 – 18)/ (4 – 3) = 2 4 48 27 (48 – 42)/ (4 – 3) = 6 (27 – 20)/ (4 – 3) = 7 5 50 41 (50 – 48)/ (5 – 4) = 2 (41 – 27)/ (5- 4) = 6 The computations above depicts that the three output level of the firm does not maximize profit at output level three since marginal revenue is not equal to marginal cost. Question 2 A perfectly competitive market is a type of a market that is characterized by homogenous product, numerous firms, perfect knowledge, freedom of entry and exit, and price taker. Thus, establishment of a market model inspired by regulations of a perfect market has raised questions on whether it can hamper innovation. The extent of perfect market model depicts that innovation is likely to be hampered in future. One of the aspects that depict that innovation is likely to be hampered under regulations inspired under perfect competition is homogeneity or standardization of product. The requirement that product be homogenous in regulating the market as required under perfect competition characteristic will hinder traders and manufacturers from undertaking product differentiation. This implies that manufacturers and producers of products supplied in the market will not undertake individual initiative of introducing new features in the product that enhances usage and efficiency. The extent of market regulations been inspired by perfectly competitive market in hindering market players from undertaking product enhancement initiative from established standard implies that investment in research and development will be eliminated. This is because the manufacturers and producers of products will be forced to wait for new standard of product to be established to ensure all product of certain application are homogenous. Consequently, innovation that is driven by need to differentiate the superiority of individual firm’s product from others to generate more sales revenue and market share. Another dimension that demonstrates that establishing market regulations that are inspired by model of perfectly competitive market has potential of hampering innovation is aspect of firms been price taker. Firms been price takers under perfect competitive market imply that firms have to sell their products at a given price to survive. This scenario has the potential of hindering firms from undertaking capital investment to enhance quality of their products since the cost will be higher than the given market price of the given product. Thus, the extent of firms in undertaking innovative investment on their product superiority will be hampered since it will cause los due to price adjustment limitation to cater for increased cost. In addition, the characteristic of perfect knowledge under perfect competitive market has potential of hampering innovation if market regulations are inclined towards perfect competitive market. The aspect of perfect knowledge implies that consumers have information readily available about product and prices from competing traders that they can access at zero cost. The ability of consumers in accessing information on prices and products offered by diverse firms in market at zero cost has potential of hindering innovative marketing strategies by firms. This is because incentive for firms to undertake market awareness strategies from traditional methods will be eliminated since the market regulations will provide for a single marketing platform. Consequently, market regulations that is inclined towards a model perfect competitive market has potential of hampering innovation. Question 3 Monetary sector in a given economic setup is composed of two distinct but interrelated components. Of the aspect of monetary sector is covered under the Central Bank of a country and the monetary policies it undertakes on money supply and interest rate formulation. The Central Bank is involved in supply of money in the country that is essential in influencing the prevailing interest rate in the market (Mandal & Gupta, 2010). Indeed, the Bank of England is responsible of issuing coins and notes that are used by consumers in making purchases. Furthermore, the Central Bank like Bank of England is the government’s banker. The other aspect of the monetary sector is the private financial sector. The private financial sector is made up of commercial banks and other financial institutions that are privately controlled. Private financial sector under the monetary sector p The running of the monetary sector is highly determined by two key determinants of liquidity preference and interest rates. Liquidity preference under macro-economic theory means the money demand that is considered liquidity (Mankiw, 2014). Thus, liquidity preference implies the extent to which households in the economy are demanding to have liquid currency for consumption. On the other hand, the interest rates imply the cost of capital derived from borrowing and savings (Gnos & Rochon, 2009). The two dimensions are essential under the monetary sector since they influence the supply of money in the general economy. Indeed, a higher preference by households to hold more cash has the effect of causing money supply in the economy to increase. Similarly, a lower interest rate has the effect of encouraging households and firms to borrow more cash from commercial banks that increases money supply in general economy (Tucker, 2011). Consequently, the two variables are instrumental in influencing the monetary sector of a given country. Question 4 Interest rate and level of uncertainty in the general economy have been cited to be essential in determining money supply. Interest rates determine money supply due to the ability of consumers and households in accessing capital from banks. Indeed, a lower interest rate has the tendency of encouraging households and investors to borrow more money from the banks to make purchases and investments that increases money supply in the general economy (Lavoie, 2003). In contrast, uncertainty determines the money supply in the economy through fears that households and investors hold about future economic performance. Indeed, the uncertainty on price of bonds and unexpected social problems has the tendency of causing people to prefer liquidity cash to ensure they are able to react to any eventuality when it arises that causes money supply in the general to increase (Hicks, 1980). Consequently, the two variables have contrasting ability of determining money supply in the economy. References Gnos, C., & Rochon, ‎.-P. (2009). Post-Keynesian Principles of Economic Policy. Boston: Wiley. Hicks, J. R. (1980). IS-LM: An Explanation. Journal of Post Keynesian Economics , 3 (2), 139-154. Lavoie, M. (2003). A Primer on Endogenous Credit-Money', in L.-P. Rochon and S. Rossi, eds., Modern Theories of Money. The Nature and Role of Money in Capitalist Economies , 506-543. Mandal, R. K., & Gupta, A. (2010). Macroeconomics. New York: Wiley. Mankiw, N. (2014). Principles of Economics. New York: Cengage Learning. Tucker, I. B. (2011). Macroeconomics for today. Mason, OH: South-Western Cengage Learning. Read More