Friday, 13 April 2012

Introduction into the macroeconomic field of enquiry....

  • The first point to note is that the infamous economist, John Maynard Keynes, is important because he was responsible for diving macroeconomic field of inquiry. 
  • The second is that the macroeconomic field of inquiry concerns four main economic aggregates; unemployment, inflation, productivity and GDP rates (growth).

Short term vs Long Run

Short-term analysis = divergence between actual level of output and potential level of output, so basically studying output gap. Fluctuations and study of it are called business cycle and these are two part of the short-term. 
Long term analysis: Path followed by the potential output in a period of 10 years or more. What drives economic growth?

Stable business cycles v Growth...

  • Stable business cycles are preferred because it is predictible, better confidence levels and less resources will be wasted (particularly unemployment). Both Classicists and Keynesians agree stable is better than unstable, where they differ is the policies which should be implemented. 

What is the method of macroeconomics? 
  • Economists do not agree on policies because different schools approach economics on different ideologies. They differ even on the fundamentals such as out of the four main study points which is the most important and which is the least. 
  • Two main schools of economics exist and those are Neo-Classical economists, then of course you have Keynesians and the other Heterodox economics (such as post-Keynesian - they follow Keynesian but differentiate from neo-classicalism, marxism, Austrian, Sraffian, complexity theory, evolutionary economics etc). 
  • Note there is a difference between Keynesian and post-Keynesian.
Main features of the Neoclassical of macroeconomic methodology
  • Macroeconomics can be found as aggregation of microeconomics based on 2 assumption as seen below.
  • Methodological individualism - understanding of economy as being composed of self-interest individuals who are rational who want to maximize utility subject to resource constraints. This is why macroeconomics is micro founded. 
  • Existence of general equilibrium - Individuals are rational  and self-interested so markets will always end up at an equilibrium where demand = supply (link to invisible hand theory). When all the markets are in equilibrium the whole economy is in what they call a "general equilibrium". This is demonstrated mathematically by Leon Walrus by beginning of 20th century - he identified a price vector (list of prices) and proved its mathematical existence.
  • The primary concern regarding the analysis is market exchange - i.e. the consequence of assumptions that markets are self-regulating.
  • Legitimacy of the assumption, neglect of the role of structures and mechanisms (i.e. governments) - the assumptions do not hold - perhaps individuals are not rational and self-interest, markets are perfectly competitive etc. methodological individualism fails to recognize that consumers may be affected by external features
  • Trade-off between static efficiency and dynamic changes? - their study is focused upon static analysis even though we know things do not change they evolve. Conflict between static and dynamic goals and this is not recognized by neo-classical economics.
Main features of Keynesian methodology
  • Macroeconomics is not aggregation of microeconomics.
  • You need a separate theory for macro which has its own method, providing a holistic approach
  • Introduction of uncertainty in analysis - economic agents are uncertain about the future and this affects behavior. Existence of uncertainty is why individual behavior cannot be used and aggregated.
  • Expectations that people have and it is on basis of this economic agents make decisions. Investment decisions of firms are also based on expectations.
  • Focus is on long-term and that it is affected by the short-term and expectations of people. He said business cycle affects long-term economic growth as it affects things like investment levels, confidence etc.

Wednesday, 11 April 2012

Capital Market

Here is a short slideshow I created on the basic notions in Capital Markets Capital Market PPT by Komilla Chadha

Labour Market

A short powerpoint I made on  the labour market...Labour market ppt by komilla chadha
View more presentations from KomillaC.

Tuesday, 10 April 2012

Oligopoly and Game Theories

Here is short slideshow I made on Game Theory and different Oligopoly models :) Game Theory PPT by Komilla Chadha

Monopolistic Competition - some key points..

Here is a basic understanding on M.C, for video tutorial please see 
Monopolistic comeptition by komilla chadha
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Sunday, 8 April 2012

Statutory Interpretation

Here is a mindmap I created on Statutory Interpretation, it is very informal and breif, these are my personal notes but I thought I'd share it with you...

Theory of Production Decisions

Here is a short booklet I made to introduce some of production concepts in microeconomics....  

Theory of Production Decisions by Komilla Chadha

Insuring Against Bad Outcomes: Risks and Utilities

Here is a small booklet I created on risks and utilities, vital for understanding theory of consumer demand.Insuring against bad outcomes by komilla chadha
View more documents from KomillaC.

Economics of Information...

The Economics of Information: Communicating/Signaling
Usually in economic models like perfect competition or utility modeling we assume that perfect knowledge exists but this isn’t usually the case, there is uncertainty caused by information asymmetry and this is what this mini booklet or post will explore.
What do we call communication in Economics?
In economics when information is conveyed we call this signaling and signals must fulfill two characteristics if they are to happen between rivals or adversaries (we can already see how important this notion is especially in terms of game theory etc):
  1. The signal must be costly to fake. Essentially this characteristic is what it says it is, that it is extremely difficult to fake because it can easily be caught out or financially cost a firm. An example of this is Product Quality Assurance.
  2. If the signal conveys information which is favorable for the firm then this automatically reveals information about the other firm even if it is not favorable information. This characteristic linked to the full-disclosure principle which states that firms are often forced to reveal unfavorable information about themselves because their silence can be taken to mean much worse. I guess this characteristic is more conditional on the content of the signal.
A bit of background...
The economics of information is arguably a new genre of economic study which has become popular largely due to the creation of the world wide web in 1973. The market for lemons was a piece written by the Nobel laureate in Economics, George Akerlof who talks about the market of used cars (lemons) and how the existence of inferior goods destroys the market for quality goods , this is caused by information asymmetry. Ultimately, it is up to the plum (good quality car) owner to signal to buyers using things like warranties to the consumers why their car is better. This signalling forces lemon owners to reveal information about themselves which is not favorable, bringing the full-disclosure principle into action.
I guess this example by Akerlof demonstrates why the study of information economics is so important, because ultimately such a situation can lead to unfavorable outcomes. The main two unfavorable outcomes most commonly discussed are:
  1. Adverse Selection - this is what can be seen in the market for lemons that the buyer risks trading with the less desirable trade partners as those are the ones who volunteer to exchange.
  2. Moral Hazard - Incentives such as insurance that lead people to file fake claims or be negligent in their care of goods.

Theory of Consumer Demand

This post will look at two models (Cardinal and Ordinal|) which explain why the law of demand is what it is. Theory of Consumer Demand by Komilla Chadha