Author: Marjan Arbab

Malthusian and Food Crisis Theory

A shot summary of Malthus Food Crisis: Thomas Malthus (1766-1834) published An essay on the Principle of Population which was considered to be the most influential book of its era. Where Matlhus has its central point over the law of diminishing Returns. A law that States that Use of Additional Inputs while other being fixed will eventually decrease the output. Informally speaking what Malthus believed was that the worlds limited amount of land would not be enough to supply food as the population grows in future. He showed that both the Marginal Product and the Average Product will Fall and as a result there will be starvation. What later happened was that there could have been starvation in future if only there were no technological improvement. People would have been using Subsistence living as they had before. But Malthus Statement could NOT be considered true because of factors like : High Yeilding seeds Disease resistant strains of seeds Better Fertilizers Harvesting Equipment And other technological improvement brought about more profitability and opportunities in the agriculture growth. Further more, Green revolution brought great influence over the developing countries to overcome there low Agriculture production problems. Evidentially the world bank data shows a clear increase in productivity yet hunger remains a severe problem such as Shel Region of Africa, because of low productivity of labor that consequently leads to lower total...

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Production Function

A production function indicates the highest output Y that a firm can produce for specific combination of input. We have many factors of production used as inputs but for simplicity we will focus only on labor and capital as a factor of production. Keeping this assumption we can write the production function as : Y=F(K,L)  This equation shows that the output Y, relates to the quantities of inputs of Capital K, and Labor L. Additionally it is important to know that Inputs and Outputs are both FLOWS. The Short Run Versus the Long Run SHORT RUN: It takes time for firms to increase their output. Probably because they would require new plants to build or add extra machinery and some other capital  ! And such activities can easily take a year or more to complete. As a result firm do have constraints for many reasons when thinking about increasing their production. Such a constraint in a factor of production that remains fixed or cannot be changed is considered to be the SHORT RUN period of a firm. That unchangeable factor is called the FIXED INPUT. LONG-RUN: It is a period when a firm is able to change all of its factor of production easily. Or the amount of time needed to make all production inputs variable. Now there is no hard and fast rule for distinguishing the short run...

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Production Decisions of a firm

Now we have demand side of the market and the supply side. From the word supply we do understand very easily that we are going to discuss about the or examine the behavior of Producers. We will see how firms can produce efficiently and how their costs change with the change in their input prices and the level of output. This all is a part of Theory of a firm which describes how a firm makes cost minimizing production decision and how the firm’s resulting cost varies with its output. Consider some of the issues or problems faced by the company. For example how much labor should be used by an automobile company? If it wants to increase production , should it hire more labor, construct new plants or both? does it make sense to produce more different product than the existing one ? how these costs effects the level of production or output ? etc. Let us break down the production decision of a firm into three steps : Production Technology Consumer constraints Input Choices Production Technology: The requirement of a practical way in describing the how the INPUTS (land, labour, capital) is transformed into Output (cars, tv, computer etc). Just as the buyers reaches to a certain level of satisfaction by buying different combination of goods, the firm can produce a particular level of output by having...

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Network Externalities

Much of what basic microeconomics discusses is that a demand for a good is independent of somebody elses demand for that same good. For Example,  Adam’s demand for a new car depends on Adam’s tastes and income, the price of the car and perhaps the price of other automobile companies in substitute. But it does not depend upon awais or sarwar’s demand for a car.  This assumption has enabled us to obtain the market demand curve simply by summing individuals demands. However, for some goods one persons demand also depends upon the demand of other people. Lets say, the demand for a particular product by a person is just because other people are also demanding it. So there is a possibility that Adam is demanding a car just because all his other colleagues have it . And if this is the real scenario than there is the presence of NETWORK EXTERNALITY. Types if network externality Network Externalities can be of two types Positive and Negative Network Externality A positive network externality exists if the quantity of a good demanded by a typical consumer increases in response to the growth of purchases of other consumers. See the above example of Adam , which is positive externality. He is demanding it just because others are buying it for themselves. And if the quantity demanded decreases then it is a negative Externality....

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Income and Substitution Effect

A fall in the price of a Good has two effects: Consumers will buy more of a good that is cheaper and less of the good which has become expensive. This consequence to a change in the price of a relative good is called the Substitution effect. Secondly When a good become cheaper, consumers are pleased with their increase in their real purchasing power . Because now you are buying the same quantity at a lower price. This is the INcome Effect. By definition: Substitution Effect: Change in consumption of a good related to the change in its price , with the level of utility held constant (Off course! if your eating more than you did before just because the prices fall than its different ). Income Effect: Change in consumption of a good resulting from an increase in purchasing power with relative prices held constant. Normal Good: If consumption of that god increase due to a decrease in it price than it is a normal Good. Inferior Good: A good is inferior if there is a decrease in the consumption of that good. This means that the income effect is negative. Giffen Good: The Special Case These are good whose demand curve slopes upward because the (negative ) income effect is larger than the substitution effect. if incase one good becomes inferior than you tend to buy more...

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What is Economic Growth ?

Economic Growth Takes Place when There is Increase in the national Income of a Country Or Increase in Country’s Productive Capacity To understand the concept of Economic Growth, we use many tools like that of the  Production possibility Curve. Let us first describe this simple concept : Production Possibility Curve The PPC represents a Boundary in  the sense that it shows the current availability of resources and technical knowledge, a country cannot produce beyond its potential capacity. So the PPC is therefore a Short Run Diagram; in the long run the PPC can be increased. So it is shifted forwards or rightwards. It is generally considered that country’s PPC curve Shifts forward but there are certain possibilities that it may go leftwards. For Example: Countries that are going through warfare, Lets take Afghanistan whose Aggregate Demand decrease to a very high level during the war period and even after the war. We can also take another example of Revolution as in the country of Iran during the Khomeini revolution which flew a lot of foreign investment and a decrease Aggregate Demand during his regime. Such factors of war, natural disaster or war basically affects the factors of Consumption, Investment and Government Expenditure that as a consequence affects the Aggregate Demand which slows down the economy. Graphically describing the PPC The Above Graph shows all the possible combinations of two...

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Financial Crisis of 2008 and 2009

In 2008 the United States went through a Financial crisis. Many of these events were said to be the reflections of 1930’s great depression that brought fear to many individuals considering it’s a severe downturn in economic transactions and rapid rise in unemployment. Rise in Housing Market and Lower Interest Rate Now the scenario of Financial Crisis begin a few years earlier with a substantial rise in housing market. This rise was due to many factors one of which was the low interest rates. Theoretically lower interest rates are usually for recovery of Economy, but by making it less expensive to get a mortgage and buy a home, they also contributed to a rise in housing prices. Subprime Borrowers and Securitization In the mortgage market, the Subprime Borrowers are those with a higher risk of default on the basis of their income and credit history. Due to the Developments in the mortgage market, the subprime borrowers were easily able to get mortgages and buy homes.One other development was Securitization “ A process which practices the pooling of various types of contractual debt like residential mortgages, commercial mortgages, auto loans etc and than this pooled debt as securities to investors. Now securities backed by mortgage receivables are called Mortgage Backed Securities. “ Some Government policies encouraged this high risk lending to make the goal of home ownership more attainable for...

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Price Index

Price Index A Price Index is a measure of the average level of prices. So when we see a news on the TV that “Inflation is rising”, they are really reporting the movement of a Price Index. A price index is a weighted average of the price of a basket of goods and services. Which means that when price indexes is calculated , policy makers weight individual prices by the economic importance of each good. In other words , its just like when you buy a household product which has a higher priority than the rest of the other products so does the price index do by taking weighted average by the importance of that product. Now the most important price indexes are : Consumer Price Index (CPI) Producer Price Index (PPI) GDP Deflator Since we have already discussed GDP deflator in our earlier posts. Let us now describe the Consumer Price Index, Consumer Price Index (CPI) The most common and widely used measure of the overall price level is the consumer price index. The consumer Price Index is the measure of the average price paid by the buyers for market basket of consumer goods and Services. Remember Consumer Goods and Services. For example in United States, the government record the prices of around 80,000 goods and services for more than 200 categories. Than the prices are arranged in...

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Business Cycle

One important factor of business fluctuations is changes to aggregate Demand. Like I said before, any changes made to consumption, investment or government expenditure will change aggregate demand which as obvious will have fluctuations in Business cycle. Though we are having a combine topic of business cycle and aggregate demand. Let me first explain the basic elements of what Business cycle or fluctuations are: Definition of Business Cycle With reference to the book of Samuelson “Business Cycle are economy-wide fluctuations in total national output, income and employment , usually lasting for a period of 2 to 10 years, marked by widespread expansion or contraction in most sectors of the economy.” Phases of Business Cycle There are two main phases of Business cycle: Recession Expansion And two turning points Peaks Trough Recession is downturn time period from 2 to 12 months. Economically speaking, a decline in income, employment and total output . If Recession last longer than that, it is called Depression. In the business Cycle graph above we can see that the contraction part is basically the situation which goes through the time period of Recession. Expansion is the progressive part of business cycle which can be interpreted as an improvement in the Income, Output and Employment. Peak and trough is the turning point in the cycle. Peak leads to contraction or recession and trough leads back to the...

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Shift Factors/Determinants of Aggregate Demand

Shift Factors of Aggregate Demand We have defined the aggregate demand in our last posts .Let us now discuss the factor that shifts the aggregate demand. In the most simplest way , any factor either external or internal that effects “Consumption, Investment or Government Expenditure” will shift the aggregate demand upward or downward. Now there are many shift factors that could possibly effect C,I or G. But one of the most important factors are the policy instruments of : · Fiscal policy · Monetary policy Fiscal And Monetary Policy The word fiscal come from the root word “FISC” which refers to the “Treasury” of a government. Fiscal Policy is one of the policy instruments of Macroeconomics that deal with  government spending and taxing policies.  Monetary policy refers to the maintenance and behavior of money supply , credit and central bank policies. We will further be discussing these two policy instruments  in detail in the upcoming posts. But the logic behind these being a shift factor of Aggregate demand is quiet simple. If Taxes are raised in Fiscal policy . This effect will lead to a decrease in consumption. Which as a result will Shift the Aggregate Demand curve downwards. Graphically:     Now lets have a look at the Effect of Govt Expenditure. An increase in Govt Expenditure will as a consequence lead to an increase in the investment...

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