Elasticity of demand

Elasticity is an extent to which buyers and sellers are responsive to change in market conditions. There are three elasticities which shows the responsiveness of the quantity demanded to a change in price of the product, that is Price Elasticity of Demand, change in income of consumers, that is Income Elasticity of Demand and change is price of another product, that is Cross Elasticity of Demand. 
Price Elasticity of demand helps to determine which of good is it. If PED is negative and less than 1, this is normal good and demand is not really responsive to a change in price and price is inelastic in this situation. If PED negative and more than 1, this is normal good and demand for it is responsive to a change in price, so price is elastic. If PED is positive, that means that there is a snob good or good of ostentation, that is when consumers’ demand increases as price of the good rises. 
The determinants of PED are:
 the availability of substitutes: if there are any goods that can be alternative for a particular product. Generally, the greater the amount of substitutes, the greater chance that price will be elastic for the product;
the expense of the product with respect to the income: if the product takes a big proportion of income, then it is more likely that price will be elastic for it.
Time: sometimes changes in prices don’t affect demand, because consumers have to have time to understand whether it is still worth buying this good or better to switch on substitutes;
Habits: for some products, such as tobacco or alcohol, price is usually inelastic, because if people are addicted and can’t give up, they will still buy products even if prices rise.

Income Elasticity of Demand also helps to determine the kind of product and often YED is positive which means that good is normal, and as income of consumers increases, demand for this good will also increase. And again if YED less than 1, demand is income inelastic and not responsive to a change in income and if YED more than 1, demand is income elastic. 
Sometimes YED can be negative which means that this is an inferior good and as income rises, demand for this good will decrease. Examples of inferior goods are supermarket’s own-label products or just some cheap products.

Cross elasticity of demand shows the relationship between two different goods and determine whether they are substitutes of complements. Positive XED shows that two products are substitutes: as price of one good rises, demand for another product will rise, e.g. apple and banana. The higher the value of XED, the closer substitutes they are and visa versa. If XED is negative, two goods are complements: if price for one product rises, demand for another product will fall, e.g. petrol and cars.

Economic growth is increase in total output in the short run and increase in productive capacity in the long run. One of the objectives of governments is to have sustainable economic growth that is the growth which can continue over time. Sustainable growth helps to achieve trend growth that is expected increase in the output over time. There are many causes of economic growth in the short run and long run. Economic growth in the short run means that there is an increase in AD because of increases in components of it. For example, if there is a fall in the exchange rates, exports will be cheaper and more competitive and so the economy will have export-led growth. Or if government increased its spending on subsidies for firms, this means that prices might go down and consumption will increase. This leads to economic growth. In order to stimulate it government might use monetary or fiscal policies such as reduce interest rates or lower exchange rates, or reduce taxes, etc. In order to achieve long run economic growth government has to spend a big amount of money for supply side policies such as education or training, promoting new firms, because increase in productive capacity can be achieved through the increase in quality and quantity of labour, resources and improvements in capital goods.

Interest rates.

Interest rate is a charge for borrowing money and the amount paid for lending money. There are many factors that affect rates of interest such as national savings, AD and others. Central Bank set the base rate first and this rate varies. If an economy is overheating that is when AD increases more quickly that AS, in order to avoid demand pull inflation, Bank will set high base rates. Because if interest rate is high, people tend to save more in order to get benefits from greater dividends. If AD is relatively low, Bank will set low base rates and this will discourage people to save and their average propensity to consume will increase. 

There is a close link between rate of interest and exchange rate. If interest rates are low, that means that people from overseas are less likely to save money in English banks because they are not gaining a lot. As we know exchange rate is determined by supply and demand, therefore when demand for currency goes down, price decreases too, so consequently exchange rate for that particular currency falls.

Balance of payments.

Balance of payments is a record of flow of money coming in and going out of the country. Balance of payments consists of current account, capital account and net errors. Current account tend to play the most significant role and it includes trade in goods, services, transfer payments and income investments. Trade in goods is also known as visible balance, because there is a trade of real physical goods between countries, trade in services is invisible balance because it is a trade in education, information, health services. Investment income shows how much UK residents earn from their dividends, interests from abroad in comparison to income of foreigners from the country. And transfers are transfer of money made by government or individuals. Capital account shows the movement of direct investment such as loans and purchase of financial assets from abroad. Net errors section is aimed to ensure that balance of payments is balanced. 
There might occur current account deficit, which means that money outflow for buying imports are greater the amount of money coming into the country from exports. To reduce current account deficit, government might encourage exports by depreciating the currency or devalue, or discourage imports using different types of import restrictions such as quotas, tariffs, and so on. Capital account deficit occurs when government lent more money than received. To solve this problem government might increase interest rates and so it will get more money from dividends. 


Budget deficit.

Budget deficit arises when government spending exceeds taxation revenue. Why does this occur? Government spends it’s budget on providing public goods and services such as health, education, defense or intervening into free market mechanism in order to prevent market failure and subsidise prices. These expenses are covered by revenue from taxation. That’s why when budget deficit is rising, government might decide to increase rates of taxes or borrow money from other countries which will lead to a capital account surplus or increase rate of interest and so savings will increase and government will have more money in banks. 

Even if in the country there is no budget deficit, there might be some situations when government has to increase its spending for wars, protecting from terrorists and ets. That’s why it is very seldom when country experiences balanced budget that is government spending = tax revenue.

(was writing without notes, and maybe can have mistakes in my explanation)

Taxes

One of the ways of government intervention into free market mechanism is taxation. Government introduces a wide range of taxes in order to allocate tax revenue to various forms of government spending such as education, health, defense. Also government might consider to spend money from tax revenue onto buying capital goods which will generate greater benefits in the future. 
There are two main types of taxes: direct and indirect. Direct tax is a tax which levies on individual’s income. This tax people cannot avoid and paid by everyone who is employed. Income tax can be regressive or progressive. In Uk’s case it is progressive which means that it takes higher percentage from the income of the rich; in other words, as your income rises, percentage of tax will go up. However there are bands exist, that is when your income is higher than a certain amount of money, percentage of tax will not increase anymore and will remain the same. 
Indirect taxes that are taxes levied on goods and services are regressive. This means that tax will take a greater percentage from the income of the poor. Indirect taxes are widely used to discourage people from buying demerit goods or other goods and services that produce negative externalities. 
Indirect tax imposed on sales of goods and services generally is called Value Added Tax. Excise taxes are imposed on specific products producing negative externalities. They are usually take a big proportion in order to decrease demand for them. Corporation tax is levied on corporate profits; inheritance taxes are taxes on transfers of wealth above the certain amount; in the UK there is also Council Tax that is a form of taxation paid by residents to local councils in Egland, Scotland and Wales.

Inflation is a sustained rise in the price level over a period of time. There are two types of inflation: demand pull and cost push. Demand pull inflation occurs when there aggregate demand rises faster than aggregate supply. When firms work close to full capacity and can’t react immediately to increases in demand, this will push price levels up. Cost push inflation arises from the supply side: when there is an increase in costs of production, wage rates, for example, or raw materials, this will also affect prices and it is difficult to reduce this inflation. 
Inflation will affect others sectors of economy such as Balance of payments. With high price levels, exports will be less competitive and demand for them might decrease, this may lead to a budget deficit. 
Also inflation will affect value of money: purchasing power of money will fall and this will reduce people’s real income, which might lead to a decrease in aggregate demand. 
Inflation creates uncertainty about the future and affects business planning and investments. 
Those workers who have fixed income will lose as their average propensity to consume will decrease with higher prices.

Cost push inflation is more harmful as it usually more difficult to reduce it. Government might reduce corporation tax of firms or give them subsidies, however this would affect budget and might lead to a budget deficit. To reduce demand pull inflation, government could raise income taxes in order to decrease aggregate demand or increase interest rates, which means that people will save more instead of spending. 

Unemployment

Unemployment is a situation where people in the working age are out of work but are willing and able to work and get Job Seekers Allowance. There are different types of unemployment.
 Cyclical unemployment occurs because of lack of aggregate demand in the economy. Also this kind of unemployment is called demand deficient. It is usually associated with economic recessions when there is an inflation and economy works in spare capacity and there are many manufactures’ closures and thereby workers’ lay-offs. 
Fricitional unemployment rises when workers are in between jobs. For example, they moved to another area of living or they are graduates and just joined labour market. It takes time while they find appropriate job with a preferred salary. Government might use more information and improve trainings for workers in order to reduce frictional unemployment. However this type of unemployment is not so dangerous like others. 
Structural unemployment occurs because of decline in certain industry or substitution by capital goods of labour. Because of decline in particular industries such as manufacturing (coal, steel, etc.) usually lead to unemployment. However if government will improve its training programs for workers in order to give them opportunity to find job in another sphere might help to reduce unemployment.
Technological unemployment arises from advances in technology which usually leads to an increase in potential output. Measures to correct this type of unemployment are similar with structural. 
International unemployment might appear when some firms decide to move abroad and produce their goods there, and for them it would be cheaper to hire workers in that area; also if households will switch on buying imported goods and so demand for domestic goods will decrease and this will lead to unemployment. Government need to encourage more small firms in order to increase their competitiveness and demand for them. 
Also even if unemployed are those who want and able to work, there will an amount of people who would like to avoid work and live on Job Seekers Allowance. This hidden unemployment might occur because people have been out of work for a long time and lost their motivation and skills needed to apply for a job and they just give up seeking for a job. Also others may think that with their skills they will not be able to find a job with an appropriate salary and JSA is enough for them to live.
To measure unemployment different countries use their own systems. In the UK unemployment is measured by Labour Force Survey and claimant count, that is a measure of unemployment that includes those receiving benefits. However there are lot of difficulties with measuring unemployment such as whom to consider as unemployed because some people are actively seeking for a job but don’t get benefits; others live on Job Seekers Allowance but aren’t interested in finding job. 

Supply – side policies.

If monetary and fiscal policies are aimed to influence on demand, supply side policies are long run and aimed to increase aggregate supply. The main target of supply side policies is to increase potential output and achieve major economic objectives. 
Some supply side policies are designed to reduce government intervention in free market mechanism such as privatization or deregulation, where the former is to reduce government influence in market and increase competition between firms by transferring assets from public sector to private; the latter means removing rules and regulations that limit firms in free market. Deregulation can help increase competitiveness, increase efficiency and productivity. 
Other policies mean increase in government intervention in order to stabilize economic activity and correct market failure. They include education/training, encouraging infant industries, reduction in taxes and other benefits… if they are well thought they can all lead to an increase in capacity and move long run supply curve outwards. However all these policies might cost a lot of money for government.

Monetary policy

Monetary policies include Central Bank/government decisions on the rate of interest, the money supply and exchange rate. Monetary policies as fiscal can be two types: reflationary and deflationary. So both these policies are aimed to influence AD and its components. If government is seeking to increase AD, it is more likely to cut interest rates, because with low rates of interest, people will save less and so their marginal propensity to consume will increase, this will lead to an increase in a component of AD. Also low interest rates mean that it is cheaper to firms to borrow money and invest and so Investment is also might increase. With low interest rates foreign investors will not be interested in investing into the country because returns will be small and thereby this will make national currency less competitive and will lead to a fall in the exchange rates. With lower exchange rates exports will become more competitive and another component of AD might increase, while Imports will decrease because they become more expensive.
So, as we can see, monetary policies might influence all the components of aggregate demand and stabilize balance of payments by lowering or raising exchange rates. Another type of monetary policy is changes in money supply. By printing more money, government might make AD to rise, because people will have more money to spend. 

In the UK there is Monetary Policy Committee of the Bank of England which sets base rates with the main objective of achieving government’s target annual rate of inflation of 2%

Fiscal policy

Fiscal policy is a policy connected with government spending and taxation decisions. By using fiscal policies, government influence aggregate demand. It can raise AD by reducing income taxes, for example, and increasing government spending. AD consists of different components, such as Investment, Government spending, consumption and trade balance. If government decided to reduce corporation tax and thereby increase firms’ profit, it can affect Investment, because more firms would be able to invest. If government reduces income tax, disposable income of people will increase and this will lead to an increase in AD because of another component. Government might increase it’s spending on capital goods or public, create more workplaces and so, unemployment rates will go down and this injection is likely to have multiplier effect, causing AD to rise. 

But not all the policies are created to increase an AD, which is known as reflationary policy, sometimes government might decide to reduce AD in order not to have high inflation rates and reduce consumption of demerit goods. This policy is known as deflationary. By increasing taxes or reducing government spending government might achieve this objective.

There are two rules in the UK which government introduced by itself and has to follow them. One of them is ‘golden rule’ which states that government might borrow only for investment purposes. And so this borrowing in the future will be cancelled out by government surpluses arising from investment. Another rule is ‘sustainable investment rule’ according to which government borrowing should never exceed 40% of GDP. These are self-imposed rules however government shouldn’t break them because following them will give international markets confidence about the UK’s market.

labeling theory

Labeling theory which is also known as theory of social interaction was developed by sociologist Howard Becker. According to this theory, we can see changes in behavior and self-identity of the human influenced by the terms used to describe them by others. It was widely used in explaining criminals’ behavior; however this concept is suitable for pupils. Teachers usually are tend to classify their students more by subjective opinion rather than objective. There is a tendency that they label students from middle-class as bright and optimistic and so pupils from working-class as less able, lacking motivation and difficult to control. And usually these labels accompany students for a long time even if they don’t want it. This is because of concepts of self-fulfiling prophecy and stereotyping. Self-fulfiling prophecy is a “prediction that directly or indirectly causes itself to become true”. The concept of self-fulfiling prophecy was developed by Rosenthal and Jacobson when they showed in an example how this concept works: “They selected a random sample of 20 per cent of the student population and informed the teachers that these children could be expected to show rapid intellectual growth. They tested all pupils for IQ at the beginning of the experiment. After the year the children were re-tested and, in general, the sample population showed greater gains in IQ. In addition, report cards indicated that teachers believed that this group had made greater advances in reading skills.”
This example shows us how teachers’ relation and expectations can influence mind and future of the pupil. 

Stereotyping another important concept, according to which one who gets a label usually will be associated with this label and so if he was labeled as lacking motivation and with ‘laddish’ behavior, it would be very difficult for him to change people’s mind about him and more likely that he would continue to behave in a way he was labeled. However there are many exceptions and Margaret Fuller in her research tried to show that it is not always when students behave according to their labels: “In a study of a group of black girls in a London comprehensive school the girls resented the negative stereotypes associated with being both female and black. They felt that many people expected them to fail, but far from living up to their expectations they tried to prove them wrong. The girls devoted themselves to school work in order to try to ensure their success.”

Also labeling theory is strongly connected with streaming and setting. If somebody passed a test and was set to an ability group which is considered to be the brightest one, it usually will affect his progress. One of the researchers who were evaluating this idea was Nell Keddie. She as Becker argued that in schools there is a tendency of creating an image of ‘ideal pupil’ to pupils from middle-class: “Teachers perceived students from non-manual backgrounds as closest to this ideal; those from lower working-class origins as farthest from it.”
So as we can see, teachers have a big power in influencing on educational process of their students. And all these examples show that inequalities start already from school, when students with ‘low abilities’ from working class families deny schools and studying which are essential for educational future and their career..