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Economic factors Economic factors

Structure Economics Microeconomics Supply and demand Cost behaviour Macroeconomics Market types Business activity Policy Structure Economics Microeconomics Supply and demand Cost behaviour Macroeconomics Market types Business activity Policy options Specific policies

Microeconomics CONSUMERS FIRMS INDUSTRIES Microeconomics CONSUMERS FIRMS INDUSTRIES

Equilibrium 9 Supply/Demand 8 demand supply 7 6 5 4 3 2 1 0 Equilibrium 9 Supply/Demand 8 demand supply 7 6 5 4 3 2 1 0 2 4 6 Price

Price elasticity of demand % D % P Price elasticity of demand % D % P

Example Period Quantity of demand (loaf) Price (rub) Last month 3000 10 Next month Example Period Quantity of demand (loaf) Price (rub) Last month 3000 10 Next month 2700 12

Elastic/inelastic PED Description Illustration <1 Relatively inelastic Necessities (bread, milk, salt) =1 Unit elastic Elastic/inelastic PED Description Illustration <1 Relatively inelastic Necessities (bread, milk, salt) =1 Unit elastic Product of unit elastic >1 Relatively elastic Not essential ( computer, car, holiday)

Factors affecting PED Availability of substitutes Amount of income spent on the product or Factors affecting PED Availability of substitutes Amount of income spent on the product or service VS Necessity of the item Duration of the change in price

Cost behaviour Short term Long term law of diminishing returns AC AC diseconomies of Cost behaviour Short term Long term law of diminishing returns AC AC diseconomies of scale SRATC LRATC Output

Types of markets perfect imperfect monopoly Types of markets perfect imperfect monopoly

Types of markets Type of market Barriers to Producers entry Price Perfect low none Types of markets Type of market Barriers to Producers entry Price Perfect low none many homogenous Monopoly fixed high one Product

Factors affecting business activity Confidence Consumer Investments spending by firms Aggregate demand Education advances Factors affecting business activity Confidence Consumer Investments spending by firms Aggregate demand Education advances Exchange rates Capital New technology Exports Government & Imports spending Government policy

Trade cycles Peak Expansion Recession Trough Trade cycles Peak Expansion Recession Trough

Economic growth: problems • Growth may be through exploitation of the poor • Growth Economic growth: problems • Growth may be through exploitation of the poor • Growth may be at the expense of the environment • Gap between rich and poor may grow • Rapid growth “sucks in” imports

Inflation and unemployment • Inflation causes uncertainty and stifles investment • Not all the Inflation and unemployment • Inflation causes uncertainty and stifles investment • Not all the incomes rise with line with inflation • Unemployment restricts economic growth • Rise in crime, poor health, etc

Balance of payments • Long-term deficit slows down economy • Long-term trade surplus can Balance of payments • Long-term deficit slows down economy • Long-term trade surplus can cause rise of inflation

How to stimulate growth Running A deficit Cutting interest rates Economic growth Affecting on How to stimulate growth Running A deficit Cutting interest rates Economic growth Affecting on supply

Forms of unemployment Cyclical Frictional Structural Real wage Seasonal Forms of unemployment Cyclical Frictional Structural Real wage Seasonal

How to reduce the level of unemployment? ↓AD ↓r ↑G Monetarists UE and Inflation How to reduce the level of unemployment? ↓AD ↓r ↑G Monetarists UE and Inflation can coexist Keynesians Free up ↑S ↓UE UE and Inflation can not coexist

Imperfections in the labour market Workers have: • wrong skills • wrong place • Imperfections in the labour market Workers have: • wrong skills • wrong place • inadequate info • immobility Natural Rate of Unemployment (NAIRU)

Types of inflation Demand-pull • Demand is growing faster than supply Cost-push • Cost Types of inflation Demand-pull • Demand is growing faster than supply Cost-push • Cost of factors of production increases Imported Inflation • Weakening currency increases cost of import Monetary Inflation • Over expansion of money supply Expectations effect • Anticipated level of inflation determines the future inflation

Balance of payments Current Account Capital & Financial Account Balance of payments Current Account Capital & Financial Account

Balance of payments deficit 1. Reducing overall demand: ↓demand for import ↓ Inflationary pressure Balance of payments deficit 1. Reducing overall demand: ↓demand for import ↓ Inflationary pressure ↓export prices ↑ Unemployment 2. Increasing interest rates: ↓ demand for import ↓ investment currency strengthen ↑export prices Expenditure-reducing strategies 1. Import controls: a)Direct b) Exchange controls 2. Boost export: a)Subsidies b)Export credit guaranty 3. Lower the exchange rate: a)Devaluation b)Depreciation Expenditure-switching strategies

DEFICIT Income>expenditure SURPLUS Income=expenditure BALANCE DEFICIT Income>expenditure SURPLUS Income=expenditure BALANCE

Budget deficit Injecting money Government • economic growth • reducing unemployment Economy Budget deficit Injecting money Government • economic growth • reducing unemployment Economy

BUDGET SURPLUS reducing aggregate demand BUDGET SURPLUS reducing aggregate demand

Monetary policy options Government use: • • changing interest rates • trading in foreign Monetary policy options Government use: • • changing interest rates • trading in foreign exchange markets setting reserve requirements for banks

Instruments of monetary policy reserve requirements interest rates Instruments of monetary policy reserve requirements interest rates

Interest rate ere on ey int ET ON RK TI A M EAC R Interest rate ere on ey int ET ON RK TI A M EAC R m st rat es m on ey su pp ly m de d an

Reserve requirements O K S TI A B C IA L ER M M Reserve requirements O K S TI A B C IA L ER M M O C O F VE S ER LY ES PP SU R Y NE MO R VE ER ES N A R

Open market operations m on GOVERNMENT ey i n PEOPLE cir cu lat io Open market operations m on GOVERNMENT ey i n PEOPLE cir cu lat io n bonds cash

Expansionary and contractionary policy Contractionary policy Expansionary policy % UE % Inf. Expansionary and contractionary policy Contractionary policy Expansionary policy % UE % Inf.

The classic view Supply • Do nothing Demand • Leave it alone The classic view Supply • Do nothing Demand • Leave it alone

Keynesian view There are equilibrium points which didn’t necessary involve full employment Concept is Keynesian view There are equilibrium points which didn’t necessary involve full employment Concept is based on the management of the aggregate demand

The monetarist view I’m from Government. I’m here to help you! Market imperfections: • The monetarist view I’m from Government. I’m here to help you! Market imperfections: • • • inflation; government spending and taxation; price fixing; minimum wage agreements; regulation of markets; abuses of monopole power.

Fantastic Four Irina Borodina Olga Gnutova Mary Levkova Pavel Troshenkov Dmitry Stiran Specialists in Fantastic Four Irina Borodina Olga Gnutova Mary Levkova Pavel Troshenkov Dmitry Stiran Specialists in Anchorman Microeconomics Economic Policy