David Smith- 'Free Lunch' (Pt. VII- On Markets, Costs, and Competition)

 

The next chapter is all about businesses and how they operate in the market system. Smith first outlines the differences between fixed and variable costs and some examples of both of them. Variable costs are those which increase with output (e.g. wages), whereas fixed costs are constant, regardless (e.g. depreciation of capital investment). From his discussion of costs, he moves to ‘economies of scale’ which is the phenomenon in which average costs and marginal costs first decrease, and then increase with growth (although, the diagram to the left shows them as slightly different, as marginal cost is the cost per EXTRA unit, rather than MEAN cost per unit produce in total). He then enters an analysis of how monopolies (or oligopolies when there are a few companies that dominate the market in a cartel-like system) and competition affect the (sub-) market that they are in. He explains that due to the ability of monopoly-holders to become inefficient and ‘bloated’ under no competition means that prices may rise due to inefficiency and be artificially inflated to gain ‘supernormal’ profits. Competition is then discussed as the utopian alternative to a monopoly citing the internet as an example of where competition is almost perfect.  Anybody with and internet connection is able to set a firm be it: B2C (business to customer), B2B (business to business), or B2G (business to government). The markets of ‘e-tailing’ also, very rarely have information failures as people can simply search for what they need. From this Smith leads on to a brief introduction to ‘Game Theory’ and how it can be used to predict (to a fair degree of accuracy) what households, firms, or governments are likely to respond to stimuli. This is particularly useful when assessing ‘flows’ and ‘colours’ of stock markets. To finish this chapter of the book, Smith goes on to discuss both capital investment by firms and the ‘stakeholder model’ that can be used in social cost-benefit analyses. He once again touches on depreciation, opportunity costs, and government investment and how they all are so closely interlinked.

Hey guys,

Just wanted to say that I'm going to start adding more different types of content for those who are perhaps studying Economics, or for those who just enjoy its study- don't worry, though as this won't mean I stop posting about the books I read and enjoy!

Keep an eye out,
K

David Smith- 'Free Lunch' (Pt. VI- On David Ricardo and John S. Mill)

Ricardo, a contemporary of Malthus, was one of the most revolutionary thinkers around the subject of international competitiveness with his ideas of both absolute and comparative advantages which can be demonstrated in PPF diagrams (see right)- he is world renowned for being the richest economist ever to live “in a profession that throws up relatively few millionaires”. For the example here, although China may have the absolute advantage (in that it can produce more cloth AND more shoes), it should produce at the point where it has the comparative advantage, as should India. This is because, if India is already better at making shoes than cloth, making more will simply make them more efficient and able to produce more, and vice versa. From this, Ricardo laid the foundations for some of the strongest arguments for free-trade. Smith then notes how important Ricardo’s ‘corn model’ was to Karl Marx in his development of both Capital and The Communist Manifesto. In this, one of the first major econometrical models, Ricardo concluded that the long term economic prospects for the world consisted of ‘Landlords’ gaining at the expense of the workers, leading to the eventual degradation of the economy as a whole (the last bit was mainly Marx, though).

Mill - as one of the great popularisers of economics- had his textbook Principals of Political Economy used as the standard text for economics students for the latter half of the 19^th Century, which in tandem with his edited version of Jeremy Bentham’s On Evidence, laid the fundamentals for what was to become the cost-benefit analysis from the idea of utilitarianism. Utilitarianism is the school of thought in which everyone can end up in a ‘Pareto’ (after French economist Vilfredo Pareto) situation in which nobody can end up better off without making others worse off.

Hey guys,

Apologies for the winter hiatus- you know how busy it gets! I hope you all had a great break, and are ready for some  more regular updates with some more progress from both my 'Free Lunch' review, and some other stuff that I've been working on in recent weeks. Also, for those studying A-level economics, I shall be producing some tips on how to answer questions and essays, alongside some other general essay writing tips!

Stay classy,

K