Monday, 24 October 2011

Circular Flow Of Income

The Circular Flow of Income is an economic model which depicts how an economy on a most basic level functions.

Starting point...

We start by observing that two economic agents exist in any economy:

(i) Households- so they own factors of production such as land, labour capital and enterprise and demand goods and services

(ii) Firms - They use factors of production and turn them into goods and services because they seek rewards - which is not only money but recognition etc. 

Before we go on, you may be wondering what about government? Other countries we trade with? They are all valid economic agents but the whole point of economics is formulate simple models which allow us to experiment. So the Circular Flow of Income model is based on 3 assumptions;

(1) The economy operates with closed trade which means no international trade exists 
(2) No government exists 
(3) No economic agent saves, any money received will be spent. 

We will see in a short while what actually happens when these assumptions are removed. But for now let me explain how the two economic agents (firms and households) are engaged in this model.

What happens is household they own factors of production which firms demand in order to produce goods and services. So a trade takes place, households sell land for rent; labour for a wage; capital for interests, profits and dividends and finally; enterprise (by which I mean entrepreneurial skill) for recognition and a salary. This is demonstrated by the two arrows shown on the diagram. 

On the other end firms sell these goods and services to households in return for a payment which if provides sufficient revenue not only encourages a firm to keep on producing but attracts more firms into the industry. 

It is important to note two things. In some place this model is depicted with four stops in the circle firms, households, market for goods and service and market for factors of production. These markets simply denote that a trade is taking place between some form of money and goods and services/factors of production. 

The second thing to note is that these arrows are incredibly important when we look at more serious models of the Circular Flow of Income. For example, the goods and services one can denote national output and rent/wage/profit one can denote national income.

So now to make the model more realistic. In reality we know that the three assumptions (no government, international trade and savings) are incorrect albeit at different levels and powers in different countries. But we do know they exist and they come under what we term in economics as leakages and injections. Leakages and Injections are external sources which either bring money in or out an economy.

So injections are external sources whereby money is gained in an economy and there are three of these which can be remembered by the abbreviation GXI - Government Spending, Exports (foreign money) and Investment. Leakages conversely are SMT (senior management team) Savings, Imports and Taxations. They are merely opposites and we can add an additional arrow to show these and make the model more realistic.

I hope this helps! 

Monday, 17 October 2011

The 3 Types of Elasticities for PED

Price Elasticity of Demand (PED) can look like one of the three graphs shown below: 

So what is the diagram above?

The diagram above shows the three different shapes you may expect to see a demand curve - remember that a demand curve can look like anything though. As I say in my theory of demand video, theoretically demand could even be upward sloping if for example we are looking at an antique painting or designer handbag where as price increases so does the demand. 

What different PEDs do the demand curves represent?

D0 - This represents the standard demand that most products have which is that demand falls from the highest prices the curve is elastic. This is because when prices fall more people are able to afford it (income effect). Then as we go to that bendy bit in the middle (sorry to write in such an informal manner) we see unitary elasticity where the percentage changes in demand are equal to the percentage changes in prices. The last vertical but shows inelasticity. When prices are low to begin with there is a limit to how much demand can increase when prices fall further. Compare the difference when a price falls from £20 to £10 and that of £2.50 to £1.25. 

D1 - This is an absolutely inelastic demand curve. No matter how much price changes demand is not affected. This is a more theoretical concept than one that exists in real life. An example of a good which has almost zero elasticity like this curve is the class A drug Heroin. No matter how much price increases demand is not likely to be affected because people are addicted and are prepared to pay the premium. However, even the demand for heroin is not absolutely inelastic simply because the price will affect the demand from those who want to try the drug for the first time. [Please note I am not trying to encourage drug abuse - I'm simply using it to prove a point] 

D2 - This is the opposite to D1. This is an infinitely elastic demand curve. What this means is that any changes in price will kill all the demand as demand is only present for that particular price. Again this is a more theoretical abstract concept than one that actually exists in real life. For example, a good may be valued at £5 and any increase even £5.01 will kill demand 100% because people are not prepared to pay even a pence more. It is the same if the price were to fall to £4.99. The demand is absolutely elastic meaning that it is 100% affected by changes in price.


- The term equilibrium refers to the point at which demand = supply. 

- It is believed that if you leave markets to their own devices, this will result in a market performing at an equilibrium level. This is based on the assumption that all other things are equal (Ceteris Paribus) such as that perfect competition exists in the market place. 

- We can clearly see from any demand and supply diagram that if we operate at a price higher than the equilibrium price than this will result in excess supply. This is because if you look at the x-axis you can see that quantity supplied is greater than quantity demand. It is obvious from my other post that the reason for this is that as price increases less people are able  or willing to afford the good. 

- Similarly, if a market operates at a price lower than that of the equilibrium price then this will result in excess demand. This is because again if we looked at a demand and supply diagram we can clearly see that the quantity demanded is greater than the quantity supplied. I can think of a great example to reflect this imbalance, when Topshop have a sale the price of their goods is reduced, the demand for sale products is great but the amount of goods that are available (the pretty ones that is) is very low. This results in people having their demand not met. 

Important to note: That all movements along the curve are down to price changes. All shifts are down to non-price determinants such as weather, tastes, incomes, price of substitutes and complements etc. 

Monday, 23 May 2011


In this video I discuss causes, consequences and way to measure unemployment.

Sunday, 15 May 2011

Peter Singer

Peter Singer and Preference Utilitarianism
What Singer essentially says that actually pleasure, whether higher or lower, is not the most important things, the interests of the individual are. Even though he believes that all humans do not possess equal worth, he says that everyone’s interests are equal. Essentially when make a moral decision we need to way out what action will result in the most interests being satisfied.
Three examples
Murder would be wrong because the person’s interest of being alive is not be met and is being overrun by the murderer’s interests . However, on the same basis voluntary euthanasia is moral because it satisfy the interest of the individual requesting it - even if they are not thinking straight. 
He would say that racism is wrong because of two reasons (i) fails to acknowledge the interests of the individual and (ii) gives greater value to the racists interests.
In this book Practical Ethics, Singer gives the example of a hydro-electric dam that is going to be built. He explores some of the interests that would be met and other violated as a result of this e.g. create jobs, provides cost effective power, destroy natural beauty, endanger species. He said by looking at preference we protect minority groups. 
In terms of medical ethics he is in favor of persoonhood and the Quality of Life argument. He says the Sanctity of Life is old and should not be used. He gives five principles which make the Quality of Life argument which he believes should replace the old Sanctity of Life argument and that is:
  1. All humans do not possess equal worth
  2. Only bring children into this world if they are wanted
  3. Respect one’s wishes to live or die
  4. Humans are not a superior life form to animals
  5. We should take responsibility for out actions

Saturday, 7 May 2011

Ethical Responses to Euthanasia

Act: Bentham would use the hedonic calculus to work out what the right thing to do is. Often in cases of euthanasia the pain is so great that Bentham would be for it as euthanasia is produces the greatest good for the greatest number.
Rule: Mill would agree with euthanasia because he held firm beliefs in the sovereignty of individual. He would however, look at each situation individually, e.g. Thomas Hyde who has the same condition as Steven Hawking ALS  would say that even though the body is dead the brain isn’t which is a higher pleasure and so the act of euthanasia would not be acting on the GHP.
 Singer - Singer was very much in favor of the QoL argument saying we should replace the outdate SoL principle with 5 new commandments:
  1. All humans do not possess equal worth
  2. We should take responsibility for out actions
  3. By saying humans are greater than animals we are committing specism 
  4. Bring children only in this world if they are wanted
  5. Respect a persons wishes to live or die
The last commandment particularly forces us to accept euthanasia as a morally permissible act.

In order to work out Kant’s response to the ethics concerning euthanasia we must explore how they would fit in with the three formulations of the Categorical Imperative.
1. Universalization
It would be absurd to say it is logical to universalize a law such as ‘I should help X die’ as that would imply that everyone is being helped to die. A claim like ‘ I should help X die if they are in  terrible pain and request to do so’ makes more sense if you are a Kantian and wish to embrace euthanasia. The problem is euthanasia is essentially form of suicide [assisted] and Kant gives the example of suicide being a perfect duty - something we should in no circumstances do.
2. Means to an end
By committing euthanasia we may be using the ill patient as a means to an end so we may be using it to cut costs, use the medical equipment etc for someone else, to be free of constantly visiting the hospital etc and Kant would say this is wrong. Some scholars however argue that euthanasia uses a person as an end in themselves because one is respecting their wishes. However, the problem is Kant clearly states that suicide is an immoral act and lists it as a perfect duty.

3. Kingdom of ends.
Here Kant says we should as though we were making the maxims into laws of nature and obviously euthanasia could not be a law of nature because it is unnatural and hence immoral.

Natural Law
Natural Law follows similar principles to the SoL principle. One of the primary precepts is to live - life the supreme good. This implies that secondary precepts which are absolute can be formed such as do not kill or commit suicide. As euthanasia is clearly a form of killing or suicide then Natural Law ethicists would be against it. However, it isn’t as absolute as Kant because the principle of double effect exists. If you overdose a patient with morphine with an intention to reduce pain and suffering but the by product is death - this can still justify euthanasia.

Situation ethics
A Christian God is personal one hence each situation should be looked at personally bar an legal rules and regulations. In many of these situations the most loving thing to do is to commit euthanasia and hence euthanasia can be accepted as a situation ethicist.

Religious Ethics
  • Job “God gives and God takes away”
  • Countless passages on SoL 
  • The body is the temple of the Holy Sprit 
All these hint towards a case against euthanasia
They see abortion and euthanasia as murder and hence it is immoral.
They believe in the strong SoL principle.
Church of England
  • Weak SoL
  • Recognises that in some situations it is necessary
Salvation army 
Direct challenge to Mill because they believe in the sovereignty of God.

The Right to Life and Euthanasia

Arguments for euthanasia
The Right to a Life 
As part of our lives we have a human right to live, this is also identified by most ethical theories such as Natural Law and Kant’s deontological theory of ethics. Dying is a part of living so the right to life prescribe a right to die. This means that people should be able to chose when to die and hence voluntary euthanasia should be allowed.
Just like we have a right to live, we also have a right not to be killed as it conflicts our right to live. This implies that other forms of euthanasia are perhaps immoral and dangerous. So there is a right not to be killed (taking life) but there is no right which says one must be saved - implying that passive forms of euthanasia are acceptable too.
It is easy to argue that active euthanasia is immoral because it is essentially killing but James Rachels (American philosopher) argues that passive was much worse. He says this is because it is long and drawn out, it brings about more suffering than necessary for the sane result - a dead patient.
Many people are frightened of accepting euthanasia because they believe it is a slippery road towards devaluing people’s lives. However, if we look at places like Netherlands and Switzerland where euthanasia is practiced the value of life is not low, not like Nazi Germany! Helga Kuhse (an Australian utilitarian and bio ethicist) advocates this view.
Patient autonomy 

John Stuart Mill would support voluntary euthanasia as he supports the argument that people should have a right to make their own decisions even about death.