The UK economy although viewed as a mainly capitalist economy has government spending taking up 35% of GDP. For the reason that the government pays for health, education, national defence etc. The overall economy is still perceived as capitalist as in the area of private enterprise companies are free to decide what to produce and for whom, and allows for an efficient allocation of resources. Although government intervention means there is a mixed of both planned and market economies.
In the real world, many economies which are viewed to have a capitalist economic system may have government spending taking up 35% of GDP. This is because the government pays for welfare, health, education and national defence. However, the economy is still viewed as capitalist because in the area of private enterprise firms are free to decide what to produce and for whom. (Tejvan.R)
Economic systems based around Capitalism allow for free enterprise and market forces, allocate people and resources to their best use. When profits are re-invested labour and capital become increasingly productive (Hawken,) Firms have to remain competive and productively efficient or risk going out of business, survival in a capitalistic system requires innovation and flexibility to keep up with the changes in supply and demand. Such a system is generally prepared to deal with the influx of competition from external sources and helps create dynamic efficiency, firms change and respond to demand and consumer trends. Any resource shortages that do occur bring forth the development of substitutes.
In a mixed market economy both market forces and government decisions which goods and serviced are produced and how they are distributed. It combines both the characteristics of a free economy and and command economy.
The mixed market economy allows the market to operate and the government to only intervene where the market fails. This means providing such services as law, healthcare and educated which would have been left un-provided by the free market. Public goods are consumed collectively by the market rather than individually so it is difficult to finance their supply through the market.
A greater free market economy is susceptible to boom and slump periods, such as those seen in the UK, it is argued that these downward cycles are built into capitalism. Marxists and others, such as Fredrick Soddy are certain that these crises are endemic to capitalism.
‘Anti- cyclical’ measures of state intervention help to mitigate conjucturual fluctuations. From as far back as the 1930 recession the Government has employed over time an increasingly strong influence on aggregate demand to prevent the boom and bust periods. It provides a growing number of jobs in the non-commodity area, regulates the growth of the social wage. It influences the level of economic activity by means of public sector contracts as well as other forms of intervention.
The government also regulates other problems of a free market such as monopoly power, which operate against public interest. ‘The Privatisation movement n Britain, which began in the Conservative Government in Britain in the 1980s provided force for economic regulation in the last 2 decades of the 20th Century’ (Select Committee of Regulators)
Most of the nationalised industries had monopoly power and retained that when privatised, regulation was needed to prevent abuse of that power, to bring in line prices and standards of service in that of a competitive market. Through government bodies created such as the office of Fair Trading and The Monopolies and Mergers Commission.
The private sector only takes into account their costs in producing goods, and not any negative externalities created, these costs to society such as pollution, noise etc. Government involvement and regulation accounts for these negative externalities which would no be considered with in a free market.
The government intervenes to assist in the correction of inequalities in income and wealth, a characteristic of capitalist economies. This is through the use of taxation system and the government expenditure; such as transfer payment, like retirement pension, sickness benefits and unemployment benefit. Some forms of taxes are relatively more progressive than others, such as Income Tax which take a higher percentage of income of the wealthy.
Some economists do argue that the inequalities in wealth and income provide incentives for us to work harder, conversely some believe governments should intervene more.
The financial global crisis has presented numerous challenges to the UK economy that the increase in the libor rate and the uncertainty of the climate meant many banks were not lending money, amongst themselves and amongst consumers. The fall of the Lehman Brother and Bear Sterns in the US, as well as problems faced to Northern Rock.
‘The Government injected tens of billions of pounds to help increase the liquidity. Banks were able to swap potentially risky mortgage debts for secure government bonds to enable them to operate’ (BBC news)
A lack of lending and decrease in consumer spending and confidence led to a fall in house prices and arise in inflation. In an attempt to kick start the housing market the Treasury introduced a one year rise in stamp duty exemption. Making houses more affordable in the hope of increasing the amount house sales. The Bank of England cut interest rates to their lowest in its 315 year history in an attempt to make mortgage lenders pass it on to consumers. Hoping again to increase house sales and prevent house prices further faller. This was important to the government as many home owners had fallen into negative equity and risked losing their homes.
The Governement announced a £37bn nationalisation of banks in a attempt to fight back from the financial crisis. Banks will effectively be state-run, with the Government-appointed board members put in place to ensure they once again begin lending to businesses and individual customers.
As demand decreased across all sectors, production decreased in line. This leading to many production industries being affected such as car manufacturers. As well as the production sector the retailing sector was also affected, consumer confidence has decreased and led to a decrease in demand across all retail, leading to the bankruptcy of many retailers such as Woolworth etc.
The government introduced further intervention tactic by temporarily lowering VAT from 17.5% to 15.% which was aimed at increasing consumer spending. This would hopefully increase demand in the retail sector and help save further retailers from becoming bankrupt.
During and economic slowdown business look to cut costs through many ways, one option is to make a reduction in the workforce. During the financial crisis unemployment has raised, the number of people claiming benefits is the highest since 1997, the claimant count has increased for 19 months in a row.
There has also been a decrease in the amount of people coming out of unemployment due to the reduction in the job market. More companies are becoming bankrupt creating more unemployment. Companies are not expanding as they may otherwise have done due to lack of capital so fewer jobs are being created.
Jobs across all sectors are being lost, in production the lack of demand has led to loss in jobs in areas such as car manufacturers. In the retail sector many retailers are going bankrupt due to a decrease in consumer confidence leading to a decrease in consumer spending. Due to the lack of available capital the construction sector has seen a considerable rise in unemployment.
White collar workers have also seen an increase in unemployment in sectors such as banking and finance, where companies cannot afford to pay overhead and look to cut costs and rationalise their business.
As the financial crisis continues and the unemployment rate continues to rise there are fewer jobs for an increasing amount of people. Consumer habits have chased, more consumers are deciding to save and be more conservative with their disposable income. Many households have been affected by the recession and unemployment directly so have seen less income coming into the household. Consumers may have been affected by wage freezes or wage cuts so have become more cautious with their income. Consumers are choosing to spend money on necessities and less on luxuries such as eating out, new clothes etc etc. Therefore demand has not increased and as such companies cannot begin to recover and create new jobs.
Consumers shopping habits have changed since the recession and there has been a fall in spending in the luxury goods area. Discount retailers have seen an increase in trade as consumers become more aware of how they spend their money. Consumers are more likely to switch brands in a recession and go for a more affordable option
Bigger items such as car sales have seen a drastic fall, along with the housing market, as consumers are cautious of and preferring to improve what they have, than make a large outlay.
In conclusion the UK has a mixed economy, developed through free market and global economy, which is regulated by the Governnment to prevent market failure.
The mixed market economy allows the market to operate and the government to only intervene where the market fails. This means providing such services as law, healthcare and educated which would have been left un-provided by the free market.
The government also intervenes to help regulate problems created by a free market such as monopolies and wealth inequalities.
The free market allows goods and services to be produced when they want, for who they want, and as such can respond to the demand and supply of the market. The government attempts to regulate the cyclical nature of the market. But in times of recession into also intervenes to solve challenged created in times such as the current financial crisis. Increased unemployment is a major challenge in the financial crisis, which affects consumer habits and the market as a whole.
Price Discrimination In India And The Us Economics Essay
Publishers have traditionally sold textbooks at different prices in different areas of the world. For example, a textbook that sells for $70 in the United States might sell for $5 in India. Although the Indian version might be printed in cheaper paper and lack color illustrations, it provides essentially the same information. Indian customers typically cannot afford to pay the U.S. price.
Use the theories of price discrimination presented in this chapter to explain this strategy.
The definition of price discrimination is the practice of charging different prices to various groups of customers that are not based on differences in the costs of production. In another word, a type product has been produced under same condition, same content, share the same cost, but it sells in different prices to different customers at different places, which in the context is the textbooks.
Price discrimination normally happened in segmenting market that varying price elasticity or price sensitivity of demand. As in the context example, U.S. customers are segmented as inelastic market whereas India customers are elastic market. It explained that U.S. customers will purchase the textbooks even it charged in a higher price, however India customers might refuse or unaffordable to purchase the higher price textbooks.
The purpose of price discrimination is to maximize the profit that has to do with consumer surplus. Consumer surplus is the difference between the total amount of money consumers are willing to pay for a product rather than do without and the amount they actually have to pay when a single price is charged for all units of the products. Refers to the Figure 1 below, the customer surplus is the area of P1AB.
As for the willingness to pay, the customers might not want to purchase the extra units of product where they think are not worth for it. Example, in India, there is plenty type of textbooks published by different publishers, why should the customers grab one of yours? Even your textbooks fit the customers’ wants, but the selling price might be too high for the customers that they think it does not worth that much for them to pay for. It is also the example of price elasticity in India market.
Basically, there are three theoretical models of price discrimination – first degree, second degree, and third degree price discrimination. For the context of textbooks selling in India and U.S. markets, it falls into the category of third degree price discrimination.
Third degree price discrimination is the most common form of price discrimination, where firms separate or segment the markets according to the price elasticity of demand and charge a different price for each market. Of course, the firms is charging a higher prices in the most inelastic demand market, which is U.S. and sells in a lower price in India that the market is more elastic or price sensitive in demand.
Since the U.S. market and India market has difference in elasticity and willingness to pay for the textbooks, the publisher segments the markets by charging U.S. market a higher price. Meanwhile, publisher charged a lower price in India market to increase or maximize its revenue.
U.S. market Quantity
India market Quantity
Figure 2On the other hand, if the publisher charged a higher price in India market as in U.S. market price, the India customers may unaffordable to purchase the textbooks or they are not willing to pay that much just for a textbook, where the textbook is not worth for what they are paying. Therefore, it would be a failure in India market if the publisher sells the textbooks in a high price as in U.S. market, which is shown in the Figure 2 based on the context example.
In the Figure 2, the right side is the demand of U.S. market and on the left is the India market demand. In order to further explain why it would be a failure to charge higher price in India market, it is drawn to shows that if the publisher charge $70 abroad all the market as in U.S., there is no demand in the India market. In order to maximize the profit, the publisher has to lower the price as like marginal revenue equal to marginal cost (MC=MR2) for the India market.
However, for the U.S. market that has the demand and the willingness to pay even in a higher selling price, it is an unwise decision to lower the textbooks selling price in U.S. market as what it charged in India market for the purpose of price standardization abroad. That is for sure the quantity in U.S. market will increase but it does not served the rules of profit maximization, where price at MC=MR1 should be charged in U.S. market that is $70.
If the publisher decides to sell this textbook online, what problems will this present for the pricing strategy? How might the publisher respond?
For the price discrimination segmented market, one problem need to be identified and managed by the firms, where the firms has to ensure or able to prevent the resale activity among the different groups of customers. Otherwise, the customers who are charged a lower price could be able to resell the product on hand to the customers who are in the higher price market segment.
Hence, if the publisher is going to sell the textbook online, it will probably have to set a single price, where it is typically the high U.S. price. It is a safe precaution step for the publisher to set in a high price that to assume the customers who order online are affordable and willing to pay even in high price. However, it would means that it will lose the India market who may not afford to pay for a high price textbooks.
On the other side, publisher might think of customization or product differentiation. For example, the publisher may amend the textbooks content such as the example in textbooks to use India currency, rupees instead of U.S. dollar. This “India” version can be sold together with the original “U.S.” version online with different pricing. One of the reasons is the India customers will feel more relevant to them that the example is in their currency and it can get in a cheaper price. However, the U.S. customers who has been charged for higher price would not tends to purchase the “India” version for a lower price as it is less relevant to their market and environment.
Another method would be using the technology. With the use of technology, the publisher may set the different price for different market, where price discrimination could be worked online. First, publisher may need the online purchaser to register an account for purchasing, where the purchaser need to fill in their particular that includes the country or location where the purchaser are stayed in. With the information gathered, the publisher can links the different groups of purchasers who come from different country or markets into different online order page and purchase with different currency. Meanwhile, the publisher can also limit the delivery of textbooks to the origin country that the purchaser registered. For example, if the purchaser is from India, the delivery will only be made to India.