Free economics revision

In a monopolistic firm, the marginal revenue (MR) curve lies below the average revenue (AR) curve at all units of output. This happens because, in a monopoly, to sell an additional unit, the firm must reduce its price not only for the additional unit but also for all previous units sold.
As a result, the marginal revenue, which is the additional revenue from selling one more unit, is always less than the price at which the additional unit is sold, causing the MR curve to lie below the AR (or demand) curve.

A perfect market structure (perfect competition) can be defined as a model where a large number of buyers and sellers trade similar products (homogeneous), with no price influence over the commodities, and are free to enter or exit the market.

Characteristics
i. Numerous Buyers and Sellers: There are many buyers and sellers in the market, none of which can individually influence the price of the product. The price is therefore determined by supply and demand rather than by the actions of any single participant.
ii. Homogeneous Products: The goods or services offered by all sellers are identical or perfectly substitutable (no differences in quality, features, or branding between products from different sellers).
iii. Free Entry and Exit: Firms can freely enter or exit the market without facing significant barriers or costs. This ensures that if there are profits to be made, new firms can enter the market, and if there are losses, firms can exit.
iv. Perfect Information: All participants in the market (both buyers and sellers) have complete and perfect knowledge of prices, product quality, and other relevant market factors. Thus, everyone makes decisions based on the same data.
v. Price Takers: Individual buyers and sellers are price takers (they accept the market price as given), and no single participant has the power to affect the price of the product, as it is determined by the aggregate supply and demand.
vi. No Externalities: There are no externalities (positive or negative) in a perfect market (the actions of buyers and sellers do not affect other parties outside the market, either in terms of costs or benefits).
vii. Mobility of Resources: Resources (such as labor and capital) can easily move from one industry to another, allowing for an efficient allocation of resources in the market.
viii. Profit Maximization: Firms aim to maximize profits, and in the long run, firms in a perfectly competitive market will earn normal profits (zero economic profit), as any excess profits attract new entrants, driving the price down.

Gross Domestic Product (GDP) includes the value of goods and services produced within the borders of a country, regardless of the nationality of the company owners. It focuses on domestic production, so if a foreign-owned company operates in a country and produces goods there, those goods are still counted in that country’s GDP.
However, Gross National Product (GNP) would include the value of goods and services produced by the country’s residents, regardless of where the production occurs, so it factors in the nationality of the company owners.

Market failure occurs when the allocation of goods and services by a free market is inefficient, leading to a loss of economic and social welfare.

Some factors that can lead to market failure in an economy include:
i. Negative and Positive Externalities: When the production or consumption of a good causes harm to third parties (e.g., pollution from factories or noise from construction), it leads to market failure because the costs are not reflected in the market price. When the production or consumption of a good benefits third parties (e.g., education or vaccination), the full benefits are not captured in the market, leading to underproduction of these goods.
ii. Public Goods: Public goods are non-excludable (no one can be excluded from using them) and non-rivalrous (one person’s use doesn’t reduce availability for others), such as national defense, street lighting, or public parks. The private sector has little incentive to produce public goods because they cannot easily charge consumers, leading to underproduction or lack of provision.
iii. Monopoly Power: When a single firm dominates a market (monopoly), it can reduce competition, set higher prices, and produce lower quantities than what would be efficient for society. This leads to allocative inefficiency and higher prices for consumers.
iv. Asymmetric Information: Market failure can occur when one party (usually the seller) has more information than the other (usually the buyer). This can lead to inefficient decision-making, such as in cases of “adverse selection” (e.g., when buyers cannot assess the quality of a product, leading to market distortion) or “moral hazard” (e.g., when individuals or companies take on excessive risk because they don’t bear the full cost of their actions).
v. Factor Immobility: Factor immobility refers to the inability of resources (such as labor or capital) to move freely between different sectors or regions in an economy. This can lead to inefficiency, as resources cannot be allocated where they are most needed, resulting in unemployment or underutilized capital.
vi. Inequitable Distribution of Income: While this doesn’t directly cause inefficiency in the market, it can lead to market failure when the distribution of income is highly unequal. In such cases, individuals with low income may not be able to afford necessary goods and services, leading to an underconsumption of certain products and services that could be socially beneficial.
vii. Imperfect Competition: Imperfect competition, such as oligopolies (few firms dominate the market), can lead to market failure by reducing competition, increasing prices, and reducing the variety and quality of goods and services available to consumers.
viii. Government Failure: Sometimes, government interventions aimed at correcting market failures can make things worse. For example, poorly designed regulations, excessive taxation, or subsidies can distort market outcomes and lead to inefficiency.

These factors highlight the complexity of achieving a perfectly functioning market system, and they often require government intervention to correct inefficiencies and promote social welfare.

The government imposes a price ceiling limit on the price of a good or service to protect consumers by ensuring that prices do not become prohibitively expensive (e.g., Rent control). An effective price ceiling creates excess demand coupled with a supply shortage. Since the producers are unwilling to sell at a lower price and consumers are demanding cheaper goods, deadweight loss (goods being produced despite the cost of doing so being larger than the benefit, or additional goods not being produced even though the benefits of their production would be larger than the costs)is created. If the demand curve is relatively elastic, consumer surplus will be net positive while the change in producer surplus is negative.

The general equilibrium theory indeed views the economy as a system of interdependent markets, where the supply and demand in each market are interconnected. This theory suggests that, under certain conditions (like perfect competition and the absence of externalities), all markets in the economy will eventually reach a state of equilibrium, where supply equals demand in all markets simultaneously.

The condition where marginal revenue (MR) equals marginal cost (MC) is necessary for profit maximization but not sufficient. A graph showing this involves two points where MR=MC, but only one represents the profit-maximizing output, where MC's slope is greater than MR's.

The Graph:
X-axis: Represents the quantity of output.
Y-axis: Represents both marginal revenue (MR) and marginal cost (MC), as well as price.
D: Represents Demand
S: Represents Supply
MC Curve: Typically slopes upwards, reflecting the fact that as production increases, the cost of producing each additional unit might increase.
MR Curve: Typically slopes downwards, reflecting the fact that to sell more, a firm might need to lower the price

MR = MC Condition (Necessary): The point where the MR and MC curves intersect is where MR = MC. At this point, a firm is neither making more profit by producing more nor losing profit by producing less.
(Marginal cost = change in total cost/change in quantity)

Profit Maximization (Sufficient Condition):
i. Not all MR=MC points are profit-maximizing: A firm might find MR=MC at two points, but only one of them will be the profit-maximizing output.
ii. To maximize profit, the MC curve must intersect the MR curve from above (i.e., the slope of MC must be greater than the slope of MR at the intersection point).
iii. If the MC curve intersects from below, the firm is at a point of minimum profit, not maximum.
Example:
Imagine a firm has two points where MR=MC. At the first point, the MC curve is still rising but at a slower rate than MR, so the firm could increase output and make more profit. At the second point, the MC curve is rising faster than MR, so the firm is at a point of minimum profit, not maximum. The profit-maximizing output is where the MC curve intersects the MR curve from above.

When Jane uses KES 5 million from her certificates of deposit (CDs) as a down payment to buy a house, this money is not serving as a medium of exchange in the context of her investments. Instead, it's being used as a store of value that she has saved and is now liquidating to make the purchase.

A medium of exchange refers to something that is widely accepted for buying and selling goods and services (such as money). In this case, Jane is using money to make the down payment, not the CDs themselves.

The marginal cost (MC) curve intersects the average cost (AC) curve at the lowest point of the average cost curve because of the way costs behave as output changes. This is because:
i. Average Cost (AC) is the total cost divided by the quantity of output. It reflects the per-unit cost of producing each item, on average.
ii. Marginal Cost (MC) is the additional cost of producing one more unit of output. It reflects the change in total cost when output increases by one unit.
Therefore:
• When MC is less than AC, the cost of producing one more unit is less than the average cost of the previous units. This causes the average cost to fall because the cost of the additional unit is pulling the average down.
• When MC is greater than AC, the cost of producing one more unit is greater than the average cost of previous units. This causes the average cost to rise because the additional unit is more expensive than the average of earlier units, thus pushing the average up.
• When MC equals AC, the average cost is at its minimum. This is because the marginal cost has just enough influence to stop either decreasing or increasing the average. At this point, the cost per unit is at its lowest.
Thus, the MC curve intersects the AC curve at the lowest point of the AC curve because that's the point where MC exactly matches AC, neither pulling it up nor pushing it down anymore.

The money supply in an economy refers to the total amount of money available for use in transactions, including currency, deposits, and other liquid assets.

The key determinants of the money supply include:
i. Central Bank Policies (Monetary Policy)
• Open Market Operations (OMO): The central bank buys or sells government securities to regulate the amount of money circulating in the economy. When the central bank buys securities, it injects money into the economy, increasing the money supply. Conversely, selling securities reduces the money supply.
• The central bank can set reserve requirements, which determine the proportion of deposits that commercial banks must keep as reserves. A lower reserve requirement increases the money supply as banks can lend more. A higher reserve requirement reduces the money supply.
• The central bank sets the interest rate at which commercial banks can borrow from it. A lower discount rate encourages borrowing and, in turn, increases the money supply. A higher discount rate has the opposite effect.
• In extraordinary circumstances, the central bank may implement quantitative easing, where it directly injects money into the economy by purchasing long-term securities, such as bonds, to stimulate economic activity and increase the money supply.
ii. Commercial Bank Lending (Credit Creation)
• Commercial banks play a critical role in the creation of money through their lending activities. When a bank lends money, it credits the borrower's account, effectively increasing the money supply (credit creation). The ability of banks to lend depends on the reserve requirement and the level of demand for loans in the economy.
• The demand for loans also affects the money supply. If businesses and consumers are more willing to borrow, banks lend more, which increases the money supply. In times of economic uncertainty or high interest rates, loan demand may decrease, reducing the money supply.
iii. Public's Demand for Money
• The public's preference for holding cash or deposits influences the money supply. If individuals and businesses prefer to hold more currency (physical money), the money supply in the form of bank deposits will be lower. On the other hand, if people prefer to keep money in banks and use electronic transactions, the money supply will be higher.
•  The need for money for day-to-day transactions (like buying goods and services) also affects the money supply. A rise in economic activity or inflation leads to an increase in the transaction demand for money.
•  People might hold more money as a precaution (to deal with uncertainty) or for speculative reasons (to take advantage of future investment opportunities). This can affect the total money circulating in the economy.
iv. Government Fiscal Policy: Government Spending and Taxation: Government fiscal policies, such as increased spending or tax cuts, can influence the overall demand for money in the economy. Increased government spending can raise the need for transactions, which may increase the money supply. Conversely, higher taxes could reduce disposable income, potentially lowering the demand for money.
v. International trade and foreign exchange transactions can affect the money supply.For example, if a country exports more than it imports, it may receive foreign currency, which could be converted into the domestic currency and thereby increase the money supply. Additionally, an influx of foreign investment (capital flows) can increase the money supply, as foreign investors exchange their currency for the domestic currency, raising the money supply in the economy.
vi. Technological Developments: Advances in financial technology (FinTech), such as mobile payments, online banking, and digital currencies, can increase the speed and volume of money transactions, effectively increasing the money supply as more transactions can take place with less physical money.

A good development plan typically has the following key characteristics:
i. Clear Objectives: Its objectives and goals should be specific, measurable, and achievable, ensuring all stakeholders understand what the plan aims to achieve.
ii. Sustainability: The plan should focus on long-term growth while considering environmental, social, and economic factors to ensure resources are available for future generations.
iii. Inclusivity: The plan should incorporate the needs and aspirations of all relevant groups, including marginalized and vulnerable populations, to ensure equitable development.
iv. Feasibility: The plan should be practical and achievable within the available resources, time, and capacity, taking into account local conditions and constraints.
v. Evidence-Based: The plan should use data, research, and analysis to inform decisions and prioritize actions, ensuring that interventions are grounded in reality and have a high likelihood of success.
vi. Flexibility: A good development plan should allow for adjustments in response to changing circumstances or unexpected challenges, ensuring it remains relevant over time.
vii. Community Participation: The plan should involve all Stakeholders, especially local communities, in the planning and decision-making process, thereby ensuring it aligns with their needs and priorities.
viii. Risk Management: The plan should be able to identify potential risks and challenges and include strategies for mitigating them to avoid setbacks.
ix. Monitoring and Evaluation: The plan should have mechanisms to track progress, measure success, and assess the impact of actions, allowing for continuous improvement.
x. Coordination and Collaboration: A good development plan should encourage collaboration among different sectors (e.g., government, private sector, civil society) to ensure a unified approach and efficient use of resources.
xi. Scalability: The plan should be able to be adapted or expanded to accommodate growth and changing circumstances over time, ensuring long-term benefits.
xii. Resource Allocation: The plan should include a clear framework for allocating financial, human, and material resources efficiently and effectively to achieve the outlined goals.

Agricultural prices in developing countries are often closely linked to international markets because many developing countries are significant producers of agricultural commodities that are traded globally. Changes in global demand, supply, and prices can directly impact the agricultural sector in these countries. Factors such as trade policies, exchange rates, and global market trends also influence local agricultural prices.

Differences between cardinal utility and ordinal utility in consumer theory.