Economic Terms

A company that sells insurance policies to an individual for suitable protection against adverse events. These companies are charaterised by long-term liabilities of uncertain vaue and liquid value-certain assets. Among the major categories of financial institution, this balance sheet structure is least likely to give rise to systemic risk, as asset transformation function in the reverse direction of banks. However, the main form of regulation imposed on insurance companies is based on consumer protection, reflecting the fact that it is difficult for consumers to assess an insuree's financial strength or the quality of its products.

This gives firms or individuals an exclusive right to receive all the benefits that arise from any of their innovations or creations. This right will last for a number of years and will be easier to enforce where a patent is granted or if a clear copyright exists.

When banks extend loans to other banks for a specified period of time. These interbank loans are typically of a short-term maturity of one week or less, which many being classed as 'overnight loans'. The loans are made at the interbank rate.

Below is a graphical depiction of how an interbank loan works, in which there is a transfer of money and that money has be to paid alongside a level of interest attached to the base rate.

 

 

 

 

 

This is where the outcomes for firms depend not only on their own decisions but also upon other firms' decisions. Oligopoly markets are the type of market structure that is characterised by a high level of interdependency as firms always have to take into account the reaction of rival firms when setting their own prices.

Below is an illustration of how interdependency works. For instance Firm A sets a unit price of £10 but the market outcome of that pricing decision depends on the type of reaction that Firm B takes. The flowchart shows that Firm B could react in three ways. Firstly they could end up charging more than £10 which means that Firm A will have undercut Firm B and steal the entire market for themselves (assuming competing over a homogeneous good). Firm B could also match the price of £10 and both firms would roughly share the market between themselves. Finally, Firm B could also decide to undercut Firm A and charge a price lower than £10 and as a result they would capture the entire market. Therefore, before Firm A sets their price they have to form a rational expectation of what other firms in the market will do, to be able to set their profit-maximising price.

The reward for providing capital.

The price of money i.e. the cost of borrowing and the reward for lending money. The rate is determined by forces of demand and supply on money markets.

Economies of scale or diseconomies of scale that arise because of the growth of a firm.

Describes the commercial activities that firms and businesses internationally engage in. For instance in the banking world this refers to the trend that financial services are conitnually becoming global and products and services can be sold to international cutomers. This has created complexities for regulatory authorities when regulating the industry.

 

The price levels (high and low) that a Government will monitor to determine when to intervene in markets to support or stabilise prices.

A policy perspective that favours government intervention in order to correct any market failures present and in the process increase the level of economic welfare in society. Policymakers that take this perspective, believe that the only way a government can fulfill their macroeconomic objectives is for a heavy layer of government intervention to be administrated.

The type of interventionist policies include:

• Regulation
• Nationalisation
• Investment in human capital
• Investment in infrastructure
• Investment in technology

The aim is to shift the LRAS curve to the right as shown by the diagram below:

Apart from reducing the price level and increasing real output, interventionist policies create a number of different advantages for an economy:

1. Greater equality - redistributes income and wealth to improve equality of opportunities.
2. Corrects market failure - governments can ensure that markets do take into account of the externalities involved in the consumption/production of goods and services.
3. Heals economic cycle problems - intervention helps overcome downturns in the economy.
4. Increases economic efficiency and productivity - increases productive capacity of the economy.

However, these types of policies can also create problems in an economy and these are the evaluative points you should consider when talking about government intervention:

1. Government failure - without full information can be pressurised by certain political groups to pursue inefficient projects. 
2. Loss of efficiency savings - nationalisation creates more state owned industries which lack profit making incentives and this could fail to drive up efficiency and lower costs.
3. Restricts freedom - government intervention takes away the decision making process from private individuals which goes against the free marketeer view (the market is best at deciding what and how to produce goods and services).