Notesale: Turn your study into money

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Chains of Reasoning

MICRO
PPF shifting out
↑Quantity/quality of resources -> ↑productive potential -> shift PPF out -> ↑growth
Ev: supply-side policies
Factors affecting demand curve
1
...
↑Population ->↑D
b
...
age group
2
...
↑Disposable income -> able to afford more -> ↑D
b
...
Related goods:
a
...
↑Price of compliment -> ↓D for original
4
...
Tastes & fashion
6
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shares -> ↑D for shares
7
...
Inelastic PED: ↑tax -> shift supply curve left -> firms are able to get away with
increasing price without losing much demand -> firms put most of tax burden on
consumer
Ev: Most effective for raising gov’t revenue

2
...
cost -> ↑production -> ↑supply
Ev: good for producer: ↑revenue; good for consumer: ↓P

S curve sloping downwards
1
...
↑P -> profitable -> encourage firms to enter market -> ↑S
3
...
↑Productivity -> ↓average cost
2
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↑no
...
↑Tech
5
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Appropriate weather -> favourable conditions -> ↑yield
7
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↓wages
8
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Time scale: SR cannot quickly change supply -> inelastic
2
...
Stocks: goods stored -> stock and ↑market supply easily -> elastic
Ev: inverse is perishable goods eg
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Substitutability of FoPs (mobility): ↑mobility of labour & capital -> resources
allocated to where extra supply needed -> elastic
5
...
Train workers
2
...
Focus on what people good at -> ↑output ↑quality
2
...
Ec of sc -> ↑size of market
4
...
Repetitiveness -> ↓motivation -> workers dissatisfied -> ↓productivity & quality
2
...
↓Variety of goods
4
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↑World output -> ↑economic welfare
2
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↑Variety
4
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Less developed country use up non-renewable resources
2
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Risk-bearing: expand production range -> fail {other parts to fall back on}
2
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Managerial: employ managers/supervisors -> ↓AC
4
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Marketing: divide marketing budgets across larger outputs -> advertisements ↓cost
6
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Control: harder to monitor how productive
2
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Communication: workers alienated/excluded -> ↓motivation -> ↓productivity ->
↑AC

Chains of Reasoning
Market Structures
1
...
of firms in market: ↑no -> ↑competitiveness
Ev: also included extent of competition from abroad
2
...
price, branding, quality ->
products more unique -> ↓competitiveness -> inelastic PED
3
...
Ec of sc
b
...
Control of important tech
d
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Backwards vertical integration -> acquire supplier -> control supply -> firms
can control price to pay supplier -> hard for new firms to compete on price
f
...
Strategic: undercutting another firm’s price
h
...
Profit maximisation
a
...
SR profit max -> give shareholders high dividend
2
...
Growth: expand product range/merging or taking over existing firms -> ↑size of firm
-> ec of sc -> risk-bearing/tech… -> ↓AC in LR -> ↑profit -> able to participate in R+D
-> ↑competitiveness ↑efficiency in LR
4
...
Society/environmental/ethical/managerial form personal gains/worker welfare
Competitiveness
Characteristics
1
...
Sellers are price takers
3
...
Perfect knowledge
5
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Firms SR profit max
Ad-/disadvantages
1
...
SR: more profitable; LR: low barriers of entry -> new firms enter market when firms
make profit -> ↑supply -> ↓AP -> existing firm’s profit competed away

Chains of Reasoning
Monopoly
… -> deter new firms from entering market as unable to compete with existing firms
Reasons
↑Barriers to entry
1
...
Limit pricing: price their goods < production costs of new firms
3
...
Sunk costs: unrecoverable costs eg
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Brand loyalty: ↑advertising -> ↑loyalty
6
...
of competitors -> ↓barriers of entry -> harder to gain market share
7
...
↑Differentiation eg
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↑P ↑profit -> ↑inefficiency -> misallocation of resources
2
...
No incentive to be efficient -> ↑production cost
4
...
Inelastic PED -> ↑P -> ↑producer surplus
Advantages
1
...
↑Profits -> ↑investment on R+D -> ↑innovation & invention +ve externality ->
↑efficiency in LR
Non-price competition
1
...
↓Costs -> ↑productive efficiency -> new firms not able to compete ->
↓competition
3
...
good customer service -> keep customers
Price mechanism
1
...
Incentive: ↑P -> more profitable -> encourage firm to ↑S
3
...
Externalities
2
...
Monopolies: ↓choice -> overcharged -> under consumption -> consumer needs and
wants not fully met -> misallocation of resources
4
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social unrest

Chains of Reasoning
Complete and partial market failure
Complete: market does not supply product -> missing market
Partial: produces good -> wrong quantity/price -> misallocation of resources
Public goods
Missing from free market & offer benefits to society -> non-rival & non-excludable -> cannot
prevent others from consumption -> do not pay for good yet receives benefit -> consumers
do not see a reason to pay -> free-rider problem -> consumers undervalue good and
producers overvalue -> difficult to measure value -> provided by gov’t -> funded by tax
revenue -> Q provided less than socially optimum
Externalities
1
...
Social costs: ↑output ↑external cost
3
...
pollution -> market equilibrium ignores this -> overprovision & under-pricing -> -ve externality -> ↓social welfare -> market failure
4
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Private benefits: changes price consumer willing to pay -> changes firm’s revenue
6
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Symmetric information: consumers & producers perfect information -> efficient
allocation of resources
2
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Imperfect information: missing information -> misallocation of resources
Ev: information can made more widely available through advertising/gov’t intervention
Unequal distribution of income and wealth
Market mechanism causes unequal and inequitable distribution of income and wealth
without gov’t intervention -> -ve externalities eg
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welfare payments

Chains of Reasoning
Gov’t interventions
Correct market failure
1
...
Ad volorem (percentages) eg
...
Specific (fixed) eg
...
Subsidy: ↓production costs -> encourage production -> encourage consumption of
merit goods -> external benefit internalised
Ev: inelastic {consumer gain more from subsidy}; elastic {producers supply more};
disadvantage: OC to gov’t & potentially higher cost, firms become reliant on subsidy
-> ↓efficiency, subsidise less efficient industries {gov’t failure}
3
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Prevent monopoly exploitation
b
...
↓P -> welfare gains -> ↑incentive to keep costs low to maintain profit ->
↑efficiency for firms
Ev: ↓profit -> ↓I in LR; ↑P of other goods -> consumers no net gain
4
...
+ve externality: decent wage -> ↑standard of living -> incentive to work
5
...
Advantages
i
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↑Revenue -> ↑I in green tech
iii
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Disadvantages
i
...
↓CoP -> pass to consumer
iii
...
Expensive to monitor
6
...
Provision of information: ensure no information failure -> firms make informed
economic decisions
Ev: expensive to police
8
...
Distortion of price signals: distorting free market mechanism -> market mech not act
freely -> inefficient allocation of resources
2
...
Excessive admin costs: financial cost of administering higher than anticipation ->
have to consider whether policy is good value for money
4

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