Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Microeconomics
Theme 1
...
(Theories in social sciences can be modified contrasted to natural sciences)
Economics = The study of choices and decision making in a world with limited resources
Microeconomics = Examines individuals, consumer, firms and markets within the economy
(Micro = small)
Economy = A system for the production of goods and services to satisfy people's needs and
wants
...

Need = must have (essential)
Want = would like (not essential)
Economic activity aim is to improve economic welfare ( Well being within society
Happiness,QOL,Real income,Education) = also known as utility or satisfaction
Economics uses theories/models based on observed behaviour
...
If it survives the tests then it will be
known as a theory but this isn't true in all circumstances it may fail later as the test gets
tougher meaning it can be disproved,amended and rejected
...
This is due to
factors such as observational bias (the fact that they're being observed while making
choices) and selection bias (As people volunteer and aren't selected)
...
This is due to the complexity of human nature and the significant number of
social interactions that are taking place in any economy at any given point in time
...

Economics makes predictions in a complex world
...

Economic Model = A simplified representation of reality used to provide insights into
economic decisions and events
...
= Change in 1 variable when all others
are the same and isolates the impact of that 1 variable has == Allows economists to simplify
and explain causes and effects
Positive Statement = A statement that is favoured by economists due to their factual and
objective nature in which it can be tested or rejected by referring to the available evidence
...

= Positive statements aren't linked to political viewpoint = they are objective and are based
on empirical evidence = Proven true or false =
Normative Statements = Statements that express a value judgement about what ought to
be,value judgments make normative statements very subjective and they cant be tested or
verified
...
The redirection of resources leaves some consumers better off and others worse off
...
Which results in an opportunity cost
Productive Possibility Frontier (PPF) = Shows the maximum combination of goods and
services that can be produced in a given time with the available resources being used
efficiency
PPF = Economic Model = Shows the maximum productive potential within an economy
Below PPF = Resources are economically inefficient and or unemployed resources
...
Better usage
due to the underside shifts the point from below the PPF
...
Need more FoPs to increase production
...

Above PPF = Currently Unobtainable or not feasible however in the long run it can be
achieved if more capital goods are produced sacrificing consumer goods now (opp cost)
...
Therefore this will make resources more obtainable in the
long run boosting standards of living and economic welfare
...
This can be explained by the Law of Diminishing Returns once the optimal
level of capacity has been reached, adding extra factor inputs will result in smaller increases
of output
...
And increasing marginal opportunity costs because some fops are specialised
and can't be adapted for other uses the opp costs increase
...

Outward Shift (PPF):
More Consumer good and capital goods can now be produced
- The PPF shifts outwards due to an increase of FoPs which leads to a rise in
productivity and efficiency
...

- Higher productivity increases output per unit of input used in production
- Better management of FoPs reduced waste and improves quality
- Increases in capital and labour supply from inward labour migration or capital
investment = training and education of labour = more productive
- Innovation and Invention of new products and resources leads to improved
production process
- Discovery/Extraction of natural resources = viable land inputs derived from
extraction boosts quantity of resources
Inward Shifts (PPF):
- Resources in an economy is depleted so a reduction in the quality/quantity of
FoPs leads to Economic Decline
- Natural Disasters
- Destruction and loss of factor inputs caused by civil war
- Large scale Outwards labour migration
- Trend declines such as recessions
- Negative Investment (costs more to hold than returns = sell offs)
Asymmetric Shift = Increase in the ‘demand’ for 1 good, So each combination will include
more of the desired good
...

Specialisation = Labour used effectively this increases productivity and increases overall
production which increases profits and revenue
...
Higher productivity lowers the unit cost of
supply which in turn leads to higher profits
...
Some nations
specialise to the point where its their goal to produce more of that one good i
...

bangladesh and textiles
lower net prices for consumers gives them higher purchasing power and higher
productivity allows businesses to pay increased wages
...
For example if
BMW Cars go they're doomed because that's all the BMW produce
...

Division of Labour = The process by which the production process is broken down into
sequences of stages with workers assigned at particular stages in the process and it was
created by Adam Smith “Grandfather of Economics”
Advantages:
- Division of Labour can raise output per person as people become more proficient
at tasks due to constant repetition
...
This is because less labour is needed to
produce the same output saving wage costs or the labour produces more
which means labour is spread over more units
...
Less time
wastage as labour does their one specialised task and not bother switching from
one job to another in the production process
...

Time and money saved as workers only needed to be trained for one job and less
likey to leave for better jobs as the skills are transferable so the firm doesn't lose
human capital
...
Workers end up taking less pride in their work and this leads
to a drop in overall quality as workers don't have the incentive to work well so they
cut corners and lower overall standards
...

- Low wages in doing only one job
- Increase staff turnover
- Good are massed produced and lack variety
- If labour lose their job they only have the one skill therefore its harder for them to get
employed
Functions of Money:
Overcome a double coincidence of wants = Both parties sufficiently need the others goods in
order to fulfil their demand
A Medium of Exchange = The most important function of money is to buy and sell
goods/services to overcome a double coincidence of wants found in a bartering economy
A Store of Value = The value of money is stored and can be worth roughly the same the next
day (but subject to inflation overtime)
...
= The transferring of purchasing power tull later

A Measure of Value = Easy to understand and compare that £20 is 2x more than £10
A Method of Deferred Payment = Money must link different time periods when it is saved
and borrowed (people will only lend money if it will be able to purchase roughly the same
amount of goods when it is paid back
...

Short Run Economics = at least 1 factor input is fixed
Long Run Economics = all factor inputs are variable
Productivity = Output per person and can measure the factors of production's efficiency
...

Productivity depends on how many factor inputs have been employed to supply the extra
output and the efficient usage of them
...
= DP Inflation
A fall in labour productivity leads to a rise in a firm's unit costs of production
Factors That Affect Labour Productivity:
● Competition
● Tech
● Specialisation
● New Capital Inputs
● Training
● High Demand
● Management
● Better infrastructure
Resources Depreciation: = Reduction in the value of resources overtime
● Machinery - dmg overtime
● Skills atrophy
● Buildings and property
● Basic Infrastructure
Resource Depletion: = Reduction in the quantity of resources
● Human Capital/labour flight
● Capital Scrapping

●
●

Natural disasters
Deforestation

Unlimited wants/desires - Limited Resources = Scarcity - Choices have to be made =
Opportunity costs - Who allocates the scarce resources?
Political systems = Are often associated with different economic systems
Capitalism = The factors of production are privately owned and is commonly associated with
free market economies
Socialism = The factors of production are socially owned
Communism = The factors of production are socially owned
Sectors of production in the economy:
Primary Sector = Natural Resources, Agriculture, Fishing, Mining
Secondary Sector = This involves the production of goods in the economy such as
processing raw materials from the primary sector
Tertiary Sector = The service sector selling skills and services such as selling goods from the
primary and secondary sectors, entertainment, finance, education
Quaternary Sector = Industries providing information services such as computing ICT
consultancy and RandD

Free Market Economy = The private sector (Consumers and Businesses) own factors of
production and allocate scarce resources through the price mechanism (Consumer/producer
through supply and demand which determines the market clearing price) = [None actually
exist but closest is like Hong Kong or Switzerland]
Advantages:
- Emphasis of consumer choice, firms have to match what consumers need and
demand
...

So there's no state provision and this puts those on low income at a disadvantage
and may result in poverty
...

- Competition leads to the rise of Monopolies and dominant firms as rivals are
taken out of business
- Public and merit goods won't be supplied or will be but at insufficient
quantities
- Competition forces small businesses out = monopolies = quality suffers to
increase supernormal profits
- Monopolies explicit consumers and the supply chain
Command Economy = Scarce resources are allocated by the government, Factors of
Production are allocated on the people's behalf as well as what to produce and who gets it
...

- Often in command economies there are low qualities of goods/services as well as
shortages
- Lower economic growth than free market economies as there is less incentive to
be efficient due a lack of competition and profit motive
...
The
central planets suffer from info gaps
Monopoly power is transferred from firms to government who are inefficient
Excess demand and supply because the market can't clear as the price mechanism
is unable to operate causing a misallocation of resources
Sames washes = disincentives to work harder and become a doctor which takes 8
yrs of study
Less competition = less innovation and product development
Lack of competition between firms causing inefficiency and low productivity

Mixed Economy = Scarce resources are allocated partly by the government (public sector)
and partly by the private sector = [Almost Every Nation]
States Role:
● State Owned Businesses (Royal Bank of Scotland)
● Welfare State = reduce income equality via taxation and redistribution
● Government spending on public goods such education and defence
● Tackle and rectify market failures such as negative externalities
Key Economic Thinkers:
Adam Smith (1723 - 1790)
Of the idea that the free market is the best way to allocate scarce resources with limited
state interference
Author of the “Wealth of Nations” (1776) which discussed free markets to argue against
protectionism and legal barriers in the economy at the time
...
This benefits society by ensuring resources are used
efficiently
...

Competition between firms would lead to smaller business being forced into liquidation
resulting in monopoly power to exploit workers and consumers, those who become bankrupt
due to this end up joining the proletariat

Marx believed that capitalism would be replaced by communism and that capitalism was 1
stage in the economic process and would self-destruct due to its flaws and weaknesses
...

The proletariat revolution was inevitable as well as an abolition of private property replaced
by common ownership of land
...

Fredrick Hayek (1899 - 1992)
In favour of the free market and a critic of state planning (socialism)
Author of "The road to serfdom" (1944), influenced Margaret Thatcher in the 70s and 80s
which states that state control is a loss of individual freedom
...

Markets should aggregate individual decisions so ultimately the market will reflect the
information available to society as a whole
...


Theme 1
...

Neoclassical Rational = Means that economic agents can rank the order of different
outcomes from an action in terms of net benefits for them
...

According to neoclassical economists when choices have to be made, they always choose
what the best alternative is at that time
...
Changes in
factors such as demand or price alters the incentives for a consumer and they behave
differently
...

People and firms have limited resources due to Scarcity and allocate their resources in a
way in which they get the highest level of satisfaction
...
People don't always act rationally
and pursue alternative objectives that does not necessarily maximise their utility/profits
...

Bounded rationality = most consumers don't have sufficient information to make a fully
formed judgment when making decisions
...
Or they'll use rule of thumb approximations that aren't
scientific and usually don't take into account all the potential variables
...

Misleading advertising
Consumer Computational Weakness:
Consumers struggle to understand, struggle to make choices, it's too difficult and too much
effort because of the difficulty
...
Firms exploit this by giving
disjointed information
...
Consumers may be
loss averse and are afraid of making themselves worse off and take no risks
...
They could also be addicted so they may not stop consuming
even though it negatively affects their welfare
...
= Therefore consumers are willing and able to spend
more on some goods than others
Basic Law of Demand = Demand varies inversely with price = Low Price = High Demand =
High Price = Low Demand
Total Utility = The total satisfaction form a given level of consumption
Marginal Utility = The amount of utility an individual gains from consuming an additional unit
of a good/service
Diminishing Marginal Utility = A decline in the additional satisfaction a person derives from
consuming an additional unit of that good
...
As price for 1 good increases, alternatives become more
price competitive so they switch their consumption to the cheaper alternative leading to a
contraction in demand for that product
...
= Marginal utility falls = Consumers are willing and able to pay
lower
A CHANGE IN PRICE CREATES A MOVEMENT ALONG THE CURVE
Changes in Condition of Demand (Shifts) [Factors that influence demand other than price]:
Population - Increase = Outward - Decrease = Inward
Advertising - Successful = Outward - Unsuccessful = Inward
Substitutes - Price of Sub increases = Outward cuz urs is cheaper, Price of sub Decreases =
Inward (For ur good, cuz theres is cheaper )
Income - Increases = Ouward - Decreases = Inward
Fashion and Preference - In fashion = Outward - Ageing = Inward
Interest Rates - rise - less rdi - fall more rdi
Compliments - complement increases so does the other good
Seansonal Boons and Trends -

Supply = How many goods/services firms are willing and able to put onto the market at any
given price at any given time
...
This is due to the profit motive/incentive business price rises so
businesses expand supply to capitalise off the rise
...
) Also new market Entrants
can help explain why there's a positive relationship, high prices lead to an incentive for
businesses in long run economics to enter the market leading to an increase in total supply
...
Free Market Forces eventually will put downwards
pressure to return to Pe where there is an expansion in demand due to there being lots of
supply and a contraction in supply and it becomes less profitable because the price drops
...
Price will return back to Pe as producers
expand supply to capitalise off the demand which results in a contraction in demand as price
rises
...

NOT ALL PRICES ARE SET BY THE FREE MARKET FORCES OF SUPPLY AND
DEMAND = PRICES CAN BE AFFECTED BY REGULATORS WHICH MAY IMPOSE A
PRICING FORMULA ON SUPPLIERS = Rail Fares/Water Bills
The Price Mechanism = Is where the free market allocates resources through the interaction
of demand and supply
The price mechanism helps free markets solve the economic problem and allocate scarce
resources and resolves the issues that come with opportunity costs in the form of price
...

Rationing Demand = When demand increases there will be a shortage of a good/service and
only those willing and able to pay a higher price will get the good/service as they are able to
afford it
...

Rationing Supply = Prices can help ration the supply of a good, if a resource is running out of
supply prices will rise causing demand to contract and those who have effective demand will
pay the higher price to obtain the scarce resources
...
Changes in what goods are preferred changes in demand and price are
all signals to producers and consumers as they oversee the price
...

Signalling Consumer Demand = Prices rise due to high demand from consumers which
signals to producers to expand output to meet the higher demand
...


Signalling Availability to Consumer = Prices fall due to a tech advancement which leads to a
higher supply and can be signalled to consumers to increase demand because of the lower
price signal
...

Incentives For Producers = Suppliers have the incentive to producer more following an
increase in demand and a higher price to maximise profits
Incentives For Consumers = Consumers have an incentive to consume goods following and
increase in supply due to a lower price
...

Measures consumer welfare as they often get the good they want for less than the price they
were willing and able to pay for it
...

Producer Surplus = The difference between the market price which firms receive and the
price at which they are willing and able to supply
...


Indirect Taxation = A charge levied by the government on goods and services which
increases the producers cost of production and shifts the supply curve to the left (inward)
Specific/Unit Tax = A tax set by the government on goods/services that is set at a constant
amount per item (Alcohol Tax) (Fixed Tax) = Parallel Shift because tax per unit Is the same
no matter the price
Ad Valorem (In Order of Value) = A tax set by the government on goods/services set as a
percentage of the price of the good (VAT) (%Tax) = Pivotal Shift because as price rises so
does the tax per unit rise which means there's a large gap between curves
IT = Increases a firm CoPs which increases supply cost so that less is supplied at each and
every price level shown via the vertical distance between the curves in the diagram
...
Indirect Tax can be used to
alter consumers behaviour for example stop smoking or raise revenue to the
government/education = Usually levied on a demerit good
Firms wish to pass as much of the tax burden onto the consumer so they do not have to pay
for it and max profits
...

(Assuming Rationality) = Depends on Elasticity
EV
●
●
●
●
●
●
●

Reduction in QD to QD2 = May be significant enough lay of workers
Tax = Effectiveness depends on Elasticity
Difficult to set the right level of tax
Unintended consequences
Depends on the revenue generated and how its used
Loss of jobs, competitiveness
More losers than winners and has a regressive effect on low incomes

A = Consumer Incidence
B = Producer incidence
All of it = Total tax revenue raised by the government
Subsidy = A sum of money or financial support paid by the government to producers and
sometimes consumers in order to reduce the costs of production and encourage production
= Usually given to a merit good
Total Spending = Subsidy per Unit × Level of Output
Subsidies = Reduce prices in the market due to reducing the costs of production = Shifts the
supply curve to the right (Outward) = Parallel shifts as Subsidies are paid in per unit
produced = The subsidy per unit is constant even if there is an increase in price
Benefits of Subsidies:
- Subsidies often encourage output and investment into new and upcoming
sectors
...
Subsidies stop and
prevent massive Job loss and unemployment during recessions
...

- Subsidies leads to investment which has Positive spillover effects
- Subsidies csn be self financing and create more tax revenue
EV:

-

-

-

Subsidies opp cost and are funded by the government which is financed through tax
or borrowing and debt
...

Subsidies lead to the risk of complacency and overreliance on them by firms
and the removal of the subsidiary could lead to liquidation as the cost of
production would be too high and the complacency means the firm is inefficient at
lowering Costs
...

X Inefficient and Shielded from competition
Depends what the subsidies is use for
Depends on how much is given in Subsidy if its too small it's useless especially
in comparison to a firm's loss figures
Will it actually stimulate demand or consumption
Is it sufficient
Burden is on taxpayers money

Top = Total Producer Benefit Per Unit
Bottom = Total Consumer Benefit Per Unit

Theme 1
...

%change in Quantity Demanded/%change in Price
QD2-QD1/QD1×100 / P2-P1/P1×100

PED = Negative (-) due to the demand curve and the inverse relationship between QD and P

GREATER THAN -1 = ELASTIC
LESS THAN -1 = INELASTIC
Perfectly Price Inelastic Demand = Where there is no change in quantity demanded following
a change in price (Demand doesn't change when price changes PED = 0)
Perfectly Price Elastic Demand = where there is an infinite change in quantity demanded
following a change in price = (Theoretical Extremely sensitive to price change PED = infinity)
Price Inelastic Demand = Where there is a less than proportionate response in Quantity
Demanded to a change in Price
...
1etc]
Unitary Price Elasticity of Demand = Where the response in QD is exactly proportional to a
change in price PED = -1
Determinants of PED:
1
...
Percentage of income spent = More spent = Elastic Less = Inelastic
3
...
Addictive Nature/Habitual Consumption = Habits,addicts,brand loyalty,persuasive
adverts = More Inelastic because they purchase anyways even with an increase in
price
5
...
Width Of The Market = Wide market definition = Inelastic less close Substitutes
Narrow market Definition = Elastic due to close Substitutes in that particular market
SPLAT = Sub, Proportion of income, Lux or Necessity, Addiction, Time
Total Revenue = Full amount of the total sales of a good/service = TR = Price × Quantity
PED = Inelastic = Total Revenue increases if price increases and decrease if price
Decreases = Raise price make more profit
PED = Elastic = Total revenue increases as price decrease and Decreases If price increases
= Sell more at a lower Price increases TR
PED = Perfectly Inelastic = Increase in price = Increase in total revenue = Consumers are
willing to pay any price for the product = Price rises without any contraction in QD

PED = Perfectly Elastic = A decrease in price leads to a decrease in TR an increase in price
= No revenue at all as consumers are willing and able to pay only one price
PED = Unitary = Total spending by consumers will remain the same at each price level so
total revenue will remain the same
Straight Curve = Top part of the curve is more elastic so lowering prices will increase total
revenue, an increase in price will lower TR = Bottom part of the curve is more Inelastic so an
increase in price to increase total revenue lowering price will decrease total revenue at the
bottom
PED Used For Firms:
● The Effect a change in price has on quantity demanded
● To determine whether their good is Inelastic or Elastic
● The effect a change in price has on total revenue of selling goods and services
● The price volatility in the market following a change in Supply = relevant to
commodities as they have large price shifts
● The effect a change in indirect Tax has on price and quantity and whether that firm
can pass all/some the tax burden on the consumer
● Can be used by a firm for price discrimination (I
...
surge pricing) = Different
prices for the same product at different segments in the market, different times/places
etc
...

● Provides insights to managers
● Encourages firms to make the demand more inelastic
● Shows when to lower or raise prices
● Benefit of subsidies = if demand is price elastic then it will have a more than
proportional increase in demand

Income Elasticity of Demand (YED) = The measure of the responsiveness of Quantity
Demanded to a change in income of the consumer
...

When real incomes rise consumers want to buy more luxury goods they couldn't previously
afford
...
e
...
5would be weak sub
Compliments:
Fall in price of one increases the DEMAND for the other
Compliment = Negative XED as price decrease demand increase
- Close Compliments = A small fall in price causes a large rise in demand for the
Compliment = Highly negative XED
- Weak Compliments = A large drop in price causes a small rise in demand
Unrelated products = 0 Cross Price Elasticity as it is irrelevant and they do not affect each
other in any way
...


-

Reliable XED estimates can predict the effects of offers and pricing strategies and
firms can adjust their prices accordingly to maximise profits
...

-

Pes > 1 = Price Elastic = More than proportionate change in supply
Pes < 1 = Price Inelastic = Less than proportionate change in Supply
Pes = 1 = Unit Elastic = Equal change in Supply
Pes = 0 = Perfectly Inelastic = No change in Supply
Pes = infinity = Perfectly Elastic = Firms can produce infinite quantities

Factors of PES:
Production Lag = How quickly can firms respond to an increase in demand
...

Substitution of FoPs = How quickly can FoPs switch from producing 1 good to another
given an increase in market demand
...
When PES is more Inelastic it's usually in highly
specialised and highly trained environments where switching would be more difficult
...
Perishable goods are often harder and
more expensive to store
...
If there isn't or there is less capacity, firms cannot respond efficiently to a change in
price
...


Lots of spare capacity, high levels of stock of raw materials and finished products,long
production times to make goods and easy FoPs Substitution makes PES more Price Elastic
...
PES is
less flexible in the short run as firms are usually committed to using their current production
lines and methods or they have a fixed supply and have to wait (Agriculture Markets Apple
trees wait next season
...


Theme 1
...
They hold the belief that the price mechanism
leads to the best allocation of resources and that the government's role is to make sure firms
can function in competitive markets with little interference
...
Lack of information makes it difficult for the market to function and they believe that
the government has more information than unregulated market forces
...

Market = Voluntary meeting of buyers and sellers where an exchange of goods and services
occurs
...

Market Failure = When the Price Mechanism fails to deliver efficiency and results in a
misallocation of resources
...
If
goods and services are too cheaply provided then they are overproduced and over
consumed
...

Externalities = Affects 3rd parties outside the market (neither producer or consumer involved
in the exchange) that can be positive or negative in terms of production and consumption
...

Externalities often cause market failure as the Price Mechanism does not take into account
the social costs or benefits 3rd parties experience
...


Private Benefit = A direct benefit to a producer/consumer internal to the exchange and taken
into account by the price mechanism
...

External Costs (Negative Externality) = Negative spillover effects on 3rd parties and are
costs external to an exchange and ignored by the price mechanism
External Benefit (Positive Externality) = Positive 3rd party spillover effects these benefits are
external to an exchange and ignored by the price mechanism
...
Similarly consumption of private healthcare
ignores the external benefits such as less strain on the NHS and a healthier UK workforce
...


Overproduction + Overconsumption = Leads to market failure = Government Intervention to
rectify it = Taxes implemented to reduce amount produced and given to increase amount
consumed
...
Negative effects on 3rd
parties (external costs) outside the market from the production of goods and services
...

Welfare loss = The excess of social costs above social benefits for a given quantity and the
extent of a market failure
...

-

MSC = 1st Supply (upwards sloping) line above MPC closer to the price axis, more
steep
MPC = 2nd supply line below the MSC more like a regular supply line

-

MEC = the distance between MSC and MPC
MPB = MSB = demand curve straight down (MPB = MSB because there are no
external benefits)

Quantity Private (QP) = MPC Crosses MPB = Low Price (p1) = Allocatively inefficient
Equilibrium (doesn't satisfy what consumers value most)
Quantity Social (QS) = MSC Crosses MPB = Higher price (P2)
Society should be producing at QS but it is not and this leads to market failure due to
overproducing at QP making the price too low
...

The Social optimum where MSC = MSB takes into account all costs and benefits in the
market
...
Only happens when the social costs are greater than the private costs
...

This is a misallocation of societies resources by failing to take into account the full costs of
production which results in overproduction and a misallocation
...

EV:
-

It's extremely difficult to quantify a negative externality of production, how do
we no where X pollution begins and ends
Difficult to assign a monetary value to external costs and benefits
Imperfect information
Magnitude

The government can uses these as attempts to quantify the value of emissions:
Shadow Pricing = Assignment of value that is not ordinarily quantifiable but needs a
valuation to calculate a cost benefit analysis
Compensation = Estimating the cost to putting right and Externality
Revealed Preference = How much people are willing to pay to avoid an Externality
Governments needs to get them to produce less

Positive Externalities of Consumption = Occurs when the social benefits are greater than the
private benefits in the consumption of goods and services this leads to a positive effect on
3rd parties (external benefit) outside the private consumption of goods and services =
Chickenpox vaccine leads to herd immunity
-

MSB = the higher demand curve = QS - P2
MPB = below MSB more in the direction of the X axis = QP - P1
MPC = MSC = Upwards sloping line = they're equal to each other as there is no
external costs

Market Equilibrium/Private Optimum = MPB = MPC at QP
Social Optimum = MSB = MPC at QS
Welfare gain = The excess of social benefit above social costs for a given quantity
MSB is above MPB because it includes MEB
Market failure due to underconsumption at QP when it should be at QS
...
Failure to
take this into account the externalities results in underproduction and underconsumption and
a misallocation of societies resources (Allocative Inefficiency)
...

Gov needs them to produce more
EV:
Often requires a value judgement on what has Positive effects on 3rd parties, who makes
that judgment? They have self interest?

Merit Goods = Is a good that people Underestimate their benefits and often results in
positive externalities = Free Market = Underconsumption of these = EV: Involves making a
value judgement on what good for you so it isn't straightforward

Demerit Good = Is a good that harms the consumer if they don't realise or they ignore the
costs
...
e cannabis is drug but helps people with
paranoia

Pure Public Goods/Collective Consumption Goods = A good which has both non-rivalry and
non-excludability characteristics (Streetlights)
Non-excludability = Once provided, no economic agent can be excluded from benefiting
...
Non-payers can reap the benefits of consumption at no financial cost (Free riders)
Non-Rivalry = The consumption of the good by one agent does not reduce the amount
available for another economic agent, if one agent consumes the good it does not diminish
the satisfaction/utility of other agents
...

Private goods = A good which had both rival and excludable characteristics
Free Rider Problem = Once a public good is provided it is impossible to prevent people who
have not paid for it from consuming this means some agents can benefit without a financial
cost to themselves which means rational consumers can simply wait for its provision and
reap the rewards for free
...

If the market was left to function on its own for public goods without government intervention
there would be a market failure as firms would not provide
...
e
...

Pure Public goods are not normally supplied by the private sector because there is no profit
incentive for firms
...
Governments often have to estimate the Net Social
Benefits for providing the public good
...
However public goods needed to
be funded by the government either by tax or borrowing which means there is an
opportunity cost for spending on public goods instead of other parts of the economy
...
If the government provides public goods it's easier to
provide collectively and in one go, the government may also benefit from economies of
scale
...
Also government provision is equitable meaning if it is provided for free all

people of all income levels can access them so the provision is based on the society's needs
and not individual agents ability to pay
...

EV:
Should the government provide public goods?
- Some economic agents overstate their demand and end up overconsuming a
public good putting pressure on public finances and creating excess demand
...
Also should consumers contribute to
the provision of public goods if so how much?
- Opp costs = tax, gov Spending, borrowing
- The government has imperfect information dealing with industries they don't
understand
The non rival nature of consumption provides a strong case for the government to provide
and pay for public goods
...
The government holding that
power can lead to inefficiency arising from the lack of competition and could lead to
complacency and higher prices when the government needs revenue
...

- The government lacks the knowledge and expertise to Provides for anything
technical
EV: Public private partnerships can be a middle ground compromise where there is a
joint venture between the government and public sector firms
...
Sometimes people have too much

information and have an advantage or focus too much and ignore other pieces of
information
...
== Reduces their Welfare by making poor decisions
Asymmetric Information = A situation where one party has more information than the other
party = Imbalance of information that distorts choices between buyers and sellers = Taken to
the extremes the lack of symmetric info could mean buyers stop buying because they don't
trust the seller
Symmetric/Perfect Information = A situation where all parties have the same amount of
information = Markets only work with symmetric info
For markets to work effectively and all competitive markets there is assumed perfect
information between producers and consumers etc and that they have full knowledge about
the prices, the benefits and the costs of goods and services
...
(EV the internet stops this)
Market Demand = Higher as consumers have better information
MPC = Supply Curve
MPB1 = Limited Info = First Demand curve below 2= Lower Q1 and P1
MPB2 = Fuller Info = Second Demand curve able 1 more outward= Higher Q2 and P2
Individuals may have imperfect information on their private benefits
...

Examples of Information Failure:
● Gaining entry to elite uni courses
● Pension Complexity
● Tourist Bazaars = Tourists don't know the local price standards and the exchange
rate
● Rip Off Merchant = Know about how much things cost
● Landlords = knows more about the property than their tenants
● Mortgages = Borrower knows more about their repayments than the lender
● Doctors = Superiority knowledge about drug treatments than patients
Insurance Markets:

Moral Hazards = These occur when insured customers are more likely to take bigger risks
and they are covered by the insurance which takes away the risk element to the insurer
...

Adverse Selection = Those who purchase insurance are more likely to use it (Health
insurance) the insurer knows this and raises the average price of insurance cover (charge a
premium) Healthy consumers are less likely to get insurance because they have been priced
out and are not able to afford it meaning only high risk individuals will gain insurance
because they'll get something out of it whereas a healthy person wanting to buy it out of
precaution will be paying alot for nothing
...

● Campaigns to raise Awareness
● Consumer Protection Laws
● Cumpsolory Labelling
● Improved Nutritional Information
● Point of Sale information
● Financial Advice
● Key Information statement
Methods of Intervention:
Legislation
Education
Taxation
Subsidy

Why use these methods relate to EEES

Legislation/Regulation/Command and Control Methods = Involves rules, laws and
restrictions placed by the government to restrict freedom of economic action in the market
...

Total Ban = Due to the product being harmful or having harmful methods of production
governments can outlaw certain products completely = However his leads to many issues in
the LONG RUN as it could mean potential job losses, loss of productivity and competition
within that market, the eventual shadow markets appearing, offshoring(Moving abroad) =
This is why were are more likely to see quantity control/quotas which limits the amount of it
or tarrifs
Advantages of Regulating:
- Regulations act as a spur for business innovation and invention
- Regulation can be effective if demand is unresponsive to price changes such
as habitual consumption goods
...
Price ceilings can distort the market by creating excess demand
...

- Also if max prices are set too high it may not have any impact at all
- Leads to secondary markets and shadow markets where people will pay above
the max price to guarantee the receiving of the good undermining the entire
system imposed by the government
...
Minimum Legal Prices can distort markets by creating excess supply
...
Min
prices used on alcohol to reduce alcohol consumption and their external costs by increasing
the price of cheap alcohol which leads to people being less antisocial and pissed
...
For example
alcohol prices rise due to a min price which contracts demand as less people can afford it
and expands supply as there is more profit incentive to supply and max profits
...

But this leaves a surplus due to the reduction in demand
...
This means the impact of excess supply and Government spending
is reduced as PED and PES become more Inelastic
...
Also stabilised producers' incomes for
commodities
...

- There can be issues with the government buying up the excess with min prices
as this leads to opportunity costs and raises issues about stock and storage,
as well as perishable goods or dumping surplus abroad which hurts LIC
farmers
...

- Consumers can buy abroad to avoid min prices or buy illegally
- Punishes moderate drinkers/CONSUMERS
- Penalises poor consumers
- No additional revenue is guaranteed to counteract Negative externalities of
production
- Harmful for me = Value Judgement = very interventionist
Tradable permits Scheme = A scheme where a limit is placed on firms' carbon emissions
through the issuing of permits
...

ETS Scheme = Overtime it reduces the volume of permits available and gradually reduces
net pollution emissions and encourage firms to invest into emissions reducing tech
...

Governments can attempt to contain pollution by putting a cap on it
...
Firms can actively trade their permits between other firms by keeping its
pollution levels low and selling them which will allow other firms to pollute more
...
": and makes use of market mechanisms
...

- The costs setting up and managing the scheme would be difficult and
expensive
- Difficult to measure Pollution output of individual firms and can be avoided
through lobbying
- Geography some areas may have denser pollution output
- Equity issues meaning that larger firms can afford to pollute more due to their
size and market share which makes permits a barrier to enter the market
forcing smaller firms and new market Entrants to pollute less often costing
them revenue == They can just tank the increase in costs
- Price at which permits are bought depends on demand and supply = if the prices is
too low the government can reduce supply to increase the price of permits
- May not reduce carbon emissions so easily

Provision of Information = Where information is provided to an uninformed party to allow
better decisions/choices to be made
Provision of info and advertising helps overcome Asymmetric Information and subsequently
market failure
...


State Provision = When the government provides good and services funded via
taxation/borrowing (Direct Provsion to solve market failure)
Provision of public goods = Not provided by the price mechanism due to the free rider issue
however the government can provide them and enforce payment through taxes
...
They are very likely to
be underconsumed and underproduced as economic agents only consider their private
benefit and not the external benefit
...

●
●
●
●
●

State Provision
Taxation
State Education
Licences patents fees
State Healthcare

Advantages of State Provision:
- Greater provision of goods/services such as public goods and goods with external
benefits
- Equality as it is free all irrespective of income due to state providing
- Governments act in the interest of the public even with information gaps
- If the project was taken on by the private sector it may not happen because they
do not factor in external benefits and they only consider private benefits
- Effective,efficient,equitable and sustainable
- Notify people that laws are for their own utility and protection
- Encourages consumption of stuff with external benefits
Disadvantages:
- Needs to be funded by tax revenue and this leads to an opportunity cost which
could be used to finance another area of the economy
- Inefficient as there is no incentives to cut costs as the state provides and it will be
difficult for the state to maintain consistent standards
- Imperfect information and scale of production needed may lead to ineffective
management and administration by the government due to inexperienced in
Provision
...
Taxation attempts to solve market failure by
making consumers take into account the external costs
...

Shifting MPC to the right subsided product is cheaper which has external benefits that
moves society towards the social optimum
...
Subsidised goods become more competitive
so there will be a reduction in external costs as people switch
UK has cut subsidies for electric cars and solar panels
Advantages of Subsidies:
- Increased consumption of goods with external benefits Rectifying market failure
- Should reduce the external costs on substitute goods due to the fact more and
more consumers switch
- Low income households can afford goods with external benefits due to a lower price
- Subsidies can be used to support certain industries to maintain employment
and growth in the economy
- Reduces consumption of non renewables
Disadvantages of Subsidies:
- Opportunity cost of Subsidies which could also impact national debt
- Firms could become inefficient due to an over reliance on Subsidies as there is
less incentive to cut costs
- Are the substitute goods good enough to encourage consumers to switch to them?
- Hard to identify goods that have external benefits, therefore a misallocation of
Subsidy money
- Costly administration and regulating of Subsidies as it is often given in output
per unit
- Political self interest/lobbyism
- Encouraging and supporting failing non competitive sectors of the economy
- Social optimum may not be achieved
- Unintended consequences = by stimulating production you cause visual and
noise pollution
Government Failure = Occurs when the government acts to deal with a market failure but in
the process creates further distortion and inefficiencies as well as a net welfare loss
...

Government failure can happen if a policy decision fails to create enough of an incentive to
change people's actual behaviour
...
Often a government will choose to go
ahead with a project or policy either considering the full amount of information required for a
well done cost benefit analysis which h results in misguided policies and long term
consequences
...
(Excess red tape making the
intervention not worth it)
Poor Value for Money = Low Productivity, high waste and inefficiencies makes spending
less effective = Public Finance Initiative being very costly to run and ineffective in getting the
private sector to do public projects = no multiplier
Policy Short Termism = Governments often look for a quick fix solution = Road widening to
reduce congestion
Regulatory Capture = When the government's operates in favour of the producer rather
than the consumer = Happens when the supplier has significant lobbying power over
government agencies = Harms consumers interest in the short term and long term as
government agencies fail to hold suppliers accountable and enforce minimum standards of
service = Increasing prices lowering real incomes and regressive effects on lower income

households = Can be NEP due to failure in regulations which cost society and lead to a
warfare loss = The financial Service Authority in the global financial crisis for not
monitoring lending of commercial banks/self regulation of alcohol
Conflicting Objectives = One policy might be in conflict with another = Min prices on
carbon affecting UK competitiveness
Bureaucracy and Red Tape = Costs of enforcement may have hurt Enterprise and
incentives = Costs of meeting health and safety laws
Unintended Consequences = Policies have unintended and unanticipated side - effects =
Smoking ban leading to the use of patio heater contributing to global warming
The Law of Unintended Consequences = Actions of consumers, producers and governments
always have unintended or unanticipated consequences
...
Shadow markets
develop to undermine official policy
...

Examples of unintended consequences:
● Bank bailouts = Moral Hazard
● Biofuel subsidies = Food price inflation
● Import tariffs on steel = Blow to domestic car and construction companies
● Targets for treating patients = reduction in the quality of care (Staffordshire general
scandal)
Evaluating the Effectiveness of Government Intervention:
●

1 = Value Judgements = Many people want particular intervention because it serves
their own vested interests

●

2 = Changing prices to change incentives and behaviours = PED has a big effect on
the effectiveness of policies

●

3 = Social Science = The effects of Intervention can not be accurately forecasted as
people's behaviour is subject to change

●

4 = Combination of Policies = A single intervention is unlikely to solve deep rooted
problems = multiple policies on market demand and market supply

●

5 = Power of Markets = Free market forces can be a powerful solution to finding
profitable solutions to problems = increase costs for the firms instead of distorting
supply and demand

●

6 = The law of Unintended Consequences = Intervention doesn't always work they
way it should or how models and theories predict == The government intervenes and
then innovation and dynamic efficiency Stops, prices increase, Customer service
deteriorates, Quality cuts

●

GOVERNMENTS INTERVENING AND USURPING OUR FREEDOM AND LIBERTY,
IT'S A SMALL FAILURE



---