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Micro-Economics
Micro-Economics Essays start here

PL Discuss how the divorce of ownership from control may affect both
the conduct and performance of firms
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This may cause instability within a firm, and
prevent efficient running of it
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It may also present a moral hazard, eg in
investment banks, employees may take excessive risks knowing if they lose money,
it would be the firms money not theirs
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They could
just remove the agent, like fire managers
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Moreover, it would also depend on the scale of the
firm, as smaller firms don’t really suffer from this problem, as the principal in most
likely the agent
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Moreover, there may be a lack of a clear goal, as all agents are likely to work for
maximising their own welfare, i
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employees would look to increase wages, instead
of maximising profits for the company
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Also, bringing in experts like
professional managers may actually improve efficiency, causing higher profits for the
firm
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(25)
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Point 1: It may lead to exploitation of consumers, as demand for products such as
trains may be inelastic, and a higher price would lead to a loss of welfare, especially
of lower income group consumers, and could price them out of the market
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One may also argue that it is fair in a free market, higher demand for a product leads
to higher prices, which leads to allocative efficiency
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Eval: It may lead to seepage, in which consumers with elastic demand buy the
product at a lower price and sell to consumers with inelastic demand at a higher
price, but lower than what they would pay to the firm
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Moreover,
doing so may increase admin costs for firms, reducing profits, and possibly
preventing dynamic efficiency
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Eval: The barriers to entry may not rise exponentially just due to asymmetric info
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PL Use the extracts and your knowledge of economics to evaluate the
case for renationalising railways in the UK
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Eval: Nationalisation will lead to decreased productivity and x inefficiency, as private
firms have a profit motive, whilst state run firms may cause inefficiencies, as they
lack a profit motive, so they wouldn’t necessarily operate on the MES (lowest point
on AC), leading to a waste of taxpayers’ money, which could have been better used
in education/ healthcare etc
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Nationalised industries may
also be subject to bureaucracy and political influence, further worsening efficiency
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Lower prices are vital in such industries,
where demand may be inelastic
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Eval: A bigger nationalised railway may suffer from diseconomies of scale, which is
further exacerbated due to railway being a state run organisation, which are known to
lack efficiency
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Diseconomies of scale may mean higher prices for consumers, lowering welfare,
which can cause exploitation of consumers, especially since demand for trains is
inelastic
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Moreover, private firms may not b making a profit in the first place,
as is the case with trains, so gov may not be able to reduce price much without EOS
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This money could have an opportunity costs, and may
be better spent on other things One may also question why firms get to enjoy whilst

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profits last, but as soon as losses come, taxpayers money has to be used? This may
be seen as unethical, and may cause a dependency culture, where firms would take
undue risks, knowing the gov would help them in times of trouble, therefore
presenting a moral hazard, leading to wastage of taxpayers money, and a worsened
budget, possibly causing debt
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Moreover, such
profits may also allow a gov to pay off some of its national debt
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Point 1: Solving wealth inequality may be seen as a more important task, since it may
lead to the poverty trap
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Moreover, the MRP of such workers may be low,
causing them to have lower wages, leading to income inequality
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If people have higher incomes, they will automatically gain
more assets? This could be the only way to pull people out of poverty trap, improve
education, healthcare, improve MRP, higher wages, for future generations, reducing
inequality in a country
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Eg, if people don’t have high incomes, they may not
be able to afford necessities, such as food, therefore relying on gov benefits,
increasing gov spending on transfer payments
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Whereas wealth equality may be seen as
a luxury in an economy, which increases consumers long run welfare, eg from rent
payments, return on investment, etc
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A gov may choose to limit the amount of transfer payments which would reduce
welfare in the short run, but may prevent money being diverted from capex, allowing
an economy to grow in the long run
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This would prevent gov spending,
possibly increase debt, leading to austerity measures on future generations
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If it is progressive, as in the UK, poor
people earning lower incomes wouldn't have a sizable impact on gov finances, Even
if there was an impact, it could be solved with higher taxation on the rich/ higher
corporation tax, who may be earning higher due to inequality rising? Therefore
national debt wouldn’t rise, and future generations wouldn’t have to face austerity
measures
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(25)
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Point 1: Monopolistically competitive markets cant harm consumers, as if a firm is
making SNP, new firms will be attracted to the market and will compete till only

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normal profit is being made, so in the long run such a market cant have negative
implications on the consumer, making it unnecessary to regulate, whereas monopoly
can inflate prices in the long run, if gov dosent intervene, making regulation vital
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The short run might actually not be very
short, as it varies from industries
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However, firms in contestable markets may engage in predatory pricing, in order to
keep out competition
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Firm may
agree to tacit or overt collusion, restricting output and raise prices, leading to
consumer exploitation
Eval: This likely to be short run as first mover advantage would lead to one of the
firms breaking the agreement, and increasing output benefiting from higher profits
and greater market share therefore any regulatory action may be unnecessary Also
One firm may choose whistle blow as they would get immunity from fines, and other
firms would get massive fines, destroying them
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(25)
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Point 1: Protectionist policies may help the growth of such developing nations, since
they have a high number of infant industries, ( and a few sunset industries) which via
the implementation of trade barriers such as tariffs/ subsidies can be protected, and
allowed to grow
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In
the long run, once such industries grow and experience EOS, there may be further
positive implications on the economy, such as lower prices domestically, or LRAS
shifting right due to tech advancements etc
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Moreover, in the long run as these firms grow, they
may hire more employees/ have higher profits, leading to a rise in income tax and
corporation tax, allowing for higher funds for economic development
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This may
mean that gov isn’t able to spend on capex, things such as infra, education and
healthcare may suffer from low/ no spending, causing a fall in living standards, and a
fall in economic development
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Moreover, domestic industries may become over reliant on
support , therefore creating a dependency culture, leading to inefficiencies
(productive, x) where even after they grow, they require support from gov to prevent
collapse
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Point 2: Retaliation( as trump has said he will do to China) may mean protectionist
policies don’t allow economic development to occur
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Moreover a fall in net exports
may also cause a fall in AD, as (x-m) is a comp
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This would lead to lower tax revenues for the
gov, and prevent funds for development, thus preventing development
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If only a few countries retaliated who weren't major
trading partners anyway, the impact is likely to be limited, however if bigger partners
such as the US, or EU retaliated, then a sizeable impact may be imminent, causing
the aforementioned to occur
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If demand is inelastic, then even after a tariff demand may not
change significantly, therefore minimising impact on the exporting firms
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Point 3: Policies such as quota Prevents dumping and allows domestic firms to stay
competitive
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CA deficit may
be cleared if tariff on imports, further helping domestic firms, and above chain of
reasoning
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Education, leading to lower living standard
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(25)
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Point 1:Inflation leads to economic growth, as GDP rises
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There may also
be the multiplier effect
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Such
an occurrence may mean LRAS shifts left, as productive capacity of economy is
lower, having long run negative implications
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Moreover, if inflation is rising faster
than wages, then price wage spiral may occur causing cost push inflation, pushing an
economy into hyperinflation, lowering purchasing power, people can’t afford
necessities, causing a fall in living standards
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Whilst deflation lowers price levels in a country, making exports
cheaper and imports more expensive, correcting a CA deficit, therefore increasing
AD, and causing a rise in demand for domestic firms, creating the potential for
economic growth and a rise in employment etc, leading to possible multiplier effect,
increasing AD and rising GDP
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Eval: The aforementioned may only be true in the short run: Inflation making exports
uncompetitive may only be in the short run, as the value of a currency falls, exports
may become relatively cheaper, causing a rise in demand, restoring export levels
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Point 3: Inflation leads to the value of national debt falling, since the value of money
is now lower
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Eval: This would depend on the type of debt
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Moreover, a high
inflation would make investors deem UK debt as high risk, and may charge higher
interest rates
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It may allow for higher investment , as investors can plan for the future
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Eval: Just a low rate of inflation may not necessarily cause a rise in investment, as
factors such as interest rates could be high, preventing for investment to occur
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Moreover, even if the affect did occur, it would end in the burst of an asset price
bubble, causing economic instability, possibly pushing an economy into recession
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(25)
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Point 1: Strict regulations are vital to ensure confidence in an economy is maintained
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Such inevitably leads to a massive fall in confidence, lowering
both consumption and investment, lowering AD, and an economy falling into
recession
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Regulation was
present even in 2008, however there was the occurrence of regulatory capture
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Sound regulation free of regulators
acting in the interest of firms is vital, which may be really hard to ensure
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It allows to ensure that banks
maintain certain liquidity ratios to ensure consumers are able to withdraw funds and
consumption dosent have adverse effects on AD
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An example could
be stress testing of banks, where they simulate their responses to any unforeseen
crisis
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Eval: However , even after stress testing, one may not be able to stay prepared for all
eventualities
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Banks are not the only thing that allow for
stability, there are other factors such as C and I in ad that will reduce AD, and cyclical
instability is unavoidable as we have seen in the past, a boom is always followed by
a recession, again followed by a boom
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It may also raise barriers to entry,
allowing firms to gain monopoly power, which could lead to instability in the industry
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Firms have much more knowledge about complex financial instruments that
consumers that buy them
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This leads to exploitation, and may leave
consumers unable to pay back eventually, possible defaulting leading to not only
lower consumption, but also instability if this happens on a large scale, as in the 2008
crisis
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and instead of regulating financial institutions, a gov may focus on providing
consumers with financial literacy, allowing them to themselves make educated
decisions
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(25)
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Point 1: Fixed systems allow for long term stability, giving investors’ confidence in an
economy, therefore causing growth, unlike floating systems where the price of a
currency may be volatile, and would depend on supply and demand, and is affected
by imports/exports/ interest rates, preventing long run stability and confidence in an
economy
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This could
cause a rise in AD, and also increase demand for domestic industries, leading to
higher employment/ higher tax revenues leading to higher spending/consumption,
possible multiplier effect, causing economic growth and development
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Point 3: Floating systems may allow for self-correction of any trade deficits/surplus,
since if imports are greater, supply of pound rises, price falls, imports become more
expensive, exports become cheaper, and the trade deficit is solved
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Point 4: Floating systems may make inflationary pressures on an economy worse,
since if net exports are -ve, and supply of pound rises, pound depreciates and
imports become more expensive, leading to cost push inflation
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Point 5:fixed systems cause a loss of control over monetary policy, since it is
required to control exchange rates, which could worsen a country’s
inflation/disinflation
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(25)
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Point 1: Oligopoly gives rise to collusion, since only few firms operation in the market,
they may choose to tacitly or overtly collude, which would involve restricting output,
pushing up prices, which could be particularly damaging in the industry such as
pharma, where demand for medicines is inelastic, as medicines are a necessity
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Eval: However such an occurrence may only be in the short run, since a firm is likely
to only be in the short run, as firms will try and break the agreement to enjoy the first
movers advantage: higher profits and greater market share
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If regulation is strict
and fines are high, firms will be disincentivized from engaging in collusion
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Point 2: Price rigidity in oligopolies would prevent the rise of prices
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Eval: However price rigidity may not be beneficial to consumers, since the price point
could be one that is very high, causing consumer exploitation, leading to a loss of
welfare
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This
may lead to new cures for diseases, leading to a gain in welfare
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Eval: However SNP won't ensure that firms are dynamically efficient
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Point 4: Non- price competition in oligopolies may benefit the consumer, such as
better quality products, better customer care
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Evaluate the view that technological change tends to bring industries
closer to the market structure of perfect competition
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Eg consumers have
access to variety of sellers at click of a button, matching characteristic of high amount
of firms in a market
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This may lead to firm having comp
advantage, and potentially gaining market share, formation of monopoly, therefore
not closer to perfect comp
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Point 2: Tech change makes markets more competitive
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This
prevents firms from building a dominant position in a market in the long run, since
one form will eventually have a new product due to tech, which will allow it to gain
significant market share
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Also One can argue the extent to
which this could occur, as tech can’t be used everywhere
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Point 3: tech has lowered barriers to entry, since previously firms had to open stores,
now one can start a website from home, and start selling goods/services
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Policies to influence the distribution of income and wealth (25)
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Point 1: One policy a gov may use to make income and wealth more equally may be
a higher rate of progressive taxation
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of income
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Eval: Laffer curve, a higher rate of tax may not actually mean that there is higher
revenue, since there would be lower incentives to work, higher tax evasion, lower
investment etc, leading to lower revenues for gov, lowering transfer payments,
making dist even worse
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Point 2: Min wages may be used, reducing inequitable dist, This can also be
combined with max wage for the rich, making dist more fairer and lower variance in
difference between poor and rich
Eval: Unemployment will be caused, leading to some people earning even lower,
making dist even worse
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Also Adverse effect
on tax revenue if rich cant earn as much
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Point 3: Gov could use supply side policy such as making labour more productive
education healthcare, higher mrp, higher wages more equitable dist
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If gov finances are weak spending may be low, and impact on wages may not be
sizeable
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Eval: such needs to be enforced, as in Uk its there but still Uk has wage differential
between workers, and may increase costs for firms, which may lead them to firing
workers or leaving country, which would lead to higher unemployment and higher
inequality in wages
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As firm face the
threat of higher comp, they would reduce prices, until AC=AR, which is the
breakeven, and only normal profit is being made
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Lowering prices for consumers,
increasing surplus
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Also allocative efficiency
may be caused as forms move closer to P=MC Note that forms don’t have to go to
AC=AR, just closer to it, so all of above efficiencies may not be visible on diagram,
but would still be there
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If the threat of comp is
neutralised, firms may again raise prices, and if the new entrant has a patent then
also the market won’t be contestable, reducing consumer welfare
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Moreover firms may use predatory pricing and mergers
etc to drive out competition, so contestability won’t last over time
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This would lead to a loss
of innovation, and the quality of products may worsen, causing a loss of welfare for
the consumer,
Eval: however, the new firms entering the market may be bringing in innovative ideas
and products, leading to not only lower prices for consumers, but also better newer
products, maximising welfare
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However it also forced incumbent firms to keep innovating and finding
newer products, to keep themselves competitive and possibly increase batteries to
entry, such as integrating highly efficient production processes, using robotics etc
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This would mean living standards to depreciate and consumers get newer and better
products, leading to a overall rise in welfare, and possibly such newer products may
make an economy more internationally competitive
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Impact of wage discrimination (25)
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Point 1:Wage discrimination may lead to firms making higher profits
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Eval: No costs for firms may actually rise
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These worker may actually have a lower MRP than the discriminated workers, and
thus would lead to lower productivity and efficiency for the firm increasing costs
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Workers may also sue firms, as happened to the BBC, further increasing
costs
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This is due to a bad reputation for
such firms, leading to consumers switching to more ethically correct firms who don’t
discriminate against workers
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Point 3: Discrimination causes increased costs to the gov, since welfare payments
may be needed to support workers who are paid unfairly low wages / are unable to
find jobs due to discrimination, and are pushed into poverty
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Use of supply side policy to reduce the NRU (both market-based and
interventionist)
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Moreover, in the long run, with tech changing every day such skills may
no longer be relevant, so providing an example of gov failure
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A gov may also provide workers subsidies to move to places where
they would find jobs more easily
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Eval: There’s no guarantee that workers would be willing to commute long distances
to find jobs
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Point 3: market Based: a gov could reduce benefits
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Eval: This however could cause a rise in NRU in the long run
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This may cause them to fall into the
poverty trap, and since future generations wouldn't be able to have good education,
they may be unskilled, making it hard for them to find a job, leading to a rise in
unemployment
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If
they don't work well, the firm could easily fire them, reducing occupational immobility
and reducing structural unemployment, at least in the short run
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Firms would face
high costs trying to upskill labour and there still is no guarantee that workers would
become more productive therefore wasting firms time and money
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Policies to correct a balance of payments deficit (or surplus, JUST DO
OPPOSITE) (25)
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Point 1: Currency devaluation may be used to correct a deficit
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Eval: This would only be short term, since once exports rise, demand for currency
rises again, making exports expensive, again leading to a deficit
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If floating system,
country would need foreign currency reserves to appreciate/ depreciate the value,

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and not all countries would have it
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Point 2: Expenditure switching policies such as lowering interest rates or
implementing tariffs may be used to lower imports, by making them more expensive
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Eval: Just expenditure switching policies may be unsuccessful depending on the
elasticity of demand for exports
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Point 3: Supply side policies such as lower min wage, lower tax would shift SRAS
left, and high gov spending would shift LRAS right, both reducing price levels, making
exports cheaper, and making consumers buy domestic, CHEAPER, products instead
of expensive imports, both leading to a fall in deficit
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Also other countries
may be facing a recession, so demand for exports to them may be low
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Long run also if quality of education isn't good,
restricted development
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Also lower incomes mean people cant have better
health education, so limit on development
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Point 4: Better education may lead to lower population, as more people choose to
work, leading to lower strain on healthcare/education, so higher human capital,
higher productivity, better education, so development
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Microfinance
means small loans given to firms, who can invest to higher productivity, earn higher
income, so save more, no more savings gap
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LAS right, as
productivity,
Eval: microfinance has high interest rates, so no higher incomes for people, since
extra profits paid as interest, since no income left, no saving, saving gap persists, low
investment, low growth, so poor level of developments, due to loss of revenue
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Also low tax, so no development
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Eval: corruption may prevent development, but a communal fund that fair trade
farmers can send themselves is their enabling development
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Point 8: Debt relief may allow for more spending on development than on servicing
debt
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Point 9: protectionism e
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competitive
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Eval: Dependency culture can cause inefficiency, divert funds away from
development
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Buffers stocks help prevent price
fluctuation from primary product dependency, so high investment, high ad, LRAS,
lower unit costs higher profits for firms, so development
Eval: overproduction means gov has to spend lots of money and high admin costs,
lowering funds for development
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Point 11: Lewis model, as country industrialises, primary product dependency won't
exist, no primary product dependency, so no prebisch singer hypothesis, no terms of
trade worsen as incomes rise, and due to more firms and employment, give revenue
rises, development
Eval: Transfer pricing, produce in one country sell other country with lower tax rate by
selling to daughter company,
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Benefits/costs of globalisation (for developed and developing countries)
(25)
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Point 1: One Benefit of globalisation may be a rise in consumer welfare
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Since trade barriers are lower, imports will be
cheaper, increasing consumer surplus
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Costs may also
reduce since MNC’s can move to countries with cheap labour, lower tax rates
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Firms due to globalisation can engage in
trading globally giving access to products/services consumers in other countries may
not have, at a lower price, increasing welfare
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Moreover, if trade barriers are removed too much

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dumping could occur, lowering demand for domestic industries
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Firms may not be able to relocate to other countries, depending on
nature of good, e
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complex tech may not be able to manufactures in LEDC’s
Point 2: Globalisation allows for development of domestic industries, since easier
transportation, lower trade barriers, better tech, they may become more competitive
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Eval: No firms may use transfer pricing, so gov revenue may not rise, gov spending
may not rise, ad may not rise
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It would depend
on absolute/ comp advantage, if other country has it then it may be more competitive,
and be able to produce goods at a lower price
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Point 3: Globalisation may lead to structural unemployment, since firms offshore,
and MNCs move to countries with cheap labour, lower tax rates
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Eval: this would depend on the nature of good, since things like banking, hi tech
products etc may not be able to be produced in LEDCs, therefore even post
globalisation, firm wouldn't move out of original country
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Use of supply side policy to achieve macroeconomic objectives (both
market-based and interventionist) (25)
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Point 1: Supply side policies can allow for economic growth without inflationary
pressures
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This would motivate
firms to reduce costs and become productively and x efficient, streamlining
productivity, by reducing the number of inputs to produce the same amount of output
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Eval: this depends on what the private firm chooses to do
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Point 2: Supply side policies such as gov spending on education and training may
allow for workers to have a higher mrp
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Moreover, since workers would now be more productive, LRAS may shift right
causing economic growth, and lower inflation therefore fulfilling 3 macro objectives
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It
would also depend on the type and quality of education workers receive
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This would be detrimental, since such schemes could have cost the gov a lot, and
come with opp cost of using this money elsewhere
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This could include
things such as the HS2, where this would not only lead to a rise in productivity of

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workers due to lower commute times, but may also increase the size of the
workforce, since workers that previously may be geographically immobile can now
find jobs further away from where they live
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Also this would boost AD, since there is higher gov spending, leading to
economic growth, but no rise in price levels due to LRAS shifting out as well,
cancelling out any possible rise, leading to higher growth, but stable low inflation
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This would be as the gov spends on
the project, but the project may take time to complete, leading to a rise in AD, but no
rise in LRAS
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Such supply side policy may
not fulfil the macro objective of sound gov finances
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(25 marks)
P1: In market forces = profit motive = efficient outcomes as productive efficiency and
allocative efficiency meet in the economy
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Resources allocated efficiently
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Monopoly power results in
static-inefficiency as they are price-setters and price above equilibrium resulting in excess
price and constrained quantity = market failure
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A form of intervention such as tradable pollution permits can help
eradicate the activities of mining that result in costs on third parties
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Risk for government failure as the cost of
intervention outweighs the benefit of it
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Reduction in negative externality as they have control over scarce resources which puts
burden on monopoly power which reduces it
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Monopoly = dynamic efficient they may use profits to reinvest and prevent market failure
PPP = best of both worlds (includes the merits)
Govt intervention is only effective if working with other countries
Many countries chose to avoid regulation even though it is necessary

Impact of changes in taxes on macroeconomic objectives (e
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VAT,
income tax, corporation tax) (25)
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Point 1:A fall in income tax may lead to higher economic growth
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Eval: This would depend on the position of an economy on the keynesian lras
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Point 2: Progressive taxation may lead to lower inequality, since the gov can tax the
rich more, and the poor less
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Eval: Highest tax for rich dosent necessarily mean higher gov revenue, laffer curve,
tax evasion/ people leaving the country, brain drain, lower productivity, lras shifts in,
so low economic growth, whilst no improvement in inequality
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Lower prices may also make exports more competitive, leading to
a better BOP CA
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Eval: If lower tax, gov revenue falls, so lower gov spending, preventing economic
growth, and lower ad, possible lower transfer payments so higher inequality
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Even if they were, it would be for the short term in a floating
system, where currency demand would increase, pushing prices back up
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Excise duties tend to be regressive (people on low income pay a
higher % of income)
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Eval: Depends on elasticity of Good
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Impact of changes in government spending on macroeconomic
objectives (25)
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Point 1: Lower gov spending can cause inequality
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This may be damaging, especially considering today’s
economic scenario of high levels of inflation causing a cost of living crisis
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Instead revenue saved from transfer payments could be used for
capex, causing a rise in long run growth LRAS right
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This would allow people to escape
benefits trap and lead to a rise in workforce, leading to LRAS shifting out, causing
economic growth, and higher levels of employment
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Moreover, even if such people found jobs, it may cause inflation, as shown by the
Philips curve, a lower unemployment causing higher inflation
Point 3: High gov spending may cause economic growth both in the short and long
run
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Eval: However the effects of gov spending leading to a rise in lras may only be felt in
the long run, and in the short run the rise in ad is likely to cause inflation
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This may also prevent sustainable economic growth,
since future generations are likely to face austerity measures to pay national debt
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Eval: If money spent on capex, then economic growth will rise in the long run, as lras
shifts left
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Use of monetary policy to achieve macroeconomic objectives (especially
control of inflation) (25)
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Point 1: contractionary Monetary policy may be used to control inflation
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This will lead to a fall in AD, causing a fall in
inflation
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For example most mortgages in the UK are fixed rate
mortgages rather than variable rate mortgages, with 82% of mortgage borrowing on
fixed rates in the UK
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Though many fixed rate mortgages may
be short term, so these fixed rate mortgages are likely to be renewed with updated
rates, with most mortgages expected to be renewed before 2025
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Point 2: Another way Monetary policy could also be used to reduce inflation
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This is as foreign
investors will choose to save in Uk banks, causing a rise in demand for uk pounds,
pushing up its value
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Eval: But this depends on what happens to other interest rates around the world
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This means there may be less of a
difference in the US and UK rates of return, reducing the likelihood of significant hot
money flows to the UK as a result of higher interest rates
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So higher interest rates in the
UK are unlikely to have a significant positive effect on net exports
Point 4: Monetary policy can be used to improve CA deficit, by selling pounds,
making supply rise, and price fall
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This will cause
economic growth also, as x-m is a comp of ad
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Also can talk about low interest rates mean higher employment but at cost of high
inflation, use of quantitative easing to boost ad and cause growth but would depend
on position on keynesian lras
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Would
depend on keynesian lras
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While the direction of the effects is mostly clear, the
magnitude is less clear
...
The effects of contractionary monetary policy also
depend on the stance of fiscal policy
...
g
...
As interest rates rise in the UK, fiscal
policy was briefly expansionary with announcements of tax cuts and spending on the
energy support scheme, yet the fiscal policy has become less expansionary under
Chancellor Jeremy Hunt, with tax rises for example on middle and higher earners
announced
...
If
workers can easily be substituted or make up a high percentage of total
costs, demand will be elastic, and wages will be lower
...
If low
skills are needed, unemployment is high, supply is elastic
...


•

Eval:

Most important/realistic business objectives (25)
•

Point 1: Profit max, since that is what will allow for a firm to stay in a market in the
long run
...
Profit is needed for
a firm to operate
...


•

Eval: However this would depend on the market structure, if firms are in contestable
markets, they may choose to use predatory strategies such as sales max to increase
market share, and drive out competition
...


•
•

Point 2: Revenue max may be vital for firms to and experience EOS, then they can
pursue other objectives such as profit max
Eval: However firms may not want to engage in such strategies, which are illegal and
anti-competition laws may result in them incurring fines and a bad reputation,
therefore harming the firm and disincentivizing firms from engaging in such
strategies
...
If
CSR or NGO firms whose sole aim is not to make profit, but to have an impact on
society, then they may choose to forgo profit, and only focus on another objectives
...


•

Eval: However even if a firms overall objective is different, to run the firm some levels
of profit, even if normal, is needed to cover costs, therefore making profit the primary,
most important objective to run the firm
...
Lower income = lower exports = UK AD falls = GDP falls = less
govt
...


•

Eval: However in real life, very few markets are controlled by a monopsony, limiting
such a scenario occurring
...
Also this would depend on the power (density) trade unions
actually have in a monopsony market, as otherwise they won't be able to increase
wages
...


•

Point 2: Trade unions may prevent exploitation of workers, by representing them
legally, and taking action against unfavourable outcomes for workers
...


Evaluate the view that achieving a low and stable rate of inflation should
be the main economic objective of governments
...
Therefore having low inflation
is vital
...
High levels of
inflation would reduce confidence in an economy, preventing investment, preventing
growth
...


•

Eval: high level of inflation indicative of a booming economy- anticipated inflation- ppl
buy now to save later - increase AD ?

UK Economic Data 2023
GDP was flat in November 2022-January 2023 compared to the previous three-month period
(August-October)
...
0%)
...
7% in the three months to January 2023 compared to the
previous year
...
5%
...
1% in January 2023, down from 10
...
Inflation in
the Eurozone was 8
...
6% in January
...
0% on 2
February, up from 3
...
This was the tenth rate rise in a row
...
5% higher in the three months to January 2023
compared with the year before
...
4%
...
84 million people were in employment in November 2022 – January 2023, up 309,000
from a year before
...
7%, up from 75
...


1
...
The unemployment rate was 3
...
The UK harmonised unemployment
rate for Q3 2022 was 3
...
0%) and equal to the US (3
...
2%)
...
3% in Q4 2022 compared with
the previous quarter
...
1%
...
At
the end of January 2023, public sector net debt was equivalent to 98
...
7% a year before
...
3 billion in the three months to January 2023, compared
with a £4
...
The current account deficit was £19
...
1% of GDP), down from £35
...
7% of GDP)
...
6% between January and February, following a decrease of
1
...
Compared with a year ago, it is 5
...

The volume of retail sales decreased by 0
...
7% compared with the
previous year
...

House prices increased by 9
...

Household debt stood at 133
...
It has been around this
level since mid-2017
...

The Act aims to spur investment in green technology in the United States by devoting
$369bn in subsidies through grants, loans and tax credits to public and private entities- also
helps deal with cost of loans- more investment
...
Lower Profitability: In a deflationary environment, businesses may face falling prices
for their products and services, which can lead to lower profitability
...

2
...
This uncertainty can make businesses hesitant to
invest, as they may not want to take on the risk of investing in a market with
decreasing prices
...
Decreased Consumer Demand: As mentioned earlier, deflation can lead to a
decrease in consumer demand for goods and services, as people delay purchases in
anticipation of lower prices in the future
...


4
...

This can increase the burden of debt on businesses, making it more difficult for them
to invest in new projects or expand their operations
...
Reduced Access to Credit: Deflation can also make it more difficult for businesses to
access credit, as lenders may become more risk-averse in a deflationary
environment
...

Overall, deflation can lead to decreased investment in the economy, reducing economic
growth and job creation
...


A rise in inflation can lead to a fall in investment for several reasons:
1
...

Higher borrowing costs can reduce the profitability of investment projects and make it
less attractive for businesses to invest
...
Increased Uncertainty: High inflation can also increase uncertainty in the economy,
as businesses and investors may not know when prices will stop rising or how much
inflation will occur in the future
...

3
...
This can lead to decreased
demand for goods and services, reducing the revenue and profitability of businesses
...

4
...
Lower real interest rates can make it
less attractive for investors to hold bonds or other fixed-income securities, reducing
the amount of capital available for businesses to borrow for investment
...
Reduced Investor Confidence: High inflation can reduce investor confidence in the
economy, as investors may view high inflation as a sign of economic instability or an
inability of policymakers to manage the economy effectively
...

Overall, a rise in inflation can lead to a fall in investment in the economy, reducing economic
growth and job creation
...


Evaluate the importance for the financial sector (25 marks)
Point 1: providing a mechanism for investment:

•

businesses incentivized to start and expand as easy-to-access loans = increase AD
and LRAS
...
Return on capital is only 4
...
So need bank for money to invest
...


Eval: consumer business confidence and if low interest rate- saving may not occur

Methods of financial regulation: (25/15 marker)
Point 1: Regulatory authorities: PRA, FPC, FCA:
Macro prudential: FPC: reduces risk on the entire bank system- regulation affects all banks
...

Micro prudential: PRA FCA- regulates single banks
...
FCA: reduce welfare loss and financial market failure
Point 2: Higher reserve ratios: forcing banks to keep more spare cash- reduce risk of
liquidity crisis
...
Eventually- banks can’t afford to pay ppl or other banks bank = bankruptcy
Point 3: separation of commercial and investment banks: reduces contingent risk- as the
failure of one doesn't affect the other
...


Evals:
regulatory capture: cognitive capture- psychologically attached to firm acts in firms interest
...

Moral hazard: if helped out, more likely to take risk as they see they aren’t the one who have
to clean up
...
Stop over reliance on
regulators
...
Sousa

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