Application Flashcards
(32 cards)
example of a free market economy
Hong Kong
- low tax rates
- relaxed regulations on businesses
- highly capitalist economic system
where is the UK ranked out of the most economically free market in the world
7th
example of a command economy
North Korea
- low levels on inequality as government control wages and employment
- suffers from food shortages, high inflation, corruption and unemployment
- around 20% of children affected by malnutrition
example of negative production externality
- 2010 = BP well spilled oil in the Gulf of Mexico
- destroyed wildlife and damaged the tourist industry
- cost the local economy $4bn
- lost 3,000 jobs
example of negative consumption externaility
- direct and passive smoking damages health
- burden on government’s health budgets
- 2012 = total healthcare expenditure to smoking-attributable disease was $422 bn or 5.7% of global health expenditure
example of positive production externality
- spending on public transport
- gov claims every £1 spent on public transport returns £4 to the greater economy
reduced transport costs = - increased connection for businesses (suppliers, customers & labour)
- reduces geographical immobility of labour
example of a positive consumption externality
- 2018 = UK spent 4.3% of national income on education
- human capital investment associated with higher GDP and lower inequality
- additional year of education is associated with over 18% higher GDP per capita
example of a specific tax on demerit goods
excise duties on tobacco, petrol and alcohol
- 1% increase in price of tobacco and alcohol results in a 0.5% fall in demand (inelastic PED)
- tobacco tax rasies the gov around £9 bn but £2bn in tax rev is loss due to smuggling
example of an ad valorem tax
VAT - 20% in UK
- regressive tax
- more relevant to the poor
example of a subsidy on a merit good
- up until 2018, gov had a subsidy scheme in place for solar energy
- helped 800,000 households and 28,000 businesses to install solar energy
example of a subsidy on an industry
- EU spends £50 bn per year subsidising european farmers to boost farmers’ incomes & ensure a stable food supply so they don’t have to rely on imports
- farmers generate 6% of the EU’s GDP but receive 30% of its total budget
example of a minimum price
- 2018 scottish government introduced a minimum price of 50p per unit alcohol
- by the end of 2018, the volume of alcohol sold in scotland fell 3% from 2017
example of a maximum price
- venezuela sets maximum prices on bread
- lead to significant shortages
example of a maximum price in the labour market
salary caps
- labour gov proposed a 20:1 limit on the gap between the lowest and highest paid worker
- difficult for firms to recruit highly qualified CEO’s
example of a government regulation
to address the challenge of obesity the government has introduced regulation forcing restaurants to put meal calories on menus and encouraged people to eat more fruit and vegetables
example of government awareness campaign
2000’s THINK! to reduce road accidents
- road death reduce by 46%
example of a contestable markets
- online music downloads
- low barriers to entry or exit in the market
- could be argued there are already some firms with large market share (Spotify, iTunes, Amazon, etc)
example of a horizontal merger
- 2015, BT bought EE
- increased BT shares up to 4.5%
- BT estimated it would generate an extra £1.6 bn a year in sales and save £360m in terms of operating costs & capital
example of a backwards vertical merger
- 2014, Nutella nought a turkish hazelnut producer, Otlan as the price of nuts spiked due to poor weather conditions
- Otlan is a world leading company in hazelnuts and receives more than $500 mil in revenue
- reduce Nutella’s costs and guarantee supply
example of a vertical demerger
- 2015, eBay split from Paypal
- cost hundreds of millions of pounds on spending on new capital
- eBay bought PayPal for $1.5 mil in 2002 (forward vertical merger)
- PayPal became the bigger and stronger of the two companies
- splitting benefitted both firms: PayPal, acting independently, has allowed it to expand to other sites
example of conglomerate demerger
- 2018, Whitbread (owner of Premier Inn Hotel Chain), sold Costa to Coca Cola for £3.9 bn
- sale allowed the firm to focus and grow its other businesses
- shareholders benefitted the most
- Whitbread used the money to reduce its debts & cut costs
example of horizontal demerger
- 2013, Lloyds Bank split from TSB bank
- more than 4.6m Lloyds customers were transferred to the 631 branches being rebranded as TSB
- forced to demerge by the EU as a result of £20bn of taxpayer money pumped unbto the bank during the 2008 bailouts
example of rising prices
cocoa:
- $11 per KG (2010) to $15 (2018)
- shrinking chocolate makers’ profit margins
response:
- shrinking size or reducing qualities of products
- focus on premium products & expanding their customer base
- vertical backward integration to acquire producers of cocoa
example of collusion
- 2013, US government fined nine Japenese car part makers, including Hitachi and Mitsubishi, $740 mil for fixing prices
- japenese car part makers were fixing prices to US carmakers such as Ford and General Motors
- affected more than $5 bn worth of car parts sold to the US
- more than 25m consumers had suffered by paying a higher price for their car
