effects of incr gov. intervention in an industry (3)

Question 1

macroeconomic impacts of incr gov. intervention

Answer 1

• actual economic growth (SR) + reduced unemployment -> incr gov. spending (i.e. infrastructure) -> injection into circular flow -> incr G (21% of AD in UK) -> incr AD = incr real GDP -> +ve multiplier -> businesses expand -> incr demand for labour -> reduced cyclical unemployment -> workers gain income -> more consumption (60% of AD in UK) -> AD up more -> reduction in -ve output gap -> actual eco. growth
• income equality improved -> raising NMW -> incr wages -> more disposable income -> Lorenz curve shifts

Question 2

evaluate macro impacts of incr gov intervention

Answer 2

• trade off between inflation + unemployment (Phillips Curve)
• crowding out effect -> incr borrowing = incr interest rates -> incr cost of borrowing = reduces private sector investment -> offsets growth in the LR
• incr NMW = higher labour costs = firms may engage in cost-cutting measures
• gov. borrowing may lead to higher taxes -> financial burden on businesses + individuals
• worsened budget deficit as revenue < expenditure

Question 3

microeconomic impact of incr gov. intervention

Answer 3

• PRICE REGULATION IN SUPERMARKET INDUSTRY -> gov. sets maximum price on necessities (e.g. bread, milk) -> more affordable for consumers -> incr consumer surplus -> more disposable income for low-income households -> lower revenue for firms -> reduced profit margins for supermarkets (cost/revenue diagram) -> smaller businesses may struggle -> supermarkets have monopsony power -> may squeeze lower prices out of farmers + suppliers -> face lower profits
• INCREASED NATIONAL MINIUMUM WAGE -> from £8.60->£10 (18-20) -> incr costs for firms -> less profits -> less funds for investment in R&D + capital -> limited dynamic efficiency -> less quality for consumers -> may pass higher costs to consumers -> reduced consumer surplus -> harms consumer welfare

Question 4

evaluate micro impact of incr gov. intervention

Answer 4

• supermarkets may reduce the quality of their goods + services to maintain their profits despite lowered prices
• regulatory bodies e.g. Groceries Code Adjudicator (GCA) -> prevents exploitation of suppliers
• depends on PED of product and WELD -> goods are inelastic so firms can pass on costs to consumers; also if it is easy to substitute labour for capital i.e. self-service checkouts, workers can automate tasks -> reduces costs