P3 Flashcards
(25 cards)
Wage differentials (12)
WES- neurosurgeons =inelastic= hard to train and takes long time = need to pass hard exams so supply is inelastic
WED= inelastic as if wages increase there will be a less than proportionate fall in demand for neurosurgeons as they are important while for cashiers there will be a more than proportionate decrease in demand for cashiers as can easily be substituted for capital machinery
EVAL
-National minimum wage can reduce wage inequality = reduces wage differentials
- trade union power = have power to do collective bargaining= if successful then can get higher wages for their workers
What might cause demand/supply for labour to increase or decrease
- immigration= higher supply of labour
- emigration = ppl leaving so supply in= less supply
- increased demand for products = increase demand
Economic development
Limitations/ constraints
1) Harrod domar: savings
- Low gdp per capita= MPC is high = low savings= insufficient bank funds= less lending= low levels of investment= AD left = low capital accumulation = low growth and economic development
EVAL- some may be receiving aid = increased rate of savings= fill savings gap= increase lending= increased investment.
2) Harrod domar: foreign exchange gap
-limited foreign reserves =weaker currency= deterioration in terms of trade
-Cant import to get better machinery
- harder to service debts
EVAL- develop tourism= higher foreign reserves
3) Primary product dependency
Prices of primary products= volatile= difficult to invest = decreased FDI= low investment. Prices volatile and if reliant of selling this primary product as main source of export earnings, and so if price of commodity falls= demand is inelastic so = less than proportional increase in demand so less export earnings= current account worsens.X-M is a component of AD , AD shifts in
Prebih singer = as incomes increase demand for manufactured goods increases faster than demand for primary products= detortation in TOT= difficult to import goods and capital machinery needed to develop the manufacturing sector = becomes even more primary product dependant
EVAL
Forward markets
Country may have comparative advantage so sould specialise as = more efficinect allocation of resources= higher living standards
Econ development strategies
Strategies
1) AID
-some may be receiving aid = increased rate of savings= fill savings gap= increase lending= increased investment.
EVAL
-may create dependency culture= decrease economic growth and devel
- corruption so aid won’t even end up on being spent on economy= may end up in hands of corrupt officials
- aid may have conditions attached or may be a loan so have to pay back as not free
2) develop tourism= higher foreign reserves = fills foreign exchange gap= improve TOT= easier to import capital machinery to develop that sector
However = market failure= more pollution= negative externality diagram
Tourism is likely to attract FDI, TNCs more likely to set up = creates jobs, investment is a component of AD = AD right. ALSO injection into CYOF= multiplier effect= Multiplier diagram = increases economic growth and decreases unemployment
- TNCs likely to improve infrastructure = external economies of scale = decreases average costs= vehicles break down less often as roads better, easier to get from A to B. = Higher profits so MC and AC fall = invest in R+D = increases dynamic efficiency
EVAL
- tourism vulnerable to external shocks eg covid = fall in gdp
Using concept of PED explain why primary products are extremely volatile in price (5)
- PED is likely to be price inelastic less than 1 because its a necessity. They are really vulnerable to external supply side socks like weather.
- Draw inelastic demand and elastic supply with supply shifting in = massive increase in price but less than proportionate fall in demand for commodity
Evaluate the micro and macro effects of supply side policies (25)
Macro
-Investment into education and training
- Reduction in red tape eg reduce NMW
- Reduction in corporation tax=
- subsidies
ONE MICROECONOMIC EFFECT OF ssp IS TO INCREASE profits for firms so gov could subsidies….
-Define subsidy= MC and AC fall= price the charge fall from p1 to p2 so sales rise from q1 to q2 so profits increase from blah to blah
- At pmax level demand is elastic so a decrease in price= more than proportionate increase demand for their goods= increased revenue = can invest in R+D= increases dynamic efficiency
EVAL
Dependency culture = may become complacent = increases x-inefficiency
subsidies= protectionism = other countries may retaliate= trade war= tariffs placed= so higher costs and lower profits as struggle to sell your goods globally so AR and MR may shift in= fall in profits = firm may shut down
One macro is investment in education and training= workers more efficient and productive= decreases unit labour cost= more globally competitive = increased in demand for goods as their cheaper and because quality may rise cos more invitations if workers smarter. Also may decrease structural unemployment in economy = LRAS out= increase productive capacity= may attract FDI
EVAL
Time lag
Gov spending large amount of money = higher sical deficit and national debt= decease credit raating= decrease demand and price of bonds= higher IR = harder to may off any future debts
Another extra micro is reduction in red tape= easier for firms to hire workers eg reduce NMW or decrease environmental laws= decrease costs so MC and AC fall as variable costs fall
EVAL
- more externalities= more pollution = draw negative externalities= higher external costs= market failure
Evaluate the microeconomic and macroeconomic factors that influence how a business grows (25)
One micro way that could influence how a business grows is their ability to merge. So better placed to tap into economies of scale where LRAC is falling as output rises, eg purchasing economies of scale so can bulk buy steel, rubber, tyres= enables firms to decreased average costs and operate closer to their MES = increases productive efficiency = charge lower prices for consumers = higher market share
EVAL
- Diseconomies of scale
Macro
One factor is the IR in that country. If central bank where to cut base rate = lower cost of borrowing for firms= increased investment= more technologically advanced= more gloablly competitive = can sell more in global market
Eval
Base rate cant be cut much more = suffer from liquidity trap = monetary policy becomes ineffective as further cuts to base rate have little to no impact as commercial banks are unwilling to cut their IR any lower= may not stimulate growth
Exchange rates
-inflation= higher prices=less demand= depreciation of currency
-higher growth= increase disposable income= demand more from abroad= sell currency and buy foreign reserves= supply shift out= currency depreciates
- if main trading partner is experiencing recession= less incomes= want less goods from your country = less demand for goods= demand less of currency = depreciates
Evaluate micro and macro effects of depreciation of currency eg euro (25)
One macro effect of depreciation is makes economy more internationally price competitive , increased exports cos international currencies can now buy more euros and imports are likely to fall because euro buys less in global market = currency account deficit falls. X-M is a component of AD= AD shifts rights, exports are an injection into the CFOY= positive multiplier effect = diagram = increased economic growth= decreased unemployment
EVAL
-For their to be an improvement in current account following a depreciation of euro= martial learner must be satisfied, it states that average sum of price elasticities of imports and exports must be greater than 1 therefore elastic this is because every unti exported out of france is now cheaper while every unit imported is now more expensive
- J curve - gets worse before gets better as likely to be stuck in trade contracts in sr so its gets worse while it get better in long run as can renegotiate contracts = currency account improves
One micro effect = makes firms more competitive= higher demand for goods and services = AR and MR shift out = increased sales= increase price they can charge= and increased sales means can tap into economies of scale = costs fall from c1 to c2= higher profits for firms from blah to blah= can invest profits in R+D= increases dynamic efficiency
EVAL
Profitability may not rise as if euro depreciated = more expensive to import from rest of world as need to convert more euro to buy one dollar, raw materials = variable costs = so MC and AC may rise as more expensive to import raw materials = decrease profits = may shut down
Evaluate the micro and micro effect of demand side policies adopted during the pandemic (25)
Micro - banks of england during pandemic cut base rate to 0.1% = decreased IR = decreased cost of borrowing for firms= variable costs fall = AC and MC fall = increased profits = decreased costs
EVAL
-liquidity trap
- even if costs fall there was a fall in demand for goods = profits may fall = firms may shut down
Macro
Expansionary fiscal policy= stimulates growth= gov spending is component of ad = AD out also injection= positive multiplier effect= increased economic growth= decreased unemployment
Eval- Fiscal deficit and national debt increases = decreased credit rating
Judgement
Another policy may have been more important
Evaluate macro and micro effects of strategies to promote economic development (25)
Lewis model- according to this model there is an excess supply of labour in the agricultural sector eg percentage of gdp . Therefore marginal productivity of labour is zero or very low due to law of diminishing marginal returns so if u move excess labour from agriculture to manufacturing sector= no opportunity cost= one benefit is diversify economy so less vulnerable to negative shocks in agricultural sector eg if price falls of primary products = not badly affected as have strong manufacturing sector. Another benefit is that strong manufacturing sector= likely to attract FDI=jons= external economies of scale = AC and MC falls
EVAL
-FDI= pollution and higher external costs = negative externalities= decreased life expectancy= higher strain on NHS= negative externality diagram
Macro
SSP= invest in education and training= improve human capital = more innovative= generate more exports= better service secor= diversify economy as not reliant on primary sector
Eval
Time lag
Fiscal deficit
Can also do tourism or protectionism
It was suggested some firms may respond to the adverting ban by cutting prices for their products. Use game theory to discuss the effect on firms of cutting prices in an oligopolistic market. (12)
Advertising ban makes market more contestable = lower barriers . By cutting prices, walkers
One effect on walkers cutting prices in response to advertising ban is to preserve their market share, the advertising ban makes the market more contestable as lower sunk costs, in the response to threat of entry becoming real, they may adopt limit pricing which is where a firms charge lower prices to deter new entry into market. In LR once gained brand loyalty then can lower prices
Eval
Kinked demand curve
Game theory illustrates that if they were to reduce their prices, other firms like KP will also reduce their prices, therefore there won’t be a dramatic increase in demand for walkers
Discuss whether borrowers benefit from microfinance (12)
If firms were unable to access credit and are now given loans, firms can use to invest in capital= MC and AC fall= prices the charge falls, output increases, profits increase, these profits can be invested into new other stuff eg R+d so dynamic efficiency will rise
EVAL
However figure 3 shows ICOST OF Loans is 75% so firms may not may back so costs will increase and some firms may shut down
Access pricing and non pricing strategies
PRICING
1- limit pricing
EVAL
-lower price may not deter new entrants as firms may compete on quality basis so if prices were to fall for one company other firms may offer quality so consumers may still switch
-there may big firms that are still able to enter the market
2- predatory pricing = big firms can absorb losses, while small firms cant so small firms leave and then u raise prices
EVAL
Illegal
Small firm may have brand loyalty
NON-PRICING
Advertising = shifts AR and MR out = increase market share
EVal
- high sunk costs
High advertising may not result in higher demand
Merge so AR and MR shift
Eval - CMA may interven
Assess the impact of increase of monopsony power on supermarkets profits, use cost and revenue diagram
-Monopsony - a single buyer
- variable costs fall so MC and AC fall = increase profits= output increases. Prices increase
EVAL- may not be able to dictate prices if suppliers are big
Cma may intervene to limit degree of monopsony power
- suppliers may merge
Monopsony power on suppliers
Profits falling= shittind down
Many sellers ie farmers = lots of substitutes that supermarkets can chose from= AR and MR shift in as less demand fro goods because of alternatives
Impact on profitability on firms ro living wage increasing
-Costs increase = MC and AC rise= some firms may shut down
EVAL- switch to workers below 23
- switch to self checkout machines or other machines
- higher wage may increase worker productivity as higher opportunity cost of losing job
Evaluate the micro and macro effects of market failure in the financial sector (25)
Market failure is where the free market left alone fails to deliver an efficient allocation of resources.
MacroOne effect it may have negative implications on bond market
- Bank had to bail out banks= expensive =increase fiscal deficit and national debt eg increased from 35% in 2007 to 60% in 2009 = decrease credit rating of gov= decrease investor interest= decrease rice and demand for bonds= increased interest rates= increases cost of borrowing= harder to service gov debt.
Additionally moral hazard created as banks know they are too big to fail so in long run may take on high levels of risk again
One effect it may have negative implications on the bond market. The financial crisis in 2008 resulted in the uk government having to intervene and bail out several banks like northern rock and lloyds, this will cause the fiscal and national debt to increase eg increased from 35% in 2007 to 60% in 2009 = this high debt to gdp ratio =resulted in uk losing AAA credit rating = decrease credit rating of gov= decrease investor interest= decrease price and demand for bonds= increased interest rates= increases cost of borrowing= harder to service gov debt= limit ability to grow economy through expansionary fiscal policy
Additionally moral hazards as banks know they now too big to fail and may end up taking excessive risks again in the future
EVAL
However as long as demand remains high for bonds then price of bonds will remain higha nd interest rate will remain low so many not be a cause of concern eg Japan has debt to gdp ratio of 200%
MICRO
2) Bubble pops= Negative equity were asset u paying mortgage on is worth less than value of mortgage
One microeconomic effect of market failure in the financial sector is that it may spillover and lead to market failure in the labour market.The 2008 financial crisis led to a bubble in the housing market which eventually popped as a result many homeowners suffered from negative equity were asset u paying mortgage on is worth less than value of mortgage eg an individual has a mortgage of £400,000 and value of assets falls to £100,000 this means if they sold their house they will still be in debt of £300,000 and if they default on their debts then this would negatively impact their ability to borrow in the future and take out another mortgage ,so if a job was presented= would struggle to relocate and take up housing there= labour becomes geographically immobile
OR if house prices collapse = negative wealth effect = decreased consumer confidence= less demand for goods and services= AR and MR shift in= firms shut down= profits fall= less investment = less dynamic efficiency
EVAL
Since then housing market has bounced back people assets have gone back to normal so may not be significant
- geographical mobility to a big issue as people can work remotely
Discuss the role of the financial sector in the growth and development of developing countries (12)
One way in which financial market can promote economic development is by facilitating savings, According to the harrod domar model many developing economies have many low savings rates as have low GDP per capita and thus have high MPC = low MPS= low savings= deters banks from setting up = low amount of banks= less investment . However if banks set up and lend money to businesses= investment rises= investment is a component of AD = aAD shifts out , its also and injection into the circular flow of income = positive multiplier effect= multiplier diagram, also investment may increase productive capacity so LRAS out and economic developments occurs
EVAL
Issue from savings gap is not just because of lack of banks its also from low incomes so does not resolve it
2- primary products are volatile = hard to plan ahead and invest= forward markets can help = increases confidence
eval - may be other issues and ppl may not know how to use forward markets. Also countries still primary product dependant = issue
Evaluate micro and macro effects of tight monetary policy( contractionary) (25) of high interest rates
-High interest rates = hot money flow = demand shift out= pound appreciates = less internationally price competitive = exports fall as other currencies like dollar can’t buy as many pounds, imports are likely to increase as the pound can buy more in the global market= worsens uk current account deficit. Also X-m is a component of AD so AD may shift in and imports a withdrawal = negative multiplier effect = negative multiplier diagram
EVAL
For current account to worsen, marshal lerner must be satisfies , it states the average sum of price elasticities of imports and exports must be greater than 1= elastic
J curve - current account deficit gets better before it gets worse as firms stuck in contracts and consumers exhibit habitual behaviour so marshal lerner is unilikley to be satisfied in SR while in LR these contracts can be renegotiated so current account may worsen
MICRO
High IR = more ppl saving = less spending =less demand for goods and services = AR and MR shift in=higher costs= less profits= some may need to shut down
EVAL
Before interest rates rose firms may have borrowed and invested into capital machinery= over time costs may fall= offsets decreases in demand= not big issue
Depends on PED of product
Judgements
Macro effect are more profound as IR affect all components of AD while on and idividaul basis firms may have ways to combat high interest rates
Dutch disease
Countries that primary product dependent= if increased in demand for cacao ppl outside ivory coats need to buy their currency= increase demand for currency= causes currency to apppreciate = firms in ivory coast become and industre like tourism are now less price competitive= collapse= become even more primary product dependant
Examine 2 reasons apart from access to finance why 90% of the manufacturing sector in mozambique is made up of small enterprises (8)
-Workforce may have a limited education and skill set = limited output and quality= less prfofits= cant grow
Poor infrastructure= cant transport raw materials quickly and goods
-limited economies of scale
EVAL
May be temporary issue
-gov may invest in infrastructure
Evaluate the microeconomic and macroeconomic effects of increased monopsony power in the global market (25)
MICRO
-higher profits formonoposonists= can push down prices= decreased variable costs= MC and AC fall
-EVAL
- cant exert monopsony power over large suppliers eg Nestle
- suppliers may merge
-CMA may intervene
MACRO
-primary product dependant economies eg ivory coast,if monosony power is higher= chocolate manufacturers can dictate prices of farmers = lower prices= decreased export earners= AD shifts in= decrease economic growth= increase unemployment = gov may now recieve as much tax revenue = less money to invest in education and healthcare= fall in HDI rankings= fall in economic development
EVAL-gov may adopt fair trade schemes - ensures illegal for farmers to sell below certain price = ppl cant buy below that price
Guaranteed minimum price scheme digram = may not be able to exert as much monospony power
Evaluate the micro and macro effects of a rise in oil prices (25)
MICRO
- increase variable costs= decreased profits as MC and AC shift up= some may need to shut down
EVAL
-service based industries may not use oil as much as manufacturing industries , so impact less on them
-other costs may be falling eg productivity may be increasing
MACRO
-If net exporter of oil eg saudi arabia , if price goes up, PED for oil is inealstic so if price increases , demand is not very reactive = total revenue will rise,= increase export earning= currency account improve= AD out= injection= positive multiplier effect
EVAL
Oil PED may become elastic as ppl may switch to electric cars and other energy eg fracking= revenue may start to fall
Evaluate the micro and macro effect of an increase in minimum wage or introduction of living wage (25)
Increased wages =Increased variable costs= MC and AC increase= decreased profits= some firms may shut down
EVAL
-may switch to younger workers
-may switch to machinery eg self checkout machines
- productivity may increase as opportunity cost of losing job is higher
MACRO
-ppl have more disposable income = AD out= increase consumption
OR
-higher living wage = deters FDI
OR
Decreases income inequality= shifts in lorenz diagram in gini coefficient falls
EVAL
-if firms switch to machinery= structural unemployment= decreased disposable incomes..
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