Paper 4 (2023) Flashcards
(29 cards)
Evaluate if the provision of healthcare by the public sector is inefficient so all should be provided by firms operating in the private sector
Private providers are unlikely to be allocatively efficient because they do not take positive externalities
Private firms aim for profit maximisation leading to higher costs
If based on ability to pay, creates inequitable outcomes
Pursuit of profit may reduce unnecessary bureaucracy
May allow more resources to be available in public sector
Impact on price and output may take time to be effective
Advertising is costly and may not have a sufficiently persuasive impact
Explanation of a government allowing the merger of two large firms in the same industry
Horizontal integration
Likely to lead to a monopoly
Can raise prices and drive smaller firms out of business
Might lead to less choice
Less incentive to operate efficiently
Negative impact on labour market
Evaluate the view that the government should not have allowed the merger of two large firms in the same industry
Increase in size can lead to more opportunities to provide a wider range of choice for consumers
Can lead to an increase in dynamic efficiency allowing long term investment and lower prices
Enables the firms to benefit from economies of scale, lowering prices
Potential negative effects can be accounted for by government regulation and intervention
Evaluation of the use of monetary policy to solve unemployment
Effectiveness depends on cause and is more effective with cyclical
Reducing interest may depreciate the currency and promote cost-push or demand-pull inflation
Alternative policies may be more effective if it is structural unemployment such as supply side policies
Lowering interest rates can cause problems for specific industries
Explanation of the benefits of globalisation for LICs and HICs
Globalisation promotes free trade, free movement of capital and labour and the transfer of technology and the strengthening of cultural and political ties
LICs have low productivity, high dependency ratios, low GDP per capita and dependence on primary goods
HICs benefits from access to a range of goods or services
Comparative advantage allows HICs to increase living standards by providing access to cheap raw materials produced in LICs
Globalisation can lead to economic dependency and imbalances of trade
Evaluation of if globalisation benefits HICs and the expense of LICs
LICs may benefit from the transfer of new technology
Higher skilled work may be provided through the global transfer of labour to train indigenous people
Globalisation can provide opportunities to create more real wealth which can provide merit goods
Individual firms in LICs may gain access to large markets in HICs which allow new businesses to grow
Assumptions of indifference curve analysis
Rational consumers who prefer more to less
A two-good world
The prices of goods are constant
The goods can be substituted for each other
If there is indifference between A and B and between B and C there is also indifference between A and C
Perfect knowledge of the market
Evaluation of indifference curve analysis to derive the demand curve for a normal good and inferior good
Assumes consumers are rational, are of a calculating mind, carry numerous combinations of commodities, can substitute one for the other, compare total utilities and make rational choices between combinations
Fall in price increases demand for both
Difficult to apply substitutability to goods such as durables which are one-off invisible purchases
Consumer is faced with more than two-goods and innumerable wants
Consumer preferences may change over time
Benefits of MNCs in a LIC
Transference of skills and knowledge
Increased tax base giving opportunities to government to invest in economy
FDI causing the multiplier
Improvement of eduction and health and the promotion of long term growth
Evaluation of the presence of MNCs in LICs to promote economic growth
Evasion of enhanced legal limits in home country and can transfer negative externalities to another country or laws that would increase costs
Destruction of indigenous industry by large scale production causing negative impact on employment
May establish a local monopoly that exploits consumers
May practice transfer pricing to move profit to tax haven
Jobs created may be low skilled
Definition of GNI
The total income earned within a country in a year plus net receipts from abroad of compensation of employees, property income and net taxes less subsidies on production
The MPI
Health: 1/3 including child mortality and nutrition
Education: 1/3 including years of schooling and attendance
Standard of living: 1/3 cooking fuel, sanitation, drinking water, electricity, housing and assets
Evaluation of the use of GNI and MPI as measures of the standard of living
GNI needs deflating for price increases and population
Range of incomes in illegal activity
Incomes from negative externalities of monopoly profits increase GNI but reduce efficiency
Real GNI per head lacks distribution of income
MPI data collection is more complex
Monetary-based measures can omit a lot
Economic growth does not always reduce poverty or deprivation
MPI for education measures inputs not outputs
Evaluate the extent to which government policies should rely upon market forces to address pollution as market failure
Private firms ignore social costs
Taxation is unlikely to remove all inefficiency because it is hard to measure the correct amount of tax
Minimum prices would only be partially effective
Alternatives to the price mechanism may allow more precise control such as through a complete ban
Evaluate the view that monopolistically competitive firms will always charge lower prices and operate more efficiently than a monopoly firm
Some monopolies may invest in new technology and achieve dynamic efficiency enabling lower average costs
Monopolies may benefit from economies of scale
Monopolistically competitive firms incur costs through the need to engage in non-price competition
Monopolistically competitive firms achieve productive efficiency in the long run but not allocative efficiency
Explain the use of fiscal policy to close a negative output gap
An output gaps shows the difference between the actual output and its potential output. A negative one shows there is spare capacity due to insufficient AD
Evaluation of fiscal policy to close a negative output gap
May lead to higher interest and crowd out private sector
Difficult to accurately see size of gap
Deficit may lead to inflation if financed by increasing money supply
Supply side policies may avoid the risk of inflation
May increase demand for imports
Dependent on PED for imports, raw materials may rise
Long run impact of inflation influenced by current state of economy
May be prioritising a needed to correct balance of payments disequilibrium by using a devaluation
Explain the impact of aid on the standard of living in LICs
Aid is any assistance given to a country that would not be provided through market forces. There is humanitarian, long term, tied, bilateral and multilateral aid. Aid the focuses on the provision of new technology, new factories and training the workforce will increase productivity, output, employment and incomes. Aid can increase real wealth and tax revenue allowing for more spending on health and education
Evaluation of the impact of aid on living standards in LICs
Sometimes aid only reaches a small section of the population
Long term loans may make it harder for LICs to escape the poverty cycle
Aid may be given for political reasons instead of need
Tied aid may compel the purchase of goods and services from the donor which are more expensive
Long term dependency might lead to a welfare mentality and reduce innovation
Evaluate is to improve allocative efficiency governments should remove subsidies to private sector providers of education
Difficulties in assessing the level of subsidy required
Subsidies are often expensive creating opportunity cost
Education access is still based on ability to pay
Pursuit of profit may enable firms to cut costs and reduce unnecessary bureaucracy leading to efficiency
State provision may be less efficient and reduce the time for high level education to be available equally
Characteristics for effective price discrimination
Ability to set price
Separable markets with different PEDs
Evaluate the view that price discrimination will always benefit the producer at the expense of the consumer and society
If firms are rational then they will always benefit
If discrimination is between domestic and foreign markets the producer may be able to drive competition from the foreign market if it charges high domestic prices to improve a balance of payments
The lower price in low PED market will benefit those consumers
Increase in profits can increase dynamic efficiency which can be enjoyed by consumers and society
Evaluate the idea that an increase in a governments budget surplus will increase unemployment in the short run but make it easier to control a balance of payments deficit in the long run
Impact depends on level of unemployment and its cause
Surplus more likely to have a negative effect on unemployment when there is a lot of spare capacity
Supply side may be more effective if structural
Surplus could lead to lower interest rates and cause problems for specific industries
Fall in interest rates makes it harder to control balance of payments in the long run
Evaluate that an increase in productivity leads to higher living standards in LICs
May lead to a substitution of capital for labour, increasing unemployment
Increase in FDI may lead to exploitation of indigenous raw materials and long run decline in growth
Relies on the government to ensure an increase in wealth leads to equitable outcomes
Living standards are also influenced by service provision
