Paper 4 questions Flashcards
(18 cards)
Consider whether a buffer stock scheme is likely to be successful in reducing price fluctuations
Occur when governments buy and sell stock to stabilise prices. Governments will supply surplus stocks in the event of a poor yield to minimise excessive price rises and buy excess supplies when yields are sufficiently high enough to cause significant price reductions. If stock cannot be stored in a way that maintains quality, it may not be sold at the intended market price. Governments budget and ability to finance the scheme
Usefulness of PES
Estimates how quickly a business will take to respond to changes in demand and levels of stock it can hold but this is only an estimate and may change
Usefulness of XED
It tells the business whether their product is a substitute (positive XED) or a complement (negative XED) and how close the relationship is and hence its sensitivity to the actions of other businesses, but the speed of change may mean it is quickly out of date
Explain two possible causes of a change in the terms of trade in an economy
The terms of the trade is the ratio of export price index to the import price index. It measures the number of exports that have to be sold to buy a given number of imports. They are said to improve when the ratio increases. The main causes of a change occur when there is an increase in export prices and a fall in imports prices which are often the result of changes in the demand for exports and imports
Which causes of a change in the terms of trade is likely to be more important for LICs
LICs are more likely to export primary goods and to import manufactured goods. The demand for primary goods may be lower than that for manufactured goods when income rises so import prices may fall and terms of trade deteriorates. Commodity prices such as oil may have an inelastic demand and prices may rise leading to an improvement in terms of trade
Explain what is meant by protectionism
When governments attempt to protect domestic businesses against foreign competition. It seeks to reduce the impact of the free market and restrict free trade by increasing the price competitiveness of domestic businesses against foreign competitors
Consider the effectiveness of using tariffs as a method of protectionism
Tariffs increase the price of imports and increase the price competitiveness of domestic businesses. Problems include possible retaliation, inelastic pED for imports and possible cost-push inflationary pressure. Retaliation by other countries may offset the impact, if the demand for imports is price inelastic then imports may not fall and domestic businesses will not benefit, if the impact is on imported raw materials this will lead to cost-push inflation and domestic businesses who rely on such imports will not benefit
Explain what is meant by purchasing power parity (PPP)
A comparison of the cost of a bundle of goods and services bought with the local currency with the cost of the same bundle bought with another currency
Evaluation of the view that monopolistically competitive firms will always charge lower prices and operate more efficiently than a monopoly firm
Some monopolies might invest in new technology and achieve dynamic efficiency which will enable lower average total costs and a opportunity to pass the benefits of lower costs on in the form of lower prices. Monopolies might benefit from economies of scale leading to lower prices. Monopolistically competitive forms may incur additional costs through the need to engage in non-price competition. Monopolistically competitive firms achieve productive efficiency in the long run but a profit maximising firms will not be allocatively efficient
Evaluation of the view that price discrimination will always benefit the producer at the expense of the consumer and society
If firms are rational the firms must benefit from their action so they will benefit. As total spend takes place there is a transfer of consumer to producer surplus. 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 the balance of payments. The lower price in low PED market will benefit consumers in that market. Increase in profit may allow producer to increase R&D leading to lower long term costs and dynamic efficiency which is enjoyed by consumers and society
Explain what is meant by a concentration ratio and how it is calculated
The sum of the market share percentage held by the largest specified number of firms in an industry indicating the degree of competition. A low concentration ratio could indicate greater competition. It is calculated by adding together the total sales for each of the specific number of largest firms in the industry. That sum is divided by the total sales of the industry and converted to a percentage
Describe two reasons why increased concentration in an industry may not improve consumers welfare
It allows increased power to monopolies with resulting higher profits that benefit the shareholders and producer management, not the consumers
It results in unequal bargaining power between employers and workers. Workers have little scope for arguing for pay rises
It allows an unequal negotiations between large organisations and small independent supplies. Large organisations can insist on low purchasing prices and small suppliers have limited power to resists
Assess whether economic theory support the idea that monopolies are efficient
Productive efficiency is producer at the lowest cost for the particular output. Allocative efficiency is where every good or services is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it
Evaluate whether excess profit is always necessary for the continued existence of firms in perfect competition and monopoly
SNP are not controlled by the firm in perfect competition but a product of increased demand to which the firm reacts by equating MR to MC. The nature of SNP is transitory. In monopoly the firm will secure long run SNP by pursuing profit maximisation. The monopolist may use the SNP to realise dynamic efficiency. The monopolist may not fully exploit the ability to extract SNP but pursue alternative strategies. Natural monopoly may exist so SNP not earned. Monopolies may not necessarily earn SNP
Consider what is meant by minimum efficient scale
The first level of output on the LRAC when further reductions in average costs no longer take place
Explain what is meant by a depreciation of the exchange rate
There is likely to be a depreciation of the exchange rate if the demand for a currency falls or there is an increase in the supply of a currency
Consider whether a depreciation is likely to increase domestic real output
A depreciation will reduce the perceived price of exports which will increase the value of AD and increase the rate of domestic real output. Assumes that the economy is not operating at full capacity and depends on the elasticity of demand for goods that are traded internationally
