microeconomics

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microeconomics

taxes and subsidies

subsidy: money paid by the gov to producers to encourage production.

indirect tax: a tax on expenditure

Ad valorem tax: tax increases in proportion to the value of the base. eg VAT.

excise duties: unit taxes, varies with the volume of goods purchased. eg sugar tax.

Direct tax: a tax directly paid to the government by the taxpayer

taxes increase cost of production, subsidies decrease cost.

supply

elasticity of supply.

in the long run suppliers have more time to react to the change in price.

factors effecting: time, spare capacity, ease and costs of mobility.

Factors effecting: cost of production, time, new producers, taxes or subsidies.

shift in the curve: shows a change in how much can and will be supplied.

Movement along the curve: shows a reduction in the amount willing to supply for that price

consumer behaviour

Irrationality

other people: if others are not looking to move why would you.

Computational difficulties: so many options and prices etc struggle to calculate the best one and so act irrationally.

Habit: creatures of familiarity so often stay with the same brands despite better welfare.

Behavioural nudges: simple, low cost techniques to influence behaviour. eg. larger recycling bins.

ASSUMPTIONS: consumers aim to maximise utility, firms aim to maximise profit.

specialisation and division of labour

functions of money

method of deferred payment: people lend money when they think that when the money comes back they will be able to buy the same goods.

store of value: high inflation destroys this ability as money in the future is worth less than in the present.

measure of value: acts as a unit of account. high inflation destroys this ability.

medium of exchange: used to buy and sell goods. there is no money in a barter economy.

division of labour:the assignment of different parts of a manufacturing process or task to different people in order to improve efficiency.

Adam Smith- ten workers could produce 48,000 pins per day if each of eighteen specialised tasks was assigned to particular workers. Average productivity: 4,800 pins per worker per day. But absent the division of labor, a worker would be lucky to produce even one pin per day

Specialisation: production of a limited range of goods by an individual or firm with others so that complete range of goods is produced.

ADVANTAGES: increased productivity, cost effective, increased quality, increased output.

DISADVANTAGE: can be monotonous, less motivated, maybe risky due to the size of the market.

government intervention

state provision of public goods: destroys the free rider problem.

trade pollution permits: give an incentive to reduce emissions.

advantages: internalises the externality.

disadvantages: how does the government know the optimum level, creating a market that can fail.

regulation: used to close information gaps etc. limits on CO2 emissions.

advantages: spurs innovation, effective with inelastic goods, can be gradually toughened.

disadvantages: high costs, unintended consequences, cost of meeting regulation can discourage small business.

subsidies: encourage the production of particular goods.

other incentives needed? firms may become dependant, extra burden for the taxpayer.

taxes: discourage the production and consumption of particular goods.

unintended consequences, depends on elasticity, ,just be at the right level, regressive effect on lower income groups.

maximum price: sets a price ceiling to ensure consumers are not exploited and maintain demand.

could create a black market due to the excess demand created.

minimum price: sets a price floor to ensure incomes for producers and encourages supply.

exploits consumers.

Information gaps:

asymmetric: where buyers and sellers have different amounts of information.

principal agent problem: occurs when the goals of principals, those standing to gain or lose from a decision, are different from agents, those making decisions on half of the principal.

Imperfect: where buyers or sellers lack information to make an informed decision.

adverse selection: most likely to purchase are the most likely to use it. eg. ill people are most likely to purchase health insurance, producers increase the price and price some people out of the market.

moral hazard: when the party with superior information alters their behaviour in a way that benefits themselves while imposing costs on those with inferior information eg. insured consumers are more likely to take risks.

Public goods

a form of market failure as they often aren't produced.

poses the "FREE RIDER PROBLEM" where no one is willing to pay for a good as soon as they produce it everyone else can use it too.

a good that is non-excludable and non-rivalrous.

market failure

types of failure: externalities, missing markets, asymmetric knowledge. lack of competition, unstable prices, income inequality.

Price mechanism

Incentives: when the price of a product increases, quantity supplied increases.

signalling: prices adjust to demonstrate where resources are required and where they are not.

Rationing: prices serve to ration scarce resources when market demand outstrips supply.

elasticities of demand

cross elasticity

number substitutes or complements, price of substitutes

income elasticity

luxury or necessity, inferior or normal good.

Price elasticity

factors effecting: number of substitutes, luxury or necessity, proportion of income, time.

types of economy

Mixed economy: an economy where both the free market mechanism and the government planning process allocate significant proportions of total resources.

Friedrich Hayek: believed the resource allocation brought by individuals would be far superior to any state planning system. thought that government should provide food and shelter.

free-market: an economic system that resolves the basic economic problems mainly through the market mechanism.

Adam Smith: explains that man's selfish desires are for a positive and useful purpose. when individuals pursue their own private interests the economic sphere will be best served.

ADVANTAGES: larger choice, strong incentives for innovation and quality, higher efficiency, better economic growth, greater political freedom.

command economy: an economic system where government, through a planning process, allocates resources.

Karl Marx: presented a criticism of capitalism, believed the capitalists must end up exploiting workers to achieve this objective. he also believed that competition would cause many firms to go bust.

ADVANTAGES: lower inequality of wealth, lower risk.

Production possibility frontiers

Movements along the curve show a change in goods manufactured whereas a shift shows a change in the productive potential of the economy.

Consumer goods: goods bought and used by consumers

Capital goods: goods used in the production of other goods.

PPF: shows the relationship between the production of different goods if the economy is working at full employment.

unobtainable production: a point outside of ppt curve.

inefficient allocation: the point will be on the inside of the curve.

economic growth or decline: shown by a shift in the PPF either outwards or inwards.

Opportunity cost: shown when the point of output on the PPF shifts and the point marked in no longer centred and so the amount of one good produced is lower than original.

Maximum productive potential: shown by the general curve of the PPF.

government failure

types:

unintended consequences: policies have unanticipated side effects.

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conflicting objectives: one policy may clash with another.

regulatory capture: when government operates in favour of producers

policy short terminsim:looking for a quick fix

poor value for money: low productivity and high waste makes spending less effective.

political self interest: influenced by political lobbying

happens when a government policy fails to create enough of an incentive to change people's behaviour.