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Section A, micro 1. Prices and markets a. Price mechanism (plus diags)…function of markets…resource allocation b. Illustrate the above using 2 S&D diags + one PPF c. Market failure i. Do markets clear? (Hrm…in LR, markets TEND towards equil.) ii. Success or failures; ext’s…public or merit goods…demerit goods and bads, mon/olig) 2. Demand a. Slope…(neg corr); i. income and ii. substitution effect! b. Recall; effective D (will/abil.) c. Qd…vs shift 3. Shifts in D a. Non-P vars…pop…prefs…tastes…Y…Px…Py…ads… change in pop structure…derived demand (labour…derived from D for goods and services) 4. Supply curve a. Upward slope (pos corr); i. Incentives f of P; ii. rising mkt P means that firms can cover increasing costs…and thus are able to put more on the mkt! b. Law of S… c. Change in Qs…vs…change in S (shift) 5. Change in S a. Weather… b. Avail…P…Quality…Quantity of fops c. Indir taxes (VAT vs unit) and subsidies d. Mkt entry/exit 6. Equil – mkt clearing a. S = D; equil…mkt clearing…AND efficiency in resource all (link to PPF and dim rets) b. ΔS → ΔP → ΔQd c. ΔD → ΔP → ΔQs d. TR: P x Q e. TR is P x Q…(the “boomerang”) f. Excess D and excess S…(once again, the P mech!) g. Note that zero PES is poss (theatre tickets) and that the BM price is where S=D! 7. PED a. Rel change in Qd…DUE TO a rel change in P b. Var’s affecting PED: i. Fashion…avail/closeness of subs…nec…proportion of y spent on it…Px and Py…time.. c. Values (minus!)…-1.2 is “greater” than -0.8 d. Slope NOT the same as PED! e. More than 1; elastic and less = inelastic, 1 means unitary f. PED goes from 0 (totally inel) to infinity g. Value of |0.8| is inelastic (rel insensitive to change in P)…|1.5| h. is elastic….value of -1 is unitary i. Curves! 8. PES a. b. c. d. Def: rel change in Qs due to a rel change in P Positive…1.5 is “elastic”…0.6 is “inelastic” Intercepts: P-axis = elastic; Q-axis = inel Det’s of PES; prod substs…stock levels…spare capacity…techn…switching costs…time.. 9. yED a. %change in Qd…over % change in income b. “+” value is a normal good; “-“ is inferior c. Dets; luxury or necessity 10. Applications of elasticity a. TR i. Def: P x Q ii. TR is maxed when PED is unitary iii. P↑ when PED is 0.8 will lead to Δ↑in TR iv. P↓ when PED is 2.3…leads to Δ↑ in TR v. “Expl why a mon might set the price higher than a PCM…” b. Price fluctuations i. “…prices will fluctuate greatly when PED is low and PES is low…” ii. “…quantity will fluctuate greatly when PED is high and PES is high...” c. Taxes i. Indirect tax; tax is paid by HHs…but goes to govt indirectly ii. Expenditure tax – a tax on the sales of a good (often called sales tax) iii. Unit tax: USD2 per bottle of beer….or USD1 per gallon of gasoline…or USD4 per tonne of wheat… iv. VAT: percentage on the sales value, e.g. 25% in Sweden v. What would discerning wine drinkers prefer; a unit tax of USD10 per bottle or a percentage tax of 15%?! vi. Why tax cigahol? 1. Low PED…Qd does not fall a lot when the tax is added 2. Neg exts are reduced d. (Links to X rev) 11. Scarcity (and PPF) a. Limited resources…unlimited wants…choice…opp costs and the basic econ problem b. Use PPF to illustrate rising opp costs and dim returns 12. Mixed economy a. Private and public ownership b. Why some goods are supplied by govt (e.g. market failure of P&M goods) c. All economies are mixed…the degree varies d. Efficiency; lowest AC e. Types of mkt failure (4 reasons) i. Externalities (pos and neg) ii. Imperf comp iii. Lack of info iv. Over-/ under-provision/consumption (Over: de-merit and bads. Under: merit and public.) 13. Specialisation and div of labour a. Div of labour…Smith…productivity revisited…advantages and disadvantages… b. Note: you should know that population and TLF are NOT the same! 14. Labour markets a. Labour supply and demand (ASL and ADL) b. Min wage and effects c. Factors affecting DL d. Factors affecting SL e. Trade unions and govt intervention – effects on U and Wr f. Wage determination – and why wages differ g. A REAL ISSUE: Wr = Wnom / CPI x 100 i. Other real issues; 1. GDPreal (Yr) = GDPnom /GDP defl x 100 2. Pr = Pnom / CPI x 100 3. (rreal = rnom – infl) 15. Govt intervention in lab mkt a. Min wage…plus diag…plus outcomes! (EVAL!) b. Trade unions and union power (e.g. appxing min wage) Section B: Business economics 16. Factors and productivity Fixed (defines the SR!) and variable factors (in LR, all factors are variable) Productivity (measure) o Q output / Qinput (often labour)…however… o …per unit of labour hour is better! 17. Sectors in the economy Primary → secondary → tertiary De-industrialisation (permanent decline in sec ind as a proportion of total GDP) o Link to structural unempl in macro! 18. Costs… TFC + TVC = TC…divide by Q… …AFC + AVC = ATC ATC is a “smiley” – falls at first, then rises…as DIM RETS set in! TR; P x Q… o π = TR – TC…or… o NPOA: π = (P – AC) x Q When TR > TC: abn profit When TR < TC: loss When TR = TC: normal profit or “BEP” 19. EOS In LR, all FoPs are variable…and thus… You get a LRAC curve… o I: EoS… o II: Constant returns to scale o III: Diseconomies of scale (critique!) Internal (firm causes EoS) and external (market situation causes EoS) 20. Productivity FoPs and increased productivity PPFs…show de facto and potential growth Ex’s of how to ↑prod’y o Land: GMO…better irrigation… o Labour: edu…work methods… o Capital: technology… 21. Externalities Neg: MSC > MPC Good is being over-consumed/over-produced Exs: neg ext (pollution) is and example of neg ext in prod… o and de-merit goods are also an example of neg ext in cons Social costs; costs inflicted on 3rd parties Private costs; costs to firm and consumer Soc cost – priv cost = neg ext Neg: Soc costs greater than priv costs – over-cons or over-prod Pos: Soc bens greater than priv benefits – under-cons or under-prov o Merit (“…my use benefits others…and good for me in LR…”) o Public (“…non-excl and non-rivalrous…”) o Govt policies Pos exts; subsidise…provide using tax monies…create incentives for people to consume more of them… Neg exts: taxes…neg advertising….decrease D by providing cheaper substitutes… 22. Competition – the PCM Basic assumptions… o No BTE…many firms…many consumers…perf knowl and info…homog goods…firms is assumed to be a SR profit-maximiser Firm is too small to influence P or Q…is a pricetaker…competes on PRICE! Benefits: choice…eff (lowest poss cost per unit…and allocative eff – S = D)…lower prices…quality…innovation… Possible disadv: no EoS…***mkt failure (envir, missing goods…etc)…”normal profit” in LR 23. Large and small Measuring firms’ size o Employees…turnover…mkt share (capital employed) Olig: few…large…dominate…mkt power (set P or Q)…4FCR (4 largest firms have circa 30% or more of mkt → olig) Eval: o Large firms adv: EoS…domination…poss to keep out rivals (predatory P)…innov due to huge profits…larger mkts and safety of many geo areas and products… Neg in large firms…lower motivation…costs rise in coord/control → poss diseconomies of scale…incentive for CARTELS… o Small firms Adv: flexibility (adapting to changes in mkt…tastes…prefs…)….personal service…ease of internal comms…poss to have lower wages…possible “niche” markets are innovative and have no EoS Disadv: lack of finance (high borrowing costs…lack of startup cap)…higher costs (no EoS)…vulnerability (in a narrow range of products and poss narrow geo area)… 24. Growth of firms Why…survival…lower cost…etc; ↑π !!!!! Internally (organic): growth through retained profit Externally: takeover…merger…(hostile takeover) o Horizontal (two café chains) o Vertical Backward Forward o Lateral (similar but non-competitive) o Diversifying or conglomerate Limits to growth: size of mkt…disecs of scale…lack of capital…mkt entry (low BTE)… 25. Monopoly One company….(25% of mkt or more) Assumps: high BTE, non-perf knowl/info, “unique” good, firms is SR profit-maximiser Sources of mon power: high BTE…patent…copyright…only source of FoP…unique production process…bound up the supply chain…and YES EoS and high start-up costs etc Assumptions: high BTE…profitmax…good is unique…imperf knowl/info o Results: firm is a price-setter o CS falls Nat mon: two key chars: 1) Huge EoS; 2)High start-up costs and FC; 3) not even a SINGLE firm can fully exploit the EoS Eval of mon. o Bad: Higher P Lower Q Loss of CS Mon is allocatively ineff (DW loss in diag) Lack of incentives for innov…R and D…new products…better quality (good example here is India) o Not so bad: EoS… A mon might have such EoS that the AC would be lower than for, say, 1,000 PCM firms Nat Mon Even at profitmax P can set P lower and Q higher than two competing firms (duopoly) “Should a country privatize public utilities?” No, probably not: two (private companies) will see their AC far higher than the nat mon! Also; a benevolent municipal govt will be both willing and able to set price at BEP…due to very high pos exts!!!! Of course, abn profits ploughed back into R and D o 26. Oligopoly Few and large…with mkt power o 4FCR of more than circa 30% o High BTE…both homog and non-homg! Often MNCs…Nike… Two main chars: o Price rigidity o Non-P competition Interdependent…results often in cartels… o Collusive (e.g. cartel) o Non-collusive Often we see economies of scale Illustrating the two main chars: kinked D-curve Eval: o Good: choice (due to non-P nature of the competition in non-coll olig), innovation, poss lower AC and thus lower price o Bad: danger of collusion/cartels → higher prices…less choice (loss of CS and cons sov) o Uncertain: do prices in fact rise of fall when firms grow?! (Fall due to EoS…but there is an element of mkt power in oligs that means prices might rise.) 27. Public and private sectors Private; basis of competition…firms are in it for profit (maybe also growth….kill off rivals…take over market…TR…BUT all this is still profit in LR!) o Note “sole provider” has complete responsibility for debts (100% liability) o Shareholder company is its own legal entity (owners are NOT personally liable) Public; other goals – equity…equality…provision of goods with high pos exts…(public and merit goods – see “mkt failure”) 28. Govt regulation Forms: laws/rules/regs, anti-trust authorities, consumer regulation offices, labour legislation…etc Anti-trust (or competition commission): fine firms for misconduct (predatory pricing…collusion…cartelbuilding…locking out rivals from supply chains…); have the last say (often) as to mergers Promoting competition; soft loans for new startups…govt subsidies…govt aid in legal help… IGCSE favourite: “…how can govts influence the location of industries…” o Why: population reasons…environment…health and safety…unemployment…equity/equality… o How: public ownership and thus allocation; subsidies; govt can provide infrastructure; (in Scandivaia, govts often put large govt offices in rural areas) 29. Privatisation (see Thatcher and Reagen, 1980s) What? When govt sells off or “farms out” government firms or services o Selling of British Steel or Brit Rail… o In US, many local services are paid for by tax monies but provided by private firms (lowest bidder wins the contract) Reasons: increased efficiency; get rid of loss-making industries; one-off increase in govt rev for the sale; simple ideology – increasing competition in the economy o Note that govt run firms were often “politicized” – e.g. were run along vote-winning lines rather than profit motives Effects: o Firms: higher eff; lower costs; greater innovation; improved int’l competitiveness… o HHs: better goods; lower prices…more choice…BUT; often with the cost of higher U in SR!