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Business and Economics Unit 4

How markets work?
Productive efficiency
o Firms producing lowest possible unit cost with the resources available
Allocative efficiency
o Economies resources are allocated to their most efficient usage i.e. output is
optimised to meet the needs of the market.
o Allocative efficiency
Point before the…

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o Net emigration
o Demographic shifts
o Political instability
o War between sovereign states
o Natural disaster

Market failure
The quantity of a product demanded by consumers does not equate to the quantity
supplied by suppliers. This is a direct result of a lack of certain economically ideal
factors, which…

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Government has duty to intervene to reduce consumption and prevent
market failure
Examples:
o Tobacco
o Alcohol
o Fast food/processed food
o Illegal substances
o Gambling/betting
Some of these can be catastrophic upon the individual and society as a whole
E.g. Alcohol ­ cost to state:
Health care/NHS
Violence and…

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Not a matter of over or under provision by private sector but that the good will not
be provided to all
Public goods have 2 characteristics
Non-excludability
o Benefits derived from provision of this good cannot be
confirmed to those who have actually contributed towards
its cost
Non-diminishable/rivalrous
o Consumption…

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Externalities
Externalities are the spill over effects upon 3rd parties resulting from production
and/or consumption of goods and services
Externalities result in market failure if the price mechanism does not reflect the full
costs of production and consumption to the whole society
Government has a responsibility to `internalise' the negative…

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Limitations/Measurement problems:
Externalities difficult to accurately place a value on externalities ­ both pro
and con = intangible
Economist `impute' s monetary value
Value of short term benefits can have a long term cost
CBA must state assumption on which results base.
Ideally range of estimates based upon different assumptions…

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` make the polluter pay' through the introduction of green taxes or environmental
taxes
The emission trading scheme has been introduced to regulate the amount of
emissions caused by particular industries
Max. Permitted levels of pollution are permitted for each industry and each
business within it.
Given a permit by…

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Strategies firms may use to dominate a market
o Collusion means agreeing with competing producers to avoid any action that would
make competition stiffer
o Cartel ­ agreement not to complete between two or more producers within an
industry. Agree to coordinate prices and production
How can cartels collude?
o…

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Can government control the economy?
Aggregate demand
o Sum total of all demand/services in the economy at a moment in time
o AD = C + I + G + ( X- M )
C = spending by households
I = investment by firms
G = government expenditure on public…

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Contractionary
o Fiscal policy
Action:
Increase direct and indirect tax
Cut public expenditure
Reduce government spending
o Monetary policy
Action:
Increase interest rates
Decrease supply of money
o Effects of fiscal and monetary :
Reduces AD resulting in reduced consumption, investment and government
expenditure
Creates unemployment
Low/negative growth
Lower inflation…

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