Business and Economics Unit 4 Condensed

Economics and business unit 4

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Business and Economics Unit 4 ­ Wider economic
How markets work?
Productive efficiency ­ Firms producing lowest possible unit cost with the resources
available
Allocative efficiency ­ Economies resources are allocated to their most efficient usage i.e.
output is optimised to meet the needs of the market.
Production possibility boundary
o To increase boundary - Increase people, technology.
o If more emphasis was placed on manufacturing, the opportunity cost would be a
reduction in output of services.
Allocative efficiency
o Point before the curve means economy is not working at maximum productive
efficiency
o Resources which are not being used can be allocated to a specific sector without
reducing the output of another sector.
o Increase the overall output and achieve closer figure to 100% allocative efficiency
Both sectors grown
Balanced out economy
Pushed line closer
Must be demand, demand is decreasing causing line being pushed away
from PPB
When not up to PPB curve, not all resources being used, i.e. unemployed
people
Factors that Shift the PPB to the right
o Improvements to technology
R&D, investment in capital goods, innovation production processes
o New resources discovered
Mineral deposits found
Birth rate increases
Therefore increased labour resource
o Improving quality of existing resources
Skills, training, education
Improvements in quality of level
o Better management of resources
Division of labour and specialisation
Lean management/ JIT
o Encouraging enterprise
Government incentives the entrepreneurs to create wealth
It is possible to increase the output of one particular sector of the economy without
compromising output in other sectors
o Increase the potential productive capacity of output of services due to adaption of a
new technology breakthrough.

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Shifting the PPB left
o Maximum potential capacity of output in the economy reduces, occurs when
firms/industries `die' and are not replaced. E.g. UK shipbuilding.
Factors that shift the PPB to the left
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.…read more

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Examples:
Tobacco
Alcohol
Fast food/processed food
Illegal substances
Gambling/betting
o Some of these can be catastrophic upon the individual and society as a whole
o E.g.…read more

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Government has to estimate to the social benefit from consumption of public goods
Monetary value on the benefits derived is problematic
Private goods ­ opposite of public goods ­ excludable and rivalries
Belongs exclusively to you
Only those who can afford to buy have access to the good
Quasi ­ public good e.g. road network
Public good up to a point until it becomes contestable e.g. if congestion results in
grid-lock then public good loses its non-excludable and non-rivalrous state.…read more

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Firework factory
Private benefits
Profits
Dividends paid
Customers derive satisfaction
Private costs
Financial costs
Wages
Raw material
External benefits
Employment
Wealth generated
Exports
External costs
Pollution
Noise/smell
Reduces availability of labour
Congestion issue
Negative externalities the government aims to internalise these external costs so that they
become part of the private costs
Triangle in graph represents total deadweight loss to the society as a result of
producing at a point.…read more

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Methods of intervention:-
Direct legislation and regulation
Provision of goods and services free at the point of use
Financial intervention ­ tax
Information and education
Financial intervention
Indirect taxation
E.g. Vat, duties, inheritance tax
Taxes are progressive
Subsidies
Used to lower costs of production
Lower price of good/service
E.g.…read more

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Share green technology
Action to reduce deforestation
Adaption
Problems of implementation
Getting people to agree
Polluter pay principle
Arguments are that no one country wants to disadvantage its competitiveness
globally
Oil producing countries in particular have a vested interest
Introduced green/environmental taxes with the intention of persuading
producers/consumers to switch to greener forms of energy
Increase costs of production or the price of goods
Adjusted to reflect the amount of harm created from the pollution caused
Internalises the external cost to the private cost
Government…read more

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Should markets be regulated?
Strategies firms may use to dominate a market
Collusion means agreeing with competing producers to avoid any action that would make
competition stiffer
Cartel ­ agreement not to complete between two or more producers within an industry.…read more

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Regulatory capture
Regulator begins to look at the industry it regulates from the view point of the managers in
that industry and not in the interests of the consumer
Can government control the economy
Aggregate demand
Sum total of all demand/services in the economy at a moment in time
AD = C + I + G + ( X- M )
C = spending by households
I = investment by firms
G = government expenditure on public services
X ­ M = difference between export…read more

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Monetary policy
o 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 ­ deflation
o Objective
Slow economy down from excessive growth in AD resulting in high inflation
Achieve a soft landing without tipping economy into recession/depression
Should government intervene in society and what effects will it have?
Redistribution of income and wealth
Inequality can apply to income and wealth
Income ­ How…read more

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