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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…

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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…

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o
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. Alcohol ­ cost to state:
Health care/NHS
Violence and vandalism
Policing cost
Welfare/disability benefits
Domestic violence
Prison costs
Drink driving
o Cost to…

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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 ­…

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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…

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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. EMA…

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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…

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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.
Agree to coordinate prices and production
How can cartels…

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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…

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o 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…

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