Microeconomics

Factors of production

Land

Goods like minerals, land itself, and all the resources we take from the world such as fish, forestry and the air

Labour

All the potential workforce, people as well as their skills and intelligence

Capital

Stock of goods used to make other goods and services eg machines, tools, computers, railways

Enterprise

Risk takers who are prepared to bring the other factors of production together to make goods

Production Possibility Frontier 

Illustrates the combination of two goods providing we assume that all available resources are being utilised to the full, anywhere on the curve all factors of production are being used to their max, so the economy is Productively efficient- you are producing at the lowest possible cost and Allocatively efficient- you cannot make someone better off without making someone worse off.

Within the PPF it is possible to increase output and welfare without changes in the level of resources or tech, shifts between 2 PPF points carry an opportunity cost. If we improve the skills and abilities of workers to some extent then output can increase using the same number of workers and amount of time, through training, education and motivating management.

Factors shifting PPF to the right- investment in new tech, introduction of new resources, increased supply of labour through migration etc, improvements in human capital through education, better management of resources via division of labour & specialisation, changed attitudes encouraging entrepreneurialism 

The Slope- Bowed- opportunity cost gets highers in terms of moving from one product to another  Straight Line- opportunity cost is constant

Demand

The demand curve is downward sloping- we assume consumers want to maximise the benefits they recieve with their limited income, the laws of economics state that as we buy more of something the benefit we receive from each extra unit will begin to diminish

Movements along the demand curve only happen due to change in price- a contraction (inwards on the curve) or extension (outwards on the curve)

Shifts caused by- Income, Advertising, Substitutes (if the price of a subsitute falls demand for the product will fall), Complementary Goods (if the price of a complementary good rises, demand for the good falls), Fashion, Population, Changes in quality, Weather, Laws, Uncertainty

Supply

As a goods price rises more is supplied as there is an increased incentive for profit, the business is willing and able to produce more, new firms will enter the industry as they believe this is a profitable industry and so existing firms will increase production. As supply increases, firms may be forced to increase prices due to diseconomies of scale

Factors shifting supply curve- Changes to raw material prices, tech improvements, increases in labour productivity, regulation and bureaucracy, wage rates, subsidies, indirect taxes, expectations about future prices, objectives of firms

An ad valorem tax will cause the new supply curve to be steeper

Supply and Demand

Signalling- tells us something about the price
Incentive- either from customer or supplier to buy or sell more of the good
Rationing- buyer/ supplier the demand/ supply less

Establish if there is excess supply or demand and label on diagram- do this reading off supply and demand at old price level, then use SIR to show what needs to happen to the price to return the market to equilibirum, and whether supply/ demand is the incentive or rationing function due to this change in price, and whether there is a contraction or extension 

Governments can impose min and max prices eg in the form of minimum wages, here it is possible there is a disequilibrium price may exist within a market and the market mechanism doesnt correct it

Responsiveness of changes in demand to changes in price- % change in quantity demanded/ % change in price (QPR)  If the value is greater than 1 (ignoring the sign) elasticity is elastic- a percentage change in price will bring about an even larger & change in demand, not steep gradient of demand curve, Infinitely elastic horizontal line on diagram

In diagram box under where reading off is the total revenue (price x quantity) 

Less than one- inelastic (ignore sign), steep gradient of demand curve, infinitely inelastic vertical line on diagram

Unitary elasticity- value of 1

Determinants- availability of substitutes, width of market definition, time (demand unresponsive to changes in short term, long term may switch to substitutes), luxury or necessity, proportion of income

% change in quantity demanded/ percentage change in income

Sign crucial- fall in demand when incomes rise gives negative value, rise gives positive

Inelastic- between +1 and -1, elastic greater than 1 or less than -1

Negative sign- inferior good (eg public transport)                Positive sign- normal good 

Cross elasticity of demand- % change in quantity demanded of one good/ % change in price of other good

Cross inelastic- lies between +1 and -1, greater than 1 or less than -1, cross elastic

Positive answer- goods are substitutes- as price of one increases, demand for other increases

Negative answer- goods are complements- as price of one increases, demand for other decreases

When the price is constant the total revenue curve is a straight line, when it is not constant the total revenue curve is curved

Average costs- total cost/ output

Production- amount of output per worker per period of time, UK productivity gap (Germany most productive in Europe)

Land (goods, land, resources we take from world), Labour (people & skills/ intelligence), Capital (stock of goods used to make other goods & services eg machines), Enterprise- risk takers, catalysts for action

Specialisation & division of labour- 3 reasons why (Adam Smith, pin factory) - worker will not need to switch between tasks, time saved, more & better machinery or capital can be employed, practice makes perfect- more efficient & productive at task- lowered supply cost per unit- lower prices for consumers, gains in economic welfare, firms more competitve

Disadvantages- repetitive work lowers motivation, less pride in work, less punctuality, may choose to move to less boring job, structural unemployment, occupational immobility, mass produced standardised goods lack variety

For specialisation to be economically worthwhile a system of trade & exchange is necessary, surplus can be traded to others. Long run- no factors of production fixed, short run at least 1 fixed and cannot be varied- only way firm can produce more in short run is by adding variable to fixed factors. A firm is said to be productively efficient when operating at the lowest point on the ACC (marginal cost meets average cost)

Perfect competition (challenge assumption as not realistic)- price takers, large number of buyers & sellers no leader, perfect information, can sell or buy as much as you want at ruling market price, individual buyer or seller cannot influence market price, homogenous product, no barriers to entry or exit in long run, lower prices, laws, competitiveness- economic theory

Various forms of imperfect competion (reality)- all structures between extremes of perfect competition & pure monopoly- many sellers, heterogenous goods, covers strucures ranging from large number of competitive firms to highly concentrated, almost all real world markets

Monopoly- price maker, one firm 100% share in pure monopoly

Competitive markets lead to productive efficiency, failure when the market fails to allocate resources efficiently- overproduction/ underproduction of goods (partial market failure), missing markets (complete market failure) 

Private good- rivalrous, excludable

Public good- non rivalry (consumption by one doesnt reduce availability to others), non excludable (once provided no person can be excluded from benefitting) eg defence, police service- impossible to prevent free riders

Quasi public goods- not perfectly non excludable but is non rival (you could stop someone getting it)

Merit good- underprovided by market, left to free market wouldn't be provided sufficiently, benefits to society exceed private benefits received by individual purchaser eg health, education

Demerit good- overprovided by market, free market would provide too much, costs to society exceed costs to individual eg drugs

Free rider- person or organisation which receives benefits which others have paid for

Income is a flow of earnings over a period of time, wealth is a stock of owned assets such as property, high inequality may lead to alienation and encourage crime, market failure, in UK distribution of wealth more unequal than income, the tax system hits income harder than wealth, unregulated market forces produce a highly unequal distribution of income and wealth, few economists believe that markets should be replaced by the command mechanism (socialist system, gov decide what & how to produce), instead of replacing the market governments should modify so it operates in a more equitable way, eg taxing

Sources of wealth- inheritance, saving, entrepreneurship, chance

Market failure in factor markets eg labour, as industries decline due to changes in demand patterns, workers must move occupations to maintain employment but don't possess the skills to do so (structural unemployment)

Occupational immobility of labour- prevented by either natural or artificial barriers from moving between jobs (membership qualifications, trade union restrictive practices, discrimination)

Geographical immobility of labour- family ties, house prices, ignorance of job opportunities

Can only exist in long run if it has high barriers to entry eg legal barriers (makes competition illegal eg Camelot state national lottery), resource barriers, economies of scale (marketing economies, technical economies, financial economies, low economies of scale, easy for small firms to produce at as low an average cost as larger firms, when just one firm can can produce all the output of an industry and still not fully exploit economies of scale, natural monopoly), Capital costs, Marketing barriers, Product differentiation, Anti Competitive practices

Monopoly Power- higher the barriers to entry, fewer the number of firms

Concentration ratios- 3:45, top 3 firms hold 45% share in market

A monopolist will raise prices & reduce output

Benefits- more efficient allocation of resources, natural monopoly- economies of scale so large not a single firm can produce at bottom of average cost curve, if there were many competing firms average costs of production would be higher, Invention & Innovation- can sell new product and earn back cost of R&D without worrying others will copy, firms unlikely to invest if perfectly competitive 

They affect individuals not directly involved in the production/ consumption of a good or service (people wish to maximise private benefit not wider social interests)

For the agent- benefit maximisation occurs when marginal private benefit= marginal private cost

Positive externalities- social benefit> private benefit, social cost< private costs

Negative externalities- social benefit< private benefit, social costs> private costs, greater private level than social optimum level

MSC (additional cost to society from producing one more unit of production)= MPC+ MEC

When looking at diagram read off free market level first (where MPB=MPC),  MEC is difference between MPC and MSC

Absence of clearly defined property rights eg who owns the air we breathe? Property right-confer legal control or ownership of a good, protected through gov legislation & regulation, an unowned asset can lead to tragedy of the commons- overuse of common land leading to permanent damage to the stock of natural resources

Production negative externalities- two supply curves, business POV, eg air pollution, overproduction, draw up from free market equilibrium to draw welfare loss triangle, MEC vertical line

Consumption negative externalities- two demand curves, consumer POV, eg excess alcohol consumption

Positive externalities- welfare gain, despite the fact MEB is getting smaller as we move towards equilibrium it is still an additional gain to what was previously had, underproduction

Production diagrams- costs (2 supply curves) Negative- MPC<MSC Positive- MPC>MSC

Consumption diagrams- benefits (2 demand curves) Negative- MPB>MSB, Positive- MPB<MSB 

Government policy- Regulation- maximum pollution levels, cheap to enforce, but may be too tight or lax, gov not industry expert, attempts to fix output, Extending Property Rights- government doesn't have to asses cost, property owners will have better knowledge of value of property than gov, transfer of resources from those who create to those who suffer, however gov may not have ability to extend rights (if cause arises in another country), could pay agents causing externality to stop, attempts to make Marginal social cost curve & MPC identical by changing externality into private cost of production, Taxes- equal to value of externality, fall in demand, difficult to put monetary value on negative externalities, subsidies with + externalities, but opportunity cost, Permits- eg to pollute, tradable for money, incentive to reduce emissions

Law of demand- as a good's price falls, more is demanded (effective demand- ability to pay, latent demand- can't afford to pay). Rational behaviour is attempting to maximise the welfare or utility gained from goods/ services consumed, up to the point where MU= P.

Utility is the satisfaction or economic welfare an individual gains from consuming one extra unit of a good. Marginal utility is the additional welfare gained from consuming one extra unit of a good. Where total utility is at its highest point, marginal utility is zero. 

Law of diminishing marginal utility- as a person increases consumption of a good while keeping consumption of other products constant, there is a decline in the marginal utlility derived from consuming each additional unit of the good. 

If all goods were free, or if households had unlimited income and capacity to consume all goods, a consumer would maximise utility by obtaining all goods up to the point of satiation- when no more utility can be gained from consuming extra units of a good. Due to scarcity, consumers face constraints which restrict choices, such as-

Limited income, a given set of prices, budget constraints, limited time available

Consumers may possess imperfect information about the long term consequences of their choices eg under/ over consumption of merit/ demerit goods

Symmetric information- buyers and sellers reasonably well informed about products, both parties can make rational decisions as to whether to buy/ supply a product.

Asymmetric info- either buyer or seller knows more. Adverse selection. Buyers often overestimate the benefits of a product and are prepared to pay a higher price than if they enjoyed perfect information. 

Principal agent problem- when goals of principals (those standing to lose/ gain from decision) are different from agent (those making decision on behalf of principal) eg. shareholders and managers, children and parents 

Moral hazard- when an economic agent makes a decision in their own best interest knowing there are potential adverse risks, and if problems result, the cost will be partly borne by other economic agents 

Choice architecture- framework setting out different ways in which choices can be presented to consumers, and the impact of that presentation on consumer decision making 

Default choice- option that is selected automatically unless an alternative is specified eg. organ donation, policy makers improve social welfare by designing goverment programmes that select as a default an option in the individuals best long term interest

Behavioural Insights Team-opting in default choice in private pension schemes

Framing- people are influenced by how information is presented, influences the choices people make, tendency for people to be influenced by context in which choice is presented eg. food label 90% fat free vs 10% fat 

Mandated choice- people required by law to make a decision

Restricted choice- limited number of options so that they are not overwhelmed by complexity of situation

Choice architecture needs to build in incentives eg educational maintenance, crimestopper reward

People are motivated by social norms and perceptions of fairness- patterns of behaviour considered acceptable influences our own, economic sanctions influence social norms

Nudges- tries to alter people's behaviour in a predictable way without forbidding any options or significantly changing economic incentives, not a legal requirement, open and transparent, seek to lead people by providing them with helpful info to make an informed choice eg. opt out 

Shoves- Instruct people to behave in a certain way by their responding to financial incentives or disincentives eg taxation and subsidies, fines, law banning acitivities

Bounded rationality- decisions subject to 3 constraints- imperfect info about possible alternatives, limited mental processing ability, time constraint 

Bounded self control- individuals lack self control to act in what they see as their self interest

Automatic/ fast thinking- little effort, intuitive/ thinking slow- concentration and effort- Kahneman

Cognitive bias- mental error that is consistent and predictable, mistake in reasoning eg. confirmation bias- tendency to seek info which matches what one believes, memory bias- more likely to remember well significant events 

Availability bias- individuals place too much weight on probability of event happening because they can recall vivid examples of similar events, will lead to overly cautious decisions that overestimates the probability of an outcome occuring 

Anchoring- predictable cognitive bias in individual decision making, tendency to rely on first piece of information offered to make subsequent judgements eg. often pick middle option 

Altruism- acting to promote someone else's wellbeing even though we may suffer as a consequence, perceptions of fairness, incorporating value judgements

When adding a variable factor of production (workers) to a fixed factor of production (factory space), the increase in total product eventually starts to get smaller and smaller 

How to overcome- 

• In the short run- you cannot
• Fixed factors can be increased in long run eg larger premises 
• Diminishing returns here will not set in as quickly but are unavoidable & set in at higher level

Increasing returns to scale contributes to economies of scale, decreasing contributes to diseconomies

EOS/ DOS

EOS can create a barrier to entry eg. industries with large fixed costs 

Internal EOS- 

Technical- Investing in expensive machinery, Division of Labour, Law of increased dimensions

Marketing- Advertising costs spread over many units of output so lower than small firms

Managerial-Specialists have better knowledge so will be more efficient 

Financial- Banks willing to loan at lower interest 

Purchasing- Bulk buying

External EOS-

• Development of research & development facilities in local unis that several businesses can benefit from
• Spending by local authority on improving transport network in local town

Why costs increase

• Control problems
• Coordination 
• Cooperation
• Communication 

L Shaped LRAC curve as DOS more than outweighed by EOS which drive down ACs

Minimum efficient scale- Lowest level of output productively efficient (if MES is very high this is a barrier to entry)

Perfect competition-

• All units at same price so MR and AR are constant and AR is equal to price

Non perfectly competitive-

• Power to dictate prices
• AR downward sloping 
• MR less than AR/ D 

Profit- reward for enterprise, incentives for businesses, influencing allocation of resources, can be indicator of efficiency

Normal profit- AR= AC

Abnormal- AR>AC, may exist where firms have market power, existence of welfare losses

Profit maximisation occurs where MC= MR

• Mechanisation- more capital intensive production but humans operate machinery
• Automation- automatic control- computer controlled robots carry out tasks

Will improve labour productivity, can improve productive and dynamic efficiency 

Generally tech change will lower costs of production in the long run

Creative destruction- old industries and firms close down enabling resources to move into more productive processes. Company closures and job losses are good for the long term well being of the economy

• price taker- no firms market power
• homogenous products
• no barriers to entry 
• perfect information 
• many small firms
• many buyers and sellers
• no abnormal profit in the long run- new firms attracted to industry & as no barriers to entry these firms compete away any temporary profits
• profit maximisers- MC= MR

Static- productive- operting at lowest point on AC curve

allocative- occurs where P= MC

Dynamic- efficiency over time- unlikely in perfect competition as no abnormal profit so no money to invest 

• price maker but higher elasticity than in monopoly
• product differentiation, competition, consumer switching 
• low barriers to entry
• many small firms 
• no abnormal profit in long run 

Oligopoly

• few large firms dominate market- highly concentrated
• branding is key
• high barriers to entry
• abnormal profits can be earnt in long run
• now allocatively or productively efficient but could be dynamically
• interdependence- actions of one firm affect others, price wars can be common but look to avoid, use non price competition eg branding advertising differentiated products

Kinked demand curve, above P1 elastic as will see large fall in demand, below is inelastic as will lead to price wars so proves price stability 

Discontinuous MR Curve- changes between MC1 and MC2 will not change PMax price (where MC= MR) as on discontinuous section, proves price stability even when marginal costs increase within reason 

HOWEVER- no account of brand loyalty, of how original price was arrived at, ignores impact of non price competition or limited price competition eg special offers

25% market share/ 100% market share (pure monopoly), one firm, highly differentiated products, high barriers to entry, only dynamic efficiency but still unlikely as no compettion so no need to decrease average costs in long run (X inefficiencies), price makers, supernormal profit, inelastic demand

Sources of monopoly power-

• Vast investment in capital equipment to achieve MES- others can't afford same equipment
• Patent laws- others can't compete with differentiated product 
• High advertising- others unable to build competitive brand loyalty 
• Product differentiation- others unable to sell close substitutes 

Evaluating monopolies- 

-ves- Welfare loss under pure monopoly (diagram)- deadweight loss to society, will not be statically efficient

+ves- Profits could fund investment; Can exploit Economies of Scale; May still face competition overseas (international competitiveness); Social welfare contributions 

Charging a different price for the same good or service

• No other firms selling the product
• Resale must be prevented
• Different elasticities of demand 

1st= every consumer different price, individual bargaining, seller accurate estimate of what customer willing to pay eg. auction 

2nd= selling off packages deemed to be surplus capacity at lower prices eg. cheap last min hotel deals- high fixed costs, marginal costs are small & predictable- in best interest to offload spare capacity

3rd= different price charged to different groups with different elasticities 

Benefits- consumers in elastic submarket see discounts so can maximise consumer surplus, monopolies able to maximise abnormal profits (but admin costs), could improve efficiency (unlikely as no competition), use up spare capacity

Drawbacks- inelastic submarket charged higher price, lose consumer surplus converted into producer surplus, not allocatively or productively efficient for economy, inequitable as not fair on those who can't afford extra costs 

• profit maximisation
• survival
• growth
• revenue
• output maximisation 

Divorce of ownership & control- people who run firm seperate from shareholders, causing X inefficiencies & focus on other objectives than profit 

Satisficing- just enough profit to keep shareholders happy 

Freedom of entry to the industry, costs of exit are low, face potential competition, every market contestable to some degree

Conditions- perfect information, relative absence of sunk costs (costs which cannot be recovered once a firm has entered the industry)- supernormal profits only earned in short run

Hit and run entry- short run entry into a contestable market seeking to take some of the supernormal profits available and then exiting quickly and costlessly 

Predatory pricing is a risky and dubious pricing strategy where a product or service is set at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors. May damage reputation. Incumbant firm will be forced to act as if they are in competition due to threat of hit and run tactics.

Reasons for increasingly contestable markets- deregulation, tougher competition laws, increased capital mobility (tech), single EU market (more competition), increased entrepreneurial zeal

Efficiency- pressure to keep costs and prices low- statically efficient, unlikely to encourage dynamic efficiency as no supernormal profits to invest

Those willing and able to supply labour to a particular industry- affected by monetary and non monetary factors eg job satisfaction, working conditions- therefore shifts caused by-

• changes in working conditions
• changes in alternative industries
• government incentive schemes
• improved training & opportunities for development and progression 
• migration 

Demand for Labour is derived from economic activity. Factors influencing DforL-

• Changes in costs
• Advances in technology
• Demand & expected future demand for products & revenue earned from output 
• Increased productivity makes labour more attractive
• If the wage rate increases faster than productivity D will fall
• Complimentary labour costs eg. NI contributions
• Price of alternative factor inputs/ substitutes ie capital 

MCL, MPP, MRPL- assumed firms will look at revenue that extra worker employed will generate compared to wage they must be paid, MRPL= MPP x Price per Unit 

If wages are too high, there will be unemployment as supply is greater than demand, but if wages are too low, there will be shortages- tends to equilibrium without government intervention

Factors increasing MRPL- better training, eduction, knowledge (human capital)/ more efficient teamwork (division of labour)/ increasing price 

Limitations- assumes measuring productivity is possible, that workers are homogenous, that self employed able to calculate MRPL 

Elasticity of Demand for Labour- Labour as % of total costs (high %= high elasticity)/ Ease & cost of factor substitution/ PED of final output produced

National Minimum Wage- legally enforced wage price floor, current living wage is £7.50

Benefits- Higher standard of living, reduction in poverty, could lead to increase in DforL due to higher consumption from greater RDI and therefore AD, incentive to work helping people out of unemployment trap, could reduce inequality by reducing gap between rich and poor

Limitations- cost push & demand pull inflation, Real Wage Rate unemployment as supply greater than demand, only affects those in work, others may also receive pay rise so not reducing gap between rich and poor, inflation leads to a reduction in international competitiveness, fall in X, unemployment, still a lower rate than recommended by Living Wage Foundation 

Organisations of workers seeking to improve and protect incomes of their members

Collective bargaining- negotiation between a group of employees and an employer, to discuss pay and working conditions, if disputes then may lead to industrial action (work to rule, strike)

Factors affecting power- 

Membership & Militancy, elasticity of demand for labour, profitability of employer, economic climate, public support for unions, legislation

Recent examples of action includes Unilever- strike over closure of final salary pension scheme

Single buyer of labour/ one employer eg the government- has significant power & can drive down wages, degree of power depends on proportion of employees in a market employed by them

The powerful monopsonist can choose any point on the labour supply curve- if it wishes to emply an extra woker it will have to offer a higher wage rate- the marginal cost of employing an extra worker is greater than the average cost of employing labour because the increased wage rate must now be paid to al other workers not just the extra worker. The employer will hire extra workers as long as that worker adds more to revenue than to costs. It will cease to hire more workers where MC= MRP. Monopsony employers therefore lead to lower wages and employment levels 

Trade unions can push up the employment and wage rate from the monopsony level 

Poverty-

Causes- unemployment, poor education/ training, low wages due to low MRP, old age (lack of private pension), sickness/ disability, discrimination, household distribution, imperfect information, dependence on others, poverty trap

Policies to reduce- reducing unemployment benefits, increasing minimum wage, offer affordable council housing, price ceiling on housing, increasing stamp duty for rich and using this to give tax breaks on housing to those in povety

Wage discrimination- based on gender eg BBC men earn average of 9.3% more than women, UK average 18%, perceived MRP of workers is lower than reality, will have to accept lower wages

Advantages- good for firms to cut costs, positive for undiscriminated group

Disadvantages- deadweight welfare loss, groups out of work or wage less than MRP, if firms have monopsony/ monopoly power, discrimination enables firms to cut costs & receive more profit at expense of workers, in competitive markets firms will experience higher costs as a result of discrimination, higher prices for consumer, sense of alienation, injustice, social disorder

Relative poverty- 60% of median income, approx £15000 or below- 10 million people, 16%, prevelant child poverty in London, 1 in 4 children in poverty in Torbay, top 10% have incomes 9 times greater than bottom 10%, wealth far more unequally distributed than income, top 1% hold 20% of wealth, top 10% 50% of wealth- 6.5% in persistent poverty

Absolute poverty- does not change relative to country's economy, state of living where basic needs cannot be met, earning less than $1.90 a day

Gini coefficient- measure of unequal distribution- 0.64 for wealth, 0.358 for net income (UK) 

Absolute poverty- unable to afford minimum standards of food, shelter, heating, healthcare etc

Causes- disparity in incomes & earnings growth (public sector jobs= low relative pay levels), economic growth (rewards tend to go to those already on high incomes), falling relative incomes of those dependent on state benefits (rises in line with prices rather than earnings of those in work, fall in relative income, dependance on state pension), higher levels of unemployment, growth in part time workers, taxes (increase in indirect taxation & regressive taxes) 

Effects- cost to gov due to demands on services and benefits, educational deprivation (children on free school meals receive 1.7 grades lower at GCSE), health deprivation (professionals live 8 years longer), fuel poverty, Fiscal drag- gov fails to raise tax thresholds in pace with inflation and earnings growth so inflation pushes someone into an increased tax band without a change in RDI- raising gov tax revenue, reduces AD (deflationary fiscal policy)

Underground economy- people work for cash without declaring income/ claiming benefits

Distribution of Income- measures how income (flow of money) is divided between rich & poor or groups in society, income inequality levels fell back to 1987 level in 2011 due to benefit changes Wealth- stock of everything which has value that a person or household owns at a particular point in time 

Factors influencing distribution of income-

• Incomes of rich tend to rise faster than those of poor due to economic growth
• Distribution of national income between land labour capital and enterprise (low labour share)
• Earned and unearned income- wages vs investment income 
• DIfferent wages due to varying productivity & SoL
• Globalisation & international migration of workers, international competition causing low wages

Factors influencing distribution of wealth-

• Ability to benefit from capital gains
• Private pension assets
• Inheritance, gifts and luck
• Wealth taxation vs income taxation 

Lorenz curve- cumulative % of total national income/ wealth plotted against cumulative % of population, nearer curve to diagonal, more equal Area A/ Area A + B= gini coefficient 

Government policies- Sustained economic growth- creates more jobs and income which can be redistributed, trickle down not always case, rich have high propensity to save, likely to benefit highly skilled, long term before effects 

Reducing unemployment through supply and demand side policies, education

Increasing progressive taxes taking income from those on highest income, creating higher gov revenue, funding increased spending, enabling cuts in regressive taxes, however this could create a discincentive to work, possibility of tax avoidance

Increasing corporation tax, eg 35%, richest earn less, gov revenue- however discourages companies from registering to pay tax in UK, higher corporation tax may discourage investment

Increasing benefits to the poor eg universal tax credits, but benefit trap (discouraged from working at all) , poverty trap (discouraged from working extra hours due to greater taxes, may go over NI threshold or lose right to means tested benefits), unemployment trap (better off on unemployment benefit thus not worth low paid job, travel etc)- increased gov spending could be better used elsewhere, encourages lack of care for education

National minimum wage increases, lowest paid earn more but firms may not be able to afford wage and may make redundancies, inflation, pay rise may be passed on to higher earners increasing gap between rich and poor

Benefits in kind- public services which are provided free at point of use eg education, allow low income families to gain skills and qualifications

Universal Basic Income, Improving training and education, likely to gain highly paid job requiring more skills, decreased structural unemployment due to mobility of labour- but people may not utilise opportunities so wasted expense

Current policies- increase personal tax allowance to £12500, increase NMW to 60% median earnings by 2020, cutting corporation tax, tougher regulation of tax advisory firms

Equity= fairness/ evenness, normative concept

Equality= statistical equalness 

Trickle down effect- increased spending by high earners creating additional demand, jobs and wages for all, increased profit for firms leads to expanding output leading to higher growth wages and income for all, lower income taxes increase incentive to work 

1980s- huge campaign of privatisation- monetarism- free market

Privatisation is the transferring of assets from the public sector (owned and controlled by the government) to the private sector eg. BT, British Gas, British Airways, Royal Mail (2013)

Advantages- raises finance for the government, raises finance for the business (selling shares) may improve efficiency due to shareholder pressure, reduces tax burden on government, removes inefficient monopolies from public sector, tax revenues spent elsewhere, lower prices (not guaranteed), healthy competition, better quality products, R&D (leading tech in industry), share ownership 

Problems- may not lead to fully competitive market (private monopoly), could merely place large inefficient industries into private sector, shareholders only interested in profits, need for large expensive QUANGOs to regulate private industries eg Ofgem for energy, small time investors simply sold shares to large institutions for quick gain, can only sell off a business once, only limited amount to sell off

Forms- 

Selling off an organisation and place it in the private sector

Contractualisation- services which were provided on the public sector eg catering are put to private sector tender (auction), service still paid for by public sector eg. private catering company in NHS- likely to be company of lowest cost, of high quality

Deregulation- removal of regulations, increasing competition, removes red tape

PPP (Public Private Partnerships) - partnership with private and public sectors to provide public services eg. council homes run by private housing associations

PPI (Private Finance Initiative)- government seeks tenders from private sector to design, build, finance and run a public sector project eg. new schools or hospitals (form of PPP), government enables rather than provides

Nationalisation- occurs when assets are taken from the private sector and places into the public sector eg. Labour proposing nationalisation of railway 

Advantages- able to control levels of employment more, greater role in controlling economy, control on cost push inflation, profits are funds to government, some services not provided by private firms, lower prices (stop exploiting consumers), gov can control key strategic industries, can follow interventionist policy

Clause 4- Labour Party Constitution- government should own the means of production 

Disadvantages- no market forces pressure, incredibly inefficient, reward payments not linked to profits, unlike private sector, fairly bureaucratic and uncompetitive

Price elasticity of supply measures the change in quantity supplied due to a change in price. Elastic= firms can increase output without a rise in costs Inelastic= hard to change production Formula= % change in quantity supplied/ % change in price

Factors affecting P.E.S- 

Spare production capacity If there is plenty of spare capacity then a business can increase output without a rise in costs and supply will be elastic in response to a change in demand. The supply of goods and services is most elastic during a recession, when there is plenty of spare labour and capital resources

Stocks of finished products and components: If stocks of raw materials and finished products are at a high level then a firm is able to respond to a change in demand - supply will be elastic. Conversely when stocks are low, dwindling supplies force prices higher because of scarcity

The ease and cost of factor substitution/mobility: If both capital and labour are occupationally mobile then the elasticity of supply for a product is higher than if capital and labour cannot easily be switched. E.g. a printing press which can switch easily between printing magazines and greetings cards. 

Time period and production speed: Supply is more price elastic the longer the time period that a firm is allowed to adjust its production levels. In some agricultural markets the momentary supply is fixed and is determined mainly by planting decisions made months before, and also climatic conditions, which affect the production yield. In contrast the supply of milk is price elastic because of a short time span from cows producing milk and products reaching the market place.