Supply-side policies are all measures that can increase the total productivity capacity of the economy. They aim to improve the long run productive potential of the economy. They do this by aiming to promote competition and reform the labour market. There are...
When governments establish a policy, there may be unintended consequences. This happens when the actions of producers and consumers have unexpected effects. An example of this would be the government increasing the NMW to raise living standards for workers. However,...
Risk – a quantifiable probability of damage, loss or injury occurring. Risks are present for banks when they lend capital as there is the possibility that it may not be paid back. The market imposes a risk, since general trade can influence interest rates and exchange...
Financial sector – the part pf the economy that provides financial services to commercial (businesses) and personal (individual) customers Generally, retail banks will lend to everyday consumers and small businesses. Investment banks...
The central bank (Bank of England for the UK) has the following main responsibilities: Provide banking services to the Government Act as a bank to retail banks Supervise banking system Control inflation through base rate The central bank manipulates the demand-side...
The Global Financial Crisis is also referred to as the Great Recession which was the decline in world GDP in 2008-9. There were several factors which contributed to the economic decline: Sub-prime mortgages These are mortgages given to those with weak credit...
Demand-side policies is an attempt to increase and decrease AD in order to control the economy. These can be fiscal and monetary. Monetary policy – used by the Bank of England to control the money flow of the economy. This is done...
Aggregate demand – total demand in the economy. It measures spending on goods/services by consumers, firms, the government and overseas consumers and firms. AD can be calculated using the following...
Market failure happens when the free market fails to allocate resources to the best interests of society, so an inefficient allocation of scarce resources occurs. This leads to economic and social welfare not being maximised. Merit goods – goods that are...
Private costs Producers are concerned with private costs of production. For example, the rent, the cost of machinery and labour, insurance, transport and paying for raw materials are private costs. This determines how much the producer will supply. It could refer to...
There are several ways to deal with market failure such as: the provision of public and merit goods indirect taxation of demerit goods tradable pollution permits provision of information legislation regulation subsidies The Provision Of Public And Merit Goods...
Marginal cost – the cost to make one extra unit of output. It is the difference between total costs at various levels of output Marginal revenue – the extra revenue earned from the sale of one extra unit. It is the difference between total...
Productivity – output per unit of input (worker) per time period. A firm is productively efficient when it is operating at the lowest point on its average costs curve Operating at minimum costs means no wastage e.g. no defective products Productivity is...
Overt collusion – when two or more firms make a formal agreement to work together on something e.g. price-fixing. Tacit (collusion) agreement – when there is no formal agreement, but firms have implied ...
The government aims to promote competition as it leads to innovation, lower prices and more consumer choice. They try to control monopoly power as it has potential for market failure. They do so in the following ways: Price regulation: They can keep monopolies from...
BENEFITS OF REGULATION There is a consumer surplus, as goods and services are provided at a lower price There is a minimum quality level reached, and ensures products are safe to use, and there is more innovation. Helps improve quality of life for customers and...
Interdependence – the actions of one firm will have an effect on all the other firms. Because each firm has so much market power, the actions of one will have repercussions for the others and competing firms must be aware of each other’s actions and be ready to...
FEATURES OF PERFECT COMPETITION Large numbers of small firms Easy for new firms to enter the market All products are homogeneous (identical) Firms are price-takers and have no monopoly power must accept market price and decide on output No individual producers can...
Barriers – obstacles that make it difficult for new firms to enter a market such as high start-up costs, patents and established brands. It increases producer surplus and reduces contestability Contestability – the ease with which new...