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econ theme 1 - Coggle Diagram
econ theme 1
theme 4
one form of gov intervention is indirect taxes= taxes on expenditure that cause an increase in cost of supply so cause supply to shift left
may be used to deal with external costs, aim is to internalise externality by taxing product so that output and consumption are at the level where MBP=MSC
advantages: incentive to reduce pollution, source of revenue for gov, few administrative costs
disadvantages: ineffective in reducing pollution if demand is inelastic, difficulty of setting appropriate tax, increased business cost
one form of gov intervention is subsidies- grant to business to reduce production cost, therefore product/ service can be provided at lower cost. may be used for positive externalities. cause rightward shift in supply
advantages: reduction in cost of production allows for lower prices, incentive for people to increase consumption, may help reduce inequality.
disadvantages: cost to tax payer, ineffective in increasing consumption of demand is elastic, difficulty setting appropriate subsidy
max price= pric ceiling.
advantages: enables consumers on low incomes to afford product, help prevent increase of rate of inflation, prevent exploitation of consumers by monopolies
disadvantages: danger that shortages means some consumers are unable to find suppliers of product, producers may exit market to use their resources to produce goods that are more profitable,
min price= price floor
commodities= minimum guaranteed price- producers will receive a set price (eg per kilo) no matter how much is produced in the hopes that it will act as an incentive.
consumer goods= to deter consumption
labour market= national min wage
advantages: producers know in advance they will recieve for their product, greater certainty allows plans for investment, prevent exploitation of retailers who have significant buying power.
disadvantages: if det too high, there will be surpluses each year, schemes involve cost of storage which tax payers suffer, encourage overproduction so could result in inefficient allocation of resources.
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regulation- imposed on activities of consumers or producers, eg complete ban on production of goods,
advantage: regulation can limit amount of pollution, might act as incentive to producers to develop new technologies that reduce pollution, limit external costs without impacting price
disadvantage: enforcement of law/ regulation costs, problem of determining socially efficient level of pollution, limits consumer sovereignty
causes of government failure include distortion of price signals, unintended consequences, excessive administrative costs, information gaps
theme 1
oppotrunity cost links to scarcity, the cost of the next best alternative forgone when a choice has been made
a PPF shows combinations of 2 goods that can be produced by an economy if all resources are fully employed
if there is a point on the utside of the ppf curve, this point is unobtainable unless economic growth was to occur
movement along ppf curve occurs when opportunity costs and marginal analysis are taken into account. can also be caused by change in combination of goods being produced
factors causing outward shift include discovering new resources, tech advancements, increased productivity, increase size of workforce
factors causing inward shift include depletion of natural resources, reduction in work force, recession
division of labour: adam smith in wealth of nations set out view that economic growth can be achieved by increasing division of labour
advantages of division of labour include worker only needs to be trained in one task so lowers costs, less time wasted, increased production reduce average cost of production
disadvantages of division of labour include boredom for workers= lower productivity, loss of skills, lack of variety
limits to division of labour includes size of market, type of production transport costs.
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free market economy
characteristics: private ownership of resources, market forces, producers aim to max profits, consumers aim to max utility, resources allocated by price mechanism
adam smith: suggested when individuals follow self interest they indirectly promote the good of society. producers would respond to changes in consumer wants in a way that there is little waste. believes government should only provide defence, justice and some public goods like roads
friedrich hayek: argues that attempts by the government to determine the answers to the economic problem were doomed to fail. state planning would involve restrictions on freedom and the use of force
advantages: consumer sovereignty, flexibility, no bureaucracy, efficiency, increased choice.
disadvantages: inequality (like income), trade cycles, imperfect information, monopolies, externalities
command economy
characteristics: public (state) ownership of resources, state determines price, producers aim to meet production targets set by state, state allocates resources, greater equality of income and wealth.
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advantages: greater equality, macroeconomic stability, no exploitation, resources allocated to max social welfare
disadvantages: inefficiency, lack of incentives to take risks, restriction on freedom of choice, shortages and surpluses, bureaucracy, no consumer sovereignty, inflexibility
theme 2
consumers act rationally by aiming to maximise their utility
firms act rationally by aiming to maximise profits
demand
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factors that cause a shift: changes in real income, size/ age distribution of population, tastes/ fashion, price of substitutes/ complements
diminishing marginal utility: as a person consumes more and more of a product, the marginal utility (extra satisfaction) falls
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cross elasticity of demand= meassure of responsiveness of quantity of one good ti a change in price of another good
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significance of XED
for firms: depending on sign (either complement or substitute) indicates to firms on what will happen to demand if they change price
income elasticity of demand: measure of responsiveness of quantity demanded of a product to c ==a change in real income
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significance of YED
for firms: important for making investment decisions. knowledge can indicate times where TR will increase (bust and boom)
for gov: knowledge of YED help estimate tax revenues from indirect taxes on particular goods and services
supply
factors causing a shift: cost of production, productivity of work force, indirect taxes, subsidies, technology
PES= measure of responsiveness of quantity supplied for a product to a change in price
always positive
factors influencing PES: time, stocks, spare capacity, availability and cost of switching from one good to another.
taxes and subsidies
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subsidy is a grant from gov, have the effect to reduce cost of production, shift supply curve to the right.
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