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Evaluate the micro and macro effects of falling house prices, Evaluate the…
Evaluate the micro and macro effects of falling house prices
MICRO eval
Firms may be able to operate at a loss as long as their AVC are less than or equal to their AR in the short run, so they can cross subsidise or take out a bank loan to contribute to paying back fixed costs
firms selling inferior goods may experience a rise in demand for their goods as incomes fall as a result of the negative YED value -> outward shift of AR and MR for greater profits (shows that not all firms within the economy will be impacted in the same way.
depends on the YED value of the normal goods, where the higher this is, the more the fall in demand will be greater than the fall in incomes, which reduces revenue even more
depends on what is happening to other costs, other than rent, for example if variable costs such as wages and raw materials are increasing this may mean costs overall do not fall
a rise in profits doesn't necessarily mean greater dynamic efficiency if these profits are only distributed among shareholders and owners
however, the negative externalities may not decrease if housing firms have to continue to build more houses due to the likely rise in demand from first-time buyers since houses become more affordable
negative externalities may not decrease in the short term due to more inelastic PES of house building so the supply fall is less than price fall as they cannot just stop building a house once they've started
MICRO
This will decrease the demand for normal goods due to the positive YED, so when incomes fall, demand falls, for goods such as perceived luxuries e.g. technology, jewellery as a result of the negative wealth effect -> decreased revenue for firms that sell normal goods -> inward shift of AR and MR -> reduces profits and could create a loss
less profits -> less returns to shareholders and owners -> less funds to reinvest into R+D and innovation so reduces dynamic efficiency -> lower productivity of firm and quality of products which may worsen consumer satisfaction and experience
if firms suffer where their AC > AR, this could cause firms to shut down which would increase unemployment and reduce consumer choice
some firms may benefit from lower rent costs, which reduces their fixed costs -> reduced AC -> increased profits -> greater returns to shareholders and owners -> greater funds for dynamic efficiency (so if these firms all sell normal goods this could counteract the loss of revenue so that profits don't fall as much or at all)
house building firms may experience a disincentive effect (function of the price mechanism) as house prices fall, so their incentive to supply homes decreases -> this reduces the negative externalities of house building -> moves closer to the socially optimal equilibrium, reduces marginal external costs to third parties (e.g. noise pollution to nearby residents disrupting lives and harming well-being) and reduces the DWL suffered by society.
MACRO
negative wealth effect experienced by home-owners where the value of their asset decreases so their consumer confidence falls -> decreased consumption
negative accelerator effect where lower consumption results in lower incentives for firms to invest as they don't have to increase capacity to supply to meet demand
lower C+I components of AD -> inward shift of AD -> reduces GDP and GPL -> hinders economic growth objectives but could help to reach the 2% inflation target by reducing demand-pull inflationary pressures
less investments into businesses can cause decreased productivity in the long run -> increased unit costs -> inward shift of AS which increases GPL and reduces GDP -> conflicts with 2% inflation rate by rising cost push pressures whilst hindering economic growth objectives
MACRO EVAL
the impacts on GDP and GPL of the inward shift in AD depend on
the elasticity of the AS curve (the more elastic, the more GDP falls and less GPL falls, the more inelastic, the more GPL falls and less GDP falls)
the position of the UK along the LRAS curve (the further along, the less GDP falls and the more GPL falls)
depends on the magnitude and duration of the house price fall, where if this only reduces prices by 2% for 2 months this won't have as much of a significant effect as a fall in price of 10% for 2 years.
depends on the magnitude of people who are homeowners
e.g. 70% owners 30% renters, consumption will decrease overall
e.g. 50% owners, 50% renters, consumption may not change
e.g. 30% owners, 70% renters, consumption may increase overall
impacts on AD are likely to be significant since C+I amount to almost 80% of the UK's AD
impacts of the inward shift in AS depend on the elasticity of the AD curve (the more elastic, GDP falls more GPL rises less, the more inelastic, GDP falls less, GPL rises more)
Evaluate the macro and micro impacts of policies used to reduce pollution within the economy
MICRO
pollution permits will increase the production costs for firms as they have to pay to emit -> increased variable costs so
AC and MC rises
-> reduces profits for firms or could create a loss -> decreased returns to shareholders and owners -> decreased funds to re-invest in R+D and innovation for less dynamic efficiency -> increased productivity and quality of products -> less consumer satisfaction and experience -> firms suffering a loss may shut down which increases unemployment (government failure of unintended consequences)
this reduces the negative externalities of production -> firms are more incentivised to invest in more sustainable technology and machinery to avoid paying for permits -> reduces the pollution they emit in production ->
reduces marginal social costs from MSC1 to MSC2 and
external costs faced by third parties from cb to db (e.g. less pressure on the NHS since there may be less patients with respiratory diseases like asthma), thus reducing the deadweight loss felt by society from abc to bed, moving closer to the socially optimal equilibrium at a from b to e.
MACRO
pollution permits generate tax revenues in the area G -> improves the fiscal position -> may reduce national debt if the government doesn't have to borrow as much to fund spending -> may stimulate greater government spending on their current, capital and transfer components -> greater G components of AD results in an
outward shift of AD boosting
GDP and GPL
pollution permits reduces pollution, especially air pollution, resulting in greater air quality and improved public health which could also boost life expectancy, thus increase the HDI score (promotes development) -> healthier population = more productive workforce -> unit labour costs fall ->
outward shift in AS
which increases GDP and reduces GPL -> helps to achieve economic growth and lower inflation targets
MICRO eval
regulatory capture where regulators may not issue fines to firms that exceed their permits, minimising the incentive for firms to reduce their pollution
hard to quantify externalities, so hard to place a value on the benefits and costs of pollution permits
BUT if their
AVC are less than or equal to their AR
in the short run, firms can continue to operate at a loss, as they can cross-subsidise or take out a bank loan to contribute to paying back fixed costs -> minimises the risk of unemployment (government failure of unintended consequences)
if one firm can by all the permits in an industry this would create a monopoly power which may result in exploitation of consumers on higher prices, lower output and lower quality shown in graph (loss of consumer surplus in return for higher producer surplus so DWL to society)
MACRO eval
the impacts of the outward shift in AS depends on the
elasticity of the AD curve
where the more elastic this is, the more GDP rises and the less GPL falls.
the effectiveness of these policies depends on:
the quantity and price of permits, where pollution may not fall as much if the supply was as S2 and price was at P2 since this reduces the incentives for firms to reduce pollution if permits are cheap -> hard for the government to know how many permits to issue due to asymmetric information, and will require lots of time to learn properly about each industry (opportunity cost of time that could be spent on facilitating other policies to reduce pollution e.g public education)
impacts of the outward shift in AD depend on the other components of AD (C+I+(X-M)) where G may not have a very significant impactimpacts of the outward shift in AD depends on
the
elasticity of the AS curve
(more elastic, the more GDP rises and less GPL rises)
the value of the multiplier (the higher this is, the greater the outward shift is -> large spare capacity, high MPC, low MPM, MPT and MPS)
the
position of the economy along the LRAS curve
(further along, GDP rises less while GPL rises more)
POLICY
pollution permits: the government issues permits to allow firms to emit pollution for a fee, internalising the negative externalities of production
Evaluate the micro and macro effects of labour shortages
MACRO
labour shortages may increase production costs since firms may have to attract workers with hire wages -> increased wage costs -> unit labour costs rise -> inward shift of AS -> decreases GDP and increases GPL so hinders economic growth objectives and 2% inflation objective by increasing cost push pressures
high inflation has many negative impacts
increased income inequality since those on the lowest incomes are the most impacted (living standards fall more as they have less savings to fall back on, have to take out short term loans to fund spending so worsens personal debt and well-being)
decreased consumption overall as real incomes fall (if they don't rise in line with inflation) thus purchasing power and spending on goods and services falls -> negative accelerator effect where lower consumption results in lower incentives for firms to invest as they don't have to increase capacity to supply to meet demand
may decrease the price competitiveness of UK exports if GPL is passed on as higher export prices, less demand for exports worsens the BoP
lower C+I+(X-M) components of AD -> inward shift of AD -> reduces GDP and GPL -> hinders economic growth objectives but could help to reach the 2% inflation target by reducing demand-pull inflationary pressures
MICRO
this is likely to increase production costs for firms since they may have to offer higher wages to attract/keep workers -> increased variable costs of wages -> increased AC and MC -> decreased profits or a loss is created
less profits -> less returns to shareholders and owners -> less funds to reinvest into R+D and innovation so reduces dynamic efficiency -> lower productivity of firm and quality of products which may worsen consumer satisfaction and experience
if firms suffer where their AC > AR, this could cause firms to shut down which would increase unemployment and reduce consumer choice
MACRO EVAL
impacts of the impacts of the inward shift in AS depend on the elasticity of the AD curve (the more elastic, GDP falls more GPL rises less, the more inelastic, GDP falls less, GPL rises more)
impacts on GDP and GPL of the inward shift in AD depend on
the elasticity of the AS curve (the more elastic, the more GDP falls and less GPL falls, the more inelastic, the more GPL falls and less GDP falls)
the position of the UK along the LRAS curve (the further along, the less GDP falls and the more GPL falls)
BoP may not worsen if the non-price competitiveness (quality) of exports is good and the GPL is still lower compared to other countries
BoP won't worsen in the short run since there is a time lag for the economic agents to realise there has been a change in the price of exports, shown by the j-curve
depends on the PED of the UK exports where the more inelastic they are, then demand won't fall as much as prices rise so BoP won't worsen
MICRO EVAL
Firms may be able to operate at a loss as long as their AVC are less than or equal to their AR in the short run, so they can cross subsidise or take out a bank loan to contribute to paying back fixed costs
it depends on what is happening to other costs, where if other variable costs such as raw materials decrease, this could offset the impacts of rising wage costs, so costs may not rise as much or at all
some firms may be able to easily and cheaply replace labour with capital goods such as technology and machinery so may not face rising wage costs, likely to be less labour intensive industries e.g. manufacturing compared to labour intensive industries like social care that cannot replace labour with capital
it depends on the magnitude of this labour shortage and the duration, where a shortage of 10,000 workers for 2 months has less of a significant effect than a shortage of 2 million workers for 2 years
it depends on whether this shortage is widespread through all sectors of the economy, or only in one? then this will only really impact some firms?
Evaluate the micro and macro policies to reduce income inequality in the UK
MICRO
increase the minimum wage while introducing a maximum wage -> this increases the incomes of the lowest paid workers from W1 to W2 -> this decreases the incomes of the highest paid workers from W1 to W2 -> closes the gap between the highest and lowest paid workers
MICRO EVAL
min wage causes a surplus of labour (as labour demand falls from q1 to qd whilst labour supply rises from q1 to qs) which could cause real wage unemployment, laying off and lowering the incomes of the lowest paid workers, thus worsening income inequality (but there is little evidence of this happening in the UK)
max wage causes a shortage a labour (as labour demand rises from q1 to qd, whilst labour supply falls from q1 to qs) since these highest paid workers feel more disincentivised to work, or could even leave the country to work elsewhere, where there is no max wage -> brain drain holds back economic activity and growth -> reduces employers within the economy to hire the lowest paid workers -> greater unemployment of lowest paid workers which worsens income inequality
depends on the magnitude of the wage differences caused by the changes to the min and max wage, where if this raises incomes of the lowest paid workers by 4% but only reduces the incomes of the highest paid workers by 2% this will be less significant at reducing income inequality as a rise of 10% compared to a fall of 15%.
MACRO EVAL
time lag for benefits of spending to take place so won't likely reduce income inequality in the short run
it takes a long time for investment projects in the NHS to be completed
it takes years for students to pass through the education system
opportunity costs of what the government could be spending on other policies to reduce income inequality such as infrastructure spending in the north to reduce the north-south divide (to address geographical immobilities of labour that keeps incomes low) or direct spending into state-funded education
social unrest if the government has to increase taxation or cut back in other areas of spending to fund this strategy
worsens fiscal position for the government as government spending rises, which may worsen national debt if they have to borrow more to fund spending (can cause negative implications as a result of crowding out -> less private sector spending -> less consumption and investment holds back AD and GDP)
magnitude and quality, accuracy of information where income inequality may be more effectively decreased by $5 billion of spending in areas that need it the most due to accurate information on the NHS compared to only $300 million of spending without information on which areas to direct this towards not effectively improving the quality of NHS services
MACRO
increase spending on state funded healthcare (the NHS) -> this may improve the quality of the NHS for those unable to afford private healthcare e.g. shorter waiting times/lists, greater stocks of medicines etc -> this improves the treatment of lower income people thus improves their health conditions
better health -> well enough to get a job or work more often -> higher incomes of people from lower income households
-> well enough for children to go to school or attend often -> greater skills and qualifications learned -> greater employability -> can gain higher skilled higher paid jobs like those from higher income backgrounds -> higher incomes of people from lower income backgrounds (decreased occupational immobility of labour)
if the incomes of those from lower income backgrounds rises, this closes the gap between higher and lower incomes so reduces income inequality (the disparity in the distribution of income such as wages throughout the economy)
inward shift of the Lorenz curve closer to the line of perfect equality from L1 to L2 so the Gini Coefficient may decrease closer to 0 as well.
Evaluate the micro and macro effects of a depreciation
MICRO
this will increase the production costs for firms that use imports as import prices rise -> increased variable costs of raw materials for example ->
increased AC and MC curve
-> reduces profits or creates a loss
lower profits -> less returns to shareholders and owners -> less funds to re-invest in R+D and innovation so reduces dynamic efficiency -> less DE results in lower quality products and less productive workforce -> may reduce consumer satisfaction and experience
if firms suffer a loss they could shut down which would increase unemployment and reduce consumer choice
MACRO
This will reduce the price of exports and increase the price of imports -> demand for imports falls while demand for exports rises -> the value of exports may rise while value of imports may fall -> improvement in the current account balance of payments -> improved (X-M) component of AD
Greater price competitiveness of exports increases demand for exports -> exporters (producers) may increase their investments and capital and labour to increase capacity to supply to meet rising demand -> greater I component of AD -> greater employment to achieve lower unemployment rates, whilst increasing disposable incomes and consumption within the economy -> increased C component of AD
Greater C+I+(X-M) components of AD results in an
outward shift in AD
-> increased GDP to achieve economic growth targets -> increased GPL may hinder 2% inflation targets by increasing demand-pull pressures.
MICRO eval
if firms that export use imports to create these exports, the rise in costs of imports may be outweighed or balanced out by the greater demand for exports that increases the average and marginal revenue for these firms -> profits may not fall as much, or at all or may even rise
firms may be able to operate at a loss and stay in the market as
long as their AVC is less than or equal to their AR in the short run,
enabling them to cross subsidise or take out a bank loan to fund spending
this depends on the magnitude and duration of the depreciation -> profits may fall more from a 10% depreciation lasting for 2 years compared to a 2% depreciation lasting 2 months
this depends on what countries and currencies the currency depreciates against -> profits may fall more if depreciation is against valuable trade partners (thus imports make a higher % of production costs) compared to a country with a currency they don't really trade with, so can continue to import products from their usual trade partners where prices wouldn't have changed
MACRO eval
However, in the long run, the greater investments in capital such as machinery, technology as well as labour, which boosts the size of the workforce the more productive the workforce becomes -> this decreases unit production costs ->
outward shift in the AS curve
which reduces GPL (which can outweigh the short term rise in GPL) by lowering cost-push pressures whilst increasing GDP
The improvement to the balance of payments will only occur in the long run since there is a time lag for economic agents to realise there have been price changes to imports and exports -> shown by the
j-curve
-> doesn't drive economic growth in the short run
a depreciation will only cause economic growth if the PED of exports + imports is above 1 where the Marshall Lerner condition is satisfied
the impacts of the outward shift in AD depends on the
elasticity of the AS curve
-> the more elastic, the more GDP rises and the less GPL rises
the value of the multiplier -> the greater this is, the more GDP and GPL rise since the outward shift is greater (results from larger spare capacity, high MPC, low MPS, MPM and MPT values)
the
position of the country along the LRAS curve
-> the further along the less GDP rises but more GPL rises
evaluate the micro and macro effects of a rise in the minimum wage
MICRO
this increases wages from W1 to W2 which increases labour supply from q1 to qs and reduces labour demand from q1 to qd which creates an excess supply of labour
increased demand for normal goods due to positive YED so as incomes rise so does demand e.g. necessities like food and luxuries like technology -> increased AR and MR -> greater profits (impacts already explained)
increased variable costs for firms that hire people on the minimum wage -> increased AC and MC -> profits may fall and a loss could be created (impacts already explained)
MACRO
reduces income inequality since those on the lowest wages experience greater incomes -> inward shift of the Lorenz curve closer to the line of perfect equality which may reduce the Gini Coefficient score too
increased incomes within the economy may rise demand for goods and services overall -> greater C -> accelerator effect for businesses to increase investments since they need to boost capacity to supply to meet rising demand -> greater I causes AD growth, boosting GDP and GPL
rising wage costs causes the production costs for firms to rise -> inward shift of AS which causes a rise in GPL whilst reducing GDP -> conflicts with stable economic growth and low inflation objectives
a higher GPL resulting from both these impacts has many negative impacts such as
reduces the price competitiveness of exports which could reduce demand and the value of exports which worsens the balance of payments -> inward shift of AD, reducing economic growth and GPL
MICRO eval
decreased demand for inferior goods due to negative YED so when incomes rise, demand falls e.g. cheap alternatives like meal deals (shows not all firms profits will rise)
dynamic efficiency may not rise if firms choose to only distribute profits among shareholders and owners
firms may not choose to re-invest if interest rates are high so incentive to invest is low ( high returns on saving and high borrowing costs)
the higher the YED value the more demand rises -> demand rises more than incomes rise -> greater rise in profits
demand for normal goods may not rise if consumer confidence is low e.g. uncertainty due to Brexit, Trump's tariffs and highest tax burden in 70 years
demand for normal goods may not rise in the short run due to the time lag for people to feel more "well-off" especially if people are only paid monthly
if people with greater incomes choose to spend on imports or save their extra incomes this would increase leakages to the circular flow, resulting in an inward shift of AD that reduces GPL and GDP
short run shut down point already explained
some firms may not experience rising costs if they can replace labour with technology and machinery e.g. manufacturing firms
depends on what is happening to other costs where if costs of raw materials(variable) or rent (fixed) decreases then this could cause costs to not rise as much or at all, they may even fall if this outweighs rising wage costs
impacts the most labour intensive firms, which cannot replace labour with capital, with a high % of total costs that are wage costs e.g. social care
depends on the magnitude of rise, where costs would rise much more if wages rose by 10% compared to 2%
MACRO eval
workers may become more motivated and focused due to higher incomes, and/or they fear real wage unemployment -> their productivity increases -> unit labour costs could actually fall overall -> outward shift in AS which drives GDP growth and reduces GPL (could outweigh the impacts of rising wage costs - the conflicts with economic growth and inflation)
impacts of the inward shift in AS depend on the elasticity of the AS curve already explained
impacts of the outward and inward shift of AD depends on many factors
real wage unemployment may occur which worsens income inequality but little evidence of this occurring in the UK
demand for exports may not fall if they have an inelastic PED (so demand won't fall as much as prices rise so doesn't worsen the balance of payments as much)
demand for exports may not fall if GPL is still lower compared to trade partners/other countries and non-price competitiveness such as quality has improved
Evaluate the micro and macro policies to promote growth and development in a country of your choice
MICRO
micro-finance loans -> increased loans for small businesses -> these loans can be used to fund investment projects -> greater I component of AD causes an outward shift in AD so GDP rises promoting growth -> in the long run greater investments can boost productivity of the workforce e.g. capital and labour saving technology implemented -> decreased unit production costs -> outward shift in AS -> increased GDP so promotes growth
privatisation -> increased competition between many private firms as opposed to a nationalised monopoly/duopoly -> incentivises firms to be more efficient to be able to compete with others -> one way of becoming more competitive is via investing in R+D and innovation -> this can reduce production costs (as productivity may rise) for greater price competitiveness and improve the quality of products sold for greater non-price competitiveness -> greater investments has the positive effects on growth already mentioned
removal of government subsidies -> reduces the opp cost for the government so they can use the extra finance to spend on education and healthcare to boost literacy rates and life expectancy for better HDI score and development -> prompts firms to be more efficient as they have to compete without subsidises with effects of this already mentioned
MACRO
attracting FDI -> increased infrastructure investments -> reduces transport costs for firms are journey times decrease -> lower production costs causes outward shift in AS curve which increases GDP -> reduces geographical immobility of labour -> increased employment so greater consumption, AD and GDP whilst boosting output and productivity of workforce in the long run for AS and GDP growth
increased training of workers -> increased skills, qualifications and employability which reduces occupational immobility of labour -> greater employment with impacts already mentioned
buffer stock scheme -> reduces the uncertainty of volatile commodity prices
greater confidence of economic agents (consumers to spend, businesses to invest and governments to spend) outward shift in AD as these components rise (as the government buys stock in good years so prices don't fall and provides stock in bad years so prices don't rise)
MICRO eval
depends on what the small businesses choose to do with their loans, since they may not choose use loans to fund investments, not driving growth and development
this may take a long time to drive growth and development because of the time lag taken for investment projects to be completed
banks may only lend to their friends and families businesses, being corrupt and not increasing growth and development equally so not felt by the country as a whole
may only work on a very small scale as these tend to be local projects so may not contribute much to the growth and development of the country as a whole
the government may not use extra finance on public services may just distribute among themselves if corrupt which holds back growth and development
firms may not be able to become more efficient if they relied to much on subsidies which can cause them to shut down which holds back growth and development if unemployment rises
MACRO eval
corruption where the government may distribute profits and earnings from investments among the elite instead of spending on the rest of society, worsening inequality whilst holding back growth and development
exploitation of workers by the TNCs that invest e.g. low incomes and poor working conditions so the citizens are trapped in low paid jobs holding back growth and development
debt and interest payments may have to be paid to the donor countries of FDI which acts as an opportunity cost of the money the government could be spending on education and healthcare to boost literacy rates, life expectancy thus the HDI score and development and may make the country less attractive to FDI in the future
imperfect information may make the government ineffective at facilitating this strategy which could cause a waste of scarce resources especially if goods are perishable e.g. bananas
worsens the fiscal position and may worsen national debt if they have to borrow to fund this policy
may worsen social unrest if they have to raise taxes or cut back in other areas of spending to fund this policy
if population grows faster than GDP rises, the GDP per capita value will worsen, thus lowering the HDI score which holds back development
impacts of outward shifts in AS and AD curves depend on many factors already mentioned
Evaluate the micro and macro impacts of a rise in tariffs
MICRO
the quantity of domestic goods produced increases from 0-q1 to 0-q3 (these become a cheaper alternative to imported goods)
the revenue for domestic firms increases from e+f to e+f+g+a+b (demand rises for domestic goods as substitutes for more expensive imports)
the producer surplus for domestic producers increases from e to e+a
this protects the incomes and livelihoods of domestic workers
this results in an outward shift in the AR and MR
curve -> increases profits for domestic producers -> increased returns to shareholders and owners -> increased funds to re-invest in R+D and innovation for greater dynamic efficiency -> increased productivity and quality of products -> greater consumer satisfaction and experience
MACRO
This reduces the quantity of imports from q1-q2 to q3-q4 (prices of imports rise so demand for imports falls)
reduces the revenue of foreign firms (importers) from g+h+i to h
the value of imports decreases which can improve the balance of payments
creates government tax revenue in the area c -> improves the fiscal position -> may reduce national debt if the government doesn't have to borrow as much to fund spending -> may stimulate greater government spending on their current, capital and transfer components
greater G+(X-M) components of AD may result in
an outward shift of AD
-> increases GDP and GPL -> can help to meet economic growth targets but may worsen demand-pull inflationary pressures
MICRO eval
dynamic efficiency may not increase if firms distribute greater profits only among shareholders and owners, or lack the incentive to invest e.g. high interest rates, uncertainty surrouding Brexit
the profits of some domestic businesses may decrease -> increased price of imports from pw1 to pw2 -> increased production costs for firms that use imports -> increased variable costs of raw materials ->
increased AC and MC curve
-> decreased profits, returns to shareholders and owners, less dynamic efficiency and some firms may even shut down if they suffer a loss
-> BUT if their AVC are less than or equal to their AR in the short run, domestic firms can continue to operate at a loss, as they can cross-subsidise or take out a bank loan to contribute to paying back fixed costs
it depends on the XED between imported and domestic goods, where the higher this is, the stronger the substitute relationship, so demand for domestic goods rises more than the rise in price of imports
MACRO eval
impacts of the outward shift in AD depends on
the
elasticity of the AS curve
(more elastic, the more GDP rises and less GPL rises)
the value of the multiplier (the higher this is, the greater the outward shift is -> large spare capacity, high MPC, low MPM, MPT and MPS)
the
position of the economy along the LRAS curve
(further along, GDP rises less while GPL rises more)
this depends on the PED of imports where if more inelastic, demand for imports won't fall as much as price rises so may not improve the BoP
depends on the magnitude of tariffs where a 5% tariff will have a less significant impact than a 20% tariff
risk of retaliation and trade wars, or even a case brought to the WTO which could damage global reputation
loss of global efficiency in the area b, since less efficient domestic firms are producing instead of more efficient foreign firms, and creates deadweight loss to society in area d (market failure)
reduces domestic consumer surplus by the area a+b+c+d and reduces domestic consumption from 0-q2 to 0-q4 -> reduces the C component of AD ->
inward shift of AD
which reduces GDP and GPL ->
negative accelerator effect
where firms are less incentivised to invest since they don't need to increase their capacity to supply to meet demand -> decreased I component of AD for another inward shift of AD that reduces GDP and GPL
Evaluate the micro and macro impacts of an imposition of a tax on sugary foods
MICRO
increased price of HFSS foods, decreased consumer surplus and utility -> reduces consumption and demand for HFSS foods -> decreased revenue for firms that sell HFSS foods -> reduces their profits -> less returns to shareholders and owners and less dynamic efficiency -> a loss could mean some HFSS food firms shut down and causes government failure of unintended consequences of unemployment
opposite effect on firms selling healthier goods due to becoming a cheaper substitute -> increased demand for healthier foods -> outward shift in AR and MR curve -> higher profits.
MACRO
this reduction in the consumption of HFSS foods in exchange for healthier alternatives results in a much healthier workforce since they have much healthier diets -> more focused and productive workforce -> unit labour costs fall -> outward shift in AS -> increased GDP (achieves economic growth targets) and reduces GPL (achieves lower inflation targets as cost push pressures fall)
a lower GPL may improve the price competitiveness of exports as they become cheaper, so demand for exports may rise -> this could boost the value of exports to improve the BoP
this generates tax revenues for the government which can improve the fiscal position -> may reduce national debt as they don't have to borrow as much to fund government spending
an improved BoP and possibly greater government spending -> increases the G+(X-M) components of AD -> outward shift in AD increases GDP and GPL
MICRO eval
consumers may not act rationally, so their consumption of HFSS foods may not decrease if they don't fully perceive the negative impacts of consumption, such as risk of type 2 diabetes and other health issues
depends on the PED of HFSS foods where the more inelastic (due to being addictive) means demand doesn't fall as much as price rises, so revenue and profits for HFSS firms may not fall
depends on the XED between healthier foods and HFSS foods where the higher this is, the stronger the substitute relationship is so demand for healthier foods rises more than the rise in price for HFSS foods -> revenue and profits rise for these firms
depends on the new price difference between healthier foods and HFSS foods -> demand for healthier foods won't rise as much if they are only 2% cheaper compared to 10% cheaper (depends on the magnitude of the tax therefore)
the government may need to use the tax revenue gained by this to invest in more policies to reduce the consumption of HFSS foods more effectively e.g. provision of information on the health risks of HFSS foods, subsidies on healthier foods etc
short run shut down theory for some HFSS foods that can continue to operate at a loss
smuggling and sale of HFSS foods on the black market would cause worse health risks as they aren't regulated and a loss of potential tax revenue for the government
MACRO eval
the impacts of the outward shift in AS depends on the
elasticity of the AD curve
where the more elastic this is, the more GDP rises and the less GPL falls.
impacts of the outward shift in AD depend on the other components of AD (C+I) where G may not have a very significant impacts of the outward shift in AD depends on
the
elasticity of the AS curve
(more elastic, the more GDP rises and less GPL rises)
the value of the multiplier (the higher this is, the greater the outward shift is -> large spare capacity, high MPC, low MPM, MPT and MPS)
the
position of the economy along the LRAS curve
(further along, GDP rises less while GPL rises more)
the rise in demand for exports depends on other factors such as the PED (more elastic, the more demand rises more than the price falls) and non-price competitiveness such as quality