Economics Unit 2

explain and evaluate the effects of supply side policies on the economy

* can target particular markets to improve efficiency * can take a long time to put into effect * could face resistance from groups within eco * policy reducing social protection benefits opposed by who believe will hurt most vulnerable in society * trade unions oppose policies limiting their power * policies may have an unintended effect - ex cut in income tax could actually lead people to work less bc they can have same disposable income through working less hours * increasing total supply over time enabled total demand to rise and lead to more employment and growth without inflation being a problem * higher quality resources also makes UK firms more competitive - helps achieve balanced BOP * in long-run, helps achieve economic objectives * can complement interest rate policy, which is used in the shorter term to manage aggregate demand

explain and evaluate the effects of fiscal policy on the economy

* fiscal policy affects aggregate demand, but not certain how far it affects it * example, reduced taxes, consumer expenditure rises, but by how much? * some may save (interest rate high?) or spend it on imports (businesses inside country do not benefit) * this reduces multiplier effect and makes fiscal policy less effective in achieving employment and economic growth * raise taxes to combat inflation, disposable incomes fall * however, some may push for wage rises which will be inflationary * info on which gov makes tax and spending decisions may be incomplete/out of date * may take time to put into effect, during which the economy may be changing in ways not anticipated * shocks may occur which put policy off course, such as terrorist attacks or doubling of world oil prices Final problem concerns conflict between objectives - trying to reduce inflation and BOP deficit, and increasing employment and economic growth, reason became less prominent in UK 1970s

compare fiscal, monetary and supply side policies

* fiscal/interest rate policy affect aggregate demand, while economy's ability to supply affected by supply-side policies * none of policies have instant effect, but supply-side takes longer to affect (number of years for effect) and fiscal/interest rate policy is quicker * most changes in fiscal planning made annually in budget, details of spending and tax measures affect supply side of economy, so fiscal/supply side policies not flexible enough to react to changes in the economy in the short run however Bank of England meets every month to set interest rates, so it is more flexible * gov can choose priorities when putting fiscal / supply side policies into practice but Bank of England places price stability first, therefore interest rate policy may be less effective in achieving the other objectives of government Reducing unemployment - budget deficit, reduce interest rates Economic growth - budget deficit, reduce interest rates reduce inflation - budget surplus, raise interest rates reducing a BOP deficit - budget surplus, raise interest rates

understand that measures to achieve one policy objective might have adverse effects on other policy objectives

* in practice, gov may only achieve some objectives, but unlikely to achieve all objectives all the time - there may be conflicts between objectives when policy measures are taken * example suffering unemployment and inflation - budget surplus and high interest rates combat inflation but unemployment is even worse * called a trade-off between unemployment and inflation - to achieve less inflation, more unemployment, vice versa * if interest rates were raised and gov budget deficit, policies would conflict and effectively cancel out - not coordinated policy but mismanagement of the economy! * supply-side policies may conflict with fiscal policy - cut direct taxes for incentives, more spending on education and training would conflict with the need for a budget surplus to combat inflation * up to gov to set priorities - may decide short-run reduce inflation and long-run help economy achieve more employment and growth

understand what is meant by supply side policies

* when aggregate demand = aggregate supply, there is equilibrium level of output (GDP) * if total demand rises further but economy cannot supply any more output, then real GDP will not increase, but price level will rise (inflation) * supply-side policies aim at helping economy produce more output - if successful then when demand rises, lead to greater GDP without inflation supply-side policies = policies that increase the ability of the economy to supply more goods and services

understand that there are many different rates of interest

At any point in time in the economy there will be many different interest rates

identify, explain and evaluate the costs and benefits of economic growth

Benefits: * Rise in living standards (if GDP faster than population) * Rise in welfare of population - gov also able to devote more resources to services (health/education?), especially beneficial to developing counties, reduces infant mortality rate, increase life expectancy and rate of literacy * Rise in employment - more workers needed in order to produce more * Reduced poverty - gov gains more in taxes, increase living standards of poor / provide more benefits to the poor Costs: * Environmental costs - higher pollution, example global warming, rise in sea levels, road transport = air and noise pollution * Congestion - growth concentrated in certain areas, become overcrowded and congested, more pressure on services such as hospitals, schools and public transport, travelling times increase * Loss of non-renewable resources - oil, natural gas, metals, other minerals, rainforests (endanger animals) etc * Lower quality of life - people materially better off, however sometimes change lifestyles to their disadvantage, example more stress * Inequalities of income and wealth - benefits unevenly spread, some are left behind * Inflation - sometimes economic growth is too fast for economy to respond without inflation Eval: in poor developing countries, benefits such as better diets and access to clean drinking water and medical facilities and more children going to school are obvious, in China many of citizens have a wider variety of goods and services However for developed countries such as the UK, benefits are less obvious, greater demand for material things and health services (growth can bring), however problems increase, more obese and pollution/environmental costs, some argue that resources gained from economic growth can be used to help the environment, example purchasing and maintaining nature reserves

explain how unemployment can be measured

Claimant count - measures unemployment according to the number of people claiming unemployment-related benefits (such as Jobseeker's Allowance) Labour Force Survey - a survey of a sample of households, counting people as unemployed if they are actively seeking work but do not have a job (in the week of the survey) Labour force uses standard international methods, so figures are directly comparible to other countries using same method, gives a much larger figure possibly because some unemployed are not claiming benefits

identify the main sources of UK government revenue

Comes from types of tax (direct and indirect taxes) Direct taxes: * Income tax - Collects most revenue, paid by millions on wages and salaries, also paid on other types of income (inc. pensions, interest, profits of non-corporate businesses), helps to redistribute incomes * National insurance contributions (NICs) - Paid by employees and employers, (employees - deduction from wages), some state benefits received depend on contributions of employees * Corporation tax - tax on profits of companies * Inheritance tax - tax on transfer of wealth at the time of death Indirect taxes: * Value-added tax (VAT) - tax on a range of goods and services, rate usually 17.5% but temporarily 15%, payable on all consumer durable goods, many non-durable goods, and services * Excise duties - tax on specific goods (ex. tobacco products, alcoholic drinks, petrol, diesel)

understand how the rate of inflation can be measured with regard to the Consumer Price Index (CPI)

Consumer prices index - gov finds out spending patterns of average families and record prices of everything they buy (done at different outlets across country), goods and services are weighted (those that take a higher proportion of spending are more important) and the rise or fall in prices from one month to the next is recorded CPI recorded using numbers (100 = normal price level, 103 = 3% inflation etc) Consumer prices index - the official measure of the rate of inflation

distinguish between direct and indirect taxes

Tax - a compulsory payment to the government Direct tax - a tax on income or wealth Indirect tax - a tax on spending, often defined as a tax on goods and services

understand what is meant by the distribution and redistribution of income

Distribution of income * total income is shared out among people in country * not equally shared therefore there is an uneven distribution of income Redistribution of income * When gov takes income from some groups and gives it to others (policy of gov) * to reduce inequalities of income, tax higher income groups more and give more in benefits to lower income groups * number of different benefits the gov pays to households as part of policy, which are called transfer payments * examples state pensions, jobseeker's allowance and child benefits (up to age 16) (some receive Education Maintenance Allowance [EMA] for staying in education after GCSEs) Key Terms: Distribution of income - how incomes are shared out among the people of the country Redistribution of income - a policy to reduce the inequalities of income so that incomes are distributed more evenly inequalities of income - incomes are distributed unevenly so some people have a much higher income than others Transfer payments - benefits to citizens which are paid out of tax revenue

understand the objectives of government policies, i.e. maintaining full employment, ensuring price stability, achieving high economic growth and balancing exports and imports

Full employment - Everyone *able* and *willing* to work has a job Economic growth - A steady rate of economic growth (richer economy and avoid cyclical changes in GDP - especially recessions) Price stability - keeping inflation low (realistically aims for around 2% rise per annum) Balancing exports / imports - not necessarily equal exports / imports each year, but deficits in some years be matched with surpluses in others

distinguish between GDP and GDP per capita

GDP (gross domestic product): the total value of goods and services produced in the country in a year GDP per capita: GDP divided by the population (average output / income of each person in country) If GDP grows faster than the population, the GDP per capita will rise (+living standards)

understand that a combination of policies can be used to achieve an objective

Fiscal policy - changing level of aggregate demand through changes in taxation and government's spending Interest rate policy - changing aggregate demand through changing interest rates (operated by bank of england) Supply-side policies - increase economy's capacity to produce goods and services combine them to achieve an objective

understand what is meant by economic growth

Growth in the output of the economy over time (growth of real GDP over time)

understand how interest rate policy works to achieve a target rate of inflation

If MPC believes inflation likely to rise, raise interest rates - reduce spending in economy, so less pressure on prices reasons why aggregate demand will fall: * saving will be more rewarding for consumers - consume less * borrowing is more expensive for consumers - consumers often finance through credit (especially for expensive durable goods) but as credit becomes more expensive, they may postpone this expenditure * borrowing more expensive for firms - they finance investment expenditure but cut back as interest rate rises * mortgage interest payments - millions of households have a mortgage, have to pay interest each month, as payments rise with interest rate, disposable income falls, less consumer expenditure as well as effects on demand, rise in interest rates raise external value of currency (exchange rate goes up) which will make imports cheaper and reduces inflation

understand the features of direct and indirect taxes, and explain and evaluate the economic effects of changes in direct and indirect taxes

If gov wishes to raise revenue, it will choose between raising direct / indirect taxes Direct taxes - * help reduce inequalities in income * much more noticeable when deducted from pay packets * harms incentives - deters people from working longer / harder / looking for higher paying jobs if income not much higher than income from benefits Indirect taxes - * increase inequalities in income (unfair to lower income groups) * much less noticeable because included in price of goods and services * therefore doesn't have the harmful effect on effort and incentives that direct taxes have * consumers have a choice of paying this tax through purchasing less/more goods/services * changes pattern of demand bc level of tax is diff between commodities, less demand for higher tax, therefore taxes are discriminating against producers, leads to less output / employment in those industries * advantageous in case of demerit goods + high external costs, consumers pay more towards high external costs, consumption also falls for it * however this tax on goods such as cigarettes can lead to illegal activity - goods smuggled from countries with a lower tax for it are sold on the unofficial market (gov loses tax revenue and power over it) ----------------------------------------------- External cost - the negative impact of an economic transaction on a party who is not directly involved in the transaction (remember negative / positive externalities are positive / negative impacts) Demerit good - a good or service whose consumption is considered unhealthy or undesirable due to its bad effects on the consumers (negative externality). It is over-consumed if left to market forces. Examples tobacco, alcohol, recreational drugs, gambling and junk food

understand what is meant by price stability, inflation and the rate of inflation

Inflation - a sustained rise in the general price level over time rate of inflation - the rate at which the general price level rises over time price stability - the general level of prices is kept constant or grows at an acceptably low rate over time (realistically objective is 2% inflation rate)

understand what is meant by interest rate policy

Interest rate policy is the main feature of monetary policy in the UK - using changes in interest rates to affect the economy * The major objective of interest rate policy is a low and stable rate of inflation (UK's target = 2% per annum, measured by the CPI) * since 1997, the monetary policy committee (MPC) of the Bank of England is responsible for setting interest rates (Bank rate) to achieve that target - Bank of England's only method of trying to achieve inflation target * impossible for exactly 2% monthly - 1-3% acceptable * The Bank considers other aspects when setting interest rates (think gov objectives), however primary objective is inflation target * MPC meets once month to set Bank rate - rate affects inflation for up to 2 years * MPC forecasts what inflation rate will be, considers economic data (consumer/investment expenditure, housing market, financial markets, labour market, various cost/price indices, exchange rate of pound, international issues) and then adjusts Bank rate to keep inflation on target * each meeting published so possible to see reasoning for why they chose the interest rate -------------------------------------------------- Monetary policy - a policy aimed at affecting the total supply of money in the economy interest rate policy - the use of interest rates to try to achieve the government's economic objectives Bank rate - the interest rate is set by the Bank of England, which affects all interest rates in the economy (also called the base rate)

understand that production and consumption can lead to negative externalities, including pollution and congestion

Market failure - when the market (through demand and supply) fails to allocate resources in the best interests of society as a whole production externalities * production can lead to externalities * often negative externalities from production * example pollution (land, air, water, visual, noise) - manufacturing business dumps waste in river, waste disposal costs down and profits up but people living near horrible smell, fishermen find dead fish, unaesthetic consumption externalities * consumption also leads to negative externalities * example driving cars - air/noise pollution and danger for pedestrians/passengers (thousands killed each year), also congestion * litter positive externalities * may be some benefits * example vaccination against contagious disease - individual benefits but also other people have a smaller chance of catching the disease (merit good)

understand what is meant by money and interest rates

Money is anything generally acceptable in exchange for goods and services - it must be instantly recognisable to sellers * must have confidence in it * medium of exchange * enables buying and selling to take place quickly and easily * measure of value - compare prices and plan spending * store of value * lending/borrowing * money can take different forms (shells, spears, cattle, cigarettes) * UK uses coins, banknotes, bank deposits (using direct debit?) * credit cards, debit cards and cheques are not money, money transferred from bank deposits (just a means of transferring money) * bank and building society deposits are basically 'invisible money', money does not take a visible form except as figures on paper/computer screen, but still an acceptable form of money Money can be saved, interest rates usually paid as reward for saving, banks and building societies usually use money being saved to lend to individuals and firms, who are borrowing from them and will need to pay interest for borrowing --------------------------------------- Money - anything that is generally acceptable as a medium of exchange Interest rate - the reward for saving and the cost of borrowing Banks and building societies - financial institutions that accept deposits and make loans

explain and evaluate the consequences of unemployment

Need some frictional unemployment as patterns of demand change, but mostly unfavourable * Labour resources are wasted - not using resources to full capacity * lower living standards - lower average income * excluded workers - could be unemployed for so long that they become unemployable * costs to taxpayers - more unemployed, need more to pay for benefits, greater cost to taxpayer * budget deficit - lose tax revenue from workers, pay more on benefits, spending in the economy will fail (however deficit combats unemployment) * regional problems - some locations may suffer more than others, lack of demand in the area leads to more unemployment, some people move away, becomes a 'depressed area' * Social problems - unemployed suffer from loss of status and self-esteem, martial break up and increased crime rate Eval: some frictional unemployment is necessary however benefits of employment outweigh costs

evaluate the consequences of redistribution measures

Reduced inequalities * aim is to reduce inequalities of income (fairer society?) * large income differences still exist but not as large as before redistribution * also aims ensure each family has basic minimum standard of living Disincentive effects * could also be adverse effects on incentives * people may find that they can live well enough on government's benefits and may not bother to seek work - disincentive to work * high progressive taxes may also provide a disincentive to work as getting a promotion, overtime etc, 40% of extra earned money is taxed * some high earners may move abroad to escape tax, government loses out on revenue * disincentive for businesses to invest and individuals to save * therefore high progressive taxes + state benefits can have adverse effects on supply side of the economy

identify the main areas of UK government spending

Social protection - system of social security benefits Health - NHS (national health service) provides range of healthcare and protection for population, huge employer Education - public sector (gov) responsible for education ages 4-16 Defence - army, air force and navy Law and order - police, courts and the prison service Debt interest - the government borrowed money when it had budget deficits and has to pay interest on the outstanding loans

show how economic growth can be measured with reference to GDP

The government measures the value of the country's output and calculates the rate at which it has risen. Example y1: £500, y2: £510, difference / original * 100, 10 / 500 * 100 = 2 (2%) Realistically, take inflation into account (use real GDP or do growth rate - inflation rate)

explain and evaluate the effects of interest rate policy on an economy

Time lags MPC meet each month, so reasonably quick to respond to economic data (constantly collected), it is quicker than fiscal policy but still takes time for full impact to work way through economy Exchange rate effects changes in interest rate can affect exchange rate, can have undesirable effect on economy - higher interest rate = higher exchange rate, exports more expensive (less competitive), could have undesirable effects on BOP

explain how redistribution of income and wealth can be achieved through taxation and government spending, including transfer payments

To reduce inequalities of income, increase progressive (explain - takes more, and also takes higher percentage of higher income) direct taxes and reduce regressive indirect taxes. Also increase transfer payments (benefits) paid to lower-income groups. Increase government spending on measures such as education and training which will enable people to earn more in the future. By doing all of this, the gap between the rich and poor will narrow Check Eval flashcard

understand why income and wealth is unevenly distributed

Wages * different people have different jobs which pay different wages * high demand, low supply of workers = high wage * therefore workers in skilled job tend to have high wage since limited supply of people with that skill * opposite applies for last 2 points * likely some low skill jobs may pay national minimum wage Other incomes * some have no job, rely on state benefits for income * example unemployed receiving job seeker's allowance * also the case for pensioners with state pension Wages / salaries most important income for most households however other forms of income households may receive from assets such as property (rent), savings (interest), shares (dividend) People with lot of assets receive higher incomes Income - the flow of money received over time (e.g. wages) Wealth - the stock of assets which are owned, wealth can earn income for the owner

understand the reasons why there are different rates of interest

Why are there different interest rates? saving vs borrowing * generally interest rate for saving is lower than rate on borrowing * bank acts as an intermediary between savers and borrowers * difference between the two rates pays for its costs (staff, premises etc) and makes profit competition between banks and building societies * different rates available at any time (some more generous than others) * banks owned by shareholders who expect a dividend while building societies owned by people who save and borrow with them, so their interest rates may be higher for savers/lower for borrowers * these institutions are competing for consumers, therefore different interest rates arise other factors affecting savings rates within one bank/building society there will be different savings accounts offering different rates of interest rate of interest will be higher: * the greater the minimum deposit for the account * the longer the time that the money is tied up * when the saver is committed to a regular saving plan * when the saver is also committed to another type of account within the same bank Some institutions pay a higher interest rate on internet accounts bc operational costs are lower Factors affecting rates on loans * loans have different rates of interest with 2 factors influencing the interest rate * First factor is risk - greater risk, higher rate of interest, large firm with good credit record will be able to get a lower interest rate than a business start-up * second factor is security - greater security, lower interest rate, mortgages are loans to buy property (houses), the house is the security against the loan, so if borrower fails to repay lender can repossess house, mortgages tend to have low interest rates. In contrast, interest rates on credit card borrowing are 3 or 4 times higher than mortgage rates, borrowers who offer little/no security may be refused loans or exploited by 'loan sharks' who charge damaging interest rates of 100% or more

understand how a government can achieve a balanced budget, a budget surplus or a budget deficit

balanced budget - gov spending equal to tax revenue budget deficit - gov spending greater than tax revenue budget surplus - tax revenue greater than gov spending multiplier effect - a process by which an original change in incomes in the economy leads to a total change in incomes which is a multiple of the original change if gov aim = expand/reflate economy then budget deficit: more economic growth and employment if gov aim = contract/deflate economy then budget surplus: reduce inflation and balance of payments decifits Reflating the economy * if aim = economic growth + employment then budget for deficit by spending more and reducing taxes * when gov spends more and lowers taxes, incomes for others rise, disposable incomes rise and consumer expenditure rises * this spending provides income for firms in the economy - produce more / supply rises - employs more workers to meet extra demand * extra incomes for workers may be spent, and the process continues - this is called the multiplier effect * gov's extra spending/reduced taxes leading to budget deficit has stimulated economic activity to achieve more employment and economic growth Deflating the economy * if aim = lower inflation + lower BOP deficit then budget for surplus by gov spending less and raising taxes * when gov spends less and raises taxes, incomes for others fall, disposable incomes fall and consumer expenditure falls * this decreased spending provides less incomes for firms, produce less / supply falls, employs less workers to match reduced demand * incomes fall further, consumer expenditure falls, process continues - multiplier-in-reverse (incomes, output and employment falling) * gov's reduced spending/raised taxes leading to budget surplus has reduced aggregate demand to achieve lower inflation and a reduced BOP deficit

evaluate the consequences of inflation, including the costs of inflation and the benefits of price stability/a low rate of inflation;

benefits of price stability - consumers know what things they can / cant afford and can plan spending benefits of inflation: * greater flexibility in a growing economy since easier for relative prices to adjust, especially wages (rise in wage lower than inflation) * incentive for businesses to invest as they can increase their prices and profits * value of debts lower example using loans to buy house, monetary value of house rises costs of inflation: * shoe leather costs - consumers spend time shopping around looking for new best price * menu costs - firms adjust their prices to keep up with inflation, extra costs when capital equipment such as vending machines have to be changed * income redistribution problems - some benefit (debtors, workers with a strong trade union) however many are worse off (those with low, fixed incomes, those who rely on state benefits [although gov usually index-links these], savers [purchasing power of savings fall], creditors [when debtors repay loans the real value is lower]) * labour market problems - workers want wage rise higher than rate of inflation, however employers are facing falling sales as costs and prices rise, conflict between them (strikes?) * balance of payments problems - particularly when rate of inflation higher than rate of inflation in countries with which we trade, exports become more expensive therefore less competitive and sales fall, meanwhile imports become more competitive against higher priced british goods in the market, purchases of imports rise, this leads to budget deficit * unemployment - if producers are selling less abroad they will need fewer workers, this leads to unemployment, also reduces confidence of business and they are less likely to invest, this reduces employment opportunities in the long run * danger of hyperinflation - wage-price spiral likely and inflation would rise higher and higher over time, if nothing is done to combat this it will lead to hyperinflation (a rate of inflation so high that the value of money becomes close to worthless) Eval: a low rate of inflation may be beneficial overall however inflation that is higher is considered harmful to the economy, the higher the inflation the worse the effects on the economy although some will benefit from it but most will lose out, the costs of high inflation always outweigh the benefits, at worst hyperinflation can lead an economy close to collapse, one of the main macroeconomic objectives

explain and evaluate policies that a government can use to reduce unemployment.

budget deficit reduce interest rates policies to increase output

identify, explain and evaluate policies that a government can use to achieve economic growth.

budget deficit reduce interest rates policies to increase output

understand what is meant by fiscal policy

budget is presented to parliament once a year, lays out the gov's spending and tax revenue plans for the financial year ahead fiscal policy - a policy that uses taxation and government spending to try to achieve the objectives of the government * fiscal policy can be used to affect only certain markets in the economy (housing / tobacco) in order to achieve microeconomic objectives * however here we consider how it can affect aggregate demand in the economy to achieve macroeconomic objectives of gov * balanced budget = neutral effect however this can be changed by gov (surplus/deficit) for certain effects

explain and evaluate policies that a government can use to control inflation and achieve price stability

budget surplus raise interest rates policies to increase output

identify and explain the causes of inflation, including costpush and demand-pull inflation

demand-pull - total aggregate demand rises but supply cant rise to match increase in demand so prices are pulled up, demand normally from consumers but could be from firms (investment), consumers in foreign countries, and the government (health / social protection benefits), often happens when economy near to full employment some believe that demand cannot rise unless supply of money to finance demand rises - called monetary inflation (money supply grows quicker than the supply of goods and services) cost-push - costs of production rise and cause price level to rise, main cost of production is wages and if it rises quicker than productivity rises, the cost per unit of output rises example 5% pay rise and productivity only rises 3% then higher costs per unit are passed on to higher prices to consumer Main aims of trade unions is to achieve pay rises, the stronger the power of the trade union the more likely cost-push inflation will take place Not just wages but other costs such as fuel, materials, interest costs, if supplies are imported and their costs rise this leads to imported inflation wage-price spiral - as price level rises, workers / trade unions push for wage rises, this pushes costs up further and leads to more inflation, this repeats ------------------------ monetary inflation - inflation caused by growth in the economy's money supply demand-pull - inflation caused by excess demand in the economy cost-push - inflation caused by a rise in costs in the economy

give examples of supply side policies and explain how they work

education and training * supply of labour important - both quantity and quality - well educated and trained workforce able to produce more goods and services (more productive) * supply side policies include those that encourage education and training - example number of university places expanded (more workers have qualifications at degree level), students encouraged to stay in education beyond 16 (ex introduction of education maintenance allowance which introduced new diploma courses into schools and colleges), arguable that healthcare spending contributes to more productive workforce reducing direct taxes * high direct taxation can have adverse effects on incentives, so cut it * especially affects incentive of low-income earners - when they receive a rise in pay, net incomes do no rise very much because pay more in income / national insurance tax and lose certain benefits (called poverty trap) * direct taxes also affects incentives of firms to invest - if corporation tax too high then unwilling to take risks of investment * gov may reduce direct taxation to increase incentives to work and invest, and thus enable economy to increase its supply of goods and services reducing benefits * if people can receive similar net income from social security benefits as to working, they may lose incentive to work * a measure gov could take is cut benefits to encourage working encouraging enterprise * new businesses can benefits from tax allowances and reliefs (capital allowances, tax relief, credits for spending on research and development) * new businesses potentially important part of future output and employment encouraging new technology and innovation * gov has introduced number of capital allowances schemes to encourage investment and R&D into new technology * will help to increase productive capacity of the economy Reducing monopoly power * monopolies restrict output and increase prices - reducing monopoly power = increase total supply in the economy * gov can prohibit mergers leading to monopoly power and force monopolies to sell off part of their operation * trade unions act as monopolies in labour markets - reducing power of trade unions improves supply side of economy

understand what is meant by employment and unemployment

employment refers to the employment of labour in the economy Full employment - when all those able and willing to work are in paid employment at the current wage rate Unemployment - when workers who are able and willing to work are unable to find employment at current wage rates

explain and evaluate policies to correct market failure, with particular regard to positive and negative externalities

gov aims to correct market failure and increase positive externalities/reduce negative externalities: taxes and charges * taxation is a method * example green taxes - positive effect on environ * excise duties / VAT on petrol sometimes called green taxes * as taxes increase, prices increase, consumption falls and reduces negative externalities * gov charges vehicle excise duty on cars / other road transport according to emissions, providing an incentive for consumers to switch to forms of transport with little emissions * other forms of making consumers pay for external costs include road tolls and the congestion charge laws and regulation gov may use laws to reduce or eliminate negative externalities, example banned use of lead in petrol and in 2007 banned smoking in public subsidies * gov encourage producers/consumers to alter behaviour by offering incentives * example cheap, convenient and reliable public transport so less private cars causing negative externalities * could do this by subsidising public transport, so it is cheaper for consumers provision of merit goods * gov directly provides goods and services with positive externalities (merit goods such as health and education services) * if left to market forces would not be enough for welfare of citizens - market failure * some would not be able to afford to pay for health and education * disadvantageous to both person and economy bc reduced workforce, spread of disease etc Eval 2 points: * most effective at reducing externalities in a particular situation - example reducing congestion, taxing not effective as demand is inelastic, so subsidies * wider impacts - more taxation on tobacco may reduce consumption, but has regressive effects

identify, explain and evaluate the causes of economic growth

quantity and quality of factors of production affects the rate of economic growth since they are needed in order to produce goods and services * Investment - Spending on capital goods, capacity to produce more goods and services * Changes in technology - quality of capital improves, higher productivity * Larger workforce - More produced with more workers (natural increase or immigration) * Education and training - quality of workforce, higher productivity * Natural resources - discovery can stimulate economic growth * Gov policies - responsibility for macroeconomic management of economy, effectiveness has a significant bearing on the economic growth rate Eval: Which factor most important for particular case, oilfields for Kuwait vs capital investment for China, increasing economy's capacity to produce alone may not lead to increase in real GDP unless demand is also rising

understand the difference between progressive, proportional and regressive taxes

taxes not only for revenue, also for redistribution a regressive tax takes a greater proportion of income from lower incomes, or takes a smaller percentage of a higher income a proportional tax takes the same proportion of income from all income levels a progressive tax takes a greater proportion of income from higher incomes, or smaller percentage of a lower income * progressive taxes help reduce inequalities * UK has all 3 types of tax * generally, direct taxes are progressive or proportional and indirect taxes are regressive Why are indirect taxes regressive? * excise duties are often specific, whereas VAT is a set percentage rate (usually 17.5%). * since VAT is a set percentage on price of goods, everyone pays the same amount, however, lower income groups pay a higher proportion of their income than higher income groups, therefore VAT is a regressive tax * some indirect taxes such as excise duties (tobacco, alcoholic drinks and petrol/diesel) take a large percentage of a low income therefore are very regressive (unless low income groups don't smoke drink or drive) * UK doesn't impose VAT on some necessities such as groceries, medicines, public transport fares etc to reduce regressive effects Why is income tax progressive? tax allowance = £6475 taxable income = total income - tax allowance basic rate = 20% of first $37,400 higher rate = 40% of all taxable income above £37,400 income tax is progressive because: * tax allowance is a higher percentage of a lower income (taxes), so tax is a lower percentage * people with higher incomes pay a higher rate of tax on extra income

identify the types of unemployment and explain the causes of these

voluntary unemployment - possibly fired from $800 wage and doesnt want £400 wage job, possibly benefits of claiming benefits outweigh the benefits of working seasonal unemployment - example tourism industry frictional unemployment - workers moving between jobs structural unemployment - long term changes in structure of industry (workers occupationally immobile / geographically immobile) technological unemployment - capital replacing labour example manufacturing and service industries (internet banking vs local bank workers) cyclical unemployment - fall in aggregate demand, fewer workers needed, lower average income, spend less so firms have less so lay off workers, cycle Learning Tip - Very Silly Fools Suck Their Chips