May 2018 TZ1 P1
With reference to the concept of excess demand, explain how a decrease in supply of a good would lead to a new market equilibrium
- Excess demand is a state where the quantity demanded of a good at a given price exceeds the quantity producers are willing and able to supply at that price - This can occur if the supply of a good decreases e.g. due to poor weather and a deiseas affecting olive trees, the supply of olive oil in Italy fell dramatically this year - the market for olive oil is initially in equilibrium where S=D and Q units of a good are bought and sold at price P (in euros) - due to poor weather conditions, the supply of olive oil decreased, shifting the supply curve left - at price P, there is now an excess demand as Qd is demanded but only Qs is supplied (excess demand of Qd-Qs) - this creates an upward pressure on price, increasing price until a new equilibrium is reached - the lower quantity of Q1 olive oil is now sold at the higher price P1
A government decides to impose an indirect tax on unhealthy drinks. Discuss the consequences for the stakeholders in these markets
- an indirect tax is a tax on expenditure, designed to raise the price of a good in order to discourage its consumption (due to the negative relationship between the price of a good and and the quantity of it stated by the law of demand, an increase in the price of a good will result in a decrease in the quantity demanded of it) - aim is to reduce Qd & to collect tax revenue - e.g. the UK tax on sugary and soft drinks of 18p per litre for drinks with >5g of sugar per 100ml - The tax shifts supply up by the exact amount of tax per unit (18p) due to an increase of 18p in costs per unit for firms selling these drinks - price increases to P1, causing a fall in Qd to Q1 (new equilibrium) - Firms (worse off as they recieve lower price P1 and sell a lower quantity, reducing their revenues & producer surplus) - Consumers (worse off as they pay higher price and recieve a lower quantity, lose consumer surplus) - Workers (may lose jobs as firms look to reduce costs elsewhere, leading to unemployment and lower income ∴ lower material SoL) -> negative impact on economic growth - Society (worse off as the quantity supplied is now less than the social optimum and so societal welfare is not maximised) - Government (only stakeholder better off as they now collect tax revenue indicated) EVAL: effective in decreasing Qd for goods (like sugary drinks) with price elastic demand but not as much for collecting tax revenue for gov. (could be used to help fund healthcare for obesity & type 2 diabetes caused by consumption) - regressive tax ∴ takes higher proportion of income from lower income groups & increases inequalities - may be more effective to subsidise healthier alternatives
Explain how expansionary fiscal policy could be used to close a deflationary gap
e.g. China (*decreased corporation tax and fees* by over *"1.1 trillion yuan"* & *issued "1.35 trillion yuan* in special bonds for *infrastructure projects"*)
