1st final exam Flashcards
Externalities occur where…
the social costs and benefits differ from the private costs and benefits.
Negative externality:
Social cost greater than private cost (or social benefit less than private benefit).
Positive externality:
Positive externality: Social cost less than private cost (or social benefit greater than private benefit).
MR=
MSB
information asymmetry:
Where one party has information not available to another party
Pure public goods:
Non-excludable
Non-exhaustible
Non-excludable (not possible to exclude free-riders) public goods:
Implies no private market is possible
Non-exhaustible
implies that the ‘allocative efficiency’ price should be 0 (price=MC=0)
Mixed public goods
A broader category of products (goods and services) that have elements of the characteristics of public goods, while not full meeting the criteria for a pur public good
Merit goods=
goods and services which tend to create positive externalities
Regulations:
- Those protecting consumers from the consequences of ‘market failure’
- Those preventing ‘market failure’ from happening in the first place
Potential benefits of deregulation:
- Opening markets up to competition
- Removing obstacles to business efficiency
- Raising economic welfare
Effects of privatization:
- Greater efficiency
- Greater managerial freedom
- Wider share ownership
- More government revenue
Public choice theory:
- This sees politicians and civil servants as seeking to maximize their own interests rather than those of the consumers of the public sector (nationalized) industry
- Politicians seek votes, civil servants seek to ‘please’ their departments (headed by politicians)
Property rights theory:
- This sees the owners of public/ nationalized industries as being unable to exercise effective control over them
- The public is a broad set of people who cannot influence the policies of the public sector/ nationalized industries in the same way as shareholders who have voting rights and can directly influence companies
Privatization: x-inefficiency
This sees public sector/ nationalized industries as being under less pressure to maximize profit that their private sector counterparts.
As a result the public sector may be content to allow costs to be higher then they need to be
Arguments for privatization:
- Greater efficiency
- Wider share ownership
- More government revenue
- More managerial freedom
Arguments against privatization:
- Simply converts state monopoly to private monopoly
- Need bureaucracy to regulate private monopoly
- In practice concentration of share ownership tends to increase
- Loss of government revenue
- Natural monopoly
LRAC
Long-run averagee cost curve
Regulators try to limit:
the possible abuse of market power in the privatixed industries
Establishing a price gap:
this method is to set a maximum price
Encouraging new maket entry:
Another method is to reduce the barriers to entry facing new firms
Three conditions determine EU involvment:
- Companies to merge must have combined turnover >5bn Euros
- EU involved if at least two companies involved have an EU turnover of 250m Euro or more
- EU not involved if all parties to mergehave two-thirds of turnover in same member state
How much time EU has after notification of proposed merger to start proceedings?
One month
When EU must make final decision?
Within four months of starting EU involvement
WIll national competition authority vestigate merger if EU is included?
NOpe, but can we make a break?
In which cases EU decision can be overruled by national authorities?
In special cases e.g. public security
MNPB
Marginal net private benefit
Marginal net private benefit:
the extra net benefit received by the firm in producing one more unit
MEC
Marginal external cost
Marginal external cost:
the extra damage to society as a result of producing one more unit
When The otimum level of pollution is achieved at a scale of activity?
MNPB=MEC
Policy options to reduce pollution:
Environmental standards
Bargaining and negotiation
Environmental taxes
Tradable permits
Minimum standards set:
- Non-market based mechanism for pollution control
2. Regulators must monitor the situaton and be able to sanction breackles in standards
Income distribution from that solution depends upon…
whether property rights are assigned to ‘polluters’ or to ‘victims’.
Pigouvian tax:
A tax on the producer of an externality which is exactly equal to the marginal external cost imposed.
Polluter pay principle:
Environmental taxes are consistent with this
widely accepted principle, under which the polluter pays the cost of any damage he/she imposes on the environment.
Limit pollution:
Total number of permits issued limit environmental damage
Market-based:
Polluters can buy or sell permits at an agreed price
Efficient mechanism:
Firms which can reduce pollution at a cost below the market value of the permit have the incentive to do so, and to sell the permits; and vice versa
Allocation of permits:
Various mechanisms, e.g. ‘grandfathering’
tradable permits:
- Limit pollution
- Market-based
- Efficient mechanism
- Allocation of permits
what is national income?
A measure of the value of the output of the goods and services produced by an economy over a period of time, usually one year.
Withdrawals:
- Any income received by domestic household (H) not passed on to domestic firm (F)
- Any income received by domestic firm (F) not passed on to domestic household (H)
- i.e. W = S + T + M.
Injections:
- Any income received by domestic household (H) not from domestic firm (F)
- Any income received by domestic firm (F) not from domestic household (H)
- i.e. J = I + G + X.
GDP
Gross Domestic Product
Gross Domestic Product
Value of everything made within an economy
GNP
Gross National Product
Gross National Product:
Value of everything produced by tax residents of a country
Net National Product NNP =
GNP – depreciation
Market prices:
valuations include taxes (inflate prices) and subsidies (deflate prices)
Factor cost:
valuations exclude taxes and subsidies (so subtract taxes and add subsidies)
national income measurements: output method-
Value added at each stage of production OR Value of final output to be included
Income method:
Measures incomes paid in return for productive activity
•Exclude transfer payments e.g. pensions, benefits paid for nonproductive activity
•Include undistributed profits (surpluses)
•Exclude stock (inventory) appreciation
Expenditure method:
Measures the flow of expenditures
•Expenditure on final output only, to avoid double counting
•Must be current expenditure (i.e. in that year)
•Not second-hand goodS
Problems of international comparisons, variations in:
- Quality of life
- Purchasing power
- Needs of residents
- Levels of unrecorded activity
- Working conditions
- Distribution of income
Exogenous variables
•Determined outside the model and independent of Y (eg. I+G+X)
Endogenous variables
•Determined inside the model and dependent of Y (eg. S+T+M)
mpw =
mps + mpt + mpm
Average Propensity to Withdraw
(APW) = W/Y
Marginal Propensity to Withdraw
(MPW) = ΔW/ΔY
Equation for calculating GDP
C + I + G + (N)X
Average Propensity to Consume (APC)
C/Y
Marginal Propensity to Consumer (MPC) =
ΔC/ΔY
ΔJ =
ΔI + ΔG + ΔX
ΔW =
ΔS + ΔT + ΔM
‘Fiscal policy’
is the name given to government policies which seek to
influence government revenue (taxation) and/or government
expenditure.
Fiscal policy
•Golden rule:
over the economic cycle the government will only borrow to invest and will not borrow to fund current expenditure.
Definition: changes in G or T
- Budget deficit T < G
- Budget surplus T > G
- Balanced budget T = G
Direct taxes:
paid directly to Exchequer by individuals or companies
Direct taxes for Individuals:
Income tax, capital gains tax, inheritance tax, wealth tax
Direct taxes for Companies:
Corporation tax, etc.
Indirect taxes:
paid indirectly to Exchequer and usually via expenditures of
individuals or companies
examples of indirect taxes
VAT, customs and excise duties, etc
Social (security) contributions:
Paid into the social security founds can compare in terms of: •Macroeconomic management •Economic incentives (paskatos) •Economic welfare •Administrative costs
Progressive tax system:
Tax paid rises more than in proportion to income
Regressive tax system:
Tax paid rises less than in proportion to income
Proportional tax system:
Tax paid rises exactly in proportion to income
monetary policy
Monetary policy has been defined as the attempt by government to manipulate the supply of, or demand for, money in order to achieve specify objectives.
Expansionary monetary policy:
increase in money supply and/or reduction in rate of interest
Contractionary monetary policy:
susitraukianti pinigų politika
decrease in money supply and/or increase in rate of interest
Costs of inflation:
- ‘Shoe leather costs’
- ‘Menu costs’
- ‘Decision-taking costs’
- ‘Inflation illusion’
- ‘Redistribution costs’ (persiskirstymo kainos)
- ‘Fiscal drag’
Benefits of inflation:
- Cost increases are more easily passed on to consumers
- Labour can therefore more easily ‘bargain’ for wage rises
- Debtors gain since they pay back less in real terms
Frictional/search unemployment:
•Results from workers who are between jobs.
•Will always exist, but it might be reduced.
•Remedies proposed include:
1. Improved information
2. Reduction in unemployment related benefits.
Structural unemployment:
- Results from changes in the pattern of demand and/or methods of production.
- As a result workers may have the wrong skills or be in the wrong location.
- Remedies proposed include: Retraining/ Relocation of workers
demand deficit unemployment occurs when…
there is insufficient demand (nepakankama paklausa) in the economy to maintain full employment
Remedies for demand deficit unemployment:
- Expansionary fiscal policy: raising G and/or lowering T
* Expansionary monetary policy: raising money supply and/or lowering interest rates
real wage unemployment results from:
- Real wages being above the level at which labour demand
would match labour supply. - Real wages seen as too high for ‘full employment’.
- Sometimes referred to as ‘classical unemployment
natural rate unemployment:
Natural Rate of Unemployment (NRU) has been defined as the (voluntary) unemployment which still exists even if the real wage is at the equilibrium level which ‘clears’ the market.
NRU is sometimes defined as the rate of unemployment at which there is no excess demand or deficiency of demand for labour
balance of payments
A record of all recorded transactions between one country and the rest of the world in a particular financial year.
The key components of balance of payments include :
- Current account
- Capital account (land purchase, capital transfers)
- Financial account (sometimes called “capital account” as well)
what can influence the BoP?
- Expenditure switching policy instruments
2. Expenditure reducing policy instruments
Expenditure switching policy instruments:
- Changing the relative prices of exports and imports by raising the exchange rate (appreciation) or lowering the exchange rate (depreciation).
- The change in relative prices may cause a switch in expenditure by consumers
- e.g. A fall in the exchange rate will make exports cheaper and imports dearer
Expenditure reducing policy instruments:
- Reducing aggregate expenditure by deflationary fiscal policy (e.g. reduced government spending, increased taxes) or deflationary monetary policy (e.g. higher interest rates, lower money supply).
- With less real income to spend, domestic consumers will purchase less imports from abroad
- Domestic consumers may also purchase less domestic production, causing these producers to more actively seek markets abroad
exchange rate:
Number of units of the foreign currency needed to purchase one unit of the domestic currency
Nominal exchange rate:
•The rate at which one currency is quoted against any other currency (i.e. bilateral exchange rate)
Effective exchange rate (EER) measures…
the value of the domestic currency against the weighted value of a basket of foreign currencies
Real exchange rate (RER):
•Seeks to measure the rate at which home products exchange for products from other countries, rather than the rate at which the currencies themselves are traded.
PESTEL analysis political:
•EU enlargement, the euro, international trade, taxation
PESTEL analysis economic:
•Interest rates, exchange rates, inflation, unemployment
PESTEL analysis social:
•Ageing population, attitudes to work, income distribution
PESTEL analysis Technological:
•Innovation, new product development, rate of technological obsolescence (pasenimas)
PESTEL analysis Environmental:
•Global warming, environmental issues
PESTEL analysis Legal :
•Competition law, health and safety, employment law
Greater efficiency:
- Public choice theory
- Property choice theory
- Avoids x-inefficiency
Long-run average cost curve shows…
the lowest cost of producing any output
GNP=
GDP + net property income from abroad
Porter’s 5 forces
- Barriers to entry
- Competition
- Bargaining power - buyers
- Threat of substitutes
- Bargaining power - supliers
boston consulting matrix structure: high market growth and high market share
Star
boston consulting matrix structure: high market growth, low market share
Question mark
boston consulting matrix structure: low market growth, low market share
Dog
boston consulting matrix structure: low market growth, high market share
Cash cow
reasons firms internationalize:
Diversification (įvairinimas) Economies of scale Government incentives Market growth Joint venture opportunities Saturated (prisotinta) domestic market
Types of export:
direct export
indirect export
internationalization methods, from minimum risk and minimum reward to maximum risk and maximum reward
- Indirect exporting
- Directing exporting
- Licensing and franchising
- Joint ventures
- Direct investment and foreign manufactures
A situation where a product generates high profits which can be invested in new products?
Cash cows
which one refers to using a low-price strategy:
loss-leader pricing
Certel prices
fixed monopoly price, individual companies cannot to undercut the prices
An increase in EER is an indication that
its exports are becoming more expensive and its imports are becoming cheaper. It is losing its trade competitiveness
BoP
Balance of payments
demand-pull inflation
is a period of inflation which arises from rapid growth in aggregate demand. It occurs when economic growth is too fast
cost-push inflation
occurs when overall prices increase (inflation) due to increases in the cost of wages and raw materials
If the economy experience inflation, then aggregate
demand increases faster than aggregate supply
The Phillips curve says: The higher the inflation,
the lower the unempoyment
What allows government to spend a specific amount of money?
Appropriation bill
MNPB means
Marginal Net Private Benefits
