Econ last min shift Flashcards
Describe internal and external economies of scale.
cost savings due to the increased size of the firm
risk-bearing economies ie diversifying into a range of goods/services, to reduce risk from failure of any one
Technical
Increased division of labour and specialisation, increased dimensions, efficient use of capital e.g. car assembly line etc.
Managerial
Able to employ specialists as there is sufficient work
Financial
Easier to attract investors due to reduced risk, higher reputation and able to borrow money at lower rates of interest
External economies of scale
cost savings due to the increased size of the industry (1)
local colleges may provide directly relevant training
How government policies can be used to reduce the rate of inflation
How does the government use the Fiscal policy to reduce inflation:
Reduce government spending or increasing income tax dampens consumer spending
In addition, if the government borrows less then this helps to reduce the growth in the money supply. Running a budget surplus according to monetarists will reduce inflation
Both dampen aggregate demand and hence are accentuated by the multiplier effect
(if there is inflation caused by too much demand the government should cut demand)
How does the government use the Monetary policy to reduce inflation:
Firstly, the Bank of england will increase the base rate. The retail banks will then copy this action as they have an interconnected relationship with the bank of england*. Market rates charged to consumers/businesses will also rise. *retail banks save money with and borrow money from the bank of england so pass on any changes to their customers in return.
Saving levels will increase because it is now more rewarding to do so i.e. the marginal propensity to save will rise.
Borrowing levels will fall because monthly repayments are now more expensive. This leads to less consumer spending, the marginal propensity to spend falls in the UK causing lower aggregate demand from individuals and businesses.
Lower aggregate demand leads to lower demand–pull inflation as businesses reduce their prices in order to sell their goods.
Explain the supply-side measures a government could use to decrease inflation.
Research and development incentives (ID), to help bring down costs of production (EXP) (1).
greater education spending (ID), to help firms improve the efficiency (EXP)
Subsidies (ID), to help firms lower prices (EXP) (1)
Control public sector pay (ID) to reduce aggregate demand (EXP) (1).
Investment grants (ID), to help businesses expand to achieve economies of scale (EXP) (1).
Tax breaks (ID), to encourage innovation in new technologies (EXP) (1)
Deregulation (ID), to increase competition (EXP) (1), which may reduce the monopoly power of firms, leading to lower prices (DEV) (1).
Explain the theories of Comparative and absolute advantage (6 marks)
(practice with table examples)
Absolute: Refers to a situation where countries are more efficient at producing some good/services than other countries. (1 mark)
This could be a result of low cost labour/high skilled labour/factor endowment/ climate. (1 development mark)
For example, China has a large low cost labour force giving it an absolute advantage in textile production. (1 development mark)
Any country with an absolute advantage should specialise and trade. (1 development mark) This will lead to increased world output and improved living standards. (1 development mark)
Comparative: This is when a country can produce goods/services at a lower opportunity cost than others (1).
This means it would sacrifice less of one good in order to produce another good (relative to a second country) (1).
A country will benefit by specialising and producing this good or service (1). This would ensure world output/standard of living would increase (1).
Then rest of the marks are gained from showing a table with examples
