effects of increased UK demand for ..... (3)

Question 1

what are the macroeconomic effects of increased UK demand on a particular industry (e.g. branded coffee shop market)?

Answer 1

• actual economic growth (SR); reduced unemployment -> increased demand = incr consumption (60% of AD in the UK) -> incr AD = incr real GDP -> +ve multiplier effect -> businesses expand to meet incr production -> incr demand for labour ie baristas -> reduced cyclical unemployment -> workers have income -> more consumption -> incr AD more -> actual eco. growth.
• increased tax revenue -> improved budget deficit -> higher industry growth within the UK -> higher corporate tax revenue or increased VAT from incr spending -> more funds available for public services -> reduces deficit (40.8bn£ in 2023)

Question 2

evaluate the macro effects of incr UK demand in a particular industry (e.g. branded coffee shops)

Answer 2

• firms may engage in tax avoidance -> less corporate tax revenue (Laffer Curve)
• reduced unemployment = inflationary pressure (Phillips Curve)
• current account may worsen as UK imports coffee beans -> imports may rise -> net exports fall -> AD will not rise as significantly -> I<E -> worsened CAD

Question 3

what are the micro effects of incr UK demand for a particular industry (e.g. branded coffee shop market)

Answer 3

• job creation -> rising demand for the product -> higher labour demand for baristas, managers -> more employment opportunities -> +ve multiplier effect -> incr disposable income -> higher consumption -> boosts derived demand for complementary industries (ie dairy) -> higher wages as a result
• higher profits -> higher demand -> shift in AR and MR -> higher revenues -> incr profits margins -> firms may increase prices -> increases producer surplus but leads to a fall in consumer surplus -> more funds for investment in capital, R&D -> incr dynamic efficiency -> expansion may lead to incr internal/external economies of scale -> reduces LRAC

Question 4

evaluate the micro effects of increased UK demand in a particular industry (e.g. branded coffee shop market)

Answer 4

• due to economies of scale -> firms may lower prices to consumers -> incr consumer surplus -> incr consumer welfare (depends on PED, YED or XED)
• coffee shop market is an oligopoly (e.g. high market concentration) -> less contestability due to high brand loyalty -> firms more likely to exploit consumers through higher prices OR they may be complacent -> incr X-inefficiency -> higher costs
• depends on other factors affecting DFL e.g. cost of other factors of production -> may be cheaper to substitute labour for capital e.g. self-service kiosks or automated coffee machines -> lower DFL -> offsets job creation