IA4 - Atar Notes

Question 1

what is macroeconomics?

Answer 1

refers to the decision making of the national economy as a whole

Question 2

what is microeconomics?

Answer 2

analyses the behaviors of consumers, households and businesses in individual markets where goods and services are exchanged, utilizing the theories of demand and supply (price mechanism).

Question 3

recall the 4 market weaknesses (with examples)?

Answer 3

1. the market fails to achieve ‘allocative’ efficiency for the production of public goods
   
   • eg. little/no market incentive for entrepreneurs to produce public goods
2. the market may fail to allocate resources to merit goods
   
   • eg. the low demand for consumers on merit goods leads to little profitability and low entrepreneurship
3. the market may allocate resources to demerit goods which are considered undesirable
   
   • eg. the selling of single use plastics is an efficient and profitable business yet has the social cost of ruining the environment
4. markets suffer from unpredictable, irregular and large fluctuations in the aggregate level of economic activity

Question 4

what factors can cause demand side shifts in the business cycle?

Answer 4

• monetary policy (interest rates)
• consumer/producer confidence
• multiplier effect

Question 5

what factors can cause supply side shifts in the business cycle?

Answer 5

• fiscal policy
• demographics
• changes in productivity research and development

Question 6

describe the boom/peak phase of the business cycle?

Answer 6

as the economy nears the stage where all resources, including labour, are fully employed, the high levels of demand will cause both the price of consumer goods and services and the cost of productive resources to rise. This is the classic situation of full employment and inflation.

Question 7

what characteristics are included in the boom/peak phase of the business cycle?

Answer 7

• full employment of resources (demand > supply), serious shortages leading to high wage increases
• rapid rise in prices, highest level of inflation (D > S), extreme inflationary pressures
• highest level of aggregate economic activity (GDP growth)
• incomes (households and businesses) rise rapidly (full employment levels)
• personal and business assets and asset prices at their highest
• consumer spending (C) growth at highest levels (over spending on luxuries and bigger priced items)
• consumers very confident to borrow (add to debt levels/high debt levels)
• high borrowing levels
• highest levels of business investment (I), businesses expand rapidly
• investment spending is more speculative (riskier) production (output) levels at their maximum
• businesses experience serious stock shortages
• strongest levels of business profits

Question 8

describe the expansion/upswing phase of the business cycle

Answer 8

As the economy moves into a period of prosperity, consumer and producer confidence grows. Demand will rise, resulting in increases in production and increases in investment. These upwards forces are reinforced by speculative investment and easy availability of credit .

Question 9

what characteristics are included in the expansion/upswing phase of the business cycle?

Answer 9

• high rising level of aggregate economic activity (GDP growth)
• incomes (households and businesses) expand rapidly (high employment levels)
• personal and business assets prices rise strongly (becomes over-valued)
• consumer spending (C) very strong (more on luxuries)
• consumer confidence to borrow/add to their existing debt levels
• strong levels of business investment (I), businesses expand
• new businesses enter the market
• production (output) levels rise rapidly and approach their maximum
• businesses begin to experience stock shortages
• strong and rising business profits
• infrastructure pressures building rapidly
• strong market confidence (consumers and producers)
• resources use approaching full employment (shortages)
• ‘skilled’ labor market shortages begin to appear
• rises in prices and wages (D > S) inflationary pressures are threatening

Question 10

describe the contraction/downswing phase of the business cycle

Answer 10

As productive resources become more costly, producers find profits are being squeezed until they pass on the cost as price increases for the finished product. Eventually, this - plus the fact consumers have all the durables they need - will lead to a levelling off of consumer demand. A slowdown in te rate of increase of demand and production will lead to a slowing down of investment, hence the economy begins to slow.