Micro Context Flashcards
Demand (Left Shift)
- Technological advances in food industry, restaurant dining is on the decline (UberEats, Just Eat, Deliveroo) allowing food to be delivered directly to your house. (Saves consumers time of travelling to restaurants & inconvenience of having to leave the comfort of their own home) [‘take-outs’ have become a substitute to ‘dining-out’]
- Technological innovation in journalism, Newspapers being substituted by online articles since setting up an e-commerce business costs less & therefore consumers can be charged less as a result. (Consumers have access to news sources on their phones that they carry daily which is more convenient than newspapers)
- Coronavirus pandemic has forced countries to close borders to foreigners to slow the spread of the virus which has the largest impact on the aviation industry (prices have fallen since there is no demand to fly anywhere since consumers cannot)
Demand (Right Shift)
- Resulting from national lockdowns (coronavirus pandemic) there has been an increase in sales of e-commerce businesses since consumers were physically unable to visit physical stores in person so they turned to the internet (Amazon announced a 200% increase in profits to $6.3 bn relative to the previous quarter (2020))
- Resulting from national lockdowns (coronavirus pandemic), online gyms such as Peloton have seen an increase in demand since consumers were unable to visit physical gyms in person due to lockdown measures* (Pelotons revenues rose by 172% to $607 million during this period)*
PED
Price Elastic: furniture stores & motor vehicle providers
Price Inelastic: electricity & water industries
Perfectly Elastic: book stores
Perfectly Inelastic: lifesaving drugs
Unitary Price Elastic: clothing
PES
(Perfectly) Elastic:
- If a firm has plenty of spare capacity then the goods they supply will be elastic as the firm can afford to offer more of the g/s if the price rises
(Perfectly) Inelastic:
- Housing in prime locations (i.e major cities). In London, the green belt policy prevents houses being built in certain areas in order to maintain the local environment (keeps supply of housing in those areas fixed since it is against the law to build any new houses (QS remains constant regardless of price offered))
Supply (Left Shift)
- UK reaching a trade deal with the EU, however it meant that there were still tariffs on UK exports & imports. Impacts the supermarket industry since tariffs would ↓ the supply of fruit & veg (therefore there is a ↑ in prices since tariffs ↑ costs of production for firms which they pass onto consumers)
- Supply of housing can suffer after a natural disaster (floods, tsunamis, etc) since these demolish houses or deem them uninhabitable (when supply ↓, prices of houses in the area ↑)
Supply (Right Shift)
- Innovation causes a ‘digital revolution’ which ↑ efficiency of supply chains & ↓ costs of production therefore ↓ prices
Diseconomies of Scale
Robot assembly lines are expensive to set up, but ↓ the labour required to produce each unit. So fixed costs ↑ (loans used to buy equipment need to be repaid) & variable costs ↓ (labour costs) {High fixed costs create large EOS}
Objectives of Firms
- Covid-19 pandemic saw several biotechnology firms set out to discover a vaccine. Moderna sold their vaccines for the highest price (objective arguably was to profit maximise). Pfizer distributed their vaccines to the public free of charge (suggesting a purely ethical objective)
- Lush (a cosmetics companies) do not test their products on animals which shows a clear ethical objective (ended up strengthening Lush’s brand name & ↑ Lush’s market share which the firm can then use to ↑ prices & profit maximise in the long run)
- British Gas raised the minimum price for their gas meter top-ups with the intention to maximise profits. However, this resulted in backlash from customers & the firm eventually reversed their policy in order to maintain market share in the energy industry.
- Covid-19 pandemic & national lockdowns forced firms to close their doors & place employees on furlough schemes showing that the main objective for the majority of these firms was survival through ↓ costs (making worker redundant, cutting back on advertising etc)
Government Failure
Pollution Permits & Global Financial Crisis (2008):
- In order to tackle climate change, the EU introduced an Emissions Trading Scheme (Pollution Permits) [this essentially created a mkt for pollution permits so if demand was high, prices would increase and vice versa] (the main aspect was that pollution of permits were fixed and so the amount pf pollution emmited from firms as a whole was also fixed)
- Initially the scheme was a success as the drop in emissions exceeded initial forecasts
- However, following the 2008 Global Financial Crisis, there was a large ↓ in economic activity & firms no longer needed any more pollution permits so prices ↓ fast
- ↓ prices = excess supply of pollution permits so it was cheaper for firms to buy permits & continue polluting rather than finding alternative, ‘cleaner’ ways to produce
- Prices remained ↓ for several years so the EU ↓ the supply of excess pollution permits to force an ↑ in prices
Classified as ‘gov failure’ due to the EU failing to anticipate the price drop following the global financial crisis (2008) which undermined the whole purpose of reducing the level of pollution in the environment
Competition Policy
- e.g: BT used to own the majority of fibre-optic cable network which allowed it to exploit its monopoly power (charged households & firms ↑ prices) however, OFGEM announced that it would force BT to open up the mkt to competitors(TalkTalk, Sky, Virgin Media, etc) to promote competition & households saw prices for fibre-optics ↓
- e.g: the CMA blocked the Sainsbury’s & Asda merger (2015) believing that it wouldn’t act in the public’s best interest due to the monopoly power the two firms would gain from it
Regulatory Capture
- e.g: when energy companies stopped showing consumers how much profit they make off of each household (2016), there was public outcry however, OFGEM sided with the energy companies without sufficient justification
Deregulation
Airline Deregulation Act (1970):
- Several firms were able to join the mkt which triggered ↑ of ‘low cost/budget’ airlines, forcing incumbent firms to ↓ prices to attract customers = ↑ economic welfare (↓ prices = both productive & allocative efficiency)
Postal Service Deregulation:
- Now that new entrants have been allowed into the mkt (Hermes, Whistl, etc), firms have found innovative ways to ↓ costs & therefore ↓ consumer prices = ↑ economic welfare
Privatisation
Privatisation of the Water Industry:
- Prior to privatisation, water quality in the UK was very poor, however once firms were privatised, water quality improved & pollution ↓ (positive externality)
Privatisation of the Probation Industry (Bad):
- Firms operating in this industry were handed over to private ownership with the hopes of ↑ efficiency but since then, they have been bailed out by the gov several times
Firms in certain industries operate more efficiently in the hands of the government
Trade Unions
Milton Friedman & Margret Thatcher:
- Both frowned upon the idea of TU
- Through collective bargaining power, they can push to ↑ wages, which ↑ production costs leading to both real-wage unemployment & cost-push inflation
- Real-Wage Unemployment: firms are forced to lay off workers they cant afford
- Cost-Push Inflation: firms incur ↑ costs with higher wages = passed onto consumers in form of ↑ prices
- e.g: the UK experienced an inflation rate of 27% (1979) [several economists argue that TU were one of the main triggers of this]
Disrimination
Equal Pay Act (1970):
- Prohibited discrimination regarding the salaries of men & woman
Friedman:
- Argued that pushing for ↑ wage rates made workers more exposed to discrimination
- Argued that employers would discriminate against those who they believed didn’t have the skills & qualifications to match the ↑ wage rate & justify their Marginal Revenue Product (MRP)
- e.g: Black & brown youth unemployment was arguably triggered by the bargaining power of TU
