Paper 1 Flashcards
How do you structure a supply side policy 20 marker?
- Define supply side policy and terms in the question
- Use extract to explain there may be a shift in Long run AS curve and refer to the extract.
- Draw LRAS curve
-Explain the impact on the main economic objectives - give drawbacks of supply side policy and government failure
conclusion- is the policy effective? can we question the benefits? should we pursue a more market based or interventionist approach? should the policy go ahead?
What are the 5 economic objectives?
Full employment price stability economic growth redistribution of income balance of payments
define supply side policies ?
Policies implemented by the government to increase productivity and efficiency in the economy.
define merit good.
A merit good is a good that benefits third parties as well as the buyer and seller such as a gym membership or education.
define demerit good
A demerit good is a good that can cause an affect on a third party as well as the buyer such as cigarettes or alcohol.
define externalities.
Positive or negative side effects that affect a third party who is neither a buyer or seller.
What are 3 drawbacks of supply side policy?
- It can take a long time to see an effect
- There is a wide level of disagreement with how to increase LRAS and if supply side policies are effective
- Most supply side improvements have to come from the private sector.
What are the 5 types of government failure?
- Excessive administration costs
- Incomplete information
- unintended consequences
- public choice theory
- price distortion
name 3 examples of a market based approach to supply side policies?
- cut corporation tax
- cut welfare benefits
- privatisation
name 3 examples of interventionalist based approaches to supply side policies?
- Subsidise Research and development
- Invest in infrastructure
- subsidise training
How do you structure a wider economic environment question?
- Definition
- Impact on revenue
- Impact on cost
- conclusion (Price elasticity and income elasticity)
Define Inflation
A sustained increase in the average price level
Define exchange rates
The price of one currency expressed in terms of another.
Define unemployment
The number of people actively seeking work but cannot obtain suitable employment
Define interest rates
The cost of borrowing and the return on savings
Define Indirect taxation
Taxes charged on expenditure such as VAT and sugar tax.
Define direct taxation
Taxes paid directly by the tax payer such as those on earnings e.g. income tax.
how do you calculate gross profit?
Revenue - cost of sales
how do you calculate operating profit?
gross profit - other operating expenses
how do you calculate net profit?
operating profit - interest
how do you work out profit margins?
0 Profit / revenue x 100
0 = gross, net or operating
define specific tax.
An indirect tax which has a fixed amount a firm has to pay for every unit sold
define subsidy
Payments by the government to the suppliers that reduce costs
what are the effects of a tax? (5 step analysis chain)
- Leads to increased costs
- Higher costs lead to a lower profit margin this decreases the firms incentive to produce leading to a decrease in supply
- To maintain it’s profit margin the business will increase prices and pass the cost on to consumer
- Consumers will switch to cheaper goods leading to a fall in quantity demanded
- Without government intervention the demerit good or negative externality will be over produced and over consumed. By reducing the amount sold the tax will move the level of production and consumption to a more socially optimum level, correcting market failure.
What are 2 drawbacks of indirect taxation?
- They can have unintended consequences such as being regressive .
- If the good is relatively price inelastic then the tax will not be very effective in reducing consumption
What happens to the supply curve on a tax diagram?
decrease in supply, leftward shift
define segmentation?
Breaking up the market into different groups of customers e.g. demographics (age, gender, location)
Define market segment
A group of customers with similar wants
what are 2 benefits and disadvantages of primary research?
+ specific to the business
+ competitors don’t have access to the data
- Expensive
- Time consuming
what are 2 benefits and disadvantages of secondary research?
+ easy to collect
+ quick to collect
- not specific to the business
- may not be accurate
What are 5 factors that can change demand?
- tastes and preference
- real income
- prices of substitutes
- branding
- population
What are 5 factors that can change supply?
- costs
- change in technology
- indirect tax
- increase in competition
- external shocks
