PAPER 1 Flashcards
Evaluate the likely microeconomic effects of such a tax.
A01 = definition
1. Nevertheless, this 20% tax can have positive effects on health. A major benefit of introducing a sugar tax is that it will raise prices cause a demand reduction and disincentivise consumers from buying soft drinks causing consumers to switch to alternatives that are not taxed or consume less sugar soft drinks overall.
A tax isa compulsory charge by the government on goods, services, income or capital.
This decreases the pressure on the NHS as there are fewer consumers suffering from diabetes. The government can spend less on the NHS, and this spending has a high opportunity cost and instead can be spent somewhere else. They can then spend this extra revenue on education to fix the information gaps involved in the consumption of unhealthy foods. This will help reduce demand for these goods in the long run and ultimately help the NHS tackle the rise of obesity in England.
- However, sugary drinks are addictive, which means that they may be price inelastic so a large change in price has little effect on the quantity demanded.
Therefore a rise in prices may have minimal impact on the quantity demanded so it may be ineffective at improving health. Moreover, the lack of substitutes in the market may mean that charging higher prices for soft drinks will not influence demand significantly as consumers have very little choice. It can also be stated that two companies PepsiCo and CocaCola account for most of the market share as CocaCola has a 31% market share of non-alcoholic drinks and PepsiCo has 25.9% of the market share. This could illustrate how the sugary drinks market is an oligopoly as it is controlled by 2 large firms with a market share over 50% which could mean that these 2 companies can regulate prices to keep consumers from switching to alternatives or instead using their high profits to cover the costs themselves.
- This depends upon whether the tax has been set at the right level: if it is incorrectly set, or too high, social welfare will not be maximised.
It is hard to estimate the specific expense of sugary drinks to the NHS. Furthermore, an increase in sugar tax can negatively affect the producers who produce fizzy drinks like Coca-Cola and Pepsi. This means that they face reduced profits as consumers spend their money elsewhere, which could in turn increase the profits for competitors that do not have sugar in their drinks. The tax may also lead to job losses in the industry as firms cut back on production. In contrast, this may lead to further investment in healthier drinks, causing producers to switch supply to healthier drinks. Increasing the supply of labour needed in the healthy drink industry.
conclusion for Evaluate the likely microeconomic effects of such a tax.
While looking at both sides of the argument, in the short term a 20% sugar tax its unlikely to have any effect as soft drinks are inelastic however in the long term educating future generations of society about the negative impacts of high sugar contents in soft drinks can make demand for fizzy drinks more elastic. Overall, employment levels in this industry and asymmetrical information have minimal effect and are outweighed by the fact that this reduces consumption of fizzy drinks and leads to less pressure on the NHS.
‘Revenue maximisation is a more realistic business objective than profit maximisation
for many businesses.’
A01 DEFINITION
Revenue maximisation isa strategy that focuses on increasing market share and thus increasing the total revenue generated by a company whereas profit maximisation iswhen a business achieves its highest profits possible.When TR>TC a profit is made and when TC>TR a loss is made thus from this revenue and profit complement each other in trying to achieve each other’s objectives
- Revenue maximisation may be more appropriate for large firms with there’s a separation of ownership from control particularly those who have an oligopoly market structure.
Naturally, supermarket chains run in an oligopolistic market structure and use a game theory approach to determine pricing strategies. For Tesco specifically in the long term profit maximisation is the main goal for them as increasing profit increases market power and in addition to this Tesco is likely to benefit from economies of scale if not already doing so. Tesco is verging on becoming a monopoly power in the market due to having more than 25 per cent market share, therefore it may be in a position where it can exploit its prices by raising them as consumers may have very little choice as to where to shop and a reduction in costs. Overall, it may be able to achieve supernormal profits.
- Typically smaller firms will have the initial goal of revenue maximisation in order to break even fairly quickly and stay in the market
however at a later stage when they have built up a larger market share they can switch their objectives to increasing profit although realistically this may not be as easy as there are many factors to consider such as pricing, products, patterns of other firms within the region etc. Larger firms or medium-sized firms may push smaller firms just to enter the market by using predatory pricing. Predatory pricing is the unfair practice of setting prices for a product unrealistically low to eliminate the competition.
The government may then subside the smaller businesses until they can compete in market. Moreover, the government can also shut down monopolies completely, if they have enough power and influence that profit does not motivate them anymore so instead they focus on merging with different businesses or innovating.
- In the early stages of the business, Tesco had focused on increasing its sales and by doing so increasing it’s total revenue. Seeking to increase revenue may lead to lower profit however in the long run this may offset the loss in profit at the beginning.
Revenue maximisation encourages brand loyalty by cutting prices at the beginning of entering the market, the business will increase its customer base and so gain bigger exposure this leads to the stepping stones for acquiring a reputation and gaining prominence as in the food industry, the lower the prices whilst assuming quality remains the same for all firms the more customers you attract and so in the long term this can double or triple your initial profit if your customer base is expanding.
In contrast, both revenue maximisation and profit maximisation may require frequent price changes which may lead to falling customer demand. Conflicting objectives by different pressure groups such as shareholders and managers within firms may lead to a compromised objective such as profit satisficing. Profit satisficing helps to overcome the principal-agent problem leading to increased productivity from workers while earning high profits to make the shareholders happy.
- In conclusion, the question of whether revenue maximisation is a more realistic business objective than profit maximisation entirely depends upon the industry
in more well-established industries profit maximisation may be seen as the more long-term goal as firms within that industry have gained a reputation, brand loyalty etc. and are well set-up to remain financially secure in the long- term and absorb any external economic/political shocks i.e. Brexit and the general election which may or may not have an impact on those businesses.
Furthermore, profit maximisation may also be needed to help fund research and development thus benefitting both the consumers and firm, most firm’s objectives that they lay out is noted that product quality is important and thus to increase the quality of products. In other industries, revenue maximisation may be the only goal they have as it can help them to become an established firm and more pronounced in the market. For a larger firm e.g. John Lewis, profit maximisation would be the more realistic objective as the firm has already reached their break-even point and has huge customer loyalty furthermore their partnership with the waitress gives them a further advantage in making profit. Therefore objectives are relative to industries and no one objective is wrong or right for a firm to pursue.
Evaluate the likely private costs and external costs involved in such major power station construction projects. Use an appropriate externalties diagram in your answer.
Definition of Private cost
Private costs refer to the costs incurred by producers or consumers directly involved in a transaction or economic activity. The private costs of the power station require 18 billion pounds such as the land, machinery, labour costs and raw materials. Moreover, this project will face a major time lag taking many years and it may face major delays. But since this project will take 60 yrs, 30 years into the project, nuclear power may be the most ideal type of energy to use. Also, this complex project may exceed the budget as it may require a lot more factors of production so there may be imperfect information on how much and what the private costs may be.
- Whereas an external cost is a cost imposed on third parties who are not part of the transaction or activity.
The external costs of power station construction would be impact on wildlife, impact on local property and road congestion. An externality is a cost or benefit that is caused by one party but financially incurred or received by another. The negative externality diagram shows that the MSC is greater than the MPC because the net social benefit is being maximised and the production is harming the environment.
The difference between the social cost and private cost is that the market is allocating resources at the wrong level leading to a misallocation of resources therefore creating a welfare loss. The MSC is higher than the MPC meaning the negative externality of production harms the environment.
- An external cost of the meltdown of the nuclear power plants can create radiation surrounding it
- Regulation
- technology
location of production
However, nuclear power is one of the most highly regulated industries in the world, and the rules and laws will strictly limit the risk of an accident occurring considering the high level of technology it uses. Even if a leak or contamination did occur it’s very difficult to know how much it will affect society. If its nuclear power production project took place in the countryside compared to the city it wouldn’t cause too much harm.
- A major benefit of nuclear power leads to less consumption of coal which is a non-renewable resource which means it can be can’t replenished.
This power station construction will require large amounts of electricity causing residents to pay high prices for their electricity above the market price. however, Nuclear power also means having constant access and stable prices of electricity for consumers for the next 60 years meaning consumers will have more money to spend elsewhere. There’s a large opportunity cost as these 18 billion pounds can be better spent elsewhere such as investing in renewable energy such as wind or solar power however the variability of wind power and solar power may not mean it is the most ideal investment as it is very volatile.
Conclusion
5. In my view, I think it depends on how advanced the technology is to prevent a leak or radioactive contamination from occurring.
Instead of nuclear power we could focus and invest in the development of cleaner electricity as it will be very beneficial in the long term. Even though the private costs are very high the external benefits are also high as there is a positive multiplier effect on local and international levels that may outweigh the costs as this project also creates employment opportunities for residents. However, it is difficult to measure the magnitude of the private and external costs, as there may be imperfect information when placing a value on the external costs.
Evaluate whether such a high market share for one company is in the consumer interest.
A01 - definition of monopoly and market share
general effects of being an monopoly on consumers
Monopoly diagram with the shaded area of supernormal profits
A monopoly is any firm with more than 25% of the market share. Market share is the per cent of total consumer sales, apple possessing over 38% of the market infers that they have monopoly power.
Apple is said to reap monopoly profits due to the lack of viable market competition which allows it to set its prices above the competitive equilibrium price for a good or service without losing profits to its competitors because Apple is a price maker which means they can set the market price which others must follow causing consumers to be exploited with high prices. This can be seen with the diagram below:
It is evident that whilst Apple makes supernormal profits of the shaded area, consumers are charged higher prices: and this is certainly against consumer interest and shows allocative inefficiency (resources do not meet consumer demand)
