past paper essay plans Flashcards
Some top UK executives are paid more than 1000 times the average wage paid to
workers in their firms.
Evaluate, using an appropriate diagram(s), whether a maximum wage should be imposed on
executive pay in the UK.
.for a maximum wage to have a effect it would need to be set below the current market equilibrium wage
why it shouldn’t be imposed:
.max wage below the equilibrium can create labour market failure via causing a shortage in executives as demand exceeds supply. this is as some executives may move overseas in search of higher wages
.draw a maximum wage graph with excess demand at the bottom
.reducing wages will reduce the incentive and the quality of entrepreneurship = risk taking is dicouraged reducing dynamic efficiency = price and quality competitiveness may fall = reducing output = reducing employment oppotunities and the wage of workers
.in practise it is hard to detemine where to set the maximum wage limit- too high = little effect, too low = large reduction in the num of people willing to be executives
.also a cost for monitioring a maximum wage
why it should be imposed:
.high pay may reduce the drive of some executives as they are motivated by non-monetary factors like job security
.however, in practise executives are unlikey to be let off over other workers
.shareholders are not usually an effective constrait on executive pay as some have significant pay rises even when the the firms perfomance is declining
.the pay might be above the market equilbrium above theri MRP = they are exerting their power to drive up pay
evaluation:
.less likely to be imposed if executive are geographically mobile
.more likely to be imposed if other countries impose a maximum wage
.impact depends on where the market wage rate lies in relation to the equilibrium
In 2014, Telefonica, a Spanish telecommunications firm with a very large share of the
Spanish market, decided to concentrate largely on increasing its sales revenue.
Evaluate, using an appropriate diagram(s), the extent to which a monopolist changing its
objective from profit maximisation to sales revenue maximisation would benefit consumers
.profit maximisation means producing at MC = MR whereas sales revenue maximation mean producing where MR = 0
how it benefits consumers:
.change in objective means that the quantity sold will increase and the price will fall
.fall in p = increased consumer surplus
.rise in Q sold = increase firms output = firm can take more advantage of economies of scale = lower average cost = even lower prices in the future
how it might not benefit consumers:
.supernormal profit are likely to fall = reduced investment and innovation = reduced quality of products produced
.charging a lower price = difficult for new firms to enter the market due to higher costs and so not being able to compete with low prices = firms are kept out of the market = reduced product choice for consumers
evaluation:
.changing objective would likely benefit consumers in the SR but not in the LR
.would not benefit consumers as if they switched to allocative efficenciy MC = AR
.impact on consumers depends on the PED of product
In the UK 7% of children are privately educated compared with 24% in Japan.
Evaluate whether the provision of education should be left solely to market forces
why it should be left to market forces:
.competition in the provision of education can increase choice = diff type of education can be provided
.it can increase allocative and productive efficiency as the profit incentive = private sector will be more responsive to the demands of parent and may be more innovative = schools also encouraged to keep costs low
why it shouldn’t be left to market forces:
.education is a merit good = might be underconsumed with parents and students not realising the full benefits of education = information failure
.people think that everyone should have access to education as it is an essential service = if poor cant afford to pay for education then their children’s future job prospects will be lower
evaluation:
.merit good = government and economists believe that education cannot be entirely left to market forces
.some economists suggest that having market pressure into the state system e.g. using voucher schemes to give parents purchasing power
In 2013 food prices in many parts of the world rose relative to other products, including air
travel.
Evaluate the extent to which the price of food is likely to rise by more than the price of air travel
in the future.
why it would:
.demand for food might rise by a greater proportion than the demand for air travel = putting a upward pressure on the price of food
e.g. a rise is the population will increase the demand for food
.sales tax like VAT might be imposed on food in the future and the gov support for firms might decrease
.food does not have subsitutes but air travel does = e.g fall in train faires = increased demand for air travel
.advances for techonology for air travel can reduce the cost of air travel
why it wouldn’t:
.demand for food is income inelastic whereas the deman for air travel is income elastic = if income rises the demand for air travels rise more than food
.taxes on air travel like air passenger duty may increase also there could be increases in the price of fuel
.introduction of GM food can reduce the price of food
evaluation:
.price of food is normally more volatile than price of air travel
.whether food prices will rise more than air travel will depend on supply conditions
.there are submarkets for both = so price of particular submarkets may rise more than others and vise versa
The world price of oil fell from over $100 a barrel during 2014 to below $45 a barrel in 2016.
Evaluate, using an appropriate diagram(s), the usefulness of the free market forces of demand
and supply in analysing commodity markets, such as oil.
.commodities tend to traded internationally are homogeneous = price of commodities are likely determined by the interaction of demand and supply
.excess supply of commoditities will cause prices to fall whilst excess demand of commodities will cause prices to rise
.the fall in the price of oil in 2014 could be due to a fall in demand from D1 to D2 or a rise of supply from S1 to S2
.on the other hand, it might not be useful in markets where there is government intervention or a market with small group of dominant firms
.e.g. government might offer subsides to producers to artificially rise the supply and reduce prices
.they could also tax the commodities to reduce the supply and rise the price
.fluctuations of prices caused by market forces may be limited by the buffer stock schemes to over-ride market forces = they set a price ceiling and price floors with gov buying up stocks to reduce supply when prices are about to fall below the floor and selling stocks to raise supply when prices are about to rise above the price ciling
the usefullness depends on
