taxes and subsidies

• tax

  it is mainly goods with an inelastic demand which are taxed, this ensures that the bulk of the tex is passed onto the customer
• if PED is more than 1, what is the coefficient

  most of the burden of an indirect tax will be absorbed by the supplier, this usually means that PED is elastic
• if PED is less than 1, what is the coefficent

  most of an indirect tax can be passed on to the final customer, this usually means the PED is inelastic
• subsidies

  they act in the opposite way to taxes, as they encourage greater production of a good, therefore shifting the supply curve to the right
• taxes and subsidies

  taxes = consumer

  producer

  subsidies = producer

  consumer
• what is consumer surplus?

  the difference between the price consumers are willing and able to pay for a good or service and the total amount they do pay

  • shown in the area underneath the demand curve and above the market price
• consumer surplus

  if pirce falls, consumer surplus will increase

  if the price rises, consumer surplus will decrease
• what is producer surplus?

  the difference between what producers are willing and able to supply a good for and the price they actually receive

  • shown in the area above the supply curve and below the market price
• formula for total revenue

  price x quantity supplied
• total economic welfare

  consumer + producer surplus
• what is specialisation?

  the prodcution of a limited range of goods by an individual or firm, so that together a complete range of goods is produced
• advantages of division of labour

  higher output per person which means improved productivity

  increased efficiency in production

  economies of scale ; lower avg costs = good profits
• what is the division of labour?

  when the production process is broken down into many separate tasks

  • raises the output per person
• money

  it eliminates the need for barter, its a medium of exchange which doesn't need to have a coincidence of wants

  • specialisation and division of labour can only work efficiently if we sell our goods and services for money
• benefits of specialisation

  increased productivity

  labour becomes cost effective

  saves time

  workers can specialise in what they best suit which will increase the quality of output
• disadvantages of division of labour

  risks of repetitive strain injuries at work

  reduced job satisfaction

  unrewarding

  some workers receive little training and may struggle to find other jobs
• what is production?

  production converts inputs into outputs, requires the use of economic resources

  finite sources ; oil, can run out

  infinite sources ; timber, can be renewed
• productivity

  how much is produced by each unit of input

  labour productivity = output per worker
• in the short run

  assume that businesses operate with a fixed amount of capital and given state of technology

  • produce more = increase labour

  in the short run, because at least one factor of production is fixed, output can only increase by adding more variable factors (labour)

  • considering fixed and variable costs
• formula for total costs

  fixed costs + variable costs
• fixed and variable costs of production

  fixed costs, relate to fixed factors which don't vary widrectly with the level of output

  variable costs, vary directly with output levels
• formula for average costs

  total costs / output
• average costs curve (AVC)

  U-shaped curve which shows the AVC of production first falling, and then rising as output increases
• in the long run

  all of the factors of production are variable

  the whole scale of production can change

  businesses in the long run can take advantage of economies of scale
• productive efficiency

  occurs when a firm minimises average costs and produces at the lowest point on its avg costs curve
• what is economy of scale?


  falling average or unit costs as a firm increases its size or scale
• diseconomies of scale

  when the firm reaches a point where in terms of capacity of machinery the only way to produce more is to expand and invest more money

  • average costs increases
• monopoly

  a natural monopoly occurs when there is room in the market for only one firm benefiting from full economies of scale
• revenue

  the income a firm retains from selling its products

  • as output increases the average revenue curve slopes downwards
• total revenue

  is the total flow of income to a firm from selling a given quantity of output at a given price

  • price x output
• average revenue

  is revenue per unit

  • total revenue / output
• profits

  arise when a businesses revenue exceeds its total costs

  • revenue - total costs
• market structures

  organisational and other characteristics of a market

  • number of other firms in the market
  • degree of monopoly power
  • profit levels
  • how much the firm can influence price
• perfect competition

  • large number of firms
  • producst are identical
  • freedom of entry and exit from the market
  • firms have no control over the price of their products
  • each firm supplies a very small proportion of the total industry
  • consumers and producers have perfect knowledge
• what is a monopoly?

  a form of market structure for which there is a single seller of a good (its the complete opposite of perfect competition)

  • the UK Competition and Markets Authority will investigate a merger if it results in the combination of the firm having more than 25% share in the market
• monopoly power

  firms influence the market in some way through their behaviour, determined by the degree of concentration in the industry

  • influencing prices
  • influencing output
  • obstructing barriers to entry
• monopoly

  natural monopoly - when there is only room int he market for one firm benefiting to the full from economies of scale

  geographical factors - when a country or climate is the only source of supply of a raw material

  government created monopolies - nationalisation

  patent law - through getting a patent or license
• barriers to entry for monopoly's

  economies of scale

  patent protection

  informational advantage (trade secrets)

  government protection

  control over resources
• strategies to limit competition

  limit pricing - a firm setting a low price to discourage new entries into the market

  predatory pricing - setting an artificially low price for a product in order to drive out competitors

  brand proliferation - saturating the market with a huge range of similar products
• concentraction ratios

  ratio of the combined market shares of a given number of firms to the whole market size

  • used to determine the market structure and competitiveness of the market, can be measured using market share or total output in a market