LS20-LS21 Booklet

• Neoclassical theory states that firms need to profit maximise
• Monopolies are firms that earn 25% or more market share
• Legal monopolies own 25% marker share
• market leaders are dominant players in the market
• monopolies dominate price, other firms (making them followers), and the production process
• Overall, monopolies have power over price and quantity produced
• maximum price is a price set below the market equilibrium price by the government
• minimum price is a price set above the market equilibrium price by the government
• If maximum prices are set, more people are able to afford the good as it is below the market equilibrium price, meaning that demand will exceed supply (excess demand). This may lead to shortages in goods, eventually leading to goods being sold on the black market .
• Setting minimum prices above the market equilibrium price causes an excess in supply because producers are unable to sell their products at the minimum price. Producers may need to lower the price so it becomes more affordable for consumers to purchase
• minimum price examples: minimum wage, fair trade, volatile products, agriculture to ensure income of farmers. If not they may decide to leave the market. This can’t happen because food is a necessity
• A government intends to introduce a minimum price for rice, a maximum prices for heating oil and a tax on chewing gum. Who benefits in each market?

  rice = producers

  heating oil = consumers

  chewing gum = government
• Adam Smith is the economist associated with the benefits of specialisation and the division of labour
• Close substitutes have a higher XED (+2.1)
• minimum price graph

  set above the market equilibrium price

  
• maximum price graph

  Price set below market equilibrium price

  
• Consumer surplus decreases if minimum price is introduced
• consumer surplus increases if maximum price is introduced
• Producer surplus increases if a minimum price is introduced
• Producer surplus decreases if a maximum price is introduced
• Total cost (minimum price graph): Q3-Q2 x min price
• A chemicals factory pollutes harmful air and waste into a nearby river. Use a cost and benefits diagram diagram to show how this would affect the market for chemicals

  NEGATIVE externalities diagram

  
• in a externalities graph:

  Q1 - free market

  Q2 - social optimum level of output
• Health care is not a public good because it is non rivalrous as someone’s consumption of healthcare will affect another persons consumption. This is seen through long waiting hours
• determinants of price elasticity of demand:

  • no. of substitutes
  • time taken to produce
  • luxury/necessity
  • addictiveness
  • proportion of income spent on the good
• determinants of price elasticity of supply:

  • excess stock
  • Time taken to produce
  • Spare capacity
  • Perishability
  • number of finished goods
• inelastic graphs - closely vertical line
• elastic graphs - closely horizontal line
• guaranteed minimum pricing scheme is a scheme in which excess supply caused from a minimum price is bought by the government. This is to protect producers income
• minimum prices is needed in the agricultural market to ensure farmers income. If we don’t, farmers will want to leave the market. Food is a necessity so we need to ensure our famers don’t leave otherwise we will need to import
• guaranteed minimum pricing scheme buys up excess stock and sells it to other markets
• advantages of a mixed economy:

  • controlled by both government and the price mechanism
  • Government controls public sector whilst price mechanism controls private sector
  • This prevents monopolies
  • Profit motive can be reached
  • which allows for more innovation and competitiveness
• Explain how subsidies aim to increase the consumption of a good or service

  • subsidies are grants given by the government to reduce the cost of production and increase supply.
  • A right shift in supply causes prices to decrease, making the goods more attractive and affordable to consumers
  • Therefore, demand will increase and consumption will increase
  • However, there may be costs for other raw materials needed to produce the good. This means that the impact of a subsidy on consumption is dependent on the size of the subsidy
• producing at the free market equilibrium level means there is a misallocation of resources
• the free market depends on the price mechanism.
• free market equilibrium is the misallocation of goods with external benefits
• Disadvantages of command economy:

  • controlled entirely by the government, control over public and private sector
  • This means the private sector wont be able to fully profit maximise
  • As profit motive is absent, there is a lack of competition and innovation
  • this causes a lack os choice for consumers
• Price elasticity for a good is likely to change overtime because of technological advancements. This will reduce the time needed to produce. As well as this, more substitutes may be introduced overtime
• Explain how an indirect tax can be used to reduce the consumption of a demerit good like tobacco

  • indirect tax is a tax levied on a good or service
  • demerit goods are goods produced by the private sector and has negative externalities
  • Indirect tax causes a left shift in supply, which increases price from P1 to P2 and demand demand decreases from Q2 to Q1
  • However due its to addictiveness, tobacco has an inelastic PED, so demand for cigarettes wont be heavily impacted by a change in price
• A limit (cap) is set on the total amount of pollution firms are allowed to emit over a set time period