T2 2.1.1 - 2.6.4 Introduction to markets and market failure

Why did Birmingham’s economy suffer during covid 19?

Large proportion of the employment is in the retail sector

What happens to supply as price increases

The supply increases as more money can be made by firms

What happens to demand as price decreases

Demand increases as more people can afford the service

State 3 Money leakage methods

1. Savings

2. Taxation

3. Imports - Buying internationally and not nationally

State 3 Money injection methods

1. Exports - Money coming in

2. Investments

3. Government spending - Money coming back in

How often is GDP measured

GDP is measured QUARTERLY (Every 3 months)

What are the 2 best ways to reduce need for benefits

Investing in healthcare (people get better faster and return to work)

Investing in education (People gain better qualifications which allows them to access higher paying jobs)

What 4 main things do we need for economic growth

1. Social infrastructure (Housing)

2. Energy infrastructure

3. Transport Infrastructure

4. Broadband Infrastructure

Can economic growth accurately be predicted

No because unexpected events such as COVID - 19 happen

Why is some degree of inflation good?

Shows there is a demand which suggests that the economy is doing well and people have money to spend

High inflation downsides

Larger proportion of disposable income gone

Social + political discontent

Businesses lose confidence

Low inflation benefits

Should encourage investment and promote international competitiveness

What is the Uk current inflation rate

3.8%

Impact of inflation on individuals

Less money to spend

Impact of inflation on firms

Have to put prices up

Smaller margins

Less customers

Impact of inflation on government

Cost of services increases therefore if budget stay the same, services will suffer

How can the government combat inflation

Increase taxes

Reduce spending

Entering free trade agreements (more supply which reduces prices)

What is the governments biggest expense

Welfare benefits so when more benefits are needed, the expenses increase

What does labour being a derived demand mean

The higher the demand for a particular product or service, the higher the demand for labour in that sector

Why does the supply of labour differ in each industry

Many industries in the UK suffer from shortages - teaching

Some industries suffer from surpluses

How does unemployment stifle growth and vice versa

Unemployment means consumers have less money to spend which is a big issue as the UK is a consumer based economy

Conversely, economic growth reduces unemployment as there is a greater demand for services and so more labour opportunity to fill that demand

What is the UK current unemployment rate

4.7%

What are the two types of economic growth

Short run growth 

Long run growth

What is short run growth

Increase in value of goods and services measured by GDP

What is long run growth

Occurs due to an increase in the capital stock of the economy which enables the economy to increase their potential and produce more goods

What are some examples of demand side-shocks

Economic downturn in trading partner

Unexpected tax increases

Financial crisis

Rise in unemployment

What are some supply side-shocks

Steep rise in oil and gas prices

Political turmoil

Natural disasters causing sharp fall in production

Unexpected tech breakthroughs (ie AI)

Define interest rates

Reward for saving or the cost of borrowing

Possible causes of recession

External events

Tightening of macro policy

Fall in asset prices or supply of credit

Drop in business/consumer confidence

Short term economic effects of a recession

Business profits and capital investment fall

Unemployment

Government finances

Inflation

Longer term economic effects of a recession

Rising structural unemployment (long term unemployment)

Low rates of investment reduces amount of capital stock (Less productivity)

Long term social effects of a recession

Falling real wages = less demand

Widening income inequality (Lower payed/skilled workers worst affected as they are first to go in a recession)

Threats to democracy 

Negative output

When the economy produces less than its potential

Positive output gap

When the economy produces more than its potential

Effects of a boom

Higher wages

Increased productivity

Lower inflation

Effects of a recession

High inflation

Higher unemployment

Higher inflation

What is the multiplier effect

This concept is based on the fact that one persons spending is anothers income

What is the marginal propensity to consume (MPC)

Proportion of increase in income spent on consumption

(ie if income increases by £5000 and you spend £4000 then your MPC is 0.8.)

An MPC of 1 = 100% consumption spend

What is the marginal propensity to save

Proportion of increase in income saved

What is the multiplier coefficient formula simple version

K = 1/(1-MPC)

This is assuming that the only leakage methods are savings

What is the multiplier coefficient for formal multiplier

K = 1/(MPS + MPT + MPM) With S, T and M being savings, taxation and imports respectively

When is the value of the multiplier higher

In a recession when there are less leakages so we are spending more

What do C,I,G,X,M stand for

Consumption

Investment

Gov. spending

Exports

Imports

What are some short run growth factors

Lower interest rates

Lower taxes

Lower oil prices

Economic boom within trading partner country (Buy more of our stuff)

What are some long run growth factors

Investment

Increased productivity

Increased labour supply

Research

Innovation

What is GNP

Gross national product is the estimate of the money value of the goods and services produced by the 4 factors of production

Why are national income statistics gathered

For the bondholders (holders of national debt)

Comparison with peers

Comparison with other countries

Helps economists forecast

Allows companies to gain knowledge so they can invest

Limitations of national income data

Does not show standard of living

Does not show purchasing power

Does not show income distribution

What does purchasing power parity allow us to do

See the relative cost of living compared to other countries

What is the Easterlin paradox

Rich people tend to be much happier than poor people

Rich societies are not happier than poorer societies

As countries get richer, they do not get happier

What affects happiness

Relative income because happiness is subjective and heavily influenced by comparison

Key drivers of economic growth

Expanding capital stock

Extracting natural resources

Increasing active labour supply

Driving innovation

What does rising house prices do

Creates positive wealth effect by increasing equity of homeowners which encourages them to spend