Micro economics IB Real World Examples

Negative consumption Externality

* Singapore 71% tax on cigarettes to combat externality
* 2 to 6 billion pound annual cost to NHS

Subsidies

* European agricultural subsidy
* 30 billion a year
* ensures farmers are more sustainable
* Museums in the UK
* received subsidies since 2001
* proved universal free entry
* intention to boost visitor number which provides a range of private and external benefits
* museum visits have increased by 184%

Price Floor

* Scottisch alcohol price
* 50p per unit
* People want to move it up to 65p per unit
* UK minimum wage laws
* 18 to 20 years old paid 5.9 pounds instead of 5.6 pounds
* Common agricultural policy of the EU
* sets minimum price for certain products such as milk and wheat
* support farmers and stabilise agricultural markets

Price Ceiling

* New York rent control
* maximum base rent system which is decided by DHCR
* Basic food items in Venezuela
* maximum prices on basic grocery items such as coffee, oil, milk, butter, flour, etc
* cause huge shortages, smuggling, black markets and mass queuing across the country
* led to large black market

positive consumption externality

* Singapore training schemes
* 95% subsidised for low wage workers

positive production externality

* nuclear and renewable energy
* less air pollution and lower costs of climate change
* subsidised by the UK
* Bee farming
* pollination of multiple species

Common pool of resources

* North America Buffalo
* In 1870 14 million Buffalos in north america
* by 1889 only 150 buffalos remained
* used for meath leather clothing and tools

Determinants of Supply

* supply shift right
* temporary VAT tax cut for the UK hospitality industry to 5% in 2021
* reduced costs of production encouraging greater quantity and lower prices of restaurant meals
* supply shift left
* UK subsidies for home solar panels ended in 2019
* led to increased costs of production and led to higher installation prices for consumers

public goods

* flood defences in the UK
* no price charged and consumers benefit without contributing towards their provision
* results in free rider problem and a missing market
* therefore only occurs in UK in flooding sensitive areas

PED determinants

* price inelastic
* oil, gas and electricity producers such as shell and BP recorded record revenues and profits in 2022
* these are necessity commodities allowing producers to benefit from significant windfalls

YED determinants

* France
* known for consumers willing to pay more for consuming fresh foods but years of stagnant incomes and high rates of unemployment have driven up the demand for cheaper and readily available fast food

PES determinants

* UK Energy Inelastic supply
* limited stocks and the closing of environmentally unfriendly power plants
* covid vaccine manufacturers
* respond swiftly to huge global demand by expanding factory sizes to scale up manufacturing

indirect taxes

* fuel duty in france
* november 2018 french government announced plans to raise feul duty on petrol and diesel
* intention to raise revenue and fight against climate change
* led to mass protest given its regressive impact and further dent into living standards forcing the idea to be scrapped a few weeks later

regulation and market failure

* Beijing Air pollution
* enforced regulations which reduced air pollution by 40%
* odd and even number plate days to drive
* yellow stickers on vehicle which emitted too much pollution banning them from certain areas
* only allowed to drive on certain days of the week
* policy was strongly enforced

tradable pollution permits

* EU cap and trade scheme
* Cap and Trade scheme created in 2005 in response to the Kyoto Protocol
* firms which go above allowed levels of pollution need to purchase permits from firs how have successfully reduced pollution to more than needed
* firms face heavy fines if actual pollution exceeds the number of permits they hold
* pollution 21% lower from 2005 to 2020

profit maximisation

* pharmaceutical companies
* research and development have high costs
* new patent gives monopoly power so firms strive to find new drugs

profit satisficing

* walmart
* 2018 walmart reacted to Donald Trump’s large corporation tax cut by paying their workers higher wages and offered employee bonuses
* stakeholder satisfaction was put above profit maximisation

revenue maximisation

* The Times Newspaper
* predatory pricing strategy to undercut rivals and drive them out of the market
* reduce price by selling newspaper for only 10p on mondays

law of diminishing marginal returns

* coffee shops
* if they over employ staff during busy times it might be inefficient
* labour productivity after a point will fall with each worker hired reducing marginal product

economies of scale

* airline industries
* bulk buying fuel and planes (purchasing economies)
* financial economies with loans
* managerial economies and marketing economies
* play a significant role in reducing unit costs

diseconomies of scale

* Pepsico
* prior 2010, pepsico’s strategy was to acquire smaller companies leading to a lack of coordination between departments
* this stifled innovation as a result

sales maximisation

* netflix
* focus on building a large user account base willingly offering deals to lure in first time customers

corporate social responsibility

* walt disney company
* pride themselves on the strength of their CSR
* focus on labour standards
* charitable giving and promotion for employees to take time towards volunteering

perfect competition

* Tuk Tuks in India
* huge number of buyers and sellers each selling homogenous services at the same prices with perfect information
* only thing it does not fit is that there is a barrier to entry as you need a licence to operate a tuk tuk and available finance

oligopoly

* Music companies US market
* universal music group, sony, warner, and EMI group
* 80% of market share

monopolistic competition

barbers, hairdressers, beauty salons

monopoly

* US smartphone market
* apply 40% of market share

natural monopoly

* UK water companies
* high fixed costs of building an maintaining pipe infrastructure
* heavily regulated

collusive oligopoly

* Scania
* truck maker fined in 2017 for its part in organising a price fixing cartel
* colluding with five other truck companies in scheme that lasted for more than 14 years
* Fined 880 million euros

consumer nudges

* organ donation scheme
* opt out system

Price mechanism

signal:

* oil crisis 1970 drove prices up dramatically
* increased cost of production

incentive:

* led to several country to produce oil domestically

imperfect information

* health insurance market
* buyers know more about their health than potential insurance providers
* USA average insurance cost is 539 dollars a month