The As

Production possibility frontier (PPF)

àIt’s a boundary that shows how to use all the resources in the most efficient way
àWhen we maximise the output from the resources we got we reach an allocative efficiency
àWhen we reallocate our resources it involves an opportunity cost – when we want to increase the output of one good, we have diminish the output of another good
àIf the opportunity cost for producing two products is constant, then we draw the PPF as a straight line.

Productivity

àIt is measure that tells us how big is an output per worker, when the productivity is high it leads to:

- Lower average cost
- Improved competitvenes and trade performance (you can sell more, as you produce in a cheaper way)
- Higher profits
- Higher wages
- Economic growth

àThe productivity gap – it is the fact that the average GDP per hour for worker in England is smaller than that in France or Germany. The reasons of it might be: the lower labour quality, low rates of spending on development and research, lower capital investments than in other countries, over regulated industry,

àTrade off – The calculation involved in deciding on whether to give up one good for some other good

The supply:

àDefinition: supply is the amount of a product that a producer is willing and able to supply onto the market at a given price in a given time period.

àThe supply rises when the price offered for the product rises. Because of:
o the profit motive
o Production of bigger amount of the product needs more money
o New entrants coming into the market, as the price rises

The demand

àThe demand is the price that consumer are able and are wiling to pay for certain amount of good. There are different types of demand:

The effective demand: The Willingness to pay for a certain good
The latent demand: The potential demand – i.e. this created by the advertisements
The derived demand: The demand that results from the demand for some other good, i.e. raising in demand for cars causes rise in demand for steel.





The demand elasticity

àPed measures the responsiveness of demand for a product following a change in its own price. The formula for calculating the co-efficient of elasticity of demand is (where Ed = the PED)


We can say that the demand is more or less elastic, if it’s:

Ped = O – than it is perfectly inelastic
Ped is between 0 and 1, than it is inelastic
Ped = 1 Than it is unit elastic. This means that 15% increase in price induces 15% increase in demand
Ped > 1 than it is the demand is elastic. That means i.e. that 15% change in price induces 30% in demand

àWhat determines price elasticity

o The number of close substitutes
o The cost of switching between the products
o The degree of necessity – if we really need this good, or if it is just luxury
o The % of consumer income that is allocated in some good
o The time period allowed following a price change
o How much we are used to consume some good
o If the time is off-peak price (than the demand is inelastic) or peak (than the demand is elastic
o The breadth of definition of a good or service – if a good is broadly defined, i.e. the demand for petrol or meat, demand is often inelastic. But specific brands of petrol or beef are likely to be more elastic following a price change.

Price elasticity of Supply

àThis is the relation between the change in quantity supplied and the price of the product

- If supply is elastic the producers can increase output without rise in cost or time delay
- If supply is inelastic the producers can not increase output in a short period of time

Pes > 1 – elastic
Pes < 1 – inelastic
Pes = 0 – perfectly inelastic
Pes = infinity – the supply is perfectly elastic

àFactors affecting the supply elasticity

- Spare production capacity – when there are plenty of resources the supply is elastic
- Stocks of finished products and components – when there is a lot of the product or components stored in a magazine
- The ease and cost of factor substitution – how it is easy to organise new factors of production
- Time period involved in the production process

The producer surplus

àIt is the wealth of the producer.


Market failure and government intervention

àMarket failure: When resources are used not in a perfect way that produces the best allocation for consumers (i.e. when people use to many plastic bags and the society has to pay for the utilization of them

àProductive efficiency: The fullest use of resources. When the maximum quantity of the products is being made

àInformation failure: When the lack of information causes inefficiency of the usage of the market resources.

Asymmetric information: When the amount of knowledge is not equal between the people making some transaction.

àExternality: (or a spill-over) an effect when those who are not directly involved in some decision making (the third parties) are affected by the actions of others

- Negative
- Positive

Costs and Benefits:

1. Private costs and benefits: directly accruing to people who make decisions or make some particular actions.
2. External costs and benefits: fall on the third party – people not involved
3. Social costs and benefits: The society gains on losses on some actions made by some other folks

àMerit good – Has some positive externality – society/third party gains while sbd. ss consuming. It creates positive externality
àDemerit good – society/third party losses while sbd. is consuming. It creates negative externality

Public goods

àNon rivalry – when someone is using it, others can use it as much as he did. (theoretically perfect example virtually it doesn’t work like that – not always)
àNon-excludability: everyone can contribute

Private goods:

àExcludability: Not everyone can consume it.
àRivalry: When consumed, are not available any more.
àRejectable: You can simply reject it, you can choose something else, some substitute good.

Quasi public good: I.e. highway you are charged for it so it has no all features of a public good.

àSemi-non-rivalry: I.e. beaches that are overcrowded.
àSemi-non-excludable: i.e. the highways that are charged

Government intervention in order to correct market failure – most common politics towards:

àPublic bad: something like waste. Opposite of public good

àNegative externalities – Charges, providing information (like on the cigarettes)
àPositive externalities – Advertising, giving subsidies,
àMerit goods – popularizing information about its good effect, tax revenues
àDemerit goods – provision of information/ban.
àPublic goods – providing them J

Taxation

àDirect taxes: Income tax, corporation tax (paid by companies); taken from the income of individuals and firms
àIndirect tax: Tax levied on goods and services (i.e. VAT)

Indirect tax: Takes into consideration externality costs produced by some good. Polluter pays principle.

Subsidy

It is a direct payment by made by government to producer or to consumer to make the good easier to get and consume.

Producers subsidies:

àCapital directly paid to the producer to increase the supply of some product, and reduce the equilibrium price. Types of producers supply


- A guaranteed payment on the factor cost of a product – gov. has to buy fixed amount of product on fixed prices
- An impute subsidy – gov. subsidies some of the producing costs i.e. the wages of the employers
- Government grants to cover the losses of made by a business
- Financial assistance – guarantying loans, financial support, helping in ‘political’ way, organizing areas of cheap labour - part of regional politics
- The more inelastic the demand curve the greater the consumer's gain from a subsidy.
Pros of subsidies
Cons of subsidies
Control of inflation
Distortion of market
Encouragement of consuming merit goods
Arbitrary assistance – the decision made on who will receive a subsidy can be made arbitrary
Increase the revenues of the producers
The final cost of the subsidy may be on those who do not benefit from it
Reduce the costs of capital investment
Encouraging inefficiency
Subsidies to slow-down the process of long term decline in an industry
Risk of fraud

Tradable permits

Allowance to emit certain amount of pollution i.e. carbon dioxide. You can sell the and buy if you want to.

àThe European Union Emission Trading Scheme – ETS it sells permissions to pollute the atmosphere,

Specialization and trade

àSpecialization causes:

-Higher output
-Variety
-Bigger market
-Competition and lower prices

àDivision of labour: When the process of production is broken up into many separate tasks. Even though it sounds good it has its limitations.
- The greatest seem to be the diseconomy of scale, which is the situation when the labors efficiency is diminished because of the fact that the workers take less pride of they are doing, or are simply bored with their work
- Narrow training of the employers may cause problems for them with changing the job

àThe specialisation of the countries. Some countries have their specialities in exporting some goods.
- the level of endowments depends on how efficiently are resources of a country used – how much it can produce from a certain amount of a resource.
- The countries have different specialities, i.e. some might have the maximum output of the vacuum cleaners of 1000 and maximum output of washing machines 2000, it means that the opportunity cost of producing one vacuum cleaner is 2 washing machines, so it is better for the country to relocate the resources to production of the washing machines to maximise the output.