complete economic environment & business unit 4 revision

Complete Economic Environment & Business Unit 4 Revision

Quick Recap Notes On Unit 4A2 Level

Do Markets Always Work?

Section 1

How Markets Work

• Profit Signalling Mechanism is the feedback loop that controls the allocation of resources in an economic system.

• Dynamic Markets are those which are constantly changing, countless decisions are made by buyers and sellers after the nature and behaviour of the market.

• Innovation can lead to a shift in the allocation of resources. It is needed to create new products for consumers and adapt to changing requirements due to constantly changing markets.

Ch.1

Market Failure

• Market Failure is a less than optimal allocation of resources. There are many reasons for market failure, including:

1. Some goods and services may not be produced at all, or to the quantities that would most benefit society

2. Market externalities may occur, when production and consumption of goods have positive an negative effects

3. Imperfect competition may lead to x-inefficiency4. Monopolists may try to dominate markets and exploit

consumers5. Markets may be slow to react to disequilibrium 6. Imperfect knowledge or uncertainty

Ch.2

Market Failure

• Merit Goods are seen as socially desirable, and would be under produced if left to the market to provide (e.g. NHS)

• Under Production occurs when there are significant benefits to society from providing goods and services, even if consumers cannot pay the free market price for them.

• Efficiency involves creating and selling a product at a price that buyers are willing and able to pay.

• Public goods are provided collaboratively by the community or government. Public goods can be non excludable (one they are available, no one can be excluded from benefitting such as road pavements) and non rivalry (individuals obtain benefits but this does not stop everyone else from benefitting.

Ch.2

Market Failure

• Public goods are subject to the free-rider problem. As they cannot be provided efficiently by the private sector, they are provided by the public sector and consumed/paid for collectively.

• Governments may intervene in markets in order to provide goods and services, funded through taxation. This can, however, lead to market failure.

• Regulation is a method used to control markets and prevent companies from exploiting consumers through higher prices. (e.g. Ofgem and the energy market)

Ch.2

Market Failure

• Demerit Goods involve significant social costs are are likely to be over produced and over consumed.

• Equity involves a fair distribution of income and wealth.

• Inequality is an aspect of market fail as poverty entails significant social costs. This can be improved with the use of income redistribution, using the tax system and the provision of merit goods.

Ch.2

Externalities

• Private benefits are received by a firm or individual when goods and services are purchased.

• Private costs are those paid by individuals and firms when buying goods and services.

• External benefits reflect positive side effects from firms using products they have paid for.

• External costs reflect the side effects of a firm or individual using a product, having a negative effect on third parties.

Ch.3

Externalities

• Social benefits are the total benefits arising from producing goods and services.

• Social costs are the total costs of producing goods and services.

• Externalities include all the costs and benefits that affect third parties. Whenever the externalities associated with production or consumption are significant, there is market failure.

• If market prices and profits do not accurately reflect the true costs and benefits to society of a particular business, then there is a misallocation of resources.

Ch.3

Are Externalities Acceptable

• Not all externalities are negative, positive externalities can benefit society as a whole. These goods are often under produced and under consumed.

• Marginal social benefit is the amount that society as a whole gains from the consumption of one more item.

• Marginal social cost is the cost to society as a whole from the consumption of one more item.

• Efficiency is achieved at the point at which the marginal social benefit curve intersects the marginal social cost curve.

Ch.4


• Increasing consumption to the socially optimum level provides welfare gain.

• Manufactures are interested in maximising profits, therefore pollution is not their main concern. They will choose to produce at a level of output at which the extra cost of producing one more item is equal to the extra sales revenue.

• In order to ensure there will not be too many external and private costs in society, government intervention may be required to reduce consumer spending.

Ch.4


• Cost benefit analysis involves investigating all the private and external costs and benefits of a possible project.

• The government is responsible for many services within society, including health and education, therefore they must decide on the best allocation of resources since funding for investment is limited.

• The government may use cost benefit analysis to assess the social costs and benefits for a particular project.

Ch.4


• Cost benefit analysis has some limitations, including:1. The fact that situations will change, therefore a

range of estimates must be based on different assumptions.

2. Social costs and benefits cannot also be valued in money terms, and therefore factors should be identified clearly.

3. The analysis is based upon guesswork – it is very hard to quantify the costs and benefits of a particular project.

Ch.4

Government Policy

• Pollution and other external costs may arise during the production process, buy also through the consumption, use of disposal of goods.

• Governments can create regulations requiring producers to stop using processes that generate negative externalities. This can be achieved through the use of clean technologies – which raise costs, leading to higher prices for consumers. This can result in a loss of international competitiveness.

Ch.5

Government Policy

• Regulation has reduced some external costs, such as health and safety. Some developed nations may use strategies to prevent pollution, such as providing financial assistance to developing nations to cut emissions.

• Another strategy could be use is to impose environmental charges. Environmental charges are government imposed fees for using natural resources.

• Green taxes are taxes on output in order to compensate for negative effects of production and consumption on the environment.

Ch.5

Government Policy

• Green taxes can be adjusted to reflect the amount of pollution. The effect of green taxes is to increase the price of goods.

• However green taxes and subsidies are not a perfect solution. Taxes are likely to be transferred into the high prices set for consumers.

• There are equity issues concerned with regressive tax systems used for consumers to pay for goods. This can cause in unequal distribution of wealth, negatively impacting the economy and growth.

• Public attitudes can determine the environmental causes of a company’s actions. Educating customers can exert pressure on manufacturers to modify products through market forces.

Ch.5

Government Policy

• A Carbon Pollution Tradable Permit works by giving firms maximum levels of carbon that they can emit during production.

• These have grown in popularity, combining market incentives with command and control measures.

• If a firm is efficient and reduces its pollution level below the permitted limit, then it can gain a credit which can be sold to less efficient producers who exceed their permitted limit.

• This command and control system determines the overall level of pollution and the market mechanism will distribute the right to pollute.

• The Emissions Trading Scheme of tradable permits that can operate on an international level with countries trading quotas.

Ch.5

Should Markets Be Regulated?

Section 2

Regulation

• Competition is beneficial for consumers, it increases choice and encourage firms to charge reasonable prices. If consumers are unhappy with one supplier, they simply switch to an alternative. The less competitive supplier will have to cut costs and lower prices in order to regain market share.

• Big companies with large market power may have less incentive to produce efficiently – customers are paying more for products than they really should.

• These firms have large economies of scale and this can help raise standards of living for people. It is likely these firms will look for international markets to locate productions in order to cut costs.

Ch.6

Regulation

• A Merger occurs when one company takes over another and the two agree to merge.

• Where there is market power, there is market failure – the allocation of resources will be affected. In a monopoly, consumers may get a smaller quantity of a product for a higher price. In an oligopoly, there may be interdependence.

• Interdependence refers to the situation where competing firms watch one another’s actions and make price/production decisions in light of competitors decisions.

• These growing market powers may prevent businesses from operating responsibly, so regulation is needed.

Ch.6

Regulation

• Anti-competitive practices include collusion and other restrictive practices. Businesses acquire market power which gives them control over their markets using pricing and marketing strategies.

• Collusion is when competing producers agree to avoid any action that would make competition stiffer.

• A Cartel is an agreement not to compete with two or more producers within an industry.

• Collusions and cartels are both illegal as they are anti-competitive practices.

Ch.6

Regulation

• Tacit Collusion is when competing firms avoid price cutting strategies in order to charge prices that guarantee good profits.

• Price wars involve substantial price cuts as each competitor tries to increase market share.

• Competition can lead to price wars, where each competitor tries to undercut other producers in order to increase market share. Companies may try to adopt non-price competition to differentiate their brand or cut prices through predatory practices in order to regain market share.

Ch.6

Regulation

• Cartels collude by: 1. Restricting Output: typically involving negotiation

and agreement between business2. Market Sharing Agreements: make each business a

dominant supplier to a particular part of the market 3. Price fixing: involves an agreement between

competitors to sell the same product or service at the same price

4. Bid Rigging: firms have agreed between each firm that will win the contract

Ch.6

Regulation

• Other restrictive practices include: 1. Full-line forcing: involves forcing a purchaser to buy the

full range of goods offered 2. Tie-in sales: the purchase of one product is made

conditional on the sale of another 3. Resale price maintenance: refusing to supply a product

unless it is sold at an agreed price. 4. Refusal to supply: threat to retailers that will impact

profits 5. Discriminatory Pricing: some outlets offer better prices

than others.

Ch.6

Regulation

• Natural Monopolies are when it would be wasteful for more than one company to supply a product (e.g. water supply). They have high infrastructure costs, leading to a high cost of duplicating the services which would be wasteful.

• There is a strong incentive for natural monopolies to abuse their market position to increase profits and enhance power. This type of abuse raises pressure from consumers for government regulation.

• Privatisation is a method that was introduced in order to bring an element of competition, however anti-competitive practices made it clear that regulation is necessary.

Ch.6

Regulation

• Natural monopolies avoid new firms from entering the market. In order to attract newcomers, conditions had to be created to overcome barriers to entry. This enabled governments to encourage firms to price competitively and to reduce the amount of subsidies paid to industries.

• Market power can give businesses opportunities to raise prices, leading to falling consumer spending power. Competition has an important role in raising purchasing power and standards of living.

• Competition makes businesses more innovative and versatile, increased pressures from rival firms. This is likely to reduce profitability for companies.

Ch.6

Government Action

• The Competition and Markets Authority gathers information about the competitiveness of markets and responds to complaints about anti-competitive practices.

• In the short run, competitiveness can give consumers lower prices and greater choice, whilst in the long run it may enhance a country’s international competitiveness.

• Consumer production laws work in combination with competition law to protect public interest. It ensures businesses cannot exploit consumers to reap large profits.

• Often, monopolies lead to consumers facing higher prices and lower levels of consumption than it would be if the market was competitive.

Ch.7

Government Action

• Sunk costs are costs that have already been paid for and cannot be redeemed in the event of the business closing down or failing to make a profit.

• Public Interest means the interests of society as a whole. • The CMA have the power to restrict large organisations

from exploiting consumers, such as by: 1. Investigating how mergers can restrict competition2. Conduct studies and investigations3. Initiate criminal proceeding for those in cartel agreements4. Undertake regulatory references and appeals

Ch.7

Government Action

• The government had created the CMA as strong competition policy can encourage firms to strive for greater productivity and high performance leading to enhanced economic growth. A competitive environment may give businesses the confidence to invest in the UK.

• Mergers who have more than 25% of the market, defined as a monopoly, would be investigated to ensure the market is sufficiently contestable to allow for meaningful competition.

• Regulatory Capture occurs when regulators begin working for businesses instead of consumers. (e.g. Ofgem working with British Gas instead of protecting consumers)

Ch.7

Effects of Policies

• Over the last 10 years, competition policy has strengthened. Measures such as the 2002 Enterprise Act have contributed to a stronger stance to unfair competition in order to protect the consumer. The lure of monopoly profits, however, impact regulation within industries, with bribes allowing businesses to get away with unfair practices.

• It is argued that government cannot predict the effect of a merger with any certainty, and therefore intervention may result in the blocking of mergers which could had led to the rationalisation and price cuts in public interest.

Ch.8

Effects of Policies

• The government offering incentives for whistleblowing has tempted a number of companies which have engaged in anti-competitive practices to come forward.

• International trade has helped market become more competitive. Businesses that cannot expand in domestic markets due to saturation can expand through export sales.

• Government Failure is when government intervention makes a situation worse rather than better. This can lead to resources not being allocated efficiently as the market may best know how to allocate resources, worsening the market distortions.

Ch.8

Effects of Policies

• Small, efficient competitors can be protected by competition law, especially when there are large barriers to entry and economies of scale to contend with.

• When a number of small businesses are competing, together they help to create a pool of highly skilled people who can innovate and develop new markets. The competition law protects these smaller businesses who may be concerned with unfair competition.

Ch.8

Can The Government Control The Economy?

Section 3

Macroeconomic Problems

• In times of a recession, consumers quickly cut back spending in order to save more. Banks reduced their loans to businesses and stopped lending to each other whilst unemployment rose fast. Governments move to bail out their weakest banks by borrowing to buy significant shares.

• Leakages reduce the demand for domestically produced goods through savings, taxes and imports.

• Injections increase demand for domestically produced goods through investment, government spending and exports.

Ch.9


• The Multiplier Effect is when more is gained from society than the initial amount spent. If leakages are low, the multiplier will have a greater effect of aggregate demand.

• Full Employment Output or full capacity output, is the maximum potential output for the economy as a whole. An increase in aggregate demand will bring the economy closer to full capacity output. Governments can stimulate aggregate demand by using policies to stimulate growth and employment or to dampen down inflation.

Ch.9


• Governments have four principal objects to ensure the economy will stay strong, this includes:

1. Sustained economic growth2. Stable prices 3. High employment rates4. Sustainable position of balance of payments • The Balance of Payments record all transactions

with the rest of the world over the course of a year.

Ch.9


• Aggregate demand can be influenced by interest rate changes. Lower interest rates – an expansionary policy – can reduce the cost of borrowing.

• This may encourage consumers to increase levels of debt to support higher levels of consumption or encourage firms to borrow more in order to invest in capital equipment.

• Interest rates can also be used as a contradictory policy in order to cause a reduction in aggregate demand.

Ch.9


• Monetary Policy uses interest rates to vary the cost of borrowing and influence the level of aggregate demand.

• Bank Rates are interest rates which the bank of England charges banks when they need to borrow.

• Fiscal policy involves changes in taxation in order to influence government spending and public borrowing.

• A Public sector deficit occurs if government spending exceeds tax revenue and borrowing is needed to cover the costs.

Ch.9


• Expansionary Policies are used to shift aggregate demand to the right, through reduced interest rates, tax cuts and increased public expenditure.

• Contractionary Policies include higher interest rates, tax increases and expenditure cuts.

• A Trade-Off is when two objects cannot be met. Policies to achieve faster growth may lead to lower unemployment, however may increase inflationary pressure and contribute to an increase in imports. Policies that are designed to reduce inflation are like to lead to slow growth and increase unemployment.

Ch.9


• The four main macroeconomic objectives (inflation, unemployment, growth and balance of payments) are closely linked to the total level of spending in the economy. Macro-economic policy influences economic activities.

• The government can use fiscal policy to influence aggregate demand as they are a large employer and purchaser of goods and services.

• Monetary policy is conducted by the Bank of England.• Supply side policies work to expand output by making

markets work more efficiently, and can be useful in promoting economic growth.

Ch.9

Macroeconomic Problems• Economic growth refers to the annual increase in income and

output for the economy as a whole. • Real GDP Measures the value of goods and services production

within the economy, adjusted for inflation. • Stimulating economic growth has important aspects: 1. There must be sufficient aggregate demand to make it worth

producing more2. Growth is achieved by increase the productive capacity of the

economy, which can involve the quality of inputs, such as production, land, labour and capital.

3. Aggregate demand can increase by using existing resources more effectively and by innovation and technological change.

Ch.9


• Production Innovation occurs when new and improved products are bought to he market.

• Process Innovation involves the use of new technologies in the production process.

• Human Capital refers to the skills, training and experience of the workforce.

• Immigration stimulated production by providing an easily available source of labour, including people with scarce skills.

Ch.9


• The government can help the growth process by: 1. Controlling firms through regulation and

competition policy to ensure competitiveness2. Education and training improved to prevent

skills shortages through investment 3. Offer tax breaks and grants to stimulate

investment4. Fund research and development to facilitate

technological improves and process innovation.

Ch.9


• The long term trend rate of growth is the rate at which the productive capacity of the economy can be expanded through investment in physical and human capital and the development of new products and technologies.

• Negative growth often calls for expansionary polices to stimulate the economy, contributing to the multiplier effect. The injection of government spending into the economy will have a ripple effect. Higher sales of one firm will lead to increased sales of another. This will income will increase demand and consumption in the economy.

Ch.9

Stabilisation Policy

• The threat of inflation will trigger moves to reduce aggregate demand. In a recession, demand may fall and cash flow may suffer. Firms may become increasing dependent on bank loads in order to survive, leading to falling profits and investments.

• Contractionary policies will be used to tack a boom if it is leading to overheating in the economy and inflation is accelerating.

• Expansionary policies will be used to stimulate an economy that is stagnating.

Ch.10


• Claimant Count unemployment includes all the people who register for unemployment benefits.

• LFS (Labour Force Survey) unemployment is everyone who are willing and able to work but do not have a job.

• Cyclical unemployment occurs during a recession. This develops as a consequence of falling aggregate demand.

• Unemployment can have significant social costs to society. Businesses try to avoid redundancies and cut back recruitment during a recession. Expansionary policies can be used to stimulate growth and employment within the economy.

Ch.10


• Hyper Inflation can cause households to lose confidence as the value of savings and dramatically fall. Inflation can cause uncertainty and make businesses planning difficult.

• Stable prices are important for a company’s competitiveness. Inflation raises domestic producer’s prices, making them less competitive on an international level.

• Supply Constraints is when all the available resources are fully employed and the economy is close to full capacity output.

• Demand Inflation is a general rise in prices caused by excessive aggregate demand.

Ch.10


• Cost Inflation is caused by rising costs of production. • Stagflation is a combination of stagnation (zero or no

economic growth) with inflation (a general rise in prices).• There is normally a trade off between inflation and

unemployment, but with stagflation they are both rising at the same time.

• Quantitative Easing is a way of providing additional monetary stimulus to reduce the impact of recession. This is a way of increase the supply of money into the banking system.

Ch.10

Supply Side Policies

• Supply side policies are used to make markets work more efficiently. They are intended to increase the average rate of growth, such as by developing a flexible labour force, improving training & education, strengthening competition policy or providing incentives to work.

• In the long run, aggregate supply can be made to expand be investment in human and physical capital, new technologies and better efficiency.

• Healthy economies are constantly changing in response to the shifts in the patterns of demand and new technologies. The social costs of unemployment make many supply side policies cost effective.

Ch.11


• Commonly used supply side policy strategies include: 1. Regulating markets to prevents distortions2. Deregulating markets or privatising parts to increase

competition 3. Changing the tax system4. Directing funds towards reducing supply constraints • The poverty trap is when unemployed people are better off

claiming benefits than entering full time employment. Those who are employed must pay tax and national insurance, so for some they will gain more by claiming benefits. The minimum wage could be used an an incentive to get people to work.

Ch.11


• Corporation tax are taxes on business profits. • Changes in demand and new technologies affect what is

produced. Nimble businesses that can adapt to change can reap large profits, whilst those who are inefficient may face falling demand, leading to redundancy through frictional and structural unemployment.

• Supply side policies can be used to reduce the level and costs of structural unemployment over the long run.

• Occupational Immobility of labour is when labour do not have the correct skills for the jobs that are available.

• Geographical Immobility of labour is when labour cannot move to areas where jobs are available.

Ch.11


• Policies that focus on education and training have the potential to increase productivity and reduce labour costs (and reduce structural unemployment)

• Policies that encourage competition can help businesses compete in international markets

• Public funding of research & development can bring cost saving technologies

• Changes to minimum wages and tax systems have increased incentives to work.

Ch.11

Economic Policy

• Interdependence is when the actions of one company influence the way other businesses make their decisions.

• The Chinese economy provides a huge market for developed economy exports. Domestic producers who did not adapt to change and take advantage of new, growing markets had to close down.

• Trade negotiations have more recently been used in order to reduce trade barriers, in turn prompted growth.

Ch.12

Economic Policy

• Deficits can be caused by a lack of competitiveness. Domestic exporters goods can become too expensive to compete, leading to a fall in demand and profits.

• In order to help exporters, a depreciated currency enables them to become more competitive, making their goods cheaper. An economy that is very competitive may accumulate a big current account surplus.

• Globalisation has bought greatly increased specialisation to countries, which has been seen to encourage economic growth.

Ch.12

Economic Policy

• A Shock is an unpredictable or unexpected event.

• Increased trade and Globalisation have both entailed huge international capital movements. Countries who have not been making risky loans had suffered as they relied on exports. These countries faced large falls in aggregate demand.

Ch.12

Policy Effectiveness

• Successful policy making means planning now for problems that may occur in the future, however economies remain vulnerable to shocks.

• Structural changes are necessary to resolve long term problems, however have high social costs – so improvements are needed in policy making to ensure markets work more efficiently to boost economic growth.

• Barriers such as protectionism prevents competition on global markets.

• Multinationals supply many cheap, effective products that are valued, however they try to protect themselves by bribing government officials, making them too powerful.

Ch.13

Policy Effectiveness

• Suppliers of products with negative income elasticity of demand do better when incomes are falling. Cheap sources of tourism can benefit as substitutes for expensive experience that will make people feel unable to afford on reduced incomes.

• Within a recession high end restaurants and luxury goods are likely to become vulnerable. Firms that export, however, benefit from the depreciated pound, making it easier to compete abroad.

Ch.13

Should The Government Intervene In Society?

Section 4

Income Redistribution

• Income is a fair distribution of income and wealth. • Wealth is the total value of everything a person owns,

less any debts. • A problem with inequality is that it leads to poverty. • Absolute poverty is when incomes are insufficient

enough to provide basic necessities. • Relative poverty occurs when income is insufficient

enough to participate fully in society. Poverty can occur because of low incomes or employment – which has known effects if increased health risks.

Ch.14


• Structural changes have affected employment within the UK – those with scarce skills and abilities have seen pay grow. Through new jobs have been created, those without skills get lower paid jobs and more difficulty finding jobs, contributing to the widening gap between the richest and poorest in society.

• Businesses have to ensure households as they provide both labour and consumption. Depending on the current economic climates, these variations in income and employment determine the demand for goods.

Ch.14


• Wide disparities in income are generally associated with low wages. This may allow businesses to employ people at a low cost.

• Capital and enterprise may be scarce in some countries, so the share of revenue going to owners and managers may be high.

• Low levels of education and training could be a deterrent as businesses need people with skills.

• Extreme poverty can create social costs, risking political instability and creating uncertainty.

Ch.14


• Regressive taxes take a higher percentage of total income from poorer people and vice versa.

• Progressive taxes that a higher percentage of total income from the wealthiest and vice versa.

• The redistribution of wealth can directly impact the poorest, who depend on state healthcare and education. This allows them to have a better quality of life.

Ch.14


• Businesses want to hire people best suited for a job and will pay the rate that motivates and attracts people they want.

• Unskilled employees have little productive potential. Employers can simply substitute capital for labour if wages look too high.

• For the economy, businesses are a direct source of tax revenue. The tax system aims to redistribute wealth, but businesses may adopt transfer pricing or tax evasion. This gives less tax revenue for the government, despite redistribution reducing significant social costs.

Ch.14

Government Intervention

• The EU is committed to create a level playing field, and so apply their regulations and rules to all businesses to protect consumers and employees. Governments can intervene in the following ways:

1. Regulation and legal restraints2. Projects financed by government funds that address

specific problems and needs. 3. Incentives that work via tax breaks or direct

subsidies to provide rewards that lead to change.

Ch.15


• Market forces can be a powerful element in the process of securing economic growth as it has the potential to improve standards of living. Governments may encourage dynamism to ensure that all individuals have opportunities to benefit.

• Unemployment benefits can leave people with little incentive to work as they may be worse off through paying income tax and national insurance.

• The Poverty Trap is when people are better off claiming benefits than working.

Ch.15


• The government tries to create incentives to work, including:

1. Introducing the national minimum wage as a strategy to reduce poverty and created incentives to work.

2. Working families tax credit ensured that most people who are not well paid can be better off when they are at work. It is argued that these two factors have made work more attractive.

Ch.15


• There are some who play the benefit system to reach an acceptable standard of living without working. Benefit cheats who are officially unemployed may take up employment for undeclared jobs as additional capital stimulus.

• High taxes may create a disincentive to work for some businesses who have to work harder as more of their profit may become taxed. This could make the UK a less attractive market for wealthy consumers and businesses.

Ch.15

The Environment• Environmental policies are used by governments in order to control

environmental damage and reduce the increasing levels of climate change. Some methods used include:

1. Regulation to fix levels of output2. Extending property rights3. Entering into international treaties4. Issuing pollution permits5. Subsidies to encourage green technologies6. Taxes on emissions7. Legislation to enforce modified behaviour• Extending property rights mean giving people more control over

their assets.

Ch.16

Business Implications

• The pattern of demand for goods and services are always changing. Growing demand for some goods usually means reduced spending on others. Changing tastes and preferences, income and new technologies can impact prices as well as new product development.

• Innovation will have a competitive advantage when governments may intervene in markets as companies can adapt their products in profitable ways.

Ch.17


• Some businesses can adapt to market change and enable them to take regulation and government intervention swiftly into their operation. These businesses would be market orientated, making research and innovation a high priority. Their adaptability is a key element that allows them to maintain competitiveness in world markets.

• Some businesses may lobby governments, leading to a less healthy aspect of government intervention. Regulatory capture may become a problem therefore regulators must hire staff that are knowledgeable to the market.

Ch.17


• Increase in trade associated with Globalisation as bought significant benefits.

• Trade increases the potential size of the market for businesses that can export, making innovation worthwhile as costs of research can be spread over a wider market. This will open up more trade opportunities and to reap economies of scale that can increase competitiveness.

• Environmental regulations are aimed at reducing the damage to the environment and saving resources. Their increased costs can make businesses lose their international competitiveness.

Ch.17


• Influencing behaviour by using incentives or legal controls can discourage activities that have high social costs. This may lead to resources being used to evade controls.

• Redistributing income through tax systems reduces inequality. Intervention may discourage investment into the UK, such as through higher corporation taxes.

• Supply side policies can be used to provide training for unemployed people.

• Demand side policies may stimulate spending and economic activity in a recession, however it must not increase aggregate demand with the worry of inflation.

Ch.17


• Competition law can be used to ensure businesses are stimulated by the need to deliver goods that are good value for money. However they must use their profits to innovate new ideas, which could improve standards of living.

• Employment and consumer protection laws ensure businesses treat employees and consumers fairly. It can lead to improved standards of living, however it may reduce the incentive to recruit as, for example, a risk of injury could be very expensive.

Ch.17