Explain the following cost of high government debt levels: Crowding Out and Slower Growth
-If the government borrows money, these funds aren’t available to private investors.
-If the government doesn’t use the money as well as the private sector would have, then this will slow economic growth.
What is the PED value range for price Inelastic Products?
-1 to 0
When a good has more than one use, so an increase in demand for one good that uses it decreases the supply of other goods that use it.
Marshall-Lerner: Explain how a depreciation in a country's currency could lead to an WORSENING in its Balance of Payments.
→ A weaker currency makes exports cheap and imports expensive.
→ When our imports and exports are INELASTIC, the volume of goods bought/sold changes less than proportionally to the change in price.
→ We keep buying our imports, which are more expensive.
→ We sell the same number of exports, but now get less money for them.
→ Less export revenue and greater spending on imports = Worsening Balance of Payments.
Explain with a diagram how PED will affect the effectiveness of tax in correcting market failure.
Tax on a product will shift Supply UP.
When demand is inelastic, this does not change the quantity significantly.
Consumers pay a high proportion of the new tax revenue (blue area).
If the good is primarily consumed by low-income groups, the tax will be regressive.
What will cause an Extension in the Supply curve?
An increase in price
Draw a demand curve showing consumer surplus at P1Q1
Price levels are falling; inflation is negative.
Evaluation of Perfect Competition:
What are the advantages of this market structure?
Consumers:
→ Low prices (Allocative Efficiency)
→ Lots of choice between firms
→ Perfect knowledge
The Economy:
→ Low unemployment (Productively Efficient in LR)
→ Low inflation (because of low prices)
Where (on a graph) will a firm be Productively Efficient?
PE where AC is minimised
This occurs where MC = AC
Point E on the graph:
