Government activity and business - quick check on knowledge

1. Identify one government objective. (1) 

Any one from: 

Sustainable economic growth; full employment; price stability; stable balance of payments. Accept appropriate alternatives. 

2. Explain how economic growth is measured. (3) 

GDP (gross domestic product): A measure of the value of all goods and services produced within a country over a period of time. 

Award 1 mark for GDP; award 2–3 marks for an explanation of GDP. 

3. Identify and explain the main stages of the business cycle. (4) 

Growth; boom; recession; slump. 

Award 1 mark per correct stage (accept variations in terms). 

4. Identify and explain two strategies a business might use to survive a recession. (4) 

Strong brand; develop essential products; reduce products’ price elasticity of demand; open overseas branches; introduce lead production; ensure continual cost-efficiency. 

Award 1 mark per correctly identified strategy (1–2) and 2–3 marks for a suitable explanation. 

5. Explain the difference between direct and indirect taxes. (2) 

Direct taxes are those charged on income (individual or company profit). Indirect taxes are applied to the purchase of goods. 

Award 1 mark per correct explanation (max 2 marks). 

6. Explain how interest rates affect business profits. (2) 

Higher interest rates will increase the debt burden (for geared firms) and reduce profits. Lower interest rates will reduce the debt burden and increase profits. Interest rates also affect consumer spending and thus affect business profits: higher interest rates may increase saving and increase the debt burden on consumers, thus reducing their spending; lower interest rates reduce the debt burden and increase disposable income (discouraging saving). 

Award 1–2 marks for a suitable explanation. It is possible to award 2 marks if only one impact is discussed fully. 

Total: 16 marks 

Government activity and business

Make sure you know this vocabulary:

Balance of payments

Bankruptcy

Boom

Business cycle

Bust

Central bank

Corporation tax

Direct taxes

Disposable income

Downturn

Economic growth

Employment

Export

Fringe/non f financial benefits

Gearing

Government spending

Gross domestic product (GDP)

Import

Income tax

Inflation

Interest rate

Price elastic

Price inelastic

Price stability

Productivity

Recession

Recovery

Slump

Spending power

Taxation

Value added tax (VAT) 

Flashcards on government activity and business

Click here

Impact of Business Activity on Society

Unit 6 external influences on business activity ppt from Irshad Tunio

How government control over the economy affects business activity

·                     Government economic objectives

- Positive balance of payments: When the value of exports is greater than the value of imports (balance of payments surplus) More exports means more money coming into the country and less imports means less money flowing out of the country, which means the country earns more money.

- Low unemployment: This ensures that people contribute to the total output of the country to improve economic growth, to provide a better standard of living, to decrease money being spent on unemployment benefits and higher level of employment means more taxes are received.

- Low inflation: People can enjoy a better standard of living because they are able to afford goods and services, it becomes easier for companies to set up new ventures and expand. If inflation increases then people may not be able to afford local goods and they may buy foreign goods which may be cheaper, and this affects local businesses in the country as they have fewer sales

- Economic growth: GDP (gross domestic product) shows whether a country's economy is growing. GDP increase means that more goods and services have been produced than the year before which increases the standard of living and increases business opportunities

·                     Main stages of the business cycle; growth, boom, recession, slump

Growth: This is when the economy recovers or grows

- Positive outlook for businesses

- Existing businesses grow and make profit 

- Increases GDP

- Falling unemployment

- Raises standard of living

Boom: This is the peak of the business cycle

- Business investments and profits are at their higher levels

- Most sectors of the economy are performing at their best

- High levels of demand for good and services which causes inflation

- Very low unemployment rates

Recession: This is when the economy shrinks in size

- Business confidence falls leading less investment in new and existing businesses

- Decline in economic activity until it reaches a minimum (slump)

- Falling demand by consumers lead to decrease in profits

- Unemployment rises because businesses have to cut costs

Slump: This is when the recession stage of the economy is at its worst

- Very low business confidence with very little investment

- Low production of goods and services

- Low demand for goods and services

- High unemployment 

·                     How changes in taxes and government can affect business activity

Direct tax: The tax charged on personal income or tax on the profit made by a business

Indirect tax: The tax charged on the price of goods and services, which is added to the price of goods and services before being bought

Disposable income: The amount of income left for individuals after taxes have been paid

Tax rates are charged to achieve economic objectives, high tax rates means that there is less disposable income for the business and this may affect the business negatively, which may make them protest. They may also decrease shareholder's dividends or decrease production because they don't have enough money. It may also cause them to relocate their operations in a foreign country with a lower tax rate. 

·                     How changes in interest rates can affect business activity

How businesses might respond to these changes

High interest rates means that the cost of borrowing is more expensive and interest costs are high, which may cause businesses to delay or cancel their plans to expand as the cost of borrowing money is high

A level Economics Revision Resources

Economics A-Level Revision Notes

• Microeconomics & Macroeconomics revision notes
• Markets In Action
• Competitive Markets
• Theories of Market Structure and Competitive Behaviour in Markets
• Labour Demand, Supply, and Wage Determination
• Market Failure and the Role of the Government and Unions in the Labour Market
• Macroeconomics - revision notes by Judah Chandra
• Model Essays and more by Kevin Longe 

Best Revision Websites

• Study notes for AS Micro, AS Macro, A2 Micro, A2 Macro, A2 Development Econ from tutor2u.net
• Various resources from tutor2u.net
• Notes, summary sheets and more from physicsandmathstutor.com
• Various resources from s-cool.co.uk
• ‘A level economics revision’ Google search

Discussion Forums

• Economics exams tsr forums
• A-level Economics tsr forums and resources

Exam Specification(s)

Select your exam board to find your exam specification.

Past Papers and Solutions

• Papers and mark schemes from physicsandmathstutor.com

Revision Books and Guides

• Amazon’s A level Economics Range
• CGP’s A level Economics Range

Guidelines for the Tradable permits question

Knowledge 4, Application 4, Analysis 8, Evaluation 9 

 Definition of external costs. 

 Identification of external costs likely in the energy market. 

 Explain the reason for government intervention, e.g. overconsumption and the need to reduce it. 

 Diagram identifying external costs and the need to reduce it – linking to overproduction/deadweight loss: 

– Indirect taxation – ad valorem and specific – costs rise for firm – reducing supply and quantity/may used funds to compensate third party/increases incentive to move to production of energy with lower external costs. But if demand inelastic just passed on to consumer/little impact on consumer/measurement problem to decide size of tax/may not be reinvested/used to compensate third parties/ avoidance/evasion 

– Tradable pollution permits – how it works/incentive to reduce pollution to be able to sell them/those that do rewarded/ those that don’t have added costs/ But only works if right quantity sold/some may not bother if surplus permits/costs to administer/monitor 

– Extension of property rights – third party can seek compensation. But only those that can afford to pursue will/no guarantee that you can prove they are the guilty party/energy companies large have expensive and powerful lawyers 

– Regulation – banning or setting limits on energy production. But expensive to police/measurement problem – what limits to set. 

 Diagrams may be rewarded where appropriate. NB 

For a Level 4 response, candidates must consider two methods in their answer.

Revision - demand/supply-side policies/fiscal policy

3.4 Demand And Supply Side Policies from Andrew McCarthy

Fiscal and supply side policy from boxonomics

Structural problems UK Economy

Low business investment - capital spending as a share of GDP has fallen from around 20% in 2007 to less than 15% today. The government has a national infrastructure plan but the time lags involved in getting major projects up and running are long. The commercial banking system remains reluctant to finance the expansion plans of many small and medium-sized businesses. Low investment is a factor behind the next structural problem. Research and development remains persistently below 2% of GDP. Click here for revision notes on this topic

Weak productivity growth - output per person employed has slumped in the UK and remains well below what would might have been expected more than five years into the recovery. There are many competing explanations for low productivity growth in the UK (referred to in some articles as the "UK productivity puzzle") click here for revision notes on this topic

Structural unemployment - there has been a welcome and sustained fall in UK unemployment (currently 5.7% of the labour force), but deep-seated structural problems remain. More than 30% of those unemployed have been out of work for at least a year. Youth unemployment remains high and there are wide variations in regional unemployment / job opportunities across the regions of Britain. Click here for revision notes on this topic

Structural decline in manufacturing - George Osborne wanted the present recovery to be a "march of the makers" but the evidence points to a weak rebound in manufacturing production, investment and jobs despite some notable successes such as car assembly in the UK. Britain continues to be heavily reliant on financial services. Click here for revision notes on this topic

Structural trade deficit - the UK ran one of the largest current account deficits on record last year - the gap was more than 5% of GDP in 2014. Export growth in the recovery has been disappointing despite the UK enjoying a more competitive exchange rate. Click here for revision notes on this topic

Structural fiscal deficit - the Coalition government has found it difficult to cut the size of the cyclically-adjusted budget deficit which remains above 5% of GDP. Weaker than expected tax revenues are a key part of the explanation, but a high budget deficit means that the national debt continues to rise in absolute terms and also as a share of GDP. Click here for revision notes on this topic

Structural lack of competition in many markets - monopoly power in utilities such as electricity and gas has remained a topical economic and political issue. Fuel bills have been slow to declined despite the collapse int the world price of oil. A lack of real competition keeps prices high and affects the real incomes of millions of consumers, especially those on tight budgets. Click here for revision notes on this topic

Structural inequality - one of the most important issues facing the UK at the moment. Real wages have been declining for a huge number of people; the real interest rates for pensioners reliant in savings have been negative. Executive pay continues to outpace the growth of average earnings by a huge amount. Click here for revision notes on this topic

Structural problems in the housing market - the chronic under-supply of housing to buy and to rent is a major barrier to labour mobility. Why is the British economy unwilling/unable to make decisive progress in improving and expanding the housing stock? Click here for revision notes on this topic

Structural under-funding of public services - economic, social and demographic pressures continue to mount on public services such as the NHS. Some economists argue that the NHS needs a major injection of extra funding over the next 5-10 years; others believe that there are many £ billions of savings still to be achieved by addressing inefficiencies in public health care. Click here for revision notes on this topic

Source: tutor2u

Why might supply curve shift?

• 1.Changes in the costs of production

• Lower costs of production mean that a business can supply more at each price. For example a magazine publisher might see a reduction in the cost of its imported paper and inks. These cost savings can then be passed through the supply chain to wholesalers and retailers and may result in lower market prices for consumers.

• If the costs of production increase, for example following a rise in the price of raw materials or a firm having to pay higher wages to its workers, then businesses cannot supply as much at the same price and this will cause an inward shift of the supply curve.

• A fall in the exchange rate causes an increase in the prices of imported components and raw materials and will lead to a decrease in supply. For example if the pounds falls 10% against the Euro, it becomes more expensive for British car manufacturers to import their rubber and glass from Western European suppliers, and higher prices for paints imported from Eastern Europe.

• 2.Changes in technology

• Production technologies can change quickly and in industries where change is rapid we see increases in supply and lower prices for the consumer.

• 3.Government taxes and subsidies and regulations

• Indirect taxes cause an increase in production costs - an inward shift of supply

• Subsidies bring about a fall in supply costs – an outward shift of supply

• Regulations increase production costs – an inward shift of supply

• 4.Changes in climate in agricultural industries

• For commodities such as coffee, oranges and wheat, the effect of climatic conditions can exert a great influence on market supply.
• Favourable weather will produce a bumper harvest and will increase supply. (An outward shift)
• Unfavourable weather conditions including the effects of drought will lead to a poorer harvest, lower yields and therefore a decrease in supply (inward shift)
• Because commodities are often used as ingredients in the production of other products, a change in the supply of one can affect the supply and price of another product. Higher coffee prices for example can lead to an increase in the price of coffee-flavoured cakes.

• 5.Change in the prices of a substitute in production

• A substitute in production is a product that could have been supplied using the same resources. If cocoa prices rise for example this may cause some farmers to switch from other crops and invest money in establishing new cocoa plantations.

• 6.The number of producers in the market and their objectives

• The number of sellers in an industry affects market supply

• When new businesses enter a market, supply increases causing downward pressure on price. If the existing businesses decide to move away from maximising their profits towards seeking a higher share of the market, then total supply available at each price will increase – the market supply curve will shift outwards.

Revision....

Price of tea rises. Show the effect on the coffee market

The price of mobile phones rises. Show the effect on the network market

The government puts a tax on alcohol. Show how much the consumer and producer pay

The government puts a tax on sugar. Show the effect on the sweetener market

The government subsidises the production of vitamins. Show the effect on the vitamin market

The government puts VAT on takeaway food. Show  much the consumer pays

The government puts a tax on milk. Show the effect on the coffee market

Butter is linked to heart disease. Show the effect on the market for margarine

Theme 2 revision questions

Essential Revision Questions for Theme 2

1.    Large firms gain a competitive advantage over smaller rivals so they can…….

2.    Define economies of scale

3.    Internal economies are where….?

4.    Explain technical economies of scale

5.    Explain marketing economies of scale

6.    Explain managerial economies of scale

7.    Explain two more economies of scale….

8.    Define and explain external economies of scale

9.    Explain minimum efficient scale

10. What is a) a monopsony b) a monopoly

11. Why is brand recognition so important?

12. Draw a diagram to show diseconomies of scale and give examples

13. Define corporate culture

14. Define organic growth

15. List six ways a business may grow

16. Complete:

Type	Organic	Inorganic
Advantages
Disadvantages

17. What is ‘conglomerate integration’?

18. Define ‘competitive advantage ‘and explain how R&D may give you a competitive advantage

19. What is the importance of risk spreading economies?

20. What are the incentives to increase market power?

21. What is the difference between ‘product innovation’ and ‘process innovation’?

22. What is the role of Innovate UK?

23. What extension strategies are there for the product life cycle?

24. How does asymmetric information arise and what is the significance of this?

25. What is ‘viral marketing’?

26. What are the advantages of online retailing compared to High Street stores? (Make sure you read: http://bit.do/Jessbringscake)

27. What is ‘viral marketing’?

28. What is micro marketing?

29. Explain ‘creative destruction’

30. Draw and explain ‘the Long Tail’

31. What advantages do small firms offer? (make sure you read: http://bit.do/Jessbringscake1)

32. Small firms may differentiate over a) USP b) flexibility c) customer service d) niche markets e) relationships – make sure you can expand on each point

33. What is the relevance of ‘ceteris paribus’ to PED, YED etc?

34. What factors influence PED?

35. How is PED important for a business?

36. List and explain six types of pricing

37. What factors influence the most appropriate pricing strategy?

38. Demand is price inelastic – would you gain by raising price?

39. How may price change to reflect social trends?

40. Non-price competition is using the marketing mix – what is in the marketing mix?

41. What are the advantages of online distribution to a) customers and b) businesses?

42. What factors affect the degree of income elasticity?

43. How income elasticity of is demand important to a business – and are there limitations to its use?

44. Define ’recession’

45. Define productivity

46. List six factors influencing productivity?

47. How does productivity affect competitiveness? (Make sure you read: http://bit.do/Jessbringscake2)

48. How does productivity affect economic growth?

49. Define ‘human capital’?

50. Define ‘investment’

51. Define a) capital intensive and b) labour intensive production

52. Much capital is purpose designed – what is the problem with that?

53. What is the formula for capacity utilisation?

54. State and explain two different ways of meeting quality standards

55. Define cell production

56. What is the difference between quality control and quality assurance?

57. Explain the usefulness of Kaizen

58. What are the disadvantages to JIT?

59. Why are lead times important to lean production?

60. What is the relevance of market research to competitive advantage?

61. How have open economies affected globalisation?

62. Why does structural change come with globalisation? (Make sure you watch the videos at: http://bit.do/Jessbringscake3 )

63. What is the attraction of the UK to FDI?

64. What made globalisation possible?

65. What is ‘trade liberalisation’?

66. What are ‘international capital flows’?

67. How do developments in transport and communication cut the costs of international trade/

68. What is a MNC?

69. Define a) developed economies  b) developing economies  c) em3erging economies

70. Why is GDP not a very satisfactory indicator of growth?

71. What does HDI measure and what does it NOT tell us?

72. What is the difference between mean and median incomes?

73. Define and explain absolute advantage?

74. Define and explain comparative advantage?

75. Explain ‘common markets’?

76. What is the connection between international trade and economic growth?

77. In the context of trade, what are ‘invisibles’?

78. What is a ‘floating exchange rate’?

79. If sterling rises, who loses?

80. If sterling falls, who loses?

81. How might a fall in the exchange rate cause inflation?

82. What are the stages of th4e economic cycle?

83. What are ‘animal spirits’?

84. Complete the table:

	Boom	Downturn	Recession	Recovery
Employment
Skills shortages
Inflation
Confidence
Investment

85. Explain the terms ‘leading and lagging indicators’

86. How MAY a recession affect a firm? (It depends…..)

87. What are the leakages in the circular flow of income?

88. What are the injections in the circular flow of income?

89. The formula for AD =…..?What are capital goods?

90. What is the ‘balance of trade’?

91. Now watch this: http://bit.do/Jesshaseatenallthecake1

92. What is a) inflation b) deflation c) reflation?

93. What are a) index numbers and b) weights?

94. What is the difference between real and nominal values?

95. Watch this and make notes: http://bit.do/Jesshaseatenallthecake1

96. How might inflation affect a firm?

97. What is a wage-price spiral?

98. How might inflation affect and individual?

99. How is unemployment measured?

100.               What causes structural unemployment?

101.               What is technological unemployment?

102.               What are two types of labour immobility and how may the government reduce each?

103.               What are the main causes of unemployment/

104.               Watch this and then be able to explain what can cause unemployment: http://bit.do/Jesshaseatenallthecake1

105.               How might unemployment affect a firm?

106.               How might unemployment affect and individual?

107.               What are the four main macroeconomic objectives?

108.               Watch this and then be able to explain how to reduce demand pull inflation: http://bit.do/Jesshaseatenallthecake1

109.               Why is zero inflation NOT the target?

110.               What is on the current account?

111.               What is an external deficit?

112.               Watch this and be able to explain how a falling pound may cause inflation: http://bit.do/Jesshaseatenallthecake1

113.               When does a current account occur?

114.               Watch this and be able to use it to show the impact of a current account deficit; http://bit.do/Jesshaseatenallthecake1

115.               What is a) real income b) disposable income?

116.               Explain expansionary fiscal policy

117.               What is the difference between a) direct and b) indirect taxes

118.               Define ‘national debt’

119.               What is a contractionary policy?

120.               What are austerity policies?

121.               Using this: http://bit.do/Jesshaseatenallthecake1 explain the possible effect of austerity policies on the economy

122.               What decisions are taken by the Monetary Policy Committee?

123.               Using this: http://bit.do/Jesshaseatenallthecake1 explain the impact of a rise in interest rates on the economy

124.               List seven supply side policies?

125.               Using this: http://bit.do/Jesshaseatenallthecake1 explain the effect of supply side policies on the economy

126.               What do the CMA do? (Read: http://bit.do/jessisillaftereatingcake)

127.               Explain the main macroeconomic policy conflicts. (Also watch here: http://bit.do/Jessnoweatsfruit1)

128.               Explain the significance of ‘short termism’

129.               What is ‘sustainable growth’?

130.               What are a) free market policies and b) interventionist policies?

131.               The government may intervene using subsidies. Arguments for/against?

132.               The government may intervene using taxes to reduce market failure.   Advantages/disadvantages/

133.               The government may intervene by banning the product – problems?

134.               The government may intervene for macroeconomic aims – using this: http://bit.do/Jesshasgoneback2cake explain how the government may intervene to reduce inflation, or stimulate growth.

135.               Is inflation a problem|?

136.               If PED = -0.6 what does that tell us about revenue if we raise our prices?

137.               What are quality circles?

138.               What is the significance of elasticity if we follow a penetration pricing policy?