Microeconomics

Microeconomics

1. Government Intervention

   • Subsidies
     • Supply curve shifts to the right
       • Costs the government more money
         • Can cause an increase in tax
         • Can cause a reallocation of funds
           • Will cause an opportunity cost of reducing those services
   • Price Ceiling
     • Reduces prices so things are more affordable for low income groups
       • Leads to an excess of demand
         • Can create a black market
           • Costs the government more money to set regulations
   • Price Floor
     • Especially on Demerit Goods
       • Leads to an excess of supply
         • Except on goods which demand is inelastic
   • Taxation
     • On Demand
       • Indirect Tax on goods
         • Decrease demand
     • On Supply
       • Cause a shift to the left on the supply curve
         • Increasing Price
   • Buffer Stock Schemes
     • Governments buy up excess supply of agricultural goods and sell it when supply is low
     • Agricultural Goods
       • Volatile Supply
         • Depends on factors such as weather
         • Causes fluctuations in prices
     • Advantages
       • Maintains farmers income
       • Consumers are able to afford goods
     • Disadvantages
       • Expensive
       • Requires significant amount of start up capital
       • Cost of storage

2. Merit & Demerit Goods

   • Merit
     • Under-consumed in a free market
       • Lack of information, people don't know the benefits
   • Demerit
     • Over-consumed in a free market
       • People are unaware of the lack of benefits the receive from consumption
         • E.g. Smoking & Alcohol
     • Negative Externalities
       • When demerit goods are consumed they have a negative effect on a third party
         • E.g. drinking to much alcohol and harm property of an innocent third party
       • Production
         • Social costs exceed private cost