economics revision notes

7/29/2019 Economics revision notes

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1. The Basic Economic Problem.

Scarce resources infinite wantsConsumers have to make choices. This is as true for big firms and Governments as it is forindividuals. When we choose something, we sacrifice something else; the thing we give up isthe opportunity cost- the next best alternative foregone. All the time we are trying to

maximise ourutility orsatisfaction. Often we are operating at the margin; when we feel wemight not be maximising our satisfaction we dont give up all spending on cinema visits orallspending on going swimming; instead we change the last couple of cinema visits or visits to thepool.

Wants and needsWe draw a distinction between wants and needs;- in economics needs are things that wecannot do without; food, clothing, water, shelter. Wants are things that we would like; aplaystation or a new CD.The first solution to satisfying wants and needs was barter, this meant that one person whowanted a chicken might barter a chicken for a pot that they owned. The problem with barter is

that it requires a double coincidence of wants- you have got to have what the other personwants, and vice- versa.

MoneySeveral thousand years ago the barter process began to be replaced by money. The key withmoney is that when people accept it, in exchange for something valuable, then they know thatthe money will be able to be used at some time in the future to obtain something else of value.

Money has four functions:1) It is a means of exchange,2) It is a store of value,3) It is a measure of value,4) It is a means of deferred payment.

Money must also have a number of characteristics:1) It must be in limited supply,2) It must be divisible,3) it must be portable,4) It must be durable,5) It must be homogenous,6) It must be generally acceptable.

Specialisation and the division of labourIn ancient societies, and through to the present day people have found that productivity isincreased by the division of labour. This means that some people do some tasks while otherpeople do others. Division of labour was relatively disorganised until the industrial revolution, atthat time manufactures realised that by breaking down the production process into specialisedtasks workers could develop expertise in carrying out a very small range of tasks and soproductivity overall would improve. For example if a textile manufacturer employed 30 workersto produce woollen cloth, he would find that it was more productive to give them specialisedtasks, carding, spinning, and weaving rather than allowing each worker to carry through the

whole process. This coupled with mechanisation vastly increased output.

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Income And WealthIncome and wealth shouldnt be confused. Income is a flow of earnings, wealth is a store ofvalue. The levels, and the distribution of income in a country determines the types of goodsthat will be produced and sold in that country. People on low incomes tend to spend their moneyon necessities such as food and housing, sometimes we can describe basic foodstuffs, cheaperclothing, public transport and so on as inferior goods. As incomes rise so consumption patterschange consumers will tend to move away from inferior goods and necessities towards normal

goods and luxuries.

Wealth. The distribution of wealth in the UK is important. Wealth is unequally distributed in theUK, so that the top 1% owns 18% of the wealth, the top 10% owns 50% of the wealth andthe top 50% owns 92% of the wealth. This is significant when it comes to issues likepoverty and redistribution.

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2. Demand, Supply, the Market and Elasticity.

Demand.The demand curve slopes down left to right reflecting the factthat as prices fall more is demanded.

Movement along the Demand Curve.Demand extends down the D curve orcontracts up the Dcurve as prices change.Factors affecting demand. Most important is the price.Other factors include

1. Size of population,2. income,3. price of other goods,4. advertising,5. tastes and preferences,

6. fashion.

Shifting the Demand Curve.The demand curve shifts when there is some change inconsumers attitudes, or desires. This could be due tochanges in consumer incomes, population changes, healthissues, fashion, technological change, advertising orwhatever.

Do these Examples:1. The interest rate has gone down, and this has made it

much cheaper to borrow in order to buy a house. Drawa graph to show what might happen to demand in thehousing market.

2. Pokemon products are a craze that appears to be becoming less popular.3. Rises in income have affected the demand for both foreign, and domestic holidays. Draw 2

graphs and write a brief explanation of each.

Supply.This is the amount that producers are willing to bring to the market at various prices. If we showthis on a graph we can see that generally, The supplycurve slopes up left to right reflecting the fact that asprices rise more is supplied. Movement along theSupply Curve. Supply extends down the S curve Orcontracts up the S curve as prices change.

Shifting the Supply CurveFactors that can shift supply include:

1. The cost of raw materials2. The cost of labour3. The interest rate4. changes in taxes and subsidies,

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5. technological change,6. weather conditions7. the time period over which the changes take place.

TheMarket Price.In Economics we say that the Market Price is

determined by the forces of Supply and Demand.Price is at equilibrium, when the same amount isoffered for sale as is being demanded.This is called various things including MarketEquilibrium, and the Market Clearing Price.

Equilibrium is the price that is agreed when buyers andsellers come together. Prices can change as attitudes ofbuyers or sellers change.Look at the list below and try to work out using graphswhy the market price has changed.

1. Over the last 10 years the average UK house price has risen from 98000 to 184000.2. In the last few months the price of oil has risen from around $70 a barrel to $95 a barrel.3. Recently Ford have decided to reduce their world supply of cars by 15%4. Over the early 1990s, prices of Beef fell in the UK by up to 50%. More recently prices have

risen back to early 1990s levels.

We see excess demand or shortage when the price isbelow that which the market will pay.Conversely there is a surplus or glut when the price isabove that which the market will pay.

Price Elasticity of DemandPrice Elasticity of Demand, sometimes called PED, refers to the responsiveness ofdemand tochanges in price.

PED = %age change in Quantity Demanded

%age change in Price

Price elasticity of demand tells us what will happen to totalconsumption as the result of a price change. If demand is priceelastic then a price change will prompt a bigger thanproportionate change in demand. If demand is inelasticthen a price change will prompt a smaller thanproportionate change in demand.

This is illustrated on the graph. Price has fallen from P toP2. On the inelastic curve this has led to a small increasein demand, and overall spending on the product has fallen.By contrast the price reduction has led to a big increase in

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demand for the product with an elastic demand curve, and therefore spending on this producthas risen.

By contrast a price rise has the reverse effect on total spending on elastic and inelasticproducts- cutting spending on those with a high PED and increasing it on those with a low PED.

PED is generally represented graphically showing curves that are steeply sloped to

indicate inelastic PED, and gently sloped to indicate an elastic PED.

Calculate the following:1. A 10% increase in price leading to a 25% decrease in consumption.2. A 22% decrease in price leading to a 14% change in consumption.3. A 30% decrease in price leading to a 44% increase in consumption.4. A price fall from 10p to 5p leading to an increase in consumption from 25 000 units to 35 000

units5. A price rise from 18p to 24p leading to a decrease in consumption from 55 to 24 units6. A price rise from 10.60 to 11.40 leading to a decrease in demand from 5 000 to 4 500

units

7. A price fall from $8.60 to $6.70 leading to an increase in consumption from 1.2m to 1.5munits

8. A price increase of 33% and a cut in demand of 5%.

Income Elasticity of DemandIncome Elasticity of Demand measures responsiveness ofdemand to changes in income.

YED = %age change in Quantity Demanded

%age change in Income

Normal and Inferior goods respond differently to changes inIncome. When income rises demand for normal goods shiftsto the right but demand for inferior goods shifts to the left whenincome rises. Eg, as incomes rise demand for cars (normal)increases but demand for public transport (inferior) goes down.

In economics we use the term normal good to refer to anygood that sees an increase in demand when incomes rise- it

could be something like cars or ipods, or it could be somethinglike luxury watches or jewellery.

Cross Elasticity of DemandCross Elasticity of Demand is sometimes expressed as XED. It measures the changingdemand for one good as a result of the changing price of another. There are 2 important kindsof good here;- substitutes and complements. If a fall in price for one good prompts a big fall indemand for another then the goods can be said to be close substitutes, (a positive

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relationship). On the other hand if a fall in the price of a good prompts a rise in the demand foranother good then they can be said to be complements (a negative relationship).

XED = %age change in Quantity Demanded of A

%age change in Price of B

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3. The Labour Market.Labouris a derived demand- we want labour not because it looks pretty but because it carriesout work. When we talk about the demand for labourthere are a number of terms to be awareof: the population of working age is all those people between the school leaving age andretirement age in the UK who are theoretically available for work. The working population isthose who are working and actively seeking work, and the workforce in employment is thosewho are actually working. There are a number of factors that help to explain what determineswage differentials:1. Qualifications, skills, abilities, experience- the more of these you have, the fewer of you

there are in supply. The higher the wages.2. The financial value of what you do- a share trader working at a stockbrokers will probably

add more to the value of the firms earnings than a cleaner at the same firm. They are likelyto be rewarded accordingly.

3. Marginal revenue product this idea suggests that as the number of workers employedrises so additional output from each new worker falls. Firms will employ workers up to thepoint where the last person adds the same to revenue as he or she costs in wages.

4. Difficult or dangerous work.

5. Labour versus capital- another view is that labour is in competition with capital, if wagesrise too much it might encourage employers to use more capital which has now becomecheaper.

6. Trade Union power- train drivers might be able to push up wages because there arerelatively few of them and it is a skilled and responsible job. It is also true to say that theyhave a strong union and they are a fairly vital group of workers.

The minimum wage is currently 4.10 per hour for workers over 22 and 3.50 per hour for 18-21 year olds.Draw a graph to show, and explain what will happen to a group of low paid workers if the newminimum wage increases their earnings from 3.80 to 4.10

Trades UnionsTrades Unions exist to protect the rights of their members. In a trade union workers havebanded together to improve their bargaining power with employers. We talk about Unionsengaging in collective bargaining with management over pay and conditions. What thismeans is that one representative of the workers meets employers to resolve disputes onworking time, wages breaks, unfair dismissals and so on. There are 4 types of Union;- craft,industrial, general and professional association.It has been argued by some that over- powerful unions have damaged the UK economy.The argument goes that Unions have forced wages too high making British goods

uncompetitive, they have forced employers to take on too many workers, or keep them on whencircumstances change causing unnecessary costs, they have forced employers to acceptunrealistic conditions for workers and they have been too quick to strike.

Trade Union membership was at its highest in 1979 when there were 13 million members or1 in 2 workers. By 1997 that had dropped to seven and a half million workers or around1/3 of all workers. Today in 2007 there are about six and a half million trade unionists.The decline was due to a number of factors including the stricter laws imposed by MrsThatchers Government on Unions, she agreed with the anti- union views set out above. HerGovernment made changes that made it more difficult to set up closed shops, or vote for astrike or take industrial action including striking. It was also true to say that the trade union

mark- up went down over the period making it less financially attractive to be a member. Unionsare less powerful today than 25 years ago.

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4. Businesses in the Economy.The Aims of Firms. Firms can have a number of different aims. These five aims are common tomost commercial organisations:-

1. to survive,2. to increase market share,3. to improve the quality of their products,4. to satisfy shareholders management, and staff,5. but the main aim of most firms is to maximise profits.

In economics we often assume that profit maximisation is the only aim.In order to calculate profitability, a firm must be able to calculate costs and revenues.Profit = Total revenue - Total costTotal revenue =Total cost = Fixed cost + variable cost

Fixed and Variable Costs.As the names suggest, fixed costs are constant and dont change as output changes. Oftenthese will include costs like: rent, repayment of bank loans, and basic wage bill. Variable costswill include things like: raw materials and components, overtime, fuel costs, and any other coststhat can be directly tied to a certain amount of production. The important thing is that as outputchanges so does variable cost.

A typical taxi firm might have the following weekly costs:

Fixed CostsRent of offices 300

Bank loan repayment 500Staff wages 950

Variable CostsFuel 10p per mileVehicle maintenance 30p per mileDriver overtime 5.00 per hour

We can also talk about things like energy costs that are semi- variable In that they dont changeprecisely with output.

Total, Average and Marginal Costs.The total cost of production (TC) is all of the costs involved in a given level of output. Theaverage cost of production (AC) is total cost divided by output, and is given by the equationTC/Q. The marginal cost of production is the change in total costs caused by producing onemore unit of output. It is given by the seemingly complicated equation:

MC= TCn -TCn-1

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Long run costs: Economies of Scale.Large firms have advantages in production oversmall firms. They can produce a unit of a goodmore cheaply than their smaller competitors. Thusthe average cost per unit is lower.

This is shown on the diagram. As output

increases (Q) so Cost per unit (C) falls. At somepoint the firm will not be able to achieve anymore economies of scale. We call that the pointof productive efficiency.

Internal economies are economies that the firm generates within itself. Examples include; aspecialised skilled workforce and specialised managers, bulk buying, discounts on loans, loweraverage transport costs because lorries and vans are always full, the principle of multiples; thatis having the right amount of capital at each stage of production, spreading advertising costsover more output, reduced interest on bigger loans.

External economies are economies which arise outside a firm because of its size;Government agencies may be prepared to pay grants to a large employer if it intends to moveto an area of high unemployment,Local Government may be prepared to make infrastructurechanges such as increasing the capacity of an airport, or widening a road to help incomingfirms, Local Colleges may run night classes in courses which will help employees at a new firm;for example Colleges in Wales ran courses in Korean and Japanese to help employees atinward investing firms.

Diseconomies of ScaleDiseconomies of Scale occur when production hasgone beyond the point of productive efficiency.For example if workers are being asked to carry outovertime and they are not as productive or wastemore resources through tiredness, or if machinesare being overworked and so break down morefrequently.

Diseconomies often occur in organisations thathave problems with internal communication- management dont know exactly what is goingon, and what are the barriers to effective performance. Workers often dont get clear signals

about what changes are required in working patterns.

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Types of Business.The main business types that concern us are:

1. Sole proprietor,2. partnership, Private Limited Company, (Ltd),3. Public Limited Company (PLC)4. Franchises5. Public Corporations (PCs).

Sole proprietorsSole proprietors are the most numerous type of business, this is because they are easy tostart, requiring little capital.

The advantages of being a sole proprietor are:1. own boss,2. easy to start up,3. keep profits,4. tax affairs kept private,5. use own name.

Disadvantages,1. unlimited liability,2. lack of continuity,3. lack of specialist skills,4. difficult to raise capital.

PartnershipsA partnership usually requires a deed of partnership, and is a natural way for a successful soleproprietor to grow.

Advantages of a partnership;1. more specialist skills,2. more capital,3. sleeping partners have limited liability.

Disadvantages;1. lack of clarity in deed leads to arguments disagreements,2. have to share profits3. responsible for debts run up by partner.

Private Limited Companies (Ltds)If a sole trader or partnership is successful then it will very likely grow. As the business grows itwill engage in bigger more lucrative contracts and the risk will also grow. A way for this sort ofbusiness to reduce risk is to become a private limited company or Ltd.

A Private Limited Company (Ltd) requires 4 documents;-1. Memorandum of Association, explaining what the business will do, and its organisation2. Articles of Association, explaining the rules of the company. These 2 documents

should be sent to the Registrar of Companies.3.

Certificate of Incorporation, This is issued by the Registrar of Companies stating thatthe company is recognised as a legal organisation. The certificateallows the businessto trade

4. Audited accounts must be lodged with Companies House once a year.

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Advantages are;1. limited liability;2. this is a good way to grow,3. A good way to raise extra capital4. continuity,5. the owners keep control because shares arent traded publicly.

Disadvantagesinclude1. lack of privacy, company information must now be made public2. disputes about the strategic development of the company.

Public Limited Companies (PLCs)A Public Limited Company (PLC) requires the same documents as the Ltd. The difference isthat shares can be traded on the stock market. PLCs tend to be the largest type of privatebusiness.

Advantages include;1. limited liability,2. specialist management and workers,3. the ability to raise capital.

Disadvantages include,1. lack of privacy- accounts must be published,2. divorce of ownership and control3. a conflict of objectives between stakeholders (workers, management, shareholders,

the community), loss of control by the original owners, increased regulation.

FranchisesAn agreement whereby one business sells to another the right to use its name, product, etc.This is a quick way to grow the business. Examples include McDonalds, The Body Shop etc.

Public Corporations (PCs)These are sometimes referred to as Nationalised industries. Nationalised Industries werecreated mainly by the Labour Governments of 1945- 51 and 1964- 70. There were a number ofreasons for the creation of Public Corporations:1) the business would fail if it wasnt taken into public ownership, eg British Rail, and RollsRoyce,

2) the business was already a monopoly, and Government wanted to defend consumersfrom the bad aspects of monopoly, eg BBC, British Airways3) the business was at risk from overseas competition and the UK Government felt that Britainneeded its own domestic industry eg steel, ship building,4) there was a socialist will to make a business a nationalised industry eg coal- mining.

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5. Competition and Monopoly- how markets work

CompetitionA Competitive market is a situation wherethere are a very large number of producers. A highlycompetitive market sees a lot of small companies competing to gain custom, all of them withproducts that are similar, or in the case of the perfectly competitive model, identical. There are 4

assumptions that we make about businesses and consumers in competition.

1. There are no/few barriers of entry or exit.

2. There are many buyers and sellers

3. The product is homogenous meaning that there are no brands or differencesbetween the goods that people consume,

4. There is perfect knowledge meaning consumers and producers know all of theoptions available to them

5. Decisions are made by consumers solely on price.

Conservatives and free- marketeers like competition, they are in favour of a competitivesolution to economic problems as they regard this as the most efficient way of solving economicproblems.

MonopolyMonopoly is when there is only one or a very few producers in the market. In the UK, acompany with 25% share of a market is usually regarded as being a monopoly. This canhappen for a number of reasons:

1. There are large economies of scale in a market (British Gas),2. A producer haspatents or copyrights on products (Microsoft),3. Government has created a legal monopoly(Royal Mail)4. A company has control of raw material supplies (De Beers and diamonds).

In other words there are significant barriers to entry to the market.

Monopoly is often regarded as bad by both free marketeers and Government because;- theycan restrict supply, they reduce consumer choice, they can drive up prices.

There are several other models of how firms work in the economy. The third is MonopolisticCompetition;- this is when there are many producers but products are differentiated bybranding and advertising.

The fourth model of how firms work in the economy is Oligopoly, sometimes calledCompetition of the few. In oligopoly firms avoid price competition orprice wars, they like toconcentrate on non- price competition like branding advertising, quality technologicaladvantages and so on. Supermarkets, car producers and oil companies are examples.

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The Competition CommissionThe Competition Commission is a government regulatory body. Its function is to investigateMonopolies and proposed Mergers in order to ascertain whether a Monopoly, or proposedMerger would is in the public interest. Broadly speaking the Commission starts from the point ofview that the control of a market by a single firm, or small group of firms will not be in the publicinterest. As a result of this it is up to firms which dominate a market need to prove thatconsumers will benefit from a merger. This could be the case, for example a producer might

need to be very large to obtain all of the economies of scale that are available.

Takeovers and MergersA takeoveris when one firm buys another, a mergeris when two firms voluntarily join together.

Horizontal and Vertical IntegrationA horizontal mergeroccurs when 2 firms at the same level of production merge to become asingle company. Eg Nestle and Rowntree.

A vertical mergeroccurs when a company in the chain of production merges with a firm that

precedes it, eg Cadburys and Cocoa growers or follows it, eg Nissan and Nissan dealers.It may well be that a merger will lead to the new single firm dominating, or obtaining adramatically increased share of a market, as with Nestle and its merger with Rowntrees in1989, orStagecoach and its purchases of a number of local Bus Companies in the early 90s.

A conglomerate mergeris when two firms in different areas of activity join together, eg a bankand a transport company.

Nationalisation and Privatisation

Nationalisation. This is the process where the Government buys or takes an industry out ofthe ownership of individuals. The 1945-51 Labour Government engaged in large scalenationalisation of many of the biggest industries in the UK. Coal, steel, rail electricity generationand gas production were all nationalised at this time. The reasons for this were:

1. Provision of essential services for all2. National defence

3. Regeneration of these industries

4. Create employment

5. Social commitment to public ownership

Privatisation. The 1980s and 1990s saw the Conservative Government seriously reduce thenumbers of Public Corporations. In the 60s and 70s the Public Corporations had often lostmoney and had to be supported by the taxpayer. The Government engaged in a series of Bigsell-offs in which firms like BT and British Gas were sold to private shareholders. Conservativesviewed the Public Corporations as inefficient, over- manned, wasteful, with powerful tradeunions imposing all sorts of restrictive practices. There was a lot of support for the idea ofopening up the PCs to competition from private companies;- taking away the monopoly powers

that often existed because the Government had created them (legal monopolies). Privatisationis a term that is used to coverderegulation of markets so that in the 80s the Government waskeen on reducing the amount of interference red- tape that affected businesses. Critics arguethat this led to things like the mis-selling of pensions in the deregulated financial services sector.

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Mrs Thatcher argued that PCs drove up price restricted choice and were far too producer-orientated.Another advantage for the Government of privatisation is revenue raising. The Conservativesregularly raised 5 billion per year in the 1980s in this way. This revenue went into publicspending, and allowed Government to keep taxes down.

Private Costs and Externalities.

In economics we talk about the private cost and externalities of any activity. Private cost iswhat it costs the individual or business to carry out an activity. The full economic cost is what itcosts the individual and the rest of society when we carry out an economic activity. Forexample, if a company chops down a forest then it will have all of the costs like labour, capital,transport and so on that are associated with that activity, all private costs. The externalities areall of the other costs, noise, congestion, pollution, the loss of an attractive amenity. These areborne by society. Clearly these are negative externalities, but there could be positiveexternalities such as training, employment, improvement of roads, and so on.

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6. Market FailureThere are two ways in which markets might fail:

1. Some goods will not be provided at all by markets2. Markets do not produce what consumers want

1. Goods which markets will not provide at all

This occurs if the good is a Public Good. A Public Good is essentially unlimited in supply. Thismeans that once it is provided for one person, it is automatically provided for everyone (nucleardefence, roads, etc), and that consumption of the good does not reduce the amount availablefor other people (Street lights). A private firm providing lighthouses will need to charge for itsservices. It cannot do so because of the Free-rider problem if the good is automaticallyprovided for everyone, then some people can consume it without paying hence no-one pays,and the firm goes bust.

2. Markets do not produce what consumers want

a. Monopolies restrict supply and raise prices. They limit consumer choice, andmisallocate resources away from consumers to the firm.

b. Externalities. See above. Markets over-produce goods with negativeexternalities, and under-produce goods with positive externalities.

c. Information problems In the 1950s cigarette firms promoted their product ashealthy, and the lack of information given to consumers meant they bought aproduct that they didnt really want!!!

Correcting market failure.

Governments can intervene into specific markets to correct these failures:

1. Taxes Congestion charge, petrol taxes, etc are there to make individual consumerspay some of the external costs of their consumption.

2. Regulation and control of monopolies3. Direct Government provision libraries, roads, lighthouses.

Government Failure

When Governments intervene in markets they can sometimes introduce the wrong policy at thewrong time in the wrong way, and actually make the market work less well than before. Eg: Inan attempt to regenerate East London the 2012 Olympic Games will be staged there, at a costof 9bn it is likely that this cost will outweigh the benefits.

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7. National Income.In a simple model of the UK economy, Households sell their labour to Firms in return forwages. In turn Firms sell goods and services toHouseholds for payment.This is illustrated in the diagram. Goods andservices flow from Firms, and consumers pay forthose goods and services.At the same time Labour is provided tobusiness, and workers are paid for that Labour.Obviously consumers and workers are veryoften the same people, and most consumption isfunded through earnings made by workers.

In a more complex model firms and individuals trade labour and products for wages andrevenue, but there are also injections into, andwithdrawals from, the economy.

Injections include sale of exports, governmentspending, and investment.

Withdrawals include savings imports, andtaxes. We say that injections speed up theeconomy and make national income grow, whilewithdrawals slow down the economy and makeit shrink. Draw the more complex model.

The National Income is the value of all goodsand services produced in the UK economy in a year.

We measure National Income using Gross Domestic Product (GDP), this is the value of allincome, or output, or expenditure over a time period, usually a year. Another measure is calledGross National Product (GNP) this includes incomes earned by British people and firms fromforeign investments, but subtracts earnings by foreign national from investments in Britain.

In 2006 National Income was about 1300 billion.

Types of Production. In economics we talk about Primary, Secondary, and Tertiaryproduction.

1. Primary is the sector that gains raw materials and includes farming, fishing, mining,extraction of ore, drilling and so on.

2. Secondary is sometimes referred to as the transformative sector. It includesmanufacturing, and takes raw materials and transforms them into finished goods.

3. Tertiary is the service sector, this is the part of the economy where products are soldand includes things like banking, retail, tourism, estate agencies and so on.

A problem for the UK economy is a long term decline in primary and secondary, while tertiarycontinues to grow. When we talk about deindustrialisation in the UK we are referring to thedecline of primary and secondary and the rise of tertiary. This could be a potential problem

because as the UK economy grows we become more and more reliant on imported goods. Thisis not a problem if imports are cheap and easily obtained but it could cause difficulties in thefuture if prices rise or supplies are interrupted. If and when this happens we are likely to seeimported inflation.

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8. Measuring Economic PerformanceAs we said earlier, Gross Domestic Product is the measure of all value of goods and servicesin the UK. The UK is one of the wealthiest economies in the world and we are fortunate that wehave amongst the highest earnings.The indicators used to measure how well a country is doing are:

1. Growth in GDP2. Rate of Unemployment3. Rate of Inflation4. Balance of Payments Current Account

The Business CycleThe Business Cycle measures therate of economic growth over time. Abusiness cycle tends to last forapproximately 10 years. It is

characterised by:

1. A period of rapid growth whenoutput and consumption rise. Thisoften then leads to inflation, whichacts as a brake on growth, and can inturn lead to recession.2. A period of decline/recessionwhen the rate of economic growthfalls. Usually unemployment risesover this period, and wages are

depressed. This can make theeconomy more competitive.

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9. The Government and the Economy.The Public Sector is that part of the Economy that is controlled by Government. There are anumber of different parts to the Public Sector: Central Government, Local Government,Public Corporations, (Nationalised Industries) Other bodies. The Public Sector provides uswith certain goods and services which at some point in the past it was felt were not beingproperly provided by the Private Sector.There are a number of reasons for the provision of goods by the Public Sector. Some goods arewhat are known as Public Goods. This means that once these goods are paid for, theneveryone benefits- for example we all benefit from the fact that Britain has an Army. We allbenefit from street- lighting, and road traffic signs. As a result it is generally agreed that they willbe provided by the state.

Another reason is that certain types of goods would not be provided, or would be underprovided by the private sector, for example Education and Health Care. In our society we haveagreed that we want to see these goods provided to a minimum level. These types of goods arecalled Merit Goods.

Left and right on Economics. In the past the debate in British politics and economics hasoften been between those on the left and in the Labour party those on the right and in theConservative party. Broadly speaking Labour supporters favoured increased direct,progressive taxes, and more public spending to increase equality; Conservativesupporters were much less concerned with equality and favoured smaller taxes,Conservatives are more concerned with the opportunities for entrepreneurs to succeed.Conservatives tend to favour the use of indirect taxes such as VAT and tend to be suspicious ofthe Governments ability to improve society with spending.Over the last 7 or 8 years this picture has changed somewhat; the Labour party is now lesskeen to spend under Tony Blair and prudent Gordon Brown. The Conservatives underDavid Cameron have begun to accept that some public services cannot be privatised.

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10. UnemploymentUnemployment is defined as the percentage of the working population, able to work andcurrently claiming benefits (registered as unemployed). We talk about 4 types ofunemployment.

1. Frictionalunemployment occurs when workers move from job to job we might expectaround 3% of all workers to be frictionally unemployed at one time so that if theunemployment figure falls below that number we can talk about over- full employmentand we risk production problems and wage inflation.

2. Structuralunemployment occurs when an industry like coal- mining or ship- building isin long term decline and workers are made unemployed, often the nature of theseindustries means that a particular area or region will be affected- regionalunemployment.

3. Seasonal unemployment occurs in sectors such as building and tourism where manymore workers are required in summer than in winter. As a consequence of this workersare likely to have short term summer contracts and are likely to have to find casual oragency work in the winter.

4. Cyclical unemployment occurs when there is an economic downturn, and recessionemployers are likely to respond by downsizing their work force.

Who suffers? There are a number of people and institutions that pay the cost ofunemployment. Firstly, the unemployed themselves. Most of the workforce want to work,and they are upset at the loss of income and status that unemployment brings. Unemploymentalso causes ill- health and other social problems such as drinking and drug taking. Those inwork suffer because the unemployed no longer contribute to tax revenue but instead are now adrain on resources, through the job seekers allowance that they are paid. The governmentloses revenue and needs to pay out more benefit, and the economy as a whole suffersbecause a scarce resource- labour is standing idle.

What causes unemployment? There are 2 views and a variety of explanations.

The Neo- classical view states that workerssometimes 'price themselves out of a job,' wagerises, trade union actions, and the minimum wagemake it impossible for employers to take on, orretain as many workers as previously.In the diagram wages have been pushed up abovethe market rate by one of these factors and causedunemployment.

Keynesians argue that the neo- classical view istoo simple. Their view is that more employmentis created if there is more spending, if in arecession there is more saving, or less borrowing to spend or a cut in government spendingthen this is much more likely to have an effect.

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Possible cures for unemploymentEconomists have identified a variety of possible cures for unemployment. These include:

Cause Cure Type of PolicyFrictional More information eg Job

Centres, more regularcontact between

unemployed and job centre

Supply Side

Seasonal Retraining, information Supply Side

Structural Retraining, Regional Policy Supply Side and DemandManagement

Voluntary Reduction in benefits, moreinformation

Supply Side

Cyclical (Keynesian) Government Spending Demand Management,Fiscal Policy, MonetaryPolicy

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11. InflationInflation is a general rise in the level of prices over

time. In other words if a tin of beans costs 30ptoday, it might cost 40p in a years time.Inflation erodes the value of money; 100today buys a lot less than it did 10 years ago.

Inflation used to be measured using the Retail PriceIndex, but for the last few years we have used theconsumer price index (CPI) This is a weightedindex that is measured by the government. It looks ata very large number of goods, and sees how theirprices have changed over a period of time. Thestatisticians then check to see how important an itemis for the average household and weight the valueaccordingly. For example, it might be that housingcosts account for 2/5 of the average household spend. If mortgage costs rise by 10% then wemultiply 10% by 2/5 to get a value of4% added to RPI. If the other prices rise by 5% then we

multiply 5% by 3/5 this gives us a value of3%. These 2 values added together give an RPI of7%.

The Causes of InflationThere is an argument going on between economists about what are the most important factorsin inflation. These are the 2 main views:

1. Monetarists argue that inflation is caused by the amount of money circulating in theeconomy; the money supply. If government spending increases, or if borrowing to spend oncredit, or if savings are run down then there will be too much money in the economy if there istoo much money in the economy chasing too few goods then this will cause prices to rise.

2. Keynesians argue that inflation is caused by bigger forces in the economy than just thesupply of money. They point to the ideas ofDemand Pull and Cost- Push. Demand Pulloccurs when there is an excess of demand in the economy; consumers feel confident and goout and spend to reflect their confidence. This drives up prices. Cost Push occurs when thecost of factors of production rises. For example if oil or other imports rise in price then the costsof all sorts of production rise and consequently we get inflation.A problem that can come out of this kind of inflation is that workers then expect their wages torise to keep pace with the higher prices. If the workers arent any more productive then thesewage rises act as fuel for further inflation, and we get a so- called wage price spiral.

The Costs of InflationIt erodes values, Inflation drives down the purchasing power of money- in periods of inflationmoney is worth less than it used to be.

Who suffers from inflation?There are a number of different groups of people who can suffer as a result of inflation:

1. Pensioners who are on fixed pensions- a pension that looks good when a personretires can quickly be eroded when a person retires. The higher the rate of inflation the

quicker a fixed pension loses value.

2. Workers who are unable to get wage increases in line with inflation. This isparticularly problematic if the economy is suffering high unemployment, low growth and

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inflation,- so called stagflation. This problem often particularly affects unskilled and semi-skilled workers.

3. Savers who find that the rate of interest is lower than the inflation rate- over timethe purchasing power of their savings is declining.

The problem of the erosion of values can be solved by index linking,- that is linking payments

to the RPI. When this happens pensions and Social Security payments rise with Inflation, and infact most of these payments are index linked. You hear older people say things like, 20 yearsago 100 000 was a lot of money. This means that today the value of 100 000 as a lump sumhas declined. This has been caused by inflation.

Why can inflation be so damaging for economic performance?

Inflation causes Uncertainty. High inflation means that we lose sight of the price that weshould pay for things. In Argentina they are currently experiencing inflation at several hundredper cent, in those circumstances, with prices changing daily what is a fair price for something?In these circumstances producers will find it difficult to work out costs and therefore prices,

foreign importers will not want to buy British because of the uncertainty, further damaging theeconomy.Inflation causes Unemployment. Neo- classical economists argue that inflation causes

unemployment. Domestic consumers are treacherous,- they are quite willing to buyforeign goods if they are cheaper. And obviously if British consumers dont want Britishgoods, why should we expect EU or North Americans to buy British?

As well as this workers will demand increasingly high pay rises when they see the effects ofinflation on their incomes,- further fuelling increases in costsAs a result, rising prices leads to falling demand for British goods. As labour is a deriveddemand from products this leads, it is argued, to unemployment.

Who benefits from inflation?Whilst most people would regard inflation as damaging to the economy, some can benefit fromit. Those who can benefit include:

1. A mortgage holder- a mortgage is long term borrowing, and inflation cuts into the valuethat a mortgage holder has borrowed

2. Businesses that owe substantial amounts of borrowed capital. The same applies aswith the mortgage holder

3. Someone with a big credit card debt- they will see the value of the capital that theyowe decline.

Cures for Inflation

1. Interest rates. The Bank of Englands MPC (Monetary Policy Committee) set interestrates every month. Recently rates have risen, but are expected to fall in 2008. If interestrates rise:

a. Consumers spend and borrow less. This reduces demand in the economyb. Firms borrow less, and reduce Investment

If demand in the economy falls, firms have too much stock, and are under pressure to cut prices(This in turn should lead to lower inflation).

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2. Controlling the growth of the money supply (monetarism) if money grows at thesame rate as output, prices should not rise.

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12. International Trade.

Ever since economic activity began countries have traded. Evidence shows that internationaltrade has taken place over a very long period.

The benefits of trade:

1. Choice2. Quality3. Prices4. Bigger market5. Economies of Scale

Absolute and Comparative advantageWe say thatproducers who use fewer resources to produce a given outputhave an absoluteadvantage in the production of that product. So India has an absolute advantage with

motorcycles, and Britain with computer software.

Some countries are better at all kinds of production than their trading partners, the questionthen becomes; is it worth their while to trade? The answer is probably yes. The reason is thatthey will be considerably better at some production and marginally better at others. Thedominant country should focus on what it is far and away the best at, and allow the othercountry to produce that which they are relatively best at. If the countries don't do this, then bothwill lose out, because resources that are given over to one kind of production can't be used foranything else.This is the principle ofcomparative advantage.

For example, in a world economy with just 2 countries, the USA might use fewer resources than

Mexico to produce cars and grow oranges. Nevertheless it would be best if the USA focuses oncar production as it uses a lot fewer resources to produce cars, and if it engaged in both kindsof production then it would have fewer resources for that which it is best at.

ProtectionismProtectionism means that the Government of a country restricts or prevents imports from othercountries. There are 3 main methods of protectionism: Tariffs, Quotas, Regulations.

Advantages of ProtectionismThe reasons for protectionism are generally to do with protecting and helping domestic

industries, and we can probably identify 3 advantages:1. Protecting a mature industry. A country that has a sizeable part of its workforceemployed in a particular industry is unlikely to wish to see that industry destroyed byforeign competition.

2. Protecting an infant industry. New industries offer opportunities for countries todevelop new specialisms and advantages, and governments will often want to preventthose industries being swamped by foreign competition.

3. Protecting domestic culture. If we think critically about UK TV, and popular music thatis consumed in the UK we realise that a lot of it is imported. In some countriesGovernments will limit these cultural imports to protect domestic culture.

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Disadvantages of ProtectionismProtectionism is the enemy of Free Trade. British Governments have long been strongsupporters of the idea of free trade and we can certainly identify a number of advantages:

1. Free trade gives consumers more choice. British consumers will suffer a lack ofchoice if they arent able to buy the lager that they would like. We would all be sad if wewerent allowed Nike hats anymore.

2. Protectionism encourages inefficiency. It is argued that domestic producers wonthave any reason for improving quality or cutting prices if they have a guaranteed marketwith little or no competition.

3. Other countries will retaliate. As was shown in the late 1990s when Britain refused totake American bananas, the American Government responded by putting high tariffs on arange of UK products.

In many ways free trade looks good, however it is true to say that Japan has prospered whilebeing quite a protectionist nation. A cynic might say that the best thing to be is aprotectionist nation when everyone else is practising free trade.

The Balance of PaymentsWe divide the UKs international trade into exports and imports, and visibles and invisibles.

Visibles are physical goods,- both finished goods, such as cars and clothing; andcommodities- raw materials such as grain or oil. Invisibles are services, they are intangiblessuch as insurance, banking charges, interest, profits and dividends on overseasinvestments, transport services like shipping, and so on. We call the difference betweenvisible imports and exports the Balance of trade.

Money flows

When we sell exports foreign buyers need tochange their own currencies into s to pay forthe goods and services, when we buy imports sterling needs to be changed into $s oreuros to pay for the imports.

The Balance of Payments AccountThis shows values for all overseas trade. There aretwo parts to the account.The current account shows the balance onvisibles and on invisibles taken together. If we look

at the figures, we can see that the UK generallyruns a deficit on visibles or goods, and asurplus on invisibles or services. A structuralproblem for the UK is that the invisible surplusis not as large as the balance of trade deficit sowe generally run an overall balance of paymentsdeficit.

This means that more money is flowing out of theUK economy than into it.The capital account shows the balance oninvestment, saving and borrowing. For example if aSpanish pharmaceuticals company bought s toestablish a research plant in St Ives it would be a

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capital inflow. When profits were returned to Spanish investors from the plant that would be acapital outflow. If a British music company buys shares in a Greek company that is a capitaloutflow, but when a dividend is paid that is an inflow. This is sometimes called the nettransactions in UK external assets and liabilities.

A Balance of Payments deficit

For many years now the UK has suffered a B of P deficit on current account we spend moreon imports that we receive from exports. Economists argue that this is not a goodposition because we have to pay for this deficit from our stores of wealth. This makesthe UK poorer over time. It also makes the UK vulnerable to Import Inflation.

A balance of payments deficit can be cured by:

1. Raising interest rates, or other measures directed at reducing consumption2. Subsidising exporters/protectionism

Questions about the Balance of Payments Account

1. What would the money flow be if a Japanese Company bought a Scottish Shipbuilders?Which part of the account would it be shown in?

2. What would the flow be if a Norwegian Company bought a ship from the builders?3. Which part of the account would it be shown in?4. What would the flow be when the parent company took its profits?5. Which part of the account would it be shown in?

The Importance of Exchange RatesIf the value of the pound is high, as it is currently, then that is good for importers, andconsumers of foreign goods. It means that the price of imported goods is low, that in turn makesthem more attractive, and can help to keep inflation down. (This is because a lot of every dayitems are imported and appear in the RPI).Howeverthis can be bad for the Balance of Payments because we are drawing in lots ofimports (a withdrawal from the circular flow) which we find it difficult to pay for because weare selling fewer exports now that they are relatively more expensive.

If the value of the pound is low, then that tends to be good for exporters and people whoare employed by exporters. It makes British exports more attractive abroad, and tends to

prevent imports.This in turn can be good for the Balance of Payments. British consumersbuy cheaper British goods and are less likely to buy expensive imports. However it can be badfor inflation because there are a lot of imports which we simply must buy and these are nowmore expensive.

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Most usually the value of a currency is determined by the forces of supply and demand. If morepeople want to buy the pound then that will force its value up.People want to hold the pound for 3 reasons:

1. Trade. Foreign consumers need pounds to buy UK products, and we need foreigncurrency for imports.

2. Changes in interest rates. A rise in UK interest rates makes pounds more attractive.

Foreign investors will buy pounds because the return is better3. Speculation. Speculators gang up and take on a currency that they see as weak at a

particular time. When this happens there is far more currency being traded than isneeded for simple trade.

Sometimes Governments have decided that the market should be allowed to set currencyvalues, at other times they have decided that the destructive power of the market is to becontrolled.

The Euro. In January 2002 12 of the 15 countries of the EU joined to form a single currency,the Euro. Since that time a further 12 more countries have joined the EU. So far none of the

new countries except Slovenia have joined the Euro however 6 are scheduled to join within thenext year.In the UK we are more sceptical about a common currency than in some countries, and weforesee problems if we join.

The advantages of the Euro include, price transparency, reduction of risk, trade creation andtrade diversion.The disadvantages include public dislike, the possible lack of convergence, and the problem ofanother body setting our rate of interest.

Fixed and Floating Exchange RatesBetween 1972 and 1990 the value of the was allowed to float against the value of othercurrencies, this meant that its value rose and fell according to the level of demand in themarket. This is known as a floating exchange rate.Between October 1990 and September 1992 the was in the ERM. This fixed its value againstother currencies. However in 1992 the was driven out of the ERM because of speculationagainst it.Since 1992 the Government has practiced managed or dirty floating against other currencies.This means that the currency is allowed to float, unless its value is badly affecting a macropolicy objective,- usually Balance of Payments or inflation. When this happens the Governmentwill intervene to try to raise or lower the value of the .

What about the Euro?We might go in, we might stay out. If we stay out then an interesting test will come when the ,as it surely must at some stage, seriously weakens against other currencies including the euro. Will we expect other governments to help prop up the ? Will we try to dash into the euro area? Will we simply try to ride an an exchange crisis and poor performances against macro

economic objectives?

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13. European UnionThe UK is a member of the EU. The EU is a Free TradeArea. In practice this means that there are no tariffbarriers or quotas against moving goods around withinthe EU. It also is a Customs Union this means that allEU countries operate a Common External Tariff (thesame tariff level) on imports coming into the EU, andrestrict the importation of some products from outsidethe EU.Britain joined the EU in 1973. At that time the EU wasknown as the European Economic Community (EEC).When we joined along with Ireland and Denmark thenumber of member states rose from 6 to 9. Since thattime a further 18 countries have joined bringing thecurrent membership to 27.

The Institutions of the EUThe Council of Ministers. This is like the Cabinet of the EU, it is made up of the most seniorMinisters in each of the EUs member states. It meets periodically to decide policy in differentareas.The European Commission. This is the equivalent of the Civil Service of the EU. There aremembers from each of the 15 countries. Once the Council of Ministers has decided on a policythen the Commission makes it into a directive that is legally binding in each of the 15 countries.The Commission comes in for some criticism for being too bureaucratic, and too interfering.

The European ParliamentThere are 785 members of the European Parliament. They sit in political blocs rather than by

country. The UK has 78 members.

The Court of JusticeThe Court of Justice is made up of 15 judges. The judges apply European legislation and theirdecisions are binding on the Governments of member countries.You can see from the examples below, drawn from the Court website, that it applies the rightsthat are set up in the Treaty of Rome such as the free movement of goods, and the freemovement of workers:

TradeIn 1992 Britain signed the Maastricht treaty which removed any remaining trade barriers, or

limits on the movement of goods and factors of production between EU members. TheMaastricht treaty moved us to a Single European Market. The objective of Maastricht was toremoveall the non- price barriers to trade are removed.Most of the UKs foreign trade is with other EU members, in 1994 50% of our imports and 54%of our exports were with other EU countries.Those who advocate that we should leave the EU really need to make a credible case to saythat we would either be able to continue this large volume of trade without any penalties, or thatwe would be able to generate significant trade elsewhere.

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Economic Policies in the EUSome of the main policies of the EU include:

1. Agricultural Policy. Spending on agricultural subsidies accounts for around 50% of allEU spending. The main objectives of agricultural policy are to guarantee supply, stableprices, and to guarantee farmers income.

2. Competition Policy. The Eu aims to eliminate all barriers to trade between countries,increase competition, and increase consumer choice.

3. Regional Policy. The EU is much more interventionist than Conservatives would like,and of course, intervention requires government spending and therefore higher taxes. Ifthe EU is enlarged east to include Poland, Romania, Bulgaria and so on, then thisproblem will increase.

4. The Euro. This single currency has applied to 11 of the 15 EU nations since January2002. It is expected to increase trade and to make trade easier between membernations. Any new EU entrant will have to join in the Euro.

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14. Macro Policy Tools.

Macro policy tools are the group of policies that Government can use to try and manage theeconomy.The most important Macro Policy Tools are:

1. Fiscal Policy- Taxation and Spending2. Monetary Policy- Control of the money supply3. Supply Side measures- policies to make sure Labour and Capital are as

productive as possible

15. Fiscal PolicyFiscal Policy is the group of policies associated with taxing and spending.The focus of fiscalpolicy is managing the amount of demand in the economy. (Demand management).

In the Year 2006 GDP was around 13000 billion, or around 1.3 trillion pounds. Government

took around 39% of that in the form of taxation. You can see below where the Revenue willcome from, and where it will be spent.Sources of Government Revenue as a %age of all Revenue in 2006Income Tax 25%, VAT 16%, National Insurance 16%, Excise Duties 10%,Corporation Tax 9%, Other24%

Areas of Government Expenditure as a %age of all spending in 20016Social Security 28%, Law and Order 5%, NHS 14%, Industry 4%, Education 12%, DebtInterest 7%,Defence 6%.

Direct taxes include income and corporation taxes, indirect taxes include VAT and exciseduties. Direct taxes are usually said to be progressive in that they take larger proportions ofincome from those on larger incomes. Indirect taxes are often regressive in that they takelarger proportions of income from those on lower incomes.

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16. Monetary Policy.This is mainly focused on the management of the Money Supply. The main tool used is therate of interest. This is altered in order to help control the level of inflation. The central bank inthe UK is the Bank of England. The Interest Rate is set by the Monetary Policy Committee(MPC).The idea is that low interest rates encourage borrowing and spending, home- owners withmortgages have more disposable income available, business people will be encouraged toborrow for investment so that it is likely to lead to an injection into the economy.If the economy is suffering inflation then the MPC may rise interest rates to choke off spending,this will lead to less disposable income, and less borrowing and therefore it will form awithdrawal from the economy.

The Bank of England controls the level of the rate of interest through its issue of Governmentstocks- if it issues more stocks then the Banks buy them and there is less money available tolend, if it issues less stocks then the banks buy less and there is more money to lend. This iscalled Open Market Operations.

There are a number of other tools that the Government can use to push up or bring downinflation rates. The Government itself borrows to spend on Public Expenditure, if it engages inoverfunding, then it borrows more than it needs and drives up the rate of interest.The Bank of England can tell the High Street Banks what proportion of their deposits they canlend out, and they can also order them to make special deposits at the Bank of England.

Credit CreationWhenever we deposit money, banks lend most of that money out. (In fact the Banks are

required by law to hold onto only 5% of deposits as cash. So for instance if we deposit 100then 95 are available for lending).

When the Banks lend money out the loans that are made will in turn be spent. Thus the 95 thathas been lent from our deposit will go to shops and other businesses. They will in turn depositsome of the money. A small proportion of this loan will be kept (4.75) and the rest (90.25) willbe loaned out again. Already we can see that a lot more than our initial 100 deposit has beenloaned, and the cycle can theoretically continue to generate around 10 000 worth of lendingfrom the initial 100 deposit!

Imagine a situation in which banks need to hold onto 20% of all deposits and you put in 20.

Follow the process of credit creation through 5 cycles. How much has been deposited? Howmuch has been lent?

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17. Supply Side PoliciesSupply Side Policies are concerned withimproving the efficiency of supply ofgoods and services in the economy, inorder to increase total production.Broadly speaking they aim to shift thesupply curve to the right.Supply- side policies aim at increasingflexibility in factor markets, they wantto make the use of factors of productionmore efficient, and to help factors movemore quickly between activities. So forexample supply- side economists will bein favour of policies that help workersmove from one kind of job to anothermore easily such as retraining, or jobclubs. They will also be in favour of policies that reduce the power of Trade Unions. Supply Side

Policies also favour lower social security payments in order to encourage people to work.

Supply Side economists aim at deregulating markets to make them more responsive to theconsumer. They favour freeer trade, cutting taxes and bureaucracy on entrepreneurship,privatisation and deregulation. Supply Side Policies favour reducing red tape, in relation toplanning decisions, so that it is easier to move land between different kinds of production.Supply Side economists also aim at increasing the sources of capital available to producers-Governments should make it increasingly attractive for ordinary people to buy shares.

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18. Regional PolicyRegional Policy is concerned with the different levels of prosperity, growth and employment indifferent regions. Uneven economic development is a problem. Some UK regions have sufferedsevere economic problems due to declining industries, lack of investment, and structuralunemployment. Where supply- siders favour little government intervention, those who believein the use of regional policy would argue that the government must often intervene. Governmentcan intervene by giving subsidies to firms, for taking on and training workers, giving firms thatinvest in a particular region tax breaks, so that they don' t pay all of their local or national taxes,or improving the infrastructure that surrounds particular investments sites.

Some of the agreements and disagreements between economists and politicians oneconomic policy Free marketeers argue that as many public goods and merit goods aspossible should be provided by the market. Individuals should provide their own private healthinsurance, social security insurance and so on. Other economists emphasise that certain goodswouldn't be provided, or would be underprovided by the free market and therefore thegovernment must tax and spend. This is one of the key areas of disagreement between groups

of politicians and economists.Historically the Labour Party has been the Party of more taxation and expenditure while theConservative Party have been the Party committed to less taxing and spending. New Labourare much less committed to taxing and spending, and are as keen on privatisation as theConservatives of the 1980s.

Those in favour of high progressive taxes and high levels of government spending are indisagreement with those who argue for low taxes and the right of those who have earned themoney to keep it. The left in this discussion favour redistribution and more equality while theright argue that there will always be inequality, and it is necessary if the wealth creators(entrepreneurs) are going to be encouraged to come up with new and different kinds of

production and add to the total value of the economy.

Supply siders and supporters of Regional policies disagree. The supply-siders argue thatRegional policy is generally ineffective,- the most productive firms are penalised and taxedhighly in order to support less efficient producers. They argue that it doesn't tend to createpermanent long- term jobs but that it also gives an unfair advantage to those firms who go to thepoorer regions. Those in favour of Regional Policy see the problems of those regions aspermanent, and unlikely to be solved by the free market. This is what we mean by marketfailure.

One of the reasons why the Conservative Party are becoming increasingly sceptical of the EU is

because they see that EU economic policy is likely to involve more Regional Policymeasures in order to help the least developed regions..

Free marketeers suggest that the problem ofnegative externalities, pollution, congestion etc isoverstated while those who favour intervention and regulation see these costs as significant andimportant. The recent discussion about road pricing highlights the differences between the 2groups.

Some economists favour protectionism and control of imports whereas others favour freetrade. Both sides have advantages and disaadvantages.

Monetarists see the Money Supply as the key factor in the creation of inflation whereas

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