Q. Evaluate the economic case for and against the UK government further increasing the tax on tobacco in order to reduce smoking. Increasing tax will lead to a fall in demand, although this may only be a small effect because demand is price inelastic. People are addicted and there are no close substitutes. Cigarettes are …
Demand side policies include expansionary fiscal and monetary policies. For example, the govt could increase Govt spending and lower taxes. G is a component of AD, therefore, this will cause AD to increase, there may also be a multiplier effect causing AD to increase even more than the initial effect Lower tax rates will increase …
Aggregate demand (AD) is the total demand for goods and services produced within the economy over a period of time. Aggregate demand (AD) is composed of various components. AD = C+I+G+ (X-M) C = Consumer expenditure on goods and services. I = Gross capital investment – i.e. investment spending on capital goods e.g. factories and …
Should the government leave house prices to market forces, or actively intervene to prevent a house price crash? Arguments for intervention Falling House Prices Could cause a recession If house prices fall, it will cause significant problems for the UK economy. There will be a fall in consumer wealth, and declining house prices can lead …
Compensated demand curve A compensated demand curve ignores the income effect of a price change. It only measures the substitution effect. A compensated demand curve is therefore less elastic than an ordinary demand curve. An ordinary demand curve shows the effect of price on quantity demanded. A change in price causes a substitution effect, but …
Readers Question: Would a cap on house prices work? Despite the recession and credit crunch, UK house prices continue to rise. (See: Why are UK house prices so high?) This has caused record levels of house price to income multiples. For homebuyers in London, house prices are approaching a record seven times average earnings. Understandably …
Readers Question: To what extent does the kinked demand curve model explain price rigidity in oligopoly? Often prices appear to be relatively stable in oligopolistic markets. There are different models to explain periods of price stability. The most predominant one being the kinked demand curve model, though this has received substantial criticism and economists have …
Aggregate Demand is the total demand in the economy. AD = C + I + G + (X-M) C= Consumer spending (Household consumption) I = Investment (gross fixed capital formation) G= Government spending (Government investment and Government consumption) X-M = Net Exports (exports – imports). Components of Aggregate Demand A graph showing components of AD …