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Economics

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Economics

Are you looking to build a strong foundation of knowledge in Economics? Are you studying for exams? The explanations on StudySmarter were written to make you an expert and prepare you for your assessments. No matter which class you are currently in or which school you are attending, StudySmarter has something for everyone!

How can StudySmarter support me in studying Economics?

Our experts at StudySmarter have prepared comprehensive learning materials to help you achieve your study goals. This article will show you the Economics Revision Guide and how to navigate our exclusive learning tools and features: summaries, flashcards, and study groups. Guess what? You can also get rewards for studying Economics on the StudySmarter platform! We will take you through the topics and learning objectives in Economics and the essential skills you need to excel at your assessments.

The essential skills in Economics follow the criteria below. They start from the most basic ones and gradually progress to the most advanced. StudySmarter has compiled a breakdown that will help you in your knowledge acquisition and subsequent preparation for writing essays or the exams based on these criteria:

  1. Understanding the material. This is the most basic skill. It requires demonstrating knowledge and understanding through definitions and examples.
    Keywords: identify, state, compare, define, distinguish
  2. Consolidation of the learned material into knowledge through revision. Going over the material several times to consolidate your knowledge into long-term memory.
    Keywords: repeat, go over, revise
  3. Application of the learned knowledge to real-world issues. Interpret and apply knowledge and understanding to information presented in written, numerical, or graphical form.
    Keywords: calculate, explain, illustrate, interpret, ‘how’
  4. Analysis of the application. Analyze economic issues and arguments using relevant economic concepts, theories, and ideas. Communicate conclusions in a clear, reasoned manner.
    Keywords: analyze, account for, the result, ‘why’
  5. Evaluation of the proposed application and its effectiveness. Critically evaluate economic information, arguments, proposals, and policies, considering relevant economic principles and distinguishing facts from hypothetical statements and value judgments. Keywords: evaluate, assess, comment upon, discuss, to what extent

Hint: Economists use two-axis graphs (otherwise also known as diagrams) to explain the relationships between variables. StudySmarter has developed a diagram for every economic problem you will encounter, as well as guidance on how to create them yourself in the most effective way.

Economics Revision Guide

Economics Explanations

Are you tired of reading heavy textbook materials? The StudySmarter Economics explanations were created to provide you with comprehensive learning materials in a more absorbable format! You don’t have to spend hours reading pages of dense text! What is more, they are relevant for all exam boards. You can also upload your own Economics notes and become a content creator yourself!

Economics Flashcards

This tool will make preparation for your exams more efficient by helping you memorize the content. StudySmarter has prepared the flashcards that cover the Economics course materials from the explanations, but you can also create your own.

Economics Study Groups

StudySmarter is not just about the content; we are building a community of learners! We have created a space for students to collaborate online and study together. For example, you can share your study materials to create extensive summaries and then use the flashcards to quiz each other. How cool is that?

Rewards for learning Economics

Helping you to get the top grades is our long-term goal, but what about short-term rewards? StudySmarter will recognize your efforts and boost your confidence in your ability to succeed! How do we do that? We have created a reward system that encourages students to study more and celebrate short-term achievements.

We understand that assessments are stressful, so why not set yourself some goals to reach to visualize your revision? You will get points for the time you spend studying, answering the flashcards correctly, or completing a subject. Reaching these goals will earn you StudySmarter trophies. For example, gain the Best thing since sliced bread if you study every week for three months, or become a Grandmaster if you answer five questions in the same course. The more you learn, the more trophies you get to celebrate your hard work.

Topics and learning objectives in Economics

There is a common view that Economics is ‘all about money.’ While that belief may have a grain of truth, it’s by no means the whole picture. The word economics comes from the Greek word Oikonomia, meaning ‘household management.’ It was perhaps best defined in 1932 by the British economist Lionel Robbins, who suggested that it is:

“the study of human behaviour as a relationship between ends and scarce means that have alternative uses.”

To put it in simple terms, everyone has:

  • Needs such as food, water, shelter, medication AND
  • Wants such as designer clothes, bigger houses, expensive hobbies, travel plans.

However, the available resources to satisfy these needs and wants are limited. American economist Thomas Sowell (born 1930) contended that:

“the first lesson of economics is scarcity: there is never enough of anything to satisfy all those who want it.”

Deciding how to allocate those limited resources effectively is what Economics is all about.

The study materials on the StudySmarter platform are divided into two overarching categories: microeconomics and macroeconomics. That is because economic agents operate on different scales: individuals, households, firms, trade unions, institutions, national economies, economic unions, etc.

Microeconomics

Macroeconomics

Studies the interactions of individuals, firm behavior, demand and supply for goods and services, factors affecting price setting, or the quantity of outputs. These activities occur on a ‘micro’ level and are classified under microeconomics. Studies the economies as a whole at the national or international level in terms of their growth, trade with other countries, taxation, and government spending. These issues require a bigger picture approach on a ‘macro’ level and are classified under macroeconomics.

Table 1. Definition of Microeconomics and Macroeconomics

However, it’s important to remember that everything in economics is interlinked. As famous economist Gregory Mankiw said in his book Principles of Economics:

“Microeconomics and macroeconomics are closely intertwined. Because changes in the overall economy arise from the decisions of millions of individuals, it is impossible to understand macroeconomic developments without considering the associated microeconomic decisions.”

StudySmarter will take you on a learning journey, during which you will go through the necessary depth of content and learn the essential skills in economics to get the best outcomes for your Economics course.
We will first walk you through the topics covered in the microeconomics study set, followed by the topics in macroeconomics on the StudySmarter platform.

Microeconomics

Microeconomics is concerned with the economic activity in individual markets that make up an entire economy. A more recent definition also specifies that Economics is a social science concerned with the production and exchange of goods and services.

Example: Beauty products such as hair spray and lipstick are examples of goods, whereas beauty treatments such as a haircut or wedding make-up – are services. On a microeconomic scale, those comprise a beauty market.

Introduction to Economics

The Introduction to Economics study set focuses on the basic economic ideas. At the heart of the evolution of economics lies the fundamental economic problem of satisfying infinite desires with limited or scarce resources effectively. Scare resources (inputs) used to make things people need and want (outputs) can be divided into four factors of production:

  • Land comprises all naturally occurring resources as well as geographic land.
  • Labour includes all work done by people.
  • Capital consists of assets used for the production of goods and services.
  • Enterprise refers to the willingness of the people (entrepreneurs) who take risks to make a profit.

Effective allocation of resources presents economic agents with opportunity costs. In other words, the benefits or losses one incurs when choosing one thing over another. In making choices, they respond to incentives.

Example: People need to work to earn money to pay for their needs and wants. If a person decides to enter employment, they choose how to use one of the most precious resources available to them: their time. Their allocation of time towards employment, as opposed to leisure, is an example of what’ alternative use of resources’ means.

You will learn how to illustrate opportunity costs between the limited resources on a graph. You will see that economists talk about scarcity in the first place because every unit of the economic architecture has a productive capacity. For instance, unless a coffee shop hires more baristas, it will only be able to make a limited number of coffees.

Consumer rationality

This section of microeconomics concerns assumptions economists make to draw inferences between the behavioral aspects of economic affairs. For example, economists assume that economic agents are utility maximizers.

Example: Consumers may want to pay the lowest price, get the best product, get the product that maximizes their utility.

Traditional economists argue that to maximize utility, economic agents must act rationally. That means that the only factor that matters when making a choice is the maximum utility from obtaining that choice. Consumer utility, in particular, is defined through the concepts of total utility, marginal utility, and the law of diminishing returns.

The assumption that consumers are able to make rational decisions is based on the premise of perfect information. In other words, the idea that consumers know everything there is to know about the good or service they are interested in. This section will also discuss whether that is always the case in the real world.

Price determination in a competitive market

The wants and needs of consumers generate demand for goods and services. The producers then supply goods and services to meet that demand. Both producers and consumers will have an idea of what they are willing to sell and buy those goods and services for. Anything above or below those values is explained using the concepts of consumer and producer surplus. Therefore, the price and the quantity in a market are determined at the point where these interests match: at market equilibrium.

Hint: Market equilibrium can be demonstrated as the intersection of demand and supply curves on a graph.

Furthermore, factors such as price, income, availability of substitutes, and others, determine the responsiveness of demand and supply to changes. This responsiveness is measured through the concept of elasticity.

The market mechanism

This study set takes that idea of market equilibrium further and demonstrates how markets allocate resources. You will see that although they are designed to do so efficiently, there are occasional instances of market failure. You will derive ways to address market failure through a variety of interventions.

Production, costs, and revenue

This section of your learning will be focused on the business side of economics. You will discover why firms specialize in producing specific goods and services and how it leads to the division of labor. You will explore what is involved in the production of goods and services and how economists measure the productivity of a factor of production. You will also study how firms incur costs, generate revenues, and maximize profits.

Market structures

This study set will take you through the market characteristics that potential entrepreneurs need to consider before starting their business. In particular, these characteristics refer to the number of already existing players, their market share, pricing power, and barriers to entry.

Economists use the model of perfect competition to demonstrate how the markets should theoretically work in ideal circumstances. These are:

  • An infinite number of producers and consumers.
  • Perfect information about the goods and services.
  • Goods and services being perfect substitutes.
  • No barriers to entry to or exit from the market.
  • Firms having the sole aim of maximizing their profit.

Even though markets do not work this way in the real world, it is still important to understand perfectly competitive markets to solve the undesirable outcomes in real-life markets. A more realistic representation of the competitive dynamic between the market players is monopolistic competition. This is a market structure where many smaller firms compete with each other. Good examples of monopolistic competition are hairdressers and running shoe markets.

If a handful of big firms dominate a market, the market is described as an oligopoly. Finally, if there is one powerful player, that is a monopoly.

Example: As of June 2021, Google maintains 92.47% of the search engine market.

Labor market

If you get down to this section, you will know that labor is one of the four factors of production. It is a commodity that workers provide in exchange for a wage. The labor market is essentially a job market.

In this Economics course, you will consider the labor market from a micro and macro perspective. From the microeconomics perspective, you will study how the labor market is subject to the equilibrium between the supply and demand for labor and the elasticity (or responsiveness) of demand and supply to certain changes, all of which can also be portrayed on a diagram. You will investigate how the number of hours a worker is willing to supply changes due to the rise in wages and how the demand for labor is derived from its marginal revenue product. You will also consider how interventions such as the National Minimum Wage introduced by governments and trade unions affect the wage-setting mechanism in the labor market. In contrast, from the macroeconomics perspective, you will explore labor productivity and unemployment rates for the whole economy.

Poverty and inequality

Letting the market mechanism perform without intervention means that some markets will do better and some will do worse. In other words, markets can lead to unequal outcomes. In Economics, we study such discrepancies both on the micro and macro level and use indices and economic indicators to compare the distribution of income within economies and their levels of development as a whole.

Macroeconomics

What if we need to discuss the welfare of economies as a whole? That is what macroeconomics is concerned with. If one compared micro with the study of trees, then macro would be the study of forests.

How the macroeconomy works

Much like in microeconomics, the macroeconomic study is also based on a set of assumptions and theoretical models, all of which will be covered in this introductory study set. However, these models operate on a larger scale. For instance, you will jump from the simple demand of one consumer to the aggregate demand of all consumers and from the supply of one producer to the aggregate supply of all producers in the economy. You will also explore how money moves around the economy using the circular flow of income model.

Economic performance

What do we mean by the ‘welfare of an economy’? Economists look at phenomena such as whether the economy is growing, whether the average price level in the economy is rising, whether people are employed or unemployed, and why or whether the economy is achieving a balance of trade with other economies. All of those describe the economic performance and can be measured using specific macroeconomic indicators.

Government’s macroeconomic policy

Do you have an objective of a grade you would like to achieve in your Economics exam? Similarly, governments have macroeconomic performance objectives. Economists focus on economic growth, stability of inflation, levels of unemployment, the balance of payments, economic stability, productivity, sustainability, distribution of income and wealth, and so on.

Remember we touched upon the idea of the opportunity cost in decision-making? The macroeconomic objectives also conflict with each other when progress in one comes at the cost of demise in another.

To achieve their performance objectives, governments have a range of policies at their disposal.

Monetary policy

This section focuses on the monetary policy used to achieve government objectives by manipulating these variables: the rate of interest, the money supply, and the exchange rate.

Fiscal policy

The fiscal policy study set explores the government’s decision-making concerning its borrowing, taxation, and spending. You will learn what instruments the government uses to achieve its performance objectives and why.

Supply-side policies

The supply-side policies are aimed at boosting the economy’s efficiency and productivity.

The International Economy

This section will take you from one country’s economics to the international or global scale. You will explore the concept of comparative advantage and the reasons why economies engage in international trade. You will also study what globalization is and the concomitant global dynamic between economies in the form of trade barriers or forming unions.

Final Economics Quiz

Question

What is a firm’s main objective?

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Profit maximisation.

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Who are the customers of a firm?


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Individual customers, businesses, or governments.

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What are the financial goals of a firm?


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Profit maximisation, market share expansion.

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What is a firm's profit?


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The difference between the total costs and revenues.

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How to maximise a firm’s profit?


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 Profit is maximised when marginal costs equal marginal revenues.

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What are some non-financial objectives of a firm?


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Customer satisfaction, job satisfaction, corporate social responsibility.

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How to improve employees’ job satisfaction?


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Activities to boost job satisfaction can be taking care of employees’ well-being, offering incentives for good performance, providing an opportunity to learn, and communicating.

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Why is corporate social responsibility important?


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Corporate social responsibility (CSR) includes activities taken by companies to create a positive impact on the society and environment.

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Define government intervention.

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Government intervention is when a government is involved in the marketplace.

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Why do governments intervene in the marketplace?


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To overcome market failure.

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What are the types of government intervention?


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Taxes 

Subsidies 

Minimum and maximum prices 

Regulations

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What are subsidies?


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Subsidies are financial support to products with positive externalities.

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What are minimum prices?


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Setting a lower limit for prices by the government.

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What are the disadvantages of setting minimum prices?


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It can be costly for the government and force it to put tariffs on cheap imports – which damages the welfare of farmers in other countries.

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Give an example of maximum prices.


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The price for bread cannot be higher than 80p/100g.

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What can create a shortage?


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maximum prices

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What are regulations?


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Regulations include non-market based ways of intervention in markets.

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Give an example of regulations.


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Minimum age laws on alcohol, maximum CO2 emissions for vehicles, ban on diesel cars.

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What are the advantages of government intervention?


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The advantages of government intervention are equality, fighting monopolies, public goods, consumer behaviour and environmental protection.

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What are the disadvantages of government intervention?


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The disadvantages of government intervention are worsening the situation, limited choice of products, pressure and dicrimination.

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What are public goods?


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Some goods and services are not provided in a free market because they do not give any financial benefits. Instead, they can be provided by the government.

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What is government failure?


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Government failure is an economic inefficiency caused by government intervention. It is when the government intervenes in the market with good intentions, but in result, creates even more problems by either deepening the market failure or causing a new failure.

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What is monopolistic competition?

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Monopolistic competition is the market structure in which many firms compete to sell slightly differentiated products.

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What are the characteristics of monopolistic competition? 


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The characteristics are:

  • A large number of firms.
  • Slightly differentiated products.
  • No barriers to entry.
  • Firms are price makers. 

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What does the demand curve for individual firms in monopolistic competition look like?


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It is more elastic than the demand curve in monopoly, though not perfectly elastic as in perfect competition.

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Are firms in monopolistic competition price-takers or price-makers? 


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Price makers, though they have limited market power.

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How is the barrier to entry for a new firm in a monopolistic competition market?

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Low or no barrier to entry. Firms can enter and exit the market any time.

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How can firms in monopolistic competition differentiate their products? 


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Products in monopolistic competition can be differentiated with physical attributes such as taste, smell, and sizes, or intangible attributes such as brand reputation, and eco-friendly image.

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When does profit optimization happen in monopolistic competition? 


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At output Q where MC = MR.

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How can firms in monopolistic competition enjoy abnormal profit? 


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In the short-run, companies in a monopolistic market are able to earn abnormal profits at the output where marginal costs equal marginal revenues. 

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Do the abnormal profits in monopolistic competition last in the long run? 


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In the long, due to the increase in the number of firms, the price of the product will drop. Thus, the firms will only make normal profits. 

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Define supply-side policies.

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Supply-side policies are policies that aim to increase productivity and efficiency in the economy.

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What is the objective of supply-side policies?

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The objective of supply-side policies is to boost aggregate supply (AS) to result in increased output.

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How do supply-side policies impact the LRAS curve?


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They aim to shift the LRAS curve to the right.

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How do supply-side policies aim to reduce inflationary pressure?

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By removing market imperfections.

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What are the two types of supply-side policies?


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Free market and interventionist policies.

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What do free market supply-side policies aim to encourage?


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Competition, market reform, and incentives.

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What is privatisation?


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When the government sells its previously state-owned assets to private individuals or companies.

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Deregulation can:


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All the answers are correct.

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Name an example of trade liberalisation.

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Eliminating trade barriers like tariffs.

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How could decreasing corporate taxes impact aggregate supply?


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Decreasing corporate taxes can allow firms to retain more of their profit and invest it back into the economy, increasing the output of the economy and shifting LRAS to the right.

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What are interventionist supply-side policies?


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Interventionist supply-side policies are policies that require government intervention to boost the economy.

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Name two examples of interventionist policies.


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Investment in human capital and investment in new technology.

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Which of the following is NOT an interventionist policy?


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Reducing unemployment benefits.

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Name two advantages of supply-side policies.

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Sustainable growth and the ability to increase employment.

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Name two limitations of supply-side policies.


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Time lag and costs.

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What are some examples of fixed costs?

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Some examples of fixed costs include the maintenance costs of an office building, rent, salaries, interest on loans, advertising, and business rates.

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What are some examples of variable costs?

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 Some examples of variable costs include wage costs, basic raw materials (wood, metal, iron), energy costs, fuel costs, and packaging costs.

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What are total costs?

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The total costs (TC) of a company are the fixed costs (FC) and variable costs (VC) added together.

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What are average costs?


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The average cost (AC) or unit cost is calculated by dividing the firm’s total cost of production by the quantity (Q) of output produced.

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