REAL WORLD EXAMPLES/QUICK EVALUATION- A03
MICRO
1. Business objectives
Firms pursue various objectives to ensure their sustainability and growth in competitive
markets:
- Profit maximisation MC=MR, maximise profits by optimising producing, pricing and cost
management strategies. E.g. Apple known for high quality, innovative products hence the
need for supernormal profits to reinvest into technological innovation. They also
minimise costs e.g. iPhone 14 only costs $500 however retails for $799 to $800
HOWEVER CON with is with profit focus ethical dilemmas arise, such as exploiting cheap
labour (e.g. Nike sweatshops) ADDITIONALLY (For pharmaceutical companies they must
have degree of monopoly power i.e. through patents to ensure supernormal profit
which is essential for incentive to create new treatment- BUT THEN ISSUE OF
ACCESIBILITY e.g. Trikafta by Boston based company vertex)
- Some firms prioritise revenue maximisation (MR=0), this approach is common among
industries with high start-up costs such as airlines (as revenue max with higher sales
can help firms with high fixed costs gain economies of scale!!-) E.g. budget airlines like
Ryanair focus on maximising revenue through ancillary services like baggage fees and
in-flight purchases (however with revenue max there is arguably incentive to cut costs
leading to lower wages for firms, but expansion could also create new jobs?)
- Sales maximisation (AR=AC), key objective pursued by firms especially those in growth or
expansion phase where they aim to increase market penetration and customer base
(flooding the market), e.g. Netflix initially started off with sales maximisation goal, to
grow- in 2020 they had 203.7 million subscribers and 80% of most watched original
series belonged to them!!
- Corporate social responsibility: Recently, Firms have increasingly embraced corporate
social responsibility as a core objective. CSR involves integrating social
responsibility/environmental concerns into decision making. E.g. Patagonia prioritises
sustainability. While CSR initiatives enhance brand reputation it does incur additional
costs and require long-term commitment (ANOTHER EXAMPLE: Suri toothbrush)
2. Behavioural economics in action
RWE: Defualt choice: organ donation opt-out scheme in the UK (introduced in 2020 and
yielded a small but significant increase in donors by 2% that year)
In a Danish municipality, streetlights turned red when solar panels are no longer sufficient to
power lights, making residents more aware of their electricity consumption
3. Elasticities of demand (importance of PED for firms and government in decision-making),
importance of YED (for firms and explaining changes in the sectoral structure of the
economy)
PED:
- Luxury brands or ostentatious goods such as Aston Martin, Patek Phillipe can afford to
set high prices to inelastic demand for their products
, - Governments rely on PED to design effective taxation policies (For example Singapore; s
government uses PED analysis to adjust toll prices on highways, aiming to manage traffic
congestion effectively)
YED:
- The rate of expansion of industries: the greater the YED for a good or service, the
greater the expansion of its market is likely to be in the future. However, during a
recession products with low YEDs can avoid large falls in sales.
- YED and sectoral structure of the economy: as society’s income grows over time, the
demand for agricultural produce grows more slowly (YED<1). By contrast, demand for
manufactured products will increase. Therefore, over time, the share of agricultural
output in the economy shrinks, while the share of manufacture output grows. AND over
more time the service/tertiary sector may expand at the expense of both primary and
secondary sector. (e.g. countries such as the UK and US have experienced a decline in the
manufacturing sector’s share of GDP, accompanied by a growth in sectors like finance
and technology)
*Would draw Engel curve
4. Government intervention in response to public goods
- Public good are non-excludable and non-rival leading to missing markets as individuals
cannot be excluded from consuming good, so there is no incentive to pay for the good,
leading to free-rider issue. Hence, there lacks incentive to provide good privately leading
to MISSING MARKET
- Hence government has to intervene and directly provide the good, this intervention is
justified because public goods generate positive externalities e.g. Street lightning,
provides safety!
PROS OF INTERVENTION:
- Correct market failure
- Ensuring universal access and equitable distribution among all members of society, thus
promoting access to essential services such as national defence and infrastructure e.g.
national rail works (in 2023 public spending on railways was 25.9 billion pounds)
- Government intervention can harness economies of scale which leads to cost efficiencie
sand more optimal resource allocation
CONS:
- Bureaucratic inefficiency e.g. red-tape, administrative delays leading to wastage of
resources and suboptimal outcomes.
- Crowding out private sector
- Political interference: gov provision of goods is susceptible to political interference and
rent-seeking behaviour (growing ones existing wealth by manipulating social/political
environment WITHOUT creating any additional productivity/wealth: leads to
misallocation of resources and inefficiencies).
- Thatcher privatised water utilities because gov lacked investment/funds required to
upgrade the infrastructure.
, 5. Behavioural economics
6. Approach to managing common pool resources
Example 1: Overfishing in Iceland
Overfishing of the pacific bluefin tuna has caused an all-time population low of
approximately 3% of their original population (this risks harming further marine ecosystems
due to ecological imbalance)
Similarly, post world war II, due to advancements in technology/fishing fleets Iceland’s
marine resources began depleting at an unsustainable rate. SO: they introduced individual
transferable quotas (ITQs) via the fisheries act in 1990
Market based policies (Tradable permits and Carbon taxes)
CARBON PIGOUVIAN TAX: in British Columbia, Canada imposed in 2008
- Revenue neutral tax, meaning every dollar generated is returned to society in the form of
personal/business tax measures e.g.: reduction in income tax rates.
- Reduced emissions by 15%
- By designing the carbon tax as revenue-neutral this enabled government to reduce taxes on
‘desirables’ such as income and capital and instead impose tax on an ‘undesirable’ such as
emissions.
- The tax was introduced at $20 per tonne of CO2-equivalent and is now at $50
- A common concern with carbon pricing is that it may have disproportionate economic
impacts on lower-income households. B.C. addressed this by dedicating a portion of
revenues to reductions in the first two personal income tax rates and the Low Income
Climate Action Tax Credit.
