A2: ESSAY Unit 3 - ECON 3 Distribution of income made more equal solely through progressive taxation and transfers? (25 marks)

Here I have attached my essay answer for this question; it is graded an A. Remember a good essay needs a balance of knowledge, application, analysis, and evaluation. My essay isn't perfect but I hope you can benefit from it nevertheless. This is a distribution of wealth and income question where you argue government policies for a more equal distribution. Questions like these are excellent opportunities for you to include real life application! *please do not repost without credit, thanks!

Do you agree that the distribution of income should be made more equal solely through the use of progressive taxation and transfers? Justify your answer. (25 marks)

Progressive taxation is when the proportion of income tax increases as income increases thus the marginal rate of tax is greater than the average rate; this enables a more equal distribution of income. However criticism could be made for the progressive taxation policy and there are other policies which may aid in a more equal distribution of income such as the national minimum wage and government supply-side schemes to improve education and training

Firstly progressive taxation closes the wealth gap as when income increases so does the tax rate. For example in the UK the lowest band with earnings up to £32,000 are taxed at 20% whereas the highest income band earning over £150,000 are taxed at 45%. Consequently this redistributes income with more equality and gives the government higher tax revenues, some transferring in the forms of welfare spending therefore closing the income and wealth gap. However, it can be argued that it is unfair for the higher income earners to be taxed harshly only for their income to be distributed to lower income earners as welfare benefits. This may create disincentives for people to aim for high income jobs or become entrepreneurs, typically requiring greater skill and qualifications, as a large quantity of the income will be taxed away; by extension this will decrease the UK’s competitiveness and wealth compared with other countries in the long run. Thus it can be considered that progressive taxation and transfers should not be the sole instrument for a fairer distribution of income. A system of regressive taxation maybe considered for example VAT where the tax added on items is fixed (currently at 20%) for all income earners, though this may be considered unfair to the low income earners. Progressive and regressive taxation discourages the equity concept whereby distribution is fair and just as it can be argued that for example a window cleaner should not be earning as much as a surgeon thus progressive taxation can be considered as not a fair system. However equity carries a value judgement as there may be conflicting opinions on what ‘fair’ is.

 

The National Minimum Wage must also be considered; in the UK the NMW is currently at £6.31 per hour for those who are aged 21 or over. Higher income will suggest higher tax revenues and national insurance contributions for the government. This policy suggests that all workers must be paid a bare minimum of £6.31 (a substantial increase since the introduction of the national minimum wage at £3.60 per hour in 1999) and therefore closes the income gap. Additionally the national minimum wage will further encourage more unemployed workers to work at the increased going wage rate thus will reduce workers falling into the unemployment trap (whereby benefits outweighs thus erode any motivation to go to work). As illustrated in the diagram above, the national minimum wage will increase wages from ‘W’ to ‘NMW’ however this illustrates there is trade-off between higher wages and employment, as firms are unwilling to hire more than ‘Q1’ at the ‘NMW’ wage rate and as more workers are willing to work at the ‘NMW’ rate results in excess supply as illustrated. Therefore higher wages can only be achieved at the cost of unemployment (Q2 to Q1).  However this will also give firms incentives to raise the productivity of employees if they must pay the minimum wage. A high minimum wage can also cause price inflation as it increases the costs to firms who then may pass on the higher cost in wages to higher prices for consumers thus results in cost-push inflation.

Government supply-side schemes promoting education and training may also be considered. For example, the government may implement training schemes to improve teaching which will lead to better education and in the long run a more educated population with greater skills and qualification which will reduce likeliness of different wages arising from very skilled and unskilled workers thus resulting in a more equal distribution of income. Other government schemes may also be considered, such as awareness campaigns illustrating the positive spill overs of merit goods such as education which will encourage people to work harder, for example in the long run better education will suggests a more prestigious high status job in the future which will also benefit the economy and contribute to economic growth.

Overall progressive taxation can be considered strong instrument in the fairer distribution of income and wealth. However this policy does not follow the concept of equity and therefore can be considered unfair. Furthermore it may cause disincentives for people to work harder for higher income jobs as a larger percentage will be taxed away thus will decrease the rate of growth of the economy and therefore weakening the international competitiveness in the long run. Thus cannot be considered the sole policy to distribute income more fairly. Other policies such as the national minimum wage can be considered as it immediately minimises the income gap in the short run. Furthermore it will encourage unemployed workers to find work however as the supply of labour increases with the higher wage rate, the demand of labour from firms will be reduced due to higher costs thus promotes unemployment. Cost push inflation may also occur if the pressure for higher wages gets passed onto to the customers by higher prices. Education and training supply-side reforms may perhaps be the best way to distribute income more fairly as it gives the opportunity of ‘unskilled workers’ to be trained thus allows more job opportunities which may enable access to better paid jobs in the long run resulting in a more equal distribution of income, though it must be considered that supply-side polices are a long run phenomenon. Overall, the best solution to a more equal distribution of income may be the combination of several policies simultaneously.

A2: ESSAY Unit 3 - ECON 3: Do you agree that large firms are always better than small firms? (25 marks)

Here I have attached my essay answer for this question; it is graded an A. Remember a good essay needs a balance of knowledge, application, analysis, and evaluation. My essay isn't perfect but I hope you can benefit from it nevertheless. This is essentially a Monopoly vs. Perfect competition essay and there is a lot to talk about. Please note I did not do this in timed conditions. *please do not repost without credit, thanks!

Do you agree that large firms are always better than small firms? Justify your answer. (25 marks)

 

Large firms can experience certain advantages that small firms cannot achieve thus can be argued to be better; however this may not always be true as they may also face disadvantages for example from diseconomies of scale. Furthermore the market is fundamental to determine if large firms are better than small firms, as perfectly competitive and monopoly markets varies the advantages and disadvantages of being a small or large firm.

Large firms tend to benefit more due to several factors from economies of scale; this means that the firm can benefit from falling average costs in the long run – however small firms cannot achieve such benefits. For example purchasing benefits whereby large firms are able to bulk buy raw materials as they are producing on a larger scale thus are able to receive discounts and therefore reducing production costs. Or they may experience technical economies whereby investment in more advanced machinery or larger premises will allow firms to experience increasing returns to scale where output is greater than input thus improving productive efficiency through division of labour and specialisation resulting again in lower costs. Economies of scale can be illustrated in diagram 1, whereby when output increases (Q to Q1), cost decreases (C to C1). Minimum efficient scale is illustrated at the constant part of the LRAC labeled QA firms are operating at the optimum point experiencing constant long run average costs where economies of scales are exhausted; the firm therefore is operating at long-run productive efficiency. This is the reason why large firms are considered to be better than small firms. However as the LRAC curve rises; large firms will experience diseconomies of scale. For example as a firm grows control becomes more difficult, monitoring productivity of each worker in a large firm will become more challenging thus may result in a loss of productive efficiency and therefore rising average costs. Additionally coupled with poor communication and co-ordination due to increasing size of firms increasing average costs are accelerated. Furthermore as large firms are often public limited companies ownership and control is often divided among a group of shareholders thus control over the firm is not subject to one person and instead are run by several directors who carry the interest of the shareholders. This makes management over large firms more difficult as negotiations and meetings are needed to carry out various operations thus reducing the efficiency of the firm whereas small firms are usually owned by one person thus management and decisions are able to be made swiftly. Also communication and co-ordination in small firms are much easier to manage and is less costly due to smaller amount of factors of production. In this sense, small firms can be argued to work more efficiently than large firms.

 

 

 Some large firms strive for monopoly market power therefore enjoying greater market power and influence thus larger profits which may be used to finance and promote innovation can result in dynamic efficiency and therefore economic growth. Additionally it enables them to obtain supernormal profits however this is impossible for small firms to achieve. This is illustrated in diagram 2 where profit maximisation occurs at MC=MR output ‘Q’, ATC is ‘Pn’ however monopolists will charge ‘Ps’ exploiting consumers at the point of demand thus will make supernormal profits illustrated in the shaded region of the diagram.  Monopolies are also able to protect their market position through the use of entry barriers. However monopolies are very rare thus such a market is not very likely to occur in the real world. Furthermore at the point of supernormal profits monopolists are not productively efficient as they are not operating at the optimum point of the ATC curve, this is because as a monopoly they face no threats to compete with others firms therefore can be considered X-inefficient as they are ‘slacking’ in efficiency if they were to be in a more competitive market. Also monopolies may not use their profits to invest to innovate thus may prevent growth. Therefore it can be argued that small firms are better as their objectives do not include exploiting consumers with high prices for supernormal profits thus may operate where they are productively efficient. Additionally since small firms cannot operate as a monopoly, there will be no abuse of monopoly power therefore small firms can be argued to be better.

 

However a perfectly competitive market is made up of a large number of small firms; the industry equilibrium of supply and demand which establishes the price – firms who try sell above this amount, consumers will not buy the product, similarly if the firm sells below this price consumers will purchase their goods however they will not be maximising returns. And thus the individual firms have no choice but to accept the price given by the industry and therefore act like price takers in a perfectly competitive market. However they can benefit from allocative efficiency; this is where the optimum allocation of scarce resources that best accords with the consumers’ pattern of demand. As shown in diagram 3 price is equal to marginal cost (P=MC) thus allocative efficiency is achieved in both the short and long run, as at the ruling price ‘P’ firms are producing the exact quantity consumer’s demand and thus there are no wasted resource thus total economic welfare is maximised.

Furthermore small firms in a perfectly competitive market often also benefit from productive efficiency as well as dynamic efficiency thus will lower costs. However the conditions for a completely competitive market are based on several assumptions such as perfect information – consumers will have all available information about price and products from competing suppliers and can access freely, many sellers and buyers, no externalities etc. however this is impossible to have in reality thus such market does not exist.

 

Overall large firms are better in terms of the benefit of economies of scale however there are pull backs if the firm becomes too large and diseconomies sets in. Additionally if a large firm becomes a monopoly; they can achieve high profits but only at the expense of exploiting consumers and they may not use profits to invest further thus abusing monopoly power this therefore suggests that large firms may not be better than small firms in all cases. In perfectly competitive market small firms has the advantage of great economic efficiency and are able to minimise costs unlike monopoly firms. However it must be emphasized that such markets are impossible in reality. Therefore overall both large firms and small firms are only better in than each another in certain cases.

A2: ESSAY Unit 3 - ECON3 JAN 11 [08] ESSAY 1 (25 marks): Perfect competition theory more realistic

As requested an essay with no diagram. Here I have attached my essay answer for this question; it is graded an A. Remember a good essay needs a balance of knowledge, application, analysis, and evaluation. My essay isn't perfect but I hope you can benefit from it nevertheless. As you'll see I have not included a diagram but you can still get a good grade. Obviously a diagram will help a lot in answer a question (and I recommend you always include a diagram where possible) but it is possible without. *please do not repost without credit, thanks!

 

'While some economic theories become outdated, the theory of perfect competition has become more realistic overtime.' Discuss whether technological developments, such as the internet, are making markets more competitive and making competition theory more realistic. (25 marks)

 

Perfect competitive markets are based on several assumptions such as; perfect information, no trade barriers, homogeneous products etc. these can be considered unrealistic as it is impossible for all assumptions to exist simultaneously. Through technological advances, however, markets are indeed becoming more competitive therefore bringing the perfectly competitive market theory to become more realistic than before. However technological development can also contribute to making perfect competitive theory more unrealistic and due to greater emergence of monopolistic firms from merging of small firms enables firms to influence market prices.

Assumptions of a perfectly competitive market includes; large number of buyers and sellers, perfect information thus buyers and sellers are aware about all products and prices, there are no barriers to entry thus any firm can enter or leave the industry. However in reality perfect information is almost impossible to achieve as there will always be imperfect or insufficient information available for example due to time lags; additionally it is difficult to not have barriers to entry to a market as most firms in reality often rely on the use of patents and brands, consumer loyalty, etc. thus creating barriers to entry. However through technological developments such as the internet it can be argued that some of these assumptions have become more realistic. The internet, for example, has enabled consumers to find a greater amount of information about goods and services e.g. through search engines such as Google thus improving information flows therefore closing the gap between imperfect and perfect information. This has resulted in more uniform prices. Furthermore the internet has allowed the removal of trade barriers to a certain degree especially through the use of sites like eBay or Amazon which enabled the creation of many small firms to be established for example through removing the barrier of high set-up costs as it is fairly cheap or free to start up a business on given sites and thus improves the assumption of no barriers to entry to be more realistic. And also therefore improves the assumption of large number of buyers and sellers due to the creation of new firms through the internet which acts as a platform for many businesses to be established and developed. Furthermore as the internet has no geographical barriers/location buyers and sellers from all over the world are able access online businesses and trade together thus are increasing the number of buyers and sellers therefore making the large number of buyers and sellers assumption more applicable in reality thus increasing market competitiveness. Therefore technological developments such as the internet can improve the realism of several assumptions in the perfect competition theory.

Additionally developments in technology will allow factors of production to become more mobile to changing market conditions. For example, improving capital machinery; firms are able to use one machine (e.g. for making plastic cutlery) however with several different functions (e.g. ability to make plastic stationary) through technological advances to perhaps follow necessary market trends or to accommodate consumers’ taste in order to survive in the competitive market which therefore makes the perfectly mobile factors of production assumption more realistic.

Conversely some technological developments have also made the theory of perfectly competitive markets more unrealistic, for example; the assumption that all firms produces homogenous products whereby all products are exactly the same thus there are not differentiating trademarks, brand names etc. which allow similar products to command different prices.  With technological improvements on tools and machinery businesses are able to establish products but with different features and styles suited to consumers tastes; for example Currys’ in the previous decades sold fridges which was almost homogenous to other firms – however with technological advancement they are able to sell several type of fridges differentiated between brands, colour, design etc. thus making the assumption of homogenous products more unrealistic. Furthermore in reality following technological advancements firms have begun to merge thus adopting monopolistic powers therefore firms may become big enough to affect the market price. For example, when new technology is introduced and is fundamental to competition some firms do not have the required capital to invest in such technology due to lack of profits thus merging together gives firms the opportunity to be able to combine capital and afford better technology therefore giving such firms monopolistic strengths like economies of scale; additionally having greater power in the market thus enabling them to perhaps influence the market price. Thus it can be argued that technology advances have made the competition theory less realistic. Although it is not entirely clear to what extent technological advancements have promoted mergers and acquisitions.

Overall it can be concluded that indeed technological development has furthered realism of the theory of perfect competition. The internet alone has improved several assumptions of perfect competition; large number of buyer and sellers, no trade barriers and perfect information to become more realistic. Moreover development in technology has also helped the assumption perfectly mobile factors of production to be put into practice more thus improving the assumption to be more realistic. Although such developments have contributed in making the theory less realistic; due to products becoming less homogenous and small firms are wielding more market powers through merging. Overall as more than half of the assumptions for a perfectly competitive market can be proven to be more realistic thus markets are becoming more competitive and therefore more realistic. However it must be emphasised that though assumptions are becoming more realistic, the perfectly competitive theory is still far from reality as the assumptions are still impossible to completely achieve in reality; for example, even with the internet there will not be complete access to perfect information on a global scale given the level of poverty. In addition, very similar but non homogenous goods leads to confusion for consumers on prices which is exacerbated by potential price fixing between an ever increasingly oligopolistic market. There will always be a constant battle between producers, aiming to maximise profits rendering perfect competition weak on the one hand and consumers minimising their spend in order to maximise their welfare rendering the model of perfect competition alive and well.