Past Paper Eco Notes

* Would the introduction of maximum prices by a government solve the problem of scarcity: Scarcity results from scarce resources and unlimited wants. An effective maximum price would be set below the market equilibrium. Unless the government took additional measures it would result in excess demand and a smaller quantity sold at a lower price. While some would benefit from lower prices others would now go without the good. Overall the action would not reduce the level of scarcity.

* Discuss whether farmers will benefit from producing goods which have low price elasticities of demand and supply: Supply is likely to be inelastic because of time lags and perishability while demand reflects necessity/substitutes and physical limits. Shifts in supply and demand cause major fluctuations in prices and affect income and planning. Increases in supply which lower price lead to falls in revenue. Against this inelastic demand maintains revenue when prices rise as supply falls. The latter only benefits farmers who manage to continue producing. Increases in efficiency can cause large falls in price and income. Uncertainty and risk avoidance often result. The impact of taxes and subsidies varies with elasticity.

* Is inflation is necessarily harmful? Changes in the general price level give rise to problems in terms of uncertainty and planning, menu and shoe leather costs, redistributional and international effects. The rate of inflation (particularly compared to rivals), its trend and whether it is anticipated affect the severity of the problems it causes. A low rate of inflation may be desirable as an incentive to producers and a stimulus to the economy. It is often advocated in preference to deflation.

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