Economics Class: Fiscal Policy and Cost Benefits
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Questions and Answers

What is one reason larger firms experience lower costs?

  • Larger firms reduce production quantity.
  • Larger firms can afford to pay premium prices. (correct)
  • Larger firms buy resources in bulk. (correct)
  • Larger firms have less diverse product offerings.

How do marketing economies benefit larger firms?

  • They predominantly sell through online channels.
  • They can spread fixed costs across fewer units.
  • They rely solely on third-party distributors.
  • They can produce more television advertisements at low cost. (correct)

What is indicated by the curve in the graph regarding average production cost and scale of production?

  • Average costs remain constant regardless of scale.
  • Average costs decrease, then increase after a certain scale. (correct)
  • Average costs are unrelated to the scale of production.
  • Average costs continuously increase with scale.

What is an example of technical economies?

<p>A small company purchasing expensive machinery for infrequent use. (A)</p> Signup and view all the answers

What is a common benefit of bulk buying for firms?

<p>Discounted rates from suppliers. (A)</p> Signup and view all the answers

What occurs when government spending exceeds government revenue?

<p>Fiscal deficit (A)</p> Signup and view all the answers

What is a potential consequence of consistently high fiscal deficits?

<p>Rising national debt (A)</p> Signup and view all the answers

Which of the following is NOT a benefit of running a fiscal surplus?

<p>Increased government spending (D)</p> Signup and view all the answers

What can a government do with a fiscal surplus?

<p>Repay government debts (D)</p> Signup and view all the answers

Which period saw Sweden experiencing fiscal deficits based on the provided information?

<p>2009-2014 (A)</p> Signup and view all the answers

What is the national debt?

<p>Total amount of money owed by a country (A)</p> Signup and view all the answers

What does a government incur when it consistently runs a fiscal deficit?

<p>More interest payments (C)</p> Signup and view all the answers

What was Sweden's fiscal situation in 2015?

<p>Fiscal surplus (B)</p> Signup and view all the answers

What is the purpose of inheritance tax?

<p>Tax on inherited money from deceased individuals (D)</p> Signup and view all the answers

What type of tax is a sales tax classified as?

<p>Indirect tax (B)</p> Signup and view all the answers

Which of the following items is likely to have a zero VAT rating?

<p>Books (A)</p> Signup and view all the answers

What is the main purpose of environmental taxes?

<p>To protect the environment (B)</p> Signup and view all the answers

What does the landfill tax specifically target?

<p>Waste disposal in landfills (A)</p> Signup and view all the answers

What is the main purpose of expansionary fiscal policy?

<p>To stimulate demand in the economy (A)</p> Signup and view all the answers

How can contractionary fiscal policy affect unemployment?

<p>It can raise unemployment by reducing demand (A)</p> Signup and view all the answers

What effect can contractionary fiscal policy have on inflation?

<p>It can reduce inflation by reducing demand (D)</p> Signup and view all the answers

Which of the following is a consequence of expansionary fiscal policy?

<p>Higher disposable income for consumers (B)</p> Signup and view all the answers

Fiscal policy can be utilized to address which of the following issues?

<p>Environmental concerns through taxation and subsidies (B)</p> Signup and view all the answers

What is the primary purpose of taxation for governments?

<p>To pay for public sector services (B)</p> Signup and view all the answers

Which of the following is an example of a direct tax?

<p>Income tax (D)</p> Signup and view all the answers

What type of tax is specifically used to fund pensions and healthcare?

<p>Social insurance tax (B)</p> Signup and view all the answers

Which tax is imposed on the profits of limited companies?

<p>Corporation tax (B)</p> Signup and view all the answers

What does capital gains tax apply to?

<p>Gains made when selling assets for a profit (D)</p> Signup and view all the answers

What is one consequence of relying on bureaucracy in large businesses?

<p>Slower decision-making (B)</p> Signup and view all the answers

How do language and cultural differences impact large organizations?

<p>They create communication challenges (D)</p> Signup and view all the answers

What is a significant issue faced by large businesses concerning control?

<p>Increased complexity in managing staff (C)</p> Signup and view all the answers

What can happen as a result of a lack of understanding between senior management and shop floor workers?

<p>Demotivation of workers (D)</p> Signup and view all the answers

What was one of the reasons Volkswagen's emissions scandal occurred?

<p>Bureaucracy made control complex (C)</p> Signup and view all the answers

What was the impact of the emissions scandal on Volkswagen's reputation?

<p>It caused significant damage (C)</p> Signup and view all the answers

Which of the following describes diseconomies of scale related to excessive bureaucracy?

<p>Wasting resources on administration (C)</p> Signup and view all the answers

What was the approximate financial impact of the emissions scandal on Volkswagen?

<p>€30,000 million drop (C)</p> Signup and view all the answers

What is meant by external economies of scale?

<p>Cost benefits that all firms in an industry can enjoy when the industry expands. (A)</p> Signup and view all the answers

How does a concentration of industry in a region influence skilled labor?

<p>It encourages local educational institutions to offer relevant vocational courses. (B)</p> Signup and view all the answers

What is a consequence of an established industry attracting suppliers to a region?

<p>Enhanced availability of specialized services for the firms in the industry. (D)</p> Signup and view all the answers

What leads to diseconomies of scale?

<p>Expansion beyond an optimal point leading to increased average costs. (C)</p> Signup and view all the answers

How can businesses in the same industry benefit from being located near each other?

<p>Shared costs and potential collaboration in research and development. (A)</p> Signup and view all the answers

What advantage do larger firms have when negotiating with banks?

<p>They can exert pressure to obtain better loan terms. (D)</p> Signup and view all the answers

What is one way larger firms achieve managerial economies?

<p>By employing specialized managers for different operations. (A)</p> Signup and view all the answers

How do risk-bearing economies benefit larger firms?

<p>They diversify their offerings to reduce business risks. (D)</p> Signup and view all the answers

Which aspect of IKEA's strategy reflects technical economies?

<p>Utilizing specialization in different product components for cost reduction. (C)</p> Signup and view all the answers

What contributes to IKEA's ability to adapt to different market conditions?

<p>Its diversification into multiple areas such as food markets and childcare services. (A)</p> Signup and view all the answers

Flashcards

Fiscal Deficit

Government spending exceeds government revenue.

Fiscal Surplus

Government revenue exceeds government spending.

National Debt

Total amount owed by a country.

Impact of Deficit (long-term)

Rising national debt, future interest payments, opportunity cost of other services.

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Impact of Surplus

Used for services, lower taxes, or reduce debt; lower future interest payments.

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Government Spending

The amount a government spends in a given period.

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Government Revenue

The amount a government receives in taxes and other income.

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Fiscal Balance

Difference between government spending and revenue (surplus or deficit).

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Internal Economies of Scale

Cost advantages a larger firm gains due to increased size.

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Purchasing Economies

Cost savings for large firms buying resources in bulk from suppliers.

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Marketing Economies

Cost savings for large firms due to their own delivery systems or advertising.

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Technical Economies

Cost savings from specialization and efficient machinery in larger factories.

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Economies of scale

Decreasing average cost as production scale increases to a minimum point, then increasing.

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Inheritance Tax

Tax on money inherited from deceased individuals.

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Indirect Tax

A tax on spending.

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Sales Tax (VAT)

Tax on spending, varying by country, with exemptions for certain items.

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Landfill Tax

Tax levied on waste disposal in landfills.

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Duties

Heavy taxes on specific goods, often associated with imports.

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Expansionary Fiscal Policy

Government actions that increase spending or decrease taxes to stimulate economic activity.

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Contractionary Fiscal Policy

Government actions that decrease spending or increase taxes to reduce economic activity.

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Fiscal Policy and Inflation

Contractionary fiscal policy can reduce inflation by decreasing aggregate demand, which lessens pressure on prices to rise.

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Fiscal Policy and Growth

Expansionary fiscal policy can boost economic growth by increasing government spending and reducing taxes, which increase demand for goods and services.

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Fiscal Policy and Unemployment

Expansionary fiscal policy can reduce unemployment by increasing demand, which encourages businesses to hire more workers.

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Direct Taxes

Taxes imposed on individuals and businesses, typically linked to income and wealth.

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Income Tax

A direct tax on the amount an individual earns, paid by both employed and self-employed people.

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Social Insurance Taxes

Direct taxes levied on income that are specifically used to fund pension benefits and healthcare.

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Corporation Tax

A tax imposed on the profits made by limited companies.

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Capital Gains Tax

A tax levied on any financial gains made when selling assets like shares, businesses, or properties at a profit.

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Bureaucracy in Large Firms

Excessive administrative processes that slow decision-making and increase costs in large companies.

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Communication Problems (Large Firms)

Difficulties in communicating between departments worldwide, due to language barriers and cultural differences.

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Lack of Control (Large Firms)

Challenges in managing and coordinating a large company's operations.

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Management Layers (Large Firms)

Many levels of management between senior staff and workers, leading to potentially poor communication and demotivation.

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VW Emissions Scandal

Volkswagen installed software to cheat emissions tests, impacting its reputation and value.

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VW's Size and Bureaucracy

VW's large size is suggested to be a cause of the issues that led to their scandal.

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VW's Diseconomies of Scale

Volkswagen's large size, and thus their complex operations, resulted in problems that increased their costs.

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Skilled Labor

A concentration of skilled workers in an industry leads to lower training costs and more specialized educational opportunities.

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Infrastructure

An industry's presence attracts infrastructure tailored to its needs, like specialized industrial estates.

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Access to Suppliers

An established industry attracts specialized suppliers, offering services like distribution, maintenance, and marketing.

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Financial Economies of Scale

Large firms have access to cheaper financing options, like loans with better interest rates, due to their size and reputation.

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Managerial Economies of Scale

Large firms can afford specialized managers for different tasks, leading to more efficient operations and lower average costs.

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Risk-Bearing Economies of Scale

Large firms can diversify their products and markets, reducing the risk of failure. This strategy is typical in supermarkets, consumer durables, and many other industries.

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IKEA and Economies of Scale

IKEA benefits from economies of scale by using specialized manufacturing, offering diverse products, and adapting to different markets.

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Technical Economies of Scale

Larger companies can afford and use specialized, efficient machinery, leading to reduced production costs per unit.

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Study Notes

Fiscal Deficits and Fiscal Surpluses

  • In most years, governments plan to spend more than they receive in tax revenue. This results in a fiscal deficit and means that the government must borrow money to fund the deficit. For example, in getting started, Figure 31-2 showed that Canada planned to borrow (CAD)49,500 million. This money might be borrowed from both domestic and foreign banks and possibly other governments.
  • If the government were to spend less than it received in tax revenues, there would be a fiscal surplus. This may be used to repay government debts. Figure 31-4 shows the pattern of fiscal deficits and surpluses for Sweden between 2008 and 2015. At the beginning of the period, Sweden enjoyed a surplus of fiscal receipts. However, from 2009 to 2014, the government spent more than it received in revenues. Finally, in 2015, the Swedish government managed to generate another surplus.

Impact of a Fiscal Deficit and a Fiscal Surplus

  • Over a long period of time, most governments would prefer to avoid running a fiscal deficit. In a fiscal deficit, the government plans to spend more than it receives in tax revenue for a year. Consequently, it might have to borrow money to fund the deficit. Government budgets build up over a period of time, the national debt gets bigger and bigger. This means that the governments would have to spend more on interest payments on paying off the debt. Many would argue that money spent on interest payments has a high opportunity cost. For example, the money could be spent on lower taxes or extra spending on social provision or infrastructure development.
  • Another problem with persistent fiscal deficits and rising national debt is that future generations may be burdened with the debt of today. Many would argue that this is not really fair on those people that have not even been born yet. They will be paying for the excesses of previous generations.
  • The impact of a fiscal surplus is likely to be positive. If a government collects more revenue than it spends in a year, the surplus could be used in a number of ways. For example, it could be used to spend on the future provision of public services or used to lower taxes, in expanding on the national debt. This would reduce future interest payments and strengthen the nation's finances.
  • Finally, when analyzing the size of fiscal deficits, it is more important to focus on the size of the deficit in relation to the nation's GDP. This is because, for example, a country with a large GDP might have a large deficit without being in any immediate trouble.

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Description

This quiz explores the concepts of economies of scale, fiscal policy, and the implications of government spending. It covers various aspects like marketing economies, technical economies, fiscal deficits, and the national debt, specifically through the lens of larger firms and their operational benefits. Test your understanding of these fundamental economic principles.

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