,Evaluate the microeconomic and macroeconomic e ects of subsidising renewable energy
(25)
Intro:
• subsidies is a grant given by the govt to producers which enables them to increase their
output by reducing their production costs and enabling them to reduce the price they charge
to consumers
• Renewable energy is regarded as a merit good - this is a good which is underprovided and
underconsumed in a free market econ (is a positive externality)
Micro e ects:
• Subsisdy reduces production cost for a rm
P
S
S +
subsidy
‰
a
℃∴ '
* cost to
govt
'
\
'
□
「
⑰ Qsub Q
• The subsidy causes supply to shift outwards from S to s+subsidy - as a result the price of
renewable energy will fall from P1 to Psub and the number of units will rise from Q1 to Qsub
• Consumer surplus and producer surplus increases
• Producer receives more money from the subsidy - thus higher rev and pro ts - these pro ts
can be reinvested into R&D, latest tech, etc —> this increases dynamic e ciency
• given that the price is now lower for renewable energy, people are more likely to switch away
from substitute goods towards renewable energy as it looks more attractive at a lower price
• A subsidy causes MC and AC to shift down - can show the e ects of that
Eval of micro e ects:
• It creates a dependency culture amongst producers - if producers become overly reliant on
the subsidy, then the issue that arises could be that they become X-ine cient - this occurs
due to a rm occurring uncessesary costs
Macro e ects:
• subsidies will allow rms to become more internationally price competitive
• Therfore, the level of exports leaving the country will increase as the lower prices o ered
from the subsidies will make the goods more attractive to foreigners
• Also, imports will fall as other domestic producers will just purchase their inputs from the
domestic market as it is cheaper
• Current account de cit is shrinking as exporting more than importing
fffffi ff fi
fi fi ff
, • also, X and M are components of AD - thus if X-M increases, AD will increase - right shift of
AD
• Furthermore, exports are an injection into the circular ow of income, therefore there will be
a positive multiplier e ect - e.g as rms are making more pro t, they can hire more workers,
these workers then earn more income, thus spend more in the economy, etc - draw an
additional shift of AD to show multiplier
*When analysing diagram, link it to macro objectives, e.g econ growth, in ation, scal de cit,
etc
Eval of macro e ects:
• 1) If this is a form of protectionism, other rms may retaliate by subsidising their own
producers, or they may impose tari s on us —> this could trigger a trade war
• 2) The world trade organisation may step in and stop the rm subsidising as they may see it
as a protectionist measure
Overall:
• summarise the points
Evaluate the micro and macro econ e ects of a devaluation of brazils currency (25)
Intro:
• devaluation is where there is an active involvement by the central bank to weaken their
currency - can do this by selling their ER on the currency market (increase S) or lowering IR
(decrease D from hot money out ows)
Macro e ects:
• Brazils econ will be more price competitive - weaker currency = more cheaper - exports will
increase as they are cheaper and imports will fall due to them being more expensive -
current account de cit will improve - can also link to X and M being part of AD and as that
increases, AD will increase - link to macro objectives - also, as exports injection into circular
ow, there will be multiplier e ects, e.g rms making more pro t so are expanding and hiring
more workers, they then make more income and spend more in the econ, etc - draw an
additional shift in AD
Eval of macro e ects:
• for Brazil’s current account to improve following the devaluation of the real, the Marshall
Lerner condition must be satis ed - this states that the sum of the price elasticities of
imports and exports must be greater than 1, thus they have to be elastic - although the
currency depreciated from the devaluation and exports became cheaper, if demand is
inelastic then the rms exporting goods wont make more revenue and pro t - also, with a
de ation, imports become more expensive, so demand should fall, but if demand for
imports is inelastic due to potential contracts, then a rm will incur higher costs in the SR
fl fl ff ff fi fi ff ff fi fl fiff fi
ff fi fi
, cwrrentaesount
劣
√
SP
↑
LR
Marshall lener condition
time
satisfied
• In the SR the likely reasons for the Marshall Lerner condition to not be satis ed is due to - 1)
consumers exhibit habitual behaviour, it takes conusmers a while to adjust their spending
patterns - 2) rms usually are tied into trade contracts, this means they cant change their
spending despite price changes - this makes demand for imports and exports inelastic - but
eventually in the LR, contracts will be nished and habitual behaviour changes, thus
becomes more elastic and therefore CA improves in the LR
Micro e ects:
• If the currency is weaker, rms typically import a lot of their raw materials - therefore cost of
importing many raw materials will increase - can draw either an inward shift in supply
showing higher cost of production or a cost and rev diagram showing an increase in MC and
AC due to higher variable costs - analyse the diagram by saying that VC have increase
because costs of production have gone up, number of units sold/consumed will fall, the
price the rm will charge will increase, the pro t the rm will make will fall, some rms may
be priced out entirely and be shut down (perhaps the average revenue for the rm is less
than the AVC, therefore they will shut down and leave the market), less money for rms to
invest so cant become dynamically e cient
Eval for micro e ects:
• If the rm is more price competitive internationally (macro e ect), then AR and MR are
shifting outwards - potentially a higher price and more sales
• If the ER is now weak, it may mean that certain industries that were struggling before, will
become more price competitive and be able to compete better
• As a proportion of a rms costs, how much will it be accounted for by imported raw
materials OR can they source their raw materials domestically
ff fi
fi fi ff fi fi ffi
fi fi fi
(25)
Intro:
• subsidies is a grant given by the govt to producers which enables them to increase their
output by reducing their production costs and enabling them to reduce the price they charge
to consumers
• Renewable energy is regarded as a merit good - this is a good which is underprovided and
underconsumed in a free market econ (is a positive externality)
Micro e ects:
• Subsisdy reduces production cost for a rm
P
S
S +
subsidy
‰
a
℃∴ '
* cost to
govt
'
\
'
□
「
⑰ Qsub Q
• The subsidy causes supply to shift outwards from S to s+subsidy - as a result the price of
renewable energy will fall from P1 to Psub and the number of units will rise from Q1 to Qsub
• Consumer surplus and producer surplus increases
• Producer receives more money from the subsidy - thus higher rev and pro ts - these pro ts
can be reinvested into R&D, latest tech, etc —> this increases dynamic e ciency
• given that the price is now lower for renewable energy, people are more likely to switch away
from substitute goods towards renewable energy as it looks more attractive at a lower price
• A subsidy causes MC and AC to shift down - can show the e ects of that
Eval of micro e ects:
• It creates a dependency culture amongst producers - if producers become overly reliant on
the subsidy, then the issue that arises could be that they become X-ine cient - this occurs
due to a rm occurring uncessesary costs
Macro e ects:
• subsidies will allow rms to become more internationally price competitive
• Therfore, the level of exports leaving the country will increase as the lower prices o ered
from the subsidies will make the goods more attractive to foreigners
• Also, imports will fall as other domestic producers will just purchase their inputs from the
domestic market as it is cheaper
• Current account de cit is shrinking as exporting more than importing
fffffi ff fi
fi fi ff
, • also, X and M are components of AD - thus if X-M increases, AD will increase - right shift of
AD
• Furthermore, exports are an injection into the circular ow of income, therefore there will be
a positive multiplier e ect - e.g as rms are making more pro t, they can hire more workers,
these workers then earn more income, thus spend more in the economy, etc - draw an
additional shift of AD to show multiplier
*When analysing diagram, link it to macro objectives, e.g econ growth, in ation, scal de cit,
etc
Eval of macro e ects:
• 1) If this is a form of protectionism, other rms may retaliate by subsidising their own
producers, or they may impose tari s on us —> this could trigger a trade war
• 2) The world trade organisation may step in and stop the rm subsidising as they may see it
as a protectionist measure
Overall:
• summarise the points
Evaluate the micro and macro econ e ects of a devaluation of brazils currency (25)
Intro:
• devaluation is where there is an active involvement by the central bank to weaken their
currency - can do this by selling their ER on the currency market (increase S) or lowering IR
(decrease D from hot money out ows)
Macro e ects:
• Brazils econ will be more price competitive - weaker currency = more cheaper - exports will
increase as they are cheaper and imports will fall due to them being more expensive -
current account de cit will improve - can also link to X and M being part of AD and as that
increases, AD will increase - link to macro objectives - also, as exports injection into circular
ow, there will be multiplier e ects, e.g rms making more pro t so are expanding and hiring
more workers, they then make more income and spend more in the econ, etc - draw an
additional shift in AD
Eval of macro e ects:
• for Brazil’s current account to improve following the devaluation of the real, the Marshall
Lerner condition must be satis ed - this states that the sum of the price elasticities of
imports and exports must be greater than 1, thus they have to be elastic - although the
currency depreciated from the devaluation and exports became cheaper, if demand is
inelastic then the rms exporting goods wont make more revenue and pro t - also, with a
de ation, imports become more expensive, so demand should fall, but if demand for
imports is inelastic due to potential contracts, then a rm will incur higher costs in the SR
fl fl ff ff fi fi ff ff fi fl fiff fi
ff fi fi
, cwrrentaesount
劣
√
SP
↑
LR
Marshall lener condition
time
satisfied
• In the SR the likely reasons for the Marshall Lerner condition to not be satis ed is due to - 1)
consumers exhibit habitual behaviour, it takes conusmers a while to adjust their spending
patterns - 2) rms usually are tied into trade contracts, this means they cant change their
spending despite price changes - this makes demand for imports and exports inelastic - but
eventually in the LR, contracts will be nished and habitual behaviour changes, thus
becomes more elastic and therefore CA improves in the LR
Micro e ects:
• If the currency is weaker, rms typically import a lot of their raw materials - therefore cost of
importing many raw materials will increase - can draw either an inward shift in supply
showing higher cost of production or a cost and rev diagram showing an increase in MC and
AC due to higher variable costs - analyse the diagram by saying that VC have increase
because costs of production have gone up, number of units sold/consumed will fall, the
price the rm will charge will increase, the pro t the rm will make will fall, some rms may
be priced out entirely and be shut down (perhaps the average revenue for the rm is less
than the AVC, therefore they will shut down and leave the market), less money for rms to
invest so cant become dynamically e cient
Eval for micro e ects:
• If the rm is more price competitive internationally (macro e ect), then AR and MR are
shifting outwards - potentially a higher price and more sales
• If the ER is now weak, it may mean that certain industries that were struggling before, will
become more price competitive and be able to compete better
• As a proportion of a rms costs, how much will it be accounted for by imported raw
materials OR can they source their raw materials domestically
ff fi
fi fi ff fi fi ffi
fi fi fi
