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Pros and Cons of Introducing a National Minimum Wage

Analyse how an increase in interest rate could reduce total demand in an economy.

Category:

Macroeconomic Factors and Policies

Frequently asked question

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Answer

Be aware of key economic terminology and use it accurately.

➡Title: The Impact of Falling Product Prices on an Economy
🍃Introduction: The fall in the price of a product can have various implications for an economy. This essay critically evaluates the potential advantages and disadvantages associated with a decline in product prices. It considers factors such as demand elasticity, the importance of the product, and its impact on revenue, employment, economic growth, and the current account. It is important to note that the magnitude and duration of the price decrease, as well as the specific characteristics of the product, will influence its overall impact on the economy.
I. Disadvantages of Falling Product Prices
A. Impact on Revenue and Firms:
➡️1. Price Inelastic Demand:
• Argument in Favor: If the demand for the product is price inelastic, a decrease in price may result in a decrease in total revenue. This can pose challenges for firms, particularly if the product is a basic necessity, as it may not cover their costs, potentially leading to business closures and reduced employment opportunities.
• Counterargument: The significance of the price decrease depends on the magnitude of the fall and the elasticity of demand. If the demand for the product is relatively elastic, a price reduction could lead to an increase in total revenue due to higher quantity demanded.
➡️2. Discouragement of Investment:
• Argument in Favor: Lower product prices can result in reduced profits for firms, potentially discouraging investment and hindering economic growth.
• Counterargument: The impact on investment and economic growth depends on various factors, such as the overall business environment, availability of alternative investment opportunities, and the extent to which firms can adapt to the changing market conditions.
➡️3. Export Revenue and Current Account Deficit:
• Argument in Favor: A decline in product prices may lead to a decrease in export revenue, potentially widening the current account deficit.
• Counterargument: The impact on the current account depends on the country's overall trade dynamics and the responsiveness of export demand to price changes. If the fall in prices enhances international competitiveness, it may improve the current account position by increasing export volumes.
B. Disincentives and Demerit Goods:
➡️1. Product as a Demerit Good:
• Argument in Favor: If the product is considered a demerit good and was previously overconsumed, a fall in its price may perpetuate overconsumption, leading to negative externalities such as health issues or environmental degradation.
• Counterargument: The decrease in price may not necessarily result in a significant change in consumption patterns, as other factors, such as awareness campaigns or regulations, can also influence consumer behavior. Additionally, if the product has merit characteristics, such as improved health outcomes, the fall in price may lead to positive social and economic impacts.
C. Deflationary Concerns:
➡️1. Recession and Unemployment:
• Argument in Favor: If the fall in the product price is part of a broader deflationary situation, it may be indicative of an economic downturn, potentially leading to a recession and higher unemployment rates.
• Counterargument: The relationship between falling prices, recession, and unemployment is complex and dependent on multiple factors, including the overall economic environment, the responsiveness of aggregate demand, and the effectiveness of monetary and fiscal policies in stimulating economic activity.
II. Advantages of Falling Product Prices
A. Increased Affordability and Living Standards:
➡️1. Price Elastic Demand:
• Argument in Favor: If the demand for the product is price elastic, a decrease in price can lead to an increase in total revenue due to higher quantity demanded. This can provide consumers with increased choices and affordability, contributing to improved living standards.
• Counterargument: The positive impact on living standards depends on factors such as income distribution and the availability of substitute goods. If the income elasticity of demand is low, the benefits may be concentrated among certain income groups,

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I. 🍃Introduction
- Explanation of the topic
- Importance of understanding the advantages and disadvantages of a fall in price

II. Disadvantages of a fall in price
- Dependence on the product in the economy
- Price inelastic demand
- Less profits and investment
- Less export revenue
- Domestic firms losing out
- Demerit goods
- Deflationary situation

III. Advantages of a fall in price
- Size and duration of the fall
- Elastic demand
- Increase in choices and affordability
- Lower cost of production
- Merit goods
- Affordability for low-income groups
- Increase in productivity and government subsidies
- Improved international competitiveness

IV. 👉Conclusion
- Summary of the advantages and disadvantages
- Importance of considering the context of the fall in price
- Implications for the economy and consumers.

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• It depends on size of fall in price and elasticity of demand for the product
• It depends upon the importance of the product to the economy / how dependent on it
• If demand is price inelastic, decrease in total revenue e.g. basic items / necessity, cannot cover the costs, firms may go out of business, less employment opportunities
• Less profits, discourages investment, reduces economic growth
• Less export revenue, may increase current account deficit
• Fall in price may be due to cheaper imports, domestic firms lose out.
• The product may be a demerit good which previously was overconsumed.
• If the product is part of a deflationary situation, there could be recession / unemploymentWhy it might not be a disadvantage:
• Depends on size of fall and whether it is short or long term
• If demand is elastic, increase in total revenue e.g. luxury goods / many substitutes
• Increase choices and affordability of product – better living standards
• Fall in the price of a raw material may lower cost of production, reducing inflation and increasing economic growth
• The product may be a merit good which previously was under- consumed
• It may make a basic necessity more affordable – low income groups may be better off
• It may be the result of an increase in productivity / a government subsidy
• It may make the product more internationally competitive, improving the current account position.

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