Microeconomics And Behavior Tools System Essay

Question:

Discuss about the Microeconomics and Behavior Tools System.

Answer:

Introduction:

Unwholesome food habits enhance government expenses on diverse health as well as services. However, in order to resolve this, there is need for using tools of subsidy as well as tax in combination. Although, both subsidies along with taxes have distorting impact, it can transform purchasing habit by altering prices by the consumers and the ones accepted by the sellers. Firstly, it is important to take into consideration the impact of particularly taxation on specifically taxation on diverse unhealthy food such as sweet along with sweet beverages.

In essence, the own price elasticity approximation for particularly sweet as well as sweet snacks are recorded to be -0.270 and -0.295 for sweets of both high and low caloried sweet and sugar snacks in that order. Thus, the demand can be considered to be inelastic in natire and therefore, the demand curve is observed to be steeper. Prior to the process of tax imposition, P* reflects the equilibrium price and Q* reflects the equilibrium quantity. However, tax imposition can increase the price paid by consumers to the level of P1 and thereby the price accepted by the producer can be considered to be P2 (Frank 2014). Nevertheless, owing to inelastic demand, consumers can put up with higher burden of tax.

In essence, food with higher level of calorie as well as vegetables necessarily have a price elasticity that is equal to -1.128 while the dairy products with lower calories necessarily have price elasticity equal to -1.97. However, at the time when a specific subsidy is provided then a definite amount paid as price by different consumers decreases whilst the amount received by producer increases. In essence, subsidy on these particular products can increase demand of specific foods by a certain fraction that is greater than the decrease in price (Frank 2014).

As suggested by Keynes government intervention is required in a certain economy in order to put up with shocks. As such, the Keynesian viewpoint received attention especially during the Great Recession. During the period of recession the entire economy stands up with depressed demand owing to decreased consumption spending. Frank (2014) asserts that spending can be regarded as a significant element of government spending. Particularly, the support delivered by the governing unit directly else wise indirectly enhances household spending and private outgoings and thus leads to overall increase in the aggregate demand. As such, the fiscal dependence was provided priority since no authority responsible for monetary affairs or in other words central bank was existent.

During the period of economic recession, the entire economy shrinks/contracts. Essentially, automatic fiscal stabilizers essentially refer to the ones that work without dynamic intervention by different policymakers. Since the entire income decreases, individuals make lesser payments for tax. Again, with shrinking employment prospects, government has the need to make higher amount of transfer payments. In addition to this, the alterations in taxation revenue and government expenses bring about automated modification in budget Case et al. (2014).


Essentially, the discretionary alterations occur in the form of alterations in taxation rate else wise government expenses. However, during the period of recession, government enhances their overall spending and decreases the overall rates of taxation. Particularly, the government spending on the whole in particularly OECD zone during the period of recessionary situation has enhanced from particularly 25% during the period of 1960 to nearly 40% in the present days.

Fiscal contraction occurs particularly in the form of lessening wasteful expenses that develops the entire economic performance. Particularly, during the period of fiscal contraction, it can be seen that a crowd in effect takes place particularly in investment owing to functionality in the money market. Frank (2014) mentions that the money market tool that works is essentially the rate of interest. Due to fiscal contraction, the rate of interest existent in the money market decreases. In particular, this helps in stimulating real investment by way of lessening the overall cost of borrowing. Investment being an element of aggregate demand leads to enhancement of economic action.

Case et al. (2014) asserts that monetary policy provides stimulus to the entire economy by providing boost to the net investment as well as aggregate demand. However, under specific expansionary monetary strategy, there occurs a reduction in the rate of interest by means of supply of money. However, the reduced rate of interest augments the level of investment in the nation because of a decreased cost of borrowing. In particular, with depreciation in the currency, the nation’s export necessarily becomes cheaper and this assists the process of export. Nonetheless, with enhancement in the bet export, national income essentially rises and subsequently the entire economy expands. Frank (2014) mentions that the stimulus provided from particular fiscal strategy does not take into consideration the specific fact that the Australian economy is to great extent reliant on level of external borrowing. Essentially, the foreign borrowing gets introduced by means of channel of banking segment where the rate of interest plays a very significant role.

References

Case, K.E., Fair, R.C. and Oster, S., 2014. Principles of economics. Pearson Higher Ed.

Frank, R., 2014. Microeconomics and behavior. McGraw-Hill Higher Education.

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