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Saturday, 21 November 2015

Unit 1: Behavioural Economics

This clip, from Sesame St, is a super example that can be used to illustrate a number of Behavioural Economics and Market Failure principles:

The Edexcel A-level Economics specification requires students to understand the concepts of bounded self-control and cognitive biases. In this clip, Cookie Monster knows that he needs to have more self-control about eating cookies and must learn to "self-regulate" - difficult, though, with his habitual consumption of cookies! A relevant cognitive bias here would be the notion of hyperbolic discounting. In technical terms, this means "time inconsistent discounting", or in plain English, we don't value the future as much as we should, placing too much emphasis on current consumption. It's also easy to link this concept with the market failure associated with demerit goods - why do people continue to consume items that are "bad" for them? Here is another Sesame St clip, again with Cookie Monster: This time, Cookie Monster has to wait for his cookie - and if he can wait, he gets two cookies instead of the one cookie he gets to wait if he can't wait. One cognitive bias shown here is the Rhyme As Reason effect, in which rhymes are perceived as more "truthful". In this case, Cookie Monster is distracted by a song containing lots of rhymes that tell him to wait. And finally, here is Cookie Monster and Sir Ian McKellen learning about the word "resist":

Unit 3: Market failure & regulatory capture

A report from the Bank of England and the Financial Services Authority has suggested that up to 10 executives that worked for HBOS should be banned from working in the City in the future. The named executives include Andy Hornby, HBOS's former chief executive, and Lord Stevenson, its former chairman.
The report suggests that the executives did not take enough action to ensure against any possible collapse in the financial markets which led to HBOS requiring a Government bailout at the start of the financial crisis in 2008.
Moreover, the report suggests that the Bank of England's own regulatory body at the time did not investigate the issues with enough stringency and relied too heavily on information from senior managers within organisations like HBOS.
For students of A Level Economics, this report offers examples of both market failure in the financial markets and the impact of regulatory capture (where the regulatory body of a market are too closely linked to the decision making of the management and ownership of the firms within that industry and therefore unlikely to act fully in the public interest).

Unit 2 & 4: The multiplier effect in action

Unit 3: Mergers, de-mergers & acquisitions in the news

Lots of action in the business markets at the moment. Please take some time to look at these. we will discuss in the lessons this week.

Monday, 16 November 2015

Unit 3: Natural Monopoly - Video presentation

In most cases, it can be argued that increased competition in a market will lead to an increase in efficiency, benefiting society and consumers. More competition, it can be argued, puts downward pressure on prices and forces firms to use their resources in a more efficient manner, encouraging firms to reduce their average total costs.

But what if the total demand for a good in a particular market is not high enough to necessitate more than one firm producing the good in question? In other words, what if having more than one firm means that each individual producer will have higher average total costs than a single firm would have? Such a scenario exists if the market demand curve intersects a monopolist's average total cost curve in the range in which economies of scale are experienced, in other words where ATC it still decreasing. This is known as a natural monopoly.

Such industries exist, particularly in the case of large utilities such as water, electricity, natural gas, sewage and garbage collection. Think about the town you live in: how many firms can you choose to buy your electricity from? The answer is most likely ONE. Would you be better off if the answer were 100? Probably not. Here's why: If 100 firms competed to provide electricity to your city, no single firm would achieve the economies of scale needed to lower its average total cost to a level that would allow it to provide electricity at the low, desirable rates that you currently pay. With 100 firms providing electricity, each firm would have much higher average costs and therefore would have to charge higher prices to their consumers! Competition would drive the price UP, instead of DOWN, like it is supposed to do, due to the significant economies of scale, namely the huge fixed costs of capital and infrastructure, needed to provide a utility such as electricity.

The problem with natural monopolies is that if they are left unregulated, they will produce much less and charge a price much higher than what is socially optimal (where marginal benefit equals marginal cost). Thus arises the need for regulation. This lesson will explain the theory of natural monopolies and examine the use of subsidies and price controls to promote a more socially optimal outcome in such industries.