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Wednesday, 28 September 2011

Unit 1 Micro: Market Failure: Smoking and Externalities

An interesting clip highlighting the issues of smoking for society.....excellent for Unit 1:-

IGCSE & Unit 1: Exercise on Equilibrium Market Prices

Following on from the exercises on Demand & Supply, here is the next stage, exercises on equilibrium price.

Tuesday, 27 September 2011

Unit 3: Putting the “discrimination” into price discrimination!

Discrimination usually has negative connotations so when teaching price discrimination, it is important to get across that treating people differently in terms of pricing is not in itself a bad thing. Although it is often marketed as a “discount”, most people accept that different groups of people are charged different amounts depending on their ability to pay and / or elasticity of demand, for example at the movies there are usually different rates for students, adults, and seniors But this example is useful to compare with genuine price discrimination as it is trying to make a political statement.


Students at the University of California’s Berkerley campus are going ahead with a bake sale where Asian and African-Americans will be charged less than whites, with women also benefitting from lower prices. The price list for the baked goods is as follows:



The students are protesting against affirmative action in university admission schemes and argue that if it is OK to have different rules for different races (and gender) then it should be OK to charge them different prices!

Although this is a political and not an economic argument, it could make for an interesting discussion in class as to how far price discrimination should be allowed to go. It seems perfectly acceptable to use it in terms of age (student and senior discount) but most people would argue that gender / ethnicity is a no-go area. But there are probably situations where people of different gender / ethnicity have different elasticities of demand for a good. And is having cheaper prices in a shop in a low-income area with a predominance of one ethnic group an example of price discrimination or not? And when I ask my male and female students how much they paid for their haircut the differences are often astounding!

And I’ve included my favourite price discrimination picture below. Enjoy the discussion!

Unit 1: Market Failure & Government Intervention (Drink Driving)

A culture of drink-driving has been a scourge in many countries for decades. The human and economic cost of lives lost and wrecked by motorists driving under the influence of alcohol is huge and most governments have introduced a range of interventions designed to change the incentives facing drivers. But which ones have most impact?


Northern Ireland Transport Minister Alex Attwood has announced plans to ramp up the regulations for drunk drivers in the province. He wants the blood alcohol limit from the current level of 80mg/100ml to 50mg/100ml with a lower limit of 20mg/100ml for young drivers and people whose livelihood depends on them keeping their licence. There are also proposals for police to have the right to make more frequent use of random stops and a tougher set of gradated penalities for offenders. He has produced figures showing that over the last five years 75 people have been killed and 473 seriously injured by drivers impaired by drink or drugs in Northern Ireland.

An alternative approach has been used for several years by Australian state governments. Their incredibly hard-hitting cinema adverts are designed to make everyone think very carefully about the risks involved. This montage is not easy to watch but undeniably moving. I use it when teaching this topic.

A five minute retrospective of the road safety campaigns produced by the TAC over the last 20 years

Market Supply - Notes & Exercise

Here is the second installment of Demand & Supply exercises. Once again, useful for IGCSE and AS level students.


Market Demand - Notes and Exercise

I have posted this specifically for the IGCSE Y10 students, but it would be useful for AS Unit 1 students to attempt as well....


Monday, 26 September 2011

IGCSE Y11: Problems of GDP/Capita as a measure of Living Standards

GDP TREATS CRIME, DIVORCE AND NATURAL DISASTERS AS ECONOMIC GAIN


Since the GDP records every monetary transaction as positive, the costs of social decay and natural disasters are tallied as economic advance. Crime adds billions of dollars to the GDP due to the need for locks and other security measures, increased police protection, property damage, and medical costs. Divorce adds billions of dollars more through lawyer's fees, the need to establish second households and so forth. Hurricane Andrew was a disaster for Southern Florida. But the GDP recorded it as a boon to the economy of well over $15 billion.

GDP IGNORES THE NON-MARKET ECONOMY OF HOUSEHOLD AND COMMUNITY

The crucial functions of childcare, elder care, other home-based tasks, and volunteer work in the community go completely unreckoned in the GDP because no money changes hands. As the non-market economy declines, and its functions shift to the monetized service sector, the GDP portrays this process as economic advance. The GDP also adds the cost of prisons, social work, drug abuse and psychological counseling that arise from the neglect of the non-market realm.

GDP TREATS THE DEPLETION OF NATURAL CAPITAL AS INCOME

The GDP violates basic accounting principles and common sense by treating the depletion of natural capital as income, rather than as the depreciation of an asset. The Bush Administration made this point in the 1992 report of the Council on Environmental Quality. "Accounting systems used to estimate GDP" the report said, "do not reflect depletion or degradation of the natural resources used to produce goods and services." As a result, the more the nation depletes its natural resources, the more the GDP goes up.

GDP INCREASES WITH POLLUTING ACTIVITIES AND THEN AGAIN WITH CLEAN-UPS

Superfund clean-up of toxic sites is slated to cost hundreds of billions of dollars over the next thirty years, which gets added to the GDP. Since the GDP first added the economic activity that generated that waste, it creates the illusion that pollution is a double benefit for the economy. This is how the Exxon Valdez oil spill led to an increase in the GDP.

GDP TAKES NO ACCOUNT OF INCOME DISTRIBUTION
By ignoring the distribution of income, the GDP hides the fact that a rising tide does not lift all boats. From 1973 to 1993, while GDP rose by over 50 percent, wages suffered a decline of almost 14 percent. Meanwhile, during the 1980s alone, the top 5 percent of households increased their real income by almost 20 percent. Yet the GDP presents this enormous gain at the top as a bounty to all.

GDP IGNORES THE DRAWBACKS OF LIVING ON FOREIGN ASSETS

In recent years, consumers and government alike have increased their spending by borrowing from abroad. This raises the GDP temporarily, but the need to repay this debt becomes a growing burden on our national economy. To the extent that Americans borrow for consumption rather than for capital investment, they are living beyond their means and incurring a debt that eventually must be repaid. This downside of borrowing from abroad is completely ignored in the GDP.

GDP IGNORES THE 'INFORMAL ECONOMY' (BLACK MARKET)
Many countries have a huge black market, where products and services are traded but not taken into account in any official data. Anyone who gets paid 'Cash in hand' will not declare this and therefore actual GDP data will be much higher than the official figures suggest.
 
GDP DOES NOT TAKE INTO ACCOUNT WHAT IS ACTUALLY PRODUCED AND WHO PRODUCES IT
 
GDP/capita data may be low in Cuba compared to the USA, but Cuba has an excellent education & health service as the government spend billions each year ensuring these key industries are well resourced. Conversely, when the USA spends billions on weapons, this may not directly help many people living standards.

IGCSE: Economic Growth

What is this clip trying to tell us?

Saturday, 24 September 2011

IGCSE/Unit 1: Opportunity cost and Angry Birds

So what really is the estimated opportunity cost of Angry Birds in the workplace? And just how much is Rovio estimated to be worth now?! Read on to find out…

IGCSE & Unit 4: Emerging Markets & Economic Growth

An excellent 13 minute audio clip highlighting the issues faced by emerging markets...

Unit 2, 4 & IGCSE: Macro-Economic Policies to avoid recession

Depressingly soon after the great recession of 2009, global economies look to be entering another recession. If we are not technically in a recession, it already feels like it.


Are there any policies which can avoid recession?

David Cameron recently wrote a letter to the leader of the G20 talking about the necessity of improving global economic growth. It was a little vague as to how this economic recovery would occur. He mentions 'tackling key problems' and criticised US and EU for not doing enough to confront the debt overhang to prevent a wider contagion to the wider global economy. Unfortunately, this prognosis offered by Cameron does little to 'restore confidence'. The UK is a good example of how an economic recovery has been sniffed out because the government placed too much importance on short term fiscal austerity at the wrong time. We are not really in a position to preach about the virtues of boosting economic growth.

To imagine the world economy can be fixed by concerted efforts to reduce government spending and reduce government debt is not the case. Yet, politicians seem to have a habit of equating debt with recession as if they are the same thing.

Austerity measures have dampened confidence. They have cause a rise in unemployment and the private sector hasn't taken the place of the government. It may be surprising to some. But, if you depress the population by repeatedly talking about austerity, job cuts and spending cuts, it is almost inevitable.

The UK and US have more options than the Euro members because they don't have the problems of liquidity fears which seem to paralyse Euro bond markets / single monetary policy / floating exchange rate.

It is interesting that the crisis has caused the yield on US treasury bonds to fall to the lowest level since the 1940s. This means investors want to buy US government bonds. It suggests markets fear a recession much more than a US government default.
Policies to Avoid Recession

Fiscal Policy

Short Term stimulus / Long Term Structural change.

The government should boost spending. They should take advantage of the low bond yields. This increase in discretionary fiscal stimulus will

Boost Aggregate Demand

Create jobs

Improve business and consumer confidence.

At the same time, the government should set out concrete plan to deal with long term spending commitments. It should make decisions which reduce long term entitlement spending.

e.g. raise retirement age

Evaluation of health care spending -

Caps on cost of health care

Increase taxes (delayed till after recession)

Here Cameron is right that there needs to be a strong political will to do the right thing. I doubt the US has this political will to agree on either short term stimulus or long term fiscal consolidation.

This combination of long term structural changes will reassure markets about debt. The short term fiscal stimulus will reassure markets, the government is committed to increasing GDP.

Governments need to understand economic growth is a KEY factor in reducing debt/ GDP ratios. You will never get to grips with a debt crisis if you plunge your economy into a recession.

Monetary Stimulus.

Federal Reserve's Operation Twist. This is a move in the right direction. Buying long dated mortgage bonds, helps to keep mortgage interest rates low and can help boost spending / investment. Markets fear it is too little too late. The Federal Reserve may need more quantitative easing to provide monetary stimulus.

Quantitative Easing. Creating money electronically and buying long term securities can have a role in increasing money supply and economic growth.

Higher Inflation Target Now is not the time to worry about inflation. Headline CPI is misleading because it includes temporary cost push factors. The Monetary authorities should be targeting 'core inflation'. This may in practise mean a CPI rate of over 2%. But, that is not the problem. Otherwise in 2012, we could see a period of deflation which would be disastrous for the economy.

Lower Interest Rates

The ECB should reverse its decision to raise interest rates earlier in the year. Only the ECB would increase interest rates as the world economy was heading into a double dip recession. When will the ECB realise there are worse things than a temporary blip in cost push inflation?

However, an interest rate cut of 0.5% would only have a limited effect in boosting EU growth. Much more is needed, but at least it would be a signal they are interested in boosting growth.

Wednesday, 21 September 2011

Unit 1: Government Failure

This article highlights the problem of Government Failure...a really popular topic in Unit 1 Economics Papers

Failed fire project wasted £469m, says committee of MPs


The project aimed to replace 46 fire control centres with nine state-of-the-art regional centres

Continue reading the main story Related StoriesFire service revamp waste exposed

A project to set up nine regional control centres for fire and rescue services in England was a "complete failure" and wasted £469m, MPs say.

The public accounts committee said the Firecontrol scheme had not achieved any of its objectives and that eight of the centres were empty "white elephants".

The plan to replace 46 smaller control rooms was scrapped in December 2010.

Fire Minister Bob Neill said Labour must be held accountable for the "comprehensive failure".

Margaret Hodge, who chairs the MPs' committee, said the project had been "flawed from the outset" and one of the worst wastes of public money for many years.

"The taxpayer has lost nearly half a billion pounds and eight of the completed regional control centres remain as empty and costly white elephants."

She said the project - launched in 2004 by the Labour government - had been terminated in 2010 "with none of the original objectives achieved and a minimum of £469m being wasted".

'Extraordinary failure'

Firecontrol aimed to abolish 46 local fire and rescue control rooms around the country and replace them with nine state-of-the-art centres linked by a new IT system.

The regional control centres would have covered regions defined as East, East Midlands, London, North East, North West, South East, South West, West Midlands and Yorkshire and Humberside.

It was hoped the project would provide a better co-ordinated response to emergencies, such as terrorist attacks, floods and rail crashes.

Continue reading the main story Scrapped regional fire control centresEast - Essex, Norfolk, Cambridge and Peterborough, Hertfordshire, Bedfordshire, and Luton and SuffolkEast Midlands - Derbyshire, Leicestershire, Nottinghamshire, Lincolnshire, and NorthamptonshireLondon - London Fire BrigadeNorth East - Durham and Darlington, Tyne and Wear, Cleveland and NorthumberlandNorth West - Cumbria, Cheshire, Lancashire, Greater Manchester and Merseyside.South East - Hampshire, Royal Berkshire, Oxfordshire, Kent, East Sussex, Buckinghamshire, Isle of Wight, Surrey and West SussexSouth West - Devon and Somerset, Dorset, Avon, Cornwall, Wiltshire and GloucestershireWest Midlands - Staffordshire, West Midlands, Shropshire, Hereford and Worcester and WarwickshireYorkshire and Humberside - West Yorkshire, South Yorkshire, Humberside and North Yorkshire

However, the MPs' report said the IT system "was simply never delivered" and that the Department for Communities and Local Government had "fatally undermined" the project by not working properly with local fire services.

"The department excluded them from decisions about the design of the regional control centres and the proposed IT solution," it added.

The cross-party committee - which heard evidence in July - also said the project had been "rushed" and got Treasury funding without proper scrutiny of feasibility and costs.

Those involved with Firecontrol also showed "an extraordinary failure of leadership", said the committee.

No-one had been made accountable, said the MPs, and senior staff "have carried on as if nothing had gone wrong" while continuing to work on other government projects.

Out of the nine buildings constructed, only the London centre has so far been transferred to the local fire and rescue service.

However, negotiations are ongoing for another four to become occupied.

The empty buildings cost the taxpayer £4m every month to maintain, the committee heard.

AdvertisementMargaret Hodge: "The project management was dire"

Mr Neill said the project was "the latest in Labour's catalogue of costly IT failures".

"Not for the first time, hard-working taxpayers are paying for Labour's inability to manage risks and control costs," he said.

"I welcome this report which exposes the absence of basic project management and leadership for a major undertaking. Labour must be held accountable for this comprehensive failure."

'Proper oversight'

Matt Wrack, general secretary of the Fire Brigades Union, said he welcomed the report, but added that the fallout from the project was still being felt.

"[It] failed because ministers failed to listen to the voice of control staff and their professional representatives," he said.

"We argued that the project was not resilient and there was insufficient scrutiny of costs and contracts.

"Now the present government is leaving it to local fire and rescue services to clear up the mess, making ad hoc arrangements without an overall view of national resilience.

"There needs to be proper oversight, not the closure and merger of control rooms."

A spokesman for the Department for Communities and Local Government said the failures referred to in the report had occurred in the earlier years of the project, from 2004 and 2008, which it accepted and had learned from.

"The department has put much better controls and programme management arrangements in place over the last few years to avoid such failures happening again," he said.

"The National Audit Office's report in July recognised that the department took a firm grip on the project from early 2009 and concluded that the department was justified in cancelling the project."

He added that ministers believed the most effective approach was to build on the experience of local fire and rescue services, rather than imposing solutions from central government.

Monday, 19 September 2011

IGCSE Y11: Case Study - Economic Growth and Chile (Emerging Market)

Economy - overview: Chile has a market-oriented economy characterized by a high level of foreign trade.

During the early 1990s, Chile's reputation as a role model for economic reform was strengthened when the democratic government of Patricio AYLWIN - which took over from the military in 1990 - deepened the economic reform initiated by the military government.

Growth in real GDP averaged 8% during 1991-97, but fell to half that level in 1998 because of tight monetary policies implemented to keep the current account deficit in check and because of lower export earnings - the latter a product of the global financial crisis.

A severe drought exacerbated the recession in 1999, reducing crop yields and causing hydroelectric shortfalls and electricity rationing, and Chile experienced negative economic growth for the first time in more than 15 years.

Despite the effects of the recession, Chile maintained its reputation for strong financial institutions and sound policy that have given it the strongest sovereign bond rating in South America.

By the end of 1999, exports and economic activity had begun to recover, and growth rebounded to 4.2% in 2000. Growth fell back to 3.1% in 2001 and 2.1% in 2002, largely due to lackluster global growth and the devaluation of the Argentine peso.

Chile's economy began a slow recovery in 2003, growing 3.2% and accelerated to 5.8% in 2004. GDP growth benefited from high copper prices, solid export earnings (particularly forestry, fishing, and mining), and stepped-up foreign direct investment. Unemployment, however, remains stubbornly high. Chile deepened its longstanding commitment to trade liberalization with the signing of a free trade agreement with the US, which took effect on 1 January 2004.


GDP - real growth rate: 5.8% (2010 est.)

GDP - per capita: purchasing power parity - $8,700 (2004) , grown to $12,000 in 2010

GDP - composition by sector: agriculture: 6.3% industry: 38.2% services: 55.5% (2004 est.)

Population below poverty line: 20.6% (2009)

Inflation rate (consumer prices): 1.56% (2010

Labor force: 6.2 million (2010 est.)

Labor force - by occupation: agriculture 13.6%, industry 23.4%, services 63% (2003)

Unemployment rate: 6.5% (2010 est.)

Budget: revenues: $21.53 billion expenditures: $19.95 billion, including capital expenditures of $3.33 billion (2009 est.)

Industries: copper, other minerals, foodstuffs, fish processing, iron and steel, wood and wood products, transport equipment, cement, textiles

Agriculture - products: grapes, apples, pears, onions, wheat, corn, oats, peaches, garlic, asparagus, beans, beef, poultry, wool; fish; timber

Exports: $29.2 billion f.o.b. (2010 est.)
Exports - commodities: copper, fruit, fish products, paper and pulp, chemicals, wine

Exports - partners: US 14%, Japan 11.4%, China 9.9%, South Korea 5.5%, Netherlands 5.1%, Brazil 4.3%, Italy 4.1%, Mexico 4% (2010)

Imports: $22.53 billion f.o.b. (2010 est.)

Imports - commodities: petroleum and petroleum products, chemicals, electrical and telecommunications equipment, industrial machinery, vehicles, natural gas

Imports - partners: Argentina 17%, US 14%, Brazil 11.2%, China 7.4% (2010)

Inequality remains in prosperous Chile


By Daniel Schweimler

BBC News

The Chilean carabineros or armed police wait at one end of the street, armed with riot shields and crash helmets and backed by mounted police and huge, metal-clad water cannon. Facing them at the other end are masked demonstrators, their backpacks loaded with stones.

Then the stones start flying and the police move in. The result: 170 arrests and one policeman injured.

Just another demonstration in Chile.

Two days later in a similar protest, a policeman was shot dead, causing outrage and great concern in this otherwise tranquil country.

Most march peacefully, but violence also frequently erupts, as it did earlier this month when demonstrators took to the street to mark the military coup on 11 September 1973, when General Augusto Pinochet overthrew the elected Socialist President, Salvador Allende.

But if it is not that, it is the transport system, or the crumbling schools or the plummeting popularity of the left-of-centre President, Michelle Bachelet.

Organised chaos

Chile is the outstanding success story in Latin America.

“ There is a mixture between real political protest and social unrest in general ”

Pablo Halpern, lawyer

Since the military left office in 1990, it has had a stable democratic government, the economy is growing, unemployment is down and disputes with its neighbours are being resolved - albeit slowly.

So why all the protests?

"Chile is a very prosperous country if you look at the figures of the economy. But the life for the people is very hard," explains one protester.

Chile has seen its economy grow year after year, at about 5.5% per year. Shiny state of the art office blocks are sprouting in the capital, Santiago, and the streets are full of new cars.

Pablo Halpern, a wealthy lawyer, joins me after a day's skiing in the mountains above Santiago.

He believes the protests do not accurately reflect the situation in Chile.

"Even if the images are sometimes very violent and result in damaging the streets and the windows of the shops - and things like that look very violent - they're for a very short period and in some narrow areas - downtown, close to the presidential palace," he explains.

"They start at a certain time and they end at 12 o'clock that same day. So it's really an exercise where there is a mixture between real political protest and social unrest in general."

Widespread discontent

The distribution of wealth in Chile is one of the worst in the region. Sandro Imacache is one of those who feels he is not reaping the benefits of the boom.

“ The gap between the rich and poor is very strong ”

Political analyst Claudio Fuentes

"At the moment the minimum wage is too low," he says, standing behind the reception desk of the modern apartment block in the plush Las Condes district of Santiago, where he works as a concierge.

That wage is $208 (£104) per month - though some 15% of Chile's work force earns less, according to the latest Survey of National Socioeconomic Composition.

"With that I've got to support a family and pay for the useless transport system that we've got. Life here in Chile is expensive - everything goes up and nothing comes down.

"The transport system is crap and expensive. It takes me one and a half hours to get to work - with three changes - and that's without the queues.

"The supermarkets, the hospitals, it's all going up. We used to pay 30 to 40 pesos for an onion - and now it's 150 or 160 - just for one."

Sandro sees the wealth but does not get his hands on much of it. He cannot afford to join the demonstrations, but is part of the growing tide of discontent in Chile among people who feel they are being left behind.

Political analyst Claudio Fuentes says the government is not acting fast enough to rectify the problem.

"Chile is one of the three most unequal countries in Latin America," he says.

"I think this problem has been waiting to be resolved for a very long time and I think the gap between the rich and poor is very strong, and I think you can see that in Santiago even - if you go to the north and south of Santiago you see the differences between the rich and poor.

"And you see that these frustrations of the people have been addressed in the last demonstrations - the students for example who can't get into the universities because the quality of the education isn't very good."

Chile is still one of the most prosperous and stable countries in Latin America.

But while most Chileans are happy with the way things are going, there is also a growing tide of discontent being fed by frustration that the wealth is not being shared by all.

And unless that problem is resolved, sooner rather than later, the demonstrations are only likely to grow - in numbers and intensity.

Unit 1 & IGCSE: Brilliant Video for Opportunity Cost

Found this gem of a video that can be used to help deliver opportunity cost. Produced by American students its relevant, well produced and explains the concept brilliantly.


Enjoy..........

Unit 2 & IGCSE: Macro economic Objectives

What are objectives and how are they different from instruments?

Please take some time to read the stuff below. Not only does it help explain the whole concepts involved in Macro economics, but also there are links to practical examples in the real world......A MUST READ!


•Objectives are the aims or goals of government policy

•Instruments are the means by which these aims might be achieved

For example, the government might want to achieve an objective of a low rate of inflation. The main instrument to achieve this are changes in monetary policy interest rates and since May 1997 they have been set by the Bank of England. Fiscal policy could be another instrument to achieve this aim. This is in the hands of the government. Supply-side policies can also be used to control inflation and promote growth.

The government might have another objective – namely to make the distribution of income and wealth more equal. It would then choose the policy instruments it thinks are best suited to reaching to this aim, perhaps a change in the income tax system or a rise in the national minimum wage .

The main policy instruments available to meet macroeconomic objectives are

Monetary policy –changes to interest rates, the supply of money and credit and also changes to the value of the exchange rate

Fiscal policy – changes to government taxation, government spending and borrowing

Supply-side policies designed to make markets work more efficiently

The Objectives of UK Macroeconomic Policy

The key objectives for the UK are:

Stable low inflation - the Government’s inflation target is 2.0% for the consumer price index. The Monetary Policy Committee sets interest rates at a level it thinks will meet the inflation target over a two year horizon.

Sustainable economic growth – as measured by the growth of real gross domestic product – sustainable in keeping inflation low and in reducing the environmental impact of growth.

Improvements in productivity – this is designed to improve competitiveness and trade performance. The pressures of globalisation and the increasing competition within the European Single Market make this one of the key objectives of the government.

High employment - the government wants to achieve full-employment – a situation where all those able and available to find work have the opportunity to work. At the time of writing, the key aim is to limit the effects of the recession on the level of unemployment.

Rising living standards and a fall in relative poverty – for example the objective of cutting child poverty and reducing pensioner poverty.

Sound government finances - including control over government borrowing and the total national debt.

What is meant by economic stability?

Economic stability occurs when there is an absence of big swings in prices, output and jobs.


The national output of a country does not grow in a steady fashion from one year to the next. All countries experience an economic cycle which tracks the fluctuations in the rate of growth of a country’s Gross Domestic Product (GDP).

Unit 3: Unit 3 Micro: Fixed and Variable Costs - Revision Notes

In the short run, because at least one factor of production is fixed, output can be increased by adding more variable factors. We make a distinction in the short run between fixed and variable costs.


In the short run, because at least one factor of production is fixed, output can be increased by adding more variable factors.

Fixed costs

1/ Fixed costs do not vary directly with the level of output
2/ Examples include the rental costs of buildings; the costs of leasing or purchasing capital equipment such as plant and machinery; the annual business rate charged by local authorities; the costs of employing full-time contracted salaried staff; the costs of meeting interest payments on loans; the depreciation of fixed capital (due solely to age) and also the costs of business insurance.

Basically any business with significant capacity will have high fixed costs; perhaps the classic example is an airline with a large number of routes, or a vehicle manufacturer that spends millions of pounds building a new factory and installing expensive and bulky capital equipment.

Fixed costs are the overhead costs of a business.

Key points:

* Total fixed costs (TFC) (these remain constant as output increases)

* Average fixed cost (AFC) = total fixed costs divided by output

* Average fixed costs must fall continuously as output increases because total fixed costs are being spread over a higher level of production.

* In industries where the ratio of fixed to variable costs is high, there is scope for a business to exploit lower fixed costs per unit if it can produce at a big enough size.

Consider the Sony PS3 or the iPhone4 where the fixed costs of developing the product are enormous, but these costs can be divided by millions of individual units sold across the world. By some estimates, Call of Duty and Modern Warfare 2 both cost between $40 million to $50 million to produce. Successful product launches and huge volume sales can make a huge difference to the average total costs of production.

Please note! A change in fixed costs has no effect on marginal costs. Marginal costs relate only to variable costs!

Variable Costs

Variable costs are costs that vary directly with output – when output is zero, variable costs will be zero but as production increases, variable cost will rise.

Examples of variable costs include the costs of raw materials and components, the wages of part-time staff or employees paid by the hour, the costs of electricity and gas and the depreciation of capital inputs due to wear and tear.

* Average variable cost (AVC) = total variable costs (TVC) /output (Q)

* Average Total Cost (ATC or AC)

* Average total cost is the cost per unit produced

* Average total cost (ATC) = total cost (TC) / output (Q)

Marginal Cost

* Marginal cost is the change in total costs from increasing output by one extra unit.

* The marginal cost of supplying extra units of output is linked with the marginal productivity of labour.

* The law of diminishing returns implies that marginal cost will rise as output increases.

* Eventually, rising marginal cost will lead to a rise in average total cost. This happens when the rise in AVC is greater than the fall in AFC as output (Q) increases.

Y10 IGCSE: The Law of Demand

Two video clips explaining the Law of Demand in Economics. Watch the two videos below with your own notes open in front of you. Pause or replay as many times as you need. When you come to class next week, I expect you to be ready to discuss the Law of Demand and ask some informed, intelligent questions about the concepts in this video.
After watching the videos, please respond to the questions below in a comment.





1.What do you like about the videos above?


2.What would you change about the videos above?

3.What do you think about the idea of the “flipped classroom” model of instruction? Do you like the idea of watching video lectures at home and spending class time practicing and getting one on one help from your teacher? Why or why not?



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Good time or good grade? Opportunity Cost

Sunday, 18 September 2011

IGCSE: Dubai, China and Economic Growth

Economics growth....is it always good?

Check out these two clips that looks at Dubai (positives)  and the potential problems of eonomic growth in China.



Saturday, 17 September 2011

Unit 3: Another Economics prop - for remembering MC=MR!

My previous posts on this topic - Getting students to remember MC = MR and Remembering MC=MR part 2 were designed to (obviously) help students remember this vital formula when drawing graphs. Now I hope to make absolutely sure they don’t forget it with this teaching prop!


While there is a huge amount of products on this website with MC=MR printed on them, from shirts to cups, and even clocks, I think I will go with the T shirt, however Ramez would look great wearing this MC=MR baseball cap.


On second thoughts, I think I will get the MC=MR clock. Whenever you look at how much time to go before you can leave (or more optimistically how much time left before you have to leave your favourite lesson and go off to something far less interesting) you will be reminded!

Friday, 16 September 2011

The Basic Economic Problem and Opportunity Cost

Year 12 and Year 10 students click here.. for some extra reading on the basic economic problem and opportunity cost.

Wednesday, 14 September 2011

IGCSE Y10: Opportunity Cost Notes

Opportunity Cost - some useful examples to aid your understanding:-


There is a well-known saying in economics that “there is no such thing as a free lunch!” This means that, even if we are not asked to pay money for something, scarce resources are used up in the production of it and there is an opportunity cost involved.

Opportunity cost measures the cost of any choice in terms of the next best alternative foregone.

•Work-leisure choices: The opportunity cost of deciding not to work an extra ten hours a week is the lost wages foregone. If you are being paid £6 per hour to work at the local supermarket, if you take a day off from work you might lose £48 of income.

•Government spending priorities: The opportunity cost of the government spending nearly £10 billion on investment in National Health Service might be that £10 billion less is available for spending on education or the transport network.

•Investing today for consumption tomorrow: The opportunity cost of an economy investing resources in capital goods is the production of consumer goods given up.

•Making use of scarce farming land: The opportunity cost of using farmland to grow wheat for bio-fuel means that there is less wheat available for food production

IGCSE: Intro - Scarcity, Opportunity Cost & PPC's

Tuesday, 13 September 2011

IGCSE: Opportunity Cost - Short Clip



A slightly more complex clip....

IGCSE: Opportunity Cost - Short Clip

Unit 3: Cost Curves in 60 Seconds and practice questions...

Cost Curves in 60 seconds....good luck!



Now you have watched the clip, try and answer the following questions from this link.

Monday, 12 September 2011

Y11 Economics Lesson: Learning Objectives

Today we are going to look at the following:

  1. Macro-Economics, what is it, how is it different to Micro
  2. The Circular Flow of Income
  3. The main macro - economic objectives

Homework:

To research a country chosen by your partner. Specifically finding their GDP growth figures for the last 5 years and their GDP/Capita figures for 2010. (or the latest you can find)

I also want to know where they came in the league of global competitiveness in 2011 (hint: the answer can be found on this blog!)

IGCSE: Economic Growth

DBS Economists go crazy trying to explain Economic Growth....



I would like you guys to produce something a little more accurate!

Saturday, 10 September 2011

Unit 2: The Economic Cycle in Pictures

This activity designed for Unit 2 (AS) macro should prompt plenty of discussion about the nature of different stages of the economic cycle and some of the indicators that might be used to identify turning points in economic activity.

I will also be using it with my Year 11 class tomorrow....exciting times!


Friday, 9 September 2011

Unit 4: Impact of Tax Cuts on Jobs

Questions that comes up time and time again in the synoptic paper are the following:

Does any evidence exist to support the argument that tax cuts for the wealthy will lead to an increase in jobs here in the U.S., not abroad?

Any evidence that "trickle-down" economics is valid?

What are the benefits of "supply-side" economics, particularly for the working class, the middle-class if you will?


Cutting taxes can have two effects:

1.Short term boost in demand as people have more income to spend

2.Long term increase in productive capacity as people more willing to work.

Do Tax cuts for the wealthy increase jobs?

Tax cuts can lead to an increase in jobs. For example, the UK has a 50% rate of marginal income tax for those earning over £145,000 a year. At this rate of marginal tax, there is a reasonable degree of disincentive to work. For example, some people may be disinclined to do overtime. There may be a bigger incentive to work abroad. If you cut this 50% tax rate to 40%, it is quite likely, there will be some supply side incentive for greater innovation and investment, which could trickle down to higher growth and lower unemployment. (Economists call for 50% tax rate cut)

However, there is still a lot of uncertainty:

•How much this higher tax rate will raise for HMRC (we will find out at end of tax year)

•How much disincentive this tax rate actually is.

The impact of cutting income tax is not straight forward. There are two effects at work:

•substitution effect - tax cuts make work more attractive - increasing productivity and output.

•income effect - tax cuts mean you can earn a target income by working less. This effect encourages less work.

Also, it depends whether people expect tax cut to be temporary or lead to higher taxes in the future (to balance budget)

Therefore there is no guarantee cutting income tax rates does actually increase productivity.

Which Tax Rate boosts Productivity?

There is also a big difference between cutting a higher income tax rate of 80% and cutting an income tax rate of 30%. Yes, there is a disincentive from higher taxes but clearly a marginal rate of 80% has a much greater disincentive impact than 20 or 30%. Cutting very high tax rates should give a bigger boost to hours worked than low tax rates.

Cutting Taxes for the Wealth?

As Warren Buffet pointed out, the tax on investment income is very low in the US. He says he pays around 17% on his investment income. This is a lower tax rate than other workers in his office who pay closer to 40% in tax. If you cut tax on this investment income, there will be a very minimal trickle down effect. The wealthy just get more from their investments.

Also as Warren Buffet pointed out, when tax rates were 39% in the 1970s, the wealthy didn't leave the US. People didn't stop working. The disincentive effect of higher taxes is often grossly over-exaggerated.

Tax cuts for Wealthy v Poor

Cutting tax on the wealthy may lead to small improvements in productivity and small increase in demand. But, cutting tax on low income earners would have much greater impact on boosting growth and jobs.

A millionaire has a low marginal propensity to consume. If a millionaire gets a tax cut, he may spend some of this extra income, but he is likely to save a high %.

If you cut tax for someone struggling on $15,000 a year, they are likely to spend it all. They don't have the luxury of saving. They have a low marginal propensity to consumer.

Therefore tax cuts for low income earners have a bigger impact on increasing spending and demand in the economy.

Depends on the Tax

When you talk of taxing the wealthy it depends which tax you cut.

•Cutting inheritance tax will have little, if any impact on boosting economic investment and productivity.

•Cutting payroll taxes, will have a much bigger impact on creating incentive to employ workers.

Empirical Evidence

•Some claim the Reagan tax cuts helped create jobs (joint economic committee)

•Some expected tax increases of Clinton administration to create recession and job losses, but they didn't. The Clinton era saw one of fastest eras of job creation and economic output.

•The Tax cuts in US of 2001, led to a very poor job creation.

WEF Global Competitiveness Report 2011-2012

The USA has, for the 3rd year running, slipped in the annual ‘Global Competitiveness’ league table compiled by the World Economic Forum. Which country is number 1? Is Britain in the top 10? Whilst there is no real surprise about Greece, which position has Hong Kong soared to? And which African nation comes in at 142nd place, bottom of the table? Read more to find out…




The top 5 in this year’s WEF Global Competitiveness Report are:


1. Switzerland
2. Singapore
3. Sweden
4. Finland
5. USA

The latest results show that international competitiveness in emerging markets has improved, signifying the shift in business activity and economic power to such economies. An interesting point is made on page 6 of the Report that shows the G7 nations have an average debt as a percentage of GDP of 101.3%!


The positions in the Global Competitiveness Report are determined by ‘pillars’ (determinants) of competitiveness. These include: infrastructure, innovation, the macro economy, education, health care, market efficiency, business sophistication and financial markets.

And the nation at the bottom of the table is Chad, ranked in 142nd place. You can download the full report here.

Thursday, 8 September 2011

Eurozone macroeconomics for 9 year olds - brick by brick


It’s time to start treating you lot like 9 year-olds...in a kind-hearted way obviously. How? With this highly creative and engaging piece of analysis by the market analysts at JP Morgan. (Click here)


The Eurozone crisis is both political AND economic, with the underlying issue one of who pays the bill for nation and bank bailouts. The political impasse in Europe over the crisis is difficult to understand. But this Lego-inspired graphic does a pretty good job of explaining who wants what. Follow the commentary underneath the graphic to hear the story.

Let me know if you can make sense of it.

Unit 2: Tax meters for German prostitutes

A new school year and I’m starting with a bit of a controversial blog. With the Eurozone in crisis Germany are looking to increase their tax income by targeting a previously tax dodging industry. This video explains.....




I welcome your thoughts!

Wednesday, 7 September 2011

Unit 4: Currency Wars: Now it's the Swiss!

The Swiss have joined the currency wars with the protectionist measure of the Swiss National Bank setting a minimum exchange rate of 1.20 francs to the euro. Read more here.


The chart opposite shows what happened on the 7th september...

Unit 3 Micro: Short Run Costs of Production

This revision presentation looks at costs of production for businesses in the short run