Unit 1: Fizzy Drinks, Fruit and Vegetables.. Price Elastic or Inelastic?

Interesting blog post from tutor2u - soft drinks are elastic, whilst fruit and vegetables are inelastic:

A 10% rise in soft drink prices could decrease consumption by up to 24% - giving a coefficient of (-)2.4, definitely in the "elastic" range.

On the other hand, if fruit and vegetables were subsidised by 10%, consumption would only increase by 8%, giving a coefficient of (-)0.8, which is inelastic.

What are the reasons for the differences in elasticity:

• Are consumers more sensitive to a price increase than a price decrease?
• Are these results due to the fact that lower income consumers are the ones most likely to be purchasing soft drinks and higher income consumers most likely to be purchasing fruit and vegetables?
• If spending on fruit and vegetables is inelastic, then total spending will fall. Will consumers spend this "extra" income on junk food?
• What other measures could / should be used to encourage consumption of healthy foods and discourage consumption of fatty foods.

Read this article HERE for more information.

Full post is HERE

Unit 1: Chiponomics!

Poor weather has caused the price of potatoes to rocket from £90 to £250 per tonne! 

This increase in price has forced some chip shops to increase the price of chips - 10p more for a bag of chips! 

Watch this video HERE for more information!

Things to think about:

1. What is the PES of potatoes in the short run and the long run?
2. Are there substitutes?
3. What is the impact on complementary goods?
4. What are possible solutions to this increase in price?

Unit 1: Hong Kong and Market Failure

According to THIS article (click on the hyperlink Year 12!!) Hong Kong is the 9th most expensive city in the world to live in. Property prices in Hong Kong are booming - why? Well it is all down to demand and supply. China, Hong Kong's next door neighbour is growing in wealth, this increased in demand for property has increased prices, but the problem is that supply can not keep up with demand. Hong Kong is a crowded peninsula - the supply of land is limited. The videos below highlights some of the issues.

Video 1
Video 2

Overcrowding has lead to other problems, Hong Kong has been referred to as 'Hong Pong'. Pollution is a major problem:

Unit 4: Economic Development

Drawing on data from the December 2012 World Bank Database, this Guardian data resource looks at growth and development indicators for six fast growing countries over the period 2007-2011. The countries are Chile, Ghana, Indonesia, Mexico, Thailand and Turkey, looking at child mortality, university enrolment, mobile phone subscriptions and the numbers of tourists arriving to analyse the 'boom'

Click here to access the article.

Unit 4: Economic Development in Liberia

Liberia has an apparently stable government, plenty of aid available, and the debt hanging over the country has been written off. And yet, as Evan Davis explains in this valuable article, for many people in Liberia, conditions are still medieval.


Regular listeners to Radio 4's 'Today' programme will know that they have run a series of reports about Liberia. It's economy is in ruins, after years of civil war. That conflict was partly funded by exports of timber and diamonds, and the UN placed bans on those exports. However, those bans were lifted in 2006 and 2007 respectively, so why does Liberia still record unemployment of 80%?

Evan explores the multiple causes of the problems which hold the country back, and condemn it to a catch-22 in which investment cannot easily occur. It should be highly attractive as a destination for inward investment, with wage rates of about $5 a day in the formal sector of the economy (about a fifth of those in the most industrial parts of China). But for industrial development, as the article points out "...you first need electricity; for electricity, you need some trained workers; for trained workers, you need some schools; for schools you need some money; for money, you need some industry."

There are other examples of the practical issues which individually hold back progress, and which combine to slow it to a barely perceptible crawl. The article provides a superb example of how to analyse the factors that might hold back development, and is a must-read for unit 4 students over Christmas!

Unit 3: Ofgem and the energy industry

Click here to access a recent BBC article on government regulation of the energy industry.

Unit 1: House Prices, Rent Controls and Labour Market Mobility

Labour Market Mobility refers to how easily people, or employees can move around in search of a job. Several factors prevent people from moving around freely, the skills and qualifications they possess is one thing. A lack of transferable skills acts as a barrier - if a worker is trained as a hairdresser they can not apply for jobs as an accountant for example. This is know an occupational immobility. Training and education can reduce occupational mobility but can be expensive and there is a time lag involved.

Geographical mobility is the ability of labour to freely move around in search of a job. In theory workers in the EU are free to work in any member country. In practice there are lots of barriers preventing people from moving to different countries. Family ties to a particular area often limit people in their search for jobs. 

Another factor that makes moving to different parts of a country in search of a job is house prices. House price in London and the South East are often much higher than in other parts of the country as shown below.

(www.tutor2u.com)

The demand for property increases for a number of reasons: Interest rates, consumer confidence, wages levels all affect house prices. Another interesting factor affecting house prices is immigration. Increased immigration increases the demand for houses, which pushes up the price. Citing immigration as a cause of increased house prices has lead to much debate in the UK. Political instability in the Middle East has lead to an increase in house prices in Dubai - people are moving from countries such as Syria to Dubai. Watch and read these links for more information:

Link 1
Video
Link 2
Link 3


Rising property prices as we looked at earlier can lead to factor immobility and market failure. There are often calls for the government to intervene and regulate the market. Have a read of this article HERE for more information.

Another method used to resolve factor immobility is rent controls. Tutor2U have created a revision presentation on the impact of rent controls.

AS Micro Rent Controls in Housing from Geoff Riley

Unit 4: Poverty in UK (Part 3)

Unit 3: Exam Question on Monopsony

The case study here is the UK supermarket industry, probably the best example we've got of a monopsony- with a 4-firm concentration ratio of 76%, and around 7,000 firms supplying food products to the industry.

Click here to access an interesting case study to create the material, and read and attempt the 3 questions in the style of Edexcel's unit 3 exam structure at the end.

Case study question - Monopsony from mattbentley34

P.S. Remember that Edexcel Unit 3 exams would also have an 8-mark question, but I couldn't think of anything else to ask about monopsonies so there's only 3 here!

Unit 3: Microeconomics course companion

A 170 page guide to all things unit 3....

A2 Microeconomics Course Companion from mattbentley34

Unit 3: Examiners Report Jan 2012

Unit 3: Examiners Report - Jan 12 from mattbentley34

Unit 3: Monopoly & Market Power

Here is a presentation on market power and how it can affect pricing strategies.

A2 Microeconomics Pricing Power from Geoff Riley

Currency and the Bristol Pound

The Y11's have been looking at the impacts of the 'Bristol Pound'. Read article by clicking here:

What are your thoughts on the currency? Will it work?!

Shifting Externalities

Bio-fuels and ethanol are being hailed as the solutions to the negative externalities created by burning fossil fuels. Bio-fuels are marketed at greener alternatives to burning oil. Today, bio-fuels are being cited as the cause of increased pollution, worldwide environmental havoc, rising food prices, worsening hunger and poverty.

Listen to this documentary to find out more...

Commodity prices, scarcity, buffer stocks...

Week one in economics is all the basic economic problem; unlimited wants and infinite needs; Scarcity. As the term progresses thoughts of scarcity are put aside as we cover concepts such as elasticity and market failure. As you prepare for Unit 1 it is important to re-visit the idea of the basic economic problem.

The price of wheat has risen dramatically over the past two years as shown here. 

In the exam you will need to be able to explain the causes, effects and solutions of this rise in price…Remember prices rises are a result of demand and supply side issues. Growing populations and extreme weather conditions have all played their part. Read this article here to find out about the causes of rising food prices.

Impact of rising food prices

Examiners like to ask you about the impacts of rising prices.
These videos here will give you some ideas.

Video 1

Video 2

Video 3

Solutions

Now you know all about the impacts have a think about what would be the solutions..

Would buffer stocks work? Is CAP the best solution? Import Controls? 

Have a look at this video for some ideas 

Tasks:

1. Draw  a demand and supply diagram explaining why the price of wheat has increased 
   (6 marks)

2. Evaluate the impact of rising wheat prices on the following groups (14 marks)

   a) Farmers (producers)

   b) Manufacturers

   c) Consumers

3. Evaluate the use of a buffer stock system to solve the problem (14 marks)

4. Explain why buffer stocks can be considered to be a case of government failure 
(12 marks)

You can put your answers in essay format or you can work in pairs to complete a presentation.

Unit 3 January 11 - Examiners Report

See below for the examiners report on Unit 3 from January 2011. Not only does it provide a model answer for a 16 mark quesion on price and non price strategies, but also gives valuable advice on what the common mistakes are and what scores highly.

You should try and look at as many examiners reports as possible of the xmas break.

Jan 11 - Examiners Report from mattbentley34

Unit 4: Poverty - Poor Kids (Part 2)

Part 2 of the BBC documentary ion poor children in the UK...

Unit 1: Smog in London - Market Failure

Click here to access a great from the BBC relating to the air pollution problems London has faced for over 60 years. This should provide a good discussion point when looking at market failure, government legislation and how this intervention can reduce air pollution.

Unit 1: Market Failure & Cigarettes

Australia has become the first state to order tobacco companies to remove logos from packaging and to sell cigarettes in unbranded packs festooned with health warnings and graphic images. The images could make smokers more aware of the private and public costs of their habit.

The Australian Federal Government claimed that removing branding and advertising would deter the young from buying cigarettes. Stocks of cigarette packs which did not comply with the new law, were being heavily
discounted or destroyed. Although tobacco firms are banned from sports sponsorship, and newspaper advertising, the Australian Government isn't able to police on-line advertising aimed at the under 25s on social media sites based outside the country. It remains to be seen whether there will be a challenge to the new law under World Trade Organisation rules.



You could also think about the microeconomics to this issue: if all packets are identical what might we infer about the PED for branded cigarettes.

Yes, given a range of substitutes they are already highly elastic, but might this make them even more elastic?

More Oxbridge questions (Dec 2012)

Some questions specific to Economics & Management and Economics interviews over the last few days! I hope you find them interesting! (aldso useful for any Economic type course)


Many non-economists are inclined to blame economics for the mess we’re in - are they right?

How valid is the idea of diminishing returns in the short run production function for internet businesses?

Should the Bank of England now start to raise interest rates in a bid to boost aggregate demand?

Interest rates – or yields - on ten year bonds issued by the UK government are at the lowest level since 1703. Over the summer yields on German and Swiss two year bonds turned negative. What explains such low bond yields?

How important is ecology and psychology in understanding economic growth?

Which economic concepts or ideas have you found counter-intuitive and why?

What is the difference between a leader and a manger?

The Romans forced engineers to sleep under a bridge once it was completed. Should managers of businesses fund losses of failed corporate investment projects?

Small is beautiful, but it is also efficient - why is government and business so obsessed by economies of scale?

To help recovery, the focus should be on debt and leverage in the economy and turning instead to equity financing. Discuss

In the long run, bailing out people is less harmful to the economy than bailing out businesses - discuss

Which is more significant for the wealth of nations - invention or innovation?

Who are the principle beneficiaries of innovation? Inventors? Shareholders? Or Consumers?

Across the western world policymakers are searching for ideas on how to raise growth rates - what would you suggest to them?

Despite a deep downturn corporate insolvencies have remained remarkably low in recent years - is good management the reason?

Some economists believe that recessions clear out unproductive capacity and create space for new, more efficient companies - do you agree?

Unit 3: Supermarket pricing strategies

Various news sources are reporting about the industry agreed self-regulation adopted by most supermarkets this week relating to the pricing strategy of charging an initially high price for a product only to discount the same product fairly quickly - giving the impression that the product has much greater value after discounting (this report from This is Money gives a couple of examples). Most of the supermakets have agreed to temper this strategy by ensuring that products are not discounted for any longer a period of time then when they were at the higher price.


Some would call the strategy a 'con' - the supermarkets can only undertake this method as they have significant power and control within the market and can afford to have low sales of the products initially. However, there is nothing illegal about the practice.
Whilst this is a good example to show students of how market power can impact on price controls within an oligopolistic market, it also struck me as a decent example of game theory in place.

A noticeable non-signature on the agreement is that of the US-owned Asda stores. In one sense, this is a brave move on Asda's behalf - their lack of agreement to the new plan may cause some concerns with their customers, especially given that the other supermarkets have subscribed. It may be, however, that Asda are relying on the fact that the news about this self-regulation is not widespread or that consumers soon forget about the agreement. Another interesting question would be whether all of the other supermarkets knew that Asda were not signing up - have they agreed to undertake a policy that reduces potential customers and allowed Asda an advantage?

Unit 4: Poverty in the UK

This series of clips is heartbreaking...but needs to be watched to understand what poverty is really like in the UK. Part one below...the rest to follow.

Unit 1: Supply, Demand and Mitt Romney (Who?)

Here is a quick piece about market equilibrium as well as elasticity of supply and demand. Mitt Romney merchandise is now in the clearance section of stores with a 75% discount on the original price. Click here to see the original article.


Show how the loss of the election is likely to affect the market for Mitt Romney merchandise. You need to consider the following:

- the direction of the shift of demand (easy)

- the likely elasticity of supply

- the change in the elasticity of demand

Answer the above and draw a diagram shoing the new likely equilibrium.

I will post the answers after the break......

Unit 1: Minimum Pricing on Alcohol

Ministers are proposing a minimum price of 45p a unit for the sale of alcohol in England and Wales as part of a drive to tackle problem drinking.

Click here to access the BBC article which poses many questions as to its effectiveness on problem drinking and the poor in society.

Questions to discuss:

Assess the effectiveness of this strategy on reducing the negative externality which is binge drinking.

Why might this be regarded as a from of 'Regressive taxation'?

What other methods could the government use to combat binge drinking?

Unit 4: China

Debunking the myths of china from MoTanweer

Unit 1: Market Failure

Click here to access several articles on all possible types of market failure with ideas on how to solve them. essential for Unit 1 questions.

Unit 3: Natural Monopolies Revision

Natural Monopoly - revisited from mattbentley34

Unit 3: Price discrimination and unfair business practice!

This is a great video on how some businesses are using cookies on our computers to price discriminate. The technology allows them to reduce our consumer surplus and maximise their producer surplus.


For example the cookies allow a business to know whether the user is using a PC or an Apple Mac. If they are using the latter then they assume the user has more income and so increase the price slightly. There is no official proof yet, but the OFT are investigating.

No more shopping with the Ipad for me!

Unit 3: Scoop it - A must read

Guys, you HAVE to take a look at this link.

Unit 3: Do Monopolies always make supernormal profits?

Click here to access a great piece on the difference between analysis and evaluation: Analysis and Evaluation - do monopolies always make supernormal profits?

The latest figures on the US Post Office came out today so have they managed to turn the business around?


Instead of making improvements, the losses have got much worse, increasing to US$15.9 billion in the latest financial year! As has been the case with some of the big car companies in previous years, having to pay for future retiree health benefits has a huge impact with US$11.1 billion of the loss attributed to this fact. If this and other labour related expenses were taken out of the accounts, the loss would be a paltry US$2.4 billion which is an improvement on the last year!

Having government control and regulation can have its benefits but also significant costs. If USPS were in the private sector, it would have long ago ditched its unprofitable Saturday mail delivery and saved a significant amount of cash. However, current law states that they must deliver on Saturday and while there is legislation before Congress that could change this, it may not happen anytime soon.

The following graphic shows one of the main problems alluded to in the earlier blog piece, although USPS is a statuary monopoly with significant barriers to entry, technology has meant that demand for their product is declining (and the losses are mounting). An excellent example for students to use for evaluating the usual textbook theory!

Unit 3: Ofgem and regulation

Gas prices fixing probe: Minister to address Commons
(see questions at the end)

The energy secretary said he would follow the two investigations closely

Energy Secretary Ed Davey will make a statement to the House of Commons later as regulators investigate claims that wholesale gas prices have been manipulated.

Mr Davey said he was "extremely concerned about the allegations".

The investigations by the Financial Services Authority (FSA) and Ofgem follow claims by a whistleblower.

Four of the UK's big six energy suppliers have released statements denying any involvement.

The wholesale gas market includes everything from the UK's own North Sea gas supplies, to gas from Norway or elsewhere, or arriving in the UK by ship as LNG, liquefied natural gas.

'Less transparent'

Energy companies buy gas at the wholesale price and then sell it on to businesses and domestic users.

The allegation is that the market has been rigged in a similar way to the fixing of Libor, the inter-bank lending rate.

It is claimed that on 28 September, dealers made unrealistic bids, at the time when information was being gathered to set the wholesale gas price, to suit their own trading position.

David Hunter, an analyst at M&C Energy Group, said that most of the trading was done directly between companies, rather than via an electronic trading system, and that this system was, in theory, easier to manipulate.

He told the BBC: "This sort of trading is less transparent than a fully fledged market. Hypothetically someone could seek to artificially lower the price by making small trades below the prevailing market price that may benefit them."

The alleged manipulation is said to have reduced the wholesale price, and as such does not imply any knock-on impact on the retail price paid by customers.

The cost of wholesale gas makes up the majority of our energy bills - 45% of the average energy bill is made up of the cost of wholesale gas, supply costs and profit margins.

'Considering evidence'

The Guardian newspaper, which received a separate tip-off from the whistleblower behind the allegations, said the investigations were into "some of the big six" energy providers, but the brief statements released by both the FSA and Ofgem did not identify any companies.

The FSA said: "We can confirm that we have received information in relation to the physical gas market and will be analysing the information."


Ofgem also said it had "received information" and was looking into the issue. It added that it would "consider carefully any evidence of market abuse that is brought to our attention as well as scope for action under all our other powers".

Mr Davey said he would keep in close contact with both investigations.

Labour's shadow Energy Secretary, Caroline Flint, said that if the reports proved to be true, they "suggest shocking behaviour in the energy market, that should be dealt with strongly".

She said that gas and electricity companies should be forced to sell the energy they generate into a pool, in order to open up the market and ensure fairer consumer prices.

The whistleblower, Seth Freedman, worked at ICIS Heron, a financial information company that publishes energy price reports.

ICIS Heron said it had "detected some unusual trading activity on the British wholesale gas market on 28 September 2012, which it reported to energy regulator Ofgem in October".

It added: "The cause of the trading pattern, which involved a series of deals done below the prevailing market trend, has not yet been established.

"If anyone was to benefit from this it would have been derivatives traders."

Energy company responses

EDF Energy said it "does not participate in loss-leading trading activity and considers it to be against existing market regulation".

It added: "We make information likely to impact market price formation publicly available on our website in compliance with the European Union's regulation on energy market integrity and transparency."

Npower said: "There is an explicit commitment in our code of conduct to comply with all laws and regulations."

Scottish Power said that it had "never engaged in trying to fix wholesale gas trading markets", adding: "Our trading division always acts with integrity and follows all rules in all of its engagements with the market."

SSE said: "We are entirely confident that our energy portfolio management team operate in a fair and legitimate way."

Questions for discussion:

What is a 'Whistleblower'?
How can the gas industry set prices?
Have the regulators done their job?
How will the consumers be effected by this in both the long & the short run?

Unit 3: Government Regulation of privatised industries

The presentation from todays lesson..

Govt Regulation (regulation of privatised industries) from mattbentley34

Unit 3: Mergers, acquisitions & regulators.

Thanks to Gabriele for finding this excellent article on market structures and the difficulties regulators face when making decisions.....

THIS year has seen the demise of a Brazilian oddity: an antitrust regime that allowed companies to merge first and the regulator to ask questions only later. Under an unlamented system laid to rest in June, studies of market dominance were carried out after mergers and acquisitions had taken place—and not once, but thrice. First the finance ministry, then the justice ministry and finally CADE, the competition regulator, would ponder before a decision was reached. “Companies could bet on the process being so slow that if a decision went against them, they could go to court and argue that unpicking the deal was now impossible,” says Tatiana Farina of Insper, a São Paulo business school.


The three regulators have now been rolled into one, promptly nicknamed “Super CADE”. Deals that could lead to consumer-harming market concentration require prior permission. If in the previous year one firm had sales in Brazil of more than 400m reais ($198m) and the other sales above 30m reais, any deal now needs the regulator’s approval.

The new CADE is modelled on antitrust regulators in the United States—with one notable difference. It has far longer to issue its ruling: 330 days instead of 30. Fear of delay led companies to rush through around 140 deals in the weeks before the switchover in June. But so far, the new CADE has beaten its leisurely deadline, says Fabíola Cammarota of Souza, Cescon, Barrieu & Flesch, a law firm. The firm has received pre-merger decisions in less than three weeks on simple cases; a complex case it submitted in July is progressing smartly.

The old CADE fell into disrepute over Nestlé’s purchase in 2002 of Garoto, a Brazilian chocolatier, giving it well over half of the chocolate market. CADE ruled that the deal should be unpicked—two years later. By then Garoto had been swallowed. Nestlé has been fighting the decision in the courts ever since. The deal may now be referred back to CADE.

Such interminable cases used to crowd out investigations into suspected cartels. Now CADE should have more time for these, and it has fiercer weapons as well. They include stiffer penalties—managers guilty of market-rigging are now more likely to go to jail—and the power to offer plea-bargains to whistle-blowers.

Pre-merger approval should help to protect Brazilian consumers from their politicians’ fondness for creating national champions. When the merger of the two dominant brewers in the 1990s created a giant with 70% of Brazil’s beer market, the government said it wanted many more such deals in other sectors, and promised that BNDES, the national development bank, would help with loans. Creating giants able to compete globally mattered more than healthy competition at home. That may now change.

You can add to the blog if possible, some interesting points I found are: (some are evaluation points)

1. Efficiency of regulators. How much time it takes for the regulators to make its decision: 330 days Brazil (very slow) vs 30 days USA

2. How stiff are the penalties for colluding?

3. Power of plea bargain to whistle-blowers (similar situation to the Prisoner's dilemma)

4. Trade off between allowing large firms to emerge in order to compete internationally vs healthy competition at home

Oxbridge Economics - Free markets: Is it all about price?

I tweeted a piece on this yesterday, but here is the man himself reacting to his award.



The growing policy relevance of insights from microeconomics is captured well in this super entry to Free Exchange on the Economist web site.

Last week Al Roth and Lloyd Shapley were jointly awarded the 2012 Nobel Prize in Economics in large part for their ground-breaking world in how to improve welfare outcomes in exchanges where prices are by-and-large absent - a field of economics that studies Matching Markets. (See you tube clip above)


Tim Harford offers this perspective on the award. (Click here)

The crisis in macroeconomics is discussed in detail in Diane Coyle's new collection of articles "What's the use of Economics?" - I recommend this book to students who are thinking of Economics at university & teaching colleagues, it has important things to say about reforms to what is taught at college and school level in our subject. I will get the library to order a copy.

Unit 4: Economic Development - why aid matters!

Why We Must Stay Committed to Alleviating Poverty

Bill believes that development aid is a small investment that generates huge returns -- not only for poorer countries that receive it but for rapidly growing and wealthier nations as well. In the last 50 years, development aid has saved a billion people from starvation, fostered strong economic growth in countries such as Brazil and Mexico, and expanded markets for the U.S. and other developed countries.

In tough economic times like we’re facing today, some people believe one way to reduce government spending is to cut development aid to poor countries.

But as I’ll point out in my report to G20 leaders, development aid doesn’t just benefit people in poor countries. It benefits us all. Just think about the economic miracles that have occurred over the last couple of decades in countries like China, Brazil, India, Indonesia, Korea, Mexico and Turkey. The people in those countries are largely responsible for the incredible progress that has occurred, and economic aid from wealthier countries played a key supporting role.
And now, these countries – having recently figured out how to reduce poverty and increase their technical capabilities – are in a unique position to work alongside other better-off nations to help the world’s poorest 2 billion people. Over time, this positive cycle of strategic aid will reduce the amount of economic assistance that will be required of wealthier countries. Even more importantly, it enables the worst-off countries to feed, educate, and employ their people, which will lead to greater economic self-sufficiency. And that, in turn, will expand global markets for trade – benefitting all countries, including the U.S.

On the other hand, if wealthier countries cut their contributions to development, people in poor countries will continue to suffer and their economies won’t grow. The world hardly needs more suffering. And poverty does nothing to improve economic and political stability around the world.

The U.S. spends about 1 percent of its total budget on development aid – about the same as many other wealthier countries. As I will say in my report to the G20, that amount of money isn’t causing the fiscal problems in the U.S. or Europe, and cutting back on development assistance isn’t going to solve them.

The fact is, development aid is a small investment that generates huge returns. In the past 50 years, it has played an important role in agricultural advances that have saved a billion people from starvation. Innovations in the development and distribution of vaccines, and health advances, has reduced the number of children under the age of 5 who die each year – from 20 million to fewer than 8 million. This is even more amazing when you consider that the world population has more than doubled in that time.

The G20 countries have a vital role to play in ensuring that development aid is prioritized where it can make the biggest impact, and ensuring that it is used wisely. I believe there are innovative approaches and partnerships that could help accomplish this.

A half-century ago, roughly two-thirds of the world’s population was living in poverty. Today, those numbers have been reversed, due in large part to development aid provided by the U.S. and other wealthy nations. This is great progress, but there is still more we can do to improve basic living conditions for the world’s poorest 2 billion people.

Unit 2: What is GDP?

GDP, or Gross Domestic Product, is arguably the most important of all economic statistics as it attempts to capture the state of the economy in one number.

Quite simply, if the GDP measure is up on the previous three months, the economy is growing. If it is negative it is contracting.

And two consecutive three-month periods of contraction mean an economy is in recession.

What is GDP?

GDP can be measured in three ways:

Output measure: This is the value of the goods and services produced by all sectors of the economy; agriculture, manufacturing, energy, construction, the service sector and government

Expenditure measure: This is the value of the goods and services purchased by households and by government, investment in machinery and buildings. It also includes the value of exports minus imports

Income measure: The value of the income generated mostly in terms of profits and wages.

In theory all three approaches should produce the same number.

In the UK the Office for National Statistics (ONS) publishes one single measure of GDP which, apart from the first estimate, is calculated using all three ways of measuring.

Usually the main interest in the UK figures is in the quarterly change in GDP in real terms, that is after taking into account changes in prices (inflation).

How is GDP calculated?

Calculating a GDP estimate for all three measures is a huge undertaking every three months.

The output measure alone - which is considered the most accurate in the short term - involves surveying tens of thousands of UK firms.

The main sources used for this are ONS surveys of manufacturing and service industries.

Information on sales is collected from 6,000 companies in manufacturing, 25,000 service sector firms, 5,000 retailers and 10,000 companies in the construction sector.

Data is also collected from government departments covering activities such as agriculture, energy, health and education.

Unit 1: Cross Elasticity of Demand - Kindle & e-books

Many thanks to Jonny Clark for this excellent example of 'Cross Elasticity of Demand' in action. Students taking Unit 1 this January should think about the following issues:

Why is the XeD of Kindle & e-books negative?
Is this relationship likely to be elastice or inelastic and why?
Also, check out the diagram below, do you understand what is happening? (if not, ask!)

I am a Kindle user!


There, I’ve said it. As the founder member of the Kindle-owners self-help group (KOSH), I’m inviting all fellow addicts to come out and admit likewise – until you admit it to yourself no-one will be able to help you. Until we act collectively, no-one will be able to stop those Amazon dealers from peddling their wares.

If we ever needed proof that they’re out to change the way we consume then you need look no further than the statements made yesterday by Amazon CEO Jeff Bezos who was in the country to promote the launch of the UK version of their new e-reader (Kindle Paperwhite) and the company’s e-book lending service. Interestingly as well, Bezos re-iterated the widely-understood business-model wherein the physical hardware that they sell (the Kindle brand in all of its guises including a tablet called the Kindle Fire) are sold at cost – Amazon do not make a profit from the devices themselves. The true profit comes from content – selling books and other media (such as movies and music).

And herein lays the example that I’ve tried to get across to my students recently. Sales of media products are not just linked to the quality of the film or the book that we wish to consume – but also how easy it is to facilitate the use of that media. The Kindle and its e-books (or the Kindle Fire and its magazines) are the new big example of complementary products. Reduce the price of the hardware to a level that is more accessible then sales of its content start to flourish. It is claimed that e-book readers now read up to 4 times as many books as those who still use the dead-tree versions (although sales of traditional books still outweigh their digital versions). Research is also showing that reading amongst children and young adults has been increased because of the use of technology such as the the Ipad.

But look out Amazon. Reports suggest that a German e-reader called the txtr beagle will soon be available and on sale for less than £10 – its low cost coming from having AAA batteries instead of rechargeable versions and transferring data via Bluetooth instead of wi-fi. At that cost, the beagle could be a real game changer to challenge the Amazon monster – perhaps your school and college could now afford class sets.

Now, I haven’t touched my Kindle all day today. I’ve got it under control, honest. I might have a look to see what Amazon’s Daily Deal has on offer – one look can’t harm can it?

Unit 4: Economic Development - The Lewis model.

Lewis turning points are the defining feature of Arthur Lewis’ Dual-Sector Model, devised in 1954.


The model assumes an economy contains two distinct sectors. Firstly, there is the capitalist sector, characterised by:

1.A capital-intensive manufacturing process, relying on the use of reproducible capital
2.Higher average wages
3.Higher marginal and average productivity
4.Higher demand for labour

Contrasting this, there will also be a subsistence or agricultural sector in an economy. This involves:

1.A labour-intensive production process
2.Low dependency on capital
3.Low marginal and average productivity
4.Low average wages

At an early stage in a country’s development, the subsistence sector is very large. As the main limit on agricultural production is likely to be land, not labour, there comes a point where the marginal productivity of every new farmer or labourer is zero. These workers are considered to be surplus labour. As a result, these workers will move to the capitalist sector over time. Because they are surplus labour, this means that the workforce in the capitalist sector can be increased without wages rising. Early on in development, the Lewis Model assumes that this source of labour is effectively unlimited.

Because marginal productivity is high, an increase in workers available without an increase in wages (which Lewis assumes to be fixed because of the assumption that labour from the subsistence sector is unlimited) means profits will increase. These profits are assumed to be re-invested. This investment leads to growth within the sector, causing the capitalist PPF to shift outwards.

Although the surplus labour from the subsistence sector is assumed to be unlimited initially, eventually it will run out, meaning moving additional labour from agriculture to manufacturing requires a decrease in the output of agriculture. As such, capitalist employers are now competing for labour, causing wages to start to rise as capital accumulation rises (assuming all profits are used to purchase capital). This point is the Lewis turning point of the title.

The model has been criticised primarily on the basis of the assumptions it makes. Firstly, it assumes that capital is the main factor contributing to long run growth, like other exogenous growth theories. For a developing economy, there may be some truth to this concept, but even in this situation capital investment is evidently not the only factor causing growth: improved government policies, for example, could improve human capital (as opposed to the fixed capital used in the model), leading to increased growth.

Secondly, the model assumes that all profits will be re-invested. This is often untrue; it may be in the short run interests of a company not to invest (as this increases costs and so decreases profits), meaning particularly if a company is poorly managed, investment will not happen to the same extent, limiting the effects on long run growth.

A final key criticism is that the model assumes that there are a large number of unproductive agricultural workers. This may be the case at certain times of the year, but the number of workers required for agriculture varies seasonally – at harvest, those workers who were previously unproductive may become productive. As such, transferring workers to the manufacturing sector may in fact cause a reduction in agricultural output, even if those workers are unproductive and so seem surplus for much of the year.

Empirical evidence supports the model to some extent – India, for example, saw agriculture as a share of employment fall from 74% in 1972 to 57% in 2000, while services and industry grew from 26% to 43% (ISI). Indian investment has also risen considerably and growth has remained high, facts that support the Lewis Model.

However, certain countries buck this trend; Egypt, for example, has managed to achieve relatively high growth recently (more than 5% since 2006), despite investment decreasing almost continually from 1960 levels as a percentage of GDP (from 36% to 8% in 2011, IMF) and agriculture rising as a percentage of total employment between 2002 and 2008 (from 27.5% to 31.6%). As a result, though the model is a useful tool for understanding some aspects of growth, it is clearly limited in its accuracy.

Mark Austen and Max Goswami-Myerscough

Unit 4: Globalisation - Tesco in India

Click here to access a link discussing the issue of multinationals opening up around the world. This one looks at Tesco in India. The Indians are not happy!

Unit 2 & 4: UK Macroeconomic data

Click here to access a great piece (with questions) on the reasons behind the UK and the double dip recession. Try and answer the questions yourself.

Unit 4: Economic Development - S Sudan

The worlds newest country is desperate to develop. However, there are huge issues that are stopping this from happening. Here is a short new report on the challenges facing post-conflict South Sudan. South Sudan has one of the lowest literacy rates in the world, as only about a quarter of its people can read and write. Decades of civil war meant few people had the chance to go to school. The main university has just reopened but the contrasts with the gleaming lecture halls of the developed world are as stark as they can be.



Questions for discussion:

How can South Sudan improve literacy rates amongst its population?
Is it as simple as throwing money at the problem or is there a cultural issue as well?

Unit 4: Economic Development - Vietnam

High inflation threatens Vietnamese growth

Vietnam has been coined Little China by some who have lauded their fast growth and development in recent years. But high inflation and property bubbles and a growing problem of non-performing loans and fragile banks threatens to derail progress. This short news report looks at the economic situation in Vietnam and includes pictures of a huge infrastructure project linking Vietnam and China - financed by the Japanese




Questions for discussion:

Is inflation inevitable when you grow at such a quick pace?

Unit 4: Current Account deficit - Revision Notes

A current account deficit measures the balance of trade in:

• goods
• services
• net investment incomes and transfers

 A deficit on the current account means a country is importing more than we are exporting. This will have to be matched by a surplus on the financial and / or capital account.

 

The financial account comprises of 2 main features:

 

a) Short Term Capital flows e.g. hot money flows and purchase of securities
b) Long Term Capital flows e.g. investment in building new factories

 

 

Some economists argue we need not worry about a current account deficit. This is because:

If a current account deficit is financed from long term capital inflows then this can be beneficial for the economy. Inward investment can increase the productive capacity of the economy.

In an era of globalisation it is much easier to attract sufficient capital flows to finance the deficit.

If the deficit gets too large it will cause a devaluation which helps to reduce the deficit. Also when there is a slowdown in consumer spending the deficit will fall.

A current account deficit provides an outlet for domestic demand and prevents inflation.

Reasons to Worry about a Current Account Deficit.

1. There could be problems financing the deficit in the long term. A short term deficit is not a problem, but if you have a deficit of over 6% of GDP then it is a problem if you rely on Capital flows. A significant part of the current account deficit in US is finance by Chinese investors buying US securities, at relatively low interest rates.

2. Most countries would not be able to borrow such large amounts at low interest rates. The US currently can because the US is seen as the World’s reserve currency. However if attitudes to the US economy change and investors lose their confidence in the US economy, they will stop buying US debt. This will cause 2 problems.

US interest rates will need to rise to attract enough people to buy the debt. These higher interest rates will reduce demand in the economy. Higher interest rates will particularly hurt American consumers who have large amounts of debt at the moment.

If capital flows can’t be attracted then the dollar will continue to devalue further. This could cause inflationary pressures, interest rates may need to rise to stabilise the dollar.

Basically to correct the deficit would be a painful experience for the US economy and result in a slowdown or possibly recession

3. In the US the current account deficit is to a large extent caused by excess spending in the economy. It is partly caused by government borrowing which increases Aggregate Demand in the economy and hence growing demand for imports. A large current account deficit is often a sign of an unbalanced economy. It could be a sign of structural weakness and an uncompetitive manufacturing sector. This is particularly a problem in the Eurozone where the exchange rates are permanently fixed.

4. A deficit on the current account increases foreign liabilities. In the beginning a current account deficit could be just a deficit on buying goods. However over time the deficit will be increased by the interest payments on the capital surplus. Foreigners invest in the US. On these investments they receive interest payments or dividends. These dividends count as a debit on the current account. Therefore the longer the deficit goes on the higher the level of investment income debits will be accrued. This means that in the future the economy will need to attract capital flows just to pay off the investment income. As well as the deficit on goods and services.

US current account deficit reached 6% of GDP in 2006. This reflected strong domestic demand and a decline in competitiveness. The credit crunch caused a reduction in US current account deficit.


Example of Iceland's Current Account Deficit

Iceland is an example of a country with a large current deficit which later imploded.


In the years leading up to 2008, there was a sharp inflow of capital to Icelandic banks. This enabled Iceland to run a record current account deficit. Iceland was spending more than they were earning. When capital flows dried up, banks lost money and there was a rapid deterioration in the current account.

Current Account Deficits in the Eurozone

 

  In the Eurozone, current account deficits are a bigger cause for concern because countries have a permanently fixed exchange rate (common currency). Therefore they can't devalue to restore competitiveness. Therefore countries may have to pursue internal devaluation (deflation) to restore competitiveness.

Conclusion

It depends on the size of the current account as a % of GDP. Clearly in Iceland's case, over 20% of GDP was unsustainable. But, in US case 6% of GDP later shrank to a more manageable 3% of GDP.

A current account deficit is often a signal of another underlying problem. For example, a banking boom (in Iceland's case). A boom in domestic demand or a lack of competitiveness in Eurozone.







 

Unit 3: Prisoners Dilemma (Game Theory)

The second form of game theory that you guys need to understand...The Prisoners Dilemma.



Questions for discussion:

How does this suggest firms should compete?
What are the benefits/drawbacks for students?

Unit 3: Monopoly & Microsoft

There was a time when if you asked students for an example of a firm with monopoly tendencies more than 25% of them would give Microsoft as their answer. Those days seemed a thing of the past as first Apple and then the more recent arrival of Google's Android platform suggested we were going tired of watching Bill Gate's egg timer. However, it would seem that the arrival of Windows 8 has brought the good old bad old days of market domination back.


Recent reports have suggested that some software companies are unhappy with the innovations they have brought with the latest incarnation of their Windows operating system. Designed primarily for tablets and sporting a more 'application market ' style user interface this is meant to be the big comeback of the flying window. The makers of of block-building Minecraft and similar games writers Activation Blizzard and Valve have expressed a familiar rage against the MS machine.

It seems that Microsoft are trying a few new domination tricks. The software firms object to the 30% cut Microsoft are taking when selling apps using their on-screen Market suggesting this could put some firms out of business. Even worse, in order to sell through Windows 8, each firm has to have its software certified by Windows, potentially restricting creativity and competition.

The creators of Minecraft are threatening to refuse to sell their product on Windows 8 - a brave but risky strategy that most firms would find hard to copy given the domination that Microsoft has.

Questions for discussion:

How are microsoft competing?
Is there any eviodence of restrictive practices?
Will the consumer benefit in the long run?

Unit 3: The difference between the OFT & CC

Click here to access a prezi on the Office or Fair Trading and the Competition Commision.

Unit 4: The World Trade Organisation - A History

A few resources when looking at the role of the WTO.


The WTO recently released their revised estimates for the growth in world trade for 2012, 2.5% (revised down from 3.7%), and 2013, 4.5% (revised down from 5.6%). This link to their website can be used to discuss the role the WTO plays in international trade. There is also a short video which is an excellent introduction to the history and objectives of the WTO: (a more detailed history from Bretton Woods to GATT to WTO is available if you click here).

Unit 3: Oligopoly Presentation

A useful presentation which introduces the key features of an Oligopolistic market structure. It also has some useful examples for you to discuss.

Oligopoly an Introduction from mattbentley34

Questions for discussion:

Please use the earlier blog post to answer the questions on Jamie's Restaurant.

Unit 3: Profit Maximisation clip

A simple explanation as to why MC = MR is the profit maximising equilibrium..

Unit 3: Market Structures - Revision Presentation + Acivity

A useful presentation which puts all the market strucures together on one presentation. There is an activity for you to try after below this presentation...

Market Structures - Revision Presentation from mattbentley34

Activity - Jamie's Kitchen
It is always tempting when looking at market structure to investigate the likes of Microsoft or the supermarkets but interesting cases can be found all around in relation to how firms behave and the complexities of analysing market structures.

We tend to assume that monopolies, for example, are large firms who dominate national and international markets - this can be the case but is not always so.

Jamie Oliver is a famous TV chef: he made his name from the BBC TV series 'The Naked Chef' and a book of the same title. A contract with retailer J Sainsbury followed a year later in 2000, which reportedly made him a millionaire. He then produced a programme for Channel 4, entitled 'Jamie's Kitchen', which focussed on training 15 unemployed youngsters in the catering business. The restaurant 'Fifteen' came out of that experiment.

Noted for his down-to-earth cockney persona and willingness to experiment and take risks with his food, as well as his passion for sourcing only the best ingredients, Oliver's restaurant was up there with the best in terms of the prices and reputation he garnered.

However, that reputation was called into question following the publication of a restaurant guide that was scathing in its criticism of Oliver's restaurant. The guide, Harden's, is written by those who visit the restaurants. Visitors to 'Fifteen' commented on the surly behaviour of staff, poor quality, uninspiring and expensive food and that the restaurant was devoid of atmosphere. The guide put 'Fifteen' at the bottom of 32 restaurants in its class - those being high priced restaurants. The average price of a meal at 'Fifteen' is around £70 per person.

'Fifteen' is a not for profit business and as such is a charity. Oliver's representatives have replied, commenting that the visitors' experiences were up to 18 months old and that measures had been taken to rectify the problems highlighted. The top chef in the guide was fellow TV star Gordon Ramsay. Ramsay's programmes have highlighted the commitment to the very highest standards in all aspects of the business and, so say his supporters, comes from having gained his experience as a working chef - something that Jamie Oliver had been accused of not possessing.

Tasks

You have the background to the story. Consider the following questions.

1.Which market structure best describes the restaurant industry in the UK?
2.Given your answer to question 1 above, explain what the short and long run equilibrium position for such a restaurant and the industry would be. Justify your view with reference to the industry and the market being considered.
3.In what ways might a restaurant such as 'Fifteen' differentiate its product/service?
4.To what extent would you suggest that a restaurant such as 'Fifteen' can exercise monopoly power?
5.On what basis could the market in which Oliver's restaurant is operating be termed an oligopoly?
6.In what ways could restaurants such as 'Fifteen' behave in a collusive manner and what might be the benefits and difficulties of engaging in such behaviour?

N.B. There is no suggestion or evidence whatsoever that 'Fifteen' or any other similar restaurant is engaging in such activity - this is a purely hypothetical question.

7.Evaluate the strategies that 'Fifteen' could adopt to regain its market position.

Some Hints:

To help you with your analysis, you may wish to consider the following points:


What type of market structure would a particular restaurant be in? What factors would influence your answer?



•You will need to think about the market in which the restaurant sits; is it in a market with all restaurants or is the fact that it has tried to differentiate itself mean that it is in a part of the overall market for eating out? If it is the former, then you would have to consider McDonald's, for example, as being a rival to 'Fifteen' - how appropriate is that?

•You might, therefore, conclude that the restaurant sits in a small market consisting of high-price, high-quality restaurants. If that is your conclusion, the market structure might be quite different and as such, the behaviour and the short and long run outcomes equally so.

•When you are considering your answer, think about the characteristics of the market structure you think it might be in and try to identify how closely those characteristics match with the restaurant industry. Look at the Presentation to remind yourself of the characteristics.

•Question 2 is designed to assess your understanding of the diagrammatic representation of market structures. You would be expected to be able to understand the difference between a short-run position and a long-run one. It is advisable to ensure that you understand how to read graphs properly (many people think they can but when it comes to the analysis...) and that you understand the relationships between marginal and average data and the relationship between total, marginal and average data.

The latter also implies that some understanding is necessary of the price elasticity of demand for products. You can remind yourself of these relationships by looking at this supplementary Presentation on total and marginal values (search 'marginal values' on this blog).




 How can restaurants differentiate the product and service they provide?

•Question 3 should be relatively straightforward; there are clues in the text about this - think about location, ambience, character, price, quality, service, etc.



•Question 4 is seeking to assess your understanding of the subtleties involved when discussing monopoly power. Firms such as Microsoft may be big enough to wield monopoly power in fairly obvious ways - although they might claim that they are not, which is an interesting discussion in itself - but small firms can also exercise monopoly power. It may tend to be localised in nature. You will have to explain what the source of the monopoly power is and how it might exercise that power. If you have done this successfully then you will be able to explain what the consequences of such monopoly power might be. The key part of this question are the command words 'to what extent', which is requiring you to make a judgement. In this case, you are expected to judge whether 'Fifteen' is able to exercise strong monopoly power, some monopoly power in limited circumstances or hardly any at all. The answer will depend to a large extent on how you have classified the market structure. Remember to support your judgements with reference to the analysis you have made previously.

•Question 5 takes the issue above one stage further and suggests 'Fifteen' might be regarded as an oligopoly. In this case, it will be assuming that there are a small number of restaurants in the market who can exercise a degree of control over the industry - the industry in this case being high value, high quality, exclusive restaurants.

•Question 6 then takes the above discussion and gives you the opportunity of assessing how collusive behaviour could be organised - think of location, pricing, possibly what types of food they serve, and so on. When considering the costs and benefits the obvious point is to think of the impact on long-term profit levels but you are also asked to think about the problems associated with collusive behaviour - will everyone stick to the agreements, for example? There are plenty of textbooks that give a good explanation of collusive behaviour.
•The last question asks you to consider ways which 'Fifteen' could regain its position in the market - the text again gives some suggestion that they have already taken steps to this end. Think of the problems the guide highlighted and what steps the business could take to overcome these weaknesses. Avoid just saying bland things such as 'they can improve quality'. If you do think this is a way forward, explain how a restaurant can increase quality. This takes your answer to another level! The command word, again, is important. You must evaluate, so if you think quality is important, you must balance this against other measures you have identified to make a judgement as to whether quality is more or less important and why.