With January 2011 AS macro module exams in mind, here is a streamed revision presentation which examines how AD-AS analysis can be used in an AS macro economics exam
Click here for AS/AD Presentation
The presentation covers shifts in AD and AS curves and also considers some of the demand and supply-side shocks that can affect an economy.
Common applications of AD-AS analysis at AS level include some of the following:
How changes in interest rates affect AD and inflation
How changes in taxation might impact on LRAS
How movements in the exchange rate affect AD & AS
Impact of supply-side policies to stimulate enterprise
Economic consequences of labour migration
Effects of changes in import tariffs and quotas
Multiplier effects from economic stimulus policies
Analysing the impact of the credit crunch / recession
Analysing the causes of higher cost-push inflation
Tuesday 30 November 2010
Monday 29 November 2010
Unit 3: Economic Efficiency
1. Productive efficiency.
This occurs when the maximum number of goods and services are produced with a given amount of inputs. This will occur on the production possibility frontier. On the curve it is impossible to produce more goods without producing less services.
Productive efficiency will also occur at the lowest point on the firms average costs curve
2. Allocative efficiency
This occurs when goods and services are distributed according to consumer preferences. An economy could be productively efficient but produce goods people don’t need this would be allocative inefficient.
Allocative efficiency occurs when the price of the good = the MC of production
3. X inefficiency:
This occurs when firms do not have incentives to cut costs, for example a monopoly which makes supernormal profits may have little incentive to get rid of surplus labour. Therefore a firms average cost may be higher than necessary
4. Efficiency of scale
This occurs when the firms produces on the lowest point of its Long run average cost and therefore benefits fully from economies of scale
5. Dynamic efficiency
This refers to efficiency over time for example a Ford factory in 1920 would be very efficient for the time period but would now be inefficient by comparison therefore it is necessary for firms to constantly introduce new technology and reduce costs over time.
This occurs when the maximum number of goods and services are produced with a given amount of inputs. This will occur on the production possibility frontier. On the curve it is impossible to produce more goods without producing less services.
Productive efficiency will also occur at the lowest point on the firms average costs curve
2. Allocative efficiency
This occurs when goods and services are distributed according to consumer preferences. An economy could be productively efficient but produce goods people don’t need this would be allocative inefficient.
Allocative efficiency occurs when the price of the good = the MC of production
3. X inefficiency:
This occurs when firms do not have incentives to cut costs, for example a monopoly which makes supernormal profits may have little incentive to get rid of surplus labour. Therefore a firms average cost may be higher than necessary
4. Efficiency of scale
This occurs when the firms produces on the lowest point of its Long run average cost and therefore benefits fully from economies of scale
5. Dynamic efficiency
This refers to efficiency over time for example a Ford factory in 1920 would be very efficient for the time period but would now be inefficient by comparison therefore it is necessary for firms to constantly introduce new technology and reduce costs over time.
Sunday 28 November 2010
Unit 1: Capturing consumer surplus...by mistake!!!
Hilarious.....well, quite amusing
Some retail research finds that customers spend less than six seconds sizing up anyone single offer thrust in front of them as they struggle around a supermarket. Shoppers who allow their concentration to slip are prone to caught out by frequent price label errors in many of the main supermarkets as this BBC Video explains.
Shop prices tend to be set centrally and the sheer volume of price discounts - 25% off, 3 for 2, 4 for 3, buy one get one free inevitably invites logistics errors in store and confusion among customers. Here is a selection of images of pricing errors some of which are comic all of which put extra money into the hands of the retailers.
Some retail research finds that customers spend less than six seconds sizing up anyone single offer thrust in front of them as they struggle around a supermarket. Shoppers who allow their concentration to slip are prone to caught out by frequent price label errors in many of the main supermarkets as this BBC Video explains.
Shop prices tend to be set centrally and the sheer volume of price discounts - 25% off, 3 for 2, 4 for 3, buy one get one free inevitably invites logistics errors in store and confusion among customers. Here is a selection of images of pricing errors some of which are comic all of which put extra money into the hands of the retailers.
Unit 3: Short Run Shut Down Position
The standard theory of the firm assumes that a business needs to make at least normal profit in the long run to justify remaining in the industry but this is not necessarily a strict requirement for a firm in the short term. Indeed many businesses make operating losses when there is a fall in market demand causing prices to fall and revenues to dip below costs.
In industries with a high income elasticity of demand the market is likely to be sensitive to changes in the economic cycle so that firms are likely to see significant changes in profitability at various stages of the business cycle.
The Shut-Down Condition: Price and Variable Cost
In the short run the firm will continue to produce as long as total revenue covers total variable costs or put another way, so long as Price per unit > or equal to Average Variable Cost (AR = AVC). The reason for this is as follows. A business’s fixed costs must be paid regardless of the level of output. If we make an assumption these costs are sunk costs (i.e. they cannot be covered if the firm shuts down) then the loss per unit would be greater if the firm were to shut down, provided variable costs are covered.
Consider the cost and revenue curves facing a business in the short run shown in the diagram below. The market equilibrium price is P1 which means that the equilibrium output for the firm (where MR=MC) is at output Q2. The business is making an economic loss at this price (AC > P1) but the price is high enough for the business to cover all of its variable costs and also make some contribution to its fixed costs. If we assume that most of the fixed costs are lost if the firm shuts down, then the firm can justify continuing to produce in the short run, losses will be greater if they close down.
The shut down price for a business in the short run is assumed to be the price which covers average variable cost. Therefore if price < AVC then the supplier is better off closing down a plant. We can use the concept of the shut down price to derive the competitive firm’s supply curve. The supply curve is the marginal cost curve above the shut down point
Example of the Shut-Down Price – The UK Electricity Market
Powergen announced in October 2002 that it planned to shut-down more than a quarter of its UK power stations, mothballing sufficient capacity to provide electricity for the whole of London. The company said the electricity market was “bust” after a price slump. Powergen will close the power station on the Isle of Grain in Kent and the Killingholme plant in Lincolnshire. UK electricity prices have fallen by almost 40 per cent since 1998 as a result of intense competition and the introduction of new trading arrangements, which have coincided with a decline in industry demand.
Powergen said that it was receiving between £13 and £15 per megawatt hour, compared with a cost of about £18 for gas-fired plant and costs of £40 per MWh for older, inefficient oil-fired plant. The decline in electricity prices has pushed British Energy, the nuclear generator, to the brink of insolvency, forcing the Government to grant a £650 million emergency loan facility.
In industries with a high income elasticity of demand the market is likely to be sensitive to changes in the economic cycle so that firms are likely to see significant changes in profitability at various stages of the business cycle.
The Shut-Down Condition: Price and Variable Cost
In the short run the firm will continue to produce as long as total revenue covers total variable costs or put another way, so long as Price per unit > or equal to Average Variable Cost (AR = AVC). The reason for this is as follows. A business’s fixed costs must be paid regardless of the level of output. If we make an assumption these costs are sunk costs (i.e. they cannot be covered if the firm shuts down) then the loss per unit would be greater if the firm were to shut down, provided variable costs are covered.
Consider the cost and revenue curves facing a business in the short run shown in the diagram below. The market equilibrium price is P1 which means that the equilibrium output for the firm (where MR=MC) is at output Q2. The business is making an economic loss at this price (AC > P1) but the price is high enough for the business to cover all of its variable costs and also make some contribution to its fixed costs. If we assume that most of the fixed costs are lost if the firm shuts down, then the firm can justify continuing to produce in the short run, losses will be greater if they close down.
In the second example in the diagram below, the market price is so low that the firm is not covering its variable costs let alone the fixed costs. Losses can be cut if the firm shuts down some of their productive capacity.
The shut down price for a business in the short run is assumed to be the price which covers average variable cost. Therefore if price < AVC then the supplier is better off closing down a plant. We can use the concept of the shut down price to derive the competitive firm’s supply curve. The supply curve is the marginal cost curve above the shut down point
Example of the Shut-Down Price – The UK Electricity Market
Powergen announced in October 2002 that it planned to shut-down more than a quarter of its UK power stations, mothballing sufficient capacity to provide electricity for the whole of London. The company said the electricity market was “bust” after a price slump. Powergen will close the power station on the Isle of Grain in Kent and the Killingholme plant in Lincolnshire. UK electricity prices have fallen by almost 40 per cent since 1998 as a result of intense competition and the introduction of new trading arrangements, which have coincided with a decline in industry demand.
Powergen said that it was receiving between £13 and £15 per megawatt hour, compared with a cost of about £18 for gas-fired plant and costs of £40 per MWh for older, inefficient oil-fired plant. The decline in electricity prices has pushed British Energy, the nuclear generator, to the brink of insolvency, forcing the Government to grant a £650 million emergency loan facility.
Saturday 27 November 2010
The cigar gave off a pleasant vanilla smell and several people commented on how nice it was. When I thought about it, I realised that I know quite a few people who like the smell of cigars, even if they do not smoke or like the smell of cigarettes.
Then an intriguing and somewhat counter-intuitive idea entered my head: could there be positive externalities from this man smoking his cigar?
We were outside so the passive smoking side of things was minimised to say the least and there was no one there that did’t like the smell. This is a good example of seeing market failure from a different perspective.
Of course, there is also some good evaluation in that the negative externalities are not limited to passive smoking (cost of healthcare for smokers, etc) but is there an argument here for subsidising (or at least reducing the tax rate on) cigars?
Unit 3: Contestable Markets
A Lincolnshire village has defied the big broadband companies and built its own broadband network.
Click here for article.
Click here for article.
Unit 3: Energy Oligopoly & price fixing
The industry regulator Ofgem has announced a fresh investigation into the pricing policies of the oligopolistic electricity and gas market - for consumer lobbying groups the wait has been too long but many analysts point to data that shows that many gas supply businesses for example have been operating at a loss for much of the last decade. And that net profit margins are pretty thin compared to the total fuel bill for household customers.
Click here for more details.
Everyone gets hot under the collar about energy prices but the reality is that gas and electricity is no longer cheap and too little progress has been made in ways to reduce our energy consumption.
Click here for more details.
Everyone gets hot under the collar about energy prices but the reality is that gas and electricity is no longer cheap and too little progress has been made in ways to reduce our energy consumption.
Thursday 25 November 2010
Unit 3: Facebook & Barriers to entry
(Although its not clear how this will impact Apple with their “FaceTime” application).
Click on this link to access full article.
Q) What would be the implications of this patent for other businesses?
Q) What are the advantages to Facebook of getting this patent?
Wednesday 24 November 2010
Unit 2 & 4: Trade off, Unemployment & Inflation
Question “Discuss the view that the Phillips Curve is irrelevant in explaining relationships between unemployment and inflation in the UK”
If you take the 1950s and 60s you could argue there was a trade off between unemployment and inflation.
As AD increased, it caused higher output, this lead to inflation as the economy came close to full employment. However, as output increased unemployment (demand deficient unemployment) fell.
This Keynesian view of the AS curve suggests there can be a trade off between inflation and demand deficient unemployment.
However, this view is criticised by the Monetarist view, which argues increased AD only causes inflation and no increase in Real GDP in the Long term.
Monetarists argue LRAS is inelastic and therefore Phillips Curve looks like this:
Another Criticism of the Phillips curve is that in the UK, we have witnessed falling unemployment and low inflation. During the 1990s and early 2000s supply side improvements enables lower unemployment and lower inflation. This suggests that it is possible to reduce unemployment without causing inflation.
However, you could argue there is still a potential trade off except the phillips curve has shifted to the left, because there is now a better trade off.
Also the fact that both have fallen doesn’t mean we can’t go back to the 1950s and 1960s.
It also depends on the role of Monetary policy. If monetary policy is done well, you can avoid some of the boom and bust economic cycles we experienced before. However, if you allow AD to increase too much there will be a trade off between inflation and unemployment
If you take the 1950s and 60s you could argue there was a trade off between unemployment and inflation.
As AD increased, it caused higher output, this lead to inflation as the economy came close to full employment. However, as output increased unemployment (demand deficient unemployment) fell.
This Keynesian view of the AS curve suggests there can be a trade off between inflation and demand deficient unemployment.
However, this view is criticised by the Monetarist view, which argues increased AD only causes inflation and no increase in Real GDP in the Long term.
Monetarists argue LRAS is inelastic and therefore Phillips Curve looks like this:
However, you could argue there is still a potential trade off except the phillips curve has shifted to the left, because there is now a better trade off.
Also the fact that both have fallen doesn’t mean we can’t go back to the 1950s and 1960s.
It also depends on the role of Monetary policy. If monetary policy is done well, you can avoid some of the boom and bust economic cycles we experienced before. However, if you allow AD to increase too much there will be a trade off between inflation and unemployment
Unit 4: If UK had joined the Euro....
Bigger Boom and Lower Interest Rates.
Between 2003-2005, ECB interest rates were 2% (ECB Rates), UK interest rates were above 4% (UK rates). Many suggested that lower interest rates would have been good (cheaper mortgages e.t.c). But, with hindsight, those years were a period of unsustainable bank lending and an unsustainable asset bubble. If the UK had been in the Euro, there would have been an even bigger boom and bust in house prices. If we had ECB rates, Bank lending would have been even greater, exposing banks to more bad debts. (like Ireland experience).
In other words, ECB interest rates were too low for the UK at that stage in the cycle. In hindsight, the MPC should have had higher interest rates to dampen the housing and asset bubble, not lower.
Response To Recession.
When the economy appeared to be heading towards recession, the Bank of England cut interest rates quickly and sharply. The ECB followed the B of E in cutting interest rates. The ECB were slightly more cautious in cutting rates, I don't think it would have made a huge difference as the Bank of England rate cut struggled to stimulate bank lending because of the nature of the credit and financial crisis.
No Quantitative Easing.
The recession hit the UK more than any other country. This was because our economy was heavily reliant on the banking and financial sector. The credit crisis hit the UK economy more than other Euro members. In response to the unprecedented downturn in the economy, the MPC embarked on an unprecedented round of quantitative easing. (creating £150bn of money). This was necessary because even interest rates of 0.5% weren't helping economy. The quantitative easing led to a depreciation in the value of the pound - a 25% depreciation.
Even with zero interest rates, quantitative easing, fiscal stimulus, bank bailouts and large depreciation the British economy struggled to get out of recession. This indicates how much the economy was affected by the financial crisis and balance sheet nature of recession. If we had less options to stimulate economy and if the asset boom and bust had been bigger, we would have faced a deeper recession.
The depreciation in the exchange rate helped make UK exports more competitive, it also made UK assets like London house prices appear more competitive to foreigners.
Though exports were slow to grow, it did reduce the size of the downturn.
The greater attraction of UK assets (due to depreciation) helped prevent house price falls of 20% becoming more like 30% or 40% like in Spain and Ireland. Though the main reason the UK property collapse was less than in other Euro countries was the fact that in the boom we didn't build many houses (due to planning restrictions). The UK doesn't have a surplus of housing stock driving prices down like in US, Spain and Ireland.
Inflation.
There are people in UK worrying that inflation is slightly above the government's target. But, we are lucky to have positive inflation and are avoiding the debt deflation which gives the likes of Ireland and Greece and unenviable situation.
The great dilemma for Greece and Ireland is that they have to cut their budget deficit, but, they don't have any alternatives for boosting growth. It is this combination of austerity plus lack of economic growth that makes bond investors take fright at prospect for debt to GDP ratio.
UK Debt
If the UK had been in the Euro, there would have been a much greater chance of debt default. I doubt we would be having bond yields of less than 3%.
In 2007, Ireland had public sector debt of only 25% of GDP, the UK had debt of 40% of GDP. In 2009, the UK had one of the largest annual debts.
Firstly, the boom and bust would have been bigger.
Secondly, we would have less potential to boost economic recovery through independent monetary policy.
This would have led to a sharp rise in government borrowing costs and debt to GDP ratio.
Given constraints of being in Euro, bond markets would have placed much greater pressure to cut budget quicker and earlier,
Tuesday 23 November 2010
Unit 1: Mark Schemes
Unit 1 Jun 09
View more documents from mattbentley34.
Unit 1 Jan 10
View more documents from mattbentley34.
Unit 1: Carbon Emmissions Trading
Unit 2 & 4: Why is the UK helping Ireland?
A key argument could be the close inter-relatedness of our economies, a key point touched on in this video,
Evaluation points could be the opportunity cost of doing this, ie what could we do with this money instead? (although, of course, this is only a loan so long term the UK should benefit through interest payments!)
Hugh Pym from the BBC points out that UK exports to Ireland include financial services, food, paper, petrol and gas. And 40% of Northern Ireland exports go south of border. Ireland is the UKs fifth largest export market, above Spain, Italy and China.
Interesting stuff, which you may want to think about in prearation for next terms macro-economics stuff! See the issues facing Ireland in the charts below....
Unit 1: Mistletoe & Cider an example of Joint Supply!
This article in The Daily Mail suggests that the booming cider sales of recent years led to a big increase in demand for apples (derived demand) and the widespread replanting of apple trees. Now that we are reaping the bumper apple harvests we find that we have bumper harvests of mistletoe too...why? Because mistletoe is a parasitic plant that loves to grow on the soft bark of apple trees. You learn a new thing every day!
Q Think about how the demand for Cider would effect the price of misteltoe (ie how would it change mistletoes demand or supply conditions)
Monday 22 November 2010
Wednesday 17 November 2010
Unit 1: Government failure - ethanol subsidies
Excellent example of government failure and the law of unintended consequences from the FT.com .
US ethanol, subsidised as a homegrown alternative to foreign oil, is being exported in record volumes.
The exports stand in contrast to the goals of US biofuels policy, which seeks to reduce dependence on imported fossil fuels in part by offering tax credits to companies that blend ethanol with petrol.
Rob Vierhout of ePure, a European ethanol trade association, said: “The blender’s credit was not set up with the intention to facilitate exports”. Government data last week showed 251m gallons in fuel ethanol exports in the nine months to September 30, more than double the 2009 total, with the US becoming a net exporter this year.
Whoops, not want the govt wanted!
US ethanol, subsidised as a homegrown alternative to foreign oil, is being exported in record volumes.
The exports stand in contrast to the goals of US biofuels policy, which seeks to reduce dependence on imported fossil fuels in part by offering tax credits to companies that blend ethanol with petrol.
Rob Vierhout of ePure, a European ethanol trade association, said: “The blender’s credit was not set up with the intention to facilitate exports”. Government data last week showed 251m gallons in fuel ethanol exports in the nine months to September 30, more than double the 2009 total, with the US becoming a net exporter this year.
Whoops, not want the govt wanted!
Monday 15 November 2010
Unit 1: Agricultural subsidies: Arguments for & against
Click here for article
Q Are the subsidies helping to improve the lives of poor farmers in Greece and Spain, therefore helping improve social welfare, or is it another example of government intervention creating too much supply and causing more market failure.
You decide!!!!
Saturday 13 November 2010
Unit 1: Government Policy and Market Failure.
But is banning sales of Christmas crackers to under-16’s also necessary? Apparently so, according to this article from the Daily Telegraph.
Households up and down the land had better review the Health and Safety implications of their Christmas lunch tables, and decide whether the crackers represent a demerit good that they should avoid. Or is this an example of the Law of Unintended Consequences taking effect?
The Law of Unintended Consequences is a great way to evaluate unit 1 questions, so get reading!
Happy holidays!!! (Georgia, hope you are feeling OK)
Friday 12 November 2010
Unit 1: Market failre and 'Chips'; a de-merit good
Planning permission & chip shops
This failure to secure planning permission shows that prohibition or regulation by the state, can be used to lower the supply of a demerit good. The external costs might include litter, obesity. However, the schools could have countered this by not allowing children to leave the premises, actions which would have lowered demand during lunchtime.
Earlier this year, Jamie Oliver’s campaign for better school food, appeared to run out of steam and government support, but does this issue highlight information failure, and the reluctance of some children to eat a more varied diet.
Some schools have stopped sales of other demerit goods, crisps, colas, lemonades and chocolate citing health reasons, countered by some enterprising pupils who then smuggled packets and cans for resale at break.
Thursday 11 November 2010
Year 12: Eid Homework
Complete the following;
The question on the blog about cocoa.
One question from the 'How markets work' pack (thats 8 multi choice and a data question)
Two questions from the 'Why markets fail' Pack. One merit and one de-merit Q
YOU CHOOSE WHICH QUESTION!
Happy holidays!!
The question on the blog about cocoa.
One question from the 'How markets work' pack (thats 8 multi choice and a data question)
Two questions from the 'Why markets fail' Pack. One merit and one de-merit Q
YOU CHOOSE WHICH QUESTION!
Happy holidays!!
Unit 1: Public Goods & Market Failure
However, some local councils have decided to not use scarce grant or ratepayers’ funds to pay for street lighting, instead the lights will be turned off or dimmed. Given that there is no statutory requirement for the provision of street lights, the policy appears to highlight the economic problem of limited resources and unlimited wants as well as opportunity cost.
Street Lighting in Nottinghamshire Click here for article
Nottinghamshire County Council proposes to switch off the lights between midnight and 5.30 in the morning. External benefits might include lower energy use, protection of nocturnal wildlife and their habitats and the creation of a clearer view of the galaxies, but these are offset by possible increases in external costs (accidents or crime). Placing a monetary value on such external costs and benefits of the proposed policy will depend on the assumptions used by the Council’s economists.
The current proposals to reduce state spending may hint at a rethink of what constitutes merit goods and public goods, and whether a partial market failure can be tolerated.
Wednesday 10 November 2010
Unit 1: Agriculture, buffer stock and cocoa
Will a collapse in global cocoa production bring an end to chocolate as an affordable treat and giver of blood sugar? This article from the Independent describes the issues faced by the cocoa producers.
Price volatility in commodity markets is an important part of the Unit 1/market failure syyllabus and something we will be covering inb detail after the Eid break. You guys must understand how price intervention strategies such as maximum prices / buffer stock schemes work in the real world and the problems they can cause.
Below is one of the things I would like you to complete over the holiday. This will be an extremely useful introduction to the issues faced in agricultural markets and the government intervention that can actually make things worse.
Yours task will be to read, research and complete the questions from the worksheet. You will need to refer to your textbook and any other noted you can find on the topic!
Price volatility in commodity markets is an important part of the Unit 1/market failure syyllabus and something we will be covering inb detail after the Eid break. You guys must understand how price intervention strategies such as maximum prices / buffer stock schemes work in the real world and the problems they can cause.
Below is one of the things I would like you to complete over the holiday. This will be an extremely useful introduction to the issues faced in agricultural markets and the government intervention that can actually make things worse.
Yours task will be to read, research and complete the questions from the worksheet. You will need to refer to your textbook and any other noted you can find on the topic!
Unit 3: Cartels and Collusion, it's everywhere!
The EU has boosted its revenue for the year by fining 11 airlines almost 800m euros for fixing cargo prices between 1999 and 2006. AirFrance-KLM are hit the hardest, at 340m, followed by BA at 104m - but Lufthansa, who blew the whistle on the other airlines involved, are not fined at all.
This gives yet another example of game theory, and the mind-games that colluding companies must engage in as they try to second-guess which fellow cartel member is most likely to alert the authorities in order to escape a fine, and exactly when that will happen.
The maximum possible fine, of 10% of a companies world-wide revenues for the year, sounds as it is enough to deter businesses from entering into cartels. Yet a look through a number of examples at the botton of this piece.
It makes me wonder if the potential benefits to the colluding firm, over the years that they manage to get away with it, are greater than the fine that they risk when, or if, they are found out. Do they see the potential fine as a legitimate expense of running the business, which is unfortunate but worth the risk?
The BBC report that “BA said it had already made a £350m provision for any possible fines over the cargo price fixing. A BA spokesman said the airline’s fine fell “within the provision made by the company in its 2006/7 report and accounts"." - almost as if it was depreciation.
Q) Surely this suggests the fines should be higher?
Check out some of the links below. I hope that you are as scandalised as me, by the way that the firm that betrays other cartel members to the authorities gets away without a fine!
BA & Virgin Price fixing
Auction Houses and Price Fixing
Billionnaire in Cardboard price fixing cartel
Firm tries to fix prices by text!
Fine for cigarette price fixing
Probe into chocolate price fixing
LCD manufacturers screened for price fixing.
Tuesday 9 November 2010
Unit 1: Free market Vs Mixed Economy
Venezuelan government intervention
On the continuum of the mixed economy, the government continues to move the Venezuelan economy towards the planned side of things. And they are not averse to letting the population know that it is for the better either!
The picture shows the price for a certain type of oil in Mercado Bicentenario, the new name for a chain of private shops that have been nationalised by the government.
There is the “fair” price of 4.73 Bfs and then the capitalist price of 7 Bfs along with the saving of 32% that Venezuelan citizens can thank their government for!
On the continuum of the mixed economy, the government continues to move the Venezuelan economy towards the planned side of things. And they are not averse to letting the population know that it is for the better either!
The picture shows the price for a certain type of oil in Mercado Bicentenario, the new name for a chain of private shops that have been nationalised by the government.
There is the “fair” price of 4.73 Bfs and then the capitalist price of 7 Bfs along with the saving of 32% that Venezuelan citizens can thank their government for!
Questions:
How can the givernment charge a lower price than the market price?
How will this benefit society (if at all)?
Unit 3: The differing roles of the CC & OFT
Useful definitions of the main competition authorities in the UK.....
The CC is an independent public body which conducts in-depth inquiries into mergers, markets and the regulation of the major regulated industries. All of the CC’s inquiries are undertaken following a reference made by the Office of Fair Trading (OFT).
The Office of Fair Trading has statutory powers within UK law. Its main aims are to ensure choice and competition within markets, investigate allegations of restrictive practices and abuse of dominant market positions and finally to maintain standards and codes of practice within industries.
If firms are found guilty of the above, they can be fined up to 10% of yearly revenue. Recent examples have included ‘Warranties on electrical goods’ and the price fixing of toys.
The CC is an independent public body which conducts in-depth inquiries into mergers, markets and the regulation of the major regulated industries. All of the CC’s inquiries are undertaken following a reference made by the Office of Fair Trading (OFT).
The Office of Fair Trading has statutory powers within UK law. Its main aims are to ensure choice and competition within markets, investigate allegations of restrictive practices and abuse of dominant market positions and finally to maintain standards and codes of practice within industries.
If firms are found guilty of the above, they can be fined up to 10% of yearly revenue. Recent examples have included ‘Warranties on electrical goods’ and the price fixing of toys.
Unit 1: Revision Videos
Lots of clips explaining the key topics for Unit 1, enjoy.....
Production Possibility Curves
Supply and Demand
Supply and Demand Shifts
Consumer and Producer Surplus
Elasticity and Total Revenue
Price Elasticity of Demand (PeD)
Income Elasticity of Demand (YeD)
Cross Elasticity of Demand (XeD)
Price Elasticity of Supply (PeS)
Production Possibility Curves
Supply and Demand
Supply and Demand Shifts
Consumer and Producer Surplus
Elasticity and Total Revenue
Price Elasticity of Demand (PeD)
Income Elasticity of Demand (YeD)
Cross Elasticity of Demand (XeD)
Price Elasticity of Supply (PeS)
Monday 8 November 2010
Unit 1: Market failure in Agricultural markets
Understanding price elasticity of supply, which measures the responsiveness of producers to changes in the price of different goods, allows firm managers and government policymakers to better evaluate the effects of their output decisions and economic policies.
Price controls and PES:
A common policy in rich countries aimed at assisting farmers is the use of minimum prices for agricultural commodities. The European Union’s Common Agricultural Policy (CAP) involves a complex system of subsidies, import and export controls and price controls, the objective of which is to ensure a fair standard of living for Europe’s agricultural community.
The use of minimum prices in agricultural markets can have the unintended consequence of creating substantial surpluses of unsold output. Take the example of butter in the EU. The following excerpt was taken from the January 22, 2009 issue of the New York Times:
“Two years after it was supposed to have gone away for good, Europe’s ‘butter mountain’ is back… Faced with a drastic drop in the [demand for] dairy goods, the European Union will buy 30,000 tons of unsold butter. Surpluses… have returned because of the sharp drop in the [demand for]… butter and milk resulting partly from the global slowdown.
In response, the union’s executive body, the European Commission, said it would buy 30,000 tons of butter at a price of 2,299 euros a ton… Michael Mann, spokesman for the European Commission, said that the move was temporary but that if necessary, the European Union would buy more than those quantities of butter — though not at the same price.”
The situation in the European Union butter market can be attributed to an underestimate by policy makers of the responsiveness of butter producers to the price controls established under the CAP. A minimum price scheme of any sort, if effective, will result in surplus output of the good in question, but the 30,000 tons of unsold butter in Europe appears to exceed the expected surplus considerably.
The graph below illustrates why:
A price floor (Pf) is set above the equilibrium price of butter established by the free market. Butter producers in Europe are guaranteed a price of Pf, and any surplus not sold at this price will be bought by the European Commission (EC).
Assuming a relatively inelastic supply, which corresponds with the short-run period (Ssr), the increase in butter production is relatively small (Qsr), resulting in a relatively small surplus (Qsr – Qd). In the short-run, the amount of surplus butter the EU governments needed to purchase was minimal. But as we learned earlier in this chapter, as producers of goods have time to adjust to the higher price, which in the case of the CAP is a price guaranteed by the EC, they become more responsive to the higher price and are able to increase their output by much more than in the short-run. Slr represents the supply of butter in Europe after years of the minimum price scheme. As demand has fallen due to the global economic slowdown, butter producers have continued to produce at a level corresponding with the price floor (Pf), leading to ever growing butter stocks and the need for the EC to spend, in this case, 69 million euros on surplus butter.
Understanding the behavior of producers in response to changes in prices, whether due to excise taxes or price controls, better allows both firm managers and government policy makers to respond appropriately to the conditions experienced by producers and consumer in the market place and avoid inefficiencies resulting from various economic policies.
Discussion questions:
Explain why the price elasticities of both demand and supply of primary commodities tend to be relatively low in the short run and higher in the long-run.
Explain the factors which influence price elasticity of supply. Illustrate your answer with reference to the market for a commodity or raw material.
Discuss the importance of price elasticity of supply and price elasticity of demand for producers of primary commodities in less developed countries.
Sunday 7 November 2010
Unit 1: Positive externalities from an advert?
This new rap produced on behalf of Yeo Valley foods in Somerset is cool, fun and has gone viral!
The brief was to get across the healthy nutritional qualities of Yeo Valley products to a younger generation and this old timer thinks that they have done a great job!
Look at it from point of view of elasticity of supply (the time it takes to switch from non-organic to organic farming when responding to changing market demand). And also barriers to entry in A2 micro - organic produce requires a licence/accreditation from the Soil Association.
It is also fun to focus on British businesses doing well in an industry where over half of yoghurts are imported!
The brief was to get across the healthy nutritional qualities of Yeo Valley products to a younger generation and this old timer thinks that they have done a great job!
Look at it from point of view of elasticity of supply (the time it takes to switch from non-organic to organic farming when responding to changing market demand). And also barriers to entry in A2 micro - organic produce requires a licence/accreditation from the Soil Association.
It is also fun to focus on British businesses doing well in an industry where over half of yoghurts are imported!
Wednesday 3 November 2010
Unit 1: Market Failure and externalities.
The most dangerous drug is legal!
Professor David Nutt’s report on Drink and Drugs in current issue of The Lancet highlights the difficulties in assessing the scale of negative externalities created by the misuse of drugs and alcohol.
Mark Easton’s Blog on the BBC considers the evidence Nutt’s team cited such as drug specific mortality, drug related mortality, crime, injury, environmental damage, and economic cost. Each substance was given a score in each category from zero to 100.
The results tables showed that the most dangerous drugs with the highest private costs to individual users were heroin, crack cocaine and crystal meth (part scores 34, 37, and 32, respectively). But when all factors were taken into account (the external cost) alcohol was found to be most harmful, followed by heroin and crack (46, 21, and 17, respectively).
Ecstasy and LSD were found to be the least damaging.The drugs with the highest social costs were considered by the experts to be alcohol with a harm score of 72, heroin (55) and crack cocaine (54) in second and third places.
The weighting process is necessarily based on judgement, so it is best done by a group of experts working to consensus”. The weighting of the damage or external cost is based on the judgement of the team. Easton and other journalists note that Nutt’s ranking of drugs is at complete odds with the official Home Office classification system.
The study argues that alcohol although legal, remains the most harmful drug in stark contrast to the much less harmful effect of Class A drugs including ecstasy and LSD.
The spillover effects of alcoholic drinks are debatable, and raise questions about the estimated Private and External Costs given by the Home Office and those assumptions, and weightings used in the research methodology by Professor Nutt’s team. How far it changes behaviour and government policy remains to be seen, but the response so far also emphasies that economics is never far away from value judgements and controversy.
For more information and a short video on the topic, click here...
Q. How would you solve the issue of alcohol consumption in the UK? (Explain & evaluate two possible solutions for 10 marks)
Professor David Nutt’s report on Drink and Drugs in current issue of The Lancet highlights the difficulties in assessing the scale of negative externalities created by the misuse of drugs and alcohol.
Mark Easton’s Blog on the BBC considers the evidence Nutt’s team cited such as drug specific mortality, drug related mortality, crime, injury, environmental damage, and economic cost. Each substance was given a score in each category from zero to 100.
The results tables showed that the most dangerous drugs with the highest private costs to individual users were heroin, crack cocaine and crystal meth (part scores 34, 37, and 32, respectively). But when all factors were taken into account (the external cost) alcohol was found to be most harmful, followed by heroin and crack (46, 21, and 17, respectively).
Ecstasy and LSD were found to be the least damaging.The drugs with the highest social costs were considered by the experts to be alcohol with a harm score of 72, heroin (55) and crack cocaine (54) in second and third places.
The weighting process is necessarily based on judgement, so it is best done by a group of experts working to consensus”. The weighting of the damage or external cost is based on the judgement of the team. Easton and other journalists note that Nutt’s ranking of drugs is at complete odds with the official Home Office classification system.
The study argues that alcohol although legal, remains the most harmful drug in stark contrast to the much less harmful effect of Class A drugs including ecstasy and LSD.
The spillover effects of alcoholic drinks are debatable, and raise questions about the estimated Private and External Costs given by the Home Office and those assumptions, and weightings used in the research methodology by Professor Nutt’s team. How far it changes behaviour and government policy remains to be seen, but the response so far also emphasies that economics is never far away from value judgements and controversy.
For more information and a short video on the topic, click here...
Q. How would you solve the issue of alcohol consumption in the UK? (Explain & evaluate two possible solutions for 10 marks)
Unit 3: Contestability: The electrical goods market has become more contestable!
The retail market for the latest TVs, gaming consoles, electronics and other gadgets has just become more contestable!
'Best Buy' the giant US electrical retailer has announced that it is planning to launch an entry into the retail market for electrical appliances in a move that will potentially shake up the consumer electronics market which has been populated and dominated for many years by high street regulars such as Currys and Dixons, more recently by Amazon and Play.com.
'Best Buy' the giant US electrical retailer has announced that it is planning to launch an entry into the retail market for electrical appliances in a move that will potentially shake up the consumer electronics market which has been populated and dominated for many years by high street regulars such as Currys and Dixons, more recently by Amazon and Play.com. Best Buy’s huge economies of scale have made it relatively easy to enter the UK market. They bought a 50 per cent stake in Carphone Warehouse last year and they have already opened five new “bricks and mortar” stores in Essex, Birmingham, Southampton and Liverpool in the past few months.
Their next move is to establish an online presence in the UK and it seems this will be up and running in time for the lucrative Christmas buying period. More here in the article from the Independent.
Tuesday 2 November 2010
Monday 1 November 2010
Unit 1: External Costs & Benefits of Industrial farming!
Our Daily Bread is a no-commentary documentary that reveals the little-known world of high-tech agriculture. In a series of visually stunning, continuously tracking, wide-screen images that seem right out of a science-fiction movie, we see the places where food is cultivated and processed: surreal landscapes optimized for agricultural machinery, clean rooms in cool industrial buildings designed for maximum efficiency, and elaborate machines that operate on a ‘disassembly line’ basis. There are scenes here that I am sure will have an immediate impact on you all.
Questions for discussion:
Regading the economics of industrial farming, what are the social costs and benefits to society?
Questions for discussion:
Regading the economics of industrial farming, what are the social costs and benefits to society?
Unit1: Elasticity & advertising
The article below discusses the effect advertising can have on elasticity. Thjere is also a good acronym to help you learn all the factors affecting elasicity.....
How can a commercial like the one below decrease the price elasticity of demand for a product like Molson Canadian beer? After this extremely successful commercial was released in Canada, Molson’s share of the beer market increased by 3%, while that of Labatt’s its largest competitor, shrunk by 3%.
Reminder: The factors that affect the price elasticity of demand for a particular good are
S -the number of substitutes the good has.
P – The proportion of income the good is of the consumer’s income.
L - Whether the good is a luxury or a necessity
A - Whether the good is addictive
T - The amount of time consumers have to respond to a change in the price
Discussion Questions:
1.How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?
2.Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?
How can a commercial like the one below decrease the price elasticity of demand for a product like Molson Canadian beer? After this extremely successful commercial was released in Canada, Molson’s share of the beer market increased by 3%, while that of Labatt’s its largest competitor, shrunk by 3%.
Reminder: The factors that affect the price elasticity of demand for a particular good are
S -the number of substitutes the good has.
P – The proportion of income the good is of the consumer’s income.
L - Whether the good is a luxury or a necessity
A - Whether the good is addictive
T - The amount of time consumers have to respond to a change in the price
Discussion Questions:
1.How can a successful advertising campaign reduce consumers’ responsiveness to changes in price of a good like Molson beer?
2.Why is it in the interest of a firm like Molson to decrease the price elasticity of demand for its product?
Unit 1: Elasticity & Russian Vodka drinkers!
Lisa and Liza...take note!!!
The elasticity, or perceived necessity of different products can influence the decision to introduce a tax. In Russia, two products, Beer and Vodka are being looked at as a potential sources of new government revenue. A proposed increase in the tax duties on beer, will potentially increase retail prices by between 20-30%. An increase in the price of one form of alcohol (beer) could shift demand towards other close substitutes, such as vodka or home brewed spirits. Hopefully, increased tax revenue will support the government finances and in the long run, the money could be reallocated to treat alcoholism.
This artcle from the Economist last week gives a good analysis of this issue. Russia is a country where people drink 30 litres of hard liquor alcohol each year, six times more than the average European. Alcohol taxes are a sensitive subject, and the implications complex, but they need to be addressed.
Discussion Questions:
1. “Pushing up beer prices is far more likely to encourage drinkers to swallow even more vodka.” What does this quote suggest, about the cross elasticity of beer and spirits in Russia. Use evidence from the article so support your explanation.
2. The Russian government is suggesting adding a tax to beer. What effect do you think this will have on the market price and market quantity of beer consumed.
3. The government wishes to impose a tax on these products. Assume a specific tax is imposed on each product. Assume the demand for beer is relatively elastic and the demand for vodka relatively inelastic and draw two graphs to show the effect on consumers and the relative tax burdens.
4. Explain what the aim of introducing taxes on vodka and beer is. Evaluate if the taxes will achieve the aims of increasing government revenue and reducing the social harms related to alcohol consumption in Russia.
The elasticity, or perceived necessity of different products can influence the decision to introduce a tax. In Russia, two products, Beer and Vodka are being looked at as a potential sources of new government revenue. A proposed increase in the tax duties on beer, will potentially increase retail prices by between 20-30%. An increase in the price of one form of alcohol (beer) could shift demand towards other close substitutes, such as vodka or home brewed spirits. Hopefully, increased tax revenue will support the government finances and in the long run, the money could be reallocated to treat alcoholism.Discussion Questions:
1. “Pushing up beer prices is far more likely to encourage drinkers to swallow even more vodka.” What does this quote suggest, about the cross elasticity of beer and spirits in Russia. Use evidence from the article so support your explanation.
2. The Russian government is suggesting adding a tax to beer. What effect do you think this will have on the market price and market quantity of beer consumed.
3. The government wishes to impose a tax on these products. Assume a specific tax is imposed on each product. Assume the demand for beer is relatively elastic and the demand for vodka relatively inelastic and draw two graphs to show the effect on consumers and the relative tax burdens.
4. Explain what the aim of introducing taxes on vodka and beer is. Evaluate if the taxes will achieve the aims of increasing government revenue and reducing the social harms related to alcohol consumption in Russia.
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