aggregate demand

current account

multiplier effect

measuring gdp

investment

inflation

government objectives

government spending

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Final Exam Advice

Econ 1 is 75 marks in 75 minutes time is tight

the MCQ 25 marks - do it first it gets the brain thinking in economic terms and also may throw up some definitions or diagrams which may be useful on the Data Response.  Thus I would recommend spending a couple of minutes glancing at the Data Response to make a  mental note of the general themes eg negative externalities to see if a diagram comes up on the MCQ you can cross reference with.

• Spend no more than 1 minute per question - a stopwatch on the time is useful. 
• Read the stem carefully - some a long which is a distractor in itself. 
• Underline key words or phrase draw a diagram on the paper if appropriate.
• Check responses - eliminate obvious wrong answers - choose best option - ie the one that relate most strongly to the question stem
• If unsure still make a stab at it and note the question number on a spare piece of paper.  This will give you a list of questions to check if you have time at the end.

The MCQ should take around 20 minutes if you stick to this approach.  Take the 3-5 minutes you have created to read over the Data Response options. 

DR 50 marks

In most exam sessions there is one straight forward question and one obscure one - choose the easy option?!

Definition 5 marks - clear concise not more than one or two sentences plus eg if appropriate.  Elasticity formula is enough for full marks.

Data 8 marks - simple and significant two points - high low = range / start finish. Just give observation + data plus units. Separate your two observations clearly eg "Firstly" Secondly".  On graphs and charts use a ruler to read accurate data.

Diagram 12 marks - remember two types:

1. orthodox - define demand supply market (2) identify factor from extract say which curve it affects and in which direction, suggest what happens to price and output (4) draw diagram labelling all curves and axis - include the idea of excess demand or supply at original price (4).  Underneath explain how identified excess demand or supply forces price to a new equilibrium, mention elasticity issues which mean price or quantity reacts the most (4).  Final paragraph adds some observation about short run vs long run changes or impacts on related markets (4) = 18 marks to max 12
2. alternative - define concept eg externality or price floor (2).  Explain the nature of the concept and how it relates to demand or supply (4).  Refer to the extract to contextualise the concept (4).  Draw diagram fully labelled (4).  Explain diagram with extra detail such a welfare impacts (4) = 18 max 12

If you do the first 3 parts of the data response quickly, accurately and concisely you can complete them in 15 minutes - use the First 5 minutes to read the 25 mark question and extracts carefully and sketch a plan using prompts from the extracts to guide you to key issues and logical order - remember think "what is my argument?"

Orthodox Essay 25 marks

Intro;
define key terms in question use data from chart/table (12 mark question) to bring discussion into context eg what has happened to wheat prices

• I1 identify problem eg price volatility explain why this happens - with diagram? and why it is a problem - this is basically a discussion of how the market works
• I2 Suggestion one policy option to deal with situation eg price ceiling explain how it works and positive and negatives.  Also what its outcome depends on
• I3 Suggest alternative policy option eg buffer stock do the same as with I1
• Conclude by bringing both policies together - think cost benefit and combining policies to see if they are mutually reinforcing (complementary) or contradictory. 
• Discuss the idea of Government Failure and other complexities

there are variations where you are asked to discuss a specific policy or, compare market outcomes with intervention but there will basically fall into a similar structure

Keep you discussion in context.  To help you refer to the extract explicitly in each section of the essay

Draw diagrams to support each issue , give them space and a full title, label them fully and integrate them into the discussion

Refer back to the question at the start of the conclusion to make sure you are answering the question set

If you have 5 minutes at the end go back to the MCQ questions you were unsure about to check them

Key Theme 7: Car Scappage Scheme

Introduction

During the credit crunch the significant slowdown expressed itself in terms of rising unemployment and falling incomes.  The car industry was hit particularly bad making as new vehicle demand could be consider income elastic thus responded negatively to the rise in uncertainty.

Labour in derived demand as the demand for new cars fell so did the demand for labour leading to layoffs. 

With these events concentrated in particular unemployment black spots such as the Midlands the Government decided to offer an inducement for buyers, £2,500 for any car over 10 years old when trading in for a new car.  This can be considered to be a subsidy which encouraged a higher level of demand and thus supported employment in this key industry.

The government also argued the policy was environmentally sound as it took older less efficient cars off the road and replaced them with newer more environmentally sound models.  This dealt with some of the negative externalities of car travel

One could argue the policy was one of the successes of the governments response to the credit crunch, investment in the UK car industry continues and the UK is set to become a net exporter of cars later this year. BBC News

Key Theme 6: Tuition Fees and Merit Goods

Introduction:
The introduction of tuition fees at £9000 per annum for university study could be an area of discussion on this years econ 1 paper.

Basic merit good arguments apply (see the last post on healthcare) but here the state is moving away from free provision towards charging individuals for their study.

It is felt there are clear merit good arguments for education to 16 (or indeed 18 with legislation to be phased in over the next couple of years) thus making it a legal requirement and providing it free makes sure the "right" quantity of education is consumed.  National Curriculum and inspection by OFSTEAD works on quality within this framework.

Higher education provision is not so clear cut - the government feels the benefits are more private in nature thus students should make more of a contribution to the cost.

There are  equity issues here in that it maybe only those from above average incomes may take the risk of investing in degrees.  Thus the government has built in some means-testing and suggested a quota system or positive discrimination to support children from lower socio-economic groups.

The impact of the introduction of tuition fees will only be known in the longer term.  The rise in youth unemployment may be enough to encourage more students into education as a way of dealing with a lack of job opportunity although many graduates are now struggling to find work.

Will we see the death of the liberal arts degree as students seek a greater return on their investment from more technical subjects??

Highly skilled and flexible workers are the key to sustainable growth in a competitive global environment - clear positive externalities of higher education exist in this sense.

Basic Analysis:

Key Theme 5: NHS and Merit Goods

Introduction:
The central provision of healthcare since WWII under the NHS follows the themes of:

• equity - where every individual has the right to a certain level of care regardless on income
• merit good - where the state deals with failures in the form of information issues related to externalities and an underestimation of private benefit
• asymmetric information: doctor have all the information thus may make decisions motivated by financial goals
• moral hazard: insurance markets have difficulty dealing with the unique challenge of affordable healthcare cover.

Analysis:

Policy:

• subsidy

• zero price provision

Conclusion:
the NHS has delivered effective care for the UK population for over 60 years but is facing a triple threat:

• increased demand from an ageing population
• increasing costs from ever more complex drugs, technology and procedures
• austerity challenging total expenditure in the face of the above two issues

Efficiency gains through reorganisation and the use of private sector providers on partnership with the public sector is seen as a model to provide healthcare for the 21 century but is proving difficult to achieve both practically and politically.

Key Theme 4: London Olympics 2012

Introduction:
Hot topic and possible to consider within the Econ 1 framework although Econ 3 is more likely.

Economic Concepts
Private Cost: Direct costs of the project (estimated involved between £9bn and £12bn on construction venues, staffing and policing the event.
External Cost: Third party effects of the games such as increased congestion and other disruptions to normal routines during the construction and hosting of the games.
Private Benefit: Direct value extracted from the consumption of a good or service eg enjoyment from being there when Bolt runs the100m final
External Benefit: third party gains from the decision to produce and consume.  Multiplier effects of construction and investment, legacy notions of facilities and a new generation of fitter healthier people
Secondary Markets:  touts selling tickets above face value

Analysis;

• secondary markets

• External Costs

 

• External Benefits

 Evaluation

• In reality the picture is complex with the creation of short and long run externalities of consumption and production of a positive and negative nature.  Identifying them and attaching a value to them is an extremely difficult task.
• Ulitmately the costs could be considered to be relatively short term whilst the benefits in terms of the legacy of the games is relatively long term.
• Regionality of impacts is another issue all together.

Key Theme 3: Monopoly

Introduction:

Monopoly is when one firm controls a market, and is said to have price maker power.  The market is said to be concentrated.

A working definition is any firm controlling more than 25% of its market in terms of sales revenue or turnover, thus Tesco could be said to be in a monopoly position in the supermarket industry with over 30%.

Monopoly is said to focus on profit maximisation and lowers output below and raises price above that which would be generated in a competitive market.  It can extract high profits protected behind barriers to entry, obstacles which prevent new firms coming in to compete away high profits.  These barrier tend to come in 3 forms (the 3 Ss):

1. structural barriers: natural barriers arising from the distinct characteristics of the industry such as high capital set up costs (often combined with high sunk costs - investment which is non recoverable on exit)
2. statutory barriers: legal barriers put in place by government such a licenses to operate in certain industries or Intellectual Property Rights (IPR) such a patent preventing other firms copying a process or innovation.
3. strategic barriers: artificial barriers created through firm decision making such as strong branding and heavy advertising or pricing levels aimed a discouraging new competition.

Analysis:

Negatives of Monopoly:

• Welfare loss is generated through restricting output and raising price (allocative inefficiency)
• The profit maximising incentive may also move the firm away from short run productive efficiency
• productive inefficiencies may be exaggerated by x-inefficiency of organisational slack, where the company allows cost to creep up due to a lack of competitive pressure
• the lack of choice could be seen to be another negative aspect of monopoly

Positives of Monopoly

• Economies of Scale

• Dynamic Efficiency: High profits are used for research and development in products and processes which drive down costs and create new choices for society in the future

If the government decides the monopoly on balance is not in the public interest there are a range of policy options open to it:

Policy:

• Tax: Not a shift to the left of the supply curve because this is a tax on income (profit) for the business owners.  A windfall tax has been used against the banking industry recently.
• Remove barriers to entry: easy when these are statutory barriers
• Privatise: creates incentive to be efficient, especially when combine with the removal of barriers to entry
• Nationalise: make profits for the government or lower prices towards welfare maximisation
• Regulate: prevent monopolies being created which are not in the consumer interest or monitor existing monopolies to make sure they are acting in the public interest

End Evaluation:

Capitalism has a natural tendency towards concentration.  Global markets means it is large companies that have the resources to compete at this level.  Anti-monopoly legislation perhaps also needs a global architecture.  Low prices and choice is perhaps best generated through a competitive oligopoly where a small number of large firms dominate a particular market



Key Themes 2: Pollution and Policy

Introduction:
The environmental impact of economic activity has become a key issue of public policy in the last 30 years.  Every decision to produce and consume creates private cost and benefits which allow the price mechanism to determine price and output levels taking account of changing market conditions. 

However there are information failures in the sense that not all costs (in the case of pollution) are included.  A missing market exists for external costs of our actions.  It is only when these are considered that we generate an efficient allocation of resources.

Private Cost + External Cost = Social Cost

A false equilibrium is generated by the market leading to over production and consumption of certain goods, a misallocation of resources, market failure and a justification for government intervention.

Analysis:

Policy Options:

• Green (Piguvian) Tax - the tax will shift the existing supply curve (MPC) to the left; the tax will be specific (per unit) and reflect the MEC caused at the efficient output level. The tax revenue will be protected (ringfenced / hypothecated) and used to deal with the pollution impacts
• Evaluate
• measuring external cost is difficult, especially when it is global and long term
• does the "polluter pays principle" apply ie is the person causing the problem paying the tax - contribution is dependent on elasticity of demand

• Carbon Trading - this is where an agency such as the government or EU sets a limit on a certain emission in a certain time period (eg tonnes of CO2 per year) for a certain industry (Commerical Air Travel - introduced in 2011).  The "CAP" (limit) is shared out among existing producers in the industry (auction will generate income?).  Firms have an incentive to clean up production as any surplus on their allocation may be sold to dirty producers.  Over time the cap is reduced to keep the price of carbon high and thus a market based solution to pollution is generated.

• Evaluate
• Where to put the cap? what is an acceptable level of pollution?? EMTS phase 1 created too many pollution permits and the price of a tonne of carbon plumeted to 50 cents - too low to incentivise firms to clean up their acts
• what emissions should be included? carbon yes but what about nitrous oxide??
• what industries and activities? surely all economic activity must be dealt with .....is trading a practical solution for this?

Conclusion

The tax v trade debate goes on.  A combination of policies will ultimately lead to progress on climate change and pollution, but only if there is multilateral action ( all nations working together).  EU has acted whilst other nations such as US and China have been slow to act.  This may actually make the present pollution levels worse as firms relocate to low regulation centres and emissions rise (carbon leakage). This could be said to be a form of Governement Failure.

The environment is a global public good with associated free rider problems leading to inertia with regards to effective policy, but something must be done to guarentee a sustainable future,

Remember inability to agree on policy is a failure of government in a political sense rather than government failure in an economic sense.

Other policy Issues:

• Clean Development Mechanism:  Allowing firms to offset carbon emissions by investing in developing countries clean production
• Subsidies for clean energy and technology - picking winners?? acting as a catalyst in the switch from non-renewable to renewable energy.

Key Themes: 1 National Minimum Wage

Introduction:
A price froor in the labour market was introduced as a flagship policy of New Labour under Blair in 1999. It deals with equity (fairness) issues resulting from low wages as a failure of the labour market. Geoff Riley has posted recently on the tutor2u blog related to the concept. Read this carefully then attempt the following data response based on the post

Key definitions
Equity: relates to the fairness of an outcome, thus is a normative (value judgement led) concept.
Price Floor: a restriction placed on a market preventing price droping below a certain level maintained through intervention buying (comoodities) or legislation and threat of prosecution. This protects supplier income or wages in a labour market.

Key analysis:

Excess supply is create at the NMW, in a labour market this may be thought of as unemployment. A welfare loss is also created as the market is held outside its natural equilibrium, the cost benefit approach would suggest the gains in terms of equity more than offset the losses due to unempoyment and inefficiency.

•  what level is the price floor compared to equilibrium?
• what is the elasticity of demand and supply? (supply tends to be elastic due to low skill labour)

development analysis:
negatives

• Does NMW compromise international competitiveness as we struggle against low wage manufacturers?
• Does NMW create a rigidity in the labour market which prevents the price mechanism working?

positives (both boost the demand curve for labour - diagram?)

• Does the NMW boost the productivity (effiecency wage theory) and hence the demand for labour thus leading to higher not lower levels of employment?
• Does the NMW boost income creating greater demand for goods and services thus boosting the demand for labour (derived demand)?

What other policy options to deal with equity issues are out there?

• price controls (ceilings) on expenditures eg food and rent poor households spend the greatest proportion of their income in these areas - but policy has similar implications as price floors
• progressive taxes on income are used to redisribute income and build opportunity through:
• merit good provision boosts opportunity and human capital for all (standards? and equal access??)
• social welfare safety nets protect the most vulerable or create poverty traps?

Final evaluation

• NMW was not too much of an issue in a growing economy before the credit crunch, however things have changed. The economic outlook is bleak and price floors are coming more into play as demand for labour falls. 
• Supply side themes and a return to sustainable growth ulitmately will ease the pressure on social safety nets especially in the face of austerity and benefit caps, but this outcome is complex and uncertain.