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AS and A Level: Markets & Managing the Economy

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How do markets work?

  1. 1 Economics is the study of the allocation of resources so understanding how prices are set and the amount of resources used for any particular product is important.
  2. 2 Most resources are allocated by the free market. Adam Smith called this ‘the invisible hand’ as no one is in charge of it. It just happens through the interaction of millions of individual buyers and sellers, all working in their own best interest.
  3. 3 The price and amount produced are determined where the amount supplied equals the amount demanded. This is known as market equilibrium or the market clearing output.
  4. 4 Any changes to the supply of a good e.g. costs change, weather disrupts production or any change in demand e.g. a product goes into or out of fashion will cause a change in the equilibrium point and so lead to a change in price and output.
  5. 5 When discussing this, always start with the change in supply and demand and talk about the change to price and output this causes. Not the other way round.

What is market failure?

  1. 1 Markets do not work perfectly all the time. Several things can and do go wrong with its operation. One of these is market power. If individuals or groups of producers (or consumers to a lesser extent) have too much power, they can distort the market.
  2. 2 Externalities – The production and consumption of many goods has an external cost e.g. pollution that is paid by other people than those who consume or produce the product. To determine how much of this product should actually be produced or consumed for the greatest benefit to society, this cost should be taken into account as well.
  3. 3 Public goods – Some goods would not be produced at all by the free market as it is impossible to stop other people benefiting from them (the free rider problem). Examples include defence, light houses and street lights.
  4. 4 Merit goods – Some goods would be under-consumed if it was left to individuals to decide how much they wanted to spend on them. This is because they have external benefits to society beyond the private benefits e.g. we all benefit from an educated workforce.
  5. 5 Make sure you are comfortable with the market failure graphs and some of the other reasons for market failure e.g. information problems, immobility of the factors of production.

Five key facts about price elasticity of demand

  1. 1 Elasticity matters because it determines the importance of shifts in the demand and supply curves and helps with our understanding of how markets operate. In theory all demand and supply curves have different elasticises at different points along them. We are interested at their elasticity where they intersect.
  2. 2 Price elasticity of demand measures the responsiveness of demand to a change in price. The formula is the percentage change in quantity demanded divided by the percentage change in price.
  3. 3 Demand for a product is elastic if the percentage change in demand is greater then the percentage change in price e.g. a 10% price rise causes a 20% reduction in demand.
  4. 4 Demand for a product is inelastic if the percentage change in demand is less than the percentage change in price e.g. a 10% price rise causes a 5% reduction in demand.
  5. 5 Remember the formulae for income and cross elasticity of demand and price elasticity of supply. Q always goes on the top in the formula. We always ‘queue up’.

  • Marked by Teachers essays 10
  • Peer Reviewed essays 11
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  1. Marked by a teacher

    Explain and illustrate the roles played by profit in allocating scarce resources within the economy over time.

    5 star(s)

    Hence, firms would allocate their resources to increase output till this point as reflected in the diagram A. As shown in Diagram A, producing at output level, Q1 would result in a profit earned reflected by the blue border box. However, the firm is not producing at the optimal output level of Q2 which generate the highest possible profit as reflected by the red border box. Hence, profit-driven firms would be motivated allocate more scarce resources to increase their output level to Q2 to maximize profits. Therefore, this shows that potential profit is able to drive allocation of scarce resources to achieve profits maximisation.

    • Word count: 954
  2. Marked by a teacher

    A free market is an economic system where the prices of goods and services are determined by unrestricted competition between privately owned businesses.

    4 star(s)

    Unlike public goods, merit goods are excludable. With merit goods such as healthcare, only those with sufficient income would be able to access the service and those who have insufficient income would not be able to access the good/service. This leads on to the next limitation of a free market, unequal distribution of income. In a free market economy, there is large unequal distribution of income because the income of most labourers is driven down by the high level of competition in the market. Those whose businesses are profitable and not forced down by competition are those with great wealth.

    • Word count: 986
  3. Marked by a teacher

    Discuss the strengths and weaknesses of demand-side policies (fiscal and monetary policy)

    4 star(s)

    Deflationary demand-side policies decrease aggregate demand in the event of aggregate demand running ahead of aggregate supply and posing inflationary risks or leading to an unsustainable deficit on the balance of payments. An example of when reflationary demand-side policies would be used is when aggregate demand is too low, so for instance when taxes are high and interest rates are high. The policies that would be used in order to shift out the aggregate demand curve would be lowering taxes and government spending, fiscal policy, and decreasing interest rates, monetary policy.

    • Word count: 810
  4. Marked by a teacher

    Asses the extent to which the internet has made markets more competitive

    3 star(s)

    Consumers who may be disadvantaged due to disabilities, age, time constraints and so on are those who use the internet the most to buy. Previously, these people would have found it difficult to buy, but with the internet comes these frequent buyers. Even people who would have normally bought from high street shops would have the option of buying from the internet. Usually, a lot of people go out and buy things to socialise with friends. These people might seek the internet to buy things on their own if they cannot go out with friends.

    • Word count: 811
  5. Peer reviewed

    The effect of Trade Unions on causing Labour Market Failure Today

    3 star(s)

    Trade union have, for many years been a major cause of LMF and to an extent, still are.since their inception, trade unions main aim has been to increase wage rate for workers.

    • Word count: 367
  6. Peer reviewed

    What are the main characteristics of a free market economy and a centrally planned economy?

    3 star(s)

    Second, in the resource market, households provide firms with the factors of production (land, labour and capital etc.) they demand in order to produce their output. But, these inputs are not free, so every firm face costs in acquiring them, so when they choose the products they produce, they must consider the cost of the products and production. Every producer is willing to reduce the cost and make the maximum profit. But, this will cause a problem in such situation, there will be some black-hearted producers that use the bad material in the production, like the dirty oil event in China, that is because the oil producer overdoes reducing the costs, and the mangers of restaurants are also

    • Word count: 751
  7. Peer reviewed

    To what extent is Price elasticity of demand useful in a companies planning decisions?

    3 star(s)

    The price elasticity of demand depends on several factors. The most important factors are whether the product concerned is produced by a monopoly industry or by a competitive industry structure where there exist many substitutes. For example if say in a mobile telephone market there exist many companies competing and customers can switch to other companies with little switching costs then the demand for the product will be most probably elastic. However, if there is considerable switching costs then the demand will be inelastic.

    • Word count: 416
  8. Peer reviewed

    Income and Price Elasticity of Demand

    3 star(s)

    Normal Good Normal goods are when demand for a product rises, income levels rise. Necessities and luxuries are normal goods. Examples of necessity would be toilet roll. Examples of luxury goods are expensive cars and designer clothes. Between 0 and +1 is a normal necessity. Greater than +1 is a superior/luxury good. Example In this current climate people income decreased and started to buy more inferior goods. E.g. Before the recession people would have bought Andrex toilet roll, however in the recession they would have bought supermarkets own brand toilet roll which would be a lot cheaper.

    • Word count: 590
  9. Peer reviewed

    Market Economies- characteristics and examples.

    3 star(s)

    The price in this case and the demand of the product from people determines decision of what is to be produced or taken. The price in this case acts to indicate the market value of resources. The government has a very restricted part to play in that it should control national defence, act against monopolies, issue money, raise taxes and protecting the rights of the private sector. Examples of Countries under Market Economy are United States of America (USA) - leading in their support for market economy have many laws such as anti-monopoly laws that restrict free competition, which is essential for a pure market economy.

    • Word count: 891
  10. Peer reviewed

    There's no such thing as a free lunch

    3 star(s)

    The definition of trade-offs is giving up something to get something. Getting a free week of yoga at Corepower Yoga is great, but what if a different yoga center is better? Corepower Yoga does many hot yoga classes. This means that the room will be heated up to one hundred and five degrees and the humidity turned up to fifty percent. This could create a lot of discomfort and strain to new yoga users that they are not ready for.

    • Word count: 556
  11. Peer reviewed

    income distribution

    3 star(s)

    Although the gap still exists from a series of factors. A rise in earnings inequality can cause income inequality. This is due to a fall in demand for unskilled and semi-skilled labour and a rise in demand for skilled labour because of deindustrialisation, where resources have been shifted from secondary to the tertiary and quaternary sectors, so thus, skilled labour is needed. In the UK this happened as we lost our wage and price competitiveness to developing countries, causing structural unemployment in the secondary sector industry. Therefore the income gap widens as skilled labour productivity widens, and thus, so do wages.

    • Word count: 482
  12. MARKET REPORT: Mobile phone recycling. For a while now, many companies have been exploiting the environmentally-friendly angle in an attempt to increase sales.

    Although mechanisms to recycle phones were already in place before this market began, there was not enough financial incentive to surrender old phones, not enough publicity and inefficient recycling infrastructure. The market for mobile recycling has increased rapidly, with industry experts predicting a mobile phone recycling volume of over 10 million handsets in 2010, and increase of over 25% from 2009. This report has been compiled in order to assess what kind of market the mobile phone recycling market is, and how contestable it is.

    • Word count: 985
  13. Capital Structure Decision

    The article also talks about another kind of theory called the "the pecking-order theory". The main point of this theory is that outside investors in a firm know less about the health of a firm than its managers do, which can cause a problem when the company wants to issue equity, managers cannot control what the investors may believe hence Issuing debt generally is less dramatic effect, but external finance is still costly, hence retained earnings becomes the main source of financing for the firms.

    • Word count: 822
  14. Three ways in which housing market affects consumption levels

    One major way in which housing markets affect consumption is between house prices and consumption (wealth affect). House prices can increase and decrease due to many things such as a new shops, parks, cinema or a new motorway may get built close to your house and hence allowing for a better/worse area for your house, which will increase/decrease the price, this is generally called a social marginal benefit. An increase in housing price will bring about an increase in the homeowners wealth and therefore will cause an increase in consumption and vice versa if house prices fall.

    • Word count: 627
  15. In your opinion are supermarkets more likely to compete using price or non-price competition?

    Supermarkets operate within an oligopolistic market, and so have a kinked demand curve. With a demand curve kinked round the prevailing price OP, a rise or fall in marginal cost will not affect the profit maximising level of output or price. Hence this model can be used to explain relative price stability in oligopolistic markets. Therefore in the supermarket market, firms are unlikely to compete using price competition. Supermarkets are therefore more likely to compete using non-price competition as they cannot compete on price to such an extent as they all charge similar prices; the big firms are able to benefit from the same economies of scale.

    • Word count: 656
  16. Competition in the Real World

    AT&T was not the first to join the monopolistic PC market in the U.S; T-mobile made netbooks available this past September in the U.S and Verizon plans to provide small, economically priced laptops later this quarter. As wireless companies enter the market, it benefits both the companies and the consumers. It benefits the wireless market because they can persuade consumers to buy monthly wireless Internet access service plans. In turn, the consumers save money on upfront costs for the computer and monthly charges may be less expensive compared to the existing Internet providers.

    • Word count: 988
  17. Free essay
  18. The Federal Budget in Australia. The three Federal Budget outcomes are budget surplus, budget deficit and balanced budget.

    The Government uses Fiscal Policy to stimulate the economy when needed in order to reduce cyclical unemployment. Also, funding retraining programs lowers structural unemployment. The three Federal Budget outcomes are budget surplus, budget deficit and balanced budget. A budget surplus occurs when revenue collected exceeds government expenditure. This means that the government is taking more out of the economy through taxes and other methods of collecting revenue than it is putting in through expenditure. This has a contractionary effect on the economy, decreasing economic activity. This is as there is a negative multiplier effect, a greater than proportional decrease in the circular flow resulting from a leakage.

    • Word count: 865
  19. Evaluate the use of game theory as a tool to explain oligopolistic behaviour

    Therefore, can we completely rely on game theory to use as a tool to explain oligopolistic behaviour? Nevertheless, the game theory can still be used in understanding the budget of firms for advertising and branding programmes. This can be seen as being essential as oligopolistic firms prefer non-price competition to prevent price wars in a particular industry (and oligopolistic markets prefer price rigidity). In fact, over the years, Nike has gradually increased the amount of money to put towards sports sponsorship programmes and more TV advertising. Many other competitors such as K Swiss and Reebok have responded by increasing their sponsorship schemes.

    • Word count: 623
  20. To what extent is the centrally planned system of running the NHS effective in its allocation of resources? (12 marks)

    With any economic system, there are advantages and disadvantages both. The main advantages which come with a planned economy is the stability gained from the way it utilizes all the resources it has available. Since it is run by the government, in theory it should be working at its maximum potential as the government will want to produce as much as it can efficiently - however this does not always prove to be true, as shown by the steel industry in Britain when it was once nationalised. Another advantage gained is the goals and design with which the planned economy is established.

    • Word count: 813
  21. Free essay

    Pay differences between men and women

    The 1970's onwards saw a growth in relative pay between men and women because of legal reasons such as the equal pay act 1970 and social trends making it less acceptable in society to discriminate against women in terms of wages and occupation. The percentages of women in traditionally "male" jobs which tend to have higher wages are growing. For example 47% of all lawyers and solicitors are now women. Furthermore, our economy is becoming far more service based which many employers believe is a more suitable sort of job for a woman than heavy manual work, for this reason it is easier for them to work their way up the job ladder and receive higher wages.

    • Word count: 911
  22. benefits and costs of Government Intervention which aims to make the distribution of income CONSIDERABLY more equal.

    Welfare benefits are cash payments to those entitled to it, also called transfer payments. They can be universal or means tested. If they are universal, it means that everyone is entitled to it, irrespective of income. For example, JSA and child benefits are universal benefits. Means tested benefits are targeted at those entitled to it. Entitlement depends on financial circumstances, i.e. income and savings, examples are income support, housing benefit and EMA. Means tested benefits are an effective way of redistributing income in the short term as they are targeted at specific groups. Universal benefits are therefore less effective as they are not targeted at those who need them.

    • Word count: 757
  23. Advantages and Disadvantages of Planned Economy.

    * Planners may not know consumer wants and may make wrong decisions leading to shortages of some goods and services and surpluses of others. * Scarce resources can be allocated to the production of necessities like basic foodstuffs and not luxuries. * Many planners and administration are needed to run the system. It leads to slow decisions, red tape and corruption.

    • Word count: 412
  24. Economics - Smoke Pollution - Data Response

    However some may be ill able to afford this. Another option would be to fine or otherwise prevent just those who emit the pollutant materials in other words incentivising them to become more environmentally friendly, this would include systems to tax those using the roads (congestion charging) and those in industry who produce large quantities of these materials. To do this everyone would have to be assessed to insure they pay the right amount for the pollution they create and rates would have to be set for every type of pollution, this would be expensive however it would ensure there were no free riders.

    • Word count: 817
  25. Economics Unit 2 AS past paper

    Problems associated with estimating private costs include it takes a long period of time to construct the rail link, as time goes on estimates become less accurate. Also, it is a large scale production, meaning huge sums of money are involved, and this means a small miscalculation in percentage terms could represent a large sum in absolute terms. If any technical difficulties, such as tunneling or external shocks such as industrial disruption, landslides and poor weather could lead to a huge change in costs.

    • Word count: 939

Conclusion analysis

Good conclusions usually refer back to the question or title and address it directly - for example by using key words from the title.
How well do you think these conclusions address the title or question? Answering these questions should help you find out.

  1. Do they use key words from the title or question?
  2. Do they answer the question directly?
  3. Can you work out the question or title just by reading the conclusion?
  • "Discuss and evaluate the proposition that perfect competition is a more efficient market structure than monopoly."

    "Consequently the statement of perfect competition being more efficient than monopoly is not entirely true. In conclusion, although perfect competition is more economically and productively efficient than monopoly, monopolies have dynamical advantages. Monopolies can exploit economies of scale and economies of scopes which in theory would lower cost. Also perfect competition doesn't include externalities in which case it wouldn't be efficient. Even though it is almost impossible to have a pure monopoly or a pure perfect competition market structure in an economy, perfect competition seems to have an advantage regarding static efficiency over monopoly. The question now is whether a perfect competition market model is more desirable over a monopoly market model. Economics Essay By: Santiago Caicedo 10-5 Topic: Perfect competition and Monopoly. Research question: "Discuss and evaluate the proposition that perfect competition is a more efficient market structure than monopoly". 1 ROY J. RUFFIN, PAUL R. GREGORY, "Principles of Economics" Chapter 30 pg.563 Fifth Edition 2 ROY J. RUFFIN, PAUL R. GREGORY, "Principles of Economics" Chapter 30 pg.566 Fifth Edition 3 ROY J. RUFFIN, PAUL R. GREGORY, "Principles of Economics" Chapter 30 pg.610 Fifth Edition 4 ANNE KRUEGER, "The Political Economy of the Rent-Seeking Society." American Economic Review 64 (June 1974). 5 HARVEY LEIBENSTEIN, "Allocative Efficiency vs X-Inefficiency", American Economic Review56(June 1966)"

  • Discuss the view that monopoly power is always negative from a consumer and economic view point.

    "Overall, there are many negative impacts of monopoly power; however, there are also benefits, both to the consumer and from an economic view. We can definitely reach the conclusion that monopoly power is not always negative as there are advantages. However, overall, the disadvantages do overpower the advantages of monopoly power when considering the view economically or form the consumers' view"

  • What are the implications for economic welfare of a market structure changing from perfect competition to a monopoly charging a single price? To what extent would you modify your conclusion if the monopoly practiced price discrimination?

    "In conclusion, perfect competition results in allocative and productive efficiency. When market structure changing from perfect competition to monopoly charging a single price, there is a deadweight loss to the society. The resources are not used efficiently. Meanwhile, there is redistribution from consumers to the monopoly producer. Moreover, the monopoly leads productive inefficiency because of lack of pressure. But on the other hand, monopoly has the incentive to innovation. It may benefit from the economies of scale. From these standpoints, monopoly is more efficient than we thought. If monopoly practices price discrimination, the economic welfare will increase up to the total surplus in the perfect competition. The price discrimination increases the efficiency of monopoly. "The more perfectly the monopoly can price discriminate, the closer its output gets to the competitive output and the more efficient is the outcome." (Economics, fifth edition, Michael P) However, there is a transfer of surplus from consumer to producer."

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