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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
  1. How should economic resources be distributed in a just society?

    However, more relevant to this question are his two main principles. The first is the liberty principle which asserts that ?each person has an equal claim to a fully adequate scheme of equal basic rights?, and this is lexically prior to the second principle. However, it is the second principle, known as the ?difference principle? which gives us the greatest insight into Rawl?s beliefs on economic distribution in a just society. Under the difference principle, inequalities in distribution are allowed only if they work to the advantage of all, and, attached to positions and offices open to all.

    • Word count: 1260
  2. Discuss whether the elasticity of supply of manufactured goods is likely to be greater than the elasticity of supply of agricultural goods [12]

    Beyond this, recent improvements in storage technologies such as refrigeration and freezing have allowed for most agricultural products to be stored for very long period of time, with refrigerated apples lasting up to 2 years and frozen produce last multiple years. All of these further increase the ability of agricultural products to be stocked and as such help increase the price elasticity of supply. Moreover, improvements in farming techniques such as pesticides and fertilizers, combined with improvements in education have vastly increased the occupational mobility of the factors of production land and labour in the farming process, all of which

    • Word count: 1018
  3. Discuss whether payment of government subsidies to farmers is a beneficial policy [12]

    One potential benefit of the implementation of subsidies to farmers can be in helping domestic producers compete with lower priced imported agricultural goods. As a result of free trade, many economies may find their domestic farmers outclassed by farmers producing in other countries, either due to lower minimum wages, better infrastructure, economies of scale or substantial subsidies in that specific country. This in turn is likely to lead to an increased demand for imported goods which, on the one hand can cause a trade deficit, and on the other, can cause a fall in demand for the domestically produced counterpart.

    • Word count: 1042
  4. Discuss the policies that businesses might adopt to maintain sales when incomes are falling and consider which is most likely to be successful. [12]

    the percentage change in the quantity demanded in relation to the percentage in the price of the product, if its value exceeds 1, then the increase in the quantity demanded wold be disproportionately higher than the fall in the price of the product, thus causing an increase in total revenue. Thus, through decreasing the price of their product in a period of falling real incomes, a firm could help maintain the same, or even higher levels of sales revenue. This policy is by no means perfect however, while a drop in the price may be highly effective at increasing revenues,

    • Word count: 1034
  5. Explain three reasons why labour markets may be imperfectly competitive

    Therefore, to compensate, and to attract workers, the market in the dustbin industry is not perfectly competitive as the firms need to ensure that in order to attract workers, not only a high pay is needed, but also longer leisure times, and holiday times are needed in order to attract workers. Therefore, jobs that are not-desirable including anti-social hours may be argued to be imperfectly competitive due to not possessing workers that are willing to work at a given wage level, and instead, non-monetary factors need to be considered as a result.

    • Word count: 1908

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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