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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. Evaluate the role played by barriers to entry in the long run

    Cost Tactics - Linking with pricing strategies, business who have been in the market for a long time, who have had experience in the field will have learnt ways in which to cut costs Advertising and Marketing - Companies that are already established in a market and have spent money in advertising and marketing making their products successful pose a threat on new companies making their entry into the market harder as they already have a loyal customer base. Economies of Scale - Economies of scale is a further barrier to entry that stops smaller, less experienced firms from entering

    • Word count: 2489
  2. Communism - A Failed Russian System

    Its organization is, therefore, essentially economic, the material production of the conditions of this unity; it turns existing conditions into conditions of unity. The reality, which communism is creating, is precisely the true basis for rendering it impossible that anything should exist independently of individuals, insofar as reality is only a product of the preceding intercourse of individuals themselves." Communism was the theory that workers take over the country with a government that truly represented the people. All people in the country would be equal and there would be no classes.

    • Word count: 2175
  3. What will happen to houses prices in five years time?

    In the past year alone, prices according to both Halifax and Nationwide have risen by about 10%, way above most analyst forecasts. Overview Average Cost: �210,578 Detached: �323,332 Semi-detached: �189,617 Terraced: �168,134 Flat: �196,505 Change in last quarter: +0.2% Change in last year: +9.25% Sales: 266,966 NAME AV PRICE (�) QUARTER ANNUAL SALES Windsor And Maidenhead �396,610 1.4% 13.1% 791 Surrey �363,554 1.8% 9.8% 6,364 Greater London �354,529 3.9% 11.6% 35,171 Buckinghamshire �334,841 4% 6.6% 2,598 Wokingham �321,851 4.6% 13.3% 879 Poole �288,965 5.2% 12.9% 948 Hertfordshire �288,219 1.6% 7.5% 5,737 West Berkshire �280,132 -1.3% 10.1% 869 Oxfordshire �276,816 1.4%

    • Word count: 2034
  4. Outline and critically assess J K Galbraiths argument that it is not the market but a planning system that drives many capitalist economies

    traditional textbook economics) views capitalism as a market system with government intervention where necessary (most often when markets fail). Power is spread between each small firm and decisions are made independently of each other. J.K.Galbraith in his 1967 book "The New Industrial State" argued that traditional textbook economics (that is neoclassical economics) was wrong as it referred to the market system as if it was the whole economy. Galbraith acknowledged that there were two parts of the economy: the market system and the planning system. This market system (according to Galbraith) works, for the most part, in the same way neoclassical economics says competitive markets work.

    • Word count: 2084
  5. To what extent do you consider monopolies to be in the public interest?

    Firms wishing to diversify their range of products or to integrate horizontally into another market would be looking for companies making abnormal profits. If they had the sufficient financial capabilities to invest they would try and compete away the existing abnormal profits. An example of this is when Virgin entered the satellite television market to compete with Sky, whilst being a leading passenger flight carrier across the transatlantic. Virgin was a dominant player in an oligopolistic market until air transport rules changed to allow new airlines to obtain landing slots at popular airports; after which Virgin have diversified into the mobile, media and train market.

    • Word count: 2652
  6. This essay compares examples of real world economics found in three studies written in 1996 with examples of commonly taught 'textbook' economics to come to the conclusion that some monopolies have displayed lower prices, an

    With monopoly there is only one seller... Monopolistic competitors have some monopoly power, but this is [or may be] limited in the long run by potential competition from possible entrants to a market...1 What is beneficial to consumers? Agreeably, factors of influence in this regard which consumers will find either beneficial or not will be factors regarding non-price competitive aspects of a particular product/service2. Characteristics include those such as quality of product, guarantee of product performance and reliability/track record of the supplying company.

    • Word count: 2360
  7. What is a Monopoly?

    Monopolies main source of power is that they enjoy economies of scale; due to this they can cut costs therefore resulting in cheaper prices of goods. Monopolies set the market price for goods, consumers take this price as competition is scares and substitutes do not exist. A monopoly is likely to set its price where marginal cost equals marginal revenue, as seen on the diagram below. This can be seen on a supply and demand diagram for the firm, where quantity is Qm and price is at Pm.

    • Word count: 2477
  8. This case study will examine the regulatory failure of antitrust laws in relation to the prosecution of IBM corporations

    The courts have traditionally given these regulations broad definitions in defining what has been violated (Bequai 1979: 96). Due to these difficulties, larger corporations like IBM have gotten away on numerous associations with any criminal violations but were punished with just mere civil fines. Background facts on IBM: International Business Machines Corporation (IBM) became giant in the fields of electronic data processing by the mid- 1950s after having achieved great success in the punch-card tabulating machine business in the 1930s. Their image can be seen as having superior products at lower price than their competitors. IBM"S customers were portrayed as loyal and satisfied with the service provided by their products.

    • Word count: 2111
  9. You have been appointed as the business adviser to Whizz Kid Industries. They have tasked you to write a report dealing with the following pressing issues.

    You are required to provide the Board with concise overview of what is meant by a supply-side approach to improving competitiveness. 1. Terms of Reference In this report, I have been appointed as the adviser to Whizz Kid Industries. The company wants to import new toy for Christmas Market. My tasks is to give suggestions for both questions from different aspects: law part which is focus on product liabilities, and define the key term "defective"; the other one is from supply-side view to find out which factors can increase competitiveness.

    • Word count: 2282
  10. Micro economics environment - Government intervention

    The view that the consumption of certain products/services is bad for a social point of view. This when the government will come in and say what they are allowed to use and banning certain goods or services e.g. certain drugs. To provide merit goods The government may produce a service that a public sector may not provide such as a school. To provide public goods These good would be provided by the private sector because they would find that many people, even if they benefited from the product they would refuse to pay for them.

    • Word count: 2285
  11. TransEcon has been commissioned to conduct a research study into the strategic issues facing the passenger railway industry in Britain.

    access rights * Rail freight and parcel operations would be transferred entirely to the private sector * The private sector would have the right to purchase or lease stations.1 British Rail was privatised in 1996. The track and infrastructure was devolved to a company called Railtrack, whilst ticketing and passenger and freight operations were franchised to individual private sector operators (originally 25 passenger and 4 freight operators). The government claimed that privatisation would see an improvement in passenger services: this outcome has yet been realised, although passenger levels initially increased to the level they had been at in the late-1980s.

    • Word count: 2838
  12. The Rail Industry.

    The transport act of 1947 nationalised the railways and set up The Railway Executive. The white paper published in 1960 entitled 'The Re-organisation of the Nationalised Transport Undertakings' said the British Transport Commission's (the body controlling The Railway Executive) responsibilities were "so large the that it was impossible to run them effectively under a single undertaking". By 1962 the British Railways Board (BRB) was set up to replace the function of the Railways Executive. In 1963 Dr Richard Beeching was appointed chairman of the new BRB. Dr. Beeching presented a plan for a more efficient railway that included recommendations to concentrate on freight and inter-city passenger routes.

    • Word count: 2142
  13. Auction is defined as a method for selling an asset to the highest bidder.

    Auction is really a unique idea, because everything is done by person to person. Auctions have a number of benefits like, 'they raise substantial amounts of money for the government, giving government good information about the value of different uses spectrum, may help to better allocate spectrum allotment in the future, tend to be quick and cost effective'.1 In contrast, a beauty contest, or comparative hearing, has government regulators selecting a winner based on its own determination of the potential pros and cons of the candidates.

    • Word count: 2789
  14. Explain why environmental pollution is regarded as a source of market failure? Evaluate three different policies the Government could use to reduce the market failure.

    For instance, take the scenario of a chemical company which produces steel and in the process it also emits carbon dioxide into the atmosphere. Here the private costs to the company would be the costs of the labour, raw material etc. The Social cost would then include the private costs and would also take into consideration the external cost of emitting carbon dioxide. These costs may include: poor health for surrounding residents, contribution to global warming and climate change. In this case a negative externality occurs as the company may make a little or no payment towards the external costs to the environment.

    • Word count: 2414
  15. "Discuss and evaluate the proposition that perfect competition is a more efficient market structure than monopoly."

    There are no barriers to entry into or out of the industry; this means that there is a freedom of entry and exit. All firms are price takers; no single seller has control over the price. Industry Demand in Perfect Competition Firm Demand in Perfect Competition The industry demand in perfect competition is a common demand curve, the demand decreases as price increases (Diagram 1). There are many sellers within the market; therefore the effect of one of them would be insignificant.

    • Word count: 2354
  16. Markets - why they fail.

    Unfair competition - once created a monopolist may use unfair competitive practices, such as cutting prices temporarily until the competitor is forced out of business 4. Natural cost advantages - some firms are natural monopolies because not a single firm in the industry can reduce their average cost to their minimum. This is usually because that firm is experiencing economies of scale: Purchasing Economies - bulk buying often results in a cheaper cost per unit input Marketing Economies - The cost of advertising can be spread over more units of output Technical Economies - A large supermarket costs less

    • Word count: 2181
  17. Discuss whether the privatisation of British Rail has been successful. Evaluate whether the new structure is likely to be a more effective and efficient way if managing a national rail network.

    The operation of rail services on the monopoly track can be arranged in a more competitive way. In some cases, other modes with provide sufficient competition. Where rail services do not face strong competition from other modes, price regulation is necessary, particularly in the case of commuter routes; low prices may be desirable to reduce congestion. The privatisation of British Rail was a complex issue. Unlike other transport privatisation, it was complicated by; the loss making nature of British Rail as a whole; the heavy dependence in external subsidy for the operation of many provincial and commuter services; the need to see safety as an overriding operational consideration; and finally, rail transport having its own dedicated track and infrastructure.

    • Word count: 2022
  18. What are the major economic functions of government in transition economies? Should government play a minimalist role in transition economies?

    In Gradualism, government provides basic macrostabilisation, sequences structural changes and price liberalization in the economy. Also, it oversees industrial policy where is needed and is responsible for institution building. The ultimate outcome is achieving a free market in which state intervention is commonly required. Institutional approach attributes to government the task of introducing price liberalization combined with cushioning and protectionism when necessary. Building appropriate market institutions, which may take years, is another government priority. In Keynesian model of transition government avoids sharp price hikes (inflation) and devaluations. Levels of public investment are high and crucial for the economic growth.

    • Word count: 2497
  19. Technological Change and Markets & The Case For Public Ownership of Utility Companies.

    Furthermore, monopolies can use barriers to entry to prevent new firms from entering the market and as they are not producing on their lowest production cost curve, this is known as productively inefficient. Due to greater technological change on the phone market, such as through the introduction of 2G technology and recently 4G technology, due to this innovation, this has allowed more than one mobile phone operator to utilise the wave frequencies in the UK. Therefore, new firms such as Virgin, Vodafone, O2, EE and Three can use different wave frequencies to provide coverage for their mobile networks.

    • Word count: 2168
  20. The tobacco industry maintains that cigarette advertising does not increase the incidence of smoking. If this is so, why do firms engage in advertising? Should tobacco advertising be banned?

    By referring to figure 1 and 2, if firm 1 advertises, firm 2 cannot obtain a higher pay-off if it chooses not to advertise be it either the collusion or non-collusion case. Such a Nash equilibrium is self-enforcing whereby no firms want to deviate by choosing another strategy. In both these cases, there is a dominant strategy equilibrium whereby the best move for a firm regardless of what another firm does would be to advertise. Figure 1 (collusion pay-offs) Do not advertise Advertise Do not advertise 2,2 3,4 Advertise 4,3 5,5 Figure 2 (Non-collusion pay-offs)

    • Word count: 2073

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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