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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’.

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  1. Introduction to Supply and Demand Factors

    will want them Rise in the price of a substitute like laptops will encourage more people to use computers and so demand for computers will increase Decrease in the UK's population will decrease the demand for computers as there are less people A save electricity campaign which highlights the environmental damage caused by excess computer usage will discourage people to use computers and so demand will decrease Rise in the price of a complement like keyboards or CDs will see a decrease demand for computers Demand side factors Increase in disposable income will increase demand for normal expensive products like

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  2. 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.

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  3. 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.

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  4. Free essay

    experience of the housing market proves that market works. ECONOMICS

    Law of demand and supply states that . , other things being equal, the demand for a commodity or service will decline if the price is raised and will rise if the price is reduced(IPA, 2004, economics stage 2, p.17...) Furthermore, from the description of Market above, the experience of the Irish Housing market over the past ten years or so indicates that Markets works. supply and demand move prices, for the past years, an increase in demand for housing forced the housing price to increase and contactors tend to build more houses to meet the consumer's need, then it got to a state of equilibrium where the

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  5. Economics Coursework

    management principles to planning the work and the workers actually perform the tasks Drawbacks of Scientific Management While scientific management principles improved productivity and had a substantial impact on industry, they also increased the monotony of work. The core job dimensions of skill variety, task identity, task significance, autonomy and feedback all were missing from the picture of scientific management. While in many cases the new way of working was accepted by workers, in some cases they were not. The use of stopwatches often was a protested issue and led to a strike at one factory where "Taylorism" was being tested.

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  6. 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.

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  7. Australian Stock Exchange

    Like product markets, the share market brings together a buyer and a seller in a medium of exchange. Most share transactions take place through a market facilitator known as a stock exchange. In many ways, the stock exchange is simply the physical manifestation of the market; buyers and sellers coming together in the one place and at the one time for trade in a range of securities such as shares, company options, bonds and trusts. It is important to note that the share market does not have just one physical location.

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  8. 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.

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  9. Who has benefited most from the takeover of Liverpool football club

    The �215m project is expected to bring new community facilities, jobs, homes and business to Anfield and Breckfield. - "For too long the area has been in decline and I am hopeful that it is now full steam ahead for this amazing project which will give local people a much better life," said council leader Warren Bradley - "The club will get a brand new state-of-the-art stadium...with new community facilities and the area will be completely regenerated with new homes and businesses." - Under the current proposals, the existing stadium will be redeveloped to become Anfield Plaza - a mix of shops, offices, homes, a hotel, and a new public open space.

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  10. customer service

    There was a mix up on the computer and they eventually sorted it out. They never really apologised to us for making us wait and not explaining thoroughly what had happened. By the end of our visit we had forgot the kafuffle at the beginning as we'd had such a good day and the service throughout the day was brill! My first impression for First Choice tour operators was fantastic. I flew with first choice to Gran Canaria in Xmas 2005. When we first got on the plane they greeted us with smiles and asked if we were ok etc.

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  11. Buffer Stock Scheme

    b) The good is often a commodity, i.e. primary goods like rubber, sugar, coffee, and grain. c) There are considerable price fluctuations on the market. When there is a tendency for the price of the good to fall, Buffer stock scheme allows certain amount of the goods supply to be taken out of the market and hence stabilizes a certain price. Coffee, for example, is one of the most traded commodities. By using buffer stock system, it tries to keep the price stable by buying certain amount of supply when there is an oversupply and giving out the good to the market when there is not enough supply.

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  12. The effectiveness of advertising

    Historically, public campaigns have been up for debate to whether they are effective or not. There is currently much debate over the "shock" tactics used to portray drink driving as many people feel the "shock" tactics employed by the government showing in what could be described as an uncut full gore version of a woman/child being hit by a car doing over the limit. During a four year run in 1997-2000 in Australia, the National Tobacco Campaign aired controversial advertisements with regard to smoking cigarettes, and their evaluations have proven their success in reducing the national smoking rates.

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  13. In 2001 in the UK a widespread disease among cattle and sheep closed off large parts of the countryside. The government decided to give aid to agriculture but not to tourism, both of which were badly affected. Comment on the governments actions in term

    one person cannot be made better-off without making someone else worse-off. The diagram shows the country's production possibility curve (PPC) that shows all the combinations of Good A and Good B that may be produced using the existing scarce resources. Both points X and Y can show allocative efficiency because these bundle sets are desired by the consumers and reallocation of resources is impossible in a way to make one group better-off without making another party worse-off i.e. Pareto optimality.

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  14. 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.

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  15. Whatever economic system a country adopts, there is always a role for the government due to market failures. Can governments correct market failures? Illustrate your answers with example.

    In contrast, a private good is characterized by both excludability and depletability" 2. Some examples of public goods are provision of national defense, the building of highway network or the support of basic science. Adequate private production of these public goods will not occur as the benefits are so widely dispersed across the population that no single firm or consumer has an economic incentive to provide them. Since private provision of public goods is insufficient, government must step in to provide public goods.

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  16. What are the reasons for governments to own business and assets? Why has privatization of public enterprise taken place? Should public housing and airport in Hong Kong be privatized?

    For example, the industries of railway, electric power, gas and waterworks. If being privatized, the company will be focused on 'making profits' rather than 'serving the people'. Private firms may lack trustworthiness in taking care the people from lower income class. In this sense, public ownership is required to ensure accountability and pubic interests in particular the services or utility is crucial for citizens. PA302 (2) CHAN Sau-fung (S05012153) 3. Insufficient capital for investments All public utilities require an enormous amount of investment, especially initial investment. For instance, the construction of an electric power company is very capital-intensive.

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  17. 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.

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  18. 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.

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  19. Injections and Withdrawals are important features in our understanding of economic activity and the business cycle

    Export Expenditure- Money floes into circular flow from abroad when residents abroad buy our exports of goods and services. Positive for economic growth and increases national income. (source:economics) * Withdrawals- only part of households income spent goods and services, the remainder will be withdrawn from the inner flow. Net Saving- Saving is money households choose not to spend and put aside for future. If households don't spend as much then national income falls, not many products brought, revenue falls. Whereas if they spend instead of save, national income increases. Net Taxes- Withdrawal of money from inner flow with no choice. National income increases by collecting taxes, more money available for government.

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  20. Workers receive childcare boost

    he may not because she/he has got the money through the grant which will make the efficiency of labour at the factory more effective hence pushing up the economy through the of the labour because of the subsidy. As might be shown in the below production possibility frontier. This frontier shows economic growth in that the inputs which are seen as subsides in this case because they favour efficiency. And as we already know that the quantity of inputs to the production process means that an economy has increase its production potential.

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  21. Explain the Causes of Popular Protests Between 1815 and 1822

    Their accommodation was also no better as they lived in factory owned housing which was cramped, dirty and ridden with damp as they were built as cheaply as possible. Similarly In the country peoples jobs were being taken away from them as the new machines in the cities which were capable of doing the work of many men were becoming increasingly more popular with factory owners as they were cheaper and could work indefinitely, this riots the main factor that led to the luddite riots.

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  22. Monopolies that make super normal profits aren't in the public interest because they could charge a lower price than they do.

    The firm may increase or decrease the price with out fear of retaliation form other firms. We may consider that there is no interdependence in this market, there in one firm only. Finally it is worth mentioning that the firm may change its demand curve by for example, advertising. (Introductory Economics, a first approach to the study of economics by Mike Cunningham 1994) Why do monopolies exist? There are several reasons. The source of Polaroid's monopoly power is its penitent on instant camera technology. No firm can copy Polaroid's process of making instant pictures. Penitent laws are one kind of barriers to entry that prevent other firms form entering the industry.

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  23. Monopoly, When a firm is the sole supplier of a particular product or service then we say that it is a monopolist.

    Since WSC is a natural monopoly (that is since it is under monopoly in the long-run its average costs would be lower than if it were shared between two competitors), it benefits from economies of scale and if a firm would enter the industry, and both firms would supply half the industry output, they would both face the demand curve D2 in Fig1.1. Thus there is no price that would allow them to cover costs. A monopoly can also be an integration of firms that have joined together to benefit from a monopoly power.

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  24. 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.

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  25. Case #1: Canadian Briefing Note (LCBO)

    Public and General Employees threw its full support behind a campaign to stop government of from privatizing the phenomenally-profitable Liquor Control Board of Ontario. Should LCBO be privatized now? In this report, first of all, the importance of the issue is discussed, then a detailed analysis of the interests among government, business and public is presented, finally I will draw the conclusion and make a few of recommendations for privatization of LCBO. 2. Importance of the Issue 2.1. Revenue The LCBO is a highly profitable business owned by the government of Ontario.

    • Word count: 1585

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