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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. 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
  2. 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
  3. Analyse the economic rationale for a competition policy, such as that in the UK, which is intended to limit potential abuses arising from the exercise of monopoly power or anti-competitive practices

    The reasoning behind the possibility of market domination is due to an almost inelastic demand for certain products, i.e. cigarettes and petrol. This is why monopolies can cripple an economy if they gain market control as people require some products no matter what the price; therefore no competition equals no price variance. To prevent such domination occurring the office of fair trading and suchlike public sector bodies put in place laws to control price fluctuations and seek to introduce fresh competition into certain sectors of trade to create a higher level of competition. These regulators can also block takeover moves or any similar business activities which it believes may lead to the rise of a monopoly.

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  4. 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.

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  5. Negative externalities are seen as an example of market failure. Discuss, with examples, the policies a government could use to improve the misallocation of resources.

    Conceivably, one person might be willing to pay 20 pounds per annum for clean air, another person might be willing to pay 2000 pounds per annum, and yet another might not be concerned with the pollution at all and unwilling to pay anything. The poll would be quite extensive, as it would not only concern those whose breathing is affected by the pollution, but also those with a vested interest in the protection of wildlife, the preservation of their buildings, etc.

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  6. Economics Report on Budget

    -"I expect the consumption of beer to fall because the tax has risen by 1p". -"I expect people to consume less amounts of wine as it has risen by 4p". -"I expect people to use public transport more as the excise duties for road tax has increased by �5". -"I expect people to be employed as more jobs have been created." Background information I have found some history on budget from the internet and tell you how budget came along. "Budget history The origins of the Budget go back to the Norman period, where two departments dealt with finance.

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  7. Study Source F and H. Use Sources F and H, and your own knowledge, to explain why the Jarrow Crusade took place

    During this time, America had gone into what was called The Great Depression in 1929 due to the Wall Street Crash. This crisis alerted people from all over the world to stop spending money and begin to save. This hit industry hard, particularly in Britain, and especially in the town of Jarrow in the North of England. The town of Jarrow was solely dependant on the family ship building business of Palmer's Yard for employment as it offered work to nearly everyone who lived in the town.

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  8. What are the origins of the Pension Crisis and what can be done to deal with it?

    Many people under purchase pensions early on in their lives and end up suffering the consequences later in life. This is therefore an example of an information problem and imperfect information seems to be one of the underlying themes behind the looming pension crisis in the UK. With merit goods, many economists argues that an authority outside the individual such as the state is a better judge of what is good for them. By government forcing people to save, they will be less likely to fall into poverty and be a burden to society when they retire, this would then be an example of a command and control measure to thereby correct a market failure.

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  9. Bear fighting

    2If the Pakistani authorities set up a permanent officer in their Wildlife Department, WSPA will set up a facility to house confiscated bears for life. 3 Some people argue that this is still far from ideal for the bears to be living in captivity and certainly not an enjoyable experience for the bears. WSPA say this is ridiculous and that 'all bears that are confiscated will have a much more pleasurable life than if they were bear baiting.' Living in a WSPA captivity camp would be similar to living in the wild.

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  10. The theory of Market Structure

    Among them are for example record shops and clothing shops, food facilities like restaurants and fast-food enterprises, producers of non-alcoholic beverages like Coca-Cola or Pepsi and a great variety of others. Such markets combine the features of monopoly and competition; therefore they are called monopolistically competitive. This model is also very interesting and important tool for analysing such issues as product variety and product choice. It helps us understand whether the market system leads to the production of the "right" assortment of goods and services as it is too expensive to produce all conceivable commodities and there is always a problem of choice.

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  11. 'Although corporate pricing decisions are influenced by many different factors, fundamentally prices will reflect cost and market conditions.Explain and discuss.

    Any firm can enter or exit the industry without serious impediments. Resources must be able to move in and out of the industry without, for example, government legislation that prevents such resource mobility. 3. There must be a large numbers of buyers and sellers. When this is the case, no one buyer or one seller has any influence on price, and also when there are large numbers for buyers and seller they would be acting independently. 4. There must be complete information. Both buyers and sellers must clearly know about market about market prices, product quality and cost condition.

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  12. Case study of Singapore E-Government.

    The CSCP was conceived with a clear direction of turning the Singapore Government into a world-class exploiter of IT. It marked the beginning of computerisation in the public sector that focused on improving internal operational efficiencies through the automation of traditional work functions and reducing paperwork. In the late 90's, the convergence of IT and telecommunications transformed the concept of service delivery. This required a paradigm shift in the way government services were delivered and the first E-Government Action plan was launched in 2000. Adopting a customer-centric approach to delivering public services, it laid the foundation for the current e-Government Action Plan II (eGAP II). Diagram 1. illustrates the Singapore Government Journey e-Government 2. Model of Singapore e-Government Business.

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  13. Economics studies the choices that people, businesses and governments make given that they have scare resources. Why Do People INteract?

    Expectations about future a. Future price increase b. Future increase in income 5. Number of households (or population) A Change in the Quantity Demanded vs. a Change in Demand A Change in Supply Change in the entire relationship between the quantity supplied and the price of a good. Factors that lead to a change in supply 1. Price of resources used to produce the good 2. The prices of related goods that the firm produces a. Related goods whose inputs are complimentary in production b. Related goods whose inputs are substitutes in production 3. Expected future prices 4.

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  14. PEST analysis

    In addition, the higher the employment rate, the more tax the government will be receiving, which will mean more money to be used for NHS, schools, etc. Taxation Cooperation tax will be charged to my business. This is when the tax sum that my organisation will have to pay depends on the profit made. This will affect my business because if the tax I will be charged is high, the prices of my product will have to be high to compensate for the loss, and not lead to a major profit loss.

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  15. Tobacco consumption to increase until year 2010.

    Tax is a government intervention that benefits the government only; the consumers and producers are both worse off. Tax will always shift the supply curve inwards, which increases the equilibrium price. When the tax is too high, the smuggling activity increases too because people could make a huge profit out of smuggled tobacco. Normally, industries will produce at a quantity (Q*) and sell at a price (P*), where the demand curve cuts the supply curve. However, as the world's population increases rapidly and enhances the income growth in developed countries, people can now easily afford luxury goods such as tobacco.

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  16. China Warns Of Excessive Industrial Investment.

    The quantity demanded of a good or service is the amount that consumer plan to buy in a specific period of time at a particular price. The quantity supplied of a good is the amount that producers plan to sell in a given period of time at a particular time. Over supply is when a good is supplied more then the quantity demanded. Unemployment is there are workers who are able and willing to work but do not have jobs.

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  17. Post war times.

    Some, like the Fabians, wanted a flat rate and no time limit on the money that came in. They also opposed the use of the means test. This type of insurance would pay the rent of the unemployed and provide them with the means to live. Opponents to the Fabians argued that such an insurance would make people lazy and avoid the search for work altogether, in which case the result would surely be a weakened economy through the combination of rising unemployment insurance costs (taxes)

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  18. The UK - a free market economy?

    In the creation of the National Health Service, most people had to pay for their healthcare directly. A trip to the doctor meant paying a fee. People faced choices about how to spend their money. If they wanted to go to the doctor, the decision had an opportunity cost. For the poor, it might have meant not eating or not being able to afford new clothes. Producers received treatment was not determined by their ability to pay.

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  19. At What Level (if any) Should Government Intervene to Promote the Competitiveness of Businesses?

    Nowadays, the research and development (R&D) system has been regarded as the source of innovations (Freeman, 1995; Rothwell, 1992; etc.). Although this system involves not only government, but industrial and academic scientists and researchers as well, the role of government to promote R&D projects, through large fund injection, personnel training and educating, and effective industry and economic policies, is still fundamental to the capacity of innovation and then competitiveness. In particular, apart from the 'quantitative factors' of expenditure on R&D, government policies regarding areas of R&D projects and the diffusion of technologies into productivity are also the key to business competitiveness.

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  20. What Happened to Railtrack Shows the ultimate failure of Privatisation.

    The bureaucratic processes involved with decision making prevent efficiency gains which arise through the market mechanism. Since organisations have been freed from political interference, they are now able to focus more on long-term objectives without having to keep voters on their side. As well as this industrial relations and productivity should improve as companies recognise that they have no government funding to fall back onto. Another argument for privatisation is that the government wanted to create more competition, many state-owned companies were monopolies which exploited the public. Privatisation has introduced competition, in the telecommunications industry with Cable and Wireless and Orange competing with BT, which has resulted in falls in prices.

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  21. Explain the disadvantages of competition, and Evaluate the Removal of restrictive practices such as the RPM.

    The result is that their will be many small firms and buyers in the market which cannot be productively efficient through economies of scale, as small firms are not able to reach the critical mass of supply that allows monopolies to benefit from the maximum reduction in average cost. As the monopolist can dictate price it does not base price on where marginal cost and demand are equal, it is able to take price from where a lower marginal cost (due to economies of scale)

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  22. 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.

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  23. The Importance of the Canadian Airline Industry.

    Background: The Birth of Canada's Airline Industry Actual air travel in Canada began in 1919, after the First World War. Pilots were eager to continue flying and demanded government intervention in the airline industry. James Richardson, who "was convinced that airline transportation would enable the development of then-untapped mineral resources at least twenty years sooner than would otherwise have been possible because planes could fly year-round" (Goldenberg 2), formed Western Canada Airways (WCA) in 1926. By the early 1930's, the Canadian airline industry was dominated by smaller, regional bush airlines, which flew through Canada's unpopulated northern forestlands.

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  24. Microeconomic Concepts - Effects of Privatization of the London Underground.

    (http://tube.tfl.gov.uk) Being a public sector company the London Underground is subsidized by the government, which is funded by taxation. The organization is not accountable to shareholders or investors but to the government and public and therefore, in theory, should place the customers first as stated in the above mission statement. As a public sector company the London Underground and its customers enjoy many benefits such as government subsidies on ticket prices, government investment, service guarantees and public accountability. Set against this are some negative affects of being publicly owned such as heavy tax burden on the public, inefficiencies due to the nature of less monetary accountability and not being profits driven, no private investment and in some cases, poor management.

    • Word count: 923

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