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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 how the equilibrium level of output is determined in perfect competition. Both for the whole market and one firm within the market

    4 star(s)

    There is also perfect information for the consumers and producers. Most importantly, in a perfectly competitive market, the firms aim to maximize profits, firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit. Following on from above, an important idea from which equilibrium output is determined in perfect competition is that the firms main aims are to maximize profits. So, price taking from the firms guarantees, that when the firms maximize profits, by choosing the quantity they wish to produce and the combination of factors of production to produce it with, the market price will be equal to marginal cost.

    • Word count: 1303
  2. Marked by a teacher

    Comment on the statement that only carbon trading is likely to be an effective and efficient way of reducing C02 emissions.

    3 star(s)

    "Developing countries would face a lower burden in reducing emissions than developed countries". This is because developed countries have more industries such as steal which require huge amounts of carbon to be exerted into the atmosphere, whereas developing countries won't have many of these industries and it will be easy for them to stay below their quota and may then even be able to sell their permits to more developed countries on the open market. You will also need tight limits on regulations, we need huge transfers of wealth to poorer countries to be effective as these countries may not be able to afford the permits if they end up going over their limit.

    • Word count: 1003
  3. Marked by a teacher

    Essay: Discuss whether the Basic Economic Problem will ever be solved

    3 star(s)

    can use coal instead, where there are huge amounts of reserves all around the world and it would be available for a lot less than the price of oil. There is a question, if the northern countries in the world can survive without oil, as they themselves have little reserves, therefore are having to import it from other places in the world for huge prices, which reflects the price consumers have to pay for it, this is why countries' governments have to look for alternatives such as coal, nuclear power and renewable energy.

    • Word count: 1175
  4. Peer reviewed

    Is the existence of a monopoly against The public interest?

    5 star(s)

    In this market structure it is also assumed profits are maximised and there is consumer rationality. Traditionally monopoly is thought to be a potentially harmful market structure with unwelcome consequences for the consumer and the economy. Competition has always therefore been seen to be desirable. It could be said therefore to be against the public interest. However there are arguments not only against monopolies but also for their existence. One of the main arguments against monopolies is that they raise prices, restrict output and therefore exploit consumers.

    • Word count: 1068
  5. Peer reviewed

    Outline the argument for and against smoking ban

    4 star(s)

    So they want people to consume where the pink lines meets the green line. MSB = MSC (5 a day). Below 5 a day both the MSC and MPC are below MPB and MSB. So both society and the individual wants to consume the good. Above 10 a day the MSC and the MPC are above the MSB and the MPB so neither the individual or society wants more than 10 cigarettes a day. However in between 5 and 10 cigarettes a day, the MSC is above the MSB so society does not want to have that many cigarettes.

    • Word count: 1026
  6. To make a decision whether to work or not a rational individual has to estimate possible costs and benefits and advantages of being an employee.

    Of course, every case is very individual, but in order to make an approximate estimation and draw conclusion I will consider an average situation. Actually the costs are very similar for every person employed in the market. They usually include transportation costs, cost of clothing, cost of eating outside and some psychological costs. Let us consider them in more details. Assuming that a student starts to work, his/her transportation costs will likely include cost of going by metro and probably by municipal transport.

    • Word count: 1719
  7. Free essay

    Characteristics of poverty in the UK

    There are however different types of poverties that need to be highlighted. Some examples are: Relative poverty which is poverty normally associated with the UK and this is when people live in poor accommodations, cannot afford luxuries, and are struggling to make enough money to eat and just live. Although for these people they are fortunate, because in this country there is the welfare state to help people and therefore people would rarely go without somewhere to live or have no food. Another type is absolute poverty and this is the type of poverty in third world countries which includes literally no food, no water, no shelter and no chance of living.

    • Word count: 1514
  8. Assess the costs and benefits of an extension of the tube line to Croydon

    External costs (or negative externalities) can be defined as "costs from production or consumption that the price mechanism fails to take into account. They have a negative effect on a third party not involved in the economic decision and are shown by the difference between social costs and private costs". Possible negative externalities of this development include disruption to the public during construction time (i.e. sections of roads may have to be closed off while digging occurs underneath) and the pollution generated during the construction process.

    • Word count: 1596
  9. Economic commentary microeconomics

    But the junk food tax didn't go down too well in Darwin yesterday, with customers at McDonald's on Smith St reluctant to pay more for their hamburger or nuggets. Darwin man Robbie Holtze, 32, thought there was enough tax on food. "I reckon it's enough now as it is, without paying for more," he said. The Australian Food and Grocery Council didn't like the idea. Chief exec Kate Carnell said there has been GST on processed foods for 10 years "but obesity levels have continued to climb".

    • Word count: 1061
  10. Finance and Foundings in Tourism Industry

    Smart investors have always known that financial statements are the keys to every company. They can warn of potential problems, and when used correctly, help determine what a business is really "worth". Analyses of financial statement's The two major financial statements are the balance sheet and the income statement. In hospitality operations, balance sheets are normally prepared for an overall operation, and income statements are prepared by each of the subordinate operating departments or divisions. (Jagels, M.J., 2007) The balance sheet The balance sheet is a financial statement that summarizes a company's assets, liabilities and shareholder's equity at a specific point of time.

    • Word count: 1788
  11. Differences between monopoly and monopolistic market competition.

    Extensive but not perfect knowledge: in this competition buyers are not open to everything, they have relative information about alternative prices and complete information about product differences. 3. Similar but not identical products: the goods sold by firms in this market system are close substitutes but not perfectly identical. These goods satisfy the same basic wants and needs and can have subtle or noticed differences. 4. Imperfect resource mobility: firms in this market system are not hindered by government rules and regulations, there is freedom of entry and exist and there are few barriers to entry.

    • Word count: 1087
  12. Tesco. "Every little helps, the advert says. Discuss the assertion that Tesco is good for us.

    will increase, which increases government spending which will increase Aggregate Demand which will cause an overall shift in the demand curve to the right. There is however a down-side to the competition. Due to the fact that Tesco is a monopoly power, owning 30.7% of the grocery market there will be a high Price Elasticity of Demand. This means that a small decrease in price will cause a higher revenue gain which means that the competition will catch up. From statistics shown in November 2009, Tesco's share of the grocery market has risen to 30.7%.

    • Word count: 1340
  13. Using transport examples throughout, explain the impact of market structure on economic efficiency and the ability of firms to set prices and make profits

    If a firm sold their goods/services at a price less that the market selling price, then they would simply make losses. Because of this, there is one market selling price at all levels of output, and so the demand curve is horizontal, matching with the average revenue and marginal revenue curves. Another condition of perfect competition is that of perfect information, consumers are aware of other firms within the market from which they could purchase homogenous goods if one firm prices too high.

    • Word count: 1473
  14. The Scottish Smoking ban

    Passive smoking being one of the main causes of the smoking ban, the above statement is fully justified. As shown in the BBC news website it was "doctors and anti-tobacco groups that had urged the executive to "be brave" and opt for a ban to improve public health." It has been clearly shown in many sources that "Scotland has one of the worst health reputations in Western Europe" With at least 1 in 4 of most deaths in Scotland being caused by Smoking and passive smoking.

    • Word count: 1301
  15. Essay: 'Discuss how PPF theory, choice, scarcity and opportunity cost can be applied to the diagram below

    either more heart operations or more 'all other' operations, and this is closely linked to opportunity cost as choosing to do one operation leads to missing out doing another operation, in this case. The PFF can easily be applied to this diagram. This is because the curve being shown is a PFF curve, and at point 'A' the NHS are using their resources to do more 'all other' operations, and a point 'B' the NHS are using their resources to do more 'heart' operations.

    • Word count: 1256
  16. Economics - Data Response January 2006

    Another reason for the Kodak continuing to produce film-based cameras is for it to retain it's brand name and image. Even if they are making a loss, a world leading camera company to stop producing a type of camera is not good for its reputation. There is also the reason that Kodak are still making film-cameras is the possibility (though unlikely) that the film-based camera market will recover. Though there is a risk with this as the cameras are currently making a loss so all the costs are sunk costs, and if the market does not recover these costs will not be possible to get back.

    • Word count: 1004
  17. The ways in which monopolist can develop are from successful internal growth of a business or through mergers. The different types of mergers are horizontal and vertical integration

    The different types of mergers are horizontal and vertical integration. Horizontal integration is where two firms join at the same stage of production on one industry. E.g.: recently Safeway and Morrison merged to create the UK's fourth largest national food retailer. Vertical integration is where a firm mergers with another firm at a different stage of production in the industry. E.g.: Oil industry where many of the leading companies produce oil and have their own retail networks for the sale of petrol and diesel and other products.

    • Word count: 1526
  18. Do Primark have a competitive advantage over f**k?

    Many of the key seasonal trends can be found at extremely affordable prices. The company also offers an assortment of products for casual wear, business attire, eveningwear, and accessories. Background Retailers with higher socio-economic group/customer, higher price, higher quality: Kookai Reiss f**k Retailers with lower price, lower quality, lower socio-economic group/customer, lower fissionability: Primark New Look Dorothy Perkins Primark is a retail group in the value sector and operates a total of 170 stores in the UK, Spain and Ireland, where it trades under the Penneys brand. Primark employs in excess of 23,500 people.

    • Word count: 1322
  19. 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

    • Word count: 1013
  20. 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

    • Word count: 1052
  21. 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.

    • Word count: 1353
  22. 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.

    • Word count: 1200
  23. 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.

    • Word count: 1375
  24. 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.

    • Word count: 1128
  25. 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.

    • Word count: 1965

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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