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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. Is the Government to Blame for Higher Petrol Prices?

    I will look in the short term to see why in this moment in time prices seem to be at this high levels and questioning are these prices high enough to reflect the true cost of Petrol? Petrol prices are often cited in newspapers and TV and my aim is to look behind the headlines and try to establish the economic basis behind these. ECONOMIC THEORIES (Applicable to Petrol Prices) Price Elasticity of Demand for Oil (Product) Refers to the responsiveness of quantity demanded to a change in price.

    • Word count: 4292
  2. 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.

    • Word count: 6857
  3. 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.

    • Word count: 3745
  4. 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.

    • Word count: 5191
  5. '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.

    • Word count: 3757
  6. 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.

    • Word count: 3650
  7. 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.

    • Word count: 3676
  8. 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.

    • Word count: 6602
  9. In economics we refer to these two acts as tax evasion and tax avoidance. The former being illegal while the latter legal.

    If a tax rate were imposed only on bond A, the owner would suffer a loss in value. In fact we say that the tax on A has been capitalized and has reduced its value. The owner of the bond finds himself in a situation where the value of this asset has to be reduced in order to find a purchaser of this bond. The tax does become stuck with the initial owner. Finally the state does not lose revenue when transformation occurs. This is a situation where producers try to reduce the cost of production as much as possible (at least break-even).

    • Word count: 3133
  10. Economy and how it affects my business selling tables

    QUANTITY 340 580 380 500 The new equilibrium price is £300 The new equilibrium quantity is 640. Factors that may have caused and increase in the demand of tables are because the quantity was increased by 180 at the same price. This can activate an increase of sales of the tables because the demand is more as more tables are available at the same price, based on an improved quantity of 180 tables. As consumers’ income is higher, there is more demand at each price level. This may have happened if interest rates had fallen and more credit was available, so more income was available to consumers to buy tables.

    • Word count: 4910

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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