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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. Capital Structure Decision

    The article also talks about another kind of theory called the "the pecking-order theory". The main point of this theory is that outside investors in a firm know less about the health of a firm than its managers do, which can cause a problem when the company wants to issue equity, managers cannot control what the investors may believe hence Issuing debt generally is less dramatic effect, but external finance is still costly, hence retained earnings becomes the main source of financing for the firms.

    • Word count: 822
  2. 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
  3. Three ways in which housing market affects consumption levels

    One major way in which housing markets affect consumption is between house prices and consumption (wealth affect). House prices can increase and decrease due to many things such as a new shops, parks, cinema or a new motorway may get built close to your house and hence allowing for a better/worse area for your house, which will increase/decrease the price, this is generally called a social marginal benefit. An increase in housing price will bring about an increase in the homeowners wealth and therefore will cause an increase in consumption and vice versa if house prices fall.

    • Word count: 627
  4. In your opinion are supermarkets more likely to compete using price or non-price competition?

    Supermarkets operate within an oligopolistic market, and so have a kinked demand curve. With a demand curve kinked round the prevailing price OP, a rise or fall in marginal cost will not affect the profit maximising level of output or price. Hence this model can be used to explain relative price stability in oligopolistic markets. Therefore in the supermarket market, firms are unlikely to compete using price competition. Supermarkets are therefore more likely to compete using non-price competition as they cannot compete on price to such an extent as they all charge similar prices; the big firms are able to benefit from the same economies of scale.

    • Word count: 656
  5. Competition in the Real World

    AT&T was not the first to join the monopolistic PC market in the U.S; T-mobile made netbooks available this past September in the U.S and Verizon plans to provide small, economically priced laptops later this quarter. As wireless companies enter the market, it benefits both the companies and the consumers. It benefits the wireless market because they can persuade consumers to buy monthly wireless Internet access service plans. In turn, the consumers save money on upfront costs for the computer and monthly charges may be less expensive compared to the existing Internet providers.

    • Word count: 988
  6. 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
  7. Free essay
  8. 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
  9. 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
  10. The Federal Budget in Australia. The three Federal Budget outcomes are budget surplus, budget deficit and balanced budget.

    The Government uses Fiscal Policy to stimulate the economy when needed in order to reduce cyclical unemployment. Also, funding retraining programs lowers structural unemployment. The three Federal Budget outcomes are budget surplus, budget deficit and balanced budget. A budget surplus occurs when revenue collected exceeds government expenditure. This means that the government is taking more out of the economy through taxes and other methods of collecting revenue than it is putting in through expenditure. This has a contractionary effect on the economy, decreasing economic activity. This is as there is a negative multiplier effect, a greater than proportional decrease in the circular flow resulting from a leakage.

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  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.

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  12. Evaluate the use of game theory as a tool to explain oligopolistic behaviour

    Therefore, can we completely rely on game theory to use as a tool to explain oligopolistic behaviour? Nevertheless, the game theory can still be used in understanding the budget of firms for advertising and branding programmes. This can be seen as being essential as oligopolistic firms prefer non-price competition to prevent price wars in a particular industry (and oligopolistic markets prefer price rigidity). In fact, over the years, Nike has gradually increased the amount of money to put towards sports sponsorship programmes and more TV advertising. Many other competitors such as K Swiss and Reebok have responded by increasing their sponsorship schemes.

    • Word count: 623
  13. 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
  14. 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%.

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  15. 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.

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  16. 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
  17. 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
  18. 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
  19. To what extent is the centrally planned system of running the NHS effective in its allocation of resources? (12 marks)

    With any economic system, there are advantages and disadvantages both. The main advantages which come with a planned economy is the stability gained from the way it utilizes all the resources it has available. Since it is run by the government, in theory it should be working at its maximum potential as the government will want to produce as much as it can efficiently - however this does not always prove to be true, as shown by the steel industry in Britain when it was once nationalised. Another advantage gained is the goals and design with which the planned economy is established.

    • Word count: 813
  20. Free essay

    Pay differences between men and women

    The 1970's onwards saw a growth in relative pay between men and women because of legal reasons such as the equal pay act 1970 and social trends making it less acceptable in society to discriminate against women in terms of wages and occupation. The percentages of women in traditionally "male" jobs which tend to have higher wages are growing. For example 47% of all lawyers and solicitors are now women. Furthermore, our economy is becoming far more service based which many employers believe is a more suitable sort of job for a woman than heavy manual work, for this reason it is easier for them to work their way up the job ladder and receive higher wages.

    • Word count: 911
  21. benefits and costs of Government Intervention which aims to make the distribution of income CONSIDERABLY more equal.

    Welfare benefits are cash payments to those entitled to it, also called transfer payments. They can be universal or means tested. If they are universal, it means that everyone is entitled to it, irrespective of income. For example, JSA and child benefits are universal benefits. Means tested benefits are targeted at those entitled to it. Entitlement depends on financial circumstances, i.e. income and savings, examples are income support, housing benefit and EMA. Means tested benefits are an effective way of redistributing income in the short term as they are targeted at specific groups. Universal benefits are therefore less effective as they are not targeted at those who need them.

    • Word count: 757
  22. Advantages and Disadvantages of Planned Economy.

    * Planners may not know consumer wants and may make wrong decisions leading to shortages of some goods and services and surpluses of others. * Scarce resources can be allocated to the production of necessities like basic foodstuffs and not luxuries. * Many planners and administration are needed to run the system. It leads to slow decisions, red tape and corruption.

    • Word count: 412
  23. 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
  24. 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
  25. Do Primark have a competitive advantage over FCUK?

    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 FCUK 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

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