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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. The General Strike 1926

    meant that Britain could not compete. By 1925 one quarter of British miners had been laid off. The denationalisation of the British staple industries encouraged much growth upon the stock exchange and investment from businessmen as profits soared. However for the working classes who kept them running, things were not so good. Many of the investors lost large sums of money when the stock market collapsed in 1921 and as an attempt to recoup their losses, industry owners began to decrease wages and increase hours worked. The pound fell in value as the government mistakenly set the price of sterling back against the 1914 price of gold.

    • Word count: 766
  2. Slavery in Rome.

    Rome lies on both sides of the Tiber River, about 17miles from its mouth in the Tyrrhenian Sea. Rome was founded on the east bank of the Tiber River and was built on seven hills-the Palatine, Capitoline, Quirinal, Aventine, Caelian, Esquiline, and Viminal (Hibbert 313). It was the cultural, architectural, and business center of the Roman Empire (Halsall). People from all over envied Rome's prosperity. They wanted to be like Rome. Everybody who was anybody called themselves Roman. The huge latifundas on the outskirts of Rome were producing massive amounts of food, and business was booming like never before ("Ancient Rome").

    • Word count: 1417
  3. What was the focus of the social reform and why was this? Liberals of 1900

    Soldiers sent to the Boer war could not fight because of rickets and other side effects of malnutrition. Unemployment figures were increased due to foreign competition, this caused crime such as theft and prostitution and not only riots but also this was a loss to the economy. The economy suffered because workers could not produce much output, "The American worker is a stronger, larger, healthier, better fed and consequentially a more efficient animal" The government's response to this was a series of acts known as the social welfare reforms, which were first step towards improving general health, unemployment and ultimately the standard of living.

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  4. In this essay, I would like to take a view at the implications for economics welfare of a market structure changing from perfect competition to a monopoly charging a single price and what else would happen if the monopoly practiced price discrimination.

    Moreover, the producers and consumers all have perfect knowledge, which means they are all very aware of the prices throughout the market. The short-run equilibrium for both industry and a firm under a perfect competition can be shown in Figure1. As a firm is only a 'price taker', it has to sell its product at the market price which is shown as a horizontal demand curve. The firm would sell nothing at a higher price, its demand curve is perfect elastic.

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  5. How effective were the liberal reforms between 1900 and 1914.

    The first liberal reform for children was an act to allow schools to provide free school meals to those they felt needed them. This act meant that children would receive at least one meal a day and encourage them to attend school. The was voluntary though and many schools did not spend their budgets providing these meals. Only half of all schools set up these meal services. In 1907, the liberals introduced medical care to schools; this act meant that schools had to provide regular medical checks for children.

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  6. Show with appropriate examples how political influences can affect agriculture in the Developed World.

    The aims set out by the CAP are: 1. to increase agricultural productivity and to improve self-sufficiency 2. to maintain jobs on the land 3. to improve the standard of living of farmers and farm workers 4. to stabilise the food markets 5. to keep consumer food prices stable and fair Some of the government policies to control agriculture are subsidies, quotas and set-aside. These are discusses below. Subsidies are used by the government to guarantee farmers a minimum price for their produce.

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  7. In this essay, I will analyze and compare the two extremes of market structure - Perfect competition and Monopoly.

    Therefore the firm has to be a price taker, otherwise, it will reduce profit. 4 All firms in the industry sell identical/homogenous product. It makes perfect competition so extremely competitive and so rare. The important thing is that the product of a firm is considered by the buyers to be the same as that of any other firm. Therefore, in the mind of the buyer, each firm's product is viewed as a perfect substitute for the product of any other firms in the market.

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  8. 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?

    To be truly perfectly competitive, all market participants should have complete information for making optimal choices. Perfect competition results in an efficient use of resources. Figure A illustrates the efficiency and economic welfare under perfect competition. Assuming that there is an increasing marginal cost. In perfect competition, the supply curve for the individual firm is its marginal cost curve and marginal revenue equals price. The marginal revenue curve is also the firm's demand curve in perfect competition. All firms maximize profit by producing the output at which marginal cost equals marginal revenue. In perfect competition, the equilibrium occurs where demand curve and supply curve intersect. The quantity produced is Q pc and the price is Ppc.

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  9. How might the increase in public expenditure over the last ten years be explained? Why might the government want to reduce real public expenditure?

    Because a large number of people had been made unemployed, tax revenue fell. This further compounded the government's budgetary problems, as expenditure exceeded income. Because of this, the government was keen to do all that it could to end the recession, although this entailed spending yet more money. To end the recession, the government had to increase aggregate demand, as this would lead to an increase in output. Because aggregate demand is based on the equation AD=C+I+G+X-M, the government can increase aggregate demand by increasing G- government spending.

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  10. Theory of Competition all depends on weather or not the company has more output than input. In other words if the companies revenue will leave some profits.

    Should a sudden increase in demand allow firms to raise prices and make excess profit, other firms will be attracted to the industry. Since entry to an industry is unrestricted and since perfect competition has no barriers firms will enter until demand is fully satisfied again. Prices will drop again, wiping out any profit. Labour also moves freely between industries. If a firm or even a whole industry drops its wages, all their labour will leave for firms or industries where better wages are paid.

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  11. Economics - Monopolists

    Legal means or certain aspects of the industry's technical or cost structure must prevent entry. Barriers to entry take several forms. A natural barrier is ownership or control of natural resources. If one firm owned the entire supply of raw material that is essential to produce a commodity, then the ownership of that resource is a barrier to entry. It would act as a barrier to entry until an alternative source of the raw material is found or until technology advances so that the raw material is no longer required to produce.

    • Word count: 1375
  12. Economics Article Analysis : Price controls amid anti-dumping probe

    Surcharges are a form of protectionism employed by the government; they are tariffs, which are placed on imported products to protect home markets. In the article, it is stated that various foreign companies were dumping their excess steel products into the Thai market. This means these imports were being sold at prices below that of production costs, putting local companies out of business.

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  13. Discuss whether the privatisation of British Rail has been successful. Evaluate whether the new structure is likely to be a more effective and efficient way if managing a national rail network.

    The operation of rail services on the monopoly track can be arranged in a more competitive way. In some cases, other modes with provide sufficient competition. Where rail services do not face strong competition from other modes, price regulation is necessary, particularly in the case of commuter routes; low prices may be desirable to reduce congestion. The privatisation of British Rail was a complex issue. Unlike other transport privatisation, it was complicated by; the loss making nature of British Rail as a whole; the heavy dependence in external subsidy for the operation of many provincial and commuter services; the need to see safety as an overriding operational consideration; and finally, rail transport having its own dedicated track and infrastructure.

    • Word count: 2022
  14. English Essay on Argument Writing:The Fuel Crisis – Should the Government Give In?

    It is also obvious that if the Government gives in to the protesters, then people will see an opportunity and will be blocking fuel for all manner of petty disputes, so if someone has a problem with a small part of the National Curriculum, for example, then they will block fuel supplies and drive a convoy of cars down the M3 at a slow speed, putting the country into turmoil and putting lives at risk. Is it not obvious that people will be encouraged to walk to places where they would normally drive, resulting in a fitter population and a better environment?

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  15. Amsterdam Airport

    Other types of Government Aid include laying down an "Infrastructure", by building road links and rail links to link the new building or project to the surrounding area. The government can also help by building houses in the surrounding area for the workers who may eventually go to work at the site, and "in" the finished product. Government Aid is usually focused on businesses that start up in "Assisted Areas", Inner Cities, and Small Businesses. Assisted areas are areas that suffer from high unemployment and lack of opportunities.

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  16. Monopoly: a Game or Reality?

    All of which are avenues through which the firm may maximize profits in the future. However, contrary to the title given to them, the reality is that monopolies are a stabilizing factor in our economy, and without them our society would be in chaos. Think of a world without monopolies. A place where big corporations are non-existent and all firms are indistinguishable. Although this world would be a fantasy for many small businesses, in reality it would be a nightmare. Let's look at it this way, if all businesses were to sell the same products then many problems may arise since every business is trying to sell the same products to the same consumers.

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  17. The Microsoft Monopoly

    Microsoft bought MS-DOS from Seattle Computer, even though Seattle Computer was accused of stealing source code from another OS, called CP/M, written by Digital Research. Though CP/M was considered by most to be superior to MS-DOS, Digital Research could do nothing considering IBM made sure that all programs for the IBM PC were only compatible with MS-DOS.1 As Microsoft continued to dominate in the OS area, they found ways to make it so that their product was the standard. In 1991, Microsoft required all manufacturers installing MS-DOS on any computer to pay a licensing fee for every machine sold, whether

    • Word count: 1367
  18. Commentary - California’s Energy Future Looks Dim

    During the harsh winter, which also increased demand, the power generators had to raise their rates because of an increase in the resources' prices. This reflected on the utilities who couldn't increase their prices as they wanted, because they were restricted by the government. If we analyse this case we can see that this market has failed mainly because of an intervention by the government. In fact, even though the state regulated the electrical sector, it still had some influence over the prices which were imposed by the utilities.

    • Word count: 515
  19. Why Did Germany Experience Hyperinflation in 1923?

    It had been assumed that Germany would actually win the war and that peace would lead to economic stability. However, Germany lost the war and there was a need for high levels of public spending to overcome post-war social difficulties, such as the injured soldiers who needed money. Yet the defeat had reduced Germany to a poor country most of whose population was starving and in need of welfare. There was next to no money entering the economy and so the government printed more money in 1919, which caused a rise in inflation. Germany had many economic problems, which could have tested the most stable of governments, yet the nature of the Weimar Constitution affected the decisions that were taken.

    • Word count: 1428
  20. Is Competition policy necessary?

    in the UK under the Fair Trading Act 1973. The Competition Policy Directorate advises the Secretary of State. -The European Commission (Directorate General for Competition) has exclusive powers to act on certain large mergers with a European dimension. It also has powers to deal with restrictive agreements and anti-competitive practices when trade between members of the European Community, or in some cases the European Economic Area (EEA), is affected. In addition a number of Sectoral Regulators (utility regulators and others) have a specific role to play in promoting or facilitating competition within their sectors. Some of these regulators also have the power to apply the Competition Act 1998 concurrently with the OFT.

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  21. What are the major economic functions of government in transition economies? Should government play a minimalist role in transition economies?

    In Gradualism, government provides basic macrostabilisation, sequences structural changes and price liberalization in the economy. Also, it oversees industrial policy where is needed and is responsible for institution building. The ultimate outcome is achieving a free market in which state intervention is commonly required. Institutional approach attributes to government the task of introducing price liberalization combined with cushioning and protectionism when necessary. Building appropriate market institutions, which may take years, is another government priority. In Keynesian model of transition government avoids sharp price hikes (inflation) and devaluations. Levels of public investment are high and crucial for the economic growth.

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  22. Transportation in Malaysia

    Cars that are more luxurious are obviously placed with a higher tax, up to 150% even. Taxation decisions are fully under the influence of the government, whereas the individual trader decides upon the final selling price of the car. A journey from Kuala Lumpur to the lion city of Singapore takes only a three to fours hours drive, thanks to the efficient highways of Malaysia. With these highways, traffic congestions can be avoided, but the major disadvantages are the tolls.

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  23. Do UK motorists get a raw deal?

    But these measures are simply not good enough in the long term. They have also provided people with an alternative means of transport, public transport, which consists of trains and buses. This also has had a knock-off effect, as people would rather get into their own cars to make a journey. Public transport has been around for a very long tome but it still lacks the ability to attract people. This could be for numerous reasons: * People feel a lot safer in their cars.

    • Word count: 797
  24. How should economic resources be distributed in a just society?

    However, more relevant to this question are his two main principles. The first is the liberty principle which asserts that ?each person has an equal claim to a fully adequate scheme of equal basic rights?, and this is lexically prior to the second principle. However, it is the second principle, known as the ?difference principle? which gives us the greatest insight into Rawl?s beliefs on economic distribution in a just society. Under the difference principle, inequalities in distribution are allowed only if they work to the advantage of all, and, attached to positions and offices open to all.

    • Word count: 1260

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