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Q. What are inflationery pressures?

A. The link below should help.

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Inflationary pressures refers to the demand and supply-side pressures that can cause a rise in the general price level. Demand-pull inflationary pressure is greatest when actual GDP exceeds potential GDP causing a positive output gap. Cost-push inflationary pressure can arise from increases in unit wage costs, rising import prices and an increase in the prices of raw materials, fuel and components used in production.

Cost push inflationary pressures

Input prices for UK manufacturers

PPI, Input prices of all materials & fuel for manufact., month, UK from Timetric

Unit labour cost inflation for the UK

United Kingdom from Timetric

UK Output Gap
(Difference between actual and potential GDP, expressed as a % of potential GDP)

United Kingdom from Timetric

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AS Macro Key Term: Inflationary Pressure | tutor2u Economics

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Inflationary pressures refers to the demand and supply-side pressures that can cause a rise in the general price level. Demand-pull inflationary pressure is greatest when actual GDP exceeds potential GDP causing a positive output gap. Cost-push inflationary pressure can arise from increases in unit wage costs, rising import prices and an increase in the prices of raw materials, fuel and components used in production.

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Q. Looking at BBC Economy Tracker, after the 2009, unemployment and inflation was gradually falling but then increased in 2011, why was this?

A. Cost push pressures for inflation and as for unemployment we were in and out of recession - cyclical unemployment.

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Q. Can't for the life of me understand why the answer is C and not A... Explain?

A. A is wrong as demand pull inflation requires action to reduce AD. C is correct as reduced unemployment will mean consumers will have higher incomes and so import more. Also increased AD will increase demand pull inflation and so make our exports less competitive and so we export less.

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Q . is there a difference between trade deficit and current account deficit?

A. Yes. Trade deficit is when we import more goods and services than we export, while a current account deficit includes other things - see graph below.

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Q. how would an increase in productivity reduce the deficit?

A. Increasing productivity will reduce the costs per unit for business and so will allow them to sell their products at a lower price and so this makes them more competitive and reduces the current account deficit. See previous answer for some supply side policy u

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Q. What is domestic investment?

A . Investment by UK firms. Always talk about the multiplier.

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Q. what percentage of UK exports are made up of car manufacturing?

A. 6%. A good export success story.

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Q. What is the difference between a current account defecit and a balance of payments defecit?

A. For your exam tomorrow you really only need to focus on the fact that we have a current account deficit and especially the deficit in goods and surplus in services. More detail on the balance of payments comes in A2.

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Q. Is the pound currently quite strong or is it weak now as the BoE announced interest rates will not be rising

A. Generally strengthened especially against the dollar so this will not help our exports if it continues to remain strong.

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Q. Which A3 Sheet? Also, what is GUBBI???!!

A. GUBBI helps you to remember the main macro indicators: Growth, Unemployment, B of P , Budget Deficit and Inflation.

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Q. What is meant by animal spirits?

A. It is all about confidence. If Businesses feel more confident then they will increase investment and if consumers feel more confident then they will consume more.

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Q. 'Working parents will be given up to £2000 per child to ease child care costs' - is that a supply side policy or a fiscal policy with effects on the supply side?

A. A Fiscal Policy that is being used for the supply side, so increase in LRAS.

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Q. If the 25 mark question is just 'assess the consequences for the UK economy of a fall in investment' what do we write about? Just the consequences And then evaluate?

A. Yes. Think GUBBI and how it will effect the macro indicators.

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Q. For a question on policies to reduce a current account deficit, if I say contractionary fiscal policy, could my evaluation include that there could be a conflict with other objectives such as unemployment or does my evaluation have to be linked to the current account?

A. Yes. This would reduce incomes and so we would import less and evaluation on how it impacts on other macro objectives would be good. See below for other policies.

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Q. Which supply curve should we draw?

A. Up to you. I. guess it will depend on what you want to show. Remember the A3 sheet we did in the lesson when we looked at all the diagrams.

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Q. When unemployment increases, does this cause a increased output gap or does the output gap become smaller because the LRAS will shift to the left?

A. Output gap increases.

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Q. Is there a figure for the trade deficit?

A. £71bn for 2013

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Q.Has the income levels in the U.K been increasing or decreasing? because the minimum wage is set to increase, does this mean incomes will go up?

A. Big issue is real incomes are still falling as wage increases are still below inflation

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Q. Any links for deflation and inflation videos

A

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Causes of inflation:  Cost-push and demand-pull

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Use the AD-AS model to explain cost push and demand pull inflation

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Q. Why is the answer B? For 15

A. Largely because that is what inflation is. Also it is possible to say the other answers are incorrect. http://www.bbc.co.uk/news/business-12196322 This may help.

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Q. Are FDIs good or bad for the economy, and do the profits from the companies go back to the foreign countries?

A. FDI can be seen as an injection into the economy and can have multiplier effects and create jobs. profits are likely to leave the country however.

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Q. As the interests rates in the U.K are very low for a long time now, would this be an example of expansionary monetary policy in the U.K?

A. Yes. The Bank of England base rate was cut very sharply after 2008 in order to try and stimulate the economy after the credit crunch. There was also a large amount of QE.

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Q . Currently in the u.k would an increase in AD cause demand-pull inflation or are we still too far from the potential output of the economy?

A. Bank of England think there is quite a large output gap so demand pull pressures are low.

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Q. for the 25 marker can you define 2 key words and still get the max. 2 marks available or do you have to give a 'fluffy' definition?

A. For Unit2 brief definitions are fine.

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Q. How does innovation improve international competitiveness

A. Increased innovation could mean better production methods that reduce costs and so make our goods cheaper or it may mean new products being developed that are attractive to our trading partners.

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Q. Is a reduction in inflation due to decrease in UKs exports likely to increase or decrease competitiveness and why?

A. Any fall in the rate of inflation compared to our competitors is likely to make our exports more competitive. Remember there are many other factors that could also influence the competitiveness of our exports.

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Q. The government's Help to Buy scheme could be "pared back" - what do they mean by 'pared'

A . It means reduced and so available to less buyers. See tweet this morning on 10 ways to reduce house prices.

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Q. So because of the time lag that comes with supply side policies, would you use contractionary monetary and fiscal policies to help reduce the demand pressures for housing for the short term?

A . Demand and Supply policies needed. Increase in interest rates is possible, but think of the trade offs with other macro objectives. Also they may well reduce the "help to buy" scheme to reduce demand. Remember there will be clues in the case study.

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Q. If the case study is referring to a different country or time period do we still answer the 25 marker using knowledge about the current UK economy?

A. Depends on the question and whether it says "any country". Remember the economic theory is the same. The time period will be at least 18 months old but you should still refer to the current state of the economy.

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Q. The multiplier’ usually refers to the effect of a change in the level of

A aggregate demand upon imports. B national income upon aggregate demand. C saving upon investment. D investment upon national income.

Why is the answer D and not B?

A. I suggest you check your definition of the Multiplier. "An initial injection into the economy leads to a greater increase in national income".

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Q . How does an increase in national income lead to a greater increase in investment?

A. An increase in national income will mean businesses will respond by increasing planned investment as they will want to be able to meet the increased demand.

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Q. How would an increase in hot money benefit the economy?

A. An increase in Hot Money will mean an increase in demand for the £ and so the exchange rate will appreciate. This will make imports cheaper and exports more expensive and so this will be an advantage or disadvantage depending on the type of business. In recent years we have seen an increase in Hot Money as foreign investors buy London property which has had a big impact on house prices.

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Q. What other supply side policies could be used to reduce pressure in the housing market? Could we use the new Garden City as an example

A. Great example to use. Other policies might include making planning easier and govt support for social housing. Remember all these policies are long term and will not have an immediate impact.

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A. Trend rate is 2.5% and Real Growth is 1% (5-4) and so growth will be below the trend rate. This means the economy is growing at a slower rate (slowdown) so unemployment is likely to rise.

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Q. How would you do this

A. To work out the Inflation rate using CPI you need to calculate the % increase. You do this by the formula (difference/original) x 100. So it is 5% and therefore the answer is A.

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Q . Would an increase in labour productivity increase the LRAS and AS or just LRAS?

A. Both

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Q. When would the government use quantitative easing? and how does this affect the economic growth?

A. Red ember it is the Bank of England who use QE. They have not use it for a while but when they did the main purpose was to encourage banks or increase their lending. As a result this should increase C and I which will increase short term growth (increase AD) and long term growth.

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Q. How does low inflation make our goods/services more competitive?

A. If the inflation rate is lower than our competitors it means our exports are not increasing in price as fast. Thanks will mean will be more competitive. Remember there are many other factors that could influence how competitive our exports are. See my tweet from earlier today on this subject.

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Q. would this be a suitable definition for national income? measure of the value of the flow of output of goods and services produced by an economy over a period of time?

A. Sounds good to me.

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Q. How is the answer to Q.20 B?

A. If there is an increase in spare capacity this means the negative output gap has increased. Businesses may have machines not being used or factories working below full capacity so there is less need to invest in new capital.

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Q . When might a government use a contractionary fiscal policy? Is this happening currently as the government want to reduce the budget deficit and increase tax revenue in order to do this?

A. You are correct. George Osborne is reducing govt spending in order to reduce the structural budget deficit. Govts tend to use Contractionary Fiscal Policy in order to reduce inflationary pressures. Of course this is the main role of Monetary Policy.

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Q . Are consumers in the UK still choosing to save despite interest rate being low, or are consumers now beginning to consume now that the U.K economy is in recovery?

A. This link should answer your question.

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Definition of Household savings ratio: The percentage of disposable income that is saved. (1)
UK Saving Ratio

Latest UK household savings ratio: Q1 2017 = 1.7% (July 2017)

By contrast the average savings ratio in the past 54 years is 9.2% of disposable income.

Total savings = Disposable income - Household consumption

Fall in real wages

Depreciation in Sterling post-Brexit - pushing up cost of living and contributing to fall in real wages

To maintain spending, consumers have borrowed and dipped into savings

Temporary factors (high tax payments on dividends)

2017 has seen a dramatic fall in the UK savings ratio to a record low. This fall in the savings ratio has been caused by

UK Saving ratio. Source: National income accounts Q4 NRJS dataset
Saving ratio and base interest rates
NRJS = Households + NPISH ( Non Profit Institutions Serving Households)

In theory, lower interest rates reduce the incentive to save. But, the interest rate is only one of many factors influencing decisions to save. The most important factor is the state of the economy. In 2009, we saw a rapid rise in the saving rate because of the recession - despite interest rates cut to zero.

Gross savings

Source: RPQL, ONS

This shows total quarterly gross household + non profit savings.

2017 saw sharp drop in saving levels

Savings ratio since 1963

In the post war period, the UK savings ratio was on an upward trend. Between 1964 and the early 1980s, we see a long-term rise. There was a peak in the recession of 1980/81.

However, between 1992 and 2008 (in a period known as the great moderation), the saving ratio fell to an all time low of 4.6%.

At the start of the credit crunch and recession of 2008-10, the saving ratio rose rapidly as consumers became more risk averse and wanted to pay off debts and increase savings. This rise in the saving ratio contributed to a fall in consumer spending and negative economic growth.

The sharp fall in real GDP in 2008/09 mirrored the sharp rise in the savings ratio.

The concern is that economic growth post-2012 is partly driven by a falling saving ratio, that is unsustainable without a rise in real wages.

Saving ratio in 2008-12 recession

In the 1991-92 recession, interest rates were much higher (reaching a peak of 15%). Since 2009, interest rates have fallen to 0.5%. Therefore, from the perspective of interest rates there is a lower incentive to save in 2012

The 2008-12 recession has caused a bigger long term squeeze on real incomes (due to higher tax, rising energy prices and falling real wages). Therefore, people have had less room to increase savings and pay off debt. They have been struggling to meet bills and so they don't have the same luxury of increasing saving.

Fall in savings ratio since 2010
The saving ratio in the 2008-12 recession didn't rise as much as during the 1990-92 recession. This is because:

Since 2010 Q1, the savings ratio has fallen significantly from 11.8% to 4.7% Q2 2015. This is partly due to stagnant real wages, though there are hopes that the recent rise in real incomes will translate into higher savings ratio.

Saving ratio v net financial wealth

1. Availability of credit until 2007 encouraged people to take out loans.

2. Rising House prices encouraged people to borrow because of their positive wealth effect. Home-owners could re-mortgage

3. Cultural / social trends encouraging an attitude of borrowing and spending. See: Problem of Personal Debt

4. Low-Interest rates. E.g. in 1991-92 interest rates were over 12%. In 2000s interest rates fell to 3%. Interest rates are currently 4.5% and less than inflation. This negative real interest rate discourages saving.

Reasons for a fall in savings ratio during 1992-2007

Note: There was also a fall in the savings rate in the Lawson boom of the 1980s

1. In a recession, people worry about unemployment and so are likely to be more cautious about borrowing and spending. If you fear unemployment, you don't want to be saddled with debt repayments on a new car. People tend to delay big purchases during economic uncertainty. Saving ratios rose during a recession such as 1991-92 and 2008-12.

2. Banks are trying to improve their balance sheets by attracting more deposits and lending less. It is often hard to get a loan during a recession.

3. During 2008-12 real interest rates were often negative which, in theory, reduces the incentive to save. However, low real interest rates can be outweighed by more important factors, such as the fear of being made unemployed. In other words, people are saving more - despite poor return from saving.

Why do saving ratios tend to rise in a recession?

Saving ratio and the paradox of thrift

The paradox of thrift is the idea that if everyone saves at once, it can cause macro-economic problems (i.e. recession). From an individual perspective, it makes sense to save and pay off debts in a recession. But, if everyone pursues the same course of higher saving, it causes a fall in aggregate demand.

See: Paradox of thrift

Savings ratio and fiscal policy

1. If the saving ratio rises, government spending needs to take the place of private sector spending and investment. Otherwise, the recession will be deeper.

2. If the saving ratio rises, the private sector has more available funds to purchase government bonds.

In a recession, a sharp rise in the savings ratio means that consumer spending will fall significantly. In Keynesian economics, this is a reason for the government to borrow and increase spending. The logic is

Benefits of a higher saving ratio

A rapid rise in the savings ratio can cause a fall in aggregate demand and recession. However, in the long term, a higher savings ratio is often considered to help promote more sustainable economic growth.

Higher savings enables more private sector investment. Many see this level of investment as a key factor in determining the long term economic growth rate.

Problems of low savings ratio

Unbalanced economy with over-reliance on consumer spending.

Build up of personal debt.

Current account deficit, (with imports greater than exports.)

A very low savings ratio can indicate:
Related pages
Notes:
Since 2010, the fall in the savings ratio has occurred during a widening of the current account deficit.

(1) The ONS define the savings ratio (NRJS) - Households' saving as a percentage of total available households' resources.

(2) The saving ratio is subject to be revised at a later date.

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Definition of Household savings ratio: The percentage of disposable income that is saved. (1) UK Saving Ratio Latest UK household savings ratio: Q1 2017 = 1.7% (July 2017) By contrast the average savings ratio in the past 54 years is 9.2% of disposable income.

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Q. Why is growth in the U.K economy not stable if we are too reliant on growth from consumption, also, it is 65% of AD that makes consumption?

A. Consumption accounts for over 60 % of AD. There is a big focus at the moment on trying to rebalance the economy so that we are less reliant on Consumption. This is difficult at G is falling due to govt cutbacks and we have not seen any real increase in I or X. Over reliance on C is not sustainable if much of it is funded by consumer borrowing (debt)

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Q. How is exports a injection for households?

A. Exports are an injection into the circular flow. They are more likely to be into businesses as they produce and sell them.

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Q. When we talk about the current account, is this just the trade in goods and trade in services part of the balance of payments?

A. It also includes investment income and government transfers. See the diagram I tweeted earlier today that shows the parts of the Current Account. For AS the main focus is likely to be trade in goods and services.

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Q. What is the difference between productivity and production?

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Q. What is the difference between productivity and production?

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A . Productivity is output per worker and production is actually how much is produced.

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Q .What is the effect on the economy of national income falling?

A. Base your answer around a good AD/AS diagram. Think lower demand pull inflation, lower output and hence higher unemployment. Also lower inflation may make exports more competitive and as incomes are lower there may be a decrease in imports and so trade deficit improves. Always remember there are trade offs between the different macroeconomics objectives.

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Q. house prices are rising so is that a positive wealth effect?

A. Correct. So this will impact on Consumption. Remember this will vary across different parts of the UK as house prices are not increasing by much in some areas.

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Q. Could you say an increase in interest rates at the moment is unlikely due to the elections coming up - policy myopia. Also would an increase in interest rates negatively impact the housing market for people with mortgages?

A. Need to be careful here as it is the Bank of England that sets interest rates and not the govt. The MPC at the Bank of England are concerned about house prices and this could be a reason for increasing interest rates, but remember they take into account numerous things when deciding on interest rates. The article below is worth a read.

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Sky News - First For Breaking News From The UK And Around The World

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Sky News - First for Breaking News, video, headlines, analysis and top stories from business, politics, entertainment and more in the UK and worldwide.

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Q . Will I be credited for including theory or even just general knowledge that I learned in Econ 4 in my Econ 2 re-take next week? I find myself applying knowledge from Econ 4 in my Econ 2 answers because the content from both units is pretty much interchangeable and interlinked.

A. Yes you will get credit for Unit 4 theory but do not go too over the top as you need to ensure you do the basic analysis especially in the 12 marker. Any relevant knowledge you use will earn you marks.

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Q. How is the answer for question 3 A?

A. GDP has gone up by 30% while CPI (inflation) has only gone up by 25% so real national income has increased. To get the CPI increase divide the difference by the original and then times by 100. (30/120)x100.

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Q Long term unemployed will have benefits cut unless they visit a Job Centre every day , work for free, or undertake training. Applies to people who haven’t found a job after 2 years' Is this a supply side policy or fiscal policy?
A. This is a good example of Fiscal policy being used for a Supply Side Policy. In fact many supply side policies will involve tax or govt spending. Remember that when you talk about Supply Side policies give an example.

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Q. Does increase in corporation tax increase business cost leading to cost push inflation?

A. Better analysis would be to say that this would decrease business profits and so is likely to reduce their level of investment and so this would impact on AD in the short term and LRAS in the long term.

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Q. How does lower interest rates increase house prices?

A. It becomes cheaper to borrow and so more people take out mortgages which means more demand for houses and so prices increase. Big issue at present especially in London.

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Q . I don't get the difference between Nominal GDP and Real GDP sir

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Q . I don't get the difference between Nominal GDP and Real GDP sir

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I know that real is adjusted for inflation but how is nominal not?

A. Nominal is the actual GDP but it does not take into account the effect of inflation and so Real GDP is a much more useful measure. For example if Nominal GDP grew at 5% but Inflation was 4% then Real GDP would only be 1%. In other words the real increase in the Productive Potential of the economy is 1%

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Q. This is the question I am generally stuck on. What kind of paragraph structure should I use. I was thinking Point, chain of reasoning, example/recent UK data, evaluation...

A. Sounds good but do not forget a diagram in some of the paragraphs and always refer to the case study.

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Q. Using the data and your knowledge of recent economic events, assess the contribution that fiscal and monetary policies can make in maintaining a stable economy.

After the definitions, are you supposed to discuss how monetary policy reduces inflation, fiscal policy decreases unemployment, then in a third paragraph discuss supply side polices and then a final paragraph or do you discuss how fiscal and monetary BOTH reduce unemployment AND inflation?

A. The key thing here and in most questions is that there should be combination of supply side and demand side policies. If there was only expansionary monetary or fiscal policy then we would get increased growth but the trade off would be increased inflation.

A stable economy means we want low unemployment and inflation and steady sustainable growth. Note that you must be realistic as to the best policies in light of the economic events over the last few years (the question says "using your knowledge of recent economic events")

Finally Macroeconomic policies always involve Trade Offs.

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Q. Could the fact that 75% of Investment is just replacing worn-out stock be an evaluation point or does AD only take into account net investment

A. Yes it does, so I feel there are better ways to evaluate.

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Q. Could we use the liquidity trap when evaluating?

A. Certainly post 2008 there was some evidence of a Liquidity Trap as very low interest rates failed to stimulate borrowing and spending. This was largely due to low consumer confidence and so saving increased and also the Credit Crunch which meant some banks were reluctant to lend. Less of an issue in 2014.

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Q.If there was a question relating to investment + interest rates, can you say decreasing interest rates, cheaper to borrow, investment increases, however, interest rates cannot be lowered any further and they're currently as an all time low. Would that be a good example of saying something wrong and then evaluating it?

A. Yes this would be good. You could then go on and say some alternatives.

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Q. What is innovation?

A. It is all about research and development into new products and production methods. This is a form of Investment by Businesses. Governments can encourage this with supply side policies such as reducing Corporation Tax rates or tax breaks for businesses who invest. Innovation is particularly important if a country wants to increase their level of exports and help to rebalance the economy.

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Q. Is the signalling function used in the free market only when there's excess supply/demand?

A. Yes.Signalling happens when there is disequilibrium. So for example when there is excess demand it will signal to suppliers to reduce prices. The opposite for excess demand.

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Q. In a 25 mark question, would be a good idea to to include a policy that may not be realistic but then use it and mention that in the evaluation for example, prohibiting the consumption of alcohol as a way of tackling market failure? Also mentioning a shadow market that may be created?

A. Sounds good. Using economic theory to put forward a policy that is not realistic and then saying why it is unlikely is a good way to evaluate. For example if the UK govt provides subsidies to a particular industry then you can draw a diagram and explain it. Then evaluate by saying it is not realistic as we are part of the EU and any subsidy for an industry would have to be provided to all firms across the EU.

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Q. In the exam are we allowed to write out a plan in the answer booklet before the 25 marker?

A. Yes this would a good idea.

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Q. Is demand relatively elastic in a buffer stock scheme?

A. Depends on the market. For example the number of substitutes and whether it is a necessity. Key thing to remember is that supply is likely to be inelastic. Remember PED could be a good way to evaluate

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Q. How could you use long term and short term as way of evaluation, could you say that a particular policy may only correct the market in the short-run meaning that there will be no long-term solution depending on the question?

A. Yes, or they be short term improvements but in the long term there may be some sort of Government Failure. You could also take the view that some policies may have a significant impact in the short run while others may be more effective in the long run.

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Q. Can you include a buffer stock diagram in the 25 mark question which is on an agricultural market question as an example of government intervention?

A. Yes.

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Q . How would you analyse a positive externality in production diagram?

A . Simply explain the free market equilibrium and how it results in under production of the good. Make sure you link to the example in the case study as there will be huge clues as to the externalities that are ignored by the free market.

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A. See below

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Is water a free good?

A free good is a good with zero opportunity cost. This means it can be consumed in as much quantity as needed without reducing its availability to others.

A free good contrasts with an economic good (a good where there is an opportunity cost in consumption)

Examples of Free Good

Air. Oxygen is something we need and we can simply breathe it in. There is no element of rivalry (e.g. if I breathe, there is still enough air for you to breath too.)

Water. In many environments water will be a free good, e.g. if you live next to a river, a small community can easily take as much water as it wants with very little effort. If you take water from a river - there is plenty available for everyone else.
However, water could become an economic good in dry environments. In desert areas, water is not in plentiful supply; society has to devote many resources to the production of drinking water. Therefore, water becomes scarce and so it is no longer considered a free good. These are sometimes known as a 'common good' as it is freely available to all but at a certain point, there is a limited supply.

Intellectual ideas. If you develop a new invention and don't patent it (e.g. yoga exercises, how to tie a knot) anybody can reuse this idea without any opportunity cost.

Web-page. If you view a web-page, it doesn't prevent anyone else consuming the good - it is still available at no opportunity cost.

Sunlight. Sunlight is available to all.
Unless your neighbour grows a leylandii hedge and casts your garden in shade.

By-products. If heat is generated from a recycling plant, this creates a good - heat at no opportunity cost.

Music. Once a song is composed, everyone is free to sing the tune.

When is a free good not a free good?

One important distinction is that just because a good is given away for 'free' it doesn't necessarily mean it is a free good.

If a firm gave away a 'free' toy in a box of cornflakes, it is not actually free because it requires time to make and raw materials. This means, there is an economic cost. If the company wasn't giving away 'free' toys, it could reduce the price of the cornflakes or make more profit.

Also, in the case of a river in a water, there may come a critical mass, where there does start to be an opportunity cost of taking water from a river. With a low population, the water is renewable. But, a high population density city may mean more water is taken from the river than can be replenished. Therefore, at certain population densities, it loses its status as free - because there starts to be an opportunity cost.

Is statistics a free good?

Is the creation of economic statistics a free good? You could argue that economic statistics can easily be produced with little effort. However, I would argue there is an opportunity cost to create high-quality economic statistics. You need to spend time and have a certain knowledge to be able to present them. The ONS will spend considerable time and effort in collecting statistics and displaying them. e.g. UK economy 2011
Using Statistics
You could argue the internet has made finding and using economic statistics much easier. A quick google search gives you information very quickly. There is little opportunity cost involved in finding it and it is available to everyone with internet access. However, to find exactly what you want may take much longer. Certainly, the internet has made information more of a free good. But, there is still room for debate.

An economic good is a good with an opportunity cost. e.g. takes time and resources to produce.

Note: A good may be free at the point of use, but not classed as a 'free good'! For example, to visit the doctor is 'free' for people in the UK. However, we have to pay the doctor through taxes. Therefore health care is not an example of a free good. If we devote resources to health care there is definitely an opportunity cost.

Related

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Definition of a free good - Economics Help

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Is water a free good? A free good is a good with zero opportunity cost. This means it can be consumed in as much quantity as needed without reducing its availability to others. A free good contrasts with an economic good (a good where there is an opportunity cost in consumption) Air.

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A. The subsidy required to increase consumption to include all Social Benefits is the line P2 P3 and so this could correct the market failure.

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Q. What is competitive demand?

A. Goods or services that are substitutes can be said to be in compe

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Q. In the past paper booklet, Question 6B, the 12 marker, the case study implies that the diagram should be negative in production, but how is the use of road travel negative in production, should it not be negative in consumption?

A. You could probably run with either as long as your chain of reasoning was appropriate. You could argue that individuals use cars too much or that there are too many roads. In both cases govt needs to intervene to correct the market failure to to ensure the full social costs are taken into account.

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Why am I wrong in this multiple choice?

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Q. What are the general things to include in an introduction?

A. Simply set the scene. If it is about govt intervention due to Market Failure then explain what Market Failure is in relation to the product/market in the question. Do not spend too long on it as time is tight. Remember a little plan before you start is essential to ensure you keep focus on the question.

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Q. What could you evaluate for and against the NHS charging for the service?

A. The first thing to say is that at AS there will be huge clues in the case study so use them. One case against is an equality issue as those on low income may be unable to afford treatment . Healthcare is a Merit good so this will mean it will be underconsumed and society will not benefit from the full social costs.

A case for charging might be that resources are limited and charging for certain services ( not all ) would ration demand (use a demand and supply diagram). There is also the argument that this may save the govt some money which would play a part in helping to cut the budget deficit which currently stands at £90bn.

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QWhat is moral hazard and can it be used it an essay

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QWhat is moral hazard and can it be used it an essay

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A. Not on the syllabus and as time is so tight in the exam I would not contemplate using it. Stick to using asymmetric information if appropriate.

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Q . what is the difference between joint demand and complimentary demand?

A. They are the same thing. For example DVD players and DVD

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Q. How would you read the recycled waste bar. For example for 1996 would it be 440kg per year or 20kg

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Q. How would you read the recycled waste bar. For example for 1996 would it be 440kg per year or 20kg

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A. 20kg

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Q. Why is the answer A?

A. Because farmers supply OQ2 and get paid OP2 for each unit. Therefore as total revenue is Price x Quantity the Total Revenue will be shown by the rectangle as per answer A.

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Q. Why is the answer to 16 b and not C

A. A missing market is something that is not provided or accounted for by the free market and so in this case an externality. This is an example of Market Failure. C is incorrect as private goods are provided by the Free market.

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Q. If we do not shade in the triangle of welfare loss on the diagram will we lose marks in the exam?

A. You may well lose 1 mark but it depends if you put other things in like the externality and the Socially Optimum point. Worth including as it gives you something else to talk about in your analys

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Q: On a Micro side, would this reduce demand because of consumer insecurity?
A. It may well do this as the workers would be unsure about the future. Also there would be lower incomes for these people on zero hour contracts and so this would impact on consumption. Of course for business it will keep their costs lower due to increased labour flexibility and increase their competitiveness. Remember in Economics there are always trade offs.

Q: On a Macro side, short run aggregare demand reduced because of reduced consumption?

A. See above.

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Q. Why is the answer B?

A. Tax impacts on the Supply Curve. So a decrease in tax would reduce costs to the betting shops so they would increase supply which causes the supply curve to shift to the right.

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Q. What is the difference between productive efficiency and allocative efficiency?

A. Please see an earlier answer. Scroll down!

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Q. Is there an example where there has been a combination of policies adopted by the government to correct a market failure which has been effective?

A. Lots of possible policies here.

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Positives of leaving it to the free market

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Positives of leaving it to the free market

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Q. If we get a question for and against free market on unhealthy food and drink how would we argue for leaving it to the free market and what diagram would we use?

A. Quite hard to argue that it should be left to the market as it is clearly a demerit good that is overconsumed. The main diagram you should use is a negative externalities in consumption and you could say that if the free market were to take into account the full social costs then it would be fine not to intervene. I guess you could also argue that as demand increases if the free market was working then the increase in demand would lead to an increase in price, but in reality prices tend to fall.

Also govt intervention may lead to govt failure and so argue that they should not intervene. Remember the case study will have very useful clues.

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Q. Why would the existence of diseconomies of scale at low levels of output discourage the growth of a firm

A. As increased growth would increase the costs per unit produced which would reduce profit. However not a likely question at AS.

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Q. Quantity supplied or demanded?

A. Both. So right Quantity of Alcohol ( or whatever the good is).

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Q:What are some good evaluation points in general for externalities? Also, what is on the x axis in a positive/negative externality graph? My textbook says Quantity but quantity of what?

A. Quantity of whatever the good or service is. For decent evaluation you need to consider the specific product or market otherwise the evaluation is going to be of a very low level. The chances are that there will be clues in the case study.

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Q. Why was I wrong? Thanks.

A. Surplus is 10million units and they pay farmers £15 per unit, so cost is £150. But sell the 10million units to Foreign buyers for £5 so get £50 revenue and so actual cost of scheme is only 150-50 =100 so answer is B

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Q. I read an article about families with 'problem debt', would an increase in Interest Rates to for example reduce inflationary pressures make these families worse off? How could I use this to evaluate growth in the UK

A. Lower inflation would increase real incomes so help these families. However it would make borrowing money more expensive and if they are borrowing this would make them worse off. Strong economic Growth is likely to mean there are more jobs and so this increases income of those who find work. However it will depend on the skills some of these people have and also the types of jobs on offer as some jobs may be low paid temporary or zero hour ones.

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How can I show economies of scale on a diagram? Could you please find a suitable link from tutor2u?

A. Simple AC curve.

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Q. Is economies of scale only achieved by monopoly?

A. No. Economies of Scale is all about as output increases the cost per unit falls. Many monopolies will have high levels of output and so are more likely to benefit. Think Amazon and the Purchasing and Technical economies they can achieve.

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Q. What is the difference between allocative and productive efficiency

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Q. What is the difference between allocative and productive efficiency

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A .Allocative efficiency is reached when no one can be made better off without making someone else worse off. This would be any point on the PPF.  Productive Efficiency is when a firm produces at their lowest average cost. This is all you need to know for AS.

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What are examples of missing markets?

A. The most common example of missing markets are Public Goods as if left to the free market they will not be produced. This is an example of Market Failure and so the govt intervenes to provide them. Make sure you can fully explain Public Goods ( non-rival and non-excludability).

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A. How can the government reduce the barriers to entry to try and tackle monopolies?

Q. So this is about Govt Intervention to reduce the market failure of Monopoly Power. There are various ways this could be done. One way is to prevent mergers that create monopolies in the first place. If there is a monopoly such as water companies then it is important that there is strong regulation to control their power. Govt can also open up markets to competition through privatisation as they are trying to do with the Royal Mail.

Sometimes if left to the market, foreign competition or changes in technology will increase competition. For example the decline in the power of Microsoft is partly due to changes in technology.

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Q. In the past paper booklet jan 09 (1B) unit 1, the question is about Italy how would we relate this to the UK economy?

A. If this is the pasta question then really use the case study and relate it to Italy. Same theory but simply a different country.

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Q. What is allocative efficiency

A. For AS all you need to know is that any point on a PPF is Allocatively Efficient. Anymore than this is A2.

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Q. Would the evaluation on subsidies be that the producers don't have to increase output if they're a monopoly as they have no incentive to produce more

A. This would be appropriate for a Monopoly. Another thing you could say is that it is very hard for the UK govt to subsidise certain industries as we are in the EU and it would be seen as unfair competition unless subsidies were given to every firm in that industry across the whole of the EU.