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What order does a free trade area,common market ,customs union and single market go in? And what is the difference?

Free trade area = Eliminates trade barriers (tariffs etc) between almost all goods and services. No free movement of capital and labour, no common external tariff.

Single Market = A free trade area which allows free movement of capital and labour. No common external tariff.

Customs Union = Free trade area with free movement of capital and labour but has a common external tariff.

Common market is virtually a single market but with stricter rules (mainly regarding movement of capital and labour).

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What does the Long Run Philips Curve Show? Thanks

In the long run, unemployment cannot fall below the NAIRU (Natural Rate of Unemployment), as increased inflationary pressures will increase business costs and so shift the SRPC to the right.

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Q. Why does a strong currency make FDI less attractive?

A. The business investing will need more of their own currency to invest on the UK so it is more expensive. However do look at an earlier question I answered where I talk about all the other factors that need to be considered

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Q. I don't really understand crowding out, is there any chance you could sort of simplify what it is and the effect it has?

A. An economic concept where increased public sector spending replaces, or drives down, private sector spending. Crowding out refers to when government must finance its spending with taxes and/or with deficit spending, leaving businesses with less money and effectively "crowding them out." One explanation of why crowding out occurs is government financing of projects with deficit spending through the use of borrowed money. Because the government borrows such large amounts of capital, its activities can increase interest rates. Higher interest rates discourage individuals and businesses from borrowing money, which reduces their spending and investment activities.

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Q. Is there any examples of the UK taking part in protectionism for a particular industry?

A. Not really as all done EU wide. Lots of examples of this such as the CAP.

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Q. Not related to Econ 4, but should I be concerned by the amount of articles on the FT which suggest that Economics degrees are currently a bit rubbish :S

A. No

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Q. Danni- with a fixed exchange rate system, why would this in theory keep inflation low?

Attempted answer:

When the gold standard was used in the major economies it resulting in countries which had a balance of payments deficit having a reduction in the supply of money. In line with fishers equation of exchange this would result in internal prices falling. Moreover if a country has comparatively high inflation, we would expect that the price mechanism would to an extent revalue the currency accordingly, as this does not happen there is a pressure to keep inflation low so as not to deteriorate a countries balance of payments position.

The Mundell-Flemming model says that a country cannot simultaneously maintain a fixed exchange rate, free capital movement and an independent monetary policy. Hence the link between inflation and the fixed exchange rate is relatively ambiguous as effective targeting by major central banks are keeping inflation low.

Im not sure how clear cut this is though, I don't think there is a very clear relationship between being fixed and inflation.

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Q. If comparative/absolute advantage came up would you demonstrate in with an example, like two countries producing two goods, and draw the PPF etc

A. Probably just the box/grid will be enough. Example below.

http://www.economicsonline.co.uk/Global_economics/Comparative_advantage.html

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Q. How do we evaluate Philips

Attempted answer: The original philips curve was based on data from a period when manufacturing was a heavily intensive industry and that labour was a significant part of the total cost of production, structural shifts in the economy may have resulted in this trade off being less apparent.

As well as this the work of the major centre banks to have inflation targets and promote inflation stability may have resulted in inflation remaining relatively constant throughout the business cycle.

In the UK especially with its high imports of commodities and oil and gas, inflation is becoming more directly linked to influences in China's slow down.

Since the 2008/9 Recession there has been a growing consensus between some economists that in fact a lot of the rules or laws in economic thought are either wrong or no longer apply such as Okun's law and this may be a similar thing.

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Q. Im worried by the fact that this exam was written over a year ago when the prediction for economic growth and inflation were distinctly different, would the questions be adapted to changing economic conditions, e.g we wouldn't get a question on high inflation or on the view that developed economies are stagnating??

A. The data will not have been updated so they will reflect the conditions 12-18 months ago. Clearly you can relate your answer to 2014 depending on what the actual question asks.

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Q. What actually is the liquidity trap, and how could you use it in an essay? (perhaps for EU or eurozone)

Attempted answer: A liquidity trap occurs when low / zero interest rates fail to stimulate consumer spending and monetary policy becomes ineffective. In this situation, an increase in the money supply could fail to increase spending because interest rates can't fall further.

The liquidity trap was used as some reasoning behind using unconventional monetary policy to effect long run interest rates through low ri on bonds and securities etc, and suggests that economic growth in some regions can't be used through monetary stimulus and perhaps keynesian expansionary monetary policy will be more appropriate.

A. Correct. We have seen a Liquidity trap in recent years as despite low interest rates we have not seen lending increase. This is down to low consumer/business confidence and also the fact that many businesses have spare capacity and so do not need to borrow to invest.

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Q. Why are real wages taken into account when the MPC is setting interest rates?

If rate of inflation is rising faster then the rate of wages, we are likely to see a decrease in the disposable income which is likely to mean less consumption. Potentially get a downward multiplier effect. Also may cause a fall in the standard of living

A. If real wages are negative ( as that are at present) then this means there is unlikely to be any real demand pull pressures so MPC will take this into account along with a whole range of other factors.

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Q. What makes a country more competitive in the long term?

A. International competitiveness could be a result of prolonged periods of a weakened exchange rate (maybe if it is pegged to another currency, e.g. yuan to the dollar). Also supply side factors may contribute, e.g. increased productivity of the economy through improved training and gains in skill, technological advances, increased investment and capital spending by firms, reduced trade union powers(potentially), privatisation of markets (likely to be more efficient), taxation incentives for firms to invest. Also it may be important to note that the ability of a country to gain comparative advantage through specialisation of labour may also be important (EG UK with financial services).

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Q. How will the UK Economy be affected in terms of the four objectives if deflation sets in in the Eurozone?

A. Well one fun thing is that capital flight might mean that investors transfer money from EU assets to the UK this is good new for borrowing and good news for George Osborne.

It will make Uk goods more expensive compared to Eurozone goods so this could have an impact on The Current Account.

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Example of Disadvantage of UK being in the EU

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Example of Disadvantage of UK being in the EU

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Q. Can I use as a disadvantage of UK being in the EU that they pay more net contributions than some countries and they get less money back after the contributions been added then given as a proportion. So the countries that got more money could take advantage of the money rather than being used properly in their economy for example corruption?

A. I feel there are much better disadvantages than this. Feels like a bit of an UKIP argument!!

This may help: http://www.bbc.co.uk/news/uk-politics-20448450

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Q . Could we use Tata investing in Jaguar and Land Rover as an example of Mitlestand?

A. Wonderful example of how things could be done.

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Q. When is a current account deficit detrimental to the economy?

A. Yes and No. Arguments in link below.

http://www.economicshelp.org/macroeconomics/bop/probs-balance-payments-deficit/

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Q. Sir, can you use this diagram to show how when the govt carry out expansionary fiscal policy, they need the funds and to attract private investors they increase interest rate on their bonds. So people are now more willing to save their money in the public sector as appose to private banks. Hence decrease in supply for private funds which causes an increase in IR, therefore now firms and households cant borrow at the same low cost as before and not in the same quantity either. In other words the crowding out effect.

A. It is not on the syllabus but you could use it. Probably better to simply mention crowding out and briefly explain it.

Thanks, so can you say the crowding out effect may possibly reduce the extent of the multiplier (<1), as any further govt spending would be offset by reduction in investment and consumption. So for example if the govt spent 100bn it would mean actual increase in national income is less.

It would certainly impact on the size of the Multiplier as there may be less business investment. A good way to evaluate.

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Q. Most important statistics to learn for Econ4?

A. Main macro indicators ( growth, trade, inflation, unemployment and budget deficit) and which way they are heading. Eg. Inflation is 1.8% and is not an issue at present.

Also any other useful data that could support an argument such as 6% of UK exports are cars or 45% of UK exports are to the EU.

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Does deflation decrease the real value of money but increase the real value of debt?

Inflation erodes the real value of money, deflation does the opposite and actually increases the real value of money, meaning that the real value of debt also increases, I think this is correct.

Well done - it is correct - Mr Smith

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Q. If indirect taxes are on consumer spending on goods and services, why does this create cost push inflationary pressures for the producer?

Attempted answer: Indirect taxes are passed on from the producer to the consumer, so originally it may be in the form of corporation tax for example, but then depending on the elasticity of demand of the product the producer may be able to pass on all or some the tax to the consumer- if they can then it will lead to cost push inflation and higher prices

A. Corporation Tax is a Direct tax and not an Indirect Tax. An example of an Indirect tax is VAT and this is paid by business ans consumers. Do an increase in VAT will result in producers increasing prices which will be passed onto consumers. This can lead to increased inflation as happened when the Coalition govt increased VAT from 17.5 to 20%. Hope this helps.

Thank you this makes sense now

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Q . What factors might determine the natural rate of unemployment

A. All supply side policies would have an impact. For example anything that increases occupational or geographical mobility. Also any policy that incentivises more people to work. More help here:

http://www.economicshelp.org/macroeconomics/unemployment/natural_rate/

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Q. Does an appreciation in the £ cause other economies to be reluctant to undergo fdi into the uk?

A. u

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Q. In an essay how would we use mitlestand in to explain the success of firms from different countries. For example VW Group from Germany?

A. These are media sized companies that are usually family owned and not owned by shareholders. As a result they look much more long term so there is much greater investment for the future. This means more innovation, R and D etc. So really use it to explain that long term investment is essential for businesses.

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Q. What exactly is the living wage? I don't really understand the concept

A. This BBC article explains it really well.

http://www.bbc.co.uk/news/business-20204594

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Q. What will happen to a countries currency if it is devalued too much?

A. One effect would be that exports cheaper are while imports become expensive and so could cause higher cost push inflationary pressures

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Q. Danni- Why might it be desirable for a country to increase interest rates to make the currency stronger? e.g South Africa. It says in the article that the currency has been weak for about 5 years, but surely a weaker currency is good for making exports cheaper? Or would they want a weaker currency so that imports such as raw materials are cheaper? Thank you

A. Certainly a weaker currency would make imports cheaper and also if there is an inflation problem caused by high import prices then this may help reduce inflation.

Also a problem if South African banks assets are based on the south african currency and liabilities from developed countries, as a significant currency devaluation will lead to balance sheet problems.

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Q. How can monetary policies be used to prevent a period of deflation?

A. Clearly reducing interest rates may increase AD and so reduce deflation. Also QE could be used to encourage lending by banks. Finally see my recent tweets on negative interest rates being used by the ECB.

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This is for you: http://www.economicshelp.org/blog/771/euro/should-uk-join-the-euro/

Hopefully it will answer any more questions you have regarding joining the Euro.

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Danni- why would joining the euro potentially increase inflation?

A. Hi again Danni, as we would not be able devalue the currency or control interest rates, if the currency was to appreciate significantly the costs of imports of raw materials would rise and we would experience cost push inflation along with wage inflation.

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Danni- What does devaluation of a currency mean in terms of whether we should join the Euro? And why is this a disadvantage?

A. Hi Danni, In the Euro you cannot devalue the currency. This mean if exports become uncompetitive, you can't depreciate the currency in order to make them competitive again. As a result, AD falls as we get lower demand and lower growth and the trade deficit worsens.

Oh, and there's no independent monetary policy either, interests rates would be set by the ECB not the Bank of England and we wouldn't be able to use Quantitative Easing either. So if the Eurozone were recovering faster than the UK, clearly higher Interest Rates set by the ECB would hinder the UK's recovery.

Thank you, how do you actually devalue the currency? I thought that was only with fixed exchange rates?

Well, under a floating exchange rate its called depreciation, but in the end the currency has still been devalued.

With floating exchange rates it is possible through simple market demand and supply. Say the UK decreased Interest Rates specifically to reduce Exchange Rates, therefore there is less Hot Money, so less demand for the pound and so the value of the pound depreciates. The depreciation in a floating exchange rate is regarded as a devaluation in a fixed exchange rate.

Treat them as the same.

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Your YouTube videos on globalisation and trade are really good with loads of examples, could you make one for the EU topic?

Top Tip: Mr.Smith likes white chocolate, maybe you could use it as an inducement ;)

I prefer Dark Chocolate actually!

I said dark and someone changed it! Grrr.

'Grrr'? Are you bent?

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Q. When talking about a firm increasing its market share. Is that sales maximisation or revenue?

A. Market share is usually measured by % of the sales in a market, so sales max.

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Q. what is the term for a loss making monopoly that produces a merit good that the govt wont let it fail because it's too important?

Example?

NHS being the example

A. OK. In this case the NHS is simply funded by the govt as health would be under provided if left to the market. Of course in recent years the govt has been trying to move some NHS services to the private sector. Overall, probably best not to see the NHS as a loss making monopoly as it is not trying to profit maximise.

Ok how about one of the water companies that makes a loss but the govt cant let them fail because then people wouldn't have water, I thought there was a term for this?

Doesn't matter now, think I figured it out, think it's called strategically important monopolies

Sounds the perfect phrase.

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Q. Danni- Can the term 'hysterisis' be used to describe why there may be a gender pay gap? e.g women take time out of work to have children therefore loose out on skills

A. Probably better to use it for long term unemployed as opposed to women who may choose to take time put from work. On the other hand it is the same problem. In conclusion it is probably best not to.

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Q. For this question can I use John Lewis of an example of a firm that profit maximisation is important as well as sales maximisation as a point of evaluation

A. If using John Lewis remember it is owned by the employees so a very different company . The focus of the question could be about the Contestability of the market and the barriers to entry and this will influence their objectives.

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Q. In coase theorem, it is assumed that transaction costs are low, what are these transaction costs?

A. Not on syllabus so irrelevant as unlikely to have time to talk about it and you risk an examiner not being totally familiar with the theory.

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Q. How would you give an A2 fully definition of profit maximisation

A. See link. Remember link to a diagram

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An assumption in classical economics is that firms seek to maximise profits.

Profit = Total Revenue (TR) - Total Costs (TC). Therefore, profit maximisation occurs at the biggest gap between total revenue and total costs.

A firm can maximise profits if it produces at an output where marginal revenue (MR) = marginal cost (MC)

Diagram of Profit Maximisation

To understand this principle look at the above diagram.

If the firm produces less than Q1, MR is greater than MC. Therefore, for this extra output, the firm is gaining more revenue than it is paying in costs, and total profit will increase.

Close to Q1, MR is only just greater than MC; therefore, there is only a small increase in profit, but profit is still rising.

However, after Q1, the marginal cost of the output is greater than the marginal revenue. This means the firm will see a fall in its profit level because the cost of these extra units is greater than revenue.

Profit maximisation for a monopoly

In this diagram, the monopoly maximises profit where MR=MC - at Qm. This enables the firm to make supernormal profits (green area). Note, the firm could produce more and still make normal profit. But, to maximise profit, it involves setting a higher price and lower quantity than a competitive market.

Note, the firm could produce more and still make a normal profit. But, to maximise profit, it involves setting a higher price and lower quantity than a competitive market.

Therefore, in a monopoly profit maximisation involves selling a lower quantity and at a higher price. see also: Diagram of monopoly

Profit Maximisation in Perfect Competition

In perfect competition, the same rule for profit maximisation still applies. The firm maximises profit where MR=MC (at Q1).
For a firm in perfect competition, demand is perfectly elastic, therefore MR=AR=D.

This gives a firm normal profit because at Q1 AR=AC.

Profit Maximisation in the Real World
Limitations of Profit Maximisation

In the real world, it is not so easy to know exactly your marginal revenue and the marginal cost of last goods sold. For example, it is difficult for firms to know the price elasticity of demand for their good - which determines the MR.

It also depends on how other firms react. If they increase the price, and other firms follow, demand may be inelastic. But, if they are the only firm to increase the price, demand will be elastic (see: kinked demand curve and game theory.

However, firms can make a best estimation. Many firms may have to seek profit maximisation through trial and error. e.g. if they see increasing price leads to a smaller % fall in demand they will try increase price as much as they can before demand becomes elastic

It is difficult to isolate the effect of changing the price on demand. Demand may change due to many other factors apart from price.

Firms may also have other objectives and considerations. For example, increasing price to maximise profits in the short run could encourage more firms to enter the market; therefore firms may decide to make less than maximum profits and pursue a higher market share.

Firms may also have other social objectives such as running the firm like a cooperative - to maximise the welfare of stakeholders (consumers, workers, suppliers) and not just profit of owners.

Profit satisficing. This occurs when there is separation of ownership and control and where managers do enough to keep owners happy but then maximise other objectives such as enjoying work.

Related

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An assumption in classical economics is that firms seek to maximise profits. Profit = Total Revenue (TR) - Total Costs (TC). Therefore, profit maximisation occurs at the biggest gap between total revenue and total costs.

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Q. Does the introduction of the NMW cause an increase in employment in a monopsony labour market?

A. Really depends on the labour market. Many jobs will not be affected by the NMW as already paid above it. Also remember the NMW was introduced over 15 years ago so do not talk about the intro of it. Better to talk about an increase or the intro of The Living Wage.

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Q. With privatisation, in theory is there a switch from the objective of the firm from corporate responsibility to profit maximisation? Because there is a video which says firms will become more allocatively efficient when privatised, but this wouldn't occur if firm was producing where MC=MR ?

A. What you say is correct, however I guess it will depend on how Contestable the market becomes as if this increases then they may be more Allocatively efficient.

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Q. I don't really understand questions which ask whether 'so and so' should be left to market forces

Could you please give some brief reasons for and against?

A. Really depends on the market. Think back to Unit 1 topic and the free market (signalling, rationing and incentives). This may help.

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Simply add the required resources to your cart, checkout using the usual options and your resources will be available to access immediately via your mytutor2u account.

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Introduction to Market Failure | tutor2u Economics

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We've just flicked the switch on moving all our digital resources to instant digital download - via our new subject stores. For every subject you can now access each digital resource as soon as it is ordered. This will always be the latest edition of each resource too (and we'll update you automatically if there is an upgraded version to use).

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Q. Is there any case for leaving it to market forces?

A. Poverty is an example of market failure so there is not much of a case for leaving it to market forces. It is probably more relevant to consider How govts could intervene and by How Much. Eg. How progressive do they make tax.

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Q. How would you use Lipsy and Lancaster's analysis when evaluating?

A. You would not. Not on syllabus so not relevant for A2.

But it is in the textbook which the Chief Examiner wrote.

Forget the textbook, forget the Chief Examiner. It's not in the syllabus.

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Q. Why does only a monopsony have a divergent MFC and Supply curve for an inelastic supply of labour

A. Highly unlikely you would want to go into this theoretical detail in an exam situation as you need to ensure you apply, analyse and evaluate and not simply sound like a textbook. It is all about getting the right mix of theory! application! analysis and evaluation.

:( What if I want to know it for fun/for next year?

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Q. What would be the negative effects on a global wealth tax like Piketty proposes?

A. May mean some people move overseas (THE MOON?) - a brain drain, but probably the accountants would find a way around it so simply end up with some sort of Govt failure.

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Q. When did Japan experience deflation, and what was the major cause of it?

A. For almost 10 years. Only ended recently. Reasons not really needed but suffice to say falling AD and low cost of imports maybe due to the exchange rate could be reasons for an economy experiencing deflation.

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Why is allocative and productive efficiency desirable considering firms can still make supernormal profits?

Attempted answer

Allocative and productive efficency is desirable as it means that an economy is producing on its PPF, so this is desirable for thing like employment etc.

Supernormal profits can only be maintained in the LR if barriers to entry or exit restrict the entrance of new competitors, and there is no reason to say that supernormal profits are an inherently bad thing as they can finance key investment.  If a firm can gain SN profit at MC=AR then it is likely all outputs before this SN profits will be achieved. Some Gov. intervention in concentrated markets however does force producers to price at ATC so no supernormal profits is gained.

Plus it would be desirable for consumers. Mr Smith

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Q. For a question on poverty could you write a paragraph on how measures to reduce unemployment could reduce relative poverty such as supply side policies and then go into a bit of detail on that or would that be too macroeconomic

A. That would be fine providing you were ATQ.

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Q. Are there any examples of consumers being happy with the service of a monopoly firm?

A. Many consumers happy with Amazon due to low prices, choice and quick delivery.

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Q. Due to the capital appreciation over time and increased income and wealth with age, could increasing inequality in developed nations be linked to the ageing populations?

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Q. How much detail should we know about Horizontal and Vertical Equity?

A. This should help.

Horizontal equity is the principle that taxpayers in similar financial circumstances must be treated in the same way, ie people on the same incomes should pay the same amount in income tax.

In order to achieve vertical equity taxpayers with different resources must be treated differently, for example, by introducing a tax structure with progressively rising tax rates. If the Government decided to make the UK tax system much more progressive in a bid to reduce relative poverty, this would be in accordance with the principles of vertical equity - but there is often a trade-off between vertical equity and efficiency.

Critics of higher marginal and average rates of tax for high-income households claim that increased taxation creates disincentives to work and take entrepreneurial risks which can have a detrimental effect on the long term growth rate and prosperity of an economy.  (via Tutor2U)

In the past there has been an exam question asking to distinguish between equity and equality, as well as explaining the effects of equity in government policies. A question like this could easily be avoided, but it might be worth knowing for evaluation purposes when mentioning taxation.

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Q. What are the advantages of monopoly demerger?

Attempted answer. In terms of banking and disinvestment where banks have recently been selling assets the main objectives is to concentrate on the core business, which has become more important due to increased regulation and the concern of the threat of shadow banking. It also means that they can gain money from asset selling. This is much more likely that a full demerger.

Demerger of company like WHSmith is generally done to concentrate on the core business but also due to concerns of potential diseconomies of scale arising.

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Q. Is Biffa and Severn Trent Water an example of a monopoly demerger.

A. Have you got more info on this?

Here is the link of the information but can we use this as an example of a monopoly demerger?

A. STW are a monopoly in the supply of water and Biffa are involved in waste disposal so I feel this would not be an example as it will not increase the Contestability of either market.

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Q. hat is the trickle down effect?

A. When benefits of growth are experienced by the poor as well as the rich. For example, when entreprenuers expand business, it would create employment prospects. However could be argued contreversial due to the effects of the poverty trap.

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Q. Please could you explain the poverty trap I'm slightly confused

A. This occurs when those experiencing relative poverty are discouraged from working because any extra income they earn would be taken away in lost benefits and higher income tax.

Spot on. Thanks. Mr Smith

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Q. At A2 level what does government failure consist of? Thanks

A. Exactly the same as AS

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When discussing the lorenz curve, if I was to talk about the gini coefficient would the examiner expect me to go into depth mentioning specific figures?

A. Well i would personally only use it show how its gone up over years e.g. from 0.34 in 1980 to 0.41 in 2013 (gross income).. and from 0.28 in 1980 to 0.36 in 2013 (disposable income) ..This shows that the distribution of income and wealth has become more unequal over the past 20 years, and would be shown as an outward shift in the lorenz curve.. this was mainly due to reggressive taxation/reduction in top rates of income tax in the late 90's when labour came into power, which benefited high income earners most. Also between 1980 and 2013 there was large scale privatisation which also lead to rise in executive pay further widening the wage differential. And there are also other factors such as fall in real value of benefits, jobseeker allowance cuts etc... all things things combined had made the gini coefficient go up. So in regards to your question - yes, i think there should be some depth of analysis behind those figures.. i wouldnt take the risk of just putting figures down without explaining them. But im not sure.. may need to be reviewed by sir.

Really it is unlikely you will need to go into much detail. Mr Smith

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Q . Hi Sir, could you just go over the structure of the 10 marker please? Is it essentially the same as for the 15 marker? Thanks

A. Definitions and then ATQ. This may mean 2 paragraphs of analysis (depends on the question) and relate to the case study. A diagram could well be the starting point for one of the paragraphs.

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Q. I was wondering whether a diagram like this can be used to show an increase in income tax, and so there would be less incentive to work and the effect of the poverty trap would start to become more apparent. Also the substitution effect would make work less attractive compared to leisure thus people would work less and enjoy more leisure. However you can evaluate by saying higher tax reduces disposable income and so according to the income effect this may even encourage people to work more in order to maintain their income.

A. Yes this would be a good way to use this diagram.

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Q. can anything be done about barriers to exit in order to increase competition?

A. Barriers to exit actually increase the intensity of competition as firms would rather 'stay and fight' as oppose to face the costs of exit (asset write-offs, closure costs).

The barriers to exit vary depending on the type of market. Small firms (in monopolistic competition) may only have worry about penalty costs ending leasing arrangements for property, whereas large firm (in an oligopoly) must deal with the expense associated with writing-off items plant and machinery and higher redundancy costs.

So to answer your question, barriers to exit already exist in a market and act as an incentive/disincentive for firms to enter a market, they can't really be changed.

Barriers to entry on the other hand is a different story.. And probably what you meant to ask about in the first place.

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Q . Was one of the issues of the privatisation of Royal Mail that it was sold for less than its worth..? Not too sure

A. Certainly this was an issue as it was significantly undervalued by the govt so they could have got a lot more for it.

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Q . Do you have any examples of regulatory capture?

A. Look no further then Ofgem with the Energy Industry.

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Q. Any statistics I can include in Econ3 essays?

A. Not as important as in Macro. Perhaps some figures about The Living Wage or the number of people facing various types of poverty ( Fuel, Child Poverty). Also any market share figures you have for Monopolies or Firms in an Oligopoly.

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Q. Could you consider bidding on ebay first degree price discrimination?

A. I would say ebay is the closest real-world example to first degree price discrimination. Of course some consumers will not pay as much as they may have been willing to, but certainly in auctions for 'in demand' products the consumer who is able and willing to pay the most will win the auction.

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Q . Could you please give a good definition of consumer and producer surplus?

A. Consumer surplus is the difference between what consumers are willing and able to pay and the equilibrium price determined by the intersection of D+S. Hence it is the triangle left of the equilibrium point with the base being the price of the good.

Producer surplus is the difference between what price producers and willing and able to produce at and the price of the good, shown by the triangle to the left of the equilibrium point on the diagram.

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Q. What does regulation of a monopoly/ oligopolistic firm involve?

A.
One method is RPI-X, which limits the amount by which the price of the good can increase by inflation minus an 'x' value which is determined by government

The government can also act as surrogate competitors, forcing the firm to charge a price the government thinks they would charge in a competitive market

Also they could impose rate of return regulation based on how much profit is expected given the size of the firm

Also Price Caps such as with Train Operators.

There is also Windfall Taxes on profits and forcing firms to demerge.

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Would discussing the FPC's remit as an alternative/complementary measure to the MPC's role in housing prices and other financial risks be suitable for an interest rate/monetary policy question?

A. If by "FPC's remit" you mean their ability to impose stricter rules on mortgage lenders and force banks to demand higher deposits, then yes.

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To what extend could the Help to Buy scheme be argued to be reducing wealth inequality?

On the one hand it is fuelling higher house prices, causing wealth inequality. However the scheme means that first time buyers (many of which have low income & wealth) can now also benefit from the positive equity effect, which may reduce wealth inequality. Which effect is stronger?

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Q. is there any examples of mergers that have created a monopoly?

A . Not really. Competition authorities tend to prevent this.

A2. Wow, couldn't disagree more. Exxon-mobil merger in 1999, now the biggest company in the world and the strongest leader in the oil market.

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How long should we spend on each question?

A. DATA

Picking a context - 2 minutes

Reading the extracts - 5 minutes

5 marker - 2 minutes

10 marker - 10 minutes

25 marker - 35-40 minutes

ESSAY

15 marker - 15 minutes

25 marker - 35-40 minutes

I agree with these timings. Mr Smith

...But this would leave you with 6 minutes to spare. #JustSaying

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Q . How can you remember the way to draw the welfare loss triangle on the externalities diagram?

A. Go to right of the Social Optimum point for Negative Externalities and to the left for Positive Externalities

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Please can you explain X-efficiency

Attempted Answer.

Hi Danni… think I'm right in saying that X-inefficiency is when a firm is being wasteful with production costs. e.g. high cost of administration and/or organisation. Firms could easily reduce these costs and be productively efficient but poor organisation causes them to be X-inefficient. It tends to occur in nationalised firms where perhaps there is no profit motive to reduce these costs, hence why reducing X-inefficiency can be a benefit of privatisation.

Sorry, I tried to explain but guess I don't know either..

Whoever answered this has done a good job - well done.

Thank you whoever that was!

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Q. Would linking tragedy of the commons in with negative externalities in production be suitable?

A. Yes, Fishing would be a good example.

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Q. What types of policies could be used by the government to control the activities of oligopolists? (June 12 paper)

A. Take a look at the mark scheme for full details. Price caps such as with roaming charges, demergers, encouraging competition, stronger regulation to prevent collusion.

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Q. An example of Active Employment Policy?

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Q. An example of Active Employment Policy?

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A. Policies to increase geographical or occupational mobility of labour. A. specific policy might be making it harder for people to claim job seekers allowance and so incentivise work.

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Q. Is HS2 going to be operated by the government or will/has a contract been given to a private company for it?

A. Building the line will be funded by govt and then I expect it will be run by a private company like the other UK train lines.

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Q. Why is AR=MR in perfect competition?

A. As price is constant (demand is perfectly elastic) AR will be the same as price and the MR from producing an extra unit of output will be the same as the price.

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Q. What exactly is the "new deal" policy?

A. A policy to get the long term unemployed back to work. It has largely been replaced by other policies.

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Q. What is competition policy

A. Any govt policy to increase or ensure competition in a market. Possible policies include regulation and price caps. The presentation below may help.

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Q. It says on a mark scheme 'Stronger evaluation would prioritise the arguments' what does this mean

A. Say which is the most important or effective would show that you are prioritising the arguments.

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Q. In theory, are barriers to entry in a perfectly competetive market, high or low

A . Assumptions - No barriers to entry.

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Q. I tried to calculate a percentage increase on my past paper (unit 3 context 2 June 2013) and I got 41% but according to the mark scheme the answer is 72%. This is for the percentage increase from 325 to 560.

A. Difference divided by original x 100

so 560 - 325 = 235/325*100 = 72.3 (1dp)

Thank you to whoever answered this question.

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Q. Would this be an appropriate long run average cost curve diagram?

A. No real need for the 1/3 and 1/2 MES points. Could also show Economies and Diseconomies of Scale

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Q. What impact does deflation have on FDI and BoP? Thanks.

A. Will make our exports cheaper and so improve our current account.

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Q. What are some of the consequences of rising oil prices?

A. Focus on the impact on cost push inflation.

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Q. Why can it be argued that in some markets price discrimination has increased competition?

A. I guess a really good example here would be low cost airlines. In other markets it will depend on the barriers to entry and the level of monopoly power so price discrimination by train operators has little impact on competition. Hope this helps.

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Q. What is the govt reducing its spending on to reduce the budget deficit?

Thanks

A. Policing, Defence, Further Education, Local councils and Benefits are some of the areas being cut. The only protected areas are the NHS, primary and secondary education and foreign aid.

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Q. Why does deflation increase the real value of money and the real value of debt which would then lead to greater difficulty for debtors to pay back their debts?

A. Your assets, such as your house, are falling in value and yet you are paying the same amount back on your mortgage. This means that you are paying back the same level of debt but for an asset that is worth less.

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Q. Wages are sometimes not accepted at the going wage rate, this is voluntary unemployment. So on a diagram will it be shown as a lack of supply of workers? Also if this is the case then why do low paid jobs which are often 'unpleasant' such as toilet cleaners paid so low? Surely there shouldn't be much supply.

A. Voluntary Unemployment: you could do an demand and supply diagram with the wage rate below the equilibrium so it shows a shortage.

Think about the elasticity of supply of labour for your second question. Supply will be elastic as they are unskilled jobs (inelastic for doctors due to skills, education and time). As a result any increase in demand for low skill jobs will only lead to a small increase in wages. Furthermore in some of these jobs increases in immigration has increased supply and so reduced wage levels.

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Q. Hi could expalin how firms have the business objective to market share? How would this he shown on a diagram?

A. May want to improve their market position and so power and so may focus on increasing market share rather than profit. They may also want to drive a competitor out of the market by cutting prices and so gain market share. You could show this with lower prices on a Monopoly diagram.

Also managers in a business may be measured by sales rather than profits and so will focus on increasing sales.

A2. Market share = revenue maximisation. Show the output on a monopoly diagram where MR=0

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Q. Please may you give me some good evaluation points regarding Monetary and Fiscal Policy

A. Will depend on the question as you need to ensure you answer it. Some things you may want to consider are:

Interest Rates are likely to increase in the next year as the economy grows and house prices continue to rise. Think of the impact on consumers who have been used to such low rates for so long.

The main focus with Fiscal Policy at present is austerity as the govt continues to try and reduce the Budget Deficit. Unlikely to see tax cuts in the near future and govt spending continues to be cut.

There is an increasing view that globalisation has meant that the impact of monetary and fiscal policy is less prominent, eg changes in inequality driven by outsourcing labour costs to developed world and less to do with changes in fiscal policy.

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Q. How sustainable is the central bank for holding foreign currency to tackle fluctuations in currency flowing in and out. Also how do they acquire this foreign reserve for different countries?

Thanks

A. A central bank would need a lot of Foreign Reserves if they were constantly intervening to control their exchange rate. China has the reserves to do this. The video below nicely explains how a Central bank may get their reserves.

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Learn for free about math, art, computer programming, economics, physics, chemistry, biology, medicine, finance, history, and more. Khan Academy is a nonprofit with the mission of providing a free, world-class education for anyone, anywhere.

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Q. What are the advantages for consumers of price discrimination?

A. Cross subsidisation of certain goods or services eg rural buses, prescriptions. Also clearly some consumers will pay a lower price eg. off-peak travel.

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Q. Why is there meant to be lower interest rates in a single currency euro than a country just in the single market?

A. A single currency is often seen as a safer and stronger currency and so bond yields are lower and so interest rates are lower. This is not really on the syllabus so probably a better thing to talk about with interest rates is the fact that an individual country loses control over their Monetary Policy and the consequences of this.