Reading Material - Unit 4

How does the budget filter down into the economy? The Nut Graph features an article by Tony Pua on the likely impact that the credit card tax will have on consumer spending in Malaysia. The Edge presents a differing view.

Reading Material - Unit 1 & 3

Is snail mail dead? This article from the Economist discusses the factors leading to the rapid fall in demand for traditional postal services across the world, and how service providers are evolving in response to this trend.

Unit 1 students, are you able to "Identify three factors contributing to the decline in postal services demand"?

Unit 3 students, are you able to "Evaluate two strategies that postal services providers could pursue to maintain their profitability"?

Reading Material - Unit 2

This article presents the limitations of GDP as a measure of economic growth - there are some useful points as well as evaluations in here. Stiglitz raises an interesting point - is there a trade off between GDP growth and the protection of the environment (i.e. do we choose to increase one at the expense of the other)? Or should GDP actually begin to reflect the fact that choices made to protect the environment can actually be good for the economy, and conversely, choices made that destroy the environment can reduce GDP in the long run? This article is also useful for Unit 4.

See related article from the Economist on the relationship between GDP and the environment in developing countries, and also a handy GDP Q&A by the BBC.

Reading Material - Unit 1

A brilliant (and doomed) template for healthcare reform

In this article, Tim Harford provides an entertaining discussion of some of the main weaknesses of the NHS and the US healthcare system. Check out his blog as well for many articles that are relevant to the A-Levels syllabus.

Reading Material - Unit 4

Africa's Population: The Baby Bonanza

This interesting article from the Economist provides useful insight on the demographic transition and the demographic dividend that Africa is undergoing. It explains how current population trends are both a blessing and a curse for the continent.

Sample Notes (Unit 1 - Competitive Markets)

Unit 1 (previously Unit 2) - Market Failure - Externalities

Externalities (Spillover Effects)

• Externalities arise when private costs/benefits are different from social costs/benefit
• Basically, this occurs when an economic transaction affects a third party, separate from the consumer and the producer
• There are positive and negative externalities

Negative Externalities

Example: A factory producing shoes pollutes the river. The cost of shoe production is paid by the factory, but there is also the cost to the villagers who can no longer the water to wash, fish, bathe and have to source water elsewhere. These villagers are affected by a negative externality.

Private cost (PC) – cost of an activity to an individual economic unit, e.g. consumer/firm

Social cost (SC) – cost of an activity not just to the economic unit which creates the cost, but to the rest of society as well

If SC > PC à there is a negative externality (external cost)

SC = EC + PC

Positive Externalities

E.g. I am infected with H1N1. By seeking early medical treatment and then quarantining myself, I benefit a) myself; but also b) all the other people that I do not infect, as a result of my precautionary action.

Private benefit (PB) – benefit of an activity to an individual economic unit

Social benefit – benefit of an activity not just to the economic unit creating the benefit, but to the rest of society too

If SB > PB à there is a positive externality (external benefit)

SB = EB + PB

Markets do not account for these externalities; they are not included in the prices we pay.

The price mechanism only reflects private costs/benefits.

This is a form of market failure.

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Sample Notes (Unit 4)

Unit 4 - Constraints on Economic Growth : Population Growth

Population growth

• The estimated population growth rate for most of world history is approximately 0.002% (in other words, 20 people per million)
• World population growth peaked in 1970, at 2.35%
• Today the world population growth rate is approx. 1.15% a year, significantly lower, however there are still regions with high population growth, e.g. Africa (2.4%)
• Developing countries tend to have much higher birth rates than death rates. This results in higher population growth rates.
• At very low levels of development, the birth rate and death rate are both high.
• Then as development begins, death rates tend to fall very quickly
• Infant mortality falls as mothers and babies get access to better healthcare
• Increased nourishment due to increase in income – fewer deaths from starvation/malnutrition, longer lifespan
• Birth rates, however, take much longer to decline
• It is usually only when modernization has taken place, to the point that women work, marry later and have fewer children in order to advance their careers that birth rates start to fall.
• Thus until this happens population growth will be high – children are seen as desirable, an addition to labour on the farm, and insurance against old age.

Problems with high population growth

• Higher dependency ratio
• Dependency ratio = Number of youths (under 15)/ Number of economically active adults (15-64)
• The higher the dependency ratio, the more difficult it is for those who are working to support those who are not
• E.g. UK and Sweden, dependents – 18%, workforce – 65%. Versus Nigeria,Ghana,Bangladesh – 40% workforce, 40% dependents
• Thus GDP growth has to be shared amongst more people. Developing countries tend to have much higher dependency ratios (see diagram below).

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Sample Answer (Unit 3 - Business Economics and Economic Efficiency)

Unit 3 (previously Unit 4) January 2006 - Question 11 – The Low Cost European Airline Market - Parts (a), (d) and (e)

a) Explain why a low cost airline company such as Easy Jet ‘typically generates all its profits in the 2^nd half of the year’ (line 6) (4)

• Demand for air travel is seasonal, with its peak in the summer months. This translates into higher revenue, which means higher profit. Also, end of year bonuses, end of year holidays lead to a peak in air travel. Vice versa, winter months are off season, thus leading to lower revenue.
• Fuel costs are lower in the summer months, as the need for fuel for heating purposes is lower

d) Examine the ability of Easy Jet and Ryanair to survive the pressures of ‘lower air fares and increased competition’ (line 17). (10)

• Both are the leaders in the market, which means they have exploited substantial EOS and thus have lower AC than the competitors. Their high profit means they can sustain losses for a longer period than their competitors, either by engaging in a price war, or refusing to reduce price at the risk of a fall in revenue.
• Evaluation : There is a danger of DEOS as the firms may experience inefficiencies as they expand, e.g. managerial slack.
• The firms are well established in the market, thus have strong, familiar brand names. Customers may have loyalty to the firms, thus enabling them to sustain revenues even as competitors slash prices.
• Evaluation : For many travellers, especially in the low cost market, price is more important than the airline.
• The firms have established networks, indicating they have borne the initial costs of establishing their networks – planes, routes, flight slots etc. This acts as a barrier to entry for newer entrants to the market.
• Evaluation : In LR, increased consolidation will mean that new entrants will compete for more and more routes. High supernormal profits will make it worthwhile to overcome the barriers to entry.

e) Assess the extent to which the European airline industry is contestable. (10)

• Contestable
• New entrants entering, indicating high contestability
• There are many firms with intense competition and falling profit levels
• Falling fixed costs – online bookings reducing the need for ticketing staff, possibility of leasing planes or second hand plane market may be a way to work around high initial capital costs.
• Non-contestable (Evaluation)
• Falling profitability and high potential EOS means eventually the market will consolidate, mergers will occur leaving a few large, dominant firms
• Bigger firms with lower AC have the ability to hold out longer in a price war
• Start up costs remain high despite possible reductions in cost mentioned above
• Strong brands and established networks may mean in the long run the bigger firms will hold out while the smaller ones price themselves out.

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Sample Answer (Unit 2 - Managing the Economy)

Managing the Economy

Unit 2 (Previously Unit 3) - January 2006 - Question 1 - parts (b) and (d)

b) Using an aggregate demand and aggregate supply diagram, examine the likely implications for the UK economy of imposing ‘more regulations on businesses’ (7)

• Diagram with AS shifting left
• Imposition of increased regulations means an increase in COP, e.g. businesses have to hire extra people or work longer hours to make sure they are complying with regulations, extra costs to change production methods if they are not.
• AS shifts left, prices rise, output falls.
• Evaluation (2 marks)
• Businesses may increase attempts to enhance productivity levels. This results in a fall in costs since each unit of input is now more productive, and thus AS may eventually shift right, offsetting the effects of the regulation.
• Increased regulations may cause confidence levels to fall, causing investment and therefore AD to fall as well.

d) To what extent might ‘shifting resources… into the public sector’ (line 10) assist the government in achieving its macroeconomic objectives? (15)

• Shifting resources into the public sector implies expanding fiscal policy and spending more in the public sector, e.g. higher budgets to government offices
• This attempts to stimulate AD, which should lead to an increase in price and output levels. Can draw diagram here.
• Increase in employment
• By spending more the government will expand the public sector, which will involve more jobs being created, higher employment levels
• However this may be offset if there is a decline in the private sector job opportunities. Government spending alone will not be enough to carry a sustained rise in job opportunities.
• Economic growth
• If government investment is towards infrastructure, e.g. roads and telecommunications, productivity in the country may be increased.
• This would stimulate confidence and investment in the economy, which would lead to higher growth rates.
• However productivity in the government sector itself is very low, e.g. 10.2% increase in spending à only 1.7% increase in output
• Inflation
• Increased government spending leads to a danger of demand pull inflation. That is, as spending power rises, C and I begin to rise, causing AD to increase, thus increasing the price level.
• Evaluation: There is an inherent conflict between expansionary fiscal policy and inflation rates; the extent of the problem depends on the level of increase in the government’s spending. Also, depends on whether there is potential growth, i.e. whether AS shifts out.
• BOP deficit
• If government spending encourages productivity, and thus make UK products more competitive, then exports will increase.
• Evaluation: But as incomes increase due to more job opportunities, the additional income may simply be spent on more imports. This would worsen the BOP.

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How Do I Evaluate?

For students who struggle to come up with evaluations, I often recommend a set of questions that provide them a starting point to think critically about the points(s) they have just made. Some examples of these questions include the following:

Will this statement be true in the long run?

Does the truth of this statement depend on any other factors?

What action by the government could change this statement?

We can use the earlier example to illustrate how each question above can help us think of an evaluation:

Question : Discuss one likely consequence for the environment of continued Chinese economic growth of ‘8 percent for the next 20 years’.

Point : One consequence of this rapid growth is the depletion of non-renewable resources. China has become the world’s biggest consumer of almost every raw material and given its large population and rising income, this demand is going to increase dramatically in years to come. As prices of raw materials rise, producers will extract these resources faster, depleting natural resources at a faster rate.

Question: Will this statement be true in the long run?

Evaluation 1: However, in the longer term, high commodity prices will encourage producers to conduct more exploration to obtain new mines, oilfields, etc, thus increasing the global supply of such resources.

Question: Does the truth of this statement depend on any other factors?

Evaluation 2: However, the pace of depletion is dependent on how much technology evolves to become more efficient, e.g. through more fuel efficient vehicles to reduce petroleum consumption and/or machines that require lower energy levels. This would slow the depletion of non-renewable resources.

Question: What action by the government could change this statement?

Evaluation 3: However, the Chinese government is investing heavily in alternative energy such as wind and solar power, which may reduce China’s demand for non-renewable resources.

Using questions like this can be very helpful, especially when faced with a time constraint during examinations. There is a wide variety of potential questions that can be used - the list above provides an example and is by no means exhaustive.

What Does 'Evaluate' Mean?

One of the most common problems that students have with the exam questions relates to questions that require an element of ‘evaluation’. These questions begin with words such as 'assess', 'discuss', 'examine', and 'evaluate'. In such questions, beyond the ability to provide a valid point, students are also expected to point out limitations with their argument, or support the argument further by providing deeper analysis.

Many students are able to come up with some good points in their answers. Below is an example:

Question : Discuss one likely consequence for the environment of continued Chinese economic growth of ‘8 percent for the next 20 years’.

John Brown’s Answer

One consequence of this rapid growth is the depletion of non-renewable resources. China has become the world’s biggest consumer of almost every raw material and given its large population and rising income, this demand is going to increase dramatically in years to come. As prices of raw materials rise, producers will extract these resources faster, depleting natural resources at a faster rate.

Sounds pretty good, right? Unfortunately, John is missing the second part of his answer, namely the evaluation…

There are fewer students who can actually provide critical evaluations for the points they have given.

Here is an example of a better answer:

Jane Keener’s Answer

Point: One consequence of this rapid growth is the depletion of non-renewable resources. China has become the world’s biggest consumer of almost every raw material and given its large population and rising income, this demand is going to increase dramatically in years to come. As prices of raw materials rise, producers will extract these resources faster, depleting natural resources at a faster rate.

Evaluation: However, in the longer term, high commodity prices will encourage producers to conduct more exploration to obtain new mines, oilfields, etc, thus increasing the global supply of such resources.

Full marks for Jane! But please note that the ‘correct’ evaluation is never set in stone; there are usually many different possibilities that are acceptable.

In the more advanced units, (e.g. Unit 5 & 6), evaluation marks can account for as much as 40% of the total. This implies that without the ability to provide strong evaluations, it is not possible to excel in the A-Levels examination.

For further information, please see 'How Do I Evaluate?'