Possible Questions in Section B Data Response Unit 3: Business Economics and Economics Efficiency

All right. Here comes Part B

(1) How to choose between the two?

As mentioned in earlier posts on Unit 2, have a look at the questions for both Q9 and Q10. I don’t encourage candidates to go through the extracts first. It would be a great waste of time going through everything and end up making a u-turn if the questions turned to be difficult. The aim of reading those questions is to get the ‘feel’ of how approachable they are. Normally I will pick those questions where I can roughly draft the answers in my head without making much reference to the extract. For instance, ‘Assess the price and non-price method that the brewery firms can adopt...” or perhaps something like “Discuss whether the industry is contestable...”. If both questions are equally student-friendly, then maybe it is time to quickly read through the extract. Pick the one where most answers are available in the texts. It will make your life much easier since you are likely to take lesser time crunching for points and all you have to do is elaborate

(2) How many questions to expect?

Under the new specification, there are only four questions (a) to (d). This is not a good news to me since that indicates each question especially the one with evaluations is likely to carry higher weight say 12/14/16 marks

(3) What is the breakdown?

First question is meant to help candidates and therefore is likely to be easy. It carries 4m. For subsequent questions they are normally evaluative types. Marks will be split equally. For example, a (12m) question will be (6m) for explanation and (6m) for evaluation. Within the (6m) itself, candidates can adopt (1+2+3) or even (2+2+2) or (3+3) and this is applicable for both explanation and evaluation. If the question were to be (16m) then the breakdown would be (8m) for explanation and (8m) for evaluation. The (8m) itself can be (4+4) or (2+2+2+2) or even (3+3+2). If there is keyword in the question, please don’t forget to provide definition and this may be awarded with (1m) or (2m). If explanation carries (6m) or (8m), this may act as a complementary or substitute. Total mark for explanation will always be (6m) or (8m) in this case

(4) Possible questions?

(a) Identification of market structure. This is most likely to appear as the first question. It carries (4m). Usually the answer will be oligopoly or monopoly (1m). Candidates are required to provide definition or explanation of its characteristics (1m) and finally making reference to extract or figures provided (2m)

(b) Definition related. This will also likely to appear as the first question. They may ask you to make reference from the extract and you will have to identify the concept from the statement given. For instance something to do with forward vertical integration (1m). Then candidates are required to define that (1m) and finally strengthen the explanation by making reference to certain lines from the extract. Other possible definitions are like EOS, sunk costs, price cap of RPI-X, RPI+K, concentration ratio etc. Remember, they must be monopoly or oligopoly related definitions since it is highly unlikely that the extract is something about perfect competition or monopolistic

(c) Contestability. Candidates will have to mention that the industry is not contestable due to reasons like high advertising expenditure, high research costs, patents etc. These points maybe available directly from the extract. In evaluation, candidates may contradict by providing evidence that the industry is contestable to certain extent. Again do make reference to the extract. Chances are, what you need is available either directly or indirectly from the extract

(4) Price and non price competition. The easiest of the lot. Provide answers like limit pricing, predatory pricing, sales maximisation, buy 2 free 1. As for non-price competition, mention about mergers to eliminate competitors, advertisement, improve quality of goods, research on production techniques, loyalty cards etc. Also candidates have to be street smart. Some points are universal while some are not. Consider loyalty card. It is more suitable for issues like consumer goods and not for utilities like electricity and water. The same goes for marketing and promotional campaign. It is more suitable for chocolate, cars and electrical goods rather than products with homogenous features like water and electricity. Expect the concept of Game Theory to be incorporated together with this

(5) Price discrimination. Candidates must be ready to provide the definition for this and assumptions behind the operation of price discrimination. Diagram is expected. As for evaluations, one can argue that lower price in the market with elastic demand may attract the attention of regulators if it set too low, the gap of prices between the one with inelastic demand and elastic demand should not be too large if the firm has considerable reputation, or else the good will be perceived as ‘cheap’ etc

(6) Role and power of OFT and Competition Commission. Mentioned that the role is to ensure healthy competition and protect consumers’ interest. It has power like confiscating documents, fine up to 10% of global sales revenue, imprisonment of directors etc

(7) Thinking skills. Some of the answer may be available in the extract
• Evidence that price fixing has taken place
• Benefits from horizontal merger
• Impact of high prices onto producers and consumers
• Evidence of high sunk costs
• Why Firm X is charging higher price in one market and lower in another?
• Is it inevitable that smaller firms in oligopoly market will exit in the industry in long run?

Well that’s all. My time is really tight in these two weeks. Hope I can still sneak some time in between tomorrow to upload another posting on the 6 most effective evaluation techniques , some standard evaluation for Unit 3 and common errors

Tips to Score Well for MCQ Unit 3: Business Economics and Economics Efficiency (Edexcel)

General technique

(1m) for correct option, (1m) for relevant definition and (2m) for explaining why the correct option is chosen

Specific techniques

I find that students are generally struggling especially to secure the remaining (2m) from explanation. Well, worry no more. I can assure you that if the techniques below are carefully applied, I can help you to increase your chance of scoring by 50%

• If you can support your answer with a diagram, please provide one. This is very applicable to questions related to topics like revenue and costs, perfect competition, monopoly and monopolistic
• If you are given a diagram, try to annotate or add curves. It may carry (1m) or (2m). Again this is applicable to topics outlined above
• If you are given a table with total costs or/ and total revenue, try to perform calculation such as marginal cost, average cost, marginal revenue and average revenue
• If you think that it is hard for you to explain a scenario say economies of scale, why AFC is falling as output increases etc try to provide simple numerical explanation. It will definitely help you
• If you have chosen the wrong option, under the new Edexcel Unit 3 specification, you can still secure up to (3m) from (4m). As such there is no need to panic if you are really not sure about the option
• If you have chosen the correct option but do not know how to explain it correctly, you can gain a maximum of (2m) by explaining why the other options are incorrect. Having said so, you ought to be careful in choosing which option to be eliminated. Make sure that you have sufficient knowledge. Secondly, you are reminded that not all options can be corrected as some of the answers are totally irrelevant that there is no way it can be corrected

What are the possible questions in MCQ?

Perfect competition
Watch out for topics like productive and allocative efficient. Also candidates must exhibit knowledge like why perfect market firms are only making normal profits in the long run. There is possibility that candidates may have to choose one out of five options, which resembles perfect market. They may provide options like coal mining, pharmaceutical, hairdressing, newspaper firms and wheat. Remember to choose answers that are agriculture related. Remember to draw diagram for questions on productive and allocative efficient as well as issues like supernormal or normal profit

Monopoly
Watch out for price discrimination. Remember the definition, assumptions, diagram and it what way price discrimination has been practiced. Productive and allocative efficient also likely to come out. Definitions of these two are essential and remember to draw diagram to support your answer. In the past, exam questions are extremely popular on change in objectives say from profit max to revenue max etc and change in costs (MC and AC) or change in revenue (MR and AR). However I have strong feeling that these topics are unlikely to be tested under new specification

Oligopoly
Make sure you know the following facts well. Oligopoly firms are few in the industry, they are highly interdependent, have high barriers to entry, price collusion/ price fixing/ tacit collusion is common, prefer non price competition, not contestable and has high sunk costs, high concentration ratio and often draw the attention of OFT, Competition Commission and European Commission. Watch out for few types of questions like benefits of mergers, game theory, concept of branding or advertisement and how is it related to high barriers of entry and in what way their act attracts the attention of regulators. It could be price fixing, agreements with distributors etc. Kinked demand curve is no longer in specification and therefore will not be tested

Monopolistic
Again, watch out for topics like productive and allocative efficient. Candidates have to remember that all firms that have price making ability are generally not efficient in both productive and allocative. Also you are reminded that only normal profits are made in the long run due to low barriers of entry and exit (perfect market has no barriers to entry and exit). Also they may ask you to choose which of the possible five options that represent monopolistic firm. It is easy to differentiate. Look for the business that is likely to have the lowest possible costs among the five

Regulators
Make sure you are familiar with roles of regulators like maintaining healthy competition and to safeguard consumers’ interest. Also expect possible questions on price capping like RPI-X and RPI+K. There are many ways to confuse students with these two terminologies. Under the new specification, candidates are required to have knowledge on price capping as well as profit capping and be able to identify the pros and cons between these two. Somehow the possibility of profit capping to reappear in this round of Unit 3 is remote since nothing much can be asked and considering that it is just recently tested (January 2010)

Hope this helps!! I will upload the next posting on Section B in a couple of hours. Stay tune.

Common Problems in Unit 2: Managing the Economy (Edexcel) and How To Improve It

(1) Not knowing which question to choose
This is the largest dilemma for candidates. If wrong question is picked, 10-15 minutes would have been wasted just like that before a U-turn. Candidates would normally panic, unable to think rationally and carefully, unable to finish the paper and end up re-attempting the paper in the next seating. So I strongly suggest students to look at questions first rather than the extracts. This is meant to get the ‘feel’ which question is easier and more appealing. How appealing or how easy depends on how much time candidates have spent revising and which part of Unit 2 they spend more time on. Provided that the student is well-armed for the paper, definitely there will be one question that is more appealing than the other entirely. Practice past year papers sufficiently. At least 7-8 sets will do. Look for exam questions that are familiar and perhaps have repeated themselves, for instance weaknesses of GDP to measure standards of living, definition of GDP, difference between claimant count and ILO measure of unemployment, issues MPC will look at before interest rate decision etc

(2) Are extracts trivial?
To be honest, yes. I realise that most of the questions can actually be answered without referring to the extract. It is provided for minor purposes, for instance allowing candidates to make statistical reference or strengthening explanation. Macroeconomics involves explanation of a process and extracts will not provide you with transmission mechanisms. For instance how does fall in income tax can affect current account, joblessness worsening government finances, high prices leading to wage-price spiral etc.

(3) Do not understand extract
Most candidates have this problem. The reason is because they are reading it too fast lacking the sense of appreciation and therefore not being analytical enough. Consider this sentence:

“Global output growth falls and jobs in UK will be adversely affected”
Full interpretation should be like this. Major economies around the world such as US, France, Germany and many other trading partners of UK are not performing well. Fall in output growth means fall in income. Demand for British goods will fall and manufacturing sector especially is expected to shed more jobs

Spain’s record economic growth of 2.8% in 2006 explains for its high inflation and worsening current account deficit
Candidate should be able to see this. Growth and inflation come together. If growth is high, the economy must be ready to tolerate high inflation. Or it could be high growth leads to higher income and therefore the economy must have experienced demand-pull inflation. Current account deficit worsen probably due to higher income. More imported goods are demanded. At the same time, when inflation is high, Spanish goods lose competitiveness. Demand for exports falls

(4) Doing essay first
I wouldn’t suggest candidate to do essay first. There is always a temptation to finish what we have started, more over an essay that carries 30m. I’m afraid that a candidate might have spent too much time with the essay, lacking the time for other questions. I have a student who took 1 hour for the essay leaving only 30 minutes for the rest of the paper. That is extremely dangerous. The thumb rule is 1m = 1 minute. The paper carries 80m and candidates have 90 minutes. So that means for a 30m essay, candidates should not spend anything more than 35-40 minutes.

(5) Wrong approach in practice
Normally we go paper by paper, year by year but in my class I go question by question. As mentioned earlier there are many questions that do not require any reference to the extract. It is more effective that way. Doing question by specialisation allows for better understanding of the trend of questions and also allowing the entire sets of papers to be completed faster


(6) Not knowing how to approach the question
Very simple. Remember the acronym of REDD. R-reference, E-valuation, D-define and D-diagram. A question always consists of one or more of these four elements. So, before writing the answer check out for these four things

(7) Not knowing when to evaluate
Here is another acronym. JE-DATE which stands for Justify, Examine, Discuss, Assess, To what extent and Evaluate. I realise that evaluation is always 4m for short questions. Candidates can provide one evaluation point if it is worth to be considered 4m or two evaluations which carry 2m each

(8) No systematic approach towards 30m essay
I have seen candidates evaluating at the beginning of the essay!!! Very ambitious I must say. Keep things simple. Write with simple English and yet providing powerful explanation. Lots of marks will be awarded to candidates that have good economics command words, being able to explain clearly and showing good working knowledge. I propose the 6-12-12 approach. 6m for definition/ explaining phrase (2m) and diagram of AD-AS (4m). Explanation carries 12m. My suggestion is 4+4+4 rather than 6+6 unless the candidate is very confident of the explanation. The same goes for evaluation of 12m

(9) Poor usage of link words
Poor candidates may use words like HOWEVER or HAVING SAID SO in their explanation. Bear in mind that these words are more suitable to be used as evaluation. Common link words I use in my explanation are furthermore, besides, this leads to, this is because, as such, therefore, first, secondly, last but not least etc.

(10) Lack of economics vocabulary
Sometimes we or even the examiners might get too tired using or seeing the word increase, increase, increase and increase all over the place. Some other words that can be considered are like sky-rocket, bullish, rise, raise, heading upward etc. For the opposite, candidates may consider nose-dive, bearish, fall, downturn, plummet other than decrease. Other than that, it is strongly advised that more economics terminologies are used in writing. This will exhibit the ability of candidates to relate theories to working knowledge and is something that often impress the examiners

(11) Superficial explanation
There are certain explanations that are logical but they are just “highly unlikely” to happen:

“Rise in unemployment will lead to higher suicidal rate....” (unless to the extent of Great Depression)
“Failure to meet the inflation target will cause Mervyn King to resign...” (unless the target is not met for ages and the Governor shows incompetency)
“Due to the ballooning budget deficit, UK government is likely to bankrupt...” (unless UK faces the same fate to the scale of Iceland)

Avoid the above at all cost!! More queries can email me at igniz_low@yahoo.com or drop a message at the query box.

Possible Questions For Edexcel Economics Unit 1: Competitive Markets-How They Work and Why They Fail? (Data Response, Section B)

Examination tips (highly possible questions) :

Commodities

(1) Demand and supply diagram to show changes in price. However, it is more likely an increase than decrease. Normally is the first question and as such no evaluation is needed. Sometimes the marking schemes indicate that students must give ALL the points for DD or SS while some other time either one point will do. In such circumstance, my advice is to give ALL since we do not know exactly what to expect from the marking scheme. 100% to appear in examination and will usually carry 6m-8m. Marks can be used as a guide as whether both DD and SS will move or either one. 6m likely one curve to move while 8m both

(2) Price elasticity of demand for the commodity. First thing to do is define. Then explain that it is inelastic due to its nature being a necessity. May need to refer to extract and figure. Evaluation is expected. Normally carries 6m-8m

(3) Cross elasticity of demand. Is possible to be tested if the extract mentions together diamond and gold, aluminium and tin etc. Most likely to be substitute than complementary. Must mention that they have positive XED and are substitutes. Explain the relationship say a rise in price of gold leads to rise in demand for diamond by jewellers. Candidates may be asked to make reference. Evaluation is expected

(4) Price elasticity of supply. Providing definition is the first action to be taken. Then, explain that it is inelastic in supply in the short run and elastic in the long run. Commodities, houses and agricultural products have this sort of nature. In evaluation, candidates can argue that this nature may not be true. For instance, better technology can expedite growth of crop or improve chances of oil discovery. As such short run it may not be inelastic. The same goes for long run. While the crops are ready to be harvested and supplied to the market, hurricane or some natural disaster may take place. As such it will be inelastic in supply even though in long run. Likely to carry 8m-10m

(5) Buffer stock. Explain what is meant by buffer stock. Draw a diagram and provide explanation how it works. This question normally carries 12m where 6m are catered for evaluation. Typical evaluation can be used, for instance expensive to set up, costly to maintain due to storage, administration and logistic etc, likely to fail based on experience with other form of commodities, may not have enough stocks to release into the market during shortage etc

(6) Minimum guaranteed price. Provide definition for this, then draw the diagram with a horizontal line above the equilibrium price. Explain the purpose of the scheme and how it is related to the question. Normally we provide supportive argument. In evaluation, I recommend contradiction as one of the possible techniques. Candidates may say it increase complacency, fall in quality of crops, opportunity cost of government spending, damage the livelihood of farmers in other poor developing countries due to dumping etc. Likely to carry 10m-12m

(7) Calculation. Students are expected to perform simple calculation involving percentage. For instance, percentage of change in price or income or quantity demanded etc. Likely to carry 2m

(8) Possible economic effects. It may carry 10m-12m. Questions may sound like ‘what are the economic effects of rising oil prices/ increase in production costs/ increase in congestion charge’ etc. 6m of evaluation is expected

Market failure

(1) Definition of PC and EC or PB and EB. May carry up to 4m for both definitions

(2) Examples of PC and EC or PB and EB. Candidates may be asked to show relevant examples which may have been provided in the extract. In some situation, candidates will have to think one of their own. For instance, private costs of consuming more oil may include rise in production costs and external costs are like air pollution, noise pollution, respiratory illnesses, fall in value of property facing main road etc. May carry up to 4m

(3) Cost-benefit diagram. Candidates will be asked to provide either a diagram of cost or benefit. The diagram is expected to carry 4m. Students may need to provide some relevant explanation which may carry 2m-4m. Evaluation is definitely available. In all, this question carries 10m-12m

(4) Government failure. Students will have to make reference to the extract and explains as in why such government intervention would have led to more problems. In evaluation, again I suggest contradictive statements. Explain why it is not entirely government failure. Most probably 10m

(5) Taxation/ subsidy. Provide definition for taxation/ subsidy. Draw a diagram to strengthen your explanation. Try not to leave the diagram unattended and if can provide short explanation. May need to make reference to extract. Last part will be evaluation. Normally carries 10m-12m

(6) Assess a solution. A student may be given some solutions to congestion or pollution in the extract and then asked to evaluate it. Most challenging questions may come from here since the extract is unlikely to explain the remedies in detail. Candidates are expected to have equipped themselves with specific knowledge on the remedy which include how it works to solve the problem and problems that may arise. 8m-12m is expected

To be continued..............

How To Remember Economics Defintions Effortlessly?

Why some economics students find it extremely hard to remember definitions?

(1) Memorising without understanding. It is a fact that most students are looking for an easy way out. While it is true that they can remember definitions faster via ‘blind memorising’, it is highly unlikely that they are able to retain what they have memorised. In some cases, one would have forgotten entirely what they had memorised hours ago while those who have photographic memory may be able to retain them slightly longer, perhaps days. The impact of such action is obvious. In exams, lecturers or examiners are often fed with wrong definitions. Some candidates provide the definition of monetary policy for fiscal policy or even supply side policy while in some situation use the inappropriate words or even left out certain key words

(2) Lack of appreciation. Some students may be able understand the terms, concepts or phrases but they just can’t retain it. This is because they fail to relate it to their personal life or events around them which can actually enforce learning and understanding. In short, candidates do not think out-of-box and they see everything as if it is textbook-like

(3) Too tired. This may not be a very significant reason but it does contribute to poor memory. Those who study last minute, and in fact 90% candidates fall into that category will choose to revise during wee hours where the brain should be laid to rest

How can a person remember so many definitions easily?

(1) Imagining a curve/ graph. Consider the definition of PPF (production possibility frontier). It is a curve (yes it is) that shows the combination of two goods (refer to the horizontal and vertical axis) that can be produced in an economy (the part where it concave from the origin shows an economy) if all resources are fully and efficiently utilised. Let’s take another example, say consumer surplus. It is the difference between what consumers are willing to pay (look at the part where demand curve intersects the vertical price axis) and the actual market price (now imagine the equilibrium price which is lower)

(2) Some common sense. Sometimes we cannot look at the definitions from ‘economics’ angle but rather ‘English’. Consider tradable pollution permit. What is permit? It means allowance and so pollution permit must be allowance to permit. Tradable means can be traded in market or bought and sold in the market. So in full it would be an allowance to pollute that can be bought and sold in the market. Now consider government failure. In layman term, it means government has failed as in failed to achieve their objectives. Tax onto cigarettes failed to reduce number of smokers or fail to raise revenue needed. In proper, it would be when government intervention to solve an economic problem leads to net welfare loss. Why net welfare loss? It brings more ‘bad’ than ‘good’ overall.

How about monetary policy? Here we have monetary as in MONEY. As such it must be related to interest rates. It is rather amusing when I see definitions like monetary policy is the manipulation of tax and government spending to influence movement of AD. Consider marginal revenue. Again understand word by word. What is marginal? It means every additional one. So marginal revenue must be additional revenue due to extra one unit of output sold. Simple isn’t it?? Ok, what about contestable market? First what is contestable? It means easy to contest or easy to compete. Put it together, it means a market which is easy to compete with one another and this can only happen when the barriers of entry and exit are low. So the official definition is a market where there are low barriers to entry and exit

These are just some examples from the non-exhaustive of list that I can think of. Good luck

Strategies to Score Well for MCQ Unit 1: Competitive Markets- How They Work and Why They Fail?

1. Each multiple choice question (MCQ) carries 4m. Candidates can generally achieve full 4m by choosing the correct option (1m), provide relevant definition for the concept tested (1m) and explain why or how that answer is related to the question (2m)

2. After years of observation and answering experience, I soon come to realise that there are actually unique techniques that can be employed to improve the answering ability of students. I break them into five, with two diagram techniques, two figure techniques and last one is rejection method

3. Diagram techniques
Is highly applicable to topics related to PPF, opportunity cost, demand and supply, consumer surplus, producer surplus, PED, XED, YED, PES, taxation, subsidy, market failure involving externalities

(a) If a diagram is provided, try to figure out what you can do to that diagram. Normally, you can get 1m-2m by annotating the diagram, shading an area e.g. additional area of consumer surplus, total subsidy payout by government, welfare gain/ loss area etc or adding curves e.g. showing changes in demand or supply or outward shift of PPF

(b) If you can support your answer using a diagram, do not hesitate to draw one. Again it is usually applied in questions related to the topics I highlighted above. It will get you around 1m-2m depending on complexities. For instance, PPF is used to show opportunity cost. As such you can get 1/2m by drawing a PPF and mark on your diagram, how an increase in the production of one good, leads to the fall in the production of another good. Similarly, if the question is about natural disaster striking a country and the impact onto PPF, you can get 1/2m by drawing a PPF shifting inward and of course you have to label the initial PPF and the PPF after disaster

(4) Calculation techniques
Is very applicable to topics highlighted above except market failure involving externalities

(a) If figures are provided, you will usually get 1m by making reference. For instance by saying, “the opportunity cost of producing the first 10million tonnes of agricultural goods is 2millions units of manufactured goods foregone”. You can also score up to 2m by performing calculation. For instance, YED = 0.4 is given in the text. In the answer, you have to put up figure, say YED = 20%/ 50%. In short, you have to explain how is the 0.4 is obtained

(b) In some other situations, you can actually use your own figure to replace word explanations. For instance, PED for petrol is inelastic. Then, in the answer you can put up your own figure, say PED oil = -10%/ 50% = -0.2 as a support to the option chosen although the -0.2 is not there

(5) Rejection method
Candidates can get up to 3m for explaining and correcting the other 3 wrong options. Consider the following examples:

(a) A production possibility frontier can be used to illustrate the concept of (Edexcel, Unit 1, Q1, May 2010)
A. External cost
B. Producer surplus
C. Opportunity cost
D. Equilibrium price

(C) is 1m. Opportunity cost is the next best alternative foregone once a decision is made. Option A is incorrect because external cost is illustrated using the cost-benefit diagram. Option B is also ruled out since producer surplus can only be shown using a demand-supply diagram

(b) Which of the following factors is most likely to cause the price of gold to fall without a shift in the demand curve? (Edexcel, Unit 1, Q2, May 2010)
A. An increase in national income
B. A decrease in price of silver
C. An increase in wages of gold miners
D. A decrease in the cost of machinery used in gold mining

(D)-1m. When machineries are cheaper, it decreases production costs. This creates an incentive to mine for more gold (2m). Option A is incorrect since rise in national income means more income per person. As such more gold will be demanded and its price will increase. This conflicts with the question (1m)

(6) Even if candidates have chosen the wrong option, still candidates can get up to 3m for explaining the incorrect option

(7) Usually there will be 5 questions from How They Work and 3 questions from Why They Fail. Candidates normally don’t do well for questions from Why They Fail. This is because of lack of understanding in terms of what public good is, how pollution permits function or even confused by the way those answers are put up. Sometimes they may sound tricky. As such I strongly suggest students to read up topics like positive and negative externalities and understand how does the cost-benefit diagram works, concept of free rider and public goods, asymmetric information, in what way the free market has failed etc

(8) Sometimes, there might be more than one concept tested at the same time (sometimes even three). For instance, opportunity cost and PPF might go together or mixed economies, free market and market failure might appear simultaneously in the same question. As such it is highly recommended to define all these keywords. The reason is because, we do not know what to expect from the marking schemes. I have seen in some situations, one might score 2m for providing definition of opportunity costs AND PPF and in some cases, they indicate "define either opportunity cost OR PPF for 1m"

Hope this helps!!!