Friday, December 30, 2011

Highly Possible Data Response Questions for Unit 1: Competitive Markets-How They Work and Why They Fail

These are the most typical questions that have VERY HIGH possibility (I'm not saying definitely, so yeah, is wiser for you to study everything and focus in these few) to be tested in next week's exam

1. Demand and supply diagram (7/8 marks)

Provide a DD/SS diagram showing correct shift in demand or/ and supply curve, equilibrium price and quantity. Please label the equilibrium as well. From the past experience, usually demand increases and supply falls leading to higher price, BUT that was due to robust growth in the global economy especially in China and India. Also, the supply usually fails to catch up with the demand. For this time around, demand curve will most likely FALL due to weaker demand for houses and commodities. I am unable to predict the direction of supply curve. Next, most probably you will have to insert some reference e.g. figures from the extract. Finally, provide reasons for the shift

2. Price elasticity of demand (PED) (5/6 marks)

Define PED. Mention that the good e.g. oil, rice, copper etc considered in inelastic in demand (usually) and provide a reason e.g. necessity. Most likely you will have to provide an evaluation and also reference from the extract

3. Cross elasticity of demand (XED) (6/7 marks)

Define XED. Explain that both goods are substitutes/ complements (usually substitute) and their sign. Explain how the relationship works. You may be asked to provide reference. High possibility for one evaluation

4. Income elasticity of demand (YED) (6/7 marks)

Define YED. Identify the status of the good e.g. normal/ inferior and also the +/- sign. Explain how do you identify that the good under consideration is normal or inferior. Again, this type of question may require reference and one evaluation

5. Price elasticity of supply (PES) (9/10 marks

Define PES. Mention that in short run the good e.g. oil/ houses etc are inelastic in supply inclusive of one reason. Then, proceed by mentioning that the good is elastic in supply in the long run with a reason. Reference may be needed and this type of question may require two evaluations from my past experience

6. Buffer stock

Provide definition for buffer stock. 100% there will a diagram required with brief supporting explanation of how buffer stock schemes work. Evaluations are extremely easy. There are three stereotype ones like expensive to maintain, high chances of failure based on experience with copper, rubber and rice and some goods especially food cannot be stored for long etc

This is extremely helpful:

http://tutor2u.net/economics/content/topics/marketsinaction/buffer_stocks.htm

7. Private benefits and external benefits (PB and EB)/ private costs and external costs (PC and EC) (12marks)

Define both and provide examples. You are most likely asked to provide a cost-benefit diagram with a brief supporting explanation. Evaluations are definite. Expect two or three evaluations

8. Issues related to congestion (10/12 marks or maybe more if they ask in different parts)

You may be asked to provide few solutions to the existing traffic standstill and evaluate. Reference may be required. Go the link below. It is from Richard Pettinger, one of the most brilliant Economics bloggers I come across

http://www.economicshelp.org/blog/143/transport/how-effective-is-a-congestion-charge/

9. Issues related to air pollution (10/12 marks or maybe more if they ask in different parts)

Same structure. You may be asked to provide few solutions to reduce air pollution or perhaps they are already available in the extracts and you have to choose. Two or three evaluations are expected. Go

http://www.economicshelp.org/blog/2204/economics/carbon-trading-schemes/

10. Issues surrounding housing market

This may include DD/SS for houses, rented houses vs. bought-for-own-stay as substitute, how does it affect geographical immobility of labour e.g. lack of teachers and nurses in London due to expensive accommodation and people refuse to move there since increment is small. For more guidance:

http://tutor2u.net/economics/content/topics/housing/housing_demand_supply.htm

http://tutor2u.net/blog/index.php/economics/C9 (Extremely good. Go for Unit 1)

11. Government failure (10 marks)

Define government failure. Based on the extract, provide few examples of government failure. Evaluate them

Hope this is helpful. I will blog about techniques on how to deal with some of the questions effectively in the next posting. Stay tune ;)

12. Taxation/ subsidy (12 marks)

Provide definition for taxation/ subsidy. Diagram is definitely a must, followed by a brief explanation on how the tax/ subsidy work to solve the issues involved e.g. higher tax onto cigarettes leads to higher price and lesser consumption etc. Candidates are expected to provide two or three evaluations. Probably, there is data reference

Monday, December 19, 2011

List of Definitions for Unit 3: Business Economics and Economics Efficiency

Hello there fellow readers! Happy new year! This is the long awaited list of definitions and also the last one for the time being. The Unit 4: Global Economy glossaries will be available somewhere in the near future. Please take note that those BOLD words are the one that are most likely to be tested in the Section A of the multiple choice questions

Just a gentle reminder. All the economic terms below are of equal importance. Even if they are not tested, they might still be very useful if you want to show to the examiners your ability to master and use the economic jargons correctly, particularly questions (b)*, (c)*and (d)* of Section B

Stay tune for the next posting on Unit 1: Competitive Markets-How They Work and Why They Fail. I will reveal 11 questions that are most likely to be tested

1. Fixed costs (FC): costs that do not change with the level of output/ costs that change not because of the level of output but rather the scale of operation

2. Variable costs (VC): costs that change with the level of output

3. Total costs (TC): sum of both fixed and variable costs/ (TFC + TVC)

4. Average fixed costs (AFC): total fixed costs for every one unit of output/ (TFC/Q)/ difference between average costs (AC) and average variable costs (AVC)

5. Average variable costs (AVC): total variable costs for every one unit of output (TVC/Q)

6. Average costs (AC): total costs for every one unit of output/ (TC/Q)

7. Marginal costs (MC): an additional total costs due to extra one unit of output produced/ (ΔTC/ ΔQ)

8. Total revenue (TR): total receipts for a firm from the sale of any given quantity of a product/ (PxQ)

9. Average revenue (AR): total revenue for every one unit of output/ (TR/Q)

10. Marginal revenue (MR): additional total revenue due to extra one unit of output sold (ΔTR/ ΔQ)

11. Economies of scale (EOS): fall in long run average costs (LRAC) due to increase in output

12. Purchasing economies of scale: when a large firm purchases raw materials and parts in big quantity, it will be able to negotiate for a better discount and hence lower down the input costs

13. Technical economies of scale: when a large firm invests in new technology, it will be able to produce in greater volume thus resulting in lower unit costs since high capital costs are spread over greater output

14. Managerial economies of scale: when a large firm can afford to hire specialist workers who are expert in their own areas, the costs of running each department can be lowered

15. Financial economies of scale: when a large firm borrows huge amount of money, it will be subjected to lower interest rate charge and hence lower costs due to the perception that big firms are more financially stable and hence carry lower default risk

16. Transport economies of scale: when a large firm establishes its own logistic unit, it can result in lower transportation costs than depending on an external logistic firm that is likely to charge much higher

17. External economies of scale: fall in long run average costs (LRAC) due to external factors/ positive externalities such as increase in number of skilled workers over the time

18. Diseconomies of scale: rise in long run average costs associated with rise in output/ further increase in size of operation

19. External diseconomies of scale: rise in long run average costs associated with external factors such as increase in market wages or costs of raw materials

20. Profit maximisation: when a firm produces up to the level of output where MC = MR/ when MC-MR =0

21. Revenue maximisation: when a firm produces up to the level of output where MR = 0

22. Sales maximisation: when a firm produces up to the level of output where AC= AR

23. Profit satisficing: when a firm tries to produce satisfactory profits rather than maximum profits to at least keep the shareholders happy as it has some other goals to pursue such as sales maximisation

24. Cost-plus pricing: a pricing method where a desired percentage of profit is added to the estimated cost

25. Supernormal/ abnormal profits: economic profits that are made when AR > AC/ when TR > TC

26. Normal profits: when economic profits equal to zero/ when AC = AR/ when TC = TR/ the minimum level of profit needed for a company to remain competitive in a market

27. Losses/ subnormal profits: when AR< AC

28. Perfect competition: a market structure with large number of sellers where each being a price taker and goods produced are homogenous/ identical

29. Monopoly: a market structure with a sole seller where goods and services produced have no close substitutes/ a firm that has more than 25% of market share by legal definition

30. Monopsony: exists when there is only one buyer in the market/ existence of a dominant buyer

31. Oligopoly: a market structure dominated by few large firms that are highly interdependent

32. Duopoly: a market structure with two companies owning all or nearly the entire market for a given type of good or service

33. Monopolistic: a market structure with large number of sellers (not as many as in perfect market) where each firm has some price making ability and goods produced are differentiated

34. Concentration ratio: total percentage of market share contributed by the top 3 to 5 firms in the industry

35. Perfect knowledge/ information: when buyers in a market are fully informed of prices and quantities for sale, whilst producers have equal access to information on the best production techniques

36. Imperfect competition: a market structure with several or large number of firms with each having the ability to control the price

37. Limit pricing: when a firm sets a low enough price to deter new entrants from coming into the market

38. Predatory pricing: when a dominant firm is selling a good or service at a very low price or even at loss/ below AC intending to drive competitors out of the market

39. Price skimming: a pricing strategy in which a firm charges the highest initial price that customers are willing to pay and over the times lowers the price to attract price-sensitive segment

40. Sunk costs: costs that are not recoverable when a firm leaves the industry

41. Natural monopoly: a situation in which there cannot be more than one efficient provider of a good or service or otherwise competition might actually increase costs and prices/ occurs when one large business can supply to the entire market at a lower price than two or more smaller ones/ a situation where it is viable only for one firm to exist rather than few so that significant economies of scale can be achieved

42. Price discrimination: the practice of selling the same good but to different market at different price

43. Cartel: a situation where a group of producers agrees to restrict output through the imposition of quota in order to push up the price

44. Explicit/Overt collusion: a formal/ spoken/ verbal but secretive collusion among competing firms designed to control the market, raise the price and otherwise act like a monopoly

45. Implicit/Tacit collusion: an informal/unspoken / independent but parallel action among competing firms in an industry that leads to higher prices and profits

46. Price leadership: when the market leader sets the price of a product or service and other competing firms feel compelled to follow that price/ a form of tacit collusion

47. Game theory: the analysis of situations in which players are interdependent

48. Payoff matrix: outcomes of a game for the players given different possible strategies

49. Contestable market: a market where there is freedom of entry to the industry and where the costs of exit are low

50. Productive efficiency: when a firm is able to produce a good or service at lowest cost possible/ produce at MC = AC

51. X-inefficiency: happens when large firms do not have the incentive to lower down their production costs

52. Technical efficiency: a concept which is closely related to productive efficiency and x-inefficiency in which a firm is able to produce maximum output from the minimum quantity of inputs

53. Dynamic efficiency: the introduction of new technology and work practices to reduce costs over the time

54. Static efficiency: when a firm is productive efficient only at one point of time

55. Allocative/ social efficiency: when a firm is producing goods and services that are wanted by consumers/ able to produce a good or service at the level where MC = AR/

56. Resale price maintenance: the practice whereby a manufacturer and its distributors agree to sell the product at a fixed price/ price within certain range and if the latter refuse, the manufacturer may want to stop doing business with it

57. Horizontal merger: when two or more firms in the same industry and at the same stage of production process merge

58. Vertical merger: when two or more firms from the same industry but at different stage of production process merge

59. Forward vertical merger: a business strategy that involves the purchase of distributors to achieve economies of scale or higher market share

60. Backward vertical merger: a business strategy that involves the purchase of suppliers to reduce dependency and also to reduce costs

61. Conglomerate: when two or more firms from totally unrelated industries merge

62. Synergy: when two or more activities or firms put together can create greater outcome than the sum of the individual parts

63. Public private partnerships (PPP): collaboration between the public sector and the private sector companies to deliver services such as PFI

64. Private finance initiative: where private firms are contracted to develop expensive infrastructure on behalf of the government and upon completion the state will enter into a leasing agreement with private contractors

65. Competitive tendering: when firms bid for a right to run a service or gain a contract

66. Office of Fair Trading/ Competition Commission/ European Commission: organisation that is set up to maintain a healthy level of competition within an industry and also to protect public interest

67. RPI-X: a price capping formula where RPI is an inflation measurement while X is the expected fall in costs due to gain in efficiency

68. RPI+K: a price capping formula where RPI is an inflation measurement while K is capital investment requirements

69. Profit capping: a method of regulation where profit of a firm is capped based on a certain percentage of the value of its asset

70. Performance targeting: a method of regulation where firms that are being regulated will have to meet the targets such as reducing complaints and cutting duration of queues within certain time frame and if they fail to do so maybe subjected to certain amount of fines

71. Marginal profit: the additional profit due to extra one unit of output sold

Friday, December 16, 2011

List of Definitions for Unit 2: Managing the Economy (GCE, Edexcel)

1. GDP: market value of all final goods and services produced within a country in a given period

2. Real GDP/ GDP at constant prices: market value of all final goods and services produced within a country adjusted for inflation

3. Real GDP per capita: market value of all final goods and services produced within a country adjusted for inflation per person

4. Annual real GDP growth: an increase in the market value of all final goods and services produced within a country adjusted for inflation measured from one year to another

5. Economic growth: an increase in real GDP/ potential GDP

6. Human Development Index (HDI): a measurement of development/ well being that is made up of real GDP per capita (PPP), life expectancy at birth and literacy rate/ average number of years spent in schooling

7. Sustainable growth: the maximum increase in potential capacity within an economy that will not lead to a fall in the potential capacity for future generations

8. Sustainable development: development which meets the needs of the present generation without compromising the needs of future generations

9. Output/ GDP gap: difference between potential GDP and actual GDP

10. Potential GDP: maximum output that can be produced within a country if all economic resources are fully employed (AS)

11. Actual GDP: the amount spent on consumption, investment, government expenditure and net exports (AD)

12. Negative output gap: happens when actual GDP is below potential GDP

13. Positive output gap: happens when actual GDP is above potential GDP

14. Recession: is when a country experiences fall in real GDP for two successive quarters

15. Depression: a sustained, long-term downturn in economic activities/ recession that lasts longer and hence has a larger decline in economic activities

16. GNP: market value of all final goods and services produced by a country’s citizens regardless of where they are

17. Hidden/ black/ informal economy: economic activity where trade and exchange take place but it goes unreported to the tax authorities motivated by the desire to evade tax

18. Injections: inflow of money into the circular flow of income that does not come from households such as investment, government spending and exports

19. Withdrawals/ leakages: outflow of money from the circular flow of income since households may save, pay tax and buy imports

20. Purchasing power parities: a theory that argues that in the long run, identical goods and services in different countries should cost the same due to the adjustment of exchange rate

21. Transfer payments: income for which there is no corresponding output such as unemployment benefits or pension payments

22. Cyclical/ demand-deficient/ Keynesian unemployment: unemployment that is due to negative economic growth/ recession/ lack of aggregate demand for goods and services

23. Frictional unemployment: transitional unemployment when people are moving in between jobs/ short term joblessness whilst involved in job search

24. Seasonal unemployment: an unemployment that is caused by seasonal variation of the jobs offered

25. Structural unemployment: unemployment due to mismatch of skills of the unemployed and the requirement of new jobs

26. Unemployment rate: percentage of the total labour force that is unemployed BUT actively seeking employment and willing to work

27. CPI/ RPI-X: a weighted price index that measures the monthly change in the prices of goods and services (about the same but not exactly)

28. RPI: a measurement of inflation that includes mortgage interest payments and other housing related costs

29. Inflation: a sustained increase in price level/ fall in the purchasing power of £1

30. Disinflation: a slowdown in the rate of increase in general price level/ prices of goods and services

31. Deflation: a decrease in the general price level/ increase in the purchasing power of £1

32. Hyperinflation: a large/ rapid increase in the price level

33. Stagflation: an economy that faces stagnation/ falling growth/ rising unemployment that is coupled with rising inflation

34. Demand-pull inflation: an increase in price level that is due to an increase in aggregate demand/ when TOTAL demand for goods and services exceeds TOTAL supply

35. Cost-push inflation: an increase in price level that is due to an increase in costs of factors of production such as land, labour and capital

36. Imported inflation: an increase in price level that is due to an increase in prices of imports

37. Shoe leather costs: cost in terms of time and effort that people spend to counter the effect of inflation e.g. making more trips to banks to withdraw money and spend it (before it falls in value)

38. Menu costs: costs incurred by firms when they need to update prices on a more regular basis e.g. printing new menus, updating price catalogues, updating computer systems and hiring consultants to develop pricing strategies

39. Balance of payments: an account that summarises the financial transactions between one country and the rests of the world

40. Current account: one of the two components under balance of payments that is largely made up of net trade in goods and services

41. Capital and financial account: an account that records the buying and selling/ transactions of assets such as land, companies, stocks and government bonds and others like FDI and hot money

42. Current account deficit: when the total imports of goods and services are greater than the country’s total exports of goods and services

43. Balance of trade: difference between a country’s imports and its exports

44. Visible trade: imports and exports of goods

45. Invisible trade: imports and exports of services

46. Rate of interest: interest rate that is set by the Monetary Policy Committee which will eventually influence the return on savings and costs of borrowing/ price of money

47. Savings ratio: the ratio of personal savings to disposable income/ percentage of disposable income hat is saved

48. Marginal propensity to consume: an increase in consumption that is due to an increase in £1 of disposable income

49. Marginal propensity to save: an increase in saving that is due to an increase in £1 of disposable income

50. Marginal propensity to import: an increase in import expenditure that is due to an increase in £1 of disposable income

51. Wealth effect: an increase in spending when people ‘feel richer’ associated with an increase in value of assets like stocks and properties

52. Disposable income: income after tax

53. Investment: spending by FIRMS to acquire more capital goods such as the purchase of machineries and building of new factories

54. Aggregate demand: total amount of goods and services demanded at any given price level

55. Aggregate supply: total supply of goods and services produced within an economy at any given price level

56. Multiplier effect: an initial increase in spending (consumption, investment, government spending and net exports) which will eventually lead to a larger secondary increase in AD

57. Full capacity: when all economic resources like land, labour and capital are fully utilised

58. Spare capacity/ excess capacity: when economic resources like land, labour and capital are not fully utilised

59. Demand side/ management policies: policies that are meant to influence the AD such as fiscal and monetary policy

60. Fiscal policy: the manipulation of government spending and level of taxation to influence the movement of AD and overall level of economic activities

61. Budget deficit: when government spending exceeds tax revenue

62. National debt: total amount of money that the British government owes to private sector and other purchasers of UK gilts/ sum of all previously incurred annual budget deficits

63. Crowding out effect: when an increase in government spending causes the interest rates in the money market to increase thus a fall in private spending

64. Reflationary /Expansionary/ loose fiscal policy: the lowering of tax or/ and increase in government expenditure to stimulate the economy/ revive the economy from recession

65. Deflationary/ contractionary/ tightening fiscal policy: the increase of tax or/ and slash in government expenditure to slow down the economy/ prevent overheating

66. Monetary policy: the manipulation of interest rates in order to influence the movement of AD and overall level of economic activities

67. Reflationary/ expansionary/ loose monetary policy: the lowering down of interest rates in order to stimulate economic activities/ to prevent deflation/ ensure that the price level does not fall too far from the targeted level

68. Deflationary/ contractionary/ tight monetary policy: the rise in interest rates to cool down an overheating economy/ prevent the price level from increasing too far above the targeted level

69. Quantitative easing: the increase in money supply when government securities are bought from financial institutions allowing those banks to have more liquidity and hence greater ability to generate lending/ a policy that is usually pursued when the interest rates have already been lowered close to 0% and yet failed to deliver the desired effect/ solution to liquidity trap

70. Liquidity trap: a situation which prevailing interest rates are low and yet savings rate is high, making monetary policy ineffective

71. Supply side policies: policies meant to influence the movement of AS by increasing the potential/ productive capacity of an economy

72. Poverty trap: a situation where people on low incomes are discouraged from working extra hours or getting a better paid job since any extra income they earn will be taken away in the form of higher tax or lost benefits

73. Unemployment trap: a situation where unemployed people have no incentive to take up a job knowing that the net increase in their income is insignificant due to income tax and withdrawal of some benefits

74. Hysteresis effect: a situation where if unemployment is high, it will remain high for a considerable period of time since some people become less motivated or lose their skills making it difficult for them to re-enter the labour market

75. Exchange rate: the value of a currency express in terms of another

76. Appreciation: when £1 gets to purchase more foreign currency

77. Depreciation: when £1 gets to purchase lesser foreign currency

78. Hot money: short term, speculative flows of money across foreign exchanges in order to make a profit on the difference between the buying and selling price of the currency

79. Privatisation: the transfer of assets from state ownership to private sector ownership

80. Deregulation: the process of removing government controls over the market

81. Income effect: when income tax is lowered, people earn a higher disposable income and in case if that is the targeted monthly income, then they wouldn’t be bothered to increase their productivity

82. Substitution effect: when an increase in wages creates incentive to work longer hours as the financial reward from working has increased