Friday, January 20, 2012

Quick Tips for Unit 3: Business Economics and Economics Efficiency Exam

Hi candidates, am sorry that I wouldn't be able to give a full and detailed coverage of tips for Unit 3. Here are some quick ones:

Section A: MCQ

1. Try to make good use of the diagrams given. You can shade area of supernormal profits or losses, add curves like shifting MC and AC or/ and MR and AR etc

2. Try to produce a diagram if you think that your answer can be supported by one. Applicable to topics like cost and revenue, perfect market, monopoly, profit maximisation, revenue maximisation, sales maximisation, price discrimination, kinked demand curve, game theory etc

3. If you are being provided with figures, perform calculation. Some relevant topics are like AR, AC, MC, MR, profits, losses, AVC, AFC etc

4. You may come up with your own figure if you think that it is relevant to the explanation

5. You can eliminate up to two wrong answers. Letter of the eliminated options MUST be stated and a valid economic reason must be given. The whole sentence must be reproduced

6. Go for definitions. Maximise your chance of scoring. Many questions these days can have up to 2/3 definitions


Section B: Data Response

1. There will only be 4 questions and the total marks are 40

2. The first question will always carry 4m and it involves definitions e.g. patents, horizontal integration, economies of scale etc plus a reference

3. Watch out for the following questions:
a) Contestability. You may say that the industry of concern is not contestable due to its oligopolistic feature e.g. high R&D expenditures, expensive equipments, high advertisements budget, patents etc and for evaluations, it is contestable due to factors like niche market, internet marketing etc

b) Efficiency. Focus not only on productive and allocative efficiency but also on other form of efficiency like technical, dynamic and static efficiency

c) Pricing strategy (may involve game theory) and non-pricing strategy. Kind of a tricky question. Provide the 2x2 matrix and explain that Firm A is undercutting its rival in order to steal market share and enlarge its super normal profits and then another non-pricing strategy. Evaluation you may refer back to the game theory and mention that such price war will lead to a lose-lose situation and hence most likely to collude

d) Benefits of merger between oligopoly firms

e) Role of regulators e.g. OFT/ Competition Commission/ ECC/ Ofwat/ Ofgen/ Oftel and price capping

4. Watch out on how they phrase those questions. Sometimes, the easiest and the most common question can be phrased into something 'bombastic' and you might think that it is a new question. For e.g. 'To what extent does the threat of competition change the behaviour of the firms' is a 'bombastic' version of 'Explain one pricing strategy and one non-pricing strategy that could be adopted by an oligopoly firm'

5. You may give different types of economies of scale/ efficiency and it will be regarded as separate points. This is applicable to questions that are relevant

6. Explanation and evaluation marks are divided equally (except for the 4m question)
a) 8m = 4+4 (22/13)
b) 12m = 6+6 (33/ 222/ 123)
c) 16m = 8+8 (2222/332/ 44)

7. For those who are running out of time for revision, focus on monopoly and oligopoly. Data response will always linger around these two. By the way, focus on some new topics. They are hits in recent years e.g. PPP (Public Private Partnerships), PFI (Private Finance Initiatives), rate of return/ profit capping and performance targets

Best of luck and Happy Chinese New Year (bad timing) for those celebrating it. Gong Xi Gong Xi :)


Oh ya, one more. Don't choose a question e.g. chocolate/ cars/ cameras etc just because you think you are fancy of those stuffs. They are not testing you on the models or functions of the camera etc, but the economic sides of it. So, choose wisely

Tuesday, January 17, 2012

Additional Tips for Unit 2: Managing the Economy

Since UK economy is in a period of stagflation since 2010, watch out for questions like:

a) define stagflation

b) how CPI is calculated e.g. 650 goods and services etc

c) Using AD/AS diagram, discuss the impact of rising oil prices towards the UK economy

d) Economic policies to deal with stagflation e.g. supply side measures

e) Definition of HDI and advantages and disadvantages of using HDI to compare standards of living between countries. It is a vital part of the curriculum and yet it has not been tested for quite a while. Last appearance was in June 2009

Questions are usually based on the events that took place 1 1/2 to 2 years in history

6 Ultimate Evaluation Techniques

1. Contradiction

To evaluate, you have to disagree with your earlier explanation BUT with a convincing reason

When interest rate is slashed, borrowing will become cheaper. This may discourage saving and boost spending thus shifting the AD rightward allowing growth to be achieved. However, this is in theory. Interest rate is brought to historical low level in UK and yet it fails to kick start spending. This shows hat expansionary monetary policy is futile if consumer confidence has collapsed. Such scenario is also known as liquidity trap

When the UK government increases public spending, there will be an injection into the circular flow of income. When AD shifts rightward, growth will be achieved. However this is unlikely to happen in the current state of UK economy. The government is already having a huge budget deficit and unsustainable national debt. Therefore most likely such spending will be axed to improve public finances

2. Prioritise

Only use if there is a more dominant point

An increase in both share prices and house prices will have positive wealth effect. Feeling richer, UK households will increase their spending into the economy thus raising the AD and hence growth. However, it is argued that an increase house prices will have a more dominant impact onto consumption. This is because most working class people store their wealth in the property market. Actually very few people who actually store their wealth in the form of paper asset and this group of people are usually very rich

3. Magnitude

Only use if the subject of argument is quantifiable e.g. unemployment, interest rate, inflation rate, government spending, income tax rate etc

When the UK government increases public spending, there will be an injection into the circular flow of income. When AD shifts rightward, growth will be achieved. However, this depends on how large is the increase government expenditure. If the increase is insignificant, probably AD may not increase that much/ the shift in AD also depends on the size of multiplier

4. Short run vs. long run

How will be the impact in long run is different from short run

An increase in budget onto education and healthcare sector will allow the UK’s AD to experience a larger rightward shift. More output can be produced and unemployment in the economy will be lower. However, the gain in the long run is much higher as the productive capacity of the economy may increase. A more educated and skilled workforce will lead to rise in productivity and efficiency in workplace. AS will shift rightward

5. Criticising the data

Use if you realise inconsistent information is being provided/ insufficient data to allow for well-informed judgement

Given that UK has sound fundamentals such as recovery in housing market, weak pound and a cut in income tax, it is expected that growth is on the way and unemployment will most likely fall in the near future. However, it can be quite difficult to tell the direction of joblessness. Although the information provided is supporting economic growth, paragraph 2 line 14-15 mention that unemployment is likely to increase in the next quarter. As such, it may be best to say that this scenario is inconclusive

An increase in both share prices and house prices will have positive wealth effect. Feeling richer, UK households will increase their spending into the economy thus raising the AD and hence growth. However, it can be quite difficult to determine the impact of these two onto growth. Figure 1 shows the trend of house prices for the period of 2009 to 2010 while Figure 2 shows the performance of London Stock Exchange only for Q3 of 2010. It is therefore best to say that impact of these two onto growth is uncertain

6. Evaluation of previous evaluation

Is basically a technique of contradiction except that you have to do it twice

MPC may consider a slash of interest rate in order to boost the economy. When borrowing is cheaper, consumers and firms will increase their spending into the economy thus pushing for economic recovery. However that is in theory. Interest rates have been kept low for nearly three years and it still fail to kick start the so much needed growth. That is the end of the traditional tool and alternative policy such as quantitative easing may be more effective. Having said so, the alternative monetary policy has not been successful either Although banks are flushed with liquidity, the refuse to pump out lending and the public cannot get access to funds

Monday, January 16, 2012

The 3 Most Anticipatd 30 Marks Essay Questions

Tips for essay writing:

1. Do not spend more than 40 minutes on the essay

2. Read and understand the issues that need to be addressed e.g. policies to increase standards of living, conflicts of macroeconomic objectives etc

3. Marks will be distributed according to 6-12-12. 6m will be given for defining policies, explaining phrases in ‘......’ and diagram. The next 12m will be for explanations. It can be 6-6 or 4-4-4. The same goes for evaluations. My advice is 4-4-4 unless you are very confident that your single explanation and evaluation can earn you a solid 6m

4. Essays are most likely going to be fiscal/ monetary/ supply side policies to achieve an economic goal e.g. higher growth/ lower unemployment/ lower inflation/ narrowing current account deficit/ environmental conservation/ income inequality. Conflicts with macroeconomic objectives and policies to reduce unemployment are not likely to be asked since they had appeared in June 2011 examination. Equally, I don’t think policies to reduce income inequality or global warming will be tested, or else many will have to retake the paper in June 2012 (nightmare)

5. Before you start writing, you must be able to confidently visualise the overall structure of the essay e.g. what to write for definitions, AD or AS shifts, clear transmission mechanism with a ready-evaluation attaching to each point. This is a cutting-edge skill that can become very handy but will take some time to master. Pretty much the same metaphor like Sherlock Holmes acted by Robert Dawney

6. In worse case scenarios, use the following standard evaluations e.g. lags/ depending on which part of AS curve the UK economy is currently operating at/ comparison of policies, for instance supply side better than demand side since growth can be achieved without inflation etc

7. Never ever use words like COSTS, PRODUCTIVITY, INCENTIVE and EFFICENCY for fiscal and monetary policy, or else you will mislead the examiner to think that you are actually quite confuse between demand side and supply side policies

Macroeconomics involves logic. To be frank, there is nothing much to memorise. Most of the transmission mechanisms involve logical sequence and you must know how to manipulate it to solve the economic problems

The 3 most anticipated 30 marks essay questions

A. Economic policies to boost growth

1. Bank of England reduces interest rates, cheaper borrowing, increase in consumption and investment, AD increases, rise in real GDP hence growth

Evaluation: Contradicts with one of the macroeconomic objectives. Higher growth but also accommodated by higher inflation

2. UK government may want to increase spending into the economy, direct injection, shifts AD rightward, actual growth is achieved. Through multiplier effect growth may be higher when jobs are created both in public and private sectors

Evaluation: UK government is already saddled by heavy debts. Budget deficit and national debt at record high level and due to the commitment to EU laws, instead of pursuing expansionary fiscal policy, the UK government may have to do the otherwise

3. Reducing income tax, greater disposable income, more money can be spent into the economy, kick start economic activities, rise in real GDP and growth is achieved

Evaluation: May not be a smart move due to poor government finances. Also have to consider that in future, it can be very politically sensitive to raise back the tax rate once economy recovers

4. Privatisation, private firms have profit motive and hence are more competitive and innovative, more goods and services produced over the time, growth achieved

Evaluation: not much space for further privatisation. Most state-owned enterprise had undergone privatisation during the era of Conservatives. Robust growth can no longer be achieved using such policy

5. Deregulation/ liberalisation, opening up the market for more competition/ allowing for more free market forces e.g. greater number of firms, more output produced and hence growth

Evaluation: depends on number of firms in the market. Conspiracy/ price fixing may still take place where companies try to cut output in order to send prices skyrocket. Growth may not be achieved

6. Education and training, UK will have more knowledgeable and skilled workers, rise in productivity and efficiency, AS shifts to the right, greater output and hence growth

Evaluation: Few obstacles in the way. First, it is increasingly difficult to raise budget onto education sector given the current state of government finances. Budget deficit has to be brought under control. Second, it is extremely long term in nature e.g. two decades once graduates enter labour market. Third, there is no guarantee that potential growth can be achieved as there are some factors that are out of control e.g. brain drain of professional workers to English speaking nations

7. Lower income tax, employees get to keep greater portion of their income, creates the incentive to be productive, more output and growth is achieved

Evaluation: May be dominated by income effect. Lower income tax allows workers to achieve their targeted disposable income effortlessly. May not have the motivation to work hard

8. Lower business tax, higher retained profits, companies more likely to invest e.g. new equipments, greater efficiency, more output and growth

Evaluation: No guarantee that firms will invest especially when the economy is still far from full recovery

9. Labour union reforms, further restriction on the ability to launch strike, more productive working days in a month/ year, more output produced and hence growth

Evaluation: If their rights are denied e.g. fight for just-pay and other benefits, they may equally lose the incentive to be pro-active at workplace. Output may fall

10. Reduction of unemployment benefits, reduce the incentive to stay unemployed, more jobless people getting back into labour market, more output produced, increased in growth

Evaluation: That is assuming other factors are constant. In reality this may be futile. For instance e.g. their skills may not be relevant or no vacancies due to economic recession. Either way, their attempts are trivial. Output growth is denied

11. Increased spending on facilities and transports e.g. more roads and better condition, reducing congestion and allow people/ firms to make more trips per day, rise in productivity since people can reach workplace earlier and companies can have more business transactions per day, rise in goods and services and therefore growth

Evaluation: Worsening budget deficit means slash in public spending and transport is likely to be affected

B. Economic policies to reduce inflation

1. Higher interest rates, more expensive to borrow, lower consumption and investment, AD shifts leftward, lower price level and inflation

Evaluation: Highly effective only if the inflation is demand-pull in nature. If it is due to cost-push, such policy will only backfire. Growth will come to a stand-still and unemployment will increase

2. Cut in public spending, lesser injections into the economy, fall in AD, lower inflation, through negative multiplier effect the income of both public sector workers and private firms is lowered, reduce the ability to spend, even lower inflation

Evaluation: Politically unpopular and current government may lose votes in next election. Besides, inflation is still within the manageable range and government should focus more on boosting recovery

3. Rise in income tax, lesser disposable income, less money to be spent back into the economy, hampers consumption, fall in AD, lower inflation

Evaluation: Politically unpopular. Also, is less effective since the nature of inflation is caused by increased in prices of energy

4. Privatisation, companies have profit motive and the industry will be very competitive, greater tendency to run operation more efficiently since this can boost profits and enlarge market share, fall in costs can be passed in the form of lower price, fall in inflation

Evaluation: Not much room for privatisation. A good policy but no longer viable

5. Deregulation, allowing for more market force, rise in competition ensures that prices can be kept low, fall in inflation

Evaluation: May be futile if the firms are operating under oligopolistic structure. Can easily collude and fix high prices and hence denying the free market force

6. Education and training, workers become more knowledgeable and skilled, costs are spread over greater output, lower unit cost, cheaper price and hence lower inflation

Evaluation: Very long run. May not have visible effects within 20 years, not until graduates have entered the labour market. Also, other factors may undermine the success e.g. weak pound and high energy prices

7. Reducing income tax, workers get the incentive to work harder and the possibility of taking up second job, greater productivity and hence lower unit cost, inflation is under control

Evaluation: No guarantee that productivity will increase due to income effect. Also, firms may not want to pass on the cost-saving

8. Cut in business tax, companies have greater retained profits, more likely to invest in cutting-edge technology, greater efficiency and lower costs, passing on in the form of lower price, inflation is kept within the targeted range

Evaluation: Companies may not want to invest if consumer confidence remains low

9. Reduction in unemployment benefits, jobless people have greater incentive to take up low-paid jobs, rise in competition for jobs, wages can be kept low, lesser cost-push inflation

Evaluation: Depends on whether wages made up a large proportion of total costs. Also, strength of pound and energy prices can undermine the success of this policy

10. Weakening the trade union, passing on laws to make strikes difficult, lesser days lost to strikes, minimise losses and costs, cheaper price and hence lower inflation

Evaluation: Productivity may fall if they know that the most vital right is being taken away. Not a proper way to reduce inflation

11. State-of-art healthcare system, working people take lesser sick leaves and can contribute more productively in workplace, more output produced allowing high costs to be spread over, lower unit cost and hence inflation is tackled

Evaluation: Requires huge government spending and under the current state of economy such policy may be considered as too ‘ambitious’. Also, there could be opportunity cost in terms of spending in other areas e.g. education and transports that can equally affect movement of AS

C. Economic policies to reduce current account deficit under the balance of payments

1. Increase in interest rates, more expensive to borrow and spend, economic activities slowing down, possibility of lower wages or slowdown in wages growth, lesser money that can be spent on imports, narrowing the deficit under current account

Evaluation: more attractive to save in UK banks. Demand for sterling increases causing pound to appreciate. Exports artificially expensive and US, France and Germany may stop buying from UK. Deficit cannot be narrowed

2. Cut in public spending, fall in AD and hence slower growth, income level may be falling and hence lesser imports, through negative multiplier effect imports may fall to a greater extent

Evaluation: Other factors not constant. For e.g. if pound appreciates against euro or dollar, still imports will rise and current account deficit cannot be narrowed

3. Increase in income tax rate, lesser disposable income, less money that can be spent onto buying imports, narrowing of current account deficit

Evaluation: Strength of pound and strong performing housing market may undermine such success

4. Rise in corporate tax, lower retained profits, companies may be cutting investment, lesser imports of capital goods e.g. machines from Germany or Japan, reducing current account deficit

Evaluation: May not be effective if consumer confidence is strong, housing market is fast recovering and pound is appreciating. People and firms will still continue to invest

5. Education and training, workers become more skilled and efficient, improvement in quality of goods produced and at lower costs, competitive pricing and hence greater exports, narrowing current account deficit

Evaluation: strengthening pound may undermine the success of this policy. Also, there is no guarantee that the training programmes will be effective in boosting productivity

For the rest of supply side policies, the transmission mechanism is exactly the same except that you have to do some modifications. For example, instead of ‘lower costs and hence lower inflation’, you write ‘lower costs and hence lower price/ more competitive pricing for international market’

By the way, do watch out for essays with new nature e.g. economic effect of recession, economic effects of weakening pound etc or fiscal/ monetary/ supply side policies to solve problems outlined in paragraph 3,4 and 5. They can be quite nasty. Stay tune for more updates. I will update this posting tomorrow with highly possible short questions

Here you go,

Tips for short essay questions

1. Evaluation for short essay questions will always be 4m and nothing else. For instance, a 16m question means 12m for explanations (reference, diagram, definition etc) and 4m for evaluation(s). The 4m can be one solid evaluation or even two less elaborated evaluations with 2m each

2. Most probably there will be a question involving AD/AS diagram. Anything that affects consumption, investment, government spending and exports will shift the AD. Anything that affects costs e.g. wages, productivity, government regulations etc will shift the AS. Remember to label your diagram e.g. axes, curve and especially equilibrium. It carries 4m

3. When a question mentions that you need to use AD/AS diagram, please include them in your explanation or else you lose 4m. However, if a question does not mention anything, with or without diagram you can still score full marks

4. Watch out for questions like difference between claimant count and LFS measure of unemployment, how CPI is calculated, graph interpretation e.g. increase at slower rate or faster rate, definition for HDI, advantages and disadvantages of using HDI