Author Archives: Mark

A2 CIE Economics – 50 question quiz

I held the annual 50 question quiz during the last session of the CIE A2 revision course. I split the class into 5 teams (approx 4-5 in each) and asked 5 questions at a time – with a time limit also. Each team had whiteboards to draw / write answers and it was a nice way to finish the three days.

  1. What conditions have to be met to achieve allocative efficiency?
  2. Draw two features of productive efficiency
  3. What is dynamic efficiency?
  4. Social cost = ?
  5. Draw negative externalities of consumption
  6. What is meant by Tragedy of the Commons?
  7. What does an indifference curve show?
  8. Using indifference curves draw a giffen good.
  9. Where does the firm’s supply curve commence?
  10. Draw minimum efficient scale
  11. What assumption is made about a product in Perfect Competition?
  12. Draw short-run to long-run in Perfect Competition
  13. List 3 characteristics of an oligopoly
  14. Draw dead weight loss for a monopoly
  15. What is significant about the output where MC=MR=AC=AR?
  16. A natural monopoly achieves economies of scale at what outputs?
  17. What are the three types of price discrimination?
  18. It is a mistake to believe that ALL oligopolists face a kinked demand curve. Why?
  19. List 4 objectives of firms other than profit maximization.
  20. Contestable markets are characterised by 2 features. What are they?
  21. What is meant by X-inefficiency?
  22. Draw the impact of a pollution tax that reduces but does not eliminate a DWL.
  23. Draw buffer stock theory.
  24. Show the impact of an increase in GST on a Lorenz Curve.
  25. Perfect Labour market has a perfectly elastic supply curve. Why?
  26. Draw a monopsony labour market.
  27. Why does Christiano Ronaldo have a lot of economic rent?
  28. Define HDI, MEW and MPI
  29. List 5 limitations of GDP as an indicator of standard of living.
  30. Using LF, WAP and unemployed -work out the unemployment and participation rate
  31. Draw a reduction in the natural rate of unemployment.
  32. Consumption function = ?
  33. What are recessionary and inflationary gaps?
  34. Give the 2 equations to work out the multiplier.
  35. Explain the credit multiplier and what is the equation.
  36. How are bonds and interest rates related?
  37. Give 2 differences between Keynesians and Monetarists
  38. Draw a flow chart to show how microfinance can help developing countries.
  39. Why does the Phillips curve no longer have significant relevance?
  40. Deflation is…………………………
  41. What did Arthur Laffer draw on a paper napkin?
  42. How can healthy growth impact the balance of payments?
  43. Explain Hot Money
  44. Explain the internal and external value of money.
  45. Draw a recessionary gap using the 45° line.
  46. What is the hysteresis effect?
  47. A positive output gap is associated with what conditions in an economy?
  48. Name two limitations of the accelerator  theory.
  49. What components of the Fisher equation stay constant?
  50. Who is Chairman of the US Federal Reserve?I

Synchronous vs. Asynchronous learning and the laundry test.

One thing that I have learnt from the lockdown and teaching online has been the challenge of finding the right split between synchronous and asynchronous material. My ‘Webex’ lessons were predominately asynchronous in that I wanted to get through material and also the fact that a lot of the more engaging aspects of my teaching are difficult to do through the Internet. Although you could do some engaging activities through chat forums nothing beats the energy and engaging nature of face-to-face in the classroom environment.

An article which I picked up from Michael Cameron’s blog ‘Sex, Drugs and Economics’ makes for very good reading.

Dan Levy ‘The Synchronous vs. Asynchronous Balancing Act’ Harvard Business Publishing Education. 7th August 2020.

Asynchronous learning is better when you think it is important to have the following:

  • Students developing a common foundation before class (especially of basic ideas or concepts).
  • An assessment of your students’ perspectives or background on the subject, as this will affect how live classes would be conducted.
  • Students being able to engage with the material at their own pace. This is especially useful if prior knowledge of the material varies a lot across students.
  • Students spending a substantial amount of time pondering and reflecting.

Synchronous learning is better when you think it is important to have the following:

  • Exchanges of perspectives among your students.
  • Students learning from each other.
  • Interactions in which you’re playing the role of facilitator or mediator.
  • Opportunities to build community.

Levy comes up with a novel way of looking at synchronous v asynchronous delivery.

Where I teach, online classes generally get recorded; students can watch the recorded videos if they cannot attend the live session. I recently asked a student how she decided whether to engage in the live class or watch the recording later. Her answer was revealing. She said, “When I am trying to decide, I ask myself, ‘Is this a class I could attend while folding my laundry?’ If the answer is yes, I watch the recording. If the answer is no, I attend the live session.”

While I think that, in general, we should design both synchronous and asynchronous experiences that students find so engaging that they cannot fold the laundry at the same time, I think the spirit of this question might help inform your decision of what to reserve for asynchronous learning. If the students can conceivably fold their laundry while engaging in the experience, my advice is to either eliminate it or reserve it for asynchronous learning.

As Cameron points out if a student could be folding laundry in your class you need to look at how you deliver your lessons / lectures. Class time is an opportunity to engage students in learning experiences and getting them to think for themselves. For this to work not only has the teacher got to have energy but the course / assessment at the end of the year has to encourage a type of thinking.

“Real thinking does not install knowledge in the brain: rather it evokes potential that exist in the student, developing innate talents and abilities.” Mind Over Water: Lessons on Life from the Art of Rowing by Craig Lambert 1999.

AS Economics Revision – Transition Economies

With the CIE AS essay paper on Wednesday next week here are some notes on the issues confronting transition economies – this topic is in Unit 1 of the syllabus. What have been the formidable challenges facing eastern European countries (command) embracing capitalism? Here are some thoughts as well as an informative video from the IMF:

  • In planned some goods are provided free but not in a market economy
  • Corruption – widespread in communist countries in eastern Europe – Oligarchs
  • Inflation ↑ – privatised firms began to charge prices that reflected high costs
  • Lack of entrepreneurial experience
  • Rising unemployment as owners of businesses try to make them more efficient.
  • Labour relations – Poor as workers are in a new environment – Job security?
  • Consumer sovereignty – some industries decline/expand
  • Resources – surplus and shortage
  • Self-Interest – fewer merit goods and more demerit goods
  • Time Gap before framework of government controls can be developed
  • Expansion of industry – potentially for greater externalities
  • Old/disabled – vulnerable with the change of government role
  • Welfare system – limited support for unemployed etc. will take time to develop
  • Provision of public services – disruption to police and other public services
  • Moral Hazard – the state insure workers against risks of losing their job

A2 Economics – Contestable Markets

I covered this topic today at the Cambridge A2 Economics revision course. The degree of contestability of a market is measured by the extent to which the gains from market entry for a firm exceed the cost of entering (i.e. the cost of overcoming barriers to entry), with the risks associated with failure taken into account (the cost associated with any barriers to exit). Accordingly, the levels of barriers to entry and exit are crucial in determining the level of a market’s contestability. Barriers to exit consist of sunk costs, that is to say costs that cannot be recovered when leaving the market. The contestable markets approach suggests that potential entrants consider post‑entry profit levels, rather than the pre-entry levels suggested by neo‑classical theory.

Obviously no market is perfectly contestable, i.e. with zero sunk costs. In modern economies it is the degree of contestability which is relevant, some markets are more contestable than others. Also just because there have been no new entrants to a market over a given period of time does not mean that this market is not contestable. The threat of entry will be enough to make the existing (incumbent) firms behave in such a way as to recognise this, i.e. by setting a price which doesn’t attract entry and which only makes normal profits.

Markets which are highly contestable are likely to be vulnerable to ‘hit and run competition’. Consider a situation where existing firms are pricing at above the entry‑limit level. Even in the event that existing firms react in a predatory style, new entry will be profitable as long as there is a time lag between entry and the implementation of such action. Having made a profit in the intervening period, the new entrant can then leave the market at very little cost.

In a contestable market there are no structural barriers to the entry of firms in the long-run. If existing businesses are enjoying high economic profits, there is an incentive for new firms to enter the industry. This increases market competition and dilutes monopoly profits for the incumbent firms. Market contestability requires there are few sunk costs. A sunk cost is committed by a producer when entering an industry but cannot be recovered if a firm decides to leave a market.

Entry limit pricing

The fear on the part of existing firms of rendering the market contestable (stimulating new entry) by making high levels of profit is likely to lead to the adoption of entry limit pricing, a concept introduced in the previous unit. This is essentially a defensive strategy, with existing firms setting prices as high as possible but not so high as to enable new corners to enter the industry. If the existing firms set price at P2 and output at Q2 (see diagram below), it would be possible for a new firm to enter the industry and supply Q1. Total market supply would then be Q3 (Q1 + Q2), the price would be P3 and the new firm would be covering its costs. If, instead, the existing firms chose to produce at Q3 (with price level P3), the new firm producing Q1 (total market supply would now be Q4 at price P4) would not be covering its costs and would have to exit the industry in the long run.

The video below on the Airline Industry in the US from Commanding Heights series is a good example of breaking down monopoly power.

Source:

Anforme – A2 Level Economics Revision Booklet.

Models of Capitalism – LMEs vs CMEs during COVID-19

The Economist Free Exchange recently ran an article looking at the various taxonomies that are used to categorise models of capitalism. The book entitled “Varieties of Capitalism” (2001), distinguished between liberal market economies (LMEs) and co-ordinated market economies (CMEs).

LMEs’ rely on market mechanisms to allocate resources and determine wages, and on financial markets to allocate capital. E.G. America, Britain and Canada
CMEs, like social organisations such as trade unions, and of bank finance. E.G. Germany, Sweden, Austria and the Netherlands

Western economies tend to sit on a continuum between these two models – below is a table outlining the main criteria each:

Source: Wikipedia

Which system is better during a pandemic?

During the pandemic, CMEs have generally had a more sound strategy for containing the spread of the virus. This may be generated by unity and consistency than by the strength of the intervention that is chosen. Some countries, e.g. Sweden, avoided lockdowns completely but seemed to get a lot of public support and relied on voluntary social distancing. New Zealand implemented a lockdown policy from the outset and relied a lot on contract tracing as well as strict system of managed isolation. LMEs such as the USA and the UK have had a policy which have been on the whole disorganised and not taken the virus seriously.

However in such situations and because of their innovative nature LMEs are more likely to focus on treatments and vaccines.

Of 34 vaccine candidates tracked by the World Health Organisation
CMEs = 4
LMEs = 13
(AstraZeneca, an Anglo-Swedish drugmaker working with Oxford University, straddles both categories).

CMEs are likely to have a lower death count but LMEs seem to hold the upper hand with regard to a vaccines. Maybe a global coalition and co-ordination is needed in future to get the best of both systems.

Source: The Economist – Which is the best market model? 12th September 2020

AS Economics – Price Elasticity of Demand

Doing some revision courses for AS students and went over Price Elasticity of Demand. Might be useful for those doing AS at the moment.

Price Elasticity of Demand (PED)
This measures the relative amount by which the quantity demanded will change in response to change in the price of a particular good. The equation is:

% change in Quantity ÷ Demanded % change in Price

How is PED calculated?

Consider the following demand schedule for buses in a city centre.

Price (average fare)          Quantity of passengers per week
100c                                      1000
60c                                        1300
30c                                        2275

Suppose the current average fare was 100c, what is the PED if fares are cut to 60c?

The percentage change in QD is equal to:
• The change in demand 300 (1300-1000) divided by the original level of demand 1000. To obtain a percentage this must be multiplied by 100. The full calculation is (300 ÷ 1000) x 100 = 30%

The percentage change in price is equal to:
• The change in price 40c (100c – 60c) divided by the original price 100c. To obtain a percentage this must be multiplied by 100. The full calculation is (40 ÷ 100) x 100 = 40%

These two figures can then be inserted into the formula with 30% ÷ 40% = 0.75
Let us now consider the PED when the average fare is cut from 60c to 30c

The percentage change in QD is equal to:
• The change in demand 975 (2275-1300) divided by the original level of demand 1300. To obtain a percentage this must be multiplied by 100. The full calculation is (975 ÷ 1300) x 100 = 75%

The percentage change in price is equal to:
• The change in price 30c (60c – 30c) divided by the original price 60c. To obtain a percentage this must be multiplied by 100. The full calculation is (30 ÷ 60) x 100 = 50%

These two figures can then be inserted into the formula with 75% ÷ 50% = 1.5

Please note that the minus sign is often omitted in PED, as the price elasticity is always negative because demand curves slope downwards. The textbook displays figures as:
PED = (-) 0.2

What price elasticity of demand figures tell us.

Determinants of Elasticity of Demand

The elasticity of a product is influenced by:
• the number of substitutes available
• whether it could be described as a luxury or a basic commodity
• the proportion of the purchaser’s income it represents
• the durability of the product.

Usefulness of Price Elasticity of Demand

The usefulness of price elasticity for producers. Firms can use price elasticity of demand (PED) estimates to predict:

1. The effect of a change in price on the total revenue & expenditure on a product.

The relationship between elasticity and total revenue.

                      Elastic         Inelastic            Unitary
Price ↑           TR↓                TR↑                      No Change
Price ↓           TR↑                TR↓                      No Change

2. The likely price volatility in a market following unexpected changes in supply.

3. The effect of a change in GST (indirect tax) on price and quantity demanded and also whether the business is able to pass on some or all of the tax onto the consumer.

4. Information on the price elasticity of demand can be used by a business as part of a policy of price discrimination – off-peak and peak travel in major cities. Before 9am – inelastic demand curve – after 9am elastic demand curve.

Adapted from CIE A Level Revision – Susan Grant

Hernando de Soto – Property Rights 20 years on.

I have blogged quite a bit on this topic using the work of Peruvian economist Hernando de Soto and his book ‘The Mystery of Capital’. There was also some great footage from the Commanding Heights Series which showed de Soto traveling in Peru and talking about what he sees as the main obstacle to the development of markets and capitalism within developing countries – property rights.

Without a title to a property nobody knows who owns what or where, who is accountable for the performance of obligations, who is responsible for losses and fraud, or what mechanisms are available to enforce payment for services and goods delivered. Consequently, most potential assets in these countries have not been identified or realised; there is little accessible capital, and the exchange economy is constrained and sluggish. However in the West, where property rights and other legal documentation exist, assets take on a role of securing loans and credit for a variety of purposes – building capital with capital.

De Soto estimated that about 85% of urban parcels in Third World and former communist nations, and between 40 and 53 % of rural parcels, are held in such a way that they cannot be used to create capital. The total value of the real estate held but not legally owned by the poor of these countries is at least $9.3 trillion – $13.5trn in today’s money. Studies suggest that titling has boosted agricultural productivity, especially in Asia and Latin America. The World Bank wants 70% of people to have secure property rights by 2030. Despite all these efforts, only 30% of the world’s people have formal titles today. In rural sub-Saharan Africa a dismal 10% do. Just 22% of countries, including only 4% of African ones, have mapped and registered the private land in their capital cities.

PRINDEX is an organisation that measures global perceptions of land and property rights – see video below.

In July 2020 they published an informative report on tenure security – “Comparative Report – A global assessment of perceived tenure security from 140 countries”. Some of the findings from the report:

  • Nearly 1 billion people around the world consider it likely or very likely that they will be evicted from their land or property in the next five years. This represents nearly 1 in 5 adults in the 140 countries surveyed.
  • Levels of perceived insecurity vary by region. While the greatest number of people who are insecure live South Asia (22% of people), sub-Saharan Africa (26%) and the Middle East and North Africa (28%) each have higher proportions of insecurity.
  • People living in cities experience higher levels of insecurity than those living in rural areas (18% vs. 16%).
  • The possession of formal land and property rights documentation tends to be associated with greater confidence of perceived tenure security compared to owners and renters who have no formal documentation at all (80% vs. 63%)
  • Nearly half of all women in sub-Saharan Africa (48%) feel insecure about their land and property rights when faced with the prospect of widowhood or divorce.
  • Tenure insecurity is strongly linked to age. Overall, 24% of young people aged 18-25 felt insecure compared to just 11% of people aged over 65.
  • Tenure insecurity is associated with economic factors in regions that are highly developed, such as North America, Europe, Australasia and parts of Asia.
  • Perceived tenure insecurity is closely correlated with other economic, human development, and governance indicators, including gross domestic product (GDP), World Governance Indicators (WGI), the Multidimensional Poverty Index, and the Human Development Index. There is a particularly strong correlation between tenure insecurity and the Corruption Perceptions Index (CPI).

Below is a graph from the report:

Perceived tenure insecurity as measured across all properties and plots of land that a respondent has rights to access or use, not just their ‘main’ property.

Concerns

In the developing world having the authority to allocate land has great benefits.

  • Politicians use land as a way of rewarding supporters and themselves
  • Politicians / Chiefs use their powers to sell the land to mining companies / developers without the consent of their people
  • Some seize the land because it is deemed to be in the “public interest”

A crucial lesson of the past few decades, however, is that if land reform is treated purely as a top-down technical task, it will not work well. It is not enough simply to map and register a property, as several high-profile efforts show. Land is an emotive issue, especially where memories of colonial expropriation still linger. As Mr de Soto argued, capitalism should be for the many, not just the few. The Economist – September 12th 2020

AS Economics Revision – Inflation

Here are some revision notes on inflation and a diagram that I have found useful. As well as cost-push and demand-pull inflation remember:

Inflationary Expectations

In recent years more attention has been paid to the psychological effects which rising prices have on people’s behaviour. The various groups which make up the economy, acting in their own self-interest, will actually cause inflation to rise faster than otherwise would be the case if they believe rising prices are set to continue.

Workers, who have tended to get wage rises to ‘catch up’ with previous price increases, will attempt to gain a little extra compensate them for the expected further inflation, especially if they cannot negotiate wage increases for another year. Consumers, in belief that prices will keep rising, buy now to beat the price rises, but this extra buying adds to demand pressures on prices. In a country such as New Zealand’s before the 1990’s, with the absence of competition in many sectors of the economy, this behaviour reinforces inflationary pressures. ‘Breaking the inflationary cycle’ is an important part of permanently reducing inflation. If people believe prices will remain stable, they won’t, for example, buy land and property as a speculation to protect themselves.