# A2 Revision – Indifference Curves – Mindmap

With the A2 multiple-choice paper next week here are some notes on indifference curves – there is usually a question on either the income effect or substitution effect. The video below is particularly useful.

Income and Substitution Effects with Indifference Curves
Any price change can be conveniently analysed into 2 separate effects – the INCOME EFFECT and the SUBSTITUTION EFFECT.

Income effect of a price change: – when there is a fall in the price of a product, the consumer receives a real income effect and is able to buy more of this and other products in spite of the fact that nominal income is unchanged. If the consumer buys more of the good when the price falls it is a Normal good. If the consumer buys less of the good when the price falls it is seen as an Inferior good.

Substitution effect of a price change: – when there is a rise or fall in the price of a product, the consumer receives a decrease or an increase in the utility derived from each unit of money spent on the product and therefore rearranges demand to maximise utility. This is distinct from the income effect of a price change. For all products, the substitution effect is always positive such that a fall in price leads to an increase in demand as consumers realise an increase in the satisfaction they derive from each unit of money spent on the product.

Remember for normal goods, both the income and substitution effects are positive. But the income effect can be negative: if a negative income effect outweighs the positive substitution effect, this means that less is bought at a lower price and vice-versa. This good is therefore known as a Giffen good.

Giffen goods are generally regarded as goods of low quality which are important elements in the expenditure of those on low incomes. A good example is a basic food such as rice, which forms a significant part of the diet of the poor in many countries. The argument, not accepted by all economists, is that when the price of rice falls sufficiently individuals’ real income will rise to an extent that they will be able to afford more attractive substitutes such as fresh fruit or vegetables to makeup their diet and as a result they will actually purchase less rice even though its price has fallen.

# Teaching MC=MR with M&M’s. Winner of the best M&M’s graph – 2020

Today we had our annual Yr 13 M&M’s graph competition. Having just completed Perfect and Imperfect Competition with my Year 13 class I used a couple of packets of M&M’s to drum home the concept of marginal analysis MC=MR. It has always been something that students have struggled with but I am hoping this experience of creating graphs with M&M’s might help their understanding and when to use the concept. There is a three way process for learning about this theory:

• Students complete worksheets / multiple-choice questions that test their knowledge of the curves that make up the graphs.
• Students draw the graphs on A3 size whiteboards
• Students construct graphs using M&M’s

Profit is maximised at the rate of output where the positive difference between total revenues and total costs is the greatest. Using marginal analysis, the firm will produce at a rate of output where marginal revenue equals marginal cost. Below are a few of the graphs done today using M&M’s. The winner this year is Year 13 student Luke Davis – his graphs are the first and second below.

Student worksheet

Student graph on A3 whiteboard

Student graphs using M&M’s

# The challenges for the oil market with COVID-19

Another good video from the FT this time on the future of the oil industry. There is a movement towards more cleaner fuels by major companies in Europe but the same can’t be said about the US. Oil producing countries have been hit by lower prices but some like Saudi Arabia have sufficient reserves to fall back whilst others like Nigeria and Venezuela are financially exposed. Below is a graphic from the video looking at supply and demand – useful for an introductory lesson on the market.

# A2 Revision – Oligopoly and the kinked demand curve – download

With the A2 Essay paper tomorrow I thought something on the kinked demand curve might be useful. I alluded to in a previous post that one model of oligopoly revolves around how a firm perceives its demand curve. The model relates to an oligopoly in which firms try to anticipate the reactions of rivals to their actions. As the firm cannot readily observe its demand curve with any degree of certainty, it has got to estimate how consumers will react to price changes.

In the graph below the price is set at P1 and it is selling Q1. The firm has to decide whether to alter the price. It knows that the degree of its price change will depend upon whether or not the other firms in the market will follow its lead. The graph shows the the two extremes for the demand curve which the firm perceives that it faces. Suppose that an oligopolist, for whatever reason, produces at output Q1 and price P1, determined by point X on the graph. The firm perceives that demand will be relatively elastic in response to an increase in price, because they expects its rivals to react to the price rise by keeping their prices stable, thereby gaining customers at the firm’s expense. Conversely, the oligopolist expects rivals to react to a decrease in price by cutting their prices by an equivalent amount; the firm therefore expects demand to be relatively inelastic in response to a price fall, since it cannot hope to lure many customers away from their rivals. In other words, the oligopolist’s initial position is at the junction of the two demand curves of different relative elasticity, each reflecting a different assumption about how the rivals are expected to react to a change in price. If the firm’s expectations are correct, sales revenue will be lost whether the price is raised or cut. The best policy may be to leave the price unchanged.

With this price rigidity a discontinuity exists along a vertical line above output Q1 between the two marginal revenue curves associated with the relatively elastic and inelastic demand curves. Costs can rise or fall within a certain range without causing a profit-maximising oligopolist to change either the price or output. At output Q1 and price P1 MC=MR as long as the MC curve is between an upper limit of MC2 and a lower limit of MC1.

Criticisms of the kinked demand curve theory.
Although it is a plausible explanation of price rigidity it doesn’t explain how and why an oligopolist chooses to be a point X in the first place. Research casts doubt on whether oligopolists respond to price changes in the manner assumed. Oligopolistic markets often display evidence of price leadership, which provides an alternative explanation of orderly price behaviour. Firms come to the conclusion that price-cutting is self-defeating and decide that it may be advantageous to follow the firm which takes the first steps in raising the price. If all firms follow, the price rise will be sustained to the benefit of all firms.

If you want to gradually build the kinked demand curve model download the powerpoint by clicking below.
Oligopoly

# Using whiteboards to teach externalities graphs

I held my annual whiteboard competition with my A2 Economics class to see who could draw the best 4 graphs showing Positive and Negative Externalities of Consumption and Production. The winner this year was Fiona Leng with two highly recommended by Jemima Hodgson and Yanz Chen.

Fiona Leng

Jemima Hodgson

Yanz Chen

The externalities topic at A2 Level Economics involves being able to draw and understand four graphs. A different way of teaching this area of the course was to get students to use A3 size whiteboards so that they could practice drawing these graphs. This proved to be very successful with students for the following reasons:

• the novelty of using whiteboards
• if they made a mistake this could be easily rubbed out and they could start again
• it allowed me to go around the class to correct graphs where necessary
• students took pride in their graphs
• the best set of graphs was posted on the econfix blog
• students who were struggling could learn off others

# Using playing cards for economics discussions

No doubt you’ve had plenty of discussions with your classes on economic issues. One of the challenges is to keep students on task and try and get contributions from all students. In order to overcome these issues I have developed a set of playing cards with certain statements on each. Students receive 8 playing cards with different assessment objectives/ skills/ elements of written work in economics – see photo below.

An exam essay question is given to students and then they debate the questions amongst themselves. However students can only speak when they play a card and they must follow what the card says – e.g. Argument, Building on someone’s point etc. This limits each student’s number of responses and makes sure the discussion helps students practice for an assessment, according to the assessment objectives. It also allows for greater contributions from other members of the class. It generally works well although at times you may have to play one of your own cards to keep students on task. I have attached a link to a document with all the statements – below. All you have to do is buy some packs of playing cards and use wide sellotape to attach statements to the cards. Be interested to know how others get on.

CARDS

# Economics website for IGCSE AS A2 and IB courses

Want to learn or need assistance with Economics? Are you studying or teaching A Level Economics, Advanced Placement, or International Baccalaureate (IB)?

Help is at hand, elearnEconomics assists individuals studying Economics. This site covers a wide range of courses and individuals have the ability to customise their course or do extension work. It’s simple, easy to use and very cost effective.

eLearnEconomics is a comprehensive online economics learning resource. It is for both students AND teachers. Students study the concepts of each topic with the key notes, then review those concepts with the audio/video and flash card sections and finally test themselves in the written answer and multi-choice sections. The multi-choice section records student scores enabling them to track their progress and build their confidence leading into exams.

Teachers have the ability to monitor students progess within the teachers’ administration section. Students can be arranged into class groups and full reports generated to quickly identify problem areas. These high quality PDF reports can also be presented at parent/teacher evenings. Click the link below to access the site.

elearneconomics

Just a note to say that free access ends on Sunday 11th November.

Below is a link to free access to elearnEconomics website. It includes notes, video lessons and multiple-choice questions with worked answers. It covers all aspects of IB, NCEA (NZ curriculum), Cambridge International Exams (CIE)  A levels and most university introductory courses.

Login as School Guest Members on the right hand side:

If you have any questions contact elearn resources:

Email: info@elearneconomics.com

Below is a link to free access to elearnEconomics website. It includes notes, video lessons and multiple-choice questions with worked answers. It covers all aspects of IB, NCEA (NZ curriculum), Cambridge International Exams (CIE)  A levels and most university introductory courses.

Login as School Guest Members on the right hand side:

If you have any questions contact elearn resources:

Email: info@elearneconomics.com

# A2 Economics – using whiteboards to teach externalities

Once again with my A2 class I successfully used whiteboards to get across the concepts of positive and negative externalities. Below are the graphs done by Sarah Cheng. As I have stated before whiteboards are a very useful way of getting across difficult graphs.

The externalities topic at A2 Level Economics involves being able to draw and understand four graphs. A different way of teaching this area of the course was to get students to use A3 size whiteboards so that they could practice drawing these graphs. This proved to be very successful with students for the following reasons:

• the novelty of using whiteboards
• if they made a mistake this could be easily rubbed out and they could start again
• it allowed me to go around the class to correct graphs where necessary
• students took pride in their graphs
• the best set of graphs was posted on the econfix blog
• students who were struggling could learn off others