10 Ideas to improve your grades


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10 Ideas to improve your grades

  1. 1. tutor2u Economics Blog - 10 Ways for Summer 2011a Great Econ Paper 10 Ways to Improve Your Economics Exam Papers tutor2u Economics Blog Summer 2011 (1) The Importance of the Margin • In textbook economics – many decisions are made at the margin – Marginal revenue = marginal cost (profit max output) – Marginal social benefit = marginal social cost (social equilibrium) – Marginal utility of consumption compared to the price • But few businesses / people have the capacity to reach such precise equilibrium points – or seek to find them • Instead they satisfice or choose rules of thumb • But…… – Marginal changes in behaviour can have a big effect if enough people make them (e.g. Energy consumption decisions) – Changing behaviour ‘at the margin’ can have important social effects – social norms can change + policies can have an impact – The fundamental value of something depends on the value of the marginal unit – important in lots of markets (e.g. oil, food)Copyright www.tutor2u.net 2011 Notfor resale 1
  2. 2. tutor2u Economics Blog - 10 Ways for Summer 2011a Great Econ Paper 2: The Law of Unintended Consequences • This is a root cause of ‘government failure’ • All government interventions in a market have at least one and often many unintended consequences • Easy to have the benefit of hindsight when seeing this! • Reasons: – Economics is a social science about behaviour – Rational agents will look for ways to offset policies that cost them – Information failure in government when setting policies – Dynamic nature of markets – markets and the agents that inhabit them move far more quickly than government – Disintermediation is inevitable in a globalized world 3: Stakeholders matter! • ‘Any person or organization that has a legitimate interest in a specific project or policy decision.’ • Check to see the sources of information in data response questions • Identify and comment when value judgements are being made – scores high for evaluation • Risk of government failure: – Regulatory capture / powerful lobbying – Policy decisions made to please a vested interest – Inequitable impact between one group and anotherCopyright www.tutor2u.net 2011 Notfor resale 2
  3. 3. tutor2u Economics Blog - 10 Ways for Summer 2011a Great Econ Paper Stakeholders • Employees of a business • Communities where a business is located or affected by a decision • Suppliers further down the supply chain • Shareholders / owners • Creditors • Government (and through them – taxpayers) • Trade unions (and the workers they represent) Stakeholders • Employees of a business • NGOs and other / organization advocacy groups (i.e. • Communities where a World Bank, IMF, business is located or Pressure Groups) affected by a decision • Prospective employees • Suppliers • Prospective customers • Shareholders • Local communities • Creditors • National communities • Government (and through • International community them – taxpayers) • Competitors within a • Trade unions (and the market workers they represent) • Professional associationsCopyright www.tutor2u.net 2011 Notfor resale 3
  4. 4. tutor2u Economics Blog - 10 Ways for Summer 2011a Great Econ Paper 4: Time Periods in Economics • Be familiar with – Immediate (momentary) especially in primary sectors – Short run (at least 1 fixed factor, diminishing returns) – Long run (all factor inputs are variable, economies and diseconomies of scale) • Applications of time periods in your analysis – Elasticity of supply (micro and macro supply curves) – Elasticity of demand (Ped, CPed, Income elasticity) – ‘Discounting’ the future value of costs and benefits – Long run macroeconomic policies e.g. supply-side / trade policy – Long run micro policies – e.g. liberalising a market, nationalisation 5: (a) Demand and supply curves are often non-linear! P P S Changing elasticity of D supply as output increases Q QCopyright www.tutor2u.net 2011 Notfor resale 4
  5. 5. tutor2u Economics Blog - 10 Ways for Summer 2011a Great Econ Paper 5(b): Upward sloping demand and downward-sloping supply! P P S1 S2 S2 Long run supply D with EoS Q Q 6: Change the elasticity to build / develop your analysis! P S + tax P2 S P1 D Q2 Q1Copyright www.tutor2u.net 2011 Notfor resale 5
  6. 6. tutor2u Economics Blog - 10 Ways for Summer 2011a Great Econ Paper 6: Change the elasticity to build / develop your analysis! More close substitutes – higher CPED P P S + tax S + tax P2 P2 S S P1 P1 D D2 D1 Q2 Q1 Q Q2 Q1 Q 7: Most markets are inter-related • Changes in relative prices / rewards in one market affect resource allocation in others • Key inter related-market concepts to revise: – Substitutes – Complements – Derived demand – Composite demand – Joint supply – Competitive supply • Also important in macroeconomics – Factor markets and the economic cycle (labour demand) – Bond markets / currency markets / equity markets – Macroeconomic effects of external demand/supply shocksCopyright www.tutor2u.net 2011 Notfor resale 6
  7. 7. tutor2u Economics Blog - 10 Ways for Summer 2011a Great Econ Paper 8: Markets at work! Relative prices, preferences and incentives • Markets are powerful – don’t underestimate them – especially the power of setting the right incentives • Policy interventions seek to change behaviour of agents • People do respond to incentives – Govt failure if the incentives turn out to be perverse – Govt failure if the incentives are not strong enough (ineffective) • Behaviour changes when relative costs & benefits alter – Leads to substitution effects (changes in demand for X and Y) – Agents react to changes in measured costs and benefits of their actions • This requires – A sufficient change in relative prices to make a difference – Availability of alternative courses of action – Sufficient time for agents to respond and react Examples of changes in relative prices and behaviour • London congestion charge / underground fares • National minimum wage • Changes in relative prices of low and high carbon energy e.g. arising from a carbon tax or carbon trading • Relative prices of different crops in farming • Relative price of ethical-products • Relative prices and demand for exports / imports e.g. Following an exchange rate change • Relative prices of legal versus illegal transactions (e.g. crime / organ sales)Copyright www.tutor2u.net 2011 Notfor resale 7
  8. 8. tutor2u Economics Blog - 10 Ways for Summer 2011a Great Econ Paper 9: Expectations matter! • Expectations of the future drive current behaviour! – Housing market / property development / decisions on land use – Capital investment decisions by businesses (expected profits) – Food supply decisions – expected returns from different crops – Currency demand and supply – speculative activity in FOREX – Monetary policy / inflation – inflation expectations and wages – Fiscal policy / tax cuts / govt borrowing – expectations of changes in taxes • Formation of expectations: – Rational expectations – Adaptive expectations 10: The cost-benefit principle • The mother of all economic ideas is the cost-benefit principle. • It says that should take an action if, and only if, the extra benefit from taking it is greater than the extra cost • The hard part is – Identifying the relevant costs and benefits – Measuring and valuing them • Individual rationality does not always lead to a socially optimum / desirable outcome • Behavioural economics questions the core rationality embedded into conventional textbook economicsCopyright www.tutor2u.net 2011 Notfor resale 8
  9. 9. tutor2u Economics Blog - 10 Ways for Summer 2011a Great Econ Paper And finally…. • Most policy problems require a combination of strategies • Understand the meaning of efficiency and equity in markets (allocative, productive, dynamic efficiency) • Have the courage to challenge the conventional wisdom • Let your diagrams do the work for you – develop the analysis with high quality diagrams • Pick out bias in extracts – normative economics • Use the data that is provided but be aware of limitations • What is rational for individual agents can often leading to outcomes that are damaging for society • Be cautious about government intervention – markets often find solutions to intractable problems in the long run – if the incentives are strong enough tutor2u The tutor2u Economics Blog is  designed to support you  throughout your revision.  Visit it  now and everyday!Copyright www.tutor2u.net 2011 Notfor resale 9