A2 economics revision workbook 2016

A Level Economics
Year 2 (A2)
Revision Workshop
Summer 2016
Note the resource download link for this workshop:Student Name
www.tutor2u.net/economics
@tutor2uEcon
@tutor2u_Jon
@tutor2uGeoff
More Economics revision and support at:
Follow tutor2u Economics on Twitter:

2 A LEVEL ECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 3
6 Services
7 Manufacturing
A01 Knowledge
Definition, basic theory
A02 Application
Examples, evidence
A03 Analysis
Explanation of theory, diagrams
A04 Evaluation
Using judgement, weighing up
Exam Advice
PEEEL Evaluation
Paragraphs
P Point
E Explanation
E Evidence/Example
E Evaluation
L Link back to the question
Evaluation Reminder
T Timescale
W Wider Context
E Efficiency
E Equality/Equity
P Priority
Exam Advice
The command words ANALYSE or EXPLAIN require a student
to produce some explanation of the theory in their answer.
You should develop CHAINS OF ANALYSIS, making 3 or 4
links using connectives to develop your point.
*This means that... *This leads to...
*This has an impact on... *Therefore...
*This can cause... *This is because...
*On the other hand... *Which in turn...
The command words EVALUATE, JUSTIFY, EXAMINE or
ASSESS require a student to demonstrate a judgement in
their answer. You will need to weigh up the evidence from
your analysis and pass a judgement on the original question.
*It depends on... *In the short run...
*In the long run... *The most important
point
*The effect on equity/equality is
*The most cost effective…
*The best solution in the circumstances
is...
1 Costs, Revenues, Business Objectives & Competition
2 Concentrated Markets and Government Intervention
3 International Trade and Exchange Rates
4 Economic Development
5 Current UK Policies and Global Economic Performance
At the back of the booklet you will find a glossary of key A2 economic terms and concepts.
Skills at A2
Theory of the Firm Revision Blast
Short
Run
Definition:
Examples:
Long
Run
Definition:
Examples:
This first session is a revision blast of the costs, revenue streams, types
of efficiencies and business objectives that firms face. We will also
look at applying these concepts to a competitive market, and
examine contestability, followed by some insights in to the
type of questions asked under examination conditions,
and focuses on improving examination technique at A2
level. The Extension Activities aim to give you an
opportunity to further your revision at home or at
school at a later date.
Session 1
Costs, Revenues,
Business Objectives
and Competition
Business economics at A2 is all about how
firms conduct themselves in the market
place, and economists are concerned with
each firm’s performance and its efficiency
of use of scarce resources to produce the
goods and services consumers desire
to purchase. In order to ensure a firm is
profit maximising, it must be aware of its
costs and its revenues. However this
section of the specification also covers
other business objectives of firms such
as sales maximisation, but then assumes
most firms ultimately aim to profit
maximise.
A LEVEL ECONOMICS YEAR 2 (A2)
REVISION WORKSHOP 2016
Welcome to our 2016 A2 revision workshop which will consist of five revision
sessions. Whilst it is impossible to cover the entire A2 economics specification in
just one day, we aim to focus on key concepts and ideas, embedded in examination
technique and advice. Some areas will inevitably be considered with a light touch,
however we aim to equip you with the tools to be able to continue in depth revision
under you own steam. Today’s sessions will cover:

Costs
Complete the diagram to illustrate the shape of cost curves:
Business Objectives
Complete the following diagrams to illustrate revenue curves in both perfect and
imperfect competition:
Output
Average cost: cost per unit
Marginal cost: the additional cost of producing
one more unit
Fixed cost: costs that are incurred even when
the level of output is zero
Variable cost: costs that vary directly with the
level of output
Falling Average
Cost
Increasing Marginal Returns: Economies of Scale:
Rising Average
Cost
Diminishing Marginal Returns: Diseconomies of Scale:
Short-Run
Perfect Competition Imperfect Competition
Long-Run
Revenue
Revenue Definition:
Formula:
Average
Revenue
Definition:
Formula:
Marginal
Revenue
Definition:
Output
Revenue
Output
Revenue
Profit Maximisation
Economic theory usually assumes that businesses
aim to maximise their profits. Complete the following
definitions:
Normal Profit:
Supernormal (abnormal) Profit:
The Profit-Maximising Condition:
The Role
of Profit?
Costs &
Revenue

Alternative Business Objectives
The table below shows a range of alternative business objectives: in reality, many businesses are
profit-seeking but not profit-maximising. Or, they may follow a strategy in the short-run that is not
profit maximising but that allows them to maximise profits in the long-run. Annotate the diagram to
illustrate as many of these objectives as possible.
Competition
Perfectly Competitive Markets
Note down the characteristics of perfectly competitive markets:
Revenue Maximisation
MR = 0
Productive Efficiency
Lowest AC
Product differentiation
This could link with entering
new markets, increasing consumer
satisfaction etc
Normal Profit (= Limit Pricing and
Sales Volume Maximisation)
AR = AC
Dynamic Efficiency
Being innovative with products or the
production process to lower costs –
requires supernormal profit
Satisficing Behaviour
Achieving a minimum acceptable
level of revenue / profit
Social responsibility
The inclusion of social and
environmental considerations
Predatory Pricing
Producing at a loss in order to
drive out competition
Allocative Efficiency
AR = MC
Costs &
Revenue
£
Output
MC
AC
MR
AR = D
What objectives might the following types of business have?
A charity
An energy
firm
A new tech
start-up
A
nationalised
firm
Price Costs &
Revenue
£
Quantity traded
P P
Q OutputQ
S
MC
AC
AR = MR
D
Annotate the diagram below to show the long-run equilibrium in a perfectly competitive market:
Should the government aim to make all markets perfectly competitive?
Arguments in favour Arguments against
1
2
3
4
1
2
3
4

Contestable Markets Exam-Style Question
What is meant by a contestable market? Discuss the impact on consumers of the mobile network market becoming more contestable.
Types of barriers to entry
Structural Legal Strategic
The outcome in a contestable market
In a market in which barriers to entry (and exit) are low, there is the potential for hit and run
competition. This forces incumbent firms to behave competitively. In other words, the POTENTIAL
FOR COMPETITION causes firms – even if there is just small number of firms – to behave as
they would in a competitive market. This results in firms operating at a point where they earn low
supernormal or even just normal profits.
To what extent are the following markets contestable
Market Contestable Not Contestable
Tour Guiding
Low Cost Airline
High Street Banking
Point...
Increasing contestability forces firms to operate at a point where normal profits
are earned - this lowers prices and raises output, therefore increasing consumer
surplus.
...this is because...
Firms must aim for normal profit so as not to attract new firms to the market
risking “hit and run” competition and a loss of market share.
...in the case of mobile networks...
There is a small number of network providers, each of which has brand loyalty
due to lengthy contracts - this allows prices to be high. A more contestable
market could lower prices for consumers and make contracts less confusing.
...however...
Difficult to see how barriers to entry in this market could be lowered because
handset prices may be dictated by phone manufacturers such as Sony and
Apple.
...furthermore...
There are large economies of scale needed for good national network coverage
- so consumer experience could be worse with increased contestability.
...link back to the question...
Consumer satisfaction may actually be reduced rather than increased as
a result of increased contestability in the mobile network provider market.

Additional Activities
Activity 3: Essay Planning FramesActivity 1: Costs Quiz
Output
2
3
4
5
6
Total Cost Marginal
Cost
Average
Total Cost
Average
Fixed Cost
Average
Variable Cost
Total Variable
Cost
Clues
1 Average fixed cost for 6 units of output is £9
2 Average variable cost for 2 units of output is £30
3 Total cost is increased by £28 when the third unit of output is added
4 Average total cost of 4 units of output is the same as the average total cost of 3 units of output
5 Total cost for 5 units of output is £258
6 Total variable cost is increased by £100 when the sixth unit of output is added
7 Total cost increases by £8 when the second unit of output is added
Think of 3 possible barriers to entry for each of the following markets:
Activity 2: Barriers to Entry
Market
Coffee Shop
Barriers to Entry
Supermarket
Pharmacist
Market
Space Tourism
Barriers to Entry
Hand Car Washing
App Design
Discuss the view that profit maximisation is always the sole aim of businesses
Discuss the extent to which a perfectly competitive market is always efficient
Define profit:
Role of profit for businesses:
Alternative objectives, with their formula and an
example of each:
Could these alternative objectives simply allow firms
to maximise profits in the long-run? Examples?
Profit maximising condition:
Diagram to illustrate alternative objectives:
What types of organisation might not seek profit at all?
Overall conclusion:
Overall conclusion:
Explain what is meant by a perfectly competitive
market and examples:
Explain what is meant by efficiency (productive,
allocative, dynamic, X, Pareto):
Draw the short-run diagrams for perfect competition: Types of efficiency achieved in the short-run:
Draw the long-run diagrams for perfect competition: Types of efficiency achieved in the long-run:
Evaluation 1 - can firms in perfect competition
achieve economies of scale?
Evaluation 2 – can firms in perfect competition be
dynamically efficient?

www.tutor2u.net 1312 A LEVEL ECONOMICS YEAR 2 (A2) Revision Workshop
Session 2
Concentrated
Markets and
Government
Intervention
This session will explore the area of imperfect
competition, focusing on the interaction between firms
in oligopolistic market structures, and the behaviour of monopolies.
We will assess the advantages and disadvantages of these imperfectly
competitive market structures, comparing them to outcomes in more
competitive markets. The session will conclude with a closer look at
the latest issues in competition policy.
Time to Think
1 Match each key term to its correct definition
Exploring Monopoly
Characteristics of concentrated markets
2 Calculate the 3 firm concentration ratios for each of the following industries
National Newspapers
The Sun 24.1%
Daily Mail 20.6%
Daily Mirror 20.1%
Evening Standard 9.8%
Daily Telegraph 6%
Daily Express 5.6%
C3 =
Broadband Providers
Talk Talk 14%
Virgin Media 20%
BT 32%
Sky 22%
Plusnet 2%
EE 4%
C3 =
Supermarkets
The Co-Operative 6.3%
Aldi 5.6%
Asda 16.4%
Morrisons 10.9%
Tesco 28.5%
Sainsburys 16.5%
C3 =
Barriers to Entry Any profit earned that is over and above the level of normal profit (where
normal profit is the minimum profit required to keep a firm operating)
Marginal Revenue Falling long run average costs as the level of output in a firm rises
Supernormal
(Abnormal) Profit
A type of competition in which firms compete in areas other than price, for
example, differences in product quality, delivery times etc
Economies of Scale A market structure in which two firms dominate the market
Monopoly Power Any factor that makes it difficult for new firms to enter the market – these
can be strategic, innocent or legal
Duopoly The addition to total revenue from the sale of an extra unit of output
Vertical Merger An illegal activity in which firms, usually in an oligopoly, work together to
restrict output and/or set prices high
Non-Price
Competition
The ability of a firm to set prices
Collusion The buying of a firm either further back
or further forward in the supply chain
Monopoly characteristics
1
2
3
4
Oligopoly characteristics
1
2
3
4
Note down some examples of monopoly market structures:

Assessing the efficiency of a monopoly
Monopoly diagram
Indicate the output level, the price, and
the area representing supernormal profit
on the diagram shown here.
Natural Monopoly
A natural monopoly is a market structure in which only one firm can exist, because the sunk costs
and/or economies of scale are so large that it would be inefficient to have more than one firm in the
industry. Often, natural monopolies are associated with large networks, such as railway networks,
water supply, or postal services. In many cases, the profit-maximising level of output for a natural
monopoly would result in the firm actually making a loss – in this case, we often find that the firm is
either nationalised or heavily subsidised by the government, because if the firm was allowed to
“fail” or exit the market, then there would be a missing market and complete market failure.
Price Competition
We often see price stability in an oligopoly involving
homogeneous goods.
We can explain this phenomenon using the kinked
demand curve:
Indicate the stable price on the diagram below:
Oligopoly
The behaviour of firms in an oligopolistic market is difficult to
predict, because it depends on whether they are selling
homogeneous or differentiated products, the strength of entry
barriers, and whether there is enough trust between firms for
them to collude. We can use a variety of techniques for
analysing the behaviour of firms in an oligopoly.
Natural monopoly diagram
On this diagram below, indicate
a the profit maximising level of output
and associated price
b the level of output and price when
the firm is nationalised and has the
objective of allocative efficiency
According to the diagram, is this monopoly firm… Evaluation: In “reality”…
Productively efficient?
Allocatively efficient?
Dynamically efficient?
X-efficient?
Costs &
Revenue
£
Output
MC
AC
MR AR = D
Costs &
Revenue
£
Output
AC
MC
MR
AR
Royal Mail – a natural monopoly?
The Royal Mail has a legal obligation to provide a postal service in the UK –
by law, it must deliver letters to all UK addresses at an affordable, standard
price at least once per day, 6 days per week. This Universal Service Obliga-
tion is important in allowing information to flow easily around the economy
without disadvantaging certain groups of people.
The only way that the Royal Mail can meet the requirements of its Universal Service Obligation
is to have a huge network of post boxes, postmen and postwomen, delivery vans, sorting
offices and so on.There are nearly 120,000 red post boxes up and down the UK. Royal Mail also
has to continually strive to take advantage of economies of scale. In recent years, Royal Mail
has invested heavily in sorting machinery – its new machines can read the addresses on 11 let-
ters every second and send them to the right pile for delivery; this means each machine can
sort over 30,000 pieces of post every day.And, these machines sort them in to the right order
for the route for each postman or postwoman, saving time and reducing errors.
Royal Mail’s profitability is under threat, however. Its peak delivery period was in 2005-2006,
when it handled 84m pieces of mail, compared with a little under 60m today. In an attempt to
slash costs, it made 3000 employees redundant in 2015. Pre-tax profits in 2015 were £116m,
down from £167m a year earlier – these are slim margins in a firm where revenue is not far
from £10bn annually. Since Royal Mail was fully privatised in October 2015 (when the
government sold its final 13% stake, after initially selling shares in October 2013), there has
been increased competition particularly in the parcels sector – the global retail giant Amazon
has dipped its toe into the water with its own parcel delivery service.
Output
Price
MR
AR = D
What happens if the oligopolist raises the price?
What happens if the oligopolist lowers the price?
What happens if the firm’s costs rise or fall?
How realistic is this model?

Occasionally, however, we may see periods in which there is collusion or periods in which there
are price wars.
Examples of price wars Examples of collusion£
Why do firms collude?
What market conditions make it more likely that firms will collude?
Using game theory to explain why
collusion is usually unstable
Game theory is a mathematical technique for helping
us to analyse the decision-making process. In A-level
Economics, we use it to help us analyse behaviour
in duopoly. The payoff matrix below is an example
of the Prisoners’ Dilemma.
Collusion
Dynamo’s Pizza High Price
Low Price
Papa Joe’s Pizza
High Price Low Price
(10 , 10) (3 , 12)
(12 , 3) (6 , 6)
a On the payoff matrix, indicate each firm’s dominant strategy and the Nash equilibrium
b Is there a “better” option for each firm, other than the Nash equilibrium?
c How could Dynamo’s and Papa Joe’s reach that “preferred” option?
d Why is this option “unstable”?
e How can competition authorities take advantage of this instability to help tackle collusion?
Non-price competition
London to New
York airlines
High Street
Pizza Chains
Supermarkets
Tablets
Chocolate
Market Types of non-price competition

18 A LEVEL ECONOMICS YEAR 2 (A2) Revision Workshop
Competition Policy Regulator
Tools of competition policy
Regulator Industry Examples of Regulation?
Regulatory Failure
In May 2015, the news agency Reuters reported that 20 global banks had paid £152bn in fines and
customer compensation since the start of the 2008 financial crisis, following intervention by banking
regulators in a number of countries including the UK and the US. In an attempt to tackle the root
causes of banking scandals and crises, the UK’s banking regulator, the Financial Conduct Authority
(FCA), had announced an inquiry that was intended to have looked at whether the pay and incentives
structures in banks contributed to scandals in UK and overseas banks.
However, at the end of 2015, the Financial Conduct Authority (FCA) decided to drop this inquiry into the
culture, behaviour and pay in banking institutions. In its announcement, the FCA said that it had decided
a “traditional thematic review” would not help it to achieve improvements in the banking sector, and that
it would work individually with banks to deliver “cultural change”.
www.tutor2u.net 19
Anti-
Competitive
Practices

In response, Labour Shadow Chancellor John McDonnell told BBC Radio 4's
World at One programme the decision by the FCA was "shocking" and could
prove a "dangerous and costly mistake", continuing "This will be a huge blow
to customers and taxpayers who are all still paying the price for the failed
culture in the banking sector that's been widely attributed to be among the
main causes of the crash and the scandals over Libor and price-fixing." He
said that the FCA’s proposal to work individually with banks could still result
in "cultural mispractice" in banking.
Many critics of the FCA’s change of heart have said that this is further evidence
that regulators and the government have decided to take a softer line with
the banks, ending the "banker bashing" era. Although UK growth figures
have picked up since the height of the financial crisis, the UK government
is keen that the UK doesn't lose its appeal as a place for global banks to
do business and employ highly paid people, who can contribute to the
government’s tax coffers. Supporting this view is the fact that the former
chief executive of the FCA, Martin Wheatley, was sacked in mid-2015 for
being an overly-fierce critic of the banks.
Some economists are now accusing the FCA of regulatory capture,
whereby the regulator ends up being too friendly and sympathetic to the
industry which it is meant to be regulating. Such action isn’t unheard of.
Dave Hartnett, the former head of the HMRC, was what he liked to call
“non-confrontational in dealing” with large [especially corporate] tax
avoiders. Since his retirement in 2012, Mr Hartnett has become a
director of a large lobbying group that campaigns against heavy taxation
of tobacco.
Reasons
for
Regulatory
Failure
Regulatory
Capture
£
Activity 1: Game Theory
Question 1 – The cement industry is dominated by two large firms, Castle Cement and
Blue Circle. Each can select a high-output or low-output strategy.
The payoff matrix below shows their profits in each possible situation.
Castle High
Low
Blue Circle
High Low
(1 , 1) (3 , 0)
(0 , 3) (2 , 2)
Does Castle have a dominant strategy? Does Blue Circle have a dominant strategy? What will be the outcome of this situation?
Question 2 – Nestle and Cadbury are the two dominant firms in the UK chocolate
market. They face the decision whether to raise prices using their market power, or to
leave prices unchanged.
The payoff matrix below shows their profits in each possible situation.
Cadbury Raise price
Remain Unchanged
Nestle
Raise Price Remain Unchanged
(2 , 2) (-12 , 12)
(10 , -10) (0 , 0)
Identify if a Nash Equilibrium exists in the game above.

Activity 2: Monopoly Analysis Activity 4: Price Regulation Essay Frame
Complete the following table
Types Explanation
Pure
Monopoly
Example
Statutory
Monopoly
Natural
Monopoly
Regional
Monopoly
My own example
Activity 3: Concentrated Markets Exam Practice
Suppose you are given the following essay title:
Discuss the view that concentrated markets are always bad for the economy.
1 Write a plan that incorporates all of the following 25 words and phrases:
2 Now add in at least 10 examples to your plan.
3 Write your essay, incorporating all of the following connectives words and phrases
Concentration Ratio
Regulator
Price
Regulatory Capture
Employment
Monopoly
Output
Contestability
Supernormal Profit
Exploitation
Consumer Surplus
Price Competition
Natural Monopoly
Tax Revenue
Innovation
Barriers to Entry
Economies of Scale
Limit Pricing
Dynamic Efficiency
Regional Monopoly
Allocative Efficiency
Deadweight loss
Quality
Diseconomies of Scale
Collusion
However
By way of illustration
Assuming that
By the same token
Although
It depends
For instance
Hence
Furthermore
Accordingly
What is more
Notwithstanding
Conversely
Since
It is worth noting that
Moreover
In summary
Because
A key aspect is
In contrast
Discuss the view that freezing energy prices will be beneficial to consumers
Context – explain these terms
Oligopoly (can you name the big energy companies?):
Concentrated market:
Pricing power:
Regulation:
Price-capping:
Outline 3 advantages to consumers of freezing
energy prices:
1
2
3
Outline 3 disadvantages to consumers of freezing
energy prices:
1
2
3
Wider issues:
• Other examples of successful or unsuccessful price-capping?
• How do we decide on the right “level” of price-capping?
• Who monitors the behaviour of energy firms?
- • Are regulators always effective?
Conclusion – answer the question and reach a supported judgement!
Analysis – explain how price-capping works
(use a diagram if you can)

Activity 5: Rail Fares and Regulation
At the start of January 2016, the Rail Delivery Group or RDG (which represents train operators and Network
Rail) announced that rail fares would rise on average by 1.1%, the smallest annual rise in 6 years. Peak-
travel and commuter fares are regulated and can only rise by RPI + 1% at the most. However, off-peak
fares are not regulated, and can therefore be increased by as much as train operators want. Rail fares now
pretty much cover the running cost of Britain’s railways – for many years they didn’t, and heavy subsidies
were needed to ensure that trains were kept running. The diagram below shows where the money is
allocated, on average, when train tickets are bought:
A spokesperson for the Campaign for Better Transport said that more needed to be done to ensure that train travel
remained affordable for most people, and that rail fares in the UK were amongst the highest in Europe already – Brits
pay 6 times more to commute than people elsewhere in Europe. Labour’s shadow transport secretary said that people
are typically paying £2000 more for a commuter ticket now than when David Cameron became Prime Minister in
2010. The Labour Leader, Jeremy Corbyn, described the situation as scandalous, saying that commuters’ money was
being used to boost the profits of private firms such as Stagecoach and Virgin, and foreign-owned operators; he went
on to reaffirm his view that the railways should be renationalised. His view is supported by the union-backed pressure
group Action for Rail, which recently calculated that on average, a commute into London costs 13% of a worker’s
salary, compared with just 2% for a commute into Rome for an Italian worker.
The rail regulator, ORR (Office of Road and Rail), is itself under scrutiny by the House of Commons Public Accounts
Committee, accused of having failed to adequately scrutinise Network Rail’s improvement plans or to take tough
enough action when Network Rail failed to deliver. For example, the electrification of the Great Western Line from
London Paddington to Cardiff is now £1.2bn over the initial prediction of £1.6bn. MPs have described this as “staggering
and unacceptable”.The Committee said that the Department for Transport “should carry out a fundamental review of
the regulator’s role and effectiveness in rail infrastructure planning.
A Define the following key terms:
i. RPI + X regulation
ii. Nationalisation
iii. Privatisation
iv. Regulator
v. Regulatory capture
vi. Infrastructure
B Explain why Network Rail (the organisation responsible for the UK’s railway network and many
stations) is considered a natural monopoly.
C Discuss the view that train operating companies, such as South West Trains, have monopoly power.
D Assess the advantages and disadvantages of renationalising the railways, as proposed by Jeremy Corbyn.
E Discuss the view that lower rail fares will be good for the economy.
F Discuss the reasons why the Office of Road and Rail (ORR) might be an ineffective regulator.
Notes

Session 3
International Trade
and Exchange Rates
An analysis of the key trends in the nature and pattern
of international trade, and the changing nature of
globalisation, is how this session will start, followed by
a close look at the structure of the Balance of Payments.
We will then evaluate the advantages and disadvantages
of free trade versus protectionism, looking at the role of
trade blocs and organisations such as the WTO. The final
part of the session will consider the pros and cons of
different types of exchange rate systems.
The changing pattern of global trade
The existing pattern How is the pattern changing?
Before the 2008 financial crisis, world trade volumes were
growing at more than twice the rate of GDP due to:
Trade volumes continue to grow more quickly than GDP but
at a slower rate because:
The geographical centre of trade is shifting towards emerging
economies. By 2060, the share of global trade amongst
present OECD members will be:
And by 2060 the share of global trade amongst Asian
economies will be:
The share of global trade amongst OECD members is currently:
And the share of global trade amongst Asian economies is
currently:
Drivers of change in the global trade pattern
Factors causing
change in global
trading patterns
What is meant
by globalisation?
What causes
globalisation?
Is there
evidence of
deglobalisation?
The Balance of Payments
The Balance of Payments is a record of all international financial transactions between consumers,
firms and the government in one economy with all other economies.
A simplified outline of the structure of the Balance of Payments:
BalanceofPayments
Current Account
Capital Account
Financial Account
Trade in Goods
Trade in Services
Net Investment
Income
Current Transfers
Direct Investment
Flows
Hot Money Flows
Reserve Assets

Does it matter if an economy runs a current account deficit?
Reasons why a current account deficit can be detrimental:
Protectionism
The tariff diagram
Discuss the benefits of strengthening
protectionist measures in the UK
Structural issues -
Unemployment
and slow growth
Over reliance on
other countries
Financed by
Hot Money
Reasons why a current account deficit may not be harmful:
Benefits
of free
trade
More
choice
Lower
prices
Productive
efficiency
Higher
output
Promotes
peace
Technology
diffusion
May be cyclical
May be importing
technology and
capital
Accompanied by
strong inward
FDI
Theory of Comparative Advantage
Countries should specialise in producing
the goods that they can produce at a lower
opportunity cost than other countries and
then trade. Total world output will rise as a
result of the increase in productivity.
Problems with the theory:
1
2
3
4
On the Tariff Diagram, indicate:
a The volume of imports before the
tariff
b The volume of imports after the tariff
c The tax revenue earned from the
tariff
d The gain in domestic producer
surplus as a result of the tariff
e The loss of domestic consumer
surplus as a result of the tariff
Quantity
Price
Pw+t
Pw
Sd
Sworld + t
Sworld
Dd
Possible benefits of increasing protectionism
could include:
1
2
3
Let’s develop one of these arguments in more detail to practise exam technique:
Point
Explanation
Example /
evidence
Evaluation 1
Evaluation 2
Link back to the
question

International Agreements?
What am I?:
What has been happening to the value of major currencies?
Floating exchange
rate
A decrease in the price of a currency compared to other currencies, in a
floating exchange rate system
Fixed exchange rate An exchange rate system in which the price of the currency is determined
entirely by the forces of demand and supply
Speculation A decrease in the price of a currency compared to other currencies,
engineered by a government in a fixed exchange rate system
Hot money A risky activity in which investors anticipate/predict a change in the exchange rate
which could lead to a financial gain if they buy or sell the currency at the right time
Depreciation International monetary flows in which investors seek a short-term return;
usually affected by changes in interest rates
Appreciation An exchange rate system in which the price of the currency is determined
and controlled by the government
Devaluation An index that measures the relative price of a currency against a basket of
other major currencies
Effective exchange
rate
An increase in the price of a currency compared to other currencies, in a
floating exchange rate system
Exchange Rate Systems
Match the 8 key terms below to their correct definition / explanation:
Revise the topics of the World Trade Organisation, trade blocs and the UK’s relationship with the EU in
depth by using the Extension Activities at the end of the Session 3 Chapter in this workbook.
Pick out 3 significant features from
the chart showing the Effective
Exchange Rate of the £:
1
2
3
Australian
Dollar
Euro Japanese
Yen
Swiss
Franc
US
Dollar
Which currency has seen the largest appreciation
over the time period shown?
Which currency has seen the largest depreciation
over the time period shown?
Which currency has been the most volatile over the
period shown?
Study the chart showing the Effective Exchange Rates for 5 major global trading currencies, and
then answer the questions below:
Decide whether each of the following scenarios is likely to lead to an increase or decrease in the
exchange rate of the £
Scenario Increase Decrease
1 An increase in the Bank of England’s base rate of interest
2 A reduction in desirability of British exports
3 A belief amongst currency traders that the £ will appreciate in the near future
4 A fall in demand for imported raw materials
5 A significant rise in the value of outwards FDI

Classify the following statements as advantages of either FLOATING exchange rate
systems or FIXED exchange rate systems:
If the economy is running a
large current account imbalance,
then the exchange rate adjusts
to allow automatic correction
of the imbalance
Fixed or Floating?
There is minimal volatility in
the prices of exports and imports,
making costs and revenues
easier to predict for businesses
and investors
Fixed or Floating?
The economy is able to adapt
quickly to economic shocks
that occur either in the
domestic or the global
economy
Fixed or Floating?
There is a reduction in
uncertainty in international
trade and portfolio
management
Fixed or Floating?
Inflation in other countries
is less likely to be
“imported”
Fixed or Floating?
The Central Bank is free to
focus on achieving other
objectives, such as low and
stable inflation, and so there
are fewer policy conflicts
Fixed or Floating?
The government or Central Bank
does not need to keep a large
quantity of foreign exchange
reserves or gold (which incur
an opportunity cost)
Fixed or Floating?
There is a reduction in
destabilising, unproductive
speculation if the monetary
authorities are credible
Fixed or Floating?
The government may be
prevented from following
overly-radical or irresponsible
economic policies
Fixed or Floating?
Activity 1: The Changing nature of International Trade
Activity 2: Comparative Advantage - Numbers and PPFs
www.tutor2u.net 33
Take a look at the OECD report “Global Trade and Specialisation Patterns over the next 50
years”: www.oecd.org/economy/Trade-and-specialisation-patterns-for-the-next-fifty-years.pdf and summarise
the key findings on one page of A4.
Question 1
a Which country has an absolute advantage in both goods?
b What is the opportunity cost ratio of 1 car in X? And one car in Y?
c What is the opportunity cost ratio of 1 lorry in Y? And one lorry in X?
d Which country has the comparative advantage in car production?
e Draw the relevant PPFs to show the non-trade situation, and the
post-trade situation at an exchange rate of 1 car = 3 lorries.
Country
X
Y
Cars
4
3
Lorries
20
6
OR
Question 2
a Which country has an absolute advantage in both goods?
b What is the opportunity cost ratio of 1 cheese in the UK? And 1 cheese in
France?
c What is the opportunity cost ratio of 1 wine in France? And 1 wine in
the UK?
d Which country has the comparative advantage in cheese production?
e Draw the relevant PPFs for this example to show the non-trade situation,
and the post-trade situation at an exchange rate of 1 cheese = 2 wine.
Country
UK
France
Cheese
50
60
Wine
20
240
OR

Activity 3: The Role of the WTO Activity 5: Should the UK leave the EU?
Read this World Trade Organisation Booklet “What the WTO can do” and summarise the 10
key roles into a mindmap: www.wto.org/english/res_e/publications_e/wtocan_e.pdf
As a further extension activity, evaluate each of those 10 roles, examining whether you think
the WTO does or does not achieve its roles using as much evidence as you can to support
your claim.
Decide whether each of the following statements represents a reason for the UK to stay in the
EU or to leave the EU. Then rank them in order from most to least persuasive reasons.
Fill in the blanks in the passage below, using the words provided
Activity 4: Optimal Currency Areas
Euro
Mundell
Fiscal
looser
wages
geographical
destiny
visas
inflation
labour
monetary
efficiency
cultural
cycles
production
An Optimal Currency Area is a _______________ area, usually larger than a single country, in
which sharing a single currency allows economic __________ to be maximised. The theory was
properly developed by the economist Robert _________. There has been significant debate about
whether the countries using the ________ actually form an OCA.
We can assess whether a region is an OCA against 4 key criteria:
1 Free movement of _________ in the region, including a lack of “physical” barriers such as
________ , a lack of ___________ barriers such as language and qualifications, and institutional
barriers such as pension and benefits transferability.
2 Free movement of capital, combined with flexibility in prices and _______, in order to allow
demand and supply in both product and labour markets to easily adjust.
3 A __________ transfer mechanism to allow the tax and benefit system to reduce inequalities
cross the OCA
4 Countries in the OCA need to have similar patterns in their economic ________ in order to
benefit from having a shared __________ policy set by a Central Bank. For example, in times
of recession, then monetary policy needs to be _________ in order to stimulate growth and in
times of boom, monetary policy needs to be tighter in order to prevent ____________.
Since Mundell proposed the theory of the OCA, other economists have suggested some additional
conditions for an area to be regarded as a functioning OCA. These include all member states believing
in a shared _________, for example the “ever closer union” of the EU, and diversity in
____________ across the member states in order to reduce risk in case of economic shocks.
British exporters do not have to
contend with tariffs when they export
to the EU; over 50% of UK exports go
to the EU
Because of EU regulations,
any EU fishermen can fish in
UK waters
UK companies can find the skilled
workers that they need from the EU
if they cannot find them in the UK,
improving labour market efficiency
The influence of the British
military abroad is high because
of its EU-affiliation
The UK must pay high annual
membership fees to be part of the
EU (around £10bn)
Because of the free movement of
labour around the EU, it makes it
difficult for the UK to manage its
borders and maintain security
Over 90% of UK companies carry
out no trade with the EU but must
still abide by EU rules, causing a huge
cost burden
British farmers gain large subsidies
from the EU’s Common Agricultural
Policy (CAP) – total UK subsidies
are around £4bn
EU regulations require the UK
to invest more in renewable
energy sources
UK workers can find the jobs that
they want either in the UK or in the
EU countries – this improves labour
market efficiency
Many firms, such as banks, in
the City of London, carry out a huge
amount of trade with the EU
The UK has had to adopt many
EU Regulations and Directives into
UK law, diminishing “parliamentary
sovereignty”
The UK has already negotiated
an opt-out clause for membership
of the Euro
Activity 6: The Levels and Types of Economic Integration
Types of integration: Free Trade Area; Monetary Union; Customs Union; Preferential Trade Agreement;
Single Market; Fiscal Union
Names of integrated areas: NAFTA, European Union, Eurasian Customs Union, Mercosur, SACU,
CEFTA, COMESA, GAFTA, USA, ASEAN, ECO
1Find out which countries are involved in each of the agreements listed above.
2Use the words above to complete the table below.
Example(s)
This exists when a number of countries decide to reduce or eliminate tariffs on certain goods
that are imported from other countries of the area. Agreements can be between 2 countries
(bilateral) or many counties (multilateral)
A scenario in which a number of countries agree to eliminate all barriers to trade e.g. tariffs,
quotas etc, on all traded items within that area
When countries agree to have a Common/Unified External Tariff against non-members of the
agreement, in addition to the removal of trade barriers between counties in the agreement.
This allows countries to negotiate as a single bloc or group.
A situation in which member states trade freely in all their economic resources – labour and
capital, for example, and not just goods and services. There may also be some common
microeconomic policies relating to things such as competition policy.
This exists when countries abandon their own currency and share a currency, in order to build
a closer union. This stage usually comes after establishing a Common External Tariff and
complete freedom of movement of labour, capital, goods and services
When countries agree to harmonise tax rates and rates of public spending and borrowing,
agreeing on the allowed size of budget deficits and budget surpluses
Type of
Integration
Description

Activity 7: Changes in Exchange Rates - Evaluation Practice
Discuss the extent to which a currency appreciation is likely to have a negative economic impact
Wider issues:
• What is meant by an appreciation?
• Can you give examples of currency appreciation?
• How do we assess “economic impact”? (hint – consider macro objectives)
Key Points:
• Currency appreciation causes exports to be relatively more expensive and imports to be relatively cheaper,
which could worsen the trade balance and reduce AD (therefore slower growth and higher unemployment)
because of the reduction in competitiveness
• Could lead to regional inequality as some industries struggle to compete; could lead to imposition of tariffs
and tit-for-tat strategies?
• Could reduce corporation tax revenue if exporting firms have less profit, and could increase the need for
government subsidies to maintain competitiveness, worsening the fiscal balance
Examples: consider the Resource Curse / Dutch Disease, or the appreciation of the Swiss Franc when confidence in the
Euro fell
Evaluation: how would the Marshall-Lerner condition
influence the impact of the appreciation? How
desirable will exports continue to be, regardless of
their price?
Evaluation: how could inflation be positively impacted if
a country is a heavy importer of raw materials and
other goods? How might this help countries needing
to import capital and technology?
Evaluation: does the impact of the appreciation
DEPEND ON what caused it? Could it be simply a
self-correction if caused by a large current account
surplus? Is it temporary if caused by an inflow of hot
money or speculation? Could it have a positive effect
on LR growth if caused by an inflow of FDI?
Overall conclusion – can you directly answer the question in 2 sentences?
Evaluation: why might the appreciation cause
exporters to be more efficient? How could this benefit
the economy?
www.tutor2u.net 37
Session 4
Economic Developme
In this session we will examine different ways of measuring
economic development, poverty and inequality, before
considering some of the theoretical and practical reasons
why different countries are at different stages in their
development, for example a lack of savings, the resource
curse and trade. We will also assess policies such as debt
relief, market liberalisation, and aid, which can be used to
stimulate growth and development in LEDCs.
nt
The difference between economic growth and economic development
Economic
Growth
Economic
Development
Measuring economic development
Why is simply using GNI per capita (i.e. income) not adequate in helping economists to assess the level
of development in a particular country?
Components of the
Human Development Index
The HDI – three dimensions
and four indicators
The Human Development Index (HDI): a United Nations measure of economic development; a combined
index that takes account of life expectancy at birth, the number of years of schooling, and GNI per capita
at purchasing power parity.

Estimate the degree of development of each of the following countries, and place it in the
appropriate box:
Alternative development measures
Match the development measure to its correct description:
Niger Morocco China Nepal Zambia Argentina
Tunisia Malawi Indonesia Norway UK Mexico
You can find more detail on the HDI for each country here: http://hdr.undp.org/en/composite/HDI
The table below lists some of the common concerns about using the HDI to measure economic
development. Read each concern, and then award it an “importance score”, where 0 = really not
an important concern, and 10 = highly important concern.
Very High Human
Development
(HDI = 0.8 to 1.0)
High Human
Development
(HDI = 0.7 to 0.8)
Medium Human
Development
(HDI = 0.55 to 0.7)
Low Human
Development
(HDI = 0 to 0.55)
Problems with using the HDI to measure development Importance
Score
Countries have similar HDI scores but may have very different development concerns e.g. the US and Japan
have similar scores but Japan gains its high ranking from high life expectancy whereas the US gains its high
ranking from high GNI per capita.
It isn’t always possible to verify the information / statistics from all countries, so data quality could be poor
Not all countries collect data every year – a national census may only take place once every decade, for
example, or data may be based on small, unrepresentative surveys
The methodology and calculations of the HDI have changed many times since the measure was first
introduced in 1990, making time-series comparisons rather meaningless
The notion of human development is more complex than can be captured in the 3 simple components
used in the HDI (GNI/capita, years of schooling, life expectancy)
Time to think - note down 10 other possible development
indicators that you think would help an economist to assess
the level of development in an economy:
Inequality-adjusted
HDI (IHDI)
Measures Descriptions
This measure uses the same three main components as the HDI (life expectancy, number
of years schooling, GNI per capita) but takes into account the differences between men
and women in these components – it shows female HDI as a proportion of male HDI
Gender Development
Index (GDI)
This measure looks at 3 components: reproductive health (maternal mortality rate and teen
birth rate), female empowerment (% of parliamentary seats occupied by women and %
of female over-25s with secondary education) and economic status (female labour force
participation rate)
Gender Inequality
Index (GII)
This measure focuses on the least developed countries, looking at deprivation in health
(malnourishment & child mortality), education (% of children enrolled in school), and living
standards (access to water, electricity, fuel, toilets etc)
Multidimensional
Poverty Index (MPI)
This measure uses the same three main components as the HDI (life expectancy, number
of years schooling, GNI per capita) but also takes into account the distribution of those
characteristics across the population
Essay technique
To what extent does economic growth lead to an
increase in economic development?
Explain
Example
Evaluation 1: GNI per head may not actually increase by much despite economic growth
Explain
Example
Evaluation 2: Development is more than an increase in the HDI
Explain
Example
Point 1: An increase in economic growth leads to an increase in the value of HDI

Why are countries at different stages in their development?
Complete the flow chart below with examples that support and refute the development constraint
suggested:
Policies for increasing the level of economic development
Complete the table below:Constraintsondevelopment
Primary export
dependency
Geographical
difficulties
Poor
governance
Savings gaps /
capital flight
Infrastructure
weaknesses
Conflict
Low
value-added
Resource curse /
Dutch Disease
Landlocked
Remote
Communities
Post-Colonial
issues
Weak financial
institutions
Weak confidence
Limited FDI
Civil War
Terrorism
Strategy Specific Policies Examples
Improve
education /
raise human
capital
Strengths: long-term benefits, increases LRAS, greater
chance of employment, healthier population
Weaknesses:
Protectionism /
Import
Substitution,
and fixed
exchange rates
Strengths: increases employment, tariffs raise tax revenue,
more confident investors, value-added
Weaknesses:
Develop
infrastructure
Strengths: positive multiplier effect, increases LRAS,
environmental benefits, predictable production
Weaknesses:
Supporting
microfinance
Strengths: grassroots level / well-targeted, relatively
inexpensive, low risk, promotes gender equality
Weaknesses:
Encouraging
FDI and trade
Strengths: improves productivity, greater choice, technology
transfer, can lead to more infrastructure
Weaknesses:
Privatisation Strengths: less government corruption, raises revenue for
government, profit incentive, shared wealth
Weaknesses:
Aid Strengths: can be targeted, humanitarian, bridges the
savings gap, technology transfer
Weaknesses:
Debt relief Strengths: tax revenue used more productively, less
post-colonial influence, don’t pay for past mistakes
Weaknesses:
Promote tourism Strengths: improved infrastructure & transport, creates
employment, better political relations
Weaknesses:
Fairtrade Strengths: reduces corruption, better quality of life for
producers – enough income to save
Weaknesses:
GreaterGovernment
Intervention
FreeMarket
Approaches
AlternativeApproaches

Creative solutions to improving economic development
Case Study 1 – Cambodia’s Lucky Iron Fish
Chocolate is a treat that so many people in the developed world take for granted, yet cocoa bean
cultivation can destroy forests thousands of miles away from the shops selling the end product.
Financially, it’s tempting for smallholder cocoa farmers, unaware of the impact their actions have on
a global scale, to expand their plots into forest areas.
According to the Forest Carbon Partnership Facility (FCPF), deforestation and forest degradation have been identified
as the causes of more than 15% of global greenhouse gas emissions, more than the entire global transportation
sector.
REDD+ (Reducing Emissions from Deforestation and forest Degradation) provides a financial incentive to forested
countries that protect their forests and stem the rate of forest loss. In Côte d’Ivoire, a three-way partnership with the
government, the World Bank and Mondelēz International, the world’s biggest chocolate maker, aims to eliminate
deforestation linked to the country’s cocoa production by educating farmers to preserve forest areas through
trainings carried out by Mondelēz as part of its $400m Cocoa Life Programme.The boss of Mondelēz says “Through
Cocoa Life, we already work
with more than 17,000 Ivorian
farmers. We provide them
good agricultural practice
trainings so they can increase
the productivity of their
existing plot and their
resulting income, and we
also work with the cocoa
communities to make them
thriving, attractive
environments for the next
generation of farmers.”
Case Study 2 – the UN’s REDD+ programme
Activity 1: Measuring Inequality
Activity 2: Understanding Poverty - key terms
www.tutor2u.net 43
Lorenz Curves and the UK’s redistribution of income
a Complete the table
b Plot Lorenz curves for a) original income, b) income after benefits, and c) income after
tax and benefits
Research and note down definitions of the following terms:
Now explore the following website: www.economicswebinstitute.org/glossary/poverty.htm
Average per
household
per year
1st
decile
2nd
decile
3rd
decile
4th
decile
5th
decile
6th
decile
7th
decile
8th
decile
9th
decile
10th
decile
Original
income
3 738 7 304 11 411 16 051 21 609 28 074 36 105 45 654 59 239 102 366
Cumulative
original
income
3 737 11 041
(3 737 +
7 304)
22 452
(11 041 +
11411)
331 550
Cumulative
% of
income
1.13
(3737
÷331550
x 100)
3.33
(11041
÷331550
x 100)
6.77
(22452
÷331550
x 100)
100.00
Income after
benefits
9 524 16 307 20 341 23 947 28 957 34 277 41 123 50 026 62 721 104 779
Cumulative
income after
benefits
9 524 25 831
(9 524 +
16 307)
392 022
Cumulative
% of income
after
benefits
2.43
(9524 ÷
392022
x 100)
6.59
(25831 ÷
392022
x 100)
100.00
Income after
benefits
and tax
Cumulative
income after
benefits
and tax
Cumulative
income after
benefits
and tax
12 050 18 958 22 450 23 895 27 230 29 486 33 700 39 102 46 372 73 682
392 022
100.00
Relative poverty
Poverty Trap
Absolute poverty
Gini Coefficient
Income
Equity
Wealth
Labour Immobility
Deprivation
LEDC

Activity 3: The Importance of Work for Development
Study the following diagram and read the accompanying case study (adapted from Chapter 1
of the 2015 United Nations Human Development Report -
http://hdr.undp.org/sites/default/files/chapter1.pdf).
Write an essay answer to the following question:
Discuss the extent to which increasing job opportunities in an LEDC will always lead
to economic development.
Activity 6: Evaluating Microfinance
Read the extracts below, and construct a list of the advantages and disadvantages of
microfinance schemes in promoting economic development in a country such as Cambodia.
Activity 4: Creative Solutions to Achieving Economic Development
Take a look at each of the following case studies which identify innovative ways of achieving greater
levels of economic development, and make brief notes.
The role of urban planning in eradicating malaria: www.bbc.co.uk/news/health-32690123
Lima’s life-saving shipping container: www.bbc.co.uk/news/health-32434568
Bangladesh’s playpens to prevent drownings: www.bbc.co.uk/news/health-31045033
Riders for Health - motorbike couriers in Malawi tackling AIDS: www.bbc.co.uk/news/science-environment-30005764
Palestinian textile company bridges the gender divide: www.theguardian.com/global-development/2016/jan/15/
palestinian-artextile-company-gender-politics-israel
World Bank Survey on Chicken Parties and other unusual ways to save: www.theguardian.com/global-development-
professionals-network/2015/jan/29/chicken-parties-poor-raise-money
Activity 5: The Sustainable Development Goals
Take the Guardian’s Sustainable Development Goals quiz to test your knowledge – you can find it here:
www.theguardian.com/global-development/2015/sep/25/sustainable-development-summit-2015-quiz
global-goals
Work enables people to earn a living and therefore achieve
“economic security”. But it is also good for development in a wider
sense – people get to improve their capabilities, improve their
health and education, and by giving people greater choice, allows
them to participate more fully in society, providing dignity, social
cohesion, and creating multiplier effects and positive externalities –
this can be really important when looking at countries post-conflict.
When measuring “development”, economists should consider that
“work” is more than just “jobs” – it can include voluntary work,
caring for others, creative work (drawing, writing and acting, for
example).The quality of work is often as important to people as the
quantity. Not all work is necessarily good for development – many
jobs are dangerous, tiring or repetitive. Many children are forced
to work, rather than gain an education, or have the chance to be
a child. Many people are forced into “bonded labour” which is
exploitative and often cruel, deprived of basic rights.Work can
also perpetuate inequality, if the gains go to a small minority.
The microfinance delusion – who really wins? Jason Hickel – professor of anthropology, LSE
What’s so fascinating about the microfinance craze is that it persists in the face of one unfortunate fact: microfinance doesn’t
work. Of course, there are some lovely anecdotes out there about the transformative power of micro-loans, but as David
Roodman from the Center for Global Development said “The best estimate of the average impact of microcredit on the
poverty of clients is zero.” In fact, it turns out that microfinance usually ends up making poverty worse. The reasons for
this are fairly simple. Most microfinance loans are used to fund consumption – to help people buy the basic necessities
they need to survive. In South Africa, for example, consumption accounts for 94% of microfinance use. As a result, borrowers
don’t generate any new income that they can use to repay their loans so they end up taking out new loans to repay the old
ones, wrapping themselves in layers of debt.
When micro-loans are used to fund new businesses, budding entrepreneurs tend to encounter a lack of consumer demand.
After all, their potential customers are poor and low on cash, and what little money they do have gets spent on basic
goods that tend already to be available. In this context, new businesses end up displacing already-existing ones, yielding
no net increase in employment and incomes. And that’s the best of the likely outcomes. The worst – and much more likely
– is that the new businesses fail, which then leads, once again, to vicious cycles of over-indebtedness that drive borrowers
even further into poverty.
The only consistent winners in the microfinance game are the lenders, many of whom charge exorbitant interest rates
that sometimes reach up to 200% per annum. In the past we would have called such people loan sharks, but today they’re
called microfinance providers, and they crown themselves with the moral halo that this term carries. Microfinance has
become a socially acceptable mechanism for extracting wealth and resources from poor people. Why is microfinance
such a resilient idea? Because it promises an elegant, win-win solution to the problem of poverty. It assures us that we –
the rich world – can eradicate poverty in the global South without any cost to us, and without any threat to existing
arrangements of political and economic power. In other words, it promises revolution without the messiness of class
struggle. And, what is more, it promises that we can help save the poor while making money from it.
If we expand our view to encompass the actual causes of poverty, it becomes clear that microfinance just won’t do.
Structural problems require structural solutions. What might this look like? We could start by democratising the World
Bank and the IMF, renegotiating trade agreements, clamping down on capital flight, rebuilding labour rights, and so on.
If we want to eliminate poverty, rich countries and rich individuals are going to have to feel the pinch – there’s no way
around it. Unfortunately, the missionaries of microfinance are unlikely to be happy about this. This is not to say that we
should abolish microfinance altogether, but simply that microfinance will never work until we address the background
conditions that produce poverty in the first place. We also need to set up the right systems for small businesses to succeed,
such as strong subsidies, state assistance, and welfare support to prop up entrepreneurs when they fail – the very systems
that neoliberalism has convinced us to abandon.
There’s also a much more immediate solution we could try. Why not just give money to the poor, for free? A growing body
of evidence suggests that direct cash transfers, with no strings attached, not only deliver success where microfinance
fails, they appear to be the single most impactful anti-poverty intervention available. Experiments with basic income
grants have been conducted in Namibia, Mexico, South Africa, Indonesia, and elsewhere, all with astonishingly good
results. They smooth out consumption deficits, improve health indicators, and allow people to start small businesses that
are successful because they can take advantage of increased local demand.
Cambodia’s microfinance crisis – drowning in debt
For years the world has patted itself on the back about the rapid growth of Cambodia’s microfinance market. Over the past
decade, Cambodia’s market has been one of the fastest-growing globally, recording a 127% portfolio increase between 2013
and 2014. Forty-five microfinance institutions (MFIs) now serve some 1.8 million borrowers, out of a total population of over
15 million. A study by the Institute of Development identified Cambodians who have as many as 6 loans, while 51% reported
having made a sacrifice (such as eating less or poorer quality food) in order to make a loan repayment. Are reckless lenders
pushing debt on to poor people who lack the knowledge they need to grasp the real risks? Regulation is needed to limit the
number of loans taken out by Cambodians, and to determine the maximum safe loan size. However, rising competition and
an increasing number of MFI providers makes this harder to achieve – and many say that borrowers need to take some
responsibility for themselves and their borrowing.

Session 5
Current UK Policies
and Global Economic
Development
This final session of the day will focus on economic data and examples that
can be used to great effect in exams to really raise the quality of answers.
We will assess the state of the UK, EU and global economies, before exploring
the likely economic impact of current UK government policies in areas as
diverse as the environment, infrastructure development, the fiscal balance,
inflation-targeting and trade agreements.
Assessing the state of the UK and EU Economies
Indicator Measure 2015
UK EU
2016 (forecast) Trend
Economic
Growth
Change in real GDP
Unemployment Unemployment rate (ILO
measure)
Inflation The annual change in the
CPI
Current Account
Balance
Value of exports – value of
imports
Inequality Gini coefficient
Budget position Budget balance as a % of
real GDP
National debt Total amount owed by the
gov’t as % of real GDP
Exchange rate Value of the currency
against a basket of others
Interest rates Overnight cost of borrowing
from the Central Bank
10 year bond
yield
The annual return on
owning gov’t debt
Confidence Proportion of optimists to
pessimists
Savings ratio The proportion of income
saved
UK EU
UK economic outlook summary
Watch the PWC Economic Outlook video (found here:
www.pwc.co.uk/services/economics-policy/insights/uk-economic-
outlook/ukeo-nov-15-summary.html), and jot down notes under
the headings below:
How might changes in the global economy affect the UK economy?
Headwinds:
Factors that are offsetting the headwinds:
Why might interest rates be back at around 3% by 2020?
Why is the rate of increase in consumer spending expected to slow down?
How is the pattern of consumer spending expected to change over the coming years?
How is the pattern of UK exports expected to change?
China’s slowdown in growth
Advantages for the UK economy:
Disadvantages for the UK economy:
Possible UK exit from the EU
Increasing “multipolarity” of global power

Global economy
snapshot
Fiscal Policy exam-style question
Summary of current UK Macroeconomic policies
US - a bright spot in a
weak global economy
Asia Pacific -
stalling growth
Latin America -
losing the race
Africa - positive
but uncertain
Euro Area -
improving recovery
Labour Market
Policies
International
Policies
Supply Side
Policies
Monetary
Policies
Fiscal
Policies
Increased Personal
Allowance
Forward Guidance National Living Wage UK Single Market
Centre
Fixing the
Foundations
Lower Corporation
Tax
Inflation Targeting Universal Credit -
Youth Work
TTIP Negotiations Help to Buy
Bank Profits Tax FPC New Apprenticeships Renegotiate EU
Stance
30hrs Childcare
Discuss the likely effects of raising the Personal Allowance to £11,000, from £10,800, in April 2016.
Possible Points:
Example/Evidence/Data:
Analysis: Supporting Diagram:
Evaluation 1:
Link back to the question:
Evaluation 2: Evaluation 3:
Monetary Policy exam-style question
Discuss the likely impact on Euro Area economies of the European Central Bank’s approach to monetary policy.
Possible Points:
Evaluation 1:

Supply Side/Labour Markets policy exam-style question
Discuss the likely effectiveness of possible policies that the UK government could use to incentivise the economically inactive
and the unemployed into work.
Policy 1:
Evaluation 1:
Policy 2:
Evaluation 1:
Activity 1: Comparing the performance of the UK Economy to
other countries
www.tutor2u.net 51
Go to the World Bank’s DataBank website: http://data.worldbank.org/indicatore
a Use the information that you find there to help you complete the table below (choose 3 of
your indicators, and also choose your own country in addition to those already listed in the
table). Indicate the trend in the data using the following symbols: ↑ ↓ ≈
b Write one page on the following theme: “How is the UK economy performing compared
with other major economies?”
UK
GDP growth
rate
USA China Germany Australia Brazil Japan South
Africa
My Choice:
GDP per
capita (PPP)
Gross savings
(% GDP)
Gov’t debt (%
GDP)
FDI (net
inflows, $)
CPI inflation
rate
Unemployment
rate
Budget deficit
(% GDP)
CO2 emissions
(tons per
capita)
Income share
held by highest
10% pop’n
My choice 1:
My choice 2:
My choice 3:

Fill in the blanks in the passage about Quantitative Easing, using the 20 words/phrases listed below:
Activity 2: Understanding Quantitative Easing
Read this report from PWC on the prospects for the UK, and summarise its findings into a two-page
report: www.pwc.co.uk/assets/pdf/uk-economic-outlook-full-report-november-2015.pdf
Activity 4: Prospects for the UK Economy
Identify, analyse and evaluate possible policies to tackle each of the economic problems suggested in
the table below:
Activity 5: Developing Knowledge of Wider Policies
Central electronically lend growth
inflationary monetary transmission assets
de-leveraging yield banks bonds
pension interest price unemployment
liquidity hoarding opportunity 375 billion
Each of the phrases below are either an advantage or disadvantage of four important UK macroeconomic
policies. These policies are: inflation targeting, increasing tax on bank profits, National Living Wage,
and, Funding for Lending.
Your task is to link as many phrases as possible to each of the four policies.
Activity 3: Evaluating Macro Policies
Encourages too much lending Encourages price stability Helps to anchor inflation expectations
Hurts the best-run banks Reduces competition to big banks Helps small businesses
Reduces impact of economic shocks Higher earnings for those in work Could lead to wage-price spiral
Tax will be passed on to customers Popular with the general public Can cause unemployment
Will add £12bn to public funds Reduced lending to SMEs Lowers Central Bank ability to handle shocks
Doesn’t affect the very poorest Collected alongside corporation tax Difficult to choose the right target
Incentivises people to work Won’t tackle excessive risk-taking May cause unemployment
Can lead to higher employment Businesses unwilling to borrow Has pushed down interest rates on savings
Quantitative Easing, or QE for short, is a relatively new type of ______________ policy, which
was developed in response to the breakdown of the traditional interest rate _____________
mechanism. In QE, the __________ Bank buys government ___________, using money that it
has created _______________. Many of these bonds are owned by financial institutions such as
__________ or _____________ funds. When these institutions sell their bonds to the Central
Bank, they receive the newly-created cash in return – in other words, the _________ of the banking
system is increased. This should encourage these institutions to ________ to more businesses and
households. By increasing the supply of money, __________ rates should also fall, further encouraging
lending. Similarly, the injection of liquidity and the resulting increase in demand for bonds leads to
an increase in the ______ of bonds, which corresponds to a fall in the bond ________. This
stimulation to lending should, in turn, lead to an increase in economic __________ and a fall in
_____________.
However, some economists dislike the idea of QE because they argued that in the longer term it will
simply lead to _____________ pressure. Others argue that by boosting lending, the price of other
________ such as houses have increased, which potentially causes dangerous “bubbles”. These
potential drawbacks have not been seen yet. QE has not had the full impact that was initially intended.
One reason for this is that many banks have been _________ the additional cash – having been
criticised for over-lending and causing the financial crisis, it is easy to see why banks have moved in
the opposite direction. Furthermore, many banks have been ________________, or reducing
their debts with the additional cash, rather than lending out. Many have also questioned the
_____________ cost – would there have been a better use for the £______ spent by the Bank
of England?
Economic problem Policy How it tackles the problem Evaluative points
High unemployment in
the North East
A lack of UK business
confidence, which is
reducing investment
An ageing population
leading to increased
strain on public finances,
especially pensions and
the NHS
Overseas-based MNCs
deciding to move their
production facilities out
of the UK
A housing bubble in the
London and South-East
of England
Huge debts incurred
by households living
in flood-affected areas
because of inadequate
insurance
An increase in the
proportion of children
classified as living in
relative poverty in the
UK
Falling oil prices leading
to a fall in revenue from
oil exports, and a widening
trade deficit

The following boxes contain descriptions of the analytical stages in building up an explanation of the
Long Run Phillips Curve (LRPC). Your task is to put the stages in the best order.
Activity 6: Policy Conflicts and the Phillips Curve
However, because of the increase in inflation,
the real value of the initial stimulus to the
economy starts to fall. If the inflationary
expectations of households and businesses
have remained unchanged, then those who
took up employment following the stimulus
will become unemployed again, and the
economy will move back to point A – the
movement along the SRPC was temporary,
and the economy returns to the NRU.
The 1970s brought periods of stagflation –
a combination of high inflation rates AND
high unemployment rates. This suggested
that the inverse relationship between
unemployment and inflation had broken
down.
If, however, workers do not suffer from
“money illusion”, then they will ‘expect’
inflation, and will build their expectations of
inflation into their wage negotiations – they
understand that inflation erodes the real value
of their wages. Higher wage demands will
cause businesses to lay off workers, and the
economy moves from point B to point C i.e.
back to the NRU, but with higher inflationary
expectations.
Professor Phillips analysed data on wage
inflation and unemployment rates in the UK
for the year 1860 to 1957, and then plotted
them onto a scatter diagram, demonstrating
empirical evidence for a inverse relationship,
or trade-off, between wage inflation and
unemployment. Before long, the diagram was
simplified to show inflation against
unemployment.
Phelps and Friedman also believed that
the economy would continue to return to a
natural rate of unemployment – no matter
what policies the government employed
(fiscal or monetary), the economy would
“self correct” and always return to this
NRU. At this point, they said that there was
no long-run trade-off between inflation and
unemployment, and so the Long Run
Phillips Curve (LRPC) would be vertical.
The economists Edmund Phelps and Milton
Friedman realised, however, that the Phillips
Curve did actually still exist – but instead of
there being just one curve, there was actually
a series of curves. Each of the newly-
discovered “Short Run Phillips Curves”
(SRPC) was associated with a different level
of inflationary expectations.
The diagram shows an economy initially in
equilibrium at point A. Suppose that the
electorate or government feels that unemployment
is too high – the government could undertake
an expansionary monetary or fiscal policy. The
resultant increase in AD would cause an increase
in GDP – and a corresponding decrease in
unemployment – along with an increase in the
rate of inflation. This would cause the economy
to move to point B.
Following publication of the Phillips curve,
economists attempted to explain its shape.
The general view taken in the 1960s was that
as the unemployment rate fell, the bargaining
power of workers relative to employers
increased, and this pushed up wage demands,
leading to wage inflation (and in turn, price
inflation). The opposite effect occurred when
the unemployment rate was high.
The only way that the rate of unemployment
can be permanently lowered i.e. shifting the
LRPC permanently to the left, is through the
use of supply-side policies relating to the
labour market. For example, such policies
could include increased flexibility of work
patterns and hours, increased mobility of
labour, improved transferable skills,
and so on.
Inflation
Rate
Unemployment Rate
LRPC
NRU
SRPC3
SRPC2
SRPC1
B
C
A
The Long Run Phillips Curve and the NRU
Inflation
Rate
Unemployment Rate
A series of Short Run Phillips Curves
Wage
Inflation
Rate
Unemployment Rate
The original Phillips curve looked as follows:
Notes

Tips for strong marks in
A2 Economics Exams
Building an Essay Answer
Command Word What does it mean
Analyse Consider causes or effects of something using theoretical ideas and relationships.
Assess Express the meaning of, translate, exemplify (give examples of), solve, or comment upon
the subject. Usually you will give your judgement or reaction to the problem, but always
make use of evidence.
Define Give concise, clear meanings of a specific term or concept.
Discuss Give reasons or present facts for and against an issue; try to provide by giving reasons
or evidence for and against.
Distinguish
between Identification of certain differences / contrasts between ideas / causes.
Evaluate Give reasons or present facts for and against an issue; try to provide by giving reasons.
Examine Consider in depth and using evidence the validity / strength of an argument, significance
of effects arising from a policy measure.
Explain Present in brief, clear form an idea or a theoretical relationship.
Identify Pick out appropriate/ significant features from a data set (chart, table, extract).
Outline Similar to explain, provide an outline of a concept, measurement.
State Clarify and interpret the material you present. State the ‘how’ and ‘why’, the results,
and where possible causes.
Understanding the key command words in a question
Important Note:
• Define, Identify, Explain, Analyse, ‘Distinguish between’ and ‘Outline’ require no evaluation
• Evaluate, Assess, Discuss, To what extent, Examine do require evaluation
Important Note:
• It is more important to write clearly and legibly
• Don’t forget to write the part number of the question clearly in the left-hand margin
• If you think that you might wish to add to your answer later, leave enough space before
you start the next part of the question. It won’t matter if you don’t use that space
Crisp and accurate
definitions
1 key point per
paragraph
+
Supporting examples /
evidence / diagrams
+ evaluate as you go
Evaluate conclusions
Good Evaluation – Reaching the Top Grade
• Evaluation is about making critical judgements and coming to reasoned conclusions
• Strong evaluative answers use supporting evidence to justify an argument. Some of that
evidence might be found in the stimulus material that accompanies a data response
question. Frequently the evidence can come from your own knowledge and awareness
having studied a subject for nearly two years.
• Justifying an argument carries more marks than making the argument since stating an
argument is often a relatively simple task.
The key piece of advice is this:
Make / build /analyse one key point per paragraph and then evaluate that argument in
the same paragraph
Here are ten more strategies for improving your evaluation skills in A2 macro data response
and essay questions
(a) Make good use of your final paragraph – try to avoid just repeating previous arguments
(b) Look for key stem words in the question – build evaluation around this
(c) Put an economic event, a trend, a policy into a wider context, be aware of the world
around you
(d) Be familiar with different schools of thought e.g. Keynesian, Free-Market approaches
(e) Be aware that a singular event never happens in isolation – our globalised world is
inter-connected
(f) Question the reliability of the data you have been given (for data questions) is it up to
date? Incomplete?
(g) Draw on your wider knowledge to provide supporting evidence and examples
(h) Consider both short-term and longer-term effects of shocks or policies
(i) Are you assuming ceteris paribus in your analysis? What happens
when all else is not constant?
(j) Try to challenge conventional views – don’t just accept things at
face value
Economics is rather like a jigsaw, if you do enough reading, thinking
and revision, eventually the pieces really start to fit together and finally
you can see the whole (bigger) picture.
Make good use of your final paragraph
• This is really important – A2 examiners now place high importance on how you conclude
an answer
• Try not to summarize points that have already been made. This scores no extra marks and
is a waste of time.
• Instead try to come to a reasoned conclusion – e.g. selecting your main argument and
then justifying it
• Perhaps look forward, e.g. is it too early to come to a definitive conclusion?
• If you are really pushed for time, add in some final evaluation points as bullets – relevant
content will be credited by the examiner

General Advice from the Examiners
(a) Make your diagrams large enough to be read! Many students sensibly use half of one
page to draw a graph
(b) Use the data! If, in both questions the phrase ‘using the data’ is included, there will be
a mark constraint imposed if there is no explicit reference to the data (a direct quote or
stating, ‘as in line…’).
(c) The command words in questions are important to note e.g. in 10 mark questions,
‘analyse’ should suggest a deeper explanation than for the first part of the question when
‘explain’ is used.
(d) Both A2 economics papers are synoptic. In ECON 4, questions do offer good
opportunities for candidates to use material from the AS units as well as from the other
A2 unit (ECON3).
(e) Examiners are keen to reward a good awareness of recent or current economic events
(f) Candidates can help themselves by making sure handwriting and diagrams are legible
(use more paper rather than less) and, for the diagrams, ensure they are supporting the
text and are labelled in such a way that an appropriate message is being conveyed.
(g) Candidates should spend sufficient time in making their choices of questions to
answer. This might be more important for the context questions but is also pertinent to the
choice of essay. There is evidence that a number of candidates see a word or phrase, such
as ‘unemployment’ or ‘fiscal policy’, without giving due consideration to the actual question
asked. They might therefore be making a wrong choice.
Abnormal profit Profit in excess of normal profit - known as supernormal profit or monopoly profit. Abnormal profits may be maintained
in a monopoly because of barriers to entry
Agency problem Possible conflicts of interest that may result between the shareholders (principal) and the management (agent) of a firm
Anti-competitive
behaviour Strategies designed to limit the degree of competition inside a market
Asymmetric information Where different parties have unequal access to information in a market
Average cost Total cost per unit of output = Total cost / output = TC/Q
Average cost pricing Setting prices close to average cost. It is a way to maximise sales, whilst maintaining normal profits. It is sometimes
known as sales maximization
Average fixed cost Total fixed cost per unit of output = TFC/Q
Average revenue Total revenue per unit of output
Average variable cost Total variable cost per unit of output = TVC/Q
Backward vertical
integration Acquiring a business operating earlier in the supply chain – e.g. a retailer buys a wholesaler, a brewer buys a hop farm
Barriers to entry Ways to prevent the profitable entry of new competitors
Bi-lateral monopoly Where a monopsony buyer faces a monopsony seller in a market
Brand extension Adding a new product to an existing branded group of products
Brand loyalty The degree to which people refuse to or are reluctant to change to other brands
Break-even output The break-even price is when price = average total cost (P=AC)
Business ethics Social responsibility of management towards the firm’s major stakeholders, the environment and society in general
Capacity The amount that can be produced by a plant, company, or economy
Capital intensive When an industry or production process requires a relatively large amount of capital (fixed assets) or proportionately
more capital than labour
Cartel An association of businesses or countries that collude to influence production levels and thus the market price of a
particular product
Collusion When rival companies cooperate for their mutual benefit. When two or more parties act together to influence production
and/or price levels, thus preventing fair competition. Common in an oligopoly /duopoly
Competition Commission Body that conducts in-depth inquiries into mergers, markets and the regulation of the major regulated industries such
as water, electricity and gas
Competition Policy Government policy which seeks to promote competition and efficiency in different markets and industries
Competitive advantage When a company has an advantage over another in the provision of a particular product or service
Complex monopoly A complex monopoly exists if at least one quarter (25%) of the market is in the hands of one or a group of suppliers who,
deliberately or not, act in a way designed to reduce competitive pressures within a market
Concentration ratio Measures the proportion of an industry's output or employment accounted for by the largest firms.Share can be by sales,
employment or any other relevant indicator.
Conglomerate merger Joining together of two companies that are different in the type of work they do - the acquisition has no clear connection
to the business buying it
Consolidation Consolidation refers to the reduction in the number of competitors in a market and an increase in the total market share
held by the remaining firms.
Constant returns When long run average cost remains constant as output increases because output is rising in proportion to the inputs
used in the production process
Consumer surplus The difference between what consumers are willing and able to pay for a good or service (indicated by the demand
curve) and the total amount that they actually pay
Consumption tax A tax imposed on the consumer of a good or service. This can be levied at the final sale level (sales tax), or at each
stage in the production
Contestable market Where an entrant has access to all production techniques available to the incumbents and entry decisions can be reversed
without cost. The crucial assumption for a contestable market is that businesses are free to enter and leave the market
Cooperative outcome An equilibrium in a game where the players agree to cooperate
Corporate governance Practices, principles and values that guide a firm and its activities
Corporate strategy A company's aims in general, and the way it hopes to achieve them - strategic objective which supports the achievement
of corporative aims
Cost synergies Cost synergies are the cost savings that a buyer aims to achieve as a result of taking over or merging with another business
Cost-plus pricing Where a firm fixes the price for its product by adding a fixed percentage profit margin to the average cost of production.
The size of the profit margin may depend on factors including competition and the strength of demand
Cost-reducing innovations Cost reducing innovations causing an outward shift in market supply. They provide the scope for businesses to enjoy
higher profit margins with a given level of demand
Countervailing power When the market power of a monopolistic/oligopolistic seller is offset by powerful buyers who can prevent the price
from being pushed up
Creative destruction The dynamic effects of innovation in markets - for example where new products or business modelslead to a reallocation
of resources. Some jobs are lost but others are created. Established businesses come under threat
Credit Union Financial co-operatives owned and controlled by their members
Cross-subsidy A cross subsidy uses profits from one line of business to finance losses in another line of business e.g. Royal Mail and
2nd class letters
Deadweight loss Loss in producer & consumer surplus due to an inefficient level of production
A2 MICRO Key Term Glossary

De-layering Removing one or more levels of hierarchy from the organizational structure. For example, many high-street banks no
longer have a manager in each of their branches
De-merger The hiving off of one or more business units from a group so that they can operate as independently managed concerns
Deregulation The opening up of markets to competition by reducing barriers to entry. The aim is to increase market supply, stimulate
competition and innovation and drive prices down
Diseconomies of scale A business may expand beyond the optimal size in the long run and experience diseconomies of scale.This leads to rising
(internal) LRAC. For example, a firm increases all inputs by 300 %, its output increases by only 200%.
Dis-synergies Negative or adverse effects of a takeover or merger. These are the disruptions that arise from the deal which result
additional costs or lower than expected revenues
Diversification Increasing the range of products or markets served by a business.
Divorce between The owners of a company normally elect a board of directors to control the business’s resources for them. However,
ownership and control when the owner of a company sells shares, or takes out a loan to raise finance, they sacrifice some of their control
Dominant market position A firm holds a dominant position if it can operate within the market without taking full account of the reaction of its
competitors or final consumer
Dominant strategy A dominant strategy in game theory is one where a single strategy is best for a player regardless of what strategy the
other players in the game decide to use
Due Diligence Due diligence is the process undertaken by a prospective buyer of a business to confirm the details (e.g. financial
performance, assets & liabilities, legal ownership & issues, operations, market position) of what they expect to buy
Duopoly Any market that is dominated by two suppliers. Proctor & Gamble and Unilever took 84 per cent of the UK market liquid
detergent sales in 2005
Duopsony Two major buyers of a good or service in a market each of whom is likely to have some buying power with suppliers in
their market.
Dynamic efficiency Changes in the choice available in a market together with the quality/performance of products that we buy. Dynamic
efficiency linked to the pace of innovation in a market
Economies of scale Falling long run average cost as output increases in the long run
Economies of scope Where it is cheaper to produce a range of products
Equilibrium output A monopolist is assumed to profit maximise, in other words, aims to achieve an output equal to the point where MC=MR
Excess capacity The difference between the current output of a business and the total amount it could produce in the current time period.
Experience curve Pattern of falling costs as production of a product or service increases, because the company learns more about it,
workers become more skilful
External diseconomies When the growth of an industry leads to higher costs for businesses that are part of that industry – for example,
of scale increased traffic congestion
External economies When the expansion of an industry leads to the development of ancillary services which benefit suppliers – causing a
of scale downward sloping industry supply curve.
First mover advantage The idea that a business that creates a new product and which is first into the market can develop a competitive
advantage perhaps through learning by doing
Fixed cost Business expenses that do not vary directly with the level of output
Forward vertica integration Acquiring a business further up in the supply chain – e.g. a vehicle manufacturer buys a car parts distributor
Franchised monopoly When the government grants a company the exclusive right to sell or manufacture a product or service in a particular area
Freemium Business model in which some basic services are provided for free, with the aim of enticing users to pay for additional,
premium features or content
Game Theory When there are two or more interacting decision-takers (players) and each decision or combination of decisions involves
a particular outcome (known as a pay-off.)
Herfindahl Index A measure of market concentration. The index is calculated by squaring the % market share of each firm in the market
and summing these numbers.
Hit-and-run competition When a business enters an industry to take advantage of temporarily high (supernormal) market profits. Common in
highly contestable markets.
Horizontal collusion Where there is agreement between firms at the same stage of the production process to charge prices above the
competitive level.
Horizontal integration When companies from the same industry amalgamate to form a larger company - firms are at the same stage of the
production process
Hostile takeover A takeover that is not supported by the management of the company being acquired - as opposed to a friendly takeover
Innovation Making changes to something established. Invention, by contrast, is the act of coming upon or finding. Innovation is the
creation of new intellectual assets
Innovation-diffusion The extent and pace at which a market as a whole adopts new products, or improved versions of existing products
Interdependence When the actions of one firm has an effect on its competitors in the market. Interdependence is a feature of an oligopoly.
In simple terms - when two or more things depend on each other (i.e. business and society)
Internal growth Internal growth occurs when a business gets larger by increasing the scale of its own operations rather than relying on
integration with other businesses
Inventories Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business
Joint-venture Agreement between two or more companies to cooperate on a particular project or a business that serves their mutual
interests
Kinked demand curve The kinked demand curve model assumes that a business might face a dual demand curve for its product based on the
likely reactions of other firms in the market to a change in its price or another variable
Last mover advantage The advantage a company gains by being one of the last to sell a product or provide a service, when technology has
improved and costs are very low
Light-touch regulation An approach of government to managing business behaviour - prefers to “influence” rather than “legislate/regulate”
Carrot or stick?
Limit pricing When a firm sets price low enough to discourage new entrants into the market
Marginal cost The change in total costs from increasing output by one extra unit – the formula for MC is ‘change in total cost divided
by change in quantity
Marginal profit The increase in profit when one more unit is sold or the difference between MR and MC. If MR = £20 and MC = £14 then
marginal profit = £6
Marginal revenue The change in total revenue from selling one extra unit of output
Merger A merger is a combination of two previously separate organisations.
Merger integration The process of bringing two firms together once they have come under common ownership. Often regarded as the most
difficult part of any takeover or merger. The integration process needs to cover “hard” areas such as IT systems and
marketing strategy as well as “soft” issues such as different business cultures
Metcalfe’s Law Coined by Robert Metcalfe, Metcalfe's law says that the usefulness of a network equals the square of the number of
users. This is linked to the concept of network economies of scale
Minimum efficient scale Scale of production where internal economies of scale have been fully exploited. Corresponds to the lowest point on the
long run average cost curve
Monopolistic competition A market structure characterized by many buyers and sellers of slightly different products and easy entry to, and exit
from, the industry. Firms have differentiated products and therefore the demand is not perfectly elastic
Monopoly profit When a lack of viable market competition allows a business to set its prices above the equilibrium price for a good or
service without losing profits to competitors
Monopsony When a single buyer controls the market for a particular good or service, in essence setting price and quality levels,
normally because without that buyer there would not sufficient demand for the product to survive
Moral Hazard When someone pays for your accidents and problems, you may be inclined to take less effort to avoid accidents and
problems
Multinational A company with subsidiaries or manufacturing bases in several countries
Nash Equilibrium In a Nash Equilibrium, the outcome of a game that occurs is when player A takes the best possible action given the
action of player B, and player B takes the best possible action given the action of player A
Nationalization When a government takes over a private sector company
Natural monopoly For a natural monopoly the long-run average cost curve falls continuously over a large range of output.The result may
be that there is only room in a market for one firm to fully exploit the economies of scale that are available
NGO Non-governmental organization (e.g. WWF, Greenpeace)
Non-price competition Non-price competition assumes increased importance in oligopolistic markets. Competing not on the basis of price but
by other means, such as the quality of the product, packaging, customer service, etc.
Normal profit Normal profit is the transfer earnings of the entrepreneur i.e. the minimum reward necessary to keep her in her present
industry. Normal profit is therefore a fixed cost, included in the average, not the marginal, cost curve
Oligopoly A market dominated by a few producers. Oligopoly is best defined by the conduct (or behaviour) of firms rather than its
market structure
Optimal plant size Optimal plant is the size where costs are minimized, i.e. when all economies of scale have been obtained, but
diseconomies have not set in. Sometimes the size of a firm or plant is also limited by the size of the market
Pareto efficiency Where it is not possible for individuals, households, or firms to bargain or trade in such a way that everyone is at least as
well off as they were before and at least one person is better off. Also known as an efficient outcome
Patent Right under law to produce and market a good for a specified period of time
Pay wall Blocking access to a website which is only available to paying subscribers
Peak pricing When a business raises its prices at a time when demand has reached a peak might be justified due to the higher
marginal costs of supply at peak times
Penetration pricing A pricing policy used to enter a new market, usually by setting a very low price
Perfect competition A market where prices reflect complete mobility of resources and freedom of entry and exit, full access to information by
all participants, relatively homogeneous products, and the fact that no one buyer or seller has any advantage over another.
Perfect price When a firm separates the whole market into each individual consumer and charges them the pricethey are willing
discrimination and able to pay
Predatory pricing Setting an artificially low price for a product in order to drive away competition - deemed to be illegal by the UK and
European competition authorities. When predatory pricing is happening it is likely than Price <Average Cost in the short
run, but in the long run there will be a rise in prices as competition is reduced.
Price capping A government-imposed limit on the price charged for a product - otherwise known as price capping. Often introduced as
a way of controlling monopoly pricing power
Price ceiling Law that sets or limits the price to be charged for a particular good
Price discrimination When a firm charges a different price to different groups of consumers for an identical good or service, for reasons not
associated with costs
Price fixing Price fixing represents an attempt by suppliers to control supply and fix price at a level close to the level we would
expect from a monopoly
Price leadership When one firm has a clear dominant position in the market and the firms with lower market shares follow the pricing
changes prompted by the dominant firm
Price regulation Government control of prices, normally for utilities and other essential services
Prisoners’ dilemma A problem in game theory that demonstrates why two people might not cooperate even if it is in both their best interests
to do so. In the classic game, cooperating is strictly dominated by defecting, so that the only possible equilibrium for the
game is for all players to defect. No matter what the other player does, one player will always gain a greater payoff by
playing defect.
Private equity Injection of funds by specialized investors into private companies with the aim of achieving high rates of return
Private Finance Initiative The PFI is a means of obtaining private funds for public sector projects
Privatization The sale of state-owned companies to the private sector, normally through a stock market listing.The opposite of nationalization
Procurement collusion Where companies illegally bid for large contracts by rigging bids to decide which one of them gets the contract in advance.
Producer surplus The difference between what producers are willing and able to supply a good for and the price they actually receive. The
level of producer surplus is shown by the area above the supply curve and below the market price

A2 economics revision workbook 2016

A2 economics revision workbook 2016

Recommended

Recommended

More Related Content

What's hot

What's hot (17)

Similar to A2 economics revision workbook 2016

Similar to A2 economics revision workbook 2016 (20)

More from Matthew Bentley

More from Matthew Bentley (20)

Recently uploaded

Recently uploaded (20)

A2 economics revision workbook 2016