10 Ideas to improve your grades

tutor2u Economics Blog - 10 Ways for Summer 2011
a Great Econ Paper

10
Ways to Improve Your
Economics Exam Papers
tutor2u Economics Blog
Summer 2011

(1) The Importance of the Margin
• In textbook economics – many decisions are made at the margin
– Marginal revenue = marginal cost (profit max output)
– Marginal social benefit = marginal social cost (social equilibrium)
– Marginal utility of consumption compared to the price
• But few businesses / people have the capacity to reach such precise
equilibrium points – or seek to find them
• Instead they satisfice or choose rules of thumb
• But……
– Marginal changes in behaviour can have a big effect if enough people
make them (e.g. Energy consumption decisions)
– Changing behaviour ‘at the margin’ can have important social effects –
social norms can change + policies can have an impact
– The fundamental value of something depends on the value of the
marginal unit – important in lots of markets (e.g. oil, food)

Copyright www.tutor2u.net 2011 Not
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a Great Econ Paper

2: The Law of Unintended
Consequences
• This is a root cause of ‘government failure’
• All government interventions in a market have at least one and often
many unintended consequences
• Easy to have the benefit of hindsight when seeing this!
• Reasons:
– Economics is a social science about behaviour
– Rational agents will look for ways to offset policies that cost them
– Information failure in government when setting policies
– Dynamic nature of markets – markets and the agents that inhabit them
move far more quickly than government
– Disintermediation is inevitable in a globalized world

3: Stakeholders matter!
• ‘Any person or organization that has a legitimate
interest in a specific project or policy decision.’
• Check to see the sources of information in data
response questions
• Identify and comment when value judgements
are being made – scores high for evaluation
• Risk of government failure:
– Regulatory capture / powerful lobbying
– Policy decisions made to please a vested interest
– Inequitable impact between one group and another

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Stakeholders
• Employees of a business
• Communities where a
business is located or
affected by a decision
• Suppliers further down
the supply chain
• Shareholders / owners
• Creditors
• Government (and through
them – taxpayers)
• Trade unions (and the
workers they represent)

Stakeholders
• Employees of a business • NGOs and other
/ organization advocacy groups (i.e.
• Communities where a World Bank, IMF,
business is located or Pressure Groups)
affected by a decision • Prospective employees
• Suppliers • Prospective customers
• Shareholders • Local communities
• Creditors • National communities
• Government (and through • International community
them – taxpayers) • Competitors within a
• Trade unions (and the market
workers they represent) • Professional associations

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4: Time Periods in Economics
• Be familiar with
– Immediate (momentary) especially in primary sectors
– Short run (at least 1 fixed factor, diminishing returns)
– Long run (all factor inputs are variable, economies and
diseconomies of scale)
• Applications of time periods in your analysis
– Elasticity of supply (micro and macro supply curves)
– Elasticity of demand (Ped, CPed, Income elasticity)
– ‘Discounting’ the future value of costs and benefits
– Long run macroeconomic policies e.g. supply-side / trade policy
– Long run micro policies – e.g. liberalising a market,
nationalisation

5: (a) Demand and supply curves
are often non-linear!

P P S

Changing elasticity of
D supply as output
increases

Q Q

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5(b): Upward sloping demand and
downward-sloping supply!

P P S1

S2

S2

Long
run
supply
D
with
EoS

Q Q

6: Change the elasticity to build /
develop your analysis!
P

S + tax

P2
S
P1

D

Q2 Q1

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6: Change the elasticity to build /
develop your analysis!
More close substitutes – higher CPED
P P

S + tax S + tax

P2
P2
S S
P1 P1

D D2
D1

Q2 Q1 Q Q2 Q1 Q

7: Most markets are inter-related
• Changes in relative prices / rewards in one market affect
resource allocation in others
• Key inter related-market concepts to revise:
– Substitutes
– Complements
– Derived demand
– Composite demand
– Joint supply
– Competitive supply
• Also important in macroeconomics
– Factor markets and the economic cycle (labour demand)
– Bond markets / currency markets / equity markets
– Macroeconomic effects of external demand/supply shocks

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8: Markets at work! Relative prices,
preferences and incentives
• Markets are powerful – don’t underestimate them – especially the
power of setting the right incentives
• Policy interventions seek to change behaviour of agents
• People do respond to incentives
– Govt failure if the incentives turn out to be perverse
– Govt failure if the incentives are not strong enough (ineffective)
• Behaviour changes when relative costs & benefits alter
– Leads to substitution effects (changes in demand for X and Y)
– Agents react to changes in measured costs and benefits of their actions
• This requires
– A sufficient change in relative prices to make a difference
– Availability of alternative courses of action
– Sufficient time for agents to respond and react

Examples of changes in relative
prices and behaviour
• London congestion charge / underground fares
• National minimum wage
• Changes in relative prices of low and high carbon energy
e.g. arising from a carbon tax or carbon trading
• Relative prices of different crops in farming
• Relative price of ethical-products
• Relative prices and demand for exports / imports e.g.
Following an exchange rate change
• Relative prices of legal versus illegal transactions (e.g.
crime / organ sales)

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9: Expectations matter!
• Expectations of the future drive current behaviour!
– Housing market / property development / decisions on land use
– Capital investment decisions by businesses (expected profits)
– Food supply decisions – expected returns from different crops
– Currency demand and supply – speculative activity in FOREX
– Monetary policy / inflation – inflation expectations and wages
– Fiscal policy / tax cuts / govt borrowing – expectations of
changes in taxes
• Formation of expectations:
– Rational expectations
– Adaptive expectations

10: The cost-benefit principle
• The mother of all economic ideas is the cost-benefit
principle.
• It says that should take an action if, and only if, the extra
benefit from taking it is greater than the extra cost
• The hard part is
– Identifying the relevant costs and benefits
– Measuring and valuing them
• Individual rationality does not always lead to a socially
optimum / desirable outcome
• Behavioural economics questions the core rationality
embedded into conventional textbook economics

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And finally….
• Most policy problems require a combination of strategies
• Understand the meaning of efficiency and equity in
markets (allocative, productive, dynamic efficiency)
• Have the courage to challenge the conventional wisdom
• Let your diagrams do the work for you – develop the
analysis with high quality diagrams
• Pick out bias in extracts – normative economics
• Use the data that is provided but be aware of limitations
• What is rational for individual agents can often leading to
outcomes that are damaging for society
• Be cautious about government intervention – markets
often find solutions to intractable problems in the long
run – if the incentives are strong enough

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10 Ideas to improve your grades

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