2. (1) Questioning marginal decisions
• In theory, 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
• Few businesses / people reach precise equilibrium
points – or even seek to find them
• 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 (drink driving, smoking)
– The fundamental value of something depends on the value of
the marginal unit – important in lots of markets (e.g. oil, food)
4. 2: The Law of Unintended
Consequences
• A root cause of ‘government failure’
• All interventions in a market have at least one and often
many unintended consequences
• Unintended consequences can be positive and negative
• Reasons:
– Economics is a social science about behaviour and choices
– Rational agents will look for ways to offset policies that cost them
– Information failure in government – few random controlled trials
– Dynamic nature of markets – markets and the agents that inhabit
them (consumers/producers) move more quickly than government
5. 3: Stakeholders matter!
• A stakeholder is ‘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 / apparent bias – this scores high for evaluation
• (Ever-present) Risk of government failure:
– Regulatory capture by powerful lobbying organisations
• Micro lobbying: Alcohol manufacturers
• Macro lobbying: Negotiations over trade / climate change policies
– Policy decisions often made to please a vested interest
– Inequitable impact between one group and another
6. Stakeholders
• Employees of a business
• Communities where a
business is located or
affected by a decision
• Suppliers
• Shareholders
• Creditors
• Government (and through
them – taxpayers)
• Trade unions (and the
workers they represent)
7. Stakeholders
• Employees of a business
• Communities where a
business is located or
affected by a decision
• Suppliers
• Shareholders
• Creditors
• Government (and through
them – taxpayers)
• Trade unions (and the
workers they represent)
• NGOs and other
advocacy groups (i.e.
World Bank, IMF,
Pressure Groups)
• Prospective employees
• Prospective customers
• Local communities
• National communities
• International community
• Competitors within a
market
• Professional associations
8. 4: Time Periods in Economics
• Be familiar with
– Immediate (momentary) especially in primary sectors
– Short run (at least 1 fixed factor, possible diminishing returns)
– Long run (all factor inputs are variable, possible economies and
diseconomies of scale)
• Applications of time periods in your analysis
– Price elasticity of supply (micro and macro supply curves)
– Elasticities of demand (Ped, CPed, Income elasticity)
– ‘Discounting’ the future value of costs and benefits (CBA)
– Long run macro policies e.g. supply-side / trade policy
– Long run micro policies – e.g. Making a market more contestable,
nationalisation, renewable energy policies
9. 5: Demand and supply curves are
often non-linear!
P P
Q
D
S
Changing elasticity of
supply as output increases
Q
Elasticity might vary across
different price ranges
10. 6: Change the elasticity to build /
develop your analysis!
P
D
S
S + tax
Q1Q2
P1
P2
11. 6: Change the elasticity to build /
develop your analysis!
P
Q
D
S
S + tax
Q1Q2
P1
P2
P
Q
D1
S
S + tax
Q1Q2
P1
P2
D2
More close substitutes – higher CPED
Double diagrams can show examiners that you have a clear
grasp of ideas and include good analysis in your answers
12. 7: Most markets are inter-related
• Changes in relative prices / rewards in one market affect
resource allocation in others
• Key related-market concepts to revise (AS micro):
– 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
15. 8: Incentives Matter!
• Markets are powerful – don’t underestimate them –
especially the power of setting the right incentives
• 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
– Substitution effects (changes in demand for X and Y)
– E.g. Consumption of de-merit goods, imports
• This requires
– A sufficient change in relative prices to make a difference
– Availability and affordability of alternative courses of action
– Sufficient time for agents to respond and react
16. Changes in relative prices
• London congestion charge / underground fares
• National minimum wage / living wage
• Changes in relative prices of low and high carbon energy
• 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 / costs of legal versus illegal transactions
(e.g. crime incentives / human organ sales)
17. 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
• Formation of expectations:
– Rational expectations
– Adaptive expectations
• In macro – changes in animal spirits among businesses,
consumers and other agents has a huge effect
18. “The master-economist must
possess a rare combination
of gifts ... He must be a
mathematician, historian,
statesman, philosopher – in
come degree. He must
understand symbols and
speak in words. He must
contemplate the particular in
terms of the general and
touch abstract and concrete
in the same flight of thought.
No part of man’s nature of his
institutions must lie entirely
outside his regard. “
Macroeconomics is having a tough time
19. 10: The cost-benefit principle
remains important!
• Perhaps the mother of all economic ideas is the cost-
benefit principle
• It says that a person should take an action if, and only if,
the extra (marginal) benefit from taking it is greater than
the extra (marginal) cost
• The hard part is
– Identifying the relevant costs and benefits
– Measuring and valuing them (are there markets in everything?)
– Applying an appropriate discount rate to future costs and benefits
to estimate their present value
• Individual rationality does not always lead to a socially
optimum / desirable outcome
• Behavioural economics questions the core rationality
embedded into conventional textbook economics
20. 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 – value judgements
• Use the data that is provided but be aware of data
limitations (forecasts, inaccuracies)
• 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 problems – if the incentives are strong
enough
21. One Main Point
per Paragraph
Explain, Analyse
/ use
Connectives
Support with
Examples /
Evidence
Evaluate the
actual point you
have made
Building a Strong Exam Paragraph
It is important to focus on one key
argument in each of your main paragraphs
– avoid a scatter-gun approach! Build
chunk paragraphs!
Many students miss out important parts of
the explanation! Provided that you explain
the relevant economics with clarity and
accuracy, you will do well!
Use the data available in the exam
extracts but also introduce into your
answer relevant examples and evidence
based on your wider economics reading!
This is really important! Focus on the
argument in your paragraph and challenge
/ question this point rather than a general
evaluation point!
22. Most common errors
Not using the data in the extracts
Not evaluating in every paragraph
Not referring to/explaining diagrams
Not defining terms accurately
Short chains of analysis – missing links
23. Top Tips
Use signposting from the question
Spread your work out well
Large analysis diagrams
Work timing out beforehand
Short plan helps to frame work
24. Good Evaluation Phrases
It depends on….
In the short run…however in the long run
The magnitude of the effect….
The most important point…
This will also impact