A Video on The Minimum Wage

Building up a strong argument is essential for getting good grades. When evaluating the minimum wage, its not good enough just to write that it creates unemployment. What are the other effects?

Here is a video describing the effects of a minimum wage. Sure it is slightly biased (free marketeers), but that's why their argument against it is really good.

Notes on the labour market, trade unions and the minimum wage can be found here!

Deck the Halls with Macro Follies

Here's something to get you all into the Christmas spirit, economics style!

This is a video summing up the different economic schools of thought from Keynes, Malthus (less relevant), J. B Say (from Say's Law) and Hayek in playful song.

Its surprisingly enjoyable to listen to and is also a nice quick and dirty memory refresher for the key economics viewpoints. Here you go:

http://www.youtube.com/watch?v=7uKnd6IEiO0

About a year ago I posted up other playful videos from Econstories on Boom and Bust and Fight of the Century.

Very useful website (part from this one obviously!)

Hi everyone, I came across this brilliant website for economics explanations, recent news analysis..etc. They have recommendations for textbooks, tailored exam board guidance, lots and lots of notes and graphs! Read it!

http://economicsonline.co.uk/

Enjoy!

Michael Portillo's 'Great Euro Crisis'

On BBC2 on Wednesday night was a very information documentary about the Eurozone crisis, in particular Greece. You can watch it here on BBC iplayer. Remember it won't be there forever, do take time to watch it.


Summary:

• One quarter shops have closed since the crisis began in 2008
• Social costs: Graffiti everywhere, dereliction
• Michael Portillo's view is that Greece's joining the euro created the crisis
• Introduction of the Euro: purpose - to help the poorer European countries catch up to their richer counterparts
• The Euro has made Greece uncompetitive, considering the Drachma was weak and this helped fuel demand for their exports
• The Euro also increased the amount of exports entering the country, particularly cars (what made it easier was the wide availability of credit for Greeks to finance the purchase of these cars)
• In 6 years, Greece's deficit from Germany went up from under €3bn to over €8bn
• Another contribution to the debt: transport advancements (equipment could not be manufactured in Greece, so had to be imported by German companies) were paid for with debt, and tax evasion
• Devaluing the currency (going back to the Drachma) can help improve their competitiveness
• Government put national assets (e.g. the airport) among other austerity measures, to try to save the country

Case Study: Separation of Ownership and Control

Sometimes it is difficult to understand how some economics concepts can be used in the real world (although with economics, it should be easier to relate that other subjects..) so here is a perfect example of the principal/agent problem.

There seems to be a conflict between what shareholders want and what managers (executives) want at Barclays. At Barclays, £730m was paid out to shareholders last year in contrast to £2.15bn that was paid in bonuses.

Read more here:  http://www.thisismoney.co.uk/money/news/article-2132282/Barclays-boss-Bob-Diamond-lose-1-3m-bonuses-bank-attempts-douse-shareholder-rebellion-pay.html 

Read notes on the Principal Agent Problem here.

Oligopoly

·       A type of market structure where there are a small number of firms dominating the market, all selling similar goods

·       What’s your definition of ‘dominating’ the market? How do economists go about determining whether a market is dominated by a few firms or not? They measure the concentration ratio – the market share of the biggest firms in the market. For example, a four firm concentration ratio shows the percentage of output produced in the market by the four largest firms. Statistically, this method is okay to use, but at A-level (and GCSE), it is better that you know that the essence of understanding the oligopoly market is that firms in the market make decisions on price and output based on the decisions of rival firms. They attempt to predict what the other firms are doing, to compile their own strategy.

·       An example of an oligopoly market is supermarkets

·       Can compete on price (resulting in a price war, see here and here) or not, instead competing on other bases such as:

o   Loyalty schemes (Tesco Clubcard, Sainsbury’s Nectar points)

o   Advertising and marketing

o   Home delivery options (e.g. Asda and Tesco)

o   Discounted petrol  (e.g. Asda, Morrisons)

o   Extension of opening hours (e.g. Metro Bank open on Sundays)

o   Lateral growth in other industries (Asda opticians, Tesco banking and insurance)

·       There are barriers to entry in the market

Kinked Demand Curve Theory

The theory explains how a competitive oligopolist may be affected by rivals’ reactions to its price and output decisions.

 Look at the AR curve for now. The AR curve is relatively elastic from P* to P₁ and relatively inelastic P₁ onwards.

The oligopolist sets price to P₁ initially. When the curve is relatively elastic, if a firm in the market increases the price, other firms will not follow because the resulting fall in demand is greater than the proportionate change in price. The firm loses too much demand to attract other firms to follow.

When the curve is relatively inelastic, if a firm lowers the price, other firms will follow because they benefit from the resulting increase in demand. Even though the resulting increase in demand is lower than the fall in price, firms benefit because consumers ‘shop around’ for lower prices; if Tesco are selling a notebook for £1 and Asda are selling a notebook for 80p, provided that Asda is just as accessible as Tesco, the consumer may decide to shop at Asda instead. This is under the assumption that the oligopoly market compete on price. If this happens, a price war may result.

Now consider the MR and MC curves. The oligopolist sets price and output level to P₁ and Q₁. The profit maximising level of output is Q₁. The initial MC curve is MC₂, but if the MC curve was to shift to above MC₁ or below MC₃, the oligopolist would have to charge a different price to ensure profit maximisation (assuming AR = selling price). Price stability is achieved because the MC curve can be anywhere between MC₁ and MC₃.

Furthermore contributing to price stability, the oligopolist may decide to leave price and output at point X because of the uncertainty from rivals’ price and output decisions.

The Kinked Demand Curve is only a theory and an estimate of how demand changes when the oligopolist changes price because there is not perfect information in the market for olipogolists to know the exact position and shapes of their demand and revenue curves. The theory is useful because it illustrates how firms are interdependent on rivals, and affected by uncertainty.

Government Policies to Reduce Market Failure

If you've watched the news recently, you guys should know that the government are considering changing the packaging on cigarettes to discourage new smokers. Use this as a case study in your exam to demonstrate government policy to reduce market failure caused by demerit goods (See notes on Negative Externality and Market Failure. These notes specifically apply to negative externalities, but it is relevant because the consumption of demerit goods causes negative externalities, e.g. second hand smoke).

The new plain branding is being considered to deter youths from starting to smoke, but critics say that the branding will make no difference to those who are already in the habit of smoking. What is your view? Good idea? Tell the examiner!