Discuss how government and the trade union can affect the equilibrium in a labour maket. 13

Reply to Abdalla Mungroo

Hi..Thank you a lot for the essays..It helps me very much! I’m a student of A level
I would like to ask you about a question: [Question above] Thank you in advance.

You’re welcome Abdalla. Glad to help. I will try to work out the outline for this question.

Introduction – explain how equilibrium is reached in the Labour Market. [I assume this has been dealt with in section A of the question.]

Government intervention in wage determination:

  1. Setting minimum wage. Explain how this work. Diagram.
    • Evaluation – ensuring that employers do not exploit the workers and that low income earners can afford a decent living wage.
    • Evaluation – increase cost for producer, reducing employment. leading to higher unemployment. Also, the worker with the lowest MRP, often the lowest wage earner, will be the first to be sacked. This worsen the plight of the lowest income earner. Unintended consequences.
  2. Setting wage control, limiting increase in pay
    • Evaluation – to reduce cost-push inflation, due to high pay rise.
    • Evaluation – reduce incentive to work, particularly to higher income earners, reducing output and growth overall.

Trade union intervention in wage determination. Explain how a trade union function.

  1. Under perfect market condition. Diagram, showing the effect of higher wages, but lees employment.
    • Evaluation – Higher cost to producer, reducing competitiveness and leads to higher unemployment. Investment may also be lower.
  2. Under imperfect labour market [Monopsony]. Diagram, showing the effect of higher wages and higher employment.
    • Evaluation – Increase in efficiency. Balancing the power between the monopsony and the workers.

Conclusion [Evaluation again] –

Trade union influence in labour market is determined by several factors, namely the proportion of union members, the profitability of the firm, the proportionof labour cost to total cost and militancy [prone to taking violent action]. Also, the country’s regulation also determine the power of trade union. Under PM Margaret Thatcher in the 70s, the power of the trade union in the UK was significantly reduced through changes in regulations.

Government has more influence in the labour market. However, they are also subject to certain limitations. Too much interference may result in investors moving their business/plant to other countries. This can badly affect the economy.

 

 

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Micro intervention part 2: Price instability and price control

The volatile fluctuation of prices of certain commodities can be a real cause for concern. Many of these commodities are raw materials (iron, oil, tin) and essential food (rice, wheat, sugar). The impact on various sectors and consumers would be damaging indeed.

This is a major concern for governments around the world. The chief goals that the government wanted to achieve are often:

  • affordability of basic food items and energy
  • stable income of producers, usually farmers, to continue production and invest in larger capacity
  • prevent hoarding by businessman

Maximum price 

A price ceiling set by the authority to make it illegal for businessman to sell the good above this price. Selling at below the maximum price is all right.

If the maximum price is set above the market equilibrium price, this maximum price is not effective. It will have no impact on the quantity or the price of the good.

if the maximum price is set below the equilibrium price, this will be an effective maximum price. It also entails a hosts of problems like shortages [excess demand], queue/waiting list and black markets.

To make effective maximum price work, the government would need to take complementing or remedial steps, depending on the severity of the shortages. Among them include rationing, imports, subsidising producer, investing in capacity expansion [a long term solution].

The strengths of a maximum price are:

  • Certain goods, usually essential food, are made affordable to all and not burden the lower income as these goods are often inelastic.
  • Prevent hoarding. During festive seasons, the demand for spices and onions in Malaysia are very high for cooking curry. Thus, retailers may exploit the situation by hoarding and creating a more severe shortage to raise the prices of these goods. Then, they will sell off their stocks when the prices are high. With a maximum price, the retailers will not be able to sell it at high price and thus, no reason to hoard supply.

Limitations and weaknesses of maximum price

  • Quality of the good will almost certainly be compromised. the classic example is the rent control in Paris back in the early 20th century was a case in point. The supply of rooms fell and the long waiting list of tenants. The quality and state of the rented property were terrible. For more rent control, click here.
  • Market distortion. With maximum price, the incentive signal to the produce to produce more is missing, while the the rationing signal for consumer is also not working. Thus, the allocation of resources would be very inefficient.
  • Wastage. With maximum price set at low level, the good may be over-consumed.
  • If the government is subsidising a good, like petrol, it may be very expensive as the price of the commodity rise.

Can maximum price work? Difficult to say.

  • In general, the maximum price set should be at a ‘fair price’for the producer to make sufficient profit and continue supplying.
  • Maximum price also may not be able to achieve its objective of supporting the low income if the high income buy more of the good than the poor, which is often the case.
  • For a long term solution, the authority need to increase the capacity by ensuring more investment.

Minimum price 

A floor price set by the authority to make it illegal for sellers to sell it below this set price.

If the minimum price is set below the equilibrium price, then the minimum price will be ineffective. Both price and quantity at the equilibrium point will remain.

However, if the minimum price is set above the equilibrium price, it will be effective. The price will be higher than the equilibrium price and again, bring all sorts of problems, like glut (excess supply), misallocation of resources, and costly for the government to maintain the guarantee (minimum) price policy.

Buffer stock scheme

The government can also set a price range, where the price of the good is determined by market forces so long as it hovers within the range. If the price move higher than the ceiling, the government will sell their stocks to increase supply, thereby reducing the equilibrium price. On the other hand, if the price falls below the range, the government will buy up stocks to increase demand, increasing the price back to within the range set.

This buying and selling stocks create the buffer to moderate the price fluctuations. It works, in real world, very much like a minimum price.

The problems face by the Buffer Stock Schemes

  • the government need to stock up for this scheme to work. For goods that have a longer lifespan like oil, the problem is not that big. But for agricultural goods, like milk, butter, rice, which are very perishable, this stocks often ended up destroyed or simply thrown away.
  • The problems of over produced by suppliers are also common in a buffer stock scheme.

Subsidy

Subsidy is a sum of money given to producer tarticleo reduce their cost of production or reduce the market price to ensure affordability to all.

Problems with subsidy

  • Subsidy distort the market, leading to wastage. In India, bread is subsidised and some firms feed their cattle with bread, instead of animal feed. Jeffrey Frankl wrote a beautiful article that illustrate this point succinctly.
  • Often, those who benefit most from subsidy is not the low income group, but the high income group. For example, a petrol subsidy will benefit high income group that drive very large vehicle with high petrol consumption, while the low income mostly walk or use public transport.
  • Subsidy trap. Often, politicians that introduce or inherit the subsidy programs find it hard to stop it. There will be protests and risk of public anger that most politicians find it too high a price to pay.

An interesting article on price control here. Read it slowly and ask your teacher if you don’t understand any part. The link between price control and inflation is also a potential that the examiners will frame their questions.

Government Microeconomics intervention – Part 1 (AS unit 3)

Government intervention arise from market failures. There are three main areas of market failure that the AS syllabus covers, i.e.;

  • Missing market
    • Public Goods, goods that are non-rivalry and non-exclusive e.g. street lighting, roads, security, will not be provided in the market economy. The private sector will not provide due to the problem of free-rider.
    • Thus, public goods will be ‘missing’ in the economy when the public sector do not provide them.
  • Asymmetric information/imperfect knowledge
    • Information of the buyer and seller may not be similar in certain economic transactions. For example, a person goes to visit the dentist, or a car mechanic or to meet a lawyer. The knowledge/information of the sellers, in this case, are greater than that of the buyer. Hence, the seller may take advantage of the situation and the buyer would have to assume the worst of the seller.
    • Thus, market fail to allocate resources in this situation. At times, it may be that the buyer has a greater amount of knowledge than the seller, eg. health insurance.
    • This market outcome due to imperfect knowledge of the buyer and the seller is a form of market failure. George Akerlof wrote a breakthrough article on this topic, titled ‘The markets for lemons.’
  • Price instability
    • As a result of the nature of elasticity in both the demand and supply of certain goods, particularly commodities, they are prone to huge price volatility.
    • When the prices increase significantly, it may make the goods unaffordable for the ordinary people. And when the price plummets, the producer may go bust and go out of business entirely.

Due to these market failures, government attempt to intervene to correct, or at least to mitigate, the problems arise from it. Of course, most government interventions also creates its own market distortion and problems as well. We will look into the various policy options that are available to the government to correct these market failures in the next article.

Stay tuned.

A2 questions

A2 Past Year Questions by Topics

Chapter 1: Efficiency & Market Failure
2008 MJ 41
2 The government in Namibia stated that electricity prices should cover cost and should also be based on the principle of allocative efficiency. Discuss whether this approach to pricing can be supported in theory. [25]

2008 ON 4
4 In India the post is delivered partly by private courier firms and partly by the government-owned India Post. The government is keen to increase its share of the market.
(a) Explain why a government might wish to increase its control over private firms. [10]
(b) Discuss whether an increase in government control necessarily improves efficiency in an organisation. [15]

2009 ON 41
2 There has been much discussion recently about the effect of climate change and the efficient use of economic resources. Discuss whether the efficient allocation of resources can be achieved only if governments are involved in the process. [25]

2010 MJ 41
2 (a) Explain what is meant by an efficient market equilibrium. [12]
(b) Discuss how the market mechanism might fail in the allocation of resources. [13]

2010 MJ 42
2 In 2007 the UK Competition Commission indicated that failure in the market mechanism would result in both winners and losers.
(a) Explain why producers are usually the winners and consumers are usually the losers when the market fails. [12]
(b) Discuss what the government might do when there are losers because the market mechanism has failed. [13]

2010 ON 41
2 In 2009 there were huge fires in Australia which destroyed much property and countryside. The government promised to allocate a large amount of money and resources to help with the restoration of the area.
(a) With the help of diagrams explain what is meant by efficiency in the use of resources. [12]
(b) Discuss the economic implications of the government’s approach to the situation. [13]

2011 MJ 41
2 Discuss whether economic efficiency can be improved if governments are involved in the regulation and provision of goods and services when there is market failure. [25]
2011 MJ 42
2 The use of cars causes market failure. To achieve an efficient use of resources it would be better if governments intervened to affect both the production and the use of cars.
Explain the meaning of the terms ‘market failure’ and ‘the efficient use of resources’ and analyse whether economic theory can be used to support this argument. [25]
2011 ON 43
7 Economists talk about the need for resources to be used efficiently. Explain what they mean by this and discuss whether it is possible in practice to achieve such efficiency. [25]

2012 MJ 41
7 Explain the difference between productive and allocative efficiency and discuss the suggestion that it is only possible to achieve such efficiencies through government intervention. [25]

2012 MJ 42
7 It is important to achieve economic efficiency in the use of resources. This can only be done if the private sector is increased in size. Government intervention in the economy should, therefore, be minimised. To what extent do you support this argument? [25]

2012 ON 41
7 (a) Explain what is meant when it is said that there might be inefficiencies in the production of goods and in the allocation of resources. [12]
(b) Discuss whether the best way to overcome market failure is to control private enterprise by means of taxation. [13]

2013 MJ 41
2 It is important that an economy makes the most efficient use of its resources. This can only be done if firms are allowed to increase in size. Government regulation of firms should, therefore, be minimised. Discuss whether you agree with this statement. [25]

2013 MJ 42
7 The market system is not able to allocate resources efficiently. Discuss this opinion. [25]

2013 MJ 43
2 It is important that an economy makes the most efficient use of its resources. This can only be done if firms are allowed to increase in size. Government regulation of firms should, therefore, be minimised. Discuss whether you agree with this statement. [25]

2013 ON 41
7 The increase in air travel has led to the pressure to build larger or extra airports. Airports create jobs, provide the facilities for international trade and bring income to the country. They also can cause noise pollution and sometimes destroy areas of natural beauty.
(a) Explain what is meant by efficiency in the use and the exploitation of resources. [12]
(b) Discuss whether the creation of income through such projects as the building of airports should be left to the private sector. [13]

2013 ON 42
4 In the economic recession of 2011 many private sector firms were still able to announce that they were successful and had made substantial profits. Large bonuses were paid to directors and shareholders received large dividends. Discuss whether it is better for an economy if the allocation of resources is left entirely to the private sector operating through the market system. [25]

2013 ON 43
7 It is said that the market does not allocate resources efficiently and that market failures occur. However, there need be no concern about market failure. All types of market failure can easily be overcome if the government intervened in the price system. Discuss this argument. [25]

2014 MJ 41
2 There is concern about conservation of the environment, prevention of waste and efficient use of resources. Economic theory is clear on how to allocate resources efficiently in a market but in reality such allocation is a problem. Discuss this opinion. [25]

2014 MJ 42
‘The profitability of firms is a measure of their efficiency. The higher the profit, the greater the efficiency. High profits should, therefore, be encouraged.’ Do you support this argument? [25]

2014 MJ 43
2 There is concern about conservation of the environment, prevention of waste and efficient use of resources. Economic theory is clear on how to allocate resources efficiently in a market but in reality such allocation is a problem. Discuss this opinion. [25]

2014 ON 41
7 The transfer of some functions of the public sector to the private sector is the best way of ensuring efficiency. It is, therefore, worthwhile. Is this an argument with which you agree? [25]

2015 MJ 41
2 International conferences have been held to discuss the effects of global warming and to persuade governments to agree to improve efficiency in the use of resources by limiting the amount of harmful gases produced by their country.
Explain what is meant by an efficient use of resources and discuss whether efficiency can only be achieved if governments are involved. [25]

2015 MJ 42
7 ‘The free market is not the way to achieve a sustainable, efficient use of economic resources. Even the famous economist Adam Smith recognised that there was a need for some government involvement.’
Discuss whether government involvement in the economy might overcome the weaknesses of the free market system. [25]

2015 MJ 43
2 Economic theories often refer to the concept of equilibrium.
(a) Identify two areas of microeconomic theory that use the concept of equilibrium and explain how in each case that equilibrium is achieved? [12]
(b) Discuss whether economic efficiency is always at its highest if the equilibrium is achieved without any government involvement. [13]

2015 ON 41
2 There was a period when many publicly owned enterprises were privatised. Investors said that privatisation would increase competition, encourage greater efficiency and raise profits.
(a) Explain what is meant by economic efficiency. [12]
(b) Discuss how the privatisation of an industry might affect economic efficiency. [13]

2016 MJ 41
2 ‘In a complex modern economy there is no possibility of a perfect market system. A concentration of market power always results and does not serve the public interest.’ Do you agree with this opinion? [25]

2016 MJ 42
‘Government economic policy is based on the idea that people cannot be trusted to choose what is good for them but instead sometimes choose things that are harmful to themselves or detrimental to the environment (or both). Therefore, a free market cannot allocate resources efficiently.’ Do you support this argument? [25]

2016 MJ 43
7 Private sector developers have discovered potentially profitable supplies of gas and proposed a new method of extracting it that involves drilling in some areas of natural beauty. They say it is important that a country’s resources are used efficiently.

Consider whether they might mean the same as economists when they talk about the efficient use of resources and whether it is possible in practice for private organisations to achieve such economic efficiency. [25]

2016 ON 41
2 Adam Smith’s eighteenth century idea of an ‘invisible hand’ where the free market allocates resources effectively and efficiently is false because the ‘invisible hand’ cannot work in a complex modern economy. Do you agree with this argument? [25]

2016 ON 42
2 It has been said that the aim in the allocation of resources should be to achieve the greatest happiness for the greatest number of people. Discuss whether economics has anything to say about the best way to maximise welfare from the use of resources. [25]

2016 ON 43
2 ‘The price mechanism is the most effective and certain method for ensuring an efficient allocation of resources to achieve maximum welfare.’ Comment on this opinion. [25]

Chapter 2.1: Utility
2008 ON 4
2 Economic analysis of resource allocation assumes consumers are rational. Where advertising exists, this analysis is of little value. Do you agree with this argument? [25]

2010 MJ 41
7 Economic analysis adequately explains how a rational consumer determines a pattern of consumption from a given income in a perfect market with no advertising. It does not explain the more common case of what happens if income changes or if there is advertising. The theory is, therefore, of little merit. Do you agree with these assertions? [25]

2010 MJ 42
5 Economic theory emphasises the idea of an equilibrium position. Discuss whether the idea of an
equilibrium is a useful and practical way of explaining the behaviour of a consumer. [25]

2011 MJ 42
3 (a) Discuss whether demand schedules and budget line diagrams are similar in the way they
represent the effect of
(i) a rise in the price of a good
(ii) a rise in a consumer’s income. [12]
(b) Analyse what is meant by the equi-marginal principle of consumer demand and whether it can be linked to the derivation of a market demand curve. [13]

2011 ON 42
2 (a) Explain the link between a consumer’s expenditure and the equi-marginal principle of utility. [12]
(b) Analyse what is meant by economic efficiency and assess whether efficiency is always achieved in a market. [13]

2012 MJ 41
2 (a) Explain, using a budget line diagram, whether
(i) the substitution effect of a price change and
(ii) the income effect would be similar for a normal good and an inferior good. [12]
(b) Discuss the extent to which the law of diminishing marginal utility may be used to determine the market demand for a good. [13]

2012 MJ 42
2 When buying goods not everyone buys the same standard product. There are some who want a
cheap product even though it might be of poor quality, while there are those who are willing to pay more for a luxury or an individually-made product. Customers search for value but value is not just in the price. (adapted from New York Times in the Observer 21.02.10)
(a) Explain the theoretical link between utility, price and the demand for a product. [12]
(b) Discuss whether the economic analysis of a rational consumer estimating demand based on value (utility) is valid not only for standard products but also for poor quality and luxury products. [13]

2012 ON 41
2 (a) Explain how the law of diminishing marginal utility might be used to construct a consumer’s
demand curve for a product. [12]
(b) Analyse how budget lines may be used to illustrate what happens for both a normal good and an inferior good when the price of the good increases at the same time as a consumer’s income increases. [13]
2012 ON 42
2 A study found that demand for tickets for exhibitions at a major art gallery had unitary price
elasticity.
(a) Explain how the concept of diminishing marginal utility may be used to construct a demand curve for the product and whether that analysis still applies in the case of demand for tickets for the exhibitions. [12]
(b) Discuss whether the law of diminishing returns contradicts the concept of economies of scale. [13]

2012 ON 43
2 ‘The achievement of equilibrium in a market rests solely on the ability to measure marginal utility.
This is not possible and, therefore, equilibrium in a market can never be achieved.’ Discuss this
argument. [25]

2013 MJ 42
2 (a) Explain how a consumer allocates expenditure according to the principle of equi-marginal utility and analyse how a change in income might affect that allocation. [12]
(b) Discuss how a government might achieve a more equal distribution of income. [13]

2013 ON 41
2 Choice is an essential part of the analysis in economic texts.
(a) Explain how economic analysis suggests that consumers make a choice when buying products and how they react to price changes. [12]
(b) Discuss the possible choices a firm might face when deciding what business objective, it should have. [13]

2013 ON 42
2 (a) Use the theory of marginal utility to analyse how a consumer will normally buy more of a product at a lower price than at a higher price and explain how this theory can be used to derive a market demand curve. [12]
(b) Economic texts examine market equilibrium. Discuss whether it is the consumer or the producer who determines the equilibrium market price and whether consumers have the same power in all types of market structure. [13]

2013 ON 43
2 (a) Explain how, according to marginal utility theory, consumers reallocate their expenditure between different products as prices change. [12]
(b) In reality perfect competition is seldom found, and firms use advertising to persuade consumers to buy their products. Discuss whether imperfect competition means that markets are controlled only by producers and the traditional idea that the consumer determines what happens in the market based upon utility theory is no longer valid. [13]

2014 MJ 41, 43
2 A consumer’s demand is sometimes influenced by advertising and sometimes influenced by impulse buying. This means that the economic theories of consumer demand based on utility are of no relevance to a firm trying to determine its likely revenue. Do you agree with this argument? [25]

2014 MJ 42
2 ‘The analysis of marginal utility as an explanation of consumer equilibrium can only be related to the purchase of one good, cannot be used if incomes increase, and is not applicable if advertising causes a change in tastes. It is, in practice, not a useful guide to consumer behaviour’. Assess this opinion. [25]
2014 ON 41
2 (a) Analyse whether there is a difference between:
• the way the effects of an increase in price can be represented using a budget line, and
• the way the effects of an increase in price can be represented using a demand curve based on marginal utility theory. [12]
(b) Discuss what is likely to happen to the equilibrium price and output if a perfectly competitive firm were to become a monopolist. [13]

2014 ON 42
2 ‘The purchases a consumer makes are based upon marginal utility. It is this alone that determines market equilibrium in perfect competition. Supply has no relevance.’ Is this true? [25]

2014 ON 43
2 The link between marginal utility and price has a similar significance for the consumer as the link between marginal cost and price for the producer.
Consider whether this statement is an accurate reflection of the economic analysis of consumer and producer equilibrium. [25]

2015 MJ 41
3 With a perfect market and a given income, economic analysis explains how a rational consumer decides the quantities of which products to demand. It cannot, though, explain what happens when incomes change or when businesses in imperfect markets manipulate prices. Discuss whether you agree with this opinion about the economic analysis of consumer behaviour. [25]

2015 MJ 42
2 (a) Describe how consumer theory suggests a rise in income will cause a consumer’s demand to change for a normal good and for an inferior good. [12]
(b) Explain the difference between structural, cyclical and seasonal unemployment and discuss whether a general rise in income in a country would have the same effect on each of these types of unemployment. [13]

2015 On 42
2 Consumers decide what they wish to buy and as a result direct the market. Producers develop new products, which they then promote by advertising, in order to maximise profits. Without producers there would be no products to buy.
(a) Explain how economic theory predicts what a rational consumer decides to buy. [12]
(b) Discuss whether the market is dominated more by producers or by consumers. [13]

2015 ON 43
2 Economic theories often use the concept of the margin.
(a) Explain how the concept of the margin is used in consumer theory to derive a market demand curve.[12]
(b) Discuss whether the use of the concept of the margin is important for a firm in deciding its business objective. [13]

2016 MJ 41
3 (a) Given the prices of two goods, how does economic theory analyse what is meant by ‘consumer equilibrium’? [12]
(b) Suppose the price of one of the goods falls. Use indifference curve analysis to discuss whether consumers would always buy more of the good when its price falls. [13]
2016 MJ 42
3 With the help of diagrams, use indifference analysis to:
(a) explain what is meant in economic theory by consumer equilibrium and how it is related to a consumer’s demand curve. [12]
(b) discuss how this equilibrium might be affected by a government fiscal policy that raises taxes on goods. [13]

2016 MJ 43
2 (a) Economists write about indifference analysis when studying consumer choice. Does this theory of consumer behaviour mean that a consumer is always indifferent when choosing between two products? [12]
(b) Discuss whether the use of a demand curve and budget lines are similar in the way they represent what will happen if the price of a good falls. [13]

2016 ON 41
3 (a) Explain the meaning of an indifference curve and show to what extent indifference curves can be used to determine a consumer’s demand curve for a product. [12]
(b) Consider whether indifference curves can be used to analyse the effects of a fall in the price of a good on the demand for both a normal good and a Giffen good. [13]

2016 ON 42
3 (a) A number of consumers are deciding whether to buy a product. How far does economic theory explain the determination of the market demand curve for that product? [12]
(b) Discuss whether that theory is still valid if the producer decides to advertise the product, and consider the effects of the advertising on the demand curve for the product. [13]

2016 ON 43
3 The use of indifference curves to establish a consumer’s equilibrium is purely a theoretical tool. They show the relation between two goods; they do not show prices or income and, therefore, cannot be used to determine a demand curve. How far do you agree with this statement? [25]
Chapter 2.2: Labour Market
2008 MJ 4
3 In some countries the power of trade unions has decreased. In other countries, trade unions have organised major strikes resulting in employees refusing to work.
(a) Is the existence of a trade union likely to be the main factor that affects the supply of labour? [10]
(b) Discuss how the theory of wage determination through market forces might need to be altered when trade unions exist in an industry. [15]

2008 ON 4
5 The economic theory of wages assumes first that there is a perfect market and secondly that the market will reach a stable equilibrium. It therefore has little relevance to a commercial world full of change and uncertainty. Discuss whether you agree with this opinion. [25]

2009 MJ 4
3 Discuss what might cause inequalities in wage rates in an economy. [25]

2009 ON 41
4 Workers in the public sector are sometimes paid less than workers in the private sector. Discuss why wage rates differ. [25]

2009 ON 42
3 By 2007, the telecommunications business had become dominated by fewer organisations. One of them, Cable and Wireless, announced there would be 3000 job losses. Another, Tiscali, announced 800 job losses and BT, the UK telecoms giant, announced a £450m major investment and restructuring resulting in thousands of job cuts.
Analyse whether the above is what marginal revenue product theory predicts will happen when a
labour market becomes less competitive and large investment takes place. [25]

2010 MJ 41
4 ‘The level of wage rates is not satisfactorily explained by economic theory because that theory concentrates on perfect competition while most labour markets are imperfect.’
Discuss whether this claim is true. [25]

2010 Mj 42
4 (a) Analyse whether an increase in the wage rate always leads to an increase in the number of hours worked by an individual. [10]
(b) A government stated that pay increases in the coming year should be kept to a minimum.
Discuss whether the main determinants of wage rates are factors such as trade unions and the government rather than market forces. [15]

2010 ON 41
4 Recently, employers in some countries have employed foreign workers instead of local workers.
The local workers argue that they should have priority over foreign workers and also that more
products should be produced at home rather than being imported.
(a) Explain, with the help of a marginal revenue productivity diagram, why an employer might prefer to switch to foreign workers. [12]
(b) Discuss whether it would be beneficial for a country to give priority to its local workers. [13]

2010 ON 43
4 Do you agree that the higher wages paid in some occupations occur just because some trade
unions have a stronger bargaining position than others? [25]

2011 MJ 41
4 Do you agree that the wage of labour is determined by the market like any other price? [25]

2011 MJ 42
5 In imperfect competition, labour markets can lead to worker exploitation in terms of the wage rates they receive compared with wage rates in perfect competition. Discuss this opinion. [25]

2011 ON 41
4 Assess the opinion that the difference in the supply of labour is the only reason explaining the difference in wage rates between occupations. [25]

2011 ON 42
4 The market is the fairest means of wage determination. To what extent do you support this opinion? [25]

2011 ON 43
4 (a) In a perfectly competitive labour market, is the demand for a worker’s services the main factor influencing the wage rate of that worker? [12]
(b) Analyse how the wage rate paid might change if labour and product markets move from being perfectly competitive to being imperfectly competitive. [13]

2012 MJ 41
5 Discuss whether the higher wage rates paid in some occupations occur solely because some trade unions have a stronger bargaining power than others. [25]

2012 MJ 42
4 Wage rates in some non-essential occupations, such as entertainment, are very high while wage rates in essential occupations, such as public sector hospital nurses, are much lower. This is unfair.
Analyse how economic theory can explain these differences in wage rates and consider whether you agree with the conclusion of this statement. [25]

2012 ON 41
4 The differences in wage rates paid in different occupations are caused entirely by the differences in the elasticity of supply of labour. The way, therefore, to overcome the differences in wage rates is to increase the training available to workers. Discuss whether economic analysis supports this argument. [25]

2012 ON 42
4 Some workers producing non-essential luxury goods or services are paid very highly. The wage rate is not related to the economic value of a good or service but more to social factors or fashion. The economic theory of wages is, therefore, of little use in explaining wage differentials. Assess this argument. [25]

2012 ON 43
4 The economic analysis of wage determination states that all wages rates in different occupations will in the long run become the same and equal to the average product of labour. Discuss this statement. [25]

2013 MJ 41
3 (a) Explain how the quantity of labour employed and the wage rate are determined by a firm in a perfectly competitive labour market. [12]
(b) Discuss why wage rates might be different in practice from those in a perfectly competitive
labour market. [13]

2013 MJ 42
3 In 2011, as a result of a recession, the governments of some countries reduced the wages that they paid to public sector workers. Trade unions organised mass demonstrations in protest.
Discuss how the economic theory of wage determination in perfect competition can be adapted to explain such a situation. [25]
2013 MJ 43
3 (a) Explain how the quantity of labour employed and the wage rate are determined by a firm in a perfectly competitive labour market. [12]
(b) Discuss why wage rates might be different in practice from those in a perfectly competitive
labour market. [13]

2013 ON 41
3 The economic theory of wages can explain wage determination in a perfect market. This, however, is of little use as all markets are imperfect and the theory has no relevance in such markets. Discuss whether you agree with this statement. [25]

2013 ON 42
3 (a) Analyse whether in a perfectly competitive labour market it is true that a profit maximising firm will employ labour only up to the point where the marginal revenue product of labour is at its
maximum. [12]
(b) Discuss whether the marginal revenue productivity theory of wages is useful in explaining
wage determination in an imperfect market where there is a trade union. [13]

2013 ON 43
3 (a) Do you agree with the view that in a perfectly competitive labour market wages are higher in
some occupations than others only because of the differences in the supply of labour? [12]
(b) A country has a minimum wage rate fixed by law. Discuss whether this can be included in the
economic analysis of the theory of wages in an imperfectly competitive labour market. [13]

2014 MJ 41
4 (a) Explain how a profit-maximising firm will choose the quantity of labour it employs. [12]
(b) Governments sometimes aim to reduce the level of unemployment. Discuss whether this
necessarily results in a conflict between this aim and other government macroeconomic aims.[13]

2014 MJ 42
4 (a) Some top executives and some sports people are paid very high salaries. It is argued that this
is inevitable as people are paid the market rate for the job. Use economic analysis to support
this opinion. [12]
(b) It is argued that the wage determination in imperfect markets leads to exploitation. It is therefore necessary and beneficial if the government intervenes in the determination of wage
rates. Discuss whether there is any truth in this argument. [13]

2014 MJ 43
4 (a) Explain how a profit-maximising firm will choose the quantity of labour it employs. [12]
(b) Governments sometimes aim to reduce the level of unemployment. Discuss whether this
necessarily results in a conflict between this aim and other government macroeconomic aims. [13]

2014 ON 41
4 (a) Employment is likely to decrease if wages fall. Employment is likely to decrease if wages rise.
Consider whether these apparently contradictory statements are true in the analysis of the demand for and supply of labour. [12]
(b) Discuss how wage rates might differ between a perfect and an imperfectly competitive market
for labour. [13]

2014 ON 42
4 A huge company with a turnover of $99.3 billion paid its chief executive $10.9 million in 2011. At
the same time it was reported that the company did not pay what was regarded as a living wage to all its employees.
(a) Use economic analysis to help explain why there can be wide differences in wage rates. [12]
(b) Discuss how this analysis could be adapted if a trade union intervened in the process of wage
determination. [13]

2014 ON 43
4 (a) Explain what economists mean when they say that the labour market is imperfect rather than perfect. [12]
(b) Does the use of the term ‘imperfect’ mean that there is some failure in the labour market that should be corrected by government intervention? [13]

2015 MJ 41
4 (a) How does economic analysis explain the level of wage rates in a perfectly competitive labour market? [12]
(b) Here are two press statements.
‘A government announced that it would limit the top level of pay for senior executives in private
industries by imposing a maximum wage.’
‘The trade union for transport workers decided to call a strike unless its members were
awarded a higher rate of pay.’
Source: The Telegraph Business, March and October 2012

Discuss how the economic analysis of wage determination would be changed by the announcement of the government and the decision of the trade union. [13]

2015 MJ 42
4 ‘Wage determination in the factor market is just like price determination in the product market. It is entirely dependent on the forces of supply and demand.’ Do you agree with this statement? [25]

2015 MJ 43
4 During the recession of 2011–2012, competition among high street shops changed. Some well-known shops closed and the labour market became more imperfect. Analyse what economic theory predicts will happen to the level of wages when competition is reduced in the labour market. [25]

2015 ON 41
4 ‘The economic theory of wages has as its central idea the achievement of an equilibrium in a
perfect market. It is difficult to find a perfect market and it is unrealistic to speak of an equilibrium
when private enterprise is full of uncertainty.’
Discuss whether this statement means that in explaining wage determination the theory has nothing to offer. [25]

2015 ON 42
7 (a) Distinguish between supernormal profit and economic rent and consider the circumstances when each occurs. [12]
(b) Discuss whether you agree with the opinion that a trade union might be able to achieve higher wages for its members but only by causing some unemployment. [13]

2015 ON 43
4 Briefly consider the causes of unemployment and then use the economic theory of the determination of wage rates to discuss whether an increase in wage rates may substantially
increase long term unemployment in some industries but not in others. [25]

2016 MJ 41
4 ‘Wage rate inequalities are inevitable and can be justified.’ Discuss whether this statement can be supported by economic theory. [25]

2016 MJ 42
(a) ‘In perfect competition in the short run, wage rates in some occupations will be higher than in others.’ Explain the economic analysis underlying this. [12]
(b) Do you agree that in an imperfect labour market any activity by trades unions designed to increase wage rates would inevitably lead to unemployment in that market? [13]

2016 MJ 43
4 Some workers are paid a basic rate and then paid additional commission based on the number of products sold. In 2014, a European court ruled that a worker’s holiday pay should be based on total pay including commissions and not just on the basic rate.
(a) Explain, according to economic analysis, the shape of a worker’s supply curve and suggest how this court judgement might affect the number of hours worked? [12]
(b) Discuss whether a trades union can always increase the wage rate of its members without affecting the level of employment. [13]

2016 ON 41
4 In 2014, the average monthly salary in South Africa for an executive business manager in the private sector was 60 000 rand; for a public sector nurse, 13 700 rand; for a cleaner, 3 600 rand.
These differences in wage rates can be entirely explained by the economic theory of the labour market. Discuss whether you agree with this conclusion. [25]

2016 ON 42
6 (a) Some occupations that do not have pleasant working conditions, such as rubbish collection, receive low pay, while those with pleasant conditions, such as senior managers, receive high pay. How far does economic analysis explain this situation? [12]
(b) Discuss what influence a trades union and a government can have in determining wage rates. [13]

2016 ON 43
5 (a) With the help of a diagram, explain how far the introduction of a minimum wage in an occupation might affect the division between a worker’s transfer earnings and economic rent. [12]
(b) Discuss how far wage differentials are caused in the real world solely by differences in market demand and supply. [13]
2.3 Cost, Market Structure, Growth of Firms, Different Objectives of Firms
Cost

2008 ON 4
3 (a) Explain how a knowledge of its long-run average costs might be useful to a profit-maximising firm. [10]

2010 ON 41
3 (b) Discuss whether there is a relationship between the marginal cost curve of the firm and the supply curve of the industry to which it belongs. [13]

2011 MJ 41
3 (a) Analyse, with the aid of a diagram, whether there is a link between diminishing marginal returns and economies of scale. [12]

2012 ON 43
3 (a) With the help of diagrams, analyse how a firm can experience both diminishing returns and economies of scale. [12]

2015 MJ 41
5 (b) Analyse and consider the extent of the link between marginal cost, diminishing returns and economies of scale. [13]

2015 ON 42
3 (a) Explain the meaning of, and the relationship between, diminishing returns, total product and marginal cost. Use a diagram to illustrate your answer. [12]

2015 ON 43
3 (a) Analyse, with the help of a diagram, the possible shape of the long-run average cost curve of
a firm and explain whether it is likely to be the same for small and large firms. [12]

2016 MJ 41
5 (a) Explain what is meant by diminishing returns and economies of scale, and consider whether diminishing returns can occur only in perfect competition and economies of scale in imperfect competition. [12]

EOS, Market Structure

2008 MJ 4
4 Large firms necessarily become monopolistic. Monopolies adopt practices that are undesirable. Therefore, large firms should be regulated by governments. Discuss whether there is any truth in this argument. [25]

2008 ON 4
3(b) Discuss whether firms always want, and are able, to maximise profits as suggested by economic theory. [15]

2009 MJ 4
2 In many cities worldwide, newspaper publishers compete with each other. Some types of newspapers are sold, but publishers also produce others that are distributed free of charge. Many people and companies pay to advertise in the free newspapers.
(a) Explain the different ways that economists classify profits and consider whether it is possible to make a profit from a newspaper that is distributed free. [12]
(b) Discuss how a firm might compete in a market. [13]

2009 MJ 4
4 Airbus, a large aircraft manufacturing company, announced in 2007 that its goal was to increase its $475 million research budget by 25 % in order to try to develop a more environmentally friendly aircraft that had lower fuel consumption.
(a) Explain why Airbus is likely to be in an imperfect rather than a perfect market structure. [10]
(b) Economics textbooks sometimes criticise firms in imperfect competition as being against the public interest. What does this mean, and how far does the Airbus announcement prove the textbooks wrong?[15]

2009 ON 41
3 BG is a rapidly growing energy company with operations in 25 countries engaged in the exploration, production and distribution of natural gas and oil. This requires complex chains of physical infrastructure, major investment funds and detailed commercial agreements with different countries.
(a) Explain why economies of scale might be significant in an industry such as gas supply. [12]
(b) Discuss whether companies that supply energy are likely to operate in contestable markets. [13]

2009 ON 42
2 In 2007 BHP Billiton, a large mining group, made a bid to take over Rio Tinto, the world’s third largest mining group. Such a takeover would create the largest producer of copper and aluminium in the world.
(a) Explain whether increasing its scale of production will always reduce a company’s costs. [12]
(b) BHP Billiton and Rio Tinto have monopoly powers and are mining a natural resource.
Discuss why the governments of the countries in which these companies operate might become concerned about this. [13]

2010 MJ 41
3 In 2007 the cost of a single ticket on London trains bought at the time of travel was £4. The same ticket bought in advance was £2.50 if used up to 19.00 hrs and £2 after 19.00 hrs. Children could travel free at any time, and those over 60 could travel free after 09.00 hrs.
(a) Explain what is meant by price discrimination and analyse what evidence there is of price discrimination in the above statement. [12]
(b) Discuss how the output and pricing policy adopted by a firm might differ depending on the market structure in which it operates. [13]

2010 Mj 42
3 In March 2009, the government of France agreed to pay 250 million Euros to the car manufacturer Renault, which employed 63 000 workers, on condition that it would not reduce the number of French jobs or factories. General Motors, a US car manufacturer which employed 600 000 workers, said that it needed $2 million in government aid to avoid bankruptcy.
(a) Describe the characteristics and likely pricing policy of the market structure in which a car manufacturer is likely to operate. [12]
(b) Discuss whether economic theory supports the idea that governments should encourage all large organisations. [13]

2010 ON 41
3 (a) Explain what is meant by internal economies of scale, and analyse the link between economies of scale and a firm’s long run average cost curve. [12]
2010 ON 43
2 (a) Explain the significance of the distinction between fixed and variable cost for the pricing and output decisions of a firm. [12]
(b) Discuss whether the pricing and output decisions of a firm are determined solely by an estimate of revenue and cost. [13]

2010 ON 43
3 It is suggested that there are so many benefits from large-scale production that all firms should be encouraged to grow in size and there should be no government restriction on such growth. Do you agree with this opinion? [25]

2011 MJ 41
3 (b) Discuss whether the objectives of a firm in a perfectly competitive market are likely to be different from the objectives of a firm in an imperfect market structure. [13]

2011 MJ 42
4 (a) Discuss whether it is always advantageous for a firm to grow in size. [12]
(b) Explain the economic theory of profit maximisation for a firm and consider whether firms are likely to follow this theory in fixing their price and output. [13]

2011 ON 41
2 The removal of imperfections in the market leads to an increase in efficiency in the allocation of resources. Discuss whether you agree with this view. [25]
3 (a) Explain what is meant by normal and abnormal profit and when such profits might occur. [12]
(b) Discuss what economic theory suggests are the characteristics and possible behaviour of firms in an oligopolistic market. [13]

2011 ON 42
3 (a) Consider whether small firms should be encouraged in an economy. [12]
(b) Economic theory states that large firms have lower average costs than small firms. Discuss whether this statement is necessarily true. [13]

2011 ON 43
2 ‘There is little difference between perfect and imperfect markets. They all have profit maximisation as an aim, they all are subject to competition and they all exploit resources for the producers’ benefit and not the consumers.’ To what extent do you agree with this statement? [25]

2012 MJ 41
3 (a) Distinguish between perfect competition and monopolistic competition. [12]
(b) Discuss whether oligopoly is likely to be the most realistic market structure in a mixed economy. [13]

2012 MJ 41
4 In 2010 the directors of a major UK chocolate firm, worth over £10 billion, recommended that its shareholders accept a takeover offer from a large US food firm. The firm would not then be controlled in the UK. It was feared that some production in the UK would cease.
(a) Analyse what economic theory suggests might be the outcome of such a takeover for the enlarged firm and its workers. [12]
(b) Discuss the possible macroeconomic outcomes for a domestic economy of such a takeover by a foreign firm. [13]
2012 MJ 42
3 (a) Explain why there may be different levels of profit within perfect competition and between perfect competition and monopoly. [12]
(b) Discuss whether the average variable cost has any significance in a perfectly competitive market structure in determining (i) the output produced by a firm and (ii) the profit of a firm. [13]

2012 ON 42
(a) Explain what is meant by an oligopoly market and why prices might fluctuate less in an oligopoly market than in a perfectly competitive market. [12]
(b) Discuss whether a firm in monopolistic competition is more likely to act in the public interest than a firm that is a monopoly. [13]

2012 ON 43
3 (b) ‘Monopolies create a deadweight loss. They should always be discouraged.’ Discuss this opinion. [13]

2013 ON 43
4 Some companies claim that restrictive regulation by governments is the biggest threat to business growth. (Source: The Independent)
(a) Explain what is meant by:
(i) a deadweight loss, and
(ii) price discrimination. [12]
(b) Discuss which is more beneficial, firms that remain small or firms that grow in size. [13]

2014 ON 41
3 In the recession of 2012, some European firms declared that their profits were not as high as in the previous year.
(a) Explain how, in theory, a firm might try to increase its profits. [12]
(b) Discuss what alternative objectives a firm might have apart from profit maximisation. [13]

2014 ON 42
3 Discuss the similarities and differences between a firm’s likely price and output policy in perfect
competition and oligopoly. [25]

2014 ON 43
3 (a) Cunard is a company that operates large passenger liners providing transatlantic crossings between the US and the UK. Larger cabins, or cabins with balconies are priced higher than the smaller cabins. Also for any cabin, passengers purchasing the voyage in the US pay a much lower price than passengers purchasing the voyage in the UK. Cunard insist that in order to make the purchase in the US the passenger must have a US address.
Explain whether these are examples of price discrimination and consider whether price discrimination can be justified. [12]
(b) Discuss whether firms operating in a market structure of monopolistic competition are less efficient than those operating in perfect competition. [13]

2015 MJ 41
5 (a) Explain why manufacturers differentiate their products and describe the characteristics of two market structures where product differentiation occurs. [12]

2015 MJ 42
3 (a) A firm in a perfectly competitive market and a firm with a monopoly both seek to maximise their profit. Explain, with the help of a diagram, why the levels of price and output might be different in the two markets. [12]
(b) Discuss whether it is always true that a firm, rather than maximising its profits while remaining small, will seek to grow in size. [13]

2014 MJ 43
‘The aim of all firms is to grow in size, overcome diminishing returns and gain economies of scale.’
(a) Explain whether the idea of diminishing returns contradicts the concept of economies of scale. [12]
(b) Do you agree that, whatever the market structure, the main aim of a firm is to grow in size? [13]

2015 ON 41
3 (a) Analyse the relationship between the cost curves of an individual firm and the supply curve of the industry. [12]
(b) In the long-run, average cost falls with increases in output and, therefore, larger firms are always to be preferred to smaller firms. Do you agree with this opinion? [13]

2015 ON 42
3 (b) ‘Firms undertake vertical and horizontal integration to grow in size. They achieve beneficial economies of scale through growth.’ Consider whether economies of scale are always caused by integration and whether, therefore, there is no place for small firms in a modern economy. [13]

2015 ON 43
3 (b) Two airlines were recently accused of colluding to exploit the consumer. An investigation was established to see if this had happened. Discuss why collusion can occur in one market structure but not in another market structure. [13]

2016 MJ 41
5 (b) ‘The theory of the firm that assumes perfect knowledge and the aim of profit maximisation can be found only in perfect competition. In monopoly those assumptions do not apply.’ Consider whether you agree with this statement. [13]

2016 MJ 42
5 The traditional theory of the firm assumes a single objective for the firm, namely the maximisation of profit.
(a) Explain whether a firm with this objective necessarily always makes a profit. [12]
(b) Discuss how the objective in the traditional theory may be varied in different market structures. [13]

2016 MJ 43
3 In 2014 an American multinational pharmaceutical drug developer and supplier made a bid to take over a Swedish-British multinational drug company, but the board of that company refused to accept the bid for its shares.
(a) Consider whether increasing a company’s scale of production will always reduce its costs. [12]
(b) Analyse what is meant by a contestable market and consider whether companies that supply drugs are likely to be in a contestable market. [13]

2016 ON 41
5 (a) Explain how an equilibrium position is determined for a firm and for an industry in perfect competition in the short run and in the long run. [12]
(b) Outline the conditions that make price discrimination in a monopoly market possible and discuss whether such discrimination is ever beneficial. [13]

2016 ON 42
4 Explain what is meant by the ‘equilibrium of a perfectly competitive firm’ and consider the view that equilibrium is always achieved in perfect competition but never in a monopoly market. [25]

2016 ON 42
4 (a) Assess the differences and the similarities in characteristics, pricing and output between perfect competition and monopolistic competition. [12]
(b) Consider whether it is true that prices are always higher and output always lower under monopoly conditions than they are under perfectly competitive conditions. [13]

3 Government Macro-economic Aims, Policies, Conflict of Policies
2009 MJ 4
6 In 2007 a report stated ‘classrooms with teachers, clinics with nurses, clean water and working toilets are the key to ending global poverty. Only governments are in a position to provide these services on the scale required’.
Discuss whether governments should abandon their traditional macroeconomic aims in favour of the alternatives in the above statement. [25]

2009 ON 41
5 Some Japanese economists have argued that higher interest rates would, unusually, improve Japan’s economic growth.
(a) Explain why it might be said that this link between interest rates and economic growth is unusual. [12]
(b) Discuss whether economic growth is good for an economy. [13]
2009 ON 42
6 (a) In some countries there has been fear of economic recession in recent years. Explain the main characteristics of an economic recession. [10]
(b) Discuss the policies that might be used to bring an economic recession to an end. [15]
7 The economy of South Africa is growing faster than its potential growth rate. The Governor of the central bank of South Africa said ‘This is why we have inflation. We need to deal with inflation as it does not lead to job creation. Interest rates are the only tool available to control inflation’.
Do you agree with the Governor’s opinion on inflation? [25]

2010 ON 41
7 Economic analysis states that the aims of the government include economic growth and economic efficiency.
(a) Explain how achieving economic growth might conflict with other government macroeconomic
aims. [12]
(b) Is economic efficiency better achieved by the market mechanism rather than by government microeconomic policy? [13]
2010 ON 43
5 (a) Explain what you consider to be three economic issues in the country in which you live and analyse which is the most significant. [12]
(b) Discuss what measures might be recommended to try to deal with the most significant issue. [13]
2011 Mj 41
7 The main way a developing country could become a developed country is for government policy to concentrate on the protection of domestic industry and investment in infrastructure. Do you agree that this is the best policy? [25]

2011 ON 41
6 (a) Explain the main macroeconomic aims a government might have and analyse which would be the most important for your country. [12]

7 It is reported that some countries are concerned about the expected increase in the proportion of older people beyond working age and also about the rise in the number of immigrants.
(a) Explain how these expected changes might have an impact on the private and public expenditure in such countries. [12]
(b) Evaluate the policies a government might use to influence the distribution of income in an economy. [13]

2011 ON 42
5 (a) Explain what is meant by government macroeconomic policies and government microeconomic policies. Illustrate your answer with two types of policy from each. [12]
(b) Consider how government economic policies might be used to help a country out of a recession. [13]
2011 ON 43
3 Car companies employ thousands of people and are an important part of the international trade of some countries. During the recession in 2009 some governments gave subsidies to consumers to encourage them to replace their old cars with new ones.
(a) Explain what effects an increase in consumer expenditure and an increase in government subsidies might have on national income. [12]
2012 MJ 42
6 It is sometimes stated that the economic growth rates of developed countries are higher than those of developing countries.
(a) Explain why developing countries often aim to increase economic growth. [12]
(b) Assess the likely effectiveness of the types of policy the government of a developing country might use if it wished to increase economic growth. [13]
2012 ON 41
5 (a) Explain what is meant by an inflationary gap. [12]
(b) Discuss the effectiveness of the policies a government might use to reduce an inflationary gap. [13]

2012 ON 43
5 In 2010 a number of governments were concerned that they had large budget deficits. A group of economists recommended that the deficit should be reduced by public spending cuts rather than tax increases.
(a) Explain what is meant by a budget deficit and why a large deficit might be a source of concern. [12]
(b) Discuss the similarities and differences of using spending cuts or tax increases as a means of solving budget deficits. [13]
2013 MJ 42
4 The combination of rapid economic growth and inflation is no coincidence. (Source: The Times)
(a) Explain why rapid growth and high inflation might often occur at the same time. [12]
(b) Discuss what policies might be used by a government to control inflation. [13]

2013 ON 41
4 In 2011, an economic advisor recommended that low interest rates in a country should continue because of the uncertainty about the ability of the economy to grow. (Source: The Independent)
(a) Explain the possible link between interest rates and the economic growth of an economy. [12]
(b) Discuss what other policies a government might use to encourage economic growth. [13]
2013 ON 43
6 Some governments place great emphasis on the aims of economic growth and keeping the level of unemployment low. How far do you agree that these aims should be the most important of a government? [25]

2014 MJ 42
5 It was reported in 2012 that consumers should not be encouraged to save more and reduce their debts. Increased saving would result in a Keynesian ‘paradox of thrift’ which would not help economic growth. Instead consumers should spend money on new purchases. (Source: The Times. 2011) (a) Explain and comment on what is meant by ‘the paradox of thrift’. [12]
(b) Discuss what is meant by economic growth and consider whether spending money on new purchases would necessarily help economic growth. [13]

2014 On 41
5 An economist stated ‘you cannot encourage economic growth, and cut spending and increases taxes at the same time’. (Source: The Times. 2011)
(a) Explain the costs and benefits of economic growth. [12]
(b) Discuss whether economic analysis can be used to support the statement of the economist. [13]

2014 ON 42
5 (a) Identify two government macroeconomic aims and analyse how a boom will bring beneficial changes for consumers and producers. [12]

Lord Skidelsky, Keynes’s biographer, stated that Keynes believed that ‘to cut government spending was completely the wrong policy in a slump’. (Source: The Times.)
(b) Discuss why cutting government spending might be considered to be the wrong policy in a slump. [13]

2015 MJ 41
6 In 2013, a new aircraft, the Boeing 787 Dreamliner, was assembled in the United States (US).
United Airlines, an American private company, ordered 50 of these aircraft, each costing over
US$200 million.
(a) Imagine that the US was a closed economy with no government intervention. Analyse why the increase in national income from this investment in new aircraft might be different than if it were an open, mixed economy. [12]
(b) Discuss the policies that a government might use to influence the level of investment in an economy.[13]
2015 MJ 42
5 ‘Lack of consumer spending causes recessions. Recessions do not improve a country’s standard of living. It is always better, therefore, to encourage consumer spending for this improves a country’s standard of living.’
(a) What is a recession and is it always caused by a lack of consumer spending? [12]
(b) Discuss what policies a government may use to try and end a recession. [13]
2015 MJ 43
5(b) The Finance Minister of a country said that ‘Monetary policy remains the main tool for responding to changes in the economic outlook at the moment’.
Source: The Telegraph Business section, February 2012
Discuss whether monetary policy is always the main tool for responding to changes in the economic outlook. [13]

2015 ON 41
5 (a) Explain why the government’s annual budget is an important instrument of economic policy. [12] (b) Analyse whether there is a link between the reasons given by the liquidity preference theory as to why people demand money and the rate of interest. [13]

2015 ON 43
5 In 2012, many smaller specialised city centre retailers struggled against competition from large supermarkets and online retailers. They were also badly affected by government fiscal policy.
(a) Explain how small retailers could be badly affected by government fiscal policy. [12]
(b) Economic theory suggests that competition is good. The statement from 2012 seems to imply that it is not. Discuss this difference of opinions and consider which you support. [13]
2015 ON 43
6 In a number of countries interest rates have remained low for a long time. Some people have been unhappy with the low rates but others have been pleased. However, high interest rates also cause different reactions.
(a) Explain why different groups of people may differ in their reaction to the level of interest rates. [12]

2016 MJ 41
6 (a) Explain what is meant by the equilibrium level of national income, and consider whether it is
possible to have such an equilibrium and unemployment at the same time. [12]
(b) At a time of an election a government makes a promise that, if re-elected, it would aim to
increase the growth rate of the national income.
Discuss whether an increase in the growth rate is necessarily beneficial. [13]

2016 MJ 43
5(b) Assess how appropriate it is to use economic growth as an indicator of how a country’s standard of living compares with other countries. [13]
2016 MJ 43
6 Equilibrium is a key concept in the study of economics. Explain what an equilibrium level of national income means and discuss the relative merits of policies a government might use to cause the equilibrium level to change in an open economy. [25]
Unemployment
2008 ON 4
6 In some countries the rate of unemployment has remained low for several years.
(a) Explain what causes unemployment. [12]
(b) Discuss whether the reduction of unemployment should always be the main aim of government policy. [13]

2009 MJ 4
5 In 2006 it was reported that a country’s unemployment rate had remained steady and that its central bank, through its interest rate policy, had prevented an increase in inflation despite a sharp rise in oil prices.
(a) Explain what might cause unemployment. [12]
(b) Discuss how interest rate policy might prevent a rise in inflation. [13]
2011 MJ 42
7 (a) As an economy develops, the relative importance of different sectors of production changes. Explain, with examples, why the pattern of employment might change as an economy develops. [12]
(b) Discuss whether increases in economic growth are necessarily beneficial to an economy. [13

2012 ON 42
5 It is said that the lack of investment funds for private companies from banks leads to temporary closures of factories which then become permanent and cause long-term unemployment. This loss of output will lead to a possible recession. Analyse each part of this argument and discuss whether you agree with it. [25]
2012 ON 43
6 (a) Explain the causes of unemployment and consider which cause is the most significant for a country with which you are familiar. [12]
(b) The main guide to the economic development of a country is the proportion of its working population engaged in the tertiary sector. Discuss whether this statement is true. [13]
2013 MJ 41
(a) A newspaper reported that ‘unemployment had risen for the third consecutive month.’ What might be the cause of a rise in unemployment? [12]
(b) Discuss whether achieving a fall in the level of unemployment should be the main macroeconomic aim of a government. [13]

2013 MJ 42
6 In 2011, one of the UKs’ largest multinational banks announced it would reduce the number of people it employed by 43 000 – the equivalent size of a small town. Unemployment in the UK reached nearly 3 million in 2011. (Source: adapted from The Times)
(a) Analyse what might cause an increase in unemployment in a country. [12]
(b) Discuss what impact an increase in unemployment is likely to have on an economy. [13]
2013 MJ 43
7 (a) A newspaper reported that ‘unemployment had risen for the third consecutive month.’ What might be the cause of a rise in unemployment? [12]
(b) Discuss whether achieving a fall in the level of unemployment should be the main macroeconomic aim of a government. [13]
2013 ON 41
6 (a) Explain the possible causes of a rise in unemployment. [12]
(b) In 2011, a government announced that it would reduce the number of people employed in the public sector and that pensions would be paid at age 65 rather than age 60.
Discuss how, according to the liquidity preference theory, a person’s demand for money might
be affected by the above announcement. [13]
2014 MJ 42
6 (a) Explain the possible causes of unemployment and explain which is responsible for most of the unemployment in your country. [12]
(b) ‘When a government wishes to lower unemployment its only method of reducing it is by the use of fiscal policies’. Do you agree with this opinion? [13]

2016 ON 42
5 (a) Explain the causes of unemployment and consider what type of unemployment is the most
serious for the country in which you live. [12]

Conflict of Aims

2011 ON 41
6 (a) Explain the main macroeconomic aims a government might have and analyse which would be the most important for your country. [12]
(b) Discuss whether it is possible to aim for all the main macroeconomic objectives without causing conflicting outcomes. [13]

2011 ON 43
3(b) Discuss whether diverting expenditure to the car industry might conflict with other macroeconomic government objectives. [13]

2013 ON 42
6 While the overall aim may be to improve the economy, governments find that their macroeconomic policies sometimes conflict with each other. Explain why some government economic policies may conflict with each other and discuss which should be given priority. [25]

2014 ON 43
5 In 2012, after a period of low demand in an economy, private consumption and investment increased and there was economic growth. This was not entirely advantageous as the increase in economic growth can conflict with other government objectives.
Explain why an increase in private consumption and investment might have led to an increase in economic growth and consider whether you agree that this may conflict with other government objectives. [25]

2015 MJ 43
5 (a) Briefly explain the differences between monetary policy, fiscal policy and supply-side policy and whether they overlap in their effects. [12]

2015 ON 42
6 Businesses say that high interest rates are not desirable because they prevent investment. Government ministers say that high interest rates are sometimes necessary because they encourage saving and control inflation. Discuss these two opinions and decide whether they are always true. [25]

2015 ON 43
6 In a number of countries interest rates have remained low for a long time. Some people have been unhappy with the low rates but others have been pleased. However, high interest rates also cause different reactions.
(b) Discuss whether a low interest rate can help a government achieve its macroeconomic aims.[13]

2016 MJ 43
5 It was reported that India’s policymakers seem to be fighting a losing battle with inflation. Some
economists linked the persistent rise in prices to the pace of economic growth.
(a) Consider whether economic growth will always cause inflation. [12]

2016 ON 41
6 (a) Explain three major governments macroeconomic policy aims and describe why there may be a conflict in trying to achieve them at the same time. [12]
(b) Governments are sometimes concerned with microeconomic issues, for example, planning applications for large projects such as airports which have environmental implications.
Discuss how a government’s decision on a microeconomic issue might have macroeconomic implications. [13]

2016 ON 42
5 (b) Discuss whether government macroeconomic aims of full employment, economic growth and price stability are likely to conflict with each other. [13]

4: Economic Development, National Income Statistic,
Circular Flow of Income, Keynesian
Developing vs Developed

2008 MJ 4
5 The solution to unsatisfactory economic development and growth is to focus on economic theory, scientific advances, new technology and market forces.
(a) Explain what is meant by economic development. [10]
(b) Discuss whether you agree with this statement. [15]

2010 MJ 41
5 For some years governments of developed countries have been promoting Fair Trade, which means paying a fair price for primary products bought from African developing countries. Now the governments in developed countries, anxious to conserve resources, are complaining that the transport of products around the world increases pollution and should be limited. They support instead the purchase of goods produced at home. These are often more expensive to produce. African farmers may be left with products that their local people do not eat.
(a) Explain what might determine whether a country is classified as developed or developing. [12]
(b) Discuss whether the old and the new approaches to trade of the developed countries would help achieve the conservation of resources. [13]
2010 ON 43
7 (a) Some African countries are richer in natural resources in the form of minerals and land than some developed countries. Why then are these same African countries referred to as developing countries? [12]
(b) Use the concept of the multiplier to discuss how an increase in investment in a developed country might affect both the developed country and developing countries. [13]
2011 ON 42
7 Some economies are said to be developing while others are developed. Explain the difference between the two and discuss whether the problems of a developing economy would be solved if it achieves developed status. [25]

2012 MJ 41
6 Population is increasing more rapidly in developing countries that can least afford it if they wish to encourage economic growth.
(a) What are the main characteristics of a developing country? [12]
(b) If a developing country wishes to become developed, the main aim of its government should be to control the growth of its population. Discuss this opinion. [13]

2012 ON 41
6 Whether a country can be classified as developed depends on the value of its GDP and the higher the GDP the better it is for the country. Assess this opinion. [25]

2012 On 42
6 (a) Explain how the age and employment structures of the population of a developing country are likely to differ from those of a developed country. [12]
(b) You are told that a country has problems relating to overcrowding, unemployment and pollution. Discuss whether the existence of such problems necessarily means that the country must be a developing country. [13]

2013 MJ 41
5 (a) What distinguishes a developed economy from a developing economy? [12]
(b) Developing economies are often keen to encourage industrial development in rural areas. Developed economies, by contrast, often prevent industrial development in rural areas. Discuss why there might be this difference in policies. [13]
2013 MJ 42
5 (a) Explain what changes might occur to the age distribution and occupational structure of a population as an economy changes from developing to developed. [12]
(b) Assume that you have been given some statistics which indicate that a country has a high rate of unemployment and a dependency on international trade. Discuss whether these statistics are sufficient to indicate whether that country may be classed as developing or developed. [13]
2013 MJ 43
5 (a) What distinguishes a developed economy from a developing economy? [12]
(b) Developing economies are often keen to encourage industrial development in rural areas. Developed economies, by contrast, often prevent industrial development in rural areas.
Discuss why there might be this difference in policies. [13]

2013 ON 43
Governments of developing countries often argue that the economy has improved while they have been in power. Explain what economic indicators might be used to support their argument and discuss the usefulness of that data in illustrating an improvement in a developing economy. [25]

2014 MJ 41
7 (a) It is sometimes claimed that the population of a developing country is always large. Is a large population the distinguishing feature of a developing country? [12]
(b) Discuss whether economic growth is necessarily beneficial to a developing economy. [13]

2014 MJ 42
7 (a) Too much labour but not enough capital. Is this the most significant difference between a developing and a developed economy? [12]
(b) Discuss whether GDP is a reliable measure of the difference in living standards between developing and developed economies. [13]

2014 MJ 43
7 (a) It is sometimes claimed that the population of a developing country is always large. Is a large population the distinguishing feature of a developing country? [12]
(b) Discuss whether economic growth is necessarily beneficial to a developing economy. [13]
2014 ON 42
7 (a) How effective is the measurement of economic growth as an indicator of how a developing country’s standard of living compares with other countries? [12]
(b) Discuss whether economic growth would necessarily lead to a more efficient use of resources in developing countries. [13]

2015 MJ 43
6 ‘Labour is a resource; the use of resources increases economic wellbeing. The main aim of the government of a developing country keen to increase wellbeing should, therefore, be to support an increase in the population of its country. ‘Discuss this argument and decide whether you agree with it. [25]
2015 ON 41
7 ‘People in developed countries suffer from pollution and overcrowding. However, people in developing countries suffer from malnutrition and poverty.’
Discuss whether it is correct to distinguish between developed and developing countries in this way and consider how living standards can be compared between the two types of country. [25]
2015 ON 43
7 Economic developments and the exploitation of resources can result in structural change and unemployment in some industries, increased environmental damage, overexploitation of fish stocks, increased inequalities in the distribution of income and pressure on resources causing inflation. Explain what is meant by a developing economy and discuss whether it would be wise to conclude from the above opinion that developing countries should, therefore, not seek to become developed. [25]

GDP, indicators of Standard of Living

2009 ON 41
6 ‘There is no point in calculating figures for GNP. They are never an accurate estimate of welfare, and people are more concerned about crime, pollution and health than GNP.’
Do you agree with this argument? [25]
2009 ON 42
5 (a) Explain whether low GDP is a good indicator that a country has a low standard of living. [12]
(b) Discuss whether the main aim of a government should be to have a policy on population growth if it wishes to increase the standard of living in its country. [13]
2010 MJ 42
7 ‘Developing countries have a low standard of living, yet many have much wealth in natural resources which multi-national companies would like to exploit.’
Discuss which is the better way of increasing the standard of living: to allow multi-national companies to exploit all the natural resources, or for the government to increase expenditure on education and health. [25]

2010 ON 41
5 National income statistics are used to calculate a country’s GDP. The table shows the GDP for five countries for 2008.
Country GDP $m
USA
India
Singapore
Mauritius
Swaziland 14580000
3319000
244000
14060
5626

Discuss how far the table might be used to determine whether one country has higher living
standards than another. [25]
2010 ON 43
6 Hurricanes can occur in some parts of the world. Major flooding is caused, crops are ruined and the wind destroys homes and factories. People’s standard of living is severely affected. Some blame climate change for unusual weather conditions.
(a) Explain how a country might measure its standard of living. [12]
(b) Discuss how far a country’s standard of living is determined by factors beyond its control. [13]

2011 MJ 41
5 (a) Explain what is meant by GDP and describe the alternative methods by which it is calculated. [12]
(b) ‘GDP figures tell us many things except that which makes life worthwhile. They tell us nothing about education, health and quality of life. They are, therefore, of little value.’ Discuss the extent to which you agree with this argument. [13]

2011 ON 41
5 (a) Two economic indicators are Gross Domestic Product (GDP) at market prices and Net National Income (NNI) at factor cost. Explain what is meant by an economic indicator and the differences between the two indicators mentioned. [12]
(b) Discuss whether GDP is the best indicator which can be used to compare the standard of living in a developing country with that in a developed country. [13]
2011 ON 43
5 In 2009 the International Monetary Fund (IMF) said that ‘it expected global economic growth to fall below zero making it the worst performance in most of our lifetimes.’
(a) Explain how economists measure a country’s economic growth rate. [12]
(b) Assess the effectiveness of economic growth as an indicator of how a country’s standard of living compares with other countries. [13]
2012 MJ 42
5 As part of the measurement of GDP governments calculate the level of investment expenditure.
(a) What determines the level of investment and how do changes in investment expenditure affect GDP? [12]
(b) Assess the difficulties of using GDP as an economic indicator. [13]
2012 ON 43
7 The table below shows figures for GDP for two countries in 2000 and 2010.

Country GDP 2000 $US billions GDP 2010 $US billions
USA
India 9825
469 13271
929
Discuss whether the above figures are sufficient to conclude that the standard of living in the USA
is higher than the standard of living in India. [25]

2013 MJ 41
4 Governments often suggest that there has been an improvement in the standard of living in their economy and support their statement by referring to a range of economic indicators. One of the indicators they use is GDP.
Discuss whether GDP is a reliable indicator of changes in the standard of living in an economy. [25]
2013 MJ 43
4 Governments often suggest that there has been an improvement in the standard of living in their economy and support their statement by referring to a range of economic indicators. One of the indicators they use is GDP. Discuss whether GDP is a reliable indicator of changes in the standard of living in an economy. [25]

2013 ON 41
5 ‘The many difficulties involved in measuring living standards mean that it is never possible to be certain that the people in one country are better off than those in another country. ‘How far do you agree with this comment? [25]

2013 ON 42
7 A country has a high level of unemployment and a low level of GDP. Discuss whether this situation is a good indication that the country is a developing country. [25]

2014 ON 41
6 Government economic policy should be directed to increasing the standard of living – employment, health, education and a sustainable environment. It should not concentrate on fixing prices, raising taxes and regulating bank lending. Discuss whether there is any truth in this statement. [25]
2014 ON 43
7 (a) The main characteristics of a developing country are a small service sector and a lack of international trade. Do you agree with this statement? [12]
(b) It was reported that in the last quarter of 2012 a developing economy ‘had performed well in terms of its GDP compared with other countries’. Explain what this statement means and discuss whether a comparison using GDP is a valid way of measuring economic performance between countries. [13]
2015 MJ 41
7 In 2012, a table for Gross Domestic Product (GDP) per head showed that only three of the world’s ten richest countries had populations above 7 million. These were the United States: 315 million; the United Arab Emirates: 8.2 million; and Switzerland: 8 million.
(a) Explain how GDP is calculated and show how GDP at market prices is different from net national income at factor cost (basic prices). [12]
(b) Classifications often distinguish between developed (rich) and developing (poor) countries. Consider in what sense a developing country is said to be ‘poor’ and discuss whether the best way to become developed (rich) would be to reduce the size of its population. [13]

2015 MJ 42
6 The table shows figures for annual GDP growth rates at market prices for three developing countries, Bangladesh, Ethiopia and Malawi, and three developed countries, Greece, UK and USA.

2016 ON 41
7 (a) Explain what is most in need of development in a developing economy. [12]
(b) Discuss how easy it is to compare the standard of living between developing and developed countries. [13]

(a) Describe what is meant by economic growth and consider if it is always advantageous. [12]
(b) Explain what is meant by a developing country and a developed country and consider whether the table supports the idea that GDP growth rates are a good indicator of development. [13]
2015 ON 42
5 The government of your country wants to know how the economy compares with other countries’ economies. Discuss which economic indicators it should obtain and how reliable they might be as a basis for such a comparison. [25]

2016 MJ 41
7 Discuss which issues are at the heart of the debate about the quality of life in a country and what indicators might be used to assess them. [25]

2016 MJ 42
6 Imagine you have been asked to produce a report about the quality of life in your country. Discuss what would be important to include in your report and what economic indicators you would use in order to reach a conclusion. [25]
National Income

2008 MJ 4
6 (a) It is feared that if the government increases tax the level of national income will fall. Explain whether this is necessarily true. [10]
(b) Discuss whether a fall in the level of national income is a good indicator that there has also been a decline in the standard of living in the country. [15]
2008 ON 4
7 (a) Explain the factors influencing the level of investment in an economy. [10]
(b) Discuss the extent to which national income is determined by private investment. [15]
2009 MJ 4
7 A World Bank report in 2007 commented on the continuing need for major spending worldwide on infrastructure on everything from roads and railways to water and electricity generation.
(a) Explain the effect on national income when there is an increase in spending on infrastructure. [10]
(b) Discuss whether an efficient allocation of resources can be obtained only if large-scale investment is undertaken by the public sector rather than the private sector. [15]

2011 MJ 41
6 (a) Explain how the impact of the Keynesian multiplier process will change if a free-market closed economy becomes a mixed economy with foreign trade. [12]
(b) Analyse how a change to the equilibrium level of income resulting from the multiplier process might lead to unemployment or inflation. [13]

2011 MJ 42
6 (a) An increase in investment will raise national income but an increase in the desire by consumers to save will reduce national income. Explain why this is the case. [12]
(b) To increase national income, interest rates should be lowered; indeed, lowering interest rates is the only policy available to increase national income? Discuss whether you support this opinion. [13]

2013 MJ 41
6 (a) Explain how a fall in interest rates might influence the level of investment and, as a result, national income. [12]
(b) Discuss, with reference to liquidity preference theory, whether interest rates are the main determinant of consumers’ demand for money. [13]
2013 ON 42
5 (a) Explain, using the concept of the multiplier, the possible link between a fall in interest rates and an increase in national income. [12]
(b) Discuss whether the use of fiscal policy is the only effective means of stimulating economic growth. [13]
2014 MJ 41
5 (a) Explain what is meant by a country’s national income multiplier and two reasons why the value of the multiplier might fall. [12]
(b) Discuss how a fall in national income might affect a country’s standard of living. [13]
2014 MJ 43
5 (a) Explain what is meant by a country’s national income multiplier and two reasons why the value of the multiplier might fall. [12]
(b) Discuss how a fall in national income might affect a country’s standard of living. [13]
2015 MJ 43
7 One macroeconomic indicator is the level of investment.
(a) What determines the level of investment? [12]
(b) Discuss how a large increase in the level of investment may affect an economy and whether such an increase is always beneficial. [13]
2015 ON 41
6 (a) Explain what are the main determinants of business investment. [12]
(b) ‘If investment increases it will cause an increase in output. If output increases, it will cause an increase in investment.’ Discuss whether both these statements can be true. [13]

2016 ON 43
7 (a) Consider whether the main distinguishing feature of a developing economy is a low level of income per person. [12]
(b) Are the problems that arise in estimating changes over time in national incomes significantly different depending on whether the countries are developing or developed? [13]
Demand for Money

2008 MJ 4
7 (a) For what purposes do people demand money? [10]
(b) Discuss the effect of an increase in the supply of money on interest rates and national income. [15]

2009 ON 42
4 (a) Explain what is meant by the transactions, precautionary and speculative demands for money. [10]
(b) An employee moves to another job because it pays more. However, the old job was paid weekly and the new job is paid monthly. At the same time interest rates are increased. Discuss how these changes would affect the employee’s transactions, precautionary and speculative demands for money. [15]

2010 MJ 42
6 (a) Explain the causes of unemployment. [12]
(b) Explain what is meant by liquidity preference and discuss how it might be affected by an increase in unemployment. [13]

2011 ON 42
6 (a) For what purposes do people demand money? [12]
(b) Assess, using the concept of liquidity preference, the possible links between an increase in the supply of money, the rate of interest and investment. [13]

2011 On 43
6 (a) Explain the three reasons, according to the liquidity preference theory, why people demand money. [12]
(b) Use the liquidity preference theory to discuss the possible consequences of an increase in the supply of money. [15]

2012 ON 42
7 (a) For what purposes do people demand money? [10]
(b) Too much money causes inflation. Discuss the main macroeconomic aims of the government and consider whether it should give priority to the limitation of inflation in achieving economic well-being. [15]

2013 MJ 43
(a) Explain how a fall in interest rates might influence the level of investment and, as a result, national income. [12]
(b) Discuss, with reference to liquidity preference theory, whether interest rates are the main determinant of consumers’ demand for money. [13]

2014 MJ 41
(a) In a time of recession some people fear that their continued employment is uncertain. Explain how, according to liquidity preference theory, this might affect their demand for money. [12]
(b) Discuss how, in a closed economy, a fall in interest rates might affect consumers and producers. [13]

2014 MJ 43
6 (a) In a time of recession some people fear that their continued employment is uncertain. Explain how, according to liquidity preference theory, this might affect their demand for money. [12]
(b) Discuss how, in a closed economy, a fall in interest rates might affect consumers and producers. [13]

2014 ON 42
6 (a) Use liquidity preference theory to explain why there is a demand for money. [12]

My higher income will make me happier. It will make other people unhappy.
(b) Discuss whether the main aim of government policy should be to achieve a more equal distribution of income. [13]

2014 ON 43
6 It is suggested that the use of credit cards has resulted in huge debts as people spend far more than they earn.
(a) Explain whether the liquidity preference theory of the demand for money can be applied to the use of credit cards. [12]
(b) Use the liquidity preference theory to discuss the possible consequences of an increase in the supply of money. [13]

2015 ON 42
4 (a) Explain the motives for the demand for money according to the Keynesian liquidity preference theory. [12]
(b) A worker is a weekly paid shop assistant. She is then promoted to a manager in a larger store on a higher monthly salary. At the same time interest rates fall. Discuss how these changes would affect the worker’s demand for money. [13]

2016 ON 42
7 (a) Conventional estimates of national income indicated that average income per head between 2009 and 2013 was US$98 780 in Norway and US$36 900 in New Zealand. Consider whether this means that the standard of living in Norway is nearly three times as high as in New Zealand. [12]
(b) Norway and New Zealand are classified as developed countries. Make a judgement on what are the important distinguishing differences between a developed country and a developing country. [13]

2016 ON 43
6 (a) ‘National income is the only determinant of the demand for money.’ Do you agree with this statement? [12]
(b) Assess how alternative macroeconomic policies might affect the demand for money. [13]

Tutorial one: Marginal Utility

Question 2

(a) Explain how, according to marginal utility theory, consumers reallocate their expenditure between different products as prices change. [12]

 

(b)

In reality perfect competition is seldom found, and firms use advertising to persuade consumers to buy their products.

Discuss whether imperfect competition means that markets are controlled only by producers and the traditional idea that the consumer determines what happens in the market based upon utility theory is no longer valid. [13]

 

N13 Question 2

(a) Use the theory of marginal utility to analyse how a consumer will normally buy more of a product at a lower price than at a higher price and explain how this theory can be used to derive a market demand curve. [12]

(b) Economic texts examine market equilibrium. Discuss whether it is the consumer or the producer who determines the equilibrium market price and whether consumers have the same power in all types of market structure. [13]

 

J13 Question 2

(a) Explain how a consumer allocates expenditure according to the principle of equi-marginal utility and analyse how a change in income might affect that allocation. [12]

(b) Discuss how a government might achieve a more equal distribution of income. [13]

 

Take time off before starting university

Of all the questions students ask me, the most common is also the hardest. It is the version of ‘So what should I do?’: Where should I go to school? Which direction should I go in afterward? Of course, these aren’t the kinds of questions I or anybody else can answer, though I certainly understand the feeling of wishing that somebody could. The only concrete suggestion I can offer is… Take time off.
Take time off to slow down, to give yourself perspective, to break the cycle of incessant achievements, to get away from constant supervision, to see that there’s a world outside of school, to develop skills and explore capacities you haven’t had a chance to cultivate.
Take time off before you go to college [or university]. Take a gap year.
Cost, of course, is an issue, but parents should consider that money spent preparing their kids to get most out of college will help them to avoid wasting money they’re already planning to spend on college. I was prevented from doing the gap year program that all my closest friends were going on because my father was worried that it would ‘knock me off my path.’ The result was a failed college experience and a much longer detour later.
But you should consider taking a gap year, without the ‘program’ part. Too much structure is among the things you need to get away from – and so is the notion of being ‘productive’. Try not enriching yourself for a change? How about doing something that you can’t put on your resume (or brag about on Facebook)?
  • How about just wandering, literally or metaphorically, or holing up and reading something?
  • How about getting a lousy apartment with a bunch of friends {or a bunch of strangers who need another room-mate) and supporting yourself with a part-time job?
  • If nothing else, you’ll probably meet the kinds of people that you’d never had a chance otherwsie.
  • How about practising your moral imagination by dreaming something up that no one else could, including me, has thought of?

 

When you are in college, try this…

So here are a few suggestions about the way you ought to conduct yourself when you go off to college. Dont talk to your parents more than once a week, or even better, once a month. Don’t tell them your grades on papers or tests, or anything else about how you’re doing during the term. Don’t ask them for help of any kind (Especially money). If they try to interfere with course selection or other aspects of your life, ask them politely to back off. If they don’t, ask them impolitely. Make it clear to them that this is your experience, not theirs.
Excellent sheep p123

 

When you are choosing your course in university… 

‘One for me, one for my parents,’ students will explain when you ask them why they’re double-majoring in things like history and computer science. But why not simply one for me? Aren’t you the one who’s going to have to live your life? What do you owe your parents? Love, and when they need it later, care, but not submission. Not your life. The family is not a business. You don’t ‘owe’ your parents; you have a relationship with them. When you are still a child, the relationship involve obedience. Once you are an adult, it has to involve independence. Negotiating the perilous passage from one to the other is what adolescence is all about, but if you wait for your parents to make it happen, it probably never will.
Excellent sheep, P 122.

 

Marginal Utility and Indifference Curve

[This post is prepared by Miss Ngew Shook Ying. Any error or inaccuracy found has nothing to do with me. hehehe…]

The Analysis on Consumer Behaviour 

  1. Consumers Behaviour can be analysed using 2 theories (in our syllabus):
  2. Marginal utility theory
  3. Indifference curve and budget line theory

 

  1. Marginal Utility Theory
  • Definition of utility, total utility, marginal utility
  • The law of diminishing marginal utility
    = when consumers consume more units of a good, the additional benefits gained by the last unit of goods consumed is diminishing.
  • Assumptions behind this theory:

1. Consumers are rational
= consumers always want to maximise their utility / satisfaction with their limited amount of income.

Critic: not all the consumers are aiming on maximising satisfaction, they have other considerations and concern that they valued more than their own satisfaction for instance their family members. Therefore, instead of maximising own utility, they will choose something which is beneficial to their family members but not necessarily maximising their utility.

2. Utility can be measure quantitatively
= it is assumed that utility derived from goods and services can be measure by assigning definite numbers like 10,20 and etc.

Critic: Utility / Satisfaction is very subjective and most of the time is measured in imaginary units. It is very difficult to quantify utility as it is more to qualitative measurement.

3. The consumption has to be continuous
= meaning that consumers have to continue consuming a product continuously without any break in between.

Critic: because in reality, this is seldom the case because consumption is often stopped. And when it is resumed some other day, the utility may not necessarily be lower.

4. Assuming every unit consumed is of the same quantity and quality
= in this case, it is assumed that consumers always consume similar amount of certain goods and services and the quality of it is constant.

Critic: In the reality, quantity and quality of product consumed is variable, it may be still ice-cream, but the flavour is different, size is different, and quality might change.

 

A2) Equi-Marginal Utility Theory

  • Formula
  • In the case of consumers are consuming a bundle of goods.
  • Consumers will consume until a stage where utility per dollar is the same for all the goods.
  • Why? When utility per dollar is equalised among different goods, then their utility is maximised constraint to their income.
  • When MU per dollar (MUx/Px) is higher than good Y, consumers will consume more X and less Y. Then the law of diminishing marginal utility sets in, eventually, utility per dollar for X will decrease due to higher consumption, utility per dollar for Y will increase due to lower consumption, and equalised. Then consumer’s utility is maximised.

 

 

Budget line & Indifference Curve Analysis

  • Define budget line, indifference curve
  • Utility is maximised when indifference curve is tangent to the budget line.
  • Income effect and Substitution effect for normal goods (both IE and SE are negative), inferior goods ( SE negative > IE positive), giffen goods (SE negative < IE positive)

 

Assumptions and limitations:

1. Only two goods are consumed

= in this theory, it is assumed that consumers consuming only 2 types of product.
Critic: In the reality, consumers are consuming more than 2 goods at the same time.

2. Consumers possess perfect information about types of products and price.
=
it is assumed that consumers have all the information about products and prices in the market.

Critic: In reality, there tend to be asymmetry information where consumers may not have all the information.

3. The consumer’s tastes, habits and income remain the same throughout the analysis.

Critic: In reality, consumers taste is changing fast, their income may vary from time to time if they are not on a fixed income.

Remarks:

The Marginal Utility Theory and Indifference Curve Analysis explained why DD curve is downward sloping and can be used to derived the demand diagram.

  1. When we assume one util is valued at 1 dollar ( y-axis, util change to price)
  2. From budget line and indifference curve, we can derive the PCC- price consumption curve

Weaknesses of Indifference Curve analysis

  1. Assumption that consumers are rational. ie. aim to maximise satisfaction. Oftehn, it is not the case. Behavioural theory states that consumers are not rational. They do not aim to maximise satisfaction at all times.
  2. Consumer tastes are not consistent. They changes often. May be due to advertising, or after consuming the first unit, find pleasantly surprised or disappointed. So, having an IC curve to represent the same level of satisfaction is absurd.
  3. Impossible to plot IC curves. Consumers cannot tell you exactly which combination can give them the same level of satisfaction.
  4. ICA does not work with durable goods. Infrequent purchase, where the consumer only buy one unit and only after a long period of time. Like a refrigerator. Measuring IC with durable goods would not work.