A2 condensed revision guide

A2 Economics

Schedule your timing carefully based on the mark allocation, multiple choices be ruthless 4 min max, the final data questions for 6EC03 and 4 require plenty of evaluation – so do plan this part carefully, think deeply. In the essay, part (a) “Explain” carries 20 marks (20 minutes – ensure 3 points evaluated and do not spend too long on) and part (b) carries 30 marks (30 minutes) – so you have 5-10 minutes of planning what to say and how to say it. Be ruthless in organising your time. Drive your exam desk!
Generally:
1. You are expected to use and evaluate basic microeconomic models (e.g. monopoly, competition and oligopoly and contestable markets) – cost, revenue, profit diagrams will be essential – don’t fall back on simple supply and demand analysis
2. As part of your evaluation try to question the validity of a piece of theory – question the assumptions on which it is based, put forward counter arguments, be aware of the limitations of economic analysis when dealing with real world industries and markets. Much of the evaluation requires considering the costs and benefits of particular policy options and the limitations of particular policy ideas (e.g. measures designed to correct for market failure)
3. Economic efficiency (static and dynamic) and economic welfare (including equity) must be included in your answers to most questions. There is often a trade-off between the two.
4. Often you will be asked to discuss solutions to economic problems (e.g. the alternative ways of dealing with pollution, different approaches to regulating an industry) – this is where the quality of your evaluation comes in and where you should exercise a degree of caution as to whether policy works at all!
5. You must be clear and well prepared on issues of market failure and potential government failure particularly as it relates to externalities, monopoly, and poverty and income inequality
6. Real world industries will be used (e.g. in the data response question). It is highly likely that there will be a question concerning a market structure and an industry that has been in the news in recent years (e.g. gas, water, electricity, telecommunications, airlines, postal services, retailing etc.)

Unit 3: Business Economics and the Distribution of Income

Theory of the Firm
Don’t automatically assume that firms seek to maximise profits, be aware of alternatives to profit maximisation and how this affects the conduct / behaviour of firms in a market (for example sales revenue maximisation (MR=0 and satisficing, normal profit option etc.)
Have a good understanding of the factors that affect a firm’s pricing power and how this is affected for example by changes in market structure, the regulation of an industry and business objectives. Elasticity of demand and supply can be used in most parts of the microeconomic syllabus for Unit 5. Often the analysis changes when you include changes in elasticity.
You are expected to make full use of relevant diagrams when answering questions on theory of the firm. Make sure you know them well and that they are accurate and fully labelled – these include diagrams that show economic efficiency and welfare in different market structures in the short and long run
Competition
Perfect competition – should be straightforward (distinguish between the industry and the single firm)
Assumptions are restrictive – but provide a benchmark against which to analyse imperfect competition
Be able to evaluate the potential gains from a more competitive/contestable market environment and distinguish between price and non-price competition



Monopolitic Competition – master the diagram(s).
Monopoly and Oligopoly
This is almost certain to come up in the exam – master diagrams and game theory. Also price discrimination.
Measures of market concentration and the main sources of monopoly power in the short and long run
Barriers to entry and exit (important in determining long run profitability and market structure)
Importance of product differentiation in determining consumer preferences / building brand loyalty
Price Discrimination (lots of real world examples please!) – 3 degrees, costs and benefits of
Consumer and producer surplus and Costs and benefits of industries with monopoly power
Interdependence between firms in oligopoly – an important market structure
Price collusion and economic welfare – conditions required for collusion; why do cartels collapse in LR
Price leadership, price wars – predatory pricing and limit pricing
Internal and external growth of a firm – implications for market structure
Some use of game theory will always be credited if applied correctly to a particular market structure
Contestable and Non-Contestable Markets
What makes an industry contestable?
How can government / regulators open up a market to competition (liberalisation)
Single European Market and competition in the UK (increasingly important))
Importance of sunk costs - examples
How does the degree of market contestability affect producer behaviour and consumer welfare?
Generally with any questions on market structure, behaviour of firms – focus on possible economic efficiency and welfare consequences – remember that most markets are dynamic – their structure does change over time
UK Competition Policy
Important for the data response question
Main features of competition policy – what does it seek to do (“surrogate competition”)
Recent trends in UK and European competition policy including the work of the OFT, the European Competition Commission and the Regulatory Authorities (including Gas, Electricity and Telecommunications)
Evaluation of price capping and other methods of market regulation
Be aware that technological change which affects the contestability of industries can be as important as regulatory decisions in affecting market performance


Unit 4: Government Policy, the National and International Economy
General Points
1. A good knowledge and understanding of recent trends / developments in the UK and international economy is expected. Refer to specific countries – show your knowledge. Examiners will reward use of relevant evidence in your answers. Show the examiners that you are up to date and interested in key economic policy issues!
2. Try to include some reference to the UK’s membership of the European Union in your answers if UK focussed – i.e. aim to include a European perspective in every question perhaps as part of the final evaluation – e.g. questions on the exchange rate or the balance of payments, or comparisons of living standards of countries inside the EU, or the single market and the potential gains from trade
3. Many of the questions will ask you to propose solutions to macroeconomic problems and evaluate current government policies – be aware of different approaches and focus in particular on demand and supply side causes and relevant policies and strategies
4. Full use can and should be made of AD-AS analysis / diagrams in your answers for example when discussing causes of economic growth, causes of inflation etc. Remember to make a clear distinction between short and long run aggregate supply
5. In the macro data question, make effective use of the data provided (remember to bring in your calculator) and time your answers carefully and provide detailed evaluation to score highly. Don’t’ spend too long on the low mark questions. Define your terms and then answer the question succinctly.
6. Often in your evaluation, you can distinguish between short run policy measures and strategies that are designed to achieve a target in the long run. The policies might be different
7. Government macroeconomic policy-making is never perfect – there are limitations and constraints on what a government can do, government failure can occur at a macro as well as a micro level
8. Define your terms precisely at the start of answers and read the question very carefully
Economic Growth and the Cycle
Endogenous and exogenous models of the economic cycle
Supply and demand shocks and their consequences (global demand shocks, oil price fluctuations etc)
Underlying trend rate of growth and the importance of the supply side – basic theories of growth
Productivity growth and competitiveness and link with economic growth in the long
Multiplier and Accelerator effects
The costs and benefits of economic growth (including sustainability and the environment)
Measuring living standards – limitations of NI accounts and alternative measurements (HDI, MEW)
International comparisons of living standards (PPP adjustments etc, HDI)
Unemployment and Inflation
Could well come up on the data question
Causes of consequences of unemployment (must consider supply side causes in detail)
Flexible labour markets – what are they, benefits and costs to individuals and businesses
The natural rate of unemployment (definition, diagram needed, what determines the natural rate?)
Phillips Curve analysis (Causes of inflation (AS-AD needed) – both domestic and external (including link to exchange rate and impact of globalisation)
Consequences of inflation in both short and long run (including the importance of inflationary expectations and impact on international competitiveness / investment)
Role of inflation targets as used in the UK in the last ten years (including impact on expectations)
Deflation
Why has inflation remained so low in the UK over the last decade (mixture of economic policy success, favourable global picture, high exchange rate, globalisation, reduction in pricing power, increased comp)
Managing the Economy
Monetary Policy
Role and performance of the MPC/BoE in recent years – including the arguments for and against an independent central bank
Impact of interest rate changes on the economy – the so called transmission mechanism of monetary policy (remember to use AS-AD diagrams, identify the asymmetric effects on different regions/industries, limitations of using interest rates as main tool for controlling AD – including time lags following a rate change, difference between nominal and real interest rates etc)
The Exchange Rate:
What determines its value?
Fixed versus floating exchange rate debate – UK has had a floating exchange rate now for a decade.
Government intervention in the exchange rate market – reasons? Effectiveness of intervention?
Recent trends in interest rates and the exchange rate and their economic impact (business responses to high exchange rate, impact on inflation and trade balance
Fiscal Policy
Direct and indirect taxes (evaluation of their relative merits / problems)
Fiscal policy and the distribution of income
Using Fiscal Policy to manage AD / inflation (AD-AS analysis again required)
The Budget balance and its significance
Changes in the size and pattern of government spending – impact on the economy
Interaction between fiscal and monetary policy – need for economic policy co-ordination
Remember that both fiscal and monetary policies have their limitations (particularly if the UK decides to join the Single European Currency)
Very important……….
Possible trade-offs between economic policy objectives and also the changing nature of these trade-offs over the years – for example whether control of inflation is at the expense of rising unemployment; can an economy continue to grow without causing an acceleration of inflation; the trade off between economic growth and the balance of payments………
International Trade
Changes in the pattern of trade between the UK and the Rest of the World – including long term changes in comparative advantage
Globalisation – what does it mean, how has it affected the UK economy (including trade performance)
Benefits / importance of trade for developed and developing countries
The model of comparative advantage – evaluation of its importance and its usefulness / limitations
Other benefits of international trade (including contestability of markets, consumer choice, improvements in economic efficiency, source of economic growth etc)
Protectionism – causes and consequences of import controls including the impact of tariffs and quotes
The European Union as a customs union – effect on the pattern of trade for the UK
The UK Balance of Payments
Current and capital account
Recent trends in the UK trade accounts – focus on capital flows
Does a balance of payments deficit matter?
Evaluation of policies designed to reduce a trade deficit / current account deficit including demand and supply side approaches
Income Inequality and Poverty
Knowledge of distribution of income and wealth and recent trends in the UK
Differences between absolute and relative poverty
What has caused the recent increase in relative poverty?
Evaluation of the different strategies / policies that might be used to reduce inequality and their possible impact on economic performance
National Minimum Wage and other policies introduced by Labour in their first five years in office
Remember that people hold different views as to the extent that a government should intervene to reduce poverty as a specific policy objective (including impact on incentives and investment etc)
Development Economics    

Difficulties in categorising. Lorenze curve/Gini. Absolute/Relative Poverty. Causes of low growth and development, problems in measuring growth and development. Solutions to low growth and development – Harrod Domar, Solow, Solow residual, market based versus government intervention (capitalism), FDI, foreign aid, debt cancellation, microfinance.