Wednesday, 25 November 2009

Cross Price Elasticity of Demand (AS-Level economics)

What is cross price elasticity of demand (XED)?

Cross price elasticity of demand is the figure which denotes the relationship between two goods.

How do economists calculate Cross price elasticity of demand?

XED = Percentage change in quantity demanded of good A / percentage change in the price of good B

Percentage change in quantity demanded of good A (divided by) percentage change in the price of good B

How do we interpret cross price elasticity of demand values?
Negative value = complements
If the value is greater than -1 than they are strong complements and if they are less than -1 they are weak complements.

'0' (zero) value = independent goods (they have no value)

Positive value = substitutes
If the value is greater than 1 then they are strong substitutes and if they are smaller than 1 they are weak substitutes

TEST YOURSELF! (Answers found below)

Q1: What type of relationship is there between two goods, X and Y, given that:
- Original price of good X =80
- Original quantity of good Y = 50
- Final price of good Y=40
- Final quantity of good Y = 40
- Original price of good Y = 5

Q2: For each of the following product pairs what would you guess about the cross price elasticity of demand? What are their relationships? Do they have a strong or weak relationship?

a) Shoes and sneakers
b) Gasoline and sports utility vehicles
c) Bread and butter
d)Instand camera film and regular camera film

ANSWERS!

Q1: XED = % change in QD of good Y / % change in P of good X

= [(40-50)/50] * 100 / [(80-40)/80] * 100
= (-10/50 ) * 100 / (-40/80) * 100
= -0.2 * 1o0 / -0.5 * 100
= -20/-50
= +0.4

Therefore they are weak substitutes

Q2: (a) Weak substitues - positive value for XED which is less than 1
(b) Strong complements - negative value for XED which is greater than -1
(c) Strong complements - negative value for XED which is greater than -1
(d) Strong substitues - positive value for XED which is greater than 1

Tuesday, 24 November 2009

Production Possibility Frontiers (PPFs)

What is a PPF?

A PPF is an economic model which shows all the maximum possibilities of two goods that an economy can produce.


















Why is the frontier downward sloping?

That as you go further on the frontier you will incur more opportunity cost, which is benefits foregone from the next best opportunity.

How can we calculate oppurtunity cost?

Total given up / total gained
(total given up divided by total gained)

What happens when the frontier is a straight line?

This tells us that the opportunity cost at every point is the same whereas on a curve we see that the opputunoity cost changes as you travel across the curve.

Why the frontier normally bowed outwards?

This is do with the increasing oppurtunity cost. The further you travel on the curve the bigger oppurtunity one has.

Explain why (a) points can be inside of the PPF? (b) points can be outside the PPF?

(a) This can be if resoures are not used to the their optimal level. For example labour is a resource and if unemployment is there then what happens is that the resources are not being used to maximum potential so the economy is working at a point below the optimal level which is depicted on the curve.

(b) This is not possible. It is not possible for an economy to operate at a level outside of the curve because the curve show the maximum points so outside it would be impossible. However, if resources are increased then the curve shifts.

Why does the frontier (a) shift right? (b) shift left?

(a) The frontier as we mentioned before can shift to the right if resources are increased. If resources are increased then there will be a new maximum level as more can be produced therefore the curve shifts right.




(b) The frontier can shif tothe left hand side. If resources can be increased then they can also be decresed too. For example, if a natural disaster takes place then the amount of resources will decreases and this means that optimal levels will decrease too so the curve is shifted inward.

How does resources such as; (a) land (b) labour (c) capital (d)technology increase in order to shift the frontier outward?

(a) Land can be increased in many ways e.g. if brownfield sites are generified, if other countries are invaded or new land like mountains are formed.

(b) Labour can be increased in several ways too e.g. if immigration increases, training/education increases or in the long-term a baby-boom will cause labour increase.

(c) Capital can increase too. Capital goods are things like machinery which in the long term help increase productivity. So investment in new capital, technological advances and automation will lead to this. It is important to recognise that consumer goods will provide short-term wealth to the economy but capital goods will bring long-term wealth.

(d) Technologicl advancement are similar. However, these include factors like if medical equipment is advanced than it will increase labour as people will be more healthy or if a new type of fast transport is invented then it will enable people to get to work faster - increasing output.

Explain how a PPF would be used in the real world?

In the real world PPFs are used with axes being 'consumer goods' and 'capital goods' as an economy can only make these two types of goods (this is a simplistic view). Analyst would see that if we should or shouldn't, and if we should then by how much we should invest in capital goods as this will in the long-term increase the output of the country. If for example an economy has just incurred a natural disaster then they would have focus more on consumer goods as demand for them would be higher and they need short-term goods like blankets not long-term capital.

Does the PPF have any disadvantages?

The PPF being an economic model is based on assumption and ceteris paribus. There are three assumptions being made with a PPF and these are:

1. We assume that in an economy there is only two types of goods.
2. That the units measuring one axis are the same units on the other axis. For example if our axis had food and clothes then we are assuming that both are measured in tonnes.
3. We have to also assume that it is over a fixed time period such as a year.

Also, I mentioned above it is based on ceteris paribus, which is all things being kept at a constant. For example if we look at our clothes and food PPF again we will have to take in account that subsidies, taxes etc. are all kept the same so the PPF does not affect it.

Monday, 23 November 2009

(AS-English Language) The politeness principle

Politeness Principle

This is a video of me explaining and written notes are below:



The politeness principle is the concept on how and why we are polite to one another. The first important word to understand is ‘face’. This is the speakers sense of linguistic and social identity. We all have two of these ‘faces’: we have a ‘positive face’ and a ‘negative face’. The positive face is our right to be approved and appreciated, whereas, our negative face is our right not to be imposed upon. We have 4 ways in which we approach this ‘face’.

Bald on-record strategy’ -

this is where we threaten the ‘face’; we do absolutely nothing to be polite and minimize threats to the listeners’ face.

Positive politeness-

we appeal to the positive face and we appreciate and accept the listener as well as using politeness markers to ask of something to the listener.

Negative politeness -

here we recognize the listeners’ negative face and use apologies and politeness markers to say something to the listener.

Off-record indirect strategy-

is were we either use hints to communicate something or you rather just leave it and wait for someone else to say it.

Tuesday, 17 November 2009

Market Failure: Public, Merit and Demerit goods (AS-Level)

Market Failure: Public, merit and demerit goods (AS-Level Economics)

Some goods are not at all provided by the private sector because there is no incentive to do so. These goods are called public goods and they are generally goods which ‘good’ for you. For example the ‘fire brigade’.
Public goods are distinguished by three key characteristics:

1. Non-rivalrous/ non-diminishable: This means that the consumption by one person will not reduce the amount for another for example, if someone watches a firework display then this does not reduce the ‘benefits’- enjoyment that others can receive from it.

2. Non-excludable: people cannot be excluded from benefiting in the good in any way for example everyone can receive benefit from street lighting, people who cannot afford it are not excluded.

3. Non-rejectable: for example just because you do not want to be protected the national defence does not mean you can have the choice to do so, it is good which you have to accept.

Some goods only have one characteristic and therefore fit in a completely different category. These goods are called ‘quasi-public goods’. An example of this would be the beach because it may be designed to be non-rivalrous, non-excludable and non- rejectable but this is not the case in reality. It usually is but if there are too many people then your benefit gained from consuming the good may be reduced. Also, not all beaches are 100% non-excludable because some beaches restrict smoking or people with dogs or even better some beaches are private.

Merit goods

These are goods, which are good for you but tend to be under-consumed because they are supplied through the private sector and there tends to be an information failure as well. It is usually because people aren’t aware of the benefits so the demand isn’t as high as it should be. These goods also cause positive externalities. For example, schools can be private and state-run. However, it is important that government has stepped in to produce state-run schools because otherwise many people would not go to school and this would have cause things like increased crime. Therefore, a merit goods like schools cause positive externalities i.e. going to school reduces crime.

Demerit goods

These are the opposite to merit goods; these are goods which are bad for you e.g. alcohol and cigarettes. If left to the free-market economy, then as the demand for these products tends to be inelastic, prices would be too low to compensate for the externalities produced and the quantity would be too high. Subsequently, the goods are overproduced. That’s why the government must intervene to cut the production and inform peoples of the negative impacts. Some goods have such major negative impacts that they have to be banned for example; illegal drugs like heroin.

This is linked into market-failure because of the free-rider problem. Firstly, negative externalities hold a big cost to society that’s why they can cause a market to fail i.e. if left to free-market everyone would be smoking cigarette which would stress the NHS and people would be spending their income on the wrong things. With merit goods, people would not pay for certain advantages they gain through activities of others and so they get a free ride. This mean there is no incentive of profits for the private sector and if no one provides for these goods like (e.g. street lighting) then the market fails.

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Monday, 16 November 2009

Derelict Cornwall (AS-Level Geography)

Cornwall is a seaside town located to the South-West of England. It is the second most deprived place in England after Durham. Deprivation is measured in six ways in the UK and these consist of income, employment, health and disability, education, housing and services.This is the range of issues that have caused the town to become deprived and in need of rebranding. We will now have a look at some of reasons. These reasons, are all valid through the personal research I have conducted.

It is firstly caused by low wages. Cornwall has the lowest weekly wage in Britain, £329.30 in 2005 which was 25% below the UK average. This is a problem because if people are earning less money then this causes the local economy to suffer as less people are likely to spend money. People who have opened their own business start to suffer which means they have less to offer locals.This is called the negative multiplier effect. With time, young people emmigrate to get better jobs, local businesses shut and issues such as fuel poverty start to arise.Fuel poverty is when electricity, water, central heating etc. becomes a large part of the household’s income therefore they cut their usage on it and this isn’t always good. Families with young children are the main victims as there tends to be more people in a household,not many of them are economically active and if they aren't using enough fuel than health problems can arise as it gets very cold in the winter. Pensioners are still relatively lucky because the government has introduced a scheme called ‘Winter Allowance’ this is where in winter senior citizens get allowances of central heating to prevent health problems from arising. This negative multiplier cycle is likely to continue and get worser. Subsequently, Cornwall is in need for rebranding because this will bring new opportunities and economic boosts to the town.

The main factor which spurred this cycle has to be the declination of the primary sector. This saw a lot of job loss and encouraged emigration of skilled people. There are four main parts of this sector which declined significantly. The first is agriculture. Not just in Cornwall but all UK farmers have to seek other alternatives to earn money because importing, especially from the EU, has become extremely cheap and quick for firms. For example, milk produced in the UK will be a minimum of 21p whereas if it is imported firms only pay 14p. To make being a farmer more expensive, EU subsidies have decreased. In fact, many have had to change their living. The second sector is the fishing market. Due to over-fishing in the past, fish stock has began to decline which automatically cuts jobs as there isn't much to fish. Moreover, the EU have allocated fish supplies to other European countries which meant many fishermen emigrated to other parts of the EU, this causes an economic downturn for the area. The third and the most famous is the declination of the mining industry. The two most well-known forms of mining were of china clay and tin.These sectors declined because of overseas competition and the strength of the UK pound.This has made it harder for overseas customers to buy these mineral. However, when these sectors boom seasonal employment is there for locals. These two did have a major economic and social impact but they also have an environmental impact. The china- clay changed the scenic view of Cornwall and some say made it more picturesque. The tin mining sites e.g. Greevor tin mine have now become some form of industrial heritage to the town.However, the loss of jobs and people does not economically outweigh the new environmental view and industrial heritage produced buy a decline of these sectors. The last area of employment that died was quarrying.This was mainly due to advancements in technology and automation. All of this may be cheaper for firms but had social costs which till today still exist. In terms of economics we would call this market failure.Thus, some form of regeneration needs to step in to offset the declination that took place post 1970.

Cornwall, does not just have issues with the way people can access it, it has problems with the location itself. Cornwall is far away from the core economic centres of London, approximately 4-6 hours away. A location like this is said to be peripheral and this originates from what geographers call the core and periphery theory. This theory states that areas within the core are better off than neighboring or distance towns and states. In the UK, the core as described as being the area from London t o Leeds and Manchester. This area:

1.Produces 75% of the UK’s goods and services.
2.It has the highest wages and levels of investment.
3.It has the densest transport infrastructure- most motor ways, the busiest airports and the densest rail networks are there.

This is theory is crucial to Cornwall because it explains some of the reasons why Cornwall is the second largest deprived area in the UK.If we were to apply this theory to Cornwall we can see why it is becoming deprived, because as the core grows economically, the outskirts suffers as young people emigrate and the focus of infrastructure and tourism tends to be attracted to the core all year round. In contrast, Surrey, another rural area which is located in the core is the UK’s most affluent place. Contrasting to Cornwall’s low wage, in Surrey the average weekly wage is £500 and one of the key reasons for this is that many residents are able to commute to work.
Infrastructure, as mentioned above, is part of the lack of services within Cornwall.For example a basic service like a cash point is 2km away for 39% of households and for 1 out of 15 households the Post Office is over 2km. So access isn’t just insufficient for accessing the place from outside but actually within the town there is lack of access to even the most simple services.

It is also interesting to see the transport facilities available to Cornwall. Cornwall, comes under the Restomal council which includes places such as Newquay and St.Austell. From the centre of Cornwall, the railway station which actually has connection with Paddington London and is close whereas, the Airport is 12 miles away and the ferry port which 27 miles away. In this way, it makes sense why tourists prefer to go to somewhere like Surrey. It has better rail links, is in the core of London and has more airports close by to it.

Tourism is an industry which has been around in Cornwall for ages and has provided locals with extra economic growth. However, this industry isn’t reliable enough for Cornwall to survive. The jobs created tends to be seasonal as Cornwall tends to attract seasonal tourism due to the weather. These jobs also are poorly paid as they are seasonal and don’t provide a stable financial base for locals.Even businesses suffer because locals don’t spend much and then if tourists only come for a short period then the revenue earned in this period tends to provide the main income for the whole year. Only 33% of these profits remain in Cornwall because as local business don’t tend to survive so hotel and leisure chain move in there and eat 67% of Cornwall’s profits.

In contrast to its image of a holiday destination, Cornwall has the UK’s highest percentage of derelict land.

























The figure above depicts the population structure of Cornwall and this is important to understand some of the issues discussed previously. As you can see, at the top the number of senior citizens outweighs the UK average. This is because Cornwall’s scenic view attracted inward migration of older/retired people and this meant that more economically active people were needed to support the dependent population. It isn’t just the extra older people that need support, Cornwall has UK’s fastest growing population and this made the dependent population quite large. However, this is actually an adverse event because as we identified before the economically active, young people are emigrating from Cornwall to get better and more highly paid jobs. This leads to an unbalance and puts much more pressure on the local council and the young people who actually stay in Cornwall. What is surprising (to some extent) is that council tax in Cornwall is below than the English average for council tax. Perhaps, the council sees the need of locals to have extra rather than have better services.

Another issue in Cornwall is the increasing number of second homes. In 2006, Cornwall was top of the country for the number second homes, it had 5.6% of all the holiday homes.This is a big problem for locals and causes conflicts between locals and holiday makers. This is because as more people buy second homes the prices of houses increases in Cornwall and many locals consider this unfair as permanent residents in Cornwall cannot even afford to buy one house for themselves. These reasons are aiding deprivation in Cornwall so through regeneration the local authority has to come up with a method to make sure these things do not happen.

Each one of this small events leads to another and in the end they all seem to interlock. We call this the cycle of deprivation and go on for absolutely forever. The question now lies how do the locals, council and the central government cope with this ever-changing cycle? What incentives do we introduce and what will now deter the young from moving away?

Saturday, 14 November 2009

Thursday, 12 November 2009

Theory of supply (A level economics)

What is the theory of supply?
At higher prices, a larger quantity will generally be supplied than at lower prices, ceteris paribus (all other thing being constant). So at a lower price a smaller quantity is produced.

This simply describes the upward sloping supply curve. The curve denotes that there is a ‘positive’ or ‘direct’ relationship between price and quantity. As one factor increases so does the other.

But why does this happen?


Suppliers have the incentive of profits, if a crop is doing well they will try and shift supply up so that they can make more profits.
The law of increasing opportunity costs means that as you increases supply of one good you must sacrifice greater and greater amounts of other resources. Therefore, as output increases , costs of producing goods increases thus the supplier must charge higher prices.

The supply curve

A supply schedule is simply a table of data showing the quantity that suppliers plan to supply at each level e.g.















A supply curve is a line which shows the quantity that suppliers plan to supply at each level e.g.:



Notice that as price increases the level of supply increases. (Positive correlation)











Shifts

The supply can shift left of right if there is a change in the quantity that supplier would supply at every price.



For example in this diagram we can see that the supply shifts to the right which is an increase in supply.
At price of P1, we can see supply increase (Sorry not that clear on this particular diagram) Notice a shift in the opposite direction from S1 to S0 would be a decrease in supply.





What causes these shifts to occur?

A shift in supply is caused by non-price determinants. There are 5 main ones you need to know:

1. Changes in costs of production: The lower the costs the greater the profit for producers. Examples of this are; input prices (raw material, rent etc.) , changes in technology (e.g. internet) , organisational changes , subsidies and taxes.

2. Profitability of alternatives; if another good becomes more profitable then a firm will switch t produce more of that e.g. the transition between cd players to MP3 players.

3. Profitability of goods in joint supply; If the supply of one good e.g. cattle increases then so will the joint good e.g.leather

4. Random shocks e.g. strikes, weather, wars, earthquakes etc.

5. Expectations of future price changes; for example if a firm expects price to rise they will either produce more or hold onto stock.

IMPORTANT:
NON-PRICE DETERMINANTS CAUSES SHIFTS AND PRICE DETERMINANTS CAUSES MOVEMENTS ALONG SUPPLY CURVE.


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