tutor2u Economics Blog - 10 Ways for a Great Econ Paper

Summer 2011

10
Ways to Improve Your Economics Exam Papers
tutor2u Economics Blog Summer 2011

(1) The Importance of the Margin

In textbook economics many decisions are made at the margin
Marginal revenue = marginal cost (profit max output) Marginal social benefit = marginal social cost (social equilibrium) Marginal utility of consumption compared to the price

But few businesses / people have the capacity to reach such precise equilibrium points or seek to find them Instead they satisfice or choose rules of thumb But
Marginal changes in behaviour can have a big effect if enough people make them (e.g. Energy consumption decisions) Changing behaviour at the margin can have important social effects social norms can change + policies can have an impact The fundamental value of something depends on the value of the marginal unit important in lots of markets (e.g. oil, food)

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tutor2u Economics Blog - 10 Ways for a Great Econ Paper

Summer 2011

2: The Law of Unintended Consequences

This is a root cause of government failure All government interventions in a market have at least one and often many unintended consequences Easy to have the benefit of hindsight when seeing this! Reasons:
Economics is a social science about behaviour Rational agents will look for ways to offset policies that cost them Information failure in government when setting policies Dynamic nature of markets markets and the agents that inhabit them move far more quickly than government Disintermediation is inevitable in a globalized world

3: Stakeholders matter!
Any person or organization that has a legitimate interest in a specific project or policy decision. Check to see the sources of information in data response questions Identify and comment when value judgements are being made scores high for evaluation Risk of government failure:
Regulatory capture / powerful lobbying Policy decisions made to please a vested interest Inequitable impact between one group and another

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tutor2u Economics Blog - 10 Ways for a Great Econ Paper

Summer 2011

Stakeholders
Employees of a business Communities where a business is located or affected by a decision Suppliers further down the supply chain Shareholders / owners Creditors Government (and through them taxpayers) Trade unions (and the workers they represent)

Stakeholders
Employees of a business / organization Communities where a business is located or affected by a decision Suppliers Shareholders Creditors Government (and through them taxpayers) Trade unions (and the workers they represent) NGOs and other advocacy groups (i.e. World Bank, IMF, Pressure Groups) Prospective employees Prospective customers Local communities National communities International community Competitors within a market Professional associations

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tutor2u Economics Blog - 10 Ways for a Great Econ Paper

Summer 2011

4: Time Periods in Economics

Be familiar with
Immediate (momentary) especially in primary sectors Short run (at least 1 fixed factor, diminishing returns) Long run (all factor inputs are variable, economies and diseconomies of scale)

Applications of time periods in your analysis

Elasticity of supply (micro and macro supply curves) Elasticity of demand (Ped, CPed, Income elasticity) Discounting the future value of costs and benefits Long run macroeconomic policies e.g. supply-side / trade policy Long run micro policies e.g. liberalising a market, nationalisation

5: (a) Demand and supply curves are often non-linear!

P P S

Changing elasticity of supply as output increases

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tutor2u Economics Blog - 10 Ways for a Great Econ Paper

Summer 2011

5(b): Upward sloping demand and downward-sloping supply!

P P S1 S2 S2

Long run supply with EoS

6: Change the elasticity to build / develop your analysis!

P

S + tax P2 S P1

D Q2 Q1

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tutor2u Economics Blog - 10 Ways for a Great Econ Paper

Summer 2011

6: Change the elasticity to build / develop your analysis!

More close substitutes higher CPED P P

S + tax P2 S P1 P1 P2

S + tax

D Q2 Q1 Q Q2 Q1

D1

D2 Q

7: Most markets are inter-related

Changes in relative prices / rewards in one market affect resource allocation in others Key inter related-market concepts to revise:
Substitutes Complements Derived demand Composite demand Joint supply Competitive supply

Also important in macroeconomics

Factor markets and the economic cycle (labour demand) Bond markets / currency markets / equity markets Macroeconomic effects of external demand/supply shocks

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tutor2u Economics Blog - 10 Ways for a Great Econ Paper

Summer 2011

8: Markets at work! Relative prices, preferences and incentives

Markets are powerful dont underestimate them especially the power of setting the right incentives Policy interventions seek to change behaviour of agents People do respond to incentives
Govt failure if the incentives turn out to be perverse Govt failure if the incentives are not strong enough (ineffective)

Behaviour changes when relative costs & benefits alter

Leads to substitution effects (changes in demand for X and Y) Agents react to changes in measured costs and benefits of their actions

This requires
A sufficient change in relative prices to make a difference Availability of alternative courses of action Sufficient time for agents to respond and react

Examples of changes in relative prices and behaviour

London congestion charge / underground fares National minimum wage Changes in relative prices of low and high carbon energy e.g. arising from a carbon tax or carbon trading Relative prices of different crops in farming Relative price of ethical-products Relative prices and demand for exports / imports e.g. Following an exchange rate change Relative prices of legal versus illegal transactions (e.g. crime / organ sales)

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tutor2u Economics Blog - 10 Ways for a Great Econ Paper

Summer 2011

9: Expectations matter!
Expectations of the future drive current behaviour!
Housing market / property development / decisions on land use Capital investment decisions by businesses (expected profits) Food supply decisions expected returns from different crops Currency demand and supply speculative activity in FOREX Monetary policy / inflation inflation expectations and wages Fiscal policy / tax cuts / govt borrowing expectations of changes in taxes

Formation of expectations:
Rational expectations Adaptive expectations

10: The cost-benefit principle

The mother of all economic ideas is the cost-benefit principle. It says that should take an action if, and only if, the extra benefit from taking it is greater than the extra cost The hard part is
Identifying the relevant costs and benefits Measuring and valuing them

Individual rationality does not always lead to a socially optimum / desirable outcome Behavioural economics questions the core rationality embedded into conventional textbook economics

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tutor2u Economics Blog - 10 Ways for a Great Econ Paper

Summer 2011

And finally.
Most policy problems require a combination of strategies Understand the meaning of efficiency and equity in markets (allocative, productive, dynamic efficiency) Have the courage to challenge the conventional wisdom Let your diagrams do the work for you develop the analysis with high quality diagrams Pick out bias in extracts normative economics Use the data that is provided but be aware of limitations What is rational for individual agents can often leading to outcomes that are damaging for society Be cautious about government intervention markets often find solutions to intractable problems in the long run if the incentives are strong enough

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