Monday, August 22, 2016

EU immigrants and jobs in the UK

Just a random thought of this. It seems that the selling point of the proponents of Brexit is, EU immigrants are taking away jobs from the natives. I don't quite agree on this. This is because:
a) When they gain employment, they will increase consumption into the real economy. More good and services will have to be produced. This means more manpower will be needed

b) They also contribute significantly to tax revenue. This improves government finances and as a result, more jobs can be created in the public sector or at least, it stops the government from continuing to lay off workers

The labour market fallacy comes from the assumption that the number of jobs are static/ fixed. So, as immigrants filled up one, there will be one less opening for the natives. Well, this is not quite true. The labour market is flexible. It adapts and evolves. In short, it is dynamic. Many more jobs will be created as fast as they are taken up

Foreign workers are only a threat under the following circumstances:

a) Bulk of the income is sent back as remittances. However, they still need to spend substantially within the UK due to the high costs of living

b) They increase the supply of labour thereby reducing the equilibrium market wage. While migrants are prepared to accept low paid jobs, the natives aren't. However, this cannot be said as taking away jobs. If locals are willing to accept, they will still get employed

c) Foreign workers are more skilled than locals. However, this will not become a major issue if the unemployed are prepared to make themselves more marketable to potential employers by improving their existing skill levels/ education attainment. Job market today isn't the same as the past. So, there must come a point where all job-seekers must remain competitive and relevant

Tuesday, June 7, 2016

Mathematical Proof for Profit Maximisation (MC = MR) for Cambridge/ CIE A Level Economics

There is a reason why profit is necessarily maximised at MC = MR. When MR > MC, the firm should continue producing more output. The logic is, at this stage of production, for every one unit of output produced, it adds more to TR than to TC. As such, a rational producer would want to produce and sell more because there is room for supernormal profits to be further increased

At MC = MR, it implies that for every one unit of output produced, TR increases at the same pace as TC. Profit has therefore been maximised. There is no more room for any further rise in abnormal profit

It will not produce where MC > MR. This is because, for every additional one unit of output produced, it adds more to TC than to TR. While there are still profits to be made, it will not be at the position where they are maximised

Mathematical Relationship Between APC and MPC

The Basic Mathematics of Costing for CIE/ Cambridge A-Level Economics

Monday, June 6, 2016

The Most Common Errors Found in Paper 3 (9708) of CIE A Level Economics (8pm tonight, Malaysian time)

Chapter 1: Basic Economic Ideas and Resource Allocation
  1. Unable to clearly distinguish between productive efficiency and allocative efficiency. The former happens when a firm is producing at the lowest cost possible. This is achieved when MC = AC. The latter happens when a firm is producing output that is valued by the consumers. If this happens, P = MC or AR = MC or MB = MC
  2. Not being aware that all points on the PPC are productively efficient. However, it is possible that there can be only one point on the PPC which is allocatively efficient. It is also possible that NONE of the combination of two goods along the PPC can be regarded as allocatively efficient (refer to North Korea that focuses only on producing guns and nuclear. NONE of these two is wanted)
  3. Unaware that social efficiency, MSB = MSC can only be achieved once all negative/ positive externalities have been taken into account
  4. If P > MC, then the firm should produce more output. By contrast, if P < MC, then efficiency can be improved if the firm produces less (Basically, ‘no one’ values the good as indicated by lower MB than MC)
Chapter 2: The Price System and the Micro Economy
Theory of Firms 
  1. Unable to perform calculations involving the AFC, AVC, AC and MC
  2. Unaware that MC is actually the gradient of TC curve while MR is the gradient of TR curve (Mathematically, MR = change in TR/ change in quantity. This is equivalent to gradient where m = change in y/ change in x. Ever wonder why MR = 0 when TR is maximised?)
  3. Frequently mixed up between profit maximisation (MC = MR), revenue maximisation (MR = 0) and sales maximisation (AC = AR)
  4. Unaware that in an imperfect market, the only way for the output to be increased is for the price to be lowered
  5. Most are unable to answer questions pertaining to the interpretation of diagrams. One of the reasons I notice is that, candidates do not practice sufficiently and have adequate understanding of the nature of each type of cost and revenue curve
  6. Weak when it comes to the calculation of returns to scale. Instead of calculating and comparing the percentage of change between input and costs, candidates compare the difference in input against the costs (The key here is PERCENTAGE)
  7. Always forget the fact that PED = 1 when TR is maximised
  8. Unaware that a firm can still continue operating despite making a loss. It will only cease production when it cannot cover its own TVC. This can be written as P < AVC or TR < TVC
  9. Thought that only perfectly competitive firms produce homogenous goods. This is not true. Oligopoly firms can also produce identical goods. Consider water, gas and electricity firms. They are very big, few in number and yet produce almost similar goods
  10. Forget one of the assumptions of price discrimination and that is MC must equal to MR in both markets
  11. Forget that PED > 1 when price is increased and PED < 1 when price is decreased. This supports the analysis of the kinked demand curve. Firms shouldn’t attempt to alter prices as it will cause their TR to fall
  12. The most striking feature for a perfectly competitive firm is homogenous products, for a monopolistic firm is differentiated products, for an oligopoly would be high interdependence and monopoly is unique products
  13. A perfectly competitive firm is both productively and allocatively efficient only in the LR. In the short run, it is productively inefficient. However, generally/ theoretically, all imperfect market firms are thought to be both productively and allocatively inefficient in both short-run and long-run
  14. Unaware that MC depends on VC and not FC. So, when there is a change in the FC, value of MC will remain unchanged    
Theory of Cardinal Utility
  1. Forget the fact that utility can only be maximised when two conditions are met. First, all the allocated money income must be spent. Second, MU per dollar for all the goods must be the same (in reality, this is not necessarily)
  2. Weak when it comes to questions involving the budget line. Candidates almost always unable to determine the direction of money income and the price of a good given that the budget line has shifted in the mentioned position
  3. Income effect and substitution effect of a price change for both normal and inferior good
Chapter 3: Government Microeconomic Intervention
  1. Not familiar with the concept of demand for labour. Do take note that DL = MRPL which can be broken down into MPL x MR. This means demand for labour will increase if productivity increases, there is a higher price for the final product and also if there is a rise in the demand for the final product (refer to the formula while going through this three. It will make much more sense)
  2. MRPL = MPL x MR. This is the universal formula to calculate marginal revenue product of labour. However, in the case of perfectly competitive labour market, MR can be replaced with P because of the assumption of homogenous goods. For a monopsonist labour market, one CANNOT replace MR with P
  3. Unaware that MCL = MRPL means profit maximising quantity of labour. In theory, firms will use such an approach to determine the number of workers to be hired so that profits can be maximised. Do take note that labour is just like any other input. They contribute to both cost and revenue. Under theory of firms, MC = MR means quantity of output to be produced so that profits can be maximised
  4. Not being aware that trade unions are more successful in bargaining for a higher wage in a monopsonist labour market than perfectly competitive (Easier to be seen and understood if you compare the diagrams for both situations)
  5. Always make mistakes for questions involving transfer earnings and economic rent

Wednesday, October 7, 2015

Basic Examination Techniques for 9708/02 (CIE Economics)

Basic Examination Techniques for 9708/02

Section A-Data Response

What do you need to know?
11. Usually have 5-7 questions

22. The last question will always be 6 marks and the instruction is ‘Discuss’. This implies that candidates will have to provide analysis points, evaluations and finally a conclusion

33. Recommended time is not more than 45 minutes

44. More inclined to macroeconomic issues rather than microeconomic

55. Will most likely have ‘Table’ and ‘Figure’

66. 1 mark per explained element, unless stated otherwise
What do you need to do?
11. Invest a quality 3 or 4 minutes to run through the extract. Read analytically from line to line and from one paragraph to another. Ask more of ‘how’, ‘why’ and ‘what’ questions. Relate/ string all the information together to see if they are interconnected

22. Analyse the ‘Table’ or/ and ‘Figure’ carefully. Watch out for any trend (before and after), the direction (increase or decrease), rate of changes (faster or slower rate) and years under consideration (from when to when)

33. Provide very short answers if the instruction is:
·         a. Identify
·         b. Outline
·         c. State/ suggest
·         d. Give
      e. What other information

44. Remember TRY (Trend, Rate of change and Year) and DRY (Direction, Rate and Year) if the question requires reference to ‘Table/ Figure’

55. Candidates need to express their views with great clarity if the instruction is ‘Analyse’ and ‘Explain’

66. Provide definition(s) and diagram(s) wherever appropriate, even when the question does not ask for it

77. The’ Discuss’ question will require candidates to provide evaluative comments. A maximum of 4 marks will be awarded if the answer is one-sided. In the event where candidates run out of time, they can choose to list down the answers and if this is correctly done, they are still entitled to a max of 2 marks. Answers do not have to be symmetrical. It can be in the form of (3+3) or (2+4) or (4+2). However, it is compulsory to provide a conclusion. Candidates have three options, either to pick a more dominant side or reject both sides/ policies and suggest an alternative outcome or claim that a conclusion cannot be made unless certain information is made available
88. Popular microeconomic questions:
  a. Reason for an outward shift of PPC and its outcome
bb. Costs and benefits from the division of labour at international level

cc. Factors that can affect demand or supply

dd. Impact on equilibrium price and output when there is a change in demand/ supply condition

ee. Whether a particular good is suitable to be classified as public/ private/ merit good

f f. Economic effects of maximum price/ minimum price policy

  g. Economic effects of an indirect tax/ subsidy

99. Popular macroeconomic questions:
aa. Characteristics of a monetary union

bb. Difference between customs union and free trade area

cc. Costs and benefits of an international trade

dd. Costs and benefits of tariffs

ee. Comparative advantage and reasons why some countries are able to specialise in the production of certain goods

f f. Productivity and how it is calculated

gg    Measurement of inflation and problems involved in the construction of CPI

hh.  Demand-pull, monetary, cost-push and imported inflation

i i.  Importance of having an inflation target/ a low inflation

j j. Factors that can influence the value of an exchange rate in a free market

kk. Costs and benefits of a floating exchange rate system

l. l.   Costs and benefits of a fixed exchange rate system

 m. Information other than those in the extract which will be needed to judge the position of current account/ national economy/ productivity

Section B-Essay

What do you need to know?
11. Candidates will have to choose one pair of essays from a given option of three

22. Essay (a) will be 8 marks while (b) 12 marks. Recommended time is a maximum of 20 minutes for (a) and 30 minutes for (b)

What do you need to do?
11. Upon deciding a particular question, candidates need to be able to identify the structure of both essays:
aa. 8 marks – ‘1 part’
·         Introduction + 2 points (with diagram)/ 3 or 4 points (without diagram)

bb. 8 marks – ‘2 parts’
·         Introduction + 2 points (issue 1) + 2 points (issue 2)

cc. 12 marks – ‘1 part’
·         Introduction + 3 analysis points + 3 evaluation points + conclusion

dd.   12 marks – ‘2 parts’
·         Introduction + 2 analysis points + 2 evaluation points (issue 1) + 2 analysis points + 2 evaluation points (issue 2) + Conclusion

22. Candidates are highly recommended to provide a detailed introduction. Upon defining an economic term, try to look into the key words within each definition. Elaborate on them. Alternatively, one can also make good use of their general knowledge to impress the examiners

33    A good essay is one that has the following features:
aa.  Written in simple English

bb.  Has many short sentences

  c.  Proper use of connectives

dd. Clearly labelled and explained diagrams

ee. Wide economic vocabularies

f f. Impressive application of real world examples into their essay

44. Popular microeconomic essays:
aa.    PPC and how it can be used to illustrate any two economic ideas

bb.   Whether free market/ mixed economy is the most desirable form of economic system

cc. Whether division of labour or money contributes more to an economy

dd.   How PED can be used to determine the total revenue of a set of goods

ee.   How XED can be used to identify a complement and substitute

f f.    How YED can be used to tell whether a good is inferior or normal

gg.   Whether PED can be changed and whether it is beneficial to do so

hh. How equilibrium price and output change when there is a change in demand/ supply condition

i i.    Positive/ negative externalities of production

 jj.    Positive/ negative externalities of consumption

kk.  Costs and benefits of maximum price/ minimum price/ an indirect tax/ subsidies. May be asked to compared any two of them simultaneously

5. Popular macroeconomic essays:
aa. Comparative advantage and the limitations of theories of international trade

bb.    Costs and benefits of an international trade

cc.    Costs and benefits of trade barriers.

dd.    Whether having a current account deficit is always a cause of concern

ee.   Whether an improvement in terms of trade is always beneficial

f f. Measurement of inflation/ unemployment and the problems involved

gg.    Difference between demand-pull and cost-push inflation

hh.    Comparison between domestic and external consequences of inflation

i i. Anticipated and unanticipated inflation and its impacts

 jj.   Advantages and disadvantages of floating/ fixed exchange rate

kk.    Factors that may influence the value of an exchange rate in the money market

l l. How government can maintain a stable/ fixed/ managed-float exchange rate, using the demand and supply analysis

  m.  Interrelatedness between exchange rate, inflation and balance of payments

nn.  Whether expenditure-dampening/ switching policies or currency devaluation/ tariffs is more effective in reducing a current account deficit