Supply and Demand, What you should know for Question 1!

You should know the assumptions that underlie the law of demand. You must also know the exceptions to theEvery year there is a long question (75 marks) on supply and demand, and on average two of the nine short questions (32 marks) are on S&D. So that means by knowing this topic inside out you can possibly have 25% in the bank come June.

This is what is on the Economics syllabus in relation to Demand & Supply

Like all topics in Economics, you need to know your definitions.

Define Demand & Supply (individual and market). You should also be able to define the different elasticity's, PED, YED and CED and explain in simple terms what they mean. 

You should know the assumptions that underlie the law of demand. You must also know the exceptions to the law such as inferior products or snob goods. 

You should also know the law of supply and the exceptions to the law such as minimum price or capacity constraint.  

You must be able to interpret the Supply and Demand graphs. You need to be able to find the market equilibrium, you have to be able to graph shifts of both curves and discuss the reasons for possible movements along the curves or movements of the curves. 

Elasticities

You need to be very comfortable with Elasticities. If you decided to answer Q1 last year (2012), elasticity’s accounted for 66 (16.5%) marks of the 400 available on the whole Exam. None of these questions were asking for a lot. It was basic interpretation of the numbers.

You should know how to calculate all three of the elasticities (PED, YED & CED). You should know what each number means or be able to interpret an elasticity, and you should know what affects or determines the elasticity of a product?

*** Exam analysis ***

Supply, Demand & Elasticities come up every year and it's usually Q1 on the paper.

Some Past mock questions

***Sample Question***

2013 Exam

The Exam has been and gone, I hope you were all happy with it. The exam looked pretty fair, it was looking for pupils to interpret and give their opinion rather than just regurgitate text from the book which is a much better way of examining, even if it is harder for pupils to prepare for.

If you want to see the exam, It's available here.

Countdown to the Exam

So most of you will have started your leaving cert with English yesterday, I hope it went well.

Before the panic sets in, what can you do from here? you are not going to cover the whole Economics course properly whilst also studying for your other exams.

There are a few bankers for the Economics exam, the following topics have come up every year as full long questions.

• Supply, Demand and Elasticities

• Market Structures

• Factors of Production

My predictions

• The public sector pay bill

• The greying population and its consequences

• Emigration (bran drain)

You only need to answer 4 long questions, so I would recommend being as clear as possible on these topics.


I don't like making predictions on possible questions, but I would be surprised if at least one of the following don't make an appearance...

Best of Luck to all sitting the exam.

My recommendations on timing

150 mins Exam.

Section A, 6 questions 25 mins

Section B, 4 Long questions 30 mins

This will leave you with 5 mins to read the exam at the start.

Market Structures - What you need to know for Q2.

I know lots of pupils stumble over the characteristics of the different market structures,  perfect competition, imperfect competition, oligopoly and monopoly. 

I have found that this table can be effective when answering questions as you just need to remember the left column, and then apply your knowledge about each Market type to relevant points 

Most years, you are asked to draw a labelled diagram of one of the market structures and explain the equilibrium position. Below I have put together diagrams with the long run positions for each of the market structures.

In Perfect Competition the firm is a price taker, and is met with a fixed horizontal demand curve.  The firm is selling at its lowest point on the average cost curve (most efficient point) which along with the no barriers to entry ensures that customers are not exploited. 

In Imperfect Competition the firm is met with a regular downward sloping demand curve (AR).

 The firm will usually try to maximise profits and hence produce the quantity where MC=MR. This is not the best point for the consumer as the firm is not getting the full potential benefit from economies of scale (lowest point of ac).

In Oligopoly there are only a few firms. Each firm will react to what others do hence the kinked demand curve. If firm a raises the price above the equilibrium other firms will keep their price stable and hence take some of firm a's market share. If firm a reduces their price below the market equilibrium price, others will follow them down and all of the firms market share will remain constant.

In Monopoly there is only one firm and the firm faces a downward sloping demand curve. The firm can choose the price of the good or the quantity made available for sale but not both. Monopolists will usually produce the quantity where MC =MR as this is the most profitable point.  

**** Exam Analysis ****

Market Structures comes up every year and is usually question 2 in the long questions. There is nearly always a short question as well, so that means it could account for as much as 22% of your exam in June. 

Beware of questions which make a statement such as "European short haul airlines operate under conditions of Imperfect competition or Oligopoly.... as the statement will often be false and you must agree or disagree as appropriate. The best way to answer such a question is to apply the table above and think does the European short haul airline apply to the market structure in the question. 

Sample Mock Questions

Ireland's new debt deal

So Ireland have reshuffled their debt, basically Ireland have spread out their debt over a longer period, we will pay back more in total, but this will free up some cash in the short term. 

Father Ted explains the situation here

Watch the clip

Karl Deeter gives a good synopsis of the new deal and how it will save each household approximately €8,000 over the course of the debt. 

LeavingCertEconomics.ie

This blog is now available at www.leavingcerteconomics.ie

It will stay accessible at economics4lc.blogspot.ie for the foreseeable future.

Section A, short questions analyzed

A few times recently I have been asked "what questions come up in Section A?".

Unlike the long questions in Section B, where there is a couple of Topics that are bankers such as Supply, Demand & Elasticities, Market Structures and Factors of Production, there is no guarantees with the Short Questions. Basically anything can come up  in section A (the short questions). There is usually a couple of definitions and a couple of questions requiring calculation, but absolutely anything can be asked in Section A

Exam Analysis
I did a little analysis and below are the most common topics.

I feel the best thing to do is practice, practice, practice.... Answer as many questions as you can!!!

*** Starting over the Easter break I will be doing some more exam analysis and I will be posting sample questions Topic by Topic in the weeks leading up to the big day in June! ***

International Trade

Why do Countries Trade?

This is a great little intro video on the benefits of Trade

    Key Terms

      An Export is any good or service provided by the residents of a country that causes money to come into the country.

      An Import is any good or service purchased by the residents of a country which causes money to leave the country.

      Visible Exports are any physical goods provided by the residents of a country which causes money to come into the country.

      Visible = computer chips, clothes, cars etc…        

      Invisible Imports are any services purchased by the residents of a country which causes money to leave the country.

      Invisible = Tourism, foreign workers repatriating money, Rory McIlroy sends winnings from the US back to  Northern Ireland.

   _______________________________________________________________

  

       Why do we Import?

• To get raw materials not available in our own country. (Oil)
• In order to get consumable goods not producible (at reasonable cost) in our own country. (bananas, cars)

      Why do we Export?

•  To earn money (foreign currency) to buy imports.
•  To increase our production level to obtain the benefits of economies of scale.
•  To sell off surplus production. 
•  In order to create employment in our own country.
•  In order to increase our national income and our standard of living
•  To create economic growth or stimulate the economy.

________________________________________________________________ 

    

Laws of Trade

      A country has an absolute advantage when it uses less of its resources to produce one unit of a product than the other country uses.

     The Law of Absolute Advantage states that countries will benefit from trade so long as each of the countries trading has an absolute advantage in one of the goods.

     The Law of Comparative (Relative) advantage (Ricardo) states that countries should trade with each other and will gain mutual benefit from trade if they specialise in the production of those goods and services in which they are relatively most efficient and obtain their other requirements through trade. 

    

     (NB) It is possible to gain from trade even when one country has an absolute advantage in everything.

_____________________________________________________________

Example

     In one hour Harry can make 8 cakes or 12 cups of tea, William can make 6 cakes or 6 cups of tea.

  

     With trade they decide that Harry should specialize in making tea, while William specializes in making cake.

      Now the two boys have increased their tea production by 6 cups (33%) and only reduced their cake production by 2 cakes (15%) making them better off as a whole.

_______________________________________________________________

  

     Assumptions governing the Laws of Absolute and Comparative Advantage

       -          There is free trade.

       -          Transport costs do not exist.

       -          There is mobility of factors of production.

       -          There are constant returns to scale.

       -          The benefits of trade are shared between the countries. 

________________________________________________________________

Free Trade

       Argument for Free Trade

      -  Trade and in particular specialization (law of comparative advantage) make society and the two trading partners better off overall. (however not necessarily both of them)

    

       Arguments against Free Trade

                - To protect employment

                - Infant industry

                - protect the balance of payments

                - protect against competition from low wage countries

                - maintain government revenue

                - prevent dumping

                - Retaliation

                - Strict domestic laws governing production. (Irish Beef)

       Ways of restricting Free Trade*

               -   Custom duties (tariffs)

               -   Quotas

               -    Embargoes

               -    Exchange control regulations

               -    Administrative regulations

               -    Subsidies to domestic producers

      

            *not allowed between members of the EU. 

      ***Exam Analysis***
  International Trade used to be a banker for a full or nearly a full question up until 2010 and 2011. It made a comeback last year with a relatively straight forward question.

     2012 Q7 (55)

     2009 Q7 (60)
     2008 Q5 (55)
     2007 Q7 (55)
     2006 Q6 (75)
     2005 Q5 (75)

Population

Regional Distribution of the Global population 

The percentage of people living in the developing world –Asia, Africa and Latin America has risen substantially since 1960. In 1960 2.1billion (70%) of the planets population of 3 billion lived in the developingworld.

By 2000 80% of the World’s population lived in developingregions and it is projected that over the next two decades that 98% of the growth(in population) that occurs in the world will come from these developing regions.

The rising population on its own is not an issue, The problem arises when the economic development of the countries in question doesnot come at the same speed as the population growth. 

Requirements of theDeveloping World

• Nearly 60% lack basic sanitation
• Almost 13% have NO access to clean water
• 25% do not have access to basic housing
• Over 20% have no access to basic healthcare
• Aids is spreading especially throughout SubSaharan Africa
• 20% of children do not attend school at primarylevel
• Literacy levels throughout the Developing World population are very low

Ireland and Population

Why is census information important? and what is it used for? (past LC exam question)

• Demographic Change (ageing population)
• Infrastructural requirements (roads, airports)
• Planning for the provision of essential services. (schools, hospitals etc..)
• Regional policy
• Pension planning (serious issue in Ireland at the moment)
• Future levels of consumer demand
• Labour market
• Profiling of the population

    

Here are some key phrases and terms that we must know after studying Population

Demography is the study of human population.

Birth Rate : average number of live births per 1,000 population per year.

Death Rate : average number of deaths per 1,000 population per year.

The Natural Increase is the difference between births and deaths. (Natural Decrease if negative)

Emigration is when a person leaves a country of residence. It is caused by push or pull factors.

What are the effects of Emigration on a country? (past LC exam question)

Positives	Negatives
A reduction in the population, easing financial pressure on the GOV. (reducing unemployment)	Smaller domestic market, which might cause further unemployment and hence more emigration.
A reduction in social costs associated with unemployment ( crime, vandalism)	Brain drain (no return on investment of educating the emigrants)
	An increase in the dependency ratio
	Loss of potential entrepreneurs.
	Difficult to attract FDI due to reduction in labour force.

A Push factor is something that compels someone to leave their own country. (High unemployment)

A Pull factor is something that attracts someone to move to a country. (better political stability) (past LC question)

Net Migration = inward migration - outward migration (It can be calculated as (increase in population – natural increase)

   *** Exam analysis 

     Population has become increasingly popular on the Leaving Cert exam in recent years as you can see below, it has also appeared a lot in the short questions. 

    2012 Q5 (30) Q8 (30) 

    2011 Q8 (45)

    2010 Q8 (25)

    2008 Q7 (20)

    2005 Q8 (45)

    2003 Q7 (55) 

Economics Past Exam Papers

If you want quick and easy access to the Leaving Cert Economics Past papers from the Department of Education. Just Click the year below!

Higher level                                                          Ordinary Level

2013                                                                      2013

2012                 Marking Scheme                            2012      Marking Scheme

2011                 Marking Scheme                            2011      Marking Scheme

2010                 Marking Scheme                            2010      Marking Scheme

2009                 Marking Scheme                            2009      Marking Scheme

2008                 Marking Scheme                            2008      Marking Scheme

2007                 Marking Scheme                            2007      Marking Scheme

2006                 Marking Scheme                            2006      Marking Scheme

2005                 Marking Scheme                            2005      Marking Scheme

2004                 Marking Scheme                            2004      Marking Scheme

Money & Banking

Money is one of the most sought after "commodities" in the world, everyone wants it even though it is just small pieces of metal or paper. It's hard to believe that a small piece of paper 1/4 the size of an A4 page can get you a laptop, a phone or even a car.

Back in the old days, people used to trade something they had for something they wanted. For example I want Pepsi and I can teach Economics, I'd probably be willing to give grinds to someone in exchange for Pepsi, but instead the person gives me money and I then give that money to a shopkeeper in exchange for pepsi.

** You must know a little more about money and banking if you want to be successful in June, The first couple of questions I think you should concentrate on are related to why and how we use money..


What do we use money for? What are its functions?

Money is a

• Medium of Exchange
• it can be used to buy something removing the need for barter. 

• Unit of Account
• It allows you to put a comparable value on everything. (A €10 book is worth twice as much as a €5 cake)

• Standard of Deferred Payment
• Money allows you to buy something now and pay later.

• Store of Wealth
• Money lets you save up for future purchases

Why use paper and coins as money? why don't we use gold or rocks or apples? 

Money should have a number of characteristics to be considered a good money form....

It should be 

• Acceptable          - accepted by everyone
• Scarce                - scarce in relation to the demand for it
• Homogeneous     - identical 
• Portable              - easy to carry
• Durable               - it should last a long time 
• Recognisable      - easy to recongnise and not easy to copy
• Divisible              - come in small denominations to buy small items and get change

Australian dollars are particularly durable as they are made from Polymer and are waterproof

How do banks create Credit (**a favorite exam question for teachers)

In the little video above we saw that the money lender (bank) lent out more iou's or money than he actually had on site, this is how our banks of today still work.

Banks take in savings from one customer and lend it out to another. Banks however do not have to hold all of the money saved with them on site as they know that on any given day only a small percentage of savers will want to withdraw their savings. The amount of money an Irish bank must keep on site is set by the ECB and is known as the reserve ratio. 

Example                                             (reserve ratio of 10%)

• John lodges €100 in the bank
• the bank knows that they only need to keep 10% (RR) of all debts on site. 

• The Bank can now lend €900 to Kate in the form of money in an account. 

• The bank now owe €1,000 with only €100 deposited.

• So the bank has created €900 credit. 

This is how banks create credit, it obviously wouldn't work if there was only two customers as it would be very easy for more money to be requested than is currently held on site. But when we have a commercial bank with 1,000's of customers they know that only a small percentage of their debtors will want their money on a given day. So this works........ most of the time..

A run on the banks happens when depositors confidence is knocked for some reason and all of the depositors want to withdraw their money on a given day and the bank doesn't have the money on site like happened in the video. This can cause the bank to go bankrupt if they do not have the money to give to its depositors. 

Inflation

** Inflation is defined as a rise in the general level of prices over a period of time.

So Inflation is basically when goods in general become more expensive. This has a number of effects on the economy, some of  which are listed below.


Effects or Results of Inflation

• The Purchasing Power of money falls
• Wage-Price spiral    wages go up causes costs and prices to rise which causes wages to go up & so on.
• Loss of jobs             as cost of business increases. 
• Loss of National competitiveness
• Rise in Government spending, which can add further to inflation. as everything has increased in price, the Govt. must spend more to get the same amount of goods.
• Those on fixed incomes suffer
• Interest rates rise. to keep the real interest rate constant (interest rate - inflation = real interest rate)

What causes inflation?

There are three types of inflation that we must be aware of cost push inflation, demand pull and Government caused inflation. 

Cost Push Inflation

This is inflation caused by a shift in supply due to the rising costs of doing business, these could include the cost of labour - wages, capital costs such as rising land or building costs or a rise in the cost of primary products such as wheat, grain or petrol. 

Demand Pull Inflation 

This is a rise in the general level of prices caused by a shift in the demand for goods causing the equilibrium price to rise. This could be caused by an increase in the money supply, or an apparent shortage of a good compared to the demand causing the prices to be bid up.

Government Caused Inflation

This is inflation caused by direct action by the Government from raising indirect taxes, increasing Government spending (causing demand pull) or increasing the costs of doing business by increasing admin costs or rates (causing cost push).

How do we calculate Inflation?

In Ireland we use the Consumer Price Index to calculate the rate of inflation. The Government do a shop every three years of 1000's of items and work out how the overall price has changed, they then work out the inflation rate. Every three months we get figures which give us an indicator of the general level of prices have changed. 

Below is a composite price index of some goods I buy on a regular basis. Normally you will be given the price in years 1 and year 2 and the weight or percentage of your income you spend on each item. 

1.  You will have to calculate the percentage change in price, by dividing P2 by P1.
2. Then you should multiply the percentage change by the weight. 
3. Once you add up all of these you will get the price index for the current year. This shows the amount you spent this year as a percentage of last years total spend.
4. To get the inflation rate you take 100 from this number. 

Below is a graph of Ireland's rate of inflation from Jan 1995 to Today. You can see that the rate of inflation was steadily around 2% until 2001 where it jumped a little before leveling out again and it fell sharply in 2008 to a low of -6.6% in Dec '09.

The Graph below gives a more detailed monthly look at the rate of Inflation over the last couple of years.

Although inflation hasn't come up on the LC Higher level paper since 2008, it used to come up about every second year and could make a come back in 2013.

The type of question we have seen on inflation in the leaving cert tend to look for the consequences of or results of or effect of Inflation. This is just three ways of asking what happens in the economy when there is inflation.
Pupils can also be asked to complete a composite price index and calculate the change in prices between two years for a number of goods.

Long Run versus Short Run

A question I am often asked is "How long is the short run? Is it 6 months, is it a year?"
When I am asked that question, I know that this pupil is struggling with the concept. The short run is not a definite period of time for all companies.

We are not talking about the 100m and the 10,000m

The Short Run 

The short run is a time period in which at least one factor of production is fixed and cannot be changed, for some firms that's an hour, and for others it can be ten years or more.

The Long Run

The long run is a time period sufficiently long that all factors of production are changeable, nothing is fixed.

What determines the length of the short run

Well this depends on the type of business and how long you sign contracts for. If you sign a rental agreement for land for 6 months, that factor of production land is fixed for 6 months and cannot be changed, assuming you can change everything else in a shorter time, we would say that the short run is 6 months. The same goes for employment contracts (labour) or premises rental agreements (capital).


The video below explains the short run nicely in 82 seconds.

Costs - The key relationship

Average Cost and Marginal Cost

These are two of the most commonly misunderstood terms by economics pupils. I believe the key to studying costs is understanding the relationship between average costs and marginal costs.


The average cost is calculated by dividing the Total Cost by the Quantity.
The marginal cost is the difference in the total cost for the addition of an extra unit.



We know that while MC < AC, the average cost is falling and when MC > AC, the average cost is rising. But whats important is understanding why...

Think of a footballer who scores two goals per game. His average is 2 and if he continues scoring two goals in every game, his marginal number of goals is also 2. However if goes and scores 4 goals in his next game (his marginal goals (4) is above his average (2) goals per game), so his overall average will rise. Likewise if he has a bad game and doesn't score (his marginal goals (0) is below his average(2) so his overall average will fall.

When we look at the graph, we see that MC curve cuts the AC curve at the lowest point on the AC curve. This is where AC is at its lowest, we said above once MC is > than AC, the average cost rises. This is the same with the curve, Once the MC curve goes above the AC curve, The AC curve starts to rise.

Price Discrimination

Price discrimination is a perfectly legal practice carried out by many sellers of goods, who wish to charge different customers different prices so as to increase their total revenue. In an ideal world for sellers, you could charge all of your customers the maximum price they are willing to pay.

There are days when I really want a bottle of Pepsi max, so much so that I would be willing to pay €5 for one. If Mr. Shopkeeper knew this, he would charge me €5 so as to get the maximum profit possible (replacing all consumer surplus with producer surplus) Fortunately for me and for most buyers, we don't tell the shopkeepers our maximum price we will pay, thus not allowing them to charge us it.

This clip from "Just go with it" shows the sellers (the little girl) producer surplus. She says that she would have done the job for the experience and no pay, so anything over that is producer surplus.
Adam Sandler shows his consumer surplus when he says that he would have paid $500 which is $200 more than the price they agreed.

In this situation the seller (the girl) has been able to exploit the buyer (Adam Sandler) as she knew that he was willing to pay more than her marginal cost which she set as "the experience".

For some sellers, selling large quantities of a good even at a reduced price is preferable to selling fewer goods at a higher price. This is where we will see buy one get one free or 3 for 2 promotions. This is another form of price discrimination where you discriminate against people who only buy one of something as compared to those who buy more than one at a reduced average price!!

When I go to the cinema now, I cost the cinema the same amount as I did when I was a student. I'm roughly the same weight, so I am not causing more wear and tear on the seats. Yet my tickets are about €2 (20%) more expensive!!!

Why? Because more students will go if its cheaper, and the price they pay is higher than the average cost for the cinema. So everybody wins except me who is paying more than student me!

________________________________________________________________________________


Definition : Price Discrimination is the selling ofthe same good (or service) to different customers at different prices, where such pricedifferences are not caused by differences in cost.

Forms of Price Discrimination

1st degree - Selling goods to each individualconsumer at the maximum price they will pay for it.

• replacing all consumer surplus with producer surplus.

2nd degree - Sale of different quantities of agood to same consumer at different prices.

• Buy 2 get one free (reducing averageprice)
• Hotel, €60 per night, stay two nightsfor €99

3rd degree - Sale of identical goods to differentcustomers at different prices.

• Student tickets
• Industrial users versus residential users (sky tv)

Can any seller price discriminate?

No, Certain conditions are necessary for PriceDiscrimination

They include 

• Element of Monopoly Power.
• Distinct and separate markets. (Noreselling between markets)
• Different elasticities of demand.
• Consumers lack of knowledge(ignorance)
• Consumer indifference

Taxes? Why are they important?

Not many people like paying taxes or believe they should be taxed... You would have a tough job finding somebody who would like to pay more tax and give up more of their hard earned money.

What would happen if nobody paid tax?

we would have no roads, no hospitals, no schools, no social welfare.The rich would be richer and the poor would be broke and not broke like many people are at the moment but completely penniless.

What are the functions of tax?

• To raise money for Government Expenditure
• To redistribute wealth
• To achieve desirable social objectives
• To provide merit goods
• To provide public goods

Taxation can also be used as an automatic stabilizer.

So we all agree that we need to Tax.... But how best to tax?

Adam Smith set down four canons of taxation in The Wealth of Nations. These canons or laws are still hugely relevant to tax today. He said that all taxes should be

• Equitable (Taxes should be fair, and tax the people who can afford it)
• Economical (Raise more money than it costs to collect)
• Convenient (It should be easy for the taxpayer to pay the tax)
• Certainty  (People should be aware of their tax liability in advance)

These canons lay the foundations of a good tax system and when applied with some new canons can best describe how most countries try to implement their tax systems. 

A good tax system should not act as a disincentive to work, invest or save. If taxes on low income earners are high and people have access to relatively high social welfare payments, it may not be worth their while to bother working which can cause a major issue for the Government.

***Exam Tip***

I believe that you can answer any question on evaluating a tax by applying Adam Smiths four canons along with the disincentive canon.

Think 

Is the tax fair? Can the people being asked to pay it, afford it?

Are the Government making a profit on collecting the tax?

Is it easy or handy to pay?

Does the tax payer know how much they are expected (liable) to pay? 

and could the tax act make people not carry out the activity and therefore reduce productivity in the economy?