farming methods and the environmental and health side effects that these create. Government failure: The risk of government failure (such as inadequate information, administrative costs and market distortions) should be considered throughout. 13 Labour Market: Wage determination Identify the main influences on demand and supply in labour markets. Understand determinants of the elasticity of the demand and supply of labour. Understand the causes and implications of wage differentials. Explanation of wages as the price of labour and that in a free market wages are therefore determined by supply and demand. Look at the demand for labour, discussing why firms need workers, and what will determine their demand – link to technology, productivity, the demand for products and thus the state of the economy. Labour is therefore a derived demand and will be negatively correlated with wage rates. Identify the main influences on demand and supply in labour markets. Optional: Marginal revenue product theory is not required at AS but learners should understand that the demand for labour is derived from the contribution that labour to the profit of the firm. 14 Labour Market Issues: Understand the factors affect flexibility in labour markets, for example trade union power, regulation, welfare payments and income tax rates. Evaluate the effects of the statutory national minimum wage on labour markets. Make clear that labour supply consists of those actively looking for work (not the supply of jobs). Again discuss the factors that will be likely to affect this – wage levels, benefit levels, societal attitudes towards gender roles (participation rates), migration, tax levels, education and so on. Hence supply will be positively correlated with wages, but strongly influenced by a range of other factors.
TERM THREE Week Specification Content Specification Amplification Further guidance notes 28 Trade (continued) Advantages and disadvantages of free trade Understand the advantages and disadvantages of international trade from the point of view of the economy as a whole and for households, firms and government. Mainly revision: Look at the reasons for trade, including detailed analysis of comparative and absolute advantage. Explain with arithmetic illustration the concepts of comparative and absolute advantage and their limitations; a two country, two product model is required using a numerical and graphical approach. Protectionism Understand the arguments for and against the implementation of protectionist policies. Explain and illustrate key methods of protectionism. Then look at the problems with free trade and the main forms of protectionism. Tariffs, quotas, export restraints, non-tariff barriers. Look at the role of the WTO in trying to reduce protectionist barriers. 29 Globalisation and Trade in the UK Evaluate the costs and benefits of globalization. Identify the UK’s export sectors. Evaluate the extent to which an increasingly integrated world economy is beneficial to the UK. Discuss what is meant by globalisation and the positive and negative effects it has had on the UK (might include: FDI, downward pressure on inflation in the short run increased growth, but now growing pressure on resource prices as China grows, short run job losses and so on). Learners should gain an understanding of the impact of globalisation on the UK economy through an appreciation of its interdependence with other economies, linking well with discussions on UK’s main trading partners.
6 - 7 Monopolistic competition Define monopolistic competition and explain the importance of its underpinning assumptions. Explain and illustrate with diagrams the short run and long run equilibrium price and output for the firm. Explain and evaluate the efficiency of monopolistically competitive markets. Explain that monopolistic competition is closely related to perfect competition, but that some of the assumptions of perfect competition have been relaxed, most importantly the assumption of identical products. Show that as a result of brand loyalty, the demand curve will not be horizontal and that therefore there is now a difference between AR and MR. Revisit previous teaching to show (again), both numerically and diagrammatically, that the MR line will be twice the gradient of the demand curve/AR line. Show short run and long run equilibrium in monopolistic competition, showing that in neither case will there be either allocative or productive efficiency. Explain that advertising and product differentiation will form an important part of competition in such markets. 7 - 8 Monopoly Define monopoly and explain the importance of its underpinning assumptions. Compare, using diagrams, the short run and long run equilibrium positions in perfect competition with those of monopoly. Explain and evaluate the potential costs and benefits of monopoly, for example, price discrimination, lack of contestability, efficiency against the benefits of economies of scale and natural monopoly. Explain that in theory monopoly is a market with a single firm dominating the market, but that examples of pure monopoly are rare (e.g. water firms/Network Rail). Hence in reality, we need to look at market concentration, and the broad concept of monopoly power. Discuss the conditions necessary for monopoly to become established (cost structure, entry barriers), and look at the characteristics of monopoly. Show that as a result of entry barriers, abnormal profits can be earned in the short and long run. Barriers to entry – look at the forms of entry barrier e.g. legal – licences, patents. Trademarks, resource based – vertical integration, retained abnormal profits, cost based – economies of scale, first mover advantage and strategic – advertising, product differentiation, research and development, limit pricing.
19 Deflation Understand that, as with inflation, deflation may be either demand side or supply side driven and the effects will depend upon the cause – deflationary pressure caused by supply side improvements may be viewed as beneficial under some circumstances. Understand that demand-deflation can create major problems for economies and understand the costs of such deflation to households, governments and firms as well as the difficulties governments face when trying to end deflationary spirals once they have taken hold. Use one lesson to explain the impact of deflation on an economy (e.g. a fall in consumer spending, increasing burden of private/public debt), falling nominal leading to mass unemployment). Use Japan as an example to discuss with learners and to understand the problems associated with deflation. 20 The Phillips Curve: and Explain that there may be a trade-off between inflation and unemployment in the short run and that such have been observed in the UK. Argue that Neo-Classical economists believe that the short run Phillips curve is not stable due to the role of expectations; in the long run, attempts to hold unemployment below its natural rate/NAIRU will result in accelerating inflation and Revisit the identified at AS level between unemployment and inflation. Look at data for the UK 1970 to present day, and show that between 1980 and 1992 there were clear trade-offs present, but that in the 1970s and post 1992 this trade-off is less apparent. Discuss possible reasons for the break-down of this trade-off, looking at firstly the expectations augmented Phillips curve. Show that if unemployment is consistently held below the NAIRU then inflationary expectations may build, meaning that when the labour market returns to equilibrium, a higher level of wage and price inflation will now be locked into the system (and that therefore the LRPC is vertical). Show the impact of the 1973 oil shock in this context.
that when the economy eventually return to its natural rate/NAIRU it will do so with a higher level of inflation. Understand that changes on the supply side (either favourable or adverse) can cause the position of the long run Phillips curve to shift and that economic policy changes can bring such shifts about. Look at the role of supply side policies as a way of improving the Phillips curve trade-off (by reducing the NAIRU). Look at the evidence of the post 1992 period. Thus the SRPC may shift either vertically or horizontally. Show that most of the same issues raised by SR/LR Phillips curve analysis can also be illustrated by SR/LR AS analysis. 21 - 22 Economic growth (revisited) Actual vs. potential economic growth Explain the differences between changes in measured gross domestic product (GDP) (actual growth) and potential growth and understand that by ‘economic growth’ economists are generally referring to an increase in the productive capacity of the economy rather than short-term changes in the level of national income. Explain the differences between actual and potential growth the concepts of positive and negative output gaps and the business cycle. Understand what is by the term ‘recession’. Revisit the difference between actual and potential economic growth, and look at how potential growth can be measured (business/trade cycles), and explain the concept of sustainable growth. Revisit PPF analysis.
Also cover the limitations of PED as a tool – can price changes really be calculated/tried out, where does the data come from, discuss whether big and small price changes will actually have the same proportional impact on demand. 7 Elasticity: Income and cross price elasticities of demand, price elasticity of supply Use the concept of income elasticity to distinguish between normal and inferior Learners should be able to define, calculate and interpret numerical values of elasticity. Learners should be aware of the factors which influence price, income and cross price elasticities of demand and price elasticity of supply. Income elasticity of demand. Idea that an increase in income may lead to either a rise or fall in demand, hence YED can be either positive or negative. Formula. Again a simple exercise involving ‘big rise in D’, ‘small rise’, ‘big fall’, ‘small fall’ with product images can get the idea across that D may rise or fall following a change in income. Explanation of normal goods, divided into income elastic and income inelastic and inferior goods focussing again on proportionality. Illustrate using income-consumption graphs. Implications of YED for firms’ strategy – not on specification, but adds a little life to what can be a bit of a dull concept – idea of a portfolio of cyclical and counter-cyclical goods (Tesco) etc., or firms that have successfully rebranded either up or down market (Waitrose essentials? Skoda?). Use social trends data to look at the relation of changes in income to pattern of household spending – drop in food as a percentage of total income even though spending has risen in absolute terms and relate this back to income elasticity – spending may fall as a percentage of income even if demand is rising if YED is less than 1. XED – formula, substitutes and complements and positive/negative XED. Implications of XED for (loss leaders and so on). Links between markets – how changes in the price of one good have an impact on the market for another in the context of substitutes and complements. Use loss leaders, captive products as an example of how firms might use XED for complements, and discuss advertising and product
Understand demand-pull and explanations of inflation. Explain and evaluate the quantity theory of money. Learners should understand the role of expectations in sustaining and driving inflation through mechanisms such as the spiral. Appreciate that rising prices can create costs, but that these costs will depend on the level of inflation, the cause of inflation and the extent to which it was anticipated. Costs include redistributive effects, macroeconomic effects and efficiency effects. Explain and evaluate possible responses to the issue of inflation in terms of how effective or desirable solutions are likely to be. Understand that, as with inflation, deflation may be either demand side or supply side driven and the effects will depend upon the – The causes are generally broadly well understood by this point, but spending some time on the wage-price spiral and expectations can be valuable in escaping a diagrammatic understanding, as well as looking at the Bank’s inflation reports. The quantity theory is a useful tool to revisit QE (if you didn’t teach it at the time) and a contrast between Zimbabwe and the UK/US can be interesting in terms of when printing money does or doesn’t trigger inflation and why/why not. Solutions can be an interesting research piece as different approaches can be contrasted for inflation. At the time of writing, deflation is mainly just Japan, but the policy decisions of the Eurozone must also merit consideration here. Diagrammatic approaches are very useful here.
Evaluate the effects of privatisation on competition, efficiency, prices and the whole economy. Renationalisation might well be looked at in the context of the rail sector with various politicians wanting to take it back into state control. The return of some franchises to the government allows for a direct comparison of state and private control. 26 Competition policy Explain the reasons why governments may be concerned with competition, monopolies and mergers in industry. Understand the role of competition authorities and regulators in promoting competition and contestability in markets. Learners should understand that regulators can affect the degree of contestability in a market. Learners should be able to evaluate the extent to competition and contestability are desirable. Detailed knowledge of UK and EU competition legislation is not required. Detailed knowledge of regulatory policies is not required. The here should be on the goal of regulation rather than its form and that some sectors may be more likely to need regulating than others run industries for example). Much of the content here will overlap with the evaluation of monopoly and oligopoly markets from earlier in the term, and that an increase in competition and contestability isn’t necessarily desirable in all circumstances (cooperation between firms is permitted under EU law in certain circumstances, for example). Probably worth looking at some of the watchdog bodies to see how regulation works (or not) in practice. Water, Post and Rail all have interesting features. Also worth looking at the CMA and some of its recent cases – domestic energy for example. Consider the reasons for, and implications of, regulatory capture. You could link really well to the financial crisis and the inability of regulators to predict it or respond to it. Market Success Market Success and Market Failure.