AS/A-level Economics For first teaching in 2015

Transcription

1 AS/A-level Economics For first teaching in 2015 Slide 1 Follow us on

2 A-level: Assessment structure at a glance Component 1: Markets and market failure Written Paper Component 2: National and international economy Written Paper Component 3: Economic principles and issues Written Paper 33.3% 2 hours 80 marks 1 data response question from a choice of 2 and 1 essay question from a choice of % 2 hours 80 marks 1 data response question from a choice of 2 and 1 essay question from a choice of % 2 hours 80 marks 30 multiple choice questions and 1 case study Slide 4

3 A-level: Assessment objectives AO AO1 Description Demonstrate knowledge of terms/concepts and theories/models to show an understanding of the behaviour of economic agents and how they are affected by and respond to economic issues Weighting range 20-23% AO2 Apply knowledge and understanding to various economic contexts to show how 26-29% economic agents are affected by and respond to economic issues AO3 Analyse issues within economics, showing an understanding of their impact on 26-29% economic agents AO4 Evaluate economic arguments and use qualitative and quantitative evidence to 22-25% support informed judgements relating to economic issues Slide 5

4 A-level: Paper 1 Slide 11

5 A-level: Content for Paper 1 Paper 1 looks at microeconomics There are limited changes to the current AQA A-level Economics specification Individual economic decision making is one new area Much of the content is identical to the current AQA A-level Economics specification, but has been clarified and modernised Slide 12

6 A-level: Content for Paper 1 Economic methodology and economic problem Individual economic decision making Price determination in a competitive market Production, costs and revenue Perfect competition, imperfectly competitive markets and monopoly The labour market The distribution of income and wealth: poverty and inequality The market mechanism, market failure and government intervention in markets Slide 13

7 A-level: Structure of Paper 1 2 hours 80 marks 33.3% of total marks 2 sections Section A 1 data response question from a choice of 2, each one containing 4 parts (40 marks in total) Section B 1 essay question from a choice of 3, each with 2 parts (40 marks in total) Slide 14

8 A-level: Paper 2 Slide 16

9 A-level: Content for Paper 2 The measurement of macroeconomic performance How the macroeconomy works Economic performance Financial markets and monetary policy Fiscal policy and supply-side policies The international economy Slide 17

10 A-level: Structure of Paper 2 2 hours 80 marks 33.3% of total marks 2 sections Section A 1 data response question from a choice of 2, each one containing 4 parts (40 marks in total) Section B 1 essay question from a choice of 3, each with 2 parts (40 marks in total) Slide 18

11 A-level: Paper 3 Slide 21

12 A-level: Content and structure of Paper 3 All macro and microeconomic content No additional content from current AQA A-level Economics specification 2 hours 80 marks 33.3% of total marks 2 sections Section A 30 multiple choice questions (30 marks in total) Section B 1 case study question with 3 parts (50 marks in total) Slide 22

13 Rational economic decision-making and economic incentives Traditional economic theory assumes that consumers are always rational. Rational consumers seek to maximise utility, whilst rational producers seek to maximise profit, in pursuit of their own self-interest. Rational decisionmaking occurs when individuals compare the costs and benefits of possible decisions and choose the one that maximises their personal net benefit. As Adam Smith wrote in the The Wealth of Nations: It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest Traditional economic theory is dominated by a particular species often referred to as Homo economicus (or Economic man, or Econs). Given the constraints they face, they will always weigh up all the costs and benefits and choose the best course of action to maximise their own narrow self-interest. Utility theory In the previous section it was suggested that rational consumers seek to maximise utility. Utility theory attempts to explain why consumers make the decisions they do why we purchase some goods and not others. When you choose to purchase an apple instead of an ice cream, it must be because it will provide you with a level of satisfaction. Economists call this satisfaction utility. Utility is defined as the satisfaction or welfare gained from consuming a good or service. Utility theory helps explain why we choose to purchase some goods over others. When you choose to purchase a Magnum ice cream over a Cornetto, it must be because it will provide you with a higher level of utility, ceteris paribus. However, there is no exact way of measuring the utility gained from consuming an additional Magnum. Even if we could measure utility, it would be different for each consumer depending on his or her circumstances.

14 When we say rational consumers seek to maximise utility, we are suggesting that we seek to maximise something that cannot be measured. However, we assume that each consumer acts as if he or she can measure utility and arranges their consumption so that the utility gained is as high as possible. Total utility If we could measure utility, total utility would be the number of units of utility that a consumer gains from consuming a given quantity of a good, service, or activity during a particular time period. The higher a consumer s Glasses of lemonade Total utility (units of utility) total utility, the greater that consumer s level of satisfaction Imagine a child who drinks six glasses of lemonade on a hot sunny afternoon. Their total utility schedule 2 14 is shown in the table to the right. When the child 3 18 consumes their first glass of lemonade, they gain units of utility. When they consume 3 glasses of 5 20 lemonade, their total utility is 18 units. The child would achieve the maximum level of utility 6 18 by consuming 4 glasses of lemonade. Consuming a fifth glass of lemonade adds nothing to their total utility. Consuming a sixth glass of lemonade would diminish total utility. This information can be represented on the total utility curve below.

15 The margin The margin is an important concept in economics. Economic theory suggests that choices are made at the margin. The margin represents the current level of activity and the decision as to whether to consume either an additional unit, or a unit less. It is the edge from which a choice is to be made, hence the phrase margin call. Economists suggest that rational consumption decisions are made at the margin. Rather than deciding to consume 5 glasses of lemonade when we wake up in the morning, we make the decision to consume one glass at a time. Only by first consuming 4 glasses of lemonade can we decide whether or not to consume the fifth. Marginal utility The amount by which an individual s total utility rises with the consumption of an additional unit of a good, service, or activity is known as marginal utility. Note that this is the same as the marginal private benefit, a concept which we encountered during the study of market failure. The first glass of lemonade provided an increase in total utility of 8 units, so we say that the marginal utility of the first glass of lemonade is 8 units. Consuming the second glass of lemonade yields an improvement in total utility from 8 units to 14 units, so the marginal utility of the second glass of lemonade is 6 units. Consuming a fifth glass of lemonade results in 0 additional units of total utility, therefore this represents a marginal utility of zero. The consumption of the sixth glass of lemonade results in a decrease in total utility from 20 to 18 units, which means that marginal utility is now negative (-2 units, or yielding disutility). Glasses of Total utility (units Marginal utility 0 0 /

16 It is important to note that although they may appear to be different, the total utility and marginal utility columns in the table above convey the same information. They also produce curves showing the same information, but presented in a different way. These curves are shown on the next page. Notice that the marginal utility curve is downward sloping; it shows that marginal utility for glasses of lemonade decreases as more is consumed. This pattern of decreasing marginal utility is typical of all goods and services and is called the law of diminishing marginal utility. The law of diminishing marginal utility states that the marginal utility derived from a good or service diminishes for each additional unit consumed.

17 Suppose it was a hot day and you really want an ice cream. The first ice cream will increase your utility, probably by a large amount. The second, however, will almost certainly increase your total utility by less than the first. A third would increase total utility by even less. This is the law of diminishing marginal utility. Utility maximisation As has already been noted, traditional economic theory assumes utility maximising behaviour. On the marginal utility curve below, utility is maximised by consuming up to the fifth glass of lemonade. After this point, total utility begins to fall and therefore marginal utility becomes negative. This point is known as the point of satiation. If all goods were free, it would be rational to consume up to this point but not beyond it. This leads us to the more general condition that total utility is maximised where marginal utility is equal to zero (MU = 0). This means that we continue to derive satisfaction from consumption until the next unit we consume yields negative utility.

18 Utility maximisation subject to constraints In reality, most goods are not available for free and we face constraints on our ability to consume, due to scarcity. The main constraints are: Income Prices Time Economists assume that the price a consumer is prepared to pay for a good is equal to their marginal utility. This means that a rational consumer will consume up until the price is equal to marginal utility (P=MU). Consider the diagram below, which provides another representation of our earlier example involving glasses of lemonade. Let us assume that a glass of lemonade costs 8. At this price level, a rational consumer would purchase only 1 glass of lemonade (where P=MU). This is because every additional glass of lemonade will yield a marginal utility lower than the price which is being charged (P>MU). If the price were to fall to 6, it would then become rational to consume 2 glasses of lemonade. The first glass of lemonade costing 6 would yield 8 units of utility (P<MU) and the second glass would yield 6 units of utility (P=MU). However, it would not make sense to consume a third glass of lemonade, since at a price of 6 the marginal utility of consuming a third glass is only 4 units of utility.

19 Note that the curve shown above is in fact the consumer s demand curve for glasses of lemonade. At a price of 2, a rational consumer will consume four glasses of lemonade by consuming up until price is equal to marginal utility. Another way of saying this is at a price of 2 quantity demanded is 4 units. The same can be said of a rise in price from 2 to 4, which causes it to now be rational to consume up until the third glass of lemonade. Another way of saying this is a rise in price from 2 to 4 results in a fall in quantity demanded from 4 glasses of lemonade to 3. Review 1) The table shows the total utility Joseph derives from eating pizza in the evening while studying. a) How much marginal utility does Joseph derive from the third piece of pizza? b) After eating how many pieces of pizza does Joseph begin to experience the law of diminishing marginal utility? c) If the pizza were free, what is the maximum number of pieces Joseph would eat in an evening (assuming he is a rational consumer)? d) If the price of a piece of pizza were 10, how many pieces would it be rational for Joseph to eat? Explain your answer. e) On separate diagrams, construct Joseph s total and marginal utility curves. 2) If a person goes to the bowling alley planning to spend 15 but comes away with 5, what, if anything, can you conclude about the marginal utility of the alternatives (for example, bowl another line, have a soda or a sandwich) available to the person at the time he or she leaves? 3) Do you tend to eat more at a fixed-price buffet or when ordering from an a la carte menu? Explain your answer using the concept of the law of diminishing returns.