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Unit 3 Micro: Business Objectives, Costs, Revenues and Profits

Monday, April 14, 2014

This blog entry brings together some of our revision resources on these crucial aspects of the theory of the firm. Scroll down below for revision notes, presentations and online quizzes for your to check your understanding.

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Unit 3 Micro: Some Key Diagrams for Business Economics

Sunday, April 13, 2014

Here is a selection of key diagrams for the Unit 3 business economics course

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Unit 2 Macro: Fiscal Policy to improve Net Trade

Tuesday, April 08, 2014

Here is a good applied example of how fiscal policy can be used to help improve the UK's net trade position. Export finance is often a problem especially for small and medium sized businesses looking to expand beyond the domestic economy to new export markets. Improving the trade position is a key aspect of re-balancing the economy and make the recovery more sustainable.

Read: www.gov.uk/government/organisations/uk-exp...

Unit 1 Micro: Toyota Plans to Replace Robots with Craftsmen

Here is an example of reverse capital-labour substitution! A hat tip to Dave Sowden for spotting this one! Read through the article and consider the motivations, opportunities and challenges facing Toyota with this change of approach.

Read: How Toyota plans to build a better car company by replacing robots with humans

Lancashire and London have dominated the Premier League.  Can it last?

Thursday, April 03, 2014

The Premier League season draws to an exciting close. It is by no means clear who will be champions, or who will gain the coveted top five European qualifying spots. There could even be a surprise. If Liverpool win, for the first time since 1995 a team from outside Manchester and North London will be crowned. Even then it was Blackburn. In the previous 21 seasons of the Premier League, all the winners have come from either the North West or London. So a Scouse victory would not alter this.

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Unit 4 Macro: Economic Benefits of EU Membership

Membership of the European Union (EU) has had a big positive effect on average incomes in all but one of its member countries. That is the central finding of research by Nauro Campos, Fabrizio Coricelli and Luigi Moretti, to be presented at the Royal Economic Society’s 2014 annual conference. They also find that the more financially developed countries have grown significantly faster after joining the EU.

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Carpet, bed and sofa retailers promise ‘genuine prices’ after OFT investigation

Wednesday, April 02, 2014

According to the Guardian, Carpetright and four other flooring and furniture retailers have promised to clean up their pricing after reaching a settlement with the Office of Fair Trading (OFT). It looks like a good example of the potential for market failure arising out of asymmetric information.

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Together They Fall, Divided they Stand

Tuesday, April 01, 2014

Today, the world's largest mining company, BHP-Billiton, has signalled that it is considering demerger and slimming the business, as a way of improving productivity and performance. However, is there more to this than meets the eye?  

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Unit 3 Micro: Energy firms face competition inquiry

Friday, March 28, 2014

The big six energy firms in the UK - who account for more than ninety per cent of suppliers to UK household, commercial and industrial consumers - will be subject to another investigation by the competition authorities.  

A report by regulator Ofgem has called for an investigation by the Competition and Markets Authority (CMA) which could take nearly two years to complete - effectively pushing the issue into the long grass well beyond the date of the next election. 

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Unit 3 Micro: Royal Mail - Industry Extracts

Tuesday, March 25, 2014

Here is a selection of short extracts on the Royal Mail and the changing structure of the industry. I have been using them when teaching Unit 3 business economics - it strikes me as an excellent case study for revising lots of parts of the course. I have added some links below to recent media coverage of Royal Mail stories.

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UCAS and Oxbridge - Delving into Management

A number of students have been asking me about suggested reading for and introductions to the study of management as they look ahead to a UCAS application in the autumn. Here are some thoughts.

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F585 Pre-Release Resources (and F583, F582 & F581 too)

Sunday, March 23, 2014

I thought it worthwhile sharing my resources which I have been collecting for students (and teachers alike). I have been promoting them on Twitter (@Economics_KSF) through scoop.it but for those of you not on there, the link for the scoop.it boards are here:

http://www.scoop.it/u/economics-kcsf

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How Coal Shortages Might Impact Indian Growth

Wednesday, March 19, 2014

The development of India, or its non-development relative to China, is an interesting topic, and one that Bob Hindle has already been blogged about in relation to its tax system.

However, there are other aspects of the Indian economy that will also impede its ability to grow, notably its lack (or should that be 'lakh'?) of coal.

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Elinor Ostrom and A Level Economics

Tuesday, March 18, 2014

Elinor Ostrom was the first and so far only women to win a Nobel Prize in Economics (strictly speaking the Swedish bank prize) in 2009 for her work on commons. According to the biologist Garrett Hardin, in an example familiar to A level economic students, unowned or collectively owned resources, say a fishing ground, tend to get trashed because of over use. 

The 'tragedy of the common' happens because people may over fish or destroy environments because of the free rider effect. One person who fishes less is discouraged from doing so because others may simply fish more, until the fish stocks run out. Ostrom looked at how local communities could organise to stop such over exploitation without government regulation. She found that instead of 'tragedy' sometimes the commons worked quite well.

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Unit 2 Macro: Structural Decline in the UK Steel Industry

If you are looking for a solid example of a manufacturing industry that experienced deep long term structural contraction then the UK steel sector is a good one to use.

Global steel output has more than doubled in the last four years but what remains of the UK steel industry is battling against rising costs and the challenge of meeting stringent climate change policies. The Financial Times visits Celsa's plant in Cardiff to find out if UK steelmakers still have a viable future. Can British producers take advantage of a rebound in steel output and profits if the European Union economy shows signs of a more durable and stronger recovery?

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Unit 2 Macro: Hurdle Rates and New Housebuilding

The government wants more new homes to be built, so too do hard-pressed home-buyers facing a continued problem of low property affordability. But cautious construction companies are reluctant to press ahead favouring share buy-backs (returning money to their shareholders) and only a limited expansion of new building.

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Unit 2 Macro: Ageing Infrastructure and Economic Growth

Saturday, March 15, 2014

Here is a revealing quote from a special study published in March 2014

"Simply put, too much of the city’s essential infrastructure remains stuck in the 20th Century—a problem for a city positioning itself to compete with other global cities in today’s 21st Century economy."

Which city do you think this report was referring to?

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Unit 3 Micro: Pop Up Shops on the Underground

In recent times, pop up shops (retail outlets available on very short term leases) have grown in popularity. In part this has been because of the increase in vacant retail space during and in the aftermath of the last recession. But increasingly other organisation are thinking about using their locations as opportunities to attract small retailers and/or retail start-ups. 

Transport for London is one such example. TfL owns more than 1,000 retail properties and this week TFL has signed a deal with Appear Here, an ‘online property agency’, to allow pop-up shops and restaurants in its tube stations. Consider the business potential for this kind of retail investment. Old Street is earmarked for this experiment - it is just a short walk from Silicon Roundabout in Shoreditch - the home of hundreds of emerging tech start up businesses.

Economies and Diseconomies of Scale at PepsiCo

Friday, March 14, 2014

This topic is very helpful when analysing the benefits or drawbacks arising from internal growth. Over the last couple of years the Economist has kept referring back to the case study of PepsiCo, and how the huge corporation has tried to control diseconomies of scale.

Here’s the latest update – a proposed break-up of the company.

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Oligopoly price wars - who will be the winner?

Thursday, March 13, 2014

There are two useful articles here for A2 economists about the news that Morrisons has made a £176m pre-tax loss for the year to February 2, and the strong impact that their plans to compete hard with the discount retailers has had on the stock market value of Tesco and Sainsburys. 

We often cite the UK supermarket industry as an example of oligopoly, and today's news around Morrisons (Britain's 4th biggest supermarket) gives plenty of scope for students to use some stakeholder analysis to look at what is going on in that market - who wins and who loses?

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Unit 2 Macro: UK R&D Spending Remains Low

For years the government has tried to lift research and development spending as a share of national income - but seemingly to no avail. The latest data finds that the UK is spending less on R&D than any other EU country. What might this mean for the supply-side competitiveness of the economy? 

The data finds that

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Unit 3 Micro: Merger of Chiquita and Fyffes

Tuesday, March 11, 2014

A mega merger is creating the world’s largest banana company - it has been announced that Chiquita of the USA and Dublin-based Fyffes will be merging to form a giant banana distribution company.

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Price Regulation in Industries

Wednesday, March 05, 2014

Regulation of prices through price capping has been a feature of regulation of the utilities in the UK for many years – although this is now being phased out as most utility markets have become more competitive.

Price capping systems

  • Price capping is an alternative to rate-of-return regulation, in which utility businesses are allowed to achieve a given rate of return (or rate of profit) on capital.
  • In the UK, price capping has been known as "RPI-X". This takes the rate of inflation, measured by the Consumer Price Index and subtracts expected efficiency savings X. So for example, if inflation is 5% and X is 3% then an industry can raise their prices on average by only 2% per year
  • In the water industry, the formula is "RPI - X + K", where K is based on capital investment requirements designed to improve water quality and meet EU water quality standards. This has meant increases in the real cost of water bills for millions of households in the UK.

Advantages

Capping is an appropriate way to curtail the monopoly power of “natural monopolies” – preventing them from making excessive profits at the expense of consumers

Cuts in the real price levels are good for household and industrial consumers (leading to an increase in consumer surplus and higher real living standards in the long run).

Price capping helps to stimulate improvements in productive efficiency because lower costs are needed to increase a producer’s profits.

  • The price capping system is a tool for controlling consumer price inflation in the UK.

Disadvantages

Price caps have led to large numbers of job losses in the utility industries

Setting different price capping regimes for each industry distorts the price mechanism

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Quiz on the Index of Economic Complexity

Sunday, March 02, 2014

The Atlas of Economic Complexity is a new book (perfect for the coffee table) from Richard Hausmann and Cesar Hidalgo. It maps out the degree of complexity of individual economies around the world and provides a hugely visual and interesting insight into the importance of knowledge in shaping the future prosperity of countries in the global economy. I have put together a 10 question quiz on some of their key results - a useful activity I hope for students interested in the commodity composition of trade of developed and developing countries. Have a go!

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Paul Ormerod: Forward guidance needed for companies, not consumers!

Thursday, February 27, 2014

Most of the commentary on the UK’s economic recovery focuses on consumers. Are they taking on too much debt again to finance their spending? Is there a bubble in house prices, as people get excited about bricks and mortar again? Certainly, in terms of its sheer size, spending by consumers is by far the biggest component of GDP, making up around 60 per cent of total domestic expenditure.

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New evidence of persistent gender bias at the UK’’s top companies

Wednesday, February 26, 2014

The UK’s biggest companies remain biased when appointing women to their boards, according to new research by Dr Ian Gregory-Smith and colleagues, published in the February 2014 issue of the Economic Journal

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Executive Pay: Shareholders have failed to curb excesses

Despite public calls for shareholders to get tough on executive pay, a new study of the UK’s highest paid company directors reveals that shareholders are overwhelmingly inclined to approve the pay packets of top directors, just as they were before the crisis

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Unit 3 Micro: Facebook Buys WhatsApp

Friday, February 21, 2014

In a bold move in the continuing battle between Facebook and Google to dominate the next phase of digital / mobile growth, Mark Zuckerberg's listed business has agreed an £11bn acquisition of WhatsApp - a deal to be paid in a combination of cash and shares.

The total value of the deal is staggering high for a business that employs just over 50 people.

  • The price Facebook is paying for WhatsApp is more than ten times what Google spent on YouTube
  • It is more than 20 times what Facebook paid for Instagram
  • The $19bn paid for WhatsApp works out at $40 for each of its 450m users!
  • The $19bn deal to buy WhatsApp is more than 10% of the annual value of Ukranian GDP

What are some of the justifications for such a mega-priced deal?

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German revival exposes deep fissure within Europe’s economies

Thursday, February 20, 2014

In the 1990s and early 2000s, Germany was seen by many as the new ‘Sick Man of Europe’. Between 1991 and 2005, GDP growth averaged only 1.2 per cent a year, compared to 3.3 per cent in the UK. Since then, the German economy has revived dramatically. The recovery in the German cluster of economies from the financial crisis has been as strong as in the United States, with the previous peak level of output being regained in 2011. Germany itself experienced virtually no increase in unemployment in 2008 and 2009, its exports are at record levels, and even the crisis in the Euro area has not prevented expansion in both output and employment.

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Unit 3 Micro: Monopolistic Competition

Saturday, February 15, 2014

This is an updated revision presentation on aspects of monopolistic competition in markets

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What’s that got to do with the price of ... almonds?!

Thursday, February 13, 2014

A great case study on the BBC about what has been driving up the price of almonds. Plenty of topics to explore in here: agricultural supply, determinants of demand, derived demand (almond milk), monopoly power, capital intensive production and maybe more.

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Perfect Competition vs Monopoly Essay Guide

Monday, February 10, 2014

A quick but informative guide on how to structure an essay evaluating perfect competition and monopoly. For more videos, click here

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Unit 3 Micro: The Market for In-Flight Wifi

Wednesday, February 05, 2014

The market for in-flight wifi is dominated by one service provider and tends to be slow and expensive. This article provides some background. It is an interesting example to think about when considering the different types of economic efficiency i.e. allocative, productive and dynamic. Less than 10% of airline users take up the wifi offer! Consider reasons for this that go beyond the high price! When was the last time you either used or wanted to use wifi on a flight?

Energy companies charge cash-paying customers more - market failure and Government intervention

Tuesday, February 04, 2014

If you attended the recent tutor2u revision conferences for up-coming micro-economic exams (look out for the macro workshops and combined micro and macro to come in March) you will have seen how fuel-pricing was used as an example of market failure, government intervention strategies and government failure.  

Fortunately, the energy market is a gift that keeps giving to us in the economics world (every cloud has a silver lining) as a report out today (see this link for the BBC version of the story) indicates that Parliament is about to intervene to try and stop the energy companies charging more to customers who pay by cash rather than by direct debit (£114 per year, according to the report).

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Game Theory - The Hotelling Model of Spatial Location

Monday, February 03, 2014

Here is a really well produced and clear visual explanation of the Hotelling model of spatial location. As two competitive cousins vie for ice-cream-selling domination on one small beach, discover how game theory and the Nash Equilibrium inform these retail hot-spots. A good short video to use when teaching or learning about game theory.

For more ....Tutor2u's Introduction to Game Theory

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Superbowl Adverts - Has the Viral Video Trumped the Big Event?

Saturday, February 01, 2014

The cost of a thirty second advertising slot at the annual Superbowl final is immense. This year advertisers are paying $4 million dollars for a 30 second advertisement during America's largest televised event. But big hits on the social web often produced at a tiny fraction of the cost challenge the conventional view that mega bucks spent reaching a TV audience remains a viable way of using the marketing dollars. This short news video from the Financial Times is a useful reminder of the importance attached to brand advertising by some of America's biggest consumer products.

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Unit 3 Micro: Perfect Competition Summary

Friday, January 31, 2014

Here is an updated revision presentation on aspects of perfect competition - A2 economics revision notes can be found here

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10 Questions on Business Objectives

Thursday, January 30, 2014

Here are ten multiple choice revision questions covering the topic business objectives

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10 Questions on Contestable Markets

Here are ten multiple choice revision questions covering the topic contestable markets

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Unit 3 Micro: Profit Satisficing and Profitability Factors

Here is an updated revision presentation on satisficing as an alternative to profit maximisation and also some of the factors affecting the profitability of a business such as Stagecoach plc - A2 economics revision notes can be found here

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Government looks to abandon use of Microsoft Office to save money

It was announced yesterday that the Government is planning to abandon its use of expensive software such as Microsoft Office (see article in the Guardian here) partly as a way of reducing costs but also as a means of breaking some of the software company's 'oligopolistic' stranglehold on the market.

As well as offering an example of Government policy to combat market failure, this story gives us a little insight into the issue of contestability in the software industry.

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Does Facebook have a Future?

So farewell, then, Facebook! That is the conclusion of a highly technical paper by two Princeton researchers, John Cannarella and Joshua Spechler, which received a lot of publicity in the press last week. The authors conclude that “Facebook will undergo a rapid decline in the coming years, losing 80 per cent of its peak user base between 2015 and 2017”.

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Unit 3 Micro: Revenues and Profits

Wednesday, January 29, 2014

Here is an updated revision presentation on short run revenues and profits for businesses - A2 economics revision notes can be found here

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Unit 3 Micro: Short Run Costs of Supply

Tuesday, January 28, 2014

Here is an updated revision presentation on short run costs for businesses - A2 economics revision notes can be found here

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Unit 3 Micro: Fixed and Variable Costs

Monday, January 27, 2014

Here is an updated revision presentation on fixed and variable costs for businesses - A2 economics revision notes can be found here  

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Capping Bonuses for Bankers - Unintended Consequences

Friday, January 24, 2014

Capping seems to be all the rage at the moment. We read of capping electricity and gas prices, capping welfare payments for families ... and now a proposed cap on bonuses for bankers is being put forward by the EU and by the Labour Party. 

In this article, Tim Harford cuts to the chase and highlights the contradictions in the EU blanket policy on capping bankers' bonuses. It is a good example of a policy where the unintended consequences include the probably that banking salaries would rise still further.

Under the EU proposal, a cap on rewards would limit payouts to banking executives to annual pay - or twice that only if shareholders approve.

Further reading:

BBC - banking bonuses - how much do they matter?

BBC Hard Talk:  Adair Turner on the effect of a bonus cap on bank salaries

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David Rowan on disruptive entrepreneurs and innovators

Monday, January 20, 2014

We have been discussing the economics of innovation in class in the last few days. I came across this short talk given by David Rowan, editor of Wired magazine. What sets disruptive entrepreneurs and innovators apart from the rest? In his INK talk, David Rowan, editor of Wired UK, asserts it’s a “healthy disregard for the impossible” and offers nine tips for cultivating that mindset.

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John Kay on Circular Thinking and Economics

Sunday, January 19, 2014

Here is a beautifully crafted essayby leading economist John Kay on the dangers of an academic obsession with rigour and consistency in developing economic models. "Economics is not a technique in search of problems but a set of problems in need of solution. Such problems are varied and the solutions will inevitably be eclectic."  He argues for a move away from formulating models that can simply run on a computer and towards "more eclectic analysis ....requiring an understanding of processes of belief formation, anthropology, psychology and organisational behaviour, and meticulous observation of what people, businesses, and governments actually do."

A rather wonderful piece that will excite many ambitious student economists keen to approach our fantastic subject in a non-linear and often contrarian way. Enjoy!

Unit 3 Micro: Google Buys Nest

What type of business integration is happening here? The announcement of Google's takeover of smart home-appliance maker Nest for $3.2bn is potentially hugely significant for Google.

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The Changing DNA of Entrepreneurs and Business Start-Ups

Here is a great overview from the Economist of some of the ideas behind lean start-ups and the shift in focus towards frequent / hi-speed reaction to customer feedback as minimum viable products are launched into the market-place. Conventional views of entrepreneurs are evolving fast but they still need to have that driving energy and a willingness to challenge orthodoxy! The Eric Ries book - The Lean Entrepreneur - is given extensive mentions here and rightly so.

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