OCR Economics Synoptic 2888 June 09 - YOUR GAME PLAN?!

Just done one for question 3. Again would appreciate your feedback:

Comment upon the potential effectiveness of the price controls put forward by the EU and Russia governments to control food price inflation. [10] (Extract 3)

Inflation can be defined as a rise in the price level which is sustained over time. It is measured using the Consumer Price Index which is an index based on a basket of goods and services frequently bought by consumers. A policy put forward with respect to price controls by the Russian Government is the imposition of a maximum price.

(Max price diagram here)

This will of course only be effective if the maximum price (PMax) is below the equilibrium price as shown in the above diagram. This policy will be successful with one respect as it keeps a maximum price level on foodstuffs thereby preventing further inflation which is what the policy is aimed to do. However this will mean that quantity demanded (Qd) exceeds quantity supplied (Qs). Hence by imposing a maximum price, a situation is created whereby the country cannot provide enough food for itself and this could lead to inequity as a by-product of curbing inflation and hence would be quite unpopular as it has been quoted as a throwback to soviet style central planning whereby market forces are eliminated. This would mean that people who need the food most may not get it and could result in higher income inequality and absolute poverty levels increasing. Prices cannot act as reliable signals for resource allocation under this scheme so this may lead to allocative inefficiency with some industries declining as consumer preference through market forces cannot be displayed. Also, this approach could lead to a formation of black market whereby prices are higher than the maximum price as people would be prepared to pay more for food that is in short supply. A black market will affect tax revenue and may worsen the position of the macro-economy as government expenditure will decline.

A policy that has been implemented by the EU is the reduction in tariffs.

(D/S diagram here showing outwards shift in S)

A reduction in tariffs will have several effects. Food imports can be considered inputs to further food manufacturing and so if there is a decrease in tariff and hence price of imports, then the costs of production will decrease. This will tend to make firms increase there output thereby causing s to shift outwards to s1 and the price to fall from p to p1. This would ultimately help offset food price inflation.

(Tariff diagram here showing a reduction)

Also, a tariff reduction will give rise to an increase in imports (Q2-Q1) compared to the amount imported when a tariff was imposed (Q4-Q3). This would mean that consumers would now have access to cheaper goods from abroad rather than being forced to buy consumer goods. This will put a downward pressure on price. Also the shaded area indicates a gain in consumer surplus which was previously tax revenue and deadweight loss to society. Also at this lower price domestic production will decrease which will mean domestic agriculture industry will decrease which is beneficial in the long term as it allows the country to produce where they have a comparative advantage and hence boost world output. Although this will likely cause unemployment in the short run.

Yeah you should be able to. If you get over 85/120 you will have a B assuming the 335/600.

Can someone please reassure me that I don't need to make profound points regarding negative externalities and whatnot to do well in this paper? All of you seem to have it pretty well covered whereas I basically know the content+evaluation points whereas i think i just lack that EDGE, i mean that answer posted by Jan90 doesnt have anything that i dont understand/wouldnt have put in, it just sounds good and A grade. I'm scared that what i write just isn't going to be.

I spose i'll bear in mind that i only need 132/120 from this and work and leisure for the A, i'd like to feel that i deserve the grade though. i've revised so much less for this than my AS's and jan exams, i dont know where the times gone!

Just done one for question 3. Again would appreciate your feedback:

Comment upon the potential effectiveness of the price controls put forward by the EU and Russia governments to control food price inflation. [10] (Extract 3)

Inflation can be defined as a rise in the price level which is sustained over time. It is measured using the Consumer Price Index which is an index based on a basket of goods and services frequently bought by consumers. A policy put forward with respect to price controls by the Russian Government is the imposition of a maximum price.

(Max price diagram here)

This will of course only be effective if the maximum price (PMax) is below the equilibrium price as shown in the above diagram. This policy will be successful with one respect as it keeps a maximum price level on foodstuffs thereby preventing further inflation which is what the policy is aimed to do. However this will mean that quantity demanded (Qd) exceeds quantity supplied (Qs). Hence by imposing a maximum price, a situation is created whereby the country cannot provide enough food for itself and this could lead to inequity as a by-product of curbing inflation and hence would be quite unpopular as it has been quoted as a throwback to soviet style central planning whereby market forces are eliminated. This would mean that people who need the food most may not get it and could result in higher income inequality and absolute poverty levels increasing. Prices cannot act as reliable signals for resource allocation under this scheme so this may lead to allocative inefficiency with some industries declining as consumer preference through market forces cannot be displayed. Also, this approach could lead to a formation of black market whereby prices are higher than the maximum price as people would be prepared to pay more for food that is in short supply. A black market will affect tax revenue and may worsen the position of the macro-economy as government expenditure will decline.

A policy that has been implemented by the EU is the reduction in tariffs.

(D/S diagram here showing outwards shift in S)

A reduction in tariffs will have several effects. Food imports can be considered inputs to further food manufacturing and so if there is a decrease in tariff and hence price of imports, then the costs of production will decrease. This will tend to make firms increase there output thereby causing s to shift outwards to s1 and the price to fall from p to p1. This would ultimately help offset food price inflation.

(Tariff diagram here showing a reduction)

Also, a tariff reduction will give rise to an increase in imports (Q2-Q1) compared to the amount imported when a tariff was imposed (Q4-Q3). This would mean that consumers would now have access to cheaper goods from abroad rather than being forced to buy consumer goods. This will put a downward pressure on price. Also the shaded area indicates a gain in consumer surplus which was previously tax revenue and deadweight loss to society. Also at this lower price domestic production will decrease which will mean domestic agriculture industry will decrease which is beneficial in the long term as it allows the country to produce where they have a comparative advantage and hence boost world output. Although this will likely cause unemployment in the short run.

Why did the EU actually decide to sell all of its butter stocks?

Mentioned a lot about supply side in your answer, but maybe could back it up with demand too? Ie, increase in demand from the develloping economies? (This was relevent to the time in which the exam was set, althought demand has fallen due to the global recession)

Other than that, good again. Maybe if you're going for a a top answer you could include a cost and revenue diagram? to show the effect of rising costs of production from a firms point of view, leading to higher prices for consumers. (ie, an increase in Marginal Cost, increasing Average Costs) leading to smaller profit.

Higher costs to firms in terms of expensive inputs such as feed wheat and fertiliser (back it up from data in ex 1) will cause supply of butter to decrease (S/D diagram?) increasing price. End of cap intervention scheme may intially lower price in short run (shift rightwards in supply) but long run supply may become limited (net effect shift left in supply)

Just a few thoughts, quite possible question tbh

It looks like you've covered everything there, but is that really what the mark scheme would want? The question asks about how effective it would be to control food price inflation, so is all of that relevant?

Taking this as well tommorrow. Someone want to explain that if we have a maximum price situation in a centrally planned economy, how can one argue that there will be a decreased supply. I mean the very nature of a centrally planned economy is that there is are few if any reactions to price by firms, and the profit motive is not really there. Surely then setting a maximum price has no effect on the incentive for producers to supply?

can we take the prerelease with our annotations in with us?
also does anyone know how long the exam is, and how much time to spend on each question roughly?

Taking this as well tommorrow. Someone want to explain that if we have a maximum price situation in a centrally planned economy, how can one argue that there will be a decreased supply. I mean the very nature of a centrally planned economy is that there is are few if any reactions to price by firms, and the profit motive is not really there. Surely then setting a maximum price has no effect on the incentive for producers to supply?

Taking this as well tommorrow. Someone want to explain that if we have a maximum price situation in a centrally planned economy, how can one argue that there will be a decreased supply. I mean the very nature of a centrally planned economy is that there is are few if any reactions to price by firms, and the profit motive is not really there. Surely then setting a maximum price has no effect on the incentive for producers to supply?