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A2 Revision – Oligopoly and the kinked demand curve – download

October 25, 2017 Leave a comment

With the A2 Essay paper next week I thought something on the kinked demand curve might be useful. I alluded to in a previous post that one model of oligopoly revolves around how a firm perceives its demand curve. The model relates to an oligopoly in which firms try to anticipate the reactions of rivals to their actions. As the firm cannot readily observe its demand curve with any degree of certainty, it has got to estimate how consumers will react to price changes.

In the graph below the price is set at P1 and it is selling Q1. The firm has to decide whether to alter the price. It knows that the degree of its price change will depend upon whether or not the other firms in the market will follow its lead. The graph shows the the two extremes for the demand curve which the firm perceives that it faces. Suppose that an oligopolist, for whatever reason, produces at output Q1 and price P1, determined by point X on the graph. The firm perceives that demand will be relatively elastic in response to an increase in price, because they expects its rivals to react to the price rise by keeping their prices stable, thereby gaining customers at the firm’s expense. Conversely, the oligopolist expects rivals to react to a decrease in price by cutting their prices by an equivalent amount; the firm therefore expects demand to be relatively inelastic in response to a price fall, since it cannot hope to lure many customers away from their rivals. In other words, the oligopolist’s initial position is at the junction of the two demand curves of different relative elasticity, each reflecting a different assumption about how the rivals are expected to react to a change in price. If the firm’s expectations are correct, sales revenue will be lost whether the price is raised or cut. The best policy may be to leave the price unchanged.

With this price rigidity a discontinuity exists along a vertical line above output Q1 between the two marginal revenue curves associated with the relatively elastic and inelastic demand curves. Costs can rise or fall within a certain range without causing a profit-maximising oligopolist to change either the price or output. At output Q1 and price P1 MC=MR as long as the MC curve is between an upper limit of MC2 and a lower limit of MC1.

Criticisms of the kinked demand curve theory.
Although it is a plausible explanation of price rigidity it doesn’t explain how and why an oligopolist chooses to be a point X in the first place. Research casts doubt on whether oligopolists respond to price changes in the manner assumed. Oligopolistic markets often display evidence of price leadership, which provides an alternative explanation of orderly price behaviour. Firms come to the conclusion that price-cutting is self-defeating and decide that it may be advantageous to follow the firm which takes the first steps in raising the price. If all firms follow, the price rise will be sustained to the benefit of all firms.

If you want to gradually build the kinked demand curve model download the powerpoint by clicking below.
Oligopoly

Observatory of Economic Complexity (OEC) – great graphics on global trade

October 9, 2017 1 comment

I picked up the OEC site from Michael Cameron’s blog ‘Sex, Drugs and Economics’. The Observatory of Economic Complexity is a tool that allows users to quickly compose a visual narrative about countries and the products they exchange. It was Alexander Simoes’ Master Thesis in Media Arts and Sciences at the MIT Media Lab. The project was conducted at The MIT Media Lab Macro Connections group. Alex’s Advisor was César A. Hidalgo, principal investigator of Macro Connections. Since its creation in 2010, the development of The Observatory of Economic Complexity has been supported by The MIT Media Lab consortia for undirected research.

The graphics on each country and products are superb and include:

  • Exports
  • Imports
  • Trade Balance
  • Destinations

It also includes Economic Complexity Index which measures the knowledge intensity of an economy by considering the knowledge intensity of the products it exports. Below are some images on New Zealand trade.

New Zealand Exports – 2015

NZ Exports 2015.png

New Zealand Imports – 2015

NZ Imports 2015

Categories: Teaching visuals, Trade

AS & A2 Revision – How PED varies along a demand curve

September 21, 2017 Leave a comment

Been doing some more revision sessions on CIE AS economics and went through how the elasticity of demand varies along a demand curve. Notice in Case A that the fall in price from Pa to Pb causes the the total revenue to increase therefore it is elastic – the blue area (-) is less than the orange area (+). In Case B the opposite applies – as the price decreases from Pa to Pb the total revenue decreases therefore it is inelastic – the blue area (-) is greater than the orange area (+). In Case C the drop in price causes the same proportionate change in quantity demanded, therefore there is no change in total revenue – it is unitary elasticity. Remember where MR = 0 – PED = 1 on the demand curve (AR curve).

Using whiteboards to teach externalities

July 6, 2017 Leave a comment

In my teaching I am very keen on using whiteboards so that students can get used to drawing graphs and also writing essay plans. It makes it very easy for me to go around the classroom to check on their accuracy and I have to say that the students enjoy the whiteboards even if it does lead to a little doodling. The boards are just over A3 size and are perfect to draw some of the more complex graphs in NCEA and CIE economics. Below are some externality graphs by A2 student Jonathan Ta.

Externalities.jpeg

Behavioural Economics Presentation – download.

April 2, 2017 Leave a comment

Below is a pdf download of a presentation on consumer behaviour that I did for our Yr12 and Yr 13 students last week. It focuses on the following:

Hedonic Treadmil – Paradox of Choice – Algorithms and Choice – Happy Money – Well-being around the world.

Click here to download. I particularly like these images.

Hedonic-TreadmillTV - paradox

Economics website for IGCSE AS A2 and IB courses

April 2, 2017 Leave a comment

Want to learn or need assistance with Economics? Are you studying or teaching A Level Economics, Advanced Placement, or International Baccalaureate (IB)?

Help is at hand, elearnEconomics assists individuals studying Economics. This site covers a wide range of courses and individuals have the ability to customise their course or do extension work. It’s simple, easy to use and very cost effective.

eLearnEconomics is a comprehensive online economics learning resource. It is for both students AND teachers. Students study the concepts of each topic with the key notes, then review those concepts with the audio/video and flash card sections and finally test themselves in the written answer and multi-choice sections. The multi-choice section records student scores enabling them to track their progress and build their confidence leading into exams.

Teachers have the ability to monitor students progess within the teachers’ administration section. Students can be arranged into class groups and full reports generated to quickly identify problem areas. These high quality PDF reports can also be presented at parent/teacher evenings. Click the link below to access the site.

elearneconomics

Screen Shot 2015-10-07 at 9.00.18 PM

A2 Worksheets – Perfect and Imperfect Labour Market

August 24, 2016 Leave a comment

Currently covering Labour Markets with my A2 level classes and put together an exercise which tests them on calculating MCL, MRPL etc and also showing why MCL = MRPL is the number of workers a firm should employ. There is an exercise for both Perfect and Imperfect Labour markets – see ‘Word’ document. The excel document is a model answer showing the data in a table and a graphical format. Hope it is of use.

Imperfect Competition in the Labour Market
ACL MCL of Labour

Categories: Labour Market, Teaching visuals Tags:

Great economics revision videos from Tutor2u

April 27, 2016 Leave a comment

Here is a great set of revision videos by Geoff Riley of Tutor2u. They cover a range of macro and micro topics for AS and A2 Level economics. Most of them are around 8 minutes long and he uses the powerpoint slides very effectively so you get his oral contribution plus the key points on the presentation slides. Well worth a look and you are bound to find them very useful as exams approach. Below is the video on the Circular Flow.

 

 

 

Categories: Teaching visuals Tags:

The Globe of Economic Complexity

August 26, 2015 Leave a comment

Here is a link to a brilliant interactive site from Harvard University. This site visualizes the economies of each country as told by the products they export. Click the link below:

The Globe of Economic Complexity

Below is a video that introduces you to the site.

Categories: Teaching visuals, Trade

Inflation – Hungary 1941 – House and Jelly Bean

August 6, 2015 Leave a comment

Here is a very useful video on Inflation from The School of Life. It discusses the causes of inflation and why it is seen as big problem in countries. They use the example of Hungary in 1941 and explain how inflation erodes the purchasing power of the income of citizens – a good example of a house and a jelly bean. Mention of Keynesian and Monetarist schools of thought – useful for IGCSE courses and above

HT: Grant McKibbin

Categories: Inflation, Teaching visuals Tags:

Skyscraper completion = Economic Downturn

April 4, 2015 1 comment

Barclays Capital have produced an interesting indicator in that its Skyscraper Index shows the relationship between construction of the next world’s tallest building and an imminent financial crisis.

Over the past 140 years it is interesting to see the economic environment post skyscraper completion. The Great Depression was matched by 3 record breaking New York skyscrapers. With the completion of the World Trade Center skyscrappers in 1973/4 saw the looming spectre of stagflation (high unemployment and high inflation) in both the US and UK economies. This condition was further compounded by the breakdown of the Bretton Woods Agreement.

The Petronas building in KL was followed by the Asian currency crisis and the Taipei 101 coincided with the early 2000’s recession and the end of the technology bubble. The Burj Khalifa was completed in 2010 which was amidst the current financial crisis. Its increase in height over the previous highest skyscraper is indicative of the extent of the current economic crisis.


Source: Barclays Bank – Equity Research

Here is an image from the Barclays Capital publication which might be useful for the classroom environment. Just click on the image.

WE THE ECONOMY – 20 short movies on economics

January 12, 2015 1 comment

WE THE ECONOMY website provides a series of short films that explain economic concepts or key features of the modern economy. Each of the 20 movies focuses on some aspect of the U.S. economy or on some economic concept. The films are grouped into five ‘chapters’ covering the basics of the economy:

What is the Economy?
What is Money?
What is the Role of our Government in the Economy?
What is Globalization?
What Causes Inequality?

Every 5-8 minute video is well worth watching and useful for the classroom. Below is the trailer – very professionally done and excellent reinforcement when teaching certain topics.

Fox News Graphic vs US Labour Department Graphic

January 10, 2015 Leave a comment

A hat tip to David Parr for this piece from the Visual Communication Guy on how umemployment data was presented by the media. The graph below shows US unemployment as presented by Fox News. Although it may seem quite genuine at first glance if you look closely you will see that the spacing of the dates on the horizontal axis are not consistent but manipulated in such a way to give the impression of accelerating unemployment. Furthermore as it is presented on TV you are unlikely to have the chance to pick the axis as your eyes are fixated with the rising line.

Fox Unemp data

 

 

 

 

 

 

 

 

 

 

 

 
While there certainly was an increase in unemployment from the end of 2007 to June 2009, the chart from the Bureau of Labor Statistics tells a very different story than Fox News’ graphic. Although there is a steep increase in unemployment during the first 6 months of President Obama’s presidency, there was a plateauing and reason to suggest that the stimulus packages were starting to work.

Official Unemp data

Whether or not you like Fox News or whether you agreed with President Obama’s stimulus packages is beyond the scope of this article. What matters is that we recognize how information is being presented to us and how easy it is for media gurus to tweak information to tell completely different stories with the same data.

We might ask ourselves: in a country where we strongly believe in freedom of speech, where do we draw the boundaries, if any, on the visual representation of data in the mass media? Where does the communication start to become unethical, and, at what point should unethical turn into illegal?

Categories: Teaching visuals, Unemployment Tags:

Opportunity Cost of watching Gangnam Style video

September 14, 2014 2 comments

The Economist produced an interesting Daily Chart looking at the Opportunity Cost of watching the Gangnam Style video. Earlier this year the music video surpassed two billion views on YouTube making it the most watched clip of all time. At 4:12 minutes, that equates to more than 140m hours, or more than 16,000 years.

What is the opportunity cost of watching this video i.e. the other achievements that were foregone.

* 3 “supercarriers” like the USS Gerald Ford built last year
* 4 Great Pyramids of Giza,
* 1 more Wikipedia,
* 6 Burj Khalifas in Dubai (the world’s tallest building).

The song’s nearest rival is Justin Bieber’s “Baby” – one billion views. The opportunity cost of watching PSY’s frivolity is huge, but humanity has at least been entertained.

Gangnam style

How the Stock Exchange Works

December 6, 2013 Leave a comment

Many thanks to colleague David Parr for this animation on how the stock exchange works from the visual.ly site. Well worth a look.

WSJ Graphic – Federal Reserve Stimulus And Its Impact On Yields

September 30, 2012 Leave a comment

Here is a cool graphic from the WSJ that looks at the impact of the US Fed’s monetary policy of dumping trillions of dollars into the economy in order to stimulate economic activity – it covers the period from September 2008 through to today. The graphic shows the impact on the following:
* 10 year treasury yields
* DJIA – Dow Jones Industrial Average
* WSJ US dollar index

Click WSJ Interactive Graphic to go to the page.

Open University – 60 second adventures in economics

September 20, 2012 Leave a comment

Here is a series of 6 cartoons from the Open University about economic concepts – I got this link from Mo Tanweer of Oundle School in the UK. They are very well done and make for good revision with the forthcoming exams. Below is one on The Invisible Hand. To view all 6 click on the link –
Open University 60 second adventures in economics.

Great Sports Economics Videos

July 21, 2012 Leave a comment

A hat tip to Matthew Ryan from the University of Auckland for these Sports Economics videos. The six short videos (called Some Sports Economics) are produced by Dr Liam Lenten from La Trobe University in Australia explaining basic economic concepts (such as prisoners’ dilemma, absolute/comparative advantage, complementaries, etc.). Well worth a look and notice the kit change for each video. Click on the link below to go to the playlist. Below is the video on “When scoring an own-goal is the only way to win”.

Some Sports Economics

Categories: Sport, Teaching visuals Tags:

Road Runner cartoon – Wile E. Coyote moment hit in 2008

June 27, 2012 Leave a comment

Another interview with Paul Krugman this time with Paul Solman of PBS. Krugman describes the events in 2008 as the Wile E. Coyote moment – a character in the Road Runner cartoons. That is, according to the law of cartoon physics, it is only when you look down that you realise that there is nothing below. Krugman likens this to the situation where housing bubble had started to burst and banks called in loans to be repaid.

But when everyone everybody tries to pay down debt at the same time what happens is the economy shrinks, prices of assets fall and people lose their jobs, people lose their income, profits crash, and everybody ends up being in a worse financial position than they were before because they’re, they’re… When everyone tries to do it at the same time, the result is mutual destruction.

Videographic – If Greece leaves the Euro

June 22, 2012 Leave a comment

Below is a very good video from The Economist on the impact of Greece leaving the Euro. Thanks to John Wilson of AGS for sharing this on twitter.

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