Thursday, 1 December 2011

so SICK of it...

What are the benefits of competition?
-better quality
-competetive prices (therefore lower)
-greater choice for consumers and workers
-higher incentives for companies to invest in innovation
-better information for consumers

What are the market failures within the healthcare market? To what extent do you think that public sector provision (in the form of the NHS) is the most effective type of intervention?
-long waiting-lists
-disproportionalities among different hospitals in different regions
-inefficient way of spending money
Privatisation allows competition and therefore improves the quality of service. However, it can lead to higher costs of this service (no government funds and subsidies).  Government could also set a special tax on health care or subsidy more (but this is of course opportunity cost).

Is this just the first step towards privatisation of healthcare?

In my opinion it could lead to a greater division of health care system in the UK. People who will be able to afford private health care will go to private clinics and people with lower incomes will use public hospitals, which would improve the situation for both.

Do you think private ownership of hospitals with significant debts is a good strategy?

In my opinion private ownership gives the opportunity to solve the difficult financial situation both for patients and owners. Everybody would gain because if a hospital is in deep debt it is not able to provide best-quality service and, therefore, patients loose. So, if there is a possibility of changing this situation (making profits from the company’s perpective) it will be worth for them to invest their money in a indebt hospital and help the patients.

Why do you think Unison have argued that Circle’s takeover is ‘an accident waiting to happen’?

Because sometimes privatisation leads to a situation when clients are forgotten and they lose because profits matter the most for the owner. Morover, Circle had no previous experience of running a public hospital and, now they will have to deal with huge debts.

Does privatisation mean that profits will be more important than patient care?

Very often to make a profit you have to treat the patient better because he/she is your customer, therefore he/she demands a good-quality service and if you a company does not realise this they will not make profits. Especially, in health-care patients are very important. However, in order to provide better service and reduce the deep debt, a new owner will have to make cuts and save money, possibly causing harm to the patient.

That's what I think, 


paying 50p ...

What are the main arguments in favour of keeping the 50p tax rate?
-higher revenues for the government (“50p tax rate will raise an additional £12.6bn over the next five years even if people choose to leave the country to avoid it”)
-tax revenues could be used to develop the economy, fight the recession etc.
-moral and fair

What are the main arguments in favour of scrapping the 50p tax rate?
-high-income people could flee the country
-disincentive for foreign investors and workers
-disincentive for entrepreneurship
-lower competiveness

What does the Laffer curve show? Is it relevant in the case of the 50p top rate of tax? What does it suggest about the ability of the tax to generate income?

The Laffer curve shows the relationship between the tax rate and the tax revenue. It can be seen that, as taxes increase from low levels, tax revenue collected by the government also increase, but after a certain point (T*) people would be discouraged to work and the tax revenue would fall. Eventually, if tax rates reached 100% , then all people would stop working because they would have to give everything they earned to the government.

 It is relevant in the case of 50p top tax rate because it shows that after a certain level, a tax rate could harm the economy. The problem is that it is very difficult to estimate the (T*) rate and many factors affect the predictions.

A possible non-symmetric Laffer Curve with a maximum revenue point at around a 70% tax rate

How does the top rate of tax affect the international competitiveness of the UK economy?
The 50p tax decreases the international competiveness of the UK because it creates disincentives for investors and enterpreneurs to come to the UK.

Why is there a trade-off between raising tax revenue and boosting economic growth through the use of the 50p tax rate?

There is a possibility that high-income people would flee the country in order to avoid high taxes or work less. Moreover, they could spend less (lower demand), because their disposable incomes would be lower. It could also discourage entrpreneurs to start new businesses or invest in others.

Why is there concern about the highest rate of tax actually causing tax revenue to fall?
Because many people would have the incentive to flee the country or work less, to pay the lower tax.

What are the equity arguments concerning the scrapping of the 50p tax and raising the tax threshold?
-all people should pay the same percentage of their incomes
-high income people pay much more anyway

Is there an equity argument in favour of the 50p tax rate?
-high-income people should pay higher taxes to reduce income disportions
-if one tax rate is to be decreased the other shoul be reduced also

That's what I think, 

Thursday, 10 November 2011


Evaluate possible economic policies other than increasing the age limit that a government might use to significantly reduce the consumption of alcoholic drinks

Market failure occurs when market imperfections lead to an inefficient allocation of resources. In order to reduce this inefficiency governments intervene. There are several economic policies that can lead to a reduction of the consumption of alcoholic drinks, e.g. increasing the age limit. In this essay I will evaluate different ways of approaching this problem and limiting the negative externalities, i.e. costs paid by third parties.

First of all, a government could put a higher tax on alcohol products to increase their prices and, consequently, discourage people to buy them. As drawn in the diagram below, an increase in indirect taxation would cause the supply curve to shift to the left and, therefore, pushing up the price of a product.

Taxes, however, are difficult to implement efficiently. To cause a significant reduction of the alcohol consumption the tax level has to be significantly higher. For example, a 1% change in tax would not have a big impact on alcohol consumption. Moreover, if a change in taxes would be high, it could lead to an increase in alcohol import from other countries, or black-market. The price elasticity of demand, i.e. the responsiveness of demand to changes in the price of a product, is another factor affecting the results of taxation. If demand for alcohol is inelastic, higher taxes will not reduce the demand significantly.

Secondly, a government could implement regulations on the alcohol consumption. For example, it could ban public drinking and/or limit the times of alcohol sale (e.g. people could buy alcohol only in the afternoon). This would lead to lower consumption of alcohol only if it would be followed by everybody and guarded by the police. It could also encourage people to go to pubs and bars instead of drinking in public places but would not decrease the consumption significantly.

Moreover, a government could prepare information campaigns and events on the negative externalities of drinking, such as higher criminality and unemployment.

It could educate people about the possible negative results of drinking and encourage them to limit their alcohol consumption. It would also lead to limiting the imperfect information problem. People should be also aware that overconsuming alcohol which a demerit good, i.e. a good which has been found through the political process to be socially undesirable, causes harm to them (e.g. liver cancer, addiction). These actions could result in significant changes, especially in the long-term and, therefore it is difficult to assess their helpfulness in a short period of time. Educating the public takes a long time and has to last for many years.

Alcohol consumption is often considered as a part of tradition and culture and therefore it will be difficult to limit it. However, from the evidence above, we can see that the government has many possible ways of intervention. These options, should not be considered only in a short-term and as substitutes but rather complement.

That's what I think, 


Comment on the effectiveness of one policy which could be used by a government to reduce income inequality.

One policy that could be used by a government to reduce income inequality is progressive taxation. People with higher incomes would have to pay a higher percentage of their income in taxes and low-income people would have to pay less. On one hand, it could lead to a reduction in income inequalities among people but, on the other hand, its effectiveness could be limited. First of all, high-income people would have an incentive to stop working (or work less) or flee the country. It could also encourage them to avoid paying taxes and keep their money in banks from abroad. Secondly, it depend on the difference between two levels of taxation, because if it is significantly low it will not have a big impact on reducing income inequalities.

Other factors to consider are:
1. wider macroeconomic implications (e.g. discouraging inward investment, fall in tax revenue, therefore, reducing the funds available for welfare benefits)
2. tax as an instrument excludes those who do not pay income tax (students, unemployed, pensioners) who, arguably suffer most from inequality
3. criticism of a fiscal policy as a blunt instrument
4. how progressive should the tax be, data from other countries?

Sunday, 23 October 2011

one electric car, two electric cars, three electric cars...

What is the purpose of a subsidy? Using a diagram explain how it will work and what the impact should be. 

Subsidy is the amount of money paid by the government to a producer, in order to decrease the sum that the consumers has to pay. In other words, subsidies represent payments by the government to suppliers that have the effect of reducing their costs and, consequently, encouraging them to increase output. The impact of a subsidy is the increase of supply and therefore a decrease in the market equilibrium price. 

In the diagram above we can see the supply (S1, S2) and demand (D) 
curves. The initial meeting point of supply and demand curves is P1Q1 with consumer surplus above the P1 level. The subsidy shifts the supply curve to the right and the equilibrium price decreases to P2. We can see a growth of consumer surplus. 

The purpose of a subsidy on electric cars, for example, is, therefore, reducing market failure (negative externalities – environmental damage) by encouraging people to buy more environmental-friendly cars. 

Why is pollution an example of a market failure? Illustrate this on a diagram. 
Pollution is an example of market failure because it is a negative externality, which leads to market imperfections. Negative externalities occur when an economic activity affects third parties (not consumers or producers). In the diagram we can see the situation when the marginal private cost = marginal social cost and the private optimum is higher than the social optimum. 

Why could electric cars also be an example of a market failure? 

1. Negative externalities (electricity is still produced mainly from fossil fuels) 

2. Positive externalities to third parties (less pollution) 

3. Imperfect competition (e.g. firms producing electric cars can create an oligopoly – nine cars will be given subsidies and, therefore, barriers of entry occur) 

How will the subsidy aim to encourage more firms to produce electric cars and also more consumers to buy them? 

Under the £43m initiative that started on 1 January 2011, buyers could get a 25% discount up to the maximum £5,000. The subsidy encourages people to buy electric cars because their prices are becoming comparable to conventional car prices. Additionally, lower maintenance costs also encourage consumers to buy environmental-friendly cars. As the former Transport Secretary, Phillip Hammond said: "The point of supporting this technology is to get it up to scale." This mean that electric cars would become more competitive with traditional cars which would encourage producers. 

Is there an argument for increased investment in technology to produce electric cars more cheaply and more effectively? The main economic goal of every company is to maximise its profits. By producing electric cars more cheaply and more effectively consumers would be encouraged to buy these products and therefore demand for these goods would rise. Moreover, investments in technology would again lead to higher competition with traditional cars causing the demand for electric cars to increase. However, people argue that electric cars are not the best way of saving our environment because they require electricity, produced mainly from coal and therefore,  there is an argument for investing in hybrid cars technology improvement instead.

Why is there such a high demand for car usage?

Cars allow people to move from place to place more or less freely. Their main advantages are on-demand and door-to-door travel. Cars are the most popular way of transport even if prices and costs of using them are higher than, for example, public transport (or a bicycle!) costs. Of course, demand depends mainly on changes in oil prices but it in a long-term demand is price inelastic. Another reason for a high demand for car usage is, arguably, the lack of close substitutes which would be able to compete with traditional cars. For example, there are more and more electric cars but the infrastructure is not adapted to them (e.g. lack of charging stations). 

Everywhere is walking distance if you have the time. ~Steven Wright

That’s what I think,


Monday, 17 October 2011


Explain how the European Emissions Trading Scheme works.

The first carbon-dioxide trade was created by the Kyoto protocol in 1997 but it did not succeed. Launched in 2005, the EU Emission Trading Scheme works on the "cap and trade" principle. This means there is a "cap", or limit, on the total amount of certain greenhouse gases that can be emitted by the factories, power plants and other installations in the system. Polluters in capped industries are then given credits for each tonne of carbon dioxide they emit. For example, a coal power company may receive credits under the European Trading System for around 80% of its emissions. Within this cap, companies receive emission allowances which they can sell to or buy from one another as needed. The limit on the total number of allowances available ensures that they have a value. At the end of each year each company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances. The flexibility that trading brings ensures that emissions are cut where it costs least to do so. It is big business – the trade was worth $90bn in 2008, and globally is predicted to grow to up to $3.1 trillion in 2020.

What are the advantages and disadvantages of the ETS as a means of reducing carbon emissions?


·         It is a way of reducing pollution

·         It has started a public debate on an important issue

·         It encourages investments in new technology

·         The trade in such permits allows polluters to pay for emissions reductions made elsewhere.


·         The government's reliance on carbon trading schemes is inefficient and could cause a financial crisis similar to that seen with sub-prime mortgages, says Friends of the Earth

·         Corruption

·         Banks, investment funds and speculators have now become the middlemen in this shadowy trade and are packaging carbon credits into increasingly complex financial products, similar to sub-prime mortgages which triggered the recent economic crash. 

·         The system is so complex the World Bank's latest report claims the EU doesn't even know how many credits are in circulation.

Copenhagen climate change conference in 2009:

Compare these advantages and disadvantages with those of green taxes.
·         They give more control to regulators and businesses over future costs of an anti-pollution program. This is due to flexibility afforded in changing the tax rates and in not meeting the target pollution level if costs become prohibitively high. This feature isn't present in Cap and Trade Markets.

·         Green taxes generate revenues for the instituting government. 

·         Tax is regressive in nature, as the extra cost is passed down to consumer. This harms low-income persons as they spend a higher proportion of their income on consumption of such goods as gasoline.

How does the market price of carbon traded within the scheme reflect the toughness of the policy? What else might the price reflect?

The higher the price the tougher the policy, because if the policy is not taught many people want to sell their limits and few want to buy them. During the first phase of the European Emissions Trading System so many permits were allocated the price of carbon fell to almost zero. But the global downturn meant companies reduced their emissions anyway and sold off their credits for cash. The result was another price crash.

What is likely to happen to the carbon price in the coming months? Explain.

In the coming months the carbon price is likely to rise because it is almost the end of the year and the demand for the limits will increase.

 That's what I think, 


Not enough food for everybody?

Yesterday it was World Food Day, but as stated in the Independent on Sunday, it could be ‘more suitably designated Global Lack of Nutrition Day’. The UN Food and Agriculture Organisation (FAO) has estimated that a total of 925 million people were undernourished in 2010, two-thirds of whom lived in just seven countries (Bangladesh, China, the Democratic Republic of Congo, Ethiopia, India, Indonesia and Pakistan).


But the problem of hunger is not because of scarcity… “In a world that can produce enough food to feed everyone, nearly a billion people will go hungry today. And this is one in seven of us.”

It is not humanity’s inability to grow enough crops but the main reasons are:

1. Rising food prices

2. Stock market speculation in crop futures

3. Political conflicts (e.g. North Korea)

4. Corrupt, repressive regimes

5. Climate change

6. Natural disasters (e.g. droughts followed by floods)

7. Lack of investment in agriculture

8. Short-term solutions

Kostas Stamoulis, director of agricultural development economics for the UN, said: “Unless we stick to a long-term plan for getting regions out of crisis and out of vulnerability, then every five years we’ll be taking about the Horn of Africa.” 

That’s what I think,


Once in the lifetime experience

284 days to go!

On 27 July 2012 Olympic Summer Games will be held in London. The eyes of the world will turn at the UK. It is a unique opportunity for success not only for the sportsmen and sportswomen but also for the Londoners. The Olympic Games are expected to attract approximately 5.5 million daytime visitors and 900,000 overnight visitors but is everybody going to make a profit?

London restaurateurs warned that the 2012 Olympic will be bad for business (and a repeat of the ‘wash-out’ Royal Wedding in 2011). They claim that regulars and cultural tourists will stay away from the Olympics and fans attending events will not dine out in central London. Moreover, business customers will attend special corporate events hosted by the Games organising committee’s sponsors and partners.

Another problem is that transport disruption, such as road closures, will cause problems not only for consumers but also for suppliers. As written in the Independent on Sunday, the Games in London mean “incredible opportunities, but those in affected areas needed to start planning now.”

How can the companies cope with these problems? For example, they could have a special Olympics website page with all information translated into foreign languages or they could offer customers the opportunity to dine at different times to fit around the sporting action. Additionally, they could enable people to watch televised events while they eat or hire the restaurant.

A good news is that some of the capital's top attractions and restaurants have signed up to a charter promising fair prices during 2012. According to the London Visitor Charter, it is done, “to protect the long term reputation, image and international perception of London as a premier visitor destination.”

One thing is obvious, it will be an unforgettable experience for all Londoners. 

That’s what I think,


Monday, 10 October 2011

We don't need no education!

What information failures are there in the market for higher education places?

Students, while choosing their future university, have imperfect information about their choices available and differences between them. As written in the Browne’s report, ‘stundent choice will drive up quality’, but how can they make rational decisions if they do not have access (and possibilities) to get the accurate information about the universities. The main information failures in the market for higher education places are:

1. The quality of teachers (their engagement, experience, skills and teaching abilities). Students do not choose their tutors, they do not even know them (their names) before deciding which university to apply to.

2. The way of teaching. Every university, every college, every tutor has a different approach to the teaching methods and every student prefers a different method of learning. They have no influence on that.

3. The choice of subject. Many students choose their subjects by coincidence (advice, lottery). They do not know what they are going to learn before their classes start. Every university has a different set of subject taught in a course and most students are not aware of that while choosing their school.

There are many more information failures concerning higher education places, including accommodation, teaching and learning resources and extra-curricular activities, but I have decided to describe only the main problems and dillemas.

What externalities are involved in higher education and will this lead to an over or underprovision of higher education in a pure market system?
Positive externalities:

def: the external benefits that may result from a course of action. Sometimes they are called spillover effects because they bring some benefit to a third party, someone who is neither a producer nor a consumer of the product.

1. Better qualified labour force

2. Lower unemployment

3. Higher future incomes à higher spending…

4. Social benefits (less crime, poverty and homelessness)

Negative externalities:

def: occur when an economic activity affects third parties, i.e. people other than the producers or the consumers, in some way which reduces their quality of life.

1. Higher costs for the government (and indirectly the citizens)

2. Bigger social inequalities

The externalities involved in higher education could lead to overprovison in a pure market system.

Apart from externalities and information asymmetries, what other market failures apply to the market for student places in HE?
def: Market failure – occurs when market imperfections lead to an allocation of which is less efficient than it might be:

· public goods

· externalities

· labour immobility

· lack of information

· poverty

· imperfect competition

Apart from externalities and lack of information (information asymmetries) there is also imperfect competition between universities (e.g. some of them are thought to be more prestigious), and students. Additionally, poverty is also an important issue. Poor students are not able to afford higher education are, therefore, locked in a poverty trap.

What are the arguments for subsidising non-STEM subjects (as well as STEM ones)? Should these subsidies vary from course to course and from university to university?

+ The chosen does not determine the future job. Many people after graduation work in another area of interest/knowledge.

+They also improve people’s knowledge and there is a possibility of a development.

+ They are needed. People are becoming more and more ‘social’.

+There should be equality between STEM and non-STEM students. Poorer students would have bigger incentive to choose STEM even if they prefer other courses. That could lead to lower efficiency.

+Poorer students would not go to university if their course is not subsidised.

In my opinion, the state should subsidy the courses that prepare students for most-wanted (and needed) jobs. For example, in Poland, there are subsidies (students even get high scholarships) for science and engineering courses (basically STEM but more specific aim). The subsidies should be based on number of students attending the course, but should not vary from university to university.

What is the best way of tackling the problem of unequal access to higher education?

I believe that everybody should have access to higher education without the distinction between student with rich and poor parents. There should be more subsidies for gifted students, because, as written in the report: ‘Higher education matters because it drives innovation and economic transformation. Higher education helps to produce economic growth, which in turn contributes to national prosperity.’ Moreover, the possibility of taking a loan and paying it back after finding a well-paid job would also allow more people to go to university and decrease inequalities in access to higher education among people. 

“This report displays no real interest in universities as places of education; they are conceived of simply as engines of economic prosperity and as agencies for equipping future employees to earn higher salaries.”

That’s what I think,


Quantitative WHAT?!

What is 'quantitative easing'?

Def: Quantitative easing was proposed in 2008 as a way of providing an additional monetary stimulus to reduce the impact of recession. Interest rates had already been reduced as far as they could be, and banks were still finding it difficult to maintain lending. Early in 2009, the Bank of England began buying bills and bonds, exchanging them for cash which would increase bank deposits. This has the effect of increasing the money supply and giving banks more liquidity. Many other central banks implemented similar policies at the same time. (In the US it is called credit easing.)

This is sometimes described as printing money and, if carried too far, it could lead eventually to inflation. But at the time it was introduced there was a significant risk of deflation occurring, which could turn out to be even more problematic.


Look at this interactive graphic!

Quantitative easing is a government monetary policy occasionally used to increase the money supply it increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity. Under this policy, the authorities buy up bonds either from banks or from the commercial sector. There are two potential benefits. The higher the price of a bond, the lower the interest rate the borrower has to pay; so the "yield" – the interest rate – on government bonds falls. Since many interest rates, including mortgage rates for example, are set with reference to gilt yields, QE should therefore help to drive down borrowing costs. Investors are likely to use the extra money from QE to buy something else – shares, for example. That should push up the price of a whole range of assets, boosting wealth and creating demand right across the economy.

Did it work? Will it work? The Bank of England recently published research suggesting that the initial £200bn bout of QE, starting in 2009, boosted GDP by around 1.5 percentage points – though given that the UK still experienced its worst recession in living memory, it was hard to feel the benefit at the time. But other economists, argue that QE1 – combined with the effect of a much larger programme of asset purchases in the US – just handed banks lots of extra money which they used to speculate on commodities such as oil, boosting their price, pushing up inflation and making life even harder for cash-strapped consumers. 

The chancellor, George Osborne, said at the conference in Manchester that the Treasury was drawing up measures to increase the supply of credit to small and medium-sized businesses, which have repeatedly complained that they are missing out on loans from the crisis-hit banks. Ed Balls will gleefully remind Osborne that while in opposition, he described QE as "the last resort of desperate governments".

In my opinion, quantitative easing is not the best way of helping the economy, because the 'printed money' will be 'lost in the banks' and there will be no significant credit easing. There are more efficient, direct ways of creating growth, e.g. creating new jobs and investing in job bureaus.

That's what I think, 


Saturday, 1 October 2011

Don't worry, be happy! :)

Gross National Happiness (GNH) measures the quality of a country in more holistic way and believes that the beneficial development of human society takes place when material and spiritual development occurs side by side to complement and reinforce each other.

Four Pillars of GNH:
1. Sustainable Development
2. Preservation & Promotion of Culture
3. Conservation of Environment
4. Good Governance

This is absolutely amazing!

That’s what I think,



Do you remember playing football in your garden or in the backyard? How many times after your strong kick the ball flew in a wrong direction? And… Score! Who cares about the broken window!? I assume that your parents were not very proud of you and there was no need to explain or excuse. The game was over.

Now, let’s think about it from another point of view. Your parents had to pay for the new window and buy glass and call assistance. The window company has earned more money. The owners could have buy better machinery so another company gained profit and so on…

What’s my point? Was breaking the window beneficial and helpful to encourage more people to exchange goods and services and, consequently, effect in a possible economic growth? Does destroying one thing causes further, uncountable benefits? Should people break their windows during a recession to boost the economy?

The answer seems to be obvious. That cannot be true! So how to explain it?

Imagine the situation when you miss the window. Your parents do not have to spend their money on repairing it and are able to buy you a bicycle instead. The bicycle company buys  more helmets (REMEMBER: SAFETY IS VERY IMPORTANT!) and etc. Everything looks similar but your window is in one piece.  Agreed?

That’s what I think,


Wednesday, 28 September 2011


Using a supply and demand diagram, explain the trend we have seen in the rental market, thinking about the impact on demand, supply and hence on price. How does this explain why sealed bids have been used to combat the increased competition?
The rental market in Britain has changed dramatically during and after the recession. People, who were not able to afford buying a house or taking a mortgage, decided to rent a property instead and keep on saving. The demand curve shifted to the right causing prices to rise. With limited supply, rents increased by up to 35% in 2010

Which factors have affected (a) the demand for rental properties and (b) the supply of rental properties? How is the elasticity of demand and supply relevant here in terms of the impact on price?
a)      Factors, which affected the demand for rental properties:

Difficulties in getting mortgages
High house prices
Higher education fees (“However, rises in university fees will see student demand come down - though foreign student demand will remain strong, thanks to the pound's weakness. ”)

b)      Factors, which affected the supply of rental properties:

Lower demand for buying houses (people decided to let their properties)
 “The supply of buy-to-let mortgages is improving and new lenders have joined the market, but there have not been enough new entrants to replace those that were pushed out during the credit crunch.

To what extent is a sealed bid format fair on potential tenants? Who does such a strategy favour?

A sealed bid format is fair on potential tenants  because it is the price that matters. Landlord is more likely to make his decision according to your proposal. It is not so important if you are a student, have children or a pet. Moreover, a potential tenants will not end up in a situation, when a landlord suddenly changes his mind, because he has received a better offer.

Richard Davies, head of lettings of Chesterton Humberts, said that there was no mystery in the sealed bid process.
"If we do have more than one offer for a property, what we do is give a deadline for people to submit their best and final offers. All those offers go to the landlord who will decide who to go with"
This strategy favours property owners who become more likely to receive bigger profit, because of higher competition. Additionaly, "The only people who like sealed bids are vendors who have most probably achieved a figure way above their asking price," says Tim Le Blanc-Smith, Director of John D Wood & Co., South Kensington.

How could this sealed bid strategy be an example of price discrimination?
If a potential tenant offers a much higher price than the value of the property it a discrimination against average people who propose a reasonable price.

What is likely to happen to your consumer surplus if you have to submit a sealed bid?
After submitting a sealed bid in highly competitive market consumer surplus is likely to fall and reach 0.

That's what I think,


Tuesday, 27 September 2011

Oily oil

Explain why oil prices have been rising. Use a diagram to illustrate your answer.
The main reasons for oil price increase are:
-       Higher demand for oil caused by population growth and technological development, especially in the developing countries (e.g. China).
-       Weather conditions, such a heavy snow falls or low temperatures, not only increase demand, but also result in more difficult delivery conditions, which causes an increase in oil prices.
-       Increased fuel duties and the higher VAT rate
-       Declining dollar encourages people to buy oil as an alternative investment.
-       Political situation, mainly in the OPEC – 40% of oil production, because they can easily control the market and prices.
-       Natural disasters (e.g. earthquake and tsunami in Japan)

How can the concepts of price elasticity of demand, income elasticity of demand and price elasticity of supply help to explain the magnitude of oil price movements?
PED (Price elasticity of demand) – Demand for oil is inelastic because there is no common substitute of this resource. If the price of oil goes up, people will still buy it.
YED (Income elasticity of demand) – Higher oil prices would affect people on a low-income. If the income falls people are more likely to buy less oil or to choose public transport.
PES (Price elasticity of supply) – The oil resources are limited (peak oil theory) and the lower is supply, the bigger is the price. However, the current oil prices are not cause by the shortage of this resource, but by the reasons mentioned above and speculations.

Examine what is likely to happen to oil prices over the coming months. What are likely to be the most important factors in determining the direction and size of the price movements? Distinguish between demand-side and supply-side effects in your answer.
Demand-side: The oil prices will depend on weather conditions. Many people will pre-buy oil to ‘be prepared for the cold winter’ and, consequently that will increase oil prices. It also will depend on current situation in the Eurozone, because oil often becomes a ‘safe investment’ in bad times.
Supply-side: Oil prices depend on OPEC forecasts, i.e the situation in the Middle East.

What are ‘crude futures’? Explain how actions in the futures market are likely affect spot prices.
Spot price - the current price at which a particular commodity can be bought or sold at a specified time and place (
Futures contracts are financial instruments and carry with them legally binding obligations. Buyer and seller have the obligation to take or make delivery of an underlying instrument at a specified settlement date in the future. 
Excessive speculations have a significant impact on oil prices.

WATCH: Playing the oil prices money game

To what extent can OPEC control oil prices?
OPEC controls production levels (i.e. has a possibility to increase production to avoid a surge in oil prices or the other way around). Moreover it prepares demand forecasts, which are also very influential.

If crude oil prices go up by x%, would you expect petrol station prices to go up by approximately x%, or by more than or less than x%? Explain.
If crude oil prices go up by x%, I would expect petrol station prices to go up more than x%. Crude is the primary raw material used to produce gasoline and other petroleum products. If its price would go up the petrol station would rise more due to transportation costs and the cost of refining the oil into gasoline.

Why have central heating oil prices risen by around 70% of over the past three months? What are the implications of your answer for the type of market structure in which central heating oil companies are operating?
In the last months of 2010 oil prices have risen by around 70%, which was caused by the profiteering from the cold weather. Central heating oil companies increased their prices in the consequence of higher demand due to cold winter. They knew that people would still buy it to heat their homes. People with oil heating suffered from the lack of close substitutes and the oligopolistic oil market.

That's what I think,