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Ten Thoughts on Improving Your Economics Papers

Ten Thoughts on Improving Your Economics Papers. Eton Economics Revision May 2008. (1) The Importance of the Margin. Textbook eco – many decisions are made at the margin Marginal revenue = marginal cost (profit max) Marginal social benefit = marginal social cost (social equilibrium)

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Ten Thoughts on Improving Your Economics Papers

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  1. Ten Thoughts on Improving Your Economics Papers Eton Economics Revision May 2008

  2. (1) The Importance of the Margin • Textbook eco – many decisions are made at the margin • Marginal revenue = marginal cost (profit max) • Marginal social benefit = marginal social cost (social equilibrium) • Marginal utility of consumption compared to the price • But few businesses / people have the capacity to reach such precise equilibrium points – or seek to find them • But…… • Marginal changes in behaviour can have a big effect if enough people make them • Changing behaviour ‘at the margin’ can have important social effects – social norms can change + policies can impact • The fundamental value of something depends on the value of the marginal unit – important in lots of markets (e.g. oil, food)

  3. 2: The Law of Unintended Consequences • A root cause of ‘government failure’ • All government interventions have at least one and often many unintended consequences • Easy to have the benefit of hindsight • Reasons: • Economics is a social science about behaviour • Rational agents will look for ways to offset policies that cost them • Information failure among policy-makers • Dynamic nature of markets – governments cannot move on internet time • Disintermediation is inevitable in a globalized world

  4. 3: Stakeholders matter! • ‘Any person or organization that has a legitimate interest in a specific project or policy decision.’ • Check to see the sources of information in data response and the EU paper • Identify and comment on value judgements – scores high for evaluation • Risk of government failure: • Regulatory capture • Policy decisions – to please a vested interest

  5. Employees of a business / organization Communities where a business is located or affected by a decision Suppliers Shareholders Creditors Government (and through them – taxpayers) Trade unions (and the workers they represent) Stakeholders

  6. Employees of a business / organization Communities where a business is located or affected by a decision Suppliers Shareholders Creditors Government (and through them – taxpayers) Trade unions (and the workers they represent) NGOs and other advocacy groups (i.e. World Bank, IMF, Pressure Groups) Prospective employees Prospective customers Local communities National communities International community Competitors within a market Professional associations Stakeholders

  7. 4: Time Periods in Economics • Be familiar with • Immediate (momentary) • Short run (at least one fixed factor) • Long run (all factor inputs are variable) • Applications • Elasticity of supply (micro and macro supply curves) • Elasticity of demand (Ped, CPed, Yed) • ‘Discounting’ the future value of costs and benefits • Long run macroeconomic policies e.g. supply-side • Long run micro policies – e.g. liberalising a market

  8. 5: (a) Demand and supply are often non-linear! P P S D Q

  9. 5(b): Upward sloping demand and downward-sloping supply! P P S1 S2 S2 LRS D Q

  10. 6: Change the elasticity to build / develop the analysis! P S + tax P2 S P1 D Q2 Q1

  11. 6: Change the elasticity to build / develop the analysis! P P S + tax S + tax P2 P2 S S P1 P1 D2 D D1 Q Q Q2 Q2 Q1 Q1 More close substitutes – higher CPED

  12. 7: Most markets are inter-related • Changes in relative prices / rewards in one market affect resource allocation in others • Key related-market concepts to revise: • Substitutes • Complements • Derived demand • Composite demand • Joint supply • Competitive supply • Also important in macroeconomics • Factor markets and the economic cycle • Bond markets / currency markets / equity markets • Macroeconomic effects of external demand/supply shocks

  13. 8: Relative prices, preferences and incentives • Markets are powerful – don’t underestimate them – especially the role that auctions can play! • Policy interventions seek to change behaviour of agents • People respond to incentives • Govt failure if the incentives turn out to be perverse • Govt failure if the incentives are not strong enough • Behaviour change when relative costs and benefits alter • Leads to substitution effects (changes in demand for X and Y) • This requires • Sufficient degree of changes in relative prices • Availability of alternative courses of action • Sufficient time for agents to respond

  14. Examples of changes in relative prices • London congestion charge / underground fares • National minimum wage • Relative prices of different crops • Relative price of ethical-products • Relative prices and demand for exports / imports • Relative prices of legal versus illegal transactions (e.g. crime / organ sales)

  15. 9: Expectations matter! • Expectations of the future drive current behaviour • Housing market • Capital investment • Food supply decisions • Currency demand and supply • Monetary policy / inflation • Fiscal policy / tax cuts / govt borrowing • Formation of expectations: • Rational expectations • Adaptive expectations

  16. 10: Importance of the cost-benefit principle • The mother of all economic ideas is the cost-benefit principle. • It says that should take an action if, and only if, the extra benefit from taking it is greater than the extra cost • The hard part is • Identifying the relevant costs and benefits • Measuring and valuing them • Individual rationality does not always lead to a socially optimum / desirable outcome • Behavioural economics questions the core rationality embedded into conventional textbook economics

  17. And finally…. • Most policy problems require a combination of strategies • Aim to understand (properly) the meaning of efficiency and equity in markets (allocative, productive, dynamic efficiency must be learnt) • Have the courage to challenge the conventional wisdom • Let your diagrams do the work for you – develop the analysis with higher quality diagrams • Pick out bias in extracts – normative economics • Use the data that is provided but be aware of its pitfalls / limitations • What is rational for individual agents can often leading to outcomes that are very damaging for society • Be cautious about government intervention – markets often find solutions to intractable problems in the long run – if the incentives are strong enough

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