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price mechanism

James,

I have written comments in capital letters in the text. Overall, in my view this effort would have achieved a pass.

1a Outline the ways in which the price mechanism allocates resources in a free market economy
b Analyse the main disadvantages of the price mechanism as a means of
allocating resources
c Assess the arguments for and against government intervention in the market for education.

1a In a free market economy, the price mechanism allocates resources through the forces of supply and demand; social costs, such as pollution and noise are not taken into consideration by individual firms. The firms produce on the basis of self interest ie what option brings the most profit, maximising behaviour MAXIMISING BEHAVIOUR IS THE WRONG TERM and not considering external costs. The problem in a free market economy remains the same as in any other; what, how and for whom to produce. The individual firms must decide what proportion of capital and consumer goods should be produced to maximise the firms profits(we are assuming the firm is a profit maximiser)
I would draw a demand/supply graph here
The diagram shows what is supplied and demanded at any given price. This concept is essential for understanding resource allocation in a free market economy since resources are allocated depending on the demand for whatever good. In a market functioning well, equilibrium will occur where supply=demand. However, if supply is lower than demand then the price will rise to make demand decrease, thus equalling equilibrium again. Resources are thus allocated on the basis of the “invisible hand”(ie the forces of supply and demand that causes producers to produce what is demanded at a given price.) In a pure free market economy the state does not provide, thus everything is allocated on this basis.
YOU MIGHT USEFULLY INCLUDE INFORMATION RELATING TO SHIFTS OF DEMAND AND SUPPLY CURVES TO SHOW THAT YOU UNDERSTAND THE DIFFERENCE BETWEEN SHIFTS AND MOVEMENTS ALONG THE CURVES. YOU SHOULD HAVE MADE SOME REFERENCE TO THE FACTORS OF PRODUCTION – THESE ARE THE CENTRAL TO THE EXPLANATION OF THE MARKET SYSTEM. THE ENTERPRISE FACTOR DETERMINES THE PROPORTTIONS OF THE OTHER FACTORS THAT WILL BE USED. YOU SHOULD ALSO HAVE MADE THE POINT THAT A TOTALLY FREE MARKET IS A THEORETICAL EXTREME CASE AND THAT IN THE REAL WORLD ALL ECONOMIES ARE MIXED.

b. The price mechanism often results in market failures. A RATHER SWEEPING STATEMENT. By this we mean anything that is dysfunctional or when supply and demand breaks down. For example, no firm acting in its self interest will take notice of the pollution it lets out, thus this is market failure. THAT IS NOT THE STANDARD DEFINITION OF MARKET FAILURE. A MARKET REFERS TO THE SUPPLY AND DEMAND ISSUES AND SOCIAL COSTS ARE NOT RELEVANT FOR THIS ANALYSIS. SOCIAL COSTS BECOME INVOLVED WHEN WE CONSIDER ISSUES OF ECONOMIC EFFICIENCY Up until the late 1980’s, the eastern bloc communist countries were controlled by the state. Inflation was almost non- existent since the state controlled everything. Workers could not push for higher wages and prices were static. Despite this system eventually breaking down due to the inability to produce enough of certain goods and the over- centralisation of production units which led to distribution problems, the planned system did not suffer from inflation, or the boom/recession cycle caused by fluctuations in the free markets of the western world. However, in a price mechanism system, the economy is a cycle as shown below YOU MIGHT WANT TO INCLUDE MORE OF THE DISADVANTAGES OF A PLANNED ECONOMY, EG SINCE PRICES ARE NOT AT THE EQUILIBRIUM, THERE WILL BE SURPLUSES AND SHORTAGES. WHERE FIXED PRICES ARE DELIBERATELY KEPT LOW FOR FOOD OR ACCOMMODATION, YOU CAN SHOW THESE PROBLEMS THROUGH A SUPPLY AND DEMAND GRAPH. SHORTAGES OF FOOD AND ACCOMMODATION – LOW PRICES BUT NO STOCKS LEAD TO POOR MORALE. NO MEASURES OF ECONOMIC EFFICIENCY, FEW INCENTIVES FOR ANYONE ETC ETC. diagram here firms increase prices leads to consumers pay higher prices leads to price increase leads to workers push for higher wages leads to firms increase prices etc This leads to inflation. THIS IS RATHER A SIMPLISTIC ANALYSIS OF COST PUSH INFLATION WHICH DOES NOT APPEAR TO BE A PARTICULAR PROBLEM THESE DAYS IN THE UK. IF THE MARKET SYSTEM WAS WORKING PROPERLY, THERE SHOULDN’T BE INFLATION. The constant cycle causes uncertainty among consumers and firms. When the government increases interest rates, for example, as a means of reducing inflation, the economy may go into recession. YOU ARE PROBABLY UNWISE TO MAKE THESE SWEEPING GENERALISATIONS CONCERNING MACROECONOMICS IN THIS SECTION.
In a price mechanism economy, certain undesirable market structures emerge, monopolies being one form. A monopolist may earn abnormal profits due to its ability to be the unique provider. This is undesirable, THERE ARE ONE OR TWO POSITIVE POINTS ABOJT SOME MONOPOLIES WHICH YOU MIGHT HAVE INCLUDED HERE TO SHOW YOU UNDERSTAND THE STRUCTURE some production may fall due to the lack of competitivity COMPETITIVENESS IS A BETTER WORD HERE and prices may rise, affecting consumers. In the U.S., Microsoft was attacked by anti trust lawyers for trying to create a monopoly which would be against the interests of consumers. Oligopoly may also prove to be bad, since cartels may be created thus again allowing firms to make abnormal profits by restricting
competition and increasing prices. REMEMBER CARTELS ARE ILLEGAL BUT OLIGOPOLIES ARE NOT. Inequality emerges in the price mechanism. Different social groups have different lifestyles due to the ability, or lack of it to buy goods. If the price mechanism worked for merit goods such as hospitals, then many poorer people would suffer from being unable to pay for it. If the state provides, then distribution of income(through taxes) and the supply of public and merit goods leads to greater equality. The cobweb theory shows how the equilibrium price is distorted by forces of supply and demand.
Supply and demand graph here showing one year , when there is a bad harvest the supply goes down to A., and price goes up to B. The farmer produces more the next year to meet new demand at high price. Demand then goes down due to over supply. The equilibrium price is not reached when there is either too much demand or supply. UNDER A PROPER MARKET SYSTEM HOWEVER, THE EQUILIBRIUM PRICE IS ALWAYS REACHED. YOU HAVE MENTIONED DIFFERENT STRUCTURES BUT NOT PERFECT COMPETITION – YOU MIGHT WISH TO DESCRIBE THAT AND INDICATE DISADVANTAGES THERE. FOR YOU TO ANSWER THIS QUESTION PROPERLY YOU HAVE TO DESCRIBE AND ANALYSE.

c.Government intervention in what is considered a “merit” good; means that exclusion does not occur. Everyone can go and the overall bill is paid for out of taxation. Education can be considered an investment since it provides for a future better work force. If education is supplied merely through supply and demand, then certain classes will be unable to receive this service. The result would thus be a poorer quality workforce, thus less competitivity COMPETITITVENESS WOULD BE BETTER against other foreign workforces. In the UK, this would be disastrous, since the EU allows complete freedom of mobility of labour from country to country. NOT FULLY IMPLEMENTED YET British workers would thus be incapable of performing as well as their european counterparts. WILD STATEMENT With the increasing services industry in the developed countries, education is more important since these jobs often require educational qualifications. NOT PARTICULARLY RELEVANT
Without government intervention, there would be no set uniform national curriculum. Those who could afford better education would be given better chances. The class gap would widen because the upper classes would obviously be able to pay for the best. The distribution of income would thus be almost non existent, ?? due to the well off people being able to take on better qualified jobs. REMEMBER NOT TO EXAGGERATE – THESE ARE TRENDS NOT CERTAINTIES.
However, government intervention may lead to a lack of competitive efficiency in the education market. If no government intervention existed, then each school would constantly try to increase its competibility to get ahead of the others. The result would be ever increasing national levels(providing agreements between the schools were not formed.) If the price mechanism allocated teaching resources then better teachers would be better paid, thus increasing the incentive to work. However, if say for example, vouchers were issued by the government and parents were free to spend these on the schools of their choice, then the worse off schools may be ignored by parents thus causing small local schools to close down. MIGHT THAT NOT REWARD GOOD SCHOOLS?

YOU SHOULD HAVE DETERMINED THE ARGUMENTS FOR AND AGAINST AND ASSESSED THEM.

OVERALL, YOU EXHIBIT A KNOWLEDGE OF ECONOMIC TERMS. YOUR FIRST ANSWER, ALTHOUGH SHORT, WAS PROBABLY ANSWERED THE BEST OUT OF THE THREE. THE THIRD QUESTION WAS THE POOREST BECAUSE IT WAS UNSTRUCTURED. YOU WOULD DO BETTER TO READ THE WORDING OF THE QUESTIONS AND IF YOU ARE ASKED TO EXAMINE OR ASSESS YOU SHOULD MAKE SURE THAT YOU DO THAT. WHERE YOU HAVE TO ASSESS AN ARGUMENT, YOU SHOULD PUT BOTH SIDES AND INDICATE WHICH SIDE IN YOUR VIEW HAS THE MOST WEIGHT.

I WOULD HAVE PASSED THIS EFFORT MAINLY BECAUSE OF YOUR KNOWLEDGE OF CONTENT, BUT YOU COULD DO A LOT BETTER WITH CARE OVER THE ORGANISATION OF YOUR ANSWER.

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monopoly and import substitution

1. I assume you already have some familiarity with monopoly theory and with UK competition policy. First, the theoretical side, which focuses on pure monopoly - in other words, the case where the firm is the industry. There are therefore barriers to entry, which means that supernormal profits made in the short run are retained in the long run. The monopolist produces a profit-maximising output, where marginal cost equals marginal revenue; average revenue (damand) and MR curves are downward sloping, and the gradient of the former is twice that of the latter - AR exceeds MR at all outputs. It is then easy to see that the monopolist is allocatively inefficient, as AR (demand) exceeds MC (supply) at its profit maximising output. The monopolist is also productively inefficient, since the output produced will not be at the lowest point of its average cost curve = moreover, AR exceeds AC at this output, which is the reason the firm makes supernormal profits. The contrast is then usually made with the long run perfectly competitive firm, where AR and MR are equal, andwhich produces where MC=MR=AR=MC, making normal profits only, any short run SNP having been eliminated through the entry of new firms, since there are no barriers to entry. Such a firm is therefore both allocatively and productively efficient, and thus welfare is said to be maximised. In the case of the monopolist however, consumers are exploited (a higher price and a lower output), while of course there is no choice of products.In technical terms, part of the consumer surplus is transferred to the monopolist and becomes producer surplus.

In practice, there are few pure monopolists, and so policy focuses on oligopolistic markets - i.e. those where a small number of firms control most of the market, and thus exert a measure of monopoly power, as described above. Again, there will be significant barriers to entry. In general, any firm with more than 25% of a given market, or any proposed merger or takeover that would result in more than a 25% market share, is subject to investigation by the competition authorities (first, the Office of Fair Trading, and then the Competition Commission), which have the power to levy fines on firms that exploit consumers and to block mergers. The criterion used is always the impact on competition in the market. They therefore look for evidence of price-fixing, restricting supplies and limits on consumers' choice. They come down particularly hard on firms that engage in anti-competitive practices as a result of collusion. Firms aiming to merge will invariably argue in their own defence that a larger firm will enjoy economies of scale, and that the resulting lower average costs will be passed on to the consumer in the form of lower prices; they often also claim that there will be more scope for research and development, and thus for the offering of improved or innovative new products to consumers. They may also claim that a larger firm is of benefit to UK exports, or else necessary to compete with a giant that already exists in the market. The Competition Commission website offers plenty of examples of such arguments, and the reasons for the final decision in individual cases. Hence the authorities intervene on competition grounds on the basis that oligopolistic firms if left to their own devices may use their protected position to exploit consumers in the ways described above.

2. Policies such as these are normally designed to improve a country's trade balance with other countries; in the process some of them at least will also stimulate higher GDP growth and employment. Essentially, you need to review the various policies on offer, since some of them clearly fall into both categories of export promotion and import substitution.

The best policy of all is a range of supply side measures designed to improve the country's economic capacity and international competitiveness. All sorts of policies come under this heading, ranging from reduction in trades unions' power (to reduce firms' costs) and the creation of a more flexible labour market to privatisation, attracting investment from abroad, promoting small businesses, deregulation and investment in human skills to raise productivity. The intended outcome is to produce a greater number of goods at a lower cost and thus price. This will promote exports and at the same time provides relatively cheaper goods for domestic consumption as an alternative to imports.

The most common policy has been to defflate the economy through some mix of restrictive monetary and fiscal policy. The aim here is not so much import substitution as a reduction in the volume of imports. This occurs because domestic consumers have less income than previously, and thus cut down on their spending on all goods, including imports. In some industries, the policy may actually serve to promote exports, since domestic firms facing reduced sales at home are likely to search for alternative markets abroad.

Another frequently used policy is devaluation of the currency, which has the effect of making the relative price of exports cheaper and the relative price of imports dearer, thus serving both purposes. The volume of exports should over tim rise, while the volume of imports should fall; moreover, domestic consumers will substitute domestically produced goods for the more expensive imports. The problem with devaluation is that it does nothing to address the underlying uncompetitiveness of the economy; moreover, it engenders imported inflation, which then adds to the costs of firms importing raw materials, energy or spare parts, hence cancelling out the benefit of the devaluation. It may also prompt a wage-price spiral as workers, faced with the higher inflation, seek compensatory wage increases. If this occurs, devaluation will ultimately achieve neither objective.

Other policies exist. Exchange controls place limits on the amount of foreign currency available to importers, and thus limit imports; they do nothing to promote exports. Protective measures involve (usually) the imposition of a tariff or quota on selected imported goods (or from particular countries), The effect in both cases is to raise import prices. The benefit to exports is dubious, since domestic consumers will normally buy more home produced goods, hence leaving fewer for export. Most protective measures have been outlawed; where they continue to exist, they often invite retailiation, which then reduces the scope for exporting.

The relevant theory in all this is that any measure that has the effect of increasing exports, or reducing imports, or increasing exports more than imports, will increase the value of (X-M) in the AD equation, which in turn leads to higher economic growth and employment, some of which will surely be in exporting industries.

I hope these detailed answers are helpful.
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Critically review Fred Fiedler's Contingency theory

You have outlined this very accurately, and I have made no significant changes. You might want to add some of the points below, which really extend what you are saying and spell out further implications. In particular, the penultimate paragraph contains positive comments on Fiedler's work.

In Fiedler's theory, leadership effectiveness is the result of interaction between the style of the leader and the characteristics of the environment in which the leader works. Together, these determine group performance.

For Fiedler, leadership style depends upon his/her personality and is thus fixed. Fiedler uses an index of the 'least preferred coworker' scale to classify leadership styles. A high overall score suggests the leader has a human relations orientation, while a low score indicates a task orientation. So this method reveals an individual's emotional reaction to people with whom he or she cannot work. Leaders who describe their preferred coworker favourably, with a high LPC, thus derive major satisfaction from establishing close relationships with fellow workers. High LPC leaders are relationship-oriented and see good interpersonal relations as a requirement for task accomplishment. Low LPC leaders are more concerned with successful task accomplishment, and worry about interpersonal relations later.

The second major factor is 'situational favourableness' or 'environmental variable' - the extent to which a ituation enables a leader to exert influence over a group. The three key situational factors are leader-member relations (the extent to which employees accept the leader), task structure (the degree to which employees' jobs are described in detail) and position power (the amount of formal authority possessed by the leader arising out of his/her position in the organisation). Naturally, leadership is at its most effective when group members respect and trust the leader, where tasks are highly structured and where leaders have the power to hire and fire, discipline and reward. It is possible to identify eight different group situations or leadership style. Task-oriented styles of leadership are generally most effective. The considerate relationship-oriented style is appropriate only where leader-member relations are good, the task is unstructured and the leader's position power is weak.

The implication is that candidates for leadership positions should be evaluated using the LPC scale. The appropriate LPC profile should determine the choice of leader - task-oriented for very favourable or very unfavourable situations, and relationship-oriented for intermediate situations. If a leadership situation is being chosen for a particular candidate, then a work team/department should be chosen which matches his/her LPC profile. It also follows that it is not accurate to talk of effective and ineffective leaders - there are only leaders who perform better in certain specified situations. Anyone can be a leader by carefully selecting those situations that match his/her leadership style. And the effectiveness of a leader can be improved by designing the job to fit the manager - by increasing or decreasing a leader's position power, altering the structure of a task, or influencing leader-employee relations.

Fiedler's work is useful and illuminating, though evidence suggests that there are other situational variables, such as education, training and experience, that also have an impact on a leader's effectiveness. There are also doubts about his measurement of different variables, and particularly over whether the LPC is a true measure of leadership style.

I hope this is helpful.

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