Evaluation for Micro Economics

June 11th, 2008 | economics -

Evaluation is the ability to look at issues from a critical perspective; to look at other potential outcomes.

These are some ways to get evaluation marks for micro economics. (note there are potentially more ways to evaluate)

1. Elasticity. e.g the effect of a tax increase depends upon the elasticity of demand. If demand for cigarettes is inelastic a tax will be ineffective in reducing demand. A trades union tries to increase wages above equilibrium level but, if demand and supply are inelastic the unemployment will be relatively small.

2. Significance. A rise in the price of oil has a significant impact on the costs of firms. A rise in the price of water is much less significant. One reason why Women get lower paid than men is men have better qualifications. However, this point is relatively insignificant because women’s academic qualifications have, more or less, caught up with men

3. Depends on industry. For example a merger between 2 firms in the car industry may enable significant economies of scale, because in that industry there are high fixed costs. However, if the merger was between 2 firms in the retail business, the scope for economies of scale is much less.

4. Short Term Long Term. The impact of a rise in oil prices in the short term is small fall in demand because demand is inelastic. But, over time demand becomes more elastic.

5. Government Intervention may always lead to government failure. E.g. government subsidies may encourage inefficiency because firms start to rely on government handouts.

6. Depends on Market Structure. The effect of a trade union depends on whether it is operating in a competitive market or monopsonistic market.

7. Depends on Objective of Firm. For example, a profit maximising firm is more likely to collude. A firm seeking to maximise market share is more likely to start a price war. Useful for a question on – Discuss How firms in Oligopoly compete?

8. Depends on contestability of market. A merger may be OK, if the market remains contestable. But, if there are barriers to entry the merger may reduce competition too much.