Evaluation in Economics - Important for essay writing!!!

Evaluation is a very important concept in economics. It is what you need to do when you have finished analysing. By analysing we mean giving your Definitions, Explanations, Examples and Diagrams (DEED). Show how the theories relate to the question and explain the theories. Basically analysing is drawing out the theory and then evaluation is discussing the benefits and drawbacks and then drawing your conclusions and also challenging the analysis.

The hard part about all of this is making sure that you say enough in your analysis and in your evaluation. So you don’t forget, remember to “Do the DEED” when you analyze and then “CLASPP it all together” when you’re evaluating.

On your essay questions and data response questions (usually the last question) you’ll need to evaluate.

CLASPP

(d.) – A clasp is something that holds things together. But (spelled with 2 P’s) it’s also an acronym for the 6 types of evaluation in A Level Economics.

Use at least 3 of these in your Part B questions. Personally, I recommend to my students that they try use Stakeholders, Assumptions each time and include a third one of their choice. We always care a lot about stakeholder effects and assumptions is impressive because it shows that you really understand the theory.   

Conclusions

-What can we conclude from the theory (that you’ve explained in your analysis)?

Long-term and short-term effects

-Is the change good in the short-term, but over in a few years it will have undesirable consequences?
-Will the policy be really hard on people in the short-run, but it fixes the long-term problem?
-Will this policy fix one problem, but create another?

Assumptions

-Are there some assumptions being made, that the theory depends on that may not hold true? This is the same as “ceteris paribus” –the assumption that all other things are being held equal, when in fact they might not stay constant. Explain what might change and how that would affect your analysis.
-Tell us the weaknesses in the theory?
-What is unrealistic about the theory?

Stakeholders

-What effects would this policy (i.e. an indirect tax) have on the government, consumers, producers and the rest of society?
-Policies (i.e. price ceilings) are often made with particular stakeholders in mind, so are there undesirable effects on other parties (i.e. price increases for consumers)?
-Is the policy great for some groups, but bad for others?

Priorities

-Discussing the priorities of a society, or the government is also a good way to keep things in perspective. A policy like subsidising schools is good for families, good for the long-term macro economy, but bad for tax payers who don’t have children, what are the priorities as a society?
-Is there an important normative (i.e. values aspect) that the theory doesn’t consider?

Pros and Cons

-What are the advantages and disadvantages of this policy?
-What are the costs and the benefits of this policy?
-What are the arguments for and the arguments against this policy?
-This one is to double-check that you haven’t left anything out in the preceding ones.

Credit to Mr. Tim Woods

www.timwoods.org

Maximum Price and Minimum Price

GOVERNMENT INTERVENTION IN MARKET PRICES

Maximum Price or PRICE CEILINGS

In some markets, governments intervene to keep prices of certain items higher or lower than what would result from the market finding its own equilibrium price.

A price ceiling occurs when the government puts a legal limit on how high the price of a product can be. In order for a price ceiling to be effective, it must be set below the natural market equilibrium.

It is also known as maximum price.

Rent control is an example of a price ceiling, a maximum allowable price. With a price ceiling, the government forbids a price above the maximum. A price ceiling that is set below the equilibrium price creates a shortage that will persist.

For the price that the ceiling is set at, there is more demand (Q2) than there is at the equilibrium price. There is also less supply (Q1) than there is at the equilibrium price, thus there is more quantity demanded than quantity supplied i.e. shortage.

Impact of Price ceiling

Inefficiency: Inefficiency occurs since at the price ceiling quantity supplied the marginal benefit exceeds the marginal cost. This inefficiency is equal to the deadweight welfare loss.

Existence of black market: Due to demand exceeding the supply, there will be buyers who will be willing to purchase the good at a higher price. This will lead to existence of black market.

How can government correct this situation

Subsidies may be offered to the firms to encourage the production of such goods. However it involves an opportunity cost to the government as they might have to divert funds from other activities.

Government may also consider the option of producing the goods by themselves.

Government may also release previously stored inventory of such goods to ensure that there is no shortage in the market, however, it might not be possible for all the goods, for example, perishable goods.

All these options will lead to the shift of supply curve to the right and thus forming a new equilibrium at Pmax.

Minimum Prices or Price Floor

A minimum allowable price set above the equilibrium price is a price floor. With a price floor, the government forbids a price below the minimum price. Price Floors are minimum prices set by the government for certain commodities and services that it believes are being sold in an unfair market with too low of a price and thus their producers deserve some assistance.

Government might set Minimum prices

• To raise incomes for producers such a farmers and protect them from frequent fluctuations in the commodity market.

• To protect workers and ensure that they get enough wages to sustain a reasonable standard of living.

Examples of price floors

• In many countries governments assist farmers by setting price floors in agricultural markets.

• Setting Minimum wages for certain occupations is also an example of price floors.

Consequences of a price floor

As seen from the diagram. The equilibrium price for a particular good is Pe and the Quantity demanded is Qe.

The government thinks that it is too low for that good thus they set up a minimum price for a good Pmin.

This will lead to a fall in demand to Q1 and increase in supply to Q2, thus creating excess supply or surplus.

Government can eliminate the surplus by buying the excess supply at the minimum price. This will result in the shifting of demand curve to the right, thus creating a new equilibrium at Pmin.

The Government may store it or sell it abroad. However, both these options have consequences. Buying the surplus and storing it will cost an opportunity cost for the government as they have to divert funds from other important areas and exporting it other countries may be considered as dumping.

How to write an essay

Introduction

Definition. Give examples (if any).

Paragraphs

Point
This is because...
This means that...
Therefore...
However...
This means that...

For example,

An increase in interest rates may lead to a reduction in inflation. This is because an increase in interest rates may act as an incentive for people to save. This means that less money is being spent into the economy. Therefore, the general level of prices may reduce. However, if interest rates increase, this may lead to an increase in the amount of people's savings. This means that people may have more disposable income to spend back into the economy and therefore the general level of prices may increase.

Conclusion

Summarise the essay and give overall point (based on question).

Buffer Stock Schemes