1.

Question

• Unit 2 .

• Technology and growth in a dynamic economy.

• Draw the production function (16.2 and Unit 1)

• What is productivity and why is it important.

• Include incentives in your answer.

 Economic models, why & characteristics

 Technology, definition, how does it affect production (use production function & explain
productivity, explain the offset of curve due to technology Malthusian trap, why did it
happen to Britain –> industrial revolution by using incentives)

Use economic models to explain the rapid growth in real wages and population in the last 2
centuries, and the stagnation in the centuries before that. (Why do we need models?) What
happens in an economy depends on the actions and interactions of millions of people.

We use models to see the big picture. Models necessarily omit many details. This is their
feature, not a bug.

Technology = A process that uses inputs to produce an output.

By reducing the amount of work-time to produce the things we need, technological changes
allowed significant increases in living standards. Technological progress also greatly
improved the speed at which information travels, making the world more connected.

Firms choose between technologies (specific combinations of inputs) to produce outputs.

Some technologies are dominated by other technologies.

 Firm’s choice is to minimise costs. That is why firms use technology to maximize their profit
and minimize their costs.

Creative destruction = the process by which old technologies and the firms that do not
adapt are swept away by the new, because they cannot compete in the market.

The first adopter is called an entrepreneur. An entrepreneurial firm is willing to try out new
technologies and to start new businesses.

Profit = revenue – costs

The change in profit is equal to the fall in costs associated with adopting the new
technology. This is the innovation rent.

(Unit 16 and Figure 16.2 – online book for more info)

Production functions show how inputs (e.g. labour) translate into outputs (e.g. goods and
services), holding other factors constant (e.g. production environment).

Productivity

We know that output per hour of labour is productivity. New technologies raise the productivity of
labour. Labour is work. Labour is an input in the production of goods and services.

Malthusian trap
Incentive: Britain = high salaries  increase of living standards  increase of
population  greater needs to cover the same inputs  use of technology to
increase outputs.
This way G. Britain move away from the Malthusian trap
2. Question

• Unit 7.

• Factors that affect a firm’s decisions.

• Differentiated products and market power. MC - AC

• Profit maximization.

 Factors that affect a firm’s decisions (costs – 1) economies of scale 2) cost functions 3)
profit maximisation)
 Profit maximisation – 2 diagrams
 Price elasticity – demand could be elastic and inelastic
 Market Power – gained by innovation (differentiated products e.g. hybrid cars) and
advertising = shift of demand and supply curve

A firm’s success and ability to grow partly depends on its pricing and production decisions.
Interactions between firms and workers determine wages, which are part of a firm’s
production costs. Other key decisions for firms include choosing product prices and
quantities to produce. These decisions affect demand and production cost as well as policies
affect the division of surplus between firms and customers. Factors that affect the firm’s
choice of price and quantities produced (costs (economies of scale, cost functions, profit
maximization), price elasticity (demand – diagram of elastic and inelastic demand), market
power (gain from innovation and advertising)). In addition, factors such as the type of the
production technology and the production scale contribute to firm’s costs and contribute
the economies of scales.

Cost advantages – Large firms can purchase inputs on more favourable terms, because they
have greater bargaining power when negotiating with suppliers.

Demand advantages - Network effects (value of output rises with number of users e.g.
software application)

A firm’s pricing decision depends on the slope of the demand curve.

Profit Maximization

To maximise profits, firms want to minimise the costs of production.

Because there is a trade-off between wages and effort, the employer should find a feasible
combination of effort and wage that minimises the cost per unit of effort.
Surplus: measuring the gains from trade
3. Question

• Unit 8.

• Characteristics of a competitive equilibrium.

• How firm entry and exit works (16.7)

• How exogenous shocks affect the demand and supply curves.

 Definition of equilibrium (equilibrium price diagram which shows supply equals demand)
 Competitive equilibrium (diagram & 4 characteristics)
 Factors which affect the equilibrium (changes in demand and supply curve which are 1)
exogenous shocks – diagram and example 2) market entry & exit – diagram 3) taxes –
diagram)
 4. Question

• Units 13 and 14.

• The business cycle and the role of investment (firms’ decisions).

• The relationship between aggregate demand and unemployment.

 Definition of business cycle – diagram of fluctuation overtime and 4 bullets, investment

info
 Aggregate demand = should mention GDP components and equation
 Okun’s Law (link between unemployment and GDP)
 (Maria’s diagrams), insert meaning of inflation and why price levels are lower at recessions

The Business Cycle

Unemployment, inflation and economic growth tend to change cyclically over time.

The four phases of the business cycle:

1. A peak is when business activity reaches a temporary maximum, unemployment is low, inflation
high.
2. A recession is a decline in total output, unemployment rises and inflation falls.

3. The trough is the bottom of the recession period, unemployment is at its highest, inflation is low.

4. expansion (recovery) is when output is increasing, unemployment begins to fall and later inflation
begins to rise.

Unemployment increases during business cycle recessions and decreases during business cycle
expansions (recoveries). Inflation decreases during recessions and increases during expansions
(recoveries).

Investment: as a coordination game in which:

 actors will be 2 firms

 Actions: invest or not invest
 Information: they decide simultaneously
 Payoff: profits from investment

The benefits of coordinating investment make cycles self – reinforcing. Firms respond positively to
the growth of demand in the economy. This is why investment is more volatile than GDP.
 5. Question

• Units 10, 14 and 15.

• Why beliefs and expectations are important.

• How they affect investment, inflation and deflation, aggregate demand and interest rates.

• Include monetary policy in your answer.

Aggregate demand (GDP) can fluctuate due to consumption and investment decisions. Sometimes
the aggregate decisions of households and firms can destabilize the economy.
Keeping unemployment “too low” leads to higher prices but also rising inflation. There is only one
unemployment rate at which inflation is stable.
Therefore, interest rates affect aggregate demand through the market for financial assets.
6. Question

• Unit 4

• Definitions of these games

• Invisible hand game

• Prisoner’s dilemma

• Ultimatum game

• Repeated interactions and the public goods game

 Definition of game theory, invisible hand game (only definition), prisoner’s dilemma
(definition & example of pesticides including the impact on social aspect), ultimatum game
(definition and diagram)
 Public good definition, repeated games definition and how repeated games have benefits
to public goods (social norms, peer punishment and reciprocity)
 Cartel and behaviour

Game theory describes the social interaction; a situation involves more than one
person/party, where one’s actions affect both their own and other people’s
actions.

Invisible Hand Game: An unseen force or mechanism that guides individuals to

unknowningly benefit society through the pursuit of their private interests.
Public goods: when individual bears a cost to provide the good and everyone receives a
benefit
Repeated interactions: Cartels behaviour
A cartel is an organization of firms that reduces output and increases price in an effort to
increase joint profits.
Repeated games: aggreements enforced by mutual retaliation explain the basic method of
operation of a cartel.
7. Question

• Units 6, 10 and 12 + Economics of projects

• The principle agent problem and associated issues, with examples.

• The relationship between incomplete contracts, hidden information and hidden actions.
Those with less wealth find it more difficult to provide equity or collateral.

Inequality may increase when some people are in a position to profit by lending money to
others.

Credit-rationing increases inequality: people with limited wealth are not able to profit from
the investment opportunities that are open to those with more assets.

Hidden Information - actions and Incomplete contracts (& The relationship between them)
8. Question

• Industry economics and Economics of projects

• Barriers to entry and the four types of market structure.

• Barriers to entry and the construction industry.

9. Question

• Industry economics and Economics of projects

• Competition policy and anti-competitive behaviour.

• Construction procurement, first-price sealed bid auctions and collusion.

 10. Question

• Construction industry economics + Units 2 and 7

• The effect of measurement issues, firm size and investment in technology on the rate of
productivity growth in the construction industry.

• There are different ways to approach this question, and no single right answer. It is the only
question that requires an essay answer.

Final Points

• Most questions have two or more parts, marks are not divided evenly between them.

• Where you are asked for explanations or definitions, keep them short and focused.

• Where you are asked to discuss a topic do so in a structured way, with an introductory
sentence or two, followed by an organised discussion and a short conclusion. Think about
what you want to say in your answer.

• Use graphs and diagrams wherever relevant, always label the axes and curves correctly.

• Questions that can be answered using graphs should take less time than ones that involve
more writing.