This document consists of 18 pages of Paper 3 Essay plans (Microeconomics & Macroeconomics). Each essay plan includes top facts, analysis, knowledge and evaluation to get you an A* in your Economics A-level. Each plan is tailored to the top scoring 25 marker structure of the Edexcel Board. However,...
Paper 3 Essay Plans
Evaluate the Micro and Macroeconomic impact of a significant rise in average UK
house prices
P1: Macroeconomic effects:
Point: An increase in house prices will lead to economic growth in the UK.
Cause:
Increased house prices -> people can now withdraw more equity from their homes -
> through mortgaging -> people become wealthier due to an exogenous change.
Consequence:
Wealth effect – people have more disposable incomes -> increased incentive to
spend money -> especially on expensive goods -> lead to higher consumption from
consumers -> shift AD outwards -> increased output and employment.
Multiplier -> increased spending -> increased confidence of consumers -> further
increased spending -> further inflation -> perhaps leading to further increased house
prices -> increase in positive wealth effect.
Evaluation:
Asymmetric impact on people who don’t own a house -> negative externality ->
rents may rise and so the cost of living will increase, squeezing their real incomes
and perhaps have an adverse impact on consumption. Also harder to get onto
property ladder.
An increase in house prices may also lead to income inequality -> wider gap between
people who own assets vs people who don’t. Hence it could mean that long run
economic growth may be hampered by income inequality as further measures by the
government may be needed to put in place to reduce income inequality.
P2: Microeconomic effects:
Point: Higher house prices may spur the supply of more houses.
Cause:
Higher house prices -> increased potential profits -> incentive to increase production
-> increase supply of housing.
Increased profits -> draw diagram of costs and revenues -> increased profits for
firms.
Consequence: Dynamic efficiency -> increased production -> new methods of
producing houses cheaply etc.
Evaluation:
Supply very inelastic -> planning restrictions and lack of available land.
Draw increase of supply. And analyse that quantity increased will not actually
increase much at all.
If house prices drop due to an economic crisis, the construction companies would
lose a lot of money and their revenues will fall, perhaps leading to unemployment
etc. 2008 financial crash due.
,Evaluate the possible Microeconomic and Macroeconomic effects on the
UK economy of a decision by the government to encourage fracking (25
Marker)
Intro: Britain has vast amounts of cheap and clean energy in the form of Shale gas, of which
is has approximately 5.3 trillion cubic metres. An encouragement of fracking to exploit this
natural resource in the UK would lead to many positive effects, both microeconomic and
macroeconomic.
P1: Microeconomic Effects:
The encouragement of fracking in the form of incentives to enter the industry like tax
breaks and more lenient environmental rules can benefit the economy from a
microeconomic point of view.
Encouragement of fracking would lead to the supply to increase due to an increase of
firms entering the market;
Supply increases from s1 to s2, resulting in a lower domestic price at p2 and quantity
increasing too at Q2.
This shift would result in an increase in consumer surplus and also increased
disposable incomes. Furthermore, due to the inelasticity of the demand curve a shift
in supply would cause a large drop in price, benefiting consumers further as UK
energy prices are very expensive, and in the US it has been proven that fracking of
shale gas has resulted in much lower energy prices, leading to an increase in overall
economic welfare.
Encouraging fracking may also result in an increase in efficiency of firms in that
industry as more firms enter the industry and competition increases. Firms before
may have been exploiting consumers due to their very inelastic demand so fracking
may mean competition pressures result in lower prices and increased dynamic
efficiency, as firms before suffered from x-inefficiency.
EVAL:
Encouragement of fracking will definitely result in a larger negative externality of
pollution and potential earthquakes, which may move the equilibrium away from the
social optimum equilibrium. This is because of the social cost being greater than the
private cost of production, consequently affecting third parties not involved in the
transactions, such as pollution for the nearby farmers. The negative externality may
also mean that in future, more serious taxes considering global warming may be
introduced and therefore result in higher price for consumers. But this is difficult to
calculate due to the non quantifiably of pollution.
, If a few firms enter the market, and drive competitors from other resources like coal,
an oligopoly may form in this industry and result in potential monopolistic actions
from the firms, leading to perhaps x-inefficiency or higher prices.
P2: Macroeconomic Effects:
There would also be macroeconomic benefits.
A decrease in taxes would stimulate investment, considering fracking is a capital
heavy process. Considering the multiplier effect too it would have exponential
benefits including a huge increase in employment, it is estimated 35 000 jobs would
be directly created. Investment and lower unemployment would lead to consumers
with higher disposable incomes and increased capital leading to higher consumption
and economic growth.
The productive capacity of the economy would also grow too and there could be a
shift in LRAS as well as AD, leading to a stable and lower price as well as increased
output. So the UK could reach sustainable and long run economic growth, while
keeping inflation low.
Lower energy prices may increase international competitiveness as well, thus
causing export revenue to increase and would lead to an improvement in the Balance
of Payments, and a trade balance with its imports as it may import less as it now has
its own substantial energy supply.
All this things stimulate growth within the economy and with the multiplier investment
will lead to more investment, and as labour is derived from demand, employment will
follow accelerating growth.
EVAL:
Investment greatly depends on how much gas there actually is, more gas the more
investment but if fracking becomes too difficult and expensive the investment into the
industry may decrease. Furthermore, if too much is found the price at which it sells
out may be too low to be attractive to invest in.
There may be overproduction and overuse of this resource leading to it being
exploited too quickly and in future this capital will go to waste as it is a finite resource.
There may also be a significant time lag, as heavy capital may take a long time to set
up and fracking may take a long time to be effective and extract the resource.
Conclusion: Overall Fracking would result to be extremely beneficial to the UK, due to the
low prices it offers consumers and it being relatively cheap compared to other resources to
produce energy. It could be a method for sustainable economic growth.
Evaluate the Micro and Macro economic effects of a slowdown in Chinese Economic
growth
P1: Increased budget surplus on the current account on the balance of payments
Chinese demand for imports will decrease as national real incomes will fall > lower
supply of yuan onto the market from currency exchanges > increased value of the
yuan > increase the costs of imports globally for other nations > reduction in the
value of Chinese exports to other countries in the long run > increased budget
surplus due to reduced value of imports (ceteris paribus)
Evaluation:
other factors may influence the budget surplus for individual nations, like currency
fluctuations
there may be no net change in the current account if China decides to limit imports
through the imposition of tariffs for instance and stimulate domestic demand,
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