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1 TEACHERS NOTES Economic Review Volume 19 Number 1, September 2001 Welcome to another Volume of the ECONOMIC REVIEW. We hope that you will find plenty of use and interest to you and your students in the magazine during the year. The ECONOMIC REVIEW is designed and written for students, and we hope that they will benefit from reading and browsing through the pages of the magazine. However, we also hope that it will be useful in your teaching. These Teachers Notes are intended to help in this, by providing additional material and suggestions for using the articles that appear in the main part of the magazine. For the coming Volume, our plans include articles specially written for AS students, plus features written from officials in the Office of Fair Trading, the Treasury, and the Bank of England. If you have access to the World-Wide Web, you can also find more information about the ECONOMIC REVIEW in our home page. Here you will find (amongst other things) advance notice of topics that will appear in the magazine in future issues. These Teachers Notes are also available on the web-site, including some additional pages that could not be accommodated here. You can find us at: More and more of our articles are now referring to additional material available on the internet. Our web links page will include direct links to all of these pages, so that you and your students can readily find your way to this extra material. If you have suggestions about the magazine or about Teachers Notes, please write to me at: Dr Peter Smith, Editor Economic Review Department of Economics University of Southampton Southampton SO17 1BJ or me at We are always pleased to receive suggestions and comments about the magazine so that we can continue to provide the sort of material that you and your students need. I hope that these Notes are helpful to you in getting the best for your students from the ECONOMIC REVIEW. Peter Smith (Editor) ECONOMIC REVIEW Teachers Notes 19(1), Page 1

2 Organic food (See the article by Anna Palmer on pp. 2-5) We are always pleased to be able to begin a new Volume of Economic Review with an article highlighting a topical application of demand and supply analysis. The market for organic food is a rapidly-changing one, and here Anna Palmer investigates some of its key features using D&S analysis, in an article especially designed for AS students. In the article, we have provided some estimates of the income elasticity of demand for a range of different foodstuffs. You may find these helpful as a discussion point for your students in helping them to understand the concept of the income elasticity, and the implications of these real world values. We suggested one idea for discussion in the article itself, suggesting that students think and talk about how they expect farmers incomes to evolve over time if they are producing inferior goods, and whether this would be expected to encourage the adoption of organic production methods. The underlying premise here is that if consumer incomes are increasing through time, then farmers may find it profitable to switch production into products such as organic foodstuffs where the income elasticity is seen to be positive. There may be dangers in continuing to rely on producing inferior goods, where demand is likely to be on a declining relative trend through time. However, the potential benefits have to be set alongside the transitional effects in the short run, as it is costly to make the switch to organic production, and it can taker between 2 and 5 years. You might like to point out to your students that there may be parallels here with the situation facing many primary-dependent developing countries, which saw a long-run decline in their terms of trade throughout the last century. The article goes on to discuss the elasticity of supply, and to explain how the elasticity of supply is likely to be greater in the long run than ion the short run. Standards of living (See the Getting Started column on pp.6-7.) This regular column appears in the first two issues of each Volume, and for the second year is written by Dan Cottrell of Cranleigh School. In this first issue, he looks at some aspects of measuring the standard of living. When your students read this piece, they may also find it helpful to have their copy of the Economic Review Data Supplement to hand, as there is some relevant further discussion to be found there. During the article, Dan poses some questions for your students to consider, so that it may be used to stimulate discussion in the classroom. You might also like to use the exercise (provided in a separate file), which supplements one of Dan s questions. ECONOMIC REVIEW Teachers Notes 19(1), Page 2

3 Labour market inequality (See the article by Stephen Machin on pp ) In this article, Stephen Machin investigates some of the theories that have been put forward to explain the rising inequality that has typified the UK labour market in recent years. In particular, he focuses on the role that education has played in this process. In particular, the wage differential between university graduates and non-graduates has widened, contributing towards the widening inequality. This has much to do with the way that technology has developed, which has been biased in favour of highly-educated workers. The third law of demand (See the article by Gavin Peebles on pp ) A prime way for students to learn about economic analysis like demand and supply is to think about how it applies to aspects of everyday life. This article by Gavin Peebles sets out to do just that, by focusing on some unusual examples of the application of demand analysis. In particular, the article underlines the fact that when an economist talks about price, it is the real, or relative price that is important. If we draw a demand curve, it is relative price that appears on the axis. In other words, we consider the effect of price on quantity demanded, with other prices assumed fixed. A first example relates to dangerous driving, and the expected impact of legislation designed to reduce road deaths. The central argument is that legislation that makes cars safer effectively reduces the price of dangerous driving. So although the probability of being killed in a given accident may fall, the probability of being involved in an accident rises, as drivers will react to the reduction in the price of dangerous driving by driving more dangerously. Key losers in this situation may be road users who are not car drivers, such as cyclists and pedestrians. For them also, the legislation may mean that the probability of them being injured whilst walking or cycling has increased. For some of them the relative price of walking may increase to the extent that they find it worthwhile to drive instead thus increasing the traffic on the road, and increasing the probability of more accidents. The article goes on to point out that transport costs can affect relative prices, such that a region may tend to export its more expensive produce while consuming lower quality products domestically. If this is so, there is an important implication. A region or a country that has a reputation for producing good products (lobsters from Maine, oysters from Colchester, leather goods from Italy) has that reputation on the basis of the quality of its exports, a high proportion of which are the high price, good quality goods. So if you visit these regions hoping to find the high quality goods you may have to search, as only a lower proportion of high quality goods will be retained for domestic consumption. ECONOMIC REVIEW Teachers Notes 19(1), Page 3

4 Opportunity cost (See the Data and Response column on pp ) Each year we send out a questionnaire to Economic Review subscribers to find out what you like about the magazine, and how we can improve it. Some teachers who responded last year expressed a preference for returning to our normal practice of tackling real questions from past papers. I hope you will understand the dilemma that has faced us in doing this, given the transition to Curriculum This has meant that we now have fewer Examining Boards, more diversity of examination structure, and a much more limited selection of past questions that would be relevant for discussion. Hence my alternative approach of using newspaper articles as the basis for the Data and Response column. Once we are through the transitional period, I hope to return to using live questions. Until then, I hope you will bear with us. Opportunity cost is such a fundamental concept in economics that it seemed ripe for discussion early in the Volume. There are so many examples in the world around us, and in everyday decisions that we all take, that it is not difficult to find text passages that provide an excuse for talking about it. No doubt you have your own favourite examples to use in the classroom. In the column itself, I suggested that readers think about the opportunity cost of reading the article, or of studying AS or A2 Economics. These examples should be relatively straightforward. However, I also threw in a further example which may be a little more challenging for the students namely, how does opportunity cost help us to explain why providing education to women in less-developed countries will influence the rate of population growth? One way of leading students into thinking about this issue is to begin by considering the demand for children. Some may object to the idea of treating children as if they were products, but the article by Gavin Peebles encourages us to look for unorthodox applications of demand and supply analysis. Once we begin to think of a demand for children, we can argue that a family will demand children up to the point where the marginal benefit from having another child is equal to the marginal cost. We can then see how opportunity cost comes into the story. If females are more highly educated, then we would expect them to have higher earnings potential. This clearly raises the opportunity cost of having children, as the earnings foregone in child-rearing activity are now higher. Other things being equal, this should lead to a reduction in the demand for children. Economic policy for competition and consumers (See the article by Mark Scott on pp ) This is the first of three articles in this Volume of Economic Review that offer a view from within the institutions responsible for key areas of economic policy in the UK economy. In later issues, we will be publishing articles written by economists within the Treasury and the Bank of England. Here, Mark Scott of the Office of Fair Trading explains how and why government intervenes to combat unfair trading and anti-competitive behaviour by firms. The article provides a clear account of how competition policy is administered, and why it is important. I hope that you and your students will find it helpful as an authoritative view from within the OFT. ECONOMIC REVIEW Teachers Notes 19(1), Page 4

5 Development profile: Country J (See the outside back cover) Country J is seemingly a country of contradictions. Figure 3 in the article tells this story. The development diamond is a visual way of trying to compare two countries in four dimensions. In this case, I chose GNP per capita, life expectancy, secondary school enrolment and access to safe water as being the four variables for a comparison of Country J with the UK. The closer are the dots for a variable, the closer the comparison between the two countries. Here we see a very distorted-looking diamond. It seems that when it comes to life expectancy and secondary school enrolment, Country J has achieved levels that are not far short of the UK. But for GNP per capita and access to safe water, the picture is very different. So, here we have a country that would appear to have successfully invested in health and in education, but where income levels and infrastructure lag way behind. Other clues? Rice, tea and civil war. It all adds up to Sri Lanka. There is a long-standing debate in development economics. There are those that argue that the path to development for a country relies on first achieving a rapid rate of economic growth. Proponents of this view would argue that once economic growth has raised income levels, then it becomes possible for the benefits from that growth to trickle down to all members of society. Others have argued that the reverse priority should be endorsed. In other words, the first priority should be to tackle poverty and income inequality, improving the health and education of the population, and seeking to reduce gender inequality. Once this is done, the population will become more productive, and this will enable economic growth. It does not appear that the question can be resolved by looking at country experiences. Certainly there are countries that have focused on economic growth, but it seems rare that the trickle-down effect cuts in. For example, there are a number of countries in Latin America that have succeeded in raising income to the middle-income range but in which poverty and inequality remain. Sri Lanka might be seen as an example of the basic needs first approach, in which education and health advances have yet to be translated into economic growth. Arguably this approach may result in enhanced quality of life even if income levels remain low. See the back page of the Data Supplement, which explores this issue further. One of the reasons given for the relatively slow rate of economic growth has been overinvolvement by the public sector. This may damage the rate of income growth if the public sector is productively less efficient than the private sector. In a number of countries, governments have been tempted into guaranteeing jobs for graduates, as an incentive for people to undertake tertiary education. All too often, this results in overstaffing of the civil service, and a waste of human resources. As for the government s priorities for the future, continued privatisation may help, but almost certainly the most important boost that could be given to the economy would be an end to the civil conflict that has been ongoing since ECONOMIC REVIEW Teachers Notes 19(1), Page 5