Perfect Evaluation in Economics (with examples)

In this video, I'm going to be guiding you on how to write a perfect evaluation for any question. Not only that, this guide is applicable to the international balorate, but it also works for IGCSE economics. the IGCSE and GCSE. Evaluation is also known as limiting factors, depending factors or the unknown factors. And there are some very well-known acronyms out there such as slap, clasp, and stop. And I'm here to yet again add another one I call mode. So this consists of magnitude, opportunity cost, assumptions, and time. So let me go through these in a little bit more detail. So in terms of

magnitude, it really depends on the size of tax or the subsidy. If the tax is insufficient, people will continue to spend. Or if the subsidy is insufficient, the producers will not be able to produce sufficient quantities of said good. Or you could say it depends on the size of the firm. As large firms are able to do things that small firms cannot. For example, in a recession, a large firm is able to operate at a loss for an extended period of time. So due to the size of the firm, the effect of the recession is very minimal compared to small firms. It also depends on the size of the government as large governments have significantly more power and control over their country compared to a small government. It also depends on the size of interest. If the country was to experience an increase in interest, but yet only to find out it was a 0. 05% 05% increase then the size of the interest was insufficient compared to the needs of the economy. You can also mention the size of the government spending whether they spent enough or not the size of the Keynesian multiplier effect or the size of the tariff and quotota. In theory if the tariff is applied on another country the domestic production will increase the price will increase and the imports will decrease from this country. But if the tariff is only 0. 5% which is only applied on 50 products for example then the effectiveness of this tariff will be minimal or limited at best. The second one is opportunity cost or also known as

priorities. This depends whether the government values or prioritizes equity or efficiency. as if the government prioritizes efficiency, there'll be a sacrifice to be made which is equity. Another one would be GDP versus the environment. As if the government wants to increase its GDP, the environment must be sacrificed as more resources will be used to make more goods and services which will increase the use of the factors of production. This also depends on whether the government values the consumer or the producer, whether to tax them or whether to subsidize the producer or the other way round. The next one is the most obvious one which is health versus education. Whether the government decides to spend more money on health and the opportunity cost will be education. As we all know that health and education are both very important for the government and due to scarcity the government has to pick one over the other. So if you are answering some sort of policy question on how the government is subsidizing something in the economy let's say for example firms then you can say well the opportunity cost is that they are not investing this money in health or education. Another opportunity cost or priority is inflation versus unemployment. For example, with very low levels of unemployment, people tend to spend more and when they spend more, this causes inflation. And when there is inflation, the government will start applying their policies to reduce inflation and the unintended consequence of that is unemployment. Again, the government cannot have both. And lastly, the budget versus the economy. Some governments will be facing the question whether to save their economy or to save their budget. As many governments in the world are in debt, it is increasingly difficult to spend more money on the economy when you can't afford it. But if the government decides to keep their budget healthy and not spend on the economy, especially during a recession, then the recession will start to prolong. This reduces confidence levels and this will end up turning into a depression. So in the real world, the government will usually save the economy first over their budget. Next we have

assumptions. This is when you are questioning the assumptions of the logic that you've just written. So firstly we have perfect information. For example, the government has no idea the exact amount of tax to apply for carbon emissions. As here the government is quantifying the unquantifiable and a tax applied is simply an educated guess. We assume that substitutes are all perfect. And as a self-proclaimed Apple fanboy, if the prices of next year's iPhone go up by 20%, I certainly will not be moving on to Android. And there are plenty of people like me out there. The other assumption is that the interest rates cannot go below zero. Well, the fact that it can look at Japan. We also assume that the government has got money to spend. As per the slide before, I said that the governments are usually in debt. So, they have to manage their expenses accordingly. We assume that there is no corruption in any government. So, the assumption that every dollar in the budget and every dollar collected by tax revenue is spent on public goods. But in the case of corruption, this money goes into the pockets of the politicians. We also assume that the consumer and producer confidence remains. So if the policies enacted by the central bank or the government is applied onto the economy, the effect of said policy is guaranteed. But if consumer and producer confidence is at an all-time low, an interest rate at 0% will do absolutely nothing. And the last one on this list is we assume that all multinationals or businesses run at profit maximization. But this depends on the objectives of the company as they might be operating at revenue maximization which is MR equals zero or the government may have intervened into this market and had forced them to increase their quantity operating at the maximum productive efficiency level of average revenue equals marginal cost. And finally, time. This is when you

discuss the short and long run effects of your economic argument. To summarize this entire slide, in the short run, nothing happens. In the long run, then you will feel the effects. For example, it takes time for consumers to change their habits. For example, the government produces a successful marketing campaign stating the dangers of cigarettes and also they've taxed it by an additional 50%. But due to the addictive nature of cigarettes and the price elasticity of cigarettes, it will take a long time for consumers to change their habits or it takes time for firms to enter and exit the market. This could be due to contracts and other long-term commitments. And talking about contracts, these contracts could be a multi-year contract with a supplier or specialist managers or highranking employees in the firm. It takes time for firms to innovate and the fruits of their research and development will only be realized in the long term. For example, people say that Apple are a profit-making company in which they are. However, they do research and develop new innovations in their product. Let's take the Mchip laptops. This took them 12 years from start to finish to develop and this was funded using their profits. And the result of this is that we got cheaper Macs which had more battery life, better performance, and overall more reliable compared to their Intel counterparts. It takes time for training to take effect. So if the government was to invest large sums of money into the economy to education, the results of this will not be felt for the next 10 to 20 years. It also takes time for policies to take effect. For example, in a democratic country, it takes time to recognize that you have a problem. It takes time for Congress to agree on the plan. and the Senate to vote on the plan. And once the plan has been applied onto the economy, it takes time for the economy to feel the effects. And on the subject of effect, no pun intended, it takes time for the multiply effect to take place. So just to summarize this acronym, M stands for magnitude, whether it is enough or not. O stands for opportunity cost as you cannot have both. A is for assumptions meaning what information have we assumed and T is for time in which we analyze the shortrun and long-term effects. Here are some student examples that I would like to show you.

In the case of imperfect information, however, fines may not be the perfect solution to market failure. It is difficult to gauge how much to find due to the imperfect market information limiting its ability to decrease dead weight loss as we will never know if fines can decrease the dead weight loss to zero. In addition, fines need proper enforcement as producers have incentive to high actual usage of chemicals and antibiotics to not pay the fines in order to decrease their marginal private cost. Hence, the cost of enforcement of fines may also be an issue and may be even greater than the externality itself. As you can see, there's a lot going on in this one paragraph alone. It says that we have imperfect information which we will never know if fines will reduce the dead weight loss to zero. On top of that, it requires proper enforcement and firms also have incentive to hide their usage which will reduce their MPC and lastly the cost of enforcement might be greater than the externality itself. And in the case of government budget

however, education and training is expensive and it takes time for this structural change, making it only effective in the long run. This can worsen the already high 7. 7% of GDP's budget deficit. Thus, this causes an opportunity cost as they could instead spend their money on helping Kenya's deteriorating infrastructure, which can increase business confidence, thus increasing investment. There is a lot going on again in this paragraph. You can see that they've said training is expensive and it takes time and the problem is that they already have a high 7. And then they've said something about opportunity costs where Kenya's deteriorating infrastructure could be invested in instead. And to help this will increase business confidence which will also increase investment. This student here has linked multiple evaluation points and has given us a well-ritten, well articulated and congruent paragraph. And looking at the next one, a

disadvantage of supply side policy is that there is an opportunity cost. As of 2018, the budget deficit grew to about 7. 8%. Government expenditure could further increase the debt burden as the budget equates to revenue minus expenditure. If infrastructure costs are too high, more crowding out and foreign debt will occur. Even if not in a deficit, spending money on infrastructure leads to opportunity costs on spending money in education, healthcare that greatly affect the long-term development and well-being of a country. Yet again, there's a few things to unpack in this paragraph. They mention opportunity cost and debt burden crowding out and foreign debt and even if they are not in a deficit there is the opportunity cost of spending money in education and healthcare. The ability to lower interest rates is

another issue. For example, the USA and Hong Kong already have very low interest rates. So they will not be able to lower their interest rates much more. Thus, the effectiveness also depends on how much the interest rates decrease by and how long that they will stay that low for. A greater change in magnitude over a longer period of time will be more effective. This is a relatively straightforward one as it states that the ability to lower rates is another issue as Hong Kong and USA already have very low interest rates and it also depends on how much the interest rate has decreased and for how long. And the last one, another evaluation

point is that monopolies are dynamically efficient. This means that monopolies will utilize their abnormal profits into research and development, investing in improving their technology in their capital goods and being innovative in the market. This will lead to a significant reduction of price and offers much higher quality good or service for its customers. And this one they say that the monopoly is dynamically efficient which they use their research and development to innovate into the market which in turn reduces the price of goods and giving their customers better quality. I hope that helped. I hope you guys have a good day. Bye-bye.