DAL Writes A Model Micro/Macro Effects 25 Marker - Edexcel Paper 3

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[00:00:00]Hello Edexcel students, the 25 marker in paper three super unique, right? You've got two of these to write and you need to be very comfortable interchanging between micro and macro, very comfortable with these effects, very comfortable using the extract, but also you need to have knowledge of what the criteria is whereby you can score the top marks in these essays and that's exactly what this video is going to help you with as I go through a plan of how to write one of these 25 markers. You can see my thought process. You can see me go through what all this criteria is for ultimate success on this essay so that you can imbibe all so that you can do it in your revision. Yes, but more importantly, you can do it in your actual paper three 25 marker. So enjoy the video coming guys. Take everything in. Be very confident that by the end you can do exactly the same. Enjoy.

[00:00:50]Just know guys there will be a paper three live stream tonight at 7:00 p.m.

[00:00:54]on YouTube. Make sure you're there. It's going to be great. Well, here's the question. You can see quite simply worded, right? Evaluate micro and macro effects of falling house prices. Always worth underlining highlighting key parts of the question. Emphasis is very much on the word falling here. Falling house prices. So before we kind of brainstorm an essay plan, the extracts are quite important. Let's get into those and see if there's anything good in there. You always want to kind of annotate or underline key parts of the extract to guide you. So I've copied here the two extracts that are relevant for this question. This is the 2023 uh past paper for Edexcel. So the first chart here is about house price changes in the UK and you can see for a long period of time that house prices grew in the UK. In fact, house price growth is most common even if there is volatility there. But when they do fall like during the financial crisis, it's a big fall, right? So maybe worth just circling that, you know, when there is a crash, it can be a very big crash. The only written extract relevant was extract D in this case, a quite short extract. So yeah, when you're going through this, just underline anything that's relevant to help you for this question. But you want the information to be absorbed.

[00:02:05]That's what you're going to the extract for. You're reading it like it's a story. Let the information seep into your head. The annotating, the underlining, you don't want that to be overdone. You want the information to be in your head, right?

[00:02:17]So let's have a quick read of this.

[00:02:19]Quick is the key.

[00:02:20]Uh so first two lines, nothing really um massive in here. House prices could fall dramatically. Okay, we can underline that.

[00:02:28]Um any reasons why? Well, we look at the next few lines. So people coming to the end of their fixed-rate mortgages are seeing rises in interest rates from two to over 5 and 1/2%, which is going to increase mortgage payments by something like 5,000 pounds a year. So we underline that. That's telling us why the fall in house prices is likely.

[00:02:47]That's a fall in demand for housing.

[00:02:50]Okay. And how many people think that house prices will never fall, but actually the fall is expected to be between 10 and 20%. A big fall, kind of complementing what we saw during the financial crisis years, like a big crash here.

[00:03:03]Um one mortgage lender said that a lack of housing supply will not keep house prices up. So we know in the UK that housing supply is chronically poor.

[00:03:12]But even that won't keep prices up.

[00:03:14]We're expecting prices to fall um because of the big increase in mortgage interest rates. And that same person said that yeah, it's a buyer's market now. The bubble's about to burst. With the greatest impact in the southeast of England. Okay, so regional differences uh could well occur. So there isn't much in the extract to guide us with effects, is there? More so the extract is telling us why house prices are likely to fall and how much they're going to fall by.

[00:03:40]But in terms of micro macro effects, really nothing here to guide us. Not a concern because always what we do after we've gone through the extract, we brainstorm ourselves. Always brainstorm before you go to an essay plan. So, let's do that, shall we? Make sense to start with macro effects. I mean, I look at falling house prices, and for me, the macro effects are quite easy here. So, when I think macro effects, my first train of thought is always, can I make a link to an AD or AS shift? And from what falling house prices, the direct link is to falling AD, right? Lower confidence, wealth effect being negative, lower consumption, lower AD. So, I'm thinking that, and the beauty of going to a shift of AD or AS, you can then always make a link to your core macro objectives. So, from here, we can make a link to falling growth from lower AD, rising unemployment, we can make a link to falling demand-pull inflation.

[00:04:33]We can also make a link to an improved trade balance, at least in theory. All of that is from the AD shift. So, that's my primary thought. Make a link to these objectives from a shift of AD or AS. My next train of thought is go to the non-core objectives. Think about government finances, inequality, the environment. So, there is a link to government finances, government finances um worsening. So, we can link that to the growth effects, the rising unemployment effects, but also directly lower stamp duty collection if house prices are lower. There is a link to inequality, this will be wealth inequality from falling house prices.

[00:05:08]There is no obvious link to the environment. My next train of thought for macro effects, other links to exchange rate changes, competitiveness changes. For both of those, nothing direct from a fallen house prices. So, this is plenty when it comes to macro effects. Let's do the same for micro effects. My train of thought for micro effects is always think about cost and revenue for firms. I like that to start with, because you can bring in cost revenue diagrams to guide you. So, from falling house prices, a link to costs for firms changing? Not really, nothing direct, nothing obvious. So, you ignore it. If the effect isn't obvious or direct, just ignore it, move to the next one. What about revenue? Well, because we know that the falling house prices is because of lower demand for housing, we can then link that to then lower revenue for house builders or house building firms. So, we can show that via a shift of AR and MR to the left. And we're then going to talk about lower profit, right?

[00:06:02]That's going to be the key thing here.

[00:06:04]So, that's a lovely micro effect.

[00:06:06]Next, I always think about labor market changes. So, shifts of labor demand, shifts of labor supply. And definitely here, lower labor demand. So, lower demand for construction workers. And the effects there will be lower wages, lower employment. I then go to uh shifts of normal demand and normal supply. Um so, for a specific good or specific service, fine. But you can also think about uh substitute or complement markets, and that's very relevant here. So, if house prices are lower, it's going to mean lower demand for rented accommodation as a substitute. Then I always think about efficiency changes because of competition changing or concentration changing. That's not really happening at all with falling house prices, so ignore that. And my last thing is, are there any market failure effects here? Well, yeah, you can argue on the grounds of equity. If house prices are high, they can crowd out uh those on low incomes or first-time buyers. But with falling house prices, it's more affordable for those people to access the housing market. So, a market failure on the grounds of equity being improved. The point is just greater affordability.

[00:07:09]It's always good to have a list of micro and macro effects in your brainstorm because some of these points might be more relevant to the extract. You might be able to write about some of these in more detail than others. But also, some of these points could be evaluation for others, right? So, now in your brainstorm, you want to settle. What's going to be your macro effect? What's going to be your micro effect? So, for me, I love, you know, any effects that link to shifts. So, I'm definitely going to go this way, uh linking to my AD shift to the left. I know I can write about that in detail. And now I'm thinking, okay, how am I going to evaluate that? You want to have that in your brainstorm as well, ready to go.

[00:07:44]So, what are evaluation options? For me, this evaluation point came very naturally. That if you're worried about AD shifting left and these negative effects, we're expecting macro policy intervention to help reduce the extent of these negative effects. So, whether that's expansionary monetary or fiscal policy, I just know that macro policy uh being used is a very good way to evaluate this. So, that came to me very naturally.

[00:08:08]And for my micro effect, I really want to write this point about lower revenue, lower profit for house builders because I can write about it in detail. I've got a lovely diagram to illustrate it. It kind of ticks all my boxes. Um and to evaluate it, we can use one of the other micro effects we've talked about. It's a positive trade-off here. So, how Okay, fine. House builders might be struggling, but for those on low incomes, for first-time buyers, the greater affordability is quite a big benefit.

[00:08:37]So, a positive trade-off right there.

[00:08:40]But, also the notion of regional differences was mentioned in the extract. Uh we can use that to say that not all house builders might be struggling um if house prices don't fall massively across the entire country. Um so, we've got that to factor in as well. Great in the brainstorm here to now form an essay plan. Normally, we would define key terms at the start of a 25-marker, but there are no key terms in this question.

[00:09:03]So, straight to analysis paragraph one.

[00:09:05]I'm going to go macro effect first.

[00:09:07]Doesn't matter which effect you want to write first. So, I'm going macro effect first, focusing on the lower growth and higher unemployment from that AD shift to the left. So, they're my effects. I start with those. I then want to explain why those effects can occur, and that will take me to explaining that AD shift to the left, the negative wealth effect, linking to lower consumption, lower AD.

[00:09:28]I'll draw my diagram of AD shifting left. And within that, I'll be quoting the extract, especially quotes that tell me about how how house prices could be falling.

[00:09:38]And then so what? What's my consequence of all of this? We just talk about what the concerns of negative growth are. So on the diagram, isolate the Y1 to Y2 link to lower growth, but focus on the negative output gap created, the large increase in spare capacity, the fact that this could be recessionary, and why that's a bad thing. But also talk about how government finances can worsen. We've already mentioned that as a separate macro effect. We can actually bring it in here as a consequence of lower also here we can talk about stamp duty revenue being less as well.

[00:10:10]And now to evaluate, we've already brainstormed a really good evaluation point. But just remember your evaluation also needs to be written in high detail with a judgment as the dominant part at the end of the paragraph. So the evaluation point here is is saying that, you know, whether these negative concerns are really likely to occur at that level depends on the nature of a macro policy response. Now you want to explain what you mean by that and why it's significant. So you would go into how we've assumed ceteris paribus in our analysis that when house prices fall, that's it in a nutshell and that effect is going to dominate. When in reality, those negative effects are likely to be foreseen by policy makers, they're likely to then intervene to prevent those concerns being so large through demand-side policies. And again, use the extract to back you up. The big fall in house prices predicted, yes, but also the huge increase in mortgage interest rates, how dramatic that is. It's that that's going to warrant the macro policy response and catch the eye of policy makers. And then your judgment and then you can back this all up by saying that look, you know, low inflation is expected from the AD shift left. So that on top of the negative concerns of house prices falling on the macro side is likely to mean that macro policy will be loosened.

[00:11:32]And now you see the judgment language is very likely to happen that monetary policy is going to be eased, it's going to be loosened by interest rate cuts, which will help to prevent a large scale fall in AD. You can say all of that, but also can help to prevent a massive fall in house prices to the point where it's a crisis in the housing market. And also go further with your judgment and say, "Well, actually with interest rate cuts, it's likely that interest rates can be cut a lot if necessary and also in a short space of time." So, all of that is kind of your judgment saying that this is a very likely response from policy makers. And it's all justified, it's fantastic evaluation right here. And now for analysis two, we've already brainstormed the micro effect. We love this lower revenue point and that is going to be the point, right? The lower revenue for home builders. Uh explaining why that occurs, you're going into the factors that will mean lower demand for housing and thus lower demand for house builders, the higher interest rates, the higher cost of borrowing, the higher cost of getting a mortgage using the extra factor and back that all up. You would then draw your diagram of MR and AR shifting left. You get all of that beautifully drawn. And then so what as a consequence? Why is that a problem? You would focus on the lower profit that the diagram will show you and why lower profit is concerning. So, dynamic efficiency losses, returns for shareholders being lower and why that's concerning, but also how actually new house builders are less likely to enter the market um given lower profit that's being made. Wonderful analysis.

[00:12:59]And to evaluate, we've already got the really good evaluation point from our brainstorm, so put that in, the positive trade-off, especially for those on low incomes and for first-time buyers. And then explain what you mean and why that's significant. Uh what we mean here is the affordability benefit, right? And solving a normative-based market failure. So, say all of that, promoting greater equity, helping to promote greater social mobility, quality of life, all of that kind of stuff. But then make a judgment about the overall effect here. And how even though, you know, this is a a really good point we're making, in truth, my judgement is there is still significant barriers to buying a house, right? The extract makes it clear, the high interest rates is still the most significant barrier that those on low incomes or first time buyers are going to face, as well as others like putting a deposit together to actually get a mortgage in the first place. There are all those barriers that can impede first time buyers and those on low incomes still mitigating the extent of this positive trade-off.

[00:13:58]But also the notion of regional effects.

[00:14:00]It's unlikely that house prices are going to fall massively all across the country. So, this benefit is limited in that sense. But also for home builders for that reason, their revenue might not fall significantly if there are wide differences in house prices falling across the country. And now to the final judgement paragraph. You always want to write this paragraph, so leave enough time to do it. And there are two ways to write a final judgement for a micro macro effects question. One is just to weigh up the most significant is your micro effect or your macro effect in saying why. The second option is saying whether your micro and macro effects are concerning or your micro and macro effects are beneficial and why. Two options for you there. So, I've taken the first option, which is saying actually that the macro effect, the negative one, is more significant than the micro effect mentioned. And then you've got to justify why. You've got to weigh up the most significant arguments that have led you to that judgement and then back that up with evidence, probably from the extract, but also from your own head, like especially questions that about the UK economy. It's likely you've got your own knowledge, which you're welcome to bring in to back up your judgement here. So, my judgement, yeah, my macro concern is far more of a significant worry than the micro effect is. And the way I'd back that up, the arguments I weigh up is from the size of the fall that the extract mentions, and also how significant that wealth effect is in the UK. The idea that the vast majority of households in the UK are actually homeowners and a lot of these people obsess about house prices. It's the largest form of wealth that most of these people will have. So, I'm kind of weighing up the extent of that wealth effect and how it could well be recessionary. That's the way I'm going to kind of justify that judgment. But, I'm going to mitigate against it slightly. The extract mentions how supply is still tight. So, there is a chance that the falling prices could be an exaggeration. [clears throat] But, still the macro concern is the most significant one is my overall judgment.

[00:15:51]So, there you have it, guys. Hopefully, you found this useful. In particular, the brainstorming at how to use the extracts effectively, how to come out with micro macro effects quickly, and of course, the techniques you're actually going to be writing in when it comes to essay writing. All of that will guide you massively when you're planning your own essays and more importantly in your actual paper three 25 marker. So, thank you so much for watching this video, guys. Truly appreciate it.

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