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CONTENTS
ABOUT THIS BOOK – Please read! ....................................3
SECTION 1: MICROECONOMICS......................................4
Scarcity ..................................................................................... 4
Markets...................................................................................... 7
Demand .................................................................................. 7
Supply .................................................................................. 10
Equilibrium: the Interaction of Demand and Supply ............. 11
Market Efficiency .................................................................. 13
Elasticities of Demand and Supply....................................... 14
Price Elasticity of Demand ................................................... 14
Cross Price Elasticity of Demand ......................................... 18
Income Elasticity of Demand ................................................ 18
Price Elasticity of Supply ...................................................... 19
Government Intervention....................................................... 21
Maximum and Minimum Prices ............................................ 21
Indirect Taxation ................................................................... 23
Subsidies .............................................................................. 25
Market Structures................................................................... 26
Aims and Objectives of Firms............................................... 26
Production and Costs ........................................................... 26
Revenue ............................................................................... 29
Profit ..................................................................................... 31
Perfect Competition .............................................................. 32
Monopoly .............................................................................. 34
Monopolistic Competition ..................................................... 38
Oligopoly .............................................................................. 40
Price Discrimination.............................................................. 42
Market Failure and Government Response ......................... 43
Externalities .......................................................................... 43
Negative Externalities........................................................... 43
Positive Externalities ............................................................ 47
Public Goods ........................................................................ 48
Merit and Demerit Goods ..................................................... 49
Monopoly Power................................................................... 49
Common Access Resources and Sustainability ................... 50
Asymmetric Information........................................................ 51
Microeconomics Sample Questions..................................... 52
SECTION 2: MACROECONOMICS ...................................53
Measuring National Income................................................... 53
Circular Flow of Income........................................................ 54
Business Cycle Model .......................................................... 54
Macroeconomic Models......................................................... 56
Aggregate Demand and Supply Analysis ............................. 56
The Keynesian/Monetarist Debate ....................................... 64
The Multiplier ........................................................................ 65
Demand-side Policies........................................................... 65
Supply-side Policies ............................................................. 69
Unemployment and Inflation ................................................. 70
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Unemployment ..................................................................... 70
Inflation ................................................................................. 74
ECONOMIC GROWTH ............................................................ 82
DISTRIBUTION OF INCOME .................................................. 85
Macroeconomics Sample Questions.................................... 88
SECTION 3: INTERNATIONAL ECONOMICS.................. 89
Reasons for Trade .................................................................. 89
Terms of Trade ....................................................................... 91
Free Trade/Protectionism ...................................................... 92
Economic Integration............................................................. 95
Exchange Rates...................................................................... 97
Balance of Payments ........................................................... 101
Correcting a Current Account Deficit ................................. 102
International Trade and Exchange Rate Sample Questions
............................................................................................... 104
SECTION 4: DEVELOPMENT ECONOMICS................... 105
Introduction to Development .............................................. 105
Measuring Development ...................................................... 108
Domestic Factors ................................................................. 110
International Trade ............................................................... 111
Foreign Direct Investment ................................................... 113
Aid and Multilateral Assistence .......................................... 114
International Debt ................................................................. 117
Markets vs. Intervention ...................................................... 118
Development Economics Sample Questions .................... 119
REVISION ADVICE........................................................... 120
Assessment Objectives (AOs) ....................................... 121
Higher Level Assessment............................................... 122
Essay Technique ............................................................. 124
Model Markschemes ............................................................ 125
Data Response Technique ............................................. 133
Model Markschemes ............................................................ 134
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3rd Edition
SECTION 1: MICROECONOMICS
SCARCITY
The basic economic problem is scarcity. But, to be more
accurate, the problem is finite resources (land, labour, capital and
enterprise) in relation to infinite wants. Because these resources
are finite, individual consumers, firms and governments constantly
have to make choices between having one thing, and not having
another.
These choices can be focused down into three
questions.
What to produce?
How to produce?
For whom to produce?
All economies, whether tending to command or to free market,
exist as an attempted solution to these three questions. All
economies, including developed and less economically developed,
face the same problem, and therefore the same questions. For
example, developed economies might face the choice between
more nuclear weapons or more healthcare, whereas a less
economically developed country (ELDC) might face a choice
between clean water and basic vaccination programmes.
Factors of Production are the scarce resources that an economy
has at its disposal to produce goods and services.
It is important that you understand
that the act of investment involves
the buying of capital goods and
has nothing to do with money.
Land represents natural resources
Labour is the human resource
Capital is goods that are used to produce other goods, and
requires an economy to forgo current consumption
Enterprise, also a human resource, organises the three
other factors to produce goods and services. The reward
for this risky activity is profit
Allocation of these resources can be organised through several
different Economic Systems. In the end, all economies are
mixed, although some will tend towards free market (eg. UK,
USA), and others will tend towards centrally-planned or
command (North Korea, Cuba). Traditional systems still exist in
many of the poorest LDCs, and involve actions such as barter, gift
and communal activities.
Opportunity Cost is the cost of the next best thing forgone. As
long as economic resources are used in the production of a good
or service, a cost is involved, even if a price is not.
A Production Possibility Curve (also referred to as boundary, or
frontier) shows the combinations of two goods/services that can be
produced efficiently with a given set of resources:
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You will normally see a curved PPC, because as more consumer
goods are produced, more capital goods have to be given up in
order to produce each marginal unit of consumer goods. As we
shall see later on, this is due to the law of diminishing returns.
Any combination of goods produced within the PPC (A) means that
there are unemployed resources. Points on the PPC (B) represent
different bundles of goods, but with fully employed resources.
Points beyond the PPC (C) are currently unattainable. In order to
attain these points, an economy would have to increase the
number of resources, increase the productivity (efficiency) of its
current resources, or improve technology. For example, Brazil
discovers offshore oil, a developed economy invests in its human
capital, and car factories become robotised.
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3rd Edition