Economics(Cambridge) for A-level

Summary: Section1 Basic economic ideas ●All economies face the so-called economic problem of limited resources and unlimited wants. ●Choice is necessary in order to decide what to produce, how to produce and for whom to produce. ●Factors of production (land, labour, capital and enterprise) are essential for the production process. ●Speacialisation allows more goods and services to be produced. Money facilitates speacialisation and exchange. ●The true cost of choices we have to make is known as opportunity cost. ● A production possibility curve is a representation of what can be produced in an economy and the trade-offs involved in making choices. ●There are various types of economic system for the allocation of resources. Section2 The price system ● A market exists whenever people come together for the trade or exchange of goods or services; it is also possible to identify sub-markets. ●The buying side of the market is referred to by economists as the demand side. It is possible to derive a demand curve for any market-this shows how the quantity which is demanded varies with the price of a product or services. ●Consumer surplus arises because some consumers are willing to pay more than the given price for what they buy. ●The demand curve shifts to the left or right when, ”other things being equal”, the assumption is changed. Three important causes of this are a change in income, a change in consumer tastes or attitudes and a change in the price of related products. ●The selling side of the market is known as the supply side. It is possible to derive a supply curve for any market-this shows how the quantity which is supplied varies with the price of the product or service. ●The supply curve shifts to the left or right when, “other things being equal,” the plans of suppliers. A change to the equilibrium position will produce a new equilibrium price and quantity. ●Elasticity is a very important concept in markets; it is the responsiveness of one economic variable following a change in another variable. ●Price ,income and cross elasticity of demand are relevant numerical measures which have considerable value and use in enhancing our understanding of how markets operate. The price elasticity of supply is relevant in understanding how producers can react in markets. Section3 Government intervention in the price system ●Markets do not always operate as suggested by economic theory. There are various reasons why markets fail. ●Where negative and positive externalities exist in a market, the outcome is an inappropriate level of production. ●Using cost-benefit analysis can be an important aid to decision making. ●Merit and de-merit goods will not be provided in the right quantities by the market. ●Public goods will not necessarily be provided by the market. ●Government intervention can take various forms including regulation, financial intervention and direct provision of goods. ●Financial intervention in the form of taxes and subsidies has been widely advocated for use in markets where there are negative and positive externalities. Section4 International trade ●International trade is an essential and beneficial feature of the global economy of the twenty-first century. ●The principle of absolute and comparative advantage can be used to show the benefits of free trade. ●Tariffs, quotas, exchange control export subsidies distort the benefits of multi-lateral free trade for the world economy; in certain circumstances, protection may be relevant especially for developing economies. ●Increasingly, economic integration through the setting up of free trade areas and the European Union can bring benefits to the members of such organisations. ●The terms of trade index measures the rate at which the goods of one country exchange for those of another. ●The balance of payments is an important financial record of the international trading transactions of country. Section5 Measurement in the macro-economy ●The measurement of certain macroeconomic variables is important for economists to understand differences between various types of economy. ●The labour force is an important economic resource; variations in both its size and participation rate can be measured across different types of economies. ●The productivity of labour has an important bearing on the living standards in an economy. ●Unemployed labour is a resource which can be used to help an economy achieve its productive potential. ●The cost of living in an economy can be measured by means of a weighted price index. Section6 Macroeconomic problems ●All types of economy are concerned about problems of inflation, balance of payments disequilibrium and fluctuations in their exchange rates. ●These problems have particular relevance and significance for developing countries. ●Inflation is caused by monetary, cost and demand factors. ●If unchecked, inflation affects the domestic and external well-being of a country. ●Disequilibrium in the balance of payments of an economy is caused by a high propensity to import, a lack of confidence in an economy and an expansion in the domestic economy of a country. ●This disequilibrium can have an adverse effect on the domestic economy and lead to a fall in the foreign exchange rate compared with major currencies. ●There are three main types of exchange rate-nominal, real and trade weighted. ●Exchange rates are crudely determined by the demand and supply of a foreign currency in international markets –under certain circumstances, the change in exchange rates may not occur or is managed between certain specified limits. ●Exchange rates can depreciate or appreciate as a consequence of changes in demand or supply for currency. ●Changing exchange rates affect import and export spending and the balance of payments of a country. Section7 policies to correct balance of payments disequilibria ●Governments may find it necessary to use various policies to correct a balance of payments deficit or surplus. ●The use of these policies is necessary where a country has a managed exchange rate. ●Such policies can have short-term detrimental effects upon the domestic economy. ●From a longer-term standpoint , supply side policies can enhance a countr y’s competitiveness.