Economics

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How the Economic Machine Works

Structured Writing - Simple Model

Structured Writing - Intermediate Model

Structured Writing - Advanced Model

Learner Guide

Check the Learner Guide

Flipped classroom - Video ressources

List of videos on economic concepts

Section 1: The basic economic problem

Chapter 1: The nature of the economic problem
Chapter 2: Factors of production
Chapter 3: Opportunity cost
Chapter 4: Production possibility curves

Chapter 1: The nature of the economic problem

basic economic problem
economic agents
economic goods
free goods
goods
needs
private sector
public sector
services
wants

resources

factors used to produce ...
... goods and services

economic problem

unlimited wants ...
... exceeding finite resources

scarcity

a situation where ...
... there is not enough to satisfy ...
... everyone's wants

economic good

a product which requires ...
... resources to produce it and ...
... therefore has an opportunity cost

free goods

a product which does not require ...
... any resources to make it and so ...
... does not have an opportunity cost.

basic economic problem

What goods and services will be produced?
How will goods and services be produced?
Who will consume the goods and services?

economic agents

households : private individuals
firms : businesses
government : public sector

circular flow diagram : model with 2 agents

The circular flow diagram shows how households and firms interact in the goods and services market, and in the labor market. The direction of the arrows shows that in the goods and services market, households receive goods and services and pay firms for them. In the labor market, households provide labor and receive payment from firms through wages, salaries, and benefits.

circular flow diagram : model with 2 agents

economic goods

resources and products are limited in supply
good that producer provides to meet the needs and wants of consumer

healthcare
food
clothing
...

free goods

resources or products that are unlimited in supply
Examples

sand
air
seawater

goods

physical items
made in the production process
Examples

tables
cars
...

needs

goods and services that are
essential for survival
Examples

food
water
shelter

private sector

part of the economy
where private firms and individuals
produce goods and services

public sector

part of the economy
where the government
produce goods and services
Examples

education
healthcare services (for the general public)

services

non-physical products
Examples

haircuts
bus journeys
telephone calls
internet access

wants

goods and services
that are not necessary for survival
but are desired by economic agents

Homework

read chapter 1
Complete Multiple Choice Questions
Complete Four-part Question

Chapter 2: The factors of production

capital
ceteris paribus
enterprise
factors of production
geographical mobility
labour
land
occupational mobility

factors of production

economic resources of :

land
labour
capital
enterprise

factors of production

land: gifts of nature available for production

labour: human effort used in producing goods and services

capital: human-made goods used in production

enterprise: risk bearing and key decision making in business

capital goods

human-made goods ...
... used in production

consumer goods

goods and services purchased ...
... by households ...
... for their own satisfaction

productivity

the output ...
... per factor of production ...
... in an hour

labour productivity

output per ...
... worker hour

output

goods and services produced ...
... by the factors of production

gross investment

total spending ...
... on capital goods

depreciation

the value of capital goods ...
... that have worn out or ...
... become obsolete

net investment

gross investment ...
... minus depreciation

$ \text{gross investment} - \text{depreciation} $

negative net investment

a reduction in the number of capital goods ...
... caused by some obsolete and ...
... worn out capital goods ...
... not being replaced

Achtung!

CAPITAL $\neq$ MONEY and CONSUMER GOOD

mobility of factors of production

mobility of land: occupationally mobile but geographically immobile

mobility of labour: housing price, family ties, education of children, visa, work permits, ...

mobility of capital: geographically mobile, can also be used for a different purpose

mobility of enterprise: occupationally mobile and geographically mobile

geographical mobility and occupational mobility

quantity and quality of factors of production

Four-part question

Identify two non-human factors of production. (2 marks)
Explain two causes of an increase in the quantity of labour. (4 marks)
Analyse why the mobility of labour may increase over time. (6 marks)

Chapter 3: Opportunity cost

consumers
decision makers
firms
government
opportunity cost

learning objectives

define opportunity cost
give examples of opportunity cost
how does opportunity cost affect the decision making of

consumers
workers
producers
governments

production possibility curve

a curve that shows ...
... the maximum output of ...
... two types of products and ...
... combination of those products ...
... that can be produced with ...
... existing resources and technology

opportunity cost

the cost of a decision ...

... in terms of the best alternative ...

... given up to achieve it

consumers

also referred to as households, ...

... they are the private individuals in a society ...

... who purchase goods and services for their personal use

decision makers

individuals or organisations ...

... that make economic choices.

Examples: consumers, workers, producers, governments

firms

businesses ...

... that produce or supply ...

... goods and services to their customers.

government

the central authority of a country ...

... responsible for the ...

... social, political and economic ...

... wellbeing of its people

video

Chapter 4: Production possibility curve

efficiency
inefficiency
movement
production possibility curve (PPC)
productive capacity
shift
the PPC diagram

learning objectives

define a production possibility curve (PPC)
draw a PPC
interpret the points on the graph
analyse :

movements along the PPC
shifts of the PPC

A Healthcare vs. Education Production Possibilities Frontier

efficiency

when an economy operates on its PPC, ...
... using its scarce resources ...
... in the best possible way.

inefficiency

when an economy operates within its PPC, ...
... because there are unemployed resources, ...
... resources are not used at their best.

movement

economy changes from one point on its PPC ...
... to another point ...
... as the economy reallocates its resources

production possibility frontier

graphical representation of the ...
... maximum amount of goods and services ...
... that can be produced in an economy ...
...per period of time

productive capacity

maximum amount of goods and services ...
... an economy can produce ...
... at any point in time ...
...with all resources used efficiently.

Exam-style Question

Multiple-choice question
Data-response question
Four-part question

Section 2: The allocation of resources

Chapter 5: Microeconomics and macroeconomics
Chapter 6: The role of markets in allocating resources
Chapter 7: Demand
Chapter 8: Supply
Chapter 9: Price determination
Chapter 10: Price changes

Section 2: The allocation of resources

Chapter 11: Price elasticity of demand
Chapter 12: Price elasticity of supply
Chapter 13: Market economic system
Chapter 14: Market failure
Chapter 15: Mixed economic system

Chapter 5: Microeconomics and macroeconomics

consumers
households
microeconomics
macroeconomics

microeconomics

the study of ...
... the behaviour and decisions ...
... of households and firms, and ...
... the performance of individual markets

macroeconomics

the study of ...
... whole economy

market

an arrangement which brings ...
... buyers into contact with sellers

economic agents

those who undertake ...
... economic activities and ...
make economic decisions

private sector

firm owned by ...
... shareholders and individuals

classroom activity

Multiple choice question
Four-part question

Chapter 6: The role of markets in allocating resources

market disequilibrium
market equilibrium
market system
price mechanism

economic system

institutions, organisations and mechanisms ...
... that influence economic behaviour and ...
determine how resources are allocated

planned economic system

an economic system ...
... where the government ...
... makes the crucial decisions ...
... land and capital are state-owned ...
... and resources are ...
... allocated by directives

directives

state instructions ...
... given to state-owned enterprises

mixed economic sytem

an economy in which ...
... both the private and public sectors ...
play an important role

market economic system

an economic system ...
... where consumers determine ...
... what is produced, ...
... resources are allocated ...
... by the price mechanism ...
... and land and capital are privately owned

price mechanism

the way the decisions ...
... made by households and firms ...
... interact to decide the ...
... allocation of resources

capital-intensive

the use of a ...
... high proportion of capital ...
... relative to labour

labour-intensive

the use of a ...
... high proportion of labour ...
... relative to capital

demand

the willingness and ability ...
to buy a product

supply

the willingness and ability ...
... to sell a product

market equilibrium

a situation where ...
... demand and supply ...
... are equal ...
at the current price

market disequilibrium

a situation where ...
... demand and supply ...
... are not equal ...
at the current price

price mechanism

the way the decisions ...
... made by households and firms ...
... interact to decide the ...
... allocation of resources

video

Command and market economies (Khan Academy)

Chapter 7: Demand

complements
contraction in demand
decrease in demand
demand
extension in demand
increase in demand
law of demand
market demand
quantity demanded
substitutes

demand

the willingness and ability ...
... to buy a product

demand schedule

data from which a demand curve is drawn on a graph

market demand

total demand ...
... for a product

aggregation

the addition of ...
... individual components ...
... to arrive at a total amount

extension in demand

a rise in the ...
... quantity demanded ...
... caused by ...
... a fall in the price of the product itself

contraction in demand

a fall in the ...
... quantity demanded ...
... caused by ...
... a rise in the price of the product itself

changes in demand

shifts in the ...
... demand curve

increase in demand

a rise in demand ...
... at any given price ...
... causing the demand curve ...
... to shift to the right

decrease in demand

a fall in demand ...
... at any given price ...
... causing the demand curve ...
... to shift to the left

normal goods

a product ...
... whose demand increases ...
... when income increases ...
... and decreases when ...
... income falls

inferior goods

a product ...
... whose demand decreases ...
... when income increases ...
... and increases when ...
... income falls

substitute

a product that ...
... can be used ...
... in place of another

complement

a product that ...
... is used ...
... together with another product

ageing population

an increase ...
... in the average age ...
... of the population

birth rate

the number of ...
... live births ...
... per thousand of the population ...
... in a year

Chapter 8: Supply

contraction in supply
decrease in supply
extension in supply
increase in supply
law of supply
market supply
quantity supplied
supply

supply

the willingness and ability ...
... to sell a product

market supply

total supply of ...
... a product

extension in supply

a rise ...
... in the quantity supplied ...
... caused by a rise ...
... in the price of the quantity itself

contraction in supply

a fall ...
... in the quantity supplied ...
... caused by a fall ...
... in the price of the product itself

change in supply

changes in supply conditions ...
... causing shifts ...
... in the supply curve

increase in supply

a rise in supply ...
... at any given price ...
... causing the supply curve ...
... to shift to the right

decrease in supply

a fall in supply ...
... at any given price ...
... causing the supply curve ...
... to shift to the left

unit cost

the average cost of production

$ \text{unit cost} = \frac{ \text{total cost} }{ \text{output} } $

improvements in technology

advances in the ...
... quality of capital goods ...
... and methods of production

direct taxes

taxes ...
... on the income ...
... and wealth ...
... of individuals and firms

indirect taxes

taxes ...
... on goods and services

tax

a payment to the government

subsidy

a payment ...
... by a government ...
... to encourage ...
... the production or consumption ...
... of a product

fall in supply

Chapter 9: Price determination

equilibrium price
excess demand
excess supply
market disequilibrium
market equilibrium
shortages
surpluses

equilibrium price

the price where ...
... demand and supply ...
... are equal

excess supply

the amount by which ...
... supply is greater than demand

disequilibrium

a situation where ...
... demand and supply ...
... are not equal

excess demand

the amount by which ...
... demand is greater than supply

disequilibrium price $\text{P}_1$

Firm sets the price above the equilibrium level.

disequilibrium price $\text{P}_1$

Firm will not sell all the products it offers for sale (surplus or excess supply).

disequilibrium price $\text{P}_1$

Firm will lower the price in order to sell the products.

disequilibrium price $\text{P}_1$

Firm will lower the price in order to sell the products.

disequilibrium price $\text{P}_1$

Firm will supply less products as the price falls and consumers will start buying the product as it gets cheaper.

Chapter 10: Price changes

decrease in demand
decrease in supply
increase in demand
increase in supply
non-price factors
sales tax
subsidy

increase in demand

Initial equilibrium.

increase in demand

Increase in demand.

increase in demand

Firms are encouraged to extend their supply in order to respond to the excess in demand.

increase in demand

Firms will start to increase their prices.

increase in demand

As the price increases, the demand of the consumers will start decreasing.

Chapter 11: Price elasticity of demand

perfectly price elastic
perfectly price inelastic
price discrimination
price elastic demand
price elasticity of demand (PED)
price inelastic demand
profit
sales revenue
unitary price elasticity of demand

price elastic demand curve

price inelastic demand curve

price elasticity of demand (PED)

a measure of the responsiveness ...
... of the quantity demanded ...
... to a change in price

pulling the rubber band — The elasticity concept can be illustrated using the rubber band

elastic demand

when the quantity demanded changes ...
... by a greater percentage ...
... than the change in price

inelastic demand

when the quantity demanded changes ...
... by a smaller percentage ...
... than the change in price

perfectly elastic demand

when a change in price ...
... causes a complete ...
... change in the quantity demanded

perfectly inelastic demand

when a change in price ...
... has no effect ...
... on the quantity demanded

unit elasticity of demand

when a change in price ...
... causes an equal change ...
... in the quantity demanded
no change in total revenue: TR=P x Q

variation of PED over a demand curve

group work (1/2)

Work in pairs!
Review the concepts of elastic, unit elastic, and inelastic demand.
Discuss the definition of PED, which measures the responsiveness of quantity demanded to changes in price.
Make sure your group members have a clear understanding of these concepts.

group work (2/2)

Examine the variation of PED along a demand curve and discuss how PED changes at the top, middle, and bottom of the demand curve.
As a group to create a concise presentation that explains the variation of PED along the demand curve.
Be prepared to present your findings to the class and engage in a group discussion after all groups have presented.

Chapter 12: Price elasticity of supply

price elastic supply
price elasticity of supply (PES)
price inelastic supply
stocks
unitary price elasticity of supply

price elasticity of supply (PES)

a measure of the ...
... responsiveness of the ...
... quantity supplied ...
... to a change in price

elastic supply

when the quantity supplied ...
... changes by a greater percentage ...
... than the change in price

inelastic supply

when the quantity supplied ...
... changes by a smaller percentage ...
... than the change in price

perfectly inelastic supply

when a change in price ...
... has no effect ...
... on the quantity supplied

perfectly elastic supply

when a change in price ...
... causes a complete change ...
... in quantity supplied

unit PES

when a change in price causes ...
... an equal percentage change ...
... in the quantity supplied

PES concept map (1/2)

PES concept map (2/2)

Chapter 13: Market economic system

economic system
market economy
mixed economy
planned economy
private sector
public sector

market economic system

Read your part in the following article
Explain in your group to each other your part.
Share with the class your part.

market economic system

public sector

the part of the economy ...
... controlled by ...
... the government

state-owned enterprises

organisations ...
... owned by ...
... the government ...
... which sell products

privatisation

the sale of ...
... public sector assets ...
... to the private sector

price mechanism

the system by which ...
... the market forces of ...
... demand and supply ...
... determine prices

market failure

market forces ...
... resulting in an ...
... inefficient ...
... allocation of resources

free rider

someone who ...
... consumes a good or service ...
... without paying for it

allocative efficiency

when resources ...
... are allocated ...
... to produce ...
... the right products ...
... in the right quantities

productively efficient

when products ...
... are produced ...
... at the lowest possible cost ...
... and making full use of resources.

dynamic efficiency

efficiency occuring ...
... over time ...
... as a result of ...
... investment and innovation

Multiple Choice Questions

What describes best an economic system in economics?

A. The method by which a government distributes resources and trade goods in a country.
B. The structured way in which an economy organizes the production, distribution, and consumption of goods and services.
C. The set of laws and regulations that govern economic activities within a country.
D. The international framework of trade and financial rules and institutions that govern global economic relations.

What describes best a market economy in economics?

A. An economic system where the government makes all decisions regarding production and pricing of goods and services.
B. An economic system based on customs, traditions, and beliefs of the community.
C. An economic system where supply and demand determine the production and pricing of goods and services.
D. An economic system characterized by heavy regulation and control by the state, with minimal private enterprise.

What describes best a mixed economy in economics?

A. An economic system where the government makes all decisions regarding production and pricing of goods and services.
B. An economic system based solely on the principles of free market and private ownership.
C. An economic system that combines elements of both capitalism and socialism, featuring a mix of private and state ownership or control.
D. An economic system based on customs, traditions, and beliefs of the community.

What describes best a planned economy in economics?

A. An economic system where the government makes all decisions regarding production, pricing, and distribution of goods and services.
B. An economic system that combines elements of both capitalism and socialism, featuring a mix of private and state ownership or control.
C. An economic system where supply and demand determine the production and pricing of goods and services.
D. An economic system based on customs, traditions, and beliefs of the community.

What best describes the private sector in economics?

A. The part of the economy owned and controlled by the government and public authorities.
B. The part of the economy operated by private individuals or companies, usually as a means of profit.
C. Organizations and entities that are neither part of the private nor the public sector, such as non-profits and charities.
D. International organizations that govern economic relations between countries.

What best describes the public sector in economics?

A. The part of the economy operated by private individuals or companies, usually as a means of profit.
B. The part of the economy owned and controlled by the government and public authorities.
C. Organizations and entities that are neither part of the private nor the public sector, such as non-profits and charities.
D. International organizations that govern economic relations between countries.

Chapter 14: Market failure

demerit goods
external benefits
external costs
externalities (spillover effects)
free riders
market failure
merit goods
private benefits
private costs
public goods
social benefits
social costs

third parties

those not directly involved ...
... in producing or consuming ...
... a good

social benefits

the total benefits ...
... to a society ...
... of an economc activity

social costs

the total costs ...
... to a society ...
... of an economic activity

private benefits

benefits received ...
... by those directly consuming ...
... or producing ...
... a product

private costs

costs borne by those ...
... directly consuming ...
... or producing ...
... a product

external costs

costs imposed on those ...
... who are not involved ...
... in the consumption ...
... and production activities ...
... of others directly

external costs

Social cost and over-production

external costs

Social cost and adjustment of the supply curve

external benefits

benefits enjoyed by those ...
... who are not involved ...
... in the consumption ...
... and production activities ...
... of others directly

socially optimum output

the level of output ...
... where social cost ...
... equals ...
... social benefit ...
... and society's welfare is maximised.

merit goods

products which the government considers ...
... consumers do not fully appreciate ...
... how beneficial they are ...
... and so which will be under-consumed ...
... if left to market forces.
Such goods generate positive externalities.

merit goods

Merit good and under-consumption.

merit goods

Government wants to increase the demand for the merit good.

merit goods

In order to increase the demand, the price should be at $P_1$. This would result in an excess demand. No incentive for firms to produce.

merit goods

Simply increasing demand would result in higher prices.

merit goods

Through subsidies, the government could give an incentive to firms to produce more. With falling prices, the quantity demand would also rise.

demerit goods

product which the government considers ...
consumers do not fully appreciate ...
... how harmful they are ...
... and so which will be over-consumed ...
... if left to market forces.
Such goods generate negative externalities.

public good

a product which is ...
... non-rival and non-excludable ...
... and hence needs to be financed ...
... by taxation

private good

a product which is both ...
... rival and excludable.

monopoly

a single seller

price fixing

when two or more firms ...
... agree to sell a product ...
... at the same price.

Multiple Choice Questions

Which of the following best describes demerit goods in economics?

A. Goods that are beneficial to society and are often under-consumed.
B. Goods that have a negative impact on the consumer and society, often leading to over-consumption.
C. Luxury goods that are only accessible to the wealthy part of the population.
D. Goods where the production and consumption have no external effects on third parties.

Which of the following statements accurately describes externalities in economics?

A. Externalities are financial benefits or costs that affect only the individuals directly involved in a transaction.
B. Externalities occur when a product is priced according to its marginal cost of production.
C. Externalities are benefits or costs that impact third parties who are not part of an economic transaction.
D. Externalities are the costs incurred by a business in the production process.

What is a defining feature of public goods?

A. They are always provided free of charge and are financed through general taxation.
B. They are excludable and rival in consumption, meaning one person's use diminishes another's.
C. They are non-excludable and non-rival in consumption, so usage by one person does not reduce availability to others.
D. They are goods provided by private sector entities, typically characterized by competitive pricing.

Which of the following best describes the concept of market failure?

A. It occurs when resources are distributed unevenly, leading to wealth disparities.
B. Market failure happens when government intervention in the economy causes inefficiencies.
C. It is a situation where the allocation of goods and services is not efficient, often leading to a net social welfare loss.
D. Market failure refers to the complete collapse of a financial market, leading to an economic crisis.

What characterizes merit goods in economics?

A. Goods that provide additional benefits to society, leading to under-consumption if left to the market.
B. Products whose consumption is solely based on individual preference and purchasing power.
C. Goods that are over-consumed in the market due to their addictive nature or negative externalities.
D. Products typically produced by the government as they are not profitable for private firms.

What are private benefits in the context of economics?

A. Benefits that accrue to the government as a result of tax revenues from businesses.
B. Benefits experienced by third parties when an individual or business engages in economic activities.
C. Advantages that individuals or businesses gain directly as a result of their economic activities.
D. Benefits derived from public goods and services provided by the government.

What best describes social costs in economics?

A. Costs that are borne by the government in providing public goods and services.
B. Costs incurred by businesses during the production of goods and services.
C. Costs associated with private transactions between individuals or businesses.
D. The total cost to society, including both private costs and external costs.

Chapter 15: Mixed economic system

direct provision
maximum price
minimum price
mixed economy
nationalisation
privatisation
rules and regulations
subsidy
taxation

Chapter 15: Mixed economic system

mixed economic system
rationing
lottery
nationalisation
public corporation
cost benefit analysis (CBA)
multinational companies (MNCs)

student activity

a mixed economy (p.112)
maximum and minimum prices (p.113)
subsidies and indirect taxes (p.114-115)
competition policy (p.115-116)
environmental policies (p.116)
regulation (p.116)
nationalisation and privatisation (p.117-118)
direct provision (p.118)
unfairness (p.119)
effectiveness (p.119-120)

mixed economic system

an economy in which ...
... both the private and public sectors ...
... play an important role.

rationing

a limit on the amount ...
... that can be consumed.

lottery

the drawing of tickets ...
... to decide who will get ...
... the products.

nationalisation

moving the ownership and control ...
... of an industry ...
... from the private sector ...
... to the government.

public corporation

a business organisation ...
... owned by the government ...
... which is designed to act ...
... in the public interest

cost benefit analysis (CBA)

a method of assessing ...
... investment projects ...
... which takes into account ...
... social costs and benefits

multinational companies (MNCs)

companies which produce ...
... in more than one country

benefits of a mixed economic system

all costs and benefits of a decision...
... are considered by the government
consumption of products that are benficial ...
... can be encouraged by government
firms exploiting consumers through high prices
... can be prevented by government
vulnerable groups can be helped by the government

maximum and minimum prices

government may impose price controls

maximum ceiling on price
(e.g. basic needs)
minimum price or price floor
(e.g. minimum wage)

measures to adress market failure: subsidy & tax

government may subsidise firms
government may tax firms

firm's willingness to invest $\downarrow$
firm's cost of production $\uparrow$

effect of taxes and subsidies depends on PED and PES

measures to adress market failure: competition policy

promote competition
prevent firms abusing market power
remove barriers to entry and exit into markets
avoid predatory pricing and limit pricing

measures to adress market failure: environmental policies

reduce amount of pollutants emitted by firms
$\longrightarrow$ issuing permits to pollute
increase costs of polluting firms
reduce costs of clean firms

measures to adress market failure: regulation

rules and laws to put restrictions on firm's activities
regulations are backed up by law
problems with regulations

government has to check $\longrightarrow$ costs $\uparrow$
people have to agree with it
reduces market flexibility
creates barriers to entry

measures to adress market failure: nationalisation & privatisation

nationalise a private sector industry
privatise state-owned enterprises
advantages and disadvantages of state-owned enterprises
issues with privatisation

measures to adress market failure: direct provision

goods & services that are esssential :
education, healthcare, ... $\longrightarrow$ merit goods
firms may have no incentive to produce the good
governments :

pay firms to produce them (through subsidies)
finance it through taxes

measures to adress market failure: unfairness

intervention to restore equity and fairness
guarantee that everyone has access to basic needs
avoid social division

effectiveness of government intervention

reduce market failure
risk of overestimating the extent of private benefits
time lag of decision making
may reduce economic efficiency

Exam-style question

Explain why sunshine is a free good. (2 marks)

Give an exact definition of a free good.
Show that the example of sunshine fulfills the conditions

Explain why demand for coal is likely to become more elastic in the future. (2 marks)

Hint: Is there any good that may be a substitute good to coal in the future?

Give exact definition of an elastic good.
Identify a situation in the extract that may affect the price elasticity of demand for coal.

Calculate the effect that an 8% rise in the price of lemons would have on the supply for lemons. (2 marks)

Give the formula for the price elasticity of supply.
$PES = \frac{ \%\Delta QS }{ \%\Delta P }$
$PES$ and $\%\Delta P$ is known.

Analyse, using a demand and supply diagram, the effect of an increased preference for fruit on the market for fruit. (5 marks)

Analyse, using a demand and supply diagram, the effect of an increased preference for fruit on the market for fruit. (5 marks)

Analyse how changes in the price of lemons affected the price elasticity of demand for lemons. (4 marks)

Use the table to :

Calculate the PES when the price changes from 1.00 Jordanian dinar to 1.20 Jordanian dinar.
Calculate teh PES when the price changes from 1.20 Jordanian dinar to 1.50 Jordanian dollar
Compare the two PES and describe how they change.

Explain whether Jordan operates a market economic system or a mixed economic system. (3 marks)

Discuss whether or not a rise in the price of a product, such as coal, will always be accompanied by a fall in sales. (6 marks)

Coal increases the production cost the firms.
How will the firms react?
What will happen to the supply curve?
What if the price is set above the equilibrium price?
What if the price increase was caused by a rise demand?

Discuss whether or not a rise in the price of a product, such as coal, will always be accompanied by a fall in sales. (6 marks)

What if the price is set below the equilibrium price?
What about the case in which demand is perfectly inelastic

Discuss whether or not governments have to produce public goods such as the police service. (6 marks)

Chapter 16: Money and banking

money
commercial banks
liquidity
central bank
bartering
cash
functions of money
money
stock exchange

money

an item which is ...
... generally acceptable ...
... as a means of payment

liquidity

being able to ...
... turn an asset into cash ...
... without a loss

forms of money

coins
notes
bank accounts

direct debits
credit cards
mobile phones

legal tender

any form of payment which, by law, has to be accepted in settlement of debt

coin = legal tender (up to certain value)
bank notes = legal tender
bank accounts = ~~legal tender~~

functions of money

medium of exchange
store of value
unit of account
standard of deferred payments

characteristics of money

no need to have an intrinsic value
should be generally acceptable
has to be in limited supply
other characteristics

durable
divisible
homogeneous
recognisable

see oldest coins

commercial banks

banks which aim to ...
... make a profit ...
... by providing a ...
... range of banking services ...
... to households and firms

role of commercial banks

commercial banks are financial intermediaries

accept deposits

current account
deposit account (or time account)

lend

overdraft
loan

enable customers to make payments : credit cards, standing orders, direct debits, debit/credit cards, online banking

role of commercial banks

change foreign currency
look after important documents
administration of customer's wills
provide advice on financial matters
sell insurance
offer savings accounts
mortgage loans

aim of commercial banks

make profit for the bank's shareholders (through loans)
ensure that they have liquidity

conflict in decision making
interest plays an important role

aim of commercial banks

make profit for the bank's shareholders (through loans)
ensure that they have liquidity

conflict in decision making
interest is not allowed
in return for a share in profit

central bank

a government-owned bank ...
... which provides banking services ...
... to the government and ...
... commercial banks ...
... and operates monetary policy

role of central banks

banker to the government
banker to commercial banks
lender of last resort
manage national debt
hold country's foreign currency and gold
issue bank notes
implement monetary policy

interest rate
money supply

control the banking system
represent the government (IMF, World Bank)

independence of central banks

has authority to decide the rate of interest
avoid conflicting targets

government may be tempted to lower interest rates to get public support
lowering interest rate may be conflicting with economic targets

video : money supply

video : the stock market and business financing

video : why Printing Trillions of Dollars May Not Cause Inflation

Chapter 17: Household

disposable income
wealth
rate of interest
average propensity to consume (APC)
consumption
savings ratio
average propensity to save (APS)
mortgage

disposable income

income after income tax ...
... has been deducted ...
... and state benefits received.

wealth

a stock of assets including ...
... money held in bank accounts, ...
... shares in companies, ...
... government bonds, ...
... cars and property.

rate of interest

a charge for ...
... borrowing money and ...
... a payment for lending money.

average propensity to consume (APC)

the proportion of ...
... household disposable income ...
... which is spent.

$$ APC = \frac{ \text{consumption} }{ \text{disposable income} } $$

average propensity to consume (APC)

average propensity to save (APS)

consumption

expenditure ...
... by households ...
... on consumer goods and income.

savings ratio

the proportion of ...
... household disposable income ...
... that is saved.

average propensity to save (APS)

as savings ratio, it is ...
... the proportion of ...
... household disposable income ...
... that is saved.

$$ APS = \frac{ \text{saving} }{ \text{disposable income} } $$

mortgage

A loan to ...
... help buy a house.

influences on spending

disposable income
wealth
confidence
rate of interest
distribution of income
advances in technology

spending pattern according to income groups (source)

influences on saving

income
wealth
rate of interest
tax treatment of savings
range & quality of financial institutions
age structure
social attitudes

influences on borrowing

availability of loans and overdrafts
rate of interest
confidence
social attitudes

consumer confidence index

household savings

household disposable income

household debt

Video (source: The Economist)

group work and presentation

watch the video that was assigned to your group (5 min)
discuss in your group to make sure that you understood the topic (5 min)
organise presentation (on paper - will be submitted)
balanced discussion

two sided discussion
evaluation

Chapter 18: Workers

earnings
wage rate
national minimum wage (NMW)
wage diﬀerential
primary sector
secondary sector
tertiary sector
elasticity of demand for labour
elasticity of supply of labour
specialisation
division of labour

Chapter 18: Workers

backward-bending supply of labour curve
demand for labour
derived demand
division of labour
equilibrium wage rate
fringe benefits (perks)
geographical mobility of labour
labour force participation rate
national minimum wage
non-wage factors

Chapter 18: Workers

occupational mobility of labour
piece rate
productivity of labour
salaries
specialisation
supply of labour
wage determination
wage factors
wages

earnings

the total pay ...
... received by a worker

wage rate

a payment which an employer ...
... contracts to pay a worker.
basic wage a worker receives ...
... per unit of time ...
... or unit of output

national minimum wage (NMW)

a minimum rate of wage ...
... for an hour's work, ...
... fixed by the government ...
... for the whole economy.

wage diﬀerential

the difference ...
... in wages

primary sector

covers agriculture, ...
... fishing, forestry, mining ...
... and other industries ...
... which extract natural resources

secondary sector

covers manufacturing ...
... and construction industries

tertiary sector

covers industries ...
... which provide services

elasticity of demand for labour

a measure of the responsiveness ...
... of demand for labour ...
... to a change in the wage rate

elasticity of supply of labour

a measure of the responsiveness ...
... of the supply of labour ...
... to a change in the wage rate

specialisation

the concentration on ...
... particular products ...
... or tasks

division of labour

workers specialising in ...
... particular tasks

factors that influence the decision to work

wage factor : wages, overtime pay, bonuses, commission
non-wage factors : job satisfaction, type of work, working conditions, working hours, holidays, pensions, fringe benefits, job security, career prospects, size of the firms, location
limiting factors : qualifications, skills, experience, location

occupational choice and opportunity cost

giving up a well-paid job for a satisfying job
giving up an interesting job for a different location

wage determination (classroom activity)

demand and supply :
demand for occupation $\uparrow$ $\longrightarrow$ pay $\uparrow$
bargaining power :
bargaining power of workers $\uparrow$ $\longrightarrow$ pay $\uparrow$
government policies :
economic policies, laws, minimum wage
public opinion
discrimination

wage determination - demand and supply

$D$ : demand for doctors
$S$ : supply of doctors

wage determination - minimum wage

wage determination - discrimination

labour force participation

changes in earnings of occupation ...

... can be caused by changes in ...

demand and supply of labour
the stages of production
bargaining power
government policy
public opinion
the earnings of individuals over time

extent to changes in earnings ...

... depends on the elasticity of demand for labor

proportion of labour costs in total costs
ease with which labour can be substituted by capital
elasticity of demand for the product produced
time period

extent to changes in earnings ...

... depends on the elasticity of supply for labor

qualifications and skills required
length of training period
level of employment
mobility of labour
degree of vocation
time period

division of labour lowers the average cost

workers get very good at their task
$\longrightarrow$ productivity $\uparrow$
time of training is shorter
no need to move from one job to another

division of labour may not lower the average cost

workers may get bored at their task
$\longrightarrow$ workers make mistakes
$\longrightarrow$ average cost $\uparrow$
absenteeism $\uparrow$
substituting absent workers is more difficult

discuss question ch18 — general structure of a *discuss*-question

Chapter 19: Trade unions

trade union
collective bargaining
real income
industrial action
strike

Chapter 19: Trade unions

collective bargaining
craft union
general union
go-slow
industrial action
industrial union
sit-in
strike
trade union
white-collar union
works-to-rule

trade union

an association which represents ...
... the interests of ...
... a group of workers

collective bargaining

representatives of workers ...
... negotiating ...
...with employers' associations

real income

income adjusted ...
... for inflation

industrial action

when workers disrupt production ...
... to put pressure ...
... on employers ...
... to agree to their demands

strike

a group of workers ...
... stopping work ...
... to put pressure on an employer ...
... to agree to their demands

types of trade unions

craft unions: workers with particular skills
general unions: workers from a range of industries
industrial unions: all the workers in a particular industry
white collar unions: particular professions

role of trade unions

collective bargaining
negotiations of wage rise
...

factors affecting the strength of trade unions

high level of economic activity
high number of members
high level of skill
consistent demand for the product produced by the workers
favourable government legislation

industrial actions

if negotions are unsuccessful
forms of industrial action

overtime ban
work to rule

most well-known form: strike

garbage collectors strike in Paris (March 2023)

trade union membership

advantages

cheaper to negotiate with workers as a group
communication channel between workers and employers
reduces conflict

disadvantages

firms can be harmed by industrial action
firm's cost $\uparrow$ & flexibility $\downarrow$

trade union density

share of employees ...
... who are union members ...
... expressed as a percentage

see data on trade union density and collective bargaining at industrial action (ILO)

Trade union density

source: QERY (accessed March 2024)

Trade union density

source: QERY (accessed March 2024)

Chapter 20: Firms

industry
quaternary sector
internal growth
external growth
horizontal merger
vertical merger
conglomerate merger
rationalisation
vertical merger backwards
vertical merger forwards
internal economies of scale
external economies of scale
internal diseconomies of scale
external diseconomies of scale

Chapter 20: Firms

average costs
conglomerate integration
demerger
diseconomies of scale
economies of scale
external economies of scale
external growth
franchise
horizontal integration
interdependence

Chapter 20: Firms

internal economies of scale
internal growth
market share
merger
primary sector
private sector
public sector
secondary sector

industry

a group of firms ...
... producing the same product

quaternary sector

covers service industries ...
... that are knowledge based

internal growth

an increase ...
... in the size of a firm ...
... resulting from it enlarging ...
... existing plants ...
... or opening new ones

external growth

an increase ...
... in the size of a firm ...
... resulting from it merging ...
... or taking over another firm

horizontal merger

the merger of firms ...
... producing the same product ...
... and at the same stage of production

vertical merger

the merger of one firm ...
... with another firm ...
... that either provides an outlet ...
... for its products ...
... or supplies it with raw materials, ...
... components or the products it sells

conglomerate merger

a merger between firms ...
... producing different products

rationalisation

eliminating unnecessary equipment ...
... and plant to make a firm ...
... more efficient

vertical merger backwards

a merger with a firm ...
... at an earlier stage ...
... of the supply chain

vertical merger forwards

a merger with a firm ...
... at a later stage ...
... of the supply chain

internal economies of scale

lower long run average costs ...
... resulting from a firm ...
... growing in size

external economies of scale

lower long run average costs ...
... resulting from an ...
... industry growing in size

internal diseconomies of scale

higher long run average costs ...
... arising from ...
... a firm growing too large

external diseconomies of scale

higher long run average costs ...
... arising from ...
... an industry growing too large

stages of production

primary sector
secondary sector
tertiary sector
quaternary sector

ownership of firms

market economic system : firms are in the private sector
planned economy : state-owned enterprises
mixed economic system : in both the private and public sectors

size of firms are influenced by

age of the firms
availability of financial capital
type of business organisation
internal economies and diseconomies of scale
size of the market

reasons of presence of small firms

small size of the market
preference of consumers
owner's preference
flexibility
technical factors
lack of financial capital
location
cooperation between small firms
specialisation
government support

two ways a firm can increase in size

internal growth: natural or organic growth
external growth: firm joining with another firm

horizontal merger
vertical merger
conglomerate merger

mergers

horizontal merger
vertical merger

vertical merger backwards
vertical merger forwards

conglomerate merger

economies of scale

source: OpenStax

economies of scale

source: OpenStax

shape of average cost curve

source: OpenStax

economies of scale

internal economies of scale

buying economies
selling economies
managerial economies
labour economics
financial economies
technical economies
research and development economies
risk bearing economies

external economies of scale

economies of scale

internal economies of scale
external economies of scale

skilled labour force
good reputation
specialist suppliers of raw materials and capital goods
specialist services
specialist markets
improved infrastructure

diseconomies of scale

internal diseconomies of scale

diﬀiculties controlling the firm
communication problems
poor industrial relations

external diseconomies of scale

diseconomies of scale

internal diseconomies of scale
external diseconomies of scale

congestion due to more and larger firms
competition may increase prices of factors of production

Amazon: Economies of Scale

Traditionally, bookstores have operated in retail locations with inventories held either on the shelves or in the back of the store. These retail locations were very pricey in terms of rent. Until recently, Amazon had no retail locations. It only sold online and delivered by mail. Amazon now has retail stores in California, Oregon and Washington State and retail stores are coming to Illinois, Massachusetts, New Jersey, and New York. Amazon offers almost any book in print, convenient purchasing, and prompt delivery by mail. Amazon holds its inventories in huge warehouses in low-rent locations around the world. The warehouses are highly computerized using robots and relatively low-skilled workers, making for low average costs per sale. Amazon demonstrates the significant advantages economies of scale can offer to a firm that exploits those economies.

Amazon: Economies of Scale

small firms won't survive

Chapter 21: Firms and production

capital-intensive
derived demand
innovation
labour productivity
labour-intensive
production
productivity

introduction : labour shortage in Canada

3 Ways to reduce manufacturing's skills and labor shortage in Canada

increase economic class immigrants
increase employment of youth and under-represented groups
invest in automation and advanced manufacturing technologies

source: Visual Capitalist

Pizzeria

The production process for pizza includes inputs such as ingredients, the efforts of the pizza maker, and tools and materials for cooking and serving.

(Credit: “Grilled gluten-free BBQ chicken pizza” by Keith McDuffee/Flickr, CC BY 2.0)

determinants of the demand for factors of production

derived demand

costs of factors of production

quantity and availability of factors of production

quality of factors of production

importance of higher productivity

economies of scale

higher profits

higher wages

improved competitiveness

prospects for economic growth

determinants of productivity

investment expenditure

innovations

skills and experiences

degree of entrepreneurial spirit

intensity of competition

advantages of labour-intensive production

lower set-up costs than capital-intensive production

premium price for output using highly skilled labour

suitable for job production (one-off projects)

specialisation and division of labour

flexibility

creativity and initiative

advantages of capital-intensive production

faster production time than labour-intensive output

better consistency of output than manual labour

suitable for mass produced goods

reduces human errors in production

less need for human resource planning

technical economies of scale

Application: Four-part question (source: Cambridge IGCSE)

Define investment. (2 marks)
Explain why production of cars may increase whilst the productivity of car workers may fall. (4 marks)
Analyse the reason why car production has become more capital-intensive. (6 marks)
Discuss whether or not industries becoming more capital-intensive will increase unemployment. (8 marks)
see the Learner Guide for the command words.

Structured Writing - Simple Model

Chapter 22: Firms' costs, revenue and objectives

average fixed cost
average revenue
average total cost
average variable cost
costs of production
fixed costs
objectives

Chapter 22: Firms' costs, revenue and objectives

profit
profit maximisation
sales revenue
total cost
total revenue
variable costs

Amazon

Amazon is an American international electronic commerce company that sells books, among many other things, shipping them directly to the consumer. Until recently there were no brick and mortar Amazon stores.

(Credit: modification of “Amazon Prime Delivery Van (50072389511)” by Tony Webster/Wikimedia Commons, CC BY 2.0)

examples of costs

wages and salaries

rent

advertising expenses

raw materials and components

utility bills

dividend payments

taxes

categories of costs

fixed: paid regardless of output level

variable: change with the level of output

total cost: fixed + variable cost

average costs: per unit costs

business objectives of firms

profit maximisation

profit satisficing

survival

market share

market leadership

corporate image and reputation

ethical objectives

growth

profit and total revenue

$\text{profit} = \text{total revenue} - \text{total cost}$

$\text{total revenue} = \text{price} \times \text{quantity}$

effects of changes in profits

higher profits will encourage more firms to enter competitive market

more financial sources will be available to firms (to update capital)

attracts new shareholders

banks are more willing to give out loans

how to increase profits

reduce costs of production

raise revenue

Achtung!

REVENU $\neq$ PROFIT

Total Cost

At zero production, the fixed costs of $160 are still present. As production increases, variable costs are added to fixed costs, and the total cost is the sum of the two.

total cost

total amount ...
... that has to be spent ...
... on the factors of production ...
... used to produce a product

fixed cost

costs ...
... which do not change ...
... with output in the short run
Examples:

interest on past loans
rent for building
security

Cost Curves

We can also present the information on total costs, fixed cost, and variable cost on a per-unit basis. We calculate average total cost (ATC) by dividing total cost by the total quantity produced. The average total cost curve is typically U-shaped. We calculate average variable cost (AVC) by dividing variable cost by the quantity produced. The average variable cost curve lies below the average total cost curve and is also typically U-shaped. We calculate marginal cost (MC) by taking the change in total cost between two levels of output and dividing by the change in output. The marginal cost curve is upward-sloping.

average total cost

total cost ...
... divided by output

average fixed cost

total fixed cost ...
... divided by output

variable cost

costs ...
... that change with output
Examples: automobile industry

electricity
component parts
wages
transport

average variable cost

total variable cost ...
... divided by output

Cost Curves

Explain the shape of the average variable cost curve.

As output increases, in the short run ...

... average variable costs tend to decline ...

... and then rise; ...

... because productivity often rises and then begins to decline after a certain output ...

Article:

Companies' reluctance to roll back price rises poses US inflation risk (FT)
4 parts - 4 learners
read your part (5 min)
present your part to your group (5 min)
create a poster (on a Din A4) - 10 min

Application: Four-part question (source: Cambridge IGCSE)

Giving an example, define variable cost. (2 marks)
Explain two causes of an increase on a firm's profit. (4 marks)
Analyse, using diagrams, how a rise in output affects total fixed cost and average fixed cost. (6 marks)
Discuss whether or not firms try to maximise profits. (8 marks) !!!read p.197-198!!!
see the Learner Guide for the command words.

Chapter 23: Market structure

competitive markets
market structure
normal profit
supernormal profit
monopoly
barriers to entry
barriers to exit
scale of production
sunk costs
price maker [price setter]
price takers

spectrum of competition

soybean farmer

total cost and total revenue at the Raspberry Farm

normal profit and supernormal profit

normal profit

minimum level of profit ...
... required to keep a firm in the industry ...
... in the long run

normal profit and supernormal profit

normal profit

minimum level of profit ...
... required to keep a firm in the industry ...
... in the long run

supernormal profit

profit above that needed ...
... to keep a firm in the market ...
... in the long run

market structure

conditions which exist in a market ...
... including the number of firms

competitive markets

market with a number of firms ...
... that compete with each other

monopoly

market with a single supplier

monopoly

market with a single supplier
characteristics of a monopoly:

firm has 100% market share
high barriers to entry and exit
price maker

companies that have monopoly power

Microsoft
Google
Facebook

how do monopolies arise?

monopolies may develop over time

by cutting costs
drive rival firms out

monopolies may exist from the start

government may have granted exclusivity
existence of a patent

why do monopolies continue to exist?

existence of barriers to entry for new firms
scale of production : monopolies produce in large quantities at lower unit costs
sunk costs: costs that cannot be recovered if firm leaves market
monopolies can make superprofits
they can set the prices

performance of monopolies

may lead to inefficiencies
prices of goods may be too high
quality may be poor
large output may lower unit costs
if wasteful capital duplication is avoided, monopoly may be more efficient than competitive markets
reinvest high profits into R&D

Section 4: Government and the macroeconomy

Chapter 24: The role of government
Chapter 25: The macroeconomic aims of government
Chapter 26: Fiscal policy
Chapter 27: Monetary policy
Chapter 28: Supply-side policies
Chapter 29: Economic growth
Chapter 30: Employment and unemployment
Chapter 31: Inflation and deflation

Chapter 24: The role of government

local government
natural monopoly
strategic industries
national champions
trade bloc
free international trade

Chapter 24: The role of government

direct taxes
employer
indirect taxes
producer
regulation
subsidies

learning objectives

What is the role of government?

locally
nationally
internationally

roles of government

producer of goods and services

employer of public sector workers

direct and indirect provision of merit goods

direct and indirect provision of public goods

influencing economic activity

government influences on private producers

employment legislation

consumer production laws

environmental protection

competition laws

intellectual property rights

subsidies

taxes: direct, indirect and tariffs

direct taxes

government charges ...
... imposed on income ...
... in order to raise government revenue ...
... and to redistribute income and wealth in the economy.

indirect taxes

government charges ...
... on goods and services ...
... where consumers ultimately pay these taxes (not firms).
Examples:

value added tax (VAT) or TVA (in Luxembourg)
excise duties on alcohol, tobacco, petrol

regulation

rules and laws ...
... that govern business behaviour in the economy.
Examples:

consumer protection
legislation
environmental protection laws

subsidies

government financial support ...
... to reduce the costs of private sector firms, ...
... thereby encouraging output and consumption of certain goods and services

education
healthcare

strategic industries

industries that are important for the ...
... development and safety of the country.
Example: South Korea

steel
car manufacturing
shipbuilding
electronics

national champions

industries that have the potential to be ...
... world leaders

trade bloc

regional group of countries ...
... that remove trade restrictions between themselves.

Chapter 25: The macroeconomic aims of government

economic growth
actual economic growth
potential economic growth
aggregate demand
aggregate supply
full employment
economically active
unemployment rate
price stability
inflation rate
balance of payments

economic growth

an increase in the output of an economy ...
... and in the long run ...
... an increase ...
in the economy's productive potential

actual economic growth

an increase ...
in the output of an economy

potential economic growth

an increase ...
in an economy's ...
... productive capacity

aggregate demand

the total demand for ...
... a country's product ...
at a given price level

$ \text{AD} = \text{C} + \text{I} + \text{G} + \underbrace{(\text{X}-\text{M})}_{\text{net exports}} $

the circular flow model

Decomposition of GDP in 2013 for the US, the Eurozone, and China.

	US	Eurozone (19 countries)	China
Consumption (C)	68.4%	55.9%	37.3%
Government spending (G)	15.1%	21.1%	14.1%
Investment (I)	19.1%	19.5%	47.3%
Change in inventories	0.4%	0.0%	2.0%
Exports (X)	13.6%	43.9%	26.2%
Imports (M)	16.6%	40.5%	23.8%

aggregate supply

total amount of goods and services ...
... that domestic firms ...
... are willing to supply ...
... at a given price level

full employment

the lowest level ...
... of unemployment possible

economically active

being a member of the mabour force

unemployment rate

the percentage of ...
... the labour force ...
... who are willing and able to work ...
... but are without jobs

price stability

the price level ...
... in the economy ...
... not changing significantly over time

inflation rate

the percentage rise ...
... in the price level of ...
... goods and services ...
... over time

balance of payments

the record ...
... of a country's ...
... economic transactions ...
... with other countries

balance of payments


current account
exports of goods and services	+
imports of goods and services	-
capital account
foreign investment in Luxembourg	+
Luxembourg investment abroad	-

balance of payments (in millions €) - 2023


current account
exports of goods and services	+	(25 212 + 138 223)
imports of goods and services	-	(25 693 + 111 850)
capital account
foreign investment in Luxembourg	+	(358 + 65 133 + 9 237 + 144 544)
Luxembourg investment abroad	-	(12 676 + 91 767 + 17 976 + 122 111)

Chapter 26: Fiscal policy

budget
budget deficit
budget surplus
national debt
multiplier effect
direct taxes
indirect taxes
progressive tax
proportional tax

Chapter 26: Fiscal policy

regressive tax
automatic stabilisers
inflation
informal economy
flat taxes
fiscal policy
expansionary policy
contractionary fiscal policy

budget

the relationship between ...
... government revenue and ...
... government spending

budget deficit

government spending ...
... is higher than ...
government revenue

$ \text{government spending} > \text{government revenue} $

budget surplus

government revenue ...
... is higher than ...
government spending

$ \text{government revenue} > \text{government spending} $

national debt

the total amount ...
... the government ...
... has borrowed over time

multiplier effect

the final impact ...
... on aggregate demand ...
... being greater than ...
... the initial change

direct taxes

taxes on income and wealth

indirect taxes

taxes on expenditure

progressive tax

one which takes a ...
... larger percentage ...
... of the income and wealth ...
... of the rich

proportional tax

one which takes the ...
... same percentage ...
... of the income or wealth ...
... of all taxpayers

regressive tax

one which takes a ...
... larger percentage ...
... of the income or wealth ...
of the poor

automatic stabilizers

forms of ...
... government expenditure and taxation ...
... that reduce fluctuations ...
... in economic activity ...
... without any change in government policy

inflation

the rise ...
... in price level ...
... of goods and services ...
... over time

informal economy

that part of the economy ...
... that is not ...
... regulated, protected or taxed ...
... by the government

flat taxes

taxes with a single rate

fiscal policy

decisions on ...
... government spending ...
... and taxation ...
... designed to ...
... influence aggregate demand

expansionary fiscal policy

rises in ...
... government expenditure and/or ...
... cuts in taxation ...
... designed to ...
... increase aggregate demand

contractionary fiscal policy

cuts in ...
... government expenditure and/or ...
... rises in taxation ...
... designed to ...
... reduce aggregate demand

effect of an expansionary fiscal policy

Shifts in Aggregate Demand

shift in AD — Total revenue for a perfectly competitive firm is a straight line sloping up. The slope is equal to the price of the good.
Total cost also slopes up, but with some curvature. At higher levels of output, total cost begins to slope upward more steeply because of diminishing marginal returns.
The maximum profit will occur at the quantity where the difference between total revenue and total cost is largest.

The effect of a 30% salt tax

The initial equilibrium. Initially the market equilibrium is at point A. The price is $P^*$ and the quantity of salt sold is $Q^*$.

The effect of a 30% salt tax

A 30% tax. A 30% tax is imposed on suppliers. Their marginal costs are effectively 30% higher at each quantity. The supply curve shifts.

The effect of a 30% salt tax

The new equilibrium. The new equilibrium is at B. The price paid by consumers has risen to $P_1$ and the quantity has fallen to $Q_1$.

The effect of a 30% salt tax

The tax paid to the government. The price received by suppliers (after they have paid the tax) is $P_0$. The double-headed arrow shows the tax paid to the government on each unit of salt sold.

aggregate demand and aggregate supply

$ \text{AD} = \text{C} + \text{I} + \text{G} + (\text{X} - \text{M})$

increase in aggregate demand : elastic part of aggregate supply

aggregate demand aggregate supply elastic part

increase in aggregate demand : inelastic part of aggregate supply

incidence of taxation: distribution of the burden of an indirect tax

influence of highly elastic demand on the incidence of taxation

influence of inelastic demand on the incidence of taxation

Chapter 27: Monetary policy

monetary policy
foreign exchange rate
expansionary monetary policy
contractionary monetary policy

monetary policy

decisions ...
... on the money supply ...
... the rate of interest ...
... and the exchange rate ...
... taken to influence ...
... aggregate demand

foreign exchange rate

the price of ...
... one currency ...
... in terms of ...
... another currency or currencies

expansionary monetary policy

increase in the ...
... money supply ...
... and/or the rate of interest ...
... designed to ...
... increase aggregate demand

contractionary monetary policy

cuts in the money supply ...
... and/or ...
... rises in the rate of interest ...
... designed to ...
... reduce aggregate demand

increase in aggregate demand : elastic part of aggregate supply

increase in aggregate demand : inelastic part of aggregate supply

aggregate demand and aggregate supply

$ \text{AD} = \text{C} + \text{I} + \text{G} + (\text{X} - \text{M})$

increase in money supply

central bank

prints more money
buys back government bonds
encourages commercial banks to lend more

$ \uparrow\text{money supply} \longrightarrow \text{interest rate}\downarrow $

$ \longrightarrow \text{consumer spending}\uparrow \text{& investment}\uparrow $

$ \longrightarrow \text{AD}\uparrow$

cut in interest rate

central bank cuts the rate of interest it charges to commercial banks

$ \text{interest rate (central bank)}\downarrow $

$ \longrightarrow \text{interest rate (commercial banks)}\downarrow $

$ \longrightarrow \text{consumer spending}\uparrow \text{& investment}\uparrow $

$ \longrightarrow \text{AD}\uparrow$

exchange rate: the big mac index

The Big Mac Index (The Economist)

Chapter 28: Supply-side policies

supply-side policy
deregulation

supply-side policy

measures ...
... designed to increase ...
... aggregate supply

supply-side policies (1/3)

improving training/education
$\longrightarrow$ skills of worker $\uparrow$
$\longrightarrow$ productivity of worker $\uparrow$
$\longrightarrow$ cost of production $\downarrow$ $\longrightarrow$ supply $\uparrow$
reducing income taxes
$\longrightarrow$ reward from working $\uparrow$
$\longrightarrow$ unemployed search for work $\uparrow$
$\longrightarrow$ labour force $\uparrow$ $\longrightarrow$ supply $\uparrow$

supply-side policies (2/3)

reducing rules and regulations
$\longrightarrow$ barriers to entry to markets $\downarrow$
$\longrightarrow$ cost of complying with regulations $\downarrow$
$\longrightarrow$ supply $\uparrow$
privatisation
$\longrightarrow$ competition $\uparrow$ $\longrightarrow$ market forces $\uparrow$
$\longrightarrow$ quality of products $\uparrow$
$\longrightarrow$ investment and efficiency $\uparrow$
$\longrightarrow$ supply $\uparrow$

supply-side policies (3/3)

labour market reforms

remove barrier to entry & exit (i.e. excessive qualification)
better training
making it easier to hire and fire workers
reduce power of trade unions

subsidies to firms
$\longrightarrow$ investment in capital equipment $\uparrow$

deregulation

the removal of ...
... rules and regulation

aggregate demand and supply

Initial equilibrium.

aggregate demand and supply

Aggregate demand increases in an inflationary way.

aggregate demand and supply

By increasing aggregate supply we can achieve economic growth in an non-inflationary way.

classroom activity

we have seen the positive effects of supply-side policies

identify (using your textbook) possible negative effects of supply-side policies

Chapter 29: Economic growth

gross domestic product (GDP)
circular flow of income
value added
transfer payments
nominal GDP
real GDP
subsistence agriculture
recession
International Monetary Fund (IMF)
sustainable economic growth

Economic growth

gross domestic product (GDP)

the total output ...
... of a country

GDP Growth Calculation

GDP Growth Rate is calculated by the percentage increase in GDP from one period to the next

\[ \text{GDP Growth Rate (%)} = \left( \frac{\text{GDP}_{\text{current period}} - \text{GDP}_{\text{previous period}}}{\text{GDP}_{\text{previous period}}} \right) \times 100 \]

circular flow of income

the movement of ...
... expenditure, ...
... income, ...
... and output ...
... around the economy.

value added

the difference between ...
... the sales revenue received ...
... and the cost of raw materials used.

transfer payments

transfers of income ...
... from one group ...
... to another ...
... not in return for providing ...
... a good or service.

nominal GDP

GDP at current market prices ...
... and so not adjusted for inflation

real GDP

GDP at constant prices ...
... and so adjusted for inflation

subsitence agriculture

the output ...
... of agricultural goods ...
... for farmers' personal use

recession

a reduction ...
... in a real GDP ...
... over a period of six months or more

recession

International Monetary Fund (IMF)

an international organisation ...
... which promotes international cooperation ...
... and helps countries ...
... with balance of payments problems

sustainable economic growth

economic growth ...
... that does not endanger ...
... the country's ability ...
... to grow in the future

productive capacity

Inefficieny point.

productive capacity

Increase in productive capacity.

AD/AS diagram

AD and AS curve.

AD/AS diagram

Economic growth resulting from higher aggregate demand (AD).

AD/AS diagram

Economic growth resulting from higher aggregate supply (AS).

Chapter 30: Employment and unemployment

employment
unemployment
flexible labour force
economically active
economically inactive
labour market participation
claimant count
labour force survey (ILO) measure

Chapter 30: Employment and unemployment

frictional unemployment
structural unemployment
cyclical unemployment
search unemployment
casual unemployment
seasonal unemployment
regional unemployment
technological unemployment

employment

being involved in a ...
... productive activity ...
... for which a payment is received

unemployment

being without a job ...
... while willing and able to work.

flexible labour force

a labour force is one ...
... which adjusts quickly and smoothly ...
... to changes in market conditions

economically active

those in the labour force ...
... both the employed and the unemployed.

economically inactive

those not in the labour force.

labour market participation

the proportion of ...
... the working-age population ...
... who are in the labour force.

claimant count

a measure of unemployment ...
... which counts as unemployed ...
... those in receipt of unemployment benefits.

labour force survey (ILO) measure

a measure of unemployment ...
... which counts as unemployed people ...
... who identify as such in a survey.

frictional unemployment

temporary unemployment ...
... arising from workers ...
... being in between jobs.

structural unemployment

unemployment caused by ...
... long-term changes in the ...
... pattern of demand ...
... and methods of production.

cyclical unemployment

unemployment caused by ...
a lack of aggregate demand.

search unemployment

unemployment arising from workers ...
... who have lost their jobs ...
... looking for a job ...
... they are willing to accept.

casual unemployment

unemployment arising from workers ...
... regularly being between ...
... periods of employment.

seasonal unemployment

unemployment caused by ...
... a fall in demand ...
... at particular times of the year.

regional unemployment

unemployment caused by ...
... a decline in job opportunities ...
... in a particular area of the country.

technological unemployment

unemployment caused by workers ...
... being replaced by capital equipment.

changes in the patterns of employment

industrial structure
proportion of women in employment
proportion of workers in the private and public sectors
full-time and part-time work
employed and self-employed
informal and formal economies
high and low quality employment
flexible employment

factors that influence labour market participation

wages
social attitudes to working women
care of children and the elderly
social attitudes and disabled to work
school leavers who go into higher education

measures of unemployment

claimant count
Labour Force Survey Measure

causes and types of unemployment

frictional unemployment
structural unemployment
cyclical unemployment
stocks and flows of unemployment

consequences of unemployment

effects on the unemployed
effects on firms
effects on the economy

policies to reduce unemployment

frictional unemployment: ...
structural unemployment: ...
cyclical unemployment: ...

student contributions

types of unemployment (by Sh.)

frictional

examples

casual/seasonal workers
workers looking for another job

policies to reduce unemployment

better info on job vacancies
reduction in unemployment benefits (incentive)
cut income tax (incentive to work)

structural
cyclical

types of unemployment (by Sh.)

frictional
structural

examples

decline of industries
technological+regional unemployment

policies to reduce unemployment

supply-side policies (improve training)
relocation allowances & grants
subsidies for firms to set up in places of low employment

cyclical

types of unemployment (by Sh.)

frictional
structural
cyclical

examples

lack of total demand
external shocks

policies to reduce unemployment

expansionary fiscal policy
expansionary monetary policy

Multiple Choice Questions

1. What describes best employment in economics?

A. The total number of people who are actively looking for work.
B. The process by which individuals earn income in return for work.
C. The total number of people who are working, including both full-time and part-time workers.
D. The ratio of employed individuals to the total labor force.

2. What describes best a flexible labour force in economics?

A. A workforce that primarily consists of full-time, permanent employees.
B. A workforce characterized by high levels of job security and stability.
C. A workforce that can quickly adapt to market changes, often including part-time, temporary, or freelance workers.
D. A workforce that is heavily unionized and operates under strict labor laws.

3. What describes best economically inactive individuals in economics?

A. Individuals who are employed and currently working in a paid job.
B. Individuals who are unemployed but actively seeking work and available to start work.
C. Individuals who are not seeking work nor available to start work, including retirees, students, and homemakers.
D. Individuals working fewer hours than they would like in their current role.

4. What describes best the term claimant count in economics?

A. The total number of individuals in an economy who are employed and earning wages.
B. The measure of the number of people claiming unemployment-related benefits.
C. The count of individuals who are actively seeking employment but not currently working.
D. The census of individuals who are economically inactive and not part of the workforce.

5. What describes best frictional unemployment in economics?

A. Unemployment caused by a downturn in economic activity or a recession.
B. Long-term unemployment arising from a mismatch between workers' skills and job requirements.
C. Unemployment resulting from the normal process of workers changing jobs or entering the workforce.
D. Unemployment due to seasonal variations in employment in certain industries.

6. What describes best cyclical unemployment in economics?

A. Unemployment caused by the normal process of workers changing jobs or entering the workforce.
B. Unemployment that occurs due to seasonal variations in specific industries.
C. Unemployment arising from a downturn in the business cycle or economic activity.
D. Long-term unemployment due to a mismatch between workers' skills and job requirements.

7. What describes best casual unemployment in economics?

A. Unemployment that occurs due to seasonal variations in specific industries.
B. Unemployment arising from a downturn in the business cycle or economic activity.
C. Short-term or temporary unemployment experienced between periods of brief employment.
D. Long-term unemployment due to a mismatch between workers' skills and job requirements.

8. What describes best regional unemployment in economics?

A. Unemployment that predominantly affects specific age groups or demographics.
B. Unemployment that occurs when industries prevalent in a region decline, affecting local job markets.
C. Unemployment caused by seasonal variations in employment in certain regions.
D. Long-term unemployment resulting from a mismatch between skills and job opportunities in a specific region.

9. What describes best unemployment in economics?

A. The situation where individuals are employed part-time but seeking full-time work.
B. The condition of being jobless while actively seeking work and being available to start work.
C. The state of being employed in a job that does not fully utilize one's skills or abilities.
D. The state of being retired or choosing not to seek employment.

10. What describes best economically active individuals in economics?

A. Individuals who are retired or not seeking employment due to personal reasons.
B. Individuals who are either employed or unemployed but are actively seeking and available for work.
C. Individuals who are not part of the workforce and are engaged in non-economic activities such as studying.
D. Individuals working fewer hours than they would like in their current role.

11. What describes best labour market participation in economics?

A. The process of negotiating wages and working conditions by trade unions.
B. The percentage of the working-age population that is part of the workforce, either employed or actively seeking employment.
C. Government policies designed to regulate or intervene in the labor market.
D. The total number of hours worked by all employees in the economy.

12. What describes best the labour force survey measure in economics?

A. A government policy designed to assess the overall productivity of the workforce.
B. A statistical measurement assessing the state of a country's labour market, often through household surveys.
C. An annual count of the total number of employed individuals within the economy.
D. A measure of the average wage level and employment benefits in a specific industry.

Chapter 31: Inflation and deflation

deflation
disinflation
consumer price index (CPI)
cost-push inflation
demand-pull inflation
wage-price spiral

Chapter 31: Inflation and deflation

monetary inflation
monetarist
hyperinflation
index-linking
menu costs
shoe-leather costs

deflation

a sustained fall ...
... in the prices ...
... of goods and services

disinflation

a fall ...
... in the rate ...
... of inflation

consumer price index (CPI)

a measure of ...
... the weighted average ...
... of the prices of ...
... a representative basket ...
... of goods and services

cost-push inflation

rises in the price level ...
... caused by higher costs ...
... of production

demand-pull inflation

rises in the price level ...
... caused by ...
... excess demand

wage-price spiral

wage rises ...
... leading to higher prices ...
... which lead to ...
... further wage claims ...
... and price rises

monetary inflation

rises in the price level ...
... caused by ...
... an excessive growth ...
... of the money supply

monetarist

a group of economists ...
... who think that ...
... inflation is caused by ...
... the money supply ...
... growing more rapidly ...
... than output

hyperinflation

a very rapid and large rise ...
... in the price level

index-linking

changing payments ...
... in line with ...
... changes in the inflation rate

menu costs

costs involved ...
... in having to ...
... change prices ...
... as a result of ...
... inflation

shoe-leather costs

costs involved ...
... in moving money around ...
... to gain high interest rates

Extract: How should you fight inflation?

read How should you fight inflation?
by Joseph Stiglitz

aggregate demand and aggregate supply.

Video: Inflation (Bank of England)

Extract: Global Inflation

read Peak inflation? The new dilemma for central banks from FT

$ AD = C + I + G + (X-M) $

constructing a price index

selecting a base year
find out how households spend their money
find out price changes
construct a weighted price index

causes of inflation

cost-push inflation
demand-pull inflation

consequences of inflation

harmful effects of inflation
beneficial effects of inflation

economic policies to control inflation

inflation rate target set by central bank

make central bank accountable
influence behaviour of households and firms

in case of demand-pull inflation : use contractionary fiscal and/or monetary policy
in case of cost-push inflation : use supply-side policy measures

causes of deflation

deflation that results from the supply-side

advances in technology
increases in labour productivity

deflation that results from the demand-side

downward spiral in economic activity
firms will reduce their output
firms reduce number of workers

consequences of deflation

good deflation
caused by an increase in aggregate supply
bad deflation
caused by a decrease in aggregate demand

good deflation

bad deflation

economic policies to control deflation

expansionary fiscal policy (government)
expansionary monetary policy (central bank)

bad deflation is very difficult to control !!!

economic policies to control deflation

Case study: Japan

economic policies to control deflation

Case study: Japan

policy conflicts

policy to reduce unemployment
G $\uparrow$ $\longrightarrow$ C $\uparrow$ $\longrightarrow$ output of firms $\uparrow$
unemployment $\downarrow$ $\longrightarrow$ AD $\uparrow$ $\longrightarrow$ price level $\uparrow$
policy to reduce imports
income tax $\uparrow$ $\longrightarrow$ spending in all products $\downarrow$
$\longrightarrow$ output $\downarrow$ $\longrightarrow$ AD $\downarrow$
$\longrightarrow$ economic growth $\downarrow$

economic policies

expansionary fiscal and monetary policies

reduce unemployment
stimulate economic growth

contractionary fiscal and monetary policies

reduce inflation
expenditure on imports

Multiple choice questions

1. Which statement accurately reflects a limitation of the barter system?

A. Barter eliminates the need for a medium of exchange, thereby simplifying transactions.
B. It ensures greater flexibility in trading as goods and services are directly exchanged.
C. Barter systems effectively address the issue of indivisible goods and services.
D. A major limitation is the need for a double coincidence of wants, making transactions more complex and time-consuming.

2. Which of the following best describes the significance of price stability in an economy?

A. Price stability primarily ensures an increase in the purchasing power of the currency.
B. It guarantees a constant growth rate in the economy by eliminating inflation and deflation entirely.
C. Price stability helps in reducing uncertainty in the economy, thereby encouraging investment and savings.
D. It ensures equitable wealth distribution, leading to minimized income disparities.

3. Which statement accurately describes a potential consequence of high inflation rates?

A. High inflation can lead to a decrease in the real value of money, thereby eroding consumer purchasing power.
B. Inflation primarily results in increased export competitiveness due to lower relative prices.
C. High inflation rates are typically accompanied by a decrease in the general level of prices in the economy.
D. Inflation leads to an increase in savings as people save more money to compensate for the rising cost of living.

4. Which of the following statements best characterizes creeping inflation?

A. It is a rapid increase in the general price level, leading to a significant drop in the currency's purchasing power.
B. This form of inflation occurs only in underdeveloped economies and is characterized by inconsistent price increases.
C. Creeping inflation is marked by a deflationary trend followed by a sudden, moderate rise in prices.
D. Creeping inflation refers to a situation where the inflation rate is low and stable, typically increasing slowly over a period of time.

5. Which statement accurately describes a significant impact of deflation on an economy?

A. Deflation typically leads to an increase in consumer spending, as people expect prices to rise in the future.
B. It encourages immediate investment in capital goods due to the expectation of higher future returns.
C. Deflation can lead to a decrease in overall spending, as consumers and businesses might delay purchases expecting further price drops.
D. It results in an increased velocity of money as people try to hold less cash due to increasing value.

6. Which of the following best describes a key consequence of hyperinflation in an economy?

A. Hyperinflation results in an increased savings rate as people try to retain the value of their money.
B. It often leads to a rapid erosion of the real value of local currency, which undermines consumer and business confidence.
C. Hyperinflation typically results in a balanced trade situation due to the increased competitiveness of exports.
D. It usually leads to an increase in foreign investment due to higher returns on investment.

7. What accurately describes the phenomenon of disinflation in an economy?

A. Disinflation occurs when the rate of inflation is reducing over time, but the overall price level is still increasing.
B. It is a situation where prices of goods and services decline, leading to negative inflation rates.
C. Disinflation is characterized by a stagnant economy with no changes in the price levels and economic growth.
D. It refers to a rapid decrease in the inflation rate due to a recession or economic downturn.

8. How does the annual average method calculate an economic indicator such as inflation or GDP growth rate?

A. It sums up the monthly data points over a year and divides by the number of months to get an average.
B. The method involves taking the median of all monthly figures to avoid the impact of outliers.
C. It calculates the growth rate by comparing the economic indicator at the start and end of the year.
D. The annual average method averages the economic indicator's values at the beginning and end of the year, considering the midpoints of these periods.

9. Which of the following best describes how the Consumer Price Index (CPI) is used in economic analysis?

A. CPI measures the profitability and productivity of consumer goods industries within an economy.
B. CPI is used to assess changes in the cost of living by measuring the average price change of a market basket of consumer goods and services.
C. It represents the total expenditure of consumers within an economy over a specified period.
D. CPI exclusively tracks the price changes in luxury goods to determine economic well-being.

10. What distinguishes real data in economic analysis?

A. Real data refers to information collected in real-time, reflecting current economic conditions.
B. It signifies raw economic data that has not been subjected to any statistical adjustments or manipulations.
C. Real data is characterized by its focus on long-term trends rather than short-term economic fluctuations.
D. Real data is adjusted for inflation, allowing for comparison of economic variables over different time periods in terms of purchasing power.

11. What best describes the mechanism of cost-push inflation?

A. It is driven by excessive consumer demand, surpassing the economy's capacity to produce goods and services.
B. Cost-push inflation arises from a devaluation of the currency, leading to more expensive imports and higher prices.
C. It occurs when rising production costs, such as wages and raw materials, lead to an increase in the overall price level.
D. This type of inflation results from technological advancements that reduce production costs but increase product prices.

12. What characterizes the wage-price spiral in an economic context?

A. It describes a situation where increasing wages lead to higher productivity and, consequently, lower prices of goods.
B. The wage-price spiral refers to a cycle where rising wages lead to higher prices, which then lead to demands for further wage increases.
C. This phenomenon occurs when an increase in wages is accompanied by a proportional decrease in employment.
D. It is a situation where wage increases are indexed to price increases, but there is no resultant change in the real wages.

13. Which statement best describes the concept of demand-pull inflation?

A. Demand-pull inflation occurs when aggregate demand in an economy outpaces aggregate supply, leading to an overall increase in price levels.
B. It is a situation where inflation is caused primarily by a decrease in taxes and an increase in government spending.
C. Demand-pull inflation arises from a prolonged period of deflation, leading to a rapid increase in consumer demand.
D. This type of inflation occurs when there is an excessive supply of money in the economy, reducing its overall value.

14. How does the concept of fiscal drag operate within an economy?

A. Fiscal drag occurs when government spending is rapidly increased to stimulate economic growth.
B. It refers to the lag in changes to fiscal policy impacting the economy, often seen during economic downturns.
C. Fiscal drag happens when people's income is pushed into higher tax brackets due to inflation, increasing tax revenue without changing tax rates.
D. It describes the resistance encountered by government efforts to reduce public spending and cut down budget deficits.

15. What does the term inflationary noise refer to in economic analysis?

A. It is the disruption caused in financial markets due to unexpected changes in the inflation rate.
B. Inflationary noise describes the audible public discontent caused by rising prices and living costs.
C. It refers to the increased volume of economic transactions that occur during periods of high inflation.
D. Inflationary noise refers to the distortion in price signals caused by inflation, which can complicate the decision-making process for consumers and businesses.

Chapter 32: Living standards

Human Development Index (HDI)
Genuine Progress Indicator (GPI)
Purchasing power parity
Gender Inequality Index (GII)
Happy Life Expectancy Index (HLEI)
Gross National Happiness

Human Development Index (HDI)

a measure of living standards ...
... which takes into account ...
... income, education and life expectancy

Genuine Progress Indicator (GPI)

a measure of living standards ...
... which takes into account ...
... a variety of indicators including ...
... income, leisure time, ...
... distribution of income ...
... and environmental standards.

Purchasing power parity

an exchange rate based on ...
... the ratio of ...
... the price of a basket of products ...
... in different countries.

Gender Inequality Index (GII)

a measure of ...
... gender inequalities in terms ...
... of reproductive health, empowerment ...
... and labour market participating.

Happy Life Expectancy Index (HLEI)

an index which multiplies ...
... life expectancy by a ...
... happiness index.

Gross National Happiness

a measure of living standards ...
... which includes ...
... a wide number of indicators ...
... including income, psychological ...
... wellbeing, education ...
... and ecological diversity.

real GDP per head as an indicator of living standards

$\uparrow$ real GDP $\longrightarrow$ living standards $\uparrow$

real GDP = average
extra income : not be evenly distributed

$\uparrow$ real GDP $\longrightarrow$ goods & services produced $\uparrow$

$\uparrow$ demerit goods $\longrightarrow$ quality of life $\downarrow$
$\uparrow$ public goods $\longrightarrow$ quality of life $\downarrow$

$\uparrow$ real GDP $\longrightarrow$ quality of life $\downarrow$

if working conditions $\downarrow$
if pollution $\uparrow$

comparing living standards between countries

real GDP per head
real GDP/head not optimal tool:
does not take into account

distribution of income
size of the informal economy
working hours and conditions
quality of output
environmental conditions

real GDP measured in local currency
$\longrightarrow$ exchange rate issue
$\longrightarrow$ use PPP

measuring income and wealth inequality

visit the World Inequality Database
Check for your country :

How much of the wealth is owned by the wealthiest 50% of adults?
Identify 5 countires that have the lowest levels of wealth inequality

Chapter 33: Poverty

absolute poverty
relative poverty
vicious circle of poverty
Multidimensional Poverty Index (MPI)

absolute poverty

a condition where ...
... people's income ...
... is too low to enable them ...
... to meet their basic needs.

relative poverty

a condition where ...
... people are poor ...
... in comparison to others ...
... in the country.
Their income is too low to ...
... enable them to enjoy ...

vicious circle of poverty

a situation ...
... where people become ...
... trapped in poverty.

Multidimensional Poverty Index (MPI)

a measure of poverty ...
... based on deprivations ...
... in education, health ...
... and standard of living.

Source: Human Development Report (UNDP)

government policies to reduce poverty

improve the quantity and quality of education
promote economic growth
introduce or raise the national minimum wage
encourage more multinational companies to set up in the country
provide benefits or more generous state benefits
Land reform

government policies that influence the distribution of income and wealth

taxation
the provision of cash benefits
the provision of free state education and healthcare, and
using labour and macroeconomic policies

economic inequality

government spending

tax revenue

healthcare spending

education spending

Chapter 34: Population

emigration
birth rate
death rate
net immigration
infant mortality rate
net migration
population pyramid
dependency ratio
optimum population

emigration

the act of ...
... leaving the country ...
... to live in ...
... another country

birth rate

the number of births ...
... in a year ...
... per 1000 population ...
... in a year

death rate

the number of deaths ...
... in a year ...
... per 1000 population ...
... in a year

net immigration

more people ...
... coming to live in the country ...
... than people leaving the country ...
... to live elsewhere

infant mortality rate

the number of deaths ...
... per 1000 live births ...
... in a year

net migration

the difference between ...
... immigration and ...
... emigration

population pyramid

a diagram showing ...
... the age and gender structure of a ...
... country's population

dependency ratio

the proportion of ...
... the population that has to ...
... be supported by the ...
... labour force

$ \frac{ \text{number in dependent age groups} }{ \text{number in the labour force} } \times 100 $

dependency ratio

optimum population

the size of population ...
... which maximises ...
... the country's output per head

factors that affect population growth

natural factors :
difference between birth rate and death rate
net immigration :
difference between immigrants and emigrants

reasons for different rates of population growth

high birth rate

cost of having children is low
if women marry young
high infant mortality
low education of women
women without employment

low birth rate

high cost of having children (schooling)
well-paid jobs for women
government is present (pensions, benefits)

infant mortality

causes of infant mortality

population structures : sex ratio at birth

optimum population

the number of people which, ...
... when combined with ...
... land, capital and technology ...
... gives the maximum output of ...
... goods and services ...
... per head of the population

benefits of an increase in population

better use of resources (if below optimum)
size of markets $\uparrow$
factor mobility $\uparrow$
demand $\uparrow$
labour force $\uparrow$

downsides of an increase in population

famine $\uparrow$
living standards $\downarrow$
overcrowding
environmental pressure
employment opportunities $\downarrow$
balance of payments pressure

how to reduce the birthrate

educational opportunities for women
employment opportunities for women
improve healthcare
improve nutrition

consequences of ageing population

dependency ration $\uparrow$
change in labour force
demand for healthcare $\uparrow$
need for welfare services $\uparrow$
cost of state & private pensions $\uparrow$
change in the pattern of demand

how to deal with ageing population?

raise the retirement age
$\rightarrow$ reduce the cost of pensions
$\rightarrow$ tax revenue $\uparrow$

eﬀects of net emigration

size of working population $\downarrow$
burden of dependency $\uparrow$
average age of the labour force $\uparrow$
mobility of labour force $\downarrow$
changes in gender distribution
shortage of skilled workers
under-utilisation of resources
workers’ remittances

"analyse" question

"discuss" question on net immigration

Chapter 35: Diﬀerences in economic development between countries

economic development
World Bank
International Monetary Fund (IMF)

economic development

an improvement in ...
... economic welfare

World Bank

an international organisation ...
... which provides long term loans ...
... on favourable terms ...
... to promote development

visit worldbank.org

International Monetary Fund (IMF)

an international organisation ...
... that promotes international trade ...
... and global financial stability ...

visit imf.org

diﬀerent stages of economic development

countries with high economic development

high income per head
high living standards
higher employment in the tertiary sector
high levels of productivity
high levels of investment

countries with lower economic development

lower income per head
lower living standards

classification of countries

United Nations

very high human development
high human development
medium human development
low human development

World Bank

high income
upper middle income
lower middle income
low income

measures of economic development

real GDP per head (material living standards)
Human Development Index (HDI)

less than 0.550 indicates low development
0.550-0.699 medium development
0.700-0.799 high development
above 0.800 very high development

Human Development Index (HDI)

causes of diﬀerences in economic development

incomes per head
saving due to diﬀerences in income per head
investment
population growth
education and healthcare
size of primary, secondary and tertiary sectors
concentration on a narrow range of exports
productivity

under-development trap or the vicious circle of poverty

country with low incomes
$\longrightarrow$ low saving rate
$\longrightarrow$ resources used for consumer goods
$\longrightarrow$ lack of capital goods
$\longrightarrow$ keeps productivity and income low

reasons for achieving economic development

range of economic & social choices $\uparrow$
life expectancy $\uparrow$ & infant mortality $\downarrow$
distribution of income
mental and physical health $\uparrow$
pollution $\downarrow$
access to education & healthcare $\uparrow$
participation in the political process $\uparrow$

$\longrightarrow$ international competitiveness $\uparrow$

conditions for economic development

improve the quantity & quality of resources

investment
education & training
healthcare
life expectancy

problems in economies with low economic development

high growth of population
high levels of international debt
reliance on the export of primary products
lack of investment in

human capital and
capital goods

emigration of key workers
trade restrictions on their products
unbalanced economies

measures to promote economic development (classroom activity)

import substitution : protection of new domestic industries

advantages: output $\uparrow$, employment $\uparrow$, ...
disadvantages: prices $\uparrow$, choice $\downarrow$
no incentive to stay competitive

promote exports
improve infrastructure
attract MNCs
borrow froem abroad

foreign aid

bilateral aid: aid from one government to another
multilateral aid: aid from international organisations to developing countries

United Nations
World Bank
International Monetary Fund (IMF)
European Union
non-government organisations (OXFAM, ...)

forms of foreign aid

grants: do not require repayment
loans: charged on favourable terms
supply of goods, services, technical assistance and guidance (MSF, ...)
loans attached to conditions: structural adjustment programmes (IMF, World Bank)

Chapter 36: International specialisation

international specialisation
over-specialisation
regional specialisation
specialisation
tariffs

international specialisation

occurs when certain countries concentrate ...
... on the production ...
... of certain goods or services ...
... due to cost advantages, ...
... e.g. their abundance of certain resources

over-specialisation

occurs when ...
... a person, firm, region or country ...
... concentrates too much on producing ...
... a very limited number of goods and services.
This exposes the economic agent ...
... to a far higher degree of risk ...
... in adverse circumstances.

regional specialisation

occurs when certain regions ...
... concentrate on the production ...
... of certain goods and services.
... e.g. Hollywood concentrates on movies

specialisation

occurs when ...
... individuals, firms, regions or countries ...
... concentrate on the production ...
... of a particular good or service.

tariffs

a tax ...
... on imports

specialisation at a national level

advantages for consumers

specialisation $\longrightarrow$ output $\uparrow$
$\longrightarrow$ choice & living standards $\uparrow$
specialisation
$\longrightarrow$ level of skills & techniques $\uparrow$
specialisation $\longrightarrow$ cost of production $\downarrow$

disadvantages for consumers

losing control in global market
health & safety standards may not be met

specialisation at a national level

advantages for firms

production on a large scale
$\longrightarrow$ economies of scale
exchange of management ideas, technologies between regions

disadvantages for firms

dependency on other countries
trade wars (taxes on imports)
competition: other countries may specialise as well

specialisation at a national level

advantages for the economy

international specialisation & trade
$\longrightarrow$ efficiency $\uparrow$
$\longrightarrow$ economic welfare $\uparrow$
$\longrightarrow$ output & GDP $\uparrow$
country can consume outside its PPC
$\longrightarrow$ living standards $\uparrow$
$\longrightarrow$ absolute poverty $\downarrow$
adapt industry to level of skill
$\longrightarrow$ unemployment $\downarrow$

disadvantages for the economy

specialisation at a national level

advantages for the economy
disadvantages for the economy

difficulty of determining future demand
$\longrightarrow$ demand may suddenly $\downarrow$
occupational & geographical immobility
$\longrightarrow$ structural unemployment $\uparrow$
if transport costs $\uparrow$
$\longrightarrow$ cost advantage of specialisation $\downarrow$

absolute advantage and comparative advantage

absolute advantage (classroom activity)

the ability to produce a good ...
... more efficiently (e.g. with less labour)

comparative advantage (classroom activity)

the ability to produce a good ...
... relatively more efficiently ...
... (i.e. at lower opportunity cost) ...

production possibilities frontier (classroom activity)

source: OpenStax

understanding trade

trade involves exchanging goods and services.
two main types:

internal (within a country)
international (between countries)

both involve risk and effort, but offer potential benefits.

benefits of international trade

wider market reach: firms can sell to more people in different countries.
economies of scale: larger production allows for lower costs per unit.
wider sourcing options: access resources and materials from a broader pool.
potentially higher profits: selling internationally may offer higher returns.

challenges of international trade (1/2)

greater distance: transportation costs, longer delivery times.
language barriers: communication difficulties with buyers and sellers.
cultural differences: products and marketing strategies need adaptation.

challenges of international trade (2/2)

trade restrictions: tariffs, quotas, and other barriers can hinder trade.
increased competition: facing competition from firms worldwide.
currency fluctuations: changes in exchange rates can impact profits.

$\longrightarrow$ these challenges require careful planning and strategic approaches from firms.

Chapter 37: Free trade and protection

globalisation
quota
embargo
exchange control
voluntary export restraints (VERs)
infant industries
declining industries
strategic industries
dumping

globalisation

the process by which the world ...
... is becoming increasingly interconnected ...
... through trade and other links

quota

a limit placed on ...
... imports or exports

embargo

a ban on ...
... imports or exports

exchange control

a limit on the amount of ...
... foreign currency that ...
... can be obtained

voluntary export restraints (VERs)

agreements with ...
... other governments ...
... to restrict ...
... their exports to the country

infant industries

new industries ...
... with relatively ...
... low output ...
... and high cost

declining industries

old industries ...
... which are going out of business

strategic industries

industries ...
... that are considered important ...
... for the survival or ...
... development of the country

dumping

selling products ...
... in a foreign market ...
... at a price ...
... below the cost of production

reasons for the greater interconnection between countries

reduced transport costs
advances in communications
removal of some trade restrictions

consequences of globalisation

advantages

competition $\uparrow$ $\rightarrow$ choice $\uparrow$
$\rightarrow$ prices $\downarrow$

disadvantages

integration of economies $\uparrow$
$\rightarrow$ effect of external shocks $\uparrow$

role of MNCs

produce in countries where goods are sold
$\rightarrow$ transport costs $\downarrow$
$\rightarrow$ avoid import restrictions
$\rightarrow$ access to cheap labor and raw materials
benefits of MNCs

employment $\uparrow$
output $\uparrow$
tax revenue $\uparrow$
import new technology $\uparrow$

risks of MNCs

may drive domestic firms out
profits may go to shareholders

benefits of free trade

countries can concentrate on their speciality
allows efficient allocation of resources
exploit comparative advantage
economies of scale $\rightarrow$ prices $\downarrow$
quality of goods $\uparrow$

methods of protection

tariff
quota
embargo
exchange control
quality standards
expensive paperwork
voluntary export restraints (VERs)
subsidies

reasons of protection

infant industries
declining industries
strategic industries
raise employment
improve the trade position
protect industries from low wage competition
protect industries from dumping
protect industries from unfair competition

sugar trade between Brazil and U.S.

source: OpenStax

free trade results in gains

source: OpenStax

effects of trade barriers

source: OpenStax

Chapter 38: Foreign exchange rates

foreign exchange rate
fixed exchange rate
devaluation
revaluation
floating exchange rate
appreciation
depreciation
foreign direct investment (FDI)
hot money flows

foreign exchange rate

the price of one currency ...
... in terms of ...
... another currency ...
... or currencies

fixed exchange rate

an exchange rate ...
... whose value is set ...
... at a particular level ...
... in terms of another ...
... currency or currencies

devaluation

a fall ...
... in the value of ...
... a fixed ...
... exchange rate

revaluation

a rise ...
... in the value of ...
... a fixed ...
... exchange rate

floating exchange rate

an exchange rate ...
... which can change frequently ...
... as it is determined ...
... by market forces

appreciation

a rise in ...
... the value of ...
... a floating exchange rate

depreciation

a fall in ...
... the value of ...
... a floating exchange rate

foreign direct investment (FDI)

setting up production units ...
... or buying existing production units ...
... in another country

hot money flows

the movement of money ...
... around the world ...
... to take advantage ...
... of differences ...
... in interest rates ...
... and exchange rates

most traded currencies

effect of an increase in the supply of currency

a. equilibrium value of the currency

effect of an increase in the supply of currency

b. supply of the currency in foreign exchange market increases

effect of an increase in the supply of currency

c. fall in the value of currency : depreciation

foreign exchange rate system

fixed exchange rate

devaluation
revaluation

floating exchange rate

appreciation
depreciation

source: Financial Times

source: OEC

source: Financial Times

reasons for buying and selling foreign exchange

speculation
demand for exports & imports
purchase & sale of financial assets
foreign direct investment (FDI)

causes of exchange rate fluctuation

change in export revenue
change in import expenditure
change in direct foreign investment
sale & purchase of financial assets
speculation
central bank action : buying & selling of currencies
current account surplus
hot money flows

consequences of a change in exchange rate

effect on export and import prices
effect on the macroeconomy (use AS-AD model)

effect of a fall in net exports

AD = C + I + G + (X - M)
AD$_1$ = C + I + G + (X - M$_1$)

where M$_1$ > M

floating exchange rates

advantages : self-regulating mechanism for eliminate a gap between export revenue and import expenditure (e.g. if X < M )
disadvantages : previous mechanism may not work if firms & individuals don't make their desision based on X < M

fixed exchange rates

advantages : creates certainty for firms who buy abroad
disadvantages : central bank has use up considerable amount of foreign currency

source: Financial Times

Chapter 39: Current account of balance of payments

trade in goods
trade in goods deficit
trade in goods surplus
trade in services
trade in service surplus
primary income
secondary income
current account balance

trade in goods

the value of ...
... exported goods ...
... and the value of imported goods

trade in goods deficit

expenditure on imported goods ...
... exceeding ...
... revenue from exported goods

trade in goods surplus

revenue from exported goods ...
... exceeding ...
... expenditure on imports

trade in services

the value of exported services ...
... and the value of imported services

trade in service surplus

revenue from ...
... exported services ...
... exceeding ...
... expenditure on imported services

primary income

income earned by ...
... people working in ...
... different countries and ...
... investment income ...
... which comes into and goes out of ...
... the country

secondary income

transfers between ...
... residents and non-residents of money, ...
... goods or services, ...
... not in return for anything else

current account balance

a record of the income received ...
... and expenditure made by ...
... a country in its dealings ...
... with other countries

components of the current account

trade in goods
trade in services
primary Income
secondary Income

factors that affect exports and imports

a country's inflation rate
a country's exchange rate
productivity
quality
marketing
domestic GDP
foreign GDP
trade restrictions

causes of a current account surplus

low exchange rate
high quality of domestically produced products
high incomes abroad
low costs of production
high investment income earned abroad
the receipt of high workers' remittances

policies to correct a current account deficit

$\rightarrow$ interest rate $\uparrow$
$\rightarrow$ rates of indirect taxes $\uparrow$
$\rightarrow$ supply-side policies (long-run)

reduce import and/or increase exports
impose import restrictions
subsidise exports
reduce the country's foreign exchange rate
raise international competitiveness

source: OEC

essay-style questions (s23)

income tax, unemployment benefit, and poverty (s23_21)

Living standards, including education, have improved for most people in South Africa in recent years. Most households have more money and the government has more tax revenue. There is, however, considerable income inequality. In 2020, 36% of the population were living in poverty. An increase in unemployment benefit payments might reduce this poverty.

Analyse the causes of an increase in a government's tax revenue. [6 marks]
Discuss whether or not an increase in unemployment benefit payments would reduce poverty. [8 marks]

labour productivity, current account surplus, balance of payments, and inflation (s23_21)

Germany's death rate is higher than some other countries, including Sweden, Cuba and the Maldives. Germany's labour force increased in size between 2011 and 2021 and has become even more productive. The country has also experienced low inflation and a growing surplus on the current account of its balance of payments.

Analyse how an increase in labour productivity in a country can increase a surplus on the current account of its balance of payments. [6 marks]
Discuss why some countries may experience lower inflation in the future and some may not. [8 marks]

government spending, life expectancy, and foreign exchange rate (s23_21)

Many people from the Philippines work in another country, often in industries that provide merit goods and public goods. In 2020, the Philippine government raised more tax revenue. Some was spent on policy measures to increase life expectancy and some on policy measures to reduce unemployment. The country's unemployment rate was also affected by a rise in the country's foreign exchange rate.

Analyse how an increase in government spending could increase life expectancy. [6 marks]
Discuss whether or not a rise in a country's foreign exchange rate would benefit its economy. [8 marks]

unemployment, and merger (s23_21)

In Greece, rich households spend more than the average household. The amount of spending in an economy influences whether its production point is on or inside its production possibility curve (PPC). In 2020, household spending in Greece fell. This affected some firms’ plans to merge. It also increased unemployment. More than half of those unemployed in Greece had been unemployed for more than a year.

Analyse why someone who has been unemployed for more than a year may not get another job. [6 marks]
Discuss whether or not a government should encourage firms to merge. [8 marks]

bank lending, resource allocation, and market economy (s23_22)

In 2020, the largest Thai commercial bank merged with a smaller commercial Thai bank. It was expected that the merger would affect the price charged for bank services and the amount that would be lent. Thai commercial banks operate in the private sector. A growing private sector can move an economy towards a market economic system.

Analyse how an increase in bank lending can benefit an economy. [6 marks]
Discuss whether or not a market economy allocates resources in the best possible way. [8 marks]

investment, unemployment, and government intervention (s23_22)

Canada's private sector firms have a number of different objectives. The quantity and quality of land used by these firms, including farms, has increased. There has also been increased investment with the firms buying more capital goods. In 2021, the Canadian government encouraged higher investment and aimed to prevent a rise in unemployment.

Analyse how an increase in investment may affect unemployment. [6 marks]
Discuss whether or not a government should try to prevent a rise in unemployment. [8 marks]

price, revenue, producer, and firms (s23_22)

In 2020, Australia had a high national minimum wage (NMW). The NMW is received by some people who work on Australian dairy farms. Australia produces milk and soft drinks. Milk is purchased by some people as an alternative to soft drinks. Some dairy farms and some small firms went out of business in 2020. The year saw an increase in the value of the country's floating foreign exchange rate.

Analyse how an increase in the price of milk may affect the revenue earned by milk producers and soft drinks producers. [6 marks]
Discuss whether or not small firms are more likely to go out of business than large firms. [8 marks]

tariffs, imports, economic growth rate, current account deficit, and balance of payments (s23_22)

In 2019, China's economic growth rate was 6.1% and Chinese households increased their spending. More Chinese people attended sports events and the earnings of top sportspeople increased. China exported more despite a rise in tariffs on some of its products. For example, the US imposed higher tariffs on the imports of Chinese tea and coffee.

Analyse the reasons for imposing tariffs on imports. [6 marks]
Discuss whether or not a country with a high economic growth rate will have a deficit on the current account of its balance of payments. [8 marks]

level of income, comparing countries, and taxes (s23_23)

Liechtenstein is a high-income economy in the middle of Europe. The country's low tax rates and low levels of regulation make it an attractive place for foreign firms and individuals to open bank accounts. Firms' costs of production in Liechtenstein are high but this is slightly offset by low indirect taxation.

Analyse the causes of differences in the level of income between countries. [6 marks]
Discuss whether or not low tax rates benefit an economy. [8 marks]

demand, competition, and firms (s23_23)

The number of Chinese restaurants in the UK fell by approximately 7% in 2020 compared to the year before. Reasons for this include falling demand for Chinese food and increasing competition from other types of food. Some small firms selling Chinese food are also unwilling to invest in the latest technology because of the possible opportunity costs.

Analyse two causes of a fall in demand for a product such as Chinese food. [6 marks]
Discuss whether or not competition is harmful to a firm. [8 marks]

government policy, immigration, and migration (s23_23)

After the recession that struck Albania in 2013, the country experienced a significant rise in emigration. Albanian workers and students in other countries have expressed little desire to return. However, the government is trying to implement policy measures that could attract more people to return to the country.

Analyse policy measures a government could use to attract workers to return to their home country. [6 marks]
Discuss whether or not an economy benefits from many of its students studying abroad. [8 marks]

sectors of employment, and population (s23_23)

The food processing, tourism, and education industries all contribute significantly to the government budget for the US state of Wisconsin. The contribution of the education industry is higher than that of other industries due to the higher wages earned in education. This industry also contributes to the population growth of the state. This not only creates private benefits but also external benefits.

Analyse the reasons why workers employed in education may earn more than workers employed in other industries. [6 marks]
Discuss whether or not having a large population is beneficial for the economy. [8 marks]