econ note for a level

7/26/2019 Econ note for a level

1/43

EconomicsRevision Note

Tua 11SKMr.Phillpot Shrewsbury International School !1"!1#

Tua 11SK Sub$ect%Economics Shrewsbury International School1


2/43

Table o&'ontents

(asic Economic Problem 1

What are factors of production? 1

Type of goods 1

Opportunity Cost 1

Resources Allocation 1

The )llocation o& Resources1

3 Types of markets 1

Market Failure1

o! markets !ork? 1

"emand 1

#upply 1

$%uili&rium 1

Ta'(#u&sidies1

)rice $lasticity of "emand *)$d+ 1

)rice $lasticity of #upply *)$s+ 1

#ocial Costs and ,ene-ts 1

The In*ivi*ual as Pro*ucer+ 'onsumer+(orrower 1

Money 1

Financial .nstitute 1



3/43

Central ,ank /

Occupation /

#peciali0ation /

Trade nions /

#pending2 #aing2 ,orro!ing/

The Private ,rm as Pro*ucer an* Employer

Types of ,usiness Organi0ation /

#ector of )roduction /

Cost /

Firms 4ro!th /

$conomies of #cale /

Competition /

The Role o& -overnment in an Economy

Macro $conomics /

Fiscal )olicy /

Monetary )olicy /

Ta' /

"isposa&le .ncome /

Economics In*icator

.n5ation /

Types of .n5ation /

nemployment /

Output and 4ro!th /

The $conomic Cycle /

evelope* an* evelopin/ Economies

"eeloped and 6ess "eeloped $conomies/

)opulation /

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(asic Economic

Problem0hat are &actors o& pro*uction

2an*" all natural resources use* in pro*uction

2abour" pro*uction e3ort pro*uct by people

'apital" human ma*e resources use* in pro*uction li4e tools+

machinery+ buil*in/s.

Entrepreneur" Person who mana/e ,rm to pro*uce /oo*s or services

Type o& /oo*s

urable consumer /oo*s" /oo* that can be use &or a lon/ type li4e

cars+ computers.

Non"*urable consumer /oo*s" /oo*s that are use* up 5uic4ly such

as &oo*+ *rin4 an* cosmetic.

'onsumer services" personal services li4e hair *ressin/+ *entistry.

'apital /oo*s" /oo*s that are use* by ,rms to pro*uce other /oo*s

an* services. E/. Shop+ o6ce an* &actory.

Semi"7inishe* /oo*s" /oo*s that are use* to ma4e other /oo*s or

services e./.. material.

8pportunity 'ost

) *ecision to use resources one way is the bene,t &ore/one &rom

their ne9t best or hi/hest value* alternative use.7or e9ample+

instea* o& *oin/ economics revision note I coul* be preparin/ &or my

mathematics+ '1 e9am.

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5/43

Resources )llocation

'hoosin/ how best to use scarce resources. 7or e9ample+ allocatin/

more pro*uctive resources to the pro*uction+ military e5uipment will

mean &ewer resources are available to pro*uce cars.

The )llocation o&Resources

# Types o& mar4ets7ree mar4et economy are economy where there is no role o&

/overnment an* there&ore no ta9es or /overnment spen*in/.

:owever+ in reality+ all mar4et economies have a /overnment that

will also *eci*e* how best to allocate some scarce resources.

Mi9e* mar4et economy are mar4et that consist between both private

an* public sector. The amount o& /oo*s an* services provi*e* by the

public sector can vary /reatly between *i3erent national economies.

Planne* economy is economy where /overnment owne* or

controlle* the vast ma$ority o& scare resources an* *etermine* what+

how an* &or whom /oo*s an* serves were pro*uce*. There were no

private ,rms in these economies many years a/o an* very little

consumer choice.

Mar4etEconomy

Mi9e*Economy

Planne*Economy

0ho *eci*e*

what an* how

to pro*uce

Pro*uces an*

consumers

Pro*ucer+

consumers an*

/overnment

-overnment

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6/43

Mar4etEconomy

Mi9e*Economy

Planne*Economy

0ho owns or

controls most

scarce

resources

Private Sector Private an*

Public Sector

-overnment

:ow are

resources

allocation

*ecision ma*e

7irms use*

mar4et price

si/nals to 4now

what /oo*san* services

consumers

want an* will

ma4e pro,t+

Same as

mar4et

economy but

the/overnment

also provi*es

some /oo*s

an* services to

those in

/reatest nee*.

-overnment

will pro*uce

&rom what they

thin4 themar4et nee*.

0ho are /oo*s

an* services

&or

'onsumers

with the

/reatest ability

to pay &or them

Same as

mar4et

economy but

the

/overnment

also provi*es

some /oo*s

an* services to

those in

/reatest nee*.

7or everyone in

the mar4et



7/43

Mar4etEconomy

Mi9e*Economy

Planne*Economy

Main

a*vanta/es

=ariety o&

/oo*s an*

services

available

Same as

mar4et

economy.

Everybo*y will

/et the same

amount o&

/oo*s an*

services an*

will create

e5uality.

Main*isa*vanta/es

:arm&ul /oo*swill be

available to

buy

Same asmar4et

economy but

/overnment

can intervene.

No choice o&/oo*s an*

services to

choose.

Mar4et 7ailure

Mar4et &ailure occurs when mar4ets &ail to pro*uce /oo*s an*

services that are worthwhile an* when mar4ets result in waste&ul or

harm&ul activities. (ut in mi9e* economy /overnment can come in

an intervene in the mar4ets+ they can or/ani>e resources to provi*e

/oo*s an* services an* create law to control harm&ul activities.

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8/43

:ow mar4ets can &ail :ow a /overnment canintervene

8nly /oo*s an* services that

are pro,table to ma4e will be

provi*e*. 7or e9ample+ a

mar4et economy will not

provi*e e*ucation or health

care &or people who cannot

a3or* to pay &or these

services.

It can pro*uces merits /oo*s

such as e*ucation an* health

care &or people+ re/ar*less o&

their ability to pay &or them+

because all the economy will

bene,t &rom havin/ a health

an* e*ucate* population.

8ther services such as street

li/htin/+ sea an* @oo*

re&erences an* national

par4s+ will not be provi*e*%

,rms woul* be unable to

char/e customers a price

accor*in/ to how much they

use them or bene,t them.

It can provi*e public /oo*s+

such as street li/htin/+ sea

an* @oo* *e&enses an*

national par4s+ that woul*

otherwise be unpro,table &or

private sector ,rm to provi*e.

:arm&ul /oo*s+ such as

*an/erous *ru/s an*

weapons+ may be pro*uce*

an* be &reely available to

consumers who want to buy

them.

2aws can ma4e the pro*uction

o& harm&ul /oo*s ille/al+ an*

hi/h ta9es can be put on

speci,c items such as alcohol

an* ci/arettes to re*uce the

consumption.

Resources will only be

employe* i& it is pro,table to

*o so. Some people who are

willin/ an* able to wor4 may

be le&t unemploye* an*

without an income.

The public sector can employ

people who otherwise be

unemploye* an* provi*e

wel&are bene,ts an*

payments to people out o&

wor4 or on low incomes.

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9/43

:ow mar4ets can &ail :ow a /overnment canintervene

Some pro*ucers may i/nore

the harm&ul e3ects o& their

pro*uction on the

environment or peopleBs

health.

2aws an* re/ulations can

protect the natural

environment an* peopleBs

health an* sa&ety. 7irms may

have to pay lar/e ,nes i& their

activities brea4 these laws.

Some ,rms may be *ominate

the supply o& a particular/oo* an* service an* will

char/e consumers very hi/h

prices. These ,rms are

*escribe* as monopolies.

Monopolies can be re/ulate*

to 4eep their prices *own orbe bro4en up into smaller

,rms to increase competition

an* choice.

:ow mar4ets wor4

In the mar4et their is *eman* an* supply. E3ective *eman* are

*eman* that consumers willin/ an* able to but that particular

pro*uct. There are some pro*ucts that are compliment to other

pro*ucts we call these $oint *eman*.

eman*The amount that an in*ivi*ual or in*ivi*uals are willin/ to buy at any/iven price. )s price rises *eman* *ecrease.It is possible that *eman*may chan/e &or reasons other than price

EM)N IN'RE)SES I7 CThai )irwaysD

1. The /oo* or service becomes more popular

. Increase in a*vertisin/ on the /oo* or service

#. 8ther substitute /oo*s Ce./. Sin/apore )irlineD increase in price

;. Improvement in 5uality


10/43


11/43

E5uilibrium

(oth *eman* an* supply when they are e5ual the mar4et will reach

the point call E5uilibrium but when it *oesnBt e5ual to each other it is

calle* ise5uilibrium.

0hen there is e9cess *eman* the price nee* to increase to brin/ the

*eman* &or that /oo*s or services *own.

0hen there is e9cess supply the price nee* to *ecrease to brin/ up

the *eman* to reach e5uilibrium.

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12/43

Ta9JSubsi*ies

Ta9 on /oo*s an* services will increase the price o& that /oo*s or

services. This will result in shi&tin/ the supply curve inwar* because

it is more e9pensive to pro*uce so pro*ucer are li4ely to supply less.

Subsi*y will be a a*vanta/e or money that is /iven to a certain ,rm

by /overnment to encoura/e them to pro*uce more /oo*s an*

services. This will re*uce their cost o& pro*uction an* they will li4ely

to supply more.



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Price Elasticity o& eman* CPE*D

PE* measures the responsiveness o& *eman* o& a chan/e in price.

PE* L chan/e in 5uantity *eman*H L chan/e in price

I& PE* is /reater than 1 it is elastic but lass than one is is in elastic.

I& PE*! it is calle* per&ectly price in elastic+ *eman* remain

constant at whatever price.

I& PE* it is calle* In,nitely price

inelastic+ there is unlimite* *eman*

but only at one price.

I& PE*1 it is calle* Fnitary elastic+ revenue

remains constant at every possible price.



14/43

Price Elasticity o& Supply CPEsD

PEs measures the responsiveness o& supply o& a chan/e in price.

PEs L chan/e in 5uantity supplyH L chan/e in price

I& PEs is /reater than 1 it is elastic but lass than one is is in inelastic.

Social 'osts an* (ene,ts

E9ternal 'ost" 0hen the economic activities o& one /roup have a

ne/ative impact on others an* when that impact is not ta4en into

account or pai* &or by those creatin/ it.

E9ternal (ene,t" 0hen the economic activities o& one /roup have a

positive impact on others an* an* that impact is not ta4en into

account or pai* by those who bene,t.

Social 'ost""The total economic cost o& an activity to a society+

inclu*in/ private costs incurre* by ,rms an* consumers un*erta4in/

the activity an* e9ternal costs a3ectin/ those not *irectly involve* in

the activity.

Social (ene,t" The total economic bene,t o& an activity to a society+

is the sum o& its private bene,ts an* e9ternal bene,ts.

-overnment can use Ta9es+ subsi*es an* 2aws an* re/ulation to

control e9ternal costs an* bene,ts.

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15/43

The In*ivi*ual as

Pro*ucer+'onsumer+(orrower

Money

7unctions o& Money

) wi*ely accepte* me*ium o& e9chan/e

) reliable measure o& value

) /oo* store o& value

) means o& *e&erre* payment

'haracteristics o& a /oo* money

)cceptable

urable

Portable

ivisible

Scarce

Type o& Money

'ash+ 7inancial )ssets+ (an/ eposits+ Physical )ssets

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16/43

7inancial Institute

'ommercial (an4+ 're*it Fnions+ Investment (an4+ Islamic (an4sCno

interest rate but char/es &eesD

Their services%

1. Keep money sa&ely &or customers

. :elp customers ma4e payments Cthrou/h che5ues an* car*sD

#. 2en* money to customers

;. Sell other pro*ucts e./. insurance+ share *ealin/.

'entral (an4

Issuin/ new notes an* coins &or the nationBs currency

Mana/in/ payments to an* &rom the /overnmentBs account

Stabili>in/ the value o& the national currency on the &orei/ne9chan/e mar4et.

Mana/in/ the stoc4 o& /overnment borrowin/CThe national

*ebtD

Supervisin/ the ban4in/ system+ re/ulatin/ the con*uct o&

ban4s+ hol*in/ their *eposits an* trans&errin/ &un*s between them.

2en*er o& last resortO or len*in/ money to ban4s to preventthem /oin/ ban4rupt i& they run short o& money.

8peratin/ the /overnment monetary policy.

8ccupation

Most people supply their labour to earn an income. They choose

*i3erent $obs or occupations *epen*in/ on the wa/e or salary they

o3er an* also *epen*in/ on non"wa/e &actors.



17/43

Non"wa/e &actors inclu*e%

:ours o& wor4 7le9ible wor4in/

arran/ements

:oli*ay Entitlement -oo* wor4in/

environment

Promotion prospects istance or travel time to

wor4

Trainin/ provision :ow secure the $ob is

Pension entitlement access to a company at

Speciali>ation

)*vanta/es isa*vanta/es

Employees can ma4e best use

their particular talents an* s4ills

oin/ the same $ob or repetitive

tas4s can become borin/ an*

stress&ul

Employees can increase their

s4ills an* e9perience by

repeatin/ tas4s.

In*ivi*uals must rely on others

to pro*uce /oo*s an* services

they want but cannot pro*uce

themselves

Employees can pro*uce more

output an* re*uce business

costs i& they concentrate on the

same $ob or tas4s.

Many repetitive manual tas4s

can now be un*erta4en by

computer"controlle* machinery

an* robots. This has le* to many

low s4ille* wor4ers bein/ ma*e

unemploye*

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18/43

)*vanta/es isa*vanta/es

More pro*uctive employees can

earn hi/her wa/es.

Tra*e Fnions

)IMS 87 TR)E FNI8NS

To increase the wa/es o& their members

To improve their wor4in/ con*itions

To a/ree a certain number o& hours to be wor4e* each wee4

To support members who have problems with mana/ers

To /et e9tra bene,ts &or wor4ers e./. pensions

:80 8 T:EG -8 )(8FT IT

" Ne/otiations with mana/ers i.e. /eneral *iscussions

" In*ustrial action e./. stri4e

" :elp an* pay to represent wor4ers in court or le/al battles

)*vanta/es an* isa*vanta/es o& stri4e

)*vanta/e

" :as an imme*iate e3ect as pro*uction halts e./. trains stoprunnin/ i& the *rivers stri4e

" (usinesses su3er an* have to ta4e notice

" May /et covera/e on T= or in newspapers.

is)*vanta/e

" May cause an/er &rom the /eneral public e./. train passen/ers

" 0or4ers *onBt /et pai* when on stri4e

" Notice has to be /iven otherwise it is ille/al

8verall the e3ect will probably *epen* upon%

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19/43

- The L o& the wor4&orce willin/ to stri4e

" The support o& the /eneral public

" The stren/th o& the mana/ement to battle it out

Spen*in/+ Savin/+ (orrowin/

isposable Income" The amount o& income a person has le&t to spen*

a&ter *e*ucte* by income ta9.

People save money to use in their &uture+ more people ten* to save

more when the interest rate is hi/her because they will /et more

money i& they save.

People borrow money to buy thin/s or to pay &or thin/s when they*onBt have enou/h money+ people ten* to borrow more money when

the interest rate is low because they will have to pay bac4 cheaper

to their len*er.



20/43

The Private ,rm as

Pro*ucer an*Employer

Types o& (usiness 8r/ani>ation

) Sole Tra*er" ) business owne* an* controlle* by one person

) Partnership" )n a/reement between a /roup o& people to run a

business an* share pro,ts.

Sole tra*ers an* /eneral partners in a partnerships have an

unlimite* liability to repay any business *ebts that their business

&ail.

Private 2imite* 'ompany" can only sell shares to people

recommen*e* by e9istin/ owners.

Public 2imite* 'ompany" can shares publicly on the stoc4 mar4et

sharehol*ers in a limite* company will elect a boar* o& *irectors to

mana/e their business.

Sharehol*ers in a limite* company have limite* liability an* will only

lose the money they investe* in their business i& it &ails.

Multinational" ) /lobal corporation with business operations in more

than one country.

Public 'ompany" Responsible &or runnin/ a business or/ani>ation

owne* by an* accountable to /overnment.

Sector o& Pro*uction

Primary Sector" &armin/+ minin/+ pro*uces natural resources.

Secon*ary" inclu*e all manu&acturin/ in*ustries an* construction.

Tertiary" Pro*uce an* supply service.



21/43

2abour Intensive" 8r/ani>ation will employ more labour than capital

e5uipment an* machinery.

'apital Intensive" 8r/ani>ation will employ more capital e5uipment

an* machinery an* relatively &ew wor4ers.

Pro*uctivity"" Measures the amount o& output or revenue pro*uce*

by a /iven amount o& labour+ capital an*Hor materials. Pro*uctivity

will increase* i&% more output or revenue is pro*uce* &rom the same

amount o& resources+ the same output or revenue can be pro*uce*

usin/ &ewer resources.

'ost

7i9e* 'osts =ariable 'ost

'osts that *o not vary with the

level o& output

'osts that vary with the level o&

output.

Rent Purchase o& materials

2oan repayment Purchase o& component parts

'leanin/ Electric

Insurances 0a/e

Total 7i9e* 'ost the sum o& all ,9e* costs

Total =ariable 'ost variable cost output

Total 'ost Total ,9e* cost Q Total variable cost

)vera/e 'ost per Fnit o& 8utput total costHtotal output

)vera/e costs ten* to &all as output rises because ,9e* costs are

sprea* over a lar/er output.

Total Revenue " price per unit 5uantity sol*

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22/43

)vera/e revenue per unit sol* total revenueH5uantity sol*

Total Revenue " Total 'ost 8 (rea4"even

7irms -rowth

Internal -rowth

This means that it /rows without $oinin/ with another business. It

coul*

buil* new premises

ta4e onB more employees

E9ternal -rowth

In this case it has some involvement with another business

Mer/er

Two ,rms $oin to/ether an* have e5ual ownership e./. 2loy*s an*

TS( mer/e to create 2loy*s TS( ban4.

:ori>ontal Inte/ration

Two businesses at the same sta/e o& pro*uction

e./. table"ma4ers $oin to/ether

7orwar* =ertical Inte/ration



23/43

) business ta4es over or mer/es with a businesses at the ne9t sta/e

o& pro*uction

e./. table ma4er $oins with a shop

(ac4war* =ertical Inte/ration

) business ta4es over or mer/es with a business at the previous

sta/e o& pro*uction

e./. a table ma4er $oins with a tree cutter

Ta4eover

8ne ,rm ta4es over another ,rm an* has the ownership o& that

business. It is probably a/ainst the wishes o& the other business. e./.

2loy*s coul* ta4eover TS(. It woul* probably still be calle* 2loy*s

but it woul* also own TS(.

(ene,ts o& -rowth

Increase* pro,ts

Increase* mar4et share

-ain new i*eas &rom the other business

)voi* havin/ to compete with the other business

-ain &rom economies o& scale Cpa/eD

The new business may not nee* all o& the wor4ers. They coul*

remove some wor4ers to become e6cient an* ma4e more pro,t

Problems o& -rowth



24/43

To the businesses

There may be two sets o& mana/ers who are unable to a/ree on

the best *irection &or the company. This coul* cause many problems.

The businesses may have *i3erent ob$ectives an* tar/ets

It costs a lot o& money to mer/e with or ta4eover another business

To customers

Possibly less choice in the mar4et an* possibly hi/her prices to pay

To wor4ers

Possible $ob losses an* $ob insecurity

Economies o& Scale

The bene,ts /aine* &rom pro*ucin/ on a lar/e scale. It usually

means that the avera/e cost o& ma4in/ a /oo* is lowere*.

E9ample

I& a shirt manu&acturer in (an/4o4 pro*uce* more shirts it shoul* see

a &all in its avera/e costs per shirt. I& it only pro*uces 1 shirt it still

has to pay its rent+ mana/ers+ bills etc.

Number of shirt Total Cost () Average Cost1 1,000 1,000

100 30,000 300

1,000 100,000 100



25/43

)s a number o& the costs are ,9e* it is bene,cial to pro*uce on a

lar/er scale.

This means the ,rm can either aD re*uce its price or bD 4eep the

same price an* ma4e more pro,t

Types o& Economies o& Scale

Thin4 o& the a*vanta/es that :arro*s has over a small+

in*epen*ently"owne* shoppin/ centre near you

M)N)-ERI)2 Employ specialist mana/ers e./. accountants.

7IN)N'I)2 Easier to /et a loan &rom the ban4

I=ERSI7G Sell a ran/e o& pro*ucts. Re*uces the ris4 o& &ailure.

)=ERTISIN- They can a3or* to a*vertise nationally on T=

(F2K (FGIN- This is cheaper per /oo* &or the business

M)SS PR8F'TI8N :elps sprea* ,9e* costs Cpa/eD

iseconomies o& Scale

These are the problems &ace* by businesses i& they become too

lar/e

2ose touch with the customers

Mana/ers lose touch with the wor4ers

'ommunication problems because the business is so lar/e

'ompetition

Types o& 'ompetition

Price 'ompetition" involves ,rms usin/ price strate/ies to attract

customers &rom rival pro*ucers.

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26/43

Non"Price 'ompetition" inclu*es o3erin/ better 5uality pro*ucts than

rival ,rms+ improvin/ customer services+ &ree /i&ts with purchases or

by usin/ persuasive a*vertisement.

Pricin/ Strate/y escription

Penetratin/ pricin/ Settin/ price low to encoura/e sales. This

maybe important &or a new ,rm or an

e9istin/ ,rm tryin/ to attract *eman* &or a

new pro*uct.

E9pansion pricin/ Settin/ price low to e9pan* *eman* &or an

e9istin/ pro*uct. )s *eman* rises+ ,rms can

increase their scale o& pro*uction an* re*uce

avera/e costs.

Mar4et s4immin/ Initially char/in/ at hi/h price &or a new

pro*uct to ma9imi>e pro,t &rom those

consumers willin/ to pay more to be amon/

the ,rst to buy the pro*uct. This strate/y iso&ten observe* in the mar4et &or new

consumer electronic /oo*s.

Price 2ea*ership 0hen smaller ,rms set their prices at a

similar level to a lar/er ,rm. This can help

avoi* a//ressive price competition an* price

wars with lar/er ,rms.

Pre*atory pricin/ )//ressive price cuttin/ by a lar/e *ominant

,rm inten*e* to *rive smaller competin/

,rms out o& business because they have

hi/her costs an* will be unable to match the

price cuts. 8nce the competition has been

remove* the lar/e ,rm is able to raise prices

a/ain.



27/43

:ow can we measure competition &or a particular /oo* or service

I. Mar4et share o& total 5uantity tra*e* or total sales revenues

II. o ,rms able to to in@uence mar4et price as 4now as price

ma4ers.

8li/opoly Pure Monopoly

0hen a smaller number o& ,rms

*ominate the mar4et supply o& a/oo* or service.

To avoi* price wars ,rms may

act to/ether to ma9imi>e their

pro,ts+ settin/ mar4et price hi/h

by restrictin/ their combine*

mar4et supply+ This is calle*

price collusion.

) cartel is a &ormal a/reement

between ,rms to control mar4et

supply or price.

They may create barriers to

mar4et entry to/ether to *eter

competition &rom new ,rms.

) ,rm that controls the entire

mar4et supply o& a /oo* orservice.

) monopoly may use pre*atory

pricin/ an* other arti,cial

barriers to entry to &orce

competin/ ,rms out o& their

mar4et.

8ther ,rms may also be

*eterre* &rom competin/ with a

monopoly because they will be

unable to match its si>e in terms

o& its capital employe* an*H or

mar4et share.

2ar/e ,rms may abuse their mar4et power by restrictin/ mar4et

supply to &orce up the mar4et price an* earn more pro,t. These are

calle* abnormal pro,t or e9cess pro,ts because they will be much

hi/her than they woul* be i& the mar4et was competitive.

8li/opolies an* Monopolies isa*vanta/es%

:i/her price than competitive mar4et because they can push

up the price.

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2ess choice &or consumer

2ower pro*uct 5uality

"ine6ciency+ hi/her pro*uction costs because poorly

mana/e*+ ue to no competition so less incentive to re*uce costs.

-overnment can use laws an* re/ulations to prevent restrictive

practices to *eter competition.

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The Role o&

-overnment in anEconomy

Macro Economics

8b$ective o& /overnment%

2ow an* stable price in@ation

) hi/h an* stable level o& employment

Economic /rowth an* prosperity

) &avorable balance o& international payment

Economics -rowth

This is measure* by the yearly chan/e in -ross omestic Pro*uct

C-PD. It is usually e9presse* as a L chan/e.

E9ample Gear 1 Tinseltown pro*uces 1+!!! worth o& /oo*s

Gear Tinseltown pro*uces 1+1!! worth o& /oo*s

Economic /rowth woul* be 1!L

It C-PD can be measure* in # ways. Each is i*entical

The total pro*uction CoutputD o& all businesses

The total incomes an* pro,ts in the country

The total o& all spen*in/ by in*ivi*uals an* businesses

0hat causes economic /rowth



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)nythin/ which allows the country to pro*uce more /oo*s an*

services.

More business investment (etter pro*uctivity

(etter machinery Improve* trainin/

(etter s4ills New technolo/y

New i*eas Increase* e6ciency

'osts an* bene,ts o& economic /rowth

(ene,ts% More income &or society+ Shoul* create $obs+ 'oul* re*uce

the number o& poor people+ More /oo*s pro*uce* an* probably more

choice &or customers an* businesses+ :i/her stan*ar* o& livin/+ 7ree

/oo* &actor in society

'osts% E9tra pro*uction coul* cause e9tra pollution+ E9haustion o&

non renewable resources li4e oil+ 8nly the rich may /ain the bene,ts

The poor stay poor an* ine5uality increases+ -reater stress on

wor4ers to pro*uce more /oo*s

)**in/ the circular @ow an* the economic activity

" (usinesses may invest money into new e5uipment or new

&actories. This allows e9tra pro*uction to ta4e place.

" The -overnment may spen* 1!! on a roa*buil*in/ pro$ect. This

creates economic activity

" )n e9port is a sale o& a /oo* or service to a &orei/ner. This brin/s

money into the economy.

2owerin/ the circular @ow an* the economic activity

Savin/s mean that people are not spen*in/ money on /oo*s an*

services

Ta9es are ta4en out o& peoples an* businesses incomes. This money

cannot be spent on /oo*s an* services.



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Imports are purchases &rom abroa*. The money leaves the country

The economy ten*s to e9perience *i3erent tren*s. These can be

cate/ori>e* as the tra*e cycle an* may &eature boom+ slump+

recession an* recovery

(88M% ) perio* o& &ast economic /rowth. 8utput is hi/h *ue to

increase* *eman*+ unemployment is low. (usiness con,*ence may

be hi/h lea*in/ to increase* investment. 'onsumer con,*ence may

lea* to e9tra spen*in/.

S2FMP% ) perio* when output slows *own *ue to a re*uction in

*eman*. 'on,*ence may be/in to su3er.

RE'ESSI8N% ) perio* where economic /rowth slows *own an* the

level o& output may actually *ecrease. Fnemployment is li4ely to

increase. 7irms may lose con,*ence an* re*uce investment.

In*ivi*uals may save rather than spen*.

RE'8=ERG% ) perio* when the economy moves between recession

an* a boom.

0:)T :)PPENS IN ) (88M

" (usinesses pro*uce more /oo*s

" (usinesses invest in more machinery

" 'onsumers spen* more money.

" 2ess money is spent by the -overnment on unemployment bene,ts

" More money is collecte* by the -overnment in income ta9 an* =)T

" Prices ten* to increase *ue to e9tra *eman* Cpa/eD

0:)T :)PPENS IN ) RE'ESSI8N

- (usinesses cut bac4 on pro*uction

" Some businesses may /o ban4rupt

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" 'onsumers spen* less money. " In*ivi*uals may lose their $obs

" More money is spent by the -overnment on unemployment

bene,ts

" 2ess money is collecte* by the -overnment in income ta9 an* =)T

" Prices start to &all

7iscal Policy

7iscal Policy" involves varyin/ total public sector e9pen*iture an*Hor

the overall level o& ta9ation to in@uence the level o& *eman* in an

economy.

E9pansionary 7iscal Policy" may be use* *urin/ an economic

recession to boost *eman* &or /oo*s an* services throu/h ta9 cuts

or increase* public sector spen*in/. 7irms may respon* by hirin/

more labour an* increasin/ output. :owever+ increasin/ *eman* can

&orce up mar4et prices an* involve spen*in/ more on importe*

/oo*s an* services &rom overseas. Increasin/ imports will have

ne/ative impact on the balance o& payments.

'ontractionary 7iscal Policy " may be use* to re*uce price in@ation. It

involves re*ucin/ *eman* in an economy throu/h ta9 increases or

cuts in public sector spen*in/. :owever+ ,rms may respon* to &allin/

*eman* by cuttin/ their output an* re*ucin/ employment. Increase*

ta9es may also re*uce wor4 incentives an* there&ore pro*uctivity.

7iscalPolicy

Instruments

Impacts on consumers Impacts on pro*ucers

Increase

income

ta9es

isposable income is

re*uce* an* consumer

spen*in/ &alls

M)r4et prices an* pro,ts

&all as consumer *eman*

&alls. 7irms cut output an*

employment.

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7iscalPolicy

Instruments


Re*uce

income

ta9es

isposable income is

re*uce* an* consumer

spen*in/ rise

Mar4et prices an* pro,ts

start to rise so &orms

e9pan* output an* employ

more labour.

Increase

ta9es on

pro,ts

'onsumers are not

*irectly a3ecte* but

may pay hi/her prices i&

,rms cut output

)&ter ta9 pro,ts &all. 7irms

may increase their prices

an*Hor cut output in

response.

'ut ta9es

on pro,ts

'onsumers may be

bene,t re*uce* prices

as output rises

)&ter ta9 pro,ts rise so

,rms may e9pan* their

output an* employment

Increase

in*irect

ta9es on

/oo*s an*

services

'onsumers on low

incomes may be hit

har*est by price rises

because they spen* all

or most o& their incomes

'onsumer *eman* may

contact an* pro,ts &all.

7irms may cut output an*

re*uce their *eman* &or

labour.

'ut in*irect

ta9es on

/oo*s an*

services

'onsumers may e9pan*

their *eman* &or /oo*s

an* services as a&ter ta9

prices &all

E9pan*in/ *eman* will

boost pro,ts which are an

incentive to ,rms to raise

their output an* *eman*

more labour



34/43

7iscalPolicy

Instruments


Raise

public

e9pen*itur

e

Public sector wor4ers

coul* be pai* more. 2ow

income &amilies may

receive more bene,ts.

More public services

coul* be provi*e* &or

&ree

7irms supply /oo*s an*

services to /overnment will

en$oy increase* revenues

an* pro,ts+ an* may

e9pan* their output an*

employment.

'ut public

e9pen*itur

e

Public sector wor4ers

coul* su3er pay cuts or

be ma*e unemploye*.

0el&are bene,ts may be

re*uce*.

) cut in public spen*in/ on

capital pro$ects+ such as

roa* an* school buil*in/+

will cause cutbac4s in the

construction in*ustry.

Subsi*es pai* to other

,rms may be cut.

Monetary Policy

Monetary Policy" involves varyin/ interest rate char/e* by the

central ban4 &or len*in/ money to the ban4in/ system in an

economy.

'ontractionary Monetary Policy" may be use* to re*uce price

in@ation by increasin/ the interest rate.

E9pansionary Monetary Policy"" may be use* *urin/ an economic

recession to boost *eman* an* employment by cuttin/ interest

rates. :owever+ increasin/ *eman* can push up prices an* may

increase consumer spen*in/ on importe* /oo*s an* services.

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Ta9

Ta9ation is money pai* to the -overnment by in*ivi*uals an*

businesses. This money is usually spent by the -overnment on

essential services such as health or e*ucation.

Types o& Ta9

irect Ta9

) ta9 place* *irectly on an in*ivi*ual or business

" Income ta9 " ta4en out o& an in*ivi*uals wa/e

" 'orporation ta9 " pai* by businesses out o& their pro,ts

" National Insurance U ta4en out o& an in*ivi*uals wa/e

In*irect Ta9

) ta9 place* on a /oo* or service

" =)T " this is put onto the price o& most /oo*s an* services+ usually

1A.


36/43

) ta9 where hi/her income earners pay a lower percenta/e o& their

income in ta9 compare* to low income earners

isposable Income

The amount o& money an in*ivi*ual earns a&ter ta4in/ away ta9 an*

national insurance payments.

:ow is it a3ecte* by ta9

Scene 1% Ta9 is hi/h

Pay"slip o& Tua

-ross pay

Income ta9 !L 1!!

National insurance


37/43

There shoul* be lots more spen*in/ in the economy

This shoul* help businesses sell more /oo*s

They may ta4e on more wor4ers V.. this woul* re*uce

unemployment

Economics In*icator

In@ation

It is a sustaine* rise in the /eneral level o& prices in an economy. It

can easily be measure* by 'PI C'onsumer Price In*e9D.

This means an increase in the avera/e price level over a year. e./.

on avera/e prices may increase by


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Problems o& in@ation

Prices increase there&ore people may buy &ewer /oo*s+ the

economy may su3er

People nee* to 4eep as4in/ &or pay increases to match price rises.This can cause problems at wor4

I& people are on ,9e* incomes e./. pensioners or stu*ents. They

will be worse o3 because they will be able to buy &ewer /oo*s

The costs to businesses may increase. They may cutbac4 on

pro*uction.

I& the prices o& FK /oo*s increase too much then people an*

businesses may start to import more /oo*s &rom abroa* because

they are cheaper. This will cause ma$or problems &or the economy.

'auses o& in@ation

'ost"Push

)n increase in costs may lea* to an increase in prices.

E9amples%

Raw material prices C possibly &rom abroa*D increase...

...'osts to business increase...

...(usiness still wants to ma4e a pro,t...

...(usiness puts its prices up...

...'onsumers can buy less with their money...

...0or4ers *eman* an* receive pay increases...

...(usinesses costs increase a/ain...

...(usinesses put prices up a/ain

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8n an* on an* on

eman*"Pull

I& there is too much *eman* &or /oo*s an* services in the economy

then prices may be &orce* upwar*s.

In*ivi*uals an* businesses e9perience a &eel /oo* &actor Cmaybe

they have $ust ha* a ta9 cutD

They wish to buy more /oo*s an* services

8nly so many /oo*s an* services are available at present

Suppliers e9perience so much *eman* &or their limite* number o&

/oo*s that they *eci*e to put up prices.

:ow to re*uce in@ation

I& in@ation is cause* by hi/h *eman* then

Raise interest rates to re*uce consumers *isposable incomes

Raise interest rates to *iscoura/e borrowin/ an* *eman*

Raise ta9es to re*uce *isposable income an* spen*in/

These policies shoul* all re*uce peoples ability to spen* too much

money

I& in@ation is cause* by hi/h costs

2imit wa/e increases i& possible e./. public sector wor4ers

7orce electricity an* /as companies to hol* their prices

Increase the value o& in or*er to re*uce the cost o& importin/

I& in@ation is cause* by too much money in the economy

Print less money



40/43

0ith*raw some money &rom circulation.

Types o& In@ation

'ost"Push In@ationCKeynesianD" cause* by an increase in the cost o&

pro*ucin/ /oo*s an* services+ &or e9ample+ &rom hi/her wa/es or

row material rices. 7irms will try to pass these costs onto consumers

throu/h hi/her prices.

eman*"Pull In@ation" cause* by total *eman* risin/ &aster than the

total output o& /oo*s an* services+ causin/ mar4et prices to riseW

Monetarism" is the believe by some economist that the money

supply into the economy cause* in@ation.

Fnemployment

Fnemployment rateCLD Number unemploye* X 2abour 7orce

1!!

7rictional Fnemployment" 0hen wor4ers chan/e $obs an* spen*

more time loo4in/ &or new $obs. 0or4ers may become unemploye*

&or relatively short perio*s as they leave $obs they *isli4e.

Seasonal Fnemployment" occurs because consumer *eman* &or

some /oo*s an* service is seasonal. 2i4e in Thailan* *urin/

ecember it is hi/h season so the hotel nee* more wor4ers to wor4

*urin/ this time.

'yclical Fnemployment" Yobs is lost *urin/ recession perio*.

Structural Fnemployment" The re*uction o& certain types o&

in*ustries.



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8utput an* -rowth

-ross omestic Pro*uctC-PD" is the main measure o& the national

income or output o& an economy sue* by /overnment an*

economists.

Economic -rowth" occurs when there is a rise in real -P.

The Economic 'ycle

Recession" Real -P /rows slowly o& &alls. eman* &or /oo*s an*

services &alls. 7irms cut their pro*uction an* lay o3 wor4ers. Pro,ts

an* other incomes &all.

Recovery" Real -P /rows &aster than normal. eman* &or /oo*s

an* services rises rapi*ly. 7irms increase output an* hire more

wor4ers. Pro,ts an* other income rises.

(oom" eman* &or /oo*s an* services rises &aster than output can

rise. This cause price in@ation.

-P per capital measure avera/e income per person but not their

economic wel&are. So :I is use*.

:I consist o&

1. -P per capital

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. E*ucation an* 4nowle*/e measure* by the a*ult literacy rate

an* school an* colle/e enrollment.

#. :ealth an* 2i&e style measure* by li&e e9pectancy at birth.

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evelope* an*

evelopin/ Economiesevelope* an* 2ess evelope* Economies

evelope* Economies" have a well *evelope* in*ustrial base an*

service+ a mo*ern in&rastructure an* hi/h avera/e income per

person.

2ess evelope* Economies or evelopin/ Economies have an

un*er*evelope* or *evelopin/ in*ustrial base+ a low level o&

economic *evelopment an* poor livin/ stan*ar*.

-P is commonly use* as an in*icator as *evelopment in*icators.

Population

(irth Rate number o& babies born &or every 1!!! people.

eath rate number o& people &or every 1!!! people

Natural increase (R"R

Net Mi/ration is the *i3erence between inwar* an* outwar*

mi/ration to an* &rom a country.

More people move into more *evelope* countries to en$oy better

livin/ stan*ar*.

epen*ency Ratio Total Population X 0or4in/ Population

In less *evelope* countries the *epen*ency ratios are hi/h an*

risin/ but in *evelope* countries are low but risin/.

econ note for a level

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