IGCSE Full Economics Notes

8/9/2019 IGCSE Full Economics Notes

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ECONOMICS

Definitions

1. Economics: It is the study on how human kind fulfills its wants whichare unlimited with the resources that are limited.

2. Scarcity and choice: Human wants are unlimited but resources tosatisfy those wants are scarce therefore we have to make a choice

between our wants and desires.3. Oortunity cost: the ne!t best alternative sacrificed .E!amle if a

man has to choose between a mobile and a lato both costin" thesame# and he chooses the lato# then his oortunity cost is themobile hone.

$. %onsumer "oods&those "oods that "ive us direct satisfaction or 'ebuy them for their own sake

(. %aital "oods: )hose foods that "ive us indirect satisfaction. 'e buythem for the sake of other "oods e!amle factory machinery.

*. +erit "oods: )hose "oods which are beneficial not only for theirconsumer but also for third arties e.". ,accines a"ainst conta"iousdiseases.

-. emerit "oods: those "oods which are harmful for third arties e.".)obacco alcohol.

/. 0iffen "oods: )hose "oods those demand rises when rice rises e.".u!ury cars# shares# land etc.

. Inferior "oods: )hose "oods whose demand falls when income risese" ublic transort.

14.5ormal "oods: )hose "oods whose demand falls when rice rises anddemand rises when income rises. )hey have a ne"ative .E. and a

ositive 6.E.11.)he sta"es of roduction:

rimary roduction: )he e!traction of raw materials from

natural resources e.". a"riculture# fishin" # minin" Secondary roduction: the rocessin" of raw materials into

finished "oods e.". 7ood rocessin"# "arments# manufacturin"#construction.

)ertiary roduction: the roduction of services e.".

)ransortation# bankin"# insurance etc.

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12.ublic "oods: those "oods which are free for all# non e!cludable andnon rivaled e.". street li"htin".

13.7actors of roduction

and: 8ll natural resources e.". fields# lakes mines etc )he cost of

land is known as rent abor: 8ll human efforts both mental and hysical e.". doctors#

fisherman. )he cost of labor is known as wa"e

%aital: 8ll man made resources e.". buildin"s and machinery. )he

cost of caital is known as interest rate.

Entrereneur9enterrise: )he risk bearer of roduction: who

monitors and suervises roduction# work e.". sole&rorietor. )hereward for entrereneur is known as rofit.

1$.abor intensive industries: )hose industries which are hi"hly

deendent on labor e.". a"riculture1(.%aital intensive industries: )hose industries which are hi"hlydeendent uon caital e.". te!tiles.

1*.8utomation: )he transition from labor intensive to caital intensiveindustries.

1-.Investment: )he creation of caital1/.Savin"s: 8n increase in ones wealth which normally occurs when

income e!ceeds e!enditure.

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Economic Growth

1. Economic 0rowth :8 rise in livin" standards which is measured by

the annual ; increase in the real 02. Standard of livin": )he ise in "overnment income

Disadvantages of Economic growth

1. >ise in social costs ?ublic nuisances@ e.". ollution con"estion#deforestation etc.

2. It mi"ht lead to unemloyment: ?)echnolo"y and inferior "oods@3. >ise in imorts: +oney "oes out of the resective countries.

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Privatization

Privatization: )he transfer of roerty from the ublic sector to the rivatesector e.". Aritish 8irways

Advantages of Privatization:

1. >ise in "overnment income: 'hen the "overnment rivatiBes somethin"the "overnment receives money from the eole who buy it. )he"overnment can use this money for the countrys welfare

2. Imrovement of


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E#terna"ities

1. E!ternalities: )he effects on third arties

E#terna" cost $or negative e#terna"it%&

1. rivate costs: 'hen an individual erforms an economic activity he orshe incurs certain costs known as rivate costs

2. E!ternal cost: )he cost incurred by a third arty is known as e!ternalcost

3. Social cost :the cost incurred by the whole society is known as thesocial cost Social cost F rivate %ost G E!ternal %ost

E#terna" !enefits or positive e#terna"ities

1. rivate benefit: 'hen an individual erforms an economic activity heor she en=oys certain benefits known as rivate benefit2. E!ternal benefit: )he benefit en=oyed by a third arty is known ase!ternal benefit3. Social Aenefit: )he benefits en=oyed by the whole society are knownas a social benefit. Social benefits Frivate benefits G E!ternal Aenefits

'emedies to e#terna"ities

1. e"aliBation: +akin" certain rules in order to revent e!ternalcost.

2. Indirect ta!es3. 7ines

$. Subsidies for "oods which have e!ternal benefits

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M"tinationa" Companies $MNC&

1. MNC: 8 comany that oerates in more than one country e.". 7%

Advantages of MNC "ocating in other contries

1. %hea raw materials2. %hea9Skilled labor

3. ar"er +arket

Advantages en(o%ed !% the contr%

1. >ise in countrys outut: )here is no ta!es or imort cost2. %reates emloyment3. >ise in "overnment income$. >ise in cometition which will result in lower rice and better


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$. Aetter 'orkin" conditions

?)he same way we increase economic "rowth e!amle education# healthcare and investment@

Inflation

Inf"ation: 8 ersistent and "eneral increase in the rice level

Inf"ation rate: )he ercenta"e amount by which the rice level rises in ayear

>eal Income: Income ad=usted with the rate of inflation e.". If a mans

income rises by 14; and the inflation rate is also 14; then his real incomeremains unchan"ed.

Effects of inf"ation

1. 7i!ed income earners suffer from oor livin" standards ?lessconsumtion results in low standards of livin"@

2. 7all in the real savin"s and investment3. 7all in e!orts and rise in imorts$. +oney loses its value. 8t times of inflation money loses its value for

which it cannot fulfill its functions roerly. It cannot measure the

value of other "oods accurately. eole feel reluctant to "ive loansbecause debtors "ain and creditors lose.

(. Investors benefit from hi"her rofit

Cases of inf"ation

1. emand ull inflation

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2. %ost ulled inflation: 'hen basic costs of roduction rise# the rice offinished "oods are also increased# leadin" to inflation. 8s a resultworkers demand hi"her wa"es causin" inflation to rise further.

Monetar% po"ic%: )he "overnments olicy in which it uses interest rates tomana"e the economy

*isca" po"ic%:)he "overnments olicy in which it uses its income and

e!enditure to mana"e the economy.

'emedies to inf"ation

+onetary olicy:

1. Ay raisin" interest on savin"s2. Ay raisin" interest on loans

*isca" po"ic%:

1. Ay increasin" direct ta!?this method is very oular for the"overnment@

2. Ay reducin" indirect ta!es?this method is very unoular for the"overnment@

3. Ay "ivin" subsidies in order to reduce rices?this method is veryunoular for the "overnment@

*orm"as

%I F %onsumer rice inde!

>ate of inflation: %I1&%I2J144; %I1

>eal income: %I1J resent income %2

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>eal income: resent income J 144 144Gr

?'here KrL is the rate of inflation@

Constrction of the 'PI+CPI+price inde#:

1. )he basket of *(4 "oods must be determined.2. )he weita"es must be assi"ned to each "ood deendin" uon how

fre


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Mnemloyment

,nemp"o%ment:Mnemloyment occurs when those who are eli"ible towork are not en"a"ed in roductive activity

-%pes+Cases of nemp"o%ment

1. Structural unemloyment: %aused by the decline of a ma=or industry.

2. %yclic unemloyment>ecession9overtyD7all in demandD7all in roductionDMnemloyment3. 7rictional unemloyment: One mi"ht be temorarily unemloyed

when switchin" from one =ob to the other.$. ,oluntary unemloyment: Some eole are unemloyed simly out of

reluctance to work.(. Seasonal unemloyment: %ertain occuations have seasonal demand.*. >esidual unemloyment: Some eole are unable to work due to

hysical or mental handicas.

Effects of nemp"o%ment1. 7all in livin" standards2. 7all in "overnment income and rise in "overnment e!enditure3. >ise in social roblems such as crime$. 'a"es will fall

Methods of measring nemp"o%ment

1. abor force survey9IO method: 8 survey is taken on a


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2. Ay reducin" interest on loans

7iscal olicy1. Ay reducin" direct ta!es2. Ay reducin" indirect ta!es

Specia"ization

SecialiBation9ivision of labor: 'hen lar"e comle! oeration is brokendown into smaller simler tasks# and each task is erformed by an individualworker# the division of labor is said to occur. E!amle in a in factory oneworker cuts the wire# another strai"htens it# and another sharens it and soon until a comlete in is made

Advantages of specia"ization

1. 0reater skill throu"h ractice2. 5o time is wasted since tools are switched over and over a"ain3. ess trainin" time re


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G"o!a"ization

G"o!a"ization: )he inte"ration and interdeendence between economies

'easons for G"o!a"ization

1. 0rowin" +5%s2. )he develoment of technolo"y

3. Aetter transortation networks$. >emoval of trade barriers: rise in imorts and e!orts thus leadin" tomore interaction

Disadvantages of g"o!a"ization

1. >ise in social costs2. Interdeendence3. E!loitation of underdeveloed countries

Advantages of g"o!a"ization $for deve"oped contries&

1. Hi"her 0 and emloyment2. ower rices3. 0reater choice of "oods

Advantages of g"o!a"ization $for nderdeve"oped contries&

1. Hi"her 0 and emloyment2. Hi"her ta!es for the "overnment

3. )ransfer of technolo"y

*oreign aid: +oney "iven to a country on "enerous terms. )hese are of fewtyes

1. 0rants. +oney "iven to a country which is not taken back2. )ied aid: +oney "iven to a country sub=ect to certain conditions3. ow interest loans :oans "iven with little or no interest

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Pop"ation

1. Otimum oulation: 8n ideal oulation siBe at which the countrysresources are roerly utiliBed

2. ife e!ectancy: )he avera"e number of years a erson is e!ected tolive.

3. 'orkin" oulation: those who are eli"ible to work and are aboveschool leavin" a"e?1( years@ and below retirement a"e ?*4 years@

$. eendant oulation: )hose who are not eli"ible to work and have todeend uon the workin" oulation. )hey are normally below schoolleavin" a"e and above retirement a"e.

(. eendency ratio: )he avera"e number of eole deendent uoneach worker

eendency ratio: eendant oulation 'orkin" oulation

*. 8"ein" oulation: 'hen the avera"e a"e of a countrys oulation

rises it is said to have an a"ein" oulation.-. Airth rate: )he avera"e number of births for a thousand eole in ayear.

/. eath rate: )he avera"e number of deaths for a thousand eole in ayear.

Cases of a rise in pop"ation

1. Hi"h birth rate: oor family lannin"# early marria"es# less use ofcontracetives.

2. ow death rate: Aetter medical facilities# better livin" standards# lowercrime rates.

3. Hi"h immi"ration: Aetter livin" standards# lower unemloyment#lower inflation etc.

$. ow emi"ration: Aetter livin" standards# lower unemloyment# lowerinflation etc.

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Cases of a fa"" in pop"ation

1. ow birth rate2. ow death rate3. ow immi"ration$. Hi"h emi"ration

Effects of a rise in pop"ation

1. >ise in demand: %ausin" Inflation2. >ise in con"estion and crowd leadin" to housin" shorta"es and

utility shorta"es3. Mnemloyment causin" wa"es to fall

Cases of high dependenc% ratio

1. Hi"h birth rate2. ow death date3. ow immi"ration of youn" workers$. Hi"h emi"ration of youn" workers

Effects of high dependenc% ratio

1. %han"e in attern of demand: )hose "oods demanded byyoun"sters and elders will rise in demand

2. abor shorta"es causin" wa"es to rise3. 7all in "overnment income$. >ise in "overnment e!enditure such as schools# ensions etc.

1$

1$


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Mnderdeveloed country eveloed country

1. Hi"h birth rate2. Hi"h death rate3. Hi"h deendency ratio

1. ow birth rate2. ow death rate3. ow deendency ratio$. 8"ein" oulation

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-a#ation1. irect ta!es: )a! on ones income e.". Income ta!# cororation ta! etc.2. Indirect ta!es: )a! on ones e!enditure e.". ,8)# sales ta!# tariffs etc.3. isosable income: Income remainin" after comulsory deductions

such as direct ta!es$. ro"ressive ta!: 8 ta! system in which the rich ay a hi"her rate of

ta!# direct ta!es are normally ro"ressiveE!amle of ro"ressive ta!'hen income: N14#444 )a! rate: 1(;'hen income N1(#444 )a! rate: 24;

(. roortional ta!: 'hen the rich and oor ay the same amount of ta!.irect ta!es sometimes can be roortional

'hen income N14#444 )a! 24;'hen income N24#444 )a! 24;

*. >e"ressive ta!: 'hen the rich ay a lower rate of ta! than the oore.". indirect ta!es are normally re"ressive

'hen income N14#444 )a! 24;

'hen income 24#444 )a! 14;

-. )he national bud"et: )he "overnments financial lan for theforthcomin" year.

/. Aud"et surlus: 'hen the "overnments income e!ceeds itse!enditure for the year

. Aud"et decficit: 'hen the "overnments e!enditure e!ceeds itsincome.

14.5ational debt: )he total amount of money the "overnment owes

Main sorces of government income

1. Indirect ta!es: +ore than half of "overnment income in Aan"ladeshcome from indirect ta!es

2. irect ta!es: 8lmost three fourths of the "overnment income inAan"ladesh comes from direct and indirect ta!es combined. )he

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lar"est ta!ayer in Aan"ladesh is )elenor# reviously however it wasAritish 8merican tobacco

3. >evenue from sale of services:$. 7orei"n aid

Main forms of government e#penditre

1. Education2. efense3. Health care$. Infra structure(. 8"riculture

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GDP

1. 0: the total money roduced by a country in a year.

Draw!ac.s of GDP:

1. It focuses on the money value of outut rather than the


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Economies of Sca"e

Economies of Sca"e:8dvanta"es en=oyed by a firm throu"h "rowthnormally such advanta"es lead to a fall in lon" term avera"e costs

E#amp"es of interna" economies of sca"e

1. urchase in economies: 'hen a firm "rows in siBe it re


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2. >e"ulators: 'hen a firm "rows in siBe it may become a threat to otherfirms# for this reason the O7I may intervene to rectify the roblem.

7or e!amle if a mer"er e!ceeds 2(; market share it mi"ht be blockedby the cometition commission

/orizonta" merger: 'hen two or more firms roducin" related"oods and oeratin" at the same sta"e of roduction come underunified control. )he mer"er of two banks

0ertica" merger: 'hen two or more firms roducin" related "oodsbut oeratin" at different sta"es of roduction come under unifiedcontrol. 7or e!amle the mer"er of an oil e!traction comany and oilrefinin" comany

Cong"omerate+diversification: 'hen two or more firms roducin"unrelated "oods come under unified control e.". a 0armentsmanufacturer mer"in" with a bank.

Advantages of /orizonta" merger:

1. Economies of scale2. 7all in cometition

Advantages of vertica" merger

1. Economies of scale2. Aetter control over sources of suly: ,ertical mer"er normally

consist of two firms who are at different sta"es of roduction.uite often these firms are sulyin" raw materials to each other#thus if they mer"e they are havin" control over their own rawmaterials

Advantages of cong"omerate

1. Economies of scale

Advantages of sma"" firms

1. >ee


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Advantages of the econom% $sma"" firms&

1. )hey are normally labor intensive2. %reates less social costs

Competition

Competitive mar.ets: 8 market in which there are many buyers and sellers#the "oods do not differ much and there are no entry barriers

Advantages of competition

1. ow rice2. Aetter


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1. an"er of collusion

Prodction Possi!i"it% *rontier $PP*&

7: It is a dia"ram that shows a countrys roductive otential with itse!istin" resources

)he 7 shifts outward if there is an increase in the countrys resources or ifthere is an increase in the efficiency of e!istin" resources e.". Investment#technolo"y# education

In other words the 7 will shift outward if there is economic "rowth in the

country

raw what will haen to the 7 if1. )here is a rise in the resources used to roduce tanks2. 7all in the efficiency of the use of resources used to roduce roses3. )here is a rise in the resources for roses and a fall in the resources for

roducin" tanks$. )here is a fall in the level of education(. )here is a rise in caital investment

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Costs and revenes

-ota" cost:)he total e!enditure incurred in roducin" a certain level ofoutut

7i!ed %ost G ,ariable costAverage cost:)he cost er Mnit

8% F )%

*i#ed Cost:)he cost that remains constant whatever the level of outut.E.". >ent# dereciation

0aria!"e Cost: )he cost that varies with the level of outut e.". wa"es# rawmaterial costs etc.

Average cost: 8vera"e 7i!ed %ost G 8vera"e ,ariable %ost

-ota" revenes: )he total income earned sellin" a certain level of outut

Average revene:)he income er unit

Average reveneF )otal >evenue uantity

)otal cost

2$

2$


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7i!ed cost ,ariable cost

8vera"e %ost E!amle

7rom the E!amle dia"ram# calculate

1. 7i!ed %ost2. ,ariable %ost for 144 units3. 8vera"e cost for 144 units$. 8vera"e ,ariable cost

85S'E>S1. 14#444

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2. 1(#4443. 2(#4449144 F 2(4$. 1(4449144 F 1(4

)otal >evenue 8vera"e >evenue

1. 7i!ed cost 24442. 8vera"e cost (444&244491444 F 33. 8vera"e cost : (44491444 F (

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Internationa" -rade

1. Dmping: )o sell "oods to forei"n countries below the cost rice. )heEM dums su"ar to 8frica.

Advantages of free trade

1. )he country earns money from abroad2. %reates =obs3. Economies of scale$. 'ider variety of choice: 8 country cannot roduce all sorts of "oods.

So it has to imort "oods to satisfy eole(. >ise in cometitionDisadvantages of free trade

1. eletion of a countrys resources2. Outflow of money to other countries3. %ometition is harmful for domestic firms

-rade 1arriers+restrictions+anti dmping measres

1. )ariffs: It is a ta! imosed uon imorted "oods. E.". in Aan"ladesh)ariffs are unto 344; uon imorted cars. )his is the most oular

trade barrier2. uotas: hysical limit on the level of imorts enterin" a country.3. )rade embar"o: 8 comlete ban on imorts e.". a trade embar"o e!ists

between Israel and 8rab countries.$. Subsidies: )he "overnment can "ive subsidies to domestic industries.

So that the rice of domestic "oods fall. 8s a result eole will imortless. However this is unoular for the "overnment

1a"ance of pa%ments2 crrent accont:8 record of the inflow and outflow

of money of a country# arisin" from trade

0isi!"e trade:E!ort of "oods Q Imort of "oods

Invisi!"e -rade: E!ort of services Q Imort of Services

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3-he ,4 has a deficit on its visi!"e trade !t %et a srp"s on in 1a"ance

of pa%ments crrent accont2 e#p"ain wh%5

85S'E>: )he Surlus in invisible trade was so much that it covered thedeficit.E#change rates:)he rice of one currency in terms of another

Effects:

)or"d trade Organization

)he ')O is a multi lateral body who aims to romote trade within itsmember country. It forms trade a"reements between countries and resolvetrade disutes. In other words it aims to increase trade liberaliBation ?freetrade@

-rade !"ocs:8 "rou of countries who form an a"reement to romote tradeamon" each other. )hey do this by removin" tariffs amon" each other#imosin" common e!ternal tariffs a"ainst outsider countries allowin" thefree movement of labor e.". the Euroean Mnion# 8SE85# 587)8 etc

3In the fo""owing e#amp"es which crrenc% has depreciated

1. 244- N1 F R 1.-244/ N1 F R1./

R# Euro dereciated

2. 2442 1 F + 4.*-2443 1 F + 4.(/

# ollar dereciated

3. 2414 R2 F T3./ 2414 R1 F T2.2

2/

2/


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Certain *actors that affect demand

1. oulation2. Income3. rice of substitutes$. rice of comlements(. Other factors such as weather# fashion events

Certain factors affecting spp"%

1. %han"e in cost of roduction

2. Entry9e!it of firms3. Indirect ta!es9,8)$. Subsidies(. Others such as weather# technolo"y

Price E"asticit% of Demand $PED&:)he resonsiveness of demand to achan"e in rice

E F ;%han"e in demand ;%han"e in rice

Income elasticity o demand: )he >esonsiveness of demand to a chan"e inincome

6E: ;%han"e in demand ;%han"e in income

Price E"asticit% of spp"% $PES&:)he resonsiveness of suly to a chan"ein rice

ES ; %han"e in Suly ;%han"e in rice

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If e"astic If Ine"astic

1. )he emand curve is flat2. 'hen rice rises revenue falls3. 'hen rice falls revenue rises

1. )he demand curve is stee2. 'hen rice rises revenue rises3. 'hen rice falls revenue falls

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Indirect ta#es

)he ,8) er unit is the vertical distance between the two suly curves

Uwhat is the ,8) er unit F N-Uwhat is the ,8) incurred by the "overnment F -J144 F N-44

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U'hat is the:a@ revious rice and new rice

b@ )he ,8) er unitc@ )he total income of the "overnmentd@ E when the rice is risin"e@ )he total revenue reviouslyf@ )he total revenue resently"@ Msin" your answers from Ve and Vf say whether rice is elastic or

inelastic

85'E>Sa@ ervious rice : N$4

5ew rice: N(4b@ ,at er unit : (4&3(F1(c@ 14(4d@ ;chan"e in demand F &34

;chan"e in suly F 2(

F &1.2e@ )otal revenue F $4J144 F N$444f@ )otal revenue F (4J-4 F N3(44"@ 8s rice rose and revenue fell it is elastic

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S!sidies

+oney "iven from the "overnment to roducers

3$

3$


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*actors determining the e#change rate

1. )he level of e!orts: 'hen we e!ort "oods forei"ners demand ourcurrency to ay for the e!orts as a result when our e!orts rise thee!chan"e rate rises and when our e!orts fall the e!chan"e rate falls.

2. )ourism: 'hen tourists enter our country they demand our currencybecause whatever they buy in our country has to be aid in our

currency. )hus if the number of tourists rise the e!chan"e rate willalso rise and when the number of tourist fall the e!chan"e rate willalso fall.

3. Interest rates: If the interest rate rises in our country then eole fromall over the world would like to save in our country. Aut to do thisthey have to first convert the money into our currency. )hus thedemand for our currency will rise and the e!chan"e rate will also rise.ikewise when the interest rate falls the e!chan"e rate will also fall.

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Economic S%stems

1. lanned9 %ommand Economy: It is an economic system in which the"overnment takes the ma=or economic decisions on what to roduce# howto roduce and how to distribute. istribution is normally done on ane

2. 7ree market economy: It is an economic system in which the eole havethe freedom to choose what to roduce# how to roduce and how todistribute. roduction and distribution is normally done accordin" to the

rice mechanism However market failures may arise# market failure means the ricemechanism is unable to allocate the resources efficiently# this haens due toe!ternalities.

3. +i!ed economy: It is an economic system where both the "overnmentand market forces lay imortant roles. %ertain resources are controlled

by the "overnment ?the ublic sector@ which is used to rovide socialwelfare# on the other hand certain resources are owned by individuals?the rivate sector@ which are allocated accordin" to the ricemechanism. Here cometition takes lace and owners try to ma!imiBetheir roducts.

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