Points outside = unattainable with current resources/technology.
Figure 1 – Production Possibility Curve (PPC) showing efficient points, inefficiency and unattainable output.
Example
Country X can produce either 100 million tons of wheat or 200 million units of textiles. If it chooses 60 million tons of wheat, the opportunity cost is the 120 million units of textiles forgone.
Concept‑Check
What does a movement from a point on the PPC to a point inside the curve indicate about a country’s use of resources?
Topic 2 – Demand and Supply (Micro‑economics)
Key Definitions
Demand: The quantity of a good or service that consumers are willing and able to buy at each price, ceteris paribus.
Supply: The quantity that producers are willing and able to sell at each price, ceteris paribus.
Market Equilibrium: The point where quantity demanded equals quantity supplied.
Determinants & Shifts
Demand Determinants
Typical Effect on Demand Curve
Consumer income (normal vs inferior goods)
↑ income → rightward shift for normal goods; leftward for inferior goods
Prices of related goods (substitutes & complements)
↑ price of substitute → rightward shift; ↑ price of complement → leftward shift
Consumer preferences, expectations, population
Positive change → rightward shift
Government policy (taxes, subsidies)
Tax on good → leftward shift; subsidy → rightward shift
Supply Determinants
Typical Effect on Supply Curve
Input prices (wages, raw materials)
↑ input cost → leftward shift
Technology
Improvement → rightward shift
Number of firms, taxes/subsidies, expectations
Positive change → rightward shift
Regulatory environment (e.g., licences)
More stringent regulation → leftward shift
Figure 2 – Rightward shift of demand (ΔD) leads to a higher equilibrium price (P₂) and quantity (Q₂).
Analysis Prompt (AO2)
Explain how a specific tax on sugary drinks would affect the market for soft drinks, using a diagram to show the shift in supply and the resulting dead‑weight loss.
Real‑World Example
In 2023 the UK saw a surge in electric‑vehicle (EV) demand after the government announced a £5,000 plug‑in grant. The demand curve for EVs shifted rightwards, raising both equilibrium price and quantity.
Concept‑Check
Why does a fall in the price of a substitute cause the demand curve for the original good to shift left?
Normal good (YED > 0), luxury (YED > 1), inferior (YED < 0).
Cross‑price Elasticity of Demand (XED):%ΔQd₁ / %ΔP₂.
Substitutes (XED > 0), complements (XED < 0).
Why Elasticities Matter (AO2)
Pricing decisions – firms with elastic demand must be careful raising prices.
Tax incidence – burden falls more on the side of the market with inelastic response.
Policy effectiveness – e.g., a tax on cigarettes (inelastic demand) raises revenue with little reduction in consumption.
Revenue‑maximising price – occurs where marginal revenue = 0, which depends on PED.
Evaluation Points (AO3)
Elasticities vary over time, between markets and along a demand curve.
Short‑run vs long‑run elasticity: demand is usually more elastic in the long run.
Data limitations: calculating accurate elasticities requires reliable price‑quantity data.
Exam‑style Question (AO3)
“Explain how the price elasticity of demand for petrol influences the likely impact of a fuel tax on government revenue and consumer behaviour. Use appropriate diagrams.”
Concept‑Check
What does a PED of –0.4 imply about the likely consumer response to a 10 % price increase?
Topic 4 – Government Intervention in Markets (Micro‑policy)
Key Instruments
Price controls: Floors (minimum price) and ceilings (maximum price).
Taxes: Specific (per unit) and ad valorem (percentage). Shift supply upward; part of the burden is passed to consumers.
Subsidies: Direct payments to producers or consumers; shift supply or demand rightwards.
Distributional impact on renters versus landlords.
Real‑World Example
In 2022 the UK introduced a £2.50 per litre tax on sugary drinks. The tax is specific, shifts the supply curve of sugary drinks leftwards, raises the price, and aims to reduce consumption while generating revenue for NHS health programmes.
Concept‑Check
Why might a government prefer a tax over a direct ban when dealing with a negative externality?
Topic 5 – Market Failure & Government Failure
Types of Market Failure
Public goods: Non‑rivalrous & non‑excludable (e.g., street lighting). Result: free‑rider problem.
Externalities: Positive (education) or negative (pollution). Unpriced social costs/benefits.
Information asymmetry: One party has more/better information (e.g., used‑car market).
Monopoly power: Single seller restricts output, raises price.
Merit & demerit goods: Goods judged socially desirable or undesirable irrespective of private preferences.
Government Responses
Provision of public goods financed by taxation.
Pigouvian taxes (negative externalities) or subsidies (positive externalities).
Regulation and standards to correct information problems.
Competition policy (anti‑trust legislation).
Direct provision or vouchers for merit goods.
Diagram – Negative Externality
Figure 6 – Social marginal cost (MSC) exceeds private marginal cost (MPC). A tax equal to the external cost aligns MPC with MSC.
Evaluation (AO3)
Cost‑benefit analysis of intervention (administrative cost vs welfare gain).
Potential for government failure (regulatory capture, misallocation, rent‑seeking).
Time lags and uncertainty in measuring external costs.
Concept‑Check
How does the presence of a positive externality affect the socially optimal level of output compared with the market equilibrium?
Topic 6 – Labour Markets
Key Concepts
Labour demand: Derived from the marginal product of labour (MPL). Firms hire up to the point where MPL = real wage.
Labour supply: Influenced by population, wages, preferences for leisure, and immigration.
Wage determination: Intersection of labour demand and supply curves.
Minimum wage: Price floor; can cause unemployment if set above equilibrium.
Trade unions & collective bargaining: Can shift the labour‑supply curve leftwards (higher wages for a given employment level).
Figure 7 – Minimum wage set above equilibrium creates a surplus of labour (unemployment).
Analysis Prompt (AO2)
Analyse the likely impact of a 10 % increase in the National Living Wage on employment, price levels and fiscal revenue in the short run.
Real‑World Illustration
In 2023 the UK increased the National Living Wage to £10.42 per hour. Studies by the Institute for Fiscal Studies showed a modest rise in employment costs for low‑skill workers but limited evidence of large job losses, highlighting the importance of labour‑market flexibility.
Concept‑Check
What distinguishes cyclical unemployment from structural unemployment?
Investing in infrastructure and R&D to raise LRAS.
Environmental regulation to internalise externalities.
AD/AS Framework – Business‑Cycle Analysis
Figure 9 – Expansionary fiscal or monetary shock shifts AD right (from AD₁ to AD₂). Short‑run equilibrium moves from Y₁ to Y₂ with higher price level (P₂). In the long run, LRAS may shift right if the shock is supply‑side.
Phillips Curve (Short‑Run Trade‑off)
Figure 10 – Inverse relationship between unemployment and inflation in the short run; vertical long‑run Phillips curve at the natural rate of unemployment.
Analysis Prompt (AO2)
Analyse how a 5 % increase in government spending financed by borrowing would affect output, price level and the budget deficit in the short run and the long run.
Evaluation (AO3)
Fiscal multipliers are lower when the economy is near full employment.
Higher public debt may raise future tax expectations, crowding‑out private investment (Ricardian equivalence).
Monetary policy may offset fiscal expansion (policy mix).
Time lags: implementation lag, impact lag, and effect lag can reduce effectiveness.
Concept‑Check
Why does the long‑run Phillips curve become vertical, and what does this imply for the inflation‑unemployment trade‑off?
Topic 11 – International Trade, Balance of Payments & Development
Reasons for Trade
Comparative advantage: Countries specialise in goods with lower opportunity cost.
Economies of scale: Larger markets reduce average costs.
Variety & consumer choice: Access to a wider range of goods.
Using the AD/AS model, analyse the short‑run macro‑economic effects of a 20 % devaluation of the pound sterling on a small open economy that is a net exporter of manufactured goods.
Evaluation (AO3)
Short‑run boost to export‑led growth vs possible inflationary pressure from higher import prices.
Long‑run sustainability depends on the elasticity of export demand and the economy’s capacity to increase production.
Exchange‑rate volatility can deter foreign investment.
Policy coordination (monetary, fiscal, trade) is crucial to avoid “policy trilemma” conflicts.
Concept‑Check
Why might a developing country choose to maintain a fixed exchange rate despite the risk of speculative attacks?
Quick Revision – Key Formulas & Diagrams
Price Elasticity of Demand (PED) = %ΔQd / %ΔP
Multiplier (k) = 1 / (1 − MPC)
Solow Production Function: Y = A·F(K, L)
Phillips Curve (short‑run): π = πe − β(u − u*)
Ensure you can draw and label the following diagrams from memory:
Production Possibility Curve (Figure 1)
Demand & Supply with shifts (Figure 2)
Price ceiling & floor (Figures 3 & 4)
Tax and subsidy effects (Figures 4 & 5)
Negative externality (Figure 6)
Minimum wage (Figure 7)
Monopoly pricing (Figure 8)
AD/AS – fiscal/monetary shock (Figure 9)
Phillips curve (Figure 10)
Tariff impact on import market (Figure 11)
Final Tips for the Exam
Always start answers with a concise definition (AO1), then move to analysis (AO2) and finish with balanced evaluation (AO3).
Use real‑world data where possible – recent figures add credibility.
Link micro‑ and macro‑concepts where relevant (e.g., how a tax on a specific good influences aggregate supply).
Practice past‑paper questions under timed conditions to improve recall of diagrams and terminology.
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