Cambridge A‑Level Economics 9708 – Complete Syllabus Notes
1. Core Economic Concepts (AS‑Level)
1.1 Scarcity, Choice & Opportunity Cost
- Resources are limited → societies must decide how to allocate them.
- Every choice involves a trade‑off; the next best alternative forgone is the opportunity cost.
1.2 Economic Methodology
- Positive statements – describe how the economy works (testable).
Example: “A rise in the price of petrol reduces the quantity demanded of diesel cars.”
- Normative statements – prescribe what ought to be (value‑laden).
Example: “The government should subsidise electric vehicles.”
- Use of ceteris paribus (all other things equal) to isolate cause‑effect relationships.
1.3 Factors of Production & Economic Systems
- Land, labour, capital, entrepreneurship.
- Economic systems: market, command, mixed – each allocates resources differently.
1.4 Production Possibility Curve (PPC)
- Shows maximum output combinations of two goods when resources are fully employed.
- Shape (concave) reflects increasing opportunity cost.
- Shifts:
- Outward – economic growth (more resources/technology).
- Inward – recession, natural disaster.
2. Micro‑economics Fundamentals (AS‑Level)
2.1 Demand & Supply
- Demand: quantity of a good consumers are willing & able to buy at each price, ceteris paribus.
- Law of demand – inverse relationship between price and quantity demanded.
- Determinants: price of the good, income, prices of related goods, tastes, expectations, number of buyers.
- Supply: quantity producers are willing & able to sell at each price.
- Law of supply – direct relationship between price and quantity supplied.
- Determinants: price of the good, input costs, technology, expectations, number of sellers.
- Market equilibrium – where the demand and supply curves intersect (E).
Movement vs. shift: a change in the price of the good causes a movement along the curve; a change in any determinant causes a shift.
2.2 Consumer & Producer Surplus
- Consumer surplus (CS) – the difference between what consumers are willing to pay and what they actually pay.
- Producer surplus (PS) – the difference between the price received and the minimum price producers are willing to accept.
- Both are measures of economic welfare; a policy that creates a dead‑weight loss reduces total surplus.
2.3 Government Intervention in Markets (Micro)
- Taxes – shift supply (or demand) left; incidence depends on relative elasticities; creates dead‑weight loss.
- Subsidies – shift supply (or demand) right; increase welfare but cost the exchequer.
- Price controls
- Maximum price (price ceiling) – may create a shortage.
- Minimum price (price floor) – may create a surplus.
- Public‑good provision – government supplies non‑rival, non‑excludable goods (e.g., street lighting).
- Merit & de‑merit goods – government intervenes to correct market failure (e.g., education, tobacco).
- Regulation – standards, licensing, safety requirements.
3. Elasticities of Demand (Core AS & A‑Level Content)
3.1 What is an Elasticity?
Elasticities measure the responsiveness of one variable to a percentage change in another variable. They are dimensionless and allow comparison across different markets.
3.2 Price Elasticity of Demand (PED)
Definition & Formula
\[
\varepsilon_{p}= \frac{\%\Delta Q_{d}}{\%\Delta P}
\]
Numerical Example (mid‑point method)
| Initial | New |
|---|
| Price, \(P_{1}=£10\) | Price, \(P_{2}=£12\) |
| Quantity, \(Q_{1}=500\) | Quantity, \(Q_{2}=450\) |
\[
\%\Delta P=\frac{P_{2}-P_{1}}{(P_{1}+P_{2})/2}\times100
=\frac{12-10}{11}\times100\approx18.2\%
\]
\[
\%\Delta Q_{d}= \frac{Q_{2}-Q_{1}}{(Q_{1}+Q_{2})/2}\times100
=\frac{450-500}{475}\times100\approx-10.5\%
\]
\[
\varepsilon_{p}= \frac{-10.5\%}{18.2\%}\approx-0.58
\]
Interpretation: \(|\varepsilon_{p}|<1\) → demand is **inelastic**; a 1 % rise in price reduces quantity demanded by less than 1 %.
Value Ranges & Total‑Revenue (TR) Test
| Range of \(\varepsilon_{p}\) | Label | TR when price rises |
|---|
| \(\varepsilon_{p}<-1\) | Elastic | TR falls |
| \(\varepsilon_{p}=-1\) | Unit‑elastic | TR unchanged |
| \(-1<\varepsilon_{p}<0\) | Inelastic | TR rises |
| \(\varepsilon_{p}=0\) | Perfectly inelastic | TR rises with any price increase |
| \(\varepsilon_{p}=-\infty\) | Perfectly elastic | TR falls to zero with any price increase |
Determinants of PED (Cambridge Syllabus)
- Availability of close substitutes.
- Proportion of income spent on the good.
- Nature of the good – luxury vs. necessity.
- Definition of the market – narrow vs. broad.
- Time horizon – long‑run > short‑run elasticity.
Elasticity Along a Straight‑Line Demand Curve
- Upper (high‑price) segment – elastic (\(|\varepsilon_{p}|>1\)).
- Mid‑point – unit‑elastic (\(|\varepsilon_{p}|=1\)).
- Lower (low‑price) segment – inelastic (\(|\varepsilon_{p}|<1\)).
Short‑run vs. Long‑run PED
- Short run – limited ability to find substitutes or change habits → lower elasticity.
- Long run – consumers can adjust, technology can evolve → higher elasticity.
3.3 Income Elasticity of Demand (YED)
Definition & Formula
\[
\varepsilon_{y}= \frac{\%\Delta Q_{d}}{\%\Delta Y}
\]
Interpretation
- \(\varepsilon_{y}>0\) – normal good.
- \(\varepsilon_{y}>1\) – luxury (elastic).
- 0 < \(\varepsilon_{y}\)< 1 – necessity (inelastic).
- \(\varepsilon_{y}<0\) – inferior good (demand falls as income rises).
Factors Influencing YED
- Nature of the good (luxury vs. necessity).
- Availability of close substitutes (more substitutes → higher YED).
- Consumer preferences and cultural factors.
- Time horizon – long‑run YED is usually larger as tastes evolve.
3.4 Cross Elasticity of Demand (XED)
Definition & Formula
\[
\varepsilon_{xy}= \frac{\%\Delta Q_{d}^{x}}{\%\Delta P^{y}}
\]
Measures the percentage change in the quantity demanded of good **x** when the price of good **y** changes.
Sign & Economic Relationship
- \(\varepsilon_{xy}>0\) – **substitutes** (e.g., tea ↔ coffee).
- \(\varepsilon_{xy}<0\) – **complements** (e.g., cars ↔ petrol).
- \(\varepsilon_{xy}=0\) – **independent** goods.
Key Determinants of the Magnitude of XED
| Factor | Effect on \(|\varepsilon_{xy}|\) | Explanation |
|---|
| Degree of closeness (substitutes/complements) |
Higher |
Strong functional overlap or joint use magnifies the response. |
| Availability of alternatives |
More alternatives → Higher |
Consumers can switch more easily when the price of one good changes. |
| Time period |
Long run → Higher |
Adjustment processes (search, habit change) need time. |
| Share of expenditure on the goods |
Higher share → Higher |
Price change affects a larger part of the consumer’s budget. |
| Consumer preferences & brand loyalty |
Strong loyalty → Lower |
Consumers resist switching even if relative prices change. |
| Market definition |
Narrow definition → Higher |
Goods are more directly comparable, so cross‑price effects are larger. |
| Nature of the relationship (fixed‑ratio vs. discretionary) |
Fixed‑ratio complements (e.g., printers & ink) → High negative XED.
Discretionary complements (e.g., movies & popcorn) → Lower negative XED. |
Degree of joint consumption determines the size of the response. |
Diagram – Shift of Demand for Good X
When the price of good Y rises:
- Substitutes – demand for X shifts right (increase).
- Complements – demand for X shifts left (decrease).
Insert a hand‑drawn or software diagram showing the original demand curve D₁, the shifted curve D₂, and the resulting change in equilibrium price and quantity.
4. Macroeconomics Foundations (AS‑Level)
4.1 Measuring National Income
- GDP (Nominal) – market value of all final goods & services produced within a country in a given period.
- Alternative measures: GNI (adds net primary income from abroad), NNI (adds net factor income from abroad, subtracts depreciation).
- Three approaches:
- Production (value added) approach.
- Income approach.
- Expenditure approach: \(GDP = C + I + G + (X-M)\).
- Common measurement problems: informal sector, underground economy, double counting, price changes.
4.2 Circular Flow of Income
Two‑sector (households ↔ firms) and three‑sector (adds government) models illustrate flows of:
- Real resources (labour, capital, land) from households to firms.
- Monetary payments (wages, rent, profit) from firms to households.
- Government taxes, transfers and spending in the three‑sector model.
Insert a simple circular‑flow diagram with arrows for resources, money, and government interaction.
4.3 Aggregate Demand (AD) & Aggregate Supply (AS)
Components of AD
- Consumption (C), Investment (I), Government spending (G), Net exports (X‑M).
AD Curve
- Downward sloping – real‑GDP falls as the price level rises (wealth effect, interest‑rate effect, exchange‑rate effect).
AS Curves
- Short‑run AS (SRAS) – upward sloping because some input prices are sticky.
- Long‑run AS (LRAS) – vertical at the economy’s potential output (full‑employment output).
Shifts in AD and AS
| Curve | Shift Direction | Typical Causes |
|---|
| AD right | Increase | Higher consumer confidence, tax cuts, expansionary fiscal policy, expansionary monetary policy, rise in foreign demand. |
| AD left | Decrease | Higher taxes, reduced consumer confidence, contractionary fiscal/monetary policy, fall in foreign demand. |
| SRAS right | Increase | Lower input prices, productivity gains, technological improvement, favourable expectations. |
| SRAS left | Decrease | Higher wages, oil price shocks, adverse supply shocks, expectations of higher future costs. |
| LRAS right | Increase | Economic growth – more capital, labour, better technology. |
| LRAS left | Decrease | Decrease in resources (e.g., natural disaster), long‑run decline in productivity. |
4.4 Economic Growth, Unemployment & Inflation
Economic Growth
- Increase in potential output (LRAS shift right).
- Measured by the growth rate of real GDP.
- Sources: capital accumulation, labour force growth, technological progress, improvements in productivity.
Unemployment
- Frictional – short‑term job search.
- Structural – mismatch of skills/locations.
- Classical (real‑wage) – wages above equilibrium.
- Demand‑deficient (cyclical) – insufficient aggregate demand.
Inflation
- General rise in the price level, measured by the Consumer Price Index (CPI) or Retail Price Index (RPI).
- Types:
- Demand‑pull – AD curve shifts right faster than SRAS.
- Cost‑push – SRAS shifts left (e.g., oil shock).
- Built‑in – wage‑price spiral.
5. Government Macro‑policy (A‑Level)
5.1 Fiscal Policy
- Expansionary – increase G or cut taxes → AD right → higher output & price level (possible inflation).
- Contractionary – decrease G or raise taxes → AD left → lower output & price level.
- Considerations: multiplier effect, crowding‑out, timing (recognition, implementation, impact lags).
5.2 Monetary Policy (Central Bank)
- Instruments: open‑market operations, policy interest rate, reserve requirements.
- Expansionary → lower interest rates → increase investment & consumption → AD right.
- Contractionary → higher rates → AD left.
- Liquidity trap, credibility of the central bank, and exchange‑rate effects are evaluation points.
5.3 Supply‑Side (Structural) Policies
- Improving productivity: investment in education, training, R&D, infrastructure.
- Labour‑market reforms: deregulation, reducing minimum‑wage rigidity.
- Tax incentives for investment, deregulation of markets.
- Evaluation – time lag, distributional effects, risk of increasing inequality.
6. International Trade & Finance (AS‑Level)
6.1 Reasons for Trade
- Comparative advantage – countries specialise in goods with lower opportunity cost.
- Economies of scale, variety, and access to natural resources.
6.2 Protectionist Instruments & Arguments
- Tariffs, quotas, import licences, subsidies, voluntary export restraints.
- Arguments for protection: infant industry, national security, protecting jobs, correcting market failure.
- Arguments against: higher consumer prices, retaliation, dead‑weight loss, inefficiency.
6.3 Balance of Payments (BOP)
- Current account (trade in goods & services, income, transfers) + Capital account (financial flows) = 0 (by definition).
- Surplus → net lender; deficit → net borrower.
- Policy responses: exchange‑rate adjustments, fiscal/monetary measures.
6.4 Exchange Rates
- Floating vs. fixed regimes.
- Determinants in a floating system: relative inflation, interest rates, expectations, terms of trade.
- Impact on AD:
- Depreciation → exports cheaper, imports more expensive → AD right.
- Appreciation → opposite effect.
7. Advanced Micro – Consumer Behaviour & Market Structures (A‑Level)
7.1 Utility Theory
- Total utility – overall satisfaction from consumption.
- Marginal utility (MU) – additional satisfaction from one more unit.
- Law of diminishing marginal utility → downward‑sloping demand.
7.2 Indifference Curves & Budget Constraint
- Indifference curves represent combinations of two goods giving equal utility.
- Higher curves → higher utility.
- Marginal rate of substitution (MRS) = slope of indifference curve = \(-\frac{MU_x}{MU_y}\).
- Consumer equilibrium where the highest attainable indifference curve is tangent to the budget line (MRS = price ratio).
7.3 Production & Cost Curves (Firm‑level)
- Short‑run: fixed and variable inputs → Total, Average, and Marginal cost curves (U‑shaped MC, falling AC then rising).
- Long‑run: all inputs variable → LRAC envelope, economies of scale, constant returns, diseconomies.
7.4 Market Structures
| Structure | Key Characteristics | Price‑setting behaviour | Typical Efficiency |
|---|
| Perfect competition | Many small firms, homogeneous product, free entry/exit. | Price taker – price = MC = MR. | Allocative & productive efficiency (P = MC, minimum AC). |
| Monopolistic competition | Many firms, differentiated products, some entry barriers. | Price > MC, but downward‑sloping demand. | Excess capacity – not fully efficient. |
| Oligopoly | Few large firms, inter‑dependent, may produce homogeneous or differentiated goods. | Strategic behaviour – kinked demand, collusion, price leadership. | Potential for inefficiency; outcomes depend on conduct. |
| Monopoly | Single seller, high barriers to entry, unique product. | Price‑setter – MR = MC, price > MC. | Usually allocatively inefficient (P > MC) and may have productive inefficiency. |
7.5 Evaluation of Market Failure & Government Role
- Externalities, public goods, information asymmetry, monopoly power.
- Policy tools: taxes/subsidies (Pigouvian), regulation, provision of public goods, competition law.
- AO3 focus – weigh efficiency gains against distributional impacts, administrative costs, and unintended consequences.
8. Revision Checklist (AO1‑AO3)
- Definitions & formulas – be able to write each elasticity formula from memory.
- Diagram skills – draw and label:
- PED curve with elastic, unit‑elastic and inelastic sections.
- Shift of demand for X when the price of Y changes (XED).
- AD/AS equilibrium and the effects of fiscal/monetary policy.
- Circular‑flow diagram and PPC shifts.
- Indifference curve & budget line equilibrium.
- Application – use real‑world examples (e.g., coffee/tea, smartphones/data plans, petrol/electric cars) to illustrate each elasticity and policy effect.
- Analysis – explain why a given determinant raises or lowers an elasticity; discuss short‑run vs. long‑run differences.
- Evaluation (AO3) – for any policy (tax, subsidy, monetary easing, trade protection) assess:
- Efficiency (dead‑weight loss, welfare changes).
- Equity (distributional impact).
- Practicality (administrative cost, time lag, political feasibility).
9. Quick Practice Questions
- Explain why the cross‑elasticity of demand between tea and coffee is expected to be positive, and state what this implies for the relationship between the two goods.
- A new, cheaper data‑plan is introduced. Predict how the XED between smartphones and data plans will change and why.
- Discuss how the time period (short run vs. long run) influences the cross‑elasticity between gasoline and electric cars.
- Calculate the price elasticity of demand for a product that sees a 12 % price rise and a 5 % fall in quantity demanded. Classify the elasticity and state the likely effect on total revenue.
- Identify three determinants of income elasticity of demand and explain how each affects whether a good is a necessity, a luxury, or an inferior good.
- Using the AD/AS model, analyse the likely macro‑economic impact of a 5 % increase in government spending financed by borrowing.
- Evaluate the effectiveness of a tariff on imported steel in protecting domestic employment, considering both short‑run and long‑run effects.
10. Suggested Further Reading & Resources
- Cambridge International AS & A Level Economics (9708) – Student Book, Chapters 2‑9.
- Past paper questions – focus on AO2 (application) and AO3 (evaluation) marks.
- Online video tutorials (e.g., Tutor2U, EconplusDal) for diagram practice.
- IMF & World Bank data sites – real‑world examples for macro‑policy questions.