Cambridge AS & A‑Level Economics (9708) – Complete Syllabus Notes

AS Level Foundations

1 Basic Economic Ideas, Methodology & Resource Allocation

• Scarcity & choice – limited resources, unlimited wants → need to make choices.
• Opportunity cost – the next best alternative foregone when a decision is made.
• Economic systems
  • Market economy – decisions made by households and firms through price signals.
  • Planned economy – central authority allocates resources.
  • Mixed economy – combination of market mechanisms and government intervention.
• Production Possibility Curve (PPC)
  • Shows maximum output combinations of two goods when resources are fully and efficiently employed.
  • Constant vs. increasing opportunity cost – bowed‑out curve reflects increasing cost.
  • Shifts:
    • Outward shift – more resources, better technology, or improved productivity.
    • Inward shift – natural disaster, war, or loss of resources.
• Classification of goods

  Type	Characteristics	Example
  Private goods	Rival & excludable	Food, clothing
  Public goods	Non‑rival & non‑excludable	National defence, street lighting
  Merit goods	Undervalued by consumers, socially desirable	Vaccinations, primary education
  De‑merit goods	Over‑consumed, socially undesirable	Cigarettes, alcohol
  Club goods	Non‑rival up to capacity, excludable	Gym membership

2 Demand, Supply & Elasticities

• Law of demand – inverse relationship between price and quantity demanded (ceteris paribus).
• Law of supply – direct relationship between price and quantity supplied.
• Market equilibrium – where demand = supply; determines price and output.
• Elasticities
  • Price elasticity of demand (PED) = %ΔQd / %ΔP
  • Price elasticity of supply (PES) = %ΔQs / %ΔP
  • Income elasticity of demand (YED) = %ΔQd / %ΔY
  • Cross‑price elasticity of demand (XED) = %ΔQd / %ΔP of related good

3 Government Intervention in Markets (Micro‑economics)

• Reasons for intervention – market failure (externalities, public goods), equity, information problems.
• Policy instruments
  • Price controls – floors (minimum wages) and ceilings (rent caps).
  • Taxes – e.g., excise duty on cigarettes.
  • Subsidies – e.g., agricultural support payments.
  • Regulation – safety standards, licensing.
• Incidence of a tax vs. a subsidy

  Aspect	Specific tax (e.g., on sugary drinks)	Specific subsidy (e.g., on solar panels)
  Who bears the burden?	Depends on relative elasticities – if demand is inelastic, consumers bear most of the tax.	If supply is elastic, producers bear most of the subsidy cost.
  Effect on surplus	Consumer surplus ↓, producer surplus ↓, government revenue ↑ → dead‑weight loss.	Consumer surplus ↑, producer surplus ↑, government expenditure ↑ → dead‑weight loss (unless externality is fully corrected).
  Policy aim	Reduce consumption of a de‑merit good (health objective).	Encourage adoption of a merit good (environmental objective).

4 Macroeconomic Objectives & Indicators

• Key objectives (Cambridge 4.1)
  1. Economic growth – increase in real GDP.
  2. Low unemployment.
  3. Price stability – low and stable inflation.
  4. External balance – sustainable current‑account position.
• Unemployment
  • Frictional – short‑term job search.
  • Structural – mismatch of skills/locations.
  • Cyclical – caused by insufficient aggregate demand.
  • Seasonal – regular fluctuations (e.g., agriculture).
• Inflation
  • Demand‑pull – AD > AS (excess demand).
  • Cost‑push – rising input costs (wages, oil).
  • Built‑in – wage‑price spiral.

5 Macro‑policy (Fiscal, Monetary & Supply‑side)

5.1 Fiscal Policy

5.2 Monetary Policy

5.3 Supply‑side (Structural) Policies

• Education & training – raises human capital → LRAS shifts right.
• Research & development subsidies – fosters innovation.
• Tax incentives (e.g., accelerated capital allowances) – encourage investment.
• Deregulation & competition policy – reduces barriers to entry.
• Infrastructure investment – improves productivity of firms.
• Labour‑market reforms – flexibility (e.g., flexible wages, reduced redundancy costs).
• Environmental regulation (e.g., carbon tax) – internalises externalities while creating green‑jobs.

6 International Trade, Finance & Balance of Payments

6.1 Comparative Advantage & Gains from Trade

• Country should specialise in the good with lower opportunity cost.
• Trade allows both partners to consume beyond their own PPC.

6.2 Trade Protection

• Tariffs – raise import price, protect domestic producers, generate revenue.
• Quotas – limit quantity, can create rent for license holders.
• Subsidies to exporters – lower export price, increase market share.
• Non‑tariff barriers – standards, licensing.

6.3 Exchange‑rate Regimes

• Fixed / pegged – central bank maintains a set rate (e.g., Hong Kong dollar).
• Floating – market determines rate (e.g., US dollar).
• Managed float (dirty float) – occasional intervention to smooth volatility.

6.4 Balance of Payments (BoP)

6.5 Policy Tools to Correct BoP Imbalances (Cambridge 6.5)

• Exchange‑rate adjustment – depreciation improves export competitiveness, raises import prices.
• Fiscal policy – reduce deficit (cut G or raise T) to lower import demand.
• Monetary policy – higher interest rates attract capital inflows, supporting the currency.
• Import controls – tariffs or quotas directly reduce import volume.
• Export promotion – subsidies, export credit agencies.
• Capital‑account measures – controls on short‑term flows to limit volatility.

A‑Level Extension – Sustainable & Inclusive Economic Growth

9.3 Economic Growth and Sustainability

Definition – Inclusive Growth

Inclusive economic growth is a multidimensional** pattern of expansion in which:

• Real output (real GDP) rises – economic growth.
• The benefits are shared widely across households, regions and social groups – social inclusion.
• The expansion occurs within the planet’s ecological limits – environmental sustainability.

In syllabus language this links the three pillars of economic, social and environmental progress.

Potential vs. Actual Output & the Output Gap

• Potential output (Y_p): level of real GDP when the economy is at full‑employment with stable inflation.
• Actual output (Y): observed real GDP.
• Output gap = Y – Y_p:
  • Positive gap → inflationary boom.
  • Negative gap → recessionary slack.
• Inclusive‑growth policies aim to raise potential output (human‑capital, infrastructure, technology) while narrowing a negative gap.

Business‑cycle Phases

Kuznets Curve (Growth‑Inequality Relationship)

The classic Kuznets hypothesis proposes an inverted‑U relationship: inequality rises in early development, then falls as a country becomes richer. Inclusive‑growth policies seek to:

• Flatten the upward leg (prevent excessive inequality during early growth).
• Accelerate the downward leg (speed up the reduction of inequality later).

Environmental Limits to Growth

• Resource depletion – non‑renewable inputs (fossil fuels, minerals).
• Carbon intensity – CO₂ emissions per unit of output.
• Pollution and biodiversity loss – externalities that can undermine long‑run growth.

Key Characteristics of Inclusive Growth

• Broad‑based rise in income and employment.
• Reduction in income and wealth disparities.
• Improved access to education, health and finance.
• Environmental sustainability – growth that does not exhaust natural capital.
• Social cohesion – a sense that “we are all in this together”.

Measuring Inclusive Growth

Why Inclusive Growth Matters for Sustainability

1. Social stability – lower inequality reduces risk of unrest that can disrupt production.
2. Human‑capital development – wider access to education and health raises labour productivity.
3. Environmental stewardship – inclusive policies often embed green technologies, limiting climate damage.
4. Economic resilience – a diversified, broadly employed workforce absorbs shocks (e.g., pandemics, commodity price swings).

Policy Instruments to Promote Inclusive Growth

• Fiscal policy
  • Progressive taxation – redistributes income and funds public services.
  • Targeted social transfers (cash, food vouchers, universal child allowance).
  • Public investment in health, education, affordable housing and green infrastructure.
• Monetary policy
  • Interest‑rate adjustments to stimulate investment in small‑business and green technologies.
  • Quantitative easing directed at lending to SMEs and climate‑friendly projects.
• Supply‑side / structural policies
  • Skills‑training programmes and lifelong‑learning schemes.
  • Improving access to finance for micro‑enterprises (credit guarantees, fintech platforms).
  • Regulatory reforms that lower entry barriers for SMEs.
  • Environmental regulations that internalise externalities (carbon tax, emissions trading).

Link to the Sustainable Development Goals (SDGs)

Inclusive growth directly contributes to:

• SDG 1 – No Poverty
• SDG 8 – Decent Work and Economic Growth
• SDG 10 – Reduced Inequalities
• SDG 13 – Climate Action (through green, inclusive policies)
• SDG 17 – Partnerships for the Goals (via international development assistance)

9.4 Employment and Unemployment (A‑Level)

Key Definitions

• Unemployment – persons aged 15+ who are without work, actively seeking a job and available to start within a short period.
• Types of unemployment
  • Frictional – short‑term job search.
  • Structural – mismatch between skills and job vacancies.
  • Cyclical – caused by insufficient aggregate demand.
  • Seasonal – regular, predictable fluctuations.
• Full‑employment – the level of employment when only frictional and structural unemployment remain (the natural rate).
• Natural rate of unemployment (NRU) / NAIRU – the unemployment rate consistent with stable inflation.
• Hysteresis – prolonged high unemployment can raise the NRU by eroding skills.

Policy Implications

• Expansionary fiscal or monetary policy can close a negative output gap, lowering cyclical unemployment.
• Supply‑side measures (training, active labour‑market programmes) target structural unemployment.
• Minimum‑wage legislation and employment‑rights reforms affect labour‑market flexibility and may shift the NRU.

9.5 Money and Banking (A‑Level)

Functions of Money

1. Medium of exchange.
2. Unit of account.
3. Store of value.
4. Standard of deferred payment.

Money‑Supply Determinants

• Currency held by the public.
• Bank reserves (required & excess).
• Bank lending (money multiplier).
• Central‑bank operations (open‑market operations, discount rate, reserve requirements).

Role of the Central Bank and Commercial Banks

• Central bank – issues currency, controls the base money supply, sets policy interest rates, acts as lender of last resort, maintains price stability.
• Commercial banks – accept deposits, create money through lending, provide payment services, channel savings into investment.

Monetary‑policy Tools (Cambridge 9.5.1‑9.5.8)

• Open‑market operations (buying/selling government securities).
• Policy (bank‑rate) adjustments.
• Reserve‑requirement changes.
• Quantitative easing / credit‑allocation programmes.
• Discount‑window facilities.
• Forward guidance (communication about future policy intentions).

10 Government Macro‑Economic Intervention (A‑Level)

Four Macro‑Economic Objectives (Cambridge 10.1)

1. Economic growth (increase real GDP).
2. Low unemployment.
3. Price stability (low inflation).
4. External balance (current‑account equilibrium).

Fiscal Policy

Monetary Policy

Supply‑Side (Structural) Policies

• Education & training – raise labour productivity (right‑shift LRAS).
• Research & development subsidies – foster innovation.
• Tax incentives for investment (e.g., accelerated capital allowances).
• Labour‑market reforms – increase flexibility (e.g., flexible wages, reduced redundancy costs).
• Infrastructure investment – improves productivity of firms.
• Environmental regulation – internalise externalities while creating green‑jobs.

Policy Conflicts & the Policy Trilemma (Cambridge 10.2‑10.3)

• Phillips‑curve trade‑off – lower unemployment may raise inflation, and vice‑versa.
• Policy trilemma – an economy cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy.
• Government failure – policies may be poorly designed, mistimed, or suffer from implementation lags and rent‑seeking.

11 International Economic Issues (A‑Level)

Balance of Payments (BoP) – recap

Exchange‑Rate Regimes (Cambridge 11.2)

• Fixed / pegged – central bank intervenes to maintain a set rate.
• Floating – market forces determine the rate.
• Managed float (dirty float) – occasional intervention to smooth volatility.

Impact of International Policies on Inclusive Growth

• Depreciation – can boost export‑oriented sectors and create jobs, but may raise import‑price inflation, affecting low‑income households.
• Capital‑account openness – attracts FDI that brings technology and jobs, yet raises vulnerability to sudden stops.
• Trade policies – tariffs may protect low‑skill labour but increase consumer prices; subsidies can promote strategic industries and green technologies.

Development Indicators (Cambridge 11.4‑11.5)

• GDP per capita (real) – average income.
• GNI per capita – includes net factor income from abroad.
• Human Development Index (HDI) – health, education, income.
• Multidimensional Poverty Index (MPI) – broader view of deprivation.

Quick‑Review Boxes (AS Level)