Econ for IGCSE students Revision book

1. “Recipe for success: Study while others are sleeping; work while others are loafing; prepare while others are playing; and dream while others are wishing.” ~ William A. Ward Econ for IGCSE students Revision book

2. Questions • Why is it important to study economics ? (10 marks) • Why might the organizer of an economy or country ask what, how and for whom to produce ? (10 marks) • John says economics is the study of money. Do you agree ? (10 marks) • Which is more important, macroeconomics or microeconomics ? (10 marks)

3. Talk like an economist • Positive = provable, fact • Normative = opinion • Utility = happiness or satisfaction, like benefit & welfare • Profit = payment for enterprise, reward for risk, revenue – cost • Rational economic behaviour: we assume people are sensible and maximise their welfare. Do they really ? • Freegood (no choice or sacrifice necessary) or economicgood (limited availability). But varies eg water free on lake, economic in desert • Scarcity (in excess demand at price=0), necessitates choice • Opportunity Cost (what is not chosen when a choice is made) • Factors of Production (description, payment, supplier) • Land (natural resource, rent, landowner) • Labour (human resource, wage, labourer) • Capital (man-made resource, rent/interest, capitalist) • Enterprise (ideas/put together other FOP, profit, entrepreneur)

4. Basic Economic Problem: Economic Concepts • What is economics about? “How to allocate limited resources to provide for unlimited wants” • What questions help answer that ? What / How / For whom to produce • Microeconomics looks at parts of an economy like what ? Labour • Macroeconomics looks at the whole of an economy like what ? Economic growth

5. Basic Economic Problem: Scarcity, Wants & Choice The basic economic problem is that people usually want more than they have but there is scarcity: not enough resource to make more products for everyone. The scarce resources we use to make products are called “Factors of Production” Land (natural resource eg. oil, wood, corn, fish) Labour (human resource eg. worker hours) Capital (man-made resource eg. machines, factories) Enterprise (putting together other FOP eg. a business idea) Because of this scarcity, all people have to make choices. Examples: We need to decide whether we want a holiday or a new car because we can not afford both A government must decide whether it wants a new hospital or a new warplane because it can not get enough resources to make both

6. Basic Economic Problem: Opportunity Cost If we spend an hour in economics class, our opportunity cost is what else we might have done. This could be : the pleasure of watching TV for an hour, or the money earned and effort given if we had chosen to work for that hour, or The benefit we would have gained if we had studied another subject such as maths for that hour When making choices, we assess the opportunity cost. That means “the alternative forgone” or ”the next best choice”. The opportunity cost of taking action is what we would have done if we had not taken that action The opportunity cost of making a product is the alternative product we could have made with the resources used

7. Allocation of Resource: Market Function The market is nature’s way of answering the economic problem It decides what to make. This, in turn, decides how much scarce resource should be used for each product. So the market decides resource allocation without anyone having to think about the best way to use resources. This is a Market Economy But people do not always let the market decide. In some cases they prefer a chosen government to decide how much resource to use for a product. This is a Centrally Planned (or Command) Economy They might want the government to restrict output of undesirable products like illegal drugs, or to increase output of desirable products like economics lessons But Market Economies lead to inequality, and Command Economies lead to inefficiency A system where the market decides resource allocation for some products and situations, and the government decides it for others, is called a Mixed Economy

8. Allocation of Resource: Demand & Supply & Determinants Supply means the quantity of a product producers will supply at each price This quantity changes with population, law and taxes, resource availability and cost, and producer substitutes (what else could those resources make), among other things Demand means the quantity of a product consumers are willing and able to buy at each price This quantity changes with population, environment, fashion, income and the availability of substitutes, among other things Equilibrium is where the quantity supplied is equal to the quantity demanded so all product is sold and no resources are wasted. It is the market’s way to answer the economic problem of scarcity. The price adjusts to reach this quantity

9. Allocation of Resource: Price Elasticity of Demand (PED) & Supply (PES) Elasticity: The responsiveness of one variable (V1) to changes in another (V2)Formula: % △ V1 / % △ V2 PED:The responsiveness of quantity demanded to changes in price. % △ QDx / % △ Px What decides this? The determinants are: time, necessity, price as % of income PES:The responsiveness of quantity supplied to changes in price. % △ QSx / % △ Px What decides this? The determinants are: time, factors of production, other products supplier could make Elastic demand: ↓ price→↑revenue Inelastic demand ↑price→↑revenue Elastic supply Inelastic supply

10. Allocation of Resource: Market Failure What is it ?The market fails in allocating resource How does it happen ? Externalities: Costs and benefits affecting people who aren’t involved with producing or consuming a product, eg for: Merit goods: products with external benefits which we should allocate more resource for, eg medicine, books Demerit goods: products with external costs which we should allocate less resource for, eg cigarettes, polluting products Public goods: which 1) can not be used up and 2) people can not be stopped from using, eg national defence and light from lighthouses Monopolies: produce too little of a product to push the price up and make large profits. We should allocate more resource to these products Inequality: The market is not allocating resource well if some people are very poor and lack food and necessities whilst others have all they want What should we do ? The government can intervene and change the resource allocation for example by controlling production or giving food to the poor.

11. Role of the Individual: Money Functions We use money so we don’t have to barter ie swap or trade one item for another. Otherwise we have to find someone with what we want who wants to trade it for what we have (a double coincidence of wants) What is money? A medium of exchange (can be used to buy things) A store of value (for saving) A unit of account (to measure value) What features should money have ? Accepted, durable, portable, scarce, divisible Who controls the money supply? The Central Bank in a country controls the printing of money and the whole financial system including the high street banks Banks, stock markets and insurance companies also serve the financial system by channeling money from savers to businesses for investment or buying capital

12. Role of the Individual: Work Choices & Context The price of labour is decided by supply and demand Supply: depends on skills, experience & education needed as well as the conditions and location of the job. Demand: depends on the productivity of labour (how much product it can make) and the price of the product. People decide what work they want to do according to: Wage factors: the money (weekly wage or monthly salary) they can earn. Non-wage factors: the convenience of the job (hours, distance, safety) and the benefits such as perks, holidays and pension. Wage differentials The level of pay is affected by : Sectors:public / private, primary / secondary / tertiary, age, experience, degree of specialisation, talent, qualifications, location, discrimination

13. Role of the Individual: Labour Market Wages may not be decided purely by free market as intervention comes from: Governments may also impose minimum wages to help workers. Trade Unions intervene using collective bargaining and industrial action such as strikes, picketing and work to rule. They try to improve work conditions and benefits as well as pay However these may push up wages so that supply exceeds demand and surplus labour or unemployment results

14. Role of the Individual: Save or Spend Choice Disposable income is what is left for spending after tax People can choose to spend or save. Saving often increases with age, income and interest rate. Expectations for the future also affect their decisions People may choose to borrow using credit cards, mortgages and overdrafts or other bank loans so they can spend more than their income. Borrowing increases current consumption and sacrifices future consumption Saving reduces current consumption and allows more future consumption People make decisions to maximise utility or the benefit they get from their resources or income

15. The Firm: Business Structures Limited Liability: Business owners can only lose money they invested in the firm Sole proprietor (trader) One person owns and manages a business eg store Partnership: from 2 to 20 partners own and manage a business eg doctors, law firm Ltd Company Ownership & management separate, can sell shares for funding, profit paid as dividend to shareholders. limited liability, 2 types: Private Company: sells shares to friends Public Company (PLC): sell shares on stock exchange Cooperative: common interest groups own and run business to serve their interests Public Corporation: Business owned by state and run by managers chosen by government Multinational: Business producing using resources in more than one country. They get access to markets and resources and can bring money, resources and knowledge to a country but is working in its own interest, not that of the hosts.

16. The Firm: Business Structures Firms size can be measured by number of staff, turnover (revenue), market share (%), or capital employed (asset value) Firms generally aim to maximise profit and may choose to do this by growing through Natural Growth: reinvesting profits, or Integration, by Takeover or Merger Nationalisation: when the government takes over a business. It may cut prices and increase output but is often inefficient . Privatisation: when a state owned industry is sold to private owners, to avoid public loss or to make the business more efficient. Integration can be: Horizontal: joining competitors Backward Vertical: joining suppliers Forward Vertical: joining customers Lateral / Conglomerate: joining unrelated firm

17. The Firm: Costs (Money paid to produce) and Revenues (Money received for product) What is the goal of most firms ? Profit maximisation = make as much profit as possible But they may only: Break Even = When total revenue = total cost As a firm increases its output, total cost usually rises, but average cost may rise, stay constant or fall

18. The Firm: Market Structures Some businesses like haircutting suit small firms, others like making ships or electricity are best done by large firms As firms get bigger they can benefit from economies of scale where costs fall with specialisation, production lines, bulk buying and cheap credit or borrowing But if firms get too big they may get diseconomies of scale where inefficiency increases costs Perfect competition many firms which have little market power and usually low profit Monopoly = just one firm which has high market power and can make large profits Benefits: economies of scale, money for research to make new products Problems: Too much market power so they can charge high prices and people can not afford their products

19. The Government In an economy the government is: An employer A producer of goods and services A policy maker It aims to ensure: Full employment Price stability Growth (of GDP) Equality Foreign balance Governments get income from taxes These can be Direct: paid on income or cash Indirect: paid on products Progressive: higher income higher rate Regressive: lower income lower rate Proportional: fixed rate These add to costs and reduce profit for businesses If the government gives money to producers to reduce costs it is called a subsidy . It uses policies that include: Demand side: fiscal (tax and spending) or monetary (money supply and interest rates) Supply side: reduce intervention Trade policy: protection, exchange rates

20. The Government: Macroeconomic Models Aggregate Demand / Supply Diagram Circular Flow Diagram Business Cycle We use economic models to simplify and present ideas about the real economy. The government can then use them to predict the effect of events and policies

21. Economic Indicators What is it ? A sustained increase in the general level of prices. How is it measured ? By comparing the price of an index (the price of a basket of goods such as the Consumer Price Index) from one year to the next. What makes it happen ? Demand Pull = An increase in the money supply or an increase in demand for products. Cost Push = An increase in the cost of resources used for production. Why is it a problem ? Money loses value and may even stop working, people and businesses get worried, governments and borrowers gain whilst others lose, resources get wasted What should governments do ?Demand side : Print and/or spend less money, raise direct taxes. Supply side : Make resource markets work better.

22. Economic Indicators What is it ? When people are willing and able to work but have no job How is it measured ? By counting tax or welfare data, by survey What makes it happen ? Natural Unemployment: Seasonal, between jobs, change in products and production methods Cyclical Unemployment: A fall in demand for products and labour in recessions Why is it a problem ? People lose income and skills and get depressed Society wastes resource. Areas get poorer What should governments do ? Demand side : Print and/or spend money, cut taxes. Supply side : Make resource markets work better.

23. Economic Indicators : GDP What is it ? The total output from inside a country in a year How is it measured ? By counting income or spending or total product, which should all be equal. What is the goal ? Governments want to increase GDP so the country gets more income and gets richer. This is called economic growth. What other measures are there ? Real GDP per Capita: The total inflation adjusted output of a country per person GNP Gross National Product: Total output in a year from resources belonging to the people of a country. Human Development Index (HDI) : Shows the standard of living based on education and life expectancy as well as income

24. Development: Population Population data includes the Dependency ratio or how many people depend on each worker. There are a lot of dependents in countries with many old or young people who can not work. That slows development because they use resources. A low dependency ratio helps an area to develop The birth rate is also important. If it is higher than the death rate then the population may be growing which gives more labour to make things, but also more need for food. Saving The population and culture also helps to determine how much of what is made is consumed or used up. The rest can be saved, it can be traded for other products or used for investment which means buying capital or man-made resource or even schools and hospitals. This increase in resources means an economy can develop and enjoy a better standard of living.

25. Development Other factors influence the level of development in an area: Geography, politics, culture, climate, resource endowment, population age size and density What is it ? It describes the standard of living or the quality of life Many factors can be measured to see the level of development in an area: Income, education, life expectancy, freedom, technology, healthcare, equality, nutrition Sectoral shift: As an economy develops, people move from primary to secondary and then tertiary sectors. This is because 1) Increases in efficiency means less labour is needed for food and other basic need so it can be used elsewhere, and 2) with development people have enough necessities and want other things like education or football matches or art so they will pay labour to make those products Governments can set policies to support development. These might include: population controls, laws to help businesses, government spending on infrastructure including roads and buildings like airports

26. International Economics: Trade Specialisation different countries or areas have different resources and so are better at making certain products. This is called comparative advantage. They should specialise in making these items and trade them with other place for items they are not good at making. Switzerland could make chocolate and export it in exchange for imports of coffee from Vietnam. Then there is more for everybody. With trade countries get more efficient because: • They are making what they are good at • They can practice and get even better at that product • They might get economies of scale in that product • Competition from other countries encourages efficiency • New ideas come from other countries with trade • People have more choices of product Increased trade supports Globalisation where there is more communication and standardisation and it seems like the world is getting smaller.

27. International Economics: Protection Why: Some countries want to protect themselves from imports from other countries because: They want to keep jobs for their own workers They want their own businesses to sell more and make more profit They don’t want to depend on other countries They don’t like the country they buy products from They want to maintain their foreign balance of trade How:do countries protect themselves and stop trade? They use Quotas = limits on the number of imports of a product Tariffs = taxes on imports Subsidies = money for their own producers to make it cheaper The WTOaims to support and encourage free trade to help development but some countries say the WTO is unfair and helps the rich countries more than poor ones

28. International Economics: Foreign Balance The balance of payments is a country’s account with the rest of the world. It includes the financial, capital and current accounts Current Account: counts the net (total inflow minus total outflow) cashflow for: Visible trade or trade in goods Invisible trade or trade in services Transfers gifts or payments made not for trade or debt Income from Investment in other countries The current account balance can be: Surplus if more money flows in than out, leading to saving Deficit if more money flows out than in, leading to debt Balanced if money flows in and out are equal

29. International Economics: Exchange Rates An exchange rate is the rate at which one currency can be exchanged for another. Exchange rates might be Floating where the rate is decided by the free market forces of supply and demand, or: Fixed where the government controls the rate by buying or selling currency, or Dirty floatwhere the government manages a floating rate if it moves too much Floating exchange rates might appreciate (rise) if many people want to buy that country’s products or hold its money, or depreciate (fall) if people do not want the products or money of a country. If a currency appreciates, the products of that country will get more expensive and so people may not buy them and it could lead to a trade deficit If a currency depreciates, the products of that country will get cheaper and so people may buy more of them and the country