Economics

1. Economics-

Is the study of human behaviour and is the analysis of economic

decisions made by humans because of their unlimited needs and
wants.

 Microeconomics- is concerned with the actions of individuals

and business
 Macroeconomics- is focus on the actions of the government
and countries

2. What is an Economy?

Is any area or region where economic activity takes place.

3. Scarcity- is the main problem in economics because of

people’s unlimited needs and wants, scarcity meaning that
there is only a fixed amount of resources (the brings up the
concept of choice)

4. Choice- a choice is caused because of scarcity and is a

decision made by the government on how to use the limited
resources to produce goods

5. Production Possibility Curve- shows how many

goods/services the economy is capable of producing (a
diagram sloping downwards from left to right that compares
the output of goods with the limited resources)

6. Factors that influence Individual Economic Decisions:

 Personal Choice (preferences)
 Cost
 Income
 Peer pressure
7. Income on Earing:
 Gross Income- the total income earned by an Individual

 Disposable Income- this is the amount which remains after

income taxes

 Real Disposable Income- refers to the actual quantity of

goods and services that disposable can buy

8. Direct tax- is one which is loan directly by the payers of the

tax

Indirect tax- taxes that are passed onto other individuals

Monetary Policy- attempts by the government to control the

amount of money circulating in an economy
 9. Types of Economies:

1) Market economy: people and business answer the economic

questions for society, the government is hands-off in this
economy

Advantages:

 Consumer satisfaction is high

 Creativity thrives

Disadvantages:

 Does not provide basic needs (public/merit goods)

 Lota of risk
 Struggles to provide services that are not profitable

The 3 Basic Economic Questions:

-What to Produce?

-How to produce?

-From whom to Produce?

2) Command Economy: The government makes all the

economic decision in this economy

Advantages:

 Cheap public services

 Can change direction of the economy in a short period

Disadvantage:

 Low quality of goods/service because there is no

competition
 Workers have no motivation
 Less range of goods to choose from
 3) Mixed Economy: is a mix between a command economy and
a market economy

Advantage:

 Large amount of individual freedom

 Government can make sure economy is moving forward

Disadvantage:

 Government can become large

10. Mert/Demerit Goods

Merit Goods- goods that are beneficial for individuals and society
but tend to be under-consumed if left to the free market.
Examples include education and healthcare.

Demerit Goods- are those where social cost exceeds the private
cost (cigarettes)
 11. Demand:

Is the quantity of goods/services a consumer is willing and able to

buy at a specific price, at a particular point in time.

Law of Demand:

As the price of a product increases the quantity bought will

decrease.

Ceteris Paribus:

This is a Latin term used in economic that means all other factors
remain the same while one factor remains the same.

Demand Curve:
Change in Quantity Demand- is when all other factor remain the
same and only price changes casing a contraction/expansion
along the demand curve

Change in demand- when the determinants of demand changes

(consumer income) therefore causing a shift of the demand curve
to the left or right.
 12. Substitute and Complementary Goods

Substitute Good- any good that can be used to replace another 2

goods or that serve the same purpose (Coffee and Tea)

Complementary Good- 2 goods that are bought/used together

(Milk and Cereal)

13. Market Demand:

Means totalling all the buyers in the market in order to get the
market or total demand for a product

Market Supply:

Is determined by summing the supply of all firms or producers in

the market.

14. Supply:

The total quantity of a good and service that suppliers wish to

produce and sell at a particular price at a specific point in time.

Law of Supply:

States that as the price of a good/service increases the quantity

supplied will also increase.
 15. Equilibrium Price (comes from the word equal)

Market Surplus- this is when quantity supplied is more than

quantity demanded

Market Shortage- this is when quantity demand is more than

quantity supplied.
 16. PED (Price Elasticity Demand)

Measures how much demand will change id a price of a product

changes that will affect revenue.

Formula: % change in Qd

% change in P

Price ($) Quantity

2 500
8 450
12 325
16 200

(a) $2 to $8

Quanty= -50 × 100 = -10% Answer= -

10% ÷ 300%

100 = -0.03%

Price= 6 × 100= 300%

8
 17. YED (Income Elasticity Demand)- by how much demand
changes if consumer’s income changes

Formula: % change in DD (Negative= Inferior Good)

% change in Y (Positive= Normal Good)

XED (Cross Elasticity Demand)- by how much demand for good A

would change if price of good B changes.

Formula: % change in quantity demand of product A

(Negative= Complementary)

% change in price of product B (Positive=

Substitute)
18. Elasticity

1) Elastic- More than 1 but less than infinity

 DD curve is flat

2) Inelastic- More than 0 but less than 1

 DD curve is steep

3) Perfectly Elastic- Infinity

 DD curve is horizontal to x-axis
 4) Perfectly Inelastic- when PED=0
 Cure is vertical to y-axis

19. Price ceiling and Price floors

Price Ceiling-

The government set a price ceiling if they believe if they believe

that the market equilibrium price is too high.

Price Floors-

The government can also set a price floor if they believe if they
believe that the market equilibrium price is too low.
 20. Factors of Production:

Production- involves the making of goods and services

Productivity- the rate at which a good or service is made

Formula: No. of bricks/outputs

No. of workers/inputs

The factors of production and their rewards:

 Land - Rent
 Labour – Wages
 Capital – Profit
 Entrepreneur – Interest

(A) Land- all natural resources that can be used to make a

good (oil, coal, iron)

(B) Labour- Refers to the physical and mental inputs by

used in making goods/services

Labour Force- the amount of people willing and able to work

within a population who are within working age

What factors determines the size of a labour force in a

country?

 Wage rate
 Immigration and migration
 Health Policies
 Education Policies
 Mobility of Labour- refers to the ability of workers to switch
from one job to the next (there are 2 types):

 Occupation- The ability of worker to switch from one job to

the next (lack of necessary skill, age of workers
 Geographical- refers to the movement of the labour force
from one location to another in search of employment

Division of Labour- assignment of different parts of a task/job

to different people to improve efficiency

Benefits- Increased Output, Employees skill improve, Improved

quality of goods

Disadvantage- Work gets boring, no more skills being

developed

(C) Capital- refers to all the goods and services used to

produce other goods/services

(D) Entrepreneur- is responsible for combining the other

factors of production

21. Short-run and Long-run

Short-Run- this is usually defined as any period of time where at

least factors of production remain fixed.

Long-Run- is defined as any time period in which all the F.O.P vary
(they change)
Law of diminishing return- when output increases and reaches its
maximum it begins to decrease (apply in the short-run)

22. Measuring firms Output

There are usually 3 areas that is measured:

 Total product
 Marginal product
 Average product

(A) Total product- refers to all the goods produced by the

firm with a given amount of F.O.P

(B) Marginal product- refers to the increase in oupt a one

more unit of F.O.P (worker) is added

Formula- Change in Total product

Change in Unit of labour

(C) Average Product- the amount of output produced per

unit of labour

Formula- Total Product

Units of labour
 Law of Diminishing Marginal Returns- states as you add
variable resources to fixed resource the output will
eventually increase

23. Costs of the Firms

Cost to the firm can be analysed into:

(A) Total costs- the sum of all the cost incurred by the
firms to produce g/s

(B) Variable Cost- changes with your out, for example if a

firms produces 11 phones that cost $500 each, the variable
cost will be $5500 but of they produce one more phone
variable cost will be $6000

(C) Total Fixed Cost (TFC)- is a cost that does not increase
or decrease (don’t change)
(D) Total Variable Cost (TVC)- is cost that can increase or
decrease with output

TC= FC + TVC

(E) Average Variable Cost (AVC)- Variable Cost per unit

(F) Average Cost- Cost per unit

(G) Marginal Cost- represents the cost to the firm to

produce one more unit of output
 TFC TVC TFC TC TVC
Output Output +TVC Outpu Output
t
Outp T.F.C T.V.C A.F.C A.V.C T.C AC MC
ut
0 1000 500×0= 0 1000= 0 500÷0 (∞) 1000 ∞ 0
0
1 1000 500×1= 500 1000= 500÷1= 1500 1500 500
1000 500
1
2 1000 500×2= 1000= 500 1000÷2= 2000 1000 500
1000 2 500
3 1000 500×3= 333.333 1500÷3= 2500 833.3 500
1500 500 33
4 1000 500×4= 250 20,000÷4= 3000 750 500
20,000 500
5 1000 500×5= 200 25,000÷5= 35000 700 500
25,000 500

(a) Fixed Cost is $1000 rent for the factory

(b) Variable cost consists of labour per unit $200 and Raw
material per unit $300

24. Normal Profit and Abnormal profit

Normal Profit- this is the level that are need for the firms to stay
in business

Abnormal Profit- this is the only level of profits earned in excess

of normal profits

Profit maximization- if the organisation is not a charity, then the

organisation will aim to maximise profits.

25. Market Structure:

refers to how different markets are classified based on their

degree of competition

Market- is where buyers and sellers interact with each other

(consists of all the buyers and sellers for a particular
good/service)
Why do some markets have more sellers and some less?

Due to barriers of entry- any factor that will make it difficult to

enter then market.

 Lack of knowledge
 Lack of Resources
 High startup cost

Types of Market Structures:

 Prefect Competition
 Monopoly
 Oligopoly
 Monopolistic competition

(A) Perfect Competition-

 Many buyers and sellers
 No barrier of entry
 Products are homogeneous (identical)
 Each firm has full knowledge of the market
 In short-run can make super normal profit and in the long-
run normal profits

(B) Monopoly-
 Productive inefficient (not operating on the lowest point
of the AC curve)
 No Competition
 Price Control
 Barriers to Entry
 Single Seller

(C) Oligopoly-
 Super normal profit earned in L.P + S.R
 Each firm has pricing power
 Barrier to entry
 Dominated by a few larger firms
 Non-price competition
 (D) Monopolistic competition-
 Large number of firms
 No barriers to entry
 Product is differentiated (Unique product)
 In short-run can make super normal profit and in the long-
run normal profits

26. Short-Run and Long-Run profit curve

(Super normal profit is any profit earned above the normal level
of profit.)

Short-Run- Super normal profits

Long-Run- Normal profits

27. Trade Union- is an association of workers with the main

objective of demanding higher wages to improve its
standard of living

Types of Trade Unions:

 General union
 Industrial union
 28. Market Failure-

Means the market is not efficient, that there is either a shortage

or surplus.

Surplus or Shortages arises due to a concept called externalities

Market Failure is due to monopoly or Imperfect competition

because the monopolies do not produce on the lowest point of the
AC

Externalities- is a side effect of economic activity that affects

others who are not directly involved in the transaction.

Examples of negative externalities:

 Smoke from factories

 Traffic congestion

Examples of positive externalities:

 Education population
 Neighbour enjoy lighting from neighbours

29. Commercial and Central Bank

Commercial Bank-

 Provide financial service to customers

 Customers can make deposits
 Customers can get loans
Central Bank-

 Bank is owned and controlled by government

 Print and issue notes and coins
 Regulates commercial Bank
 Control the supply of money

Debt Finance- refers to money that’s business borrows to pay

back

Advantages:

 The business holds ownership

 Profits not shared

Disadvantages:

 Interest payment reduces profits

Equity Financing- is money that is received in exchange for a

share of ownership

Advantages:

 No interest to be paid
 If company fails shareholders do no have to be repaid their
investments

Disadvantages:

 More owners added

 Profits to be shared

30. Money Supply-

refers to the amount of money in an economy

Money base= refers to all the cash available in the economy

Narrow money= refers to the money in money base

Wide money= refers to all the money in the economy

Government Borrowing- government of a country can also take
out loans

(A) Treasury Bills- these are financial instrument with short

term maturity dates 3-6 months

(B) Treasury Notes- these are financial instrument with

short term maturity dates 1-5 years

(C) Treasury Bonds- these are financial instrument with

short term maturity dates more than 5 years

31. Circular Flow of Income

Income- refer to money earned in an economy

Circular Flow of Income is used to show that it is the same income

flowing among different groups in the economy.

1) Households – Provide resources (labour, land, capital) to

firms and receive income (wages, rent, profit).
2) Firms – Produce goods and services and pay households for
resources.

32. National Income

Is the measure of the total income earned by a country over a

period of time usually one year

Gross Domestic Product (GDP)- is a measure of national income,

the total amount of goods and services produced in an economy
over a period of time (1 year)
GDP= Total exp= Total Output= Total Income

Three Methods of Calculating National Income:

1) Expenditure method- calculating national income by adding

the total amount of income spent un the economy

2) Income method- we simply add up all forms of income in the

economy Income is earned by all the Factors of production

PROFORMA $
Rent X
Wages X
Interest X
Profit X
G.D.P- X

3) The Output Method- measures national income by

calculating the total value of goods and services produced in
an economy over a specific period.

GDP per capita- gives an average measure of the amount of

income shared to each person in the economy

33. Opportunity Cost-

Is the amount of one good you have to sacrifice to gain more of

another good
 34. Economies/Diseconomies of scale:

Economies of scale- In the long-run the firms has the opportunity

to gorw and expand in size.

Types of economies of scale:

1) Technical Economies of scale- are the type of internal

economies of scale
2) Marketing Economies of scale- Entail larger firms lowering
the unit cost of production and advertising
3) Financial Economies of scale- are cost advantages that occur
when a company increase their scale of production.

Diseconomies of Scale- are when firms grow too large and hence
average cost begins to increase

Types of Diseconomies of scale:

1) Managerial- Difficulties a managing large firm

2) Communication- poor communication as the firm grows
3) Coordination- Challenge in coordinating activities

35. Unemployment- is when someone willing and able to

work but can’t find a job.
Four types of unemployment:

1) Seasonal Unemployment- is when jobs are only available at

a certain times of the year
2) Long-term Unemployment- people who have been
unemployed for a extended period (over 27 weeks)
3) Frictional Unemployment- Temporary unemployment when
people are searching for jobs
4) Structural Unemployment- occurs when there is a mismatch
between worker’s skills and jobs available

Past papers2017 2018 2015