Leaving Certificate Higher Level Economics: Complete Revision

Comprehensive Question and Answer flashcards covering all five strands of the Leaving Certificate Higher Level Economics syllabus, including microeconomics, market structures, macroeconomics, fiscal and monetary policy, and international trade.

How does microeconomics differ from macroeconomics?

Microeconomics studies individual markets, consumers, households, and firms making decisions regarding scarce resources, whereas macroeconomics studies the economy as a whole, including economic growth, inflation, unemployment, national income, and government economic policy.

What does Rational Choice Theory assume about human economic decision-making?

It assumes that individuals always make rational decisions that provide them with the highest amount of personal benefit and utility/satisfaction by weighing the costs and benefits of each option available to them under conditions of scarcity.

How is behavioural economics defined?

The study of psychology as it relates to the economic decision-making processes of individuals and institutions, explaining that humans are not always rational and are often incapable of making optimal decisions.

What is the key distinction between a positive statement and a normative statement in economics?

Positive statements are objective statements that can be tested, amended, or rejected by referring to available empirical evidence (how the world works), whereas normative statements express value judgements or opinions about what should happen based on personal beliefs or political persuasion and cannot be proven (how the world ought to work).

How do Keynesian economists and Free Market economists differ in their views on government intervention?

Keynesian economists believe governments should actively intervene in the economy (especially during recessions) using fiscal policy and spending to support demand, employment, and growth. Free Market economists believe markets work best with limited intervention, allowing prices, wages, supply, and demand to adjust freely to allocate resources.

What constitutes the fundamental economic problem in economics?

The condition of scarcity: economic resources (factors of production) are limited/finite, while human wants are unlimited/infinite, requiring individuals, firms, and governments to make choices that incur an opportunity cost.

What is the definition of opportunity cost?

The cost expressed in terms of the next best alternative that is foregone when an economic choice is made.

What are the four factors of production and their respective economic rewards?

1. Land — reward is Rent
2. Labour — reward is Wages
3. Capital — reward is Interest
4. Enterprise — reward is Profit (or Loss)

On a Production Possibilities Frontier (PPF) diagram, what is signified by points located on, inside, and outside the curve?

Points on the curve represent efficient allocation of resources at maximum productive capacity; points inside the curve represent an inefficient allocation where resources are underutilised or unemployed; points outside the curve represent unattainable output levels reflecting scarcity.

What production model is illustrated in this diagram showing finite resource extraction through disposal?

The traditional linear economy model (the "Take-Make-Waste" approach), where finite resources are extracted, used to manufacture products, and discarded as waste, rather than being preserved in a closed-loop system.

What is the circular economy?

An economic model that aims to reduce waste, promote sustainability, and maximise resource efficiency through a closed-loop system where products, materials, and resources are kept in use for as long as possible through recycling, refurbishing, and remanufacturing.

What are the three pillars of sustainability, and what does each require?

1. Economic Sustainability: Ensuring current economic growth and activity can be maintained indefinitely without compromising future generations.
2. Environmental Sustainability: Maintaining natural resources, ecosystems, and biodiversity over an extended period.
3. Social Sustainability: Enabling a social system to operate indefinitely at an acceptable level of social wellbeing, harmony, and equal opportunity.

How does resource degradation differ from resource depletion?

Resource degradation occurs when a natural resource is damaged or polluted, reducing its quality and usefulness even if the resource still exists (e.g., river water pollution), whereas resource depletion occurs when a natural resource is consumed or extracted faster than it can naturally replenish (e.g., overfishing or burning fossil fuel reserves).

What is the definition of a Just Social Policy?

The government’s provision of services and management of income redistribution in an economy to ensure that all citizens achieve a certain minimum acceptable standard of living.

What are the three core functions of the price mechanism?

1. Signalling: Price changes convey information to buyers and sellers regarding market conditions, shortages, or surpluses.
2. Preferences/Tastes: Prices reflect consumer demand, incentivising firms to allocate resources toward the most profitable products.
3. Rationing: When a good becomes scarce, higher prices discourage consumption, rationing scarce goods to those willing and able to pay.

What does the Law of Demand state?

The Law of Demand states that as the price of a good increases, the quantity demanded decreases, and as the price of a good decreases, the quantity demanded increases (an inverse/negative relationship), ceteris paribus.

What are four recognised exceptions to the Law of Demand?

1. Giffen Goods (inferior staple necessities where a price rise forces low-income consumers to buy more)
2. Snob Goods / Goods of Ostentation (exclusive luxury items where higher prices increase prestige)
3. Speculative Goods (assets like shares or housing where rising prices fuel expectations of further increases)
4. Addictive Goods (products like cigarettes or sugary drinks where physical or psychological dependency overrides price changes)

What type of supply condition is shown in this diagram where supply is vertical at $80{,}000$ units, and why does it occur?

Perfectly inelastic (fixed) supply. It occurs when quantity supplied cannot change in response to price changes in the short run, such as the fixed physical seating capacity of an $80{,}000$-capacity stadium like Croke Park.

In this labour market diagram, what does the horizontal line set at $13/hour represent, and what market condition does it cause?

A price floor (minimum wage) set above the equilibrium wage of $10/hour. It creates an excess supply (surplus) of labour of $200$ jobs, because $400$ jobs are supplied by workers while only $200$ jobs are demanded by employers.

What is the difference between consumer surplus and producer surplus?

Consumer surplus is the difference between the maximum price a consumer is willing to pay for a product and the actual price they pay. Producer surplus is the difference between the minimum price a producer is willing to accept and the actual price received.

What is the Law of Diminishing Marginal Utility (LDMU)?

The law of diminishing marginal utility states that as a consumer consumes additional units of a good or service, the marginal utility (extra satisfaction) derived from each additional unit will eventually decline.

Based on this table, what are the missing Total Utility and Marginal Utility values, and at what unit does diminishing marginal utility set in?

Workings:

• Marginal Utility for unit 2: $80 - 40 = 40\,\text{utils}$
• Total Utility for unit 3: $80 + 35 = 115\,\text{utils}$
• Marginal Utility for unit 4: $137 - 115 = 22\,\text{utils}$ The Law of Diminishing Marginal Utility sets in on the consumption of the 3rd unit (or after the 2nd unit), because marginal utility declines from $40$ to $35\,\text{utils}$.

What is the Equi-Marginal Principle of Consumer Behaviour?

It states that a rational consumer seeking to maximise utility from limited income will spend their income such that the ratio of marginal utility to price is equal for all goods consumed: $\frac{MU_1}{P_1} = \frac{MU_2}{P_2} = \dots = \frac{MU_n}{P_n}$.

How is Price Elasticity of Demand (PED) calculated and classified by absolute value?

Using the midpoint formula: $\text{PED} = \frac{\Delta Q}{\Delta P} \times \frac{P_1 + P_2}{Q_1 + Q_2}$.

• If $|\text{PED}| > 1$: Demand is price elastic (percentage change in quantity demanded exceeds percentage change in price).
• If $|\text{PED}| < 1$: Demand is price inelastic.
• If $|\text{PED}| = 1$: Demand is unit elastic.

How does Income Elasticity of Demand (YED) classify goods into normal, inferior, necessity, and luxury categories?

• Normal Good: $\text{YED} > 0$
• Inferior Good: $\text{YED} < 0$
• Necessity Good: $0 < \text{YED} < 1$
• Luxury / Superior Good: $\text{YED} > 1$

How do the short run and long run differ in production theory?

The short run is a time period during which at least one factor of production is fixed in supply (e.g., capital/plant capacity). The long run is a time period in which all factors of production are variable in quantity.

What is the Law of Diminishing Marginal Returns (LDMR)?

It states that if increasing quantities of a variable factor of production are added to a given quantity of a fixed factor of production, a point will eventually be reached where the addition to total output (marginal product) begins to decline.

What is the difference between explicit costs and implicit costs?

Explicit costs are out-of-pocket monetary payments made by a firm to purchase factors of production (e.g., wages, rent, raw materials), whereas implicit costs are non-monetary opportunity costs of using resources owned by the firm or entrepreneur (e.g., the owner's foregone alternative salary).

What is the profit-maximising rule for any firm?

A firm maximises profit at the level of output where Marginal Cost equals Marginal Revenue ($MC = MR$), and Marginal Cost cuts Marginal Revenue from below.

What is the difference between internal and external economies of scale?

Internal economies of scale are cost-reducing advantages that arise within an individual firm as its own scale of production expands (e.g., bulk purchasing, specialised managers). External economies of scale are cost savings that accrue to all firms in an industry as the entire industry grows (e.g., improved transport infrastructure, specialist university research).

What are the three main types of economic systems?

1. Free Market Economy: Resource allocation and prices are determined solely by market forces of supply and demand with private ownership and minimal government intervention.
2. Command Economy: The state owns most resources and centrally plans all production, output targets, and prices.
3. Mixed Economy: Combines private enterprise with government intervention in resource allocation, regulation, and public service provision.

What is the difference between privatisation and nationalisation?

Privatisation is the sale of state-owned assets or enterprises to private investors (e.g., Eir, Aer Lingus), whereas nationalisation is the transfer of private assets or industries into state ownership and control (e.g., ESB, Irish Rail).

In the provided monopoly equilibrium diagram, what do points E, P1, C1, and the shaded area "SNP" represent?

• Point E: Profit-maximising output ($Q_1$) where $MC = MR$.
• $P_1$: The selling price charged on the demand curve ($AR$).
• $C_1$: The average cost per unit of producing output $Q_1$.
• Shaded area "SNP": Supernormal profit earned because Average Revenue exceeds Average Cost ($AR > AC$).

What are the three conditions required for a firm to practice price discrimination?

1. The firm must possess some degree of monopoly / market power.
2. The markets must be separated to prevent resale between them.
3. Consumers in the different markets must have different price elasticities of demand ($PED$).

Why are prices rigid in an oligopoly under the kinked demand curve theory?

If a firm raises its price, competitors will not follow, causing it to lose substantial sales (elastic demand). If the firm lowers its price, competitors immediately match the price cut to protect market share, resulting in minimal extra sales (inelastic demand). Hence, firms keep prices stable.

What economic index is calculated using the formula shown in this image, and what do its score ranges indicate?

The Herfindahl-Hirschman Index ($HHI = \sum_{i=1}^N s_i^2$). It measures market concentration by summing the squared percentage market shares of all firms. Scores range from near $0$ to $10{,}000$. A score below $1{,}500$ indicates an unconcentrated/competitive market, $1{,}500$ to $2{,}500$ indicates moderate concentration, and above $2{,}500$ indicates high concentration.

Why is an individual firm in perfect competition described as a "price taker"?

Because each firm supplies such a tiny fraction of total market output, and goods are homogeneous with perfect market knowledge, meaning any firm attempting to charge above the market price would lose all its customers.

How do supply price, transfer earnings, and economic rent differ?

• Supply Price: The minimum payment necessary to bring and keep a factor of production in use.
• Transfer Earnings: The minimum payment needed to prevent a factor of production from moving to an alternative employment.
• Economic Rent: Any surplus payment earned by a factor of production above its transfer earnings (or supply price).

What is the Marginal Revenue Productivity of Labour ($MRP_L$), and why does it represent a firm's demand curve for labour?

$MRP_L$ is the extra revenue generated by employing one additional unit of labour ($MRP_L = MPP \times MR$). Because a profit-maximising firm hires labour up to the point where the wage rate equals $MRP_L$, the downward-sloping $MRP_L$ curve dictates the quantity of labour demanded at each wage rate.

What economic concept does this curve illustrate, and why does it bend backward above wage rate W2?

The backward-bending individual supply curve of labour. Below $W_2$, the substitution effect dominates as higher wages incentivise working more hours over leisure. Above $W_2$, the income effect dominates as the worker earns sufficient income to live comfortably and prefers to sacrifice work hours to enjoy more leisure time.

What are the two primary characteristics of a public good, and what problem do they create?

Public goods are non-excludable (no one can be excluded from using them once provided) and non-rivalrous (one person's consumption does not reduce availability to others). These characteristics lead to the Free Rider Problem, where individuals benefit without paying, resulting in market failure and necessitating state provision.

In asymmetric information, how does adverse selection differ from moral hazard?

Adverse selection occurs before an economic transaction when one party has more private information about risk or quality than the other (e.g., high-risk people disproportionately buying insurance), whereas moral hazard occurs after a transaction when a party takes greater risks because they are insulated from the financial consequences (e.g., driving recklessly because of full car insurance).

How do merit goods and demerit goods differ in terms of market failure?

Merit goods are goods that are under-consumed in a free market because consumers undervalue their long-term private and external benefits (e.g., education, healthcare), whereas demerit goods are over-consumed because consumers underestimate their private and social costs (e.g., tobacco, alcohol).

What is the Expenditure Method formula for National Income ($Y$) in an open economy?

$$Y = C + I + G + (X - M)$$

• $C$ = Consumer Spending / Consumption
• $I$ = Investment by firms
• $G$ = Government Spending on goods and services
• $X$ = Exports
• $M$ = Imports

What are the leakages and injections in the Circular Flow of Income model?

• Leakages (withdrawals from the circular flow): Savings ($S$), Taxation ($T$), and Imports ($M$).
• Injections (additions to the circular flow): Investment ($I$), Government Spending ($G$), and Exports ($X$).

What is the formula for the Multiplier in an open economy with government?

$\text{Multiplier} = \frac{1}{MPS + MPM + MPT}$, where $MPS$ is the marginal propensity to save, $MPM$ is the marginal propensity to import, and $MPT$ is the marginal propensity to pay tax.

Why was Modified GNI ($\text{GNI}^*$) introduced in Ireland, and what distortions does it remove?

$\text{GNI}^*$ was created because multinational accounting practices heavily distort Irish GDP and GNI. It strips out three major distortions: intellectual property depreciation, aircraft leasing assets depreciation, and the profits of redomiciled PLCs.

What is the relationship between an annual budget deficit and the national debt?

A budget deficit occurs in a given year when government current expenditure exceeds current government revenue; the government borrows funds (by issuing bonds) to finance this shortfall, which directly adds to the cumulative total of the National Debt.

What are Adam Smith's Four Canons of Taxation (E.C.C.E)?

1. Equity: Taxes should be fair and assessed in accordance with a taxpayer's ability to pay.
2. Certainty: The tax liability, payment timing, and collection method must be clear and certain.
3. Convenience: The timing and method of tax payment should be convenient for the taxpayer.
4. Economy: The administrative cost of collecting the tax should be minimal relative to the revenue raised.

How do direct and indirect taxes differ, and how do their distributional effects typically vary?

Direct taxes are levied directly on income, wealth, or corporate profits (e.g., PAYE, Corporation Tax) and tend to be progressive (higher earners pay a higher proportion). Indirect taxes are levied on spending, goods, and services (e.g., VAT, Excise Duty) and are regressive because lower-income households spend a larger fraction of their income on them.

In taxation, what is the difference between impact and incidence?

The impact of a tax falls on the person or business legally responsible for paying the tax to the revenue authorities (e.g., the petrol company paying excise duty), whereas the incidence of a tax falls on the party who actually bears the real economic burden of paying it (e.g., the motorist facing higher fuel prices).

What is the difference between tax avoidance and tax evasion?

Tax avoidance is the legal organisation of financial affairs to minimise tax liability using deductions, reliefs, and loopholes within tax law, whereas tax evasion is the illegal and deliberate non-payment or underreporting of tax liabilities.

What are the five main types of unemployment (S.S.F.C.I)?

1. Seasonal: Fluctuations in labour demand associated with specific times of year (e.g., summer tourism).
2. Structural: Long-term mismatch between workers' skills and employer requirements due to industrial decline or technological change.
3. Frictional: Temporary unemployment as workers transition between jobs or enter the labour force.
4. Cyclical: Caused by a general deficiency of aggregate demand during an economic recession.
5. Institutional: Arising from obstacles to labour mobility, such as local housing shortages or benefit traps.

Why is the Labour Force Survey (LFS) preferred over the Live Register for measuring unemployment?

The Live Register overstates unemployment because it includes part-time workers, casual workers, individuals working in the shadow economy, and those signing on only for PRSI credits. The LFS uses standardised ILO definitions to count only those who are completely out of work, actively seeking employment, and available to work.

How do Demand-Pull and Cost-Push inflation differ?

Demand-Pull inflation occurs when total aggregate demand ($AD$) exceeds aggregate supply ($AS$) at full employment, pulling up price levels ("too much money chasing too few goods"). Cost-Push inflation occurs when rising production costs (e.g., higher wages, oil prices, raw material costs) are passed on to consumers in higher prices.

What is the formula for calculating the Real Interest Rate?

$$\text{Real Interest Rate} = \text{Nominal Interest Rate} - \text{Rate of Inflation}$$

What formula defines the maximum credit a commercial bank can create from a cash deposit?

$\text{Total Credit Created} = \frac{1}{\text{Reserve Ratio}} \times \text{Increase in Cash Deposits}$ For example, with a cash deposit of €$100$ and a reserve ratio of $10\%$ ($0.10$), total credit creation capacity is: $\frac{1}{0.10} \times 100 = €1{,}000$.

What three dimensions comprise the Human Development Index (HDI)?

1. Health: Measured by Life Expectancy at birth.
2. Education: Measured by Mean Years of Schooling and Expected Years of Schooling.
3. Standard of Living / Wealth: Measured by Gross National Income (GNI) per capita in Purchasing Power Parity (PPP\,\).

What demographic formula is depicted in this image, and what does a high ratio indicate?

The Dependency Ratio: $\text{Dependency Ratio} = \left(\frac{\text{Number of Dependents}}{\text{Working-Age Population}}\right) \times 100$. A high dependency ratio indicates that a large proportion of dependents (children and retirees) rely on the working-age population, placing pressure on public services, healthcare, pensions, and increasing the tax burden on workers.

What are the three main accounts that make up the Balance of Payments (BOP)?

1. Current Account: Visible trade (goods), invisible trade (services), net factor income from abroad ($NFIA$), and net current transfers.
2. Capital Account: Capital transfers (e.g., EU regional development funds) and acquisitions/disposals of non-produced, non-financial assets.
3. Financial Account: Direct investment (FDI), portfolio investment (shares/bonds), and official reserve assets held by the central bank.

What are the five main protectionist trade barriers summarised by the acronym Q-SEAT?

1. Quota: A physical limit on the quantity of a good that may be imported.
2. Subsidy: Government financial assistance to domestic firms to lower production costs and increase price competitiveness.
3. Embargo: A total legal ban on the importation of a particular good or trade with a country.
4. Administrative Barriers: Excessive paperwork, testing regulations, and bureaucratic red tape designed to restrict imports.
5. Tariff: A tax or customs duty added to the price of foreign imports.

How does David Ricardo’s Law of Comparative Advantage differ from Adam Smith's Absolute Advantage?

Absolute advantage means a country can produce more of a good using the same factor inputs than another country. Comparative advantage states that a country should specialise in producing the good in which it has the lowest opportunity cost (greatest relative efficiency) and trade for the remainder of its requirements, benefiting all trading nations.

What are the economic consequences for Ireland when the Euro appreciates against the US Dollar?

• Imports from the US become cheaper, increasing import volume and decreasing domestic inflation.
• Irish exports to the US become dearer, reducing export demand and competitiveness.
• Employment may fall in export-dependent manufacturing and tourism.
• Economic growth may slow down as net exports decrease.

What are the two headline fiscal rules set out by the EU Stability and Growth Pact (SGP)?

1. A member state's annual government budget deficit must not exceed $3\%$ of GDP.
2. A member state's total outstanding gross national debt must not exceed $60\%$ of GDP.