CIE AS Level Economics 9708

Choice

Choice

The need to make decision about the possible alternative uses of scarce resources due to scarcity

Issue of Market Transition

- Inflation
- Industrial unrest
- Fall in output
- Unemployment
- Balance of payments' deficit
- Reduction in welfare services

Production Possibility Curve

a curve measuring the maximum combination of outputs that can be obtained from a given number of inputs in an economy in a period of time

Factor Mobility

the ease by which factors of production can be moved around

Economic Growth

Is an expansion in the productive capacity in an economy

Money

Anything which is universally acceptable as a means of payment for goods and services

Functions of Money

- Medium of exchange
- Measure of value
- Standard for deferred payment
- Store of value

Characteristic of Money

- Acceptability
- Divisibility
- Portability
- Durability
- Scarcity
- Uniformity

Liquidity

Refers to the extent and ease of converting a non-cash asset into cash

Near Money

non-cash assets that can be quickly turned into cash

Rivalry and Excludability

Rivalry: refers to extent to which consumption limits availability

Excludability: refers to extent to which free-riders can be prohibited from consumption

Free-rider Problem

The problem of someone who consume a product without an incentive to pay for it

Merit / Demerit Goods

Is a product which has positive/negative externalities, but would be under/over consumed and produced in a market economy as a result of information failure

Information Failure (Imperfect Information)

Is a situation in which producers and consumers lack information needed to make rational decisions, causing inefficiency

Paternalism

Is a situation where society knows beast and has some right to make a value judgement

Price Elasticity of Demand (PED)

% change in quantity demanded / % change in price

Price Elasticity of Supply (PES)

% change in quantity supplied / % change in price

Income Elasticity of Demand (YED)

% change in quantity demanded / % change in income

Cross Elasticity of Demand (XED)

% change in quantity demanded of product X / % change in price of product Y

Functions of the price mechanism

Rationing: Scarce resources are divided among their competing uses according to what is demanded

Signaling: The price of a product reflects the market conditions and signals if producers should increase or decrease production

Incentive: Prices act as an incentive for both consumers and producers, low prices encourage consumers to purchase more and suppliers will leave the market due to low profit margins forcing the price back up, whilst high prices encourage producers to enter the market or produce more, increasing supply and pushing the price back down.

Buffer Stock

An amount of commodity held to limit price fluctuation

Ad valorem Tax

Tax on consumption, is paid as percentage of value of product

Specific Tax

Tax paid in fixed amount

Average Rate of Tax

The average percentage of total income that is paid in taxes

Marginal Rate

The proportional of additional income that is taken in income tax

Transfer Payment

A payment made or income received in which no goods or services are being paid for, such as a benefit payment or subsidy.

Means-tested and Universal Benefit

Means-tested: is paid to units whose income is below a level

Universal benefit: is paid to units without income reference

Poverty-trap

Is a situation in which an individuals has work-disincentive, as additional income will be taken away as taxes and lost benefits

Nationalization - Advantage and Disadvantage of Nationalization

Takeover of property or resources by the government

Advantage:
- Economies of scale
- Avoids wasteful duplication
- CBA (Cost-benefit Analysis) is involved
- Private monopoly prevented

Disadvantage:
- Inefficient
- Non competitive
- Political mileage
- SOE (State-owned Enterprise) monopoly

Privatization - Advantage and Disadvantage of Privatization

The transfer of a business, industry, or service from public (government own) to private ownership and control

Advantage:
- Economic efficiency
- Enterprise encourage
- Lower price
- Government revenue
- Growth by investment

Disadvantage:
- Private monopoly
- Wasteful duplication
- Unemployment
- Non regular funds
- Regulations needed

Government Failure

Occurs when the government intervention economic performance rather than increasing, thus failing to correct market failure, due to:
- Imperfect information
- Policy conflicts
- Political mileage
- Corruption

Aggregate Demand

Is the total spending on an economy's goods and services, at a given price level in a given time period. It consists of:
- Consumption (C)
- Investment (I)
- Government Expenditure (G)
- Net Exports (X-M)

AD= C + I +G + (X-M)

Inflation and Deflation

Is a sustainable increase/fall in general price levels in an economy over a given time period, causing fall/rise in purchasing power of a currency

Menu Costs and Shoe-leather Costs

Menu Costs: are incurred by firms having to change prices

Shoe-leather Costs: are incurred by firms moving money for high-interest

Cost-push Inflation

Is caused by increase in costs of production decreasing aggregate supply, e.g.
- Wages rising more than productivity
- Raw materials costs rising (especially imported ones)
- Increase in indirect/corporate taxes
- Rise in profit margins

Demand-pull Inflation

Is caused by increase in aggregate demand unmatched by equivalent rise in aggregate supply, e.g.
- Consumer boom
- Money supply growing faster than output (monetarist)
- Growing budget deficit
- Increase in net exports

Balance of Payment

Is a record of a country's economic transactions with the rest of the world over a year. It consists of:

Current Account:
- Visible trade in goods
- Invisible trade in services
- Income, e.g. profits, interest
- Current transfer (no exchange involved)

Financial Account
- Direct investment
- Portfolio investment
- Reserve assets
- Other investment

Capital Account
- Capital transfer
- Nonfinancial assets