Cambridge International AS & A Level Economics - Definitive Study Guide

HOW TO USE THIS RESOURCE SERIES

• Suite Overview: This resource suite supports learners and teachers for the Cambridge International AS & A Level Economics (9708) syllabus. All components are designed for international learners using clear language and style.
• Coursebook Features:     * Learning Intentions: Found at the start of each chapter to help with navigation and indicate important concepts.     * Economics in Context: Places key ideas into real-world contexts and raises issues for discussion.     * Key Terms: Vocabulary and formulae are highlighted on first introduction with accompanying definitions. Formulae are also found in a separate appendix; terms are in the glossary.     * Tips: Advice on avoiding common errors, essay-writing, evaluation, analysis, and how answers are derived.     * Key Concept Links: Explain integration with the core syllabus concepts.     * Activity: Includes short case studies with analytic/evaluative questions for individual or group work.     * Reflection: Questions to encourage thinking about the process of learning.     * Think Like an Economist: Applying principles to international current events and the world of work.     * Self-Evaluation Checklist:conf confidence rating statements at the end of each chapter.     * Exam-Style Questions: Multiple-choice questions (at the end of chapters) and data response/essay questions (at the end of units).
• Currency Note: Throughout the text, dollars ($) refer to US dollars unless stated otherwise.
• Command Words:     * Analyse: Examine in detail to show meaning/relationships. Guidance: Link points together, avoid unnecessary detail.     * Assess: Make an informed judgement. Guidance: Write about both sides and come to a supported conclusion.     * Calculate: Work out from given facts/figures. Guidance: Give a clear answer including units (e.g., $US$).     * Comment: Give an informed opinion. Guidance: Based on evidence, not unsupported opinion.     * Compare: Identify similarities/differences. Guidance: Ensure your answer actually compares, not just states.     * Consider: Review and respond. Guidance: Brief point containing some evaluation.     * Define: Give precise meaning.     * Demonstrate: Show how or give an example using evidence.     * Describe: State points of a topic; give characteristics.     * Discuss: Write about issues in depth in a structured way; balanced account of both sides.     * Evaluate: Judge quality, importance, or value; reasoned judgement with supported conclusion.     * Explain: Set out purposes/reasons; make relationships evident using evidence.     * Give: Produce an answer from recall/memory or a source.     * Identify: Name, select, or recognise with precision.     * Justify: Support a case with evidence/argument.     * Outline: Set out main points clearly, avoiding detail.     * State: Express in clear, uncomplicated factual terms.

UNDERSTANDING THE SUBJECT AND ASSESSMENT

• Value of Economics: Highly regarded by universities and employers. Economists help reduce unemployment, raise living standards, and combat climate change and poverty.
• Differences Across Levels:     * IGCSE/O Level vs. AS/A Level: AS/A Level involves more depth (e.g., measurement of unemployment vs. measurement difficulties) and breadth (new topics like consumer surplus and terms of trade). A Level puts significantly more emphasis on evaluation and less on mere knowledge/understanding.     * AS vs. A Level: AS serves as the foundation. Ch A Level involves more depth and real-world applications, especially in macroeconomics. A Level exams assume knowledge of the AS syllabus.
• Mathematical Skills Required: Numeracy, data interpretation, and diagram drawing.     * Specific tasks: Calculating percentage changes, ratios, averages, index numbers, using formulae, interpreting scatter diagrams, pie charts, line graphs, and bar charts.
• Assessment Objectives:     * AO1 Knowledge and Understanding: Recall facts, formulae, definitions; apply to written/numerical forms.     * AO2 Analysis: Examine issues using concepts/theories; interpret data to recognise patterns and cause-effect relationships.     * AO3 Evaluation: Recognise assumptions/limitations; assess strengths/weaknesses of arguments; communicate reasoned judgements.
• Key Concepts in Economics: Scarcity and choice; the margin and decision-making; equilibrium and disequilibrium; time; efficiency and inefficiency; the role of government and inequality/equity; progress and development.
• Essay Writing Skills:     * Plan the answer to ensure focus.     * Be clear and precise; avoid using 'I' or 'we' (write impersonally).     * One idea per paragraph; support statements (explain 'why' an increase in wages reduces poverty).     * Come to a supported conclusion when asked to 'assess', 'evaluate', or 'discuss'.

CH 1: SCARCITY, CHOICE AND OPPORTUNITY COST

• The Fundamental Economic Problem: Arises because resources (inputs) are scarce while people's wants are unlimited.
• Needs vs. Wants:     * Needs: Items required for survival (food, shelter, clothing).     * Wants: Desires that improve quality of life (luxury cars, personal jets, TVs). Wants expand as people saw others enjoying goods or through new experiences.
• Scales of Preference: Individuals rank more urgent wants at the top. This is influenced by culture, upbringing, and life experiences.
• Opportunity Cost: The cost of a choice expressed in terms of the next best alternative foregone. Example: If $15$ can buy one video game or two paperback books ($7.50$ each), buying the game has an opportunity cost of the two books.
• The Three Allocation Questions:     1. What to produce?: Choosing between consumer goods (food, clothing) or capital/military goods (national defence).     2. How to produce?: Deciding on production methods, such as intensive cultivation or cheap labour vs. moral objections.     3. For whom to produce?: Distribution of output (equal share vs. inequality based on wealth/inheritance).
• Case Study: African Healthcare Funding: WHO warns Africa bears $24 \%$ of global disease burden but governments spend only $1 \%$ of world financial resources on healthcare. Spending varies: Namibia/South Africa spend $10 \times$ more per head than Kenya/Tanzania and at least $20 \times$ more than Ethiopia/DRC.

CH 2: ECONOMIC METHODOLOGY

• Economics as a Social Science: Looks at human behaviour in relation to satisfying needs/wants. Uses scientific processes: observing trends, formulating hypotheses, testing with data. Theories are called models (simplified mathematical representations).
• Types of Statements:     * Positive Statements: Objective facts based on evidence (e.g., "The inflation rate in 2021 is 8%").     * Normative Statements: Subjective value judgements or opinions (e.g., "The inflation rate of 8% was the worst in 10 years").
• Ceteris Paribus: Latin for "other things remain equal". Used to isolate the effect of a single variable change.
• The Margin: Analyzing small changes in variables (e.g., one extra unit of output). Decision-making is based on choices at the margin.
• Time Periods:     * Short Run: Only some inputs (typically labour) can be changed.     * Long Run: All factors of production can change (e.g., building a new factory).     * Very Long Run: Factors like technology, regulations, and social concerns are also variable.
• Case Study: Interest Rate Models: Since 2008, rates were cut drastically (UK 0.25%, Japan $-0.1 \%$), but models predicting higher spending/investment often failed in reality.

CH 3: FACTORS OF PRODUCTION

• Definitions and Rewards:     1. Land: Natural resources (oil, coal, rivers, climate, soil). Reward: Rent.     2. Labour: Human resources. Quality (skills) and quantity (population size, women in workforce) matter. Reward: Wages.     3. Capital: Physical resources made by humans (machinery, infrastructure). Reward: Interest/Financial Return.     4. Enterprise: Organises other factors and takes risks. Reward: Profit.
• Human vs. Physical Capital:     * Physical Capital: Result of resources made by businesses/government (factories, roads).     * Human Capital: The value of labour's skills, knowledge, and experience in contributing to growth.
• Specialisation: Individuals or firms concentrate on specific tasks. Leads to higher living standards but risks skills becoming redundant. Requires exchange/trade to satisfy all needs.
• Division of Labour: Breaking production into tasks. Adam Smith noted pin-making (18 operations) could rise to $5000$ pins per employee/day vs. $50$ if done individually. Henry Ford’s conveyor belt (1920s) is a classic example. Can lead to worker dissatisfaction/boredom.
• Case Study: James Dyson: Engineer/Entrepreneur. Net worth over $5 \, ext{billion}$ in 2019. Success with bagless vacuums; failure with washing machines and electric cars (新加坡Singapore factory project abandoned).

CH 4: RESOURCE ALLOCATION IN ECONOMIC SYSTEMS

• The Market Economy: Resources allocated via demand/supply and the price mechanism. Government intervention is minimal. Hong Kong SAR is a near-perfect example.
• The Planned Economy: Government takes central role in all decisions. State-owned resources, production targets, and price controls (e.g., subsidised bread). Examples: Cuba, North Korea.
• The Mixed Economy: Both private and public sectors involve themselves. Privatisation (transferring resources from state to private) has been a global trend since the 1980s (e.g., Eastern Europe, Vietnam's Doi Moi reforms).
• Case Study: Vietnam: Moved from centrally planned to mixed. Economic growth reached $7.1 \%$ in 2018 and $6.6 \%$ predicted for 2019. Relies on exports like electronics and footwear.
• New Zealand: Ranked 3rd in Index of Economic Freedom (2019). Follows deregulation and privatisation policies since 1980.

CH 5: PRODUCTION POSSIBILITY CURVES (PPC)

• Definition: Shows the maximum level of output of two goods an economy can produce given current resources and technology. Also called the Production Possibility Frontier (PPF).
• Key Interpretations:     * On the curve: Efficient allocation of resources.     * Inside the curve: Inefficient allocation (wasted resources).     * Outside the curve: Unattainable/Scarcity position.
• Shape and Opportunity Cost:     * Straight Line: Constant opportunity cost (resources equally suited to both goods).     * Bowed/Curved Outwards: Increasing opportunity costs (resources not equally suited; more of one good must be sacrificed for each additional unit of the other).
• Movement Along the Curve: Represents a trade-off.
• Shifts in the PPC:     * Rightward Shift: Increase in productive capacity (more resources via net immigration, investment, or technological advance).     * Leftward Shift: Decrease in productive capacity (resource depletion, natural disaster).     * Pivotal Shift: Technological advance in only one industry (e.g., robots in car manufacturing).
• Low-Income Economy Choice: Allocating resources to consumer goods (meeting present needs) vs. capital goods (long-term growth). Sacrificing a small amount of consumer goods now (A to B) can lead to a shift in the PPC.

CH 6: CLASSIFICATION OF GOODS AND SERVICES

• Characteristics:     * Excludability: Others can be prevented from consuming (usually by price).     * Rivalry: Consumption by one reduces availability for others.
• Good Categories:     * Private Goods (Economic Goods): Both excludable and rival. Must be priced because resources are used and scarce.     * Free Goods: Zero opportunity cost, non-scarce (e.g., air, rainfall).     * Public Goods: Non-excludable and non-rival (e.g., lighthouses, national defence, street lighting).     * Quasi-Public Goods: Meet one characteristic in full and the other partially (e.g., toll roads, crowded beaches).
• Problems with Public Goods: The Free Rider Problem (consuming without paying) means the free market may not provide them at all, requiring government funding through tax.
• Merit and Demerit Goods:     * Merit Goods: Desirable but underprovided/underconsumed due to Information Failure (consumers don't realize the full benefit) or low income (e.g., education, healthcare).     * Demerit Goods: Undesirable but overprovided/overconsumed due to information failure or addictive properties (e.g., cigarettes, junk food, high-sugar drinks).
• Role of Information: Information failure occurs when packaging is misleading, advertising is too persuasive, or producers know more than consumers.

CH 7: DEMAND AND SUPPLY CURVES

• Effective Demand: The quantity of a product buyers are willing and able to buy at a given price, ceteris paribus. Notional demand is just the desire to buy.
• Demand Curve (D): Shows an inverse/negative relationship between price and quantity demanded.     * Movement Along D: Caused only by a change in the price of the product (Extension/Contraction).     * Shift in D: Caused by non-price factors:         * Income: Demand for Normal Goods rises with income; demand for Inferior Goods (e.g., low-grade rice) falls as income rises.         * Related Products: Substitutes (alternative items) and Complements (jointly demanded items).         * Fashion, Taste, and Attitudes.
• Supply (S): Quantity producers are willing and able to sell at different prices.
• Supply Curve (S): Shows a positive/direct relationship between price and quantity supplied.     * Movement Along S: Caused by a change in price.     * Shift in S: Caused by non-price factors:         * Costs of Production: Wages, productivity, energy costs.         * Size/Nature of Industry: Number of firms.         * Related Goods Prices.         * Government Policy: Indirect taxes (shift left) or subsidies (shift right).         * Other: Weather in agricultural markets.

CH 8: DEMAND ELASTICITY

• Price Elasticity of Demand (PED): Measures responsiveness of quantity demanded to a price change.     * Formula: $PED = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$     * Values: $0$ (Perfectly Inelastic); $< 1$ (Inelastic); $1$ (Unitary); $> 1$ (Elastic); $\infty$ (Perfectly Elastic).     * Determinants: Availability of substitutes (number/closeness), relative expense (proportion of income), time period (short vs. long run), habit-forming nature.     * Revenue Link: If inelastic, price rise increases total revenue ($TR$). If elastic, price cut increases $TR$.
• Income Elasticity of Demand (YED): Responsiveness to income change.     * Formula: $YED = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}}$     * Signs: Positive (Normal good: Necessity $0-1$, Luxury > 1); Negative (Inferior good).
• Cross Elasticity of Demand (XED): Responsiveness of good A demand to price change of good B.     * Formula: $XED = \frac{\% \text{ change in quantity demanded of A}}{\% \text{ change in price of B}}$     * Signs: Positive (Substitutes); Negative (Complements); Zero (Unrelated).

CH 9: PRICE ELASTICITY OF SUPPLY (PES)

• PES Definition: Responsiveness of quantity supplied to a price change. Formula: $PES = \frac{\% \text{ change in quantity supplied}}{\% \text{ change in price}}$. Always positive.
• Determinants:     * Availability of Stocks: Easer storage allows elastic supply.     * Time Period: In the short run, supply is often inelastic (especially for agriculture); in the long run, productivity capacity can be expanded.     * Productive Capacity: Spare capacity makes supply more elastic.
• Agriculture vs. Manufacturing: Agriculture PES is often inelastic due to long growing seasons and external shocks (weather, climate change). Manufacturing is more flexible/elastic.

CH 10: INTERACTION OF DEMAND AND SUPPLY

• Equilibrium: Where $Q_d = Q_s$. The market "clears".
• Disequilibrium:     * Excess Supply: Price too high; stocks build up; firms cut prices.     * Excess Demand: Price too low; stocks run out; firms raise prices.
• Special Market Relationships:     * Derived Demand: Demand for factor inputs (like labour) depends on demand for the final service (e.g., hotel tourism).     * Joint Supply: Two goods produced together (e.g., soya beans for humans and animal feed residue).
• Functions of Price:     * Rationing: High prices limit demand for exclusive items.     * Signalling: Prices relay preferences from consumers to producers.     * Incentive: Low prices encourage buyers; high prices encourage suppliers.

CH 11: CONSUMER AND PRODUCER SURPLUS

• Consumer Surplus: Difference between what a consumer is willing to pay and the market price. Represented by the area below the demand curve and above the price line.
• Producer Surplus: Difference between the price a producer is willing to accept and what they actually receive. Represented by the area above the supply curve and below the price line.
• Total Benefit: Sum of consumer and producer surplus represents net society benefit.
• Impact of Price Changes: A price fall increases consumer surplus but may decrease producer surplus. Extent depends on PED and PES.

CH 12-13: GOVERNMENT MICROECONOMIC INTERVENTION

• Market Failure: Inefficient allocation where price mechanism fails to account for all costs/benefits.
• Reasons/Methods:     * Public Goods: Non-provision by market; government funds via tax.     * Merit Goods: Underconsumed; government provides free or subsidised (education, healthcare).     * Demerit Goods: Overconsumed; government bans (smoking bans) or imposes taxes.     * Price Controls:         * Maximum Price (Price Ceiling): Set below equilibrium to help low-income households (staple foods, rent). Leads to shortages and potential black markets.         * Minimum Price (Price Floor): Set above equilibrium to protect producer income (agriculture) or workers (minimum wage).     * Indirect Taxes: Shift S-curve left.         * Specific tax: Fixed amount per unit.         * Ad valorem tax: Percentage of price (VAT/GST).         * Tax Incidence: Extent to which consumer vs. producer bears the burden depends on PED. If inelastic, consumers pay most.     * Subsidies: Direct payments to producers; shift S-curve right. Reduces price and increases quantity. shared benefit between consumers/producers.     * Buffer Stock Schemes: Buying stocks when prices are low and selling when high to smooth volatility in agricultural markets.

CH 14: ADDRESSING INCOME AND WEALTH INEQUALITY

• Income vs. Wealth:     * Income: Flow concept; rewards for factors of production (wages, rent, interest, profit).     * Wealth: Stock concept; assets accumulated over time (property, shares, gold).
• Gini Coefficient: Measure of inequality. $0 = ext{perfect equality}$; $1 = ext{total inequality}$. Sample data: South Africa ($62.5 \%$), Australia ($30.3 \%$).
• Redistribution Policies:     * Minimum Wage: Prevents exploitation but may cause unemployment (Q_s > Q_d at wage $W_1$).     * Transfer Payments: Welfare (pensions, unemployment benefit) funded by tax.     * Progressive Taxes: High income earners pay a higher percentage. Marginal rate of tax ($mrt$) > average rate ($art$).     * Regressive Taxes: Lower percentage as income rises (e.g., indirect taxes).     * Proportional Taxes: Fixed percentage (Flat rate).

CH 15: NATIONAL INCOME STATISTICS

• Gross Domestic Product (GDP): Total value of output produced within a country in a year.
• Gross National Income (GNI): GDP + Net property income from abroad (profits, interest, dividends) + net compensation of employees + net taxes/subsidies.
• Net National Income (NNI): GNI minus Depreciation (Capital Consumption).
• Methods of Measuring GDP:     1. Output Method: Sum of value added at each stage of production. Avoids double counting.     2. Income Method: Sum of wages, rent, interest, and profit. Excludes transfer payments.     3. Expenditure Method: $C + I + G + (X - M)$. Excludes transfer payments.
• Price Adjustment:     * Market Price: Includes indirect taxes, excludes subsidies.     * Basic Price (Factor Cost): Market Price minus Taxes + Subsidies.     * Real GDP: Nominal GDP adjusted for inflation using a GDP Deflator.     * Formula: $Real \, GDP = nominal \, GDP \times \frac{\text{price index in base year}}{\text{price index in current year}}$

CH 16: CIRCULAR FLOW OF INCOME

• The Model: Shows real flow of products/factor services and money flow of spending/income.
• Open vs. Closed Economy:     * Closed: No international trade. Two-sector (Households/Firms) or restricted.     * Open: Includes international trade.
• Leakages (Withdrawals): Saving ($S$), Taxation ($T$), Imports ($M$).
• Injections: Investment ($I$), Government Spending ($G$), Exports ($X$).
• Equilibrium: $I + G + X = S + T + M$. If injections > leakages, national income rises.

CH 17: AGGREGATE DEMAND (AD) AND AGGREGATE SUPPLY (AS)

• AD Components: Consumption ($C$), Investment ($I$), Government Spending ($G$), Net Exports ($X - M$).
• AD Shape: Slopes down due to wealth effect, international effect, and interest rate effect.
• AD Determinants: Disposable income, interest rates, confidence, wealth, exchange rates, foreign incomes.
• Aggregate Supply (AS):     * Short-Run (SRAS): Upward sloping; input prices fixed. Moves with costs (wages, raw materials).     * Long-Run (LRAS):         * Keynesian: Perfectly elastic at low output, then vertical at full capacity. Economy can settle below full capacity.         * New Classical: Vertical at full capacity; economy always moves back to LRAS in long run.
• LRAS Shifts: Caused by changes in quantity/quality of resources (immigration, retirement age, investment, technology, education).

CH 18: ECONOMIC GROWTH

• Definition: Increase in an economy's output (Real GDP).     * Development: Process of improving economic well-being and quality of life (distinct from growth).
• Actual vs. Potential Growth:     * Actual: Movement from inside a PPC towards the curve (utilising spare capacity).     * Potential: Shift of the PPC to the right (increased capacity).
• Causes: Natural increase in population, net immigration, investment, discoveries of resources, technology, skills.
• Recession: Decline in Real GDP for two consecutive quarters (six months).
• Costs/Benefits:     * Benefits: Higher living standards, more tax revenue to help poor, higher employment.     * Costs: Opportunity cost of capital vs. consumer goods, depletion of resources, pollution, structural unemployment, stress.

CH 19: UNEMPLOYMENT

• Definition: Willing and able to work but cannot find a job.     * Labour Force: Employed + Unemployed.     * Unemployment Rate: $(\frac{\text{Unemployed}}{\text{Labour Force}}) \times 100$.
• Measures:     * Claimant Count: Those registering for benefits. Cheat to collect but may omit those not eligible.     * Labour Force Survey (ILO): Based on survey data; internationally comparable. Available for work in 2 weeks, seeking in last 4.
• Types of Unemployment:     * Frictional: Between jobs (Search, Casual, Seasonal, Voluntary).     * Structural: Mismatch of skills or location (Regional, Technological, International).     * Cyclical (Demand-Deficient): Caused by a general lack of AD.
• Underemployment: In part-time jobs when full-time wanted, or jobs not matching talents.

CH 20: PRICE STABILITY (INFLATION/DEFLATION)

• Definitions:     * Inflation: Sustained rise in general price level. Value of money falls.     * Hyperinflation: Inflation > 50 \% per month.     * Deflation: Sustained fall in price level.     * Disinflation: Fall in the rate of inflation (prices still rising, but slower).
• CPI Calculation: 6 stages (Spending survey, Basket selection, Weights, Price survey, Calculate index, Calculate average change).
• Causes of Inflation:     * Demand-Pull: AD increasing faster than AS (closer to full capacity).     * Cost-Push: Higher production costs (wages, raw materials, fall in exchange rate).
• Consequences of Inflation: Menu costs, shoe-leather costs, fiscal drag, uncertainty (discouraging investment), inflationary noise/money illusion, wage-price spirals.
• Deflation: "Good" deflation (AS shift right - technology); "Bad" deflation (AD shift left - recession).

CH 21-24: MACROECONOMIC INTERVENTION

• Macro Policy Objectives: Price stability (inflation targets), low unemployment, economic growth.
• Fiscal Policy: Spending ($G$) and Tax ($T$). Expansionary (target AD rise) vs. Contractionary (target AD fall).     * Automatic Stabilisers: Tax revenue and benefit spending that changes automatically with GDP.
• Monetary Policy: Managing interest rates, money supply, exchange rates, and credit regulations. Expansionary (cut interest, raise supply) vs. Contractionary (raise interest, cut supply).     * Islamic Finance: Compliance with Sharia; bans interest ($riba$) and excessive risk; risk-sharing models.
• Supply-Side Policy: Targets AS/Capacity. Tools: Training, infrastructure, IT support, tax cuts for firms, deregulation. Aim for non-inflationary growth.

CH 25-29: INTERNATIONAL ECONOMICS

• Trade Theories:     * Absolute Advantage: Producing more with same resources.     * Comparative Advantage: Producing at lower opportunity cost. Benefits both even if one is inefficient in all goods.
• Terms of Trade (TOT): $(\frac{\text{Index of Export Prices}}{\text{Index of Import Prices}}) \times 100$. Improvement (rises) vs. Deterioration (falls).
• Protectionism Tools: Tariffs, Quotas, Subsidies, Embargoes, Red Tape, Exchange Control.     * Arguments For: Infant industries, sunset industries, strategy (food/fuel), anti-dumping.
• Current Account Components: Trade in Goods, Trade in Services, Primary Income (dividends/interest), Secondary Income (remittances/aid).
• Exchange Rates: Price of one currency in terms of another.     * Floating: Determined by market supply/demand.     * Changes: Appreciation (Value rises), Depreciation (Value falls).     * Impact of Depreciation: Exports cheaper, imports dearer; improves current account (if demand elastic); raises AD, risks inflation.
• Policies for Balance of Payments: Contractionary fiscal/monetary to cut import spend; Supply-side to gain competitiveness; Protectionism to limit imports.