Econ Note For A Level

Economics
Revision Note
Tua 11SK
Mr.Phillpot Shrewsbury International School 2012-2013
Tua 11SK Subject:Economics Shrewsbury International School1
Table of
Contents
Basic Economic Problem
What are factors of production?
Type of goods 1
Opportunity Cost
Resources Allocation 1
The Allocation of Resources1

3 Types of markets
Market Failure1
How markets work? 1
Demand
Supply 1
Equilibrium
Tax&Subsidies1
Price Elasticity of Demand (PEd)
Price Elasticity of Supply (PEs)
Social Costs and Benefits
The Individual as Producer, Consumer,Borrower
Money 1
Financial Institute
Central Bank 2
Occupation
Specialization 2
Trade Unions 2
Spending, Saving, Borrowing2
The Private firm as Producer and Employer 2

Types of Business Organization
Sector of Production 2
Cost
Firms Growth 2
Economies of Scale
Competition
The Role of Government in an Economy

Macro Economics
Fiscal Policy
Monetary Policy
Tax
Disposable Income
Economics Indicator 2
Inflation
Types of Inflation
Unemployment
Output and Growth
The Economic Cycle 2
Developed and Developing Economies 2

Developed and Less Developed Economies 2
Population
Basic Economic
Problem
What are factors of production?
Land- all natural resources used in production
Labour- production effort product by people
Capital- human made resources used in production like tools,
machinery, buildings.
Entrepreneur- Person who manage firm to produce goods or services
Type of goods
Durable consumer goods- good that can be use for a long type like
cars, computers.
Non-durable consumer goods- goods that are used up quickly such
as food, drink and cosmetic.
Consumer services- personal services like hair dressing, dentistry.
Capital goods- goods that are used by firms to produce other goods
and services. Eg. Shop, office and factory.
Semi-Finished goods- goods that are used to make other goods or
services e.g.. material.
Opportunity Cost
A decision to use resources one way is the benefit foregone from
their next best or highest valued alternative use.For example,
instead of doing economics revision note I could be preparing for my
mathematics, C1 exam.
Resources Allocation
Choosing how best to use scarce resources. For example, allocating
more productive resources to the production, military equipment will
mean fewer resources are available to produce cars.
The Allocation of
Resources
3 Types of markets
Free market economy are economy where there is no role of
government and therefore no taxes or government spending.
However, in reality, all market economies have a government that
will also decided how best to allocate some scarce resources.
Mixed market economy are market that consist between both private
and public sector. The amount of goods and services provided by the
public sector can vary greatly between different national economies.
Planned economy is economy where government owned or
controlled the vast majority of scare resources and determined what,
how and for whom goods and serves were produced. There were no
private firms in these economies many years ago and very little
consumer choice.
Market
Economy
Mixed
Economy
Who decided
Produces and
Producer,
what and how
consumers
consumers and
to produce?
Planned
Economy
Government
government
Market
Economy
Who owns or
Private Sector
controls most
Mixed
Economy
Private and
Planned
Economy
Government
Public Sector
scarce
resources?
How are
Firms used
Same as
Government
resources
market price
market
will produce
allocation
signals to know economy but
decision made? what goods
from what they
the
think the
and services
government
market need.
consumers
also provides
want and will
some goods
make profit,
and services to
those in
greatest need.
Who are goods
Consumers
Same as
For everyone in
and services
with the
market
the market
for?
greatest ability
economy but
to pay for them the

government
also provides
some goods
and services to
those in
greatest need.
Market
Economy
Mixed
Economy
Planned
Economy
Main
Variety of
Same as
Everybody will
advantages
goods and
market
get the same
services
economy.
amount of
available
goods and
services and
will create
equality.
Main
Harmful goods
Same as
No choice of
disadvantages
will be
market
goods and
available to
economy but
services to
buy
government
choose.
can intervene.
Market Failure
Market failure occurs when markets fail to produce goods and
services that are worthwhile and when markets result in wasteful or
harmful activities. But in mixed economy government can come in
an intervene in the markets, they can organize resources to provide
goods and services and create law to control harmful activities.
How markets can fail
How a government can

intervene
Only goods and services that
It can produces merits goods
are profitable to make will be
such as education and health
provided. For example, a
care for people, regardless of
market economy will not
their ability to pay for them,
provide education or health
because all the economy will
care for people who cannot
benefit from having a health
afford to pay for these
and educated population.
services.
Other services such as street
It can provide public goods,
lighting, sea and flood
such as street lighting, sea
references and national
and flood defenses and
parks, will not be provided:
national parks, that would
firms would be unable to
otherwise be unprofitable for
charge customers a price
private sector firm to provide.
according to how much they

use them or benefit them.
Harmful goods, such as
Laws can make the production
dangerous drugs and
of harmful goods illegal, and
weapons, may be produced
high taxes can be put on
and be freely available to
specific items such as alcohol
consumers who want to buy
and cigarettes to reduce the
them.
consumption.
Resources will only be
The public sector can employ
employed if it is profitable to
people who otherwise be
do so. Some people who are
unemployed and provide
willing and able to work may
welfare benefits and
be left unemployed and
payments to people out of
without an income.
work or on low incomes.
How markets can fail
How a government can

intervene
Some producers may ignore
Laws and regulations can
the harmful effects of their
protect the natural
production on the
environment and peoples
environment or peoples
health and safety. Firms may
health.
have to pay large fines if their

activities break these laws.
Some firms may be dominate
Monopolies can be regulated
the supply of a particular
to keep their prices down or
good and service and will
be broken up into smaller
charge consumers very high
firms to increase competition
prices. These firms are
and choice.
described as monopolies.
How markets work?
In the market their is demand and supply. Effective demand are
demand that consumers willing and able to but that particular
product. There are some products that are compliment to other
products we call these joint demand.
Demand
The amount that an individual or individuals are willing to buy at any
given price. As price rises demand decrease. It is possible that demand
may change for reasons other than price
DEMAND INCREASES IF (Thai Airways)
1. The good or service becomes more popular
2. Increase in advertising on the good or service
3. Other substitute goods (e.g. Singapore Airline) increase in price
4. Improvement in quality
5. People have larger incomes
DEMAND FALLS IF
1. The good or service becomes less popular

2. Decrease in advertising on the good or service
3. Other substitute goods fall in price
4. Fall in quality or a health scare
5. People have smaller incomes
Supply
The supply of a good or service is the total quantity supplied by all
produces of that products. As price of goods or services the supply
will increase because firms want to get their maximum profit.
It is possible that supply may change for reasons other than price
INCREASE IN SUPPLY OF A GOOD
1. Cheaper raw materials (more profitable)
2. More efficient production
3. Better productivity
4. New technology
DECREASE IN SUPPLY OF A GOOD
1. More expensive raw materials (less profitable)
2. Less efficient production
3. Poor productivity
4. Poor weather / harvest
Equilibrium
Both demand and supply when they are equal the market will reach
the point call Equilibrium but when it doesnt equal to each other it is
called Disequilibrium.
When there is excess demand the price need to increase to bring the
demand for that goods or services down.
When there is excess supply the price need to decrease to bring up

the demand to reach equilibrium.
Tax&Subsidies
Tax on goods and services will increase the price of that goods or
services. This will result in shifting the supply curve inward because
it is more expensive to produce so producer are likely to supply less.
Subsidy will be a advantage or money that is given to a certain firm

by government to encourage them to produce more goods and
services. This will reduce their cost of production and they will likely
to supply more.
Price Elasticity of Demand (PEd)

PEd measures the responsiveness of demand of a change in price.
PEd= % change in quantity demand/ % change in price
If PEd is greater than 1 it is elastic but lass than one is is in elastic.

If PEd=0 it is called perfectly price in elastic, demand remain
constant at
whatever price.
If PEd= it is
called Infinitely price
inelastic, there is
unlimited demand
but only at one

If PEd=1 it is called
remains constant at
price.
Unitary elastic, revenue
every possible price.
Price Elasticity of Supply (PEs)

PEs measures the responsiveness of supply of a change in price.
PEs= % change in quantity supply/ % change in price

If PEs is greater than 1 it is elastic but lass than one is is in inelastic.
Social Costs and Benefits
External Cost- When the economic activities of one group have a
negative impact on others and when that impact is not taken into
account or paid for by those creating it.
External Benefit- When the economic activities of one group have a
positive impact on others and and that impact is not taken into
account or paid by those who benefit.
Social Cost--The total economic cost of an activity to a society,
including private costs incurred by firms and consumers undertaking
the activity and external costs affecting those not directly involved in
the activity.
Social Benefit- The total economic benefit of an activity to a society,
is the sum of its private benefits and external benefits.
Government can use Taxes, subsides and Laws and regulation to
control external costs and benefits.
The Individual as
Producer,
Consumer,Borrower
Money
Functions of Money
A widely accepted medium of exchange
A reliable measure of value
A good store of value
A means of deferred payment
Characteristics of a good money
Acceptable
Durable
Portable
Divisible
Scarce
Type of Money
Cash, Financial Assets, Bang Deposits, Physical Assets
Financial Institute
Commercial Bank, Credit Unions, Investment Bank, Islamic Banks(no
interest rate but charges fees)
Their services:
1. Keep money safely for customers
2. Help customers make payments (through cheques and cards)
3. Lend money to customers
4. Sell other products e.g. insurance, share dealing.
Central Bank
Issuing new notes and coins for the nations currency
Managing payments to and from the governments account
Stabilizing the value of the national currency on the foreign

exchange market.
Managing the stock of government borrowing(The national

debt)
Supervising the banking system, regulating the conduct of

banks, holding their deposits and transferring funds between them.
Lender of last resort or lending money to banks to prevent

them going bankrupt if they run short of money.
Operating the government monetary policy.
Occupation
Most people supply their labour to earn an income. They choose
different jobs or occupations depending on the wage or salary they
offer and also depending on non-wage factors.
Non-wage factors include:

Hours of work
Flexible working
arrangements
Holiday Entitlement
Good working
environment
Promotion prospects
Distance or travel time to

work
Training provision
How secure the job is
Pension entitlement
access to a company at
Specialization
Advantages
Disadvantages
Employees can make best use
Doing the same job or repetitive
their particular talents and skills
tasks can become boring and

stressful
Employees can increase their
Individuals must rely on others
skills and experience by
to produce goods and services
repeating tasks.
they want but cannot produce

themselves
Employees can produce more
Many repetitive manual tasks
output and reduce business
can now be undertaken by
costs if they concentrate on the
computer-controlled machinery
same job or tasks.
and robots. This has led to many

low skilled workers being made
unemployed
Advantages
Disadvantages
More productive employees can

earn higher wages.
Trade Unions
AIMS OF TRADE UNIONS
To increase the wages of their members
To improve their working conditions
To agree a certain number of hours to be worked each week
To support members who have problems with managers
To get extra benefits for workers e.g. pensions
HOW DO THEY GO ABOUT IT?
- Negotiations with managers i.e. general discussions
- Industrial action e.g. strike
- Help and pay to represent workers in court or legal battles
Advantages and Disadvantages of strike
Advantage
- Has an immediate effect as production halts e.g. trains stop
running if the drivers strike
- Businesses suffer and have to take notice
- May get coverage on TV or in newspapers.
DisAdvantage
- May cause anger from the general public e.g. train passengers
- Workers dont get paid when on strike
- Notice has to be given otherwise it is illegal
Overall the effect will probably depend upon:
The % of the workforce willing to strike
- The support of the general public

- The strength of the management to battle it out
Spending, Saving, Borrowing
Disposable Income- The amount of income a person has left to spend
after deducted by income tax.
People save money to use in their future, more people tend to save
more when the interest rate is higher because they will get more
money if they save.
People borrow money to buy things or to pay for things when they
dont have enough money, people tend to borrow more money when
the interest rate is low because they will have to pay back cheaper
to their lender.
The Private firm as

Producer and
Employer
Types of Business Organization
A Sole Trader- A business owned and controlled by one person
A Partnership- An agreement between a group of people to run a
business and share profits.
Sole traders and general partners in a partnerships have an
unlimited liability to repay any business debts that their business
fail.
Private Limited Company- can only sell shares to people
recommended by existing owners.
Public Limited Company- can shares publicly on the stock market
shareholders in a limited company will elect a board of directors to
manage their business.
Shareholders in a limited company have limited liability and will only
lose the money they invested in their business if it fails.
Multinational- A global corporation with business operations in more
than one country.
Public Company- Responsible for running a business organization
owned by and accountable to government.
Sector of Production
Primary Sector- farming, mining, produces natural resources.
Secondary- include all manufacturing industries and construction.
Tertiary- Produce and supply service.
Labour Intensive- Organization will employ more labour than capital

equipment and machinery.
Capital Intensive- Organization will employ more capital equipment
and machinery and relatively few workers.
Productivity-- Measures the amount of output or revenue produced
by a given amount of labour, capital and/or materials. Productivity
will increased if: more output or revenue is produced from the same
amount of resources, the same output or revenue can be produced
using fewer resources.
Cost
Fixed Costs
Variable Cost
Costs that do not vary with the
Costs that vary with the level of
level of output
output.
Rent
Purchase of materials
Loan repayment
Purchase of component parts
Cleaning
Electric
Insurances
Wage
Total Fixed Cost = the sum of all fixed costs

Total Variable Cost = variable cost X output
Total Cost = Total fixed cost + Total variable cost
Average Cost per Unit of Output = total cost/total output
Average costs tend to fall as output rises because fixed costs are
spread over a larger output.
Total Revenue - price per unit X quantity sold

Average revenue per unit sold = total revenue/quantity sold

Total Revenue - Total Cost = O = Break-even
Firms Growth
Internal Growth
This means that it grows without joining with another business. It
could
build new premises
take on more employees
External Growth
In this case it has some involvement with another business
Merger
Two firms join together and have equal ownership e.g. Lloyds and
TSB merge to create Lloyds TSB bank.
Horizontal Integration
Two businesses at the same stage of production
e.g. 2 table-makers join together
Forward Vertical Integration

A business takes over or merges with a businesses at the next stage

of production
e.g. table maker joins with a shop
Backward Vertical Integration

A business takes over or merges with a business at the previous
stage of production
e.g. a table maker joins with a tree cutter
Takeover
One firm takes over another firm and has the ownership of that
business. It is probably against the wishes of the other business. e.g.
Lloyds could takeover TSB. It would probably still be called Lloyds
but it would also own TSB.
Benefits of Growth
Increased profits
Increased market share
Gain new ideas from the other business
Avoid having to compete with the other business
Gain from economies of scale (page)
The new business may not need all of the workers. They could
remove some workers to become efficient and make more profit
Problems of Growth
To the businesses
There may be two sets of managers who are unable to agree on
the best direction for the company. This could cause many problems.
The businesses may have different objectives and targets
It costs a lot of money to merge with or takeover another business
To customers
Possibly less choice in the market and possibly higher prices to pay
To workers
Possible job losses and job insecurity
Economies of Scale
The benefits gained from producing on a large scale. It usually

means that the average cost of making a good is lowered.
Example
If a shirt manufacturer in Bangkok produced more shirts it should see
a fall in its average costs per shirt. If it only produces 1 shirt it still
has to pay its rent, managers, bills etc.
Number of shirt
1
100
1,000
Total Cost ()
1,000
30,000
100,000
Average Cost
1,000
300
100
As a number of the costs are fixed it is beneficial to produce on a

larger scale.
This means the firm can either a) reduce its price or b) keep the
same price and make more profit
Types of Economies of Scale
Think
of
the
advantages
that
Harrods
has
over
small,
independently-owned shopping centre near you

MANAGERIAL Employ specialist managers e.g. accountants.
FINANCIAL Easier to get a loan from the bank
DIVERSIFY Sell a range of products. Reduces the risk of failure.
ADVERTISING They can afford to advertise nationally on TV
BULK BUYING This is cheaper per good for the business
MASS PRODUCTION Helps spread fixed costs (page)
Diseconomies of Scale
These are the problems faced by businesses if they become too
large
Lose touch with the customers
Managers lose touch with the workers

Communication problems because the business is so large
Competition
2 Types of Competition
Price Competition- involves firms using price strategies to attract
customers from rival producers.
Non-Price Competition- includes offering better quality products than

rival firms, improving customer services, free gifts with purchases or
by using persuasive advertisement.
Pricing Strategy
Penetrating pricing
Description
Setting price low to encourage sales. This
maybe important for a new firm or an
existing firm trying to attract demand for a
new product.
Expansion pricing
Setting price low to expand demand for an

existing product. As demand rises, firms can
increase their scale of production and reduce
average costs.
Market skimming
Initially charging at high price for a new

product to maximize profit from those
consumers willing to pay more to be among
the first to buy the product. This strategy is
often observed in the market for new
consumer electronic goods.
Price Leadership
When smaller firms set their prices at a

similar level to a larger firm. This can help
avoid aggressive price competition and price
wars with larger firms.
Predatory pricing
Aggressive price cutting by a large dominant

firm intended to drive smaller competing
firms out of business because they have
higher costs and will be unable to match the
price cuts. Once the competition has been
removed the large firm is able to raise prices
again.
How can we measure competition for a particular good or service?

I.
Market share of total quantity traded or total sales revenues
II.
Do firms able to to influence market price as know as price

makers.
Oligopoly
When a smaller number of firms
Pure Monopoly
A firm that controls the entire
dominate the market supply of a market supply of a good or

good or service.
service.
To avoid price wars firms may
A monopoly may use predatory
act together to maximize their
pricing and other artificial
profits, setting market price high barriers to entry to force

by restricting their combined
competing firms out of their
market supply, This is called
market.
price collusion.
A cartel is a formal agreement
between firms to control market
supply or price.
Other firms may also be

deterred from competing with a
monopoly because they will be
They may create barriers to
unable to match its size in terms
market entry together to deter
of its capital employed and/ or
competition from new firms.
market share.
Large firms may abuse their market power by restricting market

supply to force up the market price and earn more profit. These are
called abnormal profit or excess profits because they will be much
higher than they would be if the market was competitive.
Oligopolies and Monopolies Disadvantages:
Higher price than competitive market because they can push

up the price.
Less choice for consumer
Lower product quality
X-inefficiency,
higher
production
costs
because
poorly
managed, Due to no competition so less incentive to reduce costs.

Government can use laws and regulations to prevent restrictive
practices to deter competition.
The Role of
Government in an
Economy
Macro Economics
Objective of government:
Low and stable price inflation
A high and stable level of employment
Economic growth and prosperity
A favorable balance of international payment
Economics Growth
This is measured by the yearly change in Gross Domestic Product
(GDP). It is usually expressed as a % change.
Example Year 1 Tinseltown produces 1,000 worth of goods
Year 2 Tinseltown produces 1,100 worth of goods
Economic growth would be 10%
It (GDP) can be measured in 3 ways. Each is identical
The total production (output) of all businesses
The total incomes and profits in the country
The total of all spending by individuals and businesses
What causes economic growth?
Anything which allows the country to produce more goods and

services.
More business investment * Better productivity
Better machinery * Improved training
Better skills * New technology
New ideas * Increased efficiency
Costs and benefits of economic growth
Benefits: More income for society, Should create jobs, Could reduce
the number of poor people, More goods produced and probably more
choice for customers and businesses, Higher standard of living, Free
good factor in society
Costs: Extra production could cause extra pollution, Exhaustion of
non renewable resources like oil, Only the rich may gain the benefits
The poor stay poor and inequality increases, Greater stress on
workers to produce more goods
Adding the circular flow and the economic activity
- Businesses may invest money into new equipment or new
factories. This allows extra production to take place.
- The Government may spend 100 on a roadbuilding project. This
creates economic activity
- An export is a sale of a good or service to a foreigner. This brings
money into the economy.
Lowering the circular flow and the economic activity
Savings mean that people are not spending money on goods and
services
Taxes are taken out of peoples and businesses incomes. This money
cannot be spent on goods and services.
Imports are purchases from abroad. The money leaves the country
The economy tends to experience different trends. These can be
categorized as the trade cycle and may feature boom, slump,
recession and recovery
BOOM: A period of fast economic growth. Output is high due to
increased demand, unemployment is low. Business confidence may
be high leading to increased investment. Consumer confidence may
lead to extra spending.
SLUMP: A period when output slows down due to a reduction in
demand. Confidence may begin to suffer.
RECESSION: A period where economic growth slows down and the
level of output may actually decrease. Unemployment is likely to
increase. Firms may lose confidence and reduce investment.
Individuals may save rather than spend.
RECOVERY: A period when the economy moves between recession
and a boom.
WHAT HAPPENS IN A BOOM?
- Businesses produce more goods
- Businesses invest in more machinery
- Consumers spend more money.
- Less money is spent by the Government on unemployment benefits
- More money is collected by the Government in income tax and VAT
- Prices tend to increase due to extra demand (page)
WHAT HAPPENS IN A RECESSION?
-
Businesses cut back on production
- Some businesses may go bankrupt
- Consumers spend less money. - Individuals may lose their jobs

- More money is spent by the Government on unemployment
benefits
- Less money is collected by the Government in income tax and VAT
- Prices start to fall
Fiscal Policy
Fiscal Policy- involves varying total public sector expenditure and/or
the overall level of taxation to influence the level of demand in an
economy.
Expansionary Fiscal Policy- may be used during an economic
recession to boost demand for goods and services through tax cuts
or increased public sector spending. Firms may respond by hiring
more labour and increasing output. However, increasing demand can
force up market prices and involve spending more on imported
goods and services from overseas. Increasing imports will have
negative impact on the balance of payments.
Contractionary Fiscal Policy - may be used to reduce price inflation. It
involves reducing demand in an economy through tax increases or
cuts in public sector spending. However, firms may respond to falling
demand by cutting their output and reducing employment. Increased
taxes may also reduce work incentives and therefore productivity.
Fiscal
Policy
Instrument
s
Impacts on consumers
Impacts on producers
Increase
Disposable income is
MArket prices and profits
income
reduced and consumer
fall as consumer demand
taxes
spending falls
falls. Firms cut output and

employment.
Fiscal
Policy
Instrument
s
Reduce
Disposable income is
Market prices and profits
income
reduced and consumer
start to rise so forms
taxes
spending rise
expand output and employ

more labour.
Increase
Consumers are not
After tax profits fall. Firms
taxes on
directly affected but
may increase their prices
profits
may pay higher prices if
and/or cut output in
firms cut output
response.
Cut taxes
Consumers may be
After tax profits rise so
on profits
benefit reduced prices
firms may expand their
as output rises
output and employment
Increase
Consumers on low
Consumer demand may
indirect
incomes may be hit
contact and profits fall.
taxes on
hardest by price rises
Firms may cut output and
goods and
because they spend all
reduce their demand for
services
or most of their incomes
labour.
Cut indirect Consumers may expand
Expanding demand will
taxes on
their demand for goods
boost profits which are an
goods and
and services as after tax incentive to firms to raise
services
prices fall
their output and demand

more labour
Fiscal
Policy
Instrument
s
Raise
Public sector workers
Firms supply goods and
public
could be paid more. Low
services to government will
expenditur
income families may
enjoy increased revenues
receive more benefits.
and profits, and may
More public services
expand their output and
could be provided for
employment.
free
Cut public
Public sector workers
A cut in public spending on
expenditur
could suffer pay cuts or
capital projects, such as
be made unemployed.
road and school building,
Welfare benefits may be
will cause cutbacks in the
reduced.
construction industry.
Subsides paid to other
firms may be cut.
Monetary Policy
Monetary Policy- involves varying interest rate charged by the
central bank for lending money to the banking system in an
economy.
Contractionary Monetary Policy- may be used to reduce price
inflation by increasing the interest rate.
Expansionary Monetary Policy-- may be used during an economic
recession to boost demand and employment by cutting interest
rates. However, increasing demand can push up prices and may
increase consumer spending on imported goods and services.
Tax
Taxation is money paid to the Government by individuals and

businesses. This money is usually spent by the Government on
essential services such as health or education.
Types of Tax
Direct Tax
A tax placed directly on an individual or business
- Income tax - taken out of an individuals wage
- Corporation tax - paid by businesses out of their profits
- National Insurance taken out of an individuals wage
Indirect Tax
A tax placed on a good or service
- VAT - this is put onto the price of most goods and services, usually
17.5%
- Council tax - paid on the value of an individuals property
- Excise duty - extra tax imposed on certain products e.g. petrol,
cigarettes and alcohol
Progressive
A tax where the higher the income of the taxpayer, the larger the
percentage of their total income paid in tax.
Proportional
A tax where the percentage of total income paid in tax remains the
same at different income levels
Regressive
A tax where higher income earners pay a lower percentage of their

income in tax compared to low income earners
Disposable Income
The amount of money an individual earns after taking away tax and
national insurance payments.
How is it affected by tax?
Scene 1: Tax is high
Pay-slip of Tua
Gross pay 500 less
Income tax 20% 100
National insurance 5% 25
Net pay 375
Scene 2: Tax is low

Pay-Slip of Tua
Gross pay 500 less
Income tax 10% 50
National insurance 5% 25
Net pay 425
Why is it important?
Tuas disposable income has increased
He has more money to spend

Other people will also have more money to spend because of lower
taxes
There should be lots more spending in the economy

This should help businesses sell more goods
They may take on more workers .. this would reduce
unemployment
Economics Indicator
Inflation
It is a sustained rise in the general level of prices in an economy. It
can easily be measured by CPI (Consumer Price Index).
This means an increase in the average price level over a year. e.g.
on average prices may increase by 5% during 2001.
If prices increase by 5% it also means that money can buy 5% fewer
goods than in the previous year. Therefore inflation leads to a fall in
the buying power of money.
REAL INCOMES If you receive a pay rise of 10% but inflation is 5%. In
real terms you are 5% better off.
How is inflation calculated?
The Retail Price Index surveys changes in the prices of goods and
services.
GOOD
CDs
Sweets
Bread
Total
INFLATION
2000 PRICE
9.00
0.20
0.80
10.00
2001 PRICE
9.50
0.25
1.00
10.75
CHANGE
0.50
0.05
0.20
0.75
0.75 or 7.5%
In the above example prices have gone up by 0.75 or 7.5%

Problems of inflation
Prices increase therefore people may buy fewer goods, the
economy may suffer
People need to keep asking for pay increases to match price rises.
This can cause problems at work
If people are on fixed incomes e.g. pensioners or students. They
will be worse off because they will be able to buy fewer goods
The costs to businesses may increase. They may cutback on
production.
If the prices of UK goods increase too much then people and

businesses may start to import more goods from abroad because
they are cheaper. This will cause major problems for the economy.
Causes of inflation
Cost-Push
An increase in costs may lead to an increase in prices.
Examples:
Raw material prices ( possibly from abroad) increase...
...Costs to business increase...
...Business still wants to make a profit...
...Business puts its prices up...
...Consumers can buy less with their money...
...Workers demand and receive pay increases...
...Businesses costs increase again...
...Businesses put prices up again
On and on and on
Demand-Pull
If there is too much demand for goods and services in the economy
then prices may be forced upwards.
Individuals and businesses experience a feel good factor (maybe
they have just had a tax cut)
They wish to buy more goods and services
Only so many goods and services are available at present
Suppliers experience so much demand for their limited number of
goods that they decide to put up prices.
How to reduce inflation?

If inflation is caused by high demand then
* Raise interest rates to reduce consumers disposable incomes
* Raise interest rates to discourage borrowing and demand
* Raise taxes to reduce disposable income and spending
* These policies should all reduce peoples ability to spend too much
money
If inflation is caused by high costs
Limit wage increases if possible e.g. public sector workers
Force electricity and gas companies to hold their prices
Increase the value of in order to reduce the cost of importing
If inflation is caused by too much money in the economy
Print less money
Withdraw some money from circulation.

Types of Inflation
Cost-Push Inflation(Keynesian)- caused by an increase in the cost of
producing goods and services, for example, from higher wages or
row material rices. Firms will try to pass these costs onto consumers
through higher prices.
Demand-Pull Inflation- caused by total demand rising faster than the
total output of goods and services, causing market prices to rise;
Monetarism- is the believe by some economist that the money
supply into the economy caused inflation.
Unemployment
Unemployment rate(%) = Number unemployed Labour Force X
100
Frictional Unemployment- When workers change jobs and spend
more time looking for new jobs. Workers may become unemployed
for relatively short periods as they leave jobs they dislike.
Seasonal Unemployment- occurs because consumer demand for
some goods and service is seasonal. Like in Thailand during
December it is high season so the hotel need more workers to work
during this time.
Cyclical Unemployment- Jobs is lost during recession period.
Structural Unemployment- The reduction of certain types of
industries.
Output and Growth

Gross Domestic Product(GDP)- is the main measure of the national
income or output of an economy sued by government and
economists.
Economic Growth- occurs when there is a rise in real GDP.
The Economic Cycle
Recession- Real GDP grows slowly of falls. Demand for goods and
services falls. Firms cut their production and lay off workers. Profits
and other incomes fall.
Recovery- Real GDP grows faster than normal. Demand for goods
and services rises rapidly. Firms increase output and hire more
workers. Profits and other income rises.
Boom- Demand for goods and services rises faster than output can
rise. This cause price inflation.

GDP per capital measure average income per person but not their
economic welfare. So HDI is used.
HDI consist of
1.
GDP per capital
2.
Education and knowledge measured by the adult literacy rate

and school and college enrollment.
3.
Health and Life style measured by life expectancy at birth.
Developed and
Developing Economies
Developed and Less Developed Economies
Developed Economies- have a well developed industrial base and
service, a modern infrastructure and high average income per
person.
Less Developed Economies or Developing Economies have an
underdeveloped or developing industrial base, a low level of
economic development and poor living standard.
GDP is commonly used as an indicator as development indicators.
Population
Birth Rate = number of babies born for every 1000 people.
Death rate = number of people for every 1000 people
Natural increase = BR-DR
Net Migration is the difference between inward and outward

migration to and from a country.
More people move into more developed countries to enjoy better
living standard.
Dependency Ratio = Total Population Working Population

In less developed countries the dependency ratios are high and
rising but in developed countries are low but rising.

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Economics

Tua 11SK Subject:Economics Shrewsbury International School1

Basic Economic Problem

What are factors of production?

The Allocation of Resources1

Price Elasticity of Supply (PEs)

Social Costs and Benefits

The Individual as Producer, Consumer,Borrower

Tua 11SK Subject:Economics Shrewsbury International School1

The Private firm as Producer and Employer 2

The Role of Government in an Economy

Output and Growth

The Economic Cycle 2

Developed and Developing Economies 2

Tua 11SK Subject:Economics Shrewsbury International School2

Tua 11SK Subject:Economics Shrewsbury International School3

what and how

Tua 11SK Subject:Economics Shrewsbury International School4

signals to know economy but

decision made? what goods

from what they

want and will

Who are goods

to pay for them the

Tua 11SK Subject:Economics Shrewsbury International School5

get the same

Tua 11SK Subject:Economics Shrewsbury International School6

How markets can fail

How a government can

Only goods and services that

It can produces merits goods

are profitable to make will be

such as education and health

provided. For example, a

care for people, regardless of

market economy will not

their ability to pay for them,

provide education or health

because all the economy will

care for people who cannot

benefit from having a health

afford to pay for these

and educated population.

It can provide public goods,

lighting, sea and flood

such as street lighting, sea

references and national

and flood defenses and

parks, will not be provided:

national parks, that would

firms would be unable to

otherwise be unprofitable for

charge customers a price

private sector firm to provide.

according to how much they

Laws can make the production

dangerous drugs and

of harmful goods illegal, and

weapons, may be produced

high taxes can be put on

and be freely available to

specific items such as alcohol