# **Detailed Notes on AS Level Economics Syllabus**

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## **1. Basic Economic Ideas and Resource Allocation**

### **1.1 Scarcity, Choice, and Opportunity Cost**

#### **1.1.1 Fundamental Economic Problem of Scarcity**
- **Definition**: Unlimited wants vs. limited resources.
- **Implications**: Forces individuals, firms, and governments to make choices.

#### **1.1.2 Need to Make Choices**

- **Levels**:
- **Individuals**: What to buy, save, or invest.
- **Firms**: What to produce, how much to invest.
- **Governments**: Allocation of public funds (e.g., healthcare vs. defense).

#### **1.1.3 Opportunity Cost**

- **Definition**: The next best alternative foregone when making a choice.
- **Example**: Choosing to study instead of working means lost wages.

#### **1.1.4 Basic Questions of Resource Allocation**

1. **What to produce?** (Goods vs. services)
2. **How to produce?** (Labour-intensive vs. capital-intensive methods)
3. **For whom to produce?** (Income distribution)

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### **1.2 Economic Methodology**

#### **1.2.1 Economics as a Social Science**
- Studies human behaviour in resource allocation.
- Uses models and theories to predict outcomes.

#### **1.2.2 Positive vs. Normative Statements**

- **Positive**: Fact-based (e.g., "Unemployment is 5%").
- **Normative**: Value-based (e.g., "Unemployment should be lower").

#### **1.2.3 Ceteris Paribus**

- **Meaning**: "All other things being equal" – used to isolate variables in economic models.

#### **1.2.4 Time Periods**

- **Short Run**: At least one fixed factor (e.g., capital).
- **Long Run**: All factors variable.
- **Very Long Run**: Technological changes possible.

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### **1.3 Factors of Production**

#### **1.3.1 Land, Labour, Capital, Enterprise**
- **Land**: Natural resources (rent as reward).
- **Labour**: Human effort (wages as reward).
- **Capital**: Man-made aids to production (interest as reward).
- **Enterprise**: Risk-taking & organisation (profit as reward).

#### **1.3.2 Human vs. Physical Capital**

- **Human Capital**: Skills/education (e.g., trained workers).
- **Physical Capital**: Machinery, buildings.

#### **1.3.4 Division of Labour & Specialisation**

- **Advantages**:
- Higher productivity (workers become skilled).
- Lower costs (efficiency gains).
- **Disadvantages**:
- Monotony (worker dissatisfaction).
- Over-reliance on one skill (structural unemployment).

#### **1.3.5 Role of Entrepreneurs**

- **Functions**: Innovate, take risks, organise production.
- **Importance**: Drives economic growth (e.g., startups).

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### **1.4 Resource Allocation in Economic Systems**

#### **1.4.1 Market, Planned, Mixed Economies**
- **Market Economy**: Prices determined by supply/demand (e.g., USA).
- **Advantages**: Efficiency, consumer choice.
- **Disadvantages**: Inequality, market failures.
- **Planned Economy**: Government controls resources (e.g., North Korea).
- **Advantages**: Equity, no unemployment.
- **Disadvantages**: Inefficiency, lack of innovation.
- **Mixed Economy**: Both market and state intervention (e.g., UK).
- **Balances** efficiency and equity, Govt Failure.

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### **1.5 Production Possibility Curve (PPC)**

#### **1.5.1 Definition**
- Shows maximum combinations of two goods an economy can produce with given
resources.

#### **1.5.2 Shape of PPC**

- **Constant Opportunity Cost**: Straight line (resources perfectly adaptable).
- **Increasing Opportunity Cost**: Concave curve (resources not perfectly adaptable).

#### **1.5.3 Shifts in PPC**

- **Outward Shift**: Economic growth (more resources/tech).
- **Inward Shift**: Resource depletion (e.g., war).

#### **1.5.4 Points on PPC**

- **On Curve**: Efficient production.
- **Inside Curve**: Unemployment/inefficiency.
- **Outside Curve**: Unattainable without growth.

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### **1.6 Classification of Goods**

#### **1.6.1 Free vs. Private Goods**
- **Free Goods**: No opportunity cost (e.g., air).
- **Private Goods**: Rivalrous & excludable (e.g., food).

#### **1.6.2 Public Goods**

- **Non-rivalrous & non-excludable** (e.g., streetlights).
- **Problem**: Free-rider issue (government must provide).

#### **1.6.3 Merit Goods**

- **Under-consumed** due to imperfect info (e.g., education).
- **Solution**: Subsidies.

#### **1.6.4 Demerit Goods**

- **Over-consumed** due to imperfect info (e.g., cigarettes).
- **Solution**: Taxes/regulation.

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## **2. The Price System and the Microeconomy**

### **2.1 Demand and Supply**

#### **2.1.1 Effective Demand**
- Demand backed by purchasing power.

#### **2.1.2 Individual vs. Market Demand/Supply**

- **Market Demand**: Sum of all individual demands.

#### **2.1.3 Determinants of Demand**

- Income, tastes, prices of substitutes/complements.

#### **2.1.4 Determinants of Supply**

- Costs of production, technology, taxes.

#### **2.1.5 Shifts vs. Movements**

- **Shift**: Change in non-price factors (e.g., income).
- **Movement**: Change in price only.

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### **2.2 Elasticities of Demand**
#### **2.2.1 PED, YED, XED**
- **PED**: Responsiveness of demand to price changes.
- **Elastic (PED > 1)**: Luxuries (e.g., cars).
- **Inelastic (PED < 1)**: Necessities (e.g., medicine).
- **YED**: Responsiveness to income changes.
- **Normal goods (YED > 0)**, **Inferior goods (YED < 0)**.
- **XED**: Responsiveness to price of related goods.
- **Substitutes (XED > 0)**, **Complements (XED < 0)**.

#### **2.2.7 PED & Total Expenditure**

- If demand is elastic, price rise reduces total revenue.

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### **2.3 Price Elasticity of Supply (PES)**

- **Factors affecting PES**:
- Time period (long run = more elastic).
- Mobility of factors.

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### **2.4 Market Equilibrium**

#### **2.4.1 Equilibrium & Disequilibrium**
- **Equilibrium**: Qd = Qs.
- **Disequilibrium**: Surplus/shortage.

#### **2.4.2 Joint & Derived Demand**

- **Joint Demand**: Complements (e.g., cars & petrol).
- **Derived Demand**: Demand for labour depends on demand for goods.

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### **2.5 Consumer & Producer Surplus**

- **Consumer Surplus**: Difference between what consumers pay and what they’re willing to
pay.
- **Producer Surplus**: Difference between market price and minimum price producers
accept.

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## **3. Government Microeconomic Intervention**

### **3.1 Reasons for Intervention**

- Correct market failures (e.g., public goods, externalities).

### **3.2 Methods of Intervention**

- **Indirect Taxes**: Reduce demerit goods (e.g., cigarettes).
- **Subsidies**: Encourage merit goods (e.g., solar panels).
- **Price Controls**:
- **Max Price**: Prevent exploitation (e.g., rent control).
- **Min Price**: Support producers (e.g., minimum wage).
- **Agriculture Market**: Buffer Stock, Labour Training, Guaranteed Price, Infrastructure.
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## **4. The Macroeconomy**

### **4.1 National Income**

- **GDP**: Total value of goods/services produced in a year.
- **GNI**: GDP + net income from abroad.

### **4.2 Circular Flow of Income**

- **Injections** (Investment, Govt Spending, Exports).
- **Leakages** (Savings, Taxes, Imports).

### **4.3 AD/AS Model**

- **AD = C + I + G + (X-M)**.
- **AS**: Short-run (upward-sloping), Long-run (vertical).

### **4.4 Economic Growth**

- **Causes**: Tech advances, more labour.
- **Consequences**: Higher living standards, but possible inequality.

### **4.5 Unemployment**

- **Types**: Frictional (job search), Cyclical (recession).
- **Consequences**: Lower GDP, social issues.

### **4.6 Inflation**

- **Demand-Pull**: Too much spending.
- **Cost-Push**: Rising production costs.
- **Consequences**: Shoe Leather, Menu, Redistribution, CA Deficit.
- **Deflation**: Falling Prices over time period.
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## **5. Government Macroeconomic Policies**

### **5.1 Fiscal Policy**

- **Expansionary**: Increase spending/cut taxes (boost AD).
- **Contractionary**: Reduce spending/raise taxes (control inflation).

### **5.2 Monetary Policy**

- **Interest Rates**: Lower rates boost borrowing/spending.

### **5.3 Supply-Side Policies**

- **Aim**: Increase LRAS (e.g., education, infrastructure).
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## **6. International Economics**

### **6.1 Trade**

- **Comparative Advantage**: Produce at lower opportunity cost.
- **Benefits of Free Trade**: Lower prices, more choice.

### **6.2 Protectionism**

- **Tariffs**: Raise import prices (protect domestic firms).
- **Quotas**: Limit imports.

### **6.3 Balance of Payments**

- **Current Account**: Trade balance + net income/transfers.
- **Deficit**: Imports > Exports.

### **6.4 Exchange Rates**

- **Depreciation**: Exports cheaper, imports dearer.
- **Appreciation**: Opposite effect.