AS economics revision workbook 2016

A Level EconomicsYear 1 (AS)

Summer 2016

Note the resource download link for this workshop:

Student Name:

www.tutor2u.net/economics

@tutor2uEcon

@tutor2u_Jon

@tutor2uGeoff

More Economics revision and support at:

Follow tutor2u Economics on Twitter:

2 A LEVEL ECONOMICS YEAR 1 (AS) Revision Workshop www.tutor2u.net 3

A01 KnowledgeDefinition, basic theory

A02 ApplicationExamples, evidence

A03 AnalysisExplanation of theory, diagrams

A04 EvaluationUsing judgement, weighing up

Exam Advice

PEEEL EvaluationParagraphsP PointE ExplanationE Evidence/ExampleE EvaluationL Link back to the question

Evaluation ReminderT TimescaleW Wider ContextE EfficiencyE Equality/EquityP Priority

Exam Advice

The command words ANALYSE or EXPLAIN require a studentto produce some explanation of the theory in their answer.You should develop CHAINS OF ANALYSIS, making 3 or 4links using connectives to develop your point.

*This means that... *This leads to... *This has an impact on... *Therefore...*This can cause... *This is because...*On the other hand... *Which in turn...

The command words EVALUATE, JUSTIFY, EXAMINE or ASSESS require a student to demonstrate a judgement intheir answer. You will need to weigh up the evidence from your analysis and pass a judgement on the original question.

*It depends on... *In the short run...*In the long run... *The most important

point *The effect on equity/equality is*The most cost effective…*The best solution in the circumstances

is...

A LEVEL ECONOMICS YEAR 1 (AS) REVISION WORKSHOP 2016Welcome to our revision workshop which will consist of five sessions listed below. Whilst it is impossible to cover the entire AS micro specification in just one day, weaim to focus on key concepts and ideas, embedded in examination technique andadvice. Some areas will inevitably be considered with a light touch, however weaim to equip you with the tools to be able to continue in depth revision under youown steam. Today’s sessions will cover:

1 How Markets Work and Elasticities

2 Market Failure and Government Intervention

3 Measuring UK Economic Performance

4 Demand Side Policies (Fiscal and Monetary)

5 Supply Side Policies and Policy Conflicts

At the back of the booklet you will find a glossary of key macroeconomic terms and concepts.

Skills at AS

The Price MechanismWhat are the functions of the price mechanism?

5p charge on bags from supermarkets and other retailersIn October 2015, the UK Government introduced a 5p surcharge on all plastic bags used for shoppers in most retail outlets (extending a regulation that had already been in place in certain parts of the country). This surcharge is not a tax – the government do not collect the money. The monies earned from the surcharge can be kept by the retailers. The policy is an attempt to reduce the use of the plastic bags as they have a negative impact on the environment.

Here, the surcharge is being used as ...........................................................

What factors affect demand and supply for a product or service?

Session 1How Markets Work and ElasticitiesIn this session we will consider the importance of price as a means to allocating resources in an economy, the factors that impact on demand and supply of products, the calculation of elasticities and the factors that impact on elasticities.

£

Demand Supply

12345


£From the table above, which is the most important factor that can impact on demand and supplyfor each of the following firms (Note: there is no particular right or wrong answer here – you haveto justify the factor that you have chosen):

Demand factors in the news – Hoverboards:One of the most popular gifts given this Christmas was the ‘hoverboard’ or ‘self-balancing’ board,made popular by a number of celebrities such as Lily Allen and Justin Bieber. The boards useclever gyro-rotational technology to respond to minute pressure from the feet of the rider to balanceand move forwards or backwards. The price ranges from £250 to £600 per board. Many firmshave manufactured the boards as much of the technology has not been patented.

Demand Factor

A Luxury GoldWatch

A budget tablet

Flight betweenManchester andLondon

Dry cleaning service

Supply Factor

Factor Explanation

1

2

What are the most important factors that have influenced the price of hoverboards in the UK from January 2016? Explain your answer:

Diesel pumps may run dry in the UKA report released in September 2015 by the RAC Foundation has warned that the availability ofdiesel fuel used by motorists could start to become scarcer, with the UK needing to rely moreand more on imported stocks.

The issue appears to have arisen for two reasons. Firstly, there has been an increase in the purchase of cars that use diesel fuel (from 1.6 million vehicles in 1994 to 11 million vehicles in 2014). This was prompted by a change in the tax regime in 2001, when the Government attempted to encourage a greater use of diesel instead of unleaded petrol. This was driven by a Government desire to reduce the creation of carbon dioxide (CO2) which is more prevalent in petrol cars than diesel.

An ironic outcome of this change was that the Government now has a greater emphasis on reducing Nitrogen Dioxide (NO2) which is more prevalent when diesel cars are used. A recent government study put the number of premature deaths in the UK attributed specifically to NO2 at 23,500.

However, there is a time-lag between any government attempt to alter the market and an actual change in the purchase of diesel or petrol cars.

The second issue relates to the refining of oil to create diesel fuel. The same report from RACF says that there are now only 6 major oil refineries in the UK. These refineries were built to create petrol rather than diesel so are not set up to accommodate the need for the change in demand for diesel fuel.

This combination of problems could well lead to a shortage of the availability of diesel and increase the UK’s need to import (at a higher price) from foreign suppliers.

List 2 factors that have impacted on the demand and supply of diesel.

Factor Cause

Demand

Supply

Likely impact on priceof diesel petrol

What has caused a potential failure of government intervention in this market?


£

Q1

P1

S1

D1

Price ofDiesel

Quantity ofDiesel

Using the diagram here, illustrate what you think may have happened to demand and supply of diesel over the last 15 years.

Demand and Supply Criss-CrossYou are about to be shown 10 changing market conditions that could cause the demand and/orsupply curve for good A to shift. Assuming for each question the original equilibrium point is atposition X, what is the new equilibrium position after each change that has occurred? Assumethat Product A is a normal good.

ElasticitiesYou will need to know the formulae for the 4 different types of elasticities. If you don’t know themalready, check the revision reminder at the back of this booklet.

Instant recallLook at the questions below and the answers that are on screen. You have 3 minutes to work outwhich numbered answer on the screen applies to the questions below:

S3

S1S2

D2

D1D3

Price ofProduct

A

Quantity of Product A

C

G

D

E

F

I

X B

A

No. Letter

1

2

3

4

5

6

7

8

9

10

Measures the change in demandfor one product following thechange in price of anotherproduct

Measures the change in demandfor a product following a changein income

PED when price increases from£1 to £2 and QD falls from 300to 200

When price of a product falls by 20 % and, quantity demandincreases by 20 %. The value of PED for the product is...

The income elasticity of demandfor bus travel is –2.0, this meansthat bus travel is...

PED if the price of a good increases from £5 to £10, causing demand to drop from10 to 8 units a week,

If a person's income increasesfrom £1,000 to £1,500 a month sonow they go on 2 foreign holidaysa year (instead of just 1), what istheir YED for foreign holidays?

A good is said to be price inelastic if its price elasticity ofdemand is...

A rail company have calculatedtheir PED to be (-) 1.2. If faresrise by 10%, what will happento the revenue they receive?

Price Elasticity Of Demand (PED)

Income Elasticity Of Demand (YED)

The Price Elasticity Of Supply (PES)

What are the factors that can impact on elasticity?Name 2 factors that can impact on the price elasticity of demand, income elasticity of demandand the price elasticity of supply:

1

2


The Impact of elasticitiesConsider this question:

“With the help of an appropriatediagram, explain how the priceelasticity of demand for peak railtickets will affect the total revenuethat the government receives if it introduces an indirect tax of5% on all rail tickets.”Assuming that both students have drawn a correct diagram, which of theseanswers would obtain more marks forapplication and why?

Student 1 responseThe price elasticity of demand for peak rail tickets is inelastic. As the cost of purchasing thesetickets increases the demand for rail travel will decrease but by a relatively small proportion compared to the increase in cost. This will mean that the government will see an increase in revenue from increasing taxes on rail travel.

Student 2 responseThe elasticity of demand for peak rail tickets is price inelastic. Extract C (line 3) indicates thatsome substitutes do exist (such as road travel) but many rail users choose to do so as it is thequickest form of transport for their daily commute. So if, for example, the government increasestaxes by 5% the government will see a rise in revenue. Some of this rise in revenue may be offset by the fact that all rail fares will increase so there may be some reduction in demand for rail use during off-peak times.

Exam Tip - Elasticities is an important topic when you are evaluating Governmentpolicies to combat market failures. It is worth attempting to include discussion aboutelasticity of the product or service that you are covering in any evaluative questions.

Consider the following products/services. State whether you think demand is price elastic or inelastic.What would be the impact of an increase in government indirect tax on their consumption?

Product Cigarettes Air travel Crisps

Elasticity

Impact of indirect tax increase on consumption

Subsidies for solar panelsDuring 2016, the Government is assessing whether to remove subsidies for solar panels installed in homes across the UK. The original subsidy was given to bring down the price of the panels andthus promote their use. As a consequence, solar panels are now installed in approximately 1.5%of households.

The Government argues that the growth of firms supplying the panels has been good enoughduring the years of subsidy that they should now be able to operate at a profit whilst keeping theprice of their goods low enough to maintain interest from consumers. The Government wouldthen be able to use the money saved from not subsidising the panels on other areas of spending.

Assess whether market forces should be left to determine the price of solar panels.

Q1

P1

S1

D1

Price ofSolar

Panels

Quantity ofSolar Panels

Argument against subsidiesPoint:

Explanation:

Argument for subsidiesPoint:

Explanation:

Extension Activities


Activity 1:

Activity 2:

Question 1 – Alex buys a new car for £12, 000. Two years later, he estimates the currentvalue of his car as £8, 000. Alex sees the same model is now selling for £15, 000 in hislocal car dealership. What is the opportunity cost of Alex keeping the car?

A £8, 000B £12, 000C £15, 000D £7, 000

Question 2 – The use of maximum prices on products such as prescriptions is designed to:

A Increase consumption of a public goodB Reduce the excludability of a private goodC Reduce the free rider problemD Increase consumption of a merit good

Question 3 – The North Korean economy allegedly experienced widespread famine in2008, with production down on 2007. This may have been down to?

A Reduced exports from the North Korean economyB A fall in the rate of increase of agricultural productivityC The government receiving inadequate information about what needed to be producedD Increased trade with China

Question 4 – If the Production Possibility Frontier is a straight line...

A Opportunity cost is increasingB Opportunity cost is decreasingC Opportunity cost is variableD Opportunity cost is constant

Question 5 – Free goods...

A Include the NHS and EducationB Have zero opportunity costC Are non-rival and non-excludableD Are best provided by governments

Answers to multiple-choice questions: 1. A, 2. D, 3. C, 4. D, 5.B

Multiple-choice questions (answers on bottom of next page):

Micro terminology WordsearchHow many words related to micro economics can you find in this wordsearch?

Answers at the end of session 2

Quick elasticity calculations

A If the price of a good increases from £5 to £10, causing demand to drop from 10 to 8 unitsa week, what is the value of price elasticity of demand? How would you describe this elasticity?

B Following an increase in the average wages by 5% in the last year, the demand for Good Awent up by 2%. What is the income elasticity of demand for Good A and what type of goodis it likely to be?


Session 2Market Failure and GovernmentInterventionsIn this session we will consider under what circumstances free-market conditions do not always lead to the optimum social outcome. We will also look at how the Government intervenes to combat such market failure and how this intervention is not always successful,

Market Failure

Examples of market failure

Complete Market Failure:

Succinct definitions!

Merit Good

Partial Market Failure:

1

Externalities:

Example

2

Example

3

Example

4

Example

5

Example

Production Consumption

Example (positive) Example (negative)

Note: AQA do not require diagrams for their AS assessment on externalities. Edexcel and OCRdo require such diagrams. Activity 1 for the Extension Activities at the end of this chapter testsknowledge of these diagrams.

Museum charges for temporary exhibitionsSince 2001, most museums in the UK do not charge for entry. This change was brought about by a government policy aimed at improving access to and attendance at the country’s cultural heritage. Figures suggest that attendance at museums across the country has increased by over 50% as a result of this policy.

However, some museums still maintain a charge for temporary exhibitions. These are exhibitions that showcase artefacts or historical information loaned from other sources. For example, the exhibition entitled ‘Sunken cities: Egypt's lost worlds’ (showing images and artefacts from two ancient Egyptian cities lost to the sea) at the British Museum between May and November 2016 will cost £16.50 to enter.

Museums argue that this admission charge helps to cover the cost of putting on the exhibition and subsidises the cost of free entry to the main sections of the museum.


Assess the arguments for and against museums charging for entry to temporary exhibitions

Argument For Argument Against

Point

Explanation

Evidence

Assess the view that the proposed merger between Celesio AG and Sainsbury’s Pharmacieswill INEVITABLY lead to welfare loss.


Point

Explanation

Evidence

How does the level of competition within a market lead to market failure and welfare loss?

CMA investigates merger between Celesio and Sainsbury’s PharmacyThe Competition and Markets Authority is to investigate the proposed merger between Celesio AG (owners of Lloyds Pharmacies) and Sainsbury’s Pharmacies. Celesio owns and runs 1542 outlets, whilst Sainsbury’s has 277 pharmacies (mainly within theirsupermarkets). The CMA has identified where 78 local areas may be affected by the merger, with some of the pharmacies likely to close.

The CMA recognise that pharmacies do not compete on price as much as other outlets as theirprimary business revolves around the set fee for prescription drugs. Pharmacies compete on thequality and range of products, with a primary factor including their opening times.

Factors that suggest that the iPlayer service is a Public Good

Factors that suggest that the iPlayer service is NOT a Public Good

Is the BBC iPlayer a Public Good?The BBC iPlayer service has some elements of the descriptors used to define publicgoods in economics.

The site allows a ‘catch-up’ service for BBC programmes, most of which have been made or purchased using finance from the UK TV Licence fee, but does not require the user to have such a licence. Users only have to be accessing the service from within the UK. With EU co-operation it may soon be possible for UK citizens to access the BBC iPlayer whilst abroad. A subscription-based version of the iPlayer was trialled in the rest of the EU but this has not been continued.


Evaluate the view that the BBC iPlayer service should be a subscription-only facility, like theservices already supplied by firms such as Netflix and Amazon Prime.


Point

Explanation

Evidence

Evaluation

Government Intervention to combat market failureDriver shortage in the UK Haulage Industry

Q1

P1

S1

D1

Price

Quantity Q1

P1

S1

D1

Price

Quantity Q1

P1

S1

D1

Price

Quantity

Indirect Tax Subsidy Price Setting (e.g. maximum price)

Other possible government interventions:

Causes of Government Failure

GovernmentFailure

According to the Road Haulage Association (RHA), an organisationthat represents nearly 7,000 hauliers in the UK, there is a hugeshortage of drivers within the industry – caused by a governmentfailure when intervening in the market. The RHA estimates that there is shortage of between 45,000 and 50,000 drivers in the UK.

Part of the problem, according to the RHA, rests with the HGV licence test implemented to improve skills within the industry. Currently, the test costs £3,000 to take and has only a 51% pass rate (would you be taking your A-Levels if this were the cost/odds?) which is acting as a disincentive for people to train to become HGV drivers. The RHA argues that a £150 million injection into the industry, paid directly to the hauliers, would assist with the cost of training and increase the number of people willing to become drivers.


Assess the view that a £150 million subsidy to the haulage industry will certainly lead to awelfare gain for the UK economy


Point

Explanation

Evidence

Evaluation

Link Back

Measure

What could the UK do next?

What measures do the WEF use to determine levels of equality?

Equality in the UKIn November 2015, the World Economic Forum ranked the UK as the 18th most equalcountry in the world with regards to gender equality (rising from 26th in 2014). However, 66% of senior posts in the economy are held by men (despite the fact that 57% of graduate are female) and there is an average pay gap of 17% between men and women.

COP21 – Climate Change SummitThe COP21 Climate Change Summit met in December 2015 and agreed global targets for reducing carbon emissions. The summit was attended by over 190 countries and was hailed as one of the most important and historic agreements ever. The countries involved agreed:

• To keep global temperatures increase "well below" 2.0C (3.6F) • Reduce greenhouse gas emissions caused by human activity to the same levels that the

planet is able to absorb naturally, beginning at some point after 2050 • Review each country's contribution to cutting emissions every 5 years • For wealthier countries to help poorer nations by providing financial support to adapt to

climate change and switch to renewable energy.

The summit is attempting to limit the impact of one of the world’s largest negative externalities –greenhouse emissions that cause global warming. The settlement also requires internationalagreement as any individual nation’s pollution will often impact on neighbouring countries.

Question Framing

Evaluate two measures the UK Government could use to reduce greenhouse emissions.

Pick up knowledge marks quickly by explaining key terms used in your extended answer:Key term 1

Key term 2

Pick up knowledge marks quickly by explaining why greenhouse emissions lead to welfare loss:

Pick up application marks by explaining a possible measure that could be used by the government to reducegreenhouse emissions:

Possible diagram?

Explain why this measure would lead to reduce greenhouse emissions:

Explain the degree of impact this measure would have, using evidence(or real example) where possible:Short term:

Long term:

Explain why this measure may not have the desired level of impact:

Make a conclusion about how effective you think this measure will be:

Repeat this process for measure 2. In your final concluding paragraph you can also suggest which ofthe 2 measures would be more effective.



Activity 1: Diagram Disasters!

Activity 2: Question Framing

The following diagrams have missing elements to them. Complete the missing spaces(answers on bottom of next page).

Title:

A:

B:

C:

S:

T:

Continue the question started at the end of the session by using the frame to outline a second measure that could be used to answer this question

Diagram 1

U T C

Marginal privateand social benefits

V

S

A

BY

Z

Costs andBenefits

Title:

X:

Y:

Z:

A:

D:

Diagram 2

B D Output

Marginal privateand social costs

C

Z

A

Y

X

Answers to Diagram Disasters!Answers to wordsearch from session 1:

Answers to Elasticity Calculations:a: -0.2 – Inelastic b: 0.4 – Good A is a necessity

Diagram 1Title: Negative production externalitiesA: Marginal social cost (MSC)B: Marginal private cost (MPC)C: OutputS: Price if left to market forcesT: Output if left to market forces

Diagram 2Title: Positive consumption externalitiesX: Marginal social benefitY: Marginal private benefitZ: Costs and BenefitsA: Price if left to market forcesD: Output if all social benefits taken into

account

Loss of Social Welfare due tomarket failure

Loss of Social Welfaredue to market failure

Evaluate two measures the UK Government could use to reduce greenhouse emissions.

Pick up application marks by explaining a possible measure that could be used by the government to reduce greenhouse emissions:

Possible diagram?

Explain why this measure would lead to reduce greenhouse emissions:

Explain the degree of impact this measure would have, using evidence (or real example) where possible:Short term:

Long term:

Explain why this measure may not have the desired level of impact:

Make a conclusion about how effective you think this measure will be:

Which of the two measures (the one from the revision session and the measure that you have just outlined) would have the biggestimpact and why?

PED: Responsiveness of

Diagrams Formula

Values for PED:

Determinants

to a proportionate change in

PerfectInelastic

0 -1 -∞

Inelastic Unitary Elastic PerfectElastic

QD

PED = % Δ∆ in QD

% Δ∆ in P

0 Perfectly price inelastic

0→ -1 price inelastic-1 unitary elasticity-1→ -∞ price elastic-∞ perfectly price

elastic

Price

P of SubstitutesP of ComplementsProportion of incomeHabit formingTime

PES: Responsiveness of

Diagrams Formula

Values for PED:

Determinants

to a proportionate change in QS

PES = % Δ∆ in QS

% Δ∆ in P

0 Perfectly price inelastic

0→ 1 price inelastic1 unitary elasticity1→ ∞ price elastic∞ perfectly price

elastic

Price

Availability of stocksEase of switchingproductionSpare CapacityComplexity of productionTime

YED: Responsiveness of

Diagrams Formula Values for YED

to a proportionate change in QD

YED = % Δ∆ in QD

% Δ∆ in Y

Income

Positive, 1+Luxury Goods

Positive, 0→ 1Necessities

Negative, <0Inferior

XED: Responsiveness of

Diagrams Formula Values for XED

to a proportionate change in

XED = % Δ∆ in QD of A

% Δ∆ in P of B

Positive = Substituteslarge - strongsmall - weak

Negative=Complements

Large = strong

Small = weak

Price ofGood B

QD ofGood A


PricePerfectlyInelastic

D

Quantity

PricePerfectlyInelastic Supply

S

Quantity

Price Perfectly elastic

Unitary elasticity

D

Quantity

Price

D

D

D

D

D

Quantity

Income Normal Good

Quantity

Income Inferior Good

Quantity

Price Perfectly Elastic Supply

S

Quantity

PriceGood X

Complementary Goods

Quantity Good Y

Income Substitute Goods

Quantity Good Y


Session 3Measuring UK Economic Performance

In this session we will consider how the UK’s economic performance is measured, how the economy is currently performing and discuss the validity of the measures that are used.

Time

Real

GDP

Using the letter codes below, placewhere you think the following mightappear on the diagram.

Key Indicator Depends on...

AB

DEF

The number of new housing starts begins to fall

Rising real income

More building skips start appearing on the streets

More companies attempt to introduce wage freezes

Imports of sewing machines rise

C Rising homelessness

A fall in income tax

A fall in interest rates

A rise in the value of the GB Pound compared to the Euro

The Components of Aggregate DemandGrowth Rates for the Components of Aggregate Demand the UK (% change)

Shifts in the Aggregate Demand CurveAll other things being equal, will the changes below shift Aggregate Demand from AD1 to AD2 or from AD1 to AD3?

Quick numeracy questions (between 2011 and 2015):

2011

2012

2013

2014

2015

-0.1

1.5

1.7

2.6

0.8

Consumption (C)

0.0

2.3

-0.3

1.6

0.6

Government Spending (G)

2.3

0.7

3.4

8.6

4.2

Investment (I)

5.6

0.7

1.5

0.5

-1.2

Exports (X)

1.0

3.1

1.4

2.4

5.2

Imports (m )

Median change in Investment

Mean change in Exports

Mode change in Exports

A fall in income tax

A fall in interest rates

A rise in the value of the GBPound compared to the Euro

AnalysisAgain, for each of the changes above, write a ‘depends on’ phrase to illustrate the level of impactfor each change:

AD3 AD1 AD2

Y3

GPL1

GeneralPrice Level

Y1 Y2 Real GDP

AD1- AD2: Outward shift –will raise national output at all price levels

AD1- AD3: Inward shift –will reduce national output at all price levels

Change Depends on...

26 A LEVEL ECONOMICS YEAR 1 (AS) Revision Workshop

Shifts in Short run Aggregate SupplyAll other things being equal, will the changes below cause a shift in aggregate supply from AS1to AS2 or from AS1 to AS3?

TASK: Analyse the view that the move towards to the Universal Credit system has led to a long term change in Aggregate Supply.

A fall in real wages for people employed

An increase in carbon taxeson polluting firms

AS2 AS1 AS3

Y2

GPL1

GeneralPrice Level

Y1 Y3 Real GDP

Long term Aggregate SupplyUniversal credit – Changing labour supplyThe Government's role-out of Universal Credit has not been without controversy. The plan is to simplify the benefit system and incentivise a return to work forthose who were claiming JobSeekers allowance. A keyfeature of the policy is to gradually reduce benefits toworkers as they remain in employment and thus counteract the trap that was caused by the sudden loss of benefits if a claimant started to work beyond 16 hours a week.

The Department of Work and Pensions released a report in December 2015 that indicated that the roll-out of UC has led to a 8% improved chance that someone will returnto work and earn more money than the incentives that laywith Jobseekers allowance.

The DWP also suggest• Universal Credit claimants work, on average, 12 days more

than Jobseeker’s Allowance claimants in the first ninemonths of their claim

• 86% were trying to work more hours, compared to 38%under Jobseeker’s Allowance

• 77% were trying to earn more, compared to 51% underJobseeker’s Allowance.

A fall in employers’ nationalinsurance contributions

Introduction of Universal Credit

This meansthat...

This can lead to...

This can cause...

It dependsupon...

A diagram to show this apparent change in in long run Aggregate Supply

Yp Real GDP

GeneralPrice Level LRAS

£

www.tutor2u.net 27

Increase in the long run aggregate supply


Growth in the UK EconomyExplain 3 reasons why the UK appears to be growing at a slower rate in 2015 compared to 2014.

One Two Three

Risks of higher inflation andhigher interest rates

Environmental effects Inequalities of income and wealth

Growing a Dynamic Private Sector

Sound Macro Policies to control inflation

Focusing on addressing Equity / Fairness

What are the economic and social costs of Economic Growth?

What is the best way to attain sustainable economicgrowth in the long run?

Source: ONS

What is meant by ‘sustainable’?

Building Trust / Social Capital Growing Intra-Regional Trade Improving Institutions

EmploymentThe chart below shows the UK employment and unemployment rates for different age categoriesin December 2015

Employment rate (%)

Unemployment rate (%)

Source: ONS


Evaluate the view that employment and unemployment rates of 16 to 25 year olds (in theUK) represents a significant issue with regards to the performance of the UK economy.


Point

Explanation

Evidence

Evaluation

Link Back to the questionEvaluate the view that the very low levels of inflation within the UK should not concern theGovernment as it is primarily caused by falling prices for fuel and food.


Point

Explanation

Evidence

Evaluation

Link Back to the question

The UK has had consistently low inflation levels over the last 2 years. In recent months the Consumer Price Index has shown inflation to be close to zero – way below the targeted level of2%. Much of the issue appears to be the falling price of fuel and food in the UK.

The diagram on the next page shows the CPI level in the UK between November 2007 andMarch 2015, along with the inflation levels for food and fuel as well as other products.

CPI

Food & fuel

Other goods& Services



Activity 1

On the diagram below, show (and fully label) the position where an economy has shown growth.

Task 1

Task 2What are the main benefits of economic growth?

B

A

PPF1

E

Capitalgoods

Consumer goods

Advantagesof

EconomicGrowth

Activity 2

Question 1 – Which of the following may occur if a country puts protectionist measures in place?

A Imports will fallB Imports will riseC Domestic firms will make more staff redundantD Domestic firms will see their profits fall

Question 3 – Which of the following UK businesses would benefit from an increase in the exchange rate?

A A computer chip maker who sell most of their products to Apple in USAB Prezzo Italian RestaurantsC A toy retailer who imports most of their products from ChinaD BAE Systems, whose biggest customer is the US government

Question 5 – Which of these goods would be given the highest weighting in the inflation calculations?

A Electric toothbrushB Paperback bookC IpadD Milk

Question 2 – A increase in the value of the pound would...

A Increase demand for UK exports?B Increase the UK interest rateC Reduce demand for UK importsD Increase demand for UK imports

Question 4 – A negative output gap means that...

A Current GDP figures are below the country's potentialB The GDP rate is higher than the inflation rateC Current GDP figures are above the country's potentialD The GDP rate is lower than the inflation rate

Multiple-choice questions

Check your answers at the end of Session 5.

www.tutor2u.net 3534 A LEVEL ECONOMICS YEAR 1 (AS) Revision Workshop

Session 4Demand Side Policies(Fiscal and Monetary)In this session we will consider how the Government of the UK uses fiscal and monetary policy to impact on their targets for the economy. We will look at the relative impact of some of the policies and discuss if any policies have conflicting outcomes.

Quick definition time!Fiscal Monetary Policy

Definition

Example

Policy Big energy users such as the steel and chemicals industries to be exempt fromenvironmental tariffs.

Phased reduction in Government spending. Statespending - as a share of totaloutput - to fall to 36.5% in2020, down from 45% in 2010.

Total education budget to riseby £10bn by 2020.

Primary economic objective

Examples from the Spending Review in November 2015Chancellor George Osborne delivered a detailed spending review in November 2015 as it was the first opportunity to set out policies since the General Election in May where the Conservative Party won an outright majority of seats. For each of the policies that were highlighted in the Review, state which economic objective(inflation, unemployment, balance of payments or economic growth) is the primarytarget of the policy.

Fiscal Policy can either be contractionary or expansionary:

Contractionary• Increase direct tax

• Increase indirect tax• Decrease borrowing

+ Expansionary• Decrease direct tax

• Decrease indirect tax• Increase borrowing

Increaseaggregate demand

Decreaseaggregate demand

Choose an appropriate fiscal policy needed for each objective and suggest a ‘depends on’ factor that can influence the success of the policy:

Income plus cash benefits by quintile groups for ALL households, 2000 and 2014The data table below shows the original income plus cash benefits for households in the UK by quintile groups for the years 2000 and 2014.

Quintile groups of all households ranked by equivalised disposable income

Reduce Unemployment

Reduce Inflation

Sustainable increase in economic growth

Reduce Balance of Payment Deficit

Fiscal Policy Suggestion ‘Depends on’ factor

2000

2014

Bottom 2nd 3rd 4th Top All

Original income 2 534 8 600 18 179 29 968 56 887 23 234

Cash benefits 5 268 5 426 3 647 1 994 1 134 3 494

Total income 7 802 14 026 21 826 31 962 58 021 26 728

Proportion in cash benefits 39% 17% 6% 13%

Original income 5 521 13 731 24 842 40 880 80 803 33 155

Cash benefits 7 394 8 413 6 775 4 695 2 947 6 045

Total income 12 915 22 144 31 617 45 575 83 750 39 200

Proportion in cash benefits 38% 21% 10% 15%

Quick numerical task: Calculate the missing numbers in the yellow boxes above. In each case, you are attemptingto find a percentage figure which shows what proportion of total income is represented by cash benefits.


EvaluationWill the change in the way that income is distributed between 2000 and 2014 lead to an increase in aggregate demand?

PEEEL Argument for Argument against

Point

Explanation

Evidence

Evaluation

Link Back to Question

£

The Impact of Quantitative EasingInterest rates in the UK have remained at a very lowlevel of 0.5% since 2009 (as of writing, Jan 2016).Quantitative Easing (QE), as Monetary Policy, wasalso tried in 2009 and we can now start to evaluatethe impact it had on the economy.QE is the process of creating more ‘money’ in an economythrough the purchase of large quantities of Governmentbonds. The creation of this extra money brings more cashdeposits into banks which, in turn, allows them to reducetheir own interest rates and therefore increase lending.This, in turn, should provide a stimulus for increased demand in a struggling economy.

EvaluationEvaluate the view that Quantitative Easing, as a Monetary Policy, has had no positive impact onthe UK economy between 2009 and 2015.


Point

Explanation

Evidence

Evaluation


EvaluationThe impact is meant to be both short and longer term. There are what are called an ‘impact phase’ (the phase when the QE process is in place) and then the ‘adjustment’ phase – where the impact of QE continues to influence aspects of economic performance.

What impact has QE actually had?• Between March 2009 and March

2013, the CPI increased from 109.8 to 125.6, suggesting that QE had a positive impact on increasing prices during a period of economic difficulties

• However, during the same 4 year period, economic growth was only 3.7%.

• During this period, real wages also decreased by an average of 8%• Many pensions, relying on the interest payments on investments such as bonds also saw

reduced yields.


Whatever happened to ‘Forward Guidance’?Forward Guidance was the strategy introduced by Mark Carney when he was first appointed as Governor of the Bank of England in 2013. The idea was to ‘pre-warn’ peopleabout possible interest rate changes – giving as much notice as possible about a time-frame so that individuals and firms could plan to adjust when changes were made.

However, as part of this guidance, Carney saidthat there would be no changes to interest rateswhilst unemployment remained above 7%. Unemployment dropped to this level within 6months of his appointment. Instead, the strategywas altered so that there would be no change tointerest rates whilst a range of measures (such asthe output gap) were above set levels. In effect, a policy that had been set up to give clear guide-lines to the economy became more complex andless... clear!

Advantages of Forward Guidance Impact of changes to Forward Guidance

EvaluationEvaluate the view that Monetary Policy in the UK has had a positive impact on the Balance ofTrade in the UK since 2013.


Point

Explanation

Evidence

Evaluation


Balance of UK trade, October 2013 to October 2015

Goods Balance

Services Balance

Total Trade

Source: ONS



Activity 1

GFK Consumer Confidence (UK)

Activity 2

Using the PEEEL evaluation structure, make one argument for and one against the 3% surchargeon stamp duty for buy-to-let properties (announced in the November 2015 Spending Review) in the short and medium term.

PEEEL Argument for (Short term)

Argument for (Medium term)

Argument against (Short term)

Argument against (Medium term)

Point

Explanation

Evidence

Evaluation


Task 1What are the advantages for the UK policy makers of using the Consumer Confidence Index whendetermining potential economic policies?

Task 1Given the current trend in consumer confidence, what would you suggest that the Bank of Englandshould do with interest rates in the UK? Explain your answer.

Advantage 1

Advantage 2


Session 5Supply-side Policies and Policy conflicts In this session we are going to focus on the instruments of supply-side policy, how they have been used in the UK and their implications. We will also consider how different policies may have caused conflicting outcomes for the Government’s economic objectives.

What are supply-side policies?Measures to make labour, product and capital markets more efficient to expand the level of productive capacity, moving the aggregate supply curve rightwards.

Labour market policies

Capital market policies

Goods and servicesmarket policies

The impact of supply-side policies on the macro economy

Key supply-side challenges for the UK economy:

PriceLevel

LRAS

Real NationalOutput (Y)

Supply-side policy Examples

Low rate of productivity growth

High rate of youthunemployment

Low trend rate ofeconomic growth

Rising inequality of incomes

Low investment andresearch spending

Challenge Explanation


The Productivity Puzzle

Productivity Pre-crisis trend

The chart above illustrates the so-called ‘productivity puzzle’ that impacts on the UK Economy. It shows the real productivity index (output per hour, 2007=0) in red and the level of productivitythat may have occurred if improvements in productivity had continued on their pre-crisis trend.

This lack of continually improving productivity is a major concern. The issue is compounded bythe fact that productivity levels in the UK are worse than all of the other G7 economies except for Japan.

One possible cause of the puzzle could be a policy conflict – the push to create more jobs (to reduce unemployment) may have meant in order to fill the vacancies employers have had to employ less effective workers.

Without improved productivity the economy will struggle to continually grow – eventually peoplecan no longer work longer hours or continue to work to a greater and greater age. We may beseeing a long-term shift in the productivity rates of the UK.

EvaluationTo what extent is the UK Government’s policy to reduce unemployment levels a direct cause oflow productivity in the economy?

Research and DevelopmentAlthough recent years have seen an increase in spending on research and development in theUK it continues to lag behind many of our competitors.

The amount of money being put into R&D by UK business hit £19.9bn in 2014, up from £19.1bn in 2013 at constant prices. This amounted to 1.1% of GDP.

However, South Korea spent 4.1% of GDP on developing new technology and products, Japan 3.4%, Germany 2.9%, the US 2.7% and France 2.2%. The EU average was 1.9pc.


Point

Explanation

Evidence

Evaluation


123

What are the key dangers from a lack of investment in research and development?


123

What are the key advantages of developing Enterprise Zones?

Has this conflict been reflected in the statistics?

UK Economic Growth and the Balance of Payment Current Account

UK Economic Growth and the Balance of Payment Current Account

UK Enterprise ZonesEnterprise zones have been set up in 24 regions within the UK. The concept is to create regionalised hubs for promoting growth and creativity in areas that may have traditionally suffered from higher unemployment.

In each zone, the organisation specialises in a particular set of industries that have the potential for success in that are (e.g. Advanced Manufacturing/Engineering in Birmingham, Aerospace in Manchester).

The Government attempts to attract businesses to the area by promising advantages such as a streamlined planning process, enhanced capital allowances or improved transport links.

Conflict between unemployment and inflationEconomists will often talk about the conflict between unemployment and inflation (see the Phillips Curve).Traditionally, the concern was that any monetary or fiscal policy put in place to reduce inflation oftenrequired controlling aggregate demand. So, increasing interest rates will reduce AD but as demand falls so will employment as firms start tolay-off employees as they are no longer needed.

Economists suggest that there is a trade-offbetween economic growth and the balance of payments current account. A positive economic growth suggests that people arewealthier – in the UK as people earn moremoney they will tend to purchase more imported goods. Thus, economic growth maylead to a larger deficit on the BoP Current Account.

Examples of possible policy conflicts

Conflicting Aims?

Unemployment andinflation (price stability)

Economic growthand inflation

Economic growth and the balance of payments

Economic growthand inequality

Name CPI (2005=100) Change? UK Unemployment(LFS) %

December 2011 122

Real GDP Growth(% per annum)

BoP Current AccountBalance (% of GDP)

2011 1.6 -1.7

2012 0.7 -3.7

2013 1.7 -4.5

2014 3.0 -5.5

2015 2.5 -3.6

8.3

December 2012 125 7.8

December 2013 127 7.2

December 2014 128 5.7

December 2015 129 5.3

Analysis

Change?

Investment in exporting industries

Exchange rate depreciation

Infrastructure Investment

Example

Dependson...


Paris Climate Summit 2015All of the major economies of the world met and discussed the issue of climate change in Paris in November 2015. At the end, each governmentagreed to new targets to reduce carbon emissions and attempt to limit therise in average world temperatures to less than 2 degrees. Some of theagreed measures are legally binding (e.g. to measure and review emissions),so the UK government must now implement a raft of measures to ensurethat they are met within the agreed timeframe.

The EU bloc of nations produces 9% of the world’s greenhouse emissionswith only China and the USA polluting more. The UK will start to formulatenew policies to meet the agreed targets but these will include further measures of taxes on polluting firms/products, incentives for firms using or developing greener technology and greater regulation on pollutingfirms/consumers.


Point

Explanation

Evidence

Evaluation


Evaluate the view that further measures by the UK Government aimed at reducing greenhouse emissions will always lead to lower economic growth.

Suggest 2 new policies that the government could introduce to reduce greenhouse emissions in the UK:

1 2

B D

AC

PPF1

PPF2

E

Capitalgoods

Consumer goods

Advantagesof

EconomicGrowth

HigherLiving

Standards

Employmenteffects(higher

employment)

Fiscaldividend -higher taxrevenue

Acceleratoreffect - rising

growthstimulatesinvestment

F

Answers to multiple-choicequestions: 1. A, 2. D, 3. C, 4. A, 5. D

Task 1 Task 2

Session 3 Extension Activity answers:

Notes



Activity 1

Proportion of UK wealth by deciles

The chart above shows how wealth is distributed in the UK. It illustrates that the richest 10% of thepopulation controls 45% of the wealth of the nation. The richest 20% of the population controls64% of the wealth.

Convert the data above from deciles to quintiles:

What is the median proportion of wealth as demonstrated by your new arrangement of the data?

Poorest 5th 2nd 3rd 4th Richest 20th

Evaluate the view that policies to promote economic growth will always leadto further inequality of income within the UK economy.

Argument for Argument against

Point

Explanation

Evidence

Evaluation


£ ££ £ £


Top Tips to Improve Your Exam Answer

Crisp and accuratedefinitions

1 key point perparagraph

+Supporting examples /evidence / diagrams+ evaluate as you go

Evaluate conclusions

Command Word What does it meann

Argue This term appears often in essay questions and requires you to examine,analyse carefully and present considerations for and against items involved.

Assess Express the meaning of, translate, exemplify (give examples of), solve, or comment upon the subject. Usually you will give your judgement or reactionto the problem, but always make use of evidence.

Discuss Give reasons or present facts for and against an issue; try to provide by giving reasons or evidence for and against.

Evaluate Give reasons or present facts for and against an issue; try to provide by givingreasons or evidence for and against.

Explain Present in brief, clear form.

Interpret Make a careful judgement of the worth of something (e.g. a theory) in the lightof its truth, usefulness etc. Give supporting evidence. You might include youropinion to a lesser extent, or refer to other theories.

State Clarify and interpret the material you present. State the ‘how’ and ‘why’, the results, and where possible causes.

Define Give concise, clear meanings.

Remember that during the exam, in your writing you should take particular care with your spelling,punctuation and grammar, as well as the clarity of expression.

Building an Essay Answer

Understanding the key command words in a question

General advice for supported MC questions (EdExcel Board only)• Define key terms throughout questions 1 to 8 on the EdExcel paper • Consider the key concept or model that lies behind question• Apply the information provided e.g. the effects of a tax or a subsidy on a market• Annotate the diagrams provided in the question paper e.g. shading in or labelling areas

of consumer & producer surplus, govt spending on a subsidy or agency spending on a bufferstock

• Be prepared to annotate tables of data too - complete them or make some simple calculations• Be prepared to calculate percentages and show your workings, including a relevant formula

• Reject one or more of the options – remember to briefly explain why you have rejected them• A suitable diagram can score two marks out of three - be prepared to offer simple

diagrammatic analysis - this unit credits the application of demand and supply diagrams toeconomic issues

• Be prepared to offer economic analysis, for example, explaining how the free rider problem occurs in the provision of public goods. This will always be credited with marks.

• Offer real world examples as a way of applying theory - for example causes of geographical immobility, causes of imperfect information

Hints for getting higher scores on data questionsOne data response question is usually based on applying the theories of supply and demand andalso government intervention in markets i.e. indirect taxes, subsidies, price floors or ceilings, bufferstock schemes, carbon trading and so on). The other question is usually on one or more aspects of market failure (externalities, merit or demerit goods, public goods, monopoly and also the distribution of income). Keep in mind that some questions will overlap these two broad areas.

Definition questions• A clear, accurate succinct definition is all that is needed for full marks• Where appropriate, this could be supported by an example or by a relevant formula• It is often the case that one full sentence is sufficient• A correct diagram to show understanding of a term may also get full marks

Data DescriptionE.g. “Identify 2 points of comparison”, “Identify 2 significant changes”, “Compare 2 significantchanges” or “Identify 2 significant features”.

• Two features should be clearly stated, ideally each in a separate paragraph• Each point should represent a significant feature of the data.• A good answer provides overview, backed up by evidence from the data• Each feature identified must be supported by the use of relevant statistics• Use of data must be accurate, e.g. the units must be correctly stated (e.g. $s per capita)• No marks are awarded for candidates who just ‘trawl’ through the data – the instructions

are to identify two main/significant features of the data• For time series data, give an overview, i.e. “over the whole period the price of coffee

rose by X%”• Do not try to explain the data! This is not what the question is asking – you will be

wasting valuable time in the exam and might struggle to complete the questions carrying the highest marks


Analysis and Explanation QuestionsThese nearly always require at least one analysis diagram to score full marks e.g. “With the help of a demand and supply diagram.” Here are some of the key diagrams you will need to know for AS microeconomics.

To score high marks on explanation and analysis• Define the economic terms that are in the question • Make good use of one (possibly more) diagrams - fully labelled with correct units on axes.• When explaining something, there are marks for identifying a relevant factor and constructing

a logical argument linked to the factor identified• Additional marks are awarded for relevant use of

elasticity concepts – if you change the elasticity, often you get a different outcome (e.g. the effects of taxation on demand for de-meritgoods)

• Carefully look at question instructions and then attempt to answer, maintaining relevance

Production Possibility Curve (and shifts in) Negative externalities in production and consumption

Price elasticity of demand and total revenue Positive externalities in production and consumption

Shifts in supply and demand Economies of large scale production

Consumer and producer surplus Maximum and minimum prices

Allocative efficiency in a market Indirect taxes

De-merit goods and information failure Government subsidies for producers and consumers

Buffer stock agency schemes Elasticity of supply – different supply curves

Developing your evaluation skillsEvaluation questions carry the highest marks and ask for more from the student. For the AQA evaluation marks are reserved for the final essay-style question. But for EdExcel, evaluation marksare available in more questions – summarised below:

Here are some thoughts from the examiners(i) Before you can evaluate you must analyse!(ii) Evaluate each argument as it is introduced into the answer(iii) Examiners like students who develop clear chains of reasoning in their answers(iv) Try to make at least 3 “explicit” references to the data given in the question(v) “Answers do not always have a clear, logical structure”. Hints for better marks:

a. Identify the area of economics which is being tested in the essay-style questionb. Outline the relevant theory, using a diagram if possible (they really do help!)c. Evaluate arguments/policies as you god. Develop one key point per paragraph and leave a clear line between each paragraphe. Remember to come to a ‘final judgement’ including referring back to the dataf. A conclusion is essential and should not just repeat earlier pointsg. Leave yourself 5 minutes for a final judgement of 4-5 lines. This is time well spent.

Try to incorporate a new idea, e.g. how a policy may impact on different parties; how the policy may have different short v long run effects.

• Answers should include alternative points of view and these should be clearly identified• Some attempt should be made to consider the strengths and weaknesses of the different

viewpoints. [Rank them if possible].• Where possible, use data to provide support for arguments or to refute a point of view• Final judgements might be qualified by statements that include phrases such as

‘it depends on’.• Useful evaluative words: “However, nevertheless, it is likely that, on the other hand….”• Maintain a high quality of presentation, especially in high mark questions and with your

diagrams.


Ability to pay The idea that taxes should be levied on a person according to how well that person can shoulder theburden / afford to pay

Absolute poverty The number of people living below a certain income threshold or the number of hous holds unable to afford certain basic goods and services. The United Nations definition is a severe and persistentdeprivation of basic human needs

Ad valorem tax An indirect tax based on a percentage of the sales price of a good or service. An increase in an advalorem tax causes an inward shift in the supply curve

Adverse selection Where the expected value of a transaction is known more accurately by the buyer or the seller due toan asymmetry of information; e.g. health insurance

Allocative efficiency Allocative efficiency occurs when the value that consumers place on a good or service (reflected inthe price they are willing and able to pay) equals the cost of the resources used up in production.

Asking price The price at which a security, commodity or currency is offered for sale on the market - generally thelowest price the seller will accept.

Asymmetric information Occurs when somebody knows more than somebody else in the market. Such asymmetric informationcan make it difficult for the two people to do business together. A situation in which some agents havemore information than others and this affects the outcome of a bargain between them

Automation A production technique that uses capital machinery / technology to replace or enhance human labourAverage cost Average or unit cost (AC) is the total cost divided by the number of units of the commodity produced.Barriers to entry Factors which make it difficult or expensive for new firms to enter a market in order to compete with

existing suppliers. Examples of barriers to entry include the effect of patents; brand loyalty amongconsumers; the high costs of buying capital equipment and also the need to win licences to operatein certain markets.

Barter The practice of exchanging one good or service for another, without using moneyBasic economic problem The basic problem is that there are infinite wants but finite (non-renewable) resources with which to

satisfy themBlack market Illegal market in which market price is higher than a legally imposed price ceiling. Bottlenecks Any factor that causes production to be delayed or stopped – this may reduce the price elasticity of

supply of a productBrand A distinctive product offering which is created by the use of a logo, symbol, name, design, packaging

or combination thereof. The key in designing and building a brand is to differentiate it from competitors.Buffer stock Buffer stock schemes seek to stabilize the market price of agricultural products by buying up supplies

of the product when harvests are plentiful and selling stocks of the product onto the market whensupplies are low.

Bulk-buying The purchase by one organisation of large quantities of a product or raw material, which often resultsin a lower price because of their market power and because it is cheaper to deal with one customerand the deliveries can be on a larger scale.

Buyer’s market A market that favours buyers because supply is plentiful relative to demand and therefore prices arerelatively low. The opposite of a seller's market.

By-product A by-product is a good or service that is produced as a consequence of producing a other good orservice.

Capacity utilisation The extent to which a business is making full use of existing factor resourcesCapacity-building Efforts to develop human skills or infrastructures within a community or organisationCapital goods Producer or capital goods such as plant (factories) and machinery and equipment are useful for the

goods and services they can help produce in the future. Distinguished from "financial capital", meaning funds which are available to finance the production or acquisition of real capital

Capital-intensive A production technique which uses a high proportion of capital to labourCapitalist economy An economic system organised along capitalist lines uses market-determined prices to guide our

choices about the production and distribution of goods. One key role for the state is to maintain therule of law and protect private property.

Carbon credits An allowance to a business to generate a specific level of emissions – may be traded in a carbon market

Cartel A cartel is a formal agreement among firms. Cartel members may agree on prices, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment ofcommon sales agencies, and the division of profits or combination of these.

Ceteris paribus To simplify analysis, economists isolate the relationship between two variables by assuming ceterisparibus - all other influencing factors are held constant.

Command and control Laws and regulation backed up by inspection and penalties for non-complianceCommand economy An economic system where all resources are allocated by the government, with no markets (egg

ex-Soviet bloc, North Korea).

Common resources Goods or services that have characteristics of rivalry in consumption and non-excludability - grazing landor fish stocks are examples. The over-exploitation of common resources can lead to the "tragedy ofthe commons"

Competition policy Government policy directed at encouraging competition in the private sector: e.g. the investigation oftakeovers or restrictive practices

Competitive market A market where no single firm has a dominant position and where the consumer has plenty of choicewhen buying goods or services. There are few barriers to the entry of new firms

Competitive supply Goods in competitive supply are alternative products a firm could make with its resources. E.g. a farmer can plant potatoes or carrots. An electronics factory can produce VCRs or DVDs.

Complements Two complements are said to be in joint demand. Examples include: fish and chips, DVD players andDVDs, iron ore and steel,

Composite demand Where goods or services have more than one use so that an increase in the demand for one productleads to a fall in supply of the other. E.g. milk which can be used for cheese, yoghurts, cream, butterand other products. If more milk is used for manufacturing cheese, ceteris paribus there is less available for butter.

Conspicuous Conspicuous consumption is consumption designed to impress others rather than something that isconsumption wanted for its own sake.Constraints Limits to what we can afford to consume – we have to operate within budgets, and make choices

from those sets that are feasible/affordable. There is always a set of conceivable thing that are actually available, and another set of that aren't

Consumer sovereignty Consumer sovereignty exists when the economic system allows scarce resources to be allocated toproducing goods and services that reflect the wishes of consumers. Sovereignty can be distorted bythe effects of persuasive advertising

Consumer surplus A measure of the welfare that people gain from the consumption of goods and services, or a measureof the benefits they derive from the exchange of goods. Consumer surplus is the difference betweenthe total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually pay (the market price)

Contestable market Market with no entry barriers - firms can enter or leave without significant cost. Costs Costs faced by a business when producing a good or service for a market. Every business faces

costs - these must be recouped if a business is to make a profit from its activities. In the short run afirm will have fixed and variable costs of production.

Cross price elasticity Responsiveness of demand for good X following a change in the price of good Y (a related good).of demand With cross price elasticity we make an important distinction between substitute products and

complementary goods and services.Deadweight loss The loss in producer and consumer surplus due to an inefficient level of production perhaps resulting

from market failure or government failureDemand curve A demand curve shows the relationship between the price of an item and the quantity demanded over

a period of time. For normal goods, more of a product will be demanded as the price falls.De-merit goods The consumption of de-merit goods can lead to negative externalities which causes a fall in social

welfare. Consumers may be unaware of the negative externalities that these goods create - they haveimperfect information.

Derived demand The demand for a product X might be strongly linked to the demand for a related product Y - givingrise to the idea of a derived demand.

Diminishing returns As more of a variable factor (e.g. labour) is added to a fixed factor (e.g. capital) a firm will reach apoint where it has a disproportionate quantity of labour to capital and so the marginal product oflabour will fall, thus raising marginal costs

Disposable income Income that remains after direct taxes and government charges has been paid.Division of labour The specialization of labour in specific tasks, intended to increase productivityEconomic efficiency Economic efficiency is about making the best use of our scarce resources among competing ends so

that economic and social welfare is maximised over timeEconomic planning Government policies aimed at influencing trends in the economy.Economy of scale Reductions in long-run average cost from an increase in the scale of production.Economy of scope Economies of scope occur where it is cheaper to produce a range of products.Effective demand Demand in economics must be effective. Only when a consumers' desire to buy a product is backed

up by an ability to pay for it do we speak of demand. Elastic demand Demand for which price elasticity is greater than 1Elastic supply Where the price elasticity of supply is greater than +1Elasticity of supply Price elasticity of supply measures the relationship between change in quantity supplied and a

change in price.Emission tax A charge made to firms that pollute the environment based on the quantity of pollution they emit i.e.

the volume of CO2 emissionsEntrepreneur An entrepreneur is an individual who seeks to supply products to a market for a rate of return (i.e. a

profit). Entrepreneurs will usually invest their own financial capital in a business and take on the risksassociated with a business investment.

AS MICRO Key Term Glossary


Equilibrium Equilibrium means ‘at rest’ or ‘a state of balance’ - i.e. a situation where there is no tendency forchange. The concept is used in both microeconomics (e.g. equilibrium prices in a market) and also in macroeconomics (e.g. equilibrium national income)

Excess demand The difference between the quantity supplied and the higher quantity demanded when price is setbelow the equilibrium price. This will result in queuing and an upward pressure on price

Excess supply When supply is greater than demand and there are unsold goods in the market. Surpluses put downward pressure on the market price.

Excludability The property of a good whereby a person can be prevented from using itExternal cost Costs faced by a third party for which no appropriate compensation is forthcoming. Identifying and

then estimating a monetary value for air and noise pollution is a difficult exercise - but one that is increasingly important for economists concerned with the impact of economic activity on our environment.

External growth When a company increases its sales and profits by buying other companies, rather than from its ownoperations.

Externalities Externalities are third party effects arising from production and consumption of goods and services forwhich no appropriate compensation is paid.

Factor incomes Factor incomes are the rewards to factors of production. Labour receives wages and salaries, landearns rent, capital earns interest and enterprise earns profit.

Finite resources There are only a finite number of workers, machines, acres of land and reserves of oil and other naturalresources on the earth. By producing more for an ever-increasing population, we may destroy the natural resources of the planet.

Fixed costs Costs that do not vary directly with the level of output. Examples of fixed costs include: rent and business rates, the depreciation in the value of capital equipment (plant and machinery) due to ageand marketing and advertising costs.

Free market System of buying and selling that is not under the control of the government, and where people canbuy and sell freely, or an economy where free markets exist, and most companies and property are notowned by the state

Freemium A business model, especially on the Internet, whereby basic services are provided free of chargewhile more advanced (premium) features must be paid for

Geographical immobility People may also experience geographical immobility – meaning that there are barriers to them movingfrom one area to another to find work

Gini Coefficient The Gini coefficient measures the extent to which the distribution of income (or, in some cases, consumption expenditures) among individuals or households within an economy deviates from a perfectly equal distribution. The coefficient ranges from 0 -meaning perfect equality -to 1- complete inequality.

Government failure Policies that cause a deeper market failure. Government failure may range from the trivial, when intervention is merely ineffective, to cases where intervention produces new and more serious problems that did not exist before

Health rationing Health rationing occurs when the demand for health care services outstrips the available resourcesleading to waiting lists and delays for health treatment.

Horizontal equity Horizontal equity requires equals to be treated equally e.g. people in the same income group shouldbe taxed at the same percentage rate

Incentives Incentives matter enormously in any study of microeconomics, markets and market failure. For competitive markets to work efficiently economic agents (i.e. consumers and producers) must respond to price signals in the market.

Incidence of a tax How the final burden of a tax is shared out. If demand for a good is elastic and a tax is imposed thenthe tax may fall mainly on the producer as they will be unable to put prices up without losing a lot ofdemand.

Income Income represents a flow of earnings from using factors of production to generate an output of goodsand services. For example wages and salaries are a factor reward to labour and interest is the flow ofincome for the ownership of capital.

Income elasticity Measures the relationship between a change in quantity demanded and a change in real income. of demand The formula for income elasticity is: percentage change in quantity demanded divided by the percentage

change in incomeIndirect tax An indirect tax is imposed on producers (suppliers) by the government. Examples include excise

duties on cigarettes, alcohol and fuel and also value added tax. Inelastic demand When the price elasticity of demand is less than 1Inelastic supply When the price elasticity of supply is less than +1Inferior good When demand for a product falls as real incomes increasesInformal economy Undeclared economic activity which forms the shadow economyInformation failure Information failure occurs when people have inaccurate, incomplete, uncertain or misunderstood data

and so make potentially ‘wrong’ choices. Innovation The commercial development of exploiting new or improved goods and services.Inputs Labour, capital and other resources used in the production of goods and services

Intellectual property Intellectual property (IP) is the legal property rights over creations of the mind, both artistic and commercial, and the corresponding fields of law. Common types of intellectual property include copyrights, trademarks, patents, and trade secrets.

Internalised Internalising is where any spill-over effects from economic activity are absorbed by the consumer orfirm themselves. This may arise for example, where a pollution tax has been charged on the good thatmakes them pay the external costs themselves

Inventories Unsold products, finished and unfinished, and the raw materials used to make themInvisible hand Adam Smith - one of the founding fathers of modern economics, described how the invisible or

hidden hand of the market operated in a competitive market through the pursuit of self-interest to allocate resources in society's best interest

Joint supply Joint supply describes a situation where an increase or decrease in the supply of one good leads toan increase or decrease in supply of another by-product. For example an expansion in the volume ofbeef production will lead to a rising market supply of beef hides. A contraction in supply of lamb willreduce the supply of wool.

Land Natural resources available for productionLatent demand Latent demand exists when there is willingness to purchase a good or service, but where the

consumer lacks the purchasing power to be able to afford the product. Latent demand is affected bypersuasive advertising - where the producer is seeking to influence consumer tastes and preferences.

Long run Period of time in which all inputs may be varied but the basic technology of production is unchanged.Market equilibrium Equilibrium means a state of equality between demand and supply. Without a shift in demand and/or

supply there will be no change in market price. Prices where demand and supply are out of balanceare termed points of disequilibrium

Market failure Market failure exists when the competitive outcome of markets is not efficient from the point of view ofthe economy as a whole. This is usually because the benefits that the market confers on individuals orfirms carrying out a particular activity diverge from the benefits to society as a whole

Market incentives Market signals that motivate economic actors to change their behaviour (perhaps in the direction ofgreater economic efficiency)

Market power Market power refers to the ability of a firm to influence or control the terms and condition on whichgoods are bought and sold. Monopolies can influence price by varying their output because consumers have limited choice of rival products.

Market shortage Where demand exceeds supply at a given priceMarket supply Market supply is the total amount of an item producers are willing and able to sell at different prices,

over a given period of time egg one month. Industry, a market supply curve is the horizontal summationof all each individual firm’s supply curves.

Maximum price A legally-imposed maximum price in a market that suppliers cannot exceed - in an attempt to preventthe market price from rising above a certain level. To be effective a maximum price has to be set belowthe free market price

Means tested benefits Welfare payments which are only paid to households who can prove they are poorMerit good A merit good is a product that society values and judges that everyone should have regardless of

whether an individual wants them. In this sense, the government (or state) is acting paternally in providing merit goods and services

Minimum price A legally imposed price floor below which the normal market price cannot fall. To be effective the minimum price has to be set above the normal equilibrium price. A good example of this is minimumwage legislation currently in force in the UK

Mixed economy Where resources are partly allocated by the market and partly by the governmentMonopoly A single seller of a product in a given market or industryMoral hazard When people take actions that increase social costs because they are insured against private loss:

sometimes it is called hidden action due to the agent’s actions being hidden from the principal.Negative externality Negative externalities occur when production and/or consumption impose external costs on third

parties outside of the market for which no appropriate compensation is paid. This causes social coststo exceed private costs

Niche market A specialist section of a larger market e.g. hand-made chocolatesNon price competition Competing not on the basis of price but by other means, such as the quality of the product, packaging,

customer service, etcNon-renewable resources Non-renewable resources are resources which are finite and cannot be replaced. Minerals, fossil fuels

and so on are all non-renewable resourcesNon-rival consumption Non-rivalry means that the consumption of a good by one person does not reduce the amount

available for others. An example could be air. Non-rivalry is one of the key characteristics of a publicgood

Normal goods Normal goods have a positive income elasticity of demand. Necessities have an income elasticity of demand of between 0 and +1. Luxuries have income elasticity > +1 demand rises more than proportionate to a change in income

Normative statements Normative statements express an opinion about what ought to be. They are subjective statements -i.e. they carry value judgments. For example, the level of duty on petrol is too unfair and unfairly penalizes motorist

Oligopoly A market dominated by a few large suppliers. Market concentration is high with typically the leadingfive firms taking over sixty per cent of total market sales.


Opportunity cost The cost of any choice in terms of the next best alternative foregone.Ostentatious Some goods are luxurious items where satisfaction comes from knowing both the price of the goodconsumption and being able to flaunt consumption of it to other people!Out-sourcing Subcontracting a process, such as design or manufacturing, to another companyOverhead costs Business costs–such as rent and utilities–that don't directly relate to the production or sale of goods

and servicesPareto efficiency In neoclassical economics, an action done in an economy that harms no one and helps at least one

person. A situation is Pareto efficient if the only way to make one person better off is to make anotherperson worse off.

Peak pricing When a business raises prices at a time when demand is strongestPersuasive advertising Designed to manipulate consumer preferences and cause a change in demandPerverse demand curve A perverse demand curve is one which slopes upwards from left to right. Therefore an increase in

price leads to an increase in demand. This may happen where goods are strongly affected by priceexpectations or in the case of Giffen goods

Planned economy In a planned economy, decisions about what to produce, how much to produce and for whom are decided by central planners working for the government rather than allocated using the price mechanism.

Polluter pays principle The government may choose to intervene in a market to ensure that the firms and consumers who create negative externalities include them when making their decisions egg first parties are forced tointernalise external costs & benefits through indirect taxes.

Positional goods Goods which are at least in part demanded because their possession or consumption implies socialor other status of those acquiring them

Positive externalities Positive externalities exist when third parties benefit from the spill-over effects of production/ consumption e.g. the social returns from investment in education & training or the positive benefitsfrom health care and medical research.

Positive statement Objective statements that can be tested or rejected by referring to the available evidence. Positiveeconomics deals with objective explanation. For example: “A rise in consumer incomes will lead to arise in the demand for new cars.” Or “A fall in the exchange rate will lead to an increase in exportsoverseas.”

Poverty trap The poverty trap affects people on low incomes. It creates a disincentive to look for work or worklonger hours because of the effects of the tax and benefits system.

Preferences Our tastes, likes, rankings – e.g. I have a preference for organic foods and I prefer the Independentnewspaper to the Guardian

Price elasticity of demand Price elasticity of demand measures the responsiveness of demand for a product following a changein its own price.

Price elasticity of supply Price elasticity of supply measures the relationship between change in quantity supplied and a changein price.

Price mechanism The means by which decisions of consumers and businesses interact to determine the allocation ofresources between different goods and services.

Price signals Changes in price act as a signal about how resources should be allocated. A rise in price encouragesproducers to switch into making that good but encourages consumers to use an alternative substituteproduct (therefore rationing the product).

Private benefit The rewards to individuals, firms or consumers from consuming or producing goods and services.Also known as internal benefits

Private cost Costs of an economic activity to individuals and firms. Also known as internal costs.Privatisation Selling off a state run industry to the private sectorProducer surplus The difference between what producers are willing and able to supply a good for and the price they

actually receive. The level of producer surplus is shown by the area above the supply curve and belowthe market price.

Production possibility A boundary that shows the combinations of two or more goods and services that can be producedfrontier using all available factor resources efficientlyProductive efficiency The output of productive efficiency occurs when a business in a given market or industry reaches the

lowest point of its average cost curve implying an efficient use of scarce resources and a high level offactor productivity.

Productivity A measure of efficiency = output per unit of input or output per person employedProfit Profits are made when total revenue exceeds total cost. Total profit = total revenue - total cost. Profit

per unit supplied = price = average total costProperty rights Property rights confer legal control or ownership of a good. For markets to operate efficiently, property

rights must be clearly defined and protected - perhaps through government legislation and regulationPublic bads Public bads include environmental damage and global warming which affects everyone – no one is

excluded from the dis-benefitsPublic goods Pure public goods are non-rival – consumption of the good by one person does not reduce the

amount available for consumption by another person, and non-excludable – where it is not possibleto provide a good or service to one person without it thereby being available for others to enjoy.

Public sector Government organisations that provide goods and services in the economy - for example throughstate education and the national health service.

Purchasing power A measure of money's value in terms of what it can buy. Purchasing power tends to change over time,mainly because of inflation.

Quota A quota is a limit on the quantity of a product can be supplied to a market Rational choice ‘Rational choice’ involves the weighing up of costs and benefits and trying to maximise the surplus of

benefits over costsReal wage The real wage is the purchasing power of money wagesRedistribution Measures taken by government to transfer income from some individuals to othersRegressive tax A tax is said to be regressive when low income earners pay a higher proportion of their income in tax

than high income earnersRelative poverty Relative poverty measures the extent to which a household's financial resources falls below an

average income threshold for the economyScarcity Scarce means limited. There is only a limited amount of resources available to produce the unlimited

amount of goods and services we desire.Seller’s market A market where demand exceeds supply, allowing the sellers of a product to have greater control over

prices, terms, etc. The opposite of a buyer's market.Shortage A situation in which quantity demanded is greater than quantity suppliedSignalling Prices have a signalling function because the price in a market sends important information to

producers and consumersSocial benefit The benefit of production or consumption of a product for society as a whole. Social benefit = private

benefit + external benefitSocial cost The cost of production or consumption of a product for society as a whole. Social cost = private cost

+ external costSocial efficiency The socially efficient output is where Social Marginal Cost (SMC) = Social Marginal Benefit. (SMB)Spare capacity Where a firm or economy can produce more with existing resources. When there is plenty of spare

capacity, elasticity of supply tends to be highSpecialisaton A method of production where a business or area focuses on the production of a limited scope of

products or services to gain greater productive efficiencySpeculation Speculation is the activity of buying a good or service in anticipation of a change in the price/market

value e.g. currency or stock-market speculationSpill-over effects External effects of economic activity, which have an impact on outsiders who are not producing or

consuming a product – these can be negative (creating external costs) or positive (creating externalbenefits)

Stakeholders Groups who have an interest in the activity of a business e.g. shareholders, managers, employees,suppliers, customers, government and local communities. Different stakeholders have different objectives e.g. owners want maximum profits, customers low prices and workers high wages and rising living standards.

State provision Government-provided good or services - funded through tax revenue in order to provide goods whichhave positive externalities or are public goods

Subsidy Payments by the government to suppliers that reduce their costs. The effect of a subsidy is to increase supply and therefore reduce the market equilibrium price.

Substitutes Goods in competitive demand and act as replacements for another productSubstitutes in production A substitute in production is a product that could have been produced using the same resources.

Take the example of barley. An increase in the price of wheat makes wheat growing more attractive.The pursuit of the profit motive may cause farmers to use land to grow wheat rather than barley.

Supply Quantity of a good or service that a producer is willing and able to supply onto the market at a givenprice in a given time period.

Supply chain Different stages of making, distributing and selling a good or service from the production of parts,through to distribution and sale of the product.

Supply shock An event that directly alters firms' costs and prices shifting the supply curve either to the right (lowercosts) or to the left (higher costs). Examples include unexpected changes in the global prices of commodities such as oil, gas and hard metals.

Tax incidence The manner in which the burden of an indirect tax is shared between participants in the market i.e.consumers and producers

Time lags Time lags occur in production, particularly in agriculture, when decisions about the quantity to be produced are made well ahead of the actual sale. Demand and the price may change in the interval,creating a problem for the producer.

Tragedy of the Commons When no one owns a resource, it gets over-used, for example fish stocks and deforestation - peopleuse and benefit from it without regard to the effect on others

Transactions cost Costs that parties incur in the process of agreeing and following through on a dealTransfer payments Government welfare benefits made available through the social security systemValue judgement A view of the rightness or wrongness of something, based on a personal view.Variable cost Variable costs vary directly with output. I.e. as production rises, a firm will face higher total variable

costs because it needs to purchase extra resources to achieve an expansion of supply. Common examples of variable costs or a business include the costs of raw materials, labour costs and consumables.

Willingness to pay The maximum price a consumer is prepared pay to obtain a product


AS MACRO Key Term Glossary

Aggregate Demand and GDPAggregate demand The total spending on goods and services in an economy = C+I+G+X-MCapital Capital is factors of production that are used to make other goods and services, for example

machinery, plant and equipment and technology.Constant prices Constant prices tells us that the data has been inflation adjustedConsumer durables Products such as washing machines that are not used up immediately when consumed and which

provide a flow of services over timeFTSE-100 Index The FTSE 100, tracks share-price movements in the 100 largest companies by market capitalization

listed on the London Stock ExchangeGDP The monetary value of the output of goods and services produced inside a countryHousehold wealth The value of assets – including property, shares, savings and pension fund assetsInformal economy Economic activity which goes unrecordedInjection of demand Money entering the circular flow – investment, government spending and exportsLeakage of demand Money leaving the circular flow – saving, taxation and importsMultiplier effect If there is an initial injection (e.g. a rise in exports) into the economy then the final increase in AD

and Real GDP will be greater.Negative equity When the value of an asset falls below the debt left to pay on that asset. Term is most commonly

used in connection with property prices and mortgagesNominal Nominal means the money value of something, for example the money value of a weekly

wage unadjusted for the effects of inflationNominal GDP This is the monetary value of all goods and services expressed at current pricesParadox of thrift If people save more, it will reduce consumption, thus aggregate demand will fall, impeding economic

growth and, in fact, lowering the general level of savingsPrecautionary saving Saving because of fears of a loss of real income or employmentReal disposable income Income after taxes and benefits, adjusted for the effects of inflationReal wage The nominal wage adjusted for the effects of inflationSaving ratio The percentage of disposable income that is saved rather than spentWithdrawal A leakage from the circular flow of income (savings, taxation and imports)

Economic Cycle

Accelerator effect Capital investment is linked positively to expected growth of consumer demandAnimal spirits The state of confidence or pessimism held by consumers and businesses.Business cycle Fluctuations of economic growth around trendComponents of AD AD=C+I+G+X-M. Household consumption is the largest element accounting for 60% of the total in

2011. Government consumption accounted for 23% and investment for 15%.Consumer confidence Confidence surveys, with information generally released ahead of official statistical data, can indicate

changes to the economic outlook as well as turning points in the economic cycleDemand shock An unexpected shock to one or more of the components of aggregate demand e.g. From recession

in the economy of a major trading partnerDepression Used to describe a severe recession which may become a prolonged downturn in the economy and

where GDP falls by at least 10 per cent.Double dip recession When an economy goes into recession twice without a full recovery in betweenEconomic cycle Variations in the annual rate of growth of an economy over timeEconomic shocks Unpredictable events such as volatile prices for oil, gas and foodstuffs.Economic stability When indicators such as growth, prices and unemployment do not change much from one year to

another.Expectations How we expect the future to unfold – this can have powerful effects on the spending

decisions of households, businesses and the governmentFine-tuning Changes in policy designed to gradually influence demand, output and pricesForecast A prediction made about the likely future performance of an economyGDP by value added In 2011 services accounted for 76% of UK Gross Value Added, manufacturing 11%, mining and

quarrying, and utilities 6%, construction 7% and agriculture, hunting and fishing 1%Gross Investment This measures total investment spending in buildings and machinery, some of which is spending on

replacement investment i.e. worn-out, fully depreciated equipmentLagging indicators Indicators which tend to follow economic cycles e.g. unemploymentLeading indicators Indicators which predict future economic trends e.g. consumer confidenceOutput gap The difference between potential and actual real national income in an economyPeak The high point of the economic cycle beyond which a recession startsRecession A period of at least six months when an economy suffers a fall in output

Slowdown A fall in the rate of growth of an economy but not a full-scale recessionSlump A sustained decrease in real GDP and a persistent rise in unemploymentSoft landing A slowdown in economic activity but which does not result in a recessionSupply shock An unexpected shock to one or more of the components of aggregate supply e.g. Higher oil and gas

prices or a rise in the cost of imported food Target A target is an objective of government policy e.g. low inflation or rising employmentTrade-off A trade-off implies that choices have to be made between different objectives of economic policy for

example a choice between unemployment and inflationTrough The low point of the economic cycle beyond which a recovery starts

Fiscal Policy

AAA credit rating The best credit rating that can be given to a corporation's or government’s bonds, effectively indicating that the risk of default is negligible

Bond Both companies and governments can issue bonds when they need to borrow moneyBond yield The rate of interest market investors demand when purchasing government bonds Budget deficit When government spending > tax revenues. This leads to a rise in the level of debtBusiness taxation Taxation aimed at firms, such as VAT, Corporation Tax and a carbon taxCorporation Tax A tax on the profits made by companiesDisposable income Income after the effects of direct taxes and welfare benefits have been calculatedFiscal austerity When government spending is being cut and/or taxation is being raised Fiscal stimulus Increased public spending and lower taxation, aimed at boosting economic activityGilts Another word for government bondsGovernment debt The debt issued by a national government for example by the sale of bondsKeynesian economics The belief that the state can directly stimulate demand in a stagnating economy. For instance, by

borrowing money for projects like roads, schools and hospitals.Progressive tax A tax that takes an increasing proportion of income as income risesRegressive tax A tax that takes a smaller proportion of income as the taxpayer’s income risesSovereign debt Debt issued by or guaranteed by a government

Economic Growth and Development

BRIC countries Brazil, Russia, India and China - short hand for a group of fast-growing countriesCatch-up effect When countries that start off poor but grow more rapidly than countries that start off rich causing

convergence in the standard of living measured by per capita GDP.De-industrialization A decline in the share of national income from manufacturing industriesEconomic growth The increase in a country’s capacity to produce goods and servicesGini Coefficient Measure of the extent to which groups of households, from the bottom of the income distribution

upwards, receive less than an equal share of income.GDP per capita National income per head of populationGross National Income The same as GDP except that it adds what a country earns from overseas investments

and subtracts what foreigners earn in a country and send back homeHuman Development An index devised to assess comparative levels of development in countries, quantified Index in terms of literacy, life expectancy and purchasing powerLorenz Curve A way of showing the unequal distribution of income and wealth in an economyPurchasing Power The exchange rate that equates the price of a basket of identical traded goods and services inParity (PPP) two countriesSustainable growth Growth without non-renewable resources being used up or pollution becoming intolerable

Inflation

Appreciation When the value of an asset or exchange rate increases in value relative to anotherCredit crunch Situation where banks across the economy reduce lending to each other due to falling confidence

that loans will be repaidDeflation A persistent fall in the general price level of goods and servicesDepreciation A fall in the market value of one exchange rate against anotherDisinflation A fall in the rate of inflation. This means a slower increase in prices but not a fall in prices (deflation)Euro Zone 17 countries (currently) that share a single currency (the Euro) and a common policy interest rate

set by the European Central BankInflation target The Bank of England has an inflation target of 2% for the consumer price indexMoney supply The total amount of money in an economy at a given timeOver-heating When an economy is growing too fast and aggregate supply cannot keep up with demand, leads to

a rise in demand-pull and cost-push inflationPrice stability A period of low stable inflation of between 1-4% when price rises are modestQuantitative easing Attempts by a central bank to increase the base supply of money by buying debt off banks and other

financial institutions. Has occurred in the UK since 2009


Real interest rate Nominal (money) rate of interest adjusted for inflationTransmission The process by which changes in interest rates and/or the supply of money work tomechanism affect demand, output and prices

Supply-side Policies

Brain drain Movement of highly skilled people from their own country to another countryEconomic infrastructure Economic infrastructure includes energy, water, transport, and digital communicationsFactor mobility The extent to which resources can move to alternative usesHuman Capital Accumulated skills, experience, aptitudes and motivation of a nation's workforceInfrastructure Transport links, communications networks, sewage systems, energy plants and other

facilities essential for the efficient functioning of a country and its economyInnovation Changes to products or production processes – innovation is important in delivering improvements

in dynamic efficiencyInvestment Spending on capital goods including plant & machinery and infrastructureProductive potential The productive capacity of the economy – boosted by high quality investmentProductivity Productivity refers to how efficiently inputs are used to produce outputs. Labour productivity is

generally defined as output per hour workedSocial Infrastructure Social infrastructure includes capital spending on schools and hospitals

Trade and Balance of Payments

Balance of Payments The total of all the money coming into a country from abroad less all of the money going out of thecountry during the same period

Balance of Trade Difference between exports and imports of goods only or goods and services combinedCompetitiveness Cost and non-price factors that make a business successful in international marketsCurrent account The balance of imports and exports of goods and services, income and transfers combinedCurrency war A term used to describe competitive devaluation of currencies, a scenario where various nations

try to devalue their currencies in an attempt to gain an advantage over each otherExchange rate The rate at which one currency is traded against anotherExport revenue Sales from selling goods and services overseasFDI Foreign direct investment from overseas businesses into a specific countryFree trade Ability of people to undertake trade with people in other countries free from any restraints imposed

imposed by governments or other regulatorsGlobalisation The deepening of relationships between countries reflected in increasing trade and investment.Import A good or a service produced overseas. Imports are a leakage of demand from the circular flow.Remittances The sending of money to people in another country. For many lower-income nations, remittance

income is now a big contribution to their Gross National Income (GNI)Sterling exchange rate The Sterling Exchange Rate Index (SERI) measures sterling’s value against a ‘basket’ of currencies, index ‘trade-weighted’ (based on currencies’ relative importance in UK trade)Tariff A tax on imported products which may be ad valorem (%) or a specific taxTrade deficit When a country imports a greater value of goods and services than it exports. Trade surplus When the value of exports exceeds the value of imports in a given time period

Unemployment

Apprenticeships Paid jobs that incorporate on and off the job trainingClaimant Count The number of people claiming Jobseeker’s Allowance (JSA) benefitsCyclical unemployment Involuntary unemployment due to a lack of demand. This is also known as Keynesian unemploymentFrictional Unemp Transitional unemployment as people move between jobs or are in active job searchFull Employment Jobs for all that want them but not zero unemployment because some people are always between

jobs, there will usually be some frictional unemploymentLabour shedding When businesses reduce the size of their workforce Long-term Unemp People out of work for at least one year, often suffering structural unemploymentEconomically active Those aged 16 and over who are either in employment or unemployedStructural Unemp A mismatch between people's skills and requirements of the new jobs due to occupational and

geographical immobility of labourUnemployment trap Disincentive caused by tax and benefit system that may make people worse off if they take a new job

Keep Up to Date with Your Economics!Tutor2u provides many opportunities for students and teachers to keep up to date with the latest developments and issues affecting the UK and other countries. We write regular blogs and providestreamed presentations and news services such as those on Scoop.It and Slide Share.

Scoop.It – Go to www.scoop.it/t/developments-in-the-uk-economy/

Slide Share – Go to www.slideshare.net/tutor2u

Our main AS macro economics blog focusing on the UK economy can be found here:

www.tutor2u.net/blog/index.php/economics/C4


Notes

AS economics revision workbook 2016

Education

Transcript of AS economics revision workbook 2016