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Igcse Full Economics Notes
Igcse Full Economics Notes
ECONOMICS
Definitions
1. Economics: It is the study on how human kind fulfills its wants which
are unlimited with the resources that are limited.
2. Scarcity and choice: Human wants are unlimited but resources to
satisfy those wants are scarce therefore we have to make a choice
between our wants and desires.
3. Opportunity cost: the next best alternative sacrificed .Example if a
man has to choose between a mobile and a laptop both costing the
same, and he chooses the laptop, then his opportunity cost is the
mobile phone.
4. Consumer goods-those goods that give us direct satisfaction or We
buy them for their own sake
5. Capital goods: Those foods that give us indirect satisfaction. We buy
them for the sake of other goods example factory machinery.
6. Merit goods: Those goods which are beneficial not only for their
consumer but also for third parties e.g. Vaccines against contagious
diseases.
7. Demerit goods: those goods which are harmful for third parties e.g.
Tobacco alcohol.
8. Giffen goods: Those goods those demand rises when price rises e.g.
Luxury cars, shares, land etc.
9. Inferior goods: Those goods whose demand falls when income rises
eg Public transport.
10.Normal goods: Those goods whose demand falls when price rises and
demand rises when income rises. They have a negative P.E.D and a
positive Y.E.D
11.The stages of production:
Primary production: The extraction of raw materials from
natural resources e.g. agriculture, fishing , mining
Secondary Production: the processing of raw materials into
finished goods e.g. Food processing, garments, manufacturing,
construction.
Tertiary production: the production of services e.g.
Transportation, banking, insurance etc.
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12.Public goods: those goods which are free for all, non excludable and
non rivaled e.g. street lighting.
13.Factors of production
Land: All natural resources e.g. fields, lakes mines etc The cost of
land is known as rent
Labor: All human efforts both mental and physical e.g. doctors,
fisherman. The cost of labor is known as wage
Capital: All man made resources e.g. buildings and machinery. The
cost of capital is known as interest rate.
Entrepreneur/enterprise: The risk bearer of production: who
monitors and supervises production, work e.g. sole-proprietor. The
reward for entrepreneur is known as profit.
14.Labor intensive industries: Those industries which are highly
dependent on labor e.g. agriculture
15.Capital intensive industries: Those industries which are highly
dependent upon capital e.g. textiles.
16.Automation: The transition from labor intensive to capital intensive
industries.
17.Investment: The creation of capital
18.Savings: An increase in one’s wealth which normally occurs when
income exceeds expenditure.
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Economic Growth
1. Economic Growth :A rise in living standards which is measured by
the annual % increase in the real GDP
2. Standard of living: The quality of life enjoyed by an average
individual in terms of income, consumption etc.
3. Recession: A fall in the living standards which is measured by the
annual % decrease in real GDP
1. Education
2. Investment
3. Technology
4. Healthcare facilities
5. Others: There are many other ways of achieving economic growth
such as exploitation of natural resources, reduction in corruption etc.
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Privatization
Private Sector Public Sector
Ownership →owned by Owned by the government
individuals
Controlled by board of directors Controlled by cabinet of ministers
Financed by owners through Financed by government through
shares taxes
Profit maximization is the primary Social welfare is primary. Profit is
motive. Public welfare is secondary
secondary
Quality of output is better due to Quality of products is arguably
profit making motive poor
Privatization: The transfer of property from the public sector to the private
sector e.g. British Airways
Advantages of Privatization:
Disadvantages of privatization
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Externalities
Remedies to externalities
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1. MNC : A company that operates in more than one country e.g. KFC
Disadvantages to a country
1. Domestic firms suffer from foreign competition
2. Rise in social costs
3. Profits are remitted abroad
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Inflation
Inflation rate: The percentage amount by which the price level rises in a
year
Real Income: Income adjusted with the rate of inflation e.g. If a man's
income rises by 10% and the inflation rate is also 10% then his real income
remains unchanged.
Effects of inflation
1. Fixed income earners suffer from poor living standards (less
consumption results in low standards of living)
2. Fall in the real savings and investment
3. Fall in exports and rise in imports
4. Money loses its value. At times of inflation money loses its value for
which it cannot fulfill its functions properly. It cannot measure the
value of other goods accurately. People feel reluctant to give loans
because debtors gain and creditors lose.
5. Investors benefit from higher profit
Causes of inflation
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2. Cost pulled inflation: When basic costs of production rise, the price of
finished goods are also increased, leading to inflation. As a result
workers demand higher wages causing inflation to rise further.
Fiscal policy: The government’s policy in which it uses its income and
expenditure to manage the economy.
Remedies to inflation
Monetary policy:
Fiscal policy:
Formulas
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Unemployment
Types/Causes of unemployment
Effects of unemployment
1. Fall in living standards
2. Fall in government income and rise in government expenditure
3. Rise in social problems such as crime
4. Wages will fall
Remedies to unemployment
Monetary policy
1. By reducing interest on savings
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Fiscal policy
1. By reducing direct taxes
2. By reducing indirect taxes
Specialization
Advantages of specialization
Disadvantages of specialization
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Globalization
Disadvantages of globalization
1. Rise in social costs
2. Interdependence
3. Exploitation of underdeveloped countries
Foreign aid: Money given to a country on generous terms. These are of few
types
1. Grants. Money given to a country which is not taken back
2. Tied aid: Money given to a country subject to certain conditions
3. Low interest loans :Loans given with little or no interest
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Population
1. High birth rate: Poor family planning, early marriages, less use of
contraceptives.
2. Low death rate: Better medical facilities, better living standards, lower
crime rates.
3. High immigration: Better living standards, lower unemployment,
lower inflation etc.
4. Low emigration: Better living standards, lower unemployment, lower
inflation etc.
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Taxation
1. Direct taxes: Tax on ones income e.g. Income tax, corporation tax etc.
2. Indirect taxes: Tax on one's expenditure e.g. VAT, sales tax, tariffs etc.
3. Disposable income: Income remaining after compulsory deductions
such as direct taxes
4. Progressive tax: A tax system in which the rich pay a higher rate of
tax, direct taxes are normally progressive
Example of progressive tax
When income: £10,000; Tax rate: 15%
When income £15,000; Tax rate: 20%
5. Proportional tax: When the rich and poor pay the same amount of tax.
Direct taxes sometimes can be proportional
When income £10,000; Tax 20%
When income £20,000; Tax 20%
6. Regressive tax: When the rich pay a lower rate of tax than the poor
e.g. indirect taxes are normally regressive
When income £10,000; Tax 20%
When income 20,000; Tax 10%
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1. Education
2. Defense
3. Health care
4. Infra structure
5. Agriculture
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GDP
Drawbacks of GDP:
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Economies of Scale
Economies of Scale: Advantages enjoyed by a firm through growth
normally such advantages lead to a fall in long term average costs
Internal economies of scale: The advantages which arise from the growth
of a firm itself
External economies of scale: These are those advantages which arise from
the growth of a whole industry.
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1. Economies of scale
2. Better control over sources of supply: Vertical merger normally
consist of two firms who are at different stages of production.
Quite often these firms are supplying raw materials to each other,
thus if they merge they are having control over their own raw
materials
Advantages of conglomerate
1. Economies of scale
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Competition
Competitive markets: A market in which there are many buyers and sellers,
the goods do not differ much and there are no entry barriers
Advantages of competition
1. Low price
2. Better quality
3. Wider choice
Disadvantages of competition
1. Wastage of expenditure through advertisement, packaging etc.
2. Uncertainty for producers
Monopoly: A single firm dominating the whole market. This can even
happen if a firm has 25% of the market or more. Monopoly often setup entry
barriers to prevent firms from entering into the market
Advantages
1. Economies of scale
Disadvantages
1. Exploitation of customers through higher prices and poor quality
2. Lack of innovation
Oligopoly: When few firms dominate the industry, they also setup certain
entry barriers to prevent other firms from entering. If the firms get into
collusion/conspiracy they can charge higher prices from their customers
Advantages of oligopoly
1. Stable prices(Only possible if there is no collusion)
2. Better in quality
Disadvantages of oligopoly
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1. Danger of collusion
In other words the PPF will shift outward if there is economic growth in the
country
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Fixed Cost: The cost that remains constant whatever the level of output.
E.g. Rent, depreciation
Variable Cost: The cost that varies with the level of output e.g. wages, raw
material costs etc.
Total revenues: The total income earned selling a certain level of output
Total cost
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ANSWERS
1. 10,000
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2. 15,000
3. 25,000/100 = 250
4. 15000/100 = 150
Total Revenue Average Revenue
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International Trade
1. Dumping: To sell goods to foreign countries below the cost price. The
EU dumps sugar to Africa.
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#The UK has a deficit on its visible trade but yet a surplus on in Balance
of payments current account, explain why?
ANSWER: The Surplus in invisible trade was so much that it covered the
deficit.
Exchange rates: The price of one currency in terms of another
Effects:
1. 2007 £1 = € 1.7
2008 £1 = €1.8
€, Euro depreciated
2. 2002 $1 = DM 0.67
2003 $1 = DM 0.58
$, Dollar depreciated
3. 2010 €2 = ¥3.8
2010 €1 = ¥2.2
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¥, Yen depreciated
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1. Population
2. Income
3. Price of substitutes
4. Price of complements
5. Other factors such as weather, fashion events
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If elastic If Inelastic
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Indirect taxes
The VAT per unit is the vertical distance between the two supply curves
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#What is the:
a) Previous price and new price
b) The VAT per unit
c) The total income of the government
d) PED when the price is rising
e) The total revenue previously
f) The total revenue presently
g) Using your answers from ‘e’ and ‘f’ say whether price is elastic or
inelastic
ANWERS
a) Pervious price : £40
New price: £50
b) Vat per unit : 50-35=15
c) 1050
d) %change in demand = -30
%change in supply = 25
= -1.2
e) Total revenue = 40×100 = £4000
f) Total revenue = 50×70 = £3500
g) As price rose and revenue fell it is elastic
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Subsidies
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2. Tourism: When tourists enter our country they demand our currency
because whatever they buy in our country has to be paid in our
currency. Thus if the number of tourists rise the exchange rate will
also rise and when the number of tourist fall the exchange rate will
also fall.
3. Interest rates: If the interest rate rises in our country then people from
all over the world would like to save in our country. But to do this
they have to first convert the money into our currency. Thus the
demand for our currency will rise and the exchange rate will also rise.
Likewise when the interest rate falls the exchange rate will also fall.
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Economic Systems
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