Economics memorization

List the four factors of production and their rewards

Entrepenurhsip - profit
Capital – interest
Land – rent
Labour – wage

Distinguish between economic and free goods

Economic goods ahev ppurutnity cost attached to them
Free goods do not have any oppurntity cost attached to them

Using the diagram ( PPC) , economic and actual growth

The economic growth is when the output of a firm shift from one to point to another point
inside the PPC curve, comes closer to the PPC curve
Actual growth is when there is shit in the PPC curve due to change in the factors of
rpdocution

Draw circular flow of income diagram

State the 3 assumptions of demand

Law of diminishing utility – with each extra outout comsumed, the extra utility gets
decreased

Susbsitution effect – if the price of a good falls, the consumers will hop to the susbsititue
good

Income effect – of the price of a good falls, consuemrs will buy more due to hgigehr
purchasing power

State two assumptions of supply

Marginal cost – the extra variable cost for creating additional output decreases until the fixed
factor is echausted

Marginal cost – there are

Explain all four tytpes of govt intervention, why, how and so what
1. Price celing : where there is price control to maximise the price of a good or service
below the equilibrium level
It helps to make goods and serices affordable to low income families
This leads to welfare loss and inefficneicy due to the market not being able to produce the
optmum output which it has the potential too
Stakeholder:
- Govt helps in boosting their public
- Producers have to sell the good at lower rpices, lower revenue hwoever, higher output
 - Consumers : can buy more at lower cost
- Employee: higher chances of being fired

Pirce flooring: setting minimum rpcie baoev the equkilirbrium for minimum wage
- Porudcer : are affected due to high cost
- Employee: benefited and as well not
- Govt : image
- Consumers: extra cost
Susbsidy : grant by govt
Differentiate all 4 types of markets
1. Perfect comperititon
High number of firms
0 market power
Homogeneus products
Long run: normal profit

2. Monopoly
One dominant firm
Highest market power
No close subsititue
Long run: abnormal profit

3. Monopolistic
Long run : normal profit
Differenciatyyed goods
High number of firms
price amker

4. oLIGOPOLY
FEW DOMIANNT FIRMS
Long run: normal prodit
Price amekrs
Collusive
Non collusive
Give common price
Different rpodcuts but sustitues

Explain hwo to clauclate GDP

Three approach to calculate GDP as because of circular flow of income

Income = expenditure = value of output
Income = the spebndings by govt, consuemrs and producers

Explain aggregate demand with all of its determiannts two each

Aggregate demand is thte total demand in the economy of The stakeholders for

Explain short run and long in the context of micro and amcro economics

Explain agregagate supply

Deifne table:
Oppurtunity cost
Production possibility curve
Inferiour goods
Subssitutte goods
Normal goods
Incentives
Signalling
Allocative efficiency
PED
PES
YED
Common pool
Reivalorous
Non excludable
Sustaimnable resource
Market failiure
Over provision
Underprovision
Externality
Adverse
Moral hazard
Market power
Price makers
Price takers
Profit maximization
Productive efficiency
GDP
GNI
Real vs normal GDP
PPPS

Diagrams:
PPC
Circular flow of income
Demand
Supply
+ Assumptions
Equilibrium
PED
PES
YED
Angel curve
Price ceiling
Price flooring
Subsidy
Indirect tax
 All four externality + solutions *requires
special attention*
Perfect comperititon
Monopoly
Oligopoly
Monopolistic
Business Cycle
Agregrade demand
Aggregate Supply

Formulas
Allocative Efficiency

MB = MC
MC = AR
PED

change in quantity demanded/ change in the

price

PED1<x>0 = inElastic
PED 1<x< infinity = Inelastic
PED = 1 Unit elastic
PED = 0 = perfectly inelastic
PED infinity = Perfectly elastic
PES
YED
TR
Q/P
AR

TR/Q
MR

Change in total revenue/ change in

quantitiy
P = AR
MC

Change in totoal cost/ change in quantity

AC
= TC/Q
Revenue Maximization

MR= 0
Profit maximization
MR = MC
Allocative efficiency
 MB=MC
AR=MC
Producitve efficiency
AC =MR
GDP
C+G+I+(X-M) = GDP
GDP Deflator = nominal/ real *1000
Real GDP
Nominal/ deflator *100

Notes
⁃ Read the naalsys ind depth for all the markets
⁃ Specially govt response to absue of powers, the evaluation of the policy
⁃ Memories the determinants
⁃ Look at the GDP case

Using real-world examples, discuss the view that monopolistic competition is a

more desirable market structure than oligopoly.

Answers may include:

• Terminology: monopolistic competition, oligopoly.
• Explanation: of the view in terms of the possible benefits of monopolistic
competition
as compared to oligopoly; eg less market power for producers who face more elastic
demand curves, more product variety, freedom of entry for new firms, normal profits
in the long run; and in terms of the drawbacks of oligopoly such as collusion and the
possibility of higher prices.
• Diagram: collusive oligopoly diagram showing more significant market power
compared to monopolistic competition; relevant use of monopolistic competition
diagrams (less market power).
• Synthesis (discuss): a challenge to the view in terms of the possible advantages of
oligopoly over monopolistic competition, such as economies of scale and R&D; non-
colluding oligopolies can be allocatively more efficient than monopolistically
competitive firms in case of a price war; benefits for consumers of non-price
competition (eg advertising) occurring more significantly in oligopoly.
• Examples: real-world examples of markets which are characterized by either
monopolistic competition or oligopoly and their benefits or drawbacks.

Using real-world examples, discuss the assumption that consumers always seek
to maximize their utility. [15]
Answers may include:
• Terminology: utility.
• Explanation: of the assumption in terms of consumer rationality, perfect
information and the maximization of total utility.
• Diagram: not needed for this question.
• Synthesis (discuss): a challenge to the assumption in terms of the limitations
to rational consumer choice such as imperfect information, bounded
rationality, bounded selfishness, biases – rule of thumb, anchoring and
framing, availability; consideration of the word “always”.
• Examples: real-world examples of consumers acting rationally or where there
are limitations to their ability to do so.

Using real-world examples, discuss how a government might respond to a situation in

which there is a high concentration ratio in a market. [15]
Answers may include:
• Terminology: concentration ratio, oligopoly, monopoly, market.
• Explanation: governments might intervene in markets where there is a high
concentration
ratio because it might indicate abuse of market power from either monopoly or
oligopoly
firms, leading to higher prices, lower output, and allocative inefficiency. Therefore,
the
government might intervene in the form of taking ownership, regulation and
legislation,
and fines.
• Diagram: to show a firm with market power in imperfect competition such as
monopoly/
collusive oligopoly.
• Real-world example: of where a government has intervened in a market where there
is a
high concentration ratio. Examples might be government ownership (nationalization)
of
key industries, price controls in natural monopolies, regulation, legislation and fines
imposed on monopoly/oligopoly firms.
• Synthesis (discuss): might be framed around the different policy options open to
government and the advantages and disadvantages they might present or how effective
they are likely to be. Increased government influence through nationalization, fines
and
regulations and legislation has advantages and disadvantages. Students might also
choose to contest the idea that intervention is necessary, and they might give reasons
for
where government might allow

Using real-world examples, discuss whether gross national income (GNI) is a useful
measure of economic well-being. [15]
Answers may include:
• Terminology: gross national income, economic well-being.
• Explanation: an explanation of the ways in which measures for GNI indicate higher
economic well-being (standards of living) through the increases in incomes they
measure
and the increased living standards they can support.
• Diagram: not needed for this question.
• Real-world example: real-world examples of where GNI statistics are, or are not, a
useful
way of measuring economic well-being.
• Synthesis (discuss): consideration of where GNI statistics are or are not a good
measure
of economic well-being. Discussion might include consideration of inequality of
income
and wealth, externalities, the informal economy, output not put up for sale, unpaid
work,
statistical error, composition of output, depletion of natural resources and so on.
Consideration of alternative measures of economic well-being such as the OECD
Better
Life Index, Happiness Index and Happy Planet Index.
N.B. It should be noted that definitions, theory and examples that have already been
given in part (a), and then referred to in part (b), should be rewarded.
Examiners should be aware that candidates
Using real-world examples, evaluate the policies a government might adopt torespond
to a market situation in which significant asymmetric information exists.[15]
Answers may include:
•Terminology: Asymmetric information, adverse selection, moral hazard.
•Diagram: Not needed for this question.
•Theory: Candidates should consider government responses to markets inwhich
asymmetric information is considered problematic such as legislationand regulation,
the provision of information. Candidates might also considerprivate responses such as
signalling and screening where a governmentdecides not to intervene.
•Synthesis (evaluate): An evaluation of the different policies available to
thegovernment when there is asymmetric information in the context of theexamples
offered by the candidate. Candidates might conclude that the bestcourse of
government action is to do nothing and allow private responses tothe asymmetric
information. Or, alternatively, that government action in certainsituations may be
imperative.
•Example(s): A relevant real-world example(s) in which asymmetric
informationexists.

b)Using real-world examples, discuss the impact of large firms having

significantmarket power.[15]
Answers may include:
•Terminology: market power
•Explanation: of the impact of significant market power in terms of themonopoly and
oligopoly models
•Diagram: showing monopoly/collusive oligopoly (significant market power)
•Synthesis (discuss): the advantages and disadvantages of significant marketpower in
terms of economies of scale, including natural monopolies, abnormalprofits to finance
investment in R&D and innovation; the possible welfare loss,the risks in relation to
price, output and consumer choice, the possibility thatsuch firms may pursue goals
other than profit maximization
•Examples: