Hodder Cambridge International AS & A Level Economics Second Edition PDF

The Cambridge international A Level Economics series consists of a Student Book, Boost eBook, Workbook and Teacher Resource Pack. Cambridge Cambridge Cambridge Cambridge International AS & International AS &...

The Cambridge international A Level Economics series consists of a Student Book, Boost eBook, Workbook and Teacher Resource Pack. Cambridge Cambridge Cambridge Cambridge International AS & International AS & International AS & International AS & A Level Economics A Level Economics A Level Economics A Level Economics Second Edition Second Edition Workbook Teacher Resource Pack Boost eBook 9781398308275 9781398308244 9781398308282 9781398308299 To explore the entire series, visit www.hoddereducation.com/cambridge-alevel-economics Practise and apply what you have studied and develop independent learning skills by answering a range of questions. Build confidence with extra practice to ensure that a topic is thoroughly understood before moving on. Fully explore and analyse international economies through data response questions based on real case studies. Keep track of your work with ready-to-go write-in exercises. Save time marking and get support for delivering the revised Cambridge International AS & A Level Economics syllabus (9708). Confidently deliver the revised syllabus with guidance from experienced teachers on the transition between IGCSE and A level, ESL guidance and the subject-specific skills students will need, including how to interpret quantitative data. Familiarise students with the command words they will face in exams and improve their confidence with answer guidance to the questions in the student book. Save time with pre-made class and homework activities, such as editable worksheets, additional case studies and quizzes online. king for ove We are working with Cambridge Assessment or r W 25 ducation Ca International Education to gain endorsement for m bridge A YEARS al E these forthcoming titles on es i ss sm WITH at ent Intern  Cambridge International AS & A Level Economics Second edition Peter Smith with Adam Wilby and Mila Zasheva 1 308275_FM_CAM_IASAL ECO_001_006.indd 1 23/03/21 10:24 AM  Cambridge International copyright material in this publication is reproduced under licence and remains the intellectual property of Cambridge Assessment International Education. Exam-style questions (and sample answers) have been written by the authors. In examinations, the way marks are awarded may be different. 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You can also order through our website: www.hoddereducation.com. © Peter Smith, Adam Wilby, Mila Zasheva 2021 First published in 2014 This edition published in 2021 by Hodder Education, An Hachette UK Company Carmelite House 50 Victoria Embankment London EC4Y 0DZ www.hoddereducation.com Impression number 10 9 8 7 6 5 4 3 2 1 Year 2025 2024 2023 2022 2021 All rights reserved. Apart from any use permitted under UK copyright law, no part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or held within any information storage and retrieval system, without permission in writing from the publisher or under licence from the Copyright Licensing Agency Limited. 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ISBN: 978 1 3983 0827 5 308275_FM_CAM_IASAL ECO_001_006.indd 2 20/03/21 10:47 AM  Contents Get the most from this book 5 How to use this book 6 AS LEVEL Part 1 Basic economic ideas and resource allocation 7 1 Introducing economics 7 Part 2 The price system and the microeconomy 24 2 Demand and supply curves 24 3 Elasticity 40 4 Market equilibrium and the price system 54 Part 3 Government microeconomic intervention 73 5 The government in the microeconomy 73 Part 4 The macroeconomy 88 6 National income 88 7 Aggregate demand and aggregate supply analysis 97 8 Economic growth 114 9 Unemployment 125 10 Price stability 134 Part 5 Government macroeconomic intervention 146 11 Macroeconomic policy 146 Part 6 International economic issues 164 12 International trade and protectionism 164 13 The balance of payments and exchange rates 182 3 308275_FM_CAM_IASAL ECO_001_006.indd 3 17/02/21 10:44 AM  A LEVEL Contents Part 7 The price system and the microeconomy 197 14 Marginal utility and consumer choice 197 15 Efficiency and market failure 208 16 Private costs and benefits, externalities and social costs and benefits 218 17 Types of cost, revenue and profit, short-run and long-run production 234 18 Different market structures: perfect competition and monopoly 256 19 Different market structures: monopolistic competition and oligopoly 276 20 The growth and objectives of firms 292 Part 8 Government microeconomic intervention 310 21 Government policies to achieve efficient resource allocation and correct market failure 310 22 Equity and redistribution of income and wealth 329 23 Labour market forces and government intervention 337 Part 9 The macroeconomy 362 24 The circular flow of income and the multiplier 362 25 Economic growth and sustainability 376 26 Employment and unemployment 392 27 Money and banking 407 Part 10 Government macroeconomic intervention 423 28 Macroeconomic policy 423 Part 11 International economic issues 446 29 The balance of payments and exchange rates 446 30 Economic and human development 462 31 Relationships between countries 489 32 Globalisation 503 Glossary  516 Index  527 4 308275_FM_CAM_IASAL ECO_001_006.indd 4 17/02/21 10:44 AM  Get the most from this book This textbook has been tailored explicitly to cover the Cambridge International AS & A Level Economics syllabus (9708) for first examination from 2023. The text provides the foundation for studying this qualification, but you will no doubt wish to keep up to date by referring to additional topical sources of information about economic events. This can be done by reading serious newspapers, visiting key sites on the internet, and reading magazines such as Economic Review. The syllabus is built around key concepts – the essential ideas, theories, principles or mental tools that help learners to develop a deep understanding of the subject and make links between different topics. An icon indicates where each key concept is covered. Scarcity and choice markets and governments are able to respond to these The fundamental problem in economics is that resources changes in different ways depending on the time frame. are scarce and wants are unlimited, so there is always Some economic decisions have a time frame element – a choice required between competing uses for the trading off a cost in the present for a benefit in the future, resources, and an opportunity cost in making this choice. for example. The margin and decision making Efficiency and inefficiency In economic theory, decision making by consumers, firms Individual markets and the economy as a whole can be and governments is based on choices at the margin – for both efficient and inefficient in different ways when using example, firms will produce up to the point where the scarce resources. revenue generated by an extra unit of output is equal to the The role of government and the issues of equality cost of producing it. However, economic decision making and equity can be based on facts, theory, effectiveness, priorities/ There is a trade-off between, on one side, freedom for objectives and values/ethical judgements. firms and individuals in unregulated markets and, on Equilibrium and disequilibrium the other side, greater social equality and equity through Individual markets and the economy as a whole are government regulation of individuals and markets. always moving into and out of equilibrium, constantly Progress and development altering the allocation of resources. Economics studies how societies can progress in Time measurable money terms and develop in a wider, more Economic conditions change in different time periods, normative sense regarding living standards, inclusivity such as the short run and the long run. Individuals, firms, and sustainability. Special features Exercises to provide active A LEVEL Economics EXERCISE 22.1  Imagine that you are the Minister for Poverty Alleviation in a country in which the A statement of the key topics 22 (absolute) poverty line is set at $500. Of the people living below the poverty line, Equity and redistribution of you know that there are two distinct groups, each made up of 50 individuals. The engagement with economic people in group 1 have an income of $450, whereas those in group 2 have only income and wealth $250. Suppose that your budget for poverty alleviation is $2,500. a Your prime concern is with the most needy: how would you use your budget? covered in each chapter. b Suppose instead that your prime minister instructs you to reduce the 22 EQUITY AND REDISTRIBUTION OF INCOME AND WEALTH percentage of people living below the poverty line: do you adopt the same analysis. strategy for using the funds? 22 Equity and rEdistribution of incomE and wEalth What this chapter covers c How helpful is the poverty line as a strategic target of policy action? ★ the distinction between equity and equality ★ the difference between equity and efficiency ★ absolute poverty and relative poverty SUMMARY: POLICIES TOWARDS EQUITY AND ★ policies that can be adopted towards equity and inequality ★ the poverty trap INEQUALITY » Policy towards equity needs to promote fairness in the way that people are In all countries, there is inequality in the distribution of income and wealth. In this treated: for example, through encouraging equal opportunities. Learning links show the chapter, we explore ways in which a government can attempt to influence the way » One approach to tackling inequality is to implement a negative income tax, but in which resources are allocated among different groups in society, particularly in there are problems in terms of logistical and political problems. response to the presence of poverty. » Transfers from rich to poor households in the form of monetary benefits or benefits in kind are one of the most important ways of tackling inequality. » Such benefits can be universal (provided to all) or means tested. 22.1 Equity and inequality connections between themes » Proposals have been discussed whereby a guaranteed safety net would be Regulation, equality and equity provided in the form of a universal basic income (UBI) that would be paid to Some degree of inequality in the distribution of income within a society is inevitable. everyone. KEY TERMS Individuals have different innate talents and abilities, and choose to undertake » Pilot schemes have been launched in a number of countries around the world. » Problems can arise if benefit levels are set so high that individuals have little and cross-reference further inequality: where different types and levels of education and training. This means that they acquire different groups within different sets of skills, which open up different income-earning opportunities. incentive to work — this is known as ‘the poverty trap’. society receive differing Inequality also arises because of the pattern of ownership of assets. In other words, » The balance between (progressive) direct taxation and (regressive) indirect amounts of income and/ complete equality of income in a society (whereby everyone receives the same amount taxation needs to be handled carefully to ensure that the net effect on the or wealth income distribution is as desired. of income and wealth) can never be achieved. treatment of topics. equity: where people in the same situation receive equal treatment LEARNING LINK END-OF-CHAPTER QUESTIONS Chapter 5 introduced some key concepts related to inequality in the distribution End of chapter questions to help of income in a society, and ways in which the degree of inequality can be 1 Read the following extract and then answer the questions that follow. measured. It also explained the distinction between income and wealth. Universal basic income: old hat or new fashion? A separate issue is whether there can be equity in the way that people are treated. The idea of a universal basic income (UBI) is nothing new — the notion has been Test yourself 22.1 One aspect of this is whether individuals face equal opportunities, and whether around since the sixteenth century. More recently, libertarian economist Milton you prepare for examination. Provide another identical people receive identical treatment in economic terms. Many people would Friedman surprisingly endorsed its use through a negative income tax system. example of how some acknowledge that people in identical circumstances and with identical skills, abilities Friedman realised that even if an economy achieves Pareto optimality, a trade- groups receive unequal and experience should receive identical income. There are situations in which such 5 off might be required between efficiency and equity in policy design. treatment compared Bulleted summaries of each topic with others in your equal treatment is not achieved. One example is that male and female workers receive Other proponents of UBI argue it is the best way to end absolute and relative country. unequal treatment in many societies. poverty: just give everyone money! Some also say it will help society cope with the coming automation-induced job losses. SUMMARY: EQUITY AND EQUALITY In 2017, the Finnish government decided to see what would happen if, in a trial, can be used as a revision tool. 10 it chose 2,000 unemployed citizens at random and gave them Ð560 ($635) every » Inequality in the distribution of income and wealth occurs in all societies. month for 2 years. Participants were assured they would keep receiving the UBI » This results from differences in talents, abilities and experience, and from if they got a job. The trial ended in 2018 and the results are still being debated. differences in the ownership of assets. » Equity is where people in the same situation receive equal treatment. » Equity is also present in societies to some degree. 12 6 Page_012.indd 12 7/9/20 8:04 PM Page_006.indd 6 7/9/20 8:03 PM Key terms: clear, concise 22 KEY TERMS headcount ratio: a measure of the A common way of measuring the poverty rate in a country is to estimate the percentage of the population living below a poverty line, known as a headcount ratio. The poverty line in this context is an estimate of the income needed to ensure basic human survival. People living below this level are perceived to be in absolute poverty.  CASE STUDY 3.1 Acommonproblem Case studies to show economic definitions of essential key terms percentage of a To enable international comparisons of poverty levels, the World Bank has defined an Fishing and fisheries have been contentious in many countries. Who should have country’s population concepts applied to real-world living below a poverty International Poverty Line. This is based on 2011 prices, and from October 2015 it was the rights to catch fish in international waters? Or should the seas be open to line set at $1.90. The line has to be reset every few years in line with changing prices over all? And how about a stretch of inland water such as Lake Victoria, the largest time. The World Bank estimated that around 736 million people worldwide were living freshwater lake in Africa, which shares borders with Uganda, Kenya and Tanzania. International beneath this level in 2015 (down from 1.9 billion in 1990). Some individual countries where they first appear. Poverty Line: an Follow-upquestions also set their own national poverty line to reflect local conditions. 22 EQUITY AND REDISTRIBUTION OF INCOME AND WEALTH 22 Equity and rEdistribution of incomE and wEalth agreed measure that situations. defines the absolute 1 How would you expect a market to evolve if the good has these Progress has been made to reduce the number of people living in absolute poverty characteristics of being non-excludable but rivalrous? poverty line based on on this definition, except in sub-Saharan Africa, where the number continues to rise. international prices, 2 Give another example of where this problem could arise. However, there was concern that poverty remained a problem, with people living on set at PPP$1.90 from October 2015 incomes that were not significantly higher than the International Poverty Line. persistent poverty: In October 2018 the World Bank launched additional poverty lines to reflect typical EXTENSION MATERIAL national poverty lines in lower- and upper-middle-income countries. It was estimated where a household is currently in relative that in 2015, over a quarter of the world’s population was surviving on less than $2.20 Profitmaximisation income poverty and per day, and almost a half on less than $5.50 per day. The profit-maximising condition can be written as: Study tips: short pieces of advice has also been in this Figure 22.1 shows estimates of the poverty headcount ratio for a range of countries state in at least 2 of the wage = marginal revenue × marginal physical product of labour around the world. For most developed economies, the headcount ratio at this level preceding 3 years is zero or close to it. Italy is unusual in appearing on this graph, as relatively few which is the same as: developed countries have poverty on this measure. marginal revenue = wage ÷ MPP L to help you present your ideas Extension points to stretch your Remember that capital input is fixed for the firm in the short run, so the wage STUDY TIP China divided by the MPPL is the firm’s cost per unit of output at the margin. This This distinction Sri Lanka shows that the profit-maximising condition is the same as that derived for a between absolute Italy profit-maximising firm in Chapter 17: in other words, profit is maximised where Pakistan and relative poverty marginal revenue equals marginal cost. This is just another way of looking at the Brazil effectively and avoid potential is an important one. firm’s decision. understanding. Indonesia Absolute poverty Bangladesh is almost entirely Nepal confined to the less South Africa QUANTITATIVE SKILLS 17.2 developed countries, India pitfalls. but relative poverty can exist in any society, Zimbabwe Tanzania Therelationshipbetweenoutputandcosts even in the more Zambia Table 17.2 provides an arithmetic example to illustrate the relationship between these different aspects of developed nations. Uzbekistan costs. The firm represented here faces fixed costs of £225 per week. The table shows the costs of production Madagascar for up to 6,000 units of the firm’s product per week. Column 3 shows total variable costs of production: you 0 10 20 30 40 50 60 70 80 can see that these rise quite steeply as the volume of production increases. Adding fixed and variable costs gives the total costs at each output level. This is shown in column 4, which is the sum of columns 2 and 3. Test yourself 22.2 % of population Explain why it is Source: based on data from World Development Indicators ▼ Table 17.2Theshort-runrelationshipbetweenoutputandcosts(in£s) necessary to recalibrate ▲ Figure 22.1 Poverty headcount ratio at $1.90 (% of population) the poverty line on a (1) (2) (3) (4) (5) (6) (7) (8) Output Fixed costs Total Total costs Average Marginal Average Average Test yourself: short questions regular basis. In Europe (including the UK), estimates of poverty are based on a regular survey Worked examples of quantitative of households conducted in EU member states and some other selected countries. (000 units (STFC) variable (2) +(3) total cost cost variable fixed cost In 2017, the UK’s threshold for poverty was set at £12,597. This is based on per week) costs (STC) (4)/(1) ∆(4)/∆(1) cost (3)/(1) (2)/(1) Test yourself 22.3 adjustments for household size and composition. Households with income below (STVC) (SATC) (SMC) (SAVC) (SAFC) Calculate the median this are described as being in relative income poverty (or being ‘at risk of poverty’); 1 225 85 310 310 65 85 225 households that experience this in the current year and at least 2 of the 3 preceding designed to allow you to check your adjusted household 2 225 150 375 187.5 60 75 112.5 skills that you will need to disposable income years are said to be in persistent poverty. 3 225 210 435 145 90 70 75 level for the UK in 2017, Figure 22.2 presents some data for a range of European countries in 2017. The based on the fact that 4 225 300 525 131.25 175 75 56.25 proportion of people below the relative poverty line varies substantially across these the UK relative poverty 5 225 475 700 140 395 95 45 countries, from 11.5% in Finland to 23.6% in Romania. understanding of key concepts. threshold is 60% of the develop. median. 6 225 870 1,095 182.5 145 37.5 8 14 310445_22_Cambridge_006-014.indd 8 7/9/20 1:33 PM Page_014.indd 14 7/9/20 9:35 PM 5 308275_FM_CAM_IASAL ECO_001_006.indd 5 17/02/21 10:44 AM  How to use this book How to use this book Welcome to economics – or, if you have previously studied this subject, welcome back. This book is designed to help you learn, revise, test yourself and practise your knowledge and skills application for the Cambridge International AS & A Level Economics 9708 syllabus for examination from 2023. Any subject or field of expertise requires a solid theoretical background, and economics is no exception. It is the application of skills in an unfamiliar context that defines where the static content of a textbook transits into the dynamic world of real economics. This textbook offers a clear progression through the topics to support students transitioning from previous study in economics as well as those studying economics for the first time: » We start with easing the way into the basic economic ideas – the building blocks of the course, for example the basic economic problem. » We then introduce the principles of micro- and macroeconomics, while studying the behaviour of economic agents and the consequences of government policies. » The concepts of international trade present the big picture of economic relations between countries in today’s sometimes turbulent world. During this journey, the skills acquired and honed will help you to learn, make links and discuss key relationships, dependencies, causes and effects of the above. This is underpinned by the seven key concepts introduced on page 5. They are the anchor points of your course and the tools an economist uses to study the behaviour of individuals, firms and governments, markets and national economies. Acknowledging the importance and role of these key concepts is a step towards putting together the different sections of this textbook into a coherent understanding of the principles of economics. The key concepts resurface in different topics across the textbook and are signposted to flag the relationships to look out for. The icons act as quick reminders to revisit the concepts and encourage you to take a more holistic approach to the subject. Going beyond the textbook As you progress through the course, you will find that there is far more to economics than what fits between the covers of any textbook. Our Cambridge International AS & A Level Economics Workbook from the same series is available to enhance your academic experience by providing guidance for developing and applying your skills and knowledge, for example by using diagrams and practising your quantitative skills, as well as engaging with a variety of multiple-choice, data response and essay-style questions that follow the order of this textbook. The series of publications also offers support for teachers – our Cambridge International AS & A Level Economics Teacher Resource Pack is aimed at both new and experienced teachers to help them deliver a structured and engaging economics course that encourages students to pursue the subject further and beyond the school classrooms. This textbook provides the foundation for studying this qualification, but you will no doubt wish to keep up to date by referring to additional topical sources of information about economic events. The team of authors wish you a successful and enjoyable journey as you discover the world of economics. Test yourself, exercises and case studies Answers to the test yourself questions and commentaries on the exercises and case study questions can be found at: hoddereducation.com/cambridgeextras End of chapter questions The practice questions in this book are designed to help you apply your knowledge and skills learnt throughout this course. They do not follow the exact formulation in the exam – for example, the number of parts in data response questions in this book may not always necessarily reflect the number that would appear in an exam. Guidance for answers to the end of chapter questions is available in our Cambridge International AS & A Level Economics Teacher Resource Pack. 6 308275_FM_CAM_IASAL ECO_001_006.indd 6 18/03/21 2:49 PM  AS LEVEL PART 1 Basic economic ideas and resource allocation 1 Introducing economics 1 Introducing economics What this chapter covers ★ the fundamental economic problem ★ factors of production ★ scarcity, choice and opportunity cost ★ the division of labour and specialisation ★ decision making at the margin ★ the role of the entrepreneur ★ basic questions of resource allocation ★ resource allocation in different economic systems ★ economics as a social science ★ production possibility curves ★ positive and normative statements ★ classification of goods and services: free goods, ★ the importance of the time period private goods, public goods, merit and demerit goods Welcome to economics. Many of you opening this book will be meeting economics for the first time, and you will want to know what is in store for you as you set out to study the subject. This opening chapter sets the scene by introducing you to some key ideas and identifying the scope of economic analysis. As you learn more of the subject, you will find that economics is a way of thinking that will broaden your perspective on the world around you. 1.1 Scarcity, choice and opportunity cost The fundamental economic problem faced by any society in the world is that of KEY TERM scarcity. For countries in sub-Saharan Africa or parts of South Asia, it seems obvious scarcity: a situation that that there is scarcity. However, it is also true of relatively prosperous economies such arises because people as those of Switzerland, the USA and the UK. have unlimited wants It is true in the sense that all societies have finite resources, but people have in the face of limited unlimited wants. A big claim? Not really. There is no country in the world in which all resources wants can be met, and this is clearly true at the global level. There is a difference between wants and needs. Everyone needs to breathe and to eat, so air and food are necessary for human life. However, people would like to consume goods that are not strictly essential to maintain life, such as ice cream or designer Test yourself 1.1 clothes. These are known as wants. Thinking of yourself, give an example of a Talking about scarcity in this sense is not the same as talking about poverty. Poverty ‘want’ and a ‘need’. might be seen as an extreme form of scarcity, in which individuals lack the basic necessities of life – whereas even relatively prosperous people face scarcity because resources are limited. Scarcity and choice The key issue that arises from the existence of scarcity is that it forces people, firms (businesses) and governments to make choices. Each individual must choose which goods and services to consume. In other words, everyone needs to prioritise the consumption of whatever commodities they need or would like to have, as they cannot satisfy all their wants. Firms need to make choices about what to produce, and what techniques of production to use. At the national level, governments have to make choices between alternative uses of resources. 7 308275_C01_CAM_IASAL ECO_007_023.indd 7 18/03/21 10:07 AM  It is this need to choose that underlies the subject matter of economics. Economic analysis is about analysing those choices made by individual people, firms or 1 governments. The margin and decision making The notion of ‘the margin’ is important in much of economic analysis. Decision- makers – whether they be firms or consumers – are seen to take decisions with KEY TERMS reference to small changes in behaviour. For example, a firm may decide whether marginal principle: to increase its output by an extra unit by checking whether the additional revenue the idea that that it would receive from selling the extra unit will compensate for the additional AS LEVEL PART 1 BASIC ECONOMIC IDEAS AND RESOURCE ALLOCATION economic agents may cost of producing it. A consumer may decide whether the extra benefit of consuming take decisions by an additional can of cola is worth the price to be paid for it. This is known as the considering the effect of small changes from the marginal principle. existing situation You will meet this approach to decision making in a variety of situations as you study microeconomics: the economics. At the heart of much of economic analysis is the notion that economic study of economic agents have clear objectives, and that they take decisions that allow them to do decisions taken by the best that they can to achieve those objectives. For example, it is often assumed individual economic that consumers set out to gain as much satisfaction from consuming goods and agents, including services as they can. Their decisions can be analysed by looking at small changes from households and firms their current position, seeing whether a small (marginal) change can improve their macroeconomics: satisfaction. the study of the interrelationships between economic Choices are made at different levels variables at an When we come to explain how choices are made, it is helpful to be aware that choices aggregate (economy- are taken by different sets of economic agents, and at different levels. Individuals wide) level (people or households) take decisions about what goods and services to consume, and about how much labour to supply. Firms (businesses) face choices about what to produce and how to produce it. Governments need to take decisions about their LEARNING spending and taxation policies. LINK Microeconomics and macroeconomics The marginal Economic thinking is applied in different ways, depending on whether the focus is approach is explored on the decisions taken by individual agents in the economy or on the interaction more fully in between economic variables at the level of the whole economy. Chapter 14. Microeconomics deals with individual decisions taken by households or firms, or in particular markets. Test yourself 1.2 Give examples of ways Macroeconomics examines the interactions between economic variables at the level in which government of the whole economy. For example, it might examine the effect of a change in income spends its funds. taxes on the level of unemployment, or of the interest rate on total demand and the rate of inflation. In some ways the division between the two types of analysis is artificial. The same sort of economic reasoning is applied in both types, but the focus is different. EXERCISE 1.1 Think about the following, and see whether you think each represents a macroeconomic or microeconomic phenomenon. a The overall level of prices in an economy b The price of ice cream