CAIE A2 Level Economics Revision Notes PDF

ZNOTES.ORG UPDATED TO 2023-2025 SYLLABUS CAIE A2 LEVEL ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS Prepared for Murtaza Sohail for personal use only. CAIE A2 LEVEL ECONOMICS 1. The Price System and The Microeconomy 1.1. Utility Utility: the satisfaction gained from the consumpti...

ZNOTES.ORG UPDATED TO 2023-2025 SYLLABUS CAIE A2 LEVEL ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS Prepared for Murtaza Sohail for personal use only. CAIE A2 LEVEL ECONOMICS 1. The Price System and The Microeconomy 1.1. Utility Utility: the satisfaction gained from the consumption of a Income Effect: the resultant change in demand for a good product. or service caused by an increase or decrease in a Total Utility: the satisfaction from consuming all product consumer's purchasing power or real income. units over a particular period. The income effect has a positive relationship with normal Marginal Utility: the satisfaction gained from one more goods, meaning if income increases, consumers can unit of a product consumed over a particular period of purchase more of the normal goods. time. Tends to fall as consumption increases. The income effect has an inverse relationship with inferior Note: Consumers purchase products when P ≤ MU goods, meaning if income increases, consumers will The Law of Diminishing Marginal Utility: the fall in purchase less of the inferior goods. marginal utility as consumption rises. These cause a shift in the budget line, a rightward shift for Assuming limited income, rational behaviour and a normal goods, and a leftward shift for inferior goods. goal to maximise total utility. Equi-Marginal Principle: Consumers maximise their utility Indifference Curve where their marginal valuation for each product consumed is the same. Indifference Curve: this shows the different combinations It can be used to draw up a demand curve. Price rises of two goods that give consumers equal satisfaction. for product A; marginal utility will be less than other Represents the extent to which consumers are willing to goods and reduce the buying of consumers of A substitute a good for another. compared to other products due to their goal of Marginal Rate of Substitution: The rate at which a maximising total utility. Through it, we get to know the consumer is willing to substitute a good for another. This level of demand for consumers. is what affects the slope of the curve, MU ∗ A MU ∗ B MU ∗ C = = =⋯ P∗A P∗B P∗C ​ ​ ​ Limitations of Marginal Utility and Rational Consumer Behaviour Customers can not always put wants in order of most satisfaction, as some products may carry the same level of satisfaction or may change depending on mood. Customers may not always be able to assign a value to their satisfaction, as it is difficult to put intangible thoughts and feelings to numbers. It also assumes rational behaviour from consumers, that Consumers are indifferent to x, y, and z since they all are they will be satisfied with more rather than less. in the same curve. The equimarginal principle is applied here. A higher indifference curve (I2) means a higher level of 1.2. Indifference Curves and Budget consumption and utility. The higher the curve placement, Lines the preferable. Budget Lines Budget Line: the combination of 2 products obtainable with given income and prices. Substitution Effect: Following a price change, a consumer will substitute the more expensive product for the one that is now relatively cheaper. The budget line represents the extent of consumer income, and the IC indicates the extent of available WWW.ZNOTES.ORG Copyright © 2024 ZNotes Education & Foundation. All Rights Reserved. This document is authorised for personal use only by Murtaza Sohail at Nixor College on 18/09/24. CAIE A2 LEVEL ECONOMICS consumer choices. Together, they show how consumers We conclude: can maximise satisfaction. Substitution effect is E1 to E2. Consumer switch to Consumer’s choice is optimal at the point where budget buying more of good A. lines touch/is at a tangent to the highest indifference Income effect is E2 to E3. Less purchasing power, curve. This point shows the marginal rate of substitution. makes Income effect negative, reducing consumption of both goods. In the case of Inferior goods, An increase in purchasing power/real income, would mean less of Good B would be consumed (with consumers favouring more expensive goods). This creates a negative income effect, but it is not enough to counter the substitution effect. Following a price decrease for Normal good B, in the example above, a price decrease for good B has caused an increase in the purchasing power of consumers (now can buy more). A shift from consumer equilibrium, E1 to E2, is the substitution effect. Consumers will now be purchasing more of Good B as it is relatively cheaper than Good A, Giffen Goods is a sub-category of inferior goods; its shifting the optimum consumer satisfaction more towards consumption increases when its price increases. This is good B. because of a strong income effect (Real income changes). A shift from consumer equilibrium, E2 to E3, is the income If price for a giffen good increases, example staple effect. With more purchasing power, the budget line shifts food like rice/meat, substitution effect is negative to B2, downward sloping as more of Good B can be since the budget decreases (shifts left), but due to a purchased while Good A stays the same. fall in real income (consumers have less to spend), a Through the diagram above, we can conclude that: strong positive income effect takes place that exceeds A substitution effect is E1 to E2, meaning a shift in the the substitute effect. budget line causes movement along the IC curve. An income effect is E2 to E3 when a new IC is formed. Price Price Effect = Substitution effect + Income effect. Effects Price Good Price Effect (on Demand Change Type demand) Change Fall Normal Both effects ↑ Rise Sub. Effect ↑ > In. Fall Inferior Rise effect ↓ Sub. Effect ↑ > In. Fall Giffen Fall effect ↓ Rise Normal Both effects ↓ Fall Sub. Effect ↓ > In. Rise Inferior Fall effect ↑ Sub. Effect ↓ > In. Rise Giffen Rise effect ↑ Limitation of the Model of Indifference Curves Consumers are not always rational in their choices; The example above, is an Increase in price of Normal emotions and personal judgement affect the choice of the Good B. best available alternative. WWW.ZNOTES.ORG Copyright © 2024 ZNotes Education & Foundation. All Rights Reserved. This document is authorised for personal use only by Murtaza Sohail at Nixor College on 18/09/24. CAIE A2 LEVEL ECONOMICS The consumer may not always realize the level of utility Pareto Optimality from consumption or the original expectation of utility. The indifference curve can only be done for 2 or, at best, Pareto Optimality: where it is impossible to make for 3 goods and can not take into account ALL the goods in someone better off without making someone else worse a basket. off. Indifference curve analysis can not help when one of the If resource allocation is not Pareto efficient, then there is goods (A or B) is a durable good. For example, comparing scope for improvement. the quantity of cake to the quantity of cake pan. Any improvement in economic efficiency will need some form of compensation to individuals negatively affected 1.3. Efficiency and Market Failure by the improvement. Economic Efficiency: where scarce resources are used Dynamic Efficiency most efficiently to produce maximum output. Consists of: Dynamic Efficiency: a productive efficiency that benefits a Productive Efficiency: When a firm is producing at the firm over time. Resources are reallocated so that output lowest possible cost. increases relative to the increase in resources. Allocative Efficiency: where price equals marginal The long-term phenomenon is achieved when firms meet cost; firms produce the goods and services most the market's changing needs by introducing new consumers want. No waste, both producers and production processes in response to competitive consumers are satisfied with produced goods. pressures and require investment with outside firms. The marginal cost of production measures the When a firm becomes dynamically efficient, the long-run opportunity cost of resources used to produce this average cost curve shifts downwards. unit. Productive Efficiency Productive Efficiency only exists when producing in the border of a PPC curve. Competition may lead to productive efficiency, forcing firms to lower prices and not go bankrupt, and will lead to firms reducing their costs to get the greatest possible profit. Perfect Competition pushes firms to long-run equilibrium in the market by producing at q and price at p. Lowest Average cost is achieved, leading to productive efficiency in the economy. Allocative Efficiency The table below, shows us the most allocative efficient output would be Quantity 4. Market Failure Quantity 1 2 3 4 5 Market Failure is when a free market fails to make the Price per unit 6 6 6 6 6 optimum use of scarce resources due to no government Marginal cost per unit 3 4 5 6 7 intervention. It is when a market's interaction between supply and demand does not lead to productive and/or allocative efficiency. It cannot be expressed using a PPC curve. Any point on Reasons for market failure (oversupply or undersupply of the frontier/border as long as the marginal cost and goods): selling price are the same. Externalities present in the market A competitive market can lead to allocative efficiency. It No Provision of merit and demerit goods leads to 2 motivations: motivation to make the greatest No Provision of public and quasi-public goods profit so they will produce the products with the highest Information failure exists level of demand; second, the other firms will be producing Adverse selection or moral hazard high-demand products, which forces other firms to do the Abuse of monopoly power in the market same to prevent failure and closure of the firm. Allocative efficiency can be seen in the graph, where the marginal cost curve meets the price. 1.4. Private Costs and Benefits, Externalities, Social Costs and Benefits WWW.ZNOTES.ORG Copyright © 2024 ZNotes Education & Foundation. All Rights Reserved. This document is authorised for personal use only by Murtaza Sohail at Nixor College on 18/09/24. CAIE A2 LEVEL ECONOMICS Social Costs Externalities: where the actions of producers or consumers give rise to side effects on third parties who Social Costs = Private Costs + External Costs are not involved in the action; sometimes referred to as spillover effects. Social Costs: the total costs of a particular action borne by Negative Externalities: where side effects negatively all the society. impact and impose costs on third parties. Private Costs: those costs that are incurred by an Negative Production individual who produces a good or service. Negative Consumption External Costs: those costs incurred and paid for by third Positive Externalities: where the side effects positively parties not involved in the action. impact and benefit third parties. Positive Production Marginal Social Costs Positive Consumption Arise through the actions of consumers and producers, Marginal Social Costs = Private Marginal Costs + External distinction is sometimes not always clear. Marginal Costs Externalities create the problem of an inappropriate Marginal Social Costs: the total cost society pays for the amount of goods and services being produced. Firms do production of another unit or for taking further action in not usually take into account all social costs, only private. the economy. Thus, the overproduction of goods with negative Private Marginal Costs: the change in the producer's total externalities will continue due to no acknowledgement of cost due to producing an additional unit of a good or social costs by private decision-makers. service. External Marginal Costs: the change in the cost to parties other than the producer or buyer of a good or service due to the production of an additional unit of the good or service. Social Benefits Social Benefits = Private Benefits + External Benefits Social Benefits: the total benefits arising from a particular action. Private Benefits: benefits that accrue to individuals who produce and consume a particular good. External Benefits: benefits received by third parties not involved in the action. If social benefits rise more than private, positive externalities are present. The graph above shows how Marginal private costs (MPC) is the level of supply currently produced, with price P and Marginal Social Benefits quantity Q; since negative externalities of production are not acknowledged, firms overvalue (as it may seem like a Marginal Social Benefits = Marginal Private Benefits + higher profit margin) and hence overproduce, and the Marginal External Benefits market is in a disequilibrium. Only through government intervention and the Marginal Social Benefits: the satisfaction experienced by acknowledgement of the negative externalities will the consumers/producers of a specific good, plus the overall supply shift to the left, causing P to shift to P* and Q to environmental and social benefits. shift to Q*, and will the market be in equilibrium. Marginal Private Benefits: the total marginal benefits of Deadweight Welfare Loss: A deadweight loss is a cost to every consumer for each quantity of good consumed. society created by market inefficiency, which occurs when Marginal External Benefits: the benefit from consuming supply and demand are out of equilibrium. one more unit of a good or service that falls on people Market inefficiency occurs when goods within the other than the consumer**.** market are either overvalued or undervalued. the 4 kinds of externalities (Positive consumption Deadweight welfare loss is indicated by the triangle in the externalities, negative consumption externalities, graph. Positive production externalities and negative production externalities) Externalities WWW.ZNOTES.ORG Copyright © 2024 ZNotes Education & Foundation. All Rights Reserved. This document is authorised for personal use only by Murtaza Sohail at Nixor College on 18/09/24. CAIE A2 LEVEL ECONOMICS Positive Consequences of Negative Consequences of Asymmetric Information Asymmetric Information Specialisation is encouraged People can be taken in a healthy economy. The advantage of, and economy will benefit from encouraging immoral activity trade and the Division of may reduce living standards. labour. Greater aggregate demand Adverse selection can take and a better standard of place, which results in living. negative externalities. 1.6. Cost-Benefit Analysis in Decision- Making Positive externalities may also cause deadweight loss. In the graph above, Marginal Private Benefit (MPB) is the Cost-Benefit Analysis (CBA): a method for assessing the level of current demand, with price P and quantity Q; since desirability of a project, taking into account the costs and Positive externalities of consumption are not benefits involved. acknowledged, consumers undervalue (since they are not Used to measure the feasibility of a project/business. aware of the actual benefit), and hence producers Weighing the costs with the benefits and comparing them underproduce, and the market is in disequilibrium. to the opportunity cost Aims for a competitive advantage. Only through government intervention and acknowledging The technique assumes that a monetary value can be the positive externalities will the demand shift to the right, placed on all the costs and benefits of a program, causing P to shift to P* and Q to shift to Q*, and the including tangible and intangible returns to other people market will be in equilibrium. and organizations in addition to those immediately impacted. 1.5. Asymmetric Information and Moral Stages in a Costs-Benefits Analysis Hazard 1. Identification of all relevant costs and benefits. Asymmetric Information 2. Putting a monetary value on all relevant costs and benefits. Asymmetric Information: occurs when one party to an 3. Forecasting future costs and benefits (where economic transaction possesses greater material appropriate). knowledge than another. 4. Decision-making - the interpretation of the results Where people do not have full or complete information from CBA. and do not realise the benefit of a merit good or the side effects of a demerit good. Step Advantages Disadvantages Moral Hazard: the tendency for insured or otherwise All costs/benefits Identification is Identification protected people to take a greater risk. This situation considered tough arises from Asymmetric Information, where the person in Monetary Most will have market the market is more informed than the seeker of Shadow prices evaluation prices advice/buyer. Uncertainty in For example, a doctor's diagnosis. Forecast Future consequences estimation This could lead to a misallocation of resources More of a risk as it is not done purposefully by the Interpretation All info. Useful Bureaucracy person in the market. Decision- Investment projects Public expenditure Adverse Selection: where an insurance company making encounters the probability of extreme loss due to a risk not divulged at the time of a policy's sale. 1.7. Short-Run Production Function For example, when applying for health insurance, the insured hides bad habits (smoking, drinking, etc.). Short-run production function defines the relationship This case of information failure is due to information between 1 variable factor of production (while keeping the being withheld or portrayed inaccurately. This is more rest fixed) and output. purposeful. Short-run is not a period of time, but rather a condition where not all factors of production are variable. Positive Consequences of Negative Consequences of Asymmetric Information Asymmetric Information WWW.ZNOTES.ORG Copyright © 2024 ZNotes Education & Foundation. All Rights Reserved. This document is authorised for personal use only by Murtaza Sohail at Nixor College on 18/09/24. CAIE A2 LEVEL ECONOMICS The production function shows the maximum possible output from the given set of factor inputs. Formula: Q=AF(K, L), where Q is total output (Quantity), A is technology, and F is factors of production, with K being capital and L being labour. Total product is the total output a firm produces within a given period, utilising given inputs. Total product = Average product x labour Average product, output per unit of inputs of variable factors. Total product Average product = Labour ​ Marginal product is the addition of variable factors to the total product. Changed output Marginal product = Changed input ​ Isoquant: a curve that shows a particular output level over The Law of Diminishing Returns (law of variable a combination of inputs. It is similar to the indifference proportions) is where the output from an additional input curve. Output refers to the total physical product. unit leads to a fall in the marginal product. An example graph given below. The points x, y and z on the graph show the same output. Short Run Cost Function Fixed Costs: Those costs are independent of output in the short run, so they are a straight line and don’t change with output. Variable Costs: those that vary directly with output; all costs are variable in the long run, so the graph is curved and changes with output Total cost = total fixed cost + total variable cost. It starts at the fixed cost line and follows the variable cost line, since it combines both. Optimum Output: most efficient output at the lowest unit cost. Production efficiency in the short run. Optimum output ≠ profit maximisation (this is a long run). Average Fixed Cost = totaloutput fixed cost ​ Average variable cost = total variable output cost ​ total cost Average total cost = output ​ change in cost Marginal cost = change in quantity ​ The short-run average cost curve (SRAC) shows us the optimum output point where marginal cost meets the WWW.ZNOTES.ORG Copyright © 2024 ZNotes Education & Foundation. All Rights Reserved. This document is authorised for personal use only by Murtaza Sohail at Nixor College on 18/09/24. CAIE A2 LEVEL ECONOMICS lowest point of average total cost. The cup shape of the curve is because, initially, the average cost reduces due to increased efficiency and better-fixed factors, known as increasing returns. It continues to drop until the Optimum output is reached. Then, as the additional cost of producing more units becomes a burden (increase in marginal cost), diminishing returns happen, leading to increased average total cost and the slope turning upward. 1.8. Long-Run Production Function In the long run, all factors of production are variable. This LRAC is also known as the envelope curve, consisting of allows factor input to be manipulated to find the most the short-run average costs over time. efficient level. Increasing returns to scale: where output increases 1.9. Economies and Diseconomies of proportionately faster than the increase in factor inputs. Decreasing returns to scale: where factor inputs increase Scale at a proportionately faster rate than the increase in output. Economies of Scale - the benefits gained from falling long- run average costs as the scale of output increases. Long Run Cost Function Internal Economies of Scale: a long run result of a decision to produce on a larger scale. Long-run cost The principal advantage for a firm benefiting from economies of scale is a reduced cost per unit produced. Technical Advantages gained directly in the Economies production process Purchasing Increase purchase power, bulk buying, economies cheaper inputs Marketing Promote at lower rates, saving in costs economies of distribution Managerial Specialisations and specialists/experts economies Technological Cost saving through online advertising economies and booking systems Financial Better and cheaper access to borrowed economies funds The reason the curve is sloping is because, over-time, Risk-bearing More risk-averse due to diversified economies of scale reduce costs and output increases economies conglomerate activity (increasing returns to scale), but there will come a point where costs reach the lowest they can while output is External economies of scale: cost-saving accruals to all highest, and once firms surpass that point, diseconomies firms in an industry as the scale increases. start to gain. Economies of Concentration: Increase in the power of Minimum Efficient Scale: lowest level of output at which the wealth and thus the influence of government costs are minimised. interventions, such as taxes and tariffs. Low MES leads to a fragmented market, and high MES Economies of Technology: Involvement of better and levels lead to a natural monopoly. advanced technologies and sciences in relation to Long-run average cost cure-envelope curve economic activities. Economies of Skills: Where skilled/specialised people can work more efficiently and cost-effectively. The Benefits: Egalitarian: All the businesses in an industry enjoy these economies of scale equally. Growth: stimulate industry growth in particular regions and encourage the rapid economic WWW.ZNOTES.ORG Copyright © 2024 ZNotes Education & Foundation. All Rights Reserved. This document is authorised for personal use only by Murtaza Sohail at Nixor College on 18/09/24. CAIE A2 LEVEL ECONOMICS development of support industries and the wider Supernormal Profit: any profit in excess of normal profit. It geographic area. only exists in the short term and only for monopolies, Lower Costs: Besides lower production and TR>TC, the total revenue is greater than the total operating costs, economies of scale may reduce costs. variable costs per unit because of operational efficiencies and synergies. 1.11. Different Market Structure Diseconomies of Scale: where long-run average cost increases as the scale of output increases Industry: a group of productive enterprises or Internal Diseconomies of scale are possible because organisations that produce or supply goods, services, or the excessive concentration of economic activity in a sources of income. narrow geographical area will lead to disadvantages. MNC: A multinational corporation (MNC) has business Technical Diseconomies: inefficiencies in the operations in two or more countries. production process. When companies grow faster Market Structure: the way in which a market is organised than they can adapt and can't meet demand, they in terms of the number of firms and barriers to the entry meet scalability issues. of new firms. Organisational Diseconomies: inefficiencies in the Barriers to Entry: any restriction that prevents new firms workforce management. Additional growth from entering an industry. requires additional workers to the workforce. This Spectrum Structure: can cause issues with communication and Large ← Number of firms → Small motivation, thus reducing employee productivity. None ← Barrier to entry → High Purchasing Diseconomies: laxity in purchasing due None ← Control over price change → Full to additional cash inflows, which creates problems Perfect Competition: an ideal market structure with many of irresponsible spending, greater waste, higher buyers and sellers, identical or homogeneous products costs and even lack of progress. and no barriers to entry. Competitive Diseconomies: This happens due to It is on the furthest left end of the spectrum. non-competitive markets; this lack of tangible Imperfect Competition: any market structure except for incentives causes inefficiency. perfect competition. Financial Diseconomies Monopolistic Competition: a market structure where there External diseconomies of scale come in the form of: are many firms, differentiated products and few barriers Traffic Congestion, which increases distribution to entry costs. This falls after perfect competition in the middle of the Land Shortages and, therefore, rising fixed costs. spectrum structure. Shortage of Skilled Labour and, therefore, rising An oligopoly is a market structure with few firms and high variable costs. barriers to entry. Falls after monopolistic competition in the middle of 1.10. Revenue and Profit spectrum structure. Monopoly: a pure monopoly is Just 1 firm in an industry Revenue with very high barriers to entry. It falls at the furthest right end of the spectrum Total Revenue (TR) = price x quantity Stages to help identify the market structure in the Average Revenue (AR) = total revenue Output ​ spectrum: Marginal Revenue (MR) = change in total revenue Count firms, larger numbers, closer to perfect change in total output competition. ​ Marginal revenue is the additional revenue gained by Concentration ratio to see the combined market the additional unit. structure of the biggest firms as a percentage of the The firm only sells more by reducing price; AR is always industry total. The bigger percentage is closer to higher than MR. The demand curve is the AR line. oligopoly and monopoly. Considering barriers to entry Profit Considering the importance of economies of scale to a There are 3 types of profit: firm, the more it is, the closer to oligopoly. Barriers to Entry: Normal Profit: a cost of production that is just sufficient Access to Capital: The market could have high fixed for the firm to keep running in the same industry costs/set-up costs, such as research and Subnormal Profit: any profit less than the normal profit. If development, which might require a high salary over a the problem persists, then the firm will leave the industry long period to be profitable. and go into one that will make a profit. Sunk costs act as a barrier to exit, and the high risk of P13,845 >13,205 Income In practice, putting monetary value on non-marketed goods and services is challenging. Indicators of Living Standards and Economic Multidimensional Poverty Index (MPI): a composite measure of deprivation in terms of the proportion of Development households that lack the requirements for a reasonable standard of living. Monetary Indicators G WWW.ZNOTES.ORG Copyright © 2024 ZNotes Education & Foundation. All Rights Reserved. This document is authorised for personal use only by Murtaza Sohail at Nixor College on 18/09/24. CAIE A2 LEVEL ECONOMICS Six living standard indicators (cooking fuel, sanitation, be demanded, potentially at an even faster rate than safe drinking water, floor space, and assets) equal can be supplied. 33% of total weight. Real GDP measures the quantity of output, not quality. Two indicators of education (years of schooling and Output may rise, but if quality falls, so does living attendance) equal 33% of total weight. standards. Two indicators of health (child mortality and In practice, however, quality rises over time. nourishment) equal 33% of total weight. Working conditions also tend to improve over time, with Households are considered multidimensionally poor if working hours falling. deprived of at least 33% of the weighted indicators. If real GDP per head stays the same, while working The Kuznets Curve: a curve that shows the relationship conditions rise and working hours fall, people's living between economic growth and income inequality. standards will increase. If improved working conditions over time lead to a decline in the quality of the environment, lower living standards will happen, but GDP may rise (more resources being devoted to cleaning up the environment) Between Countries In Countries with Higher GDP per head, the citizens are likely to enjoy higher living standards than those with lower GDP per head. However, this is not always the case. Real GDP per head must be converted into a common As an economy develops, income becomes less evenly currency to compare living standards. distributed until it reaches a certain point it becomes To avoid comparisons being distorted by exchange rate evenly distributed. changes, economists would adjust the exchange rate to This is because only a few gain high rewards as the consider their purchasing power parity. economy develops, so there is a broader income gap. Example: However, a middle grade emerges due to progressive 2.5 Oman rials = 1 US dollar. tax, and more income is spent on social welfare and If Oman’s real GDP per head was 10,000 rials, and the public goods. US GDP per head was 20,000 dollars. This would Only applicable to developing countries. It does not mean when Oman’s real GDP is converted to US explain the rise in inequality in developed. dollars (4,000 dollars), the people in the US are five All developing countries do not use it. times better off than Oman’s people. However, if 1 dollar can buy more in the US than in 5.5. Comparisons of Economic Growth Oman, using the exchange rate will exaggerate Oman’s output. Rates and Living Standards A basket of products may sell for 200 dollars in the USA and 1400 rials in Oman. This would mean that in Overtime terms of ability to buy (Purchasing parities), 7 rials are worth 1 dollar. Real GDP per head is usually used as the main indicator. Using this as a basis to convert Oman’s output to US In a particular year, if real GDP per head is greater than dollars would show that the people in the US are 14 the previous year, it is expected that the population is times better off than people in Oman. experiencing a higher living standard. Even if a country has a higher real GDP than another However, Real GDP is not evenly distributed. Higher country using PPP, it does not guarantee that the GDP per head may not mean everyone is well off. population will enjoy a higher living standard. The change in real GDP may not reflect the true change in This is due to uneven income distribution, e.g., Kuwait the number of goods and services households can enjoy has one of the highest GDP per capita, but many due to undeclared economic activity over time. For immigrant workers receive low wages. example, more weapons produced in war may not mean Like comparisons over time, factors not measured in real consumers' quality of life is improving. GDP per head must be accounted for in assessing living In the long run, producing more capital goods will result in standards. higher consumer products and, thus, higher living standards. However, in the short run, the shift of 5.6. Characteristics of Countries at resources may cause a dip in living standards. More goods/services are not guaranteed to result in Different Levels of Development better living standards. As more is supplied, more will WWW.ZNOTES.ORG Copyright © 2024 ZNotes Education & Foundation. All Rights Reserved. This document is authorised for personal use only by Murtaza Sohail at Nixor College on 18/09/24. CAIE A2 LEVEL ECONOMICS Population Growth and Structure As the population grows, it makes better use of the stock of capital and land. This increases returns enjoyed by Demographic Factors population growth. A country is considered underpopulated if the population Birth Rate: the number of live births per thousand is below the optimum level. population in one year. The country is considered overpopulated if the population Number of live births The total population x ​ 1000 exceeds the optimum level, and decreasing returns are It is also referred to as crude birth rate, as it only gives happening. basic information on births (not, for example, the In practice, the situation is more dynamic (constantly in mother's age). change). Technical knowledge is continually improving, Death Rate: the number of deaths per thousand and due to the number of other factors constantly population in one year. changing, there is no fixed optimum population for a Number of death The total population x ​ 1000 country. Death rates include children under 1, even tho infant Level of Urbanisation mortality is measured separately. The natural increase in population is when the birth Countries with low income per head usually have a high rate exceeds the death rate. proportion of the population living in rural areas. Infant Mortality: the opposite of Birth rate, the number of Rural-urban migration rates are high in these deaths of children under 1 per thousand of the population countries, putting pressure on the urban areas' in one year. infrastructure, housing and schools. Net Migration: The difference between migration into and Most of the population in countries with high income per out of a country divided per thousand head live in urban areas, so they have small growth in Difference between immigration and emigration The total population ​x 1000 urban population. If immigration into the country is greater than In some cases, people are migrating to rural from emigration out, net immigration or positive net urban due to technological advances allowing more migration happens. “work from home”. Causes of population changes: Income Distribution As countries develop, population growth goes down. The death rate decreases, but the birth rate drops more. This is due to a decline in infant mortality, increased cost of raising children and women’s participation in the labour force, better healthcare, housing, nutrition, etc., contributing to people living longer. Population growth can still occur in these countries through increased net immigration (higher living standards and income attract people). Low development is associated with high population growth rates due to the birth rate exceeding the death rate. The need for children to support parents, lack of availability/methods of birth control, low cost of raising kids, lack of education for women and high infant mortality (more children to compensate). This results in a low average population age and a high dependency ratio (people who can’t be in the workforce must be provided for). Gini Coefficient: a numerical measure of inequality High development creates an ageing population (due to a Area A Calculated as, Area A + Area B decreasing birth rate and a decreasing death rate), and ​ If the distribution is equal, the coefficient is 0. this also makes a high dependency ratio and greater cost A coefficient of 1 would mean complete inequality for health care and pensions. (one person getting all the income). Governments have increased the retirement age to The higher the coefficient, the more unequal the reduce the cost of pensions. distribution of income. The Optimum Population Lorenz Curve: a graphical representation of inequality. The 45° line shows a completely equitable distribution Optimum Population: the size of the population that of income. maximises GDP per head. WWW.ZNOTES.ORG Copyright © 2024 ZNotes Education & Foundation. All Rights Reserved. This document is authorised for personal use only by Murtaza Sohail at Nixor College on 18/09/24. CAIE A2 LEVEL ECONOMICS The curve shows the actual distribution of income or Voluntary Aid incorporates volunteers who donate their wealth. labour as a form of aid. Area A is the difference between the curve and the Official Development Assistance (ODA): government aid line. It represents inequality; the smaller the Area of A, that promotes and specifically targets developing the more equal the distribution. countries' economic development and welfare. Reasons for Aid: Economic Structure Tied, bilateral aid may be given to promote the industries of the donor country through sending aid Primary Sector: extraction of natural resources to be used and expecting the recipient country to invest/spend on and processed into goods and services. products from the donor country, restricting its import. Agriculture and Extractive Industries. Increases donor countries’ exports. Secondary Sector: the manufacturing of goods and Untied aid may promote the donor country’s exports services from natural resources. through better economic growth in the recipient Manufacturing industries and construction industries. country, as they may import more due to a good Tertiary Sector: Service industries to both consumers and relationship. firms. Bilateral aid may be used to gain political influence. Countries with high income per head and high The recipient government may be pressured or development have a large portion of their labour force in inclined to support the donor government in its the tertiary sector. disputes with other government(s). They export mainly manufactured goods and services. Both bilateral and multilateral aid may be given to Countries with low income per head and development influence the economic policies of the recipient depend more on the primary sector. government. E.g. Aid given on the condition ends the More vulnerable to natural forces, High rain use of child labour. seasons/droughts will affect agriculture-dependent Bilateral and multilateral aid can be given for economies, leading to famine, and if they are exported humanitarian motives, such as crisis aid (to save lives to almost no foreign currency earning. during natural disasters and famines). The The majority of Export revenue is generated from development of other countries increases global GDP primary products. Frequent and significant and international trade and reduces the risk of fluctuations in price (through demand and supply negative external shock. changes) make them vulnerable in their trading The effects and importance of aid: relations. Aid helps the recipient country experience increases Industrialisation of the economy (due to economic in its income per head and development by providing development) investment/finance to stimulate them. will increase the relevance of the secondary sector, and If investment is encouraged, a virtuous cycle may be this will move the labour force from the primary industry, created. reducing its significance. Primary goods are inelastic, with manufactured ones being more elastic. Low prices and revenue for direct goods compared to manufactured goods make them hard to export, creating a decline in primary goods. As the economy develops, the employment of the labour force will continue shifting towards the tertiary sector. Increases the value of output due to higher labour and capital productivity. 5.7. Relationships Between Countries at Dependency: a situation where the economic Different Levels of Development development of the recipient economy is hindered by its relationships with donor economies. International Aid Recipients may become indebted, with high-interest Foreign Aid: assistance given to developing economies on payments, for past loans to high-income countries; favourable terms. they may be paying more than the aid received. Tied Aid comes with conditions Aid in terms of advice and policies suggested/imposed may not always be suitable towards the recipient Untied Aid is given without conditions Bilateral Aid is given to one country by another. country. Multilateral Aid is given by countries to international organisations, who distribute it to other countries. Trade and Investment WWW.ZNOTES.ORG Copyright © 2024 ZNotes Education & Foundation. All Rights Reserved. This document is authorised for personal use only by Murtaza Sohail at Nixor College on 18/09/24. CAIE A2 LEVEL ECONOMICS Low-income/some middle-income countries favour trade It may drive domestic firms out of the market more than aid. International trade has many benefits (especially infant and declining industries), but this compared to aid: does not create higher employment. Economies of scale are becoming possible because of Depletion of non-renewable resources and the the larger market. creation of pollution. Increased competition encourages domestic May send profits back to home country and employ entrepreneurs to innovate and look for new foreign rather than domestic workers. production techniques. Depending on MNCs’ power, it may pressure the Trade leads to the transfer of skills and technology. government into employing policies that benefit them Specialisation and trade increase income and provide but not the economy and negotiate favourable tax increased savings that can be used for investment. breaks and exemptions from some environmental Expansions caused by trade increase employment, laws. expand spending power and increase demand for Monopoly Power may be developed, which gives them domestic output. the power to drive down prices of raw material Low-income/middle-income countries specialise in supplies in the host country. agricultural products, this puts them at a disadvantage due to: Foreign Direct Investment (FDI) The income elasticity of demand for primary goods is very inelastic, causing little extra demand with Foreign Direct Investment (FDI): setting up production increased world income. units or purchasing existing production units in other Producers of manufactured goods in high-income countries. It is not the same as a portfolio investment economies have some monopoly power, which helps (purchasing shares in another country). maintain their high prices. Puts primary goods at a Low-income/middle-income countries benefit from FDI disadvantage in trade. through MNCs, which helps the country’s infrastructure. Subsidies provided in the USA and Europe put Large inward flows of FDI indicate that a country is downward pressure on global agricultural prices. expected to grow rapidly and provide large markets for Unfair competitive advantage due to subsidies and a MNCs or markets with low production costs or an deflated global price. abundant supply of raw materials. Countries adopt import substitution policies (less import Measures to attract FDI: of manufactured to develop their own manufacturing Low corporation tax industries) and attempt to diversify their economies in Good education system attempt to combat these exploitative trading patterns. Few rules and regulations for firms. Export-led growth through industrialisation gives them a Government subsidies more comparative advantage in industries previously dominated by high-income economies. External Debt Investment flows between countries in search of profits, interest and dividends. External debt includes: Many low-income/middle-income countries incur a deficit Loans have not been repaid, and interest payments on in their current account, which makes investment loans have not been made to foreign banks, impossible unless a surplus in the financial account governments and international organisations. covers it. This makes Low income/middle income Causes of Debt: Structural current account deficit countries seek to attract direct and portfolios from other countries. Overconfidence in the value of loans that could be repaid. Role of Multinational Companies (MNCs) Inefficient use of borrowed funds Unexpected events Multinational Companies (MNCs): a business with a Consequences of Debt: parent company based in one country but with production The opportunity cost of repaying debt with the welfare or service operations in at least one other country. of the population. The Beneficial activities of MNCs: A high level of debt may make it difficult for low- Bring in new technology and new ideas into host income/middle-income countries to attract more countries. development funds. Add to GDP and exports, contributing to the economic welfare of the host country. Role of the International Monetary Fund (IMF) Generate employment opportunities Led to an increase in Foreign direct investment (FDI) The International Monetary Fund (IMF) works to achieve Negative consequences of MNCs: sustainable growth and prosperity for its 190 member countries. WWW.ZNOTES.ORG Copyright © 2024 ZNotes Education & Foundation. All Rights Reserved. This document is authorised for personal use only by Murtaza Sohail at Nixor College on 18/09/24. CAIE A2 LEVEL ECONOMICS The primary aim of IMF: Reduced supply chain costs - improved transport, as To promote international monetary cooperation made resource mobility easier and cheaper. To facilitate the expansion and balanced growth of Deregulation of financial markets - more freedom for international trade banks to use and allocate their capital, increase in To promote exchange rate stability foreign direct investment, portfolio and direct To assist in setting up a multilateral system of investment. payments Technological change - technological advancement To make resources available (with adequate has made many processes more efficient and safeguards) to members experiencing balance of effective. payments difficulties. Consequences of Globalisation: These activities create a stable system of international Improved standards: Increases comparative payments and exchange rates necessary for trade advantage, allows for increased GDP and economic between 2 countries. growth and increased living standards. Functions of IMF: Increase of Foreign Direct Investment: Reduced trade Surveillance and technical assistance, which restrictions attract MNCs, which increases FDI. encourages countries to adopt sound economic Greater Variety of Products: removal of trade policies, helps promote global growth and economic restriction encourages imports. stability. Structural Unemployment: Industries expand due to Lending is used to help members experiencing greater international competition while some decline. difficulties in financing their balance of payments. Interdependence of Economies: the increased possibility of demand and supply side shocks; these Role of World Bank may be adverse shocks like natural disasters. International investment: free flow of portfolio and The World Bank is an international development direct investment runs the risk of a negative multiplier organisation owned by 187 countries. effect if economic conditions worsen and the The World Bank supports low/middle-income countries investment is drawn out quickly. through internal investment payments such as building International Coordination of Policies: to prevent policy new roads, improving infrastructure and constructing new conflicts and improve the effectiveness of policies, but health facilities. not very easy to achieve. The International Bank for Reconstruction and Development (IBRD) assists middle-income and Economic Integration creditworthy poorer countries, while the International Development Association (IDA) focuses on the poorest Economic Integration: an arrangement among nations economies, which are given grants. that typically includes reducing or eliminating trade They provide loans that cover the following: barriers and coordinating monetary and fiscal policies. Health and education Trade Blocs: a regional group of countries that have Agriculture and rural development entered trade agreements. Environmental protection Free Trade Areas: a trade bloc where member Infrastructure governments agree to remove trade restrictions among Governance (anti-corruption reasons) themselves and determine their external trade These loans are given to recipients who want to create restrictions/policies towards non-members. E.g. NAFTA. wider-reaching changes to their economic policies. Custom Unions: a trade bloc with free trade between member countries and a common tariff on imports for 5.8. Globalisation non-members. E.g. SACU Monetary Union: a trade bloc with free trade between Globalisation: increasing interdependence of world member countries, a common external tariff, the same economies due to the growing scale of cross-border trade currency, and the same monetary and exchange rate of commodities and services, the flow of international policies. E.g. EU capital and the vast and rapid spread of technologies. Economic Unions: a trade bloc with free trade between Causes of globalisation: member countries, a common external tariff, economic Reduction in trade barriers - makes product, capital policies, and a common currency. E.g. 7, the original and labour markets easily accessible for different states joining together into the UAE or the 13 states that countries. formed the USA. Improved telecommunications - more accessible to The full economic union is the final stage of keep in contact with production plants, making integration. coordinating the production process easier. The increase in online stores makes consumption more Trade Creation and Trade Diversion convenient. WWW.ZNOTES.ORG Copyright © 2024 ZNotes Education & Foundation. All Rights Reserved. This document is authorised for personal use only by Murtaza Sohail at Nixor College on 18/09/24. CAIE A2 LEVEL ECONOMICS Trade Creation: where high-cost domestic production is Trade Diversion: where trade with low-cost countries replaced by more efficiently produced imports within the outside a customs union is influenced by higher-cost customs union. products supplied within. Before joining the customs union, the price was P and Initially, the country bought from the most efficient quantity Q (Qa supplied by domestic producers, Qa- Q is country and placed tariffs on imports, price at P and the amount imported). quantity at Q, with tax being c + e. After joining the customs union, it can import without The trade is switched to another member country when tariff, which pushes the price to P1 and increases quantity joining the customs union. Price falls to P1, and quantity to Q1. rises to Q1. Here, consumers gain low prices and high quantity, while Consumer surplus increases by a, b, c, d amount. firms lose sales and lower prices. This could be because If producer surplus falls by an amount, tariffs will of a resource shift to specialise in price-competitive decrease by c+ e. goods. If areas b and d are less than area e, welfare will be Lower price increases consumer surplus by a, b, c, d reduced. amount. Producer surplus falls by an amount and tariff revenue by c, giving a net gain of b and d. WWW.ZNOTES.ORG Copyright © 2024 ZNotes Education & Foundation. All Rights Reserved. This document is authorised for personal use only by Murtaza Sohail at Nixor College on 18/09/24. CAIE A2 LEVEL Economics © ZNotes Education Ltd. & ZNotes Foundation 2024. All rights reserved. This version was created by Murtaza Sohail on 18/09/24 for strictly personal use only. These notes have been created by Yumna Elshaikh for the 2023-2025 syllabus The document contains images and excerpts of text from educational resources available on the internet and printed books. If you are the owner of such media, test or visual, utilized in this document and do not accept its usage then we urge you to contact us and we would immediately replace said media. No part of this document may be copied or re-uploaded to another website. Under no conditions may this document be distributed under the name of false author(s) or sold for financial gain. “ZNotes” and the ZNotes logo are trademarks of ZNotes Education Limited (registration UK00003478331).