O Level OSIE Economics Notes

Economics2286OLevel Notes v2.0Contents:1. QuestionTypes+AnsweringMethod2. Topic1KeyPoints3. Topic2KeyPoints4. Topic3KeyPoints5. Topic4KeyPoints 6. Topic5KeyPoints7. Topic6KeyPoints8. DefinitionsList9. Notes+SampleQuestions10. Acknowledgements 1QuestionTypes+AnsweringMethod - Calculate(Q1):usedatafromthesourcetocalculaterequiredvalue- Identify:namerequiredterms,usingsourcedataforQ1- State:expressinclearterms- Define:givespecificmeaningtoagiventerm(s)- Explain:givepurposes/reasons,describewhyand/orhow,supportwithrelevantevidence(esp.Q1)- Analyse:- Q1(Analysetherelationshipbetween…):staterelationship,provide2supportingexamples(fromsource),provideexceptionswithexamples(fromsource),commentonrelationship- (c):givedetailstoshowmeaning- Discuss:writeaboutagivenissue/topicinastructuredandbalancedway(2A,2CA,evaluation) ● SectionA(Q1):○ Calculate[1]○ Identifyreasons(fromsource)○ Explain(usingsourcematerial)○ Analysetherelationship…[5]○ Analyse[4]→2points○ Discuss(x2)[6]each→3points● SectionB(3outof4):○ Identify/State/Define[2]○ Explain[4]→2points○ Analyse[6]→3pointsor definitionof giventopic+2to3points○ Discuss[8]→4points(2A,2CA) 1

2Topic1KeyPoints - basiceconomicproblem:scarcity(i.e.unlimitedwantsbutlimitedresources)- wantsisnotthesameasdemand,scarcityisnotthesameasshortage- factorsofproduction:- land: naturalresourcesusedinproduction(reward:rent)- labour:humanresourcesusedinproduction(reward:wages)- capital:man-madegoodswhichcontributetoproduction(reward:interest)- entrepreneurship:skillsrequiredtocombineandmanageotherFOPforproduction,risktaker(reward:profits)- freegoodvseconomicgood- freegood:unlimited,notscarce∴doesnotincuropp.cost(e.gsunshine,air)- afreegoodisnotthesameasagoodthatisfreeofcharge- ec.good:limited,scarce∴incursopp.cost- firms:‘production’→resourcesprocessedintogoodsandservices- householdsandconsumers:‘consumption’→actofbuyingproducedgoodsandservicestosatisfywants- opportunitycost:thenextbestalternativeforgone- allocationofresources:- householdsandconsumers→maximumsatisfaction(qualityandpriceofproducts)- firms→maximumprofits- governments→maximumSOLofthepopulation- PPC(ProductionPossibilityCurve):maximumproductivecapacityofacountry- pt.onPPC:resourcesfullyutilised(FE)- pt.withinPPC:attainableproductionpoint(resourcesnotfullyutilised)- pt.abovePPC:unattainableinproduction- movement of pt. alongPPC: moreresourcesusedtoproduceagoodbut lesstotheother good(opp. cost)- shiftofPPC:changeinquantityand/orqualityofFOP- increasedforeignworkers- increasedtrainingofworkers- technologicaladvancement- resourcesdestroyed(e.gwar) 2

3Topic2KeyPoints - microec.vsmacroec.- microeconomics:economicdecisionsofconsumers,producersandhouseholds- macroeconomics:economicissuesandactionsthataffectthewholeeconomy(decisionsofgovt.)- demand:willingnessandabilitytopurchasegoodsandservices- quantitydemanded:changeinpricecausesachangeinquantitydemanded- individualvsmarketdd- individualdemand:amountanindividualdemands- marketdemand:totaldemandforaproduct- conditions:- income- substitutes- compliments- tasteandfashion- priceelasticityofdemand( ):responsivenessofthequantitydemandedtoachangeinprice %∆𝑄𝑑𝑑%∆𝑃 - thehigherthePED,themoreelasticthedemand- elastic(PED>1):changeinpricecausesamorethanproportionatechangeinquantitydemanded- inelastic(PED<1):changeinpricescausesalessthanproportionatechangeinquantitydemanded- determinants:- substitutes- compliments- proportionofincomespent- natureofproduct(luxury,addictive,etc.)- supply:willingnessandabilitytosellgoodsandservices- quantitysupplied:changeinpricecausesachangeinQss- individualvsmarketss- individualss:supplyofonefirm- marketss:totalsuppliedbyallfirms- conditions:- costofproduction- improvementsintechnology- taxes/subsidies- pricesofotherproducts- disastersandwars- priceelasticityofsupply( ):responsivenessofthequantitysuppliedtoachangeinprice %∆𝑄𝑠𝑠%∆𝑃 - thehigherthePES,themoreelasticthesupply- elastic(PES>1):changeinpricecausesamorethanproportionatechangeinquantitysupplied- inelastic(PES<1):changeinpricescausesalessthanproportionatechangeinquantitysupplied- determinants:- timetakentoproduceaproduct(longertimetaken→PESmoreinelastic)- feasibilityofstoringaproduct(abletostorelonger→PESmoreelastic) 3

- marketequilibriumvsdisequilibrium- equilibrium:pricewheredd=ss- disequilibrium:ddnotequaltoss(i.e.surplusorshortage)- marketeconomicsystem:nogovernmentintervention(i.e.resourcesareprivatelyowned,self-interestsoffirms,pricesignals)- resourceallocationquestions:- whattoproduce?- howtoproduce?- forwhomtoproduce?- pricemechanism:demandandsupplyforcesdeterminethepricesofgoodsandservicesinamarketeconomy- fewlargefirms(monopolies)dominatethemarket(limitedcompetition)- publicgoods(e.gdefence)notproduced(nopricesignals)- note:roadsarequasi-publicgoods(notexactlyapublicgoodasitisrivalrousandexcludable)- negativeexternalities- freedomofchoice(nogovernmentrestrictions)- marketfailure:freemarketforcesdonotleadtothemostdesiredoutcomeinproductionandconsumption,misallocationofresources→needforgovernmentinterventionandefficiency- failuretosupplycertaingoodsandservices(e.g.publicgoods)- publicgoods:non-rivalry,non-excludability,notproducediflefttomarketsolutions:1. fullprovisionbygovernment(financedfromtaxrevenue)- ensureessentialgoodsareprovidedforall- deterforeigninvasion(defence)andensurepeaceandstability- moreconduciveforFDIandMNCs- difficulttoestimateamountofgoodstoprovide(over→wastage,under→insufficient)- highopp.cost- costontaxpayers 4

- under-consumptionofcertaingoodsandservices(e.g.meritgoods)- socialbenefit=privatebenefit(firms,individuals,government)+externalbenefit(3rdpartynotinvolvedinproductionorconsumption)- meritgoods:sociallydesirable(+veexternalities)- e.g.education,vaccination,publiclibrary- under-consumptiondueto- ignoringofexternalbenefits:generatesEBon3rdpartybutconsumersseekingtomaximiseself-interestonlytakeintoaccountPCandPBandignoreEB- imperfectinformation:consumersdonotfullyappreciatethebeneficialeffectstothemselves(perceivedPB<actualPB)- over-consumptionofcertaingoodsandservices(e.gdemeritgoods)- socialcost=privatecost+externalcost- demeritgoods:-veexternalities- e.g.cigarettes,alcohol,factories(pollution),gambling- over-consumptiondueto- ignoringofexternalcosts:generatesECon3rdpartybutconsumersseekingtomaximiseself-interestonlytakeintoaccountPCandPBandignoreEC- imperfectinformation:consumersnotfullyawareofharmfuleffectsofdemeritgoodconsumption(perceivedPC<actualPC)solutions:1. changeinsupply(producers)a. subsidies(under-consumption)- lowerCOP- increaseinsupply(surplus→downwardpressureonprice)- producerspassoncostsavings,encourageconsumptionb. taxation(over-consumption)- increaseCOP- decreasesupply(shortage→upwardpressureonprice)- higherpricesdiscourageconsumption- taxesboostgovt.revenue- easytoimplement- highopp.cost(subsidies)- over-reliance,abuseofsystem- difficulttovaluate- demeritgoodsareusuallyaddictive,demandpriceinelastic2. rulesandregulationsa. banconsumptionofdemeritgoodsb. compulsoryconsumptionofmeritgoods- fastimplementation- breakingofrules(duetoweakenforcement),illegalmarkets- highadministrativeandenforcementcost3. moralsuasion(advertising,education,campaigns)- canbesuccessfulinlongterm- peoplemorereceptivetowardsmoralsuasion- highopp.cost- maynotbesuccessful,takesalongtimeforchanges- pricefloorandpriceceiling- pricefloor(minimumprice)→setaboveequilibriumpricetoincreasethepriceofaproduct/wagesoflabour(usuallydemeritgoods,e.g.cigarettes)- priceceiling(maximumprice)→setbelowequilibriumpricetolowerthepriceofaproduct(usuallymeritgoods) 5

- privatevspublicexpenditure- privateexp.:firmsareprofitdriven→moreefficientproductiontolowerAC,butmaychargehighprices(increaseTR,increaseP)- abuseofmonopolypower(monopoly:onefirm,absolutemarketpower):restrictoutputandchargehigherprices,mayleadtounderproductionofgoods(misallocationofresources)solution:- increasecompetition- privatisation:transferofownershipoffirmsfromgovernmenttoprivatesector- nationalisation:oppositeofprivatisation- publicexp.:ensurepublicandmeritgoodsareaccessib