National Year 13 Economics
Chapters: 10
1. 4.1.2 Individual economic decision making
4.1.2.1 Consumer behaviour · 4.1.2.2 Imperfect information · 4.1.2.3 Behavioural economic theory · 4.1.2.4 Behavioural economics and policy
- Consumer's Equilibrium: Utility, Budget Line and Indifference Curves – A consumer is in equilibrium when she gets the most satisfaction from her fixed income at given prices, and has no reason to change her purchases. By utility analysis, with one good she buys until MU (in rupees) = price; with two goods MUx/Px = MUy/Py. By indifference curve analysis, the best bundle is where the budget line just touches the highest indifference curve: MRS = P1/P2, with MRS falling.
- Market Failure – A market fails when buying and selling on its own does not give the best result for society. Resources are used in the wrong amounts: too much of some goods (pollution, cigarettes), too little of others (street lights, vaccines, education). Main causes: externalities, public goods, merit and demerit goods, imperfect information, market power and unfair inequality. Governments try to fix it with taxes, subsidies, rules, direct provision and information, but government action can also fail.
- Behavioural Economics: How Real People Decide – Traditional economics assumes people are fully rational: they know all options, weigh costs and benefits and always pick what is best for them. Behavioural economics uses psychology and experiments to show how real people decide. Our rationality is bounded by limited time, information and brain power, so we use shortcuts (heuristics) that cause predictable biases: anchoring, availability, herd behaviour, loss aversion, present bias and framing. People also care about fairness and social norms, as the ultimatum game shows. Governments and firms use these ideas in nudges and choice architecture, for example default options. Nudges keep freedom of choice but raise ethical questions about manipulation.
2. 4.1.4 Production, costs and revenue (A-level extension)
4.1.4.3 Diminishing returns and returns to scale · 4.1.4.6 Marginal, average and total revenue · 4.1.4.7 Profit
- Production Function: TP, AP, MP and Returns to a Factor – A production function shows the maximum output a firm can get from given inputs: q = f(L, K). In the short run some inputs are fixed, so output changes only by changing the variable input. TP is total output, MP is the extra output from one more unit of the input, and AP is output per unit. As more labour works on fixed land, MP first rises, then falls, and finally becomes negative: the law of variable proportions (returns to a factor).
- Cost and Revenue: TC, AC, MC and TR, AR, MR – Cost is what a firm spends on inputs. Total cost (TC) = total fixed cost (TFC) + total variable cost (TVC). Dividing by output gives AFC, AVC and AC; marginal cost (MC) is the extra cost of one more unit. AFC keeps falling; AVC, AC and MC are U-shaped, and MC cuts AVC and AC at their minimum. Revenue is money from sales: TR = P × q, AR = TR/q = price, MR = extra TR from one more unit. With a fixed price AR = MR; with a falling price MR lies below AR and TR is highest where MR = 0.
- Perfect Competition and Price Determination – In perfect competition, very many firms sell the same product to very many buyers, so each firm is a price taker. The market price is set where market demand equals market supply (Qd = Qs). If demand rises, price and quantity both rise; if supply rises, price falls and quantity rises.
3. 4.1.5 Perfect competition, imperfect competition and monopoly
4.1.5.3 Perfect competition · 4.1.5.4 Monopolistic competition · 4.1.5.5 Oligopoly · 4.1.5.6 Monopoly · 4.1.5.7 Price discrimination · 4.1.5.8 Dynamics of competition · 4.1.5.9 Contestable markets · 4.1.5.10 Static and dynamic efficiency · 4.1.5.11 Consumer and producer surplus
- Perfect Competition and Price Determination – In perfect competition, very many firms sell the same product to very many buyers, so each firm is a price taker. The market price is set where market demand equals market supply (Qd = Qs). If demand rises, price and quantity both rise; if supply rises, price falls and quantity rises.
- Market Structures: From Perfect Competition to Monopoly – A market structure describes how many firms sell, how alike their products are, and how easy it is to enter. Perfect competition: many firms, identical goods, free entry, price takers, normal profit in the long run. Monopolistic competition: many firms, differentiated goods, easy entry, some price power. Oligopoly: a few interdependent firms, high barriers, strategic behaviour (game theory, collusion, price leadership). Monopoly: one firm, no close substitutes, high barriers, price maker with possible supernormal profit and price discrimination. Contestable markets show that the threat of entry also limits power.
- Economic Efficiency: Consumer Surplus, Producer Surplus, Static and Dynamic Efficiency – Consumer surplus is the difference between what buyers are willing to pay and what they actually pay (the area under demand and above price). Producer surplus is the difference between the price received and the lowest price sellers would accept (above supply, below price). Allocative efficiency happens where price equals marginal cost, which makes total surplus as large as possible. Productive efficiency means producing at the lowest point of the average cost curve. Together they are static efficiency, at one point in time. Dynamic efficiency is improvement over time through investment, innovation and new products, which lowers costs. When output is below the efficient level, as with a monopoly or a tax, some surplus is lost: the deadweight loss.
4. 4.1.6 The labour market
4.1.6.1 Demand for labour · 4.1.6.2 Supply of labour · 4.1.6.3 Wages in perfectly competitive labour markets · 4.1.6.4 Wages in imperfect labour markets and trade unions · 4.1.6.6 National Minimum Wage · 4.1.6.7 Discrimination in the labour market
- The Labour Market – The labour market is where workers sell their time and skills and employers buy them. Firms demand labour because people buy their products (derived demand). Workers supply labour, and more people offer work at higher wages. The wage settles where demand meets supply. A minimum wage above that level can raise pay but may cut jobs. Trade unions, a single big employer (monopsony), skills, discrimination and new technology all change wages and jobs.
5. 4.1.7 Distribution of income and wealth: poverty and inequality
4.1.7.1 Income and wealth distribution · 4.1.7.2 Poverty · 4.1.7.3 Policies to reduce poverty and inequality
- Income Inequality – Income inequality means income is shared unevenly between people. Economists rank people from poorest to richest, split them into five groups of 20% (quintiles) and compare their shares. The Lorenz curve plots the cumulative share of income against the cumulative share of people; the further it bends from the straight line of equality, the more unequal the society. The Gini coefficient = A ÷ (A + B) turns this into one number between 0 (perfect equality) and 1 (one person has everything). Wealth (what you own) is usually more unequal than income (what you earn). Causes include differences in skills, education, inherited wealth, discrimination and technology. Governments reduce inequality with progressive taxes, benefits, minimum wages and public services such as free schooling and health care.
- Poverty: Meaning, Measurement, Causes and Responses – Absolute poverty means lacking the basics needed to survive: food, water, shelter, clothing. The World Bank extreme-poverty line is about US$3 a person a day (2021 prices). Relative poverty means having much less than the usual standard in your society, often measured as below 60% of median income, so people cannot join normal life. Poverty is unequally spread: children, lone parents, disabled people, unemployed people, some ethnic minorities and rural families face higher risk, and wealth is even more unequal than income. Cultural explanations blame values passed on in families or a welfare-dependent "underclass"; structural explanations blame low wages, unemployment, insecure and de-skilled work, globalisation and welfare cuts. Responses include benefits, pensions, minimum wages and free services, with debate about dependency.
6. 4.1.8 Market failure and government intervention (A-level extension)
4.1.8.7 Competition policy · 4.1.8.8 Public ownership, privatisation and regulation
- Competition Policy: Regulating Monopolies, Mergers and Cartels – Competition policy is the set of laws and agencies that keep markets competitive so consumers get lower prices, more choice and better quality. Authorities measure market power with market shares, concentration ratios and the HHI. They review mergers and can allow, allow with conditions or block them. They ban cartels (price fixing, market sharing, bid rigging) with large fines, and they stop dominant firms abusing their power through predatory pricing, tying or refusing to supply. For natural monopolies, regulators use price caps such as RPI − X, rate-of-return rules and performance targets, or open the market to new firms. Policy can fail too: regulators may lack information or be captured by the firms they regulate.
- Government Intervention in Markets – Markets often work well, but they can fail: harmful goods are over-used, useful ones under-used, public goods are not provided, firms gain monopoly power, and incomes become very unequal. Governments step in with indirect taxes (which raise price and cut quantity), subsidies (which lower price and raise quantity), maximum and minimum prices, regulation, state provision of public goods and services, public ownership or privatisation, competition policy, and redistribution through taxes and benefits. They also use fiscal and monetary policy to smooth the economic cycle. Intervention can itself go wrong – this is government failure.
7. 4.2 National economy (A-level extension)
4.2.1.4 Uses of national income data · 4.2.2.4 Multiplier and accelerator · 4.2.2.6 Long-run aggregate supply views · 4.2.3.2 Unemployment: natural rate and Phillips curve · 4.2.3.3 Inflation: monetarist views
- National Income Aggregates: GDP, GNP, NDP, NNP, Real GDP and Welfare – Start with GDP at market price: value of all final goods and services made inside the country in a year. Subtract depreciation to go from Gross to Net. Add net factor income from abroad (NFIA) to go from Domestic to National. Subtract net indirect taxes (indirect taxes − subsidies) to go from Market Price to Factor Cost. NNP at factor cost is National Income. Nominal GDP uses current prices; real GDP uses base-year prices; GDP deflator = nominal ÷ real × 100. A higher GDP need not mean more welfare because of unequal distribution, non-monetary exchanges and externalities.
- Aggregate Demand, Propensities to Consume and Save, and the Investment Multiplier – Aggregate demand (AD) is total planned spending on final goods: C + I + G + (X − M); in a two-sector model AD = C + I. Consumption depends on income: C = c̄ + bY, where b = MPC. APC = C/Y, MPC = ΔC/ΔY, APS = S/Y, MPS = ΔS/ΔY; APC + APS = 1 and MPC + MPS = 1. Short-run equilibrium output is where AD = AS (planned spending = output), or saving = planned investment. A rise in investment raises income by a multiple: k = ΔY/ΔI = 1/(1 − MPC) = 1/MPS.
- Aggregate Demand and Aggregate Supply: The AD-AS Model – The AD-AS model shows the whole economy on one graph: price level up, real GDP across. AD = C + I + G + (X − M) slopes down. SRAS slopes up because wages are sticky in the short run. LRAS is vertical at full-employment (potential) output. Where AD meets SRAS we get the short-run equilibrium. Shifts of AD or SRAS change prices and output and can open an inflationary or recessionary gap. In the long run wages adjust and the economy returns to LRAS; automatic stabilisers soften the swings.
- Unemployment: Meaning, Rate, Types, Costs and Cures – A person is unemployed when they have no job, are able to work, and are actively looking for work. The labour force is everyone who is employed plus everyone who is unemployed. The unemployment rate is the unemployed divided by the labour force, times 100. Economists sort unemployment by its cause: frictional (moving between jobs), structural (skills or places no longer match the jobs), cyclical (a slump in total demand) and seasonal (work only in some months). Unemployment costs the person income, costs the country lost output and tax, and can harm health and society. Governments fight it with spending and interest-rate policy for cyclical unemployment and with training, information and mobility for the other types. Some unemployment always remains; the lowest sustainable level is called the natural rate.
8. 4.2.4 Financial markets and monetary policy
4.2.4.1 Financial markets and assets · 4.2.4.2 Commercial and investment banks · 4.2.4.3 Central banks and monetary policy · 4.2.4.4 Regulation of the financial system
- Financial Markets: Money, Capital, Forex, Bonds and Regulation – Financial markets move money from savers to borrowers. The money market deals in short-term loans (under one year), the capital market in long-term finance (shares and bonds), and the foreign exchange market in currencies. A bond pays a fixed coupon, so its yield = coupon ÷ price: when the price rises the yield falls, and when market interest rates rise, bond prices fall. Banks are linked, so one failure can spread (systemic risk). If banks expect a rescue they take more risk (moral hazard). Regulators (a conduct regulator and a prudential regulator, usually linked to the central bank) set rules such as capital buffers to keep the system safe.
- Money Creation by Banks and the Central Bank (RBI) – Banks keep only a part of deposits as reserves (the legal reserve ratio, LRR) and lend the rest. Each loan is spent and comes back to banks as a new deposit, so total deposits become a multiple of the first deposit: total deposits = initial deposit × 1/LRR. The RBI is India's central bank: it issues currency, is banker to the government and to banks, is lender of last resort, controls credit and keeps foreign exchange reserves. It controls credit with repo rate, reverse repo rate, bank rate, CRR, SLR, open market operations and margin requirements.
9. 4.2.5 Fiscal and supply-side policies
4.2.5.1 Fiscal policy · 4.2.5.2 Supply-side policies
- Government Budget and the Economy – A government budget is a yearly plan of expected receipts and planned expenditure. Receipts are revenue (taxes, non-tax income) or capital (borrowing, loan recovery, disinvestment). Spending is revenue (builds no asset) or capital (builds an asset or cuts debt). A budget can be balanced, surplus or deficit, and the deficit is measured as revenue, fiscal and primary deficit.
- Supply-Side Policies – Supply-side policies try to raise how much an economy CAN produce (its productive capacity), not just how much people want to buy. They aim to make workers more skilled, markets work better and firms invest more. Market-based policies give people and firms more reason to work and compete: cutting income and profit taxes, removing unneeded rules (deregulation), selling state firms (privatisation) and reforming trade unions. Interventionist policies use government spending: education and training, roads and ports, broadband and research. If they work, the long-run aggregate supply (LRAS) curve shifts right: output and jobs can grow without pushing up prices, and exports become more competitive. But they are slow, can be costly, and some may increase inequality.
10. 4.2.6 The international economy
4.2.6.1 Globalisation · 4.2.6.2 Trade · 4.2.6.3 Balance of payments · 4.2.6.4 Exchange rate systems · 4.2.6.5 Growth and development
- Globalisation and Global Governance – Globalisation is the growth of flows of goods, capital, information and labour that tie places together. Technology, transport and trade deals drive it. The flows are unequal: rich economies hold more power, poorer ones have weaker market access. TNCs spread production of one product across many places. Agencies like the UN, WTO, IMF and World Bank try to govern these flows, and treaties protect global commons such as Antarctica. Globalisation brings growth and cheaper goods but also inequality, conflict and environmental harm.
- International Trade: Comparative Advantage, Protection and the Forex Market – Countries gain by specialising in goods where their opportunity cost is lowest (comparative advantage) and trading at terms between their costs. Tariffs, quotas and subsidies protect local firms but raise prices and cause a deadweight loss. Trade blocs and the WTO shape the rules. In the foreign exchange market, a rise in a country's real interest rate pulls in capital, raises demand for its currency, makes it appreciate and lowers net exports.
- Balance of Payments – The balance of payments (BoP) is a yearly record of all money dealings between residents of a country and the rest of the world. The current account records goods, services, transfers and income; the capital account records investment, loans and deposits. Autonomous items are done for their own sake; accommodating items (reserve changes) settle the gap. A BoP surplus raises reserves; a deficit lowers them.
- Foreign Exchange Rate – The foreign exchange rate is the price of one currency in terms of another, such as ₹80 per dollar. Under a flexible rate, demand for and supply of foreign currency set it; a rise means the rupee depreciates. Under a fixed rate, the government sets it and changes it by devaluation or revaluation. Managed floating mixes both: the market sets the rate, and the central bank smooths big swings.
- Economic Growth and Development: Measures, Barriers and Strategies – Economic growth is a rise in real GDP. Economic development is a rise in people's well-being: longer lives, more education, more income and more choices. We measure development with the HDI and other indicators. Barriers like low savings, weak infrastructure, corruption, debt and dependence on one export hold countries back. Market-led and state-led strategies try to remove them, while global forces (trade, technology, resources, population change, international organisations) push from outside.