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ECON 201 Ateneo De Manila University Economics
Economics AS Level Notes
Economics Definition – The study of how to allocate scarce resources in the most effective way

Economic Problem Definition – How to allocate scarce resources among alternative uses

Household Definition – A group of people whose spending decisions are connected

Microeconomics Definition – The study of how households and firms make decisions in markets

Macroeconomics Definition – The study of issues that affect economies as a whole

The Basic Economic Problem
The fact that resources are scarce compared to the unlimited wants → Choices having to be

made
Goods Definition – Tangible products, i
...
products that can be seen and touched, such as cars,
food and washing machines
Services Definition – Intangible Products, i
...
products that cannot be seen or touched, such as
banking, beauty therapy and insurance

Factors of Production
Factors of Production Definition – The resource inputs that are available in an economy for the
production of goods and services

The Four Factors:
Land – This is a natural resource
...

Labour – This is the human resource that is available in any economy / The quantity and quality
of human resources
Some economies (generally poor countries) have large populations but lack a skilled workforce
and for other countries like Germany with declining populations, they depend on immigrant
workers to do both skilled and unskilled jobs
...

Capital - Man-made aids for production / Goods used to make other goods
It is combined with Land and Labour
MERC - Machines, Equipment, Robots and Computers

Entrepreneurship - The willingness of an entrepreneur to take risks and organise production
...


Some Extra Definitions
The world’s poorest countries tend to have few or poor Factor Endowments (vice versa)
...
E  A
Unemployed Resources - Any point inside the curve Eg
...
Y
Bliss Points – Where the curve starts or ends Eg
...
Changes in the quantity of resources
o The quantity of labour may increase as a result of net immigration of people of
working age, a higher proportion of women entering the labour force or a rise in the
retirement age
...

o The quantity of enterprise may be increased by a reduction in rules and regulations
placed on firms, privatisations and government incentives to start up new
businesses
2
...

o The quality of enterprise may be raised by management training and improved
education

NOTE – The fact that the line isn’t straight for any of the diagrams is because they are imperfect
substitutes


PPC Shifter Right (Graph):

PPC Shifters (Left):

-


Natural Disaster (Less resources Less of each product can be produced)

PPC Stretches:

-

More resources / Capital (More of one product can be produced) Eg
...
Wine

Economics Systems and The Role Of The Market
Economic System – The way in which production is organised in a country or group of countries
An economic system - The term used to describe the means by which a country’s people,
organisations and government make decisions with respect to(WHW):
 What goods and services are to be produced
 How these goods and services are produced
 Who should receive these goods and services
Market Economy – An economic system whereby resources are allocated through the market
forces of demand and supply
Price System – A method of allocating resources by the free movement of prices
Command Economy – An economic system in which most resources are state owned and also
allocated centrally
Mixed Economy – An economic system in which resources are allocated through a mixture of
the market and direct public sector involvement

The advantages of a free market economy / The disadvantages of command economies(CIGE):
 Choice – Firms will produce whatever consumers are prepared to buy and there is no
restriction on what they produce in the FM
...

Because of property rights(intellectual property rights through patents) there are
incentives for innovation and producing better quality products
...

 Higher Economic Growth Rates – Countries with economic systems closer to the free
market tend to have higher economic growth
...
Most of their industries are assumed to
be perfectly competitive and so allocative and productive efficiency occur
...
Merit goods are likely to be under consumed in the free market and demerit
goods over consumed
...

 Unequal Distribution of Income – Benefits will be low and health service and school
unaffordable for a lot
...
A command
economy may not allow the successful to make millions but it will at least try to make
sure the poor are not left to destitution so the economy is fairer
 Environment – Free market economies are likely to produce more pollution
...

 Developing and maintaining a brand image
 Economies of scale
The Disadvantages of Specialisation / Division of Labour to Firm (From Mark Scheme):
 Reliance on a narrow range of products
 Specialist factor inputs are more expensive per unit
 Limited market size
 Reliance on one specialist resources / suppliers or factor immobility
 Reduced flexibility
 Boredom of workers / demotivation
Extra
The Advantages of Specialisation / Division of Labour – TO THE FIRM:
 Specialist workers become quicker at producing goods
o Production becomes cheaper per good because of this
o Production levels are increased
 Each worker can concentrate on what they are good at and build up their expertise
The Advantages of Specialisation / Division of Labour – TO THE WORKER:
 Increased productivity
 Higher pay for specialised work
o Improved skills at that job
The Disadvantages of Specialisation / Division of Labour – TO THE FIRM:
 Greater cost of training workers
 Quality of products may suffer if workers become bored by the lack of variety in their
jobs
The Disadvantages of Specialisation / Division of Labour – TO THE WORKER:
 Boredom as they do the same job
 Their quality and skills may suffer
 May eventually be replaced by machinery

Competitive Markets and How They Work
Market – Where or when buyers and sellers meet to trade or exchange products
Sub-Market – A recognised or distinguishable part of a market> Also known as a market segment
Ceteris Paribus – Assuming other variables remain unchanged
Disposable Income – Income after taxes on income have been deducted and state benefits have
been added
Real Disposable Income – Income after taxes on income have been deducted and state benefits
have been added and the result has been adjusted to take into account changes
Normal Goods – Goods for which an increase income leads to an increase in demand
Inferior Goods – Goods for which an increase in income leads to a fall in demand
Substitutes – Competing Goods
Complements – Goods for which there is joint demand

Efficiency - Where the best use of resources is made for the benefit of consumers
Disequilibrium Graph:

Consumer Surplus – The extra amount that a consumer is willing to pay for a product above the
price that is actually paid

Producer Surplus – The difference between the price a producer is willing to accept and
what is actually paid

How a Consumer / Producer Surplus Changes (Mark Scheme) (4 Marks):
 Correctly labelled, Downward sloping demand curve / Upward sloping supply curve
 Original Consumer / Producer surplus identified
 Consumer / Producer surplus will Increase / Decrease
 Area of Consumer / Producer surplus Increase / Decrease indicated by letters or
labels
Comment on size of change of Consumer / Producer surplus:
 Change in price
 Elasticity of Curve

Demand
Demand – The quantity of a product that consumers are able and willing to purchase at various
prices over a period of time
Notional Demand – The desire for a product
Effective Demand – The willingness and ability to buy a product
Demand Curve - This shows the relationship between the quantity demanded and the price of a
product
Demand Schedule – The data that is used to draw the demand curve for a product
Movement Along The Demand Curve – This is in response to a change in the price of a product
Change In Demand – This is where a change in a non-price leads to an increase or decrease in
demand for a product

ILAPTIMERS(Demand shifters / Determinants):
I – Income – Increase in Income  Increase in D
L – Legislation – Eg
...
Substitution Effect
o The good is relatively more expensive than alternative goods and people can
switch to other goods
...
Income Effect
o The increase in price decreases one’s purchasing power and so one’s real disposable
income decreases
...


Supply
Supply – The quantity of a product that produces are willing and able to provide at different market
prices over a period of time
Profit – The difference between the total revenue (sales revenue) of a producer and total cost
Supply Curve – This shows the relationship between the quantity supplied and the price of a product
Supply Schedule – The data used to draw the supply curve of a product
Change In Supply – Occurs when a change in a non-price influence leads to an increase or decrease
in the willingness of a producer to supply a product

PRATNESTS(Supply shifters / Determinants):

P – Productivity – Increase in productivity Increased S

R – Resource Cost – Decrease in Resource Cost Increase in S
A – Alternative Output – Alternative product selling for higher price Increase S of alternative T
– Technology – Better / More Technology Increased productivity  Increase in S
N – Number Of Suppliers – Increased Number Of Suppliers  Increase in S
E – Expectations of Future Prices – Price expected to rise Increase in S later
S – Subsidies – Increase in amount of SubsidyDecrease in Cost of Production  Increase in S T
– Taxes – Taxes Increased Increase in Cost of ProductionD increases now
S – Seasons – Winter is coming Decrease in S of crops

Price – The amount of money that is paid for a given amount of a particular good or service
Equilibrium Price – The price where demand and supply are equal
Clearing Price – Same as equilibrium price
Disequilibrium – Any position in the market where demand and supply are not equal
Surplus – An excess of supply over demand
Shortage – An excess of demand over supply

Comment on how overall impact of shift in D or S depends on (Generally worth 2 marks):
Size of Shift/s (1 mark) + elaborated with reference to effect on price or quantity (1 mark)
 Elasticity of curve not shifting or elasticity of both curves (1 mark) + elaborated with

reference to effect on price or quantity (1 mark)
 There are other factors that affect demand and/ or supply (up to 2 marks)


Elasticity
Elasticity:
 Is a numerical estimate
 Measures the response to a change in price or to a change in any other factors that
determine the demand or supply of a product
Elasticity Definition – The extent to which buyers and sellers respond to a change in market
conditions

Price Elasticity (PED)
Price Elastic Definition – Where the percentage change in the quantity demanded is sensitive to
a change in price of the product {Greater than 1 or Less than -1} / Further away from 0
Price Inelastic Definition – Where the percentage change in the quantity demanded is
insensitive to a change in price of the product {Less than 1 or Greater than -1} / Closer to 0
Price Unit Elastic Definition - Where the percentage change in the quantity demanded is equal
to a change in price of the product {Equal to 1}
Price Elasticity Of Demand (PED) Definition – The responsiveness of the quantity demanded to
a change in the price of the product
Price Elasticity Of Demand (PED) Formulae

Determinants Of The Price Elasticity Of Demand (SHITBND):
 The availability and closeness of substitutes – the more substitutes, the more price
elastic demand is
 Habit Forming – Habit forming goods tend to have very price inelastic demands
 The relative expense of the product with respect to income – Increased price elasticity
with relatively expensive goods
 Time (Short Term / Long Term) – Consumers are less likely to change spending habits in
the short term but in the long term will become more aware of substitutes increasing
price elasticity
...

 Brand Loyalty – Products with strong brands tend to have more price inelastic demands
 Necessities – Necessities tend have very price inelastic demands
 Durability – Goods that are expected to last a long time tend to be more price elastic as
the purchase can be delayed whereas milk will run out quickly and need to be
repurchased even if its price rises

Income Elasticity Of Demand (YED)
Income Elasticity Of Demand Definition - The responsiveness of demand to a change in
income Income Elastic Definition – Goods for which a change in income produces a greater
proportionate change in demand
Income Inelastic Definition – Goods for which a change in income produces a less than
proportionate change in demand
Normal Good Definition – Goods for which an increase in income leads to an increase in
demand / Goods with a positive income elasticity of demand YED > 0
Normal Necessity – YED = 0
...
4
Pure Normal – YED = 0
...
9
Superior Good Definition – Goods for which an increase in income leads to a relatively large
increase in demand / Goods with a relatively large positive income elasticity of demand YED > 1
Inferior Good Definition – Goods for which an increase in income leads to a fall in demand /
Goods with a negative income elasticity of demand YED < 0
Giffen Good – YED < -2

Income Elasticity Of Demand (YED) Formulae

Comment on Income Elasticity of Demand:
1
...
10% Example – YED = 1
...
Does the YED correspond with economic theory? e
...
A TV can’t be an inferior good
4
...
These estimates can change over time
6
...
They
have more knowledge than you
 Environment – We know less about our negative effects on the environment than
environmental experts
...
Mobile phones – The seller is likely on commission and has
more knowledge than the buyer leading them to make a bad choice potentially
...
They are relying on your honesty and integrity
...
It causes the market to
fail
...


Negative Externality Graph (Costs and Benefits Version):
Costs and
Benefits

Quantity

Positive Externality Graph (Costs and Benefits Version):

Costs and
Benefits

Quantity

Merit Good – These have more private benefits than their consumers actually realise
Demerit Goods – Their consumption is more harmful than is actually realised

Public Goods
Public Goods – Goods that are collectively consumed and have the characteristics of nonexcludability and non-rivalry
Non-Excludability – Situation existing where individual consumers cannot be excluded from
consumption
Non-Rejectable – Situation existing where individual consumers cannot reject consumption
Non-Rivalry – Situation existing where consumption by one person does not affect the
consumption of all others
Free Riders – Someone who directly benefits from the consumption of a public good but who
does not contribute towards its provision
Quasi-Public Goods – Goods having some but not all of the characteristics of a public good

Direct Tax – One that taxes the income of people and firms and that cannot be avoided
Indirect Tax – A tax levied on goods and services
Indirect Tax Graph:

Polluter Pays Principle – Any measure, such as a green tax, whereby the polluter pays explicitly for
the pollution caused
Polluter Pays Principle Problems:
 Amount of Tax – Virtually impossible to estimate the cost of the negative externality
 Producers not paying full amount of tax - Some of it often gets pushed onto the consumer
 PED is often Inelastic –Consumption not reduced by as much as intended so production is
higher than intended
 Better quality information for consumers – May lead to consumption being decreased too
much

Subsidy – A payment, usually fr

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