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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
...
XED Coefficient – Substitute or Complement + Its Elasticity
2
...
5 Product X goes up 10% Product Y goes up 15%
3
...
These are estimates + They may also be unreliable
5
...
Assumes ceteris paribus which may not apply (Usually accepted)

Price Elasticity Of Supply (PES)
Price Elasticity Of Supply (PES) Definition – The responsiveness of the quantity supplied to
a change in the price of the product
Price Elasticity Of Supply (PES) Formulae

Determinants Of The Price Elasticity Of Supply (FTSCN):
 Factor Mobility – When labour is the most important factor of production, supply is
elastic as labour is generally easy to obtain
...
In the long-term supply is
more elastic
...
For stock that cannot be stored (Hotel rooms and Cinema Seats)
the supply is inelastic as the product must be consumed on a particular day or within a
certain time period
 Existence of Spare Capacity – Supply is more elastic, the greater the spare capacity, as
it is easier to raise output if the price rises
 Number Of Producers - Supply will be more price elastic as the more producers there
are the easier the market can respond to a change in price

Comment on Price Elasticity of Demand/Supply:
1
...
10% Example – PES = 1
...
Does the PED / PES correspond with economic theory? e
...
PES can’t be negative
4
...
These estimates can change over time
7
...
Assumes ceteris paribus which may not apply (Usually accepted)
How information on elasticity can be collected:
 Sample surveys
 Past records from within a company
 Competitor analysis

Both comments (7 + 8) are very similar
and so you may only get one mark for
mentioning both
...
This is
because it takes a long time to for quantity supplied to respond to a change in price, due to
crops taking long to grow, oil taking time to mine and houses taking lots of time to be built

Market Failure and Government Intervention
Market Failure – When the free market fails to achieve allocative efficiency

Allocative Efficiency – When resources are used to produce the goods and services that

consumers want and in such a way that consumer welfare is maximised
Productive Efficiency – Where production takes place using the least amount of scarce
resources
Economic Efficiency – Where both allocative and productive efficiency are achieved
Inefficiency – Any situation where economic efficiency is not achieved
Free Market Mechanism – The system by which the market forces of demand and supply
determine prices and the decisions made by consumers and firms
Regulations – Consists of laws/ restrictions imposed by the government
Government Failure – Government failure is a situation where government intervention in the
economy to correct a market failure creates inefficiency and leads to a misallocation of scarce
resources

Information Failure
Information Failure – A lack of information resulting in consumers and producers making

decisions that do not maximise welfare
Asymmetric Information – Information not equally shared between two parties
Examples of Information Failure:
 When consumers are not aware of the benefits or the harmful effects of consuming a
particular product
 When advertising over stimulates demand  Overconsumption
 Inaccurate or misleading claims on product packaging
Examples of Asymmetric Failure Information Failure:
 Health Care – You are forced to rely on the doctor’s experience and competence
...

 Consumer Purchases – Eg
...

 Insurance – You know more about your circumstances than the company selling you a
policy
...

NOTE - Information failure distorts how the market allocates resources
...


Externalities, Social Costs and Benefits
Externality – A cost imposed or benefit felt by a third party (a party not involved in the economic

decision)
Private Costs – The costs incurred by those taking a particular action
Private Benefits – The benefits accruing to those taking a particular action
External Costs – The costs that are the consequence of externalities to third parties
External Benefits – The benefits that accrue as a consequence of externalities to third parties
Social Costs – Private Costs + External Costs
Social Benefits – Private Benefits + External Benefits
Negative Externality – This exists where the social cost of an activity is greater than the private cost
Positive Externality – This exists where the social benefit of an activity is greater than the private
benefit
Positive Externalities:
 Inoculation / Medicine – External Benefit = Less likely for other people to catch the disease
 Cross rail – External Benefit – Reduced road traffic congestion
 Education and Training – External Benefits – Better qualified employees for firms and
enhanced longer-term for the economy as a whole
Negative Externality Graph:

Positive Externality Graph:

Normal Supply and Demand diagram can be used to show externalities but you have to say that Q1
may not be the exact social optimum but that it is hopefully (for the government’s sake) closer
...
g
...
g
...
+ Ignore Cigarette
prices, just write Price instead
...

Red = Knowledge – Level 1
Additionally it is important to note
Orange = Application – Level 2
that this 18 marker could be improved
in some parts but I think this would be
Purple = Analysis – Level 3
sufficient for getting 17 - 18 marks
...


Blue = Evaluation – Level 4
Green = Stated Judgement + Conclusion - End

Indirect taxes are taxes levied on goods and services
...
Negative externalities are costs imposed on third parties (a
party not involved in the economic decision)
...

Production in country such as China for example has increased greatly over the years as it is a
BRIC, one that is developing very quickly, causing production to also increase at a very high rate
as well
...
The pollution arising from production is affecting third parties (parties not involved
in the economic decision) due to things such as CO2 emissions leading to global warming, fumes
worsening people’s asthmas and firms dumping waste materials in rivers
...
This leads to levels of
production being too high which means that too many scarce resources are being allocated
towards production causing the market to be allocatively inefficient
...

Ultimately I would say it’s not worth the
hassle but
it is vital that you draw a graph unless
the question is such that it would be too
difficult to attempt to graph anything
...
This means producers can supply
less at any given price
...
This should solve the
overproduction that was leading to negative externalities further causing the market to move
closer to a point of allocative efficiency, thus increasing welfare
...
If
you don’t memorise them you’ll be screwed
...


The specific points on the mark scheme are the basic core of what
your answer needs to be but you have to expand on them and
make them developed otherwise you may get capped
...
One case for indirect taxation is that it deters production by raising the
cost of production
...

A case against indirect taxation would be that if PED is inelastic then it is likely we will see the
producer push on more of the tax onto the consumer as the price increase would have little
effect on a consumer’s decision on whether or not to buy the product
...
This leads onto another point about whether or not the government will
set the right amount of indirect tax
...
Government failure is when
government intervention to correct market failure leads to inefficiency and a misallocation of
resources which would be a large negative of indirect taxation
...
A pollution permit is
a permit that allows the owner to emit a certain amount of pollution and that, if unused or only
partially used, can be sold to another polluter
...

All in all I think that indirect taxation IS the most effective policy measure to correct market
failure arising from the negative externalities of production
...

I think this because although both indirect taxation and pollution permits have the same issue

such as measuring negative externalities and the same advantage of increasing the likelihood of

decreasing production leading to less negative externalities, pollution permits are more difficult

to change
...

The rest is just you justifying the statement you made
via a conclusion
...


Discuss whether regulation is the most effective solution to the market failure arising
from information failure:

Level 1 KNOWLEDGE (1–4 marks)
 Regulation consists of laws/ restrictions imposed by the government
 Market failure is where the free market fails to achieve allocative efficiency
 Information failure occurs when a lack of information results in consumers and producers making
decisions that do not maximise welfare
...



Level 3 Band 1 ANALYSIS (9–10 marks)
 Diagram showing vertical supply curve imposed on market (to left of old equilibrium)
 Supply shifts to the left (because regulation may increase firms’ costs)
 Demand shifts to the left (because regulation makes it more difficult for consumers to obtain the
product)
 Price rises (from P to P1)
 Quantity falls (from Q to Q1)
Yo u can do quite a few different
diagrams (as made clear by the
mark scheme) for this but this is the
on e I would do as it is generally
more straightforward and so a bit
easier to than the others in my
op inion
...

 Opportunity cost of enforcement
...

 Regulation may not be set at optimal level – government failure
...

 Consumers may not respond to the information provided
...

The above points may be credited as L2 if answer has not progressed to L3 B2
...

 Knowledge of subsidy
 Awareness of pros and cons to subsidies not applied to specific case
...

8 marks: More than one well developed applied point applied to specific case
...

 Subsidies will increase supply……
...

 Consumer surplus increases

Level 3 Band 1 ANALYSIS (9-10 marks)
 Subsidies effectively reduce producer costs
 Supply shifts to the right
 Price falls (from P to P1)

Level 3 Band 2 ANALYSIS (11-12 marks)
 The subsidy increases quantity (from q to q1)
 This solves underproduction of affordable new housing 
Consumer surplus increases
You don’t actually have to show the
gain to buyers and sellers nor do
you have to show the additional
trades made, it is your choice but I
just wouldn’t bother unless the
question is suggesting that it should
be mentioned
...
Also
you can write S1 instead of S +
Subsidy

Level 4 EVALUATION (13-15 marks)
Case for a subsidy with respect to supply could include:
 Incentive for producers to increase supply
 Lowers the cost of housing - potentially lowering price
 Helps people to get onto the property ladder

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