A-Level Economics (AQA) Macroeconomics Cheatsheet
Based on Specification Version 1.3 (June 2022)
4.1 Individuals, firms, markets and market failure
4.1.1 Economic methodology and the economic problem
4.1.1.1 Economic methodology
• Social science: Studies human behaviour/decision-making in context of scarcity. Uses scientific method (mod-
els, hypotheses, testing) but human behaviour is less predictable than natural phenomena. Controlled experi-
ments difficult.
• Models: Simplified representations of reality (e.g., Demand/Supply). Rely on assumptions (e.g., ceteris paribus
- all other things being equal).
• Positive statements: Objective, fact-based, testable (can be proven/disproven). E.g., ”An increase in price
leads to a fall in quantity demanded”.
• Normative statements: Subjective, value judgements, opinions, cannot be tested. Often use words like
’ought’, ’should’, ’fair’. E.g., ”The government should increase the minimum wage”.
• Value judgements: Influence economic decision making and policy choices (e.g., views on income inequality
affect tax policy).
4.1.1.2 The nature and purpose of economic activity
• Purpose: Production of goods and services to satisfy needs (essentials) and wants (desires).
• Key decisions: What to produce? How to produce? For whom to produce?
4.1.1.3 Economic resources (Factors of Production - F.o.P.)
• Land: Natural resources (raw materials, land itself). Reward: Rent.
• Labour: Human effort (mental/physical). Reward: Wages.
• Capital: Man-made aids to production (machinery, factories). Reward: Interest.
• Enterprise: Organising F.o.P., taking risks. Reward: Profit.
• Environment: A scarce resource providing inputs and absorbing waste.
4.1.1.4 Scarcity, choice and the allocation of resources
• Scarcity: Fundamental economic problem - unlimited wants vs. limited resources.
• Choice: Necessary due to scarcity; involves trade-offs.
• Opportunity Cost: The value/benefit of the next best alternative forgone when a choice is made.
4.1.1.5 Production possibility diagrams (PPF/PPC)
• Shows: Maximum potential output combinations of two goods/services with given resources and technology.
• Illustrates: Scarcity (boundary), Opportunity cost (slope/movement along curve), Trade-offs, Efficiency (on
curve = productively efficient), Unemployment/inefficiency (inside curve), Economic growth (outward shift).
• Shape: Typically concave to origin due to increasing opportunity cost (resources not equally suited to producing
both goods). Straight line = constant opportunity cost.
• Allocative efficiency: Producing the specific combination of goods society most desires (a single point on the
PPF). Not all points on PPF are allocatively efficient.
4.1.2 Individual economic decision making
4.1.2.1 Consumer behaviour
• Rationality assumption: Consumers aim to maximise utility (satisfaction).
• Utility: Satisfaction/benefit derived from consuming a good/service.
• Marginal Utility (MU): Extra satisfaction from consuming one more unit.
1
, • Diminishing Marginal Utility: MU tends to fall as consumption increases. Explains downward-sloping
demand curve.
• Marginal analysis: Decisions based on comparing marginal benefits and marginal costs.
4.1.2.2 Imperfect information
• Importance: Perfect information needed for rational decisions (often unrealistic).
• Asymmetric information: One party in a transaction has more/better information than the other (e.g., seller
of used car, insurance applicant).
• Consequences: Can lead to market failure (adverse selection, moral hazard), poor decision-making.
4.1.2.3 Aspects of behavioural economic theory
• Challenges rational assumption. Recognises psychological influences.
• Bounded rationality: Limits to human thinking capacity, information, time. Leads to ’satisficing’ not max-
imising.
• Bounded self-control: Individuals lack self-control (e.g., overspending, procrastination).
• Cognitive biases (Heuristics/Rules of Thumb):
– Anchoring: Over-reliance on first piece of information.
– Availability: Overestimating likelihood of events easily recalled.
– Social norms/Herding: Following behaviour of others.
• Altruism and fairness: Individuals may care about others/fairness, not just self-interest.
4.1.2.4 Behavioural economics and economic policy
• Choice architecture: Designing how choices are presented to influence decisions.
• Framing: How information is presented affects choices.
• Nudges: Gentle prompts/suggestions to encourage behaviour without forbidding options (e.g., default options,
placement of items).
• Default choices: Opt-in vs. opt-out systems (e.g., organ donation, pensions).
• Restricted choice: Limiting options available.
• Mandated choice: Requiring individuals to make a choice.
4.1.3 Price determination in a competitive market
4.1.3.1 The determinants of the demand for goods and services
• Demand: Quantity consumers are willing and able to buy at a given price over a period of time.
• Law of Demand: Inverse relationship between price and quantity demanded (downward sloping curve).
• Movements along D curve: Caused by change in price only.
• Shifts of D curve: Caused by change in non-price factors (PASIFIC): Population, Advertising, Substitutes
(price of), Income (normal/inferior goods), Fashion/Tastes, Interest rates, Complements (price of).
4.1.3.2 Price, income and cross elasticities of demand (PED, YED, XED)
• Elasticity: Measures responsiveness of one variable to a change in another.
• PED = %∆Qd /%∆P . Measures responsiveness of Qd to change in P.
– > 1: Elastic (responsive). < 1: Inelastic (unresponsive). = 1: Unitary elastic. = 0: Perfectly inelastic.
= ∞: Perfectly elastic.
– Factors (SPLAT): Substitutes, Percentage of income, Luxury/Necessity, Addictive, Time.
– Relation to TR: Elastic D → P↑ TR↓. Inelastic D → P↑ TR↑.
• YED = %∆Qd /%∆Y . Measures responsiveness of Qd to change in Income (Y).
– > 0: Normal good (> 1 = Luxury, 0 < Y ED < 1 = Necessity). < 0: Inferior good.
• XED = %∆Qd (A)/%∆P (B). Measures responsiveness of Qd of good A to change in P of good B.
– > 0: Substitutes. < 0: Complements. = 0: Unrelated.
4.1.3.3 The determinants of the supply of goods and services
• Supply: Quantity producers are willing and able to sell at a given price over a period of time.
• Law of Supply: Positive relationship between price and quantity supplied (upward sloping curve - profit
motive).
Based on Specification Version 1.3 (June 2022)
4.1 Individuals, firms, markets and market failure
4.1.1 Economic methodology and the economic problem
4.1.1.1 Economic methodology
• Social science: Studies human behaviour/decision-making in context of scarcity. Uses scientific method (mod-
els, hypotheses, testing) but human behaviour is less predictable than natural phenomena. Controlled experi-
ments difficult.
• Models: Simplified representations of reality (e.g., Demand/Supply). Rely on assumptions (e.g., ceteris paribus
- all other things being equal).
• Positive statements: Objective, fact-based, testable (can be proven/disproven). E.g., ”An increase in price
leads to a fall in quantity demanded”.
• Normative statements: Subjective, value judgements, opinions, cannot be tested. Often use words like
’ought’, ’should’, ’fair’. E.g., ”The government should increase the minimum wage”.
• Value judgements: Influence economic decision making and policy choices (e.g., views on income inequality
affect tax policy).
4.1.1.2 The nature and purpose of economic activity
• Purpose: Production of goods and services to satisfy needs (essentials) and wants (desires).
• Key decisions: What to produce? How to produce? For whom to produce?
4.1.1.3 Economic resources (Factors of Production - F.o.P.)
• Land: Natural resources (raw materials, land itself). Reward: Rent.
• Labour: Human effort (mental/physical). Reward: Wages.
• Capital: Man-made aids to production (machinery, factories). Reward: Interest.
• Enterprise: Organising F.o.P., taking risks. Reward: Profit.
• Environment: A scarce resource providing inputs and absorbing waste.
4.1.1.4 Scarcity, choice and the allocation of resources
• Scarcity: Fundamental economic problem - unlimited wants vs. limited resources.
• Choice: Necessary due to scarcity; involves trade-offs.
• Opportunity Cost: The value/benefit of the next best alternative forgone when a choice is made.
4.1.1.5 Production possibility diagrams (PPF/PPC)
• Shows: Maximum potential output combinations of two goods/services with given resources and technology.
• Illustrates: Scarcity (boundary), Opportunity cost (slope/movement along curve), Trade-offs, Efficiency (on
curve = productively efficient), Unemployment/inefficiency (inside curve), Economic growth (outward shift).
• Shape: Typically concave to origin due to increasing opportunity cost (resources not equally suited to producing
both goods). Straight line = constant opportunity cost.
• Allocative efficiency: Producing the specific combination of goods society most desires (a single point on the
PPF). Not all points on PPF are allocatively efficient.
4.1.2 Individual economic decision making
4.1.2.1 Consumer behaviour
• Rationality assumption: Consumers aim to maximise utility (satisfaction).
• Utility: Satisfaction/benefit derived from consuming a good/service.
• Marginal Utility (MU): Extra satisfaction from consuming one more unit.
1
, • Diminishing Marginal Utility: MU tends to fall as consumption increases. Explains downward-sloping
demand curve.
• Marginal analysis: Decisions based on comparing marginal benefits and marginal costs.
4.1.2.2 Imperfect information
• Importance: Perfect information needed for rational decisions (often unrealistic).
• Asymmetric information: One party in a transaction has more/better information than the other (e.g., seller
of used car, insurance applicant).
• Consequences: Can lead to market failure (adverse selection, moral hazard), poor decision-making.
4.1.2.3 Aspects of behavioural economic theory
• Challenges rational assumption. Recognises psychological influences.
• Bounded rationality: Limits to human thinking capacity, information, time. Leads to ’satisficing’ not max-
imising.
• Bounded self-control: Individuals lack self-control (e.g., overspending, procrastination).
• Cognitive biases (Heuristics/Rules of Thumb):
– Anchoring: Over-reliance on first piece of information.
– Availability: Overestimating likelihood of events easily recalled.
– Social norms/Herding: Following behaviour of others.
• Altruism and fairness: Individuals may care about others/fairness, not just self-interest.
4.1.2.4 Behavioural economics and economic policy
• Choice architecture: Designing how choices are presented to influence decisions.
• Framing: How information is presented affects choices.
• Nudges: Gentle prompts/suggestions to encourage behaviour without forbidding options (e.g., default options,
placement of items).
• Default choices: Opt-in vs. opt-out systems (e.g., organ donation, pensions).
• Restricted choice: Limiting options available.
• Mandated choice: Requiring individuals to make a choice.
4.1.3 Price determination in a competitive market
4.1.3.1 The determinants of the demand for goods and services
• Demand: Quantity consumers are willing and able to buy at a given price over a period of time.
• Law of Demand: Inverse relationship between price and quantity demanded (downward sloping curve).
• Movements along D curve: Caused by change in price only.
• Shifts of D curve: Caused by change in non-price factors (PASIFIC): Population, Advertising, Substitutes
(price of), Income (normal/inferior goods), Fashion/Tastes, Interest rates, Complements (price of).
4.1.3.2 Price, income and cross elasticities of demand (PED, YED, XED)
• Elasticity: Measures responsiveness of one variable to a change in another.
• PED = %∆Qd /%∆P . Measures responsiveness of Qd to change in P.
– > 1: Elastic (responsive). < 1: Inelastic (unresponsive). = 1: Unitary elastic. = 0: Perfectly inelastic.
= ∞: Perfectly elastic.
– Factors (SPLAT): Substitutes, Percentage of income, Luxury/Necessity, Addictive, Time.
– Relation to TR: Elastic D → P↑ TR↓. Inelastic D → P↑ TR↑.
• YED = %∆Qd /%∆Y . Measures responsiveness of Qd to change in Income (Y).
– > 0: Normal good (> 1 = Luxury, 0 < Y ED < 1 = Necessity). < 0: Inferior good.
• XED = %∆Qd (A)/%∆P (B). Measures responsiveness of Qd of good A to change in P of good B.
– > 0: Substitutes. < 0: Complements. = 0: Unrelated.
4.1.3.3 The determinants of the supply of goods and services
• Supply: Quantity producers are willing and able to sell at a given price over a period of time.
• Law of Supply: Positive relationship between price and quantity supplied (upward sloping curve - profit
motive).
