Advanced Economics Study Notes
© [CY.Xing], [2025]. All rights reserved.
Unauthorized resale, reproduction, or distribution is strictly prohibited.
For personal study use only. Not an official course material.
1
,ECONOMICS-AS LEVEL
TABLE OF CONTENT:
No. Content Page
CHAPTER 1: BASIC ECONOMIC IDEAS AND RESOURCE ALLOCATION
1. 2020/S21: Explain, with the aid of a production possibility curve (PPC) Production 6
diagram, why scarcity makes choice inevitable for firms and how each Possibility
choice has an opportunity cost. [8] Curve (PPC)
2. 2020S/22: Use a production possibility curve diagram(s) to distinguish 7
between the growth of an economy and a reduction in the number of
unused resources in an economy and explain one reason that might
cause each to occur. [8]
3. EXTRA: Explain the features of market economy and planned Types of 9
economy [12] economy
4. 2004S/02: Discuss whether the operation of a market economy 12
always produces a desirable outcome. [12]
5. 2020S/22: Discuss whether the transition of an economy from one 15
that is centrally planned to one in which resources are allocated
through the free market is likely to be of overall benefit to the citizens
of that economy. [12]
6. 2018M/22: Discuss whether decision-making is more effective when 17
undertaken by governments in a planned economy rather than by
individuals in a free market economy. [12]
7. 2017W/22: Discuss the way in which resources are allocated in 19
planned economies and free market economies. Consider which type
of economic system is likely to have the more beneficial outcome.
[12]
8. 2015S/21: Discuss whether entrepreneurs or government are more 20
likely to cause economic growth in a mixed economy. [12]
9. 2012W/22: Discuss the ease with which a planned economy may be 21
changed into a market economy. [12]
10. EXTRA: Explain how private and public sectors exist in a mixed market. 23
[12]
CHAPTER 2: THE PRICE SYSTEM & MICROECONOMY
1. 2020M/22: Discuss the effectiveness of any possible measures to Demand and 25
ensure that food would be available to consumers in an economy Supply
where food supplies are frequently disrupted because of drought.
[12]
2. EXTRA: Analyse the effect on market equilibrium, when there is: 27
(a) a rise in consumer income
(b) a rise in price of substitute goods
(c) a rise in price of complement goods
(d) a given subsidy
(e) an improved technology
(f) a rise in cost of production
(g) g) an imposed of indirect tax
3. 2016W/21: With the help of a supply and demand diagram, explain Consumer 32
how the introduction of an indirect tax on a good would affect the and Producer
surplus enjoyed by the consumers of that good. [8] surplus
2
,4. 2021S/21: With the aid of diagrams, explain how consumer surplus is 35
affected by a decrease in the price of a luxury product with many
substitutes, and of an essential product with few substitutes. [8]
5. 2015W/22: A study estimates that dark chocolate has a price Elasticity of 36
elasticity of demand of (-)0.8 and that white chocolate has a price demand
elasticity of demand of (-) 1.4. Explain how chocolate producers
would change price to increase total revenue for each type of
chocolate. [8]
6. 2019S/22: Discuss how businesses might attempt to change the price 38
elasticity of demand for their products and consider which approach
is most likely to be successful. [12]
7. 2021M/22: Explain how you would use the concept of cross-elasticity 40
of demand to measure the impact on the demand for cars when there
is a rise in the price of fuel for cars and when there is a rise in the
price of public transport. [8]
8. 2018W/22: Explain the significance of cross-elasticity of demand 42
values that are negative, positive and zero. [8]
9. 2021S/21: Discuss the extent to which knowledge of the income 43
elasticity of demand for its product is likely to be more useful to a
business than knowledge of the cross elasticity of demand for its
product [12]
10. 2021S/23: Market research has estimated that the cross-elasticity of 45
demand for hotels in Barbados with respect to the price of flights to
Barbados is –2.5, and that the cross-elasticity of demand for flights to
Antigua with respect to the price of flights to Barbados is +0.5.
(a) Explain what is meant by cross-elasticity of demand and what
these values mean in terms of the effect of changes in the price of
flights to Barbados on
(i) the demand for hotels in Barbados, and (ii) the demand for flights
to Antigua.
11. 2020S/23: The price elasticity of supply for a new smartphone is Elasticity of 47
estimated at 0.8 in the short run and 1.5 in the long run. Explain price supply
elasticity of supply and suggest why the above estimates differ. [8]
12. 2020S/22: In summer 2018, many countries suffered a water shortage 49
because of a long spell of very dry weather. Explain whether you
would expect the price elasticity of supply of water to be relatively
elastic or relatively inelastic. [8]
13. 2020S/22: Consider the short-term and long-term policies that could 50
be adopted to deal with a water shortage in an economy and discuss
whether these are likely to be successful. [12]
CHAPTER 3: GOVERNMENT MICROECONOMIC INTERVENTION
1. 2021S/21: Explain whether private goods, free goods and public Market 51
goods will all be sold in a free market economy. [8] failure
2. 2017M/22: Explain the difference between public goods and private 52
goods. Consider why profit can be made through the supply of one
type of good, but not the other. [8]
3
,3. EXTRA: Market failure in free market (public goods, merit goods and 54
demerit goods) [8]
4. 2020M/22: Explain what determines the change in equilibrium price 56
and equilibrium quantity of a good when there is a rise in incomes in
an economy. [8]
5. 2020M/22: Discuss the view that direct taxes are the fairest and the 58
most effective way for governments to raise revenue. [12]
6. 2021S/21: Explain whether private goods, free goods and public 59
goods will all be sold in a free market economy [8]
7. 2010W/22: Discuss the importance of price in the effective operation 61
of a mixed economy [12]
8. 2021S/22: In 2018 the UK government, concerned about the rise in 63
obesity, particularly amongst young people, imposed a tax on
producers of sugar-sweetened drinks.
(a) State what is meant by a demerit good, and with the help of a
diagram(s) explain how a tax on producers can improve the allocation
of resources in the market for sugar-sweetened drinks. [8]
(b) Compare the likely effectiveness of a policy of imposing minimum
prices on demerit goods with one other policy to improve public
health and consider which policy is more likely to be successful. [12]
CHAPTER 4: THE MACROECONOMY
1. 2016M/22: Outline the components of AD and explain one cause of Aggregate 66
an increase and one cause of a decrease in AD in an economy. [8] demand &
2. 2020W/22: Explain how the factor of production enterprise Aggregate 68
contributes to AS in a modern economy and how it differs from the supply
other factors of production in terms of the reward for its services. [8]
3. 2020W/22: Explain how AD is likely to be affected by an increase in 69
the money supply and consider whether the impact of such an
increase will be on employment or on the general price level. [12]
4. 2021S/23: Explain what is meant by aggregate supply and explain one 70
reason why the aggregate supply curve of an economy would shift
outwards in (i) the short run, and (ii) the long run. [8]
5. 2017M/22: Explain what is used as money in a modern economy. Inflation 71
Consider how an increase in the money supply can cause inflation. [8]
6. 2017M/22: Discuss the consequences of high inflation consider 72
whether the internal consequences can ever be more serious than
the external consequences in an economy that has extensive foreign
trade. [12]
7. 2016S/23: Use AD and AS analysis to distinguish between cost-push 74
and demand-pull causes of inflation. [8]
8. 2018W/22: Explain how the rate of deflation is measured and the 76
impact of a period of deflation on an economy. [8]
9. 2016W/S3: Using diagrams, explain how rising prices in raw materials 77
and a fall in the rate of the interest might cause different types of
inflation. [8]
10. 2023Specimen paper/02: The annual rate of inflation in an economy 79
increased sharply and unexpectedly. Explain the likely consequences
of such an increase for consumers and firms. [8]
4
, CHAPTER 5: GOVERNMENT MACROECONOMIC INTERVENTION
1. 2017S/22: Explain the difference between fiscal policy and monetary Fiscal, 80
policy. Show how each can be used to increase AD. [8] monetary
2. 2016S/22: Discuss the advantages and disadvantages of supply-side and supply- 82
policy and consider its effectiveness in an economy that is facing a side policies
labour shortage. [12]
3. 2018W/22: Discuss whether increased government spending on a 84
country’s infrastructure will always lead to a rise in rate of inflation.
Use AD and AS analysis to support your answer. [12]
4. 2020M/22: Discuss whether monetary policy measures are always 85
effective in correcting a high rate of inflation. [12]
5. 2021S/22: Discuss whether a government should use monetary policy 87
or fiscal policy to solve the problem of deflation in an economy. [12]
6. 2021S/21: Discuss how likely it is that monetary policy would be 89
successful in reducing inflation in an economy with a floating
exchange rate. [12]
CHAPTER 6: INTERNATIONAL ECONOMIC ISSUES
1. 2021S/23: Discuss the view that the gains from tariff-free trade are Reasons for 90
greater for countries who are net importers than for countries who international
are net exporters. [12] trade
2. 2020S/23: Explain why the theory of comparative advantage may not 91
give a true account of the benefits of free trade. [8]
3. EXTRA: Advantages and disadvantages of rise in Terms of Trade (TOT) 92
[8]
4. 2013S/22: Explain the meaning of the term ‘protection’ in the context Protectionism 94
of international trade and describe two methods of protection used
by the government. [8]
5. 2013S/22: Discuss, with examples, how international trade protection 96
may affect consumers and producers in an economy and whether on
balance protection can be justified. [12]
6. 2019S/22: Explain, using examples, what is meant by ‘protectionism’ 98
and show with the help of a diagram how export subsidies can be
considered as a form of protectionism. [8]
7. 2014W/23: Discuss whether a floating exchange rate is consistent Exchange rate 101
with the policy objective of a low and stable rate of inflation. [12]
8. 2016W/21: Discuss the probable impact of this exchange rate rise on 102
the US economy and assess whether it is likely to benefit this
economy overall. [12]
9. 2018S/22: Explain how a high rate of inflation and a rise in an 104
economy’s exchange rate can each cause a deficit in an economy’s
current account of the balance of payments. [8]
10. 2021S/21: With the aid of a diagram(s), explain one demand factor 105
and one supply factor that would cause the value of a currency in a
floating exchange rate system to depreciate. [8]
5
,CHAPTER 1 Production Possibility Curve (PPC)
CHAPTER 1: BASIC ECONOMIC IDEAS AND RESOURCE ALLOCATION
Production Possibility Curve (PPC)
1. 2020/S21: Explain, with the aid of a production possibility curve (PPC) diagram, why scarcity
makes choice inevitable for firms and how each choice has an opportunity cost. [8]
Scarcity is the fundamental economic problem, which refers to the scarce resource relative
to the unlimited human needs and wants. This means that the firms have to make choices about how
to allocate their scarce resources to satisfy their most pressing needs and wants. Basically, the firms
must make choices about what goods and services to produce, how to produce and for whom to
produce.
The cost expressed in terms of the best alternative that is foregone is opportunity cost. For
example, if a boy is given a $20 gift voucher, he could either buy a DVD that costs $20 or two
storybooks that costs $10 each. It is clear that he could not have the DVD and the storybooks at the
same time. So, the opportunity cost of DVD is the two storybooks.
Production possibility curve (PPC) is a simple representation of the maximum level of output
that an economy can achieve when using its existing resources in full. Diagram below shows the
original PPC. Point 3 and point 4 indicate efficient use of resources, point 1 indicates under-utilisation
of resources, and point 2 is an unattainable point.
With the given PPC, firms need to decide which combination of goods to produce. For
example, a firm must make a choice between combination 3 which implies more of good y and less
of good x, or combination 4, which implies more of good x and less of good y.
In conclusion, scarcity forces firms to make choices about the allocation of their limited
resources, and each choice comes with an opportunity cost.
6
,CHAPTER 1 Production Possibility Curve (PPC)
2. 2020S/22: Use a production possibility curve diagram(s) to distinguish between the growth of
an economy and a reduction in the number of unused resources in an economy and explain one
reason that might cause each to occur. [8]
Production possibility curve (PPC) is a simple representation of the maximum level of output
that an economy can achieve when using its existing resources in full. Diagram below shows the
original PPC. Point 3 and point 4 indicate efficient use of resources, point 1 indicates under-utilisation
of resources, and point 2 is an unattainable point.
One reason that might cause the growth of an economy is improved technology is used. An
improvement in technology will increase production efficiency as it enables a firm to produce more
of Good X and Good Y with the given amount of resources. Therefore, PPC will shift outward. The
diagram below shows the growth of an economy.
On the other hand, an increase in consumer income can cause a reduction in the number of
unused resources in an economy. This is because aggregate demand increases as consumers'
purchasing power grows when their disposable income rises. The diagram below illustrates this
reduction in unused resources through a movement from a point within the curve to a point closer
to the PPC (from point 1 to point 3 or point 4), indicating greater resource utilisation.
7
,CHAPTER 1 Production Possibility Curve (PPC)
8
,CHAPTER 1 Types of Economy
Types of Economy
3. EXTRA: Explain the features of market economy and planned economy. [12]
[Main Point]
Features of market economy:
Profit motive and self-interest lead to motivation
The market forces of demand and supply determine allocation of resources
Private ownership of non-human resources is possible
Provides high level of competition in the market, consumers have wider choices
Planned economy:
Resources are owned and controlled by the government
Motivation is not to make profits but to look after public interest
Centralized decisions by the government dominate economic activity
Consumers and producers do not have the freedom to choose
[Full Essay]
Introduction:
An economy is the system by which a society allocates its resources and distributes goods
and services. Economic systems vary based on how resources are owned, controlled, and allocated.
Two of the most distinct economic systems are the market economy and the planned economy.
While a market economy relies on market forces and private ownership, a planned economy is
characterized by government control and central planning. I will explore the key differences between
these two systems based on motivation, resource allocation, ownership, competition, and consumer
choice in the following paragraphs.
Market Economy:
A market economy is primarily driven by profit motive and self-interest, which act as strong
incentives for individuals and businesses to work efficiently and innovate. Entrepreneurs seek profits,
and consumers aim to maximize their satisfaction.
Resource allocation in a market economy is determined by market forces of demand and
supply. When demand for a product increases, prices rise, encouraging producers to supply more.
Conversely, if demand decreases, prices fall, signalling producers to reduce output. This system
ensures that resources are allocated efficiently to meet consumer needs.
9
, CHAPTER 1 Types of Economy
Another feature of a market economy is the private ownership. Land, factories, and capital
goods are owned by individuals or businesses rather than the government. This encourages
investment and economic growth, as individuals have the right to profit from their assets.
Moreover, a market economy promotes high levels of competition, which leads to better
quality products and services. Consumers benefit from a wider range of choices as businesses
compete to attract customers. This competition also fosters innovation and efficiency, making goods
more affordable and improving overall economic welfare.
Planned Economy:
In contrast, a planned economy operates under government ownership. The state owns land,
industries, and production facilities, ensuring that all economic activities align with national priorities
rather than individual profit motives.
Unlike a market economy, motivation in a planned economy is not driven by profits but by
the public interest. The government aims to achieve social welfare rather than wealth accumulation.
Essential goods and services, such as healthcare and education, are often provided for free or at
subsidized prices, ensuring accessibility for all citizens.
Decision-making in a planned economy is centralized. The government determines
production, pricing, and distribution, rather than allowing supply and demand to dictate these
factors. This system aims to prevent economic inequalities and ensure stability but often leads to
inefficiencies, shortages, or surpluses due to a lack of market signals.
Another key feature is that consumers and producers do not have the freedom to choose.
Consumers may face limited product options, and businesses cannot operate independently without
state approval. This lack of competition often results in lower product quality and innovation
compared to a market economy.
Conclusion:
In conclusion, a market economy is characterized by private ownership, profit-driven
motivation, decentralized decision-making, high competition, and offering consumers a variety of
choices. In contrast, a planned economy is state-controlled, prioritizes social welfare over profit, and
relies on central planning, limiting competition and consumer freedom. While both systems have
10
© [CY.Xing], [2025]. All rights reserved.
Unauthorized resale, reproduction, or distribution is strictly prohibited.
For personal study use only. Not an official course material.
1
,ECONOMICS-AS LEVEL
TABLE OF CONTENT:
No. Content Page
CHAPTER 1: BASIC ECONOMIC IDEAS AND RESOURCE ALLOCATION
1. 2020/S21: Explain, with the aid of a production possibility curve (PPC) Production 6
diagram, why scarcity makes choice inevitable for firms and how each Possibility
choice has an opportunity cost. [8] Curve (PPC)
2. 2020S/22: Use a production possibility curve diagram(s) to distinguish 7
between the growth of an economy and a reduction in the number of
unused resources in an economy and explain one reason that might
cause each to occur. [8]
3. EXTRA: Explain the features of market economy and planned Types of 9
economy [12] economy
4. 2004S/02: Discuss whether the operation of a market economy 12
always produces a desirable outcome. [12]
5. 2020S/22: Discuss whether the transition of an economy from one 15
that is centrally planned to one in which resources are allocated
through the free market is likely to be of overall benefit to the citizens
of that economy. [12]
6. 2018M/22: Discuss whether decision-making is more effective when 17
undertaken by governments in a planned economy rather than by
individuals in a free market economy. [12]
7. 2017W/22: Discuss the way in which resources are allocated in 19
planned economies and free market economies. Consider which type
of economic system is likely to have the more beneficial outcome.
[12]
8. 2015S/21: Discuss whether entrepreneurs or government are more 20
likely to cause economic growth in a mixed economy. [12]
9. 2012W/22: Discuss the ease with which a planned economy may be 21
changed into a market economy. [12]
10. EXTRA: Explain how private and public sectors exist in a mixed market. 23
[12]
CHAPTER 2: THE PRICE SYSTEM & MICROECONOMY
1. 2020M/22: Discuss the effectiveness of any possible measures to Demand and 25
ensure that food would be available to consumers in an economy Supply
where food supplies are frequently disrupted because of drought.
[12]
2. EXTRA: Analyse the effect on market equilibrium, when there is: 27
(a) a rise in consumer income
(b) a rise in price of substitute goods
(c) a rise in price of complement goods
(d) a given subsidy
(e) an improved technology
(f) a rise in cost of production
(g) g) an imposed of indirect tax
3. 2016W/21: With the help of a supply and demand diagram, explain Consumer 32
how the introduction of an indirect tax on a good would affect the and Producer
surplus enjoyed by the consumers of that good. [8] surplus
2
,4. 2021S/21: With the aid of diagrams, explain how consumer surplus is 35
affected by a decrease in the price of a luxury product with many
substitutes, and of an essential product with few substitutes. [8]
5. 2015W/22: A study estimates that dark chocolate has a price Elasticity of 36
elasticity of demand of (-)0.8 and that white chocolate has a price demand
elasticity of demand of (-) 1.4. Explain how chocolate producers
would change price to increase total revenue for each type of
chocolate. [8]
6. 2019S/22: Discuss how businesses might attempt to change the price 38
elasticity of demand for their products and consider which approach
is most likely to be successful. [12]
7. 2021M/22: Explain how you would use the concept of cross-elasticity 40
of demand to measure the impact on the demand for cars when there
is a rise in the price of fuel for cars and when there is a rise in the
price of public transport. [8]
8. 2018W/22: Explain the significance of cross-elasticity of demand 42
values that are negative, positive and zero. [8]
9. 2021S/21: Discuss the extent to which knowledge of the income 43
elasticity of demand for its product is likely to be more useful to a
business than knowledge of the cross elasticity of demand for its
product [12]
10. 2021S/23: Market research has estimated that the cross-elasticity of 45
demand for hotels in Barbados with respect to the price of flights to
Barbados is –2.5, and that the cross-elasticity of demand for flights to
Antigua with respect to the price of flights to Barbados is +0.5.
(a) Explain what is meant by cross-elasticity of demand and what
these values mean in terms of the effect of changes in the price of
flights to Barbados on
(i) the demand for hotels in Barbados, and (ii) the demand for flights
to Antigua.
11. 2020S/23: The price elasticity of supply for a new smartphone is Elasticity of 47
estimated at 0.8 in the short run and 1.5 in the long run. Explain price supply
elasticity of supply and suggest why the above estimates differ. [8]
12. 2020S/22: In summer 2018, many countries suffered a water shortage 49
because of a long spell of very dry weather. Explain whether you
would expect the price elasticity of supply of water to be relatively
elastic or relatively inelastic. [8]
13. 2020S/22: Consider the short-term and long-term policies that could 50
be adopted to deal with a water shortage in an economy and discuss
whether these are likely to be successful. [12]
CHAPTER 3: GOVERNMENT MICROECONOMIC INTERVENTION
1. 2021S/21: Explain whether private goods, free goods and public Market 51
goods will all be sold in a free market economy. [8] failure
2. 2017M/22: Explain the difference between public goods and private 52
goods. Consider why profit can be made through the supply of one
type of good, but not the other. [8]
3
,3. EXTRA: Market failure in free market (public goods, merit goods and 54
demerit goods) [8]
4. 2020M/22: Explain what determines the change in equilibrium price 56
and equilibrium quantity of a good when there is a rise in incomes in
an economy. [8]
5. 2020M/22: Discuss the view that direct taxes are the fairest and the 58
most effective way for governments to raise revenue. [12]
6. 2021S/21: Explain whether private goods, free goods and public 59
goods will all be sold in a free market economy [8]
7. 2010W/22: Discuss the importance of price in the effective operation 61
of a mixed economy [12]
8. 2021S/22: In 2018 the UK government, concerned about the rise in 63
obesity, particularly amongst young people, imposed a tax on
producers of sugar-sweetened drinks.
(a) State what is meant by a demerit good, and with the help of a
diagram(s) explain how a tax on producers can improve the allocation
of resources in the market for sugar-sweetened drinks. [8]
(b) Compare the likely effectiveness of a policy of imposing minimum
prices on demerit goods with one other policy to improve public
health and consider which policy is more likely to be successful. [12]
CHAPTER 4: THE MACROECONOMY
1. 2016M/22: Outline the components of AD and explain one cause of Aggregate 66
an increase and one cause of a decrease in AD in an economy. [8] demand &
2. 2020W/22: Explain how the factor of production enterprise Aggregate 68
contributes to AS in a modern economy and how it differs from the supply
other factors of production in terms of the reward for its services. [8]
3. 2020W/22: Explain how AD is likely to be affected by an increase in 69
the money supply and consider whether the impact of such an
increase will be on employment or on the general price level. [12]
4. 2021S/23: Explain what is meant by aggregate supply and explain one 70
reason why the aggregate supply curve of an economy would shift
outwards in (i) the short run, and (ii) the long run. [8]
5. 2017M/22: Explain what is used as money in a modern economy. Inflation 71
Consider how an increase in the money supply can cause inflation. [8]
6. 2017M/22: Discuss the consequences of high inflation consider 72
whether the internal consequences can ever be more serious than
the external consequences in an economy that has extensive foreign
trade. [12]
7. 2016S/23: Use AD and AS analysis to distinguish between cost-push 74
and demand-pull causes of inflation. [8]
8. 2018W/22: Explain how the rate of deflation is measured and the 76
impact of a period of deflation on an economy. [8]
9. 2016W/S3: Using diagrams, explain how rising prices in raw materials 77
and a fall in the rate of the interest might cause different types of
inflation. [8]
10. 2023Specimen paper/02: The annual rate of inflation in an economy 79
increased sharply and unexpectedly. Explain the likely consequences
of such an increase for consumers and firms. [8]
4
, CHAPTER 5: GOVERNMENT MACROECONOMIC INTERVENTION
1. 2017S/22: Explain the difference between fiscal policy and monetary Fiscal, 80
policy. Show how each can be used to increase AD. [8] monetary
2. 2016S/22: Discuss the advantages and disadvantages of supply-side and supply- 82
policy and consider its effectiveness in an economy that is facing a side policies
labour shortage. [12]
3. 2018W/22: Discuss whether increased government spending on a 84
country’s infrastructure will always lead to a rise in rate of inflation.
Use AD and AS analysis to support your answer. [12]
4. 2020M/22: Discuss whether monetary policy measures are always 85
effective in correcting a high rate of inflation. [12]
5. 2021S/22: Discuss whether a government should use monetary policy 87
or fiscal policy to solve the problem of deflation in an economy. [12]
6. 2021S/21: Discuss how likely it is that monetary policy would be 89
successful in reducing inflation in an economy with a floating
exchange rate. [12]
CHAPTER 6: INTERNATIONAL ECONOMIC ISSUES
1. 2021S/23: Discuss the view that the gains from tariff-free trade are Reasons for 90
greater for countries who are net importers than for countries who international
are net exporters. [12] trade
2. 2020S/23: Explain why the theory of comparative advantage may not 91
give a true account of the benefits of free trade. [8]
3. EXTRA: Advantages and disadvantages of rise in Terms of Trade (TOT) 92
[8]
4. 2013S/22: Explain the meaning of the term ‘protection’ in the context Protectionism 94
of international trade and describe two methods of protection used
by the government. [8]
5. 2013S/22: Discuss, with examples, how international trade protection 96
may affect consumers and producers in an economy and whether on
balance protection can be justified. [12]
6. 2019S/22: Explain, using examples, what is meant by ‘protectionism’ 98
and show with the help of a diagram how export subsidies can be
considered as a form of protectionism. [8]
7. 2014W/23: Discuss whether a floating exchange rate is consistent Exchange rate 101
with the policy objective of a low and stable rate of inflation. [12]
8. 2016W/21: Discuss the probable impact of this exchange rate rise on 102
the US economy and assess whether it is likely to benefit this
economy overall. [12]
9. 2018S/22: Explain how a high rate of inflation and a rise in an 104
economy’s exchange rate can each cause a deficit in an economy’s
current account of the balance of payments. [8]
10. 2021S/21: With the aid of a diagram(s), explain one demand factor 105
and one supply factor that would cause the value of a currency in a
floating exchange rate system to depreciate. [8]
5
,CHAPTER 1 Production Possibility Curve (PPC)
CHAPTER 1: BASIC ECONOMIC IDEAS AND RESOURCE ALLOCATION
Production Possibility Curve (PPC)
1. 2020/S21: Explain, with the aid of a production possibility curve (PPC) diagram, why scarcity
makes choice inevitable for firms and how each choice has an opportunity cost. [8]
Scarcity is the fundamental economic problem, which refers to the scarce resource relative
to the unlimited human needs and wants. This means that the firms have to make choices about how
to allocate their scarce resources to satisfy their most pressing needs and wants. Basically, the firms
must make choices about what goods and services to produce, how to produce and for whom to
produce.
The cost expressed in terms of the best alternative that is foregone is opportunity cost. For
example, if a boy is given a $20 gift voucher, he could either buy a DVD that costs $20 or two
storybooks that costs $10 each. It is clear that he could not have the DVD and the storybooks at the
same time. So, the opportunity cost of DVD is the two storybooks.
Production possibility curve (PPC) is a simple representation of the maximum level of output
that an economy can achieve when using its existing resources in full. Diagram below shows the
original PPC. Point 3 and point 4 indicate efficient use of resources, point 1 indicates under-utilisation
of resources, and point 2 is an unattainable point.
With the given PPC, firms need to decide which combination of goods to produce. For
example, a firm must make a choice between combination 3 which implies more of good y and less
of good x, or combination 4, which implies more of good x and less of good y.
In conclusion, scarcity forces firms to make choices about the allocation of their limited
resources, and each choice comes with an opportunity cost.
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,CHAPTER 1 Production Possibility Curve (PPC)
2. 2020S/22: Use a production possibility curve diagram(s) to distinguish between the growth of
an economy and a reduction in the number of unused resources in an economy and explain one
reason that might cause each to occur. [8]
Production possibility curve (PPC) is a simple representation of the maximum level of output
that an economy can achieve when using its existing resources in full. Diagram below shows the
original PPC. Point 3 and point 4 indicate efficient use of resources, point 1 indicates under-utilisation
of resources, and point 2 is an unattainable point.
One reason that might cause the growth of an economy is improved technology is used. An
improvement in technology will increase production efficiency as it enables a firm to produce more
of Good X and Good Y with the given amount of resources. Therefore, PPC will shift outward. The
diagram below shows the growth of an economy.
On the other hand, an increase in consumer income can cause a reduction in the number of
unused resources in an economy. This is because aggregate demand increases as consumers'
purchasing power grows when their disposable income rises. The diagram below illustrates this
reduction in unused resources through a movement from a point within the curve to a point closer
to the PPC (from point 1 to point 3 or point 4), indicating greater resource utilisation.
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,CHAPTER 1 Production Possibility Curve (PPC)
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,CHAPTER 1 Types of Economy
Types of Economy
3. EXTRA: Explain the features of market economy and planned economy. [12]
[Main Point]
Features of market economy:
Profit motive and self-interest lead to motivation
The market forces of demand and supply determine allocation of resources
Private ownership of non-human resources is possible
Provides high level of competition in the market, consumers have wider choices
Planned economy:
Resources are owned and controlled by the government
Motivation is not to make profits but to look after public interest
Centralized decisions by the government dominate economic activity
Consumers and producers do not have the freedom to choose
[Full Essay]
Introduction:
An economy is the system by which a society allocates its resources and distributes goods
and services. Economic systems vary based on how resources are owned, controlled, and allocated.
Two of the most distinct economic systems are the market economy and the planned economy.
While a market economy relies on market forces and private ownership, a planned economy is
characterized by government control and central planning. I will explore the key differences between
these two systems based on motivation, resource allocation, ownership, competition, and consumer
choice in the following paragraphs.
Market Economy:
A market economy is primarily driven by profit motive and self-interest, which act as strong
incentives for individuals and businesses to work efficiently and innovate. Entrepreneurs seek profits,
and consumers aim to maximize their satisfaction.
Resource allocation in a market economy is determined by market forces of demand and
supply. When demand for a product increases, prices rise, encouraging producers to supply more.
Conversely, if demand decreases, prices fall, signalling producers to reduce output. This system
ensures that resources are allocated efficiently to meet consumer needs.
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, CHAPTER 1 Types of Economy
Another feature of a market economy is the private ownership. Land, factories, and capital
goods are owned by individuals or businesses rather than the government. This encourages
investment and economic growth, as individuals have the right to profit from their assets.
Moreover, a market economy promotes high levels of competition, which leads to better
quality products and services. Consumers benefit from a wider range of choices as businesses
compete to attract customers. This competition also fosters innovation and efficiency, making goods
more affordable and improving overall economic welfare.
Planned Economy:
In contrast, a planned economy operates under government ownership. The state owns land,
industries, and production facilities, ensuring that all economic activities align with national priorities
rather than individual profit motives.
Unlike a market economy, motivation in a planned economy is not driven by profits but by
the public interest. The government aims to achieve social welfare rather than wealth accumulation.
Essential goods and services, such as healthcare and education, are often provided for free or at
subsidized prices, ensuring accessibility for all citizens.
Decision-making in a planned economy is centralized. The government determines
production, pricing, and distribution, rather than allowing supply and demand to dictate these
factors. This system aims to prevent economic inequalities and ensure stability but often leads to
inefficiencies, shortages, or surpluses due to a lack of market signals.
Another key feature is that consumers and producers do not have the freedom to choose.
Consumers may face limited product options, and businesses cannot operate independently without
state approval. This lack of competition often results in lower product quality and innovation
compared to a market economy.
Conclusion:
In conclusion, a market economy is characterized by private ownership, profit-driven
motivation, decentralized decision-making, high competition, and offering consumers a variety of
choices. In contrast, a planned economy is state-controlled, prioritizes social welfare over profit, and
relies on central planning, limiting competition and consumer freedom. While both systems have
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