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-A2 LEVEL
TABLE OF CONTENT:
No. CONTENT PAGE
CHAPTER 7: THE PRICE SYSTEM AND THE MICROECONOMY
1. 2011J/42: Analyse what is meant by the equi-marginal principle Utility 4
of consumer demand and whether it can be linked to the
derivation of a market demand curve. [13]
2. 2022S/42: A rational consumer will always purchase less of an Indifference 6
item as the price increases. Discuss, with the use of indifference curve
curve analysis, whether this statement is correct. [25]
3. 2021S/42: Use indifference curve analysis to explain how an 8
individual’s demand curve for an inferior good is derived. [12]
4. 2019S/42: Use indifference curve analysis to distinguish 10
between the effect of an increase in income on a consumer’s
demand for a normal good and an inferior good. [13]
5. 2018W/42: Discuss whether economic efficiency is always Economic 13
achievable in a market economy. [25] efficiency
6. 2008W/22: Discuss whether the use of cost-benefit analysis Cost-benefit 17
helps to improve economic decision making. (12) analysis
7. 2022W/42: Discuss whether merges between firms always Mergers 19
operate against the consumers’ interest. [13]
8. 2022S/42: Discuss the significance of economies of scale for the Economic of 21
survival of firms. [13] scale
9. 2022W/42: Discuss the extent to which a firm’s ability to Price 23
operate a policy of price discrimination is determined by the discrimination
market structure in which that firm operates [13]
10. 2017J/42: Discuss whether consumers or producers benefit 25
more from the practice of price discrimination. [13]
11. 2021W/42: Discuss whether firms always want to maximize Economic 27
profits and are able to do so in the way suggested by economic theory
theory. [13]
12. 2020S/42: Explain what is meant by the principal-agent problem Principal-agent 30
and consider its importance in relation to the objectives for a problem
firm. [13]
CHAPTER 8: GOVERNMENT MICROECONOMIC INTERVENTION
1. 2019W/42: Explain the relevance of economic rent and transfer Economic rent 32
earnings when comparing the wages of skilled workers and and transfer
unskilled workers. [12] earnings
2. 2019W/42: Discuss whether workers always benefit when their Trade Union 35
trade union achieves an increase in wages. [12]
3. 2022S/42: The best outcome for labour markets is that the Wages supply 38
forces of supply and demand are left to determine wages and demand
without government interference. Discuss with the use of
diagrams, whether this statement is always true. [25]
CHAPTER 9: THE MACROECONOMY
1. 2006J/Q4: ‘If investment increases it will cause an increase in Multiplier 41
output. If output increases it will cause an increase in effect
investment’. Discuss whether both these statements can be
true. [15]
2
,2. 2019S/42: Explain what is meant by actual economic growth Economic 43
and potential economic growth. [12] growth
3. 2018S/42: To what extent do you agree that the costs of 45
economic growth are greater than the benefits? [13]
4. 2021S/42: Policies to achieve economic growth will inevitable 47
cause a government budget deficit. How far do you agree with
this statement? [13]
5. 2021S/42: Explain what is meant by quantitative easing (QE) and Quantitative 50
consider whether it is an effective policy to be used in a easing
recession. [12]
6. 2017W/42: Consider what are likely to be the main causes of Unemployment 52
unemployment. Explanation of the various types of
unemployment. [13]
7. 2020S/42: Explain the Keynesian theory of the determination of Motives 54
the rate of interest. [12]
8. 2019/42: Discuss how far (i) an increase in wages and (ii) a loss Loanable fund 57
of business confidence might affect the rate of interest. [13] and liquidity
9. 2015W/42: A worker is a weekly paid shop assistant. She is then preference 60
promoted to a manager in a larger store on a higher monthly theory
salary. At the same time interest rates fall. Discuss how these
changed would affect the worker’s demand for money. [13]
CHAPTER 10: GOVERNMENT MACROECONOMIC INTERVENTION
1. 2013W/42: Discuss whether a government can achieve all its Macroeconomic 62
key macroeconomic aims simultaneously. [13] aims
2. 2015N/43: In a number of countries interest rates have 65
remained low for a long time. Some people have been unhappy
with the low rates but others have been pleased. However, high
interest rates also cause different reactions.
Discuss whether a low interest rate can help a government
achieve its macroeconomic aims. [13]
3. 2020W/42: Discuss whether a reduction in unemployment 68
should always be the main aim of government policy. [13]
CHAPTER 11: INTERNATIONAL ECONOMIC ISSUES
1. 2017W/22: Discuss the ways in which expenditure-dampening Expenditure- 70
and expenditure-switching policies attempt to remove a current dampening and
account deficit. Assess which approach is preferable. [12] expenditure-
switching
policies
2. 2021S/42: Discuss the extent to which the Human Development GNI,HDI, MEW 74
Index (HDI) and the Measure of Economic Welfare (MEW)
provide better measures of living standards than Gross National
Income (GNI). [25]
3. 2018W/42: Explain how developing countries differ from Developing and 77
developed countries. [12] developed
countries
3
,CHAPTER 7 The price system and the microeconomy
CHAPTER 7: THE PRICE SYSTEM AND THE MICROECONOMY
The price system and the microeconomy
1. 2011J/42: Analyse what is meant by the equi-marginal principle of consumer demand and
whether it can be linked to the derivation of a market demand curve. [13]
Marginal utility refers to the additional utility derived from the consumption of one more
unit of a particular good. The law of diminishing marginal utility states that the marginal utility
gained from the consumption of a product tends to fall as consumption increases.
Economics assumes that consumers have limited incomes, behave in a rational manner and
seek to maximise their total utility. A consumer is said to be in equilibrium if it is impossible for him
to switch any expenditure from one product to another product in order to increase total utility. This
is known as the equi-marginal principle. In other words, the equi-marginal principle refers to
consumers maximising their utility where their marginal valuation for each product consumed is the
same. This principle can be represented by the following equation:
Marginal Utility of A Marginal Utility of B
Price of A Price of B
It is possible to use the equi-marginal principle to derive a downward sloping individual
demand curve. I will show two circumstances to illustrate how it works.
First, the value of MUA/PA will decrease when the price of good A increases. As a result, the
marginal utility of good A per dollar spent will now be less than any other goods. Therefore, the
consumer will increase total utility by decreasing their consumption of good A until the equilibrium is
restored. This will then reduce the quantity demanded of good A. Overall, the quantity demanded of
good A decreases when its price rises.
On the contrary, the value of MUA/PA will increase when the price of good A decreases. As a
result, the marginal utility of good A per dollar spent will now be more than any other goods.
Therefore, the consumers will decrease total utility by increasing their consumption of good A until
the equilibrium is restored. This will then increase the quantity demanded of good A. Overall, the
quantity demanded of good A increases when its price falls. In conclusion, the individual demand
curve for a good is downward sloping.
4
,CHAPTER 7 The price system and the microeconomy
Now, the problem is whether the equi-marginal principle is applicable to the creation of a
market demand curve. Basically, the market demand curve is the summation of the individual
demand curves in a given market. As explained, the equi-marginal principle can be used to derive an
individual demand curve. Thus, a market demand curve can also be derived, but only if all individuals
in the market have the same consumption behaviour. For example, they will buy more particular
good when its price falls, or they will buy less particular good when its price rises.
5
,CHAPTER 7 Indifference curve
Indifference curve
2. 2022S/42: A rational consumer will always purchase less of an item as the price increases.
Discuss, with the use of indifference curve analysis, whether this statement is correct. [25]
An indifference curve shows the different combinations of two goods that give consumers
equal satisfaction. A budget line shows the combinations of two products obtainable with given
income and prices. When consumers behave in a rational manner, they will seek to maximize total
utility. Hence, a consumer’s choice is optimal where an indifference curve is tangent to a budget line.
At this point, the consumer’s equilibrium occurs.The diagram below shows point A is the consumer’s
equilibrium point where the indifference curve is tangent to the budget line.
Good Y
Indifference curve
Good X
Budget line
The substitution effect is where following a price change, a consumer will substitute the
cheaper product for the one that is now relatively more expensive. When the price of good X rises,
good y is then relatively cheaper. To maximise utility, rational consumers will tend to substitute the
product which has become relatively cheaper. As a result, demand for good y increases and this will
reduce the consumption of good X. Note that the substitution effect occurs regardless of the types of
good X. Hence, the substitution effect is the same when X is a normal good, an inferior good or a
Giffen good.
On the other hand, the income effect is where following a price change, a consumer has
higher real income and will have more purchasing power to buy products. When the price of good X
rises, this implies that the real income of consumers falls. Here, the types of good X should be
considered carefully. First, if X is a normal good, then the quantity demanded of good X will decrease.
Secondly, if X is an inferior good, that is, poor quality goods such as fast food, then the quantity
demanded of X will increase. Thirdly, if X is a Giffen good, that is, a type of very inferior good, then
the quantity demanded of good X will increase.
6
, CHAPTER 7 Indifference curve
The total effect of price change is shown below. When X is a normal good, the substitution
effect and income effect move in the same direction. Therefore, when the price of good X rises, its
quantity demanded will fall. This is because the substitution effect and income effect reinforce each
other.
Next, when X is an inferior good, the substitution effect and income effect move in the
opposite direction. The substitution effect shows that the quantity demanded of good X will
decrease, while the income effect shows that the quantity demanded of good X will increase.
However, since the substitution effect outweighs the income effect, the quantity demanded of good
X will fall when the price of good X rises.
In addition, when X is a Giffen good, the substitution effect and income effect move in the
opposite direction. The substitution effect shows that the quantity demanded of good X will
decrease, while the income effect shows that the quantity demanded of good X will increase.
Nonetheless, since the income effect outweighs the substitution effect, the quantity demanded of
good X will rise when the price of good X rises.
In conclusion, the statement of ‘a rational consumer will always purchase less of an item as
the price increases’ is correct if X is a normal good or inferior good. However, it is incorrect if X is a
Giffen good.
7
© [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-A2 LEVEL
TABLE OF CONTENT:
No. CONTENT PAGE
CHAPTER 7: THE PRICE SYSTEM AND THE MICROECONOMY
1. 2011J/42: Analyse what is meant by the equi-marginal principle Utility 4
of consumer demand and whether it can be linked to the
derivation of a market demand curve. [13]
2. 2022S/42: A rational consumer will always purchase less of an Indifference 6
item as the price increases. Discuss, with the use of indifference curve
curve analysis, whether this statement is correct. [25]
3. 2021S/42: Use indifference curve analysis to explain how an 8
individual’s demand curve for an inferior good is derived. [12]
4. 2019S/42: Use indifference curve analysis to distinguish 10
between the effect of an increase in income on a consumer’s
demand for a normal good and an inferior good. [13]
5. 2018W/42: Discuss whether economic efficiency is always Economic 13
achievable in a market economy. [25] efficiency
6. 2008W/22: Discuss whether the use of cost-benefit analysis Cost-benefit 17
helps to improve economic decision making. (12) analysis
7. 2022W/42: Discuss whether merges between firms always Mergers 19
operate against the consumers’ interest. [13]
8. 2022S/42: Discuss the significance of economies of scale for the Economic of 21
survival of firms. [13] scale
9. 2022W/42: Discuss the extent to which a firm’s ability to Price 23
operate a policy of price discrimination is determined by the discrimination
market structure in which that firm operates [13]
10. 2017J/42: Discuss whether consumers or producers benefit 25
more from the practice of price discrimination. [13]
11. 2021W/42: Discuss whether firms always want to maximize Economic 27
profits and are able to do so in the way suggested by economic theory
theory. [13]
12. 2020S/42: Explain what is meant by the principal-agent problem Principal-agent 30
and consider its importance in relation to the objectives for a problem
firm. [13]
CHAPTER 8: GOVERNMENT MICROECONOMIC INTERVENTION
1. 2019W/42: Explain the relevance of economic rent and transfer Economic rent 32
earnings when comparing the wages of skilled workers and and transfer
unskilled workers. [12] earnings
2. 2019W/42: Discuss whether workers always benefit when their Trade Union 35
trade union achieves an increase in wages. [12]
3. 2022S/42: The best outcome for labour markets is that the Wages supply 38
forces of supply and demand are left to determine wages and demand
without government interference. Discuss with the use of
diagrams, whether this statement is always true. [25]
CHAPTER 9: THE MACROECONOMY
1. 2006J/Q4: ‘If investment increases it will cause an increase in Multiplier 41
output. If output increases it will cause an increase in effect
investment’. Discuss whether both these statements can be
true. [15]
2
,2. 2019S/42: Explain what is meant by actual economic growth Economic 43
and potential economic growth. [12] growth
3. 2018S/42: To what extent do you agree that the costs of 45
economic growth are greater than the benefits? [13]
4. 2021S/42: Policies to achieve economic growth will inevitable 47
cause a government budget deficit. How far do you agree with
this statement? [13]
5. 2021S/42: Explain what is meant by quantitative easing (QE) and Quantitative 50
consider whether it is an effective policy to be used in a easing
recession. [12]
6. 2017W/42: Consider what are likely to be the main causes of Unemployment 52
unemployment. Explanation of the various types of
unemployment. [13]
7. 2020S/42: Explain the Keynesian theory of the determination of Motives 54
the rate of interest. [12]
8. 2019/42: Discuss how far (i) an increase in wages and (ii) a loss Loanable fund 57
of business confidence might affect the rate of interest. [13] and liquidity
9. 2015W/42: A worker is a weekly paid shop assistant. She is then preference 60
promoted to a manager in a larger store on a higher monthly theory
salary. At the same time interest rates fall. Discuss how these
changed would affect the worker’s demand for money. [13]
CHAPTER 10: GOVERNMENT MACROECONOMIC INTERVENTION
1. 2013W/42: Discuss whether a government can achieve all its Macroeconomic 62
key macroeconomic aims simultaneously. [13] aims
2. 2015N/43: In a number of countries interest rates have 65
remained low for a long time. Some people have been unhappy
with the low rates but others have been pleased. However, high
interest rates also cause different reactions.
Discuss whether a low interest rate can help a government
achieve its macroeconomic aims. [13]
3. 2020W/42: Discuss whether a reduction in unemployment 68
should always be the main aim of government policy. [13]
CHAPTER 11: INTERNATIONAL ECONOMIC ISSUES
1. 2017W/22: Discuss the ways in which expenditure-dampening Expenditure- 70
and expenditure-switching policies attempt to remove a current dampening and
account deficit. Assess which approach is preferable. [12] expenditure-
switching
policies
2. 2021S/42: Discuss the extent to which the Human Development GNI,HDI, MEW 74
Index (HDI) and the Measure of Economic Welfare (MEW)
provide better measures of living standards than Gross National
Income (GNI). [25]
3. 2018W/42: Explain how developing countries differ from Developing and 77
developed countries. [12] developed
countries
3
,CHAPTER 7 The price system and the microeconomy
CHAPTER 7: THE PRICE SYSTEM AND THE MICROECONOMY
The price system and the microeconomy
1. 2011J/42: Analyse what is meant by the equi-marginal principle of consumer demand and
whether it can be linked to the derivation of a market demand curve. [13]
Marginal utility refers to the additional utility derived from the consumption of one more
unit of a particular good. The law of diminishing marginal utility states that the marginal utility
gained from the consumption of a product tends to fall as consumption increases.
Economics assumes that consumers have limited incomes, behave in a rational manner and
seek to maximise their total utility. A consumer is said to be in equilibrium if it is impossible for him
to switch any expenditure from one product to another product in order to increase total utility. This
is known as the equi-marginal principle. In other words, the equi-marginal principle refers to
consumers maximising their utility where their marginal valuation for each product consumed is the
same. This principle can be represented by the following equation:
Marginal Utility of A Marginal Utility of B
Price of A Price of B
It is possible to use the equi-marginal principle to derive a downward sloping individual
demand curve. I will show two circumstances to illustrate how it works.
First, the value of MUA/PA will decrease when the price of good A increases. As a result, the
marginal utility of good A per dollar spent will now be less than any other goods. Therefore, the
consumer will increase total utility by decreasing their consumption of good A until the equilibrium is
restored. This will then reduce the quantity demanded of good A. Overall, the quantity demanded of
good A decreases when its price rises.
On the contrary, the value of MUA/PA will increase when the price of good A decreases. As a
result, the marginal utility of good A per dollar spent will now be more than any other goods.
Therefore, the consumers will decrease total utility by increasing their consumption of good A until
the equilibrium is restored. This will then increase the quantity demanded of good A. Overall, the
quantity demanded of good A increases when its price falls. In conclusion, the individual demand
curve for a good is downward sloping.
4
,CHAPTER 7 The price system and the microeconomy
Now, the problem is whether the equi-marginal principle is applicable to the creation of a
market demand curve. Basically, the market demand curve is the summation of the individual
demand curves in a given market. As explained, the equi-marginal principle can be used to derive an
individual demand curve. Thus, a market demand curve can also be derived, but only if all individuals
in the market have the same consumption behaviour. For example, they will buy more particular
good when its price falls, or they will buy less particular good when its price rises.
5
,CHAPTER 7 Indifference curve
Indifference curve
2. 2022S/42: A rational consumer will always purchase less of an item as the price increases.
Discuss, with the use of indifference curve analysis, whether this statement is correct. [25]
An indifference curve shows the different combinations of two goods that give consumers
equal satisfaction. A budget line shows the combinations of two products obtainable with given
income and prices. When consumers behave in a rational manner, they will seek to maximize total
utility. Hence, a consumer’s choice is optimal where an indifference curve is tangent to a budget line.
At this point, the consumer’s equilibrium occurs.The diagram below shows point A is the consumer’s
equilibrium point where the indifference curve is tangent to the budget line.
Good Y
Indifference curve
Good X
Budget line
The substitution effect is where following a price change, a consumer will substitute the
cheaper product for the one that is now relatively more expensive. When the price of good X rises,
good y is then relatively cheaper. To maximise utility, rational consumers will tend to substitute the
product which has become relatively cheaper. As a result, demand for good y increases and this will
reduce the consumption of good X. Note that the substitution effect occurs regardless of the types of
good X. Hence, the substitution effect is the same when X is a normal good, an inferior good or a
Giffen good.
On the other hand, the income effect is where following a price change, a consumer has
higher real income and will have more purchasing power to buy products. When the price of good X
rises, this implies that the real income of consumers falls. Here, the types of good X should be
considered carefully. First, if X is a normal good, then the quantity demanded of good X will decrease.
Secondly, if X is an inferior good, that is, poor quality goods such as fast food, then the quantity
demanded of X will increase. Thirdly, if X is a Giffen good, that is, a type of very inferior good, then
the quantity demanded of good X will increase.
6
, CHAPTER 7 Indifference curve
The total effect of price change is shown below. When X is a normal good, the substitution
effect and income effect move in the same direction. Therefore, when the price of good X rises, its
quantity demanded will fall. This is because the substitution effect and income effect reinforce each
other.
Next, when X is an inferior good, the substitution effect and income effect move in the
opposite direction. The substitution effect shows that the quantity demanded of good X will
decrease, while the income effect shows that the quantity demanded of good X will increase.
However, since the substitution effect outweighs the income effect, the quantity demanded of good
X will fall when the price of good X rises.
In addition, when X is a Giffen good, the substitution effect and income effect move in the
opposite direction. The substitution effect shows that the quantity demanded of good X will
decrease, while the income effect shows that the quantity demanded of good X will increase.
Nonetheless, since the income effect outweighs the substitution effect, the quantity demanded of
good X will rise when the price of good X rises.
In conclusion, the statement of ‘a rational consumer will always purchase less of an item as
the price increases’ is correct if X is a normal good or inferior good. However, it is incorrect if X is a
Giffen good.
7
