Cambridge Pre-U Economics (Principal Subject) Syllabus

What conditions define a monopoly, and what is its key source of power?

A single (or dominant) seller of a good with no close substitutes, protected by high barriers to entry; the firm is a price maker.

Define an oligopoly and one of its key features.

A market dominated by a few large firms with a high concentration ratio; features include interdependence of decisions, non-price competition, and potential for collusion.

Distinguish productive efficiency from allocative efficiency.

Productive efficiency is producing at minimum average cost (on the PPF); allocative efficiency is producing the goods consumers most want, where price equals marginal cost ($P = MC$).

What is price discrimination and a necessary condition for it?

Charging different prices to different consumers for the same good for reasons not based on cost. It requires market power, the ability to separate markets, and different price elasticities of demand, with no resale (arbitrage) between markets.

Define market failure.

A situation where the free market, left alone, fails to allocate resources efficiently, leading to a net welfare loss to society.

What is a negative externality, and how do private and social costs compare?

A cost imposed on third parties not involved in the transaction; marginal social cost exceeds marginal private cost ($MSC > MPC$), so the good is over-produced relative to the social optimum.

Define a public good and its two defining characteristics.

A good that is non-rival (one person's consumption does not reduce availability to others) and non-excludable (you cannot prevent non-payers from consuming), e.g. national defence.

What is the free-rider problem?

Because public goods are non-excludable, individuals can consume them without paying, so private firms cannot charge effectively and the good is under-provided or not provided by the market.

Distinguish a merit good from a demerit good.

A merit good is under-consumed because individuals undervalue its private/external benefits (e.g. education); a demerit good is over-consumed because individuals undervalue its costs (e.g. tobacco).

What is information failure (asymmetric information)?

When one party in a transaction has more or better information than the other, leading to misallocation; it can cause adverse selection and moral hazard.

How does an indirect (Pigouvian) tax correct a negative externality?

By imposing a tax equal to the marginal external cost, it 'internalises the externality', raising private cost to equal social cost and reducing output to the socially optimal level.

How is Gross Domestic Product (GDP) defined?

The total monetary value of all final goods and services produced within a country's borders in a given time period.

Distinguish nominal GDP from real GDP.

Nominal GDP is measured at current prices; real GDP is adjusted for inflation (measured at constant prices) so it reflects changes in actual output, not the price level.

How is the rate of inflation usually measured in the UK?

By the percentage change in the Consumer Prices Index (CPI), a weighted price index of a representative basket of goods and services.

How is the unemployment rate calculated?

$$\text{Unemployment rate} = \frac{\text{number unemployed}}{\text{labour force}} \times 100$$ where the labour force = employed + unemployed (those willing and able to work).

What is the difference between a recession and economic growth?

Economic growth is a rise in real GDP; a recession is conventionally two consecutive quarters of falling real GDP (negative growth).

List the four components of aggregate demand.

$$AD = C + I + G + (X - M)$$ Consumption, Investment, Government spending, and net exports (exports minus imports).

Why does the aggregate demand (AD) curve slope downwards?

Because of the real-balance (wealth) effect, the interest-rate effect, and the international trade effect — a lower price level raises real spending power, lowers interest rates, and makes exports more competitive.

Distinguish short-run aggregate supply (SRAS) from long-run aggregate supply (LRAS).

SRAS slopes upward and shifts with costs of production; LRAS reflects the economy's productive capacity (full-employment output) and shifts with the quantity/quality of factors of production and productivity.

What is the multiplier effect, and give its formula using the marginal propensity to consume.

An initial change in injections leads to a larger final change in national income. $$k = \frac{1}{1 - MPC} = \frac{1}{MPW}$$ where MPW is the marginal propensity to withdraw.

State the four UK government macroeconomic objectives.

Price stability (low, stable inflation), low unemployment (high employment), sustainable economic growth, and a satisfactory balance of payments (often plus fairer income distribution).

Distinguish monetary policy from fiscal policy.

Monetary policy uses interest rates and the money supply (controlled by the central bank) to influence AD; fiscal policy uses government spending and taxation to influence AD.

What is the difference between expansionary and contractionary fiscal policy?

Expansionary fiscal policy raises government spending and/or cuts taxes to boost AD; contractionary (deflationary) fiscal policy cuts spending and/or raises taxes to reduce AD.

What does the Phillips curve illustrate about policy conflicts?

A short-run inverse relationship (trade-off) between unemployment and inflation: reducing unemployment by boosting AD tends to raise inflation, and vice versa.

Give two examples of conflicts between macroeconomic objectives.

Lower unemployment vs lower inflation (Phillips curve trade-off); faster economic growth vs a satisfactory balance of payments (growth raises imports); growth vs environmental sustainability.

State the principle of comparative advantage.

A country should specialise in and export goods it can produce at a lower opportunity cost than other countries, even if it has no absolute advantage; mutual specialisation and trade then raise total world output.

Distinguish a tariff from a quota.

A tariff is a tax on imports that raises their price; a quota is a physical limit on the quantity of a good that may be imported.

What is the difference between a current account deficit and a surplus?

A current account deficit means the value of imports of goods, services and income outflows exceeds exports and income inflows; a surplus is the reverse (net inflow).

List the main components of the current account of the balance of payments.

Trade in goods (visible balance), trade in services (invisible balance), primary income (investment income and compensation of employees), and secondary income (current transfers).

Distinguish a floating exchange rate from a fixed exchange rate.

A floating rate is determined by demand and supply of the currency in the foreign exchange market; a fixed rate is pegged by the government/central bank at a set value and maintained through intervention.

How does a depreciation of a currency affect exports and imports?

A weaker currency makes exports cheaper to foreigners and imports dearer to domestic buyers, tending (via the SPICED/WPIDEC mnemonic) to raise export volumes and lower import volumes.

Distinguish economic growth from economic development.

Economic growth is a rise in real GDP (a quantitative increase in output); economic development is a broader improvement in living standards, welfare, health, education and freedoms.

What does the Human Development Index (HDI) measure?

A composite index of development combining life expectancy at birth (health), mean and expected years of schooling (education), and GNI per capita at PPP (standard of living).

Define globalisation.

The increasing integration and interdependence of national economies through cross-border flows of goods, services, capital, labour and technology.

How do nominal and real values differ, and why convert nominal to real?

Nominal values are measured at current prices; real values are adjusted for inflation using a price index. Converting removes the distorting effect of price changes so that genuine changes in volume/purchasing power can be compared over time.

In data handling, distinguish an index number from a percentage change.

An index number expresses a value relative to a base period set to 100 (e.g. CPI), showing proportional change from the base; a percentage change measures the proportional change between any two periods directly.

What is the ceteris paribus assumption and why is it used in economic reasoning?

'All other things being equal' — it isolates the effect of one variable by holding all others constant, allowing economists to identify cause-and-effect relationships in models.

What is meant by the margin in economic reasoning?

Rational decision-making compares the marginal (extra) benefit of one more unit with its marginal cost; the optimum is where marginal benefit equals marginal cost ($MB = MC$).

What does correlation not implying causation mean for case-study analysis?

Two variables moving together does not prove one causes the other; the link may be coincidental, reverse-caused, or driven by a third (confounding) variable — a key caution when drawing conclusions from data.

When applying economics to a case study, why must context and time period be considered?

Because the appropriate policy or prediction depends on the economy's circumstances (e.g. spare capacity vs full employment, short run vs long run, elasticities, and the magnitude and reliability of the data).