GCE Advanced Level (A-Levels) Economics Syllabus

Define a public good and its two key characteristics.

A public good is non-rival (one person's use does not reduce availability to others) and non-excludable (people cannot be prevented from consuming it). This causes the free-rider problem, e.g. national defence.

What is the free-rider problem?

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

List the main forms of government intervention to correct market failure.

Indirect taxes, subsidies, price controls (max/min prices), tradable pollution permits, regulation and legislation, provision of public goods, and information provision.

What is government failure?

Government failure occurs when state intervention leads to a net welfare loss / a worse allocation of resources than the free market, e.g. due to unintended consequences, distorted incentives, information gaps, or administrative costs.

Define information asymmetry and give one consequence.

Information asymmetry exists when one party in a transaction has more or better information than the other. Consequences include adverse selection (e.g. in insurance) and moral hazard, leading to misallocation.

What are the four key macroeconomic objectives of government?

Sustainable economic growth, low and stable inflation (UK target 2% CPI), low unemployment (full employment), and a satisfactory balance of payments on the current account. (Often also: income equality and balanced budget.)

How is real GDP distinguished from nominal GDP?

Nominal GDP is measured at current prices; real GDP is adjusted for inflation (measured at constant/base-year prices), so it reflects actual changes in the volume of output.

How is the rate of inflation measured in the UK, and what is the target?

By the Consumer Prices Index (CPI), which tracks the price of a representative basket of goods/services using weights. The Bank of England target is 2% CPI (±1 percentage point).

Distinguish demand-pull from cost-push inflation.

Demand-pull inflation results from excess aggregate demand pulling prices up (AD shifts right). Cost-push inflation results from rising costs of production (e.g. wages, raw materials) shifting SRAS left.

State the formula for the unemployment rate.

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

Distinguish cyclical, structural, and frictional unemployment.

Cyclical (demand-deficient): caused by a fall in AD in a downturn. Structural: caused by a mismatch of skills/location as industries decline. Frictional: short-term unemployment while moving between jobs.

What are the components of aggregate demand, and give the formula?

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

Why does the AD curve slope downward?

Due to the real-balance (wealth) effect, the interest-rate effect, and the international trade effect: a lower price level raises real wealth, lowers interest rates, and makes exports more competitive, raising real output demanded.

Distinguish the short-run aggregate supply (SRAS) curve from the Keynesian long-run AS curve.

SRAS slopes upward because some costs (esp. wages) are sticky in the short run. The Keynesian LRAS is L-shaped: horizontal with spare capacity, becoming vertical at full employment (potential output).

What is the multiplier, and give its formula using MPC?

The multiplier measures how 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.

What is the difference between fiscal policy and monetary policy?

Fiscal policy uses government spending and taxation to influence AD. Monetary policy uses interest rates, the money supply, and quantitative easing (set by the central bank) to influence AD.

How would the Bank of England use monetary policy to reduce demand-pull inflation?

Contractionary monetary policy: raise the base interest rate (Bank Rate). This raises borrowing costs, encourages saving, reduces C and I, lowers AD, and eases inflationary pressure.

Distinguish a budget deficit from national debt.

A budget (fiscal) deficit is when government spending exceeds tax revenue in a single year (a flow). National debt is the cumulative total of all past deficits minus surpluses (a stock).

What are supply-side policies and give two examples?

Policies aimed at increasing the productive capacity (LRAS) of the economy. Examples: education/training to raise skills, tax cuts to boost incentives, deregulation, infrastructure investment, and labour-market reforms.

State the law of comparative advantage.

A country should specialise in and export goods in which it has a lower opportunity cost of production, and import the rest. Mutual gains from trade arise even if one country has an absolute advantage in everything.

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. Both are protectionist measures that reduce import competition.

What is the difference between the current account and the financial account of the balance of payments?

The current account records trade in goods and services, primary income (investment income) and secondary income (transfers). The financial account records flows of investment and financial assets (e.g. FDI, portfolio flows).

Define globalisation and name two of its drivers.

Globalisation is the increasing integration and interdependence of national economies through trade, capital flows, and movement of labour. Drivers include falling transport/communication costs, trade liberalisation, containerisation, and growth of multinational corporations (MNCs).

Distinguish fixed cost from variable cost, and give the formula for total cost.

Fixed costs (FC) do not vary with output in the short run; variable costs (VC) rise with output. $$TC = FC + VC$$ and average total cost $$ATC = \frac{TC}{Q}$$

State the law of diminishing marginal returns.

In the short run, as successive units of a variable factor (e.g. labour) are added to a fixed factor, the marginal product of the variable factor eventually falls. This makes marginal cost eventually rise.

Give the formulas for total revenue, average revenue, and marginal revenue.

$$TR = P \times Q, \quad AR = \frac{TR}{Q} = P, \quad MR = \frac{\Delta TR}{\Delta Q}$$

State the profit-maximising rule for a firm.

A firm maximises profit where marginal cost equals marginal revenue: $$MC = MR$$ (with MC cutting MR from below). Profit = $TR - TC$, or $(AR - AC) \times Q$.

Distinguish the four main market structures by number of firms and key features.

Perfect competition: many firms, identical products, free entry, price takers. Monopolistic competition: many firms, differentiated products. Oligopoly: few dominant interdependent firms. Monopoly: single dominant firm (often defined as >25% market share), high barriers to entry.

What distinguishes the long-run equilibrium of perfect competition from monopoly in terms of profit and efficiency?

Perfect competition: only normal profit ($AR=AC$), produces at allocative efficiency ($P=MC$) and productive efficiency ($P=$ min AC). Monopoly: can earn supernormal profit long run, is allocatively inefficient ($P>MC$) and may be productively inefficient.

How is the wage in a competitive labour market determined, and what is derived demand?

The wage is set where labour demand equals labour supply. Labour demand is a derived demand: it depends on demand for the goods/services that labour produces. A firm hires where $MRP = $ wage, with $MRP = MPP \times MR$.

What is a monopsony in a labour market, and what is its effect on wages and employment?

A monopsony is a single dominant buyer of labour. It uses its market power to pay a lower wage and employ fewer workers than a competitive labour market, because the marginal cost of labour exceeds the wage.

What are the main functions of money and the financial sector?

Money functions: medium of exchange, store of value, unit of account, standard of deferred payment. The financial sector channels funds from savers to borrowers, provides liquidity, facilitates payments, manages risk, and enables investment.

Distinguish equality from equity in the distribution of income, and define the Gini coefficient.

Equality means incomes are the same; equity means fairness (which may not be equality). The Gini coefficient measures income inequality from the Lorenz curve, ranging from 0 (perfect equality) to 1 (perfect inequality).

Distinguish absolute poverty from relative poverty.

Absolute poverty is when income is insufficient to afford basic necessities (a fixed threshold). Relative poverty is income below a set proportion of the median (e.g. below 60% of median income) — measured relative to society's standard.

What is the difference between economic growth and economic development?

Economic growth is an increase in real GDP (output). Economic development is broader: improvements in living standards, including health, education, and freedom — e.g. measured by the Human Development Index (HDI).

What three dimensions make up the Human Development Index (HDI)?

Health (life expectancy at birth), Education (mean and expected years of schooling), and Standard of living (GNI per capita, PPP). The HDI is an index between 0 and 1.