• The social nature of economics
• The basis of the study of economics: microeconomics and macroeconomics
• Introduction to the nine central concepts: scarcity, choice, efficiency, equity, economic well-being, sustainability, change, interdependence, intervention

• Factors of production—land, labour, capital and entrepreneurship
• Scarcity
  • Unlimited human needs and wants to be met by limited resources
  • Scarcity and sustainability
• Opportunity cost
  • The cost of choice
  • Free goods
• The basic economic questions
  • What/how much to produce, how to produce and for whom to produce?
• Means of answering the economic questions
  • Market versus government intervention
  • Economic systems: free market economy, planned economy and mixed economy

• Assumptions of the model
• Increasing versus constant opportunity cost
• Features of the model: opportunity cost, scarcity, choice, unemployment of resources, efficiency, actual growth and growth in production possibilities

• The circular flow of income model
• Interdependence between economic decision-makers interacting and making choices in an economy: households, firms, the government, the banks and financial sector, and the foreign sector (foreign firms and households)
• Leakages and injections

• The role of positive economics
  • The use of logic
  • The use of hypotheses, models, theories
  • The ceteris paribus assumption
  • Empirical evidence
  • Refutation
• The role of normative economics
  • Value judgments in policy making
  • The meaning of equity and equality

• Origin of economic ideas in a historical context
  • 18th century: Adam Smith and laissez faire
  • 19th century: classical microeconomics (utility); the concept of the margin; Classical macroeconomics (Say’s law); Marxist critique of classical economic thought
  • 20th century: Keynesian revolution; rise of macroeconomic policy; monetarist/new classical counter revolution
  • 21st century: increasing dialogue with other disciplines such as psychology and the growing role of behavioural economics; increasing awareness of the interdependencies that exist between the economy, society and environment and the need to appreciate the compelling reasons for moving toward a circular economy

• Assumptions underlying the law of demand (HL only)
  • The income and substitution effects
  • The law of diminishing marginal utility

• Income
• Tastes and preferences
• Future price expectations
• Price of related goods (in the cases of substitutes and complements)
• Number of consumers

• Assumptions underlying the law of supply (HL only)
  • The law of diminishing marginal returns
  • Increasing marginal costs

• Changes in costs of factors of production (FOPs)
• Prices of related goods (in the cases of joint and competitive supply)
• Indirect taxes and subsidies
• Future price expectations
• Changes in technology
• Number of firms

• Resource allocation
  • Signalling
  • Incentive
• Rationing

• social/community surplus maximized at equilibrium
• marginal benefit (MB) equals marginal cost (MC)

• Assumptions—consumer rationality, utility maximization and perfect information
• Behavioural economics—limitations of the assumptions of rational consumer choice
  • Biases—rule of thumb, anchoring and framing, availability
  • Bounded rationality
  • Bounded self-control
  • Bounded selfishness
  • Imperfect information

• Choice architecture—default, restricted, and mandated choices
• Nudge theory

• Profit maximization
• Alternative business objectives
  • Corporate social responsibility
  • Market share
  • Satisficing
  • Growth

• PED = \frac{\text{percentage change in quantity demanded}}{\text{percentage change in price}}
• Degrees of PED—theoretical range of values for PED
• Changing PED along a straight line downward sloping demand curve (HL only)
• Determinants of PED—number and closeness of substitutes, degree of necessity, proportion of income spent on the good, time
• Relationship between PED and total revenue

• Importance of PED for firms and government decision-making

• Reasons why the PED for primary commodities is generally lower than the PED for manufactured products (HL only)

• \text{YED} = \frac{\text{percentage change in quantity demanded}}{\text{percentage change in income}}
• Income elastic demand (services and luxury goods) and income inelastic demand (necessities)
• Significance of sign
  • Positive YED (normal goods) and negative YED (inferior goods)
  • Less than one (necessities) and greater than one (services and luxury goods)

• Importance of YED (HL only):
  • for firms
  • in explaining changes in the sectoral structure of the economy

• \text{PES} = \frac{\text{percentage change in quantity supplied}}{\text{percentage change in price}}
• Degrees of PES—theoretical range of values for PES
• Determinants of PES—time, mobility of factors of production, unused capacity, ability to store, rate at which costs increase

• Reasons why the PES for primary commodities is generally lower than the PES for manufactured products (HL only)

• Influencing market outcomes in order to:
  • earn government revenue
  • support firms
  • support households on low incomes
  • influence level of production
  • influence the level of consumption
  • correct market failure
  • promote equity.

• Price controls: price ceilings (maximum prices) and price floors (minimum prices)
• Indirect taxes and subsidies
• Direct provision of services
• Command and control regulation and legislation
• Consumer nudges (HL only)

• Price ceiling (maximum price)
• Price floor (minimum price)
• Indirect tax
• Subsidy

Calculation (HL only): the effects on markets and stakeholders of:

• price ceilings (maximum prices) and price floors (minimum prices)
• indirect taxes and subsidies.

• Positive externalities of production and consumption and welfare loss
• Merit goods
• Negative externalities of production and consumption and welfare loss
• Demerit goods
• Common pool resources
  • Characteristics: Tragedy of commons, rivalrous but non-excludable
  • Unsustainable production creating negative externalities

• negative externalities of production
• negative externalities of consumption
• positive externalities of production
• positive externalities of consumption

Calculation (HL only): welfare loss from a diagram

• Indirect (Pigouvian) taxes
• Carbon taxes
• Legislation and regulation
• Education—awareness creation
• Tradable permits
• International agreements
• Collective self-governance
• Subsidies
• Government provision

• Indirect (Pigouvian) taxes
• Carbon taxes showing effects on the market of a particular polluting industry
• Subsidies
• Legislation and regulation
• Education

• challenges involved in measurement of externalities
• degree of effectiveness
• consequences for stakeholders

• Global nature of sustainability issues
• Challenges faced in international cooperation
• Monitoring, enforcement

• Non-rivalrous, non-excludable
• Free rider problem

• Direct provision
• Contracting out to the private sector

• Adverse selection
• Moral hazard

• Government responses: legislation and regulation, provision of information
• Private responses: signalling and screening

• Oligopoly—few large firms, high barriers to entry, interdependence
• Monopolistic competition—many firms, free entry, product differentiation

• Total revenue – Total costs (TR – TC)
• Marginal cost = Marginal revenue (MC = MR)
• Abnormal profit (AR > AC)*
• Normal profit (AR = AC)*
• Losses (AR < AC)*

* AR = Average revenue, AC = Average cost

• Meaning of market power
• Perfect competition—no market power—firm as price taker
  • Profit maximization:
    • in the short run
    • in the long run
  • Meaning of allocative efficiency, necessary conditions
• Imperfect competition—varying degrees of market power—firm as price maker

• abnormal profit
• normal profit
• losses

Diagram: equilibrium in perfectly competitive market with reference to allocative efficiency when P = MC or MB = MC, maximum social/community surplus.
*P = Price, D = Demand

• Profit maximization
• Allocative inefficiency (market failure)
• Welfare loss in a monopoly in comparison with perfect competition due to restricted output and higher price
• Natural monopoly

• abnormal profit
• normal profit
• losses

Diagram: price/quantity comparison of a monopoly firm with a perfect competitive market. Also showing welfare loss under the monopoly.
Diagram: natural monopoly

• Collusive versus non-collusive
• Interdependence, risk of price war, incentive to collude, incentive to cheat
• Allocative inefficiency (market failure)
• Simple game theory payoff matrix
• Price and non-price competition
• Measurement of market concentration – concentration ratios

• Profit maximization:
  • in the short run
  • in the long run
• Less market power due to many substitutes—more elastic demand curve compared with monopoly
• Allocative inefficiency (market failure)
• Less inefficiency, more product variety

• Abnormal profit
• Normal profit
• Losses

Diagram: monopolistic competition (with a more elastic demand curve compared to a monopoly)

• Economies of scale including natural monopolies
• Abnormal profits may finance investments in research and development (R&D), hence innovation

• Risks in terms of output, price, consumer choice

• Legislation and regulation
• Government ownership
• Fines

• Workings of free market economy may result in an unequal distribution of income and wealth

• Comparisons over time
• Comparisons between countries

• OECD Better Life Index
• Happiness Index
• Happy Planet Index

• Aggregate demand curve

• C: consumer confidence, interest rates, wealth, income taxes, level of household indebtedness, expectations of future price level
• I: interest rates, business confidence, technology, business taxes, level of corporate indebtedness
• G: political and economic priorities
• X – M: income of trading partners, exchange rates, trade policies

• costs of factors of production
• indirect taxes

• Monetarist/new classical view of the long-run aggregate supply (LRAS) curve
• Keynesian view of the AS curve
• Inflationary and deflationary/recessionary gaps

• Changes in the quantity and/or quality of factors of production
• Improvements in technology
• Increases in efficiency
• Changes in institutions

• Macroeconomic equilibrium
• Short-run equilibrium
• Equilibrium in the monetarist/new classical model
  • Determination of long-run equilibrium at full employment level of output (potential output)
  • Automatic adjustment to full employment equilibrium
  • Unemployment at full employment equilibrium is equal to the natural rate of unemployment
• Equilibrium in the Keynesian model
  • Persistence of deflationary/recessionary gaps: equilibrium level of output might not equal the full employment level of output

• Short-term growth
  • Actual growth in the PPC model
  • Role of AD in the AD/AS model
• Long-term growth
  • Shifts of the PPC (growth in production possibilities)
  • Role of LRAS in the AD/AS model
• Measurement of economic growth

• impact on living standards
• impact on the environment
• impact on income distribution

• Measurement of unemployment and the unemployment rate
• Difficulties of measuring unemployment
• Causes of unemployment—cyclical (demand deficient), structural, seasonal, frictional
• Natural rate of unemployment—sum of the structural, seasonal, frictional unemployment
• Costs of unemployment—personal costs, social costs, economic costs

• Measuring the inflation rate, using consumer price index (CPI) data
• The limitations of the CPI in measuring inflation
• Causes of inflation—demand-pull and cost-push
• Costs of a high inflation rate—uncertainty, redistributive effects, effects on saving, damage to export competitiveness, impact on economic growth, inefficient resource allocation
• Causes of deflation—changes in AD or SRAS
• Disinflation and deflation
• Costs of deflation—uncertainty, redistributive effects, deferred consumption, association with high levels of cyclical unemployment and bankruptcies, increase in the real value of debt, inefficient resource allocation, policy ineffectiveness

• Measurement of government (national) debt as a percentage of GDP
• Relationship between a budget deficit and government (national) debt
• Costs of a high government (national) debt—debt servicing costs, credit ratings, impacts on future taxation and government spending

• Low unemployment and low inflation
• High economic growth and low inflation
• High economic growth and environmental sustainability
• High economic growth and equity in income distribution

• Trade-off between unemployment and inflation (HL only)
  • Short-run and long-run Phillips curve

• Unequal distribution of income
• Unequal distribution of wealth

• Lorenz curve and Gini coefficient (index)

• Difference between absolute and relative poverty

• Single indicators including:
  • international poverty lines
  • minimum income standards
• Composite indicators including the Multidimensional Poverty Index (MPI)

• inequality of opportunity
• different levels of resource ownership
• different levels of human capital
• discrimination (gender, race and others)
• unequal status and power
• government tax and benefits policies
• globalisation and technological change
• market-based supply side policies

• economic growth
• standards of living
• social stability

• Progressive, regressive and proportional taxes
  • Average and marginal tax rates
• Direct taxes
  • Personal income
  • Corporate income
  • Wealth
• Indirect taxes

• policies to reduce inequalities of opportunities/ investment in human capital
• transfer payments
• targeted spending on goods and services
• universal basic income
• policies to reduce discrimination
• minimum wages

• Control of money supply and interest rates by the central bank

• Low and stable rate of inflation
  • Inflation targeting
• Low unemployment
• Reduce business cycle fluctuations
• Promote a stable economic environment for long-term growth
• External balance

• Open market operations
• Minimum reserve requirements
• Changes in the central bank minimum lending rate (base rate/discount rate/refinancing rate changes)
• Quantitative easing

• Constraints on monetary policy, including:
  • limited scope of reducing interest rates, when close to zero
  • low consumer and business confidence
• Strengths of monetary policy, including:
  • incremental, flexible and easily reversible
  • short time lags
• Strengths and limitations in promoting growth, low unemployment, and low and stable rate of inflation

• Sources of revenue—direct and indirect taxation, sale of goods and services from state-owned enterprises, sale of government assets
• Expenditures—current expenditures, capital expenditures, transfer payments

• Low and stable inflation
• Low unemployment
• Promote a stable economic environment for long-term growth
• Reduce business cycle fluctuations
• Equitable distribution of income
• External balance

• \frac{1}{1 - MPC} or
• \frac{1}{MPS + MPT + MPM}

MPC— marginal propensity to consume
MPS—marginal propensity to save
MPT—marginal propensity to tax
MPM—marginal propensity to import

Effectiveness of fiscal policy

• Constraints on fiscal policy, including:
  • political pressure
  • time lags
  • sustainable debt

• • crowding out (HL only)

• Strengths of fiscal policy, including:
  • targeting of specific economic sectors
  • government spending effective in deep recession
• Automatic stabilizers: progressive taxes, unemployment benefits (HL only)
• Strengths and limitations in promoting growth, low unemployment, and low and stable rate of inflation

Goals of supply-side policies

• Long-term growth by increasing the economy’s productive capacity
• Improving competition and efficiency
• Reducing labour costs and unemployment through labour market flexibility
• Reducing inflation to improve international competitiveness
• Increasing firms’ incentives to invest in innovation by reducing costs

Market-based policies, including:

• policies to encourage competition, such as:
  • deregulation
  • privatization
  • trade liberalization
  • anti-monopoly regulation
• labour market policies, such as:
  • reducing the power of labour unions
  • reducing unemployment benefits
  • abolishing minimum wages
• incentive-related policies, such as:
  • personal income tax cuts
  • cuts in business tax and capital gains tax

Diagram: AD/AS model and LRAS curve to show the effect of supply-side policies

Diagram: showing minimum wage

• education, training
• improving quality, quantity and access to health care
• research and development
• provision of infrastructure
• industrial policies

• Constraints on supply-side policies
  • Market based—equity issues, time lags, vested interests, environmental impact
  • Interventionist—costs, time lags
• Strengths of supply-side policies
  • Market based—improved resource allocation, no burden on government budget
  • Interventionist—direct support of sectors important for growth
• Strengths and limitations in promoting growth, low unemployment, and low and stable rate of inflation

• increased competition
• lower prices
• greater choice
• acquisition of resources
• more foreign exchange earnings
• access to larger markets
• economies of scale
• more efficient resource allocation
• more efficient production

• Gains from trade
• Sources of comparative advantage
• Opportunity costs

• Effects on markets and stakeholders

• Effects on markets and stakeholders

• Effects on markets and stakeholders

• Standards and regulations

• protection of infant (sunrise) industries
• national security
• health and safety
• environmental standards
• anti-dumping
• unfair competition
• balance of payments correction
• government revenue
• protection of jobs
• Economically least developed country (ELDC) diversification

• misallocation of resources
• retaliation
• increased costs
• higher prices
• less choice
• domestic firms lack incentive to become more efficient
• reduced export competitiveness

• Bilateral
• Regional
• Multilateral (the World Trade Organization)

• Free trade areas/agreements
• Customs unions
• Common markets

• trade creation (HL only)
• greater access to markets offer potential for economies of scale
• with freedom of labour, there are greater employment opportunities
• membership in a trading bloc may allow for stronger bargaining power in multilateral negotiations
• greater political stability and cooperation

Disadvantages, including:

• trade diversion (HL only)
• loss of sovereignty
• challenge to multilateral trading negotiations

• Objectives and functions
• Factors affecting the influence of the WTO, including:
  • difficulties of reaching agreement on services/primary products
  • unequal bargaining power of members

• Determination
  • Depreciation and appreciation of a currency

• foreign demand for exports
• domestic demand for imports
• inward/outward foreign direct investment
• inward/outward portfolio investment
• remittances
• speculation
• relative inflation rates
• relative interest rates
• relative growth rates
• central bank intervention

• the inflation rate
• economic growth
• unemployment
• the current account balance
• living standards

• Devaluation and revaluation of a currency
• How fixed exchange rates are maintained

• Overvalued currencies
• Undervalued currencies

• Credit and debit items
• Surplus or deficit on an account

• Current account
  • Balance of trade in goods
  • Balance of trade in services
  • Income
  • Current transfers
• Capital Account
  • Capital transfers
  • Transaction in non-produced, non-financial assets
• Financial account
  • Foreign direct investment (FDI)
  • Portfolio investment
  • Reserve assets
  • Official borrowing

• Zero balance in the balance of payments
• Credits matched by debits
• Deficits matched by surpluses

• exchange rates
• interest rates
• foreign ownership of domestic assets
• debt
• credit ratings
• demand management
• economic growth

• Expenditure switching
• Expenditure reducing
• Supply-side policies

• domestic consumption and investment
• exchange rates
• inflation
• employment
• export competitiveness

• GDP/GNI per person (per capita) at PPP
• Health and education indicators
• Economic/social inequality indicators
• Energy indicators
• Environmental indicators

• Human Development Index (HDI)
• Gender Inequality Index (GII)
• Inequality adjusted Human Development Index (IHDI)
• Happy Planet Index

• Rising economic inequality
• Lack of access to infrastructure and appropriate technology
• Low levels of human capital—lack of access to healthcare and education
• Dependence on primary sector production
• Lack of access to international markets
• Informal economy
• Capital flight
• Indebtedness
• Geography including landlocked countries
• Tropical climates and endemic diseases

• Weak institutional framework
  • Legal system
  • Ineffective taxation structures
  • Banking system
  • Property rights
• Gender inequality
• Lack of good governance/corruption
• Unequal political power and status

• Trade strategies
  • Import substitution
  • Export promotion
  • Economic integration
• Diversification
• Social enterprise
• Market-based policies
  • Trade liberalization
  • Privatization
  • Deregulation
• Interventionist policies
  • Redistribution policies including tax policies, transfer payments and minimum wages
• Provision of merit goods
  • Education programs
  • Health programs
  • Infrastructure including energy, transport, telecommunications, clean water and sanitation
• Inward foreign direct investment
• Foreign aid
  • Humanitarian aid/development aid
  • Debt relief
  • Official Development Assistance (ODA)
  • Non-governmental organizations (NGOs)
• Multilateral development assistance
  • The World Bank
  • International Monetary Fund
• Institutional change
  • Improved access to banking, including microfinance and mobile banking
  • Increasing women’s empowerment
  • Reducing corruption
  • Property rights
  • Land rights