Edexcel Advanced GCE in Economics A (9EC0) Specification

Based on Edexcel Advanced GCE in Economics A (9EC0) Official Specification

Theme 1: Introduction to markets and market failure

1.1 Nature of economics

1.1.1 Economics as a social science

  • Thinking like an economist: the process of developing models in economics, including the need to make assumptions
  • The use of the ceteris paribus assumption in building models
  • The inability in economics to make scientific experiments

1.1.2 Positive and normative economic statements

  • Distinction between positive and normative economic statements
  • The role of value judgements in influencing economic decision making and policy

1.1.3 The economic problem

  • The problem of scarcity – where there are unlimited wants and finite resources
  • The distinction between renewable and non-renewable resources
  • The importance of opportunity costs to economic agents (consumers, producers and government)

1.1.4 Production possibility frontiers

  • The use of production possibility frontiers to depict:
    • the maximum productive potential of an economy
    • opportunity cost (through marginal analysis)
    • economic growth or decline
    • efficient or inefficient allocation of resources
    • possible and unobtainable production
  • The distinction between movements along and shifts in production possibility curves, considering the possible causes for such changes
  • The distinction between capital and consumer goods

1.1.5 Specialisation and the division of labour

  • Specialisation and the division of labour: reference to Adam Smith
  • The advantages and disadvantages of specialisation and the division of labour in organising production
  • The advantages and disadvantages of specialising in the production of goods and services to trade
  • The functions of money (as a medium of exchange, a measure of value, a store of value, a method of deferred payment)

1.1.6 Free market economies, mixed economy and command economy

  • The distinction between free market, mixed and command economies: reference to Adam Smith, Friedrich Hayek and Karl Marx
  • The advantages and disadvantages of a free market economy and a command economy
  • The role of the state in a mixed economy

1.2 How markets work

1.2.1 Rational decision making

  • The underlying assumptions of rational economic decision making:
    • consumers aim to maximise utility
    • firms aim to maximise profits

1.2.2 Demand

  • The distinction between movements along a demand curve and shifts of a demand curve
  • The factors that may cause a shift in the demand curve (the conditions of demand)
  • The concept of diminishing marginal utility and how this influences the shape of the demand curve

1.2.3 Price, income and cross elasticities of demand

  • Understanding of price, income and cross elasticities of demand
  • Use formulae to calculate price, income and cross elasticities of demand
  • Interpret numerical values of
    • price elasticity of demand: unitary elastic, perfectly and relatively elastic, and perfectly and relatively inelastic
    • income elasticity of demand: inferior, normal and luxury goods; relatively elastic and relatively inelastic
    • cross elasticity of demand: substitutes, complementary and unrelated goods
  • The factors influencing elasticities of demand
  • The significance of elasticities of demand to firms and government in terms of:
    • the imposition of indirect taxes and subsidies
    • changes in real income
    • changes in the prices of substitute and complementary goods
  • The relationship between price elasticity of demand and total revenue (including calculation)

1.2.4 Supply

  • The distinction between movements along a supply curve and shifts of a supply curve
  • The factors that may cause a shift in the supply curve (the conditions of supply)

1.2.5 Elasticity of supply

  • Understanding of price elasticity of supply
  • Use formula to calculate price elasticity of supply
  • Interpret numerical values of price elasticity of supply: perfectly and relatively elastic, and perfectly and relatively inelastic
  • Factors that influence price elasticity of supply
  • The distinction between short run and long run in economics and its significance for elasticity of supply

1.2.6 Price determination

  • Equilibrium price and quantity and how they are determined
  • The use of supply and demand diagrams to depict excess supply and excess demand
  • The operation of market forces to eliminate excess demand and excess supply
  • The use of supply and demand diagrams to show how shifts in demand and supply curves cause the equilibrium price and quantity to change in real-world situations

1.2.7 Price mechanism

  • Functions of the price mechanism to allocate resources:
    • rationing
    • incentive
    • signalling
  • The price mechanism in the context of different types of markets, including local, national and global markets

1.2.8 Consumer and producer surplus

  • The distinction between consumer and producer surplus
  • The use of supply and demand diagrams to illustrate consumer and producer surplus
  • How changes in supply and demand might affect consumer and producer surplus

1.2.9 Indirect taxes and subsidies

  • Supply and demand analysis, elasticities, and:
    • the impact of indirect taxes on consumers, producers and government
    • the incidence of indirect taxes on consumers and producers
    • the impact of subsidies on consumers, producers and government
    • the area that represents the producer subsidy and consumer subsidy

1.2.10 Alternative views of consumer behaviour

  • The reasons why consumers may not behave rationally:
    • consideration of the influence of other people’s behaviour
    • the importance of habitual behaviour
    • consumer weakness at computation

1.3 Market failure

1.3.1 Types of market failure

  • Understanding of market failure
  • Types of market failure
    • externalities
    • under-provision of public goods
    • information gaps

1.3.2 Externalities

  • Distinction between private costs, external costs and social costs
  • Distinction between private benefits, external benefits and social benefits
  • Use of a diagram to illustrate:
    • the external costs of production using marginal analysis
    • the distinction between market equilibrium and social optimum position
    • identification of welfare loss area
  • Use of a diagram to illustrate:
    • the external benefits of consumption using marginal analysis
    • the distinction between market equilibrium and social optimum position
    • identification of welfare gain area
  • The impact on economic agents of externalities and government intervention in various markets

1.3.3 Public goods

  • Distinction between public and private goods using the concepts of non-rivalry and non-excludability
  • Why public goods may not be provided by the private sector: the free rider problem

1.3.4 Information gaps

  • The distinction between symmetric and asymmetric information
  • How imperfect market information may lead to a misallocation of resources

1.4 Government intervention

1.4.1 Government intervention in markets

  • Purpose of intervention with reference to market failure and using diagrams in various contexts:
    • indirect taxation (ad valorem and specific)
    • subsidies
    • maximum and minimum prices
  • Other methods of government intervention:
    • trade pollution permits
    • state provision of public goods
    • provision of information
    • regulation

1.4.2 Government failure

  • Understanding of government failure as intervention that results in a net welfare loss
  • Causes of government failure:
    • distortion of price signals
    • unintended consequences
    • excessive administrative costs
    • information gaps
  • Government failure in various markets

Theme 2: The UK economy – performance and policies

2.1 Measures of economic performance

2.1.1 Economic growth

  • Rates of change of real Gross Domestic Product (GDP) as a measure of economic growth
  • Distinction between:
    • real and nominal
    • total and per capita
    • value and volume
  • Other national income measures:
    • Gross National Income (GNI)
  • Comparison of rates of growth between countries and over time
  • Understanding of Purchasing Power Parities (PPPs) and the use of PPP-adjusted figures in international comparisons
  • The limitations of using GDP to compare living standards between countries and over time
  • National happiness:
    • UK national wellbeing
    • The relationship between real incomes and subjective happiness

2.1.2 Inflation

  • Understanding of:
    • inflation
    • deflation
    • disinflation
  • The process of calculating the rate of inflation in the UK using the Consumer Prices Index (CPI)
  • The limitations of CPI in measuring the rate of inflation
  • The Retail Prices Index (RPI) as an alternative measure of the rate of inflation
  • Causes of inflation:
    • demand pull
    • cost push
    • growth of the money supply
  • The effects of inflation on consumers, firms, the government and workers

2.1.3 Employment and unemployment

  • Measures of unemployment:
    • the claimant count
    • the International Labour Organisation (ILO) and the UK Labour Force Survey
  • The distinction between unemployment and under-employment
  • The significance of changes in the rates of:
    • employment
    • unemployment
    • inactivity
  • The causes of unemployment:
    • structural unemployment
    • frictional unemployment
    • seasonal unemployment
    • demand deficiency and cyclical unemployment
    • real wage inflexibility
  • The significance of migration and skills for employment and unemployment
  • The effects of unemployment on consumers, firms, workers, the government and society

2.1.4 Balance of payments

  • Components of the balance of payments, with particular reference to the current account, and the balance of trade in goods and services
  • Current account deficits and surpluses
  • The relationship between current account imbalances and other macroeconomic objectives
  • The interconnectedness of economies through international trade

2.2 Aggregate demand (AD)

2.2.1 The characteristics of AD

  • Components of AD: C+I+G+(X–M)
  • The relative importance of the components of AD
  • The AD curve
  • The distinction between a movement along, and a shift of, the AD curve

2.2.2 Consumption (C)

  • Disposable income and its influence on consumer spending
  • An understanding of the relationship between savings and consumption
  • Other influences on consumer spending:
    • interest rates
    • consumer confidence
    • wealth effects

2.2.3 Investment (I)

  • Distinction between gross and net investment
  • Influences on investment:
    • the rate of economic growth
    • business expectations and confidence
    • Keynes and ‘animal spirits’
    • demand for exports
    • interest rates
    • access to credit
    • the influence of government and regulations

2.2.4 Government expenditure (G)

  • The main influences on government expenditure:
    • the trade cycle
    • fiscal policy

2.2.5 Net trade (X–M)

  • The main influences on the (net) trade balance:
    • real income
    • exchange rates
    • state of the world economy
    • degree of protectionism
    • non-price factors

2.3 Aggregate supply (AS)

2.3.1 The characteristics of AS

  • The AS curve
  • The distinction between movement along, and a shift of, the AS curve
  • The relationship between short-run AS and long-run AS

2.3.2 Short-run AS

  • Factors influencing short-run AS:
    • changes in costs of raw materials and energy
    • changes in exchange rates
    • changes in tax rates

2.3.3 Long-run AS

  • Different shapes of the long-run AS curve:
    • Keynesian
    • classical
  • Factors influencing long-run AS:
    • technological advances
    • changes in relative productivity
    • changes in education and skills
    • changes in government regulations
    • demographic changes and migration
    • competition policy

2.4 National income

2.4.1 National income

  • The circular flow of income
  • The distinction between income and wealth

2.4.2 Injections and withdrawals

  • The impact of injections into, and withdrawals from, the circular flow of income

2.4.3 Equilibrium levels of real national output

  • The concept of equilibrium real national output
  • The use of AD/AS diagrams to show how shifts in AD or AS cause changes in the equilibrium price level and real national output

2.4.4 The multiplier

  • The multiplier ratio
  • The multiplier process
  • Effects of the multiplier on the economy
  • Understanding of marginal propensities and their effects on the multiplier:
    • the marginal propensity to consume (MPC)
    • the marginal propensity to save (MPS)
    • the marginal propensity to tax (MPT)
    • the marginal propensity to import (MPM)
  • Calculations of the multiplier using the formulae 1/(1-MPC) and 1/MPW, where MPW = MPS + MPT + MPM
  • The significance of the multiplier for shifts in AD

2.5 Economic growth

2.5.1 Causes of growth

  • Factors which could cause economic growth
  • The distinction between actual and potential growth
  • The importance of international trade for (export-led) economic growth

2.5.2 Output gaps

  • Distinction between actual growth rates and long-term trends in growth rates
  • Understanding of positive and negative output gaps and the difficulties of measurement
  • Use of an AD/AS diagram to illustrate an output gap (level of spare capacity) in an economy

2.5.3 Trade (business) cycle

  • Understanding of the trade (business) cycle
  • Characteristics of a boom
  • Characteristics of a recession

2.5.4 The impact of economic growth

  • The benefits and costs of economic growth and the impact on:
    • consumers
    • firms
    • the government
    • current and future living standards

2.6 Macroeconomic objectives and policies

2.6.1 Possible macroeconomic objectives

  • Economic growth
  • Low unemployment
  • Low and stable rate of inflation
  • Balance of payments equilibrium on current account
  • Balanced government budget
  • Protection of the environment
  • Greater income equality

2.6.2 Demand-side policies

  • Distinction between monetary and fiscal policy
  • Monetary policy instruments:
    • interest rates
    • asset purchases to increase the money supply (quantitative easing)
  • Fiscal policy instruments:
    • government spending and taxation
  • Distinction between government budget (fiscal) deficit and surplus
  • Distinction between, and examples of, direct and indirect taxation
  • Use of AD/AS diagrams to illustrate demand-side policies
  • The role of the Bank of England:
    • the role and operation of the Bank of England’s Monetary Policy Committee
  • Awareness of demand-side policies in the Great Depression and the Global Financial Crisis of 2008
    • different interpretations
    • policy responses in the US and UK
  • Strengths and weaknesses of demand-side policies

2.6.3 Supply-side policies

  • Distinction between market-based and interventionist methods
  • Market-based and interventionist policies:
    • to increase incentives
    • to promote competition
    • to reform the labour market
    • to improve skills and quality of the labour force
    • to improve infrastructure
  • Use of AD/AS diagrams to illustrate supply-side policies
  • Strengths and weaknesses of supply-side policies

2.6.4 Conflicts and trade-offs between objectives and policies

  • Potential conflicts and trade-offs between the macroeconomic objectives
  • Short-run Phillips curve
  • Potential policy conflicts and trade-offs

Theme 3: Business behaviour and the labour market

3.1 Business growth

3.1.1 Sizes and types of firms

  • Reasons why some firms tend to remain small and why others grow
  • Significance of the divorce of ownership from control: the principal-agent problem
  • Distinction between public and private sector organisations
  • Distinction between profit and not-for-profit organisations

3.1.2 Business growth

  • How businesses grow:
    • organic growth
    • forward and backward vertical integration
    • horizontal integration
    • conglomerate integration
  • Advantages and disadvantages of:
    • organic growth
    • vertical integration
    • horizontal integration
    • conglomerate integration
  • Constraints on business growth:
    • size of the market
    • access to finance
    • owner objectives
    • regulation

3.1.3 Demergers

  • Reasons for demergers
  • Impact of demergers on businesses, workers and consumers

3.2 Business objectives

3.2.1 Business objectives

  • Different business objectives and reasons for them:
    • profit maximisation
    • revenue maximisation
    • sales maximisation
    • satisficing
  • Diagrams and formulae to illustrate the different business objectives:
    • profit maximisation
    • revenue maximisation
    • sales maximisation

3.3 Revenues, costs and profits

3.3.1 Revenue

  • Formulae to calculate and understand the relationship between:
    • total revenue
    • average revenue
    • marginal revenue
  • Price elasticity of demand and its relationship to revenue concepts (calculation required)

3.3.2 Costs

  • Formulae to calculate and understand the relationship between:
    • total cost
    • total fixed cost
    • total variable cost
    • average (total) cost
    • average fixed cost
    • average variable cost
    • marginal cost
  • Derivation of short-run cost curves from the assumption of diminishing marginal productivity
  • Relationship between short-run and long-run average cost curves

3.3.3 Economies and diseconomies of scale

  • Types of economies and diseconomies of scale
  • Minimum efficient scale
  • Distinction between internal and external economies of scale

3.3.4 Normal profits, supernormal profits and losses

  • Condition for profit maximisation
  • Normal profit, supernormal profit and losses
  • Short-run and long-run shut-down points: diagrammatic analysis

3.4 Market structures

3.4.1 Efficiency

  • Allocative efficiency
  • Productive efficiency
  • Dynamic efficiency
  • X-inefficiency
  • Efficiency/inefficiency in different market structures

3.4.2 Perfect competition

  • Characteristics of perfect competition
  • Profit maximising equilibrium in the short run and long run
  • Diagrammatic analysis

3.4.3 Monopolistic competition

  • Characteristics of monopolistically competitive markets
  • Profit maximising equilibrium in the short run and long run
  • Diagrammatic analysis

3.4.4 Oligopoly

  • Characteristics of oligopoly
    • high barriers to entry and exit
    • high concentration ratio
    • interdependence of firms
    • product differentiation
  • Calculation of n-firm concentration ratios and their significance
  • Reasons for collusive and non-collusive behaviour
  • Overt and tacit collusion; cartels and price leadership
  • Simple game theory: the prisoner’s dilemma in a simple two firm/two outcome model
  • Types of price competition:
    • price wars
    • predatory pricing
    • limit pricing
  • Types of non-price competition

3.4.5 Monopoly

  • Characteristics of monopoly
  • Profit maximising equilibrium
  • Diagrammatic analysis
  • Third degree price discrimination:
    • necessary conditions
    • diagrammatic analysis
    • costs and benefits to consumers and producers
  • Costs and benefits of monopoly to firms, consumers, employees and suppliers
  • Natural monopoly

3.4.6 Monopsony

  • Characteristics and conditions for a monopsony to operate
  • Costs and benefits of a monopsony to firms, consumers, employees and suppliers

3.4.7 Contestability

  • Characteristics of contestable markets
  • Implications of contestable markets for the behaviour of firms
  • Types of barrier to entry and exit
  • Sunk costs and the degree of contestability

3.5 Labour market

3.5.1 Demand for labour

  • Factors that influence the demand for labour
  • Demand for labour as a derived demand

3.5.2 Supply of labour

  • Factors that influence the supply of labour to a particular occupation
  • Market failure in labour markets: the geographical and occupational mobility and immobility of labour

3.5.3 Wage determination in competitive and non-competitive markets

  • Diagrammatic analysis of labour market equilibrium
  • Understanding of current labour market issues
  • Government intervention in the labour market:
    • maximum and minimum wages
    • public sector wage setting
    • policies to tackle labour market immobility
  • The significance of the elasticity of demand for labour and the elasticity of supply of labour

3.6 Government intervention

3.6.1 Government intervention

  • Government intervention to control mergers
  • Government intervention to control monopolies:
    • price regulation
    • profit regulation
    • quality standards
    • performance targets
  • Government intervention to promote competition and contestability:
    • enhancing competition between firms through promotion of small business
    • deregulation
    • competitive tendering for government contracts
    • privatisation
  • Government intervention to protect suppliers and employees:
    • restrictions on monopsony power of firms
    • nationalisation

3.6.2 The impact of government intervention

  • The impact of government intervention on:
    • prices
    • profit
    • efficiency
    • quality
    • choice
  • Limits to government intervention:
    • regulatory capture
    • asymmetric information

Theme 4: A global perspective

4.1 International economics

4.1.1 Globalisation

  • Characteristics of globalisation
  • Factors contributing to globalisation in the last 50 years
  • Impacts of globalisation and global companies on individual countries, governments, producers and consumers, workers and the environment

4.1.2 Specialisation and trade

  • Absolute and comparative advantage (numerical and diagrammatic): assumptions and limitations relating to the theory of comparative advantage
  • Advantages and disadvantages of specialisation and trade in an international context

4.1.3 Pattern of trade

  • Factors influencing the pattern of trade between countries and changes in trade flows between countries:
    • comparative advantage
    • impact of emerging economies
    • growth of trading blocs and bilateral trading agreements
    • changes in relative exchange rates

4.1.4 Terms of trade

  • Calculation of terms of trade
  • Factors influencing a country’s terms of trade
  • Impact of changes in a country’s terms of trade

4.1.5 Trading blocs and the World Trade Organisation (WTO)

  • Types of trading blocs (regional trade agreements and bilateral trade agreements):
    • free trade areas
    • customs unions
    • common markets
    • monetary unions: conditions necessary for their success with particular reference to the Eurozone
  • Costs and benefits of regional trade agreements
  • Role of the WTO in trade liberalisation
  • Possible conflicts between regional trade agreements and the WTO

4.1.6 Restrictions on free trade

  • Reasons for restrictions on free trade
  • Types of restrictions on trade:
    • tariffs
    • quotas
    • subsidies to domestic producers
    • non-tariff barriers
  • Impact of protectionist policies on consumers, producers, governments, living standards, equality

4.1.7 Balance of payments

  • Components of the balance of payments:
    • the current account
    • the capital and financial accounts
  • Causes of deficits and surpluses on the current account
  • Measures to reduce a country’s imbalance on the current account
  • Significance of global trade imbalances

4.1.8 Exchange rates

  • Exchange rate systems:
    • floating
    • fixed
    • managed
  • Distinction between revaluation and appreciation of a currency
  • Distinction between devaluation and depreciation of a currency
  • Factors influencing floating exchange rates
  • Government intervention in currency markets through foreign currency transactions and the use of interest rates
  • Competitive devaluation/depreciation and its consequences
  • Impact of changes in exchange rates:
    • the current account of the balance of payments (reference to Marshall-Lerner condition and J curve effect)
    • economic growth and employment/unemployment
    • rate of inflation
    • foreign direct investment (FDI) flows

4.1.9 International competitiveness

  • Measures of international competitiveness:
    • relative unit labour costs
    • relative export prices
  • Factors influencing international competitiveness
  • Significance of international competitiveness:
    • benefits of being internationally competitive
    • problems of being internationally uncompetitive

4.2 Poverty and inequality

4.2.1 Absolute and relative poverty

  • Distinction between absolute poverty and relative poverty
  • Measures of absolute poverty and relative poverty
  • Causes of changes in absolute poverty and relative poverty

4.2.2 Inequality

  • Distinction between wealth and income inequality
  • Measurements of income inequality:
    • the Lorenz curve (diagrammatic analysis)
    • the Gini coefficient
  • Causes of income and wealth inequality within countries and between countries
  • Impact of economic change and development on inequality
  • Significance of capitalism for inequality

4.3 Emerging and developing economies

4.3.1 Measures of development

  • The three dimensions of the Human Development Index (HDI) (education, health and living standards) and how they are measured and combined
  • The advantages and limitations of using the HDI to compare levels of development between countries and over time
  • Other indicators of development

4.3.2 Factors influencing growth and development

  • Impact of economic factors in different countries:
    • primary product dependency
    • volatility of commodity prices
    • savings gap: Harrod-Domar model
    • foreign currency gap
    • capital flight
    • demographic factors
    • debt
    • access to credit and banking
    • infrastructure
    • education/skills
    • absence of property rights
  • Impact of non-economic factors in different countries

4.3.3 Strategies influencing growth and development

  • Market-orientated strategies:
    • trade liberalisation
    • promotion of FDI
    • removal of government subsidies
    • floating exchange rate systems
    • microfinance schemes
    • privatisation
  • Interventionist strategies:
    • development of human capital
    • protectionism
    • managed exchange rates
    • infrastructure development
    • promoting joint ventures with global companies
    • buffer stock schemes
  • Other strategies:
    • industrialisation: the Lewis model
    • development of tourism
    • development of primary industries
    • Fairtrade schemes
    • aid
    • debt relief
  • Awareness of the role of international institutions and non-government organisations (NGOs):
    • World Bank
    • International Monetary Fund (IMF)
    • NGOs

4.4 The financial sector

4.4.1 Role of financial markets

  • To facilitate saving
  • To lend to businesses and individuals
  • To facilitate the exchange of goods and services
  • To provide forward markets in currencies and commodities
  • To provide a market for equities

4.4.2 Market failure in the financial sector

  • Consideration of:
    • asymmetric information
    • externalities
    • moral hazard
    • speculation and market bubbles
    • market rigging

4.4.3 Role of central banks

  • Key functions of central banks:
    • implementation of monetary policy
    • banker to the government
    • banker to the banks – lender of last resort
    • role in regulation of the banking industry

4.5 Role of the state in the macroeconomy

4.5.1 Public expenditure

  • Distinction between capital expenditure, current expenditure and transfer payments
  • Reasons for the changing size and composition of public expenditure in a global context
  • The significance of differing levels of public expenditure as a proportion of GDP on:
    • productivity and growth
    • living standards
    • crowding out
    • level of taxation
    • equality

4.5.2 Taxation

  • Distinction between progressive, proportional and regressive taxes
  • The economic effects of changes in direct and indirect tax rates on other variables:
    • incentives to work
    • tax revenues: the Laffer curve
    • income distribution
    • real output and employment
    • the price level
    • the trade balance
    • FDI flows

4.5.3 Public sector finances

  • Distinction between automatic stabilisers and discretionary fiscal policy
  • Distinction between a fiscal deficit and the national debt
  • Distinction between structural and cyclical deficits
  • Factors influencing the size of fiscal deficits
  • Factors influencing the size of national debts
  • The significance of the size of fiscal deficits and national debts

4.5.4 Macroeconomic policies in a global context

  • Use of fiscal policy, monetary policy, exchange rate policy, supply-side policies and direct controls in different countries, with specific reference to the impact of:
    • measures to reduce fiscal deficits and national debts
    • measures to reduce poverty and inequality
    • changes in interest rates and the supply of money
    • measures to increase international competitiveness
  • Use and impact of macroeconomic policies to respond to external shocks to the global economy
  • Measures to control global companies’ (transnationals’) operations:
    • the regulation of transfer pricing
    • limits to government ability to control global companies
  • Problems facing policymakers when applying policies:
    • inaccurate information
    • risks and uncertainties
    • inability to control external shocks

References

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