O Level Economics Revision Notes (Cambridge CIE)

1. Basic Economic Problem

Scarcity, Choice, Opportunity Cost

• Scarcity: Unlimited wants vs. limited resources. The fundamental problem.
• Choice: Decisions made due to scarcity, involving trade-offs.
• Opportunity Cost: The value of the next best alternative forgone when a choice is made.
• Factors of Production: Land (natural resources), Labour (human effort), Capital (man-made aids to production), Enterprise (organising factors).
• Production Possibility Curve (PPC): Illustrates scarcity, choice, and opportunity cost. Shows maximum output combinations of two goods with given resources.

2. Economic Systems

• Market Economy: Resources allocated by supply and demand, minimal government intervention. Price mechanism guides decisions.
• Command Economy: Resources allocated by central planning (government).
• Mixed Economy: Combination of market and command elements. Most common type.

3. Demand and Supply

Demand

• Demand: Quantity consumers are willing and able to buy at various prices.
• Law of Demand: As price rises, quantity demanded falls (ceteris paribus).
• Demand Curve: Slopes downwards.
• Factors affecting Demand (Shifts): Income, Tastes, Price of Substitutes, Price of Complements, Expectations, Population.

Supply

• Supply: Quantity producers are willing and able to sell at various prices.
• Law of Supply: As price rises, quantity supplied rises (ceteris paribus).
• Supply Curve: Slopes upwards.
• Factors affecting Supply (Shifts): Cost of Production, Technology, Subsidies, Indirect Taxes, Number of Producers, Expectations.

Market Equilibrium

• Equilibrium Price and Quantity: Where Quantity Demanded = Quantity Supplied.
• Excess Demand (Shortage): Price below equilibrium; pushes price up.
• Excess Supply (Surplus): Price above equilibrium; pushes price down.

4. Elasticity

Price Elasticity of Demand (PED)

• Measures: Responsiveness of quantity demanded to a change in price.
• Formula: % change in QD / % change in P.
• Elastic (PED > 1): Quantity demanded changes proportionally more than price.
• Inelastic (PED < 1): Quantity demanded changes proportionally less than price.
• Unitary (PED = 1): Quantity demanded changes proportionally same as price.
• Factors: Availability of substitutes, Necessity vs. Luxury, Proportion of income, Time period.

Price Elasticity of Supply (PES)

• Measures: Responsiveness of quantity supplied to a change in price.
• Formula: % change in QS / % change in P.
• Elastic (PES > 1), Inelastic (PES < 1), Unitary (PES = 1).
• Factors: Time period, Availability of resources, Spare capacity, Ease of storage.

Other Elasticities

• Income Elasticity of Demand (YED): Responsiveness of QD to change in income. Normal goods (+ve YED), Inferior goods (-ve YED).
• Cross Elasticity of Demand (XED): Responsiveness of QD of one good to change in price of another. Substitutes (+ve XED), Complements (-ve XED).

5. Production and Costs

Factors of Production

• Land: Rent.
• Labour: Wages.
• Capital: Interest.
• Enterprise: Profit.

Costs of Production

• Fixed Costs (FC): Do not vary with output (e.g., rent).
• Variable Costs (VC): Vary with output (e.g., raw materials).
• Total Costs (TC): FC + VC.
• Average Costs (AC): TC / Output.
• Marginal Cost (MC): Cost of producing one additional unit.

Economies and Diseconomies of Scale

• Economies of Scale: Falling average costs as output increases (e.g., technical, purchasing, managerial).
• Diseconomies of Scale: Rising average costs as output increases (e.g., coordination problems, poor communication).

6. Market Structures

Perfect Competition

• Many small firms, homogeneous products, free entry/exit, perfect information.
• Price takers, earn normal profit in long run.

Monopoly

• Single dominant firm, unique product, high barriers to entry.
• Price maker, can earn supernormal profit in long run.

Oligopoly & Monopolistic Competition

• Oligopoly: Few large firms, interdependence, potential for collusion.
• Monopolistic Competition: Many firms, differentiated products, relatively free entry/exit.

7. Government Intervention

Reasons for Intervention

• Correct market failures (e.g., externalities, public goods).
• Reduce inequality.
• Stabilize the economy.
• Promote economic growth.

Methods of Intervention

• Taxation: Indirect taxes (e.g., VAT, excise duties) to discourage consumption/production of demerit goods.
• Subsidies: Payments to producers to encourage production/consumption of merit goods.
• Price Controls: Maximum price (price ceiling) to protect consumers; Minimum price (price floor) to support producers or workers (minimum wage).
• Legislation/Regulations: Laws to control economic activity (e.g., environmental laws).
• Direct Provision: Government provides public goods (e.g., defence, roads).

8. Macroeconomic Aims and Indicators

Main Macroeconomic Aims

• Economic Growth: Increase in real GDP.
• Low Unemployment: Full employment of resources.
• Low Inflation: Stable general price level.
• Balance of Payments Stability: Sustainable current account.
• Income Redistribution: Reduce inequality.

Key Indicators

• GDP (Gross Domestic Product): Total value of goods/services produced in a country.
• Inflation: Sustained rise in general price level. Measured by CPI (Consumer Price Index).
• Unemployment: People actively seeking work but unable to find it. Measured by unemployment rate.
• Balance of Payments: Record of all economic transactions between residents of a country and the rest of the world.

9. International Trade

Benefits of International Trade

• Specialisation: Countries produce what they are best at.
• Economies of Scale: Larger markets allow for greater output and lower costs.
• Greater Choice: Consumers have access to wider range of goods.
• Increased Competition: Leads to lower prices and higher quality.

Protectionism

• Tariffs: Taxes on imported goods.
• Quotas: Limits on quantity of imported goods.
• Subsidies (to domestic producers): Makes local goods more competitive.
• Arguments for Protectionism: Protect infant industries, national security, prevent dumping, protect domestic jobs.
• Arguments against Protectionism: Reduces trade, leads to higher prices, less choice, potential for trade wars.

Answer Key / Key Concepts

As this document provides revision notes rather than questions, this section highlights the fundamental concepts covered in O Level Economics:

• Scarcity is the central problem, leading to the need for choice and incurring an opportunity cost.
• The price mechanism allocates resources in a market economy, guided by demand and supply.
• Elasticity measures the responsiveness of economic variables, crucial for understanding market reactions.
• Firms aim to minimise costs and maximise profits, experiencing economies or diseconomies of scale.
• Different market structures (e.g., perfect competition, monopoly) have distinct characteristics and implications for efficiency and pricing.
• Government intervention is used to correct market failures, redistribute income, and achieve macroeconomic aims such as economic growth, low inflation, and low unemployment.
• International trade offers benefits through specialisation but faces challenges from protectionist measures.