cambridge international as and a level economics...

Cambridge International AS and A Level Economics

Student CD Mind mapsAs the ‘Preparing for examinations’ chapter suggests, mind maps are a good way of revising as you progress through your course. Aft er you have covered a topic, try drawing a mind map linking the main features of the topic. It would also be useful to draw one linking that topic to other aspects of diff erent topics. Th is section provides 20 mind maps, two for each chapter. You may use these as:■ a reminder of the key features of a topic■ the basis to draw larger versions with additional links, which you may wish to place on a wall or include in your notes■ an inspiration to draw up your own maps that bring out links, causes and consequences.

ScarcityTh is is a key economic concept that explains why choices have to be made and why producing products involves an opportunity cost. It also links to the fundamental questions faced by any economic system.

Resources are

finite

Wants are

infinite

Wants exceed resources

Meaning

What to

produce

How to

produce

Who to

produce for

Economic

goods

Limited

supply

Scarce Not scarce

Unlimited

supply

Free goods

Leads to the three

fundamental economic

questions

Different types of

Products

Gives rise

to choice

Opportunity cost

Best alternative

forgone

Scarcity

1Student CD Mind maps© Cambridge University Press 2015 Cambridge International AS and A Level Economics


Diff erent economic systemsEconomic systems have to make a number of choices. A planned economy and a market economy use diff erent mechanisms to determine what is produced. A mixed economy uses a combination of the mechanisms employed by a planned economy and a market economy.

What to

produce

How to

produce

Way a country answers

fundamental economic

questions

Who to

produce for

Economic system

Mixed economy

Market forces and government

decisions determine

what is produced

Use

Price

Mechanism

State

Planning

Government determines

what is produced

Use directives

Planned economy

Market economy

Consumers

determine

what is produced

Different Economic

systems

Inform state owned firms

what to produce

Signal preferences to firms

using the price mechanism

EquilibriumTh is key economic concept can be applied in a micro or macro context and in both product and labour markets. Th is mind map concerns equilibrium in a product market, why it might be in disequilibrium and how it moves to equilibrium.

No shortage

or surplus

Occurs where

demand = supply

Equilibrium price

Market Equilibrium

Disequilibrium

price

Occur where

Demand ≠ supply

Supply greater

than demand

Demand greater

than supply

Shortage Surplus

Shortage

Move to

equilibrium

Price rises

Price falls

Demand

extends

Supply

contracts

Supply

extends

Demand

contracts

Surplus

Move to

equilibrium



Producer surplusProducer surplus is a concept that is not always well understood. In this case you might want to add a link to how producer surplus would be infl uenced by the elasticity of supply and/or use the mind map as the basis for drawing a separate one on consumer surplus.

Producer surplus

Equivalent to

Total revenue minus

total variable costsprice rise

Increase

producer

surplus

Reduce

producer

surplus

price

reduction

Area

below the price level and

above the supply curve

Positive difference between

the price paid and what

firms were willing to accept

Definition

Effect of a

price change

Government influence on pricesA government can infl uence prices in a range of ways and for a range of reasons. Th e direct ways include setting maximum and minimum prices on products and determining the price, which may be a zero price, of the products whose production it fi nances. Th e indirect ways are providing subsidies and imposing tariff s.

Rent controls

Maximum price

of food

To help poor

consumers

Maximum price

Government

price setting

Indirect taxes

Maybe produced free at

the point of consumption

To encourage

consumption

To help the poor

Designed to

Discourage

consumption of

demerit goods

Raise

revenue

Subsidies

To Producers

To encourage

an increase in output

To consumers

To encourage

an increase in

consumption

Minimum price

To help sellers

Minimum

wagesMinimum price

of agricultural products

Government Influence

on prices

Set prices for government

financed products



Government help to the poorA government may seek to help the poor in a number of ways. Th ese include cash benefi ts (transfer payments), favourable tax treatment (tax free allowance), benefi ts in kind (direct provision of products) and the creation of jobs (employment opportunities).

Pensions

E.G.

Money given by the government

not in return for the production of a

product

Transfer payments

Employment

opportunities

at low levels of

income

Tax free allowances

at low price levels Direct provision

of jobs

Indirect provision

of jobs

Subsidise private

sector firms to take

on unskilled workers

Dirrect provision of

products

Provided at low or

zero prices

E.G. in some

countries

Education Health care

Government help

to the poor

Unemployment

benefits

In state owned firms

DeflationTh is mind map brings out the distinction between good and bad defl ation. You might want to draw a mind map bringing out the diff erence between cost-push and demand-pull infl ation.

A sustained fall in

the price level

Causes

Decrease in

aggregate demand

Advances in

technology

Reduction in costs

of production

Encourage consumers to

postpone purchases

Encourage consumption

and exports

Reduce output and

employment

Increase output and

employment

Good

deflation

Good

deflation

Bad

deflation

Definition

Bad

deflation

Deflation

Effects Effects



Exchange rate systemsTh e three main exchange rate systems are a fi xed rate, a fl oating rate and a managed exchange rate system. Th is mind map brings out the key features of each system.

Exchange rate system

Floating

exchange rate

system

Managed exchange

rate system

Rise in

demandRise in supply

Fall in priceRise in price

Price of currency

set by market

forces

Price of currency allowed to

vary within an upper limit and

lower limit

Action taken by central

bank if there is a threat

price will move outside

limits

How price

of currency is

determined

Fixed

exchange

rate system

Price of

currency

set by

government

Maintained

by central

bank

Purchases/

sales of

currency Interest rate

changes

Role of

market forces

Role of

government

Policy measures to correct inflationTh is mind map highlights the key government policy measures to correct infl ation. You might want to draw one that focuses on government policy measures to correct defl ation.

Aims

Supply - side

policy Deflationary

monetary policy

Raise

interest

rate

Decrease

growth

in the money

supply

Reduce

exchange

rate

Measures such as a cut in

corporation tax and an

increase in training

Reduce long-run

inflationary pressure

Reduce

government

spending

Increase income

taxAchieve

a low rate

Achieve a

steady rate

Policy measures to

correct inflation

Deflationary Fiscal

policy



Policy measures to correct a current account deficitTh ese measures may aim to reduce import expenditure and/or raise export revenue. Th ey may also be short-term or long-term measures.

Aim

Quotas

Embargoes

Exchange control

Voluntary export

restraint

Subsidies to domestic

producers

Devaluation

Measures to reduce

spending on imports

Short-term measures

to increase export

revenue

Long-term measures

to reduce import

expenditure and

increase export

revenueTrade fairs

Education Training Privatisation

Devaluation

Long-term balance of

credit and debit items

Subsidies

to domestic

producers

Policy measures to correct a

current account deficit

Tariffs

Pareto eff iciencyPareto effi ciency is a relatively technical concept. Th is mind map brings out its meaning, the conditions needed for it to exist and its link to a Pareto improvement.

Pareto improvementConditions needed

Definition

Pareto efficiency

Reallocation of resources

Makes at least one person

better off without making

someone else worse off

Also called

Pareto

optimality

Socially

efficient

Not possible to make

someone better off

without making

someone else worse off

Economy cannot produce

more of any product

without producing less of

another product

Allocative

efficiency

Productive

efficiency



ExternalitiesExternalities are an important cause of market failure. You might want to draw a mind map based on how a government seeks to correct the market failures caused by externalities.

Externalities

Positive externalitiesResult in market

failure

Existence of negative

externalities results in

Over consumption

and over production

Existence of positive

externalities results in

Under consumption

and under production

Cost and benefits

experienced by third parties

Negative

externalities

Harmful effects on

third parties

Arise if social

costs exceed

private costs

Effects on those not

directly involved

in consumption or

production of the product

Arise if social benefits

exceed private benefits

Positive effects on third

parties

Indiff erence curvesAs this mind map shows, indiff erence curves are linked to utility. Th ey can also be used to examine the eff ect of a change in price and in income.

Series of

indifference

curves

Moving to

the right

Higher

utility

Indifference

map

Budget lines

Combination of two

products that can be

purchased

will pivot if will shift if

Price

changes

Income

rises

Illustrate people’s

preferences

Slope determined by

Indifference curves

Diminishing marginal

rate of substitution

Diminishing marginal

utility

Shows all the combinations of

two products that give the same

utility



Eff iciencyEffi ciency is a key economic concept. Th is mind map includes productive, allocative and dynamic effi ciency as well as x-ineffi ciency.

Productive

efficiency

Dynamic

efficiency

Efficiency

Allocating resources

efficiently over timeMay come

close in

Monopoly

Due to

Super

normal

profit to

invest

Barriers

to protect

any return

earned

Force of

competition

Perfect

information

Not

searching

for cheapest

raw materials

Over

staffing

Due to

Perfect

competitionInvestment

in human

capital

Investment

in research

and development

Investment in

capital goods

Allocative

efficiency

Due to lack of

competitive

pressure

Monopolies

failing to keep

costs down

Occurs where

MC = ACOccurs where

MC = AR

Always achieved in

perfect competition

Not usually achieved

in other market

structures

Achieved

in long run

in perfect

competition

Not usually

achieved in other

market

structures

X-inefficiency

Decision-making at the marginTh e concept of the margin comes into many decisions in economics. Th ese include decisions by consumers, fi rms and governments.

Decision making at

the margin

A consumer’s decision to

change pattern of expenditure

A firm’s decision whether to

change its output

A firm’s decision whether

to change employment of

resources

Aiming for

May be aiming for profit

maximisation

MC = MR

A governments decision

whether to tax a product

May do so if MSC > MSB

Aiming for MSC = MSBAiming for

MP of product A =

MP of product B

P of product A p of product B

= =MP of labour

P of labour

MP of capital

P of capital

MP of land

P of land



EquityTh ere are a number of issues of equity but each is somewhat subjective. For instance, economists disagree about the extent to which there is a risk that fi rms and employers may abuse market power, what constitutes too uneven a distribution of income and the extent to which education and health are merit goods.

Issues of equity

Employer’s abuse of

market power

Firm’s abuse

of market power

Government protect

consumers by

May be

produced free

at the point of

consumption

May be

subsidised

to lower

price

Consumption

may be made

compulsory

Competition

policy Provision of

information

Regulation

Uneven distribution

of income

Need for access to

merit goods

Education and

health care

Government may protect workers

with limited bargaining power Government

may reduce by

Progressive income

tax

Provision of

products

Minimum

wage Living wage

State cash benefits

Economic progressEconomic progress is what governments aim for. Th is mind map examines it in connection with four of the main government macroeconomic objectives.

Economic Progress

Economic growth

Price stability

Low rate Stable rate

Employment

Balance of

payments

Current account

in balance in long

term

Full employment

High

quality

jobs

Matching potential

and actual economic

growth

Avoidance of

output gaps

A more staple

economic growth

rate

Avoidance of

booms and

recessions

Inflation



Economic developmentEconomic development is usually but not always promoted by economic growth, as this mind map brings out. It also defi nes the concept and identifi es a number of policy outcomes that promote economic development.

Economic development

An improvement

in economic welfare

Policy outcomes that

promote economic

development

Improved health

care

Improved

education

Reduction in

crime

Reduction in

corruption

May be promoted

by economic

growth

May not be promoted by

economic growth

May be

environmental

damage

Income

may not evenly

distributed

Change may

cause stress

Higher income

per head

If GDP ↑ by more

than POP ↑

Higher tax

revenue

More spending on E.G.

education, health care,

environment

Lower

unemployment

Rise in literacy

Cleaner

environment

Reduction in

poverty

Longer life

expectancy

Increase in

choices

Definition

Expansionary fiscal policyTh is mind map examines the nature of expansionary fi scal policy. You might want to draw one showing contractionary/defl ationary fi scal policy.

Aims

May cause

demand - pull

inflation

May increase a

current account

deficit

Policy

measure

Increase

By a multiple

amount

Reduce taxes

Increase

government

spending

Increase

employment

Increase

economic growth

Expansionary fiscal policy

Possible policy

conflicts

Effect on aggregate

demand



Deflationary monetary policyDefl ationary monetary policy uses monetary policy to reduce aggregate demand. Th is time you might want to draw a mind map showing expansionary/refl ationary monetary policy.

Deflationary monetary

policy

Aims

May reduce

economic growth

rate

May cause

unemployment

Policy measures

Decrease or

decrease growth

By a multiple

amount

Raise interest

rate Reduce growth of

the money supply

Revaluation of

the currency

Reduce demand-pull

inflationReduce a current

account deficit

Effect on aggregate

demand

Possible policy

conflicts


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