Main - Economics Edexcel Notes Chapterwse

CHAPTER 1 : THE NATURE OF ECONOMIC PROBLEM
Key terms
1. Wants : desires for goods and services
2. Resources: factors used to produce goods and services
3. The economic problem : unlimited wants exceeding finite resources
4. Scarcity : a situation where there is not enough resources to satisfy
everyone's wants
5. Economic good: a product which requires resources to produce it and
therefore has an opportunity cost
6. Free goods : a product which does not require any resources to make it and
so does not have an opportunity cost
1. Economic Problem
Economic Problem: limited resources and unlimited want
Kevin has limited money. He would like to have coffee and cake
but his money is not enough for getting both.
We cannot get everything by the condition of limited resources.

It needs to trade off or choose
E.g. Kevin decided to spend money on coffee.
The lost of the next best alternative foregone is called

“ opportunity cost ”
E.g. Kevin lost the opportunity to eat cake which is called opportunity cost.
CHAPTER 2 : Factors of production
Key terms
1. Factors of production : economic resources of land, labour, capital and
enterprise
2. Land : natural resources such as oil and coal
3. Labour : workers who are used in production of goods and services
4. Capital goods : human-made goods used in production
5. Consumer goods : goods and services purchased by households for
their own satisfaction
6. Enterprise : who take risks and make key decisions in business.
7. Occupationally mobile: capable of changing use
8. Geographically immobile: incapable of moving from one location to
another Location
9. Mobility of labour : the ability of labour to change where it works or in
which occupation
10. Mobility of capital : the ability to change where capital is used or in
which occupation
11. Mobility of enterprise: the ability to change where enterprise is used or
in which occupation
12. Entrepreneur : a person who bears the risks and makes the key
decisions in a business
13. Labour force : people in work and those actively seeking work.
14. Productivity : the output per a factor of production per period of time
15. Labour productivity : output per worker hour.
16. Output : goods and services produced by the factors of production.
17. Investment : spending on capital goods.
18. Gross investment : total spending on capital goods
19. Depreciation (capital consumption) : the value of capital goods that
have worn out
20. Net investment : gross investment - depreciation.
1. Factors of production
Factors of Definition Example Return

production
1.Land Natural resources oil and coal Rent
1.Labour Workers who are used in Builder, teacher Wage

production of goods and
services
1.Capital Human-made goods used in Machines, Interest

production equipment, tools
1.Enterprise Who take risks and make key The owner of a Profit
decisions in business business
2. Mobility of factors of production
Factors of Geographically mobility Occupationally mobile

production
1.Land Geographically immobile Occupationally mobile
2.Labour Geographically immobile Occupationally immobile
3.Capital Depend Occupationally immobile
4.Enterprise Geographically mobile Occupationally mobile

CHAPTER 3 : Opportunity cost
Key terms
1. Opportunity cost : the next best alternative foregone
1. Definition of opportunity cost
: Opportunity cost is the next best alternative given up when a choice is

made.
Opportunity cost to Opportunity cost to Opportunity cost to

consumers producers government
• Consumers have • Producers have limited • Government has a limited

limited budgets. workers in companies. budget.
⇩ ⇩
⇩
• If they decided • If the government
to spend money • If they decided to decided to allocate
on a car, they allocate workers to the budget to build
lost the produce cars, they roads, there would
opportunity to lost the opportunity not be enough
buy a house. to produce houses. money to provide
education for poor
people.
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CHAPTER 4 : PRODUCTION POSSIBILITY CURVE

Key terms
1. Production Possibility Curve (PPC) : a curve that shows the maximum
combination of two goods that can be produced by existing resources and
technology.
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1. PPC and point
• ON PPC : Point X, Y, Z : ⇒ Efficiency

• Below PPC : Point W, U : ⇒ Inefficiency
• Above PPC : Point T :Unobtainable or above capacity
2. PPC and opportunity cost
• Economic problems arise from limited resources and limitless want.

• When a country increases the production of output B from 10 units to 20 units, it
has fewer resources available to produce output A. The production of output A falls
from 100 units to 80 units from Point X to point Y.
• The opportunity cost of an extra 10 units of output B is the loss of 20 units of output
A. (100-80=20units).
3. Shift in production possibility curve (PPC)
• The PPC shifts outward, meaning that there will be higher maximum outputs or
economic growth. ( XX to YY)
4. Factors causing a shift outward of PPC
Increase Quantity Factor of Increase Quality Factor Technological Advance

production of production
CHAPTER 5 : MICROECONOMICS AND MACROECONOMICS

Key terms
1. Microeconomics : the study of the behaviour and decisions of household and
firms and the performance of individual markets
2. Macroeconomics: the study of the whole economy
3. Market : an arrangement which brings buyers into contact with sellers
4. Economic agents: those who undertake economic activities and make economic
decisions
5. Private sector : firms owned by shareholders and individuals
6. Public sector : Government
1. The difference between microeconomics and macroeconomics
2. Decision makers in microeconomics and macroeconomics
Private sectors Public sectors
Owner : firms owned by shareholders Owner : Government

and individuals
Characteristics : Characteristics :
⇒ Firms aim for profit maximization. ⇒ Government aims for social welfare
⇒ Households or consumers aim for maximization and a strong economy.
cheap and high-quality products.
CHAPTER 6 : THE ROLE OF MARKET IN ALLOCATING OF

RESOURCES
Key terms
1. Economic system : the organisations that influence economic behaviour and
determine how resources are allocated
2. Planned economic system : an economic system where the government makes
the crucial decisions, land and capital are state-owned and resources are
allocated by the government
3. Mixed economic system : an economy in which both private and public sectors
allocate resources together
4. Market economic system : an economic system where consumers determine
what is produced, resources are allocated by the price mechanism and land and
capital are privately owned
5. Price mechanism : the way the decisions made by households and firms
interact to decide the allocation of resources
6. Capital - intensive : the use of high proportion of capital relative to labour
7. Labour - intensive : the use of high proportion of labour relative to capital
8. Demand : The willingness and ability to buy a product
9. Supply : the willingness and ability to sell a product
10. Market equilibrium : a situation where demand and supply are equal at the
current price
11. Market disequilibrium : a situation where demand and supply are not equal at
the current price
1. The three key allocation decisions
Functions of economic system is to answer fundamental economic 3 questions.

⇒ what to produce?
⇒ How to produce?
⇒ For whom? / Who is to receive the product?
2. Different economic systems
Economic systems Definition Example
1.Planned economic ⇒ The state or government makes E.g. North

system / command / decisions about what to produce, how to Korea
collectivist economy produce it, and who receives it.
2.Market economic ⇒ Buyers or consumers determine what is E.g. USA,

system produced. They signal what they want to Australia
sellers through the price mechanism.
3.Mixed economic ⇒ Both private sector and public sector E.g. Thailand
system (government) allocate resources together
3. The role of price mechanism

: Resources are allocated to produce products which consumers want.
CHAPTER 7 : DEMAND
Key terms
1. Demand : the willingness and ability to buy a product

2. Market Demand : the total demand for a product
3. Extension in demand : a rise in the quantity demanded caused by a fall in the price of
the product itself
4. Contraction in demand : a fall in the quantity demanded caused by a rise in the price
of the product itself.
5. Changes in demand : Shift in the demand curve.
6. Increase in demand : a rise in demand at any given price, causing the demand curve
to shift to the right.
7. Decrease in demand : a fall in demand at any given price, causing the demand curve
to shift to the left.
8. Normal goods : a product whose demand increases when income increases, and
decreases when income falls.
9. Inferior goods : a product whose demand decreases when income increases and
increases when income falls.
10. Substitute : a product that can be used in place of another.
11. Complement : a product that is used together with another product.
12. Aging population : an increase in the average age of the population.
1. What is Demand ?
Demand : the willingness and ability to buy a product at any price level.
2. Demand curve
Demand curve : shows the inverse relationship between price and quantity demand.
3. Causes a shift in demand curve
3.1 Change in income

3.2 Change in price substitute good
3.3 Change in price complement goods
3.4 Advertising campaigns
3.5 Change in population
3.6 Change in taste and Fashion
3.7 Other factors eg. weather condition
CHAPTER 8 : Supply
Key terms
1. Supply : the willingness and ability to sell a product
2. Market Supply : total supply of a product
3. Extension in supply : a rise in the quantity supplied caused by a rise in the price of
the product itself
4. Contraction in Supply : a fall in the quantity supplied caused by a fall in the price of
the product itself.
5. Change in supply : change in supply conditions causing shift in the supply curve
6. Increase in supply : a rise in supply at any given price, causing the supply curve
to shift to the right
7. Decrease in supply : a fall in supply at any give price, causing the supply curve
to shift to the left
8. Direct taxes : taxes on the income and wealth of individuals and firms
9. Indirect taxes : taxes on goods and services
10. Taxes : A payment to the government
11. Subsidy : A payment by a government to encourage the production or
consumption of a product.
1. What is supply ?
Supply : the willingness and ability to sell a product at any price level.
2. Supply curve
Supply curve : shows the positive relationship between price and quantity supply.
Market supply : total supply of the product supplied by all firms in an industry at any
price level.
3. Causes a shift in supply curve to the right
3.1 Cost of production↓
3.2 An improvement of technology
3.3 Direct tax such as corporation tax and indirect tax such as VAT ↓
3.4 Subsidy ↑ cost of production ↓
3.5 Favour Weather conditions
3.6 Price of other product ↑
3.7 Discoveries new alternative resources
CHAPTER 9 : Price determination

1. Equilibrium price : the price where demand and supply are equal.
2. Excess supply : the amount by which supply is greater than demand.
3. Disequilibrium : a situation where demand and supply are not equal.
4. Excess demand : the amount by which demand is greater than supply.
1. Market Equilibrium
Equilibrium price : the price where demand and supply are equal.
• At market equilibrium : Demand = Supply at price ฿5 per unit

Disequilibrium : where demand ≠ supply
↳ Shortage or excess demand
↳ Surplus or excess supply
2. Moving from market disequilibrium to market Equilibrium
• Disequilibrium : where demand ≠ Supply
2.1) At price = 8, there is excess supply : supply > demand
• Price↓ causing contraction in supply and extension in demand
• Price falls until it reaches the equilibrium.
2.2) At price = 2, there is excess demand : demand > supply
• Price↑ causing contraction in demand and extension in supply
• Price rises until it reaches the equilibrium.
CHAPTER 10 : PRICE CHANGES

1. The effect of changes in demand curve
Case 1 : Consumers have higher income.
1. Original equilibrium is at P1 and Q1.

2. Consumers have higher income and they have more ability to spend. Demand for
rice increases and the demand curve shifts to the right.
3. New equilibrium, price and quantity increase to P2 and Q2.
2. The effect of changes in supply curve
Case 2 : Producers have higher cost of production.
1. Original equilibrium is at P1 and Q1.

2. Producers face higher cost of production and they gain lower profit. Supply of rice
decreases and the supply curve shifts to the left.
3. New equilibrium, price increases to P2 and quantity decreases to Q2.
CHAPTER 12 : PRICE ELASTICITY OF SUPPLY

Key terms
1. Price elasticity of supply (PES) : a measure of the responsiveness of the quantity
supply to a change in price.
2. Elastic supply : when the quantity supplied changes by a greater percentage than the
change in price
3. Inelastic supply : when the quantity supplied changes by a smaller percentage than
the change in price.
4. Perfectly elastic supply : when a change in price causes a complete change in the
quantity supplied.
5. Perfectly inelastic supply : when a change in price has no effect on the quantity
supplied.
6. Unit elasticity of supply : when a change in price in the quantity supplied, leaving total
revenue unchanged.
1. Definition of price elasticity of supply
: Price elasticity of supply(PES) : measures the responsiveness of quantity supply to
changes in price.
PES = % change in quantity of supply

% change in price
Price elastic supply Price inelastic supply
Definition The percentage change in quantity The percentage change in quantity

of supply is greater than the of supply is lesser than the
percentage change in price percentage change in price
Value of PES > 1 0 < PES < 1

PES
Curve
2. Determinants of price elasticity of supply
2.1) Time under consideration
: In the short run ; firms cannot employ more labour and capital Inelastic PES
: In the long run ; firms can employ more labour and capital Elastic PES
2.2) Production time

: Products which take long time to produce Inelastic PES
2.3) Resources availability

: Products which take long time to produce Inelastic PES
2.4) Perishability
: Products which are easily perishable e.g. vegetable Inelastic
3. Special supply curve
Perfectly price elastic Perfectly price inelastic Unitary price elastic
PES = ∞ PES = 0 PES = 1
CHAPTER 13 : MARKET ECONOMIC SYSTEM

Key terms
1. Public sector : the part of the economy controlled by the government.
2. State-owned Enterprise (SOES) : organisations owned by the government which sell
products
3. Privatisation : the sale of public sector assets to the private sector.
4. Price mechanism : the system by which the market forces of demand and supply
determine prices.
5. Market failure : market forces resulting in an inefficient allocation of resources.
6. Free rider : someone who consumes a good or service without paying for it.
7. Allocative efficient : when resources are allocated to produce the right products in the
right quantities.
8. Productive efficient : when products are produced at the lowest possible cost and
making full use of resources
9. Dynamic efficiency : efficiency occurring over time as a result of investment and
innovation
1. The market economic system
Market economic system : resources are allocated by price mechanism. Consumers

allocate resources by buying a product. Firms aim for profit maximization and allocate
resources to produce a product that consumers’ wants.
2. Advantages and disadvantages of market economic system
Advantages Disadvantages
1.Firms produce products responding to customers' 1.Market may be dominated by only on

wants. firms(monopoly).
2. Products are high quality and innovative. 2. Public goods are under provided due
rider problems.
3. More variety of goods and services for consumers. 3. Merit goods are underconsumption. D
goods are overconsumption.
4. Due to high competition, firms try to improve 4. Larger income gap between rich and
efficiency to be competitive in the market.
3. Types of efficiency
3.1 Allocative efficiency : resources are allocated in a way that maximises customer's
satisfaction.
3.2 Production efficiency : when produced at the lowest possible cost per unit.
3.3 Dynamic : efficiency occurring over time as a result of investment and innovation.
CHAPTER 14 : MARKET FAILURE

Key terms
1. Social benefit : benefit to the society or the sum of private benefit and external
benefit
2. Social cost : cost to the whole society or the sum of private cost and external cost
3. Private benefits : benefits from consumption to consumers or benefit from
production to producers
4. Private cost : cost of consumption to consumers or cost of production to producers
5. External cost : negative effects from consumption or production to the third party
6. External benefit : positive effects from consumption or production to the third party
7. Socially optimal output: the level of output where society's welfare is maximized. It
is where social cost and social benefit are equal
8. Merit goods: products which generate positive externalities and are under-
consumed in the free market e.g. education and healthcare
9. Demerit goods: Products which generate negative externalities and are over-
consumed in the free market e.g. alcohol
10. Private goods: Product which is rival and excludable.
11. Public goods : Product which is non-rival and non-excludable. It needs government
help to provide
12. Monopoly : A single seller
13. Price fixing : when two or more firms agree to sell a product at the same price
1. What is Market failure?
Market failure : when markets allocate resources inefficiently.
2. Types of market failure

2.1) Externality
: Market fails to take into account all costs and benefits.
↳ There is overproduction and overconsumption in some goods which generate
external cost e.g. pollution and alcohol.
↳ There is underproduction and underconsumption in some goods which generate
external benefits e.g. research on medicine and education.
2.2) Information failure
: when consumers and producers do not have equal access to information. It leads to the
wrong decision.
2.3) Underconsumption or underproduction of merit goods
: Products which are under consumed in the free market. And, the goods generate
positive externalities (Positive effect to the third party)
2.4) Overconsumption or overproduction of demerit goods
: Products which are over consumed in the free market. And, the goods generate negative
externalities (negative effect to the third party)
2.5) Public goods
: Product which is non-rival and non-excludable, it is under-provided in the free market.
Non-excludable means no one can be excluded from the consumption. Non-rival means
the consumption by one person does not reduce the consumption to the next consumer.
2.6) Monopoly
: A single seller has market power to restrict output to push up the price. Then
consumers face high prices and low quantities of output in the market.
2.7) Immobility of resources
: Some resources are geographical and occupational immobility.
CHAPTER 15 : MIXED ECONOMIC SYSTEM

Key terms
1. Mixed economic system : an economy in which both the private and public sectors
play an important role.
2. Rationing : a limit on the amount that can be consumed.
3. Lottery : the drawing of tickets to decide who will get the products.
4. Nationalisation: moving the ownership and control of an industry from the private
sector to the government
5. Public Corporation: a business organisation owned by the government which is
designed to act in the public interest
6. Cost benefit Analysis (CBA) : a method of assessing investment projects which take
into account social costs and benefits.
7. Multinational companies (MNCs) : companies which produce in more than one
country
1. A mixed economy
: Both the government and private sector allocate resources together.
2. Advantages of mixed economy : it combines the benefits of the free market and
government which allocate resources together.
Advantages of free economy Advantages of government intervention
1.Many choices of goods and 1.Government concerns social cost and social
services for consumers benefit in decision making.
2.It increases efficiency 2.Government provides information to consumers
3.Firms have profit motive, so they and producers to reduce imperfect information.
produce product responding 3.Government subsidizes education and
consumers' want healthcare to encourage the consumption of
4.Products are high quality and merit goods.
innovative. 4.Government taxes on alcohol and cigarettes to
discourage the consumption of demerit goods.
5.Government directly provides public goods
which cannot be charged such as national
defence.
6.Government helps vulnerable people and
reduces income inequality.
2.1 Maximum prices
→ Maximum price is to prevent too high price in order to enable poor people
to afford basic necessities.
→ Effective maximum price must be set below market price.
Problems: shortage or excess demand.
2.2 Minimum Price

→ Goods and services cannot be sold below the minimum price.
→ Minimum price is to prevent too low price in order to stabilize producers' income
Problems: surplus of outputs
3. Government Policies to correct market failure.

3.1. Subsidies
→ Subsidy is a grant paid by the government to producers in order to reduce cost, lower
price of product, increase supply of product and stabilize farmers' income.
Limitation: Opportunity cost from subsidy
3.2. Indirect tax

→ Indirect tax is tax on spending.
→ Government may impose indirect tax on cigarettes and alcohol in order to
discourage the consumption of demerit goods
3.3 Competition policy

• To prevent firms from abusing their market power to set high prices , the
government can use competition policy such as the removal of barriers to entry
and exit markets, regulation of monopolies and prohibition of uncompetitive
practices.
3.4 Environmental policy

• Government can regulate the amount of pollution emitted by firms.
3.5 Regulation
• E.g. Regulation on pollution and consumption of demerit goods. It includes price
control (maximum and minimum price) on uncompetitive practices to prevent
monopoly.
3.6 Nationalisation and Privatization

• Nationalisation : transferring the ownership and control of an industry from the
private sector to the government
Advantages and disadvantages of state-owned enterprises (Businesses owned &

control by government)
1.Government takes into account social 1.Government might be slowing down

cost and social benefits in decision decision making.
making. 2. It might cause inefficiency and low
2.It can prevent private monopoly quality products.
3.Government aims to maximise social 3.It has opportunity cost.
welfare then goods and services
provided by government are likely to
have low price and high quality.
3. 7 Direct provision
→ Government directly provides public goods Ce.g. road, national defence) and merit
goods such as education, healthcare)
3. 8 Unfairness
→ Government can reduce poverty and income inequality.
↳ by imposing direct tax and contributing tax revenue to help poor people.
CHAPTER 16 : MONEY AND BANKING

Key terms
1. Money : an item which is generally acceptable as a measure of payment.
2. Commercial bank : banks which aim to make a profit by providing a range of
banking services to households and firms.
3. Liquidity : being able to turn an asset into cash quickly without a loss.
4. Central bank : a government-owned bank which provides banking services
to the government and commercial banks and operates monetary policy.
1. Money
→ Money is anything which can be made a purchase.
4 Functions of money
1. Medium of exchange : it is generally acceptable to exchange for goods and services

2. Store of Value : money can be saved for consumption in the future.
Limitation : value of money may fall as inflation rises
3. Unit of account : money can be used to place value on an item e g. price of a pen=2$.
4. A standard of defer payments : money allows people to borrow and lend.
The characteristics of money

1. Money does not need to have intrinsic value like gold or silver.
2. Acceptability : people accept the item as payment.
3. Durability : it will last some time.
4. Portability : it is easy to carry.
5. Divisibility : it can be divided into units of different values.
6. Homogeneous : every note or coin of the same value should be the same.
7. Recognisability : it can easily see that item as money.
2. Banking
Central bank Commercial bank
It is the government's bank or national bank. Banks are owned by the

private sector.
It aims to stabilize an economy by monetary policies It aim to make profit for its
including controlling inflation. shareholders.
CHAPTER 17 : Household
Key terms
1. Disposable income : income after income tax has been deducted and state benefits
received.
2. Wealth : a stock of assets including money held in bank accounts, shares in companies,
government bonds, cars and property.
3. Rate of interest : cost of borrowing and return on saving
4. Average propensity to consume (APC) : The proportion of household disposable income
which is spent.
5. Consumption : expenditure by households on consumer goods and services.
6. Saving ratio : the proportion of household disposable income that is saved.
7. Average propensity to save (APS) : as saving ratio, it is the proportion of household
disposable income that is saved.
8. Mortgage : A loan to help buy a house.
1. Spending
Factors influence spending
1. Disposable income (income-tax) ↑ ⇒ ability to spend↑ ⇒ spending on goods and
services↑
2. Wealth ↑ ⇒ ability to spend↑ ⇒ spending on goods and services↑
3. A fall in rate of interest ⇒ save less ⇒ spend↑
4. Consumer confidence ↑ ⇒ higher consumer confidence ⇒ spending
5. Attitude on spending ⇒ some people love shopping ⇒ spending ↑
Income and consumption.

Average propensity to consume (APC): the proportion of household disposable income
which is spent. When income increases , expenditure increases but APC falls
Pattern of expenditure
• Rich people → spend the large proportion of income on education and holiday.
→ spend the small proportion of income on basic needs.
→ have a lot of total expenditure.
→ spend on high quality goods and services
2. Saving
Saving ratio = Saving

Disposable income(Income-tax)
= Average propensity to save (APS)
Factors influence on saving

1. Disposable income (income-tax) ↑ ⇒ save↑
2. Wealth ↑ ⇒ save↑
3. Interest rate ↑ ⇒ save↑
4. Variety of saving schemes ↑ ⇒ save↑
5. Age structure e.g. working age ⇒ save↑
6. Attitude on saving ↑ ⇒ save↑
7. Save to buy expensive item ↑ ⇒ save↑
3. Borrowing
Factors influence borrowing

1. The availability of loan and overdrafts ↑ ⇒ borrow ↑
2. A fall in interest rate ⇒ borrow ↑
3. Confidence ↑ ⇒ borrow ↑
4. Attitudes on borrowing
5. Borrow to buy expensive items ↑ ⇒ borrow ↑
6. Borrow because of facing financial problems ⇒ borrow ↑
CHAPTER 18 : Workers
Key terms
1. Earnings : the total pay received by a worker.
2. Wage rate : a payment which an employer contracts to pay a worker. It is the basic
wage a worker receives per unit of time or output.
3. National minimum wage (NMW) : a minimum rate of wage for an hour's work, fixed by
the government for the whole economy.
4. Primary sector : agriculture, fishing, forestry, mining, and other industries which extract
natural resources.
5. Secondary sector : manufacturing and construction industries
6. Tertiary sector : industries which provide services.
7. Elasticity of demand for labour : a measure of the responsiveness of demand
8. for labour to change in the wage rate.
9. Elasticity of supply of labour : a measure of the responsiveness of supply of labour to
change in the wage rate.
10. Specialisation : the concentration on particular products or tasks
11. Division of labour : workers specialising in particular tasks.
1. Factors that influence an individual's choice of occupation
1. Wage factor
1. Salary : fixed amount of inamegermenjfudy salary
2. Wage : the amount of payment based on piece or working hour
3. Overtime payment : payment to workers who work in excess of the
standard working week.
4. Bonus : extra payment based on performance
5. Commission : payment based on sales made by workers
2. Non wage factors

1. Job satisfaction
2. Type of work
3. Working conditions
4. Working hours
5. Holiday
6. Pension
7. Fringe benefits
8. Job security
9. Location of workplace
10. Career prospects
11. Size of firms
2. Wage determination and the reasons for differences in earnings
• Wage is determined by demand for and supply of labour.
• Demand for labour ; the amount of workers that firms would like to employ at
any wage level.
• Supply of labour ; labour force.
Factors cause demand for labour to increase

1. Demand for product↑ firms have to employ more labour demand for labour↑
2. Labour's productivity↑ firms have lower cost demand for labour↑
3. Price of capital↑ firms replace capital by workers demand for labour↑
Factors cause supply of labour to decrease

1. A fall in population and labour force supply of labour ↓
2. A rise in qualification and length of training supply of labour ↓
3. A fall in non wage benefits e.g. car service, job promotion supply of labour ↓
4. Elasticity of demand for labour and supply of labour.
Inelastic Elastic
The determinants of elasticity of demand for labour.

1. The proportion of labour cost in total costs is large
Demand for labour is elastic.
2. The ease of labour can be substituted by capital

If it is easy to find substitute of labour
3. The elasticity of product is elastic then demand for labour is elastic too.
When wage increases, firms have to maintain profit by raising the price of products.
This makes demand for the product falls by the large proportion and demand for the
labour will fall in the same way.
4. Demand for labour is more elastic in the long run.

As firms have time to arrange the production methods.
The determinants of elasticity of supply of labour

1. The qualification and skills required ; the more qualifications and skills needed, the
more inelastic supply of labour.
2. The long period of training required causes supply of labour to be wage inelastic.
3. The immobility of labour causes supply of labour to be wage inelastic.
4. High degree of vocation attaches workers to their jobs and becomes inelastic.
5. The longer time period allows workers to recognise higher wages and undertake the
jobs. Then supply of labour is wage elastic in the long run.
5. Specialisation and division of labour.

• Specialisation means the concentration on a particular products or tasks
• Division of labour means a worker carries out one particular task and everyone
contributes to the whole production process.
1. More outputs are created. 1. Workers have to depend on each other.

2. Unit costs are lower due to Other workers cannot cover up for those
specialisation. specialised staff who are absent.
3. Worker can do the task they are 2. Workers may feel bored leading to
best at. lower productivity and high unit cost.
4. Better quality of products 3. Workers have limited skills and have
produced. 4. Risk of being unemployed when their
skills are no longer wanted.
CHAPTER 19 : TRADE UNION

Key terms
1. Trade union : a group of workers formed to ask for better wage and working conditions.
2. Collective bargaining : representatives of workers negotiating with employer’
associations.
3. Real income : income adjusted for inflation.
4. Industrial action : when workers disrupt production to put pressure on employer to
agree to their demands.
1. Types of trade union

1.1) Craft unions : workers with particular skills from a number of industries e.g.
plumbers and weavers.
1.2) General unions : workers with a range of skills and a range of industries.
1.3) Industrial unions : all the workers in a particular industry e.g. workers in the rail
industry.
1.4) White collar unions: workers in particular professions, including pilots and teachers.
2. The role of trade unions

2.1) To negotiate with employers for better wage and working conditions.
2.2) To protect workers' rights and jobs.
2.3) To improve productivity of members by providing education and training.
2.4) To provide benefits to members such as strike pay, legal advice and sickness pay.
2.5) To pressure the government to set minimum wage.
3. Factors increasing chance for trade union to achieve higher wage

3.1) Profit of company
3.2) The number of members
3.3) Productivity of members
3.4) The strong finance of the trade union
3.5) Demand for the product
3.6) Favourable government legislation
Industrial action : When wage negotiation fails, then trade unions may take industrial
action to put pressure on their employers e.g. strike (refuse to work and protest)
4. Advantages and disadvantages of trade union for workers
1. Workers have more bargaining power 1. Being members of trade union and
to ask for higher wage and better doing industrial action have a chance
working condition such as sick payment, to be unemployed.
holiday and healthcare benefits. 2. Member fees are expensive.
2. Trade union protects right and jobs 3. During strike workers cannot get
to members. any income.
3. Trade union provides education and 4. Some workers might satisfy with
training for members. their jobs, so they do not want to join
trade union.
5. Some workers have power to negotiate
directly with employers.
5. Advantages and disadvantages of trade union for firms
1. Trade union provides training to 1. Trade union asks for higher wage
members. It improves members' which increases the cost to firms.
productivity. They can generate more 2. Trade unions might protest which creates
firms' profits. a bad reputation for business. It stops the
2. Labour and firms have good production process of firms and they might go
relationships. Labours are motivated bankrupt.
and work efficiently. 3. Trade union might influence government
to set minimum wage which increases
6. Advantages and disadvantages of trade union for economy
1. Trade union protects benefits of 1. Trade union increases wage and cost
workers. Then working age would to firms which causes firms to lay off
like to participate in the labour market. some workers ⇒ Unemployment↑
↳ Supply of labour ↑ 2. Minimum wage may discourage
↳ National output ↑ foreign direct investment(FDI) ⇒
2. When workers have more wage Unemployment↑
they can afford more goods and services 3. Trade union increases wage and cost
↳ It increases production and to firms which causes exports to
economic growth. be less competitive in the world market
3. Trade union improves productivity of resulting in lower export revenue.
labours by providing education and

training
↳ Country's productive potential↑
CHAPTER 20 : Firms
Key terms
1. Industry : a group of firms producing the same product.
2. The quaternary sector : covers service industries that are knowledge based.
3. Internal growth : an increase in the size of a firm resulting from it enlarging existing
plants or opening new ones.
4. External growth : an increase in the size of a firm resulting from it merging or taking
over another firm.
5. Horizontal merger : the merger of firms producing the same product and at the
same stage of production.
6. Vertical merger : the merger of one firm with another firm that either provides an
outlet for its products or supplies it with raw materials components or the product it
sells.
7. Conglomerate merger : a merger between firms producing different products.
8. Rationalisation : eliminating unnecessary equipment and plant to make a firm more
efficient.
9. Vertical merger backwards : a merger with a firm at an earlier stage of the supply
chain.
10. Vertical merger forwards : a merger with a firm at a later stage of the supply chain.
11. Internal economies of scale : lower long run average costs resulting from a firm
growing in size.
12. External economies of scale : lower long run average costs resulting from an
industry growing in size.
13. Internal diseconomies of scale : higher long run average costs arising from a firm
growing too large.
14. External diseconomies of scale : higher long run average costs arising from an
industry growing too large
1. Classification of firms
1.1 By the stages of production.
• Primary sector : involved in the extraction and collection of raw materials
such as agriculture, coal mining and forestry.
• Secondary sector : involved with the processing of raw materials into finished goods
including manufacturing and construction.
• Tertiary sector : involved with service industry such as tourism, banking and insurance.
• Quaternary sector : a subsection of tertiary sector which is involved with
the collection, processing and transmission of information.
1.2 By Ownership of firms

• Private sector : individuals and firms
• Public sector : state-owned enterprises
1.3 By The size of firms

Factors influence the size of firms
1. Age of the firms
2. Availability of financial capital
3. Type of business organisation
4. Internal economies and diseconomies of scale
5. Size of the market.
Reasons for being small firms
1. The small size of the market such as designer dresses and suits.
2. Small firms can provide personal services such as hairdressing.
3. Owners' preference; some owners do not want to have management worries from
owning large businesses.
4. Small firms are flexible to adjust to changes in market condition quickly.
5. Some industries require little or no capital, then there are large numbers of small
firms.
6. Lack of financial capital to expand firms.
7. Location : due to high transport cost firms sell products in local areas rather than
national markets.
8. Cooperation between small firms : e.g. small farmers may join together to buy
seeds and equipment.
9. Specialisation : small firms may supply specialist products to large firms.
10. Government support: government gives subsidy to small firms to help reduce
cost of production.
Reasons for being large firm

1. To gain a lot of profit which could fund research and development and
innovation.
2. To gain more market share.
3. To take advantages of economies of scale : Higher production leads to lower
average cost e.g. buying raw material in bulk.
4. To become a monopoly which has power to set high prices.
Disadvantages of being large firm

1. Firms might face diseconomies of scale e.g. communication diseconomies of
scale and labour diseconomies of scale ⇒ Average cost ↑ ⇒ Price↑
2. Owners might have management worries from operating a large-size business
2. Causes of the growth of firms.
1.) Internal growth or natural or organic growth.
⇒ Firms grow by expanding existing production.
2.) External growth
⇒ Firms grow in size by merge or takeover.
3 mains types of merger

3.1) Horizontal merger (A+A or B+B or C+C) : the merger of two firms at the same stage
of production
1.Firms can take advantage of economies 1. Firms may experience diseconomies of

of scale scale. A large firm can be difficult to
2. Rationalisation: merging could enable control.
them to sell off the redundant 2.It is difficult to integrate the two firms with
resources. different management structure and
culture.
3.2) Vertical merger : when a firm merges with another firm involved with the production
of the same product but at a different stage of production.
• Vertical merger backwards (B+A) : when a firm merges with another firm that is
the source of its supply of raw materials e.g. a coffee manufacturer merges with a
coffee farm.
1.To ensure an adequate supply of 1.There is no competition between suppliers

good quality raw materials at anymore. It may lead to higher raw material
reasonable price. costs.
2.It is more certain over the production 2.There is higher risk from adverse change in
such as quantity, quality and price. supplier as it will affect the whole business.
3.To restrict suppliers to supply raw 3.It may cause diseconomies of scale from
materials to rival firms. being large firms.
• Vertical merger forwards (B+C) : when a firm merges or takes over a market
outlet e.g. a coffee manufacturer buys a coffee shop.
1.To ensure that there are sufficient 1.There is a higher risk from holding high
outlets. fixed costs. The fortunes of business are
2.To ensure that products are stored tied to the distribution system.
and displayed well in high quality 2.Process are independent then a slight
outlets. disruption will affect the whole.
3.Firms can control after sale service. 3.It may cause diseconomies of scale from
4.A merger may help in development being large firms.
and marketing of new products.
3.3) Conglomerate merger : the merger of two firms which make different products e.g. a
coffee manufacturer merges with a hotel company.
1.A merger spreads a firm's risks. If the 1.It may cause diseconomies of scale from
sale revenue from a product falls, the being large firms.
firm still has revenue from other 2.A merger may lack experience in new
products. business. It has a chance to fail.
2.It enables a merger to grow even if the
market of one of its products is
declining.
3.A merger is being larger, it can borrow
more money at lower interest.
The effects of merger on consumers
Positive effects Negative effects
1. A merger can generate economies of 1.It may result in diseconomies of scale

scale leading to lower average cost and leading to higher average cost and
lower price of products to consumers higher price of products to consumers
2. A merger gains high profit which could 2.It may increase market power to merged
generate high quality of products and firms then they have power to set high
innovation. prices and limit choice to consumers.
3. A merger can increase its efficiency.
4. Economies and diseconomies of scale.
Economies of scale : Lower long run average cost (LRAC)
4.1 Internal Economies of scale :
When a firm grows in size, it leads to lower average cost. It causes downward
movement along the average cost curve.
Types of internal economies of scale

1. Purchasing economies: buying raw material in bulk at discount.
2. Marketing economies: advertising cost per unit falls as output rises.
3. Managerial economies: Large firms can employ specialist staff.
4. Labour economies : Large firms can engage in division of labour ⇒ Average cost
falls.
5. Financial economies: It is easier for large firms to raise funds at a cheaper interest
rate.
6. Technical economies: Large firms can use technologically advanced machinery
7. Research and development economies
8. Risk bearing economies: Large firms produce a wide range of products ⇒ risk of
trading falls.
4.2 External economies of scale :
External economies of scale : When industry grows, it leads to lower average cost to
firms. It causes the average cost curve to shift down.
Types of external economies of scale
1. A skilled labour force available
2. A good reputation e. g. France-wine.
3. Specialist suppliers of raw materials and Capital goods
4. Specialist services e. g. university
5. Improved infrastructure lowers transport cost for businesses.
6. Sharing knowledge between firms in the industry
Diseconomies of Scale (higher long run average cost (AC))
4.3 Internal diseconomies of scale : When firm grows in size ⇒ AC rises
Types of internal diseconomies of scale

1. Difficulties controlling the firm
2. Communication problems: Large firms have many layer causing difficulties
in communication
3. Labour diseconomies: workers in large firms do only a small part of business.
It might demotivate them to work efficiently.
4.4 External diseconomies of scale : When industry growing ⇒ AC rises
Types of External diseconomies of scale.

1. congestion
2. telecommunication deterioration.
CHAPTER 21 : Firms and production
1. Demand for factors of production

Factors influencing demand for capital goods
1. Price of capital↓ Demand for capital↑
2. Price of other factors of production e.g. wage↑ Demand for capital↑as firms
use more capital to replace workers.

3. Profit levels↑ Demand for capital↑ as firms have the ability to invest in machines.
4. Corporate tax↓ Demand for capital↑as firms pay lower tax and have higher ability
to invest in capital.
5. Income↑ Demand for capital↑as consumers have higher spending then firms
have to increase production and invest more on capitals.

6. Demand for product↑ Demand for capital↑to produce products responding to
higher demand.
7. Interest rate↓ Demand for capital↑as firms have lower cost of borrowing.
2. Production and Productivity

Production : The process to convert raw material into a product.
Productivity : output per input per period of time.
CHAPTER 22 :Firm costs revenue and objectives

Key terms
1. Total cost : the total amount that has to be spent on the factors of production
used to produce a product.
2. Average total cost : total cost divided by output.
3. Fixed costs : costs which do not change with output in the short run.
4. Average fixed cost : total fixed cost divided by output.
5. Variable costs : costs that change with output.
6. Average variable cost : total variable cost divided by output.
7. Long run : the time period when all factors of production can be changed
and all costs are variable.
8. Price : the amount of money that has to be given to obtain a product.
9. Total revenue : the total amount of money received from selling a product.
10. Average revenue : the total revenue divided by the quantity sold.
11. Profit satisficing : sacrificing some profit to achieve other goals.
12. Profit maximisation : making as much profit as possible or making the largest
difference between total revenue and total cost.
1. Calculating the costs of production
• Total cost : the total amount that has to be spent on the factors of production
used to produce a product.
Total cost = Fixed cost + Variable cost
• Fixed costs : costs which do not change with output in the short run e.g.
machines, rent, and interest on loan.
• Variable costs : costs that change with output e.g. raw material.
• Average fixed cost : total fixed cost divided by output.
Average fixed cost = Total fixed cost

Quantity of output
Average variable cost : total variable cost divided by output.
Average variable cost = Total variable cost

Quantity of output
AVC↑ when a firm faces diseconomies of scale.
AVC↓ when a firm faces economies of scale.
2. Revenue
• Total revenue : the total amount of money received from selling a product.
Total revenue = Price × Quantity
• Average revenue: the total revenue divided by the quantity sold.
Average revenue = Total revenue

Quantity of output
CASE : When price is constant in perfect competition market
Average revenue = Total revenue = Price

Quantity of output
For example : Price = 10 USD
Quantity Price Total Revenue (TR) Total Average Revenue (AR)
1 10 10 10
2 10 20 10
3 10 30 10
4 10 40 10
5 10 50 10
To sum up : When price is constant, AR = P
CASE: When price is falling as the quantity sold rises
For example :
Quantity Price Total Revenue (TR) Total Average Revenue (AR)
1 10 10 10
2 9 18 9
3 8 24 8
4 7 28 7
5 6 30 6
6 5 30 5
7 4 28 4
To sum up : When price is falling as the quantity sold rises AR =P and AR is falling. TR
rises and falls.
3. Objectives of firms
1. Survival
2. Growth
3. Social welfare
4. Profit satisficing
5. Profit maximization
4. To increase profit
1. Reducing cost of production.
2. Increasing revenue

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CHAPTER 1 : THE NATURE OF ECONOMIC PROBLEM

Economic Problem: limited resources and unlimited want

We cannot get everything by the condition of limited resources.

The lost of the next best alternative foregone is called

Factors of Definition Example Return

1.Land Natural resources oil and coal Rent

1.Labour Workers who are used in Builder, teacher Wage

1.Capital Human-made goods used in Machines, Interest

2. Mobility of factors of production

Factors of Geographically mobility Occupationally mobile

1.Land Geographically immobile Occupationally mobile

2.Labour Geographically immobile Occupationally immobile

3.Capital Depend Occupationally immobile

4.Enterprise Geographically mobile Occupationally mobile

: Opportunity cost is the next best alternative given up when a choice is

Opportunity cost to Opportunity cost to Opportunity cost to

• Consumers have • Producers have limited • Government has a limited

CHAPTER 4 : PRODUCTION POSSIBILITY CURVE

• ON PPC : Point X, Y, Z : ⇒ Efficiency

2. PPC and opportunity cost

• Economic problems arise from limited resources and limitless want.

4. Factors causing a shift outward of PPC

Increase Quantity Factor of Increase Quality Factor Technological Advance

CHAPTER 5 : MICROECONOMICS AND MACROECONOMICS

2. Decision makers in microeconomics and macroeconomics

Private sectors Public sectors

Owner : firms owned by shareholders Owner : Government

CHAPTER 6 : THE ROLE OF MARKET IN ALLOCATING OF

Functions of economic system is to answer fundamental economic 3 questions.

2. Different economic systems

Economic systems Definition Example

1.Planned economic ⇒ The state or government makes E.g. North

2.Market economic ⇒ Buyers or consumers determine what is E.g. USA,

3. The role of price mechanism

1. Demand : the willingness and ability to buy a product

3.1 Change in income

3.1 Cost of production↓

3.2 An improvement of technology

3.4 Subsidy ↑ cost of production ↓

3.5 Favour Weather conditions

3.6 Price of other product ↑

3.7 Discoveries new alternative resources

CHAPTER 9 : Price determination

• At market equilibrium : Demand = Supply at price ฿5 per unit

2. Moving from market disequilibrium to market Equilibrium

• Disequilibrium : where demand ≠ Supply

2.1) At price = 8, there is excess supply : supply > demand

• Price↓ causing contraction in supply and extension in demand

• Price falls until it reaches the equilibrium.

2.2) At price = 2, there is excess demand : demand > supply

• Price↑ causing contraction in demand and extension in supply

• Price rises until it reaches the equilibrium.

CHAPTER 10 : PRICE CHANGES

1. Original equilibrium is at P1 and Q1.

1. Original equilibrium is at P1 and Q1.

CHAPTER 12 : PRICE ELASTICITY OF SUPPLY

: Price elasticity of supply(PES) : measures the responsiveness of quantity supply to

PES = % change in quantity of supply

Price elastic supply Price inelastic supply

Definition The percentage change in quantity The percentage change in quantity