Economics Solving Revision

Higher Income :
1) Spend on g/s ,so satisfy needs and wants, so decrease absolute poverty

2) Increase workers motivation, so increases productivity

3) Encourage more people to work and so increase labour force

el
4) Higher demand on goods, will encourage businesses to invest , (MNC to open in the country) so higher
output (GDP) and Higher economic growth.

5) Higher spending so increasing AD , so:

m
a) Increase demand pull inflation (Disadv)
b) Increase GDP
c) Decrease unemployment

Ka
6) Increase Gov Tax revenue:
a) Increase income tax revenue for the government (due to higher wages)
b) Increase corporation tax revenue ( since higher profits)
c) Increase Indirect tax revenue (since higher spending)

7) Higher income Increases Imports , so decreases AD (Disadv)

Higher Government Spending:

rif
1) Government spend on Public goods
a) Since they aren’t produced by the private sector since businesses can’t charge a price for it and they
aren’t profitable
ha

b) They have Private benefits which are underestimated and External benefits which are ignored

2) Government Spend on Merit Goods

a) Since they are under produced and underconsumed, Bec. it’s External benefits are ignored and
Private benefits are underestimated
.S

3) Government spend on Transfer Payments

a) Unemployed take Welfare benefits…… so increase consumer spending, Increasing AD
b) Retired people take Pensions…… so increase consumer spending, Increasing AD
c) Businesses take Subsidies…. So increase Investment , increasing AD

4) Government buy g/s , so increasing AD

R

5) Higher spending on Infrastructure. So will attract Multinationals to invest in the country.

D

Dr. Sharif Kamel - Business and Economics Tutor - 01143186699

Investment :
It’s increasing the spending by the businesses on capital goods

1) Increases AD so … (Higher Inflation, lower unemployment,higher GDP, Higher Exports)

2) Higher investment (spending) will increase government indirect tax revenue.

3) Increase quality of products, so more Internationally Quality competitive, so higher exports, improving current
account

4) Increase productivity, so lower Avg. Cost ,so more internationally price competitive , so higher exports, so

el
improving current account.

5) Replace workers (if they are substitutes) so higher unemployment

m
6) Encourage MNCs to open in the country (if investment is in infrastructure)

Business increase output/Grow :

Ka
Always Remember Economies (decrease in Avg cost) and diseconomies of scale (increase in Avg cost)

Price change :
Remember Elastic and Inelastic demand

If Demand Inelastic …. Price should increase …. To increase Sales Revenue … to increase Profits
If Demand Elastic …. Price should decrease …. To increase Sales Revenue … to increase Profits
rif
Different names of Price: (MOVE ALONG THE CURVE IN D/S Diagram):
1) Price of product = Price / Avg. Revenue
ha

2) Price of labour = Wage/ Salary

3) Price of Foreign currency = Exchange rate

4) Price of Land = Rent

.S

5) Price of Capital = Interest rates

6) Price of Loans = Interest rates

R

Fiscal Policy: (By the Government)

Remember Changes in Tax and Gov. Spending
D

Remember fiscal policy = Budget

Expansionary Fiscal policy = Budget deficit
a) By decreasing Tax and increasing Gov spending (to increase AD)

Contractionary Fiscal policy = Budget surplus

a) By Increasing Tax and Decreasing Gov spending (To decrease AD)

State = Government

Dr. Sharif Kamel - Business and Economics Tutor - 01143186699

Saving will decrease spending in short run but will increase spending on the long run

Borrowing will increase spending (especially on Luxurious goods)

Increase Borrowing:

1) Increase spending on luxurious goods , so higher business profits

2) Increase spending on education, so higher future incomes and lower poverty

3) Increase spending on healthcare, so higher life expectancy and higher standard of living

el
4) Starting new businesses, so decreasing unemployment

5) Encourage MNCs to invest in the country

m
6) Government borrowing could increase production of Public Goods and Merit Goods

Higher Interest rates :

Interest rates are the cost of borrowing / reward for saving

Ka
1) Increase savings, since higher reward
2) Decrease Borrowing, since higher cost of production
3) Increase Exchange rate (due to higher inflow of hot money in the country so higher demand on currency)

N.B: Higher Exchange Rate = Higher Foreign exchange rate = Rise in the currency

Remember always it affects IMPORTS and EXPORTS

rif
Higher Exchange Rate:
- Imports will be cheaper, so higher demand on imports, so higher import expenditure
ha

- Exports will be Expensive, so lower demand on exports, so lower export revenue

- If import expenditure is higher than export revenue , lead to worsening of Current account
.S

Current account surplus:

When all Credit items of Exports, primary income and secondary income exceeds all debit items of imports , primary
income and secondary income.

Current account deficit:

When all Credit items of Exports, primary income and secondary income are less than all debit items of imports ,
R

primary income and secondary income.

Current account is mainly affected by :

- Import expenditure
D

- Export revenue

Current account deficit… leads to depreciation of currency

Current account surplus… leads to appreciation of currency

Dr. Sharif Kamel - Business and Economics Tutor - 01143186699

Exchange rate systems:

1) Floating (determined by the Demand and Supply)

a) Corrects Current account automatically
b) Government have time to concentrate on more important objectives
c) Country’s reserves are not wasted
d) HOWEVER, It’s fluctuating so decreases business confidence

2) Fixed (Determined by the Government)

a) Put pressure on country’s reserves
b) Not fluctuating so increases business confidence

el
c) Opportunity cost (reserves could have been spent elsewhere)

During Floating system :

Currency Appreciates (Increase) and Depreciate (decrease)

m
During Fixed system :
Currency Revaluate (increase) and Devalue (decrease)

How to Revalue :

Ka
Government buy its own currency using reserves

How to Devalue :
Government sells its own currency by buying foreign currencies

N.B: Demanding a currency means Supplying another currency

rif
Subsidies :
1) Decrease cost of production, so increases supply (shift), leading to lower prices so higher Quantity demand
(Along the curve)
ha

2) Increases business inefficiency (complacency), (since they rely on it)

3) Has opportunity cost (could have been spent elsewhere)

4) Only successful if demand is PRICE ELASTIC and Supply is PRICE ELASTIC

.S

Subsidies are given to businesses to produce products that have External benefits or to help businesses
decrease External costs

Higher Population:
R

1) Increase labour force

2) Increase consumers , so higher AD
D

3) Increase the number of taxpayers, so higher Gov. Tax revenue

4) Beneficial if underpopulated, harmful if overpopulated
5) If population increased due to high birth rate, higher dependency ratio (people under 15)
6) If population increased due to lower death rate , will increase dependency ratio (people over 60)
7) If due to net immigration it could lead to new skills and ideas in the country, but could lead to tension between
different races.
8) Leads to more congestion,and external costs
9) Decrease GDP per capita , IF INCREASED MORE THAN INCREASE IN GDP

Dr. Sharif Kamel - Business and Economics Tutor - 01143186699

 Standards of Living Indicators Development Indicators Economic
Indicators
Real GDP per capita (Avg Income/person) Real GDP per capita (Avg Income/person) Inflation
Not GDP Not GDP

HDI: HDI: Unemployment

1) Real GDP per capita (Income/person) 1) Real GDP per capita (Income/person)
2) Life expectancy (healthcare) 2) Life expectancy (healthcare)
3) Avg years of schooling (education) 3) Avg years of schooling (education)

el
Absolute poverty GDP

Relative poverty Balance of Payments

m
Population Growth (NOT Population)

Foreign direct investment (FDI)

1ry vs 2ry vs 3ry

Ka
Availability of consumer goods

Availability of clean water and sewage

system
rif
Consumer Goods Capital Goods
Satisfy customer needs and wants Man made resources used to produce other goods and
ha

services

Very Important Tip :

More capital goods now ….. More Consumer goods in the future
So there is opp cost.
.S

Microeconomy Macroeconomy
Study of the behaviour of individuals, businesses or industry Study of the overall performance of the economy
Ex: Ex:
Higher Demand on chocolates Inflation
R

Higher supply of cars Unemployment

D

Occupational Mobility Geographical Mobility

Move from one Job to another Moving from one place to another

Public Goods Merit Goods

They are products that are Non- excludable and Non- Products which have External benefits . ex: education.
rivalry. Ex: street lights , defence healthcare

Dr. Sharif Kamel - Business and Economics Tutor - 01143186699

Local Government Central Government
Responsible for decision making in the town or local The national government which is responsible for
area planning and decision making on issues that affect the
whole country

Economic Goods Free Goods

el
They are produced from resources and have They are not produced from resources and have no
opportunity cost opportunity cost ex: air, sunlight

m
Production Productivity
Combining factors of production to produce goods and It's a measure of efficiency , it shows the output

Ka
services to satisfy needs and wants produced from every unit of input in a certain period of
time .
Output ÷ Input

Real Income Disposable Income

rif
Income after adjusting for inflation (Purchasing power) Income left after paying tax
ha

Nominal GDP Real GDP

Nominal GDP is the market value of goods and Real GDP is nominal GDP, adjusted for inflation to
services produced in an economy, unadjusted for reflect changes in real output.
inflation.
.S

Balance of Payments Budget

Recording the financial transactions between residents Difference between Government revenue and
of a country and the world Government spending
R

(in and out the country) (In and out of the government)
D

Profit Profit Maximisation

Total sales revenue - Total costs The level of output that makes the biggest difference
between total revenue and total costs

Dr. Sharif Kamel - Business and Economics Tutor - 01143186699

Minimum Price (Increases Price) Maximum Price (Decreases Price)
LAW SET BY THE GOVERNMENT where businesses LAW SET BY THE GOVERNMENT where businesses
can’t set a price BELOW it can’t set a price ABOVE IT

Always lead to surplus Always lead to shortage

Demand Pull Inflation Cost push

el
When AD exceeds AS When there is high cost of production so businesses
increases prices to maintain profit

Less harmful, since high AD so high GDP and Low More harmful … leading to low AS so lower GDP,

m
unemployment Higher unemployment

Low inflation High Inflation Deflation

Ka
Beneficial Harmful Harmful if due to low AD

Not a big problem if due to High AS

,high efficiency, high competition and
Economies of scale
rif
Low decrease in Purchasing power High decrease in purchasing Increase in purchasing power
(Real income) power (Real income)

Consumers increase demand (since Consumers are not able to buy Consumers delay payment in a hope
cheaper to buy now rather than the due to decrease in purchasing that prices decrease more , so lower
ha

future) so Higher AD (so Economic power. AD (Recession and higher

growth and low unemployment) So lower AD (Leading to unemployment)
recession and higher
unemployment)
.S
R
D

Dr. Sharif Kamel - Business and Economics Tutor - 01143186699

When Inflation is Harmful and when it is not?

Inflation > Interest rates Harmed

Savers and Lenders
Inflation < Interest rates Benefit

Inflation = Interest rates Not affected

Inflation > Income Harmed

Workers
Inflation < Income Benefit

el
Inflation = Income Not affected

Inflation > Inflation in other countries Harmed

m
Exporters
Inflation < Inflation in other countries Benefit

Inflation = Inflation in other countries Not affected

Ka
Benefit during Inflation because,
Borrowers they will return loans with a lower
value

Low inflation Beneficial

rif
Owners of Assets ( ex: Land) Benefits as it’s value increases with
the inflation
ha

Private Sector Public sector

Profit Maximisation is the main aim - Providing essential services
- Providing Low prices
- Decreasing unemployment
.S

Resources are allocated by the Price mechanism of Resources are determined by the Government
Demand and Supply

Main source of finance is Owners finance and previous Main source of finance is Subsidies from the
years profits government (that comes from taxes) and previous
years profits.
R

They use resources efficiently to gain highest profits Low efficiency since lack of profit motive
D

They are small and large businesses Usually Large businesses

Ignore External costs and Benefits Considers all social costs and benefits

Dr. Sharif Kamel - Business and Economics Tutor - 01143186699

 Labour Intensive Capital Intensive
Production depends on labour more than machines Production depends on machines more than labour

Used when low demand on product Better when high demand on product

Used when there is low finance Used when business can afford machines

Used if labour costs are lower and Productivity of labour Used if Capital costs is lower and Productivity of Capital
are higher is higher

Used when products are Customised Used when product is standardised

el
Sunrise industries (infant industry/ emerging Sunset industries (Declining Industry)

m
industry)

Protection of Sunrise industries since they are small If industry declined, There will be high structural
businesses ,so they have low Economies of scale , so unemployment , so government should protect to slow

Ka
difficult to compete internationally down the decline and give employees some time to
learn new skills or find other jobs

Why Government prevent Dumping?

Foreign businesses decrease prices below costs to destroy domestic businesses.
rif
Short Run: Benefit consumers since lower prices
Long Run: Harm customers since these businesses will dominate the market and charge higher prices.

Define CPI / RPI / Weighted Avg Price:

ha

It’s a way to measure the rate of inflation , it takes into account the weight of each product (proportion of
income spent on each product)

What are the Price Indices?

.S

CPI / RPI

Offsets:
R

- Inflation Vs Higher income , Interest Rates and Inflation in other countries

- Higher Birth rate increase the population ? offset Death rate and Migration rate
- Higher Exch rate decrease exports? Offset by lower inflation, higher productivity, higher inflation in other countries
D

- Higher Export revenue improves Current account ? Offset by higher import expenditure
- Higher revenue means higher profits? Offset by higher costs
- Does Increase GDP increase GDP per capita ? Offset by increase in population
- Gov spending on education / healthcare ? could increase quantity but not quality / Less efficient spending

Dr. Sharif Kamel - Business and Economics Tutor - 01143186699

Taxes Features and Functions:

Features Functions

Equity Increase Government revenue to increase gov

spending

Economic Decrease Gap between rich and poor

(progressive tax)

Efficiency Increase price of exports (Tariffs)

el
Certainty Increase price of Demerit goods

Convenient Protection if the environment

m
Flexible Manage the macroeconomy (Fiscal policy)

Ka
Money Features and Functions:

Features Functions

Acceptable Medium of Exchange

rif
Portable Measure of Value (Unit of account)

Durable Means of deferred payment

Divisible Store of value

ha

Scarce

Homogenous
.S

Young Old

More physical ability More experienced so higher productivity

More knowledge about new technology

R

More flexible
D

More Mobile

Dr. Sharif Kamel - Business and Economics Tutor - 01143186699

 Calculations:
Inflation rate = New-Old / Old x 100 between 2 CPI

Economic Growth = New-Old / Old x 100 between 2 GDP

Unemployment Rate= Unemployed / Labour force x 100

GDP per Capita = GDP / Population x 100

PED = % change in QD / % change in Price

el
PES = % change in QS / % change in Price

Tax Revenue = Tax Rate (%) x Tax Base (income,profit,spending)

m
Current account = Balance of Trade + Balance of services + Net 1ry Income + Net 2ry income
(Exp goods- imp goods) (Exp service - Imp service) (Credit - Debit ) (Credit - Debit)

Ka
Dependency Ratio = Dependants / Working population

Birth Rate = Born/ 1000 person/ year

Death rate = Deaths / 1000 person / year

Net migration = Immigration - Emigration / 1000 person / year

rif
Net immigration = Immigration > Emigration

Net emigration = Immigration < Emigration

ha

Gross Pay = Basic pay + Extra pay

Net Pay = Gross pay - Deductions

Social costs = Private costs + External costs

.S

Social Benefit = Private benefit + External benefit

Profit = Total Revenue - Total Costs

Total Revenue = Price X Quantity

R

Total Costs = Fixed costs - Total Variable costs

Average revenue = Total revenue / units = Price

D

Average cost = Total cost / units

Average Fixed cost = Fixed cost / units (Decreases with output)

Average Variable costs = Variable costs/ units (same with output)

Break even = Fixed costs / (selling price per unit - Vc per unit)

Productivity = Output / input

Labour productivity = No’ of units / No’ of employees

Dr. Sharif Kamel - Business and Economics Tutor - 01143186699