Macroeconomic Objectives Definitions:

• Economic growth is defined as an increase in real GDP over time; whereas GDP refers to the total value of goods/services produced in an economy.
• Unemployment occurs when those that are willing and able to work is unable to find work in the economy.
• Inflation is defined as the increase in general price level of the economy over time.
• A balanced government budget is when total government spending is equal to the amount of government taxation for that year.
• The current account is a component within the balance of payments, consisting of the net international trade in goods/services, net investment income and net transfer payments.

Macroeconomic Objectives Explanation:
There are a few main economic objectives that nearly every government pursues. One macroeconomic objective is Economic growth, which aims to increase how much we produce as an economy and how much we earn. For example, if all of our labour combined can produce a giant pumpkin pie each year, the government will hope to increase the size, quantity or quality of the pie we make, so our production becomes more valuable – how wonderful! As a result, all of us should be able to earn higher incomes after selling the more valuable pie and dividing the amount of money we earned among ourselves.

Another economic objective is to ensure unemployment is low. When unemployment is low, it means more people are in work and earning an income, thus leading to better standards of living. During extraordinary times of Covid, unemployment is very high. There is a hesitation for many companies (e.g. restaurants, hotels) to keep staff employed as they are uncertain of their future profits. As a result, this will cause a spike in unemployment which the government would hope to keep low.

Usually when the economy is growing, there would be a rise in prices for goods and services in the economy. This is because our incomes and purchasing power rises and there is more demand for goods in the economy, hence making them more expensive. Did you know the price of a Big Mac increased more than 3 times throughout the past 30 years? Governments hope to keep inflation low so our cost of living do not spiral out of control, and to ensure businesses can confidently predict what prices/profits they should have.

Macroeconomic Objectives Notes:

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Of course, the government would also want to keep their finances in order as an economic objective. This usually means balancing government spending with the amount they earn via taxes in the long run. As UK national debt reaches over £2 trillion, it is important to be able to manage that debt sustainably so that businesses and investors do not lose confidence in the UK economy, and the government’s ability to pay that back. Otherwise, economic growth may be affected negatively.

Finally, the government may also aim to ensure a stable current account, so that the total value of our imports/exports do not affect our economy adversely. The current account is mainly a measure to indicate how much we import and export as a country in monetary terms. If we import too much goods/services, there will be an outflow of incomes from our economy to other countries, which can cause the economy to contract; vice versa. However, it is important to know that a current account deficit (total value of imports > total value of exports) is not always problematic given there are other factors which determine the health of an economy.

Macroeconomic Objectives Video Explanation – featuring EconPlusDal

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Macroeconomic Objectives Multiple Choice Questions

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Macroeconomic Objectives in the News

Related A-Level, IB Economics Resources

Full Employment as the Most Important Objective

Macroeconomic Goals and Conflicts
Measuring Economic Performance

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Public Goods Definitions:

• A public good is defined as a good which is non-excludable and non-rivalrous.
• A good is non-rivalrous if the consumption/use of it will not decrease the possibility of others doing so.
• A good is non-excludable if anyone can use or access it, without monetary payment.
• A quasi-public good is a good which is non-excludable but rivalrous; or excludable but non-rivalrous.
• A good in Economics is defined as anything which humans can derive utility from.
• A private good is defined as a good which is excludable and rivalrous.

Public Goods & the Free-Rider Problem Explanation:
In Economics, a public good does not mean something is under public ownership. Instead, a public good is something that is freely usable by anyone, without cost and exclusion, and does not reduce in quantity available when used. The Ozone layer in our atmosphere, for example, is a public good. It protects us from harmful radioactive rays from the Sun that can cause cancer (giving us utility), and anyone can benefit/access it (non-excludable) without taking away the opportunity for others to do so (non-rivalrous). Note that whenever there is a monetary cost to consume a good, it becomes excludable as there are people who cannot access the good. For example, private tuition is a private good. Because anyone can access a public good (like traffic lights), nobody is willing to produce it since they cannot reimburse the cost of production. This is called the free-rider problem. As a result, the government tends to provide public goods in order to tackle missing markets for these goods and to improve economic efficiency. Public goods often suffer from abuse (the ‘Tragedy of the Commons‘) as nobody is willing to pay the cost for maintaining it, as nobody owns it. Such is the case for the depletion of our Ozone layer and the gradual destruction of our environment via over-fishing, greenhouse gases and climate change.

Public Goods & the Free-Rider Problem Notes with Diagrams/Graphs:

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Public Goods & the Free-Rider Problem Video Explanation (Featuring EconPlusDal)

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Public Goods Multiple Choice Questions

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Public Goods in the News

Related A-Level, IB Economics Resources

Quasi-Public Goods
Market Failure from Public Goods

Public, Private and Free Goods

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Jump to: Unit 1: Introduction to Economics | Unit 2: Microeconomics | Unit 3: Macroeconomics | Unit 4: The Global Economy

Comparison with Old IB Economics Syllabus

Compared to the old syllabus, the new IB Economics curriculum brings in new topics within Behavioural Economics (e.g. consumer rationality / biases), and newer Monetary Policy Tools (e.g. quantitative easing, bank reserve regulations) for HL Economics students. This addition is similar to the A-Level Economics syllabus updated in 2015. The teaching in IB Economics should be focused on relating back to the key, recurring Economics concepts in the syllabus below in Unit 1. Whereas International and Development Economics are now forced together to form Unit 4. Finally, in terms of assessment, IB HL Economics students are now required to answer policy recommendation questions in Paper 3, and SL Economics students need to answer some quantitative questions in Paper 2. It is also important to be aware that the questions in the 3 Economics papers can be from any unit in the syllabus below. Hence, be sure to use our IB Economics notes & questions by topic for practicing and revising certain areas of the course.

Syllabus key concepts: scarcity, choice, efficiency, equity, economic well-being, sustainability, change, interdependence, intervention.

Unit 1: Introduction to Economics

Recommended teaching time: 10 hours
Conceptual understandings:
• Economics is a social science characterized by interdependence, which focuses on how people interact with each other to improve their economic well-being, influenced and enabled by their values and their natural surroundings.
• The economic world is dynamic in nature and constantly subject to change.
• Economic theories are based on logic and empirical data, using models to represent and analyse this complex reality. Individual and collective motivations and behaviours are complex and diverse, and their understanding entails the interaction of a variety of disciplines such as philosophy, politics, history, and psychology.
• Economic decision-making impacts the relative economic well-being of individuals and societies.
• The central problems of economics are scarcity and choice. This forces societies to face trade-offs, opportunity costs and the challenge of sustainability.
• Debates exist in economics regarding the potential conflicts between economic growth and equity and between free markets and government intervention.
• Endless economic growth, based on the consumption of finite resources, cannot continue indefinitely. New economic models and social movements have challenged mainstream opinion about the purpose of growth and how the economy could be redesigned to support long-term prosperity.

1.1 What is economics?	Depth of teaching	Diagrams
Economics as a social science • The social nature of economics • The basis of the study of economics: microeconomics and macroeconomics • Introduction to the nine central concepts: scarcity, choice, efficiency, equity, economic well-being, sustainability, change, interdependence, intervention	AO2
The problem of choice • Factors of production—land, labour, capital and entrepreneurship • Scarcity Unlimited human needs and wants to be met by limited resources Scarcity and sustainability • Opportunity cost The cost of choice Free goods • The basic economic questions What/how much to produce, how to produce and for whom to produce? • Means of answering the economic questions Market versus government intervention Economic systems: free market economy, planned economy and mixed economy	AO2
The production possibilities curve model (PPC) • Assumptions of the model • Increasing versus constant opportunity cost • Features of the model: opportunity cost, scarcity, choice, unemployment of resources, efficiency, actual growth and growth in production possibilities	AO2, AO4	Diagram: PPC illustrating choice and opportunity cost, unemployment of resources, actual growth and growth in production possibilities Diagram: PPC showing increasing versus constant opportunity cost
Modelling the economy • The circular flow of income model • Interdependence between economic decision-makers interacting and making choices in an economy: households, firms, the government, the banks and financial sector, and the foreign sector (foreign firms and households) • Leakages and injections	AO2, AO4	Diagram: circular flow of income model, with leakages and injections
1.2 How do economists approach the world?
Economic methodology • The role of positive economics The use of logic The use of hypotheses, models, theories The ceteris paribus assumption Empirical evidence Refutation • The role of normative economics Value judgments in policy making The meaning of equity and equality	AO2
Economic thought • Origin of economic ideas in a historical context 18th century: Adam Smith and laissez faire 19th century: classical microeconomics (utility); the concept of the margin; Classical macroeconomics (Say’s law); Marxist critique of classical economic thought 20th century: Keynesian revolution; rise of macroeconomic policy; monetarist/new classical counter revolution 21st century: increasing dialogue with other disciplines such as psychology and the growing role of behavioural economics; increasing awareness of the interdependencies that exist between the economy, society and environment and the need to appreciate the compelling reasons for moving toward a circular economy	AO2

Unit 2: Microeconomics

Recommended time for teaching and inquiry: SL—35 hours, HL—70 hours

Real-world issue 1: How do consumers and producers make choices in trying to meet their economic objectives?

Conceptual understandings:
• Interaction between consumers and producers in a market is the main mechanism through which resources are directed to meet the needs and wants in an economy.
• Consumer and producer choices are the outcome of complex decision-making.
• Welfare is maximized if allocative efficiency is achieved.
• Constant change produces dynamic markets.

2.1 Demand	Depth of teaching	Diagrams and calculations
The law of demand—relationship between price and quantity demanded • Assumptions underlying the law of demand (HL only) The income and substitution effects The law of diminishing marginal utility	AO2
Demand curve	AO4	Diagram: downward- sloping demand curve
Relationship between an individual consumer’s demand and market demand	AO2
Non-price determinants of demand • Income • Tastes and preferences • Future price expectations • Price of related goods (in the cases of substitutes and complements) • Number of consumers	AO2
Movements along the demand curve and shifts of the demand curve	AO2, AO4	Diagram: movements along the demand curve and shifts of the demand curve
2.2 Supply
The law of supply—relationship between price and quantity supplied • Assumptions underlying the law of supply (HL only) The law of diminishing marginal returns Increasing marginal costs	AO2
Supply curve	AO4	Diagram: upward-sloping supply curve
Relationship between an individual producer’s supply and market supply	AO2
Non-price determinants of supply • Changes in costs of factors of production (FOPs) • Prices of related goods (in the cases of joint and competitive supply) • Indirect taxes and subsidies • Future price expectations • Changes in technology • Number of firms	AO2
Movements along and shifts of the supply curve	AO2, AO4	Diagram: movements along and shifts of the supply curve
2.3 Competitive market equilibrium
Demand and supply curves forming a market equilibrium	AO4	Diagram: market equilibrium
Shifting the demand and supply curves to produce a new market equilibrium, with reference to excess demand (shortage) and excess supply (surplus)	AO2, AO4	Diagram: showing changes in equilibrium/ role of price mechanism
Functions of the price mechanism • Resource allocation Signalling Incentive • Rationing	AO2
Consumer and producer surplus	AO2, AO4	Diagram: showing consumer surplus and producer surplus (social/ community surplus)— maximized at competitive market equilibrium Calculation (HL only): consumer surplus and producer surplus from a diagram
Social/community surplus	AO2, AO4
Allocative efficiency at the competitive market equilibrium: • social/community surplus maximized at equilibrium • marginal benefit (MB) equals marginal cost (MC)	AO2, AO4
2.4 Critique of the maximizing behaviour of consumers and producers
Rational consumer choice (HL only) • Assumptions—consumer rationality, utility maximization and perfect information • Behavioural economics—limitations of the assumptions of rational consumer choice Biases—rule of thumb, anchoring and framing, availability Bounded rationality Bounded self-control Bounded selfishness Imperfect information	AO3
Behavioural economics in action (HL only) • Choice architecture—default, restricted, and mandated choices • Nudge theory	AO3
Business objectives (HL only) • Profit maximization • Alternative business objectives Corporate social responsibility Market share Satisficing Growth	AO3
2.5 Elasticities of demand
Concept of elasticity	AO1, AO4	Diagram: relatively elastic and inelastic demand
Price elasticity of demand (PED) • PED = percentage   change   in   quantity   demanded percentage change in price • Degrees of PED—theoretical range of values for PED • Changing PED along a straight line downward sloping demand curve (HL only)	AO2, AO4	Diagram: constant PED—perfectly elastic, perfectly inelastic and unitary PED along a demand curve
• Determinants of PED—number and closeness of substitutes, degree of necessity, proportion of income spent on the good, time • Relationship between PED and total revenue		Diagram (HL only): PED along the straight line demand curve Diagram: showing changes in revenue as a result of price changes when demand is price elastic and price inelastic Calculation: PED, change in price, quantity demanded or total revenue from data provided
• Importance of PED for firms and government decision- making	AO3
• Reasons why the PED for primary commodities is generally lower than the PED for manufactured products (HL only)	AO2
Income elasticity of demand (YED) • YED = percentage   change   in   quantity   demanded percentage change in income • Income elastic demand (services and luxury goods) and income inelastic demand (necessities) • Significance of sign Positive YED (normal goods) and negative YED (inferior goods) Less than one (necessities) and greater than one (services and luxury goods)	AO2, AO4	Diagram: showing income elastic, income inelastic and inferior goods on an Engel curve Calculation: YED, change in income, quantity demanded from data provided
• Importance of YED (HL only): for firms in explaining changes in the sectoral structure of the economy.	AO3
2.6 Elasticity of supply
Price elasticity of supply (PES) • PES = percentage   change   in   quantity   supplied percentage change in price • Degrees of PES—theoretical range of values for PES • Determinants of PES—time, mobility of factors of production, unused capacity, ability to store, rate at which costs increase	AO2, AO4	Diagram: relatively elastic and inelastic supply Diagram: constant PES —perfectly elastic, perfectly inelastic and unitary PES along a supply curve Calculation: PES, change in price or quantity supplied from data provided
• Reasons why the PES for primary commodities is generally lower than the PES for manufactured products (HL only)	AO2

Real-world issue 2: When are markets unable to satisfy important economic objectives—and does government intervention help?

Conceptual understandings:
• The market mechanism may result in socially undesirable outcomes that do not achieve efficiency, environmental sustainability and/or equity.
• Market failure, resulting in allocative inefficiency and welfare loss.
• Resource overuse, resulting in challenges to environmental sustainability.
• Inequity, resulting in inequalities.
• Governments have policy tools which can affect market outcomes, and government intervention is effective, to varying degrees, in different real-world markets.

2.7 Role of government in microeconomics	Depth of teaching	Diagrams and calculations
Reasons for government intervention in markets • Influencing market outcomes in order to: earn government revenue support firms support households on low incomes influence level of production influence the level of consumption correct market failure promote equity.	AO2
Main forms of government intervention in markets • Price controls: price ceilings (maximum prices) and price floors (minimum prices) • Indirect taxes and subsidies • Direct provision of services • Command and control regulation and legislation • Consumer nudges (HL only)	AO2, AO4	Diagram: showing the following measures and the possible effects on markets and stakeholders • Price ceiling (maximum price) • Price floor (minimum price) • Indirect tax • Subsidy Calculation (HL only): the effects on markets and stakeholders of: • price ceilings (maximum prices) and price floors (minimum prices) • indirect taxes and subsidies.
Government intervention in markets—consequences for markets and stakeholders	AO3
2.8 Market failure—externalities and common pool or common access resources
Socially optimum output: marginal social benefit (MSB) equals marginal social cost (MSC). (MSB = MSC): allocative efficiency; social/community surplus maximized • Positive externalities of production and consumption and welfare loss • Merit goods • Negative externalities of production and consumption and welfare loss • Demerit goods • Common pool resources Characteristics: Tragedy of commons, rivalrous but non-excludable Unsustainable production creating negative externalities	AO2, AO4	Diagram: allocative efficiency Diagram: showing market failure due to: • negative externalities of production • negative externalities of consumption • positive externalities of production • positive externalities of consumption. Calculation (HL only): welfare loss from a diagram
Government intervention in response to externalities and common pool resources including: • Indirect (Pigouvian) taxes • Carbon taxes • Legislation and regulation • Education—awareness creation • Tradable permits • International agreements • Collective self-governance • Subsidies • Government provision	AO2, AO4	Diagram: showing government responses to externalities • Indirect (Pigouvian) taxes • Carbon taxes showing effects on the market of a particular polluting industry • Subsidies • Legislation and regulation • Education
Strengths and limitations of government policies to correct externalities and approaches to managing common pool resources including: • challenges involved in measurement of externalities • degree of effectiveness • consequences for stakeholders	AO3
Importance of international cooperation • Global nature of sustainability issues • Challenges faced in international cooperation • Monitoring, enforcement	AO3
2.9 Market failure—public goods
Public goods • Non-rivalrous, non-excludable • Free rider problem	AO2
Government intervention in response to public goods • Direct provision • Contracting out to the private sector	AO3
2.10 Market failure—asymmetric information (HL only)
Asymmetric information • Adverse selection • Moral hazard	AO2
Responses to asymmetric information • Government responses: legislation and regulation, provision of information • Private responses: signalling and screening	AO3
2.11 Market failure—market power (HL only)
Perfect competition–many firms, free entry, homogeneous products	AO2
Monopoly—single or dominant firm, high barriers to entry, no close substitutes Imperfect competition • Oligopoly—few large firms, high barriers to entry, interdependence • Monopolistic competition—many firms, free entry, product differentiation	AO2
Rational producer behaviour—profit maximization (HL only) • Total revenue - Total costs (TR -TC) • Marginal cost = Marginal revenue (MC=MR) • Abnormal profit (AR > AC)* • Normal profit (AR = AC)* • Losses (AR < AC)* * AR = Average revenue, AC = Average cost	AO2, AO4	Calculation (HL only): profit, MC, MR, AC, AR from data
Degrees of market power • Meaning of market power • Perfect competition—no market power —firm as price taker profit maximization: in the short run in the long run Meaning of allocative efficiency, necessary conditions Imperfect competition—varying degrees of market power—firm as price maker	AO3, AO4	Diagram: perfectly competitive firm as price taker where, *P = D = AR = MR Diagram: perfectly competitive firm showing: • abnormal profit • normal profit • losses Diagram: equilibrium in perfectly competitive market with reference to allocative efficiency when P = MC or MB = MC, maximum social/ community surplus. *P = Price, D = Demand
Monopoly • Profit maximization • Allocative inefficiency (market failure) • Welfare loss in a monopoly in comparison with perfect competition due to restricted output and higher price • Natural monopoly	AO3, AO4	Diagram: market power where AR > MC Diagram: monopolist showing: • abnormal profit • normal profit • losses Diagram: price/quantity comparison of a monopoly firm with a perfect competitive market. Also showing welfare loss under the monopoly. Diagram: natural monopoly
Oligopoly • Collusive versus non-collusive • Interdependence, risk of price war, incentive to collude, incentive to cheat • Allocative inefficiency (market failure) simple game theory payoff matrix • Price and non-price competition • Measurement of market concentration – concentration ratios	AO3, AO4	Diagram: collusive oligopoly acting as a monopoly
Monopolistic competition • Profit maximization: in the short run in the long run • Less market power due to many substitutes—more elastic demand curve compared with monopoly • Allocative inefficiency (market failure) • Less inefficiency, more product variety	AO3, AO4	Diagram: monopolistically competitive firm showing: • abnormal profit • normal profit • losses Diagram: monopolistic competition (with a more elastic demand curve compared to a monopoly)
Advantages of large firms having significant market power, including: • Economies of scale including natural monopolies • Abnormal profits may finance investments in research and development (R&D), hence innovation	AO3
Risks in markets dominated by one or a few very large firms • Risks in terms of output, price, consumer choice	AO3
Government intervention in response to abuse of significant market power • Legislation and regulation • Government ownership • Fines	AO3
2.12 The market’s inability to achieve equity (HL only)
• Workings of free market economy may result in an unequal distribution of income and wealth	AO2	Diagram: showing the circular flow model to illustrate why the free market results in inequalities

Unit 3: Macroeconomics

Recommended time for teaching and inquiry: SL—40 hours, HL—75 hours

Real-world issue 1: Why does economic activity vary over time and why does this matter?

Conceptual understandings:
• Change in the conditions of the demand and supply sides of the economy cause economic activity to vary over time.
• Fluctuations in economic activity impact the economic well-being of individuals and societies.
• Different schools of macroeconomic thought identify different causes and offer different solutions for macroeconomic problems.

3.1 Measuring economic activity and illustrating its variations	Depth of teaching	Diagrams and calculations
National income accounting as a measure of economic activity	AO2, AO4	Diagram: circular flow of income model showing the interactions between decision makers, leakages and injections
Equivalence of the income, output and expenditure approaches to national income accounting, with reference to the circular flow model	AO2, AO4
[Nominal] Gross domestic product (GDP) as a measure of national output	AO2, AO4	Calculation: [nominal] GDP from sets of national income data, using the expenditure approach
[Nominal] Gross national income (GNI) as a measure of national output	AO2, AO4	Calculation: [nominal] GNI from data
Real GDP and real GNI	AO2, AO4	Calculation: real GDP and real GNI, using a price deflator
Real GDP/GNI per person (per capita) Real GDP/GNI per person (per capita) at purchasing power parity (PPP)	AO2, AO4	Calculation: real GDP per capita and real GNI per capita
Business cycle: short-term fluctuations and long-term growth trend (potential output)	AO2, AO4	Diagram: business cycle showing short-term fluctuations and long-term growth trend (potential output)
Appropriateness of using GDP or GNI statistics to measure economic well-being—use of national income statistics for making: • comparisons over time • comparisons between countries	AO3
Alternative measures of well-being • OECD Better Life Index • Happiness Index • Happy Planet Index	AO2
3.2 Variations in economic activity—aggregate demand and aggregate supply
Aggregate demand (AD) • Aggregate demand curve	AO2, AO4	Diagram: AD curve
Components of AD: consumption (C) + investment (I) + government spending (G) + net exports (total exports [X] - total imports [M])	AO2
Determinants of AD components • C: consumer confidence, interest rates, wealth, income taxes, level of household indebtedness, expectations of future price level • I: interest rates, business confidence, technology, business taxes, level of corporate indebtedness • G: political and economic priorities • X - M: income of trading partners, exchange rates, trade policies	AO2
Shifts of the AD curve caused by changes in determinants	AO2, AO4	Diagram: shifts of the AD curve
Short-run aggregate supply (SRAS) curve and determinants of the SRAS curve • costs of factors of production • indirect taxes	AO2, AO4	Diagram: SRAS curve
Shifts of the SRAS curve	AO2, AO4	Diagram: shifts of the SRAS curve
Alternative views of aggregate supply (AS) • Monetarist/new classical view of the long-run aggregate supply (LRAS) curve • Keynesian view of the AS curve • Inflationary and deflationary/recessionary gaps	AO2, AO4	Diagram: alternative views of the AS curve
Shifts of the AS curve over the long-run (monetarist/new classical LRAS) or over the long term (Keynesian AS) • Changes in the quantity and/or quality of factors of production • Improvements in technology • Increases in efficiency • Changes in institutions	AO2, AO4	Diagram: shifts of the LRAS or Keynesian AS
• Macroeconomic equilibrium • Short-run equilibrium • Equilibrium in the monetarist/new classical model Determination of long-run equilibrium at full employment level of output (potential output) Automatic adjustment to full employment equilibrium Unemployment at full employment equilibrium is equal to the natural rate of unemployment • Equilibrium in the Keynesian model Persistence of deflationary/recessionary gaps: equilibrium level of output might not equal the full employment level of output	AO2, AO4	Diagram: macroeconomic equilibrium in both the short run and long run
Assumptions and implications of the monetarist/new classical and Keynesian models	AO3
3.3 Macroeconomic objectives
Economic growth • Short-term growth Actual growth in the PPC model Role of AD in the AD/AS model • Long-term growth Shifts of the PPC (growth in production possibilities) Role of LRAS in the AD/AS model • Measurement of economic growth	AO2, AO4	Diagram: PPC model showing actual growth and growth in production possibilities Diagram: AD increases showing increases in real output Diagram: LRAS increases showing increases in full employment output Calculation: the rate of economic growth from a set of data
• Consequences of economic growth, including: impact on living standards impact on the environment impact on income distribution	AO3
Low unemployment • Measurement of unemployment and the unemployment rate • Difficulties of measuring unemployment • Causes of unemployment—cyclical (demand deficient), structural, seasonal, frictional • Natural rate of unemployment—sum of the structural, seasonal, frictional unemployment • Costs of unemployment—personal costs, social costs, economic costs	AO2, AO4	Calculation: the unemployment rate from a set of data Diagram: minimum wage to show unemployment Diagram: showing a fall in the demand for labour for a particular market or geographical area Diagram: deflationary gap to show cyclical unemployment
Low and stable rate of inflation • Measuring the inflation rate, using consumer price index (CPI) data • The limitations of the CPI in measuring inflation • Causes of inflation—demand-pull and cost-push • Costs of a high inflation rate—uncertainty, redistributive effects, effects on saving, damage to export competitiveness, impact on economic growth, inefficient resource allocation • Causes of deflation—changes in AD or SRAS • Disinflation and deflation • Costs of deflation—uncertainty, redistributive effects, deferred consumption, association with high levels of cyclical unemployment and bankruptcies, increase in the real value of debt, inefficient resource allocation, policy ineffectiveness	AO2, AO4	Calculation (HL only): a weighted price index, using a set of data provided Calculation: the inflation rate from a set of data using quantities purchased as weights in the CPI Diagram: demand-pull inflation Diagram: cost-push inflation Diagrams: deflation
Relative costs of unemployment versus inflation	AO3
Sustainable level of government (national) debt (HL only) • Measurement of government (national) debt as a percentage of GDP • Relationship between a budget deficit and government (national) debt • Costs of a high government (national) debt—debt servicing costs, credit ratings, impacts on future taxation and government spending	AO2
• Potential conflict between macroeconomic objectives Low unemployment and low inflation • High economic growth and low inflation • High economic growth and environmental sustainability • High economic growth and equity in income distribution	AO3
Trade-off between unemployment and inflation (HL only) Short-run and long-run Phillips curve	AO3, AO4	Diagram (HL only): AD/AS curves Diagram (HL only): Phillips curve showing the short-run and long- run relationship between inflation and unemployment
3.4 Economics of inequality and poverty
Relationship between equality and equity	AO2
The meaning of economic inequality • Unequal distribution of income • Unequal distribution of wealth	AO2
Measuring economic inequality • Lorenz curve and Gini coefficient (index)	AO2, AO4	Diagram: Lorenz curve showing the distribution of income and possible changes in the distribution of income Construction (HL only): a Lorenz curve from income quintile data
Meaning of poverty • Difference between absolute and relative poverty	AO2
Measuring poverty • Single indicators including: international poverty lines minimum income standards • Composite indicators including the Multidimensional Poverty Index (MPI)	AO2
Difficulties in measuring poverty	AO2
Causes of economic inequality and poverty, including: • inequality of opportunity • different levels of resource ownership • different levels of human capital • discrimination (gender, race and others) • unequal status and power • government tax and benefits policies • globalisation and technological change • market-based supply side policies	AO2
The impact of income and wealth inequality on: • economic growth • standards of living • social stability	AO3
The role of taxation in reducing poverty, income and wealth inequalities • Progressive, regressive and proportional taxes Average and marginal tax rates • Direct taxes Personal income Corporate income Wealth • Indirect taxes	AO3, AO4	Calculation (HL only): given the indirect tax rate, the amount of indirect tax paid from a given level/ amount of expenditure Calculation (HL only): total tax and average tax rates from a set of data
Further policies to reduce poverty, income and wealth inequality, including: • policies to reduce inequalities of opportunities/ investment in human capital • transfer payments • targeted spending on goods and services • universal basic income • policies to reduce discrimination • minimum wages	AO3

Real-world issue 2: How do governments manage their economy and how effective are their policies?

Conceptual understandings:
• Government intervention attempts to achieve macroeconomic objectives through a choice of policies.
• Political, economic, social and environmental factors are interdependent and will influence the effectiveness of government policies.

3.5 Demand management (demand-side policies)— monetary policy	Depth of teaching	Diagrams and calculations
Monetary policy • Control of money supply and interest rates by the central bank	AO1
Goals of monetary policy • Low and stable rate of inflation Inflation targeting • Low unemployment • Reduce business cycle fluctuations • Promote a stable economic environment for long-term growth • External balance	AO2
The process of money creation by commercial banks (HL only)	AO2
Tools of monetary policy (HL only) • Open market operations • Minimum reserve requirements • Changes in the central bank minimum lending rate (base rate/discount rate/refinancing rate changes) • Quantitative easing	AO2
Demand and supply of money—determination of equilibrium interest rates (HL only)	AO2, AO4	Diagram (HL only): showing the determination of equilibrium interest rates
Real versus nominal interest rates	AO2	Calculation: real interest rates from given data
Expansionary and contractionary monetary policies to close deflationary/recessionary and inflationary gaps	AO3, AO4	Diagram: AD/AS curves showing expansionary and contractionary monetary policy
Effectiveness of monetary policy • Constraints on monetary policy, including: limited scope of reducing interest rates, when close to zero low consumer and business confidence • Strengths of monetary policy, including: incremental, flexible and easily reversible short time lags • Strengths and limitations in promoting growth, low unemployment, and low and stable rate of inflation	AO3
3.6 Demand management—fiscal policy
Fiscal policy • Sources of revenue—direct and indirect taxation, sale of goods and services from state-owned enterprises, sale of government assets • Expenditures—current expenditures, capital expenditures, transfer payments	AO2
Goals of fiscal policy • Low and stable inflation • Low unemployment • Promote a stable economic environment for long-term growth • Reduce business cycle fluctuations • Equitable distribution of income • External balance	AO2
Expansionary and contractionary fiscal policies in order to close deflationary/recessionary and inflationary gaps	AO3, AO4	Diagram: AD/AS curves showing expansionary and contractionary fiscal policy for both Keynesian and monetarist/new classical schools of thought
Keynesian multiplier (HL only) • 1 / (1 − MPC) or • 1 / (MPS + MPT + MPM) MPC— marginal propensity to consume MPS—marginal propensity to save MPT—marginal propensity to tax MPM—marginal propensity to import	AO2, AO4	Calculation (HL only): Keynesian multiplier Calculation (HL only): the effect on GDP of a change in an injection in investment, government spending or exports, using the Keynesian multiplier
Effectiveness of fiscal policy • Constraints on fiscal policy, including: political pressure time lags sustainable debt	AO3
crowding out (HL only)	AO4	Diagram (HL only): showing the crowding-out effect
• Strengths of fiscal policy, including: targeting of specific economic sectors government spending effective in deep recession • Automatic stabilizers: progressive taxes, unemployment benefits (HL only) • Strengths and limitations in promoting growth, low unemployment, and low and stable rate of inflation	AO3
3.7 Supply-side policies
Goals of supply-side policies • Long-term growth by increasing the economy’s productive capacity • Improving competition and efficiency • Reducing labour costs and unemployment through labour market flexibility • Reducing inflation to improve international competitiveness • Increasing firms’ incentives to invest in innovation by reducing costs	AO2
Market-based policies, including: • policies to encourage competition, such as: deregulation privatization trade liberalization anti-monopoly regulation • labour market policies, such as: reducing the power of labour unions reducing unemployment benefits abolishing minimum wages • incentive-related policies, such as: personal income tax cuts cuts in business tax and capital gains tax	AO2, AO4	Diagram: AD/AS model and LRAS curve to show the effect of supply-side policies Diagram: showing minimum wage
Interventionist policies, including: • education, training • improving quality, quantity and access to health care • research and development • provision of infrastructure • industrial policies	AO2
Demand-side effects of supply-side policies	AO2
Supply-side effects of fiscal policies	AO2
Effectiveness of supply-side policies • Constraints on supply-side policies Market based—equity issues, time lags, vested interests, environmental impact Interventionist—costs, time lags • Strengths of supply-side policies Market based—improved resource allocation, no burden on government budget Interventionist—direct support of sectors important for growth • Strengths and limitations in promoting growth, low unemployment, and low and stable rate of inflation	AO3

Unit 4: The Global Economy

Recommended time for teaching and inquiry: SL—45 hours, HL—65 hours

Real-world issue 1: Who are the winners and losers of the integration of the world’s economies?

Conceptual understandings:
• The increased interdependence of economies has benefits and costs.
• Increased economic integration may result in efficiency, welfare gains and improvements in economic well-being but the benefits may not result in equity.

4.1 Benefits of international trade	Depth of teaching	Diagrams and calculations
Benefits of international trade, including: • increased competition • lower prices • greater choice • acquisition of resources • more foreign exchange earnings • access to larger markets • economies of scale • more efficient resource allocation • more efficient production	AO2, AO4	Diagram: free trade illustrating exports when world price is above domestic price Diagram: free trade illustrating imports when world price is below domestic price Calculation (HL only): from a diagram, the quantity of exports, quantity of imports, import expenditure, export revenue
Absolute and comparative advantage (HL only) • Gains from trade • Sources of comparative advantage • Opportunity costs	AO2, AO4	Diagram (HL only): linear PPC showing differing opportunity costs and the potential gains from specialization and trade as a result of comparative advantage Calculation (HL only): opportunity costs from a set of data in order to identify comparative advantage
Limitations of the theory of comparative advantage (HL only)	AO3
4.2 Types of trade protection
Tariffs • Effects on markets and stakeholders	AO3, AO4	Diagram: showing the effect of a tariff on price, production, consumption, expenditures, revenues, welfare
	AO4 (HL only)	Calculation (HL only): from a diagram, the effects on stakeholders of tariffs
Quota • Effects on markets and stakeholders	AO3, AO4	Diagram: showing the effect of a quota on price, production, consumption, expenditures, revenues, welfare
	AO4 (HL only)	Calculation (HL only): from a diagram, the effects on stakeholders of quotas
Subsidy/export subsidy • Effects on markets and stakeholders	AO3, AO4	Diagram: showing the effect of a subsidy on price, production, consumption, expenditures, revenues, welfare
	AO4 (HL only)	Calculation (HL only): from a diagram, the effects on stakeholders of subsidies
Administrative barriers • Standards and regulations	AO3
4.3 Arguments for and against trade control/ protection
Arguments for trade protection/advantages of trade protection, including: • protection of infant (sunrise) industries • national security • health and safety • environmental standards • anti-dumping • unfair competition • balance of payments correction • government revenue • protection of jobs • Economically least developed country (ELDC) diversification	AO2
Arguments against trade protection/disadvantages of trade protection, including: • misallocation of resources • retaliation • increased costs • higher prices • less choice • domestic firms lack incentive to become more efficient • reduced export competitiveness	AO2
Free trade versus trade protection	AO3
4.4 Economic integration
Preferential trade agreements • Bilateral • Regional • Multilateral (the World Trade Organization)	AO1
Trading blocs • Free trade areas/agreements • Customs unions • Common markets	AO2
Advantages and disadvantages of trading blocs Advantages, including: • trade creation (HL only) • greater access to markets offer potential for economies of scale • with freedom of labour, there are greater employment opportunities • membership in a trading bloc may allow for stronger bargaining power in multilateral negotiations • greater political stability and cooperation Disadvantages, including: • trade diversion (HL only) • loss of sovereignty • challenge to multilateral trading negotiations	AO3
Monetary union	AO2
Advantages and disadvantages of monetary union (HL only)	AO3
The World Trade Organization (WTO) • Objectives and functions • Factors affecting the influence of the WTO, including: difficulties of reaching agreement on services/ primary products unequal bargaining power of members	AO2
4.5 Exchange rates
Floating exchange rates • Determination Depreciation and appreciation of a currency	AO2, AO4	Diagram: showing the exchange rate determination and changes in equilibrium in a floating exchange rate system Calculation: using exchange rates, the price of a good in different currencies
Changes in demand and supply for a currency—factors including: • foreign demand for exports • domestic demand for imports • inward/outward foreign direct investment • inward/outward portfolio investment • remittances • speculation • relative inflation rates • relative interest rates • relative growth rates • central bank intervention	AO2, AO4	Calculation: changes in the value of a currency from a set of data
Consequences of changes in the exchange rate on economic indicators, such as: • the inflation rate • economic growth • unemployment • the current account balance • living standards	AO3, AO4	Diagram: AD/AS curves to show potential consequences of changes in the exchange rate on the economy
Fixed exchange rate • Devaluation and revaluation of a currency • How fixed exchange rates are maintained	AO2, AO4	Diagram: showing how a fixed exchange rate is maintained
Managed exchange rates • Overvalued currencies • Undervalued currencies	AO2, AO4	Diagram: showing the exchange rate determination and changes in equilibrium in a managed exchange rate system
Fixed versus floating exchange rate systems (HL only)	AO3
4.6 Balance of payments
Balance of payments • Credit and debit items • Surplus or deficit on an account	AO1, AO4	Calculation: elements of the balance of payments from a set of data
Components of the balance of payments • Current account Balance of trade in goods Balance of trade in services Income Current transfers • Capital Account Capital transfers Transaction in non-produced, non-financial assets • Financial account Foreign direct investment (FDI) Portfolio investment Reserve assets Official borrowing	AO2
Interdependence between the accounts • Zero balance in the balance of payments • Credits matched by debits • Deficits matched by surpluses	AO2
Relationship between the current account and the exchange rate (HL only)	AO2, AO4	Diagram (HL only): on exchange rate showing the relationship between the current account balance and the exchange rate
Relationship between the financial account and the exchange rate (HL only)	AO2
Implications of a persistent current account deficit in terms of: (HL only) • exchange rates • interest rates • foreign ownership of domestic assets • debt • credit ratings • demand management • economic growth	AO3
Methods to correct a persistent current account deficit (HL only) • Expenditure switching • Expenditure reducing • Supply-side policies	AO2
Effectiveness of measures to correct a persistent current account deficit (HL only).	AO3
The Marshall-Lerner condition and the J-curve effect (HL only)	AO2, AO4	Diagram (HL only): J- curve with reference to the Marshall Lerner condition
Implications of a persistent current account surplus in terms of (HL only): • domestic consumption and investment • exchange rates • inflation • employment • export competitiveness	AO3

Real-world issue 2: Why is economic development uneven?

Conceptual understandings:
• Perceptions of the meanings of development and equity change over time and vary across cultures.

4.7 Sustainable development	Depth of teaching	Diagrams and calculations
The meaning of sustainable development	AO2
Sustainable Development Goals	AO2
Relationship between sustainability and poverty (HL only)	AO2
4.8 Measuring development
The multidimensional nature of economic development	AO2
Single indicators • GDP/GNI per person (per capita) at PPP • Health and education indicators • Economic/social inequality indicators • Energy indicators • Environmental indicators	AO2
Composite indicators • Human Development Index (HDI) • Gender Inequality Index (GII) • Inequality adjusted Human Development Index (IHDI) • Happy Planet Index	AO2
Strengths and limitations of approaches to measuring economic development	AO3
Possible relationship between economic growth and economic development	AO3
4.9 Barriers to economic growth and/or economic development
Poverty traps/poverty cycles	AO2, AO4	Diagram: a poverty cycle showing any linked combination of factors that perpetuate poverty
Economic barriers • Rising economic inequality • Lack of access to infrastructure and appropriate technology • Low levels of human capital—lack of access to healthcare and education • Dependence on primary sector production • Lack of access to international markets • Informal economy • Capital flight • Indebtedness • Geography including landlocked countries • Tropical climates and endemic diseases	AO2
Political and social barriers • Weak institutional framework Legal system Ineffective taxation structures Banking system Property rights • Gender inequality • Lack of good governance/corruption • Unequal political power and status	AO2
Significance of different barriers to economic growth and/or economic development	AO3
4.10 Economic growth and/or economic development strategies
Strategies to promote economic growth and/or economic development • Trade strategies Import substitution Export promotion Economic integration • Diversification • Social enterprise • Market-based policies Trade liberalization Privatization Deregulation • Interventionist policies Redistribution policies including tax policies, transfer payments and minimum wages • Provision of merit goods Education programs Health programs Infrastructure including energy, transport, telecommunications, clean water and sanitation • Inward foreign direct investment • Foreign aid Humanitarian aid/development aid Debt relief Official Development Assistance (ODA) Non-governmental organizations (NGOs) • Multilateral development assistance The World Bank International Monetary Fund • Institutional change Improved access to banking, including microfinance and mobile banking Increasing women’s empowerment Reducing corruption Property rights Land rights	AO2, AO4	Diagrams: in this section students are expected to draw from the diagrams used in the other sections
Strengths and limitations of strategies for promoting economic growth and economic development	AO3
Strengths and limitations of government intervention versus market-oriented approaches to achieving economic growth and economic development	AO3
Progress toward meeting selected Sustainable Development Goals in the context of two or more countries	AO3

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Economies of Scale & Long-Run Average Cost (LRAC) Definitions:

• The LRAC is a a cost curve which shows the average cost per unit of production over varying amounts of output in the long-run, and can be calculated by total costs divided by total output.
• Economies of Scale is the condition where the firm is able to reduce average costs (LRAC) in the long run, when output of goods/services increases.
• Diseconomies of Scale is the condition where the firm’s average costs (LRAC) in the long run increases, when output of goods/services increases.
• The Minimum Efficient Scale is defined as the range of production outputs where the firm can produce at its lowest long-run average costs on the LRAC curve.

Economies of Scale & Long-Run Average Cost (LRAC) Explanation:
When businesses get bigger and produce more, they benefit from certain cost advantages, such as being able to negotiate bulk discounts from suppliers, or being able to afford more productive equipment. As a result, it is common for them to see their costs decrease, and experience Economies of Scale. For example, if you are a small Chinese takeaway during Covid, you may need to rely on Uber to make your deliveries, who take commission (fees) from you for each one. However, if you are a large Chinese restaurant with enough orders, you can hire your own driver, make your deliveries in one go and potentially reduce costs. As a result, the business experiences transport Economies of Scale. Similarly, this start-up connects restaurants with offices ordering in bulk to help reduce delivery costs.

However, note that expanding the restaurant kitchen, hiring and driver and getting a business vehicle takes time. This means it may not occur in the short-tun where fixed factors of production cannot be changed/increased. Hence, Economies of Scale is a long-run concept. Despite the cost savings from expanding, Diseconomies of Scale will eventually set-in for the restaurant when it gets too big and difficult to operate (imagine if you expanded from Chinese to other Asian cuisines and find it much costlier to manage the food quality and chefs). By that point, LRAC will start to increase again. Therefore, the LRAC Curve is U-shaped due to Economies/Diseconomies of Scale, whereas the short-run average cost (SRAC) curve & marginal cost (MC) curve is U-shaped due to diminishing marginal returns.

Economies of Scale & Long-Run Average Cost (LRAC) Notes with Diagrams/Graphs:

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Economies of Scale & Long-Run Average Cost (LRAC) Video Explanation – EconPlusDal

The left video explains Economies of Scale and Diseconomies of Scale, and the right video looks at the Long-Run Average Cost (LRAC) Curve).

Economies of Scale & Long-Run Average Cost (LRAC) Multiple Choice Questions

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Economies of Scale & Long-Run Average Cost (LRAC) in the News

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Numerical Example for Long-Run Average Cost
Uber’s Diseconomies of Scale

Types of Economies of Scale
Returns to Scale
Economies of Scale and Monopolies

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Monopsony Definitions:

• A pure monopsony is defined as a market where there is only one buyer for a good/service, or labour.
• Monopsony power occurs when a buyer faces little competition to purchase a good/service, or labour, and can reduce the prices or wages they pay compared to a competitive market.

Monopsony Examples & Explanation:
While a monopoly is when there is only one seller in the market, a monopsony is when there is only one buyer. For example, the UK Army is likely the only organisation buying nuclear warheads in the UK. Similarly, for the labour market, the UK Army is the only organisation recruiting soldiers in Britain. When there are limited buyers or employers, the bargaining power of the buyer enables them to suppress prices paid to suppliers (monopsony power). Such is the case for many agricultural products such as coffee bean or milk farmers, where they sell their products to large multinational corporations. When large corporations pressure suppliers (e.g. farmers) to reduce prices, this helps them create cost savings that can be passed onto consumers. However, it can also force suppliers out of business, causing them to reduce product quality to meet lower prices. For example, when supermarkets reduced prices they paid for beef, it contributed to the horsemeat scandal in the UK, where beef farmers substituted horsemeat for beef to sell to supermarkets so they do not go out of business. Similarly, when monopsony employers such as the National Health Service (NHS) in the UK suppress wages of nurses/doctors, this may damage the quality of the service when less employees are hired at a lower salary. This is because it may lead to staff being overburdened with work and a reduction in staff retention rates.

Monopsony Notes with Diagrams/Graphs:

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Monopsony Video Explanation – EconPlusDal

The left video explains the impact of a Monopsony in the labour market, and the right video explains how a trade union may be able to counteract that.

Monopsony Essay & Multiple Choice Questions

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Monopsony in the News

Related A-Level, IB Economics Resources

Monopsony Power in Product Markets
Policies to Counter Monopsony Power

Numerical Example on Monopsony
Numerical Example on Labour Market

Monopsony Exploitation

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Types of Business Objectives and their Definitions:

• Profit Maximisation is when a business aims to generate the highest earnings possible. This is defined by producing at the output where a firm’s marginal cost equals marginal revenues i.e. MC = MR.
• Revenue Maximisation is when a business aims to maximise the total value of their sales. This is defined by producing at the output where marginal revenue equals zero. i.e. MR = 0
• Sales (Volume) Maximisation is when a business aims to maximise the number of goods sold without incurring a loss. This is defined by producing at the point where average revenue equals average costs i.e. AR = AC
• Satisficing is when a business aims to meet the expectations of its stakeholders (e.g. shareholders, employees, consumers, suppliers…), by generating an acceptable amount of profits rather than maximizing it.

Business Objectives Examples & Explanation:
Profit maximization is assumed to be the default business objective of most firms in Economics. However, firms can operate in a more strategic manner in the market. For example, Amazon made little to no profits from 1997-2015, when their total revenues grew from $0 to $100 billion. During that period, they sold Kindles at production cost in order to gain as much market share as possible by aiming for sales volume maximisation. As a result, they came to dominate the e-book market. Similarly, football clubs focus on winning games as long as they generate enough profits to operate (satisficing). They do not aim to maximise profits, or to generate a financial return to the club owner. The reason for buying a football club may most likely be due to its sentimental value or its ownership as a status symbol, as sometimes billions of dollars are spent on them and cannot be recovered. We can see different organisations/businesses can have different business objectives, although there is a trend for larger companies to embrace corporate social responsibility (be environmentally friendly, treat staff well etc.) and satisfice their stakeholders sustainably.

Business Objectives Notes with Diagrams/Graphs:

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Types of Business Objectives Video Explanation – EconPlusDal

The videos explain the different types of business objectives including profit, revenue and sales maximization, as well as satisficing. The left video is for A-Level and the right is for IB.

Business Objectives Essay & Multiple Choice Questions

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Business Objectives in the News

Related A-Level, IB Economics Resources

Explaining Business Objectives

Various Business Motives

Stakeholders in a Business
Do Firms Maximise Profits?

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Phillips Curve Definition:
The Short-Run Phillips Curve (SRPC) shows the trade-off relationship between inflation and unemployment. The long-run Phillips Curve represents the natural rate of unemployment in the economy when it is at full capacity.

Phillips Curve Example Explanation:
The Short-Run Phillips Curve indicates that when an economy experiences low levels of unemployment, inflation is likely to be high. This usually happens in the boom phase of the Economic/Business cycle when aggregate demand (AD) is high and the economy is operating near full capacity. On the other hand, when unemployment is high, inflation is likely to be low. This would occur when the economy is in a recession where the price level is low due to a lack of AD. However, this relationship does not hold when there is stagflation (high inflation and limited economic growth), like the UK in the 1970s. When that happens, we shift the SRPC outwards indicating higher unemployment and inflation, which is synonymous to a fall in AS. Hence, one can note that changes in the Phillips Curve diagram can be attributed/explained using the AD & AS diagram.

Phillips Curve Notes with Diagrams/Graphs:

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Phillips Curve Video Explanation – EconPlusDal

The left video explains the Short-Run Phillips Curve, the right explains the Long-Run Phillips Curve and its relationship to the SRPC.

Phillips Curve Multiple Choice Questions

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Phillips Curve Examples in the News

Related A-Level, IB Economics Resources

The Wage Phillips Curve

Global economics: Phillips Curve
Phillips Curve After the Financial Crisis

Different Views of the Phillips Curve
Unemployment/Inflation Trade-off

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Profit Maximization Definition:
Profit Maximization is defined as producing at the quantity where a firm’s marginal cost equals marginal revenues i.e. MC = MR.

Profit Maximization Example Explanation:
Profit maximization is assumed to be the business objective of most firms in Economics unless specified otherwise. Let’s say you sell rubber bath ducklings. Marginal revenue is the revenue you gain from selling an extra duck. Marginal cost is the cost you incur by producing one extra duck. If marginal revenue is higher than marginal cost (MR > MC), it would mean selling an extra duck will make you a profit of (MR – MC). Hence you will want to produce more, until the point where MC = MR. If marginal cost is higher than marginal revenue (MC > MR), it would mean selling an extra duck will make you a loss in profit of (MR – MC). Hence you will want to produce less, until the point where MC = MR. Therefore firms maximise profits by producing at MC = MR for all market structures.

Profit Maximization Notes with Diagrams/Graphs:

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Profit Maximization Video Explanation – EconPlusDal

The left video explains profit maximization, the right explains various business objectives including profit, revenue and sales maximization as well as satisficing.

Profit Maximization Multiple Choice Questions

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Profit Maximization Examples in the News

Related A-Level, IB Economics Resources

Profit Maximisation
Departing from Profit Maximisation

The Role of Profit in an Economy
Do Firms Maximise Profits?

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Revenues Formulas & Definitions:
Total Revenue (TR) is the total value of sales earnings a firm receives in a given time period.
Total Revenue = Price x Quantity
Average Revenue (AR) is the amount of revenue earned by the firm per each unit of output (good/service) sold.
Average Revenue = Total Revenue / Quantity
Marginal Revenue (MR) is defined as the change (increase) in total revenue by producing one additional unit of output.
Marginal Revenue = Change in Revenue / Change in Quantity

Revenues Examples & Explanation:
If you own a durian fruit store (smelly or not?) and sell $500 worth of durians, then your total revenue (TR) is $500. If you sold 10 durians in total, then your average revenue (AR) is $500/10 = $50 per durian. If you will earn $30 for selling the 11th durian, then your marginal revenue (MR) is $30 since MR is the additional amount you get in revenues for selling the next unit (so MR changes depending on your output). Note that revenue structures in Economic theory tend to vary depending on a firm’s market structure. In a perfectly competitive market, your marginal revenue equals to your average revenue as the price you sell your good at stays constant as a price taker. However, this is not the case in any other market structure where marginal revenue is twice as steep as average revenue (assuming your revenue curve is linear).

Revenues Notes with Diagrams/Graphs:

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Revenues Video Explanation – EconPlusDal

The left video explains different types of revenue curves, the right explains the relationship between PED and Total Revenue.

Revenues Multiple Choice Questions

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Revenues Examples in the News

Related A-Level, IB Economics Resources

Business Revenues
Apple’s Revenues
Revenues Revision Quiz

Revenue Theory
Revenue/Profit/Costs Quiz

Profits and Revenue

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Price Controls Definition:
Price Controls are a type of government intervention in markets to change the existing market price, by imposing a maximum price (price ceiling) or minimum price (price floor).

Price Controls Examples & Explanation:
A minimum price can be implemented to help protect suppliers or producers (e.g. minimum milk price, minimum wage); whereas a maximum price can help to reduce exploitation of consumers, particularly on essential goods (e.g. rent controls). However, they do have their limitations and can potentially cause excess demand or excess supply and hence market failure. It can also be a way to reduce or limit the impact of the consumption of demerit goods with negative externalities (e.g. alcohol) by making them less affordable using a minimum market price, which the UK has imposed.

Price Controls Notes with Diagrams/Graphs:

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Price Controls Video Explanation – EconPlusDal

The left video explains impacts of a minimum price (price floor), the right explains impacts of a maximum price (price ceiling).

Price Controls Examples in the News

Related A-Level, IB Economics Resources

Government Intervention: Maximum Prices
London Housing Rent Crisis – More Controls Needed?

Competitive Markets: House Prices

Price controls – advantages and disadvantages
Subsidies vs Minimum Prices for farmers
Minimum price for alcohol – pros and cons

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