A LEVEL 9708 ECONOMICS SYLLABUS

Section 7: The Price System and the Microeconomy (A Level)

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Candidates will examine the motivation and behaviour of individual consumers and firms in
markets to gain a more detailed understanding of market forces and the price mechanism.
They will consider the efficiency of markets and their participants, and the market failures
that can arise from their activities. Both perfectly competitive and imperfect market
structures will be analysed and appraised. This work will draw on these key concepts:
scarcity and choice; the margin and decision-making; equilibrium and disequilibrium;
efficiency and inefficiency; time.

7.1 Utility

●​ 7.1.1 definition and calculation of total utility and marginal utility

●​ 7.1.2 diminishing marginal utility
●​ 7.1.3 equi-marginal principle
●​ 7.1.4 derivation of an individual demand curve
●​ 7.1.5 limitations of marginal utility theory and its assumptions of rational behaviour

7.2 Indifference Curves and Budget Lines

●​ 7.2.1 meaning of an indifference curve and a budget line

●​ 7.2.2 causes of a shift in the budget line
●​ 7.2.3 income, substitution and price effects for normal, inferior and Giffen goods
●​ 7.2.4 limitations of the model of indifference curves

7.3 Efficiency and Market Failure

●​ 7.3.1 definitions of productive efficiency and allocative efficiency

●​ 7.3.2 conditions for productive efficiency and allocative efficiency
●​ 7.3.3 Pareto optimality
●​ 7.3.4 definition of dynamic efficiency
●​ 7.3.5 definition of market failure
●​ 7.3.6 reasons for market failure

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7.4 Private Costs, Externalities, and Social Costs/Benefits

●​ 7.4.1 definition and calculation of social costs (SC) as the sum of private costs (PC)
and external costs (EC), including marginal social costs (MSC), marginal private costs
(MPC) and marginal external costs (MEC)
●​ 7.4.2 definition and calculation of social benefits (SB) as the sum of private benefits
(PB) and external benefits (EB), including marginal social benefits (MSB), marginal private
benefits (MPB) and marginal external benefits (MEB)
●​ 7.4.3 definition of positive externality and negative externality
●​ 7.4.4 positive and negative externalities of both consumption and production
●​ 7.4.5 deadweight welfare losses arising from positive and negative externalities
●​ 7.4.6 asymmetric information and moral hazard
●​ 7.4.7 use of costs and benefits in analysing decisions (knowledge of net present
value is not required)

7.5 Production Analysis: Costs, Revenue, and Profit

●​ 7.5.1 short-run production function:​

• fixed and variable factors of production​
• definition and calculation of total product, average product and marginal product​
• law of diminishing returns (law of variable proportions)
●​ 7.5.2 short-run cost function:​
• definition and calculation of fixed costs (FC) and variable costs (VC)​
• definition and calculation of total, average and marginal costs (TC, AC, MC),
including average total cost (ATC), total and average fixed costs (TFC, AFC) and total and
average variable costs (TVC, AVC)​
• explanation of shape of short-run average cost and marginal cost curves
●​ 7.5.3 long-run production function:​
• no fixed factors of production​
• returns to scale
●​ 7.5.4 long-run cost function:​
• explanation of shape of long-run average cost curve​
• concept of minimum efficient scale
●​ 7.5.5 relationship between economies of scale and decreasing average costs
●​ 7.5.6 internal and external economies of scale
●​ 7.5.7 internal and external diseconomies of scale
●​ 7.5.8 definition and calculation of revenue: total, average and marginal revenue (TR,
AR, MR)
●​ 7.5.9 definition of normal, subnormal and supernormal profit
●​ 7.5.10 calculation of supernormal and subnormal profit

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7.6 Market Structures

●​ 7.6.1 perfect competition and imperfect competition: monopoly, monopolistic

competition, oligopoly, natural monopoly
●​ 7.6.2 structure of the listed markets as explained by number of buyers and sellers,
product differentiation, degree of freedom of entry and availability of information
●​ 7.6.3 barriers to entry and exit:​
• legal barriers​
• market barriers​
• cost barriers​
• physical barriers
●​ 7.6.4 performance of firms in different market structures:​
• revenues and revenue curves​
• output in the short run and the long run​
• profits in the short run and the long run​
• shutdown price in the short run and the long run​
• derivation of a firm’s supply curve in a perfectly competitive market​
• efficiency and X-inefficiency in the short run and the long run​
• contestable markets: features and implications​
• price competition and non-price competition​
• collusion and the Prisoner’s Dilemma in oligopolistic markets, including a two-player
pay-off matrix
●​ 7.6.5 definition and calculation of the concentration ratio

7.7 Growth and Survival of Firms

●​ 7.7.1 reasons for different sizes of firms

●​ 7.7.2 internal growth of firms: organic growth and diversification
●​ 7.7.3 external growth of firms – integration (mergers and takeovers):​
• methods of integration:​
– horizontal​
– vertical (forwards and backwards)​
– conglomerate​
• reasons for integration​
• consequences of integration
●​ 7.7.4 cartels:​
• conditions for an effective cartel​
• consequences of a cartel
●​ 7.7.5 principal–agent problem arising from differing objectives of
shareholders/owners and managers

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7.8 Firm Objectives and Pricing Policies

●​ 7.8.1 traditional profit-maximising objective of firms

●​ 7.8.2 an understanding of other objectives of firms:​
• survival​
• profit satisficing​
• sales maximisation​
• revenue maximisation
●​ 7.8.3 price discrimination – first, second and third degree:​
• conditions for effective price discrimination​
• consequences of price discrimination
●​ 7.8.4 other pricing policies:​
• limit pricing​
• predatory pricing​
• price leadership
●​ 7.8.5 relationship between price elasticity of demand and a firm’s revenue:​
• in a normal downward sloping demand curve​
• in a kinked demand curve

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 A LEVEL 9708 ECONOMICS SYLLABUS

Section 8: Government Microeconomic Intervention (A Level)

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Candidates will evaluate the various policy options available to government to tackle
different forms of market failure, considering the advantages and disadvantages of the
policies and how they improve the efficiency of resource allocation. They will also consider
government failure and its causes and implications for economic efficiency. Candidates will
develop a deeper understanding of income and wealth distribution by exploring equality,
equity and efficiency and aspects of poverty. This will lead candidates to examine the
operation of labour markets under both perfectly competitive and imperfect conditions and
how government intervention can affect labour markets. The key concepts that underpin
much of this work are: the margin and decision-making; equilibrium and disequilibrium;
efficiency and inefficiency; time; the role of government and the issues of equality and
equity.

8.1 Government Policies for Efficient Resource Allocation

●​ 8.1.1 application and effectiveness of measures to tackle different forms of market

failure:​
• specific and ad valorem indirect taxes​
• subsidies​
• price controls​
• production quotas​
• prohibitions and licences​
• regulation and deregulation​
• direct provision​
• pollution permits​
• property rights​
• nationalisation and privatisation​
• provision of information​
• behavioural insights and ‘nudge’ theory
●​ 8.1.2 government failure in microeconomic intervention:​
• definition of government failure​
• causes of government failure​
• consequences of government failure

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8.2 Equity and Redistribution of Income and Wealth

●​ 8.2.1 difference between equity and equality

●​ 8.2.2 difference between equity and efficiency
●​ 8.2.3 distinction between absolute poverty and relative poverty
●​ 8.2.4 the poverty trap
●​ 8.2.5 policies towards equity and equality, for example:​
• negative income tax​
• universal benefits and means-tested benefits​
• universal basic income

8.3 Labour Market Forces and Government Intervention

●​ 8.3.1 demand for labour as a derived demand

●​ 8.3.2 factors affecting demand for labour in a firm or an occupation
●​ 8.3.3 causes of shifts in and movement along the demand curve for labour in a firm
or an occupation
●​ 8.3.4 marginal revenue product (MRP) theory:​
• definition and calculation of marginal revenue product​
• derivation of an individual firm’s demand for labour using marginal revenue product
●​ 8.3.5 factors affecting the supply of labour to a firm or to an occupation:​
• wage and non-wage factors
●​ 8.3.6 causes of shifts in and movement along the supply curve of labour to a firm or
an occupation
●​ 8.3.7 wage determination in perfect markets:​
• equilibrium wage rate and employment in a labour market
●​ 8.3.8 wage determination in imperfect markets:​
• influence of trade unions on wage determination and employment in a labour market​
• influence of government on wage determination and employment in a labour market
using a national minimum wage​
• influence of monopsony employers on wage determination and employment in a
labour market
●​ 8.3.9 determination of wage differentials by labour market forces
●​ 8.3.10 transfer earnings and economic rent:​
• definition of transfer earnings​
• definition of economic rent​
• factors affecting transfer earnings and economic rent in an occupation

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 A LEVEL 9708 ECONOMICS SYLLABUS

Section 9: The Macroeconomy (A Level)

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Candidates will develop a more detailed appreciation of the workings of the
macroeconomy by studying the determinants of Aggregate Demand, the multiplier process
and the role of money and banking. The cyclical nature of economic performance will be
examined along with its implications for the main macroeconomic performance indicators:
economic growth, low unemployment, price stability and balance of payments stability.
Consideration will also be given to the sustainability and inclusivity of economic growth.
Key concepts that are fundamental to these issues are: the margin and decision-making;
time; equilibrium and disequilibrium; progress and development.

9.1 The Circular Flow of Income

●​ 9.1.1 the multiplier process:​

• definition of the multiplier​
• formulae for and calculation of multiplier in a closed and open economy, with and
without a government sector​
• calculation of:​
– average and marginal propensities to save (aps and mps)​
– average and marginal propensities to consume (apc and mpc)​
– average and marginal propensities to import (apm and mpm)​
– average and marginal rates of tax (art and mrt)​
• national income determination using AD and income approach with the multiplier
process​
• calculation of effect of changing AD on national income using the multiplier
●​ 9.1.2 components of Aggregate Demand (AD) and their determinants:​
• consumption function: autonomous and induced consumer expenditure​
• savings function: autonomous and induced savings​
• autonomous and induced investment; the accelerator​
• government spending​
• net exports (exports minus imports)
●​ 9.1.3 full employment level of national income and equilibrium level of national
income:​
• inflationary and deflationary gaps

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 A LEVEL 9708 ECONOMICS SYLLABUS
9.2 Economic Growth and Sustainability

●​ 9.2.1 actual growth versus potential growth in national output

●​ 9.2.2 positive and negative output gaps
●​ 9.2.3 business (trade) cycle:​
• phases of the cycle​
• causes of the cycle​
• role of automatic stabilisers
●​ 9.2.4 policies to promote economic growth and their effectiveness
●​ 9.2.5 inclusive economic growth:​
• definition of inclusive economic growth​
• impact of economic growth on equity and equality​
• policies to promote inclusive growth
●​ 9.2.6 sustainable economic growth:​
• definition of sustainable economic growth​
• using and conserving resources​
• impact of economic growth on the environment and climate change​
• policies to mitigate the impact of economic growth on the environment and climate
change

9.3 Employment and Unemployment

●​ 9.3.1 definition of full employment

●​ 9.3.2 equilibrium and disequilibrium unemployment (including hysteresis)
●​ 9.3.3 voluntary and involuntary unemployment
●​ 9.3.4 natural rate of unemployment:​
• definition​
• determinants​
• policy implications
●​ 9.3.5 patterns and trends in (un)employment
●​ 9.3.6 mobility of labour:​
• forms of labour mobility: geographical and occupational​
• factors affecting labour mobility
●​ 9.3.7 policies to reduce unemployment and their effectiveness

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9.4 Money and Banking

●​ 9.4.1 definition, functions and characteristics of money

●​ 9.4.2 definition of money supply
●​ 9.4.3 quantity theory of money (MV = PT)
●​ 9.4.4 functions of commercial banks:​
• providing deposit accounts (demand deposit account, savings account)​
• lending money (overdrafts, loans)​
• holding or providing cash, securities, loans, deposits, equity​
• reserve ratio and capital ratio​
• objectives of commercial banks: liquidity, security, profitability
●​ 9.4.5 causes of changes in the money supply in an open economy:​
• commercial banks as sources of credit creation and the bank credit multiplier​
• role of a central bank​
• government deficit financing​
• quantitative easing​
• changes in the balance of payments
●​ 9.4.6 policies to reduce inflation and their effectiveness
●​ 9.4.7 demand for money: liquidity preference theory
●​ 9.4.8 interest rate determination: loanable funds theory and Keynesian theory

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 A LEVEL 9708 ECONOMICS SYLLABUS

Section 10: Government Macroeconomic Intervention (A Level)

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Candidates will develop their understanding of macroeconomic intervention by considering
the challenges encountered by a government when trying to manage the macroeconomy to
achieve its chosen macroeconomic objectives. Important trade-offs like the Phillips curve
will be analysed along with other policy conflicts, and candidates will evaluate the
effectiveness of different macroeconomic policies with regard to different macroeconomic
objectives. The possibility of macroeconomic government failure will also be considered.
These issues encompass the key concepts: scarcity and choice; the margin and
decision-making; equilibrium and disequilibrium; efficiency and inefficiency; time; progress
and development.

10.1 Government Macroeconomic Policy Objectives

●​ 10.1.1 objectives in terms of inflation, balance of payments, unemployment, growth,

development, sustainability and redistribution of income and wealth

10.2 Interrelationships in Macroeconomic Problems

●​ 10.2.1 relationship between the internal value of money and the external value of
money
●​ 10.2.2 relationship between the balance of payments and inflation
●​ 10.2.3 relationship between growth and inflation
●​ 10.2.4 relationship between growth and the balance of payments
●​ 10.2.5 relationship between inflation and unemployment:​
• traditional Phillips curve​
• expectations-augmented Phillips curve (short- and long-run Phillips curve)

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10.3 Evaluating Macroeconomic Policy Options

●​ 10.3.1 effectiveness of different policies in relation to different macroeconomic

objectives:​
• fiscal policy including Laffer curve analysis​
• monetary policy​
• supply-side policy including market-based and interventionist policies​
• exchange rate policy​
• international trade policy
●​ 10.3.2 problems and conflicts arising from the outcome of these policies
●​ 10.3.3 existence of government failure in macroeconomic policies

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 A LEVEL 9708 ECONOMICS SYLLABUS

Section 11: International Economic Issues (A Level)

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Candidates will explore the international aspects o f an economy further by considering the
balance of payments in full and the strengths and weaknesses of using fixed and managed
exchange rate systems. The process of economic development, the characteristics of
countries at different levels/stages of development and the relationships between
high-income and low-income countries will be investigated. Major issues examined include
the appraisal of living standards, the role of international aid, the influence of multinational
companies, the burden of external debt on many low-income countries and the process of
globalisation. The key concepts most relevant to these issues are: progress and
development; scarcity and choice; time.

11.1 Balance of Payments and Policy Interventions

●​ 11.1.1 components of the balance of payments accounts: current account, financial

account and capital account
●​ 11.1.2 effect of fiscal, monetary, supply-side, protectionist and exchange rate policies
on the balance of payments
●​ 11.1.3 difference between expenditure-switching and expenditure-reducing policies

11.2 Exchange Rates

●​ 11.2.1 measurement of exchange rates:​

• distinction between nominal and real exchange rates​
• trade-weighted exchange rates
●​ 11.2.2 determination of exchange rates under fixed and managed systems
●​ 11.2.3 distinction between revaluation and devaluation of a fixed exchange rate
●​ 11.2.4 changes in the exchange rate under different exchange rate systems
●​ 11.2.5 the effects of changing exchange rates on the external economy using
Marshall-Lerner and J curve analysis

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11.3 Economic Development and Living Standards

●​ 11.3.1 classification of economies in terms of their level of development

●​ 11.3.2 classification of economies in terms of their level of national income
●​ 11.3.3 indicators of living standards and economic development:​
• monetary indicators including real per capita national income statistics (GDP, GNI,
NNI) and purchasing power parity​
• issues of comparison using monetary indicators​
• non-monetary indicators​
• composite indicators:​
– Human Development Index (HDI)​
– Measure of Economic Welfare (MEW)​
– Multidimensional Poverty Index (MPI)​
• the Kuznets curve
●​ 11.3.4 comparison of economic growth rates and living standards:​
• over time​
• between countries

11.4 Characteristics of Countries at Different Development Levels

●​ 11.4.1 population growth and structure:​

• measurement and causes of changes in birth rate, death rate, infant mortality and
net migration​
• optimum population​
• level of urbanisation
●​ 11.4.2 income distribution:​
• calculation of Gini coefficient and Lorenz curve analysis
●​ 11.4.3 economic structure:​
• employment composition: primary, secondary and tertiary sectors​
• pattern of trade at different levels of development

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11.5 Relationships Between Countries at Different Development Levels

●​ 11.5.1 international aid:​

• forms of aid​
• reasons for giving aid​
• effects of aid​
• importance of aid
●​ 11.5.2 trade and investment
●​ 11.5.3 role of multinational companies (MNCs):​
• definition of MNC​
• activities of MNCs​
• consequences of MNCs
●​ 11.5.4 Foreign Direct Investment (FDI):​
• definition of FDI​
• consequences of FDI
●​ 11.5.5 external debt:​
• causes of debt​
• consequences of debt
●​ 11.5.6 role of the International Monetary Fund (IMF)
●​ 11.5.7 role of the World Bank

11.6 Globalisation

●​ 11.6.1 meaning of globalisation and its causes and consequences

●​ 11.6.2 distinction between a free trade area, a customs union, a monetary union and
full economic union
●​ 11.6.3 trade creation and trade diversion

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