Chains 90

Economics A-Level Chains
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1. Specialisation The separation of tasks in the production process ’

increased practice of workers in specific tasks ’ im-
proved skills through repetition ’ enhanced productiv-
ity ’ lower unit costs.
The separate of tasks in the production process ’

increases employee boredom ’ worker alienation ’ in-
creased absenteeism and periods of inactivity ’ higher
unit costs.
2. Increase in demand • Rise in disposable income (for a normal good) per-

may come from: haps through fall in direct tax (e.g. income tax)
3. Microeconomics The separation of tasks in the production process ’

Specialisation increased practice of workers in specific tasks ’ im-
Specialisation proved skills through repetition ’ enhanced productiv-
ity ’ lower unit costs.
The separate of tasks in the production process ’
increases employee boredom ’ worker alienation ’ in-
creased absenteeism and periods of inactivity ’ higher
unit costs.
4. Market Equilibrium • Rise in disposable income (for a normal good) per-

Increase in demand haps through fall in direct tax (e.g. income tax)
may come from: • Fall in disposable income (for an inferior good)
• Rise in price of substitute good
• Fall in price of complement good
• Favourable change in fashion, taste and preference
• Increased population size
E.g. An increase in disposable income ’ rise in effec-
tive demand ’ D to D1 ’ equilibrium price P becomes
disequilibrium price ’ excess demand ’ producer ex-
ploitation and hence raise price to P1 ’ extension of
supply along S ’ contraction of demand along D1 ’ new
equilibrium price P1.
5. Increase in supply • Fall in production costs

may come from: • Improved technology which raise productivity
• Fall in levy of indirect/producer tax (e.g. VAT)
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• Grant of a subsidy
E.g. An increase in production costs ’ lowers supply
at any given price ’ S to S1 ’ equilibrium price P be-
comes disequilibrium price ’ excess supply ’ suppliers
must lower price to clear stock to P1 ’ contraction of
supply along S1 ’ extension of demand along D ’ new
equilibrium price P1.
Remember: an indirect tax or subsidy will affect firms'
variable costs of production
6. Price Mechanism Price rise ’ information about market conditions ’ sig-

nals scarcity to producers ’ re-allocate factors of pro-
duction towards the good.
Price rise ’ higher profit (assuming constant produc-
tion costs) ’ incentivises producers ’ re-allocate factors
of production towards the good.
Price rise ’ lowers consumers' effective demand ’ ra-
tions the good to those who are most willing and able
to purchase the good.
7. Market Failure (in Non-excludability and non-rivalry ’ no ability for firms

general) to charge prices and make profit ’ goods and services
Public Goods not provided ’ missing market ’ complete market failure
’ misallocation of resources ’ reduced social welfare/al-
locative efficiency.
8. Externalities Third party spill-over effects ’ not included in private

decisions ’ divergence between private and social
costs and benefits ’ misallocation of resources ’ un-
der/over consumption ’ partial market failure ’ reduced
social welfare/allocative efficiency.
9. Information failure Consumers don't possess or ignore relevant informa-

tion ’ myopia leads to over-consumption of demerit
goods and under-consumption of merit goods ’ MPB
< MSB ’ partial market failure ’ reduced social
welfare/allocative efficiency.
10. Utility Maximisation Consumers seek to maximise welfare ’ acquire the

bundle of goods and services that provide maximum
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utility
’ consume to point of satiation of a wide variety of
goods and services.
Constraints include:
• Limited income
• A given set of prices
• Limited time
• Limited information
11. Outputs and Costs In SR at least one factor of production is fixed in

Marginal returns quantity ’ increases in other factors of production (e.g.
(short run) labour) ’ DMR ’ total output rises at a slowing rate ’
marginal product falls ’ marginal cost rises.
12. Returns to scale (long In LR all factors of production are variable ’ if inputs
run) double but output less than doubles ’ decreasing re-
turns to scale ’ total output rises by less than total
inputs ’ unit costs rise.
13. Economies of scale Sources include: Bulk-buying; Managerial; Financial;

(long run) Technical; Marketing; Risk-bearing
E.g. Bulk-buying ’ lowers per unit input costs ’ reduces
LRATC as output rises
14. Objectives of Firms Quantity of output set where MC = MR ’ maximum

Profit maximisation profit ’ no incentive to change production level ’ rein-
(MC = MR) vest profit into R&D ’ innovate and invent ’ dynamic
efficiency ’ lower prices or increase future profit
Supernormal profit ’ incentives other firms to enter
industry ’ increases competition ’ increases industry
supply (if no/low entry barriers) ’ lowers market price
’ lowers AR for firm ’ reduces supernormal profits (to
normal if PC or monopolistic).
15. Revenue maximisa- Managerial pay and rewards may be linked to revenue
tion (MR=0) ’ e.g. market share ’ increase revenue ’ increase mo-
nopoly power ’ raise price in future ’ increase future
profit
16.
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Sales maximisation For a start-up firm sales max may be necessary to
or Normal Profit Only ensure survival ’ increase sales ’ economies of scale ’
(ATC = AR) lower unit costs ’ and increase brand loyalty ’ increase
market share ’ increase monopoly power ’ raise price
in future ’ increase future profit
17. Perfect Competition In PC any good priced above equilibrium will not be
AR and MR curves sold since consumers can switch to alternate supplier
’ firms fact perfectly elastic demand ’ AR curve is
horizontal ’ AR for every good sold is equal to market
price hence also equal to MR ’ MR is constant and
equal to MR ’ gradient of TR curve is positive and
constant.
18. Supernormal profit In SR firms in PC can make supernormal profit ’ new

firms are attracted to enter the industry ’ firms can
enter due to lack of entry barriers ’ increases industry
supply (S to S1) ’ reduces industry price (P to P1)
’ reduces AR for firms until AR = ATCmin ’ normal
profits only in LR.
19. Losses In SR firms in PC can incur a loss ’ firms producing

where AR < AVC shutdown (in SR) or leave the indus-
try (if AR < ATC in LR) due to a lack of exit barriers
’ reduces industry supply (S to S1) ’ raises industry
price (P to P1) ’ increases AR for firms until AR =
ATCmin ’ normal profits only in LR.
20. Monopoly Market quantity demanded is inversely proportional

AR and MR curves to price ’ pure monopoly is single seller so demand
curve is firm's AR curve ’ to increase quantity sold
monopoly must reduce price ’ if AR is falling then MR
must be
falling at a faster rate.
21. Sources of monopoly Economies of scale ’ lower unit costs of production for
power monopolist (falling LRATC as output rises) ’ able to
charge lower price than small firm ’ forms a barrier to
entry.
Advertising and branding ’ increase price inelasticity
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of demand for monopolist's product ’ difficult for new
firms to gain a foothold in the market ’ monopolist can
then charge a higher price to increase revenue.
22. Market failure Monopolist enjoys monopoly power ’ restricts output

to MC = MR ’ raises price above allocatively efficient
level ’ lowers output below productivity efficient level ’
captures consumer surplus ’ increases producer sur-
plus ’ causes a deadweight loss of welfare overall.
23. Advantage of monop- Large firm enjoys economies of scale ’ lower pro-
oly duction costs ’ increase supernormal profit ’ reinvest
in R&D ’ higher innovation and invention ’ dynamic
efficiency gains ’ increased choice and variety of prod-
ucts for consumers at lower costs ’ increased social
welfare.
24. Oligopoly Any price increase above X ’ other firms maintain price
Price rigidity (kinked at X ’ consumers switch to other firms ’ demand for
demand theory) firm's output becomes relatively price elastic ’ revenue
falls. Any price reduction below X ’ other firms match
price reduction ’ demand for firm's output becomes
relatively price inelastic ’ revenue falls ’ no incentive to
compete on price in oligopolistic markets.
25. Uncertainty Competitor firms could take any number of actions

in response to a price cut ’ firms do not know how
their competitors could behave ’ a firm could match
a price reduction, or start a price war or do nothing ’
uncertainty leads to inaction and focus on non-price
competition.
26. Price leadership Dominant firm raises its price ’ dominant firms loses
price competitiveness ’ PED more elastic ’ lower barri-
er to entry ’ loses market share to competitive fringe ’
loses monopoly power ’ becomes less dominant ’ loses
profit.
27. Controlling activities Price ceiling ’ reduces price ’ contraction of supply and
extension of demand ’ transfer producer to consumer
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surplus ’ encourages firms to be more efficient to
produce production costs.
Tax on profits (e.g. windfall tax) ’ decreases incentive
to collude.
28. Positive outcome Large firm enjoys economies of scale ’ lower pro-
duction costs ’ increase supernormal profit ’ reinvest
in R&D ’ higher innovation and invention ’ dynamic
efficiency gains ’ increased choice and variety of prod-
ucts for consumers at lower costs ’ increased social
welfare.
29. Negative outcome Interdependence ’ collusion (joint-profit maximisation)

’ agree quotas and restrict output to industry profit
max (MC = MR) level of output ’ raises prices for
consumers ’ decrease consumer welfare.
30. Efficiency in competi- Profit maximising firm operates where MC = MR ’

tive markets enjoys supernormal profit ’ attracts new firms to the
industry ’ increase industry supply ’ reduces indus-
try price ’ lowers firms' AR and increases output to-
wards where = MC (allocatively efficient) and where
= ATCmin (productively efficient).
31. Competition Policy Reduce barriers to entry or exit ’ increased threat of

Market contestability competition ’ firms behave as if there is competition ’
increase output and lower price to where AR = ATC
to prevent incentive of new firms to enter ’ increases
productive and allocative efficiencies.
32. Necessary because... Natural monopoly ’ high barriers to entry ’ no need

to pass on lower unit costs to consumers ’ abuse of
monopoly power ’ reduced consumer welfare.
33. Not necessary be- When supernormal profits exist ’ attracts new firms to
cause... enter ’ increases competition ’ incumbent firms must
compete on price ’ abuse of monopoly power cannot
persist ’ no need for competition policy intervention.
34.
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3rd Degree Price dis- Firms identify different groups of buyers with different
crimination PEDs and keep them separate at low cost ’ produce
output where MC = MR overall ’ sets MC = MR in sub
groups ’ charge higher price to inelastic PED and low-
er price to elastic PED groups ’ increase supernormal
profit compared to single price.
Benefit to consumers:
• Priced into market
• Some buyers pay less than before
35. Unequal Distribution Increases incentive to work ’ increase supply of labour

of Income ’ wages rates fall ’ lower costs of production for firms
Positive outcome ’ increase profit ’ increase investment in R&D ’ raises
dynamic efficiency gains for all.
36. Negative outcome Lower effective demand at any given price ’ demand
curves for products more elastic ’ lower consumer
surplus possible ’ lower social welfare.
37. Progressive taxation Higher income earners pay a higher proportion of

income in tax and Personal Allowance increased ’ high
income earners keep less whilst low income earners
keep more of their earned income ’ gap reduces ’ more
equal Lorenz curve.
38. Taxation not the best Increase opportunities for lower income earners (e.g.
Pupil Premium) ’ increased education and training ’
increased skill level ’ increased mobility of labour ’
increase wages ’ decrease disparity between earners
39. Regressive taxation Lower income tax for high income earners ’ increased
(Trickle-Down) absolute income to spend on goods and services ’
increase in derived demand for lower income labour ’
increase wages ’ reduced income gap.
40. Labour Markets Increase in wage (to W2) ’ excess supply of labour
Minimum wage may relative to firms' demand ’ increase unemployment.
not benefit workers
41.
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Minimum wage nega- Increase in wage ’ increases variable costs of produc-
tive impact on firm tion ’ shifts MC and ATC upwards ’ lowers supernormal
profit.
42. Positive impact of Incentives workers to upskill to increase productivity ’

wage differentials lowers costs of production ’ ATC falls ’ increases firms'
profit ’ dynamic efficiency ’ increase consumer choice
and variety of goods ’ increases social welfare.
43. Negative impact of If based on discrimination (e.g. sex) ’ fall in demand for
wage differentials female workers in one market raises supply of female
workers in other market ’ fall in wage rate in other
market ’ all females paid less ’ widens gender pay gap.
44. Macroeconomics Possible triggers for a rise in consumption:

Aggregate Demand • Increase in disposable income
and the Multiplier • Fall in taxation / increase in Personal Allowance
Consumption • Positive wealth effect
• Consumer confidence
• Reduction in interest rates
• Increase in availability of credit
• Inflation expectations
• Fall in savings ratio
E.g. An increase in the Personal Allowance (e.g.
£12,500 in 2019) ’ increase in disposable income ’
according to Keynesian Consumption Function ’ in-
crease in consumer spending ’ increase in demand
for goods and services throughout the economy ’ in-
crease in aggregate demand (AD to AD1) ’ increase
in national income (real GDP) ’ short-run economic
growth.
45. Government spend- Possible reasons for an expansionary fiscal policy

ing stance:
• Recessionary pressure
• War and threat of terrorism
• Natural disasters
• Politics
E.g. Government issues gilts in primary capital mar-
kets ’ raise finance to fund budget deficit ’ increase
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in demand for goods and services throughout the
economy ’ injection into the circular flow of income
’ increase in aggregate demand (AD to AD1) ’ de-
rived-demand for labour ’ fall in unemployment.
46. Investment Possible triggers for a rise in investment:

• Fall in interest rates
• Fall in cost of capital
• Increase in technological progress
• Increase in business expectations
Fall in interest rates ’ lowers cost of borrowing for firms
’ increase in Marginal Efficiency of Capital ’ increase
in investment ’ increase in demand for capital goods ’
increase in productive capacity of economy (LRAS to
LRAS1) ’ long-run economic growth.
47. Net Exports (X-M) Possible triggers for a rise in export revenue
• Fall in exchange rates
• Improved economic performance of trading part-
ners
• Relatively lower inflation rate
E.g. A reduction in the Base Rate of interest ’ reduc-
tion in reward for international saving ’ outflow of hot
money ’ increase in supply of sterling (S to S1) ’ fall
in Sterling exchange rate ’ lower external price of UK
exports ’ increase in demand for X ’ improvement in
Balance of Payments on Current Account.
48. Possible triggers for a • Rise in exchange rates

fall in export revenue: • Worsening economic performance of trading part-
ners
• Relatively higher inflation rate
E.g. A relatively high inflation rate in UK ’ increase in
external price of UK exports ’ reduction in international
price competitiveness ’ fall in demand for UK exports
’ fall in export revenue ’ smaller injection than planned
into circular flow of income ’ fall in aggregate demand
(AD to AD1) ’ fall in demandpull inflationary pressure.
49.
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Possible triggers for a • Fall in interest rates
rise in import expen- • Rise in national income
diture • Relatively higher inflation rate
E.g. A fall in Bank Rate ’ lower cost of borrowing for
commercial banks ’ increases spread ’ reduction in
interest rates for borrowers whilst maintaining origi-
nal spread ’ lower cost of borrowing for consumers ’
increased spending on goods and services ’ UK has a
particularly high MPM (35%) ’ increase in demand for
imports ’ increase in import expenditure ’ worsening of
trade balance.
50. Possible triggers for a • Rise in interest rates

fall in import expendi- • Fall in real output
ture: • Relatively lower inflation rate
E.g. A fall in real output ’ fall in derived-demand for
labour ’ fall in real national income ’ fall in house-
holds disposable income ’ according to Keynesian
Consumption Function ’ fall in expenditure ’ UK has
particularly high MPM (35%) ’ fall in import expendi-
ture ’ improvement in Balance of Payments on Current
Account.
51. Multipliers • Investment (I)

Injections into circu- • Export revenue (X)
lar flow • Government spending (G) except transfer pay-
ments/welfare payments since no output in return!
52. Withdrawals from cir- • Saving (Savings Ratio - SR)

cular flow • Import expenditure (Marginal Propensity to Import)
• Taxation (Marginal Rate of Tax - MRT)
53. Positive multiplier ef- Any increase in an injection into (or decrease of a
fect withdrawal from) the circular flow of income:
E.g. Increase in investment ’ increase in demand for
capital goods ’ injection into the circular flow of in-
come
’ increase in AD (AD to AD1) ’ increase in derived-de-
mand for labour ’ increase in disposable income ’
increase in demand in a different market e.g. for
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consumer goods ’ subsequent secondary spending
rounds ’ (AD1 to AD3) ’ additional increases in real
output (Y1 to Y3) known as a positive multiplier effect.
54. Negative multiplier ef- Any decrease in an injection into (or increase of a
fect withdrawal from) the circular flow of income:
E.g. Rise in exchange rate ’ lower cost of imported
goods ’ increase in demand for imports relative to
domestic goods ’ reduced demand for UK goods ’ fall
in derived-demand for labour ’ rise in unemployment
’ fall in household disposable income ’ according to
Keynesian Consumption Function ’ fall in consumption
’ fall in aggregate demand (AD to AD1) ’ decrease
in demand in other markets ’ subsequent secondary
spending rounds ’ (AD1 to AD3) ’ additional decreases
in real output (Y1 to Y3) known as a negative multipli-
er effect.
55. Accelerator Expansionary demand-side policy ’ rise in rate of eco-

nomic growth ’ firms close to full capacity increase
capital expenditure in anticipation of future increases
in demand for goods ’ higher proportional increase in
rate of investment ’ injection into the circular flow of
income ’ increase in aggregate demand (AD to AD1) ’
increase in demand-pull inflation.
56. Productivity Gap Possible causes of productivity gap with G7:

• Low levels of investment
• Lower R&D
• Worse education/skills of labour force
• Over-regulation
E.g. Relatively low levels of investment ’ less up to
date capital machinery / technology ’ less innovation ’
reduced output per input ’ reduced labour productivity
’ higher per unit cost ’ less international competitive-
ness.
57. Supply-Side Policies Including:

• Labour market: education and training to improve
occupational mobility
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• Labour market: infrastructure and transport net-
works to improve geographical mobility
• Labour market: lower taxation to improve incentives
to work
• Labour market: lower benefits to improve incentives
to work
• Labour market: trade union reform to improve flexi-
bility
• Product market: privatisation
• Product market: deregulation
• Product market: outsourcing/contracting out
• Production market: competition policy
• Capital market: lower taxation to encourage invest-
ment in R&D
• Capital market: regulation and deregulation of finan-
cial markets
E.g. Government reforms of education (e.g. more
rigorous GCSEs and A-levels) ’ increase in human
capital (stock of skills and knowledge) ’ increase in
labour's productive potential ’ increase in potential
output in
economy (LRAS to LRAS1) ’ long run economic
growth
58. Fiscal Policies • Reduction in direct taxation

Expansionary fiscal • Reduction in indirect taxation (e.g. VAT)
stance includes: • Increase in current spending
• Increase in capital spending
• Budget deficit
E.g. A reduction in direct taxation (e.g. increase in
40% income tax band from £46,350 to £50,000 in
2019) ’ increase in household disposable income ’
according to Keynesian Consumption Function ’ in-
crease in consumer spending ’ increase in demand
for goods and services throughout the economy ’ in-
crease in aggregate demand (AD to AD1) ’ increase
in national income (real GDP) ’ short-run economic
growth.
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59. Financial Crowding Government incurs a budget deficit ’ issues more gilts
Out in Primary Capital Market ’ increases demand for loan-
able funds ’ government must increase coupon rate
on gilts to attract investors/savers seeking a balanced
portfolio ’ commercial banks must raise their interest
rates in response to attract savers ’ higher cost of
borrowing throughout the economy ’ lowers borrowing
and spending by consumers and firms ’ financially
crowds out private sector ’ offsets increased G via
lower C and I ’ reduced increase in aggregate demand
’ limits economic growth.
60. Monetary Policies Includes:

Conventional • Bank Rate (interest rate)
• Consumer spending
• Housing market
• Discretionary income of variable rate mortgage pay-
ers
• Demand for credit
• Consumer confidence
• Savings
• Investment
• Demand for credit
• Business expectations
• Net-exports
• Hot money flows / exchange rate
E.g. A fall in Bank Rate ’ lowers cost of borrow-
ing for commercial banks ’ lowers mortgage interest
rates whilst maintaining spread ’ increases demand
for mortgage credit ’ increases demand for houses
(D to D1) ’ increase in house prices ’ increase in
positive wealth effect ’ increase in consumer spending
’ increase in aggregate demand (AD to AD1) ’ increase
in demand-pull inflation.
E.g. A rise in Bank Rate ’ increases reward for saving
’ attracts international hot money flows ’ increase in
demand for Sterling (D to D1) ’ increase Sterling ex-
change rate ’ lowers cost of imported raw materials
and part finished goods for firms ’ lowers cost of
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production ’ increases domestic supply (AS to AS1) at
any given price level ’ reduction in cost-push inflation.
61. Unconventional Includes:

• Quantitative Easing (QE)
• Forward Guidance
E.g. Bank of England creates digital money ’ pur-
chases back previously issued gilts and targeted pri-
vate sector bonds from large financial institutions like
Pension Funds ’ increases demand and hence the
price of these debt instruments ’ increases liquidity
(broad money) and lowers yield in Secondary Capital
Markets ’ lowers coupon rate needed to be offered
by private sector firms who wish to raise capital in
Primary Capital Markets ’ lower cost of borrowing for
firms ’ increases private sector investment ’ increases
demand for capital goods ’ increases aggregate de-
mand (AD to AD1) ’ increases real output (Y to Y1) ’
short run economic growth.
62. Unemployment Expansionary demand-side policy ’ increases de-

Phillips Curve (Short mand for goods and services throughout the econ-
Run) omy ’ increases aggregate demand (AD to AD1) ’
increases derived-demand for labour ’ lowers unem-
ployment ’ when economy is close to full employment
workers and trade unions exploit labour shortage and
increase wage rates ’ higher cost of production ’ firms
supply less for any given price level (AS to AS1) ’
cost-push inflation (movement up and to the left along
SRPC1).
63. Price Instability Price instability ’ uncertainty about costs, prices and
revenue ’ caution ’ inaction ’ reduced consumer spend-
ing (to increase consumer surplus) and reduced in-
vestment (to protect profits) ’ reduced aggregate de-
mand in the economy ’ lower derived-demand for
labour ’ falling national income ’ reduced economic
growth.
64.
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Inflation • Fall in direct taxation
Demand-pull causes • Fall in interest rates
include: • Fall in exchange rate
• Increased government spending
E.g. A fall in corporation tax rates (e.g. to 18% in
2020) ’ increase in firms' retained profits ’ since 70% of
investment is funded from retained profits ’ increase
investment ’ increase in demand for capital goods ’
increase in aggregate demand (AD to AD1) ’ increase
in price level (P to P1) ’ demand-pull inflation.
65. Cost-push causes in- • Fall in exchange rate / imported inflation (cost of
clude: imported raw materials and part-finished goods)
• Rise in raw material costs
• Tight labour market
• Rise in indirect taxation
E.g. A rise in the National Minimum Wage (e.g. to
£7.83 for 25+ year olds) ’ increases firms' cost of
production ’ reduces supply at any given price level
(AS to AS1) ’ increases price level (P to P1) ’ cost-push
inflation.
66. Deflation Increase in AS: benign deflation

E.g. Fall in cost of capital ’ increases investment rate
of return ’ increases investment within the economy ’
increases productive potential (LRAS to LRAS1) ’ fall
in price level (P to P1) ’ benign deflation.
67. Disinflation Occurs during the multiplier effect as the price level
rises by less each time.
68. Trade Each country specialises in the production of goods

Comparative Advan- and services in which they have the lower opportunity
tage cost ’ agree terms of trade that lie between the inter-
nal trade off ratio ’ trade occurs between economies
with higher total consumption of goods and services ’
increased social welfare.
69. Trade deficits Trade deficit (import expenditure greater than export
revenue) ’ negative net imports ’ withdrawal from cir-
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cular flow of income ’ lower aggregate demand (AD
to AD1) ’ fall in real output ’ lower derived-demand
for labour ’ negative multiplier effect via reduced sec-
ondary spending rounds ’ additional rise in domestic
unemployment.
70. Overcome by • Expenditure reduction policies (contractionary fiscal

policy)
• Expenditure switching policies
E.g. Central Bank ’ sells Sterling on FOREX / buys
foreign currency (e.g. €) ’ increases supply of Sterling
(S to S1) ’ lowers exchange rate ’ decreases exter-
nal price of UK exports ’ improves international price
competitiveness ’ more exports sold ’ higher export
revenue ’ reduction of trade deficit.
71. Trade surplus Central Bank ’ uses FOREX currency (e.g. $) from
reserves to buy Sterling ’ increase demand for Sterling
(D to D1) ’ increases exchange rate ’ increases ex-
ternal price of UK exports ’ lowers international price
competitiveness ’ fewer exports sold ’ lower export
revenue ’ reduction of trade surplus.
72. Protectionism • Tariffs

Forms include: • Quotas
• Embargoes
• Domestic subsidies
• Product standards
• Bureaucracy
E.g. Government introduces a tariff (e.g. on steel
imports) ’ increases world supply price of steel imports
’ contraction of domestic demand and increase in do-
mestic supply ’ reduction of imports (Q1Q2 to Q3Q4) ’
improvement in trade balance/increase in derived-de-
mand for labour/increase in domestic output.
73. Globalisation Increase in international trade ’ increase competition

between suppliers ’ greater choice of a variety of
goods and services at lower prices for consumers ’
increased social welfare.
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Increase in labour supply ’ increase in productive ca-
pacity of nations (LRAS to LRAS1) ’ lower wage costs
’ benign deflation.
Increase in potential markets ’ increase in output ’
economies of scale ’ lower LRATCs ’ higher profits
ceteris paribus ’ increased investment in R&D ’ in-
crease in aggregate demand (AD to AD1) ’ short run
economic growth.
74. Aid • Hard or soft loans

Forms include: • Tied Aid
• Disaster relief
Government lends money to foreign nations ’ increase
in infrastructure and education spending ’ increase
in productive potential (LRAS to LRAS1) ’ increase
in human capital ’ attracts FDI ’ increases aggregate
demand (AD to AD1) ’ increases derived-demand for
labour ’ increase in household disposable income ’
increase in both economic growth and economic de-
velopment Unintended consequences include:
• Dependency culture
• Corruption
Countries may become dependent on aid ’ lack of
initiative to invest in preventative measures ’ economic
cycle of donor countries reduces aid ’ no long run
solutions.
75. Development Barri- Corruption ’ tax revenue diverted ’ lack of infrastruc-

ers ture investment ’ reduced pace of productive capacity
growth ’ slower rising national incomes ’ since GNI is
US$ PPP per capita is part of HDI ’ slower develop-
ment.
Race to the bottom / tax evasion ’ deprives govern-
ment of tax revenues ’ reduced spending on state-run
medical services ’ brain drain ’ reduced life expectancy
’ since part of HDI ’ slower development.
Lack of private property rights ’ dissuades entrepre-
neurial spirit since capital and profits can be captured
by government ’ reduced investment ’ reduced pace
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of productive capacity growth ’ slower rising national
incomes ’ since GNI is US$ PPP per capita is part of
HDI ’ slower development.
War and internal conflict ’ destroys physical capital
(e.g. tarmac roads and rail lines) and human capital ’
higher costs of production ’ less supplied for any given
price level ’ cost-push inflation ’ reduced international
price competitiveness ’ fewer export sales ’ slower
rising national incomes ’ since GNI is US$ PPP per
capita is part of HDI ’ slower development.
Lack of savings ’ fewer loanable funds held in commer-
cial banks ’ reduced credit available to firms ’ higher in-
terest rates ’ reduced borrowing ’ reduced investment
’ reduced pace of productive capacity growth ’ slower
rising national incomes ’ since GNI is US$ PPP per
capita is part of HDI ’ slower development.
76. European Union • Four freedoms (free trade in goods, free trade in
Benefits of Single services, free movement of labour, free movement of
Market and Customs capital)
Union include: • Economies of scale / increased efficiency / lower
production costs
• Increased trade / economic growth / lower unem-
ployment
• Trade creation / higher consumer welfare
• Increased competition / lower inflation
• Specialisation / improved trade balance
• No trade deflection
E.g. As a member of the EU then UK firms have
tariff-free access to 500m consumers ’ provides scope
to exploit comparative advantage and specialise (e.g.
in financial services) ’ enjoy economies of scale (e.g.
marketing) ’ lowers average fixed cost of production
’ increases profits ’ increased investment in R&D ’
increase in derived-demand for labour ’ raises house-
hold disposable incomes ’ according to Keynesian
Consumption Function ’ increase in consumer spend-
ing ’ increase in aggregate demand (AD to AD1) ’
economic growth.
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77. Costs of Single Mar- • Structural unemployment

ket and Customs • Fragmentation
Union include: • Race to the bottom
• Trade diversion
E.g. UK must now set common tariff to non-EU mem-
ber countries ’ loses non-member tariff-free (or low
tariff) trade partners (e.g. New Zealand) ’ UK con-
sumers now switch to EU suppliers at a higher than
previous, but lower than tariff-imposed, price ’ reduced
consumer welfare.
78. Money A medium of exchange and means of payment ’ re-

Functions of money moves need for double-coincidence of wants ’ enables
specialisation of labour ’ improves human capital ’
increases productive capacity of economy (LRAS to
LRAS1) ’ long run economic growth
A store of value and wealth ’ enables savings ’ increas-
es quantity of loanable funds ’ enables commercial
banks to lend to firms ’ increases investment ’ increas-
es demand for capital goods ’ increases aggregate
demand (AD to AD1) ’ increase in real output ’ short
run economic growth.
A measure of value ’ enables price comparisons be-
tween differing goods and services ’ increases com-
petition ’ encourages innovation and invention ’ in-
creases choice and lowers price for consumers ’ in-
creases social welfare
A standard of deferred payment ’ facilities trade credit
’ enables firms borrowing ’ increases production ’ in-
creases real output ’ increases derived-demand for
labour ’ lowers unemployment.
79. Financial Markets Commercial banks accept deposits ’ whilst no interest

Role of Financial Mar- is paid households' money is safe yet access is imme-
kets diate and easy ’ provides means of carrying purchas-
ing power into the future for households ’ facilitates
larger purchases of consumer durables ’ enables both
day-to-day and more sizeable transactions ’ stable
aggregate demand ’ economic growth/low unemploy-
19 / 22
ment/price stability.
Provides short-term credit facilities ’ enables firms to
raise short-term funds via commercial bills ’ improves
firms' liquidity ’ finances working capital requirements
and operational expenses of trade and industry ’ e.g.
paying bills, wages and raw materials ’ facilitates
smooth functioning of businesses ’ maintains employ-
ment and real incomes.
Enables governments to raise short-term funds via
Treasury bills ’ reduces need to print/mint new money
for expenditure ’ reduces excessive growth of money
supply ’ via MV=PQ ’ limits inflationary pressure whilst
facilitating fiscal and supply-side fiscal policies ’ macro
objectives.
Spot market facilities instant conversion of one cur-
rency into another ’ transfers purchasing power be-
tween countries ’ enables international payments and
debt clearance between nations ’ facilities FDI, trade
and exploitation of comparative advantage ’ trade
creation and its benefits ’ international (cross-border)
investment ’ macroeconomic objectives.
Forward market facilities ’ three month contracts to
buy or sell FOREX at a fixed date in the future at
a fixed rate ’ hedging against unanticipated or un-
favourable movements ’ increased certainty and se-
curity ’ increased foreign credit (for short-term trade)
and increased foreign capital transfer (long term in-
vestment) ’ increased globalisation, trade and devel-
opment.
80. Financial Crash 2008 Insufficient regulation of (and increased interrelated-

(in a nutshell) ness of) financial markets coupled with inappropriate
consumer borrowing and profligate bank lending ’ ex-
cessive risk taking ’ housing bubble ’ housing supply
continued to increase whilst demand started to fall ’
bubble burst ’ increased failure rate of sub-prime mort-
gage repayments ’ information failure exacerbated via
regulatory capture ’ collapse of trade in mortgage
backed (and related) securities ’ credit crunch ’ global
20 / 22
financial market contagion ’ widespread bank failures
’ uncertainty ’ higher unemployment ’ falling incomes ’
reduced real output ’ economic recession.
81. Guidance on Evalua-

tions
82. Fall in income tax Depends on which income group is affected (Keyne-
sian consumption function) since have different mar-
ginal propensities to consume. Laffer curve.
83. Fall in interest rates Depends upon the extent of consumer confidence
and level of firms expectations. Monetary policy is
often a necessary but insufficient condition to affect
change. Zero-lower bound. Liquidity trap.
84. Fall in availability of Affects big-ticket items e.g. houses and consumer
credit durables bought on credit more than lower priced
consumer goods.
85. Increase in inflation Unequal impact on the living standards of savers and
borrowers. Ability to increase wages/income.
86. Rise in savings ratio Paradox of thrift.
87. Changes in G, I, X Size of multiplier effect depends upon marginal tax

rates, savings ratio and propensity to import.
88. Changes in G Depends on type of expenditure. Transfer payments

do not affect AD. Capital spending increases LRAS
whilst current spending may form deadweight debt if
it requires an increase in the PSNCR.
89. Changes in X-M Depends on exchange rate, performance of trading

partners, relative inflation rates.
90. Changes in unem- Depends upon economic cycle, extent of SSPs, re-
ployment placement ratio, unemployment trap.
91. J-curve. Marshall-Lerner condition.

21 / 22
Changes in exchange
rates
92. Protectionist policies Depends on PES of UK. Extent of retaliation by trad-

ing partners.
93. Increased G borrow- Crowding-out depends upon the stage in the econom-
ing ic cycle.
94. Benefits of speciali- Scope to achieve a fall in MC depends upon size of

sation and division of firm.
labour
95. Size of D-curve shift Conditions of demand (closeness of substitutes and

complements, size of income change, longevity and
size of fashion, speed of population change).
96. PED Quantity and quality (closeness) of substitutes,

timescale, % income, market width, necessity/luxury.
97. Size of S-curve shift Conditions of supply (size of production cost change,
size of benefits of technological change, value of
indirect tax and subsidy).
98. PES Timescale for growing agricultural goods, degree of

spare capacity, stockpiles/inventories, factor mobility.
22 / 22

Chains 90

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Chains 90

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Economics A-Level Chains

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1. Specialisation The separation of tasks in the production process ’

The separate of tasks in the production process ’

2. Increase in demand • Rise in disposable income (for a normal good) per-

3. Microeconomics The separation of tasks in the production process ’

4. Market Equilibrium • Rise in disposable income (for a normal good) per-

5. Increase in supply • Fall in production costs

6. Price Mechanism Price rise ’ information about market conditions ’ sig-

7. Market Failure (in Non-excludability and non-rivalry ’ no ability for firms

8. Externalities Third party spill-over effects ’ not included in private

9. Information failure Consumers don't possess or ignore relevant informa-

10. Utility Maximisation Consumers seek to maximise welfare ’ acquire the

11. Outputs and Costs In SR at least one factor of production is fixed in

13. Economies of scale Sources include: Bulk-buying; Managerial; Financial;

14. Objectives of Firms Quantity of output set where MC = MR ’ maximum

18. Supernormal profit In SR firms in PC can make supernormal profit ’ new

19. Losses In SR firms in PC can incur a loss ’ firms producing

20. Monopoly Market quantity demanded is inversely proportional

22. Market failure Monopolist enjoys monopoly power ’ restricts output

25. Uncertainty Competitor firms could take any number of actions

29. Negative outcome Interdependence ’ collusion (joint-profit maximisation)

30. Efficiency in competi- Profit maximising firm operates where MC = MR ’

31. Competition Policy Reduce barriers to entry or exit ’ increased threat of

32. Necessary because... Natural monopoly ’ high barriers to entry ’ no need

35. Unequal Distribution Increases incentive to work ’ increase supply of labour

37. Progressive taxation Higher income earners pay a higher proportion of

42. Positive impact of Incentives workers to upskill to increase productivity ’

44. Macroeconomics Possible triggers for a rise in consumption:

45. Government spend- Possible reasons for an expansionary fiscal policy

46. Investment Possible triggers for a rise in investment:

48. Possible triggers for a • Rise in exchange rates

50. Possible triggers for a • Rise in interest rates

51. Multipliers • Investment (I)

52. Withdrawals from cir- • Saving (Savings Ratio - SR)

55. Accelerator Expansionary demand-side policy ’ rise in rate of eco-

56. Productivity Gap Possible causes of productivity gap with G7:

57. Supply-Side Policies Including:

58. Fiscal Policies • Reduction in direct taxation

60. Monetary Policies Includes:

61. Unconventional Includes:

62. Unemployment Expansionary demand-side policy ’ increases de-

66. Deflation Increase in AS: benign deflation

68. Trade Each country specialises in the production of goods

70. Overcome by • Expenditure reduction policies (contractionary fiscal

72. Protectionism • Tariffs

73. Globalisation Increase in international trade ’ increase competition

74. Aid • Hard or soft loans

75. Development Barri- Corruption ’ tax revenue diverted ’ lack of infrastruc-

77. Costs of Single Mar- • Structural unemployment

78. Money A medium of exchange and means of payment ’ re-

79. Financial Markets Commercial banks accept deposits ’ whilst no interest

80. Financial Crash 2008 Insufficient regulation of (and increased interrelated-

81. Guidance on Evalua-

86. Rise in savings ratio Paradox of thrift.

87. Changes in G, I, X Size of multiplier effect depends upon marginal tax

88. Changes in G Depends on type of expenditure. Transfer payments

89. Changes in X-M Depends on exchange rate, performance of trading

91. J-curve. Marshall-Lerner condition.

92. Protectionist policies Depends on PES of UK. Extent of retaliation by trad-

94. Benefits of speciali- Scope to achieve a fall in MC depends upon size of

95. Size of D-curve shift Conditions of demand (closeness of substitutes and

96. PED Quantity and quality (closeness) of substitutes,