Economics

Economics Revision Guide

Economics Summaries

Are you tired of reading heavy textbook materials? The Vaia Economics summaries were created to provide you with comprehensive learning materials in a more absorbable format! You don’t have to spend hours reading pages of dense text! What is more, they are relevant for all exam boards. You can also upload your own Economics notes and become a content creator yourself!

Economics Flashcards

This tool will make preparation for your exams more efficient by helping you memorise the content. Vaia Institute has prepared the flashcards that cover the Economics course materials from the summaries, but you can also create your own.

Economics Study Groups

Vaia is not just about the content; we are building a community of learners! We have created a space for students to collaborate online and study together. For example, you can share your study materials to create extensive summaries and then use the flashcards to quiz each other. How cool is that?

Rewards for learning Economics

Helping you to get the top grades is our long term goal, but what about short term rewards? Vaia will recognise your efforts and boost your confidence in your ability to succeed! How do we do that? We have created a rewards system that encourages students to study more and celebrate short term achievements.

We understand that assessments are stressful, so why not set yourself some goals to reach to visualise your revision? You will get points for the time you spend studying, answering the flashcards correctly, or completing a subject. Reaching these goals will earn you Vaia trophies. For example, gain the Best thing since sliced bread if you study every week for three months, or become a Grandmaster if you answer five questions in the same course. The more you learn, the more trophies you get to celebrate your hard work.

Topics and learning objectives in Economics

There is a common view that Economics is ‘all about money.’ While that belief may have a grain of truth, it’s by no means the whole picture. The word economics comes from the Greek word Oikonomia, meaning ‘household management.’ It was perhaps best defined in 1932 by the British economist Lionel Robbins who suggested that it is:

To put it in simple terms, everyone has:

• Needs such as food, water, shelter, medication AND

• Wants such as designer clothes, bigger houses, expensive hobbies, travel plans.

However, the available resources to satisfy these needs and wants are limited. American economist, Thomas Sowell (born 1930) contended that:

Deciding how to allocate those limited resources effectively is what Economics is all about.

The study materials on the Vaia platform are divided into two overarching categories: microeconomics and macroeconomics. That is because economic agents operate on different scales: individuals, households, firms, trade unions, institutions, national economies, economic unions, and so on.

Table 1. Definition of Microeconomics and Macroeconomics

However, it’s important to remember that everything in economics is interlinked. As famous economist Gregory Mankiw said in his book Principles of Economics:

Vaia will take you on a learning journey during which you will go through the necessary depth of content and learn the essential skills in economics to get the best outcomes for your Economics course.

We will first walk you through the topics covered in the microeconomics study set followed by the topics in macroeconomics on the Vaia platform.

Microeconomics

Microeconomics is concerned with the economic activity in individual markets that make up an entire economy.

Introduction to Economics

The Introduction to Economics study set focuses on the basic economic ideas. At the heart of the evolution of economics lies the fundamental economic problem of satisfying infinite desires with limited or scarce resources effectively. Scare resources (inputs) used to make things people need and want (outputs) can be divided into four factors of production:

• Land comprises all naturally occurring resources as well as the geographic land.

• Labour includes all work done by people.

• Capital consists of assets used for the production of goods and services.

• Enterprise refers to the willingness of the people (entrepreneurs) who take risks to make a profit.

Effective allocation of resources presents economic agents with opportunity costs. In other words, the benefits or losses one incurs when choosing one thing over another. In making choices, they respond to incentives.

You will learn how to illustrate opportunity costs between the limited resources on a graph. You will see that economists talk about scarcity in the first place because every unit of the economic architecture has a productive capacity. For instance, unless a coffee shop hires more baristas, it will only be able to make a limited number of coffees.

Consumer rationality

This section of microeconomics concerns assumptions economists make in order to draw inferences between the behavioural aspects of economic affairs. For example, economists assume that economic agents are utility maximisers.

Traditional economists argue that to maximise utility, economic agents must act rationally. That means that the only factor that matters when making a choice is the maximum utility from obtaining that choice. Consumer utility, in particular, is defined through the concepts of total utility, marginal utility, and the law of diminishing returns.

The assumption that consumers are able to make rational decisions is based on the premise of perfect information. In other words, the idea that consumers know everything there is to know about the good or service they are interested in. Whether that is always the case in the real world will also be discussed in this section.

Price determination in a competitive market

The wants and needs of consumers generate demand for goods and services. The producers then supply goods and services to meet that demand. Both producers and consumers will have an idea of what they are willing to sell and buy those goods and services for. Anything above or below those values is explained using the concepts of consumer and producer surplus. Therefore, the price and the quantity in a market are determined at the point where these interests match: at market equilibrium.

Furthermore, factors such as price, income, availability of substitutes, and others, determine the responsiveness of demand and supply to changes. This responsiveness is measured through the concept of elasticity.

The market mechanism

This study set takes that idea of market equilibrium further and demonstrates how markets allocate resources. You will see that although they are designed to do so efficiently, there are occasional instances of market failure. You will derive ways to address market failure through a variety of interventions.

Production, costs and revenue

This section of your learning will be focused on the business side of economics. You will discover why firms specialise in producing specific goods and services and how it leads to the division of labour. You will explore what is involved in the production of goods and services and how economists measure the productivity of a factor of production. You will also study how firms incur costs, generate revenues, and maximise profits.

Market structures

This study set will take you through the market characteristics that potential entrepreneurs need to consider before they start their business. In particular, these characteristics refer to the number of already existing players, their market share, pricing power, and barriers to entry.

Economists use the model of perfect competition to demonstrate how the markets should theoretically work in ideal circumstances. These are:

• An infinite number of producers and consumers.

• Perfect information about the goods and services.

• Goods and services being perfect substitutes.

• No barriers to entry to or exit from the market.

• Firms having the sole aim of maximising their profit.

Even though markets do not work this way in the real world, it is still important to understand perfectly competitive markets to solve the undesirable outcomes in real-life markets. A more realistic representation of the competitive dynamic between the market players is monopolistic competition. This is a market structure where many smaller firms compete with each other.

If a handful of big firms dominate a market, the market is described as an oligopoly.

Finally, if there is one powerful player, that is a monopoly.

Labour market

If you got down to this section, you will know that labour is one of the four factors of production. It is a commodity that workers provide in exchange for a wage. The labour market is essentially a job market.

In this Economics course, you will consider the labour market both from the micro and macro perspective. From the microeconomics perspective, you will study how the labour market is subject to the equilibrium between the supply and demand for labour, as well as the elasticity (or responsiveness) of demand and supply to certain changes, all of which can also be portrayed on a diagram. You will investigate how the number of hours a worker is willing to supply changes due to the rise in wages, and how the demand for labour is derived from its marginal revenue product. You will also consider how interventions such as the National Minimum Wage introduced by governments and trade unions affect the wage-setting mechanism in the labour market. In contrast, from the macroeconomics perspective, you will explore labour productivity and unemployment rates for the whole economy.

Poverty and inequality

Letting the market mechanism perform without intervention means that some markets will do better and some will do worse. In other words, markets can lead to unequal outcomes. In Economics, we study such discrepancies both on the micro and macro level and use indices and economic indicators to compare the distribution of income within economies as well as their levels of development as a whole.

Macroeconomics

What if we need to discuss the welfare of economies as a whole? That is what macroeconomics is concerned with. If one compared micro with the study of trees, then macro would be the study of forests.

How the macroeconomy works

Much like in microeconomics, the macroeconomic study is also based on a set of assumptions and theoretical models, all of which will be covered in this introductory study set. However, these models operate on a larger scale. For instance, you will jump from the simple demand of one consumer to the aggregate demand of all consumers, and from the supply of one producer to the aggregate supply of all producers in the economy. You will also explore how money moves around the economy using the circular flow of income model.

Economic performance

What do we mean by the ‘welfare of an economy’? Economists look at phenomena such as whether the economy is growing, whether the average price level in the economy is rising, whether people are employed or unemployed and why, or whether the economy is achieving a balance of trade with other economies. All of those describe the economic performance and can be measured using specific macroeconomic indicators.

Government's macroeconomic policy

Do you have an objective of a grade you would like to achieve in your Economics exam? Similarly, the UK government has macroeconomic performance objectives. Economists focus on economic growth, stability of inflation, levels of unemployment, and the balance of payments, as well as on economic stability, productivity, sustainability, distribution of income and wealth, and so on.

Remember we touched upon the idea of the opportunity cost in decision-making? Well, the macroeconomic objectives also conflict with each other when progress in one comes at the cost of demise in another.

To achieve their performance objectives, governments have a range of policies at their disposal.

Monetary policy

This section focuses on the monetary policy used to achieve government objectives by manipulating these variables: the rate of interest, the money supply, and the exchange rate.

Fiscal policy

The fiscal policy study set explores the decision-making of the government concerning its borrowing, taxation, and spending. You will learn what instruments the government uses to achieve its performance objectives and why.

Supply-side policies

The supply-side policies are aimed at boosting the economy's efficiency and productivity.

The international Economy

This section will take you from economics in a single country onto the international or global scale. You will explore the concept of comparative advantage and the reasons why economies engage in international trade. You will also study what globalisation is, and the concomitant global dynamic between economies in the form of trade barriers or forming unions.