Economics microeconomics the UK economy and the international economy

Economics
Microeconomics,
The UK Economy and
The International Economy

[INTERMEDIATE 2;
HIGHER]
Martin Duguid

abc


The Scottish Qualifications Authority regularly reviews
the arrangements for National Qualifications. Users of all
NQ support materials, whether published by LT Scotland
or others, are reminded that it is their responsibility to
check that the support materials correspond to the
requirements of the current arrangements.

Acknowledgement
Learning and Teaching Scotland gratefully acknowledge this contribution to the National
Qualifications support programme for Economics.
First published 2005
© Learning and Teaching Scotland 2005
This publication may be reproduced in whole or in part for educational purposes by
educational establishments in Scotland provided that no profit accrues at any stage.
ISBN 1 84399 082 2

© Learning and Teaching Scotland

CONTENTS

5

Introduction: Student Induction Pack
Unit 1: Microeconomics
Topic 1: The basic economic problem
Topic 2: Demand
Topic 3: Supply
Topic 4: The operation of markets
Topic 5: Types of market (for Higher only)

23
32
44
70
79

Unit 2: The UK Economy
Topic 1: National income
Topic 2: Inflation and unemployment
Topic 3: The role of government in the economy
Topic 4: Government economic policies (for Higher only)

85
104
122
143

Unit 3: The International Economy

Topic 1: International trade and payments
Topic 2: The international economic environment

179
206

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

3


4

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland


STUDENT INDUCTION PACK

INTRODUCTION

Introduction
The aim of this pack is to provide information which will help you
during your Economics course at Intermediate 2 or Higher level.
Rationale
All societies, organisations and individuals face the economic problem of
allocating scarce resources among competing uses. Economics is the

social science which provides the knowledge and skills required to make
decisions about the production and consumption of goods and services.
This course is concerned with the ways in which such decisions are
made and the implications which these decisions have for individuals,
organisations and society. The course will help you to build up
knowledge of economic principles. You will develop skills in
interpreting and analysing economic information as well as evaluating
the costs and benefits of decisions.
This economics course looks at both the world of business and the
economic environment in which business is set. It will benefit anyone
thinking of a career in central or local government, commerce, finance
or industry.
Course aims
The course aims to develop:
• a knowledge and understanding of the basic economic problem of
allocating scarce resources among alternative uses
• an understanding of the economic roles and responsibilities of the
individual as a consumer, employee, producer and citizen
• an understanding of the economic roles and responsibilities of firms
and governments in the use of resources
• an understanding of the environmental and social costs involved in
economic decisions
• an understanding of the economic relationships between countries
• an ability to explain and analyse economic problems and to suggest
possible solutions
• an ability to communicate economic ideas in a logical and effective
manner.

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

5


STUDENT INDUCTION PACK

Course details
The course is made up of three units:
• Microeconomics
• The UK Economy
• The International Economy
Each unit is divided into topics. It will help you to organise your notes if
you have a ring binder for each unit with a separate section for each
topic. The topics are:
Unit 1: Microeconomics
1.
2.
3.
4.
5.

The Basic Economic Problem
Demand
Supply
The Operation of Markets
Types of Market

Unit 2: The UK Economy
1.

2.
3.
4.

National Income
Inflation and Unemployment
The Role of Government in the Economy
Government Economic Policies

Unit 3: The International Economy
1.
2.

International Trade and Payments
The International Economic Environment

Methods of teaching and learning
Different methods of teaching and learning will be used during your
course but emphasis will be placed on examining, explaining and
analysing current economic events and issues in the UK, European and
world economies. You will be using articles from newspapers, magazines
and journals and programmes recorded from TV or radio. The Internet
is a very valuable source of material. You may also use computer
simulations of the economy and economic statistics drawn from a variety
of sources. It is important that you keep up with economic events and
you should regularly listen to or watch news bulletins. You will also find

6

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland


STUDENT INDUCTION PACK

it useful to scan radio/TV listings to look for and record relevant
programmes. Reading a newspaper and compiling a file of articles will
also be of great benefit to you.

Homework
Your teacher will give you homework. This may consist of written
exercises, completing work started in class or researching information.
Study is also important and you should spend time as soon as possible
after each lesson reading and learning your notes and textbook. It is
important that you identify any problems of understanding as soon as
possible and ask your teacher for help. Do not let problems drift – they
will not go away by themselves. Keeping up with events (as outlined
above in Methods of Teaching and Learning) should also be considered
as part of your homework. It follows that planning, setting deadlines and
sticking to them is vital for homework and study. This will contribute
greatly to your success.

Absence
If you know in advance that you are going to be absent, inform your
teacher and ask for any work which will be covered in your absence.
In the case of sickness or other unavoidable absence, ensure that you
obtain a copy of all notes, homework, etc. before the next class. It is
your responsibility to catch up on the work that you have missed.
Because part of your assessment is continuous, it is important that your

attendance is good. Poor attendance, together with a failure to cover
any work which has been missed, will inevitably result in lack of success.

Assessment
You will be assessed on your performance in two main ways – internal
assessment and external assessment.
Internal assessment
There are three internal assessments, one for each unit. Each
assessment will be one hour long.

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

7


STUDENT INDUCTION PACK

External assessment
At the end of the course you will sit an examination. This assessment will
be set and marked by the Scottish Qualifications Authority. If you pass
you will awarded a grade A–C.
You must pass all the internal assessments and the final examination to
pass the course.
Intermediate 2
The examination will be a written paper and you will be allowed 1 hour
45 minutes.
Part 1

Two data response items.

Part 2

One question from a choice of five.
Each question will be normally divided up
into three sections. You will have to write
extended answers.

TOTAL

40 marks

20 marks
60 marks

Higher
The examination will be a written paper and you will be allowed 2 hours
30 minutes.
Section A

Two data response items.

Section B

Two questions from a choice of six.
Each question will require you to write
extended answers.

TOTAL

50 marks

50 marks
100 marks

Prelim examination
You will also be given an examination in the spring which will be of the
same type as your final examination. The prelim exam is to give you
practice and may be used for an appeal if you fail to reach the grade
your school expects. This exam is not part of your assessment for the
course.

8

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland


STUDENT INDUCTION PACK

Learning outcomes
The following pages provide you with a checklist for revision purposes.
You should tick each learning outcome when you have revised it in
preparation for (1) an internal assessment, (2) your prelim exam, (3)
your final exam. You will also find it useful to compare your
performance in internal assessments and in your prelim exam with these
learning outcomes.

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

9


STUDENT INDUCTION PACK

Unit 1: Microeconomics

explain the basic economic problem.
explain the meaning of scarcity.
explain with examples the meaning of opportunity cost as
it is faced by individuals, firms and governments.
describe the choices (what, how, for whom) faced by
different economic systems.
describe three different types of economic system (see also
Topic 3 in Unit 2: The Role of Government in the Economy).
classify resources/factors of production and describe their
characteristics.
explain the meaning of economic efficiency and why
countries seek to achieve it.
explain the meaning of substitution of resources.
explain the meaning of geographical and occupational
mobility of resources.
describe measures to increase the substitution and mobility
of resources.
and in addition for Higher, you should be able to:
explain how substitution of resources and mobility of

resources may contribute to improved economic efficiency.
explain the term potential output.
draw production possibility curves.
calculate opportunity costs from production possibility
figures or curves.
explain the factors which may shift a production possibility
curve.
explain the term equity.

10

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

Final exam

Prelim exam

For Intermediate 2 and Higher, you should be able to:

Internal
assessment

Topic 1 – The Basic Economic Problem


STUDENT INDUCTION PACK

Unit 1: Microeconomics

Final exam

Prelim exam

For Intermediate 2 and Higher, you should be able to:

Internal
assessment

Topic 2 – Demand

define the term effective demand.
distinguish between individual and market demand.
distinguish between total and marginal utility.
draw a demand curve and explain its shape in terms of
marginal utility.
define the law of demand in words and in graph form.
describe factors which influence demand and explain the
effects of changes in these factors on demand.
distinguish between movements along and shifts of
demand curves.
outline the economic objectives of consumers in terms of
marginal utility.
and in addition for Higher, you should be able to:
describe price elasticity of demand in words and in graph
form.
calculate price elasticity of demand.
describe the effects of price changes on revenue for
different price elasticities.

explain the factors which may influence price elasticity of
demand.
describe and calculate income elasticity of demand.
explain the significance of positive and negative income
elasticity.
outline the significance of price and income elasticities of
demand for firms and governments.

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

11


STUDENT INDUCTION PACK

Unit 1: Microeconomics

define the law of supply and draw a supply curve.
explain the factors which influence supply.
describe the effects on supply of changes in these
influencing factors.
distinguish between movements along and shifts of supply
curves.
and in addition for Higher, you should be able to:
explain and calculate elasticity of supply.
analyse the importance of time in influencing elasticity of
supply.

12

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

Final exam

Prelim exam

For Intermediate 2 and Higher, you should be able to:

Internal
assessment

Topic 3 – Supply


STUDENT INDUCTION PACK

Unit 1: Microeconomics

Final exam

Prelim exam

For Intermediate 2 and Higher, you should be able to:

Internal
assessment

Topic 3 – Supply – Cost, Revenue and Profit

explain the meanings of specialisation and division of
labour by product and by process.
describe the advantages and disadvantages of specialisation
to employees, employers and consumers.
distinguish between the short and the long run period of
time.
define the law of diminishing marginal and average
returns.
explain why varying a factor of production eventually leads
to diminishing returns.
define fixed and variable costs of production.
calculate total, average costs and marginal costs from a
given set of figures.
draw fully labelled graphs of total, average and marginal
costs as they vary with output in the short run.
explain the shape of the short run average cost curve in
terms of increasing and diminishing returns.
define optimum output.
explain the shape of the supply curve in terms of the
marginal cost curve.
define economies of scale; internal and external.
describe the different internal economies of scale.
explain diseconomies of scale.
describe the trends and motives towards globalisation
amongst multi-national enterprises.
describe the process and motives for downsizing.

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

13


STUDENT INDUCTION PACK

Unit 1: Microeconomics

explain the relationship between long run output (returns
to scale) and average cost.
draw a fully labelled graph showing the behaviour of
average cost in the long run.
define optimum size.
define and calculate total, average and marginal revenue.
define and calculate profit.
describe the role of profit for a firm.

14

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

Final Exam

Prelim Exam

Internal
Assessment

Topic 3 – Supply – Cost, Revenue and Profit (contd.)


STUDENT INDUCTION PACK

Unit 1: Microeconomics

Final exam

Prelim exam

For Intermediate 2 and Higher, you should be able to:

Internal
assessment

Topic 4 – The Operation of Markets

define what a market is, and give examples.
describe and explain, both in diagrams and in words, how
equilibrium or market-clearing price is arrived at in a free
competitive market.
describe and explain the effects on equilibrium price and
output of changes in demand and supply.
define what is meant by market intervention and describe
the types of such intervention.
explain why intervention in free markets may take place.

and in addition for Higher, you should be able to:
explain the meaning of ceteris paribus.
show on a diagram the effects of intervention such as
maximum price, minimum price, tax, subsidy.
analyse data, in textual, numerical or graphical form, of
given market situations.

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

15


STUDENT INDUCTION PACK

Unit 1: Microeconomics

distinguish between a perfect and an imperfect market.
describe and analyse the different types of competition in
markets, i.e. competitive, oligopolistic, monopolistic and
monopsonistic in terms of the number and size of firms in
the market.
describe how firms may differentiate their products.
outline the possible barriers to entry to a market and the
effects of such barriers
explain and analyse how prices are determined in perfect
and imperfect markets

16

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

Final exam

Prelim exam

This is for Higher level only, and you should be able to:

Internal
assessment

Topic 5 – Types of Market


STUDENT INDUCTION PACK

Unit 2: The UK Economy

Final exam

Prelim exam

For Intermediate 2 and Higher, you should be able to:

Internal
assessment

Topic 1 – National Income

explain the term national income.
describe the relationship between national output, income
and expenditure.
describe what national income statistics are used for.
identify the problems of measuring national income.
describe the circular flow of income.
explain the meaning of injections and withdrawals and
their effects on output, employment and income.
and in addition for Higher, you should be able to:
distinguish between GDP, GNP and national income.
explain the difference between nominal and real
measurement.
describe the difficulties in using national income statistics
for making comparisons over time, or between countries.
describe aggregate demand and its components.
describe aggregate supply (including potential/full
employment supply).
explain how equilibrium national income is arrived at,
using an aggregate demand and supply diagram.
explain reasons for change in equilibrium national
income.
describe and explain, using the circular flow of income
diagram, how the multiplier process works.
calculate the multiplier and its effect on national income.
describe the phases of the business cycle.

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

17


STUDENT INDUCTION PACK

Unit 2: The UK Economy

define inflation.
explain how the rate of inflation is measured in terms of
the Retail Price Index (headline rate) and the Consumer
Price Index (underlying rate).
list and describe the factors which can cause inflation.
explain the difference between measuring prices and
incomes in money terms and in real terms.
explain the effects of inflation on individuals, firms,
government and the economy.
and in addition for Higher, you should be able to:
describe what is meant by money.
explain the quantity theory of money and the role of
money in inflation.
describe and explain the main trends in inflation in recent
years.
For Intermediate 2 and Higher, you should be able to:
define unemployment in terms of unused resources.
describe how unemployment may be measured using the
claimant count and labour force survey.
list and explain the demand side causes of unemployment.
list and explain the supply side causes of unemployment.

explain the effects of unemployment on individuals, firms,
government and the economy.
and in addition for Higher, you should be able to:
explain patterns and trends of unemployment from given
statistics.

18

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

Final exam

Prelim exam

For Intermediate 2 and Higher, you should be able to:

Internal
assessment

Topic 2 – Inflation and Unemployment


STUDENT INDUCTION PACK

Unit 2: The UK Economy

Final exam

Prelim exam

For Intermediate 2 and Higher, you should be able to:

Internal
assessment

Topic 3 – The Role of Government in the Economy

describe the characteristics of different economic systems,
namely free market, planned, mixed.
describe the economic objectives of government.
describe the main types of government expenditure in
terms of programme and type, i.e. capital or current.
explain the reasons for government expenditure on nonmarketable goods (public and merit) and transfer
payments.
describe the changes in recent years in government
provision of goods and services.
list the main sources and types of government income.
explain direct, indirect, progressive and regressive taxes.
describe the change in balance between direct and indirect
taxation in recent years.
explain the Budget and its role.
explain the effects of changes in the Budget on individuals
and the economy.
state the meaning of economic growth.
describe how economic growth is measured.
describe the sources of economic growth.
distinguish between private and external costs and
benefits.

In addition for Higher, you should be able to:
distinguish between macroeconomic and microeconomic
objectives.
list government macroeconomic objectives and identify the
possible conflicts between them.
list government microeconomic objectives.

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

19


STUDENT INDUCTION PACK

Unit 2: The UK Economy

explain fiscal policy and how it may be used to achieve a
government’s macroeconomic objectives.
explain monetary policy and the role played by the Bank
of England in attempting to achieve a government’s
macroeconomic objectives.
explain supply-side policies and their impact on workers
and firms.
explain the meaning of and give examples of market
failure.
explain the reasons for market failure.
describe and explain the policies which a government may
use to address failings of the market mechanism.

20

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

Final exam

Prelim exam

This is for Higher only and, you should be able to:

Internal
assessment

Topic 4 – Government Economic Policies


STUDENT INDUCTION PACK

Unit 3: The International Economy

Final exam

Prelim exam

For Intermediate 2 and Higher, you should be able to:

Internal

assessment

Topic 1 – International Trade and Payments

describe and explain the gains from trade in terms of
absolute advantage and comparative advantage.
describe the benefits of international trade to countries
and consumers.
analyse patterns and trends in trade from given statistics.
outline the main trends in recent years in the pattern and
direction of UK trade.
describe the barriers to free trade.
describe the purpose and structure of the current account
of the balance of payments.
explain what is meant by an exchange rate and how it is
determined.
explain the effects of changes in an exchange rate for visitors
and travellers and on prices of exports and imports.
describe the progress towards and features of European
Monetary Union.
In addition for Higher, you should be able to:
explain the reasons for governments imposing barriers to
free trade.
explain the effects of trade barriers on consumers, firms
and the economy.
describe the purpose and structure of the capital account
of the balance of payments.
explain the factors which influence the capital account.
explain the relationship between exchange rates and
interest rates, and capital movements.

distinguish between fixed, floating and managed
exchange-rate systems.
outline the advantages and disadvantages of fixed, floating
and managed exchange rate systems.

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

21


STUDENT INDUCTION PACK

Unit 3: The International Economy

describe the main economic features of the European
Union.
describe the main characteristics of developing countries.
describe the main characteristics of newly industrialised
countries.
In addition for Higher, you should be able to:
list and explain the advantages and disadvantages of
monetary union.
explain the economic problems of developing countries.
explain the role of developed countries in promoting
development.
describe the work of the World Trade Organisation and its
recent achievements.
explain the role of international trading and monetary

organisations in the world economy.

22

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

Final exam

Prelim exam

For Intermediate 2 and Higher, you should be able to:

Internal
assessment

Topic 2 – The International Economic Environment


MICROECONOMICS

UNIT 1

Topic 1: The Basic Economic Problem
1

Scarcity

1.1

The basic economic problem is scarcity. In economics scarcity
means that there are not enough resources to produce all the
goods and services which consumers want. Scarcity arises because
human wants for goods and services are unlimited but the
resources required to produce them are limited.

1.2

Scarce goods and free goods. Scarce goods, also called economic
goods, are those which have a price, i.e. something has to be
sacrificed to obtain them. Free goods are those goods of which
there is enough to satisfy everyone’s wants, e.g. fresh air, sea
water. Free goods have no price. All scarce goods have an
opportunity cost whereas free goods do not.

1.3

Scarcity is not the same as shortage.
• A shortage is when the demand for a product is greater than its
supply.
• Scarcity is when wants for a product are greater than its supply.
Demand means what consumers want and can afford to buy.
Therefore if there is enough of a product to meet the demand of
those consumers who want and can afford to pay the prevailing
price there is no shortage. However the product will remain scarce
because of all those consumers who want the product but cannot
afford to pay the price.

2

Choice and opportunity cost

2.1

Because of the problem of scarcity it follows that choices have to
be made. Consumers must choose what to buy out of their limited
incomes. Producers must choose what to produce with their
limited resources. Governments must choose what services to
provide out of their limited tax revenues.

2.2

Every choice involves a sacrifice and this sacrifice is called
opportunity cost. Opportunity cost is the sacrifice of the next best

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

23


MICROECONOMICS

alternative choice. For a consumer the opportunity cost of
choosing a product is the next item on his/her scale of preference.
For a producer the opportunity cost of producing a good is the
next most profitable product which could have been produced
with the resources used. For a government the opportunity cost of

providing a service is the next best service which it could have
provided with the resources used.
2.3

In economics we assume that people are rational, i.e. when faced
with a choice they will always choose the alternative that will give
them the greatest satisfaction. This involves weighing up all the
alternatives and then choosing the one that has the lowest
opportunity cost.

3

Resources: factors of production

3.1

Resources may be classified as natural, human or man-made. They
are sometimes called factors of production and are then classified
as land, labour, capital and enterprise.

3.2

Land refers to all the gifts of nature and includes not only land
itself, but also all the minerals in and on the land, the sea and
everything in the sea, the air, sunlight, etc.

3.3

Labour refers to any human effort (manual or mental), which is
directed to the production of goods or services.

3.4

Capital refers to those man-made resources which are used to
produce goods or services. Capital may be categorised as
industrial, social, private or financial.
• Industrial capital is used by firms, e.g. factories, offices, plant
and machinery, tools, vehicles.
• Social capital belongs to the whole community, e.g. schools,
hospitals, roads.
• Private capital belongs to individuals, e.g. houses.
• Financial capital is money waiting to be used to buy capital
goods. When capital goods are bought this is called investment.
(Note the difference between saving and investment!)

3.5

24

Enterprise refers to the decision making and risk taking of
entrepreneurs. The entrepreneur decides how many of each factor
is to be used, how they are to be combined to make the most profit
and how the work should be done. He or she also bears the risks

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland


MICROECONOMICS

caused by business uncertainties. An entrepreneur is an organiser
and a risk taker.
4

Mobility of resources

4.1

Modern industrial economies are dynamic. This means that they
are in a continual state of change. Changing consumer demands
and changing production methods mean that some industries will
be growing, e.g. electronics, finance while others are declining,
e.g. coal, shipbuilding. In such a world there is a need for
resources to be mobile – to be able to change their location or
their use. Resources which cannot change either their location or
their use run the risk of becoming unemployed.

4.2

Factor or resource mobility is the speed and ease with which a
resource can move from place to place (geographical mobility) or
can change use (occupational mobility).

4.3

In practice there are obstacles to factor mobility and to ensure that
resources are used efficiently these obstacles need to reduced.

4.4

Land tends to be geographically immobile. Its mineral wealth and
the crops it produces are commonly transported from one area to
another but the great majority of land is used where it is. For this
reason, attention is focused not so much on where it might be
used as on how.

4.5

People may become geographically and occupationally immobile.
Many factors influence people’s mobility. Willingness to move
elsewhere is determined largely by age and by family and cultural
ties. Willingness and ability to do another type of job is closely
linked to age, education and training.

4.6

Capital has varying degrees of mobility. Some capital is highly
specialised. As a result it is difficult to adapt it to other uses. Power
stations and swimming pools are examples, as also are screwdrivers
and staplers. The geographical mobility of capital is determined
largely by its size and weight. Money capital is much more mobile.
It can be moved about the world quickly and cheaply by electronic
means.

INTERMEDIATE 2/HIGHER ECONOMICS

© Learning and Teaching Scotland

25