Economics A level full notes

  • Created by: McevoyJM
  • Created on: 11-12-19 16:32


Circular flow of income

National output = national income = national expenditure

Physical flow: of real things, such as Goods, services, labour, land and capital
Monetary flow: money used to buy physical things
Injections: exports, investment and government spending, go directly to firms
Withdrawals: imports, savings and taxes, made by households or firms
Multiplier affect: the actual change of national income is greater than the initial injection as money travels around the circular flow of income, the size of the multiplier depends on the rate at which the money leaks from the circular flow

Aggregate demand (AD)

Total spending on goods and services, AD = C + I + G + (X-M)

Consumption: Consumers' expenditure on goods and services, largest component of AD, affected by income, interest rates, consumer confidence, wealth effects, taxes and unemployment

Investment: spending on capital goods e.g. equipment and new buildings to produce consumer goods, it effects the supply-side as well as AD. It is affected by risk, government incentives and regulation, interest rates, access to credit, technical advances, business confidence.

Government Spending: spending on state-provided goods and services including public goods and merit goods, it is affected by the economy and political priorities. Transfer payments such as benefits, state pensions and job-seekers allowance are not included in current government spending because they are a transfer from one group (taxes) to another (pensioners)

X-M: Exports are goods and services are an inflow of demand (injection) Imports of goods and services are a withdrawal of demand (leakage) Net exports is X-M. When net exports is positive, there is a trade surplus (adding to AD) Affected by:
Exchange rate: in the LR imports increase and exports fall as the value of a currency increases. In the SR imports and exports are inelastic so theres a time lag before countries switch to substitutes
World economy: net exports fall as real income rises for a country, strong growth in other countries leads to more exports
Protectionism: in the SR, tariffs and quotas increase net exports and reduce imports, in the LR exports fall as firms have less of an incentive to be efficient
Non-price factors: such as quality, technological advances, politics

Average propensity to consume (APC) = consumption/total income

Average propensity to save (APS) = amount saved/ total income

Marginal propensity to consume (MPC) = change in consumption/change in income

Marginal propensity to save (MPS) = change in saving/change in income

Multiplier = 1/(1-MPC) or 1/MPW (MPC + MPW =1)

Aggregate supply

Measures the volume of goods and services produced within the economy at a given price level, it represents the ability of an economy to produce goods and services either in the short term or in the long term.

Short-run aggregate supply: (SRAS) shows total planned output in the economy when prices can change but all other factors of Production are constant. The curve is shifted by:
Factors of production costs: e.g. rental costs,
Commodity prices: Changes to raw material costs and other components e.g. the price of…


No comments have yet been made