AS Economics

Economics begins with the problem of scarcity—limited resources versus unlimited wants. This leads individuals, firms, and governments to make choices, each involving opportunity costs. To manage resources effectively, every society must answer three fundamental questions: what to produce, how to produce, and for whom to produce. These concepts are central to understanding how economies function.

Economics, as a social science, uses systematic methodologies to study how scarce resources are allocated. It involves making assumptions like ceteris paribus, distinguishing between positive (fact-based) and normative (opinion-based) statements, and analyzing the significance of time periods—short run, long run, and very long run. Understanding these principles helps explain real-world economic behavior and decision-making.

Factors of production form the backbone of any economy. They include land, labour, capital, and enterprise, each playing a unique role in the production process. This chapter explores their definitions, differences between capital types, the rewards they receive, how labour is divided for efficiency, and the pivotal role of entrepreneurs in organizing these inputs and taking risks.

Economic systems determine how resources are allocated and decisions are made regarding production and distribution. This chapter explores three primary economic systems—market, planned, and mixed economies. Each has distinct mechanisms for resource allocation and decision-making, influencing efficiency, equity, and freedom. Understanding these systems helps explain how different societies tackle the basic economic problem of scarcity.

The Production Possibility Curve (PPC) models how economies allocate limited resources to produce different goods. It demonstrates trade-offs, opportunity costs, and production efficiency. The curve’s shape and shifts reflect economic realities such as growth or decline. Understanding positions on the curve also reveals whether resources are being fully utilized, underutilized, or if the goals are currently unattainable.

This chapter explains how goods and services are classified in economics based on their characteristics. It covers private, public, merit, and demerit goods, highlighting issues like the free rider problem, under- or over-consumption, and market failure due to imperfect information. Understanding these categories is essential for grasping how governments address inefficiencies in the free market system.

Demand and supply are fundamental to economic analysis, forming the backbone of market interactions. This chapter explores how consumers and producers behave in different price settings and what causes demand or supply to increase or decrease. It also explains the graphical interpretation and difference between movements along and shifts in the demand and supply curves.

This chapter explores how quantity demanded of goods responds to changes in price, income, or the price of related goods. It introduces key elasticity types—price elasticity of demand (PED), income elasticity of demand (YED), and cross elasticity of demand (XED)—alongside their definitions, calculations, influencing factors, and real-world business applications in pricing and market strategy.

Price elasticity of supply (PES) measures how responsive the quantity supplied of a good is to a change in its price. It helps determine how quickly producers can adapt to market conditions. This chapter explores the definition, calculation, and significance of PES, as well as the key factors influencing it and its practical implications for businesses.

Understanding how demand and supply interact is crucial in economics. This chapter explores how market equilibrium is determined, how changes in demand or supply affect prices and quantities, and how different markets relate through joint, alternative, and derived demand. It also introduces the essential functions of price in resource allocation—rationing, signalling, and incentivising behavior within markets.

Consumer and producer surplus measure the economic benefits to buyers and sellers in a market. These concepts help economists analyze market efficiency and welfare impacts of various policies. Understanding what causes changes in surplus, such as price fluctuations and elasticity, is essential for evaluating outcomes of market changes and government interventions.

Governments intervene in markets primarily to correct market failures and ensure equitable distribution of resources. They address issues like the non-provision of public goods, over-consumption of demerit goods, and under-consumption of merit goods. Additionally, price controls such as maximum and minimum prices help regulate affordability and availability of essential goods and services.

Government intervention plays a vital role in correcting market failures and promoting economic efficiency. This chapter explores different methods by which governments influence markets, including taxation, subsidies, direct provision of goods and services, price controls, buffer stock schemes, and provision of information. Understanding the incidence and effects of these tools helps evaluate their economic and social implications.

This chapter explores how income and wealth are distributed unequally in society, how this inequality is measured, and what causes it. It explains the fundamental difference between income as a flow and wealth as a stock, and outlines key policies used by governments to redistribute income, including taxation, public provision, and wage regulation, aiming to promote social equity and fairness.

National income statistics provide an essential overview of a country’s economic activity. They help in measuring total output and income through GDP, GNI, and NNI. Adjustments for market vs. basic prices and gross vs. net values refine these figures, offering clearer insights. These tools are vital for evaluating growth, managing the economy, and shaping fiscal or monetary policy.

The circular flow of income is a fundamental concept in macroeconomics that illustrates how money moves within an economy. It showcases the interdependence of households, firms, government, and international sectors. Understanding the flow of income, alongside injections and leakages, helps economists determine whether an economy is in equilibrium or disequilibrium. 

This chapter examines the concepts of Aggregate Demand (AD) and Aggregate Supply (AS) to understand macroeconomic equilibrium. It highlights the components, causes of movement and shifts, and the effects on real output, price levels, and employment. This model is essential in predicting the behavior of an economy in response to policy changes or external shocks.

Economic growth represents a key objective for any nation, signifying an increase in the production of goods and services. It’s crucial for improving living standards and reducing poverty. This chapter explores the meaning, measurement, and implications of economic growth, while distinguishing between nominal and real GDP. It also addresses the various causes and potential positive and negative effects of growth.

Unemployment remains one of the most pressing macroeconomic challenges. This chapter explores what unemployment is, how it is measured, the various types and causes of it, and the wide-ranging consequences it brings. Understanding unemployment is essential for assessing labor market performance and designing policies aimed at achieving sustainable economic growth and social stability.

This chapter explores price stability, focusing on inflation, deflation, and disinflation. It covers how changes in price levels are measured, primarily through the Consumer Price Index (CPI), and discusses the causes and consequences of inflation. The chapter also differentiates between nominal and real values, equipping learners with a clearer understanding of economic trends and their real-world implications.

Governments use macroeconomic policies to steer national economies toward desired outcomes. These objectives typically include price stability, low unemployment, and sustained economic growth. By adjusting spending, taxation, and interest rates, policymakers attempt to manage demand and supply in the economy. This section explores how government strategies are implemented to achieve these core goals of macroeconomic performance.

Fiscal policy is a vital tool used by governments to manage the economy by altering taxation and government spending. It aims to influence aggregate demand, control inflation, and promote economic growth. This chapter explores the government budget, taxation systems, types of government spending, and fiscal strategies—expansionary or contractionary—and examines their impact on national income and employment using the AD/AS model.

Monetary policy is a vital economic tool used by central banks to control inflation, manage employment, and stabilize economic growth. By adjusting interest rates, money supply, and credit conditions, monetary authorities influence aggregate demand. This chapter explains monetary policy’s definition, tools, types, and its effects using the AD/AS framework to understand its impact on output and employment.

Supply-side policy focuses on boosting an economy’s long-run productive potential. It differs from demand-side approaches by targeting improvements in labor efficiency, infrastructure, and innovation. These policies aim to shift the long-run aggregate supply (LRAS) curve rightward, enhancing output without inflation. This chapter explores the tools, objectives, and macroeconomic impact of supply-side measures through AD-AS analysis.

International trade enables countries to specialise in producing goods where they have an advantage, leading to improved efficiency and global welfare. This chapter explores the foundations of trade through absolute and comparative advantage, benefits of trade liberalisation, and the implications of changes in the terms of trade. It also critically examines the limitations of classical trade theories.

Protectionism in international trade refers to policies that limit imports and exports to shield a nation’s economy. Countries adopt various methods like tariffs, quotas, subsidies, and red tape. While these tools protect domestic industries and jobs, they can distort market efficiency. This chapter explores the meaning, methods, and arguments surrounding protectionist policies in a globalized economy.

The current account of the balance of payments records a country’s trade in goods and services, incomes, and transfers. It highlights economic health by showing whether a nation is earning more from exports or spending more on imports. Understanding this balance helps explain economic trends and the implications of trade deficits or surpluses.

Exchange rates play a crucial role in determining a country’s global trade performance and economic stability. This chapter explores the definition, determinants, and effects of a floating exchange rate system. It examines the causes behind exchange rate fluctuations and their broader impact on national income, output, employment, and inflation using AD/AS analysis.

A stable current account is crucial for sustainable economic growth and avoiding external financial shocks. Chapter 6.5 explores how governments address current account imbalances using fiscal, monetary, supply-side, and protectionist policies. These tools aim to switch or dampen expenditure and improve international competitiveness to restore equilibrium and promote macroeconomic stability in both the short and long term.