ZNOTES.ORGUPDATED TO 2022 SYLLABUSCAIE A2 LEVELECONOMICS(9708)SUMMARIZED NOTES ON THE THEORY SYLLABUSCAIE A2 LEVEL ECONOMICS(9708)1.Basic Economic Ideas andLRACResource AllocationLRAC21.1.Efficient Resource AllocationProductive efficiency:when a firm is producing at thelowest possible cost.9192OutputAverage costsNon-Inflationary Economic Growthof productionPareto optimality:where it is impossible to makesomeone better off without making someone else worseoff.The PPC shows that one good has to be given up toproduce more of the other.All the points on the graphare pareto efficient including point Y.Apoint outside thecurve indicates an increase in resources.Paretoinefficiency is caused when the resources are not used tothe complete potential.Point X on the graph is paretoOutputinefficient.productive efficiency in perfect competition:Marginal costAverage costAveragerevenuemarginalrevenueQuantityAllocative efficiency:where price is equal to marginal0Consumer goodscost;firms are producing those goods and services mostwanted by consumers.Dynamic efficiency is a form of productive efficiency that1.2.Social Costs Benefitsbenefits a firm over time.Resources are reallocated insuch a way that output increases relative to the increaseSocial cost/benefit:is total cost/benefit to whole societyin resourcesdue to an economic activity.(Social cost Privatecost/benefit External cost/benefit)Private cost/benefit:is internal cost/benefit of aneconomic activity.External cost/benefit:is 3rd party cost/benefit of aneconomic activity.1.3.Market FailureMarket failure occurs when there is an oversupply orundersupply of goods.Market failure occurs when:There are externalities present in the marketWWW.ZNOTES.ORGCAIE A2 LEVEL ECONOMICS (9708)There is provision of merit and demerit goodsThere is provision of public and quasi-public goodsInformation failure existsThere is adverse selection or moral hazardof all relevant costsThere is abuse of monopoly power in the marketand benefits1.4.ExternalititesExternality:where the actions of producers or consumersgive rise to side effects on third parties who are not involvedin the action;sometimes referred to as spillover effectsNegative/Positive externality:where the side effects have aPutting a monetarynegative/positive impact and impose costs/provide benefitsvalue on all relevantto third parties.costs and benefitsNegative production externalities:These are spillovereffects that occur as a result of production activity.Negative consumption externalities:These are created byconsumers as a consequence of their use of productsthat result in harm to others who are not involved in theconsumption.Forecasting futurePositive production externalities:These are benefits tothird parties and are created by producers of goods andcosts and benefits(where appropriate)Positive consumption externalities:Here,the benefits arethe spillover effects of consumption of a good or serviceon othersDecision making-theinterpretation of theresults from CBACBA adds up the total costs of a program or activity andcompares it against its total benefits.The technique assumesthat a monetary value can be placed on all the costs and1.5.Cost-Benefit Analysisbenefits of a program,including tangible and intangiblereturns to other people and organizations in addition toCost-benefit analysis(CBA):a method for assessing thethose immediately impacted.As such,a major advantage ofdesirability of a project taking into account the costs andcost-benefit analysis lies in forcing people to explicitly andbenefits involvedsystematically consider the various factors which shouldShadow price:one that is applied where there is noinfluence strategic choice.recognised market price availableStepAdvantagesDisadvantagesAll cost/benefitIdentification isconsideredtoughMonetaryMost will have marketevaluationShadow pricespricesForecastFuture consequencesUncertainty inestimationInterpretationAll info.usefulDecisionInvestment projectsPublic expendituremakingWWW.ZNOTES.ORG