Themes in economics flashcards

Topic 3: Themes in economics

What does Component 03, Themes in economics, assess?

It is entirely synoptic: no content of its own, drawing on micro and macro applied to an unseen theme. One paper of 2 hours and 80 marks: 30 multiple-choice questions, then 50 marks of short and extended questions on the theme.

Synoptic link: a rise in imported input prices

Micro: firms' costs rise, supply shifts left, profit falls. Macro: cost-push pressure; SRAS shifts left, the price level rises and real output falls.

Synoptic link: a rise in interest rates

Micro: dearer borrowing for firms and households, less demand for credit-financed goods. Macro: investment and consumption fall, so AD shifts left.

Synoptic link: a tax on a good with a negative externality

Micro: supply shifts left; price rises and output falls towards the social optimum. Macro: the price level and tax revenue change; the burden may fall on low earners if the tax is regressive.

Synoptic link: a higher exchange rate

Micro: imports cheaper for firms and consumers, exports dearer abroad. Macro: net exports fall, so AD shifts left; import prices ease inflation.

Energy prices rise 40%; energy is 150 of a firm's 1,000 costs; short-run PED for energy −0.2. New total cost?

Energy use falls 8%, so spending = 150 × 1.40 × 0.92 = 193.2. Total cost = 193.2 + 850 = 1,043.2, a rise of 4.32%.

Percentage change vs percentage-point change

A rate rising from 5% to 6% is a rise of 1 percentage point and of 20%. Percentage change = (new − old) ÷ old × 100.

Pay rises from 2,000 to 2,120 while the price index goes from 100 to 106. Real pay growth?

Real pay in year 2 = 2,120 ÷ 106 × 100 = 2,000, so real growth is 0%, despite 6% nominal growth.

How to evaluate in a synoptic answer

Judge through time (short run vs long run), scale (size of the change), stakeholders (who gains, who loses) and trade-offs, then give a final judgement and the factor that would change it.