Costs and Benefits
Costs and Benefits
CONTENTS
Private, external and social costs
Private, external and social benefits
Cost-benefit analysis
Concepts of Marginal private benefit,
Marginal private cost, Marginal social
benefit (MSB) and Marginal social cost
(MSC)
Private, external and social costs
Private costs
The private costs are those costs that are paid for by someone who produces or
consumes a good or service.
For example, the driver of a car pays for the insurance, road tax, petrol and the cost
of purchasing the car.
External costs
For example, a car driver does not pay for the cost of the congestion and air pollution
created when driving the car.
Social costs
There is a market failure because the private costs (of driving) do not represent the
true costs (of driving) to society.
Private, external and social benefits
Private benefit
The private benefits are those that accrue solely to the individual making the action.
When a person has a vaccination against tuberculosis, they receive the private
benefit of being immune to the disease.
External benefit
When a person has a vaccination against tuberculosis, other people are also
protected from this highly contagious disease.
Social benefit
The social benefits of a decision are all of the benefits that accrue from that decision.
This is an example of market failure because there are external benefits to society of
vaccination programmes. If vaccinations were left to the choice of individuals, they
would be under-consumed, mainly due to the price that would be charged for them.
Cost-benefit analysis
Stages
The first stage is to identify all of the relevant costs and benefits arising
out of any particular project.
An issue with externalities is that it is difficult to put a cost upon it. How
do you put a monetary value on air pollution?
Monetary value
Decision making
The results of the earlier stages are drawn together so that the outcome
can be presented in a clear manner in order to aid decision making.
Concepts of Marginal private benefit, Marginal private cost, Marginal
social benefit (MSB) and Marginal social cost (MSC)
The demand curve represents the benefits that consumers derive from consuming a good as measured by the
prices they are willing to pay. For this reason, the demand curve is also known as the marginal private benefit (MPB)
curve.
The supply curve shows the firm's costs of production; these are marginal costs, hence the supply curve is also
known as the marginal private cost (MPC) curve.
If there are no externalities present, then the best outcome is at price Pe and output Qe. Any variation from this
optimum will be a situation of market failure or allocative inefficiency.
Social benefit maximisation which maximises the public interest or the welfare of the whole society occurs when:
marginal social benefit (MSB) = marginal private benefit (MPB) + marginal external benefit (MEB)
marginal social cost (MSC) = marginal private cost (MPC) + marginal external cost (MEC)
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TOPICS
1.Introducing economics 16.Population
2.The economic problem 17.Aggregate demand and supply
3.Basic economic Ideas 18.Inflation and deflation
4.Economic systems 19.Policies to correct inflation and
5.Demand and supply deflation
6.Elasticity 20.Unemployment
7.Money 21.Macroeconomic policies
8.Production cost and Specialisation 22.International Trade
9.Firm's cost structure 23.Exchange rates
10.Market structures 24.Balance of payments
11.Behavioural economics 25.Policies to correct Balance of
12.Types of goods payments Disequilibrium
13.Costs and benefits
14.Market failure
15.Microeconomic policies
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BENEFITS
01
Economics Notes.
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Topics
1. Introducing economics
2. The economic problem
3. Basic economic Ideas
4. Economic systems
5. Demand and supply The fundamental economic problem
6. Elasticity
The fundamental economic problem is:
7. Money
‘scarce resources in relation to unlimited wants'.
8. Production cost and Specialisation
9. Firm's cost structure Scarcity: The excess of human wants over what can actually be produced to fulfil these wants
10. Market structures Resources: inputs available for the production of goods and services.
11. Behavioural economics Wants: needs that are not always realised.
14. Market failure Choice underpins the concept that resources are scarce so choices have to be made by consumers,
firms, and governments.
17. Aggregate demand and supply Choice involves sacrifice. The more food you choose to buy, the less money you will have to spend on
other goods.
18. Inflation and deflation
19. Policies to correct inflation and Opportunity cost
deflation In other words, the production or consumption of one thing involves the sacrifice of alternatives. This
20. Unemployment sacrifice of alternatives in the production (or consumption) of a good is known as its opportunity cost.
21. Macroeconomic policies Opportunity cost is the cost expressed in terms of the best alternative that is forgone.
Well structured
Simple and clear english
Diagrams included where relevant
For A level, AS level, GCSEs and O level.
STEPS TO ANSWER A
Europe. This reflected a global trend where small airlines found it
increasingly difficult to compete against large airlines, which have
continued to grow.
For the super-airlines, large scale is the easy way to avoid the stresses
and strains of open competition. For passengers this will lead to higher
prices and poorer service. STEP First reading: Skim the data
01
Sources: adapted from Financial Times, 6 October 2017 and The
Economist, 27 April 2019
(d) Explain two reasons why a government may privatise an industry. [4]
STRUCTURE
Read the Requirements There are several reasons why a government may
privatise an industry, such as air travel.
CLEAR
HEADINGS
Always read the requirement first as this enables you to focus on
the detail of the question with the specific task in mind. Reason 1: Privatising an industry may lead to an increase
in government revenue.
What is the point in reading a scenario if you don't know what you
are looking for? If you don't read and understand the requirements
carefully, then you will find that you are not actually answering the The government may earn more tax revenue if it
question. If you are not answering the question, then you are not privatises a state-owned industry. This is because a PARAGRAPHS
earning marks.
privately owned industry has to pay corporation tax. A
Pay attention to (1) The content and (2) The instructions corporation tax is a tax levied on companies profits.
Explain what is meant by a contestable market and The sale of a state-owned enterprise to the private
discuss how making the airline market more contestable sector will also raise money for the government. REFERENCE TO
could benefit passengers.
THE DATA
In the data, it was mentioned that a successful sale of
THE CONTENT Air India to the private sector would have raised money
... contestable
When you read each part of
the requirement, highlight the for the Indian government.
'content'. This is simply what
market...benefit the question is about.
This helps you to focus your
mind on answering the actual
More tax revenue will enable the government to increase SIMPLE ENGLISH
Economics
Multiple Choice Questions.
Looking for past paper questions classified by topic?
Classified by topic.
Answers and Explanations included.
For A level, AS level, GCSEs and O level.
Topic O level
Scarcity, Choice and Opportunity Cost
topics
Multiple Choice Questions
A finite resources and limited wants D Scarce economic resources are while the resources
Questions
2. C If this decision
C infinite resources and limited
A government isf aced with thech oiceof was not taken, resources
wants would have remained in
Answers and
D infinite resources and unlimited sp ending oneithere duc ationor investment causing in
wants healthcare.
vestment to increase. So
IJ10/P2Q2] Of what is this an example? the next best alternative
Explanations
(opportunity cost) of this
A conservation of resources
2. The government of a country with a decision is the reduction
B monetary policy in investment
rapidly increasing population decides C opportunity cost
to switch resources from investment 3. A The problem of
to increased subsidies to farmers. D substitution of factors scarcity arises due to lim
What is the opportunity cost of this [N10IP1IQ5J ited resources to satisfy
unlimited wants Option A
decision? 5.
A firmd ecidesto stop manufacturin g would decrease the exist
A the profit earned by farmers
ovensand t o producewashing machines ing limited resources
B the rent of the land on which food instead. while all other options
is grown would increase lhe limited
What is the opportunity cost to the firm? resources
C the reduction in investment
A the additional washing machines
D the wages of the farm workers 4. B Since limited
produced resources have many
IJ10IP1IQ4]
B the cost of producing ovens alternative uses, it
becomes important to
3. Which economic change would C the cost of producing washing
machines choose one and forgo
increase the problem of scarcity? al other possible uses
D the loss of the production of
A a decrease in fish stocks ovens
5. C Making a choce
involves giving up alterna
B a discovery of a new oil field {J11IP1IQ2!
Paper and year
tives which results in an
C an increase in labour productivity What is meant by the economic opportunity cost i.e the
D a reduction in waste 6. problem?
cost of the next best al
[J 10/ Pl / Q5J ternative forgone
Ah ow toachi eveefficie ncyw ith 6. D Opportunity
4. What makes choice an important theexist enc eoffixe dresou rces cost is defined as the next
limi ted wantsand test alternative foregone
element in the basic economic prob
lem? B how to allocate resources be In this example you give
tween public and private sectors up the production of ovens
A Increased demand leads to C how to balance unlimited wants to produce washing ma
higher market prices. against finite resources chines Hence the loss of
production of ovens is the
B Limited resources have many al D how to decide which methods to opportunity cost
ternative uses. use to exploit all resources
AS level topics
A level
topics
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ECONOMICS
NOTES
PAGE CHAPTERS
2 1. INTRODUCING ECONOMICS
26 2. THE ECONOMIC PROBLEM
38 3. BASIC ECONOMIC IDEAS
45 4. ECONOMIC SYSTEMS
63 5. DEMAND AND SUPPLY
79 6. ELASTICITY
92 7. MONEY
113 8. PRODUCTION COST AND SPECIALISATION
133 9. FIRM'S COST STRUCTURE
141 10. MARKET STRUCTURES
149 11. BEHAVIOURAL ECONOMICS
163 12. TYPES OF GOODS
169 13. COSTS AND BENEFITS
175 14. MARKET FAILURE
199 15. MICROECONOMIC POLICIES
215 16. POPULATION
221 17. AGGREGATE DEMAND AND SUPPLY
234 18. INFLATION AND DEFLATION
251 19. POLICIES TO CORRECT INFLATION AND DEFLATION
264 20. UNEMPLOYMENT
271 21. MACROECONOMIC POLICIES
282 22. INTERNATIONAL TRADE
295 23. EXCHANGE RATES
312 24. BALANCE OF PAYMENTS
325 25. POLICIES TO CORRECT BALANCE OF PAYMENTS DISEQUILIBRIUM
Chapter 1
Introducing
Economics
Topics
The basic economic problem
Scarcity, choice and opportunity cost
The Production Possibility Curve (PPC)
The economic problem
Economic systems
ECONOMICS NOTES
Chapter2
Basic economic
ideas
Topics
The fundamental economic problem
Factors of production
Positive and Normative statement
Production possibility curves
Movement in PPC curve
Shift in PPC curve
Money
Characteristics of money and barter
ECONOMICS NOTES
Chapter 3
Economic
systems
Topics
Economic systems
The Free Market
The Free Market Pros and Cons
The planned economy
The planned economy Pros and Cons
Mixed economy
ECONOMICS NOTES
Chapter 4
Demand and
supply
Topics
Demand 1Markets in equilibrium
Demand curve 1Markets disequilibrium
Movement along the demand curve 1Consumer surplus
Factors influencing demand 1Producer surplus
Shifts in the demand curve
Supply
Supply curve
Movement along the supply curve
Factors influencing supply
Shifts in the supply curve
ECONOMICS NOTES
Chapter 5
Elasticity
Topics
ECONOMICS NOTES
Chapter 6
Money
Topics
Functions of money
Properties of money
Forms of money
Central bank
Commercial bank
Credit creation
ECONOMICS NOTES
Chapter 7
Production,
Costs and
Specialisation
Topics
Factors of production
Specialisation
Division of labour
Costs of production
Economies of scale
Diseconomies of scale
ECONOMICS NOTES
Chapter8
Market
structures
Oligopoly
ECONOMICS NOTES
Chapter 9
The Organization
Of Firms
Topics
ECONOMICS NOTES
Chapter 10
Firm's cost
structure
Topics
Profit
Fixed costs and variable costs
Marginal cost and Marginal
revenue
Average costs
Economies of scale
Marginal cost and average
costs
ECONOMICS NOTES
Chapter 11
Behavioral
economics
Topics
ECONOMICS NOTES
Chapter 12
Types of goods
Topics
Types of goods
Private goods
Public goods
Merit goods
Demerit good
ECONOMICS NOTES
Chapter 13
Costs and
benefits
Topics
ECONOMICS NOTES
Chapter 14
Market failure
Topics Demerit goods- Negative consumption
ECONOMICS NOTES
Chapter 15
Microeconomic
policies
Topics
ECONOMICS NOTES
Chapter 16
Population
Topics
ECONOMICS NOTES
Chapter17
Aggregate demand
and Aggregate
supply
Topics
Aggregate supply
Macroeconomic policy objectives
Short-run aggregate supply
Long-run aggregate supply
Aggregate demand
Keynesians LRAS curve
The aggregate demand curve
Classical LRAS curve
The aggregate demand and price
Interaction of aggregate demand
level
and aggregate supply
ECONOMICS NOTES
Chapter 18
Inflation and
deflation
Topics
Part 1 Part 2
Inflation Deflation
Measuring Inflation Good deflation
The CPI versus the RPI Bad deflation
Demand-pull inflation
Aggregate demand and inflation
Causes of demand-pull inflation
Cost push inflation
Causes of cost push inflation
The consequences of inflation
Benefits of inflation
1Effects of inflation
ECONOMICS NOTES
Chapter 19
Policies to correct
inflation and
deflation
Topics
Part 1 Part 2
Policies to correct inflation Policies to correct deflation
Fiscal policy Fiscal policy
Monetary policy Monetary policy
Deflationary policies - Diagram Diagram
Supply-side policy
Supply-side policy- Diagram
ECONOMICS NOTES
Chapter 20
Unemployment
Topics
Types of unemployment
The consequences of unemployment
ECONOMICS NOTES
Chapter 21
Macroeconomic
policies
Topics
Types of policies
Fiscal policy
The budget
The relationship between the budget
and the state of the economy
Automatic stabilisers and discretionary
fiscal policy
Limitations of fiscal policy
Monetary policy
Limitations of monetary policy
Supply-side policy
ECONOMICS NOTES
Chapter 22
International trade
Topics
International trade
The benefits of free trade
Absolute advantage
Comparative advantage
Protectionism
Tariffs
Quotas
Other methods of protectionism
Arguments in favour of
protectionism
Arguments against
protectionism
ECONOMICS NOTES
Chapter 23
Exchange rates
Topics
Exchange rates
Floating exchange rate system
Demand and supply of the currency
Floating exchange rate Pros
Floating exchange rate Cons
Fixed exchange rate
Managed float
Factors changing foreign exchange rates
Depreciation/ Devaluation
Depreciation/ Devaluation Effects
Marshall learner condition
The J curve effect
Appreciation/Revaluation
Reverse J-curve
ECONOMICS NOTES
Chapter 24
Balance of
payments
Topics
The balance of payments
The current account
Financial and capital account
Current account deficit
Causes of a current account deficit
Consequences of a current account deficit
Causes of a current account surplus
Impact of a current account surplus
Terms of trade
Causes of changes in the terms of trade
ECONOMICS NOTES
Chapter 25
Policies to correct
balance of
payment disequilibrium
Topics
Policies to correct balance of
payments disequilibrium
Expenditure switching policies
Expenditure switching policies
examples
Expenditure reducing policies
Expenditure reducing policies - Fiscal
policy
Expenditure reducing policies -
Monetary policy
Supply-side policy