Economics for CIE IGCSE
Students
Revision book
Basic Economic Problem: Talk like an Economist
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Utility: happiness, satisfaction, welfare or benefit
Profit: payment for enterprise, reward for risk, revenue – cost
Scarcity: excess demand at price=0, so we have to choose
Opportunity Cost: the alternative given up when we choose
Free good: plentiful good without opportunity cost
Economic good: scarce good with opportunity cost. But varies eg
water
Factor of production
(FOP)
Land
Description
Example
Payment
Provided by
Natural resource
Oil, Fish
Rent
Landowner
Labour
Human resource
Factory worker
Wage
Worker
Capital
Man-made
resource
Machine
Rent/interest
Capitalist
Enterprise
Ideas / putting
together other FOP
Businessperson
Profit
Entrepreneur
Basic Economic Problem: Economic Concepts
• What is economics about ? “How
to allocate limited resources to
provide for unlimited wants”
• What questions help answer that ?
What / How / For whom to produce
• Microeconomics looks at parts of
an economy like what ? Labour
and other resources
• Macroeconomics looks at the
whole of an economy like what ?
Economic growth
Basic Economic Problem: Scarcity and Choice
The basic economic problem is that people want more than
they have but there is scarcity: not enough resource to
make more products for everyone.
Because of this scarcity, all people
have to make choices.
Examples:
A government must decide whether it
wants a new school or a new warplane
because it can not get enough
resources to make both.
OR ?
When making choices, we assess the
opportunity cost or the alternative
forgone
The opportunity cost of taking action is
what we could have got if we had taken
an alternative action
The opportunity cost of making a product
is another product we could have made
with the resources used
Basic Economic Problem: Production
Resources are combined to satisfy wants
and needs. This is called production
which can be
•Primary Sector: taking raw materials or
land from nature, eg farming, mining
•Secondary Sector: using resources to
make goods eg car manufacturing
•Tertiary Sector: using resources to provide
services eg selling goods, teaching
Production can also be:
Labour Intensive or Capital Intensive
based on the resource it uses most
Sectoral Shift
As an economy develops, its production
moves from primary to secondary to
tertiary.
This happens because as efficiency
increases not so many resources are
needed to fulfil primary and then secondary
sector needs. People can then work to
provide services instead.
Test Yourself
1.
Explain the term opportunity cost and discuss why an increase in
spending on police and armed forces may result in an opportunity
cost. [4] (S2009)
2.
After studying for your Economics qualification you have to decide
whether to leave school and find a job or enrol at a college for more
specialised training. What factors might you consider when making
your decision? [5] (W2009)
3.
Explain with the use of one example what is meant by a natural
resource of a country. [3] (S2008)
4.
Discuss which factor of production might be most significant in the
operation of a luxury hotel. [4] (W2005)
Allocation of Resource: Market Function
The market is nature’s way of
answering the economic
problem
Individual people, or the
Private Sector, decide what
to make, for profit; and what to
buy, for satisfaction.
This, in turn, decides how
much resource should be
used for each product.
So the market decides
resource allocation without
anyone planning it. This is a
Market Economy.
Decisions about resources are
made by individual people.
Centrally Planned (or
Command) Economy: people
do not always let the market
decide. In some cases they
prefer a government to decide
how much resource to use for a
product.
They might want the government, or Public Sector, to
make fewer undesirable products like illegal drugs, or to
make more desirable products like economics lessons.
Market Economies lead to
inequality and pollution.
Command Economies lead to
inefficiency.
A system where the market
decides resource allocation for
some products and situations,
and the government decides it
for others, is called a Mixed
Economy.
Test Yourself
1.
Distinguish between the private sector and the public
sector of an economy. [3] (S2006)
2.
Discuss the disadvantages of allocating resources
through the public sector. [7] (S2006)
3.
Explain the most important features of ‘the market
system’. [4] (W2001)
4.
Describe what is meant by a mixed economy. [4]
(W2009)
Allocation of Resource: Demand & Supply & Determinants
Supply means the
quantity of a product
producers will supply at
each price
This quantity changes with
•population
Equilibrium is where the
•environment and weather quantity supplied is equal to
Demand means the
quantity of a product
the quantity demanded
•law and taxes,
consumers are willing and •resource availability and
able to buy at each price
cost
all product is sold and no
resources are wasted.
•producer substitutes
This quantity changes with (what else could those
resources make), among This is the market’s way to
•population
other things
•environment
answer the economic
problem of scarcity.
•fashion
•Income
The price adjusts to reach
•law
this quantity. The market
•the availability and price
then uses enough resource
of substitutes and
to make this quantity for
complements, among
efficient resource allocation
other things
Test Yourself
1.
Explain, using a demand and supply diagram, what is
likely to happen in the market for air travel as a result of
increased delays at airports. [4] (W2009)
2.
Identify a complementary (jointly demanded) good or
service industry connected with cruise ships and discuss
the possible employment prospects in that industry as a
result of the increase in airport delays. [6] (W2009)
3.
Explain the difference between an equilibrium price and
a disequilibrium price. [4](W2006)
4.
Identify three causes of a change in the demand for a
good. [3] (W2002)
Allocation of Resource:
Price Elasticity of Demand (PED) & Supply (PES)
Elasticity: The responsiveness of one variable (V1) to changes in another (V2)
Formula: % △ V1 / % △ V2
PED:The responsiveness of
quantity demanded to changes in
price.
% △ QDx / % △ Px
PES:The responsiveness of
quantity supplied to changes in
price.
% △ QSx / % △ Px
What decides this? The
determinants are: time, necessity,
habit, price as % of income,
substitutes
What decides this? The
determinants are: time, factors of
production, other products
supplier could make
Elastic demand:
Inelastic demand
↓ price→↑revenue
↑price→↑revenue
Elastic supply
Inelastic supply
Test Yourself
1.
Define what is meant by price elasticity of demand and
explain how it is calculated. [3] (W2002)
2.
Discuss whether the demand for chocolate is likely to be
price elastic or price inelastic. [7] (W2009)
3.
Use the concept of elasticity of demand to discuss how
indirect taxes may be used by a government to (i)
increase its revenue, (ii) decrease imports. [4] (W2005)
4.
Explain the concept of price elasticity of demand.
Choose two goods and explain why they might have
different price elasticities of demand. [6] (W2005)
Allocation of Resource: Market Failure
What is it ? The market does not allocate resource effectively
How does it happen ?
Externalities: Costs and benefits affecting
people who aren’t involved with producing
or consuming a product, where
Public goods: which 1) can not be used
up and 2) people can not be stopped from
private+external = social (costs/benefits)
using, eg police and lighthouses, so
businesses will not provide them.
Merit goods: products with external
Non-sustainability: businesses may use benefits which we should allocate more
resource for, eg medicine, books
up resources gaining growth and profit
now, but reducing future life quality.
Inequality: The market fails if some
people are poor and lack food whilst
others have all they want.
Monopoly: limits output to increase profit.
Demerit goods: products with external
costs which we should allocate less
resource for, eg cigarettes, polluting
products
What should we do ?
The government can intervene and
change the resource allocation for
example by controlling production,
taxing the rich and feeding the poor.
Test Yourself
1.
Discuss whether a country should conserve or use its
resources. [5](W2009)
2.
Explain what is meant by (i) external cost, [2] (ii) social
benefit. [3](W2002)
3.
Sometimes the government provides services in an
economy, sometimes the private sector provides
services. Explain why it is that the government provides
some services. [6](S2004)
4.
Some countries have now prohibited smoking in public
areas in buildings. Use the concepts of private and social
costs and benefits to explain this policy. [6](S2009)
Role of the Individual: Money Functions
What is money?
A medium of exchange (can be
used to buy things)
A store of value (for saving)
A unit of account (to measure
value)
What features should money
have ?
Acceptable, durable, portable,
scarce, divisible
We use money so we don’t
have to barter ie swap or
trade one item for another.
Otherwise we have to find
someone with what we
want who wants to trade it
for what we have (a double
coincidence of wants)
Who controls the money supply? The Central Bank in a country. It includes
the printing of money and overseeing the whole financial system including the
high street banks
Banks, stock markets and insurance companies also serve the financial
system by channeling money from savers to businesses for investment or
buying capital
Test Yourself
1.
Explain why some people prefer to keep money in cash
and current accounts in banks even though other
accounts earn more interest. [5] (W2001)
2.
Outline the functions of a central bank. [4] (W2008)
3.
Analyse how a central bank might influence consumer
saving. [6] (W2008)
Role of the Individual: Work Choices & Context
The price of labour is decided by supply and demand
Supply: depends on skills, experience & education
needed as well as the conditions and location of the job.
Demand: depends on the productivity of labour (how
much product it can make) and the price of the product.
People decide what work they want to do
according to:
Wage differentials
Wage factors: the money (weekly wage or monthly
salary) they can earn.
The level of pay is
affected by :
Non-wage factors: the
convenience of the job
(hours, distance, safety)
and the benefits such as
perks, holidays and pension.
Sectors:public / private,
primary / secondary /
tertiary, age, experience,
degree of specialisation,
talent, qualifications,
location, discrimination
Role of the Individual: Labour Market
Wages may not be decided purely by the free market as intervention
comes from:
Trade Unions intervene using collective bargaining
and industrial action such as strikes, picketing and
work to rule.
They try to improve work conditions and benefits as
well as pay.
+ they can improve worker relations and productivity
- they push up wages and costs for firms
Governments may also impose minimum wages to help workers.
However these may push up
wages so that supply exceeds
demand and surplus labour or
unemployment results
Test Yourself
1.
Describe how a person’s income is likely to change
during their life. [3] (W2008)
2.
Discuss what might determine why one job is paid more
than another. [7] (W2008)
3.
State three factors that might determine an individual’s
choice of occupation. [3] (W2004)
4.
If a company is large and employs many people it often
has to deal with trade unions. What is a trade union and
what is its role in an economy? [6] (W2007)
Role of the Individual: Save or Spend Choice
Disposable income is what is left for spending after tax
People can choose to spend or save.
Saving often increases with age, income and interest rate.
Expectations for the future also affects peoples’ decisions
People may choose to borrow using credit cards,
mortgages and overdrafts or other bank loans so they can
spend more than their income.
Borrowing increases current consumption and sacrifices
future consumption
Saving reduces current consumption and allows more
future consumption
Income affects spending and saving decisions. High income people spend and save
more money in all than others, but it is still a lower percentage of their income.
Test Yourself
1.
Discuss what motives consumers have for deciding
whether to spend or save. [6] (S2002)
2.
Analyse why different income groups have different
spending patterns. [6] (W2009)
3.
How might a reduction in interest rates on credit card
borrowing affect the way that people choose to save or
spend? [6] (W2007)
4.
How might inflation affect a person’s spending, saving
and borrowing? [10] (S2009)
The Firm: Business Structures
Sole proprietor / trader One person
owns and manages a business eg store
Partnership: from 2 to 20 partners own
and manage a business eg doctors, law
firm
Ltd Company Ownership &
management separate, can sell shares
for funding, profit paid as dividend to
shareholders. limited liability, 2 types:
Private Company (Ltd): sells shares to
friends
Public Company (PLC): sell shares on
stock exchange
Cooperative: common interest groups
own and run business to serve their
interests
Public Corporation: Business owned by
state and run by managers chosen by
government
Limited Liability: Business owners
can only lose money they invested in
the firm. This reduces risk and so
makes investing more attractive.
Multinational: Business producing
using resources in more than one
country. They get access to markets
and resources and can bring money,
resources and knowledge to a country
but is working in its own interest, not
that of the hosts.
Test Yourself
1.
State four ways in which multi-national companies can
help developing countries such as Bangladesh. [4]
(W2006)
2.
What is meant by ‘labour-intensive’ production? [2]
(S2004)
3.
Is intervention by a foreign multi-national always
beneficial for a country? [6] (W2008)
4.
Discuss what might happen to costs if a firm replaces
labour with machines. [6] (W2006)
The Firm: Business Structures
Firms size can be measured by number of staff,
turnover (revenue), market share (%), or capital
employed (asset value)
Firms generally aim to maximise profit and may
choose to do this by growing through
Natural Growth: reinvesting profits, or
Integration, by Takeover or Merger
Integration can be:
Horizontal: joining competitors
Backward Vertical: joining suppliers
Forward Vertical: joining customers
Lateral / Conglomerate: joining
unrelated firm
Nationalisation:
when the
government takes
over a business.
It may cut prices
and increase
output but is often
inefficient .
Privatisation:
when a state
owned industry is
sold to private
owners, to avoid
public loss or to
make the
business more
efficient.
The Firm: Costs (Money paid to produce)
and Revenues (Money received for product)
As a firm increases its output, total
cost usually rises, but average cost
may rise, stay constant or fall
What is the goal of most firms ?
Profit maximisation = make as much
profit as possible
But they may only: Break Even: When
total revenue = total cost
Cost Type
Explanation
Total
All Cost
Average
Total Cost / Quantity
Fixed
Cost that does not change
with Quantity and is paid
even if output = 0
Variable
Cost that changes with
Quantity
Revenue
Type
Explanation
Total
All Revenue
Average
Total Revenue / Quantity
The Firm: Market Structures
Some businesses like haircutting suit small
firms, others like making ships or electricity
are best done by large firms
As firms get bigger they can benefit from
economies of scale where costs fall with
specialisation, production lines, bulk buying
and cheap credit or borrowing
But if firms get too big they may get
diseconomies of scale where
inefficiency increases costs
Perfect competition
many firms which
have little market
power, must follow
the market price and
make low profit
Monopoly one firm which
controls the market
Benefits: economies of scale,
money for research to make
new products
Problems: they can charge
high prices and make unfair
profits
Test Yourself
1. How do some firms become large? [4] (W2005)
2. Discuss how a supermarket might benefit from
economies of scale. [6] (W2005)
3. Why might a company have an increase in
revenue and a fall in profits at the same time? [2]
(W2002)
4. What is meant by fixed cost, variable cost and
average total cost? [4] (W2006)
The Government
In an economy the government is:
An employer
A producer of goods and services
A policy maker
It aims to ensure:
Full employment
Price stability
Growth (of GDP)
Equality
Foreign balance
It uses policies that include:
Demand side: Fiscal (tax and spending) or
Monetary (money supply and interest rates)
Supply side: reduce intervention
Trade policy: protection, exchange rates
.
Governments get
income from taxes
These can be
Direct: paid on income, profit or cash
Indirect: paid on products eg sales tax
Progressive: higher income higher rate
Regressive: lower income lower rate
Proportional: fixed rate
These add to business costs.
If the government gives money to
producers to reduce costs it is called a
subsidy
The Government: Macroeconomic Models
Business Cycle
Circular Flow Diagram
Aggregate Demand /
Supply Diagram
We use economic models to simplify and present ideas about the real economy.
The government can then use them to predict the effect of events and policies.
Test Yourself
1. Discuss how some aims of government policy
might conflict with each other. [6] (S2007)
2. Discuss how a government might influence
private producers. [8] (S2007)
3. Using examples, describe the difference
between direct and indirect taxes. [4] (S2008)
4. How might a reduction in taxation help any two
macro-economic aims of a government? [6]
(S2008)
Economic Indicators
What is it ? A sustained increase in the general level of prices.
How is it measured ? By comparing the price of an index (the
price of a basket of goods such as the Consumer Price Index)
from one year to the next.
What makes it happen ?
Demand Pull = An increase in the money supply or an increase in demand for
products.
Cost Push = An increase in the cost of resources used for production.
Why is it a problem ? Money loses value and
Becomes dysfunctional, people and businesses
get worried, governments and borrowers gain
whilst others lose, resources get wasted
What should governments do ? Demand side : Print and/or spend less
money, raise direct taxes. Supply side : Make resource markets work better.
Economic Indicators
What is it ? When people are willing and able
to work but have no job
How is it measured ? By counting tax or
welfare data, by survey
What makes it happen ?
Natural Unemployment: Seasonal, Frictional
(between jobs), Structural (change in products and
production methods)
Cyclical Unemployment: A fall in demand for
products and labour in recessions
Why is it a problem ? People lose income and
skills and get depressed
Society wastes resource. Areas get poorer, crime occurs
What should governments do ?
Demand side : Print and/or spend money, cut taxes.
Supply side : Make resource markets work better.
Economic Indicators : GDP
What is it ? The total output from inside a country in a year
How is it measured ? By counting income or spending
or total product, which should all be equal.
What is the goal ? Governments want to increase GDP so the country gets more
income and gets richer. This is called economic growth.
What other measures are there ?
Real GDP per Capita: The total inflation
adjusted output of a country per person
GNP Gross National Product: Total
output in a year from resources belonging to
the people of a country.
Human Development Index (HDI) :
Shows the standard of living based on
education and life expectancy as well as income
Test Yourself
1. Explain how different types of unemployment
may be caused and consider which might be the
most serious. [10] (S2007)
2. Explain what is meant by GDP. [3](S2005)
3. What might be the result of a general increase in
the level of consumer spending in an economy?
[4] (S2008)
4. What is meant by inflation? [4] (S2009)
Development: Population
Population data includes the Dependency ratio or how many people
depend on each worker. There are a lot of dependents in countries
with many old or young people who can not work. That slows
development because they use resources. A low dependency ratio helps an
area to develop
The birth rate is also important. If it is higher than the death rate
then the population may be growing which gives more labour to
make things, but also more need for food.
Saving The population and culture also helps to determine how
much of what is made is consumed or used up. The rest can be
saved, it can be traded for other products or used for investment
which means buying capital or man-made resource or even schools
and hospitals. This increase in resources means an economy can
develop and enjoy a better standard of living.
Development
What is it ? It describes the standard of living or the quality of life
Many factors can be measured to see the level of development
in an area: Income, education, life expectancy, freedom,
technology, healthcare, equality, nutrition
Other factors influence the level of development in an
area: Geography, politics, culture, climate, resource
endowment, population age size and density
Sectoral shift: As an economy develops, people move from primary to
secondary and then tertiary sectors. This is because 1) Increases in
efficiency means less labour is needed for food and other basic need so
it can be used elsewhere, and 2) with development people have
enough necessities and want other things like education, football
matches and art so they will pay labour to make those products
Governments can set policies to support development. These might include:
population controls, laws to help businesses, government spending on
infrastructure including roads and buildings like airports
Test Yourself
1.
Discuss why many countries aim to increase economic
growth. [4] (S2009)
2.
How might a government affect economic growth in a
country? [8] (W2007)
3.
What determines the change in the size of a country’s
total population? [3](S2002)
4.
How may living standards between countries be
compared? [10](W2009)
International Economics: Trade
Specialisation: different countries, people or areas have different
resources and so are better at making certain products.
This is called comparative advantage. They should specialise in
making these items and trade them with other place for items they
are not good at making.
Switzerland could make chocolate and export it in exchange for
imports of coffee from Vietnam. Then there is more for everybody.
With trade, countries get more efficient because:
• They are making what they are good at
• They can practice and get even better at that product
• They might get economies of scale in that product
• Competition from other countries encourages efficiency
• New ideas come from other countries with trade
• People have more choices of product
Increased trade supports Globalisation where there is more
communication and standardisation and it seems like the
world is getting smaller.
International Economics: Protection
Why: Some countries want to protect themselves from imports from
other countries because:
They want to keep jobs for their own workers
They want their own businesses to sell more and make more profit
They don’t want to depend on other countries
They don’t like the country they buy products from
They want to maintain their foreign balance of trade
How: do countries protect themselves and stop trade? They use
Quotas: limits on the number of imports of a product
Tariffs: taxes on imports
Subsidies: money for their own producers to make it cheaper
The WTO aims to support and encourage free trade to help
development but some countries say the WTO is unfair and helps
the rich countries more than poor ones
International Economics: Foreign Balance
The balance of payments is a country’s account with the rest of
the world. It includes the financial, capital and current accounts
Current Account: counts the net (total inflow minus total
outflow) cashflow for:
Visible trade or trade in goods
+
Invisible trade or trade in services
+
Transfers gifts or payments made not for trade or debt
+
Income from Investment in other countries
The current account balance can be:
Surplus if more money flows in than out, leading to saving
Deficit if more money flows out than in, leading to debt
Balanced if money flows in and out are equal
International Economics: Exchange Rates
An exchange rate is the rate at which one currency
can be exchanged for another. Exchange rates might be
Floating where the rate is decided by the free market
forces of supply and demand, or:
Fixed where the government controls the rate by buying or selling currency, or
Managed float where the government controls a floating rate if it moves too
much
Floating exchange rates might appreciate (rise) if many people want to buy
that country’s products or hold its money, or depreciate (fall) if people do not
want the products or money of a country.
If a currency appreciates, the products of that country will get
more expensive and so people may not buy them and it could
lead to a trade deficit
If a currency depreciates, the products of that country will get
cheaper and so people may buy more of them and the country’s
foreign balance can improve.
Test Yourself
1.
Explain what is meant by a visible trade deficit and identify in
which part of the balance of payments the deficit would be
recorded. [3] (S2004)
2.
Discuss what might lead to an improvement in the balance of
payments of a country. [6] (S2005)
3.
Discuss the consequences for an economy if its currency ‘was
gaining strength.’ [5] (W2004)
4.
Distinguish between a tariff and a quota. [4] (S2009)
5.
Why do countries trade with each other? [6] (W2009)