Causes of poverty: age

IGCSE Economics 0455 – Economic Development: Poverty (Causes – Age)

1. The Basic Economic Problem (1.1‑1.4)

• Scarcity – resources are limited but human wants are unlimited.
• Factors of Production – land, labour, capital, enterprise.
• Opportunity Cost – the value of the next best alternative fore‑gone.
  Example: If a country can produce either 100 000 t of wheat or 200 000 t of rice, the opportunity cost of 1 t of wheat is 2 t of rice.
• Production Possibility Curve (PPC)
  • Shows the maximum combinations of two goods that can be produced when all resources are fully and efficiently employed.
  • Points on the curve = efficient use; inside the curve = under‑utilisation; outside = unattainable.
  • Links to the three basic economic questions:
    • What to produce – choice of the point on the PPC.
    • How to produce – determined by the mix of factors (e.g., more capital shifts the PPC outward).
    • For whom to produce – distribution of the output among households.
  • Shifts of the PPC:
    • Increase in factor quantity or quality (e.g., more educated labour) → outward shift.
    • Natural disaster or war → inward shift.

2. Allocation of Resources (2.1‑2.10)

2.1 Demand and Supply

• Demand curve – downward sloping (inverse relationship between price and quantity demanded).
• Supply curve – upward sloping (direct relationship between price and quantity supplied).
• Market equilibrium where Q_d = Q_s and the market price is set.

2.2 Price Determination

• At equilibrium, the price reflects the marginal benefit to consumers and the marginal cost to producers.
• Any shift in demand or supply changes the equilibrium price and quantity.

2.3 Elasticity

Elasticity	Formula	Interpretation
Price elasticity of demand (PED)	\(\displaystyle PED=\frac{\%\Delta Q_d}{\%\Delta P}\)	‑>1 = elastic, 0‑1 = inelastic, =1 = unit‑elastic
Price elasticity of supply (PES)	\(\displaystyle PES=\frac{\%\Delta Q_s}{\%\Delta P}\)	Same interpretation as PED.
Income elasticity of demand (YED)	\(\displaystyle YED=\frac{\%\Delta Q_d}{\%\Delta Y}\)	Positive = normal good; negative = inferior good.

2.4 Market Economic System (2.8)

• Definition – an economy where most decisions about what, how and for whom to produce are made by households and firms interacting in markets.
• Advantages
  • Efficient allocation of resources (price signals).
  • Consumer sovereignty – choice driven by preferences.
  • Innovation encouraged by competition.
• Disadvantages
  • Market failures (public goods, externalities, merit/demerit goods).
  • Unequal income distribution.
  • Undersupply of essential services such as health and education.

2.5 Market Failure (2.4‑2.5)

• Public goods – non‑rival and non‑excludable (e.g., street lighting).
• Merit goods – socially desirable but under‑consumed (e.g., primary education, vaccinations).
• Demerit goods – socially undesirable but over‑consumed (e.g., tobacco, alcohol).
• Externalities – costs or benefits that affect third parties (e.g., pollution, herd immunity).

2.6 Government Intervention to Correct Market Failure (2.10)

• Price controls
  • Maximum (price ceiling) – prevents prices from rising above a set level (e.g., rent control).
  • Minimum (price floor) – prevents prices from falling below a set level (e.g., agricultural price support).
• Indirect taxes – raise the price of demerit goods and internalise negative externalities (e.g., tobacco tax).
• Subsidies – lower the price of merit goods or positive externalities (e.g., school‑feeding programmes).
• Regulation – legal requirements (e.g., emission standards, safety regulations).
• Provision of merit goods – government directly supplies services such as health care and education.

2.7 Mixed Economy (2.6‑2.7)

• Co‑existence of market forces and government intervention.
• Arguments for mixed economy
  • Corrects market failures.
  • Provides a safety net for vulnerable groups.
  • Promotes more equitable income distribution.
• Arguments against mixed economy
  • Government failure – inefficient bureaucracy.
  • Distorts price signals, reducing efficiency.
  • Risk of over‑regulation and reduced incentives for innovation.

3. Micro‑economic Decision‑makers (3.1‑3.7)

3.1 Households

• Consumers of goods and services.
• Earn income from labour, rent, interest and profit.
• Decide how much to spend on consumption versus saving.

3.2 Workers (Labour Market)

• Supply labour; wages are influenced by marginal productivity, bargaining power and minimum‑wage legislation.
• Unemployment types (see section 4.6): frictional, structural, cyclical.

3.3 Firms

• Produce goods/services with the aim of maximising profit.
• Production concepts – short‑run vs long‑run, diminishing marginal returns.
• Cost concepts – fixed, variable, total, average, marginal.
• Revenue concepts – total, average, marginal.
• Economies of scale – lower average cost as output expands.

3.4 Types of Markets (3.7)

Market Type	Key Characteristics	Advantages	Disadvantages
Perfect competition	Many buyers & sellers, homogeneous product, free entry & exit, price‑taker.	Allocative efficiency, consumer choice, low prices.	Hard to achieve in reality; firms have no market power.
Monopoly	Single seller, unique product, high barriers to entry, price‑setter.	Potential for economies of scale, stable profits for the firm.	Allocative inefficiency, higher prices, lower output, possible abuse of market power.

3.5 Money & Banking

• Functions of money – medium of exchange, store of value, unit of account.
• Banking creates credit, influences interest rates and can affect household income (e.g., mortgage availability, loan access).

4. Government & the Macro‑economy (4.1‑4.7)

4.1 Fiscal Policy

• Government spending on health, education and social security directly raises living standards and reduces poverty.
• Taxation
  • Progressive income tax – redistributes income.
  • Indirect taxes (VAT, excise) – can be regressive; may be offset by targeted transfers.

4.2 Monetary Policy

• Central bank controls interest rates and the money supply.
• Low interest rates stimulate investment and job creation – helping working‑age adults escape poverty.

4.3 Supply‑side Policy

• Improves productivity through infrastructure, training, deregulation and research & development.
• Higher productivity raises potential output, which raises long‑run living standards.

4.4 Macro‑economic Objectives (4.1)

Objective	Why it matters for poverty
Economic growth	More resources become available for poverty‑reduction programmes.
Full employment	Reduces income poverty among working‑age adults.
Price stability	Protects low‑income households from inflation eroding real wages.
Balance of payments equilibrium	Prevents sudden devaluation that would raise import‑priced food and fuel.
Redistribution	Directly narrows income inequality.
Sustainable development	Ensures that future generations are not poorer because of environmental degradation.

4.5 Unemployment (4.6)

• Definition – the proportion of the labour force that is willing and able to work but has no job.
• Measurement – Unemployment Rate = \(\frac{\text{Number of unemployed}}{\text{Labour force}}\times 100\)
• Types
  • Frictional – short‑term transition between jobs.
  • Structural – mismatch between skills and job requirements.
  • Cyclical – caused by a downturn in aggregate demand.
• High unemployment, especially among working‑age adults, is a major cause of income poverty.

4.6 Inflation (4.6)

• Definition – a sustained rise in the general price level.
• Measurement – Consumer Price Index (CPI) or Retail Price Index (RPI); inflation rate = \(\frac{\text{CPI}_{t}-\text{CPI}_{t-1}}{\text{CPI}_{t-1}}\times100\).
• Effects on poverty:
  • Reduces real wages, especially for those on fixed incomes.
  • Raises the cost of basic goods (food, fuel, medicine).
  • Can erode the value of savings for the elderly.

5. Economic Development

5.1 Measuring Living Standards

Indicator	What it measures	Limitations
GDP per capita (US$)	Total output divided by population – average income.	Ignores income distribution, non‑market activities, environmental costs.
GNI per capita	GDP plus net income from abroad.	Same distribution issue; does not capture welfare.
Human Development Index (HDI)	Composite of life expectancy, education and GNI per capita.	Broad; can mask inequalities within a country.

5.2 Poverty – Definition and Measurement

• Absolute poverty line – a fixed monetary threshold (e.g., US$2.15 per day, 2022 PPP).
• Relative poverty – households earning less than a set proportion of median income (commonly 60 %).
• Poverty headcount ratio – % of the population below the poverty line.
• Poverty Gap Index (PGI) – average shortfall of the poor from the poverty line, expressed as a proportion of that line. $$PGI = \frac{1}{N}\sum_{i=1}^{N}(z - y_i)$$ where N = number of poor, z = poverty line, y_i = income of the ith poor person.

5.3 Population Dynamics and Poverty

• Birth‑ and death‑rates affect the size of the dependent young and elderly.
• Dependency ratio = \(\frac{\text{Population 0‑14} + \text{Population 65+}}{\text{Population 15‑64}}\). A high ratio raises the fiscal burden on the working‑age group.
• Migration – remittances can lower poverty, but brain‑drain may reduce future growth.

5.4 Cross‑Country Development Comparisons (2023)

Country	Income group	GDP per capita (US$)	Poverty headcount % (absolute)	Life expectancy (years)
Germany	High‑income	55 000	5	81.2
Malaysia	Upper‑middle‑income	13 000	13	77.0
Niger	Low‑income	620	78	60.3

6. Poverty and Age – Why Age Matters

• Age determines earning capacity, dependency, and exposure to economic shocks.
• Three key age groups:
  • Children (0‑14 years)
  • Working‑age adults (15‑64 years)
  • Elderly (65 years +)

6.1 Children (0‑14 years)

• Fully dependent on household income – no own earnings.
• Higher per‑capita expenditure needs: nutrition, health care, education.
• Vulnerable to malnutrition, school dropout and child labour.
• Policy focus: universal primary education, school‑feeding, child‑health programmes.

6.2 Working‑Age Adults (15‑64 years)

• Primary earners; poverty linked to unemployment, under‑employment and low‑skill jobs.
• Gender disparities – young women may face lower wages or limited job opportunities.
• Skill mismatch can trap individuals in informal, low‑pay work.
• Policy focus: skills development, active labour‑market programmes, minimum‑wage enforcement.

6.3 Elderly (65 years +)

• Retirement ends regular labour income.
• Reliance on pensions, savings or family support; many low‑income countries have limited non‑contributory pensions.
• Higher health‑care costs and reduced ability to work increase poverty risk.
• Policy focus: universal or non‑contributory pensions, subsidised health care, community‑based support.

6.4 Illustrative Poverty Rates by Age (Low‑Income Country Example)

Age Group	Poverty Rate %	Average Household Income (US$)	National Poverty Line (US$)
0‑14 years	42	1.8	2.0
15‑64 years	28	2.5	2.0
65 + years	55	1.4	2.0

6.5 Poverty Depth – Poverty Gap Index by Age

The PGI is usually highest for the elderly because their incomes are far below the poverty line, whereas children’s gap depends on the total household earnings.

7. Policy Responses Targeted at Age‑Specific Poverty

7.1 Children

• Universal free primary education and compulsory school attendance.
• School‑feeding schemes to improve nutrition and attendance.
• Conditional cash transfers (CCT) that require school attendance or health check‑ups.
• Maternal and child health services (vaccinations, antenatal care, nutrition programmes).

7.2 Working‑Age Adults

• Skills development, vocational training and apprenticeships.
• Active labour‑market policies – job‑matching services, wage subsidies, public‑works schemes.
• Minimum‑wage legislation and effective enforcement.
• Support for entrepreneurship (micro‑credit, business‑incubation).

7.3 Elderly

• Non‑contributory or universal pension schemes.
• Subsidised health‑care, prescription drugs and long‑term care.
• Community‑based support networks (old‑age clubs, cash‑for‑care programmes).
• Age‑friendly employment policies for those who wish to work longer.

8. Linking Age‑Specific Poverty to the Wider Economy

• Reducing child poverty improves future human capital, boosting long‑run economic growth.
• Increasing employment and wages for working‑age adults raises aggregate demand and tax revenues.
• Protecting the elderly through pensions and health care reduces inter‑generational inequality and stabilises consumption.
• All three groups affect the dependency ratio; policies that lower the ratio (e.g., family planning, extending working lives) can relieve pressure on public finances.

9. Summary

Age is a fundamental determinant of poverty because it shapes earning potential, dependency, and access to social protection. Understanding the distinct challenges faced by children, working‑age adults, and the elderly enables governments to design targeted interventions that reduce both the incidence and depth of poverty across the life‑cycle, while supporting broader macro‑economic goals such as growth, full employment, price stability, balanced payments, redistribution and sustainability.