IGCSE Economics 0455 – Cambridge Syllabus (2027‑2029) – Quick‑Reference Guide
This guide summarises every core topic of the Cambridge IGCSE Economics (0455) syllabus, with a detailed focus on Section 3.6 – Firms’ Costs, Revenue and Objectives. Use the sections for revision, exam practice and diagram drawing.
1. The Basic Economic Problem & Allocation of Resources
- Scarcity: Unlimited wants vs. limited resources.
- Three basic economic questions: What to produce? How to produce? For whom to produce?
- Economic goods vs. free goods: Economic goods require scarce resources and have a price; free goods are abundant and have no price (e.g., air).
- Opportunity cost: The next best alternative fore‑gone when a choice is made.
- Factors of production: Land, labour, capital, enterprise.
- Production Possibility Curve (PPC): Shows the maximum output combinations of two goods.
- Points on the curve – efficient production.
- Points inside – inefficient (resources under‑used).
- Points outside – unattainable with current resources.
- Economic efficiency – producing on the PPC where marginal benefit = marginal cost.
2. Allocation of Resources – Markets and Government
2.1 Market System
- Definition: A system in which resources are allocated by the interaction of buyers and sellers through the price mechanism.
- Price determination: Interaction of demand and supply.
- Shift in demand → price ↑ or ↓ (movement along supply).
- Shift in supply → price ↑ or ↓ (movement along demand).
- Equilibrium: Quantity demanded = quantity supplied; the market clears.
2.2 Elasticities
| Elasticity | Formula | Interpretation |
|---|
| Price elasticity of demand (PED) | %(ΔQd) / %(ΔP) | How much quantity demanded changes when price changes. |
| Price elasticity of supply (PES) | %(ΔQs) / %(ΔP) | How much quantity supplied changes when price changes. |
| Income elasticity of demand (YED) | %(ΔQd) / %(ΔY) | Normal good (YED>0) vs. inferior good (YED<0). |
| Cross‑price elasticity of demand (XED) | %(ΔQd of Good A) / %(ΔP of Good B) | Substitutes (XED>0) vs. complements (XED<0). |
2.3 Market Failure & Government Intervention
- Market failure: Externalities, public goods, information asymmetry, monopoly power.
- Government tools:
- Price ceiling (max price) – prevents prices from rising too high.
- Price floor (min price) – prevents prices from falling too low.
- Taxes – raise price, reduce quantity (internalise negative externalities).
- Subsidies – lower price, increase quantity (encourage positive externalities).
- Regulation – standards, licences, safety rules.
- Privatisation – transfer of state‑owned firms to private owners.
- Nationalisation – transfer of private firms to state ownership.
- Quotas – limit the quantity that can be imported or exported.
- Mixed economy: Combination of market forces and government intervention; aims to balance efficiency with equity.
3. Micro‑economic Decision‑makers
3.1 Households
- Consumers of goods & services.
- Suppliers of labour, land and capital.
- Decision‑making based on utility maximisation and budget constraint.
3.2 Workers
- Wage determination: Intersection of labour‑demand (derived from marginal product of labour) and labour‑supply curves.
- Labour‑market diagram: Shows equilibrium wage and employment; shifts illustrate policy impacts (e.g., minimum wage).
- Mobility: Geographic and occupational mobility affect labour supply.
- Division of labour: Specialisation increases productivity but may require coordination.
3.3 Money & Banking
- Functions of money: Medium of exchange, unit of account, store of value, standard of deferred payment.
- Forms of money: Commodity money, fiat money, electronic money.
- Central bank vs. commercial banks:
- Central bank – issues currency, controls money supply, sets policy interest rates.
- Commercial banks – accept deposits, provide loans, create money through fractional reserve banking.
- Banking system links savers and borrowers, influencing investment and consumption.
3.4 Firms
- Objectives: Profit maximisation (short‑run), growth, market share, social responsibility (long‑run).
- Demand for factors of production: Derived from the marginal revenue product of each factor.
- Labour‑intensive vs. capital‑intensive production: Choice depends on technology, factor prices and scale.
- Economies of scale: Average cost falls as output rises (e.g., bulk buying, specialised staff).
Diseconomies of scale: Average cost rises at very large output (e.g., management difficulties).
- Market structures:
- Perfect competition – many sellers, homogeneous product, price‑taker.
- Monopoly – single seller, price‑setter, barriers to entry.
- Oligopoly – few large sellers, inter‑dependent pricing, possible collusion.
- Monopolistic competition – many sellers, differentiated products, some price‑setting power.
3.5 Production & Costs (links to Section 3.6)
Understanding how output levels affect costs is essential for the profit‑maximising rule MR = MC. See Section 3.6 for detailed diagrams and analysis.
4. Section 3.6 – Firms’ Costs, Revenue and Objectives
Learning Objective
Draw and interpret diagrams that show how changes in output affect the costs of production, and use these diagrams to explain short‑run profit‑maximising and shutdown decisions.
Key Definitions & Formulas
| Term | Definition | Formula (where applicable) |
|---|
| Fixed Cost (FC) | Costs that do not vary with output (e.g., rent, salaries of permanent staff). | — |
| Variable Cost (VC) | Costs that change directly with output (e.g., raw materials, hourly wages). | — |
| Total Cost (TC) | Sum of fixed and variable costs. | TC = FC + VC |
| Average Fixed Cost (AFC) | Fixed cost per unit of output. | AFC = FC ÷ Q |
| Average Variable Cost (AVC) | Variable cost per unit of output. | AVC = VC ÷ Q |
| Average Total Cost (ATC) | Total cost per unit of output. | ATC = TC ÷ Q = AFC + AVC |
| Marginal Cost (MC) | Additional cost of producing one more unit. | MC = ΔTC ÷ ΔQ |
| Total Revenue (TR) | Revenue earned from selling output. | TR = P × Q |
| Average Revenue (AR) | Revenue per unit of output (equals price in perfect competition). | AR = TR ÷ Q = P |
| Marginal Revenue (MR) | Additional revenue from selling one more unit. | MR = ΔTR ÷ ΔQ |
| Profit (π) | Difference between total revenue and total cost. | π = TR – TC |
Typical Shapes of Cost Curves (Short‑run)
| Curve | Shape | Key Features |
|---|
| FC | Horizontal line | Constant at all output levels; intersects the vertical axis at the fixed‑cost amount. |
| VC | Upward‑sloping, convex | Starts at the origin; steepens as output rises because of diminishing marginal returns. |
| TC | Upward‑sloping, convex | Vertical sum of FC and VC; lies above the VC curve by the amount of FC. |
| AFC | Downward‑sloping hyperbola | Falls as output rises – fixed cost spread over more units. |
| AVC | U‑shaped | Falls initially (increasing returns), reaches a minimum, then rises (diminishing returns). |
| ATC | U‑shaped, lies above AVC | Combination of AFC and AVC; minimum occurs where MC cuts ATC. |
| MC | U‑shaped, steeper than AVC | Crosses AVC and ATC at their respective minima; indicates the cost of the next unit. |
Step‑by‑Step Guide to Drawing the Cost Diagram
- Axes: Vertical axis – “Cost (£)”; horizontal axis – “Output (Q)”.
- Fixed Cost (FC): Draw a horizontal line at the level of the firm’s fixed expenses.
- Variable Cost (VC): From the origin, sketch an upward‑sloping convex curve.
- Total Cost (TC): Shift the VC curve vertically upwards by the amount of FC.
- Average Fixed Cost (AFC): Plot a hyperbola that falls as Q increases.
- Average Variable Cost (AVC): Draw a U‑shaped curve below ATC and intersecting MC at its minimum.
- Average Total Cost (ATC): Add AFC to AVC (or draw a U‑shaped curve that lies above AVC). Its minimum is where MC cuts ATC.
- Marginal Cost (MC): Sketch a U‑shaped curve that cuts both AVC and ATC at their lowest points.
- Label: Clearly label each curve (FC, VC, TC, AFC, AVC, ATC, MC) and mark the intersection points MC ∩ AVC and MC ∩ ATC.
Interpreting Changes in Output
- Moving right along the MC curve (increasing output):
- When MC is falling, AVC and ATC also fall – the firm enjoys increasing returns.
- After MC reaches its minimum, it rises; AVC and ATC follow, signalling diminishing returns.
- Short‑run profit‑maximising rule: Produce the output where MR = MC, provided that price (P) is above AVC at that output.
- If P > ATC → economic profit.
- If AVC < P < ATC → loss, but the firm continues (covers variable costs).
- If P < AVC → shut‑down; produce Q = 0 in the short run.
- Long‑run decision (all costs variable):
- P > ATC → profit → entry of new firms.
- P = ATC → normal profit → no incentive to enter or exit.
- P < ATC → loss → exit of firms.
Worked Numerical Example
Data for a perfectly competitive firm (price £30 per unit):
| Q | FC (£) | VC (£) | TC (£) | TR (£) | ATC (£) | AVC (£) | MC (£) |
|---|
| 0 | 200 | 0 | 200 | 0 | — | — | — |
| 10 | 200 | 150 | 350 | 300 | 35 | 15 | 15 |
| 20 | 200 | 260 | 460 | 600 | 23 | 13 | 13 |
| 30 | 200 | 390 | 590 | 900 | 19.7 | 13 | 13 |
- ATC at Q = 20: ATC = TC ÷ Q = £460 ÷ 20 = £23.
- MC between Q = 20 and Q = 30: MC = (£590 − £460) ÷ (30 − 20) = £130 ÷ 10 = £13.
- Since P = £30 > MC = £13 and P > ATC = £23 at Q = 20, the firm should increase output until MR (= P) meets MC.
Short‑run Decision Flowchart
- Identify the output where MR = MC.
- Compare price (P) with AVC at that output.
- If P ≥ AVC → continue producing.
- If P < AVC → shut down (Q = 0).
- Compare price with ATC to determine profit or loss.
- P > ATC → economic profit.
- P = ATC → break‑even (normal profit).
- P < ATC → loss (but stay in business if P ≥ AVC).
Exam Checklist – Cost & Revenue Diagram
- Know definitions and formulas for FC, VC, TC, AFC, AVC, ATC, MC, TR, AR, MR, and profit.
- Be able to sketch all seven cost curves on one set of axes, label them, and mark:
- Minimum of AVC (where MC cuts AVC).
- Minimum of ATC (where MC cuts ATC).
- Shut‑down point (P = AVC) and break‑even point (P = ATC).
- Apply the profit‑maximising rule MR = MC and the shutdown rule P < AVC.
- State the long‑run implications for entry and exit.
5. Macroeconomic Policy
5.1 Macro‑economic Aims
- Economic growth
- Low unemployment
- Price stability (low inflation)
- Equitable distribution of income
- External balance
5.2 Fiscal Policy
- Expansionary: Increase government spending and/or cut taxes → AD rises.
- Contractionary: Decrease spending and/or raise taxes → AD falls.
- Tools: direct spending, tax rates, tax rebates, subsidies.
5.3 Monetary Policy
- Set by the central bank to control the money supply and interest rates.
- Expansionary: Lower policy interest rates, purchase government securities (open‑market operations), reduce reserve requirements → money supply ↑, AD ↑.
- Contractionary: Raise interest rates, sell securities, increase reserve requirements → money supply ↓, AD ↓.
- Other tools: foreign‑exchange interventions, discount window facilities.
5.4 Supply‑side Policies
- Improve productivity and shift LRAS right.
- Training and education.
- Deregulation and simplification of planning permission.
- Tax cuts for businesses.
- Privatisation of state‑owned enterprises.
- Investment in infrastructure (roads, ports, broadband).
5.5 Economic Growth
- Definition: Sustained increase in a country’s real output (real GDP) over time.
- Measurement: Real GDP, real GNP, GNI per capita, growth rate (% change per year).
- Causes: Capital accumulation, labour force growth, technological progress, improvements in human capital, efficient institutions.
- Consequences: Higher living standards, increased tax revenue, potential environmental pressure.
- Recession: Two or more consecutive quarters of negative real GDP growth.
5.6 Unemployment
- Definition: People of working age who are willing and able to work but are without a job.
- Types:
- Frictional – short‑term, due to job search.
- Structural – mismatch of skills/locations.
- Cyclical – caused by downturns in aggregate demand.
- Seasonal – regular fluctuations (e.g., tourism).
- Measurement: Unemployment rate = (Number unemployed ÷ Labour force) × 100.
- Policies: Training programmes, active labour‑market policies, wage subsidies, macro‑policy to boost AD.
5.7 Inflation
- Definition: Persistent rise in the general price level.
- Measurement: Consumer Price Index (CPI), Retail Price Index (RPI); inflation rate = % change in CPI.
- Causes:
- Demand‑pull – AD exceeds LRAS.
- Cost‑push – rising production costs (e.g., wages, oil).
- Built‑in – wage‑price spiral.
- Policies: Contractionary fiscal or monetary policy, supply‑side measures to increase LRAS.
6. Economic Development, Poverty & Population
6.1 Indicators of Development
- GNI per capita (adjusted for PPP).
- Human Development Index (HDI) – combines life expectancy, education (mean years of schooling, expected years of schooling) and GNI per capita.
- Literacy rates, school enrolment, infant mortality, access to clean water.
6.2 Poverty
- Absolute poverty: Living below a fixed minimum standard (e.g., $1.90 a day).
- Relative poverty: Living significantly below the average standard in a society.
- Measurement: Poverty line, head‑count ratio, poverty gap.
- Policies: Education, health care, micro‑credit, social safety nets, progressive taxation.
6.3 Population
- Population growth rate = (Births − Deaths + Net migration) ÷ Mid‑year population.
- Demographic transition model – stages from high birth/death rates to low birth/death rates.
- Effects on labour supply, demand for goods, housing, and the environment.
6.4 Development Differences Between Countries
- Income levels – high‑income vs. low‑income economies.
- Productivity – technology, capital stock, human capital.
- Sectoral structure – proportion of agriculture, industry, services.
- Resource endowments – natural resources, climate.
- Institutions – property rights, political stability, corruption.
7. International Trade, Specialisation & Globalisation
7.1 Comparative Advantage
- Definition: A country has a comparative advantage in producing a good if it can produce it at a lower opportunity cost than another country.
- Specialisation according to comparative advantage leads to gains from trade – higher total output and greater consumer choice.
7.2 Benefits of Trade
- Access to a larger variety of goods and services.
- Economies of scale – lower average costs when producing for larger markets.
- Technology transfer and foreign direct investment.
- Increased competition – drives efficiency.
7.3 Trade Restrictions
- Tariffs – tax on imports.
- Quotas – quantitative limits on imports.
- Subsidies to domestic producers.
- Import licences, voluntary export restraints, embargoes.
- Effects: raise domestic prices, protect jobs in certain sectors, but reduce overall welfare.
7.4 Balance of Payments (BoP)
- Current account: Trade in goods & services, income, current transfers.
- Capital & financial account: Direct investment, portfolio investment, loans, reserves.
- Surplus = inflows > outflows; deficit = outflows > inflows.
7.5 Foreign‑exchange Market
- Determines the exchange rate – price of one currency in terms of another.
- Spot market: Immediate delivery.
- Forward market: Delivery at a future date at a predetermined rate.
- Factors influencing rates: interest‑rate differentials, inflation differentials, expectations, political stability.
7.6 Multinational Corporations (MNCs) & Globalisation
- MNCs operate in several countries, transferring capital, technology and management practices.
- Globalisation effects: increased trade and investment, cultural exchange, but also concerns about inequality and environmental impact.
8. Sustainability & the Environment
- External costs (negative externalities): Pollution, depletion of natural resources – not reflected in market prices.
- Policy responses:
- Carbon taxes – price the external cost.
- Cap‑and‑trade – allocate permits and allow trading.
- Subsidies for renewable energy.
- Regulation – standards, emission limits.
- Triple Bottom Line: Firms and governments evaluate performance on economic, social and environmental dimensions.