IGCSE Economics (0455) – Complete Syllabus Notes

1. The Basic Economic Problem

• Scarcity: Resources (land, labour, capital, entrepreneurship) are limited, while human wants are unlimited.
• Factors of Production & Rewards:

  Factor	Reward
  Land	Rent
  Labour	Wages
  Capital	Interest
  Entrepreneurship	Profit

• Opportunity Cost: The value of the next‑best alternative that is foregone when a choice is made.
  • Consumer example: Spending £100 on a concert ticket means the opportunity cost is the other things that £100 could have bought (e.g., a new pair of shoes).
  • Worker example: Choosing to work overtime means the opportunity cost is the leisure time that is given up.
  • Producer example: A firm that uses a factory to make bicycles foregoes the opportunity to produce scooters in that same factory.
  • Government example: Allocating a budget to build a new road means the opportunity cost is the health services that cannot be funded with that money.
• Economic vs. Free Goods
  • Economic good: Has a price because it is scarce (e.g., a mobile phone).
  • Free good: Abundant and available without a price (e.g., air, sunlight).
• Production Possibility Curve (PPC) – shows the maximum combinations of two goods an economy can produce with its existing resources and technology.

  

2. Allocation of Resources – Demand, Supply & Equilibrium

2.1 Demand Schedule

A demand schedule records the quantity of a good that consumers are willing and able to buy at different prices, ceteris paribus.

Price ($)	Quantity Demanded (units)
10	90
8	110
6	130
4	150
2	170

2.2 Supply Schedule

A supply schedule records the quantity of a good that producers are willing and able to sell at different prices, ceteris paribus.

Price ($)	Quantity Supplied (units)
2	30
4	50
6	70
8	90
10	110

2.3 Finding the Equilibrium

1. Identify the price at which quantity demanded equals quantity supplied.
2. If the tables do not contain an exact match, draw straight‑line demand and supply curves and solve algebraically.

Using the two points (P = 10, Q_D = 90) and (P = 2, Q_D = 170) we obtain the linear demand equation:

QD = 190 – 10P

Using the two points (P = 2, Q_S = 30) and (P = 10, Q_S = 110) we obtain the linear supply equation:

QS = 10 + 10P

Set Q_D = Q_S:

190 – 10P = 10 + 10P  
180 = 20P  
P* = 9  (equilibrium price)  
Q* = 190 – 10×9 = 100  (equilibrium quantity)

Equilibrium: P* = $9, Q* = 100 units.

2.4 Interpretation of Equilibrium

• At $9 the amount consumers want to buy exactly equals the amount producers want to sell – there is no inherent pressure for the price to move.
• The market is in allocative efficiency: every unit produced is purchased by a consumer who values it at least as much as the cost of producing it.
• If price rises above $9 a surplus (excess supply) appears; producers will lower price to clear stock.
• If price falls below $9 a shortage (excess demand) appears; producers will raise price.

2.5 Price Changes – Shifts in Demand or Supply

Cause of Shift (Demand)	Direction of Curve	Effect on Equilibrium
Increase in consumer income (normal good)	Rightward	Higher P* and higher Q*
Decrease in consumer income (inferior good)	Leftward	Lower P* and lower Q*
Change in tastes, population, price of substitutes/complements	Rightward or leftward	Corresponding change in P* and Q*

Cause of Shift (Supply)	Direction of Curve	Effect on Equilibrium
Improvement in technology	Rightward	Lower P*, higher Q*
Increase in input prices	Leftward	Higher P*, lower Q*
Taxes on producers	Leftward	Higher P*, lower Q*
Subsidies to producers	Rightward	Lower P*, higher Q*

2.6 Price Elasticity of Demand (PED)

Definition: % change in quantity demanded ÷ % change in price.

PED = (%ΔQD) / (%ΔP)

Categories of PED

• Perfectly elastic (|PED| = ∞) – horizontal demand curve; any price rise eliminates all demand.
• Elastic (|PED| > 1) – quantity changes proportionally more than price. Example: A 10 % fall in price of a luxury watch leads to a 20 % rise in quantity demanded.
• Unit‑elastic (|PED| = 1) – proportional change. Example: 5 % price fall → 5 % quantity rise.
• Inelastic (|PED| < 1) – quantity changes proportionally less than price. Example: A 15 % rise in price of bread leads to only a 5 % fall in quantity demanded.
• Perfectly inelastic (|PED| = 0) – vertical demand curve; quantity demanded does not change with price.

Determinants of PED

• Availability of close substitutes
• Proportion of income spent on the good
• Nature of the good (luxury vs. necessity)
• Time‑period considered (short‑run vs. long‑run)

Price‑Change Consequences

Demand Elasticity	Effect of a Price Rise on Consumer Expenditure	Effect on Firm Revenue
Elastic	Expenditure falls (because quantity falls proportionally more)	Revenue falls
Unit‑elastic	Expenditure unchanged (percentage change in Q equals % change in P)	Revenue unchanged
Inelastic	Expenditure rises (quantity falls proportionally less)	Revenue rises

2.7 Price Elasticity of Supply (PES)

Definition: % change in quantity supplied ÷ % change in price.

PES = (%ΔQS) / (%ΔP)

Categories of PES

• Perfectly elastic (|PES| = ∞) – horizontal supply curve; producers can supply any quantity at a given price.
• Elastic (|PES| > 1) – quantity supplied responds strongly to price changes (e.g., manufactured goods).
• Unit‑elastic (|PES| = 1) – proportional response.
• Inelastic (|PES| < 1) – weak response (e.g., agricultural land in the short run).
• Perfectly inelastic (|PES| = 0) – vertical supply curve; quantity supplied cannot change (e.g., a fixed‑supply of rare art).

Determinants of PES

• Time period (more elastic in the long run)
• Flexibility of production techniques
• Mobility of factors of production
• Availability of spare capacity

2.8 Market Economic Systems

Feature	Market Economy	Mixed Economy
Decision‑makers	Households & firms (private)	Both private & government
Resource allocation	Price mechanism (supply & demand)	Price mechanism + government intervention
Ownership of resources	Predominantly private	Mixed ownership
Role of government	Limited (protect property rights, enforce contracts)	Regulation, public‑good provision, redistribution, market‑failure correction

Arguments For Mixed Economies

• Can correct market failures (e.g., provision of public goods).
• Reduces extreme inequality through redistribution.
• Provides a safety net for the unemployed, sick and elderly.

Arguments Against Mixed Economies

• Government intervention may lead to inefficiency and waste.
• Higher taxes can discourage investment and work effort.
• Risk of “government failure” – policies that worsen outcomes.

2.9 Government Intervention Tools (Diagrams & Interpretation)

• Price Ceiling (Maximum Price) – set below equilibrium → shortage.

  

• Price Floor (Minimum Price) – set above equilibrium → surplus.

  

• Indirect Tax on Producers – shifts supply leftward; price to consumers rises, quantity falls.

  

• Subsidy to Producers – shifts supply rightward; price to consumers falls, quantity rises.

  

• Regulation (e.g., safety standards) – can increase production costs, shifting supply leftward.
• Privatisation – transfer of state‑owned enterprise to private ownership; usually aims to increase efficiency.
• Nationalisation – transfer of private enterprise to state ownership; often used for utilities or strategic industries.
• Quota – limit on the quantity of a good that can be imported or produced; creates a market‑price effect similar to a tax.

3. Micro‑Economic Decision‑Makers

3.1 Money & Banking

• Functions of Money: medium of exchange, unit of account, store of value, standard of deferred payment.
• Characteristics of Money:
  • Durability – does not wear out quickly.
  • Divisibility – can be broken into smaller units.
  • Portability – easy to carry and transfer.
  • Uniformity – each unit is the same as every other unit.
  • Acceptability – widely accepted as payment.
  • Limited Supply – not so abundant that it loses value.
• Forms of Money: cash (notes & coins), bank deposits, electronic money (credit/debit cards, online payments).
• Central Bank (e.g., Bank of England, Federal Reserve):
  • Issues currency.
  • Sets policy interest rates.
  • Controls the money supply (open‑market operations, reserve requirements).
  • Acts as lender of last resort.
• Commercial Banks:
  • Accept deposits and pay interest.
  • Provide loans to households and firms.
  • Create money through the multiplier effect (deposits → loans → new deposits).

3.2 Households

Factors influencing consumption, saving and borrowing decisions:

• Disposable income
• Interest rates (cost of borrowing, reward for saving)
• Consumer confidence and expectations
• Age, culture and lifestyle
• Prices of related goods (substitutes & complements)
• Taxes and government benefits

3.3 Workers (Labour Market)

• Wage Determination – interaction of labour demand (by firms) and labour supply (by workers).
• Trade‑Union Influence – can negotiate higher wages, better conditions, and may affect the labour‑demand curve.
• National Minimum Wage (NMW) – government‑set floor; if set above the market‑determined wage it can create a surplus of labour (unemployment).
• Labour Mobility:
  • Geographical – movement between regions or countries.
  • Occupational – switching between different types of jobs.
  • Skill‑based – upgrading skills to move into higher‑pay occupations.
• Diagram (labour‑supply ↑, labour‑demand ↓) – equilibrium wage (W*) and employment (E*). (Placeholder diagram below.)

3.4 Firms

• Types of Firms: sole trader, partnership, private limited company, public limited company.
• Objectives: profit maximisation, growth, market share, survival, corporate social responsibility.
• Costs (per period):

  Cost	Definition
  Fixed Cost (FC)	Does not vary with output (e.g., rent)
  Variable Cost (VC)	Changes with output (e.g., wages for hourly workers)
  Total Cost (TC)	FC + VC
  Average Cost (AC)	TC ÷ Q
  Marginal Cost (MC)	ΔTC ÷ ΔQ

• Revenue:

  Total Revenue (TR) = Price × Quantity

  Average Revenue (AR) = TR ÷ Q = Price

  Marginal Revenue (MR) = ΔTR ÷ ΔQ

• Economies & Diseconomies of Scale
  • Economies of scale – AC falls as output rises because of factors such as bulk buying, specialised labour, and spreading fixed costs.
  • Diseconomies of scale – AC rises after a certain point due to coordination problems, bureaucracy, and over‑use of resources.
  • Distinguish internal (within the firm) from external (industry‑wide) economies.

  

3.5 Market Types (Micro)

Market Structure	Key Characteristics
Perfect Competition	Many sellers, homogeneous product, price‑takers, free entry & exit.
Monopoly	Single seller, unique product, price‑setter, high barriers to entry.
Oligopoly (brief)	Few large firms, inter‑dependent pricing, possible collusion.
Monopolistic Competition (brief)	Many sellers, differentiated products, some price‑setting power.

4. Government & the Macro‑Economy (Brief Overview)

• Macro‑economic aims: sustainable economic growth, low unemployment, price stability, external balance.
• Key policy tools: fiscal policy (government spending & taxation) and monetary policy (interest rates & money supply).
• Interaction with the micro‑economic concepts above – e.g., how a change in tax rates shifts the supply curve for goods and services.