IGCSE Economics (0455) – Complete Syllabus Overview & Revision Notes
1. The Basic Economic Problem
1.1 Scarcity, Choice & the Three Fundamental Questions
Scarcity: Resources (land, labour, capital, entrepreneurship) are limited.Choice: Society must decide how to allocate these scarce resources.Three basic economic questions:
What goods and services should be produced?
How should they be produced?
For whom should they be produced?
1.2 Opportunity Cost
The value of the next best alternative that is foregone when a decision is made.
Example: Building a new hospital uses funds that could have been spent on a new school – the opportunity cost of the hospital is the school.
1.3 Economic Goods vs Free Goods
Economic Good Free Good
Limited supply; price > 0 (e.g., wheat, cars) Unlimited supply; price = 0 (e.g., air, sunlight)
1.4 Factors of Production & Their Rewards
Factor Reward Example
Land Rent Farmland, mineral deposits Labour Wages Factory workers, teachers Capital Interest Machinery, factories Enterprise Profit Business owners, innovators
1.5 Production Possibility Curve (PPC)
Shows the maximum possible output of two goods when all resources are fully and efficiently employed.
Points on the curve = efficient; inside = under‑utilisation; outside = unattainable.
Outward shift = economic growth (more resources or better technology).
Inward shift = recession or loss of resources.
Typical PPC diagram – efficiency, inefficiency, and economic growth.
2. Allocation of Resources
2.1 Demand & Supply Basics
Demand: Quantity buyers are willing & able to purchase at each price.Supply: Quantity sellers are willing & able to sell at each price.Market equilibrium: Intersection of the demand and supply curves.
2.2 Price Determination & Elasticities
Concept Formula Key Determinants Interpretation
Price Elasticity of Demand (PED)
Δ%Qd ÷ Δ%P
Substitutes, proportion of income, time horizon
Steeper = inelastic; flatter = elastic
Price Elasticity of Supply (PES)
Δ%Qs ÷ Δ%P
Production flexibility, spare capacity, time period
Steeper = inelastic; flatter = elastic
2.3 Causes & Consequences of Price Changes
Shift in demand → new equilibrium price & quantity (movement along supply curve).
Shift in supply → new equilibrium price & quantity (movement along demand curve).
Price change → changes in total revenue:
Elastic demand: price ↓ → TR ↑; price ↑ → TR ↓.
Inelastic demand: price ↓ → TR ↓; price ↑ → TR ↑.
2.4 Market Failure & Government Intervention
2.4.1 Types of Market Failure
Public goods: Non‑rival & non‑excludable (e.g., street lighting).Merit goods: Under‑consumed if left to the market (e.g., education, vaccination).Demerit goods: Over‑consumed if left to the market (e.g., cigarettes, alcohol).Externalities:
Negative: Pollution – private cost < social cost.
Positive: Education – private benefit < social benefit.
Information asymmetry: One party has better information (e.g., used‑car market).Monopoly power: Single seller can set price above marginal cost.
2.4.2 Government Tools to Correct Failure
Tool Purpose Typical Diagram
Maximum (price ceiling) Protect consumers when price is too high Price ceiling below equilibrium → shortage Minimum (price floor) Support producers when price is too low Price floor above equilibrium → surplus Tax Internalise negative externalities Supply curve shifts up by amount of tax Subsidy Encourage positive externalities Supply curve shifts down Regulation Set standards (e.g., emissions limits) Often shown as a shift in supply Privatisation Transfer public assets to private sector Can improve efficiency (no diagram required) Nationalisation Transfer private assets to public sector Often used to correct market failure Quotas Limit quantity of imports/exports Supply curve shifts left (import quota)
2.4.3 Mixed Economy – Definition & Evaluation
Definition: An economic system that combines market mechanisms with government intervention.Advantages: Balances efficiency with equity; can correct failures; provides public goods.Disadvantages: Potential for government failure; higher taxes; possible inefficiencies from over‑regulation.
3. Micro‑economic Decision‑makers
3.1 Households
Consumers of goods & services; suppliers of labour.
Decision‑making based on utility maximisation subject to a budget constraint.
3.2 Firms
Producers of goods & services; aim to maximise profit.
Key cost concepts:
Fixed Cost (FC)
Variable Cost (VC)
Total Cost (TC = FC + VC)
Average Cost (AC = TC/Q)
Marginal Cost (MC = ΔTC/ΔQ)
Revenue concepts:
Total Revenue (TR = P × Q)
Average Revenue (AR = TR/Q = P)
Marginal Revenue (MR = ΔTR/ΔQ)
3.3 Markets for Factors of Production
Labour market: Wages determined by supply of workers and demand for labour.Capital market: Interest rates set by supply of savings and demand for investment.Land market: Rent determined by scarcity and productivity of land.
3.4 Money & Banking (Micro‑level)
Functions of money: Medium of exchange, store of value, unit of account.Types of money: Commodity, fiat, commercial‑bank deposits.Deposit (money) multiplier: Banks create money by lending a portion of deposits; see Section 4.4.
3.5 Market Structures
Structure # Firms Product Differentiation Price‑setting Power Typical Diagram
Perfect Competition Many Homogeneous Price taker Horizontal demand at market price Monopolistic Competition Many Differentiated Some price‑setting Downward‑sloping demand, excess capacity Oligopoly Few Either Strategic interdependence Kinked‑demand (optional) Monopoly One Unique Price maker Demand curve = market demand
4. Government & the Macro‑economy
4.1 Macro‑economic Objectives
Economic growth (real GDP ↑)
Low & stable inflation
Low unemployment (frictional, structural, cyclical)
Equitable distribution of income
External balance (stable balance of payments)
4.2 Fiscal Policy
Expansionary fiscal policy: Increase government spending and/or cut taxes → AD ↑ → higher output & price level.Contractionary fiscal policy: Decrease spending and/or raise taxes → AD ↓ → lower output & price level.Key tools: government expenditure, direct taxes, indirect taxes (VAT), subsidies, public‑sector borrowing.
4.3 Supply‑side (Structural) Policy
Improves productive capacity: investment in education, training, infrastructure, R&D, deregulation, tax incentives, competition policy.
Long‑run effect: shifts LRAS (or potential output) right.
4.4 Monetary Policy – Changing the Money Supply
4.4.1 What is Monetary Policy?
Actions taken by a country’s central bank (e.g., Bank of England, Federal Reserve, Reserve Bank of India) to control the amount of money in the economy and the cost of borrowing. Primary aims: price stability, sustainable growth and low unemployment.
4.4.2 Main Instruments (Changes in Money Supply)
Instrument Typical Action Effect on Money Supply Effect on Interest Rates Impact on AD
Open Market Operations (OMO)
Buy or sell government securities
Buy → ↑ money supply; Sell → ↓ money supply
Buy → ↓ market rates; Sell → ↑ market rates
Buy → AD ↑; Sell → AD ↓
Reserve Ratio (RR)
Change the proportion of deposits banks must keep as reserves
Lower RR → ↑ money supply; Higher RR → ↓ money supply
Lower RR → ↓ lending rates; Higher RR → ↑ lending rates
Lower RR → AD ↑; Higher RR → AD ↓
Discount (Policy) Rate
Change the rate at which commercial banks can borrow from the central bank
Lower rate → ↑ money supply; Higher rate → ↓ money supply
Lower rate → ↓ market rates; Higher rate → ↑ market rates
Lower rate → AD ↑; Higher rate → AD ↓
Quantitative Easing (QE)
Large‑scale purchase of long‑term government or corporate bonds
Direct injection of base money → ↑ money supply
Pushes long‑term interest rates down
AD ↑ (especially investment & housing)
4.4.3 The Transmission Mechanism
Central bank changes the money supply using one of the instruments above.
The change alters the inter‑bank (policy) interest rate.
Commercial banks adjust their lending and deposit rates.
Borrowing costs for households and firms change.
Consumer spending, business investment and net exports respond.
Aggregate demand shifts, influencing real GDP and the price level.
4.4.4 Money (Deposit) Multiplier
Shows how a change in base money is magnified through the banking system:
m = 1 ÷ rr where rr = reserve ratio (expressed as a decimal).
Example: Base money injected = £10 million; reserve ratio = 5 % (0.05).
Money multiplier = 1 / 0.05 = 20.
Potential increase in total money supply = 20 × £10 million = £200 million.
4.4.5 Policy Stance & Economic Context
Expansionary monetary policy: Used in recession or when inflation is below target.Contractionary monetary policy: Used to cool an overheating economy or curb high inflation.
4.4.6 Limitations & Evaluation
Liquidity trap: When rates are already near zero, further cuts may not stimulate borrowing.Time lags: Recognition, implementation and impact lags can span months to years.Exchange‑rate effects: Lower rates may depreciate the currency, boosting exports but raising import prices.Financial‑stability risks: Prolonged easy money can fuel asset‑price bubbles (e.g., housing).Policy coordination: Monetary policy is less effective if fiscal policy is contractionary.
4.4.7 Diagrammatic Requirement
LM curve shift – expansionary monetary policy moves LM rightward, lowering interest rates and raising output.
4.5 Key Macroeconomic Diagrams to Master
AD‑AS (short‑run & long‑run)
IS‑LM (interaction of goods & money markets)
Phillips curve (inflation ↔ unemployment)
Budget‑deficit & government‑spending multiplier
LRAS shift (supply‑side policy)
External balance diagram (BP curve)
5. Economic Development
5.1 Measuring Development
Indicator What it Measures Strengths / Weaknesses
Real GDP per capita Average income Easy to calculate; ignores distribution & non‑market activity Human Development Index (HDI) Composite of income, education, health More holistic; still limited by data quality Multidimensional Poverty Index (MPI) Deprivations in health, education, living standards Highlights poverty beyond income; complex
5.2 Causes of Development Differences
Physical & human capital (schools, hospitals, infrastructure)
Technology & innovation
Institutional quality (property rights, rule of law, governance)
Geography & natural resources (climate, mineral endowments)
Trade openness & foreign direct investment (FDI)
Macroeconomic stability (low inflation, credible fiscal policy)
5.3 Policies to Promote Development
Education & health investment: Improves labour productivity.Infrastructure development: Roads, electricity, broadband reduce transaction costs.Stable macro‑economic environment: Low inflation, sustainable public finances.Trade liberalisation & FDI attraction: Access to larger markets and technology.Good governance & institutions: Reduces corruption, secures property rights.Targeted poverty‑reduction programmes: Conditional cash transfers, micro‑credit.
6. International Trade & Globalisation
6.1 Benefits & Costs of Trade
Benefits: Comparative advantage, larger markets, economies of scale, lower prices, technology transfer.Costs: Domestic industries may shrink, job losses in certain sectors, dependence on external shocks.
6.2 Trade Protection Instruments
Instrument Purpose Effect on Domestic Market
Tariff Raise price of imports Domestic price ↑; quantity imported ↓; domestic producers benefit Quota Limit quantity of imports Same price effect as tariff; creates rent for licence holders Import licence Control volume of imports Administrative control; can be used for strategic reasons Subsidy to exporters Make domestic goods cheaper abroad Boosts export volumes; may provoke retaliation Anti‑dumping duty Counteract sales below cost Raises price of dumped imports
6.3 Balance of Payments (BoP) Overview
Current account: Trade in goods & services, income, transfers.Capital & financial account: Direct investment, portfolio investment, loans.Official reserves: Central‑bank holdings of foreign currency, gold.Surplus → net inflow of foreign currency; Deficit → net outflow (may be financed by borrowing or reserve depletion).
6.4 Exchange‑Rate Regimes
Floating (flexible) rate: Determined by market forces.Fixed (pegged) rate: Government/central bank maintains a set rate, using reserves or OMO.Managed float (dirty float): Authorities intervene occasionally to smooth volatility.
6.5 Globalisation – Evaluation
Positive aspects: Faster technology diffusion, cultural exchange, poverty reduction in many developing countries.Negative aspects: Environmental degradation, cultural homogenisation, widening income inequality.
Key Revision Tips
Master the definitions – many exam questions ask for precise terminology.
Practice drawing all required diagrams from memory; label axes, curves and shifts.
Use the “cause‑effect‑evaluation” structure for essay questions (e.g., explain how a change in the reserve ratio affects AD, then evaluate its effectiveness).
Memorise the formulae:
Money multiplier = 1 ÷ reserve ratio
GDP = C + I + G + (X – M)
Real GDP per capita = Real GDP ÷ Population
Link case‑study examples (e.g., UK quantitative easing 2020, China’s export‑led growth, Brazil’s inflation targeting) to the relevant theory.