Cambridge IGCSE Economics (0455) – Quick‑Reference Notes
Road‑map of the Syllabus
This section shows the six content units and the key sub‑points you must know for each AO‑1 (knowledge) and AO‑2 (application) requirement. Use the links to jump to the relevant unit in these notes.
- Unit 1 – The Basic Economic Problem (Scarcity, Choice & Opportunity Cost)
- Unit 2 – Allocation of Resources (Demand & Supply, Price Elasticities, Market Failure)
- Unit 3 – Micro‑Decision‑Makers (Consumers, Producers, Market Structures)
- Unit 4 – Government & the Macro‑Economy (Fiscal & Monetary Policy, Unemployment, Inflation)
- Unit 5 – Development (Indicators, Poverty, Sustainable Development)
- Unit 6 – International Trade (Specialisation, Protection, Balance of Payments, FX)
Unit 1 – The Basic Economic Problem
1.1 What the “basic economic problem” means
- Scarcity: Limited resources (land, labour, capital, enterprise) versus unlimited human wants.
- Choice: Selecting one alternative over another because resources cannot be used for every possible end.
- Opportunity Cost: The value of the next‑best alternative that is foregone when a choice is made.
Key definition (Cambridge wording)
Opportunity cost – the value of the next best alternative that must be given up when a decision is made.
1.2 The three fundamental questions every economy must answer
- What to produce?
- How to produce?
- For whom to produce?
1.3 Factors of Production and their rewards
| Factor |
What it is |
Typical reward |
| Land |
Natural resources – land, minerals, water, forests |
Rent |
| Labour |
Human effort – physical & mental work |
Wages |
| Capital |
Man‑made goods used to produce other goods – machinery, factories, tools |
Interest |
| Enterprise (Entrepreneurship) |
Risk‑taking & innovation – organising the other factors |
Profit |
1.4 Why resources are scarce
- Physical limits: Finite natural stocks (e.g., oil, arable land).
- Human limits: Population size, skill levels, health and education.
- Technological limits: Current technology determines how efficiently inputs are turned into outputs.
1.5 Opportunity Cost – Worked Examples
- Consumer example: You have £30. Buying a concert ticket (£30) means you cannot buy the new video game that costs the same. Opportunity cost = value of the video game.
- Government example: A council spends £5 million on a new sports centre. The same £5 million cannot be spent on extra library books. Opportunity cost = the benefit of the books forgone.
Formula box (AO‑2)
| Opportunity Cost | = Value of the next best alternative |
1.6 The Production Possibility Curve (PPC)
1.6.1 How to draw a PPC (template)
- Choose two representative goods (e.g., cars on the vertical axis and computers on the horizontal axis).
- Mark the maximum output of each good if all resources were devoted to it (points C and D).
- Connect the points with a bowed‑out curve – this is the PPC.
1.6.2 Standard diagram conventions (exam‑ready)
- Axes labelled with the two goods and appropriate units (e.g., “Cars (thousands)”).
- Points labelled:
- A – on the curve (efficient).
- B – inside the curve (inefficient, unemployment).
- C – outside the curve (unattainable with current resources).
- Arrow showing the direction of a shift (outward = economic growth).
- Slope at any point labelled “Opportunity cost of a computer = cars given up”.
1.6.3 Interpretation
- On the curve: All resources used efficiently; any increase in one good requires a sacrifice of the other.
- Inside the curve: Resources under‑utilised (e.g., idle factories, unemployment).
- Outside the curve: Not achievable with existing resources/technology – demonstrates scarcity.
- Outward shift: More resources, better technology, improved skills → higher production capacity.
- Inward shift: Natural disaster, war, loss of skilled labour → lower capacity.
Worked PPC example
Suppose an economy can produce either 100 units of wheat or 80 units of cloth, or any combination in between. Plot wheat on the vertical axis, cloth on the horizontal axis, and draw the curve. Moving from point (30 cloth, 70 wheat) to (50 cloth, 55 wheat) means the opportunity cost of the extra 20 units of cloth is 15 units of wheat.
1.7 Quick Revision Box – Must‑Know for the Exam (Unit 1)
| Topic | Key point for AO‑1 | Typical AO‑2 task |
|---|
| Basic Economic Problem |
Scarcity forces choice; answer the three fundamental questions. |
Explain why a country must decide what to produce given limited resources. |
| Factors of Production |
Land‑rent, Labour‑wages, Capital‑interest, Enterprise‑profit. |
Identify the factor being rewarded by a given payment. |
| Opportunity Cost |
Value of the next best alternative. |
Calculate opportunity cost in a consumer or government scenario. |
| Production Possibility Curve |
Draw, label points (on/inside/outside), explain slope, describe causes of outward shift. |
Interpret a given PPC diagram and comment on economic growth. |
Unit 2 – Allocation of Resources
2.1 Demand & Supply (core diagram)
- Demand curve: Downward sloping, labelled “Price (P)” on vertical axis, “Quantity demanded (Qd)” on horizontal.
- Supply curve: Upward sloping, labelled “Quantity supplied (Qs)”.
- Equilibrium: Intersection labelled “E”; equilibrium price (Pe) and quantity (Qe).
Formula box – Price Elasticity of Demand (PED)
| PED | = %ΔQd ÷ %ΔP |
| Interpretation | |PED| > 1 = elastic, |PED| < 1 = inelastic, |PED| = 1 = unit‑elastic. |
Worked example (PED)
Price of smartphones falls from £500 to £400 (‑20%). Quantity demanded rises from 1 million to 1.3 million (+30%).
PED = 30% ÷ (‑20%) = –1.5 → |PED| = 1.5 → demand is elastic.
2.2 Determinants of PED & PES
| Determinant | Effect on elasticity |
|---|
| Availability of close substitutes | More substitutes → higher PED |
| Proportion of income spent | Higher proportion → higher PED |
| Time horizon | Longer period → higher PED |
| Nature of the good (luxury vs. necessity) | Luxury → higher PED |
2.3 Market Failure
- Public goods – non‑rival & non‑excludable (e.g., street lighting).
- Merit & demerit goods – under‑consumed or over‑consumed relative to society’s optimum.
- Externalities – positive (e.g., education) or negative (e.g., pollution).
- Monopoly – single seller, price‑setter, allocative inefficiency.
2.4 Quick Revision Box – Unit 2
| Topic | Key point | Typical exam task |
|---|
| Demand & Supply | Equilibrium price & quantity where D = S. | Draw a labelled diagram and show the effect of a tax. |
| PED & PES | Formula, determinants, revenue test. | Calculate PED and comment on total revenue. |
| Market Failure | Identify type and suggest a government remedy. | Explain why a government might subsidise renewable energy. |
Unit 3 – Micro‑Decision‑Makers
3.1 Consumers
- Utility maximisation – choose the basket with the highest total satisfaction within budget.
- Budget constraint – Income = Px·Qx + Py·Qy.
Formula box – Budget line
| Budget line: Y = (I/Py) – (Px/Py)·X |
3.2 Producers
- Profit maximisation – produce where Marginal Cost (MC) = Marginal Revenue (MR).
- Short‑run vs. long‑run costs (ATC, AVC, AFC, AFC).
Formula box – Profit
| Profit = Total Revenue – Total Cost |
3.3 Market structures (exam focus)
| Structure | Key features | Typical price outcome |
|---|
| Perfect competition | Many sellers, identical product, free entry/exit. | Price = MC = ATC (normal profit). |
| Monopoly | Single seller, price‑setter, barriers to entry. | Price > MC (economic profit). |
| Oligopoly | Few large firms, inter‑dependent decisions. | Price may be above or below MC; possible collusion. |
| Monopolistic competition | Many firms, differentiated products. | Price > MC but < MC = ATC in long‑run. |
3.4 Quick Revision Box – Unit 3
| Topic | Key point | Typical AO‑2 task |
|---|
| Consumer choice | Budget line and utility maximisation. | Draw a budget line and show a change when income rises. |
| Producer profit | MC = MR for profit maximisation. | Calculate profit given TR and TC. |
| Market structures | Identify characteristics and likely price outcome. | Explain why a monopoly can earn long‑run profits. |
Unit 4 – Government & the Macro‑Economy
4.1 Fiscal Policy
- Government spending (G) and taxation (T) affect aggregate demand (AD).
- Expansionary fiscal policy: ↑G or ↓T → AD ↑ → higher output/price level.
- Contractionary fiscal policy: ↓G or ↑T → AD ↓.
Formula box – Budget balance
| Budget balance = Tax revenue – Government spending |
4.2 Monetary Policy
- Control of the money supply (M) and interest rates (i) by the central bank.
- Expansionary: ↓i or ↑M → AD ↑.
- Contractionary: ↑i or ↓M → AD ↓.
4.3 Unemployment
- Types: frictional, structural, cyclical.
Formula box – Unemployment rate
| Unemployment rate = (Number of unemployed ÷ Labour force) × 100% |
4.4 Inflation
- Demand‑pull vs. cost‑push.
Formula box – Consumer Price Index (CPI) inflation rate
| Inflation % = [(CPI₂ – CPI₁) ÷ CPI₁] × 100 |
4.5 Quick Revision Box – Unit 4
| Topic | Key point | Typical AO‑2 task |
|---|
| Fiscal policy | Impact of changing G or T on AD. | Analyse the effect of a tax cut on output and price level. |
| Monetary policy | Interest‑rate changes shift AD. | Explain why raising rates can curb inflation. |
| Unemployment | Formula and types. | Calculate the unemployment rate from given data. |
| Inflation | CPI calculation and demand‑pull vs. cost‑push. | Compute inflation using CPI figures. |
Unit 5 – Development
5.1 Development indicators
- GDP per capita (real terms).
- Human Development Index (HDI) – combines life expectancy, education and income.
- Multidimensional Poverty Index (MPI).
Formula box – Real GDP per capita
| Real GDP per capita = (Real GDP ÷ Population) |
5.2 Causes of economic development
- Investment in physical capital.
- Human capital – education, health.
- Technology transfer & innovation.
- Good governance & stable institutions.
5.3 Sustainable development (new 2027 content)
- Balancing economic growth with environmental protection and social equity.
- Policies: renewable energy, carbon taxes, re‑forestation.
5.4 Quick Revision Box – Unit 5
| Topic | Key point | Typical AO‑2 task |
|---|
| GDP per capita | Measure of average income. | Calculate real GDP per capita from given data. |
| HDI | Composite index of health, education, income. | Explain why a country with high GDP per capita might have a lower HDI. |
| Sustainable development | Economic, social and environmental pillars. | Suggest one policy that promotes sustainable growth. |
Unit 6 – International Trade
6.1 Why countries trade
- Comparative advantage – lower opportunity cost.
- Specialisation leads to higher world output.
6.2 Trade protection
- Tariffs – tax on imports.
- Quotas – limits on quantity.
- Subsidies – government support to domestic producers.
6.3 Balance of Payments (BOP)
- Current account (trade in goods & services, income, transfers).
- Capital & financial account (investments, loans).
Formula box – Current‑account balance
| Current‑account balance = Exports – Imports + Net income + Net transfers |
6.4 Foreign exchange market
- Exchange rate – price of one currency in terms of another.
- Depreciation vs. appreciation.
Formula box – Exchange‑rate change (%)
| % Change = [(New rate – Old rate) ÷ Old rate] × 100 |
6.5 Quick Revision Box – Unit 6
| Topic | Key point | Typical AO‑2 task |
|---|
| Comparative advantage | Based on lower opportunity cost. | Identify which country should specialise in which good. |
| Tariffs | Raise price of imports, protect domestic industry. | Show the effect of a tariff on a supply‑and‑demand diagram. |
| Current‑account balance | Exports – imports + net income + transfers. | Calculate the balance from given trade data. |
| Exchange rate | Depreciation makes exports cheaper, imports more expensive. | Explain the likely impact of a 10 % depreciation on the trade balance. |
Summary – The Thread that Connects All Units
Scarcity is the starting point of every economic decision. Because resources are limited, societies must choose how to allocate them, incur opportunity costs, and use tools such as the PPC to visualise trade‑offs. The same logic underpins the operation of markets (Unit 2), the behaviour of consumers and firms (Unit 3), government interventions (Unit 4), pathways to development (Unit 5) and the patterns of international trade (Unit 6). Mastery of the definitions, formulas and diagram conventions presented here will give you a solid foundation for the entire Cambridge IGCSE Economics syllabus.