The Cambridge IGCSE Economics Syllabus – Core Concepts
Learning Objectives
- Explain the basic economic problem and the four factors of production.
- Define opportunity cost and calculate it.
- Interpret the Production Possibility Curve (PPC) – location of points, shape, shifts and the significance of different production points.
- Describe how markets allocate resources (demand, supply, price‑mechanism, price changes, elasticity).
- Identify the different market‑economic systems, their advantages and disadvantages.
- Define and give examples of the main market‑failure terms (merit‑/demerit‑goods, private/social costs‑benefits, monopoly, externalities, public goods, information asymmetry).
- Analyse the role of government – interventions, fiscal & monetary policy, growth and recession.
- Understand micro‑decision‑makers (households, workers, firms, money & banking) and macro‑decision‑makers (government, central bank).
- Recognise the main issues in economic development and international trade.
1. The Basic Economic Problem
- Definition (syllabus wording): The basic economic problem is the tension between finite resources (land, labour, capital, enterprise) and unlimited human wants.
- Free vs. non‑free goods: A free good (e.g., air) is abundant and has no price; a non‑free good (e.g., wheat) is scarce and must be allocated by price.
1.1 The Three Fundamental Questions
- What to produce?
- How to produce?
- For whom to produce?
1.2 Factors of Production
| Factor |
What it provides |
Reward to the owner |
| Land (natural resources) |
Raw materials, space, location |
Rent |
| Labour |
Physical & mental effort |
Wages |
| Capital (physical) |
Machinery, buildings, tools |
Interest |
| Enterprise (entrepreneurship) |
Risk‑taking, organisation, innovation |
Profit |
1.3 Opportunity Cost
When a choice is made, the next best alternative that is foregone is the opportunity cost.
Formula:
\[
\text{Opportunity Cost of } X = \frac{\Delta Y}{\Delta X}
\]
where \(\Delta Y\) = loss of Good Y and \(\Delta X\) = gain in Good X.
Example: Moving from (100 wheat, 200 cloth) to (150 wheat, 150 cloth) means an opportunity cost of 50 units of cloth for the extra 50 units of wheat.
2. Production Possibility Curve (PPC)
2.1 What the PPC Shows
- Maximum feasible output combinations of two goods when all resources are fully and efficiently employed.
- Illustrates scarcity, choice, opportunity cost and economic growth.
- Usually bowed‑outward → reflects increasing opportunity costs.
2.2 Typical PPC Diagram (description)
Imagine a graph with Good A on the vertical axis and Good B on the horizontal axis. The curve is bowed‑outward. Marked points:
- A – on the curve (productive efficiency).
- B – inside the curve (productive inefficiency).
- C – outside the curve (unattainable with current resources).
- D – outward shift of the whole curve (economic growth).
- E – inward shift of the whole curve (contraction/recession).
2.3 Significance of Each Production Point
| Location |
Interpretation |
Economic Implication |
| Point A – on the curve |
Productive efficiency – all resources fully utilised. |
Any increase in one good requires a sacrifice of the other (opportunity cost). |
| Point B – inside the curve |
Productive inefficiency – resources under‑utilised or technology not fully used. |
Output of one or both goods can be increased without reducing the other. |
| Point C – outside the curve |
Unattainable with current resources/technology. |
Only reachable after economic growth (e.g., investment, better technology) or by importing. |
| Point D – outward shift |
Economic growth – higher productive capacity. |
Caused by capital accumulation, technological improvement, larger labour force, or better organisation. |
| Point E – inward shift |
Economic contraction/recession – lower productive capacity. |
Result of natural disasters, war, loss of skilled labour, or deterioration of capital stock. |
2.4 Why the Bowed‑Out Shape Matters
- Resources are not equally suited to producing both goods; as production of one good expands, increasingly unsuitable resources must be used, raising the opportunity cost.
- A straight line would imply constant opportunity costs, which is unrealistic for most economies.
3. Allocation of Resources – The Market Mechanism
3.1 Demand and Supply
- Demand: Quantity of a good that consumers are willing & able to buy at each price.
- Law of demand – inverse relationship between price and quantity demanded.
- Movement along the demand curve = change in price.
- Shift of the demand curve = change in non‑price determinants (income, tastes, price of related goods, expectations, number of buyers).
- Supply: Quantity of a good that producers are willing & able to sell at each price.
- Law of supply – direct relationship between price and quantity supplied.
- Movement along the supply curve = change in price.
- Shift of the supply curve = change in non‑price determinants (input prices, technology, taxes/subsidies, expectations, number of sellers).
- Equilibrium: Intersection of demand and supply – the market‑clearing price and quantity.
3.2 Price Changes – How Shifts Affect Price and Quantity
Diagram description: Two separate diagrams are useful.
- Demand shift right (increase): New equilibrium – higher price and higher quantity.
- Supply shift left (decrease): New equilibrium – higher price and lower quantity.
- Combined shifts (e.g., demand ↑ & supply ↑) – price may rise, fall or stay the same depending on the relative magnitude; quantity definitely rises.
3.3 Price Elasticity
| Elasticity |
Formula |
Interpretation |
| Price Elasticity of Demand (PED) |
\(\displaystyle \text{PED} = \frac{\%\Delta Q_d}{\%\Delta P}\) |
‑> |PED| > 1 : elastic; 0 < |PED| < 1 : inelastic; |PED| = 1 : unit‑elastic. |
| Price Elasticity of Supply (PES) |
\(\displaystyle \text{PES} = \frac{\%\Delta Q_s}{\%\Delta P}\) |
Higher PES when producers can quickly adjust output (e.g., services); lower PES for goods with fixed capacity. |
Determinants of PED: availability of substitutes, proportion of income spent, necessity vs. luxury, time horizon.
3.4 Market‑Economic Systems
| System |
Key Features |
Advantages |
Disadvantages |
| Pure Market Economy |
Resources allocated by price mechanism; private ownership. |
Efficient allocation, encourages innovation, consumer choice. |
May lead to inequality, under‑supply of merit goods, externalities. |
| Mixed Economy (Cambridge definition) |
Market allocates most resources; government intervenes to correct failures, provide public goods and achieve equity. |
Combines efficiency of markets with social welfare goals. |
Risk of government failure, bureaucracy, possible distortion of price signals. |
3.5 Market Failure – Key Terminology (syllabus list)
| Term |
Definition |
Example |
| Merit good |
Good that provides more social benefit than private benefit; under‑consumed in a free market. |
Education, vaccinations. |
| Demerit good |
Good that imposes more social cost than private cost; over‑consumed in a free market. |
Cigarettes, alcohol. |
| Private cost / benefit |
Costs or benefits incurred by the buyer or seller directly. |
Cost of a car to the purchaser. |
| Social cost / benefit |
Costs or benefits that affect third parties. |
Air‑pollution from a factory (social cost). |
| Externality |
When private and social costs/benefits differ. |
Noise from a nightclub (negative externality). |
| Public good |
Non‑rival and non‑excludable. |
National defence. |
| Information asymmetry |
One party has more/better information than the other. |
Used‑car market. |
| Monopoly |
Single seller with price‑setting power. |
State water supply. |
3.6 Government Intervention Tools (with diagram hints)
| Tool |
Purpose |
Typical Example |
| Tax |
Reduce consumption of a negative externality or raise revenue. |
Excise duty on cigarettes. |
| Subsidy |
Encourage production/consumption of a merit good. |
Grant for solar panels. |
| Price ceiling |
Make a good affordable (prevent price from rising above a set level). |
Rent control. |
| Price floor |
Support producers (prevent price from falling below a set level). |
Minimum wage. |
| Regulation |
Set standards for safety, quality or the environment. |
Emissions standards for cars. |
Diagram tip: Show a tax as an upward shift of the supply curve; the vertical distance between the original and new supply curves equals the tax per unit.
4. Decision‑Makers in the Economy
4.1 Money – Functions & Characteristics
- Functions: medium of exchange, unit of account, store of value, standard of deferred payment.
- Characteristics of good money: widely accepted, durable, portable, divisible, stable in value.
4.2 Banking & the Financial System
- Commercial banks: accept deposits, provide loans, create money through the multiplier effect.
- Central bank (e.g., Bank of England, Federal Reserve): issues currency, sets policy interest rates, conducts open‑market operations.
- Money market vs. capital market: short‑term (liquidity) vs. long‑term (investment) financing.
4.3 Households
- Goal: maximise utility subject to income and prices.
- Decisions: consumption of goods & services, supply of labour, saving vs. borrowing.
4.4 Labour Market
- Wage determination: intersection of labour‑demand (derived from marginal product of labour) and labour‑supply curves.
- Influences: trade‑unions, minimum‑wage legislation, labour mobility, skill levels, discrimination.
- Division of labour: specialisation increases productivity but may require coordination.
4.5 Firms
- Goal: maximise profit = total revenue – total cost.
- Key decisions: output level, choice of technology, pricing (depends on market structure).
Types of Firms (syllabus)
| Type |
Key Characteristics |
Typical Example |
| Small‑scale (owner‑operated) |
One owner, limited capital, flexible production. |
Local bakery. |
| Large‑scale (corporate) |
Many shareholders, large capital stock, bureaucratic structure. |
Automobile manufacturer. |
| State‑owned |
Government owns majority of shares; profit may be secondary to social objectives. |
National rail service. |
| Multinational |
Operates in several countries; can benefit from economies of scale and technology transfer. |
Apple Inc. |
Economies & Diseconomies of Scale
- Economies of scale: lower average cost as output rises (e.g., bulk buying, specialised staff, spreading fixed costs).
- Diseconomies of scale: higher average cost when a firm becomes too large (e.g., management inefficiency, worker demotivation).
Cost & Revenue Concepts (required for calculations)
- Fixed cost (FC) – does not vary with output.
- Variable cost (VC) – changes with output.
- Total cost (TC) = FC + VC.
- Average cost (AC) = TC ÷ Q.
- Marginal cost (MC) = change in TC ÷ change in Q.
- Total revenue (TR) = Price × Quantity.
- Marginal revenue (MR) = change in TR ÷ change in Q.
Market Structures (pros & cons)
| Structure |
Key Features |
Advantages |
Disadvantages |
| Perfect competition |
Many sellers, homogeneous product, free entry/exit, price‑takers. |
Allocative & productive efficiency; consumer choice. |
Little incentive for R&D; firms earn normal profit only. |
| Monopoly |
Single seller, unique product, high barriers to entry, price‑setter. |
Potential for large economies of scale; stable profits. |
Allocative inefficiency, higher prices, possible X‑inefficiency. |
| Monopolistic competition |
Many sellers, differentiated products, some entry barriers. |
Variety for consumers; some profit potential. |
Not fully efficient; excess capacity. |
| Oligopoly |
Few large firms, inter‑dependent pricing, possible collusion. |
Economies of scale, stable employment. |
Risk of collusive behaviour, price rigidity. |
5. Macro‑Decision‑Makers & Economic Performance
5.1 Government – Fiscal Policy
- Expansionary: increase spending or cut taxes → boost aggregate demand.
- Contractionary: decrease spending or raise taxes → curb inflation.
5.2 Central Bank – Monetary Policy
- Expansionary: lower interest rates, buy government securities → increase money supply, stimulate investment.
- Contractionary: raise interest rates, sell securities → reduce money supply, dampen demand.
5.3 Economic Growth vs. Recession (PPC perspective)
- Growth: outward shift of the PPC (more resources, better technology).
- Recession: inward shift of the PPC (resource loss, reduced capital stock).
6. Economic Development
- Development indicators: GDP per capita, Human Development Index (HDI), life expectancy, literacy rate, infant mortality.
- Obstacles: low investment, poor education & health, political instability, inadequate infrastructure, external debt.
- Ways to promote development: foreign direct investment (FDI), aid, technology transfer, improving education & health, sound macro‑economic policies, trade openness.
7. International Trade
7.1 Comparative Advantage
- A country should specialise in the good for which it has the lowest opportunity cost.
- Both trading partners can reach a consumption point outside their individual PPCs – the “gains from trade”.
7.2 Gains from Trade
- Higher total output (more efficient use of resources).
- Access to a greater variety of goods and services.
- Economies of scale and technology spill‑overs.
7.3 Trade Protection Instruments
| Instrument |
Purpose |
Typical Effect on Domestic Market |
| Tariff |
Raise the price of imports. |
Reduces import quantity, protects domestic producers, raises government revenue. |
| Quota |
Limit the quantity of a good that can be imported. |
Creates scarcity, raises domestic price, benefits domestic producers. |
| Import licence |
Administrative control over who can import. |
Can be used to protect strategic industries. |
| Subsidy to exporters |
Encourage domestic firms to sell abroad. |
Increases export volume, may lead to trade disputes. |
| Non‑tariff barriers (e.g., standards, licences) |
Make it harder for foreign firms to meet domestic requirements. |
Protects domestic industry without raising price directly. |
7.4 Balance of Payments (brief note)
- Current account – trade in goods & services, income, transfers.
- Capital & financial account – flows of investment, loans, reserves.
- Surplus ↔ deficit influences exchange‑rate policy and foreign‑exchange reserves.
8. Significance of the Location of Different Production Points (PPC Insight)
- Point A (on the curve): The economy is using its resources efficiently; any move to produce more of one good must sacrifice some of the other – this reflects the core of the basic economic problem.
- Point B (inside the curve): Indicates unemployment, under‑used resources or outdated technology; moving towards the curve improves welfare without extra cost.
- Point C (outside the curve): Unattainable with current resources; reaching it signals economic growth (e.g., new factories, better skills, foreign investment).
- Point D (outward shift): Represents long‑run growth – more land, labour, capital, or improved technology expands the set of feasible production points.
- Point E (inward shift): Reflects recession or disaster – the economy loses the ability to produce previously attainable combinations.
Understanding where an economy is on its PPC helps policymakers decide whether to focus on improving efficiency (moving from B to A) or on expanding capacity (shifting from the original curve to D).