Cambridge IGCSE & A‑Level Economics – Complete Syllabus Notes (2026‑2028)

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Key Concepts (Reminder)

• Scarcity & Choice – limited resources, unlimited wants; every choice has an opportunity cost.
• Opportunity Cost – the value of the next‑best alternative fore‑gone.
• Factors of Production – land, labour, capital, entrepreneurship.
• Marginal Analysis – decisions are made at the margin (Δ). Compare marginal benefit (MB) with marginal cost (MC).
• Equilibrium – where quantity demanded = quantity supplied (or where MSB = MSC).
• Efficiency – allocative (MSB = MSC) and productive (lowest possible cost).
• Market Failure – when the market does not achieve allocative efficiency.
• Government Role – correct failures, promote equity, ensure macro‑economic stability, and support long‑term development.
• Time Horizon – short‑run vs. long‑run outcomes (e.g., SRAS vs. LRAS).

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AS‑Level Units (1 – 6)

1 – Basic Economic Ideas & Resource Allocation (1.1‑1.6)

1.1 Scarcity, Choice & Opportunity Cost

• Every decision involves a trade‑off; the opportunity cost is the value of the fore‑gone alternative.
• Illustration: producing an extra 1 000 computers may require giving up 2 000 shirts – the slope of the PPC shows this trade‑off.

1.2 Factors of Production & Ownership

Factor	Definition	Typical Ownership
Land	Natural resources (e.g., minerals, forests)	Private, state, common
Labour	Human effort – physical & mental	Individuals, firms
Capital	Man‑made tools, machinery, infrastructure	Firms, investors
Entrepreneurship	Risk‑taking, innovation, organisation of the other factors	Individuals, firms

1.3 Production Possibility Curve (PPC)

• Shows the maximum feasible output of two goods given existing resources and technology.
• Points on the curve – efficient (MSB = MSC).
• Inside the curve – inefficient (resources under‑utilised).
• Outside the curve – unattainable with current resources/technology.
• Shape:
  • Straight line – constant opportunity cost.
  • Bow‑shaped – increasing opportunity cost (more realistic).
• Shifts:
  • Outward shift – economic growth (more resources or better technology).
  • Inward shift – war, natural disaster, or decline in factor quality.

1.4 Classification of Goods

Good	Rivalry	Excludability
Private	Rival	Excludable
Public	Non‑rival	Non‑excludable
Club (or toll)	Non‑rival	Excludable
Common‑pool (or common‑good)	Rival	Non‑excludable

1.5 Economic Systems

• Market economy – decisions made by households and firms through the price mechanism.
• Command economy – central authority decides what, how and for whom to produce.
• Mixed economy – a blend of market and command features; most modern states.

1.6 Role of the State

• Provide public goods and merit goods.
• Correct externalities (taxes, subsidies, regulation).
• Promote equity (welfare programmes, progressive taxation).
• Maintain macro‑economic stability (fiscal & monetary policy).
• Regulate markets to prevent abuse of market power.

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2 – The Price System & Micro‑economics (2.1‑2.5)

2.1 Demand & Supply

• Law of demand: ceteris paribus, price ↑ → Q_d ↓.
• Law of supply: ceteris paribus, price ↑ → Q_s ↑.
• Market equilibrium where Q_d = Q_s; at this point the market clears.
• Shifts:
  • Demand shifts right (↑) when income rises (normal good), price of substitutes ↑, tastes favour the good, population ↑, expectations of higher future price.
  • Supply shifts right (↑) when input prices fall, technology improves, number of firms rises, expectations of lower future price.

2.2 Elasticities

General formula: Elasticity = (%ΔQ) / (%ΔP)

Elasticity	Formula	Interpretation	Key Determinants
Price Elasticity of Demand (PED)	ΔQd/Qd ÷ ΔP/P	|PED| > 1 = elastic; 0 < |PED| < 1 = inelastic; |PED| = 1 = unitary	Availability of substitutes, proportion of income spent, necessity vs. luxury, time horizon.
Price Elasticity of Supply (PES)	ΔQs/Qs ÷ ΔP/P	More elastic in the long run; depends on spare capacity & time to adjust.	Production flexibility, storage possibilities, time period.
Income Elasticity of Demand (YED)	ΔQd/Qd ÷ ΔY/Y	YED > 0 = normal good; YED < 0 = inferior good; YED > 1 = luxury.	Nature of the good, consumer income level.
Cross‑price Elasticity (XED)	ΔQx/Qx ÷ ΔPy/Py	XED > 0 = substitutes; XED < 0 = complements; magnitude shows strength of relationship.	Degree of similarity (substitutes) or joint usage (complements).

2.3 Consumer & Producer Surplus

• Consumer surplus (CS) – area above the market price and below the demand curve.
• Producer surplus (PS) – area below the market price and above the supply curve.
• Government intervention (taxes, subsidies, price controls) changes CS and PS and may create a dead‑weight loss (DWL) – the loss of total surplus not recovered by any party.

2.4 Market Structures (Intro)

• Four main structures: perfect competition, monopolistic competition, oligopoly, monopoly.
• Key distinguishing features – number of sellers, product differentiation, entry barriers, price‑setting power.
• Full treatment appears in Section 7 (A‑Level micro‑theory).

2.5 Market Failure (Intro)

• Externalities, public goods, information asymmetry, merit & demerit goods.
• Detailed analysis, government failure and corrective measures are covered in Sections 7 & 8.

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3 – Government Intervention in the Micro‑economy (3.1‑3.5)

3.1 Taxes

• Purpose: correct negative externalities, raise revenue, curb market power.
• Types:
  • Specific (excise) – fixed amount per unit.
  • Ad valorem – percentage of price.
  • Progressive vs. regressive – based on income distribution.
• Incidence: depends on relative elasticities of demand and supply.
  • If demand is inelastic, consumers bear most of the burden.
  • If supply is inelastic, producers bear most of the burden.
• Effect on equilibrium: price paid by consumers rises, price received by producers falls, quantity falls → DWL.

3.2 Subsidies

• Used to encourage merit goods, correct positive externalities, or support low‑income consumers.
• Supply‑side subsidy shifts supply right (or demand‑side subsidy shifts demand right).
• Result: price to consumers falls, price received by producers rises, quantity increases; government outlay = subsidy × quantity.
• Potential drawbacks: fiscal cost, risk of over‑consumption, possible crowding‑out of private provision.

3.3 Price Controls

• Price ceiling (e.g., rent control) – set maximum price below equilibrium → shortage, possible black‑market.
• Price floor (e.g., minimum wage) – set minimum price above equilibrium → surplus, possible unemployment or waste.
• Evaluation must weigh consumer/producer surplus, administrative costs, and unintended side‑effects.

3.4 Regulation & Buffer‑stock Schemes

• Regulation – quality standards, licensing, competition law, safety requirements.
• Buffer‑stock schemes – government buys excess output and sells when there is a shortage (e.g., wheat, oil) to stabilise prices.

3.5 Direct Provision (State‑run Supply)

• When appropriate: pure public goods, merit goods with strong equity concerns, natural monopolies, markets too small for private entry.
• Advantages: universal access, price can be set at marginal cost, quality and standards centrally controlled, profit motive does not limit provision.
• Disadvantages: bureaucratic inefficiency, political interference, weak cost‑minimisation incentives, possible crowding‑out of private sector.
• Implementation steps:
  1. Identify the market failure and justify state involvement.
  2. Determine the socially optimal output where MSB = MSC.
  3. Set the price at marginal cost (or subsidised to achieve affordability).
  4. Allocate resources through a public agency or state‑run firm.
  5. Monitor outcomes – coverage, quality, cost‑effectiveness, and equity.

Illustrative Example – Public Primary Education

• Free at point of use; financed by general taxation.
• Positive externalities: higher future productivity, lower crime, better civic participation.
• Standardised curriculum ensures minimum quality; outcomes measured by enrolment rates, attendance, and national test scores.
• Potential issues: overcrowded classrooms, variable teacher quality, fiscal burden on the state.

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4 – International Trade (6.1‑6.5)

4.1 Reasons for Trade

• Absolute and comparative advantage – specialization increases world output.
• Economies of scale – lower average costs when firms produce for larger markets.
• Variety and consumer choice.

4.2 Protectionist Policies

Policy	Mechanism	Intended Effect	Typical Drawbacks
Tariff (ad valorem or specific)	Raises price of imports	Protect domestic producers, raise government revenue	Higher consumer prices, retaliation, DWL
Import quota	Limits quantity of a good that can be imported	Protect domestic industry	Quota rents (often captured by importers), possible smuggling
Export subsidy	Government pays producers to sell abroad	Boost export earnings, support domestic jobs	Fiscal cost, WTO disputes, encourages over‑production
Voluntary export restraint (VER)	Exporting country agrees to limit exports	Political compromise, avoid tariffs	Creates scarcity, raises world price, benefits foreign exporters

4.3 Balance of Payments (BoP)

• Records all economic transactions between residents and the rest of the world over a period.
• Two main accounts:
  • Current account – trade in goods & services, primary income (interest, dividends), secondary income (transfers).
  • Capital & financial account – foreign direct investment (FDI), portfolio investment, loans, reserves.
• BoP must balance: Current account + Capital/Financial account + Official reserves = 0 (ignoring statistical discrepancy).

4.4 Exchange‑Rate Determination

• Floating (flexible) rates – determined by supply and demand in the foreign‑exchange market.
• Fixed (pegged) rates – government or central bank commits to buying/selling at a set price; requires adequate foreign‑exchange reserves.
• Factors influencing demand for a currency: relative interest rates, inflation differentials, expectations of future exchange‑rate movements, political stability.

4.5 Policies to Correct Current‑Account Imbalances

• Demand‑side: fiscal contraction (reduce G or raise taxes) or monetary tightening (raise interest rates) to lower import demand.
• Supply‑side: improve productivity, promote export‑oriented industries, devalue a fixed exchange rate.
• Structural: trade agreements, export promotion agencies, investment in education & infrastructure.

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A‑Level Units (7 – 11)

7 – Micro‑theory (Utility, Demand, Market Failure) (7.1‑7.5)

7.1 Utility & Indifference Curves

• Total utility – overall satisfaction from consuming a bundle of goods.
• Marginal utility (MU) – extra utility from one additional unit; MU typically falls as consumption rises (diminishing marginal utility).
• Indifference curve (IC) – set of bundles giving the same level of satisfaction.
  • Downward sloping, convex to the origin (reflects diminishing MU).
  • Higher IC = higher utility.
• Budget line: P_x·X + P_y·Y = I. The point of tangency between the highest attainable IC and the budget line gives the consumer’s optimal choice (where MU_x/P_x = MU_y/P_y = marginal utility per pound).

7.2 Deriving Demand from Utility Maximisation

• Consumer’s optimisation leads to the derived (or individual) demand curve – relationship between price of a good and the quantity demanded, holding income and other prices constant.
• Income and substitution effects explain how a price change moves the consumer along the demand curve.

7.3 Market Failure – Externalities

• Negative externality – MSB < MSC; market equilibrium produces too much (e.g., pollution). Corrective measures: Pigouvian tax, regulation, tradable permits.
• Positive externality – MSB > MSC; market equilibrium produces too little (e.g., education). Corrective measures: subsidy, public provision.
• Diagrammatic representation: social marginal cost (SMC) and social marginal benefit (SMB) curves alongside private curves.

7.4 Public Goods & Common‑Pool Resources

• Public goods – non‑rival and non‑excludable (e.g., national defence). Market fails → government provision or voluntary financing.
• Common‑pool resources – rival but non‑excludable (e.g., fisheries). Prone to over‑use (tragedy of the commons); solutions include regulation, tradable licences, community management.

7.5 Merit & Demerit Goods

• Merit goods – under‑consumed if left to the market (e.g., vaccinations). Government may subsidise or directly provide.
• Demerit goods – over‑consumed (e.g., tobacco). Government may tax or restrict.

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8 – Government Intervention in Micro‑economy (8.1‑8.5)

8.1 Price‑based Instruments (Tax, Subsidy, Price Controls)

• Recall AS‑level formulas for incidence and dead‑weight loss; at A‑level evaluate distributional effects, efficiency, and administrative practicality.

8 – 2 Regulation & Competition Policy

• Anti‑trust legislation, price‑cap regulation, quality standards, licensing.
• Potential for government failure – regulatory capture, information problems, bureaucratic delay.

8.3 Direct Provision (expanded)

• Compare with market provision using a cost‑benefit table (coverage, equity, efficiency, fiscal cost, risk of politicisation).
• Case studies: NHS (UK), public transport in Singapore, universal primary education in Finland.

8.4 Income Redistribution

• Progressive taxation, means‑tested benefits, universal basic services.
• Evaluation criteria: equity (horizontal & vertical), work‑disincentive effects, administrative cost, impact on consumption.

8.5 Evaluation Framework (AO2)

• Identify the objective of the policy.
• Analyse the mechanism (how it works).
• Consider short‑run vs. long‑run effects.
• Assess efficiency (total surplus), equity, and practicality.
• Weigh likely unintended consequences.

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9 – Macroeconomic Theory (9.1‑9.6)

9.1 Circular Flow & National Income Accounting

• Two‑sector model (households ↔ firms) → expands to include government and foreign sector.
• GDP measured by:
  • Expenditure approach: GDP = C + I + G + (X‑M)
  • Income approach: wages + rent + interest + profits + indirect taxes – subsidies.
  • Production (value‑added) approach.
• Real vs. nominal GDP – use GDP deflator: Real GDP = Nominal GDP ÷ (GDP deflator/100).

9.2 Aggregate Demand (AD) & Aggregate Supply (AS)

• AD curve – downward sloping; shifts:
  • Right (↑) when C, I, G or (X‑M) rise.
  • Left (↓) when any component falls.
• SRAS – upward sloping (price‑wage rigidity, sticky prices).
• LRAS – vertical at potential output (full‑employment output); shifts when factor endowments, technology or institutional factors change.

9.3 Economic Growth

• Long‑run increase in potential output (rightward LRAS shift).
• Sources: capital accumulation, labour‑force growth, human capital, technological progress, institutional improvements.
• Measuring growth: Real GDP growth rate = [(GDP₂ – GDP₁)/GDP₁] × 100 %.
• Sustainable growth – must consider environmental limits and resource depletion.

9.4 Unemployment

Type	Definition	Typical Causes
Frictional	Short‑term job search	Information gaps, voluntary moves
Structural	Mismatch of skills/locations	Technological change, relocation, education gaps
Classical (voluntary)	Real wage above equilibrium	High minimum wages, strong unions
Cyclical	Insufficient aggregate demand	Recession, weak investment

9.5 Inflation

• General rise in the price level; measured by CPI (consumer‑price index) or GDP deflator.
• Types:
  • Demand‑pull – AD shifts right > LRAS.
  • Cost‑push – SRAS shifts left (e.g., wage‑price spiral, oil shock).
  • Built‑in (inflationary expectations) – wage‑price feedback loop.
• Consequences: reduced purchasing power, menu costs, shoe‑leather costs, redistribution effects.

9.6 Phillips Curve

• Short‑run: inverse relationship between unemployment (U) and inflation (π) – π = π_e – β(U – U_n).
• Long‑run: vertical at the natural rate of unemployment (U_n); no trade‑off once expectations adjust.
• Policy implication: in the long run, attempts to keep unemployment below U_n cause accelerating inflation.

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10 – Macroeconomic Policy (10.1‑10.4)

10.1 Fiscal Policy

• Expansionary – increase G or cut taxes → AD ↑ → higher output & price level (short‑run).
• Contractionary – decrease G or raise taxes → AD ↓.
• Multipliers:
  • Government‑spending multiplier: k = 1 / (1 – MPC).
  • Tax‑cut multiplier: k = MPC / (1 – MPC) (or 1 / (1 – MPC × (1 – t)) when accounting for marginal tax rate t).
• Limitations: time lags (recognition, decision, implementation, impact), crowding‑out (higher interest rates reduce private investment), debt sustainability.

10.2 Monetary Policy

• Conducted by the central bank (e.g., Bank of England, Federal Reserve).
• Tools:
  • Open‑market operations – buying/selling government securities.
  • Policy interest rate (base rate, repo rate).
  • Reserve requirements (mandatory cash holdings).
  • Quantitative easing – large‑scale asset purchases.
• Effect on AD:
  • Expansionary – lower interest rates → ↑ investment, ↑ consumption, ↑ net exports (via depreciation) → AD rightward.
  • Contractionary – higher rates → opposite.
• Limitations: liquidity trap (interest rates near zero), time lags, credibility & expectations, exchange‑rate side‑effects.

10.3 Supply‑Side Policies

• Goal: shift LRAS right (increase potential output) without causing inflationary pressure.
• Categories:
  • Labour‑market reforms – training, apprenticeships, flexible wages, reducing trade‑union power.
  • Productivity‑enhancing measures – R&D subsidies, tax incentives for investment, deregulation.
  • Infrastructure development – transport, ICT, energy.
  • Institutional reforms – property rights, legal system, anti‑corruption.
• Evaluation – short‑run costs, time required for impact, distributional effects.

10.4 Policy Mix & Effectiveness

• Co‑ordination of fiscal, monetary and supply‑side policies is crucial to avoid policy conflict (e.g., expansionary fiscal policy with contractionary monetary policy).
• Effectiveness depends on:
  • Economic context (recession vs. inflationary gap).
  • Institutional capacity and credibility.
  • External environment (exchange‑rate regime, openness).
• Potential for government failure – policy lag, political business cycles, mis‑allocation of resources.

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11 – International Economics (11.1‑11.6)

11.1 Balance of Payments – Detailed Structure

• Current account – trade balance (goods + services), primary income, secondary income.
• Capital account – transfers of non‑produced, non‑financial assets (e.g., debt forgiveness).
• Financial account – direct investment, portfolio investment, other investment, reserve assets.
• Surplus vs. deficit – implications for exchange‑rate pressure, foreign‑exchange reserves, and sustainability.

11.2 Exchange‑Rate Regimes

Regime	Key Features	Advantages	Disadvantages
Floating (flexible)	Market determines rate; central bank may intervene occasionally.	Automatic adjustment of BoP imbalances; monetary policy independence.	Volatility, possible speculative attacks.
Fixed (pegged)	Official rate set; central bank maintains by buying/selling reserves.	Exchange‑rate stability; encourages trade & investment.	Requires large reserves; loss of monetary‑policy autonomy; risk of devaluation crises.
Managed float (dirty float)	Predominantly market‑driven but with occasional intervention.	Blend of stability and flexibility.	Policy credibility can be questioned.
Currency board	Domestic currency fully backed by foreign reserve currency.	High credibility, low inflation.	Very limited monetary policy; vulnerable to external shocks.

11.3 Determinants of Exchange Rates (Short‑run)

• Relative interest rates (interest‑rate parity).
• Relative inflation rates (purchasing‑power parity).
• Expectations of future rates (speculative flows).
• Political stability & economic performance.

11.4 Trade Policy & Development

• Arguments for liberalisation: comparative advantage, technology transfer, economies of scale.
• Arguments for protection in early development: infant‑industry protection, strategic sectors, terms‑of‑trade considerations.
• Role of multilateral institutions (WTO, IMF, World Bank) in promoting trade‑friendly policies.

11.5 Foreign Direct Investment (FDI)

• Definition: investment by a firm from one country into business interests in another, with lasting interest & control.
• Benefits: capital inflow, technology transfer, job creation, integration into global value chains.
• Potential downsides: profit repatriation, crowding‑out of domestic firms, environmental concerns.
• Policy tools: incentives (tax holidays, subsidies), restrictions (ownership caps), screening mechanisms.

11.6 Development Indicators & Sustainable Development

• Economic indicators: real GDP per capita, GNI, Human Development Index (HDI), Poverty headcount ratio.
• Social indicators: life expectancy, literacy rates, gender parity.
• Environmental indicators: CO₂ emissions per capita, ecological footprint.
• Policy focus: inclusive growth, poverty reduction, climate‑change mitigation, good governance.

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Quick Reference Tables

Policy Comparison (Micro‑intervention)

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Instrument	Mechanism	When Preferred	Main Drawbacks
Tax	Increases price, reduces quantity	Negative externalities, revenue needs	Regressive impact, possible evasion
Subsidy	Decreases price, increases quantity	Positive externalities, merit goods	Fiscal cost, risk of over‑consumption