Cambridge IGCSE / A‑Level Economics – Complete Syllabus Notes
1. Basic Economic Ideas & Resource Allocation
1.1 Scarcity & Choice
- Resources (land, labour, capital, entrepreneurship) are limited.
- Societies must decide:
- What to produce?
- How to produce?
- For whom to produce?
1.2 Opportunity Cost
- The next best alternative fore‑gone when a choice is made.
- Example: If a factory uses its workers to make cars instead of bicycles, the opportunity cost of each car is the bicycles not produced.
1.3 Economic Systems (Syllabus 1.4)
- Market economy – decisions made by households and firms through the price system.
- Planned (command) economy – central authority decides what and how much to produce.
- Mixed economy – combination of market forces and government intervention; most modern economies.
- Strengths & weaknesses are compared in exam questions (efficiency, equity, flexibility).
1.4 Production Possibility Curve (PPC)
- Shows the maximum combinations of two goods that can be produced when resources are fully and efficiently used.
- Key points:
- On the curve – efficient production.
- Inside the curve – under‑utilisation (unemployment, idle resources).
- Outside the curve – unattainable with current resources/technology.
- Shifts:
- Outward shift = economic growth (more resources or better technology).
- Inward shift = decline (natural disaster, war, loss of resources).
1.5 Economic Methodology (Syllabus 1.5)
- Positive statements – describe what is; can be tested (e.g., “An increase in income raises the demand for cars”).
- Normative statements – prescribe what ought to be; value‑judgements (e.g., “The government should reduce unemployment”).
- Ceteris paribus – “all other things being equal”. Used to isolate cause‑effect (e.g., “If the price of tea rises, ceteris paribus, the quantity demanded falls”).
1.6 Factors of Production & Rewards
| Factor | Reward |
|---|
| Land | Rent |
| Labour | Wages |
| Capital | Interest |
| Entrepreneurship | Profit |
2. The Price System & Microeconomics
2.1 Demand
- Law of Demand: Quantity demanded falls when price rises, ceteris paribus.
- Determinants (shifters) of demand:
- Income
- Prices of related goods (substitutes & complements)
- Tastes & preferences
- Expectations of future price or income
- Population size
- Shift vs. movement:
| Change | Result on the demand curve |
|---|
| Change in price of the good itself | Movement along the curve |
| Change in any other determinant | Shift of the whole curve (right = increase, left = decrease) |
2.2 Supply
- Law of Supply: Quantity supplied rises when price rises, ceteris paribus.
- Determinants (shifters) of supply:
- Input prices (e.g., wages, raw‑material costs)
- Technology
- Number of firms
- Expectations of future price
- Taxes, subsidies & regulations
- Shift vs. movement – same table format as demand.
- Price Elasticity of Supply (PES):
- Formula: \(\displaystyle PES=\frac{\%\Delta Q_s}{\%\Delta P}\)
- Interpretation: |PES| > 1 = elastic; |PES| < 1 = inelastic; |PES| = 1 = unit‑elastic.
- Determinants of PES: time period, availability of spare capacity, mobility of factors, stock‑piling possibilities.
2.3 Market Equilibrium
- Equilibrium occurs where the demand curve (D) meets the supply curve (S). The intersection gives the equilibrium price (P*) and quantity (Q*).
- Diagram tip: label axes (price, quantity), D, S, P*, Q*, and any shift arrows.
2.4 Elasticities
| Elasticity | Formula | Interpretation |
|---|
| Price Elasticity of Demand (PED) | \(\displaystyle \frac{\%\Delta Q_d}{\%\Delta P}\) | Elastic if |PED| > 1, inelastic if |PED| < 1, unit‑elastic if |PED| = 1. |
| Price Elasticity of Supply (PES) | \(\displaystyle \frac{\%\Delta Q_s}{\%\Delta P}\) | Same interpretation as PED; depends on time, spare capacity, etc. |
| Income Elasticity of Demand (YED) | \(\displaystyle \frac{\%\Delta Q_d}{\%\Delta Y}\) | Positive = normal good; negative = inferior good. |
| Cross‑price Elasticity (XED) | \(\displaystyle \frac{\%\Delta Q_{d1}}{\%\Delta P_{2}}\) | Positive = substitutes; negative = complements. |
Example: A 10 % rise in price reduces quantity demanded by 25 % → PED = ‑2.5 (elastic).
2.5 Derived (Joint) Demand & Complement/Substitute Relationships
- Derived demand: Demand for a factor of production is derived from the demand for the final product (e.g., demand for steel depends on demand for cars).
- Substitutes: An increase in the price of good A raises demand for good B (positive XED).
- Complements: An increase in the price of good A reduces demand for good B (negative XED).
2.6 Consumer & Producer Surplus
- Consumer Surplus (CS): Area between the demand curve and the price actually paid, up to the quantity purchased.
- Producer Surplus (PS): Area between the price received and the supply curve (the minimum price firms are willing to accept), up to the quantity sold.
- Both measure welfare; policy changes (taxes, subsidies, price controls) can be evaluated by the change in CS + PS.
3. Government Intervention in Microeconomics
3.1 Market Failure (Syllabus 3.1)
- Public goods: Non‑rival and non‑excludable (e.g., street lighting). Free‑rider problem → government provision.
- Externalities:
- Negative externality (pollution) – marginal social cost > marginal private cost. Diagram: MC_social above MC_private.
- Positive externality (education) – marginal social benefit > marginal private benefit.
- Merit & Demerit Goods:
- Merit goods (health, education) are under‑consumed; government may subsidise.
- Demerit goods (tobacco, alcohol) are over‑consumed; government may tax or restrict.
3.2 Government Failure (Syllabus 3.2)
- Information problems – government may lack accurate data.
- Implementation costs and administrative inefficiency.
- Unintended consequences (e.g., rent‑seeking, moral hazard).
3.3 Policy Instruments
| Instrument | Objective | Effect on Curves | Typical Welfare Impact |
|---|
| Excise/Ad‑valorem Tax | Reduce consumption of demerit goods / raise revenue | Supply curve shifts left (higher marginal cost) | CS falls, PS falls; dead‑weight loss. |
| Subsidy | Encourage merit goods / support producers | Supply curve shifts right | CS rises, PS rises; cost to government. |
| Price Ceiling | Make essential goods affordable | Legal maximum price below P* → shortage (QD > QS) | CS may rise for some consumers, PS falls; dead‑weight loss. |
| Price Floor | Protect producers (e.g., minimum wage) | Legal minimum price above P* → surplus (QS > QD) | PS may rise, CS falls; dead‑weight loss. |
| Regulation (e.g., emission standards) | Control negative externalities | Increases marginal cost → supply shifts left | Reduces external cost; possible loss of PS. |
| Buffer‑stock Scheme | Stabilise agricultural prices | Government buys when price falls, sells when price rises | Reduces price volatility; fiscal cost. |
3.4 Redistribution
- Progressive taxation, welfare benefits, public provision of health & education aim to reduce income inequality.
- Potential trade‑off with efficiency (e.g., work‑disincentive effects).
4. The Macro‑Economy
4.1 National‑Income Accounting
- Real GDP: Value of all final goods & services produced within a country in a given year, measured at constant prices.
- Components: C + I + G + (X – M).
- Related concepts:
- Nominal GDP – measured at current prices.
- GNI – GDP + net primary income from abroad.
- NNI – GNI – depreciation.
- Three measurement approaches (production, income, expenditure) give the same total.
4.2 Circular Flow of Income
- Two‑sector model: Households ↔ Firms (goods & services market and factor market).
- Three‑sector model: Adds Government (taxes, spending, transfers).
- Four‑sector model: Adds Foreign sector (exports, imports, capital flows).
- Diagram tip: arrows show flow of money (payments) and flow of real resources.
4.3 Aggregate Demand & Aggregate Supply (AD‑AS) Model
- Aggregate Demand (AD): \(AD = C + I + G + (X-M)\). Downward‑sloping because of:
- Wealth effect – higher price level reduces real wealth.
- Interest‑rate effect – higher price level raises interest rates, reducing investment.
- Exchange‑rate effect – higher price level makes domestic goods relatively expensive, reducing exports.
- Short‑Run Aggregate Supply (SRAS): Upward‑sloping; some input prices (wages) are sticky, so firms increase output when the price level rises.
- Long‑Run Aggregate Supply (LRAS): Vertical at potential (full‑employment) output; reflects the economy’s productive capacity (capital, labour, technology).
4.4 Output Gaps (Positive & Negative)
- Potential output = level of real GDP when the economy is at full employment (LRAS).
- Positive (inflationary) output gap:
- Actual real GDP > potential output.
- AD lies to the right of LRAS.
- Result: upward pressure on prices (demand‑pull inflation) and low unemployment (below the natural rate).
- Negative (recessionary) output gap:
- Actual real GDP < potential output.
- AD lies to the left of LRAS.
- Result: downward pressure on prices (disinflation or deflation) and higher unemployment (above the natural rate).
- Diagram tip: show LRAS as a vertical line, AD intersecting SRAS left (negative gap) or right (positive gap) of LRAS.
4.5 Inflation
- Demand‑pull inflation: Excess aggregate demand (positive output gap) pushes the price level up.
- Cost‑push inflation: Rising production costs (wages, oil, taxes) shift SRAS left, raising the price level while reducing output.
- Built‑in inflation: Wage‑price spiral; workers demand higher wages because they expect higher prices, firms raise prices to cover higher wages.
- Measurement:
- Consumer Price Index (CPI) – basket of consumer goods.
- Retail Price Index (RPI) – includes housing costs.
- GDP deflator – ratio of nominal to real GDP.
4.6 Unemployment
| Type | Definition | Typical Causes |
|---|
| Frictional | Short‑term job search unemployment | Information gaps, voluntary moves, new entrants. |
| Structural | Mismatch between workers’ skills and job requirements | Technological change, geographic immobility, education gaps. |
| Cyclical | Result of insufficient aggregate demand | Negative output gap. |
| Seasonal | Fluctuations tied to calendar periods | Agriculture, tourism, retail peaks. |
- Natural rate of unemployment = frictional + structural unemployment; the economy can operate at this rate without accelerating inflation.
- Hysteresis: Prolonged high unemployment can raise the natural rate (skills loss, reduced labour‑market attachment).
4.7 Economic Growth
- Real (long‑run) growth: Increase in potential output, measured by the growth rate of real GDP.
- Sources of growth:
- Capital accumulation (more factories, machinery).
- Labour‑force growth (population, migration).
- Human capital improvement (education, health).
- Technological progress (R&D, innovation).
- Distinguish short‑run growth (movement along SRAS due to demand changes) from long‑run growth (rightward shift of LRAS).
5. Government Macro‑Intervention
5.1 Fiscal Policy (Syllabus 5.1)
- Expansionary fiscal policy: Increase government spending (G) or cut taxes (T) → AD shifts right → reduces negative output gap, raises output & employment; risk of demand‑pull inflation.
- Contractionary fiscal policy: Decrease G or raise T → AD shifts left → closes positive output gap, lowers inflation; risk of higher unemployment.
- Budget balance: Surplus (revenues > spending), deficit (spending > revenues), public debt (cumulative deficits).
- Multiplier effect: \(\Delta Y = k \times \Delta G\) (or \(\Delta T\)); \(k = \frac{1}{1-MPC}\) where MPC = marginal propensity to consume.
- Potential crowding‑out: Higher government borrowing may raise interest rates, reducing private investment.
5.2 Monetary Policy (Syllabus 5.2)
- Controlled by the central bank (e.g., Bank of England, Federal Reserve).
- Tools:
- Open‑market operations (buy/sell government securities).
- Policy interest rate (repo, base rate).
- Reserve requirements.
- Discount window facilities.
- Expansionary monetary policy: Lower interest rates or buy securities → increase money supply → AD shifts right.
- Contractionary monetary policy: Raise rates or sell securities → decrease money supply → AD shifts left.
- Transmission mechanisms:
- Interest‑rate effect on consumption & investment.
- Asset‑price effect (stock, house prices).
- Exchange‑rate effect (lower rates depreciate currency, boost exports).
- Liquidity trap: When interest rates are already near zero, further monetary easing may have little impact on AD.
5.3 Supply‑Side Policies (Syllabus 5.3)
- Goal: Shift LRAS right (increase potential output) without creating inflation.
- Examples:
- Education & training – improve labour productivity.
- Infrastructure investment – reduce transport and transaction costs.
- Research & Development subsidies – promote technological progress.
- Labour‑market reforms – flexibility, reduction of trade‑union power, encouragement of part‑time work.
- Tax reforms – lower marginal tax rates to increase work incentives.
- Potential side‑effects: Short‑run costs, distributional impacts, possible increase in inequality.
6. International Economic Issues
6.1 Why Trade? (Syllabus 6.1)
- Absolute advantage: Producing a good using fewer resources than another country.
- Comparative advantage: Lower opportunity cost; basis for mutually beneficial trade.
- Gains from trade: Higher real incomes, greater variety, economies of scale.
- Terms of trade = price of exports ÷ price of imports; improvement means a country can import more for a given export volume.
6.2 Protectionism (Syllabus 6.2)
| Instrument | Intended Effect | Typical Economic Consequences |
|---|
| Tariff | Raise price of imports | Domestic producers gain; consumers lose; dead‑weight loss. |
| Quota | Limit quantity imported | Similar welfare loss; rents may go to foreign exporters or import licences. |
| Import licensing | Control volume/quality of imports | Administrative costs; potential for corruption. |
| Subsidy to domestic exporters | Make domestic goods cheaper abroad | Export expansion; fiscal cost; possible retaliation. |
| Anti‑dumping duties | Counteract foreign firms selling below cost | Protect domestic industry; may provoke WTO disputes. |
6.3 Balance of Payments (BoP) (Syllabus 6.3)
- Current account: Trade balance (exports‑imports) + net primary income + net secondary income.
- Capital & Financial account: Net inflows/outflows of FDI, portfolio investment, loans, and other capital transfers.
- Financial account (sometimes combined with capital account) records changes in ownership of assets.
- Surplus ↔ deficit → influences exchange‑rate pressures and foreign‑exchange reserves.
- ‘Errors & omissions’ balance the accounts.
6.4 Exchange Rates (Syllabus 6.4)
- Floating (flexible) rate: Determined by supply and demand in the foreign‑exchange market.
- Fixed (pegged) rate: Government/central bank maintains a set rate, using reserves or interventions.
- Depreciation (floating) or devaluation** (fixed) makes exports cheaper and imports more expensive → AD shifts right.
- Appreciation (floating) or revaluation** (fixed) has the opposite effect → AD shifts left.
- Determinants: interest‑rate differentials, inflation differentials, expectations, political stability.
7. Development Economics
- Economic development – sustained increase in living standards, not just higher GDP.
- Key indicators: GNI per capita, Human Development Index (HDI), poverty rates, life expectancy, literacy.
- Barriers: Poor infrastructure, low human capital, weak institutions, disease, political instability.
- Policy approaches:
- Import‑substituting industrialisation (ISI) – protective tariffs, state‑owned enterprises.
- Export‑oriented industrialisation (EOI) – special economic zones, export subsidies.
- Foreign aid & debt relief – conditionality, aid effectiveness debate.
- Structural adjustment programmes (SAPs) – fiscal discipline, liberalisation, privatisation.