These concise revision notes follow the Cambridge IGCSE 0455 specification. They cover every required sub‑topic, give the exact terminology used in the syllabus, and include quick‑review tables, formulae and diagram placeholders for fast revision (AO1–AO3).
Unit 1 – The Basic Economic Problem
1.1 Economic Goods vs. Free Goods
Economic goods: scarce – they have a price because the quantity supplied is limited.
Free goods: abundant – no price is needed (e.g., air, seawater).
1.2 Scarcity, Choice & Opportunity Cost
Scarcity: limited resources versus unlimited wants – the fundamental problem for every economy.
Choice: because of scarcity societies must decide:
What to produce?
How to produce?
For whom to produce?
Opportunity Cost (OC): the value of the next best alternative that is fore‑gone.
Formula: OC = Benefit of next best alternative – Benefit of chosen option
1.3 Production Possibility Curve (PPC)
Shows the maximum output combinations of two goods when all resources are used efficiently.
Points on the curve = efficient production; inside the curve = under‑utilisation; outside = unattainable.
The slope of the PPC represents the opportunity cost of producing one more unit of the good on the horizontal axis.
Typical PPC – the slope shows the opportunity cost of Good A in terms of Good B.
1.4 Factors of Production & Factor Rewards
Factor of Production
Reward (as named in the syllabus)
Land (natural resources)
Rent
Labour (human effort)
Wages
Capital (machinery, buildings)
Interest
Enterprise (risk‑taking, organisation)
Profit
Unit 2 – Allocation of Resources
2.1 Demand, Supply & Market Equilibrium
Law of Demand: ceteris paribus, as price falls, quantity demanded rises.
Law of Supply: ceteris paribus, as price rises, quantity supplied rises.
Equilibrium: where Qd = Qs and the market price is stable (P*).
Demand and supply intersect at the equilibrium price (P*) and quantity (Q*).
2.2 Elasticities of Demand and Supply
Elasticity
Formula
Key Terms (syllabus)
Price Elasticity of Demand (PED)
PED = (%ΔQd) / (%ΔP)
Perfectly elastic (PED = ∞)
Elastic (|PED| > 1)
Unit‑elastic (|PED| = 1)
Inelastic (0 < |PED| < 1)
Perfectly inelastic (PED = 0)
Price Elasticity of Supply (PES)
PES = (%ΔQs) / (%ΔP)
Same terminology as for demand.
Worked Example (PED)
Price falls from £10 to £8 (‑20%).
Quantity demanded rises from 100 units to 130 units (+30%).
PED = 30% / –20% = –1.5 → demand is elastic.
2.3 Market Systems
Market (capitalist) economy: decisions made by households and firms through the price mechanism.
Command economy: central government decides what, how and for whom to produce.
Mixed economy: features of both market and command systems.
Arguments for mixed economies:
Market efficiency + government correction of market failures.
Provides public services that the market would under‑provide.
Arguments against mixed economies:
Potential for government failure (inefficiency, bureaucracy).
Risk of crowding‑out private investment.
2.4 Government Intervention Tools
Tool
Purpose (syllabus wording)
Typical Effect on Curves
Tax (e.g., excise)
Reduce over‑consumption of demerit goods / raise revenue
Supply curve shifts left → price rises, quantity falls.
Subsidy
Encourage consumption/production of merit goods
Demand (or supply) curve shifts right → price falls, quantity rises.
Price ceiling (maximum price)
Make essential goods affordable
Set a price below equilibrium → shortage (excess demand).
Price floor (minimum price)
Protect producers (e.g., minimum wage)
Set a price above equilibrium → surplus (excess supply).
Regulation (e.g., safety standards)
Correct negative externalities or protect health and safety
Non‑excludable and non‑rivalrous; the market will under‑provide it.
National defence, street lighting.
Merit good
Good for which social benefit > private benefit; tends to be under‑consumed if left to the market.
Vaccinations, primary education.
Demerit good
Good for which social cost > private cost; tends to be over‑consumed if left to the market.
Cigarettes, alcoholic drinks.
Private benefit (PB)
Benefit received by the individual consumer or producer.
The enjoyment a person gets from watching a film.
External (positive) benefit (EB)
Benefit that accrues to third parties not involved in the transaction.
Herd immunity from vaccination.
Social benefit (SB)
SB = Private Benefit + External Benefit
SB of education = personal skill + better‑educated society.
Private cost (PC)
Cost borne by the individual consumer or producer.
Cost of fuel for a car driver.
External (negative) cost (EC)
Cost imposed on third parties not involved in the transaction.
Air‑pollution from a factory.
Social cost (SC)
SC = Private Cost + External Cost
SC of a coal plant = fuel cost + health costs from pollution.
Monopoly
Market structure with a single seller, no close substitutes and high barriers to entry; the firm can set price above marginal cost, creating dead‑weight loss.
Supply = Private MC; Social MC lies above it because of external costs. The gap creates a dead‑weight loss (DWL) between the private equilibrium (Ep) and the socially optimal equilibrium (Es).
Demand = Private MB; Social MB lies above it because of external benefits. Under‑consumption occurs at the private equilibrium (Ep); a subsidy can shift demand to the socially optimal point (Es).
Unit 3 – Microeconomic Decision‑Makers
3.1 Households – Consumer Behaviour
Households are the *demanders* of goods and services.
Decision rule: purchase the combination of goods that maximises total *private* benefit given the budget constraint Income = Σ(P × Q).
3.2 Firms – Producer Behaviour
Firms are the *suppliers* of goods and services.
Decision rule: produce where Marginal Cost (MC) = Marginal Revenue (MR) (i.e., price in a competitive market).
Short‑run costs: Fixed Cost (FC), Variable Cost (VC), Total Cost (TC = FC + VC).
Long‑run: economies of scale (LRAC falls) and diseconomies of scale (LRAC rises).
3.3 Market Structures (required for the syllabus)
Structure
Key Features
Typical Outcome
Perfect competition
Many sellers, homogeneous product, free entry/exit
Price = MC; no dead‑weight loss.
Monopoly
Single seller, high barriers to entry
Price > MC; dead‑weight loss.
Unit 4 – Macro‑Economic Objectives & Government Policy
4.1 Core Economic Objectives
Economic growth: increase in real GDP over time.
Low unemployment: utilisation of labour resources.
Price stability: low and stable inflation (target usually 2‑3%).
Balance of payments equilibrium: sustainable current‑account position.
4.2 Fiscal Policy
Expansionary: increase government spending or cut taxes → AD shifts right.
Contractionary: decrease spending or raise taxes → AD shifts left.
