Economics for CIE IGCSE Students Revision book. Basic Economic Problem: Talk like an Economist. Utility : happiness, satisfaction, welfare or benefit Profit : payment for enterprise, reward for risk, revenue – cost Scarcity : excess demand at price=0, so we have to choose
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The basic economic problem is that people want more than they have but there is scarcity: not enough resource to make more products for everyone.
Because of this scarcity, all people
have to make choices.
A government must decide whether it wants a new school or a new warplane because it can not get enough resources to make both.
When making choices, we assess the opportunity cost or the alternative forgone
The opportunity cost of taking action is what we could have got if we had taken an alternative action
The opportunity cost of making a product is another product we could have made with the resources used
Resources are combined to satisfy wants and needs. This is called production
which can be
As an economy develops, its production moves from primary to secondary to tertiary.
This happens because as efficiency increases not so many resources are needed to fulfil primary and then secondary sector needs. People can then work to provide services instead.
Production can also be:
Labour Intensive or Capital Intensive based on the resource it uses most
Centrally Planned (or Command) Economy: people do not always let the market decide. In some cases they prefer a government to decide how much resource to use for a product.
The market is nature’s way of answering the economic problem
Individual people, or the Private Sector, decide what to make, for profit; and what to buy, for satisfaction.
This, in turn, decides how much resource should be used for each product.
So the market decides resource allocation without anyone planning it. This is a Market Economy.
Decisions about resources are made by individual people.
They might want the government, or Public Sector, to make fewer undesirable products like illegal drugs, or to make more desirable products like economics lessons.
Market Economies lead to inequality and pollution.
Command Economies lead to inefficiency.
A system where the market decides resource allocation for some products and situations, and the government decides it for others, is called a Mixed Economy.
Demand means the quantity of a product consumers are willing and able to buy at each price
This quantity changes with
Equilibrium is where the quantity supplied is equal to the quantity demanded
all product is sold and no resources are wasted.
This is the market’s way to answer the economic problem of scarcity.
The price adjusts to reach this quantity. The market then uses enough resource to make this quantity for efficient resource allocation
Elasticity: The responsiveness of one variable (V1) to changes in another (V2)Formula: % △ V1 / % △ V2
PED:The responsiveness of quantity demanded to changes in price.
% △ QDx / % △ Px
What decides this? The determinants are: time, necessity, habit, price as % of income, substitutes
PES:The responsiveness of quantity supplied to changes in price.
% △ QSx / % △ Px
What decides this? The determinants are: time, factors of production, other products supplier could make
Externalities: Costs and benefits affecting people who aren’t involved with producing or consuming a product, where
private+external = social (costs/benefits)
Merit goods: products with external benefits which we should allocate more resource for, eg medicine, books
Demerit goods: products with external costs which we should allocate less resource for, eg cigarettes, polluting products
What is it ?The market does not allocate resource effectively
How does it happen ?
Public goods: which 1) can not be used up and 2) people can not be stopped from using, eg police and lighthouses, so businesses will not provide them.
Non-sustainability: businesses may use up resources gaining growth and profit now, but reducing future life quality.
Inequality: The market fails if some people are poor and lack food whilst others have all they want.
Monopoly: limits output to increase profit.
What should we do ?
The government can intervene and change the resource allocation for example by controlling production, taxing the rich and feeding the poor.
We use money so we don’t have to barter ie swap or trade one item for another.
Otherwise we have to find someone with what we want who wants to trade it for what we have (a double coincidence of wants)
What is money?
A medium of exchange (can be used to buy things)
A store of value (for saving)
A unit of account (to measure value)
What features should money have ?
Acceptable, durable, portable, scarce, divisible
Who controls the money supply? The Central Bank in a country. It includes the printing of money and overseeing the whole financial system including the high street banks
Banks, stock markets and insurance companies also serve the financial system by channeling money from savers to businesses for investment or buying capital
The price of labour is decided by supply and demand
Supply: depends on skills, experience & education needed as well as the conditions and location of the job.
Demand: depends on the productivity of labour (how much product it can make) and the price of the product.
People decide what work they want to do according to:
Wage factors: the money (weekly wage or monthly
salary) they can earn.
Non-wage factors: the
convenience of the job
(hours, distance, safety)
and the benefits such as
perks, holidays and pension.
The level of pay is affected by :
Sectors:public / private, primary / secondary / tertiary, age, experience, degree of specialisation, talent, qualifications, location, discrimination
Wages may not be decided purely by the free market as intervention comes from:
Governments may also impose minimum wages to help workers.
Trade Unions intervene using collective bargaining and industrial action such as strikes, picketing and work to rule.
They try to improve work conditions and benefits as well as pay.
+ they can improve worker relations and productivity
- they push up wages and costs for firms
However these may push up wages so that supply exceeds demand and surplus labour or unemployment results
Disposable income is what is left for spending after tax
People can choose to spend or save.
Saving often increases with age, income and interest rate.
Expectations for the future also affects peoples’ decisions
People may choose to borrow using credit cards, mortgages and overdrafts or other bank loans so they can spend more than their income.
Borrowing increases current consumption and sacrifices future consumption
Saving reduces current consumption and allows more future consumption
Income affects spending and saving decisions. High income people spend and save
more money in all than others, but it is still a lower percentage of their income.
Limited Liability: Business owners can only lose money they invested in the firm. This reduces risk and so makes investing more attractive.
Sole proprietor / trader One person owns and manages a business eg store
Partnership: from 2 to 20 partners own and manage a business eg doctors, law firm
Ltd Company Ownership & management separate, can sell shares for funding, profit paid as dividend to shareholders. limited liability, 2 types:
Private Company (Ltd): sells shares to friends
Public Company (PLC): sell shares on stock exchange
Cooperative: common interest groups own and run business to serve their interests
Public Corporation: Business owned by state and run by managers chosen by government
Multinational: Business producing using resources in more than one country. They get access to markets and resources and can bring money, resources and knowledge to a country but is working in its own interest, not that of the hosts.
Firms size can be measured by number of staff, turnover (revenue), market share (%), or capital employed (asset value)
Firms generally aim to maximise profit and may choose to do this by growing through
Natural Growth: reinvesting profits, or
Integration, by Takeover or Merger
Nationalisation: when the government takes over a business. It may cut prices and increase output but is often inefficient .
Privatisation: when a state owned industry is sold to private owners, to avoid public loss or to make the business more efficient.
Integration can be:
Horizontal: joining competitors
Backward Vertical: joining suppliers
Forward Vertical: joining customers
Lateral / Conglomerate: joining unrelated firm
What is the goal of most firms ?
Profit maximisation = make as much profit as possible
But they may only: Break Even: When total revenue = total cost
As a firm increases its output, total cost usually rises, but average cost may rise, stay constant or fall
Some businesses like haircutting suit small firms, others like making ships or electricity are best done by large firms
As firms get bigger they can benefit from economies of scale where costs fall with specialisation, production lines, bulk buying and cheap credit or borrowing
But if firms get too big they may get diseconomies of scale where
inefficiency increases costs
Monopoly one firm which controls the market
Benefits: economies of scale, money for research to make new products
Problems: they can charge high prices and make unfair profits
Perfect competition many firms which have little market power, must follow the market price and make low profit
How do some firms become large?  (W2005)
Discuss how a supermarket might benefit from economies of scale.  (W2005)
Why might a company have an increase in revenue and a fall in profits at the same time?  (W2002)
What is meant by fixed cost, variable cost and average total cost?  (W2006)
In an economy the government is:
A producer of goods and services
A policy maker
It aims to ensure:
Growth (of GDP)
income from taxes
These can be
Direct: paid on income, profit or cash
Indirect: paid on products eg sales tax
Progressive: higher income higher rate
Regressive: lower income lower rate
Proportional: fixed rate
These add to business costs.
If the government gives money to producers to reduce costs it is called a subsidy
It uses policies that include:
Demand side: Fiscal(tax and spending) or
Monetary (money supply and interest rates)
Supply side: reduce intervention
Trade policy: protection, exchange rates
Aggregate Demand /
Circular Flow Diagram
We use economic models to simplify and present ideas about the real economy. The government can then use them to predict the effect of events and policies.
Discuss how some aims of government policy might conflict with each other.  (S2007)
Discuss how a government might influence private producers.  (S2007)
Using examples, describe the difference between direct and indirect taxes.  (S2008)
How might a reduction in taxation help any two macro-economic aims of a government?  (S2008)
What is it ? A sustained increase in the general level of prices.
How is it measured ? By comparing the price of an index (the price of a basket of goods such as the Consumer Price Index) from one year to the next.
What makes it happen ?
Demand Pull = An increase in the money supply or an increase in demand for products.
Cost Push = An increase in the cost of resources used for production.
Why is it a problem ? Money loses value and
Becomes dysfunctional, people and businesses
get worried, governments and borrowers gain
whilst others lose, resources get wasted
What should governments do ?Demand side : Print and/or spend less money, raise direct taxes. Supply side : Make resource markets work better.
What is it ? When people are willing and able
to work but have no job
How is it measured ? By counting tax or
welfare data, by survey
Why is it a problem ? People lose income and
skills and get depressed
Society wastes resource. Areas get poorer, crime occurs
What should governments do ?
Demand side : Print and/or spend money, cut taxes.
Supply side : Make resource markets work better.
What makes it happen ?
Natural Unemployment: Seasonal, Frictional (between jobs), Structural (change in products and production methods)
Cyclical Unemployment: A fall in demand for products and labour in recessions
What is it ? The total output from inside a country in a year
How is it measured ? By counting income or spending
or total product, which should all be equal.
What is the goal ? Governments want to increase GDP so the country gets more income and gets richer. This is called economic growth.
What other measures are there ?
Real GDP per Capita: The total inflation
adjusted output of a country per person
GNP Gross National Product: Total output in a year from resources belonging to the people of a country.
Human Development Index (HDI) :
Shows the standard of living based on
education and life expectancy as well as income
Explain how different types of unemployment may be caused and consider which might be the most serious.  (S2007)
Explain what is meant by GDP. (S2005)
What might be the result of a general increase in the level of consumer spending in an economy?  (S2008)
What is meant by inflation?  (S2009)
Population data includes the Dependency ratio or how many people
depend on each worker. There are a lot of dependents in countries
with many old or young people who can not work. That slows
development because they use resources. A low dependency ratio helps an area to develop
The birth rate is also important. If it is higher than the death rate then the population may be growing which gives more labour to make things, but also more need for food.
Saving The population and culture also helps to determine how much of what is made is consumed or used up. The rest can be saved, it can be traded for other products or used for investment which means buying capital or man-made resource or even schools and hospitals. This increase in resources means an economy can develop and enjoy a better standard of living.
Other factors influence the level of development in an area: Geography, politics, culture, climate, resource endowment, population age size and density
What is it ? It describes the standard of living or the quality of life
Many factors can be measured to see the level of development
in an area: Income, education, life expectancy, freedom, technology, healthcare, equality, nutrition
Sectoral shift: As an economy develops, people move from primary to secondary and then tertiary sectors. This is because 1) Increases in efficiency means less labour is needed for food and other basic need so it can be used elsewhere, and 2) with development people have enough necessities and want other things like education, football matches and art so they will pay labour to make those products
Governments can set policies to support development. These might include: population controls, laws to help businesses, government spending on infrastructure including roads and buildings like airports
Discuss why many countries aim to increase economic growth.  (S2009)
How might a government affect economic growth in a country?  (W2007)
What determines the change in the size of a country’s total population? (S2002)
How may living standards between countries be compared? (W2009)
Specialisation: different countries, people or areas have different resources and so are better at making certain products.
This is called comparative advantage. They should specialise in making these items and trade them with other place for items they are not good at making.
Switzerland could make chocolate and export it in exchange for imports of coffee from Vietnam. Then there is more for everybody.
Increased trade supports Globalisation where there is more communication and standardisation and it seems like the world is getting smaller.
Why: Some countries want to protect themselves from imports from other countries because:
They want to keep jobs for their own workers
They want their own businesses to sell more and make more profit
They don’t want to depend on other countries
They don’t like the country they buy products from
They want to maintain their foreign balance of trade
How:do countries protect themselves and stop trade? They use
Quotas: limits on the number of imports of a product
Tariffs: taxes on imports
Subsidies: money for their own producers to make it cheaper
The WTOaims to support and encourage free trade to help development but some countries say the WTO is unfair and helps the rich countries more than poor ones
The balance of payments is a country’s account with the rest of the world. It includes the financial, capital and current accounts
Current Account: counts the net (total inflow minus total outflow) cashflow for:
Visible trade or trade in goods
Invisible trade or trade in services
Transfers gifts or payments made not for trade or debt
Income from Investment in other countries
The current account balance can be:
Surplus if more money flows in than out, leading to saving
Deficit if more money flows out than in, leading to debt
Balanced if money flows in and out are equal
An exchange rate is the rate at which one currency
can be exchanged for another. Exchange rates might be
Floating where the rate is decided by the free market
forces of supply and demand, or:
Fixed where the government controls the rate by buying or selling currency, or
Managed floatwhere the government controls a floating rate if it moves too much
Floating exchange rates might appreciate (rise) if many people want to buy that country’s products or hold its money, or depreciate (fall) if people do not want the products or money of a country.
If a currency appreciates, the products of that country will get more expensive and so people may not buy them and it could lead to a trade deficit
If a currency depreciates, the products of that country will get cheaper and so people may buy more of them and the country’s foreign balance can improve.
Explain what is meant by a visible trade deficit and identify in which part of the balance of payments the deficit would be recorded.  (S2004)
Discuss what might lead to an improvement in the balance of payments of a country.  (S2005)
Discuss the consequences for an economy if its currency ‘was gaining strength.’  (W2004)
Distinguish between a tariff and a quota.  (S2009)
Why do countries trade with each other?  (W2009)