Economics IGCSE (0455) - Theory Syllabus Notes

1. The Basic Economic Problem

1.1. Economic Problem

• Limited resources vs. unlimited wants.
• Scarcity: Fundamental economic problem.
• Types of Goods:
  • Economic goods: Scarce, have opportunity cost.
  • Free goods: Abundant, no opportunity cost (e.g., air).

1.2. Factors of Production

• Land: Natural resources.
• Labour: Human effort.
• Capital: Man-made resources.
• Enterprise: Skills to organize production.
• Durable vs. Non-durable goods: Longevity.
• Capital goods: Used in production.

1.3. Opportunity Cost

• Cost of the next best alternative foregone.
• Examples: Investment choices, land use decisions.

1.4. Production Possibility Curves & Choice

• PPC shows maximum feasible outputs.
• Points within PPC indicate inefficiency.
• Points outside PPC are unattainable.

2. Allocation of Resources

2.1. Microeconomics vs. Macroeconomics

• Microeconomics: Individual markets, supply & demand.
• Macroeconomics: Economy-wide phenomena, government policies.

2.2. Role of Markets

• Market System: Decisions based on supply and demand.
• Key Questions: What, how, and for whom to produce?
• Price Mechanism: Determines resource allocation.

2.3. Demand

• Inversely related to price.
• Factors: Price, consumer preferences, income, substitutes, population.

2.4. Supply

• Directly proportional to price.
• Factors: Production costs, technology, global factors.

2.5. Price Elasticity of Demand (PED)

• Inelastic Demand: PED < 1, price changes have little effect.
• Elastic Demand: PED > 1, price changes have significant effects.

2.6. Price Elasticity of Supply (PES)

• Inelastic Supply: PES < 1, supply changes little with price.
• Elastic Supply: PES > 1, large supply changes with price.

2.7. Market Economic System

• Only private sector.
• Advantages: Variety, innovation.
• Disadvantages: Market failures, inequity.

2.8. Market Failure

• Inefficient resource allocation.
• Causes: Public goods, externalities, monopolies.

2.9. Mixed Economic System

• Combines private & public sectors.
• Government intervention to correct market failures.

3. Microeconomic Decision Makers

3.1. Money and Banking

• Functions of Money: Medium of exchange, unit of account, store of value.
• Commercial Banks: Accept deposits, provide loans.
• Central Banks: Print money, control monetary policy.

3.2. Households

• Income influences spending, saving, borrowing.
• Factors: Interest rates, consumer confidence.

3.3. Workers

• Wage determinants: Skills, demand, non-wage factors.
• Specialization: Focus on specific tasks.

3.4. Trade Unions

• Protect worker interests, negotiate wages.
• Industrial action when negotiations fail.

3.5. Firms

• Size: Employees, capital, market share.
• Economies & Diseconomies of Scale: Cost advantages/disadvantages of scale.
• Integration: Mergers, takeovers.
• Production: Capital vs. labour intensity.
• Costs and Revenue: Fixed, variable costs, objectives.

3.8. Market Structure

• Competitive Markets: Price takers, efficient resource allocation.
• Monopoly Markets: Price makers, potential inefficiencies.

4. Government & The Macroeconomy

4.1. Role of Government

• Produce essential goods, regulate monopolies.

4.2. Macroeconomic Aims

• Low inflation, full employment, growth, trade balance.
• Conflicting aims can arise.

4.3. Fiscal Policy

• Government spending and taxation.
• Expansionary: Boost demand.
• Contractionary: Reduce inflation.

4.4. Monetary Policy

• Interest rates, money supply.
• Expansionary: Reduce unemployment.
• Contractionary: Control inflation.

4.5. Supply-Side Policies

• Increase productive potential.
• Tools: Tax incentives, education, deregulation.

5. Economic Development

5.1. Living Standards

• GDP Per Capita: Measure of economic performance.
• Human Development Index: Broader measure including education, health.

5.2. Poverty

• Absolute: Basic needs unmet.
• Relative: Income below societal average.
• Policies to alleviate poverty: Aid, investment.

5.3. Population

• Factors: Birth, death rates, migration.
• Demographic Transition Model: Stages of population growth.

6. International Trade & Globalisation

6.1. International Specialisation

• Advantages: Efficiency, consumer benefits.
• Disadvantages: Over-specialization, dependency.

6.2. Foreign Exchange Rates

• Impact of currency value changes on trade.
• Floating vs. Fixed Rates: Determination mechanisms.

6.3. Current Account Balance of Payments

• Surplus: More exports than imports.
• Deficit: More imports than exports.
• Policies for balance stability: Supply-side, fiscal, monetary policies.

Note: These are summarized notes from the CAIE IGCSE Economics syllabus for educational purposes, designed to assist in studying and understanding core economic concepts. This content is adapted from educational resources and retains original copyrights where applicable.