IGCSE ECONOMICS 0455 
           Short Notes for Revision
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      IGCSE | ECONOMICS 0455                                                                    2                                                                               Etude.tv
  1. Basic Economic Problems                                      1.2 Scarcity and Opportunity cost                               1.3 Production Possibility Curve
  1.1 Factors of Production                                       •   There are too few productive                                •   Opportunity cost can be shown on a 
  •    Consumers are people or firms who                              resources to make all the goods and                             production possibility curve (PPC).
       need and want goods and services                               services that consumers need and                            •   It is a curve that shows the maximum 
                                                                      want.                                                           output of two types of products and 
  •    Resources or factors of production                         •   Scarcity of resources is the basic                              combination of those products that 
       are used to make goods and services                            economic problem.                                               can be produced with existing re-
  •  Land: all natural resources used in                          •   Unlimited wants and limited resourc-                            sources and technology.
       production e.g. land, oil                                      es
  •  Labour: effort provided by people, or                        •  Opportunity cost is the cost of                                     100
       human resources e.g. employees                                 choosing between alternative uses of                                                                        Z
                                                                      resources.                                                                                          A
  •  Capital: man-made resources used                                                                                                 s   65
                                                                  •   Example: A person chooses to buy a                              d                                        B
                                                                                                                                      o
       in production of other goods and                                                                                               o   50
                                                                      PS5.                                                             G                               X
       services e.g. machinery, tractor                                                                                               r
                                                                      •   s/he could have bought a XBOX                               me
                                                                                                                                      u
  •  Enterprise: organize and combine                                                                                                 s
                                                                          instead.                                                    n
                                                                                                                                      o
       resources in firms to produce goods                            •   opprtunity cost of buying the PS5                           C
       and services.                                                      would be XBOX. 
  •    Entrepreneurs organize and combine  •  Choosing one use will always mean                                                            0
                                                                      giving up the opportunity to use                                                                  50   60        80
       resources in firms to produce goods                            resources in another way, & loss of                                                     Capital Goods
       and services                                                   goods & services they might have   
  •    Durable goods such as electrical                               produced instead                                            •   Point y signifies inefficiency.
       items and furniture last a long term.                      •   Problem of resource allocation is                           •   Point z cannot be reached due to the 
       Non durable goods like food and milk                           choosing how best touse limited                                 lack of resources.
       do not last long.                                              resources to satisfy as many needs                          •   The PPC shows that in order to pro-
  •    Capital goods and semi-finished                                and wants as possible and maximize                              duce an additional 15 tonnes of con-
       goods or components are used up in                             economic welfare.                                               sumer goods, the economy must give 
       production.                                                •   Aim of economics is to find the most                            up 10 tonnes of capital goods.
      IGCSE | ECONOMICS 0455                                                                    3                                                                               Etude.tv
  2. Allocation of Resources                                      •  Example: United Arab Emirates                                Advantage
  2.1 Economic Systems                                                                                                            •   Wide veriety of goods and service 
                                                                                                                                      available.
  •    An economic system determines                                                                                              •   Fast response to consumer de-
       how scarce resources are alloacted.                                                                                            mands.
                                                                                                                                  •   Profit motives encourages them to 
  Market Economy System                                           2.2 Market failure                                                  be efficient and innovative.
  •    It is an economy where consumers                                                                                           Disadvantage
       determine what is produced, resourc-                       •   It occurs when market fails to allo-                        •   Market failure exists.
       es are allocated by the price mecha-                           cate resources more efficiently thus                        •   Goods that are profitable will only be 
       nism and land and capital are private-                         social costs become greater than                                produced.
       ly owned.                                                      social benefits.                                            •   Production of demerit goods increas-
  •    Producers aim for profit maximiza-                                                                                             es.
       tion.                                                      Effects of market failure :
  •  Price mechanism allocates scarce                             •   Only goods and services that are                            2.3 Mixed Economy System 
       resources.                                                     profitable to make are produced.                            •   It is an economy in which both the 
  •    Producers use price signals to deter-                      •   Public goods like street lights won’t                           private and public sectors play an 
       mine what is profitable.                                       be provided.                                                    important role.
  Scarcity creates 3 key questions:                               •   Resources will only be employed if it                       •   Most economies in the world are 
       •   What to produce?                                           is profitable - unemployement may                               mixed becuause a totally free mar-
       •   How to produce?                                            rise.                                                           ket economy would mean that there 
       •   For whom to produce?                                   •   Harmful goods like drugs may be                                 would be no taxes or government 
                                                                      produces and sold freely.                                       sepnding. 
  •  Price mechanism allocates scarce                             •   Producers may ignore harmful ef-                            •   A government can try to interven 
       resources to the most profitable uses                          fects to enivroment and society.                                mixed economic system.
       in a market system.                                        •   Monopolies may dominate and ex-                             •   It can allocate scarce resources to 
                                                                      ploit market.                                                   provide goods and services that are 
                                                                                                                                      necessary.
                                                                                                                                  •   Can introduce laws & regulations to 
      IGCSE | ECONOMICS 0455                                                                    4                                                                               Etude.tv
  •  Example: USA                                                 Planned Economy System                                          •  Demand extends when price falls.
                                                                  •   It is an economy where the govern-                          •  Demand contracrs when price rises.
                                                                      ment makes the crucial decisions,                           •  Rise in demand shifts demand curve 
                                                                      land and capital are state-owned and                            outwards to right.
                                                                      resources are allocated by directives.                      •  Fall in demand shifts demand curve 
                                                                                                                                      inwards to left.
                                                                  •   Example: North Korea                                        Factors that effect demand
  Advantage                                                                                                                       •   Price
  •    Same as market economy plus.                                                                                               •   Consumer’s income
  •    government can intervene to correct                                                                                        •   Consumer’s taste/choices
       market failure.                                                                                                            •   Price of substitutes and complement
  Disadvantage                                                                                                                    •   Consumer population
  •    Same as market economy plus.                               2.4 Demand                                                      •   Promotion of the product/service
  •    taxes can be high.                                         •   Demand is the willingness and ability  2.5 Supply
  •    public sector provision may be ineffi-                         to buy a product.                                           •   Supply is the willingness and ability 
       cient.                                                                                                                         to sell a product.
  Government Intervention                                             Price ($)
                                                                              D1                                                     Price ($)
  •    Produce merit goods such as educa-                                                                                                         High price = High supply
       tion and healthcare.                                                               A                                                                                        S1
  •    Provide public goods like street light.                        P1
  •    Public sector can employ people and                                                                                                                                 B
                                                                                                                                     P2
       give welfare benefits to the poor.                             P2                                      B
  •    Laws and high taxes can reduce pro-                                                                                                                 A
       duction of demirit goods.                                                                                                     P1
  •    Laws and regulations can protect the 
       enivronment.                                                    0                 Q1                 Q2    Quantity
  •    Monopolies can be regulated so they                                   High price = Low demand
       don’t exploit consumers.                                                                                                        0                   Q1              Q2          Quantity