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0455 IGCSE® Economics Ultimate Revision Notes

SECTION 1 The basic economic problem
SECTION 2 The allocation of resources
SECTION 3 Microeconomic decision makers
SECTION 4 Government and the macroeconomy
SECTION 5 Economic development
SECTION 6 International trade and globalisation
Question Type




























Mind map

The economic problem
Unlimited wants
Exceeding finite resources
Economic good
Require resources to produce
Have o
...

Free good
Don’t require any resource to produce
No o
...

No need to pay for
FoP
Economic resources
Used to produce G & S
Including land, labour, capital & enterprise
Enterprise
Risk taking
Decision making
Organise other FoP
Influence to quantity and quality
education, skilled labour, attract
MNC
immigration
subsidies to lower start cost
cut corporation tax to allow them to keep more profit
lower i
...
to make it easy to borrow
deregulation / end monopolies to remove barriers to entry
income / consumer spending
Investment
Spending on capital goods, increase AD; more advanced technology, higher AS
Higher quality due to capital and R & D, higher D and higher D(X)
Investment in human capital increases productivity
Occupational mobility of labour










































































































workers are more skilled, lower structural unemployment
find another job quickly when unemployed, lower frictional unemployment
firms can quickly respond market changes, by changing roles of labour, filling
vacancies easily, greater use of resources


























SECTION 1 The basic economic problem

Planned / market economic system
Who decides what is produced (sovereign): government / consumers
How resources are allocated: government / price mechanism
Who owns the capital and land: government / private
Market economic system
Adv
Economic freedom, consumers and producers make own decisions,
consumer sovereignty
Competition encourages efficiency to keep competitiveness, higher
quality, lower cost, lower P, more affordable
Respond to consumers’ D, wider choice
No government intervention, more efficient allocation of resource by
price mechanism
Dis
May cause market failure, unemployment, instability e
...
inflation,
exploitation of workers
Uneven distribution of income causes poverty
Poor consumers have no sovereign due to little purchasing power
Capital / labour-intensive
The use of high proportion of capital / labour relative to another
Capital-intensive
higher productivity
improved quality due to fewer mistakes
lower average cost in a long term
Labour-intensive
more flexible
personal services, personalised products
low start cost
contribution to ideas
Factors shift D
Income
Related goods: substitutes & complements
Advertisement
Awareness of e
...
environment, health
Population (of the niche market consumers)
Change in taste & fashion
Expectation / confidence of future price / income
The factor derives it










































































































Factors shift S


















SECTION 2 The allocation of resources

Effect of P decreasing
consumers can buy more of that product and other products, higher l
...

if necessities, more affordable, lower poverty
if FoP, lower cost of production, attract investment and MNC
PED
A measure of the responsiveness
Of the QD to a ∆P
= %∆QD / %∆P
Factors change PED
Availability of substitutes
Consumer will switch or not
Proportion of income spent on the product e
...
small
Insignificant ∆P when %∆P is large, still buy
Necessity / luxury
Still buy when P(necessity) increases
Addictiveness / habit
If so, difficult to stop buying
How wide the market is defined
Wider, less substitutes
Time
Price along D
More elastic at higher prices, consumers more sensitive
Shift of D
To right, PED decreases
Easiness to postpone purchasing
PED in decision making
Producers decide P to maximise revenue
Producers try to remain competitive to reduce PED
Indirect tax to discourage consumption will be more successful if PED is elastic

























































































































Factors change PES
Time taken to produce
E
...
time for livestock / crop to mature
Cost of altering the supply
E
...
recruitment, if at full capacity (theatre)
Storage
Agricultural goods are difficult to store












Costs, labour productivity, advance in technology
Natural conditions / supplies
Price of competitors
Quantity of resources
Tax & subsidies

Time
Time allows flexibility
In long run, all FoP can change




























PES in decision making
Producers want PES to be elastic
Higher profit when D increases
Take greater adv when price increases
Government want to subsidise elastic producers as effect will be more significant
Government promotes flexibility in production / mobility of FoP, more efficient

Functions of commercial banks
Accept deposits
Lending
Make payments
Financial services e
...
advice
Exchange currency
Functions of central banks
Control money supply
Set i
...

Lender of last resort
Banker of government & commercial banks
Supervise financial system
Create price stability by implementing monetary policies
Issue notes and coins
Intervene FEM by holding foreign reserves
Lending
to consumers, higher C, higher AD, risk of getting into debt if can’t repay
to firms, higher investment in capital, higher productivity, higher AD, may cause
financial crisis if can’t repay a lot
higher spending on M, lower current account position
D-pull inflation
Factors change spending
Disposable income
Wealth / saving which can spend on
Ability to borrow
Confidence about future income
I
...

Advance in technology
Policies
Factors change saving
Disposable income
I
...

Confidence
Financial institutions
Tax on interest earned
















































































































Reasons for saving
Target savers: for a particular purpose e
...
to buy a car or a home; investment
Precautionary reasons: for e
...
retirement, children’s future, emergencies












SECTION 3 Microeconomic decision makers

Wage
Job type
D&S
D for G & S
Productivity
Availability and productivity of capital
Non-wage factors
Tax & subsidies
Training periods
Danger
Production methods: capital / labour-intensive
Bargaining, trade union
Government policies
Working time
Discrimination
Inflation, living costs
Choice of job
wage
qualification required
working conditions
danger
working hrs
fringe benefits
job security
job satisfaction
social status
promotion opportunity
exploitation
Tertiary sector jobs
tend to be better paid
better working conditions
higher D as economy develops

























































































































Division of labour
Adv
Save time for training, switching works
Increase skills, productivity, wage, fewer mistakes higher quality, higher D
and revenue
Mechanised production process
Lower cost of production, lower price, higher QD
Dis
Increased boredom, lack of motivation
































For income gain

Trade union
Adv
Higher l
...
for workers by increasing wage, motivation
Training, higher productivity
Working conditions, increase health and safety
Lower working hrs, lower stress, increase leisure time
Effective and efficient negotiation with employers by collective bargaining
Protect workers’ rights e
...
maternity leave
Provision of benefits
Maintain job security by e
...
close shop
Dis
Cost of production ^, cost-push inflation
Industrial action, disrupt production
Restrict firms’ ability to respond to consumers’ D by changing output
Inflation
Higher u
...

Influences of strength
membership, funds, industrial actions ability, collective bargaining strength
as difficulty for firms to replace labour
skills
D for product
unemployment, difficulty for firms to recruit
legislations

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