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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









































































































































Small firms vs large
Influence
Size of market
Availability of finance
Type of business organisation and product
Government policies
Age
Goals of entrepreneurs
Personal service
Niche market, local monopoly
Subsidy by government
EoS & DisEoS
Predatory pricing
Reputation / brand loyalty
Finance by shares
Risk of failure
As a supplier or outlet of large firms
Regulation / paper work, time and effort
Management skills
















Limited skills, lack of occupational mobility
Over-dependence

Private vs public sector
Private
More competitive, lower price, higher quality
Profit incentive (afraid to make loss, not supported by the government),
keep costs low, respond to consumers’ demand, higher efficiency
Higher investment, R & D, higher quality, lower costs, wider choices
Easier to raise finance by selling shares
Not require tax revenue to fund
Public
No monopoly
Charge low price to help the poor and ensure access
Take into account external C & B, for social welfare
May be largely funded by the government for R & D and expansion for EoS
Less likely to go out of business so continuity of supplies
EoS / DisEoS
Larger size enable firms to take adv of EoS / make firms experience DisEoS
Lower / higher average cost of production + e
...

Lower / higher price
Decrease / increase cost-push inflation
Fixed costs
rent determined by landlords
insurance determined by insurance companies
interest paid on loans determined by central bank
change of production plant / process e
...
more capital goods
cost of workers with long-term contracts determined by many factors






















































































































How monopoly harms economy
Reduce competition, inelastic D
Develops monopoly
Increase price, as a price maker
Reduce choice
















Monopoly
Adv
Higher profit as a price maker, finance R & D, higher quality
Compete with foreign firms, larger market
Easy to expand, EoS, lower costs, lower P
If state-owned monopoly, low price, social welfare as objective
Dis
Abuse monopoly power as a market failure form
As a single seller so high market power and be price maker, raise price
Restrict supply
Complacency, reluctant to R & D

EoS
purchasing: discount price when raw materials bought in bulk
financial: get a loan cheaply / sell shares easily
R & D: R & D expenditure spread over a high output
managerial: employ specialist staffs
marketing: cost of advertising campaign spread over a high output
DisEoS
management: administrative costs, slowly respond to change in market conditions
communication problems: misunderstand ideas, mistakes
poor industrial relations: less sense of belonging, lower productivity
Productivity
Education & training, skills
Wage & working condition, motivations
Investment, quantity & quality of capital, technology
Healthcare, tired, sick absent, stress, physically fit
Infrastructure, mobility, transport
Repetition and boredom
Age
Specialisation





















































































Objectives of firms
Survival
Growth
Profit maximisation
Social welfare






















Restrict supply
DisEoS and complacency, lower efficiency
Reluctant to R & D, lower quality, lack of choice
May reduce competitiveness

Factors change u
...

AD
Investment
D for labour, productivity
Mobility
Time delay
Voluntary (incentive and disincentive)
Season
Health care
Factors affecting economic growth
AD
investment and output by both domestic firms and MNC, price and quality
competitiveness, X - M
income, consumer spending, en / discourage firms to produce more
tax revenue, G
AS
education, healthcare and training, skills and productivity, cost of production
discovery of new resources
motivation
population change
Economic growth
Adv
Longer life expectancy due to nutrition, housing and healthcare
U
...
v
Trade position ^
Tax revenue ^
More G & S available to people, l
...
^
Dis
May cause stress
Lead to external cost e
...
pollution
Depletion of natural resources
Higher D for M, current account deficit









































































































































Unemployment
Adv
Less wage bargaining / less powerful trade union / less industrial actions
Greater ease to recruit labour
Lower wage, reduce cost-push inflation, lower D(M)
Dis
Waste of resources, lower output
Lower income tax revenue
























SECTION 4 Government and the macroeconomy

Inflation
Adv
Stimulus to production
Reduction in debt, keep firms in business, stop households getting into
difficulty
Reduction in u
...
due to non-contractionary policies
Target other objectives instead of price stability
Reduce risk of deflation
Dis
No certainty, confidence, encouragement to investment, efficiency of choices
Lose price competitiveness, lower X
Savers, borrowers, lenders unplanned redistribution of income
Fixed income group has lower purchasing power
Extra costs e
...
menu, lower profit, higher u
...

Fiscal drag, as income rise, fall in higher income tax bracket
Cost of living ^, stops purchasing power from being eroded too mush
CPI calculation
Construct a representative basket of G & S
Monitor P over time
Give weighting of each G / S according to the proportion of disposable income
they account for
Prices × weights
Compare against a base yr
Effect of i
...
(cost of borrowing, reward to saving, o
...
of spending)
change in consumption and and savings, AD
GDP, employment
D-pull inflation
change in I, amount of R & D, productivity, productive capacity, employment
change in value of currency by speculations, current account balance
some individuals can’t repay when i
...
increases, get into debt
Effect of deflation
If due to lower AD, GDP v, u
...
^
Households postpone purchasing wait for prices to fall further, AD v
Reduce firms’ profits, investment v, lower D for capital goods
If due to higher AS, GDP ^, u
...
v
X^
Higher real disposable income, higher spending, higher AD























































































































Reason for government spending and taxation
















More expenditure on unemployment benefits, healthcare
Lower income, lower AD
May increase emigration

How to reduce poverty
Education, training & healthcare, jobs, income
Provision of food & housing
State benefits e
...
unemployment benefits, increase income of poor
Progressive tax system, reduce gap between rich and poor, reduce relative
poverty
Higher pay to low-paid workers as motivation, higher productivity
Reduction of u
...

Government failure
time lag
not taken effectively by firms e
...
don’t pass down subsidies, capital instead of
labour
mismatch of e
...
education and skill
































































Effect of increase in firms’ profits
higher output
employ more
more investment in capital, higher AD
more R & D, higher quality
attract new entrants
























Redistribution of income
Correct market failure
Trade protection
Influence AD, GDP, price level
Taxation to fund spending

Problems with HDI
Uneven distribution of income, not everyone has high income
U
...
may be high
No job vacancies
Long working hrs, stress, less leisure
Poor working conditions, health
Pollution, health
Quality of products
Informal market
Vicious cycle of poverty
Low income
Bad healthcare, ill
Bad education, reduce productivity, employment opportunities and income
Policies to reduce poverty
Expenditure on benefits, education, healthcare and training
Expansionary fiscal & monetary policies
Progressive tax system
Attract MNC
BR
Education, employment, delay birth
Family planning
Contraception
Proportion of women in the labour force
Infant mortality rate, fewer children in expectation that more will survive
Number of women
Fertility rate
Easiness of maternity leave
Government policies e
...
benefits and education, pensions
Cost in raising children e
...
education
DR
Income, l
...

Education, knowledge about nutrition
Healthcare, cure of diseases
Lifestyle, diet
Pollut

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