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Economics Notes for IGCSE

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Unit 1: The Basic Economic Problem: Choice and the allocation of resources
1
...
Resources are
scarce so we have to make sacrifices when making a choice on how a resource will be used
...
2 Factors of Production
There are 4 Factors of Production
Land: all natural resources
Labour: physical and mental contributions of an employee
Capital: all items that go into producing others
Enterprise: the factor that brings all other factors together to make profit
Factors of production are combined to made goods
...


1
...
The
opportunity cost is the real cost of any economic decision
...


1
...
g
...
50

Producers
Producers have to decide what to produce and where to produce
...
g
...
Producers consider wage costs and whether there is a
lot of labour in the area
...

Businesses are often criticised for failing to consider how opportunity cost and their decisions affect others
...
g
...


Governments
Governments have to decided how to organise and designate areas of their income (in the form of tax)
...
g
...

Economic problems: Issues that arise from balancing the uses of scarce resources and goods
...

Factors of production: Resources used in production: land, labour, capital and enterprise
...

Opportunity cost: The next best alternative when a decision is made
...


Economics Notes for IGCSE

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Unit 2: Allocating Resources: The Market at work and Market failure
2
...
Some are provided by nature and some are man made
...

Government influence on decision making: the levels of government interference can determine the type
of economy a country has
...
Buying and selling decisions are made by buyers and sellers
...


High prices create profit and increased supply
...


The lower the price, the more customers will buy
...

In a MIXED ECONOMY, decisions are made by a combination of the government and the market
...
The market has no control in what is sold
...
2 Demand
Effective demand for a good or service is a want supported by the
money to purchase it
...

Businesses use demand as a factor in setting prices
...

If prices are too low, not enough revenue will be made
...


2
...
Suppliers supply more at
higher prices, higher prices
enable producers to cover costs
and make increasing profits
...

Extensions and contractions in
demand result from changes in the quantity demanded of a product
resulting from changes in the price of a good
...
4 Equilibrium Price

Page 3 of 46



Equilibrium means a state of balance
...


The market price is often referred to as the market clearing price because
demand matches the quantity supplied therefore the market would be
cleared with no extra goods remaining and no dissatisfied customers
...


2
...

Factors that affect demand are:
• Popularity or fashion
The more popular a good the higher the demand for it and
therefore the curve moves to the right
...

• Income
The amount of income that people have to spend on goods is
called disposable income
...
But the incomes of
consumers tend to rise with time so with more disposable income,
more goods can be bought and the demand for products can
increase
...
g
...



• The Age Distribution of the Population
Many products can appeal to different age groups
...

• The Price of Substitutes and Complements
Substitutes are alternatives that can replace others e
...
buses and cars
...
The demand curve will shift to the right if larger
quantities of the good are demanded
...
6 Causes of Changes in Supply and the Effect on the Market



The cost of producing an item is
determined by different outputs e
...

the cost of raw materials and
machinery used
...
The factors that can
cause changes in supply are:
• Rising or falling production costs
• Changes in physical conditions
• Taxation and subsidies
• Joint supply

Rising or falling production costs: A rise in production pushes the supply curve to the left (it will cost
more to produce each level output) and a fall in production costs pushes the supply curve to the right
...
Rising resource prices lead to rising production
costs
...
g
...


Economics Notes for IGCSE

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Physical Conditions: changes in the weather, natrural disasters, quality of soil 

Taxation and Subsides: Rises in taxation and subsidies have opposite effects on supply
...

Joint Supply: Some production process create more than one product
...



2
...
It is useful for the
government to know the effects of raising taxes on
particular goods
...

But if raising tax leads to a fall in tax revenue and a
substantial fall in sales for makers of the taxed goods
...
If demand changes by a
smaller proportion than the change in price, it is said
to be inelastic
...
8 Price Elasticity of Supply
Price elasticity of supply is the extent to which supply alters in response to a change in price
...
Other factors include: the ease with which a product can be stored and the
cost of increasing supply
...


E
...
coffee can be stored in packets
so supply is elastic, while
strawberries do not stay fresh for
very long making supply inelastic
...

Perfectly in elastic supply refers to a
situation when however much price
increases, it is impossible to increase
supply by a single unit
...
9 Usefulness of Price Elasticity of Demand
PED is used to calculate at which level of output and at which price will the most revenue be generated
...
g
...
If a good is a luxury the demand for it will ten to be elastic, if the good is a
necessity the demand for it will tend to be inelastic
...


Economics Notes for IGCSE

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2
...
The price the seller sets helps buyers to decide what and
how much to purchase, buyers show what they prefer buy their choice of purchase
...

Producers and sellers supply the market provided they can make a profit
...
The market coordinates decision making by the buyers making their own
decisions on what to purchase
...
In a pure market system there is no need for the government to allocate resources
...
11 Market Failure
Markets fail when they are inefficient, This happens when:

• They fail to produce goods that consumers want
...

• They fail to produce goods at acceptably low prices
...
The
market system does not always produce ‘desirable’ outputs
...
g
...
g
...

Individuals would be reluctant to pay for such a service because people who choose not to pay for a
service would still benefit from it
...

A merit good is one with substantial benefits (sometimes referred to as positive externalities) for society
as a whole rather than being restricted to individuals - for example, inoculation against a particular
disease, everyone benefits if these are provided at low cost
...
The market
often does not provide these goods because it is very difficult to get people who benefit to pay for them
...



2
...
Decision should
only be made when the benefits outweigh the costs
...

Private benefits — private costs = net private or benefit or profit
This method does not consider externalities
...
Favourable externalities e
...
a factory being set
up allows more locals to get jobs, it is called a Positive externality
...
Social benefits include the private
and other positive benefits that result from a particular business activity or decision
...
e
...
of building a factory
...

private costs and benefits are only part of wider social costs and benefits
...
13 Conflict between Private and Social interests
Conflicts can occur between private and social interests
...
Another conflict is between whether the use of resources should be decided by private
expenditure or whether the government should make more of the spending decisions
...
These are stakeholders with an
interest in activities and decisions
...
There are issues of conserving resources as opposed to using the resources
and public expenditure vs private expenditure
...
Society inherits different forms of capital e
...

Natural capital: lakes, rivers, clean air, other gifts of nature
Man-made capital: roads, bridges, factories
Social capital: relationships between members of society such as family and community
Conflicts often arise between business seeking to develop land into buildings while society wants to
conserve into parks
...

Private expenditure is carried out by individuals and businesses that are not government owned
...

People who are in favour of more private expenditure argue that:
• Individuals would be the best at choosing how to spend their own money
...

• When governments spend money it can be wasteful
...

• Public sector workers may be more likely to spend money in a way that is fair to all, narrow interest
groups are less likely to do that
...

Demand: The quantity of a good or service that will be purchased at a particular price
...

Disposable income: Money available for spending after tax and other compulsory deductions
Equilibrium Price: The price at which quantity demanded equals quantity supplied to a market and at which buyers
and suppliers are content
...

externalities can be positive or negative
...
g
...
This is the opposite of Elastic Demand
Joint supply: Two or more goods that are produced as part of the same production process e
...
by-products of sugar
when sugar is created
Market clearing price: The price at which quantity supplied to the market will be bought in its entirety with no
unsatisfied demand
...

Market failure: Inefficient allocation of resources by the market such that another outcome would have led to 

participants in the market being better off
...

Mixed Economy: An economy in which decision are made through a combination of buyers and sellers deciding what 

to, buy, sell and produce coupled with so,e government interference e
...
taxing and subsidising the 

production of some goods
...

Price elasticity of supply: The responsiveness of quantity supplied to a change in the price of a specific item
...

Private benefits: Advantages to a group or individual resulting from their economic actions
...

Public expenditure: Government spending
...
g
...

Social benefits: The advantages of a particular activity to members of a society
...

Substitutes: Alternatives that can replace others
Supply: The quantity of good that will be produced or sold at a particular price
...
1 The Functions of Money
Money is anything that is generally accepted for payments
...
The main function of money is as a means of making exchange (payment
for goods)
...
This requires a double coincidence of
wants
...
Other forms of money were used because they were: Scarce, Acceptable,
Portable, Durable, Divisible
...

• A unit of account: The price of an item can be measured in terms of how many units of currency it is
worth
...
g
...

• A store of value: money can be saved because it keeps its value
...


3
...
Sometimes they’re called
retail banks because their lending to businesses and households is relatively small compared with some
investment banks which provide large sums of capital to business
...
Money 

is deposited in accounts
...
Current accounts are for keeping money safe, but some can be 

withdrawn to make payments
...
Banks also keep documents and other valuable items in 

safe deposit boxes
...
g
...
Businesses may 

borrow from banks when they will want to grow
...
The business will need to pay back the sum
borrowed plus the agreed rate of interest
...
The borrower has agreed
to an overdraft limit and will pay interest to the bank if the account is overdrawn
...
Every month users
receive a statement showing them how much they owe the bank
...
If they do not pay the bill in full they are charged a
high rate of interest
...

Debit Cards: A means of making payment using your own funds in your own bank account rather
than through borrowing
...
The legal
deeds of ownership of the property are kept by the bank until the mortgage has been repaid
...
g
...

Other banking services
They provide a means of making payment, such as cheques and banker’s drafts
...

They provide foreign currency, banks and ATMs make it easy for a customer to withdraw money in most
urban areas worldwide
...
Commercial banks provide banking services to businesses
...
3 Central Banks
Every country has a central bank whose job it is to supervise the banking system in the domestic
economy
...
The central bank influences the economy
in the following ways
...


Economics Notes for IGCSE

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Too much spending in the economy leads to rising prices
...
The central bank also creates rules (financial regulations) that affect how other
banks can be set up and for example how much they can safely lend
...
It also destroys torn notes and worn out coins
...
(Interest rates are the price paid for borrowing money
...

• A reduction in interest rates:
• Borrowers find borrowing cheaper, borrow more and increase spending
...

• A lender of last resort
...
The central bank
can decide to penalise other banks for lending too much and charge them a high rate of interest
...
(The rate set by the central
bank on which all other interest rates are based
...
The central bank helps the government to create and manage monetary policy
...
By acting as the banker’s
bank, debts between the commercial banks can be settled through their accounts at the central bank
...

• The central bank helps the government to borrow money by issuing government bills and bonds
...
The bonds are official
promises to repay money in the future with interest in return for the loan
...

• Helping to manage the international financial system
...
This requires confidence in the
international financial system
...

• One of its functions is to lend money to governments to help them in times of financial crisis
when investors may have lost confidence in the banking systems of those countries
...

• Countries deposit gold and their own currency with the IMF
...

• Leading central bankers meet regularly with important government officials and members of the
IMF to create better systems of financial management
...
The
central bank issues notes and coins
...


3
...
Shares are bought and
sold by traders who purchase shares from other traders
...
Today most share
buyers are financial institutions e
...
insurance companies and pension funds
...
The stock market is a very efficient market because each trader has instant
access through their screens to the prices of all of the shares traded on a particular exchange
...
Regulations say who can be brokers and who needs to pass special examinations
...
They enable businesses to raise financial capital
...


Economics Notes for IGCSE

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Functions of the stock exchange:
The main purpose is to help public companies raise capital
...
Finance
can be used to purchase physical capital e
...
buildings and machinery
...
The
rewards from holding shares are that:
• Every 6 or 12 months, shareholders receive dividends as their
reward (their share of company profits)
• They can also benefit from the rising value of their shares
• Some companies offer special concessions e
...
cheap flights for airline shareholders or discount
vouchers to use in company stores
Shareholders are protected by limited liability
...
They are not expected to pay any more to cover the debts of the company
...
Listed companies have their accounts checked by independent auditors and present an
annual report to shareholders
...
Institutions and other investors lend the government money knowing that they are almost certain
to be paid back
...


3
...
g
...
The higher the reward, the bigger
the incentive to work in a particular occupation
...

An individual’s choice of occupation is determined by a combination of wage and non wage factors
...

Wage Factors:
• Basic pay:
• Amount of money that will be received by an employee before any additional increments or
deductions are made
...

• Overtime:
• Hours worked in addition to the basic contracted number of hours
...

The higher rate is often required to encourage people to work ‘unsocial hours’
...

e
...
a certain level of production/revenue
...
In a retail store an employee might
receive 10% of each sale made, or may be paid an hourly rate plus 5% commission on each sale
...

• Career prospects:
• Many people want to work in jobs where there are opportunities to get promoted
...
g
...

Other non wage incentives:

• Length of holidays,

Economics Notes for IGCSE

•
•
•
•

Page 10 of 46

Good pensions schemes (for public sector workers),
Job security (for public sector)
Location of the job, (close to family and friends) (in an area close to home)
Complexity of the job (some people crave a challenge, some want something simple to do)

3
...
But if they lose their job and retrain they might have to restart at a lower grade
...
There
are a number of opportunities to become more skilled
...
The young
employees will be provided with training opportunities enable them to acquire several job-related
qualifications
...
g
...

Skilled workers:
The more experience an employee has, the more opportunities there are
to increase earnings
...
The more skilled an employee becomes, the
greater the demand
...
If employers wish to attract more highly
skilled workers from other companies, higher rewards must be offered
...
However, employees that do
not keep up to date with changing trends and technology might become
obsolete, their skills are no longer valued or are valued less
...
Older workers whose wages are relatively high may experience this and become vulnerable
and redundant
...
As employees become better
trained and more skilled and their experience increases, they will receive higher wages
...


3
...
However there is also discrimination involved which could
create inequalities
...
These include the level of skill, the nature of the
industry, public or private sector and male/female differences
...

Skilled and Unskilled workers
If labour is in short supply and the demand for that particular
type of labour is strong, employers will be prepared to pay higher
wages to engage suitable workers
...
A skilled worker contributes more to production than
an unskilled worker
...

The Public and Private Sectors
In many countries public sector workers earn more than those in
the private sector, this is sometimes called the public sector
premium
...

Male and Female Workers (Wage Gap)
In most countries average wages are higher for men than
women
...
It can also be used to refer to differences between ethnic groups
...

Agriculture, Manufacturing and Services
The demand for labour is derived demand, labour is wanted to produce end products desired by customers
...
The biggest demand for workers is in the service sector
therefore employers are more likely to pay more to tempt workers
...
As new industries develop, wages will increase in these industries
...
g
...
Also,
the strong bargaining power of trade unions in the public sector
...


3
...
Trade unions are formed, financed and run by their members who pay an annual subscription
...
Public sector
unions bargain with government appointed public sector employees
...

One purpose of trade unions is to negotiate with employers
...
Both
sides try to reach agreement on issues such as conditions of
employment (e
...
hours worked, safety of environment)
...
g
...


•
•
•
•
•

Trade Union Membership: The
benefit to individuals
Typical benefits of belonging to a
trade union include:
Knowing that you are part of a group that represents you and fellow workers
...
g
...

Direct benefits (sickness benefits)
...
g
...
g
...

Direct action to support members (e
...
if negations do not go well, the union may call a strike/union
members stop working)

The ability to strike gives unions considerable power because companies lose money, profit and their
reputation for reliability
...

Trade Union: The Impact on the Economy
Trade unions play an important part in determining wages
...
In some countries, representatives are part of company decisions
...


Economics Notes for IGCSE

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Trade unions are set up to protect the interest of their members
...
Trade unions to protect the interests of workers within the
wider economy
...


3
...
Employees specialise in given occupations
...
g
...
If people and resources concentrate on
things they can do well, then usually everyone benefits
...
It
benefits individuals to concentrate on what they do best
...
However, because the economy is changing so rapidly it is important for employees to be
flexible by learning new skills
...

Flexibility enables employees to secure higher lifetime earnings
...
Specialisation of individuals at work is
called the division of labour
...
Division of labour enables
individuals to become more skilled
...

Advantages of Division of Labour:

• Increase in skill:
• By doing something repeatedly, the employee becomes more skilled
...


• Time Saving:
• It takes time to change from one task to another
...

• Specialisation in ‘best lines’:
• Division of labour makes it possible for people to concentrate on what they do best
...
As employees become more skilled
at a set task they often take great pride in what they are able to achieve
...
Most
specialist work is supported by applications e
...
such as databases of relevant information
...

Disadvantages of Division of Labour:

• Dependency:
• Because of specialisation many individuals, groups and processes become dependent on each
other
...

• Unemployment:
• Specialisation in a specific task can be harmful if the economy no longer requires that skill/
specialism
...

• Frustration and boredom:
• If the work that people have to do is unimaginative and repetitive they may not enjoy work
...

• Over concentration:
• By concentrating on one special skill, individuals may not develop other abilities
...


3
...
The goods may be for immediate consumption or they may be
consumer durables
...
g
...

Saving: Setting money aside instead of spending it
...

Borrowing: When an individual receives money from another individual or financial institutions with the intention of paying
it back
...

Motives for Spending, Saving and Borrowing
Spending:
The main motive for spending is to buy goods and services that you can consume now
...
Other spending is on non-essential goods e
...
a DVD
...

When inflation occurs, consumers may put off buying expensive products
...

Saving:
The main motive for saving is to put money aside in order to buy something else at a later date
...
g
...

Older people might save for their retirement when they are no longer earning
...
Attitudes to savings vary with culture
...
People may feel that if prices go up, their savings will buy
less
...
People save more for the future because they
fear that they may lose their jobs and have nothing to fall back on
...
Another motive is to buy an expensive item
...
People also
borrow money if they anticipate being able to repay it in the future
...
When interest
rates are low, people will be encouraged to borrow because the cost of future repayment has been
lowered
...

Economists use the term consumption to refer to anyone spending on goods that are used up either
immediately or over a period of time
...
Incomes can be
supplemented by borrowing to purchase an expensive item e
...
a car
...
11 Income and Expenditure patterns
Patterns of income and expenditure

Size of income

Spending

Saving

Borrowing

High income
household

Not likely to
spend all of their
income

Will be able to
save some of
their income

Unlikely to need to borrow

Medium income
household

May spend most
of their income

May be able to
save a little

Probably borrowing to buy at least some
consumer durable items

Low income
household

Will most
probably spend
all of their
income and this
may not cover all
their needs
...
However a
problem for low income households is that
they will find it more difficult to borrow
because lenders are less sure about being
repaid

As people become richer they are more likely to spend more
...
Rising consumption is typically associated
with rapid industrialisation
...
The proportion of income spent, saved and borrowed is influenced by the size of
income
...


Definitions for TOPIC 3
Barter: Exchange of one good for another; relies on a double coincidence of wants (i
...
that two people each require 

what one is offering the other
...

Credit card: Used for making purchases the user pays for items by a stipulated later date
...
The amount of interest charged depends on the length of the credit 

period
...
The account holder pays interest on negative balances
...
The money is 

deducted immediately (compare credit card)
...

Division of Labour: Concentration of workers on specific specialist work tasks
...

Interest rate: The price charged for borrowing money
...
An international body set up to provide finance for countries that need 

relatively short term financial support
...

Loan: A sum of money advanced to a borrower, usually in return for a payment of interest as well as the repayment of 

the loan
...

Monetary Policy: Regulations created by the government and monetary authorities to control the supply of money in 

an economy and the level of interest rates
...

Private sector: The part of the economy owned by private individuals and organisations not the government
...

Savings account: A bank account designed to encourage regular savings
...

Savings: Income that is set aside for a purpose
...

Standard for deferred payments: A measure for making payments in the future
...

Trade union: A Body, recognised in law, of employees with a common work interest who seek to further this through 

bargain with employers
...

Unit of account: One of the functions of money: Money can be divided into separate units (e
...
dollars and cents) 

which can be used to record the value of transactions, loans and other financial deals
...
1 Sole proprietors and Partnerships
Sole proprietors or Traders
Businesses that are owned and controlled by one person (though there may be more than one
employee) are owned by sole proprietors
...
They are the most basic
form of a business
...
2) All profits go to
the sole trader
...
4) Decisions can be made
quickly
...

Disadvantages: 1) They have to work long hours
...

3) Do not have the legal protection of limited liability
...

Partnerships
An agreement by two or more partners to run a business together
...
Partnerships are formed to share workloads and to bring in new finance, ideas
and skills to a business
...
This is called a deed of partnership
...

Advantages: 1) It may be easier for a partnership to raise the capital needed to start the business and the
partners can share skills and the workload
...
3) New finance, ideas and

Economics Notes for IGCSE

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skills can be brought to a business
...
g
...

Disadvantages: 1) Partners may disagree
...
3) Profits will
be shared
...
2 Private Companies
Companies
A company is a body that has been set up by following established legal guidelines (stating how it
should operate) and which is owned by shareholders
...
In law the company is recognised as separate from its
owners
...
The return they
receive is called a dividend
...
Shareholders of companies choose a board of
directors to run the company for them
...
g
...
Companies have limited liability, this means
that if the company gets into financial difficulties and has to pay back debtors, the maximum amount
that the shareholders have to pay is the value of their shares in the company
...
Private limited companies tend to be smaller than public
companies and are often family businesses
...
There
are at least two shareholders, but there is no maximum number
...

Private limited companies find it possible to raise more cash (by selling shares) than unlimited
liability businesses
...
Private companies can be made public by making its shares
available on the stock market to the general public
...
To register the company will have fill out paperwork
...
If shareholders want to sell shares they have to get permission from the board of
directors
...
The finance from
shareholders is called equity and the finance from banks and lenders is called loan capital
...
3 Public Companies
Companies with shares traded on one or more national stock exchanges are public companies
...
The advantage of having shares traded on the stock exchange is that large
sums of money can be raised quickly
...
It is also costly to have shares quoted on
the stock exchange
...

Businesses are happy to trade with public companies knowing that they have financial backing
...
On ‘bad days’, companies can lose millions of dollars on the stock exchange
...
On ‘bad days’ a company will have to sell its shares at a
lower price than it would like
...
Shares can also be sold to certain
financial institutions for example pension funds and insurance companies
...
A lot of paperwork is involved in setting up the business
...

2
...
Bigger companies tempt smaller companies by
convincing them to sell their companies at high prices offered
...
Public companies often concentrate on paying short term dividends to shareholders rather than
building up the business over time
...
4 Multinationals
Multinational companies produce and sell products in many countries
...

Multinationals are companies that operate in several countries
...
Multinationals are able to buy labour and raw materials in
more countries and can sell to a much larger market
...

• A source of labour that may be cheaper in the home country
...

Disadvantages:
• There may be different tastes, requirements and legal standards
...

Benefits and disadvantages of host countries:

Advantages:
• Employment, new products and new technology is brought to the host countries
...

Disadvantages:
• They may not pay enough for raw materials and employee wages
...
5 Cooperatives
‘Cooperation’ means working together in agreement
...
In a
cooperative people join together to make decisions, work and share profits
...
The cooperators often elect a committee to represent them
...
The three types of cooperatives are: farming cooperatives,
production cooperatives and retailing cooperatives
...
Cooperators set up
large store units so that farmers can sell their produce slowly
...
The cooperative shares money from sales
between the farmers
...

Production cooperatives
Production cooperatives AKA workers cooperatives, employ all or most of its members
...
Most of the workers own shares
...
The board then hires managers
...
The main advantage is that members work together and share the benefit
...

Retailing cooperatives
...
This gives
them voting rights to choose how the cooperatives should run and what types of goods to stock
...
They only buy from suppliers who sell products at fair
prices
...


4
...
Although the corporation is government
owned, the controllers are given considerable freedom to make their own decisions
...
In India people call it
public sector undertaking
...
Public
sector businesses do not always use resources as efficiently as if they faced greater competition
...
Sometimes public corporations are set up to preserve jobs
...
This enables the government to
provide services to locations where it is not economical to provide them e
...
water supplies to areas of
water shortage
...

When a business or industry is taken over by the government, its called nationalisation
...
But sometimes, public corporations can become
too large and difficult to manage
...
Subsidising a public corporation through taxes may prevent the revenue from being used
more efficiently for other purposes
...
7 Effects of Changes on Business Growth
Businesses grow to take advantage of new opportunities
...
A sole trader or partnership may be altered to create a company
...
As a result of growing to become a large company, a number of
benefits will arise: the ability to raise finance from across the world, being known across the world, the ability to engage in
extensive research and investment to improve capability, the power to draw talented people from around the world to work for
the company and adapting new ideas for other countries and markets
...
The dangers of going public are that a company
may become subject to a hostile takeover bid
...
New owners would now have control over the business
...
A private company may change
to become a public company to raise more funds and more expertise
...


4
...
The
demand for factors of production comes from the demand for the products that they make
...
E
...
if there is a rise in the demand for
nuclear energy (which uses uranium and miners who are needed to mine the uranium) this will happen:
Combining factors of production
In buying factors of production, buyers will consider
the relative prices of factors to choose the best
combination
...
Labour intensive industries employ a lot of
labour compared with the amount of capital
employed
...
Because capital tends to be highly
productive at a low cost
...
9 Fixed and Variable Costs
Fixed and Variable Costs

• The costs of production are either fixed or variable
...
Fixed costs have to be paid no matter what the output e
...
rent
...
Variable costs are zero when output is zero and
rise directly with output e
...
cost of raw materials
...
Therefore, as the level of output increases, the fixed cost per unit falls
...
A business with a small output will not be
able to make efficient use of variable resources
...
But too many workers would get in
each other’s way and thus work less efficiently
therefore the average variable cost would start to
rise again
...

Once resources are combines less well, they start
to rise again
...
10 Total and Average Costs
Total cost is calculated by adding fixed and variable
costs at different levels of output
...

Average cost is the cost of producing a unit at a
particular output
...
The

lowest point on the curve is the
optimum output level
...


4
...
Total cost is calculated by adding together all the
costs at each level of output
...
Average cost is the total cost divided by the
level of output or sales
...
12 Total and Average Revenue
Revenue is the sum of money that a business receive from making sales
...
Total revenue = Quantity of goods sold x Price
...
Average revenue is compared with average cost
...
13 Profit Maximisation
The main aim of a business is to make profit
...
Shareholders like to make sure that the business they’ve invested in, is making a large

Economics Notes for IGCSE

Page 19 of 46

profit because large profits for the business mean large dividends for shareholders
...

Businesses may have other goals for example: draw attention away from their high profit because the
government and regulating bodies may question how such large profits were made
...


4
...
The greater the competition the
closer the prices charge by rivals
...
Perfect competition does not exist in a pure form because there are always differences
between sellers e
...
one seller may be more friendlier than another
...

• Each firm would produce an identical product
...

• There would be no barriers to new firms entering the market, and no barriers to exit, so that firms
could enter or leave the industry easily
...

• There would be lots of buyers, each of whom would know all the prices charged by different sellers
...

This price would be the minimum they could charge without going out of business
...

At the market price the average cost of production would be the same as average revenue for selling
...


•
•
•
•
•

Price takers and Price makers
In perfect competition businesses and suppliers would be price takers: it would take its price from the
market
...

Businesses would produce at the point where: Output x Average Revenue = Output x Average Cost

4
...
In a pure monopoly, there is only one firm in the
industry, so there is no competition
...
Sometimes
there are businesses so large that they can benefit from the same advantages as monopolies
...
A lack of competition can
enable companies to benefit from monopoly-like powers
...
Monopolists would choose the price where the difference between cost and revenue is
maximised
...
The monopolist is therefore making profit over and above normal profit
...

The features of a monopoly:
There is only one firm in the industry and it controls the market
...

Monopolists make profits over and above normal profit
...
E
...
energy
companies, water suppliers and other important public services
...
It may build up a reputation and position that are difficult for others to
match
...
g
...


• Through marketing and branding: Companies spend billions of dollars on advertising and promotion,
the high cost of advertising deters other firms from setting up in competition
...

• Some businesses are also natural monopolies: This occurs when resources are located in a limited
geographical are and are easily exploited area
...
16 Different Sizes of Firms
The ways to measure the size of a firm are by:

• The number of employees: Firms may be large but have few employees because they employ a lot of 

capital
...
g
...


• The value of sales: the value of sales made by the business is a good way of measuring the size of retail 

businesses e
...
supermarkets
...
g
...


Reasons why large businesses exist:

• To meet demand: if a lot of one product is needed, a large company can produce a lot of the product to 

meet demand
...
Companies are able to operate 

from large factories with very low average unit costs
...
g
...

Reasons why small businesses exist:
• Some are new businesses
• They may supply a local market
• They provide essential components and supplies for large businesses
• There may be only a limited demand for their product
• Their owners may prefer to run a small enterprise
• Personal services requiring attention to detail are often suitable for small firms
...
17 Different Forms of Integration
To integrate means to join together
...
A merger
occurs when two business combine to form a single company
...
A takeover occurs when one business
gains control of or acquires a part of another business
...
Integration gives access to new markets, technologies and
large scale production
...

Mergers and takeovers take place because:

• There is too much supply in the market relative to demand
...


• To get access to new markets, perhaps in other countries
...

• To acquire dynamic products
Horizontal
Integration

Vertical
Integration

Firms join together at the same stage of production
...

The increased size in the business provides economies of scale
...
g
...
E
...
Backward = a tea advertising
company taking over a company that makes tea
...


Economics Notes for IGCSE
Lateral
Integration

Page 21 of 46

Occurs when there is a merger of firms that use the same distribution channels
...
g
...


A conglomerate business is made up of a range of companies or divisions producing
products that are not necessarily related
...
They are also able to build up a high profile
Integration
enabling it to raise finance more easily
...
E
...
profits from Tata steel could be channeled into
producing the Tata IT company
...
A joint venture is a good way of
entering a new international market
...
E
...
Tata tea
invests in Chinese tea companies
...


4
...
Economies of scale enables a business to reduce
its average cost curve for a growing business in successive time
periods
...

Internal economies are the advantages that a firm gains from its
own growth
...

Internal economies of scale enable larger businesses to produce
lower unit costs
...
External economies result from the growth of an industry or improved services n a region
reducing costs for a range of businesses
...


• Financial Advantages:

Large firms find it easier and cheaper to borrow money because banks are confident that the loan
will be repaid
...

• Commercial Advantages:
Large firms are able to buy and sell in bulk
...
The cost of creating a global advertising campaign can be spread over billions of people
who could watch the TV advert across the globe
...

• Product diversification: producing and selling lots of different products
...

• Supplier diversification: using several different suppliers in case one is unable to supply in time
...
There may be technical
problems with complicated equipment
...
If the business produces too many products for too many markets and a
number of them fail, the losses may have a damaging effect on the development of the company’s other
products
...
All
firms benefit from external economies of scale such as: improved communications and transport links, improved
educational facilities, the development of suppliers supplying components to all the firms in the industry, improved housing and
social amenities that encourage workers to move to an area and the development of banking and insurance services in an area
...

There may also be congestion and pollution from business activities
...
19 Advantages and Disadvantages of Monopolies
Monopolies enable businesses to dominate a market
...
Monopolies can provide a high quality service to consumers
...
A virtual monopoly
is when large firms have powers as if they were monopolies
...

Through economies of scale a large business with monopoly-like powers can produce at a lower cost
than smaller rivals
...
The monopolist has an incentive to produce
high quality products and serves to maintain the monopoly position
...
It is able to ensure that high quality products are provided to consumers
...

• Monopolists might restrict the quantity of goods they supply to the market in order to keep prices high
...

• Monopolies may to invest in developing new products because they can sell existing ones
...

Average Revenue (AR): Average receipt to a business from the number of units sold
...

Capital employed: Relates to financial definition of capital: total amount of finance used by a business to support its 

activities
...

Cooperative: Organisation set up by a group to further their mutual interests
Derived Demand: Demand for a product or service from its use in producing some other demanded good or service
...

Economies of scale: The advantages of a larger firm over a smaller one enabling it to produce larger output at lower 

unit costs
...

Integration: The bringing together of businesses and their operations
...

Limited liability: The greatest amount that a company’s owners might have to pay out to meet their debts, the 

maximum being the sum they invested in the business
...

Market capitalisation: The value of all the shares of a company on a particular day
...

Monopoly: The existence of only one firm in an industry
...

Partnership: A businesses owned by two or more people
Perfect Competition: A situation in which there are many buyers and sellers in a market each of whom has knowledge 

of all of the prices being offered in a market
...

Price Competition: A situation in which businesses seek to sell at lower prices than rival
...


Economics Notes for IGCSE

Page 23 of 46

Price taker: A business that can only sell at the market prices,
Privatisation: The transfer of a business from the government to private ownership
Profit maximising point: The production or sales level at which there is the greatest difference of total cost and total 

revenue
...

Public corporation: Government owned firms
...
Government approval is required for major expenditure decisions
...

Total cost: The sum of all fixed and variable costs at a given level of output
...
The total receipts of a business from selling 

activities
...
g
...
1 The Government as a Producer and Employer
The government plays a major part in owning and running many large industries or important businesses
in an industry
...
The public
sector can step in to produce merit goods and public goods that the private sector may not produce
...
Governments take responsibility for production for a number of reasons:
To produce essential goods and services: Employees pay part of their income to the government in tax so that the
government can provide essential goods and services such as health care and education
...
This would again include health and education services
...
The government would supply these such as
street lighting
...
If they were owned by a private company, they
might charge high prices
...


The government as an employer
The government is a major employer in all countries
...
g
...
g
...
Government employees can also work in
public sector jobs such as education and healthcare can also work for state controlled businesses such
as national post office services
...
2 Government Policy: Full employment
Full employment might mean that everyone has a job, but at any time people are moving jobs so there will
be an element of temporary unemployment
...
Full employment is therefore defined as a
situation where most people are at work but there are enough people out of work to prevent wages
from rising at an increasing rate
...
A small amount of unemployment may be helpful to the economy
...
In most countries
unemployment rates are higher among younger workers,
people with low educational qualifications, minority groups and
people in rural areas
...
High levels of
unemployment are costly to the government: tax revenues
fall and spending on the unemployed increases, Rising levels of unemployment and falling incomes for
poorer people can lead to social unrest and rising crime figures
...
When people are in employment they feel happier, are able to feed themselves and their
families and do not have to rely on the government for handouts
...
The government needs to identify and create policies to deal with unemployment,

Economics Notes for IGCSE

Page 24 of 46

depending on the type
...

Cause/Type

Possible cures

Temporary

Publicise job vacancies

Technological

Provide educational and training opportunities focusing on new technical skills
required for new jobs

Frictional

Training in job areas where there are shortages of supply: provide more information
through government and private labour resources about job opportunities to reduce
period of search unemployment

Structural

Encourage people and businesses to move into growth areas of the economy regions and occupations

Cyclical, demand- Government increase in its own spending in times of recession; lower business
deficient
taxes to reduce costs an encourage employment of more labour
...
3 Government Policy: Price Stability
When prices are stable it is easier for households, businesses and governments to make economic
decisions
...
Average prices are measure by the government using the Consumer price index
...
But if prices rise above 2% each year or if changes in prices become unpredictable, then prices
become unstable
...
Most businesses sell goods on credit, they supply now expecting to be paid a given
sum in the future
...

This makes businesses reluctant to supply goods on credit
...
Inflation will reduce the value of some of the
taxes received
...
In period of inflation,
governments and businesses find it difficult to calculate how much they will receive at future dates
from creditors
...
The main reason that governments want price stability is to
enable accurate planning
...

Government policy to create price stability
A price and income policy is a set of measures by which the government sets prices and wages to create
stability
...
Direct control of prices
...
The problems of doing this are that:
• The price system no longer operates as an efficient system for signalling the preferences of consumers
...

2
...
This would
work in the following way:
• Reduced government spending lowers the demand for goods in the economy leading to fall in prices
• Increased taxes mean that taxpayer incomes fall, so there’s less to spend, leading to a fall in prices
...
Controlling the quantity of money available for spending in the economy
...

The central bank can also impose restrictions on other banks requiring them to reduce their lending
...


5
...
Over time an economy
needs to be able to provide better living standards so that people have more goods to consume, more
leisure time and better environmental and other living conditions
...
GDP measures the total value of goods produced in an economy in a given period, usually one year
or a quarter (three months), It is important that GDP per head is increasing
...
The government places a very high priority of economic
growth
...
Governments invest in major
projects that improve an economy that help to support growth
...
An important
part of sustainable economic growth is that there is investment for future generations
...
g
...
It can also be social and
welfare investment e
...
clinics providing a healthier and more educated population
...

The trade cycle:
The nature of economic growth is that is does not take place in a steady way
...
In
some periods there is even negative growth
...


5
...
Redistribution of income involves
transferring income or benefits from the rich to the poor
...
This is inequality
...
If a person’s income is below the poverty line (US $1
...
The government can redistribute income by:
Taxation:
The government can tax the rich and redistribute this income for example through spending on public
goods
...
Poor consumers can
receive ration cards enabling them to buy food at a lower cost than the normal price
...

Government Spending:
The government can use the money that it receives from taxes and other revenues to spend on goods and
services that benefit the poor more than the rich
...
g
...
6 Government Policy: Balance of Payments Stability
The balance of payments is the financial statement that sets out the monetary transactions between a
country and the rest of the world in a particular period of time
...
Other parts of the balance
of payments include capital flows e
...
investments in shares in foreign companies and the running down
or building up of foreign currency reserves
...
Exporting products can enable a country to earn foreign currency
...

Having a deficit is not necessarily bad provided a country is able to attract inflows of capital from
countries with a surplus and a country has a large economy
...
In the short term it does not matter if a country has a surplus or deficit provided it
is not too large
...
If
you have a few years of deficits, you will want to turn these into surpluses to pay off the deficits
...
Not enough foreigners want to
buy exports from that country
...
Governments need to take
action to make sure their economy remains competitive
...


Economics Notes for IGCSE

Page 26 of 46

• Encouraging consumers to buy domestically produced products
...
7 Conflict Between Government Aims
Governments managing their economies often face conflicting policy aims:
— Spending more money to stimulate growth can lead to rising prices, resulting from increased 

demand
...

— If the government tries to create full employment, labour may become increasingly scarce
...
They raise wages which in turn lead to rising wage 

inflation
...
This in turn might slow down economic growth
...
It may have to trade off or accept a little more
unemployment for a little less inflation
...

NAIRU is the non accelerating inflation rate of unemployment
...
Prices are allowed
to increase gradually and some unemployment is tolerated
...

The government should be trying to achieve a suitable mix:
A state of almost full employment 4%
Inflation held at a manageable rate (2%)
Year by year sustainable growth
The reduction in inequality over time
International payments balanced so that deficits in some years are balanced by surpluses in
others

•
•
•
•
•

Economies need to be quite strong to achieve this
...
Successful
economies experiencing high rates of GDP and those that are rich often have high levels of inequality
...
The government needs to trade off and balance its five main
economic policy objectives
...
8 Types of Taxation
Reasons for taxing
A tax is a payment made by individuals or businesses
to the government
...

To discourage certain activities: To discourage
activities that are seen as antisocial or cause high
pollution such as smoking or cars
...

To discourage the import of goods: Import taxes are
referred to as tariffs
...

To redistribute income from the rich to the poor
...

Direct taxes: The burden falls on the person paying for it
...
g
...

Progressive, regressive and proportional taxes
If income is going to be redistributed then the rich need to pay more in tax than from a poor person
...

Regressive tax:
The poor pay a higher percentage of their income in tax than the rich
...

Proportional tax:
A situation in which tax rises in proportion to the income of the taxpayer
...
Higher income earners pay a larger percentage of
income tax
...

A tax on company profits: This is a direct tax
...

A tax on purchasing: E
...
Value Added Tax
...
The shop then makes the customer pay
the tax
...
If the government taxes goods that are bought buy the rich more than
those bought by the poor, the purchase tax system would be progressive
...

Taxes on specific products: E
...
cigarettes, alcohol and petrol
...
They may be regressive if
they hit the poor harder than the rich
...
Indirect taxes are paid through an intermediary rather
than the person on whom the burden of the tax falls
...
9 Government Influence on Private Producers: Regulation
Regulations are rules
...
In the
world of business the aim of regulations is to influence the behaviour of firms and individuals in the
private sector
...
Regulations can impose costs and time burdens on private businesses
...


Setting up a new business

Paperwork to be filled in to register the business rules protecting
shareholders, filing of tax returns
...


Product standards

Quality of food products labelling of contents of a product
...


Providing goods on credit

Information that must be given about the cost of the credit to the
borrower, rules setting out the possibility of the borrower pulling out of
a credit agreement
...


Supply of harmful products

Health warnings on cigarettes
...
They
can also be created by granting licences and permits to firms that meet certain conditions
...
Failure
to do so can result in fines or loss of the licence
...

The benefits of regulations:
Governments use regulations to improve efficiency and redistribute income
...
Monopolists may restrict output or artificially

Economics Notes for IGCSE

Page 28 of 46

raise prices
...
Governments also use regulations to limit the effect of externalities such
as where pollution is created in production
...
g
...
Regulation makes it possible to
strike a balance between private firms seeking to make a profit and the interests of the people who use
their services
...
To comply with regulations a
business must: learn the regulations that relate to it, fill in all the paperwork and create systems
and methods that fit with regulations
...

They mean that they have to spend so much time and money complying with the regulations that they
cannot concentrate on running their business
...
However these
countries also gain a competitive advantage because their standards are higher
...
10 Government Influence on Private Producers: Subsidy
Subsidies are sums of money provided by the government to a producer or supplier for a specific
purpose
...
Subsidies are granted to support declining industries, to produce essential
products and to protect domestic industries
...

They may be provided for several reasons:
• To encourage the production of goods of national importance
• The government may provide subsidies to farmers of essential food supplies, this guarantees an
income to a farmer
...
In some countries the government provides subsidies to encourage the development of
new forms of energy
...

• If the industry did not receive a subsidy it might not survive
and lots of people will be out of work so the government
would have to give handouts which is expensive
...

• Lower cost to supplier
When a supplier receives a subsidy it will be encouraged to
produce more for the market
...
When this happens it leads to an increased
supply at lower prices
...
For example, in a loss making industry the
more likely effect will be to stop supply from falling rather than
leading to its increase
...
11 Government Influence on Private Producers: Taxes
Taxes act in the opposite way to subsidies
...
However if a tax rate is set too
high it can discourage some desirable business activity
...
When a sales tax
is increased, the supply curve shifts to the left
...
The supply
curve shifts upwards by the amount of tax
...

Knowledge of elasticity and the impact on indirect taxes helps the government set tax rates for VAT and
other sales taxes
...
The government should also consider elasticity in tax levels for licenses and local
business taxes
...
Effective
taxes should focus on producing desirable goods and services and discourage businesses from carrying
out undesirable activities
...
They should also provide

Economics Notes for IGCSE
Elastic

Page 29 of 46
Inelastic

suitable revenues for
the government
...

They should be simple
to operate and
understand, and not
need excessive form
filling by taxpayers
...


Definitions for
TOPIC 5
Ad valorem tax: A tax levied as a percentage of the value of the item it is imposed on
...

Budget: Plan for the future set out in numbers
...

Economic Growth: The increased efficiency in an economy to produce goods over time measured by rising GDP
...

Government Interference: Government actions to regulate and control market forces through taxes and subsidies
...

Indirect tax: A tax that is paid by an intermediary who then passes on the taxes to an end payer
...

Merit good: A good that an individual should have on the basis on need
...

Natural monopoly: A monopoly resulting from natural factors
...

Prices and income policy: A government imposed limit on wage increases and prices that business can change
...

Public good: A product consumption by which one person does not reduce the possibility of someone else 

consuming it and where no one can be excluded from consuming the good
...

Recession: Two or more consecutive quarters when inflation is taken into consideration
...

Regulations: Rules and laws
...

Subsidies: Money granted by the state to keep down the price of goods and maintain the supply
...

Trade cycle: Increasing and falling levels of economic activity over time
...


Unit 6: Economic Indicators
6
...
It
measures changes in average prices over a year
...
The list will be updated to take account of
changing spending patterns
...
A family household survey is issued to 10,000 people
to find out what they spend their money on
...
Create a basket of goods representing the most
commonly bought goods and services
...
The weighting of people’s income spent on these
items is created based on survey answers
4
...

5
...

6
...

7
...

Inflation is a persistent or sustained rise in the general level of prices over a period of time
...
The weighting is a figure given to a category of goods according to
the percentage of typical household’s income that is spent on it
...
The price index
measures changes in an average basket of goods bought by a typical consumer or family
...

Problems involved in using a price index:
The price index is designed to show a general increase in prices and how they affect consumers
...

• The index makes comparisons with a base year however if prices were low at the base year the
comparison may exaggerate the price rise
...


6
...
The effect may be an
increase in prices
...
Rising costs
include agricultural prices, raw material costs, labour costs and weakening exchange rates
...

Cost push factors:
Cost push refers to the costs that a business has to meet such as wages and raw materials
...

Food costs:
The price of basic foodstuffs increases as supply decreases, which leads to increased competition of food as
a result of growth of huge economies
...

Raw material costs:
The cost of raw materials has risen and because raw materials are at the centre of modern economies, so as
their prices rise, there is an effect on many other prices
...
If foods and fuel prices rise for workers, they
will press their employees for higher wages
...

Land costs:
The price of land has risen which leads to land price inflation
...

Exchange rate costs:

Economics Notes for IGCSE

Page 31 of 46

Changes in the exchange rate between countries can have a major impact on business costs, people may
have to pay more for imported goods
...
This happens when people have more to
spend
...
Businesses compete for resources
and this will lead to a rise in prices
...
3 Consequences of Inflation
Inflation is a sustained rise in the general level of price
...
When inflation rises more quickly it can
disrupt economic decision making because it become difficult for
businesses government and even ordinary people to make plans
...
The reverse of inflation is
deflation, when prices start to fall
...
When
prices rise rapidly governments are often tempted to print more money
...

The government is forced to print more money, but it becomes worthless
...
People resort to buying the
lowest priced products available
...
Because
money loses value, people on fixed incomes save less and spend more
...
People may switch to cheaper
alternatives and cut back on extravagant purchases
...


Who loses out in a period of inflation:
The poor:
Poor people are the first to suffer in times of inflation
...

People on fixed incomes:
Their incomes have to rise to keep up with inflation but because their incomes are fixed they are not able
to save more, they have to spend more
...
Their savings may be deposited in a
bank or kept in a safe place
...
When the
money comes to be spent it is not worth as much as when it was first saved
...
These are usually
unskilled workers with less bargaining powers who don’t belong to a trade union
...

Businesses:
A lot of business activity involves supply goods on credit perhaps to other businesses
...
In contrast, people who borrow
money are likely to gain
...

Mild inflation:
Gently rising prices encourage businesses to supply more to the market and to help increase profits
...

Deflation:

Economics Notes for IGCSE

Page 32 of 46

Deflation refers to a general fall in the level of price
...
This is likely to be harmful to the economy as businesses will start to lay off workers
and reduce levels of production
...
4 Patterns and Levels of Employment
Employment is the work that people do in an economy
...
There are
indicators that show what jobs people do and how many are employed
...

The number of people available to work depends on:

• the number of people within the working age range
• the number within the age range who are prepared

to participate in work: This is the participation rate:

Participation rates vary in each country depending on:

• Social attitude: in some countries women are not supposed to work, in some countries it may be 

acceptable for a woman to work
...

• Age at which people stop and retire
...


Another way of examining patterns of employment is to look at the industrial structure of the economy
...
g
...

Type of employee

Status

Very important to the economy
...

Part time
Self employed
Employed workers

Able to combine work with other commitments such as a family
...
The businesses they set up may take on others and
grow to become major employers in the future
...
E
...
Large businesses and the government
...
Most employees in developed economies work for large
companies who employ thousands of workers
...


Skilled employees

Have developed skills through training and practice
...


Extractive/Primary industries
This industry uses natural resources
...
g
...
They sometimes produce raw materials for
manufacturing
...

Manufacturing and construction/Secondary industries
This industry uses raw materials to make and assemble new products e
...
furniture and cars
...

Service/Tertiary industries
This industry is particularly important in the modern world
...
There are three waves of development
...

In the second stage: countries are dominated by manufacturing when industries such as coal and steel 

become important
...
This can lead to
countries 

being highly developed in
some areas while still having districts where
people live in 

considerable poverty
...

The structure of employment refers to the employment rate, proportions of men and women working,
differences between public and private sector employment and other structural differences
...
As economies develop the main change is an increasing proportion of
jobs in the service sector
...
5 Causes of Unemployment
Employment refers to the use and payment of labour
...

Some of the causes of unemployment are more serious and long term than others
...

Unemployed people are defined as those who are:
• without a job but who want a job and have actively sought work in the last month and are available to
start work in the next two weeks
...

There are two major statistics to look at when examining unemployment:

• Is the total number of unemployed people rising or falling over time?
• Is the unemployment rate (percentage of working population who are unemployed) rising or falling over
time?
Unemployment and inflation are two of the most serious economic problems
...
Unemployment is
caused by a range of factors some of which are more harmful than others in that they affect more people
and have a longer term impact on the economy
...
Or when they are leaving school/university before going on to work
...
For part of a year there will be
plenty of jobs but in the other part, fewer jobs will be available
...
However
technology also helps to create new jobs by leading to economic growth
...

Frictional unemployment:
This occurs when the market system does not work as smoothly as it should
...
For example when there aren’t enough skilled
workers to do a job
...
This occurs when people who have lost their
previous jobs are trying to find new ones but are unable to find them because there is too little
information about availability
...
E
...
when the economy moves away from primary and secondary sector jobs and places a
higher priority on tertiary jobs
...

Cyclical unemployment:
On a larger scale this unemployment results from a substantial fall in demand that affects the economy as
a whole
...


Economics Notes for IGCSE

Page 34 of 46

Dealing with unemployment:
Governments need to identify cures or policies to deal with unemployment
...


6
...
High and rising unemployment has a negative effect on many
groups within the economy
...
Rising unemployment on a large scale has
a negative effect on the trade cycle
...
Unemployment means people losing their job
have all privileges and benefits of being part of a workforce taken away
...
Large number of
unemployed people can lead to widespread poverty and hardship are more likely to suffer from stress and
illness and have lower life expectancy
...
There is an increase in social problems such as
higher crime rates and drug abuse
...

Businesses:
Increased unemployment has an effect on businesses know as the ripple/multiplier effect
...
Some businesses close down or reduce the size of their labor force
...
It can set up job creation
projects to reduce youth and long term unemployment
...
More unemployed people mean that there are fewer people paying taxes and more
claiming unemployment benefits
...
Tax revenue then falls, spending rises and there is a greater likelihood
of a budget deficit
...
Rising unemployment has a downward effect on
the trade cycle
...
When major businesses start to lay off workers
there is a much wider ripple effect on the economy
...


6
...
It is the most common measure of national income and indicates how an economy is
growing
...
GDP is a
measure of the value of output produced in an economy in a period of time used to measure
economic growth
...
Real GDP is a measure that takes into account
inflation
...
There are several ways of
measuring GDP
...
It is important not
to double count outputs
...

The expenditure method
Add together the final spending on outputs produced by a country
...
Only incomes
earned for producing outputs are included
...

GDP per head
The figure for GDP per head of population is probably more informative than the total value of GDP but
it does not take account of the way income is spread out or distributed between the different income
groups in the population
...

Real GDP
When calculating GDP it is important to take account of the effect of inflation this usually means taking
it out
...
Nominal GDP figures are ones that have not been adjusted for inflation
...
This involves calculating the value of the GDP
produced in a particular year in terms of the prices of a base year
...
One difficultly is that some economic activity is simply not recorded
...
g
...


6
...
GDP is widely regarded to be a good measure of living standards
...

Criticisms of using GDP as an economic indicator:

• It does not take into account inequality in society
...
GDP calculations do not take into account the
harmful effects of growth such as pollution and waste
...
Cigarettes are counted as goods ever though they create lung cancer
and other illnesses
...
This is because GDP is
calculated usually calculated within a country using the currency of that country
...
People may have more goods but they are not
necessarily better off or happier
...

Human Development Index
The HDI is a broader method of measuring the quality of life
...

Achievement in each of these three areas is measured by how far a country has gone in attaining the
following goals
...

Criticisms of HDI are that it fails to take into account the impact of economic growth on the
environment
...
The standard of
living measures access to levels of material comfort
...
The HDI has been developed as an alternative measure
...
Health eDucation Income

Definitions for TOPIC 6
Base Year: A year used as a basis for comparison when creating an index
...


Comparisons can then be made against the base year
...

Core worker: Full time relatively well paid employees typically working on long term employment contacts
...


Economics Notes for IGCSE

Page 36 of 46

Cyclical unemployment: Unemployment resulting from downturns in the trade cycle when there is a general fall in 

demand in an economy
...

Demand-pull inflation: General rise in prices resulting from a general increase in the demand for goods in an 

economy
...

Fixed incomes: Incomes not related ti he rate of inflation in a country and tend to remain stable because the earners 

have little bargaining power
...

Tends to be of a relatively short duration
...
Also the value of all earning 

and spending in an economy within a time period
...

Human Development Index: An index used to measure human well being
...

Inflation: A general increase in the level of prices in a country over time
...

NICs (Newly Industrialised Countries): Countries such as Brazil, Russia, India and China that are experiencing 

rapid growth
...

Primary industry: The first stage in a production process that uses natural resources
...

Secondary industry: The stage in the production of goods concerned with making or using raw materials from 

primary industry
...

Technological unemployment: Unemployment resulting from new developments in technology
...

Weighted price index: A way of calculating price changes
...
The index is thus weighted to give greater 

consideration to relatively important items of expenditure
...


Unit 7: Developed and Developing Economies
7
...
Medical and education services
should also be improving
...
This helps to
make decisions about lending money and supporting development projects in specific countries
...
Low to middle income countries are
developing and high income countries are developed
...

Other characteristics of developing economies include high infant mortality, high rates of population
growth, relatively poor levels of education and healthcare, poor infrastructure, sanitation and housing and
an over reliance on small export industries and low productivity in large parts of agriculture
...

Differences in income can be measured by the Gini index
...

100 represents absolute inequality in society
...


7
...
It is defined by someone living on less than 

$1
...
This is the poverty line
...
Poor could mean
being deprived in many ways so there many be high rates of infant mortality, low levels of literacy, poor
heath conditions and a lack of job opportunities
...
Policies for combating poverty include redistributing income, economic growth
and targeting benefits at the poor
...
Economic growth can be achieved if the
government helps markets to work more smoothly by cutting out unnecessary regulation or by providing
subsidies and tax incentives to new growing industries
...

Redistribution of income:
Income can be redistributed through raising taxes so that the rich pay more than the poor (Progressive
taxes)
...
Such high taxes for
the rich can discourage effort and richer workers may feel they are being unfairly penalised
...

Minimum wage can also be enforced for lowly paid workers
...
3 Factors that Affect Population Growth
The main factors are: the birth rate, death rate fertility rate and net migration
...

Or number of live births per 1000 of the population per year
...

Infant mortality rate: The number of children under one year dying divide by the number of live 

births that year
...

General fertility rate: The number of live births per 1000 women between the ages of 15 to 44 years
...

Net migration: The difference between immigration and emigration of an area during a year
...

Population growth:
To calculate annual population growth or fall subtract the population figure at the start of the year from
the figure at the end
...
Multiply by 100 to
get a percentage growth or fall
...
Birth rates are high in developing
countries because they have to combat infant mortality and children can add to household
earnings once they start to work
...
Better health care and
inoculation against diseases and better diet will cause a fall in death rates
...
The death rate can be
affected by the quantity and quality of food available and medical facilities
...

Net migration: If net migration is negative, meaning more people are moving out of the country
than into it, then this will reduce the impact of natural increase on the population
...
Net migration is determined by
the ease with which people can move between countries and whether they want to
...
4 Reasons for Different Rates of Population Growth
Population growth in developing and developed countries:
Developing countries: Have a high death rate, birth rates and low life expectancy
...
There are fewer doctors, hospitals and nurses per head of population
...
The drugs to combat diseases and high mortality rates
are very expensive
...
The low
death rate is from better healthcare, higher incomes and nutritious diets
...
Most families choose 

to have fewer children so that they can enjoy a higher standard of living
...
The structure of the pyramid is determined by births, deaths and migration
...

Developing countries have high death rates inducing high infant mortality rates
...

Developing countries have high birth rates often as a result of a lack of family planning education and
resources and choosing to have more children
...
5 Problems of Population Change
Demography is the study of population features such as size growth and distribution in different age
groups
...
As societies become more prosperous/developed average incomes rise along with higher
literacy rates and improvements in diet, access to clean water healthcare and sanitation
...
Once the birth rate starts to fall, the rate of increase of population will slow down
...

Low development —————————————————————————— —> High development
Stage 1: High mortality and
fertility rates

Stage 2: Falling mortality
combined with high fertility rates

Stage 3: Low mortality and low
fertility rates

Economics Notes for IGCSE

Page 39 of 46

Low development —————————————————————————— —> High development
Problems: Low life
expectancy, poor health and
sanitation conditions, high
birth rate
...


Problems: Rising standards of
living but problems may arise
from falling population
...
If the
population grows in a poor country, there are less resources to go round
...
Resources are stretched by population growth leading to pressures on
health, education and other services and an inability to meet the basic needs of people
...
There is
unsustainable use of natural resources if forests are cut down for land and firewood and land is overused
for agriculture and soil quality falls
...

Consequences of population change for developed countries:
Developed countries are more likely to face problems of a falling population
...
Couples are marrying later and more women prefer to
work longer before starting a family
...
In numbers of countries there are not enough people of working age
...
This can help counteract the fall in the birth rate and lead to an increase in the number of
younger workers
...
Lower fertility rates result in a smaller
working population and a larger dependent population, the young and the old depend on those in work
...
6 The Effect of Changing Size of Population on an economy
Most countries are either underpopulated or overpopulated: they have too few people to work efficiently
with other resources available (or not enough people with the required skills), or they have too many
people for the resources available
...
The optimum population depends on the availability of other resources
...
Some countries are underpopulated
...

Overpopulation:
Some economists suggest that areas of land have a carrying capacity or an optimum amount of people for
sustainable economic development
...
Areas most in danger of
overpopulation include:
• Small island economies with large populations
• Landlocked economies with no access to ports
• Parts of megacities where there are large numbers of people over stretching facilities such as
sanitation and water
...
This is currently
happening in almost every country in the world
...

• Higher taxes for those in work which could discourage them from working so hard
...

An ageing population pushes an economy towards overpopulation by putting more pressure on the
working population However older workers can be an economic asset because of their greater
experience and willingness to work hard and take on more responsibility
...


7
...


• Age structure: grouping people according to age
• Occupational structure: grouping people by their jobs or employment sector
...


Age structure:
Economists make a distinction between the working population and the dependent population
...
Dependents
are those who for various reasons such as age and condition are not paid in work
...
There is greater opportunity for countries to increase productivity and
labour and to save and invest more in the economy
...
This will lead to an increasing burden on healthcare and social security
...

Young (0 —14)

Together with elderly group, the young are the most dependent on the
working population for services such as education, accommodation,
food and health
...


Elderly (65+)

Similar requirements to ‘Young’ group
...
Recently more people are moving from the agriculture and extraction
and manufacturing industries to the service sector
...
The
growth in numbers working in the service sector has led to rising living standards for an increasing
percentage of the population
...
The service sector is the fastest growing part of the occupational structure
...
An important economic effect is that younger workers leave rural areas, these areas become
increasing dependent on the ageing workforce
...
One effect on cities is to increase over crowding
...
In other over crowded cities some areas are characterised by high
levels of unemployment and high crime rates
...
Depopulation often leads to a deterioration of local services because there are not enough people to
pay for them
...


7
...
Inequalities exists within countries and between countries
...
A person’s living standard can be thought of as a basket of goods and services they need in
order to live their day to day lives
...
Some people have access to more goods and better services than others
...


Economics Notes for IGCSE

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• Some people earn a higher income because of the type of income they do
...


• Some people own their own businesses or have shareholdings in businesses
...
The rewards in form of profit may be high
...

Differences in living standards between countries:
There are many indicators that can be considered in comparing living standards between countries
...
Protective industries enable employees to achieve high living standards and they also
contribute benefits to to everyone in the economy E
...
Through higher taxes
...
Typically citizens of more developed
countries have access to bigger baskets of goods and welfare services
...

Living standards and quality of life:
What is beneficial depends on personal judgement
...
g
...
While living standards may be useful for making
comparisons in terms of access to goods and services they may not be very good at measuring the quality of
life
...
g
...
Quality of life is difficult to measure but is more concerned with
providing citizens with what they value
...


Definitions for TOPIC 7
Absolute poverty: A measure of the number of people with an income below a certain figure, usually US$1
...

Ageing population: A population with increasing average age, usually resulting in increased proportion of older to 

younger people
...

Developed Country: Country characterised by high GDP per head and HDI indicators, low birth and death rates 

allowing all citizens to enjoy a free and healthy life in a safe environment
...

HIV/AIDS: Acquired Immune Deficiency Syndrome (AIDS) is an infectious disease cause by the Human 

Immunodeficiency Virus
...

Megacity: A city with over 10 million inhabitants
...

Optimum population: The most efficient size of population in terms of combining the other resources in the 

economy with the number of people
...

Population pyramid: A diagram indicating the numbers of people in a country by age and gender groups
...

Relative poverty: State of being poor resulting from one individual or group receiving relatively less than others
...
g
...

Standard of living: The basket of goods and services that an individual is able to purchase and enjoy with their 

income including access to health and education services
...


Unit 8: International Aspects
8
...
The climate of the country majorly affects what a country
produces
...
This
is called regional specialisation
...
Countries can become world leaders in terms of
manufacturers
...
There are several reasons for
doing this such as:
• The country has the resources required to produce certain goods
...
Some resources occur naturally, others are
developed over time
...

Advantages of Specialisation

Disadvantages of Specialisation

Enables increased output: e
...
large scale
farming yields large low cost outputs

A country can be vulnerable if it has to rely on imports to meet its
needs
...


Consumers have access to a greater variety of
higher quality products from across the world

A country may be vulnerable if the specialised products can be
replaced by alternatives
...


Jobs in areas such as production may be vulnerable if cheaper
labour is available elsewhere
...


Leads to greater efficiency which in turn leads to
production being carried out by the most
efficient producers/countries
...


8
...
It consists of four elements:
• Trade in goods (visibles)
• Trade in services (invisibles)
• Income flows
• Current transfers
The balance of trade in goods and services
The balance of trade in goods and services account shows the flows of money coming into and going
out of a country as a result of trading
...
E
...
cars and butter
...

- Visible imports are purchases of goods bought by a country from other countries
...
E
...
banking and insurance
...

- Invisible imports consist of expenditure on service bought by a country from other countries
...
Credits represent
receipts from sales of exports
...
Find the visible balance
...
Find the invisible balance
...
Add them together to find the total
...

Income flows
The current account also records two other
types of income flows, for example
Germany:
1
...

2
...

3
...

4
...

Current transfers
These are transfers of money goods or services that are not part of a trading process e
...
charity donations
and sending of gifts
...
3 Exchange Rates
The exchange rate is the rate at which one currency exchanges for another
...
Exchange rates can be fixed against other currencies or be free to float
according to the laws of supply and demand
...
A major determinant of the of the value of a
currency is popularity of it
...

Exchange rate systems
A country’s government must decide how to manage/influence a country’s exchange rate:
Fixed exchange rates:
The value of that currency is fixed against another currency or a group of currencies
...
This helps to make the currency stable
...
A disadvantage is that the government has to support the existing rate when the rate
makes it difficult for exporters to sell their goods competitively
...
If we are
finding it difficult to sell exports the currency will fall in price as demand
falls
...


8
...
If the demand for a
currency rises, the value of that currency will increase or appreciate
...
Some people also buy currency to speculate
when price will rise and fall so they can buy at a low price and sell when
prices rise
...

Devaluation and Revaluation
Revaluation of a currency occurs when its value is adjusted
...
This
would make the dollars half as expensive
...
They may become overvalued over time
...
The would
reduce its price and make imports more expensive
...
Changes in demand and supply for currencies results from the demand and supply of
currencies for trade purposes and for capital flows
...


8
...

They also have knock on impacts on the economy e
...
prices changes
...
External
value of the currency
goes up
...

Exporters will sell less and make
less profit
...


Imports from other countries become
cheaper, including raw materials and finished
goods
...
Value of imports increases
...
External
value of the currency
goes down
...
Exporters
will sell more and make more
profit
...


Imports from other countries become more
expensive, including raw materials and
finished goods
...
Value of
imports decreases
...

Inelastic demand for goods lead to higher revenues
...

The consequences of depreciating a currency
This can help you sell more while leading to a fall in imports
...
If the demand for imports is
also elastic, a depreciating currency could lead to a more than proportional fall in imports
...
6 Methods of Protection
Trade protection is restricting the entry of foreign goods into a domestic market or imposing a tax to
raise the price of imports
...

Limiting numbers or prices: To protect domestic industries a government can restrict the number of
imports allowed into its country
...
Another way of
restricting imports is to limit the availability of foreign exchange required to purchase them
...
Tariffs increase the cost of importing and increase the price of 

imported goods in domestic markets
...

Import quotas: Quotas set a physical limit on the number of imports
...
This also protects domestic industries
...
Not granting a license 

is a type of protection
...


This creates a burden that can be seen as a cost and therefore a 

discouragement for importers
...
The effect is to make domestic goods cheaper to produce 

often enabling them to be sold at a lower price than imports making them competitive
...
The involve a direct payment to the exporter
...


Economics Notes for IGCSE

Page 45 of 46

Exchange rate manipulation: The government can buy or sell its own currency in order to alter the 

exchange rate for example it could sell its own currency in order to reduce 

the exchange rate and make exports cheaper
...


8
...
Free trade
enables countries to specialise in what they do most efficiently and then trade with others to buy at less
cost than manufacturing itself, what other countries produce
...
If countries specialise in their best lines of production, the
global output of goods and services is increased
...
With free trade, countries can specialise in lines where they
have the greatest comparative advantage
...
A country should focus on becoming leaders in industries where it has
a comparative advantage
...
This means that the producer is able to capture a larger proportion of the value of the product
...

Free trade enables consumers to buy better quality imports from other countries
...

New job opportunities result from growth of production
...
Its purpose is to open up trade for the benefit of all achieved by rules and
agreements set out for trading between nations
...
WTO agreements are followed by most of the world’s trading nations
...
They mainly: negotiate reductions or the elimination of import tariffs, other trade barriers and
agreeing rules on the conduct of trade
...


8
...
g
...
g
...
e
...

To protect strategic industries e
...
energy suppliers
To encourage green and environmentally friendly technologies
To protect Intellectual Property Rights (IPRs) E
...
research done over the years
...
Protectionism helps against
the effects of dumping and against imports from countries with a poor environmental record
...


Definitions for TOPIC 8
Appreciation of Currency: Rise in the value of of the currency in term of other currencies, for which it can be 

exchanged
...

Current account balance: The part of the balance of payments that sets out exports and imports of goods to and from 

a country in a specific period of time
...

Devaluation: A fall in the value of a currency usually brought about by the central bank
...

Dumping: Increasing sale by exporting goods into a foreign market than the goods cost to make in the domestic 

market
...

Eurozone: Area in which the euro is generally accepted currency
...

Exchange control: Limiting the quantity of foreign currency available to the general public and to business as well as 

controlling the purposes for which the foreign currency can be used
...
The government can fix the 

exchange rate between its currency and one or more currencies
...

Floating Exchange rate: An exchange rate between one currency and other determined by their relative demand and 

supply, this changes from day to day
...

Free trade: Carrying out trade without tariffs, quotas or restrictions on trading
...

International specialisation: Countries focusing on lines of production at which they are relatively efficient
...

Protection: Measures to limit important quantities, or to raise the price in order to give domestic industries an 

increased advantage
...

Revaluation: An increase in the value of a currency usually resulting from deliberate actions from the government and 

or monetary authorities
...

Visible trade: Exports and imports of physical goods
...
It actively seeks to 

encourage the removal of tariffs and quotas and to create regulations governing 

fair trading between nations

---