os Complete Economics for Cambridge IGCSE® & O Level Second Edition 7s So e. SEO nL eleNCTiET anitley/ a Le (am CiEconomics for fa RYT Le Endorsed by Cambridge and accurately matched to the most recent Cambridge IGCSE and O Level syllabuses, this bestselling text supports achievement and performance, while wholly engaging students in learning. It is packed with the crucial practice central to attainment, while global examples and statistics resonate with students and solidify the key concepts. Oxford and Cambridge are world leaders in international education. Our combined expertise and knowledge shape Oxford's resource packages for Cambridge IGCSE and O Level. You can rely on ¢ Fully comprehensive, endorsed student textbooks, mapped to the Cambridge syllabus, equipping students to tackle complex theory ‘© Customisable digital Teacher Kits recommended by Cambridge and loaded with digital material to support effective delivery ¢ Thorough revision support focused on building exam confidence and supporting achievement eee a Breet ee oe ee Pere (Other tite include: 9780199129591 9780199154869, Eee oy ‘olen OXFO OOP eects os rene ee nent es Near tensas email schools.enquiries.uk@oup.com tel +44 (0)1536 452620 Pomme TOTT 472 err SPE WME Dy Brian Titley Brian Titley and Sir Dan Moynihan have significant experience of economics and ‘management in education, business and government. They are respected authors writing for students at the secondary level, ISBN 976-0-19-912960-4 iii l 12958 MlComplete Economics for Cambridge IGCSE® & O Level RYereeN eM ae LCCeL) zn C i SPEI OTE! _ elit a a” ia ‘ord and Cambridge leadin pong ESSOXFORD [UNIVERSITY PRESS os gies owen tary ee Sothern, ret, eee Earesees moe SS Fe ca ee pee eee See ea ee hie Ne ee oe renee tee ana Se es cymes Soltero red tn ny foes ay ony eae, eee rcemaced crea Se mcrae ed pr Sele eee emt ner eee cent, Seen Se ‘ym cr ihn erg Soe eee sae nee eae eee eee ‘ae mt ik Ce See reas, a Mp tg bpm pnt i eae ceeen ecea ae ee cream mca eee amare a cud Des rm ean att Secncas cameos Sc oe Sarat mat ari gout not mt ween er SME pecyeucar ae cee ee ee ee Dene ee ee het Der ete ae Cen rir a eee Srerracgamec nat een ere ee ee ET Re eg ee a eo re a aoc ae eaarey en means toes, Sa eee ome carmen aut re ele acme cae Se ohne ozaeceane mere eee oan wees tg oT, Caicos PM quits after corruption inquiry’, The Iadeperadene, 242.2008, copyright ©The {International Labour Organlaaton LO) frees (pp 246,48 fom Glob "Employment ends 3011, copypit © Intemational abr Onna, 2018 “The Ish Times for |p 395) Paul CllenOvenea i nding human ight ae Theis es 201.2011, copyrgt © Tesh Hes 201: dip 17) i Tes, Reporte Choice ef gh tates or peting etree, Th i ines, 2.9 2010, yah ©The her 2010 NON New Zealand ory 73) Ronin tke bey with ty ads ta 19.2010, ‘News International Group vs the Newsy Marketing Agency fo (p87) Toy i thet we sat et Ea by David rows The Laon Per Dae ‘OP for extracts tom OUCD Saisie cg p62, 29) a fortes, ‘Eaphc and chars rom Tang Wages 2010, (OECD, 30]. by OFCD Feo $Enlossconomte Evionmentl ant Sc Stes (8CD 2010 fp 38, eb O8CD Family Darin (O8CD. 2010p 140), Solo Symdication frp 357 James Chapman the REAL cox of unetployment 664 ‘ion per yest, They a 312007, and () 23) Dal Mal Report scone _owechaging by up to 300% for some pt maine, The Dui Mal 27.9010. ‘Telegraph Media Group 14d frp 395) Gaedon Rayner 'Nilions in overs io ‘Aen embezsed l eeraph 52. 2017-copmght © segaph Meda ro oe f Amer (0 Gr 428) Tens of Thowands uta 20 Suni in ‘Moa reeratonotxchange VI] ri 12210 WE Mart is pay 2011 ‘Worl Trade Organization (10) for otal tae frre fp 41.432, 445) "The publisher woul ke to thank the allowing er pera to epodce Pog ‘top bttom meme Met ight Lo RandnStersac: :SaguStestck PL: Tony 2S "ser atrekSoftentrk PODLRichand Jones Fees: a: mayo. 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It is sometimes difficult to understand these and what impact they could have on our daily lives without an understanding of economics. People who have studied economics are good at problem solving because they learn to identify problems, to suggest alternative solutions, to determine what information is relevant, and to weigh up different costs and benefits in decision making. Knowledge of economics also helps us understand what determines the prices of different products, why people earn different amounts in different jobs and why these can change over time, why some countries are poor and others are rich and how and why governments influence the behaviours of different groups of consumers and producers. But above all, the study of economics makes us realize that we are all dependent upon one another and that the decisions we make will affect others, By studying for the University of Cambridge International Examinations IGCSE or O Level in Economics you will therefore develop valuable lifelong, skills including: © an understanding of economic theory, termi and principles ology © the ability to apply the tools of economic analysis to real-world situations © the ability to distinguish between facts and personal judgements in real economic issues © an understanding of, and an ability to use and interpret, basic economic data, numeracy and literacy © the ability to take a greater part in decision-making processes in everyday life an understanding of the economies of developed and developing nations © an excellent foundation for more advanced study in Complete Economics will help you to build these skills, quickly. It contains everything you need to master the content of the Cambridge IGCSE and 0 Level Economics courses in an enjoyable and exciting way by providing real insight into how different markets and entire economies work, Final examinations will assess your skills and knowledge of economics At the end of your Cambridge IGCSE or 0 Level course in Economics you will take two papers (from May 2014) ened ene Candidates answer 30 multiple choice questions. 30% of total marks. eaten ee Aiea) Candidates answer one compulsory question that requires them to interpret and analyse previously unseen data relevant to a real economic situation, and three questions from a choice of six. 70% of total marks. ‘Those students studying for the Cambridge 16 Economics who will sit their exams in 2012 or 2013 will take three papers: meee ee Candidates answer 30 multiple choice questions. 20% of total marks. Poeeae ker Ai Candidates answer one compulsory question and three questions from a choice of six. ‘50% of total marks. Paper 3 Analysis and critical Garni) ena Candidates answer two compulsory questions and are. required to interpret and analyse previously unseen data relevant to a real economic situation, 30% of total marks. IntroductionThe following key skills will be assessed in all the examination papers. ‘Show your knowledge and and Understanding of economic facts, definitions, concepts, principles and theories Use economic vocabulary and terminology. Apply your economic: knowledge and understanding in written, numerical, diagrammatic ‘and graphical form Use economic data, to recognize patterns in such data and to deduce telationships. Critical evaluation and decision making Distinguish between evidence and opinion, make reasoned Judgements and communicate them in an accurate and logical way Recognize that economic theory has various limits and uncertainties Evaluate the social and environmental implications of particular courses of economic action. Draw conclusions from economic information and critically evaluate economic data Communicate conclusions in a logical and concise manner, © weversion The requirement to demonstrate evidence of the key skills in the different examination papers varies. The importance placed on each skill in each examination paper from May 2014 is as follows: Cc (oy ‘A: Knowledge with understanding 45+/-5 20+/-5 B: Analysis 554-5 354/-5 : Critical evaluation and 454/-5 decision-making So, for example, up to 50% of the marks in paper 1 will, be allocated to evidence of your knowledge and understanding and up to 60% for evidence of your analytical ability. (Note that this applies to examinations from May 2014 onwards. Complete Economics contains a wealth of real examination questions for you to practise and develop these key skills. Model answers to help you attain top marks for all the examination questions in this book are provided on the accompanying CD-ROM. The CD also contains additional examination papers for you to complete, and sample answers, Best of luck with your studies and examinations! Note Unless otherwise reported all $ figures quoted inthe text are US dlollas. In many cases the S sign is used simply to denotea unit of money and could therefore represent any currency. However, real world examples of values quoted in $are always actual US dollars “unless otherwise stated, This s because many other countries use a dollar sign to denote their currency, such as the Australian dolla, the ‘Bahamian dollar and the Canadian dallas, ‘Wherever you see an arrowhead symbol followed by numbers atthe end of paragraph they are referring you to look a other nits in the bbook that contain related information and further explanation on the concepts you have just covered. For example, > 4.2 suggests you should look at Unit 4.2 on Organizing Production,Introduction Ey) the basic economic problem choice and the allocation of resources 1.1 The basic economic problem What is the economic problem? Factors of production The satisfaction of human wants Opportunity cost: the cost of choice Assessment exercises The allocation of resources: how markets work; market failure 21 Economic systems What is an economy? How economies determine what, how and for whom to produce Different economic systems The market economic system The mixed economic system 2.2 How markets work What is demand? What is supply? Market price Price elasticity of demand Price elasticity of supply ‘The impact of taxes and subsidies on market outcomes 2.3 Social costs and benefits How the decisions of firms can affect others Market failure and government intervention Opportunity cost revisited How consumers’ decisions can affect others Conservation or commercialization? Assessment exercises The individual as producer, consumer and borrower 3.1 Money and finance Why do we need money? The functions of money 21 22 2 23 25 26 31 39 101 102 103 105 3.2 3.3 3.4 What makes a good money? The history of money What is money? The money market ‘The stock market Occupations and earnings Why do people work? What isthe labour market The market wage for a job Why do the earnings of employees differ? Why do governments intervene in labour markets? ‘The role of trade unions What is @ trade union? How trade unions are organized Collective bargaining Spending, saving and borrowing Consumption Saving Borrowing money Assessment exercises 108 110 nz m4 122 129 130 134 136 139 146 150 150 153 154 161 161 168 170 7 The private firm as producer and employer 41 4.2 43 ‘Types of business organization Starting a business The sole trader Partnerships Joint-stock companies Multinational corporations. Cooperatives Public sector organizations Organization of production Production The aims of production Productivity and factor demand Calculating costs and revenues Profit, loss or break-even The growth of firms The size of firms How firms grow in size Increasing the scale of production Can firms grow too much? Contents 181 182 183 186 187 190 198 202 205 210 a 25 27 225 232 237 238 240 242 245The relationship between costs and a ; productive scale 27 Wj Developed and developing Why some firms remain small 249 economies: trends in 4.4 Competition 252 production, population Why do firms compete? 252 and living standards 381 Pricing strategies 257 1.1 Developed and less-developed Market structures 260 economies 382 ‘Monopoly and opportunistic behaviour ae) Economic development in different economies 382 Controlling monopolies and regulating Development indicators 306 ee ore 7 Measures to reduce international poverty 392 sessment exercises a an r 0 ati 399 & Role of government in an eee ee toe auses of population change economy, 215 The structure of populations a 5.1 Government economic policy 276 Assessment exercises 420 The role of government in a mixed economy 277 Macroeconomic objectives 279 International aspects 423 pea a 8.1 International specialization Supply-sde policies 230 aoa eaae a Peeler 26 Globalization and trade 405 oe) peouen ore International specialization 426 Financing public expenditure 299 Intemational trade patterns 430 Tax systems 304 Free trade or protectionism? 434 Direct taxes ee 8.2 Balancing international payments 443 noes a2 Exports and imports aaa pacar eis ae The balance of payments 407 ‘Assessment exercises 321 ae a Fern Correcting a trade imbalance 462 IQ Economic indicators 325 Assn xcs ‘e 6.1 Price inflation 326 What is inflation? 327 Index 412 How to measure inflation 329 What causes inflation? 333 The costs of inflation 337 What is deflation? 340 What’s on the CD? 6.2 Employment and unemployment 345 Guidance and answers to all the activities and Employment trends 346 ‘exam preparation exercises in this book The causes and consequences of ‘Answers to all the end of chapter assessment unemployment. 361 exercises in this book 6.3 Output and growth 360 Printable vesons of all the crosswordsin his 100k along with their solutions Measuring output a ‘An economics dictionary containing definitions Economic growth oe for all the essential terms used in the course Growth cycles 368 Further exam preparation inthe form of two Economie growth or economic welfare? 372 Practice papers with sample answers provided Assessment exercises 378 - GD corThe basic economic problem: choice and the allocation of resources [ERIE the basic economic problem EEG] Muttipte choice Structured questions The resources available to produce goods and services are scarce compared with our limitless wants. Land (natural resources), labour (human effort), capital man-made resources) and enterprise (the knowledge and skills people need to organize production) are scarce resources. They are factors of production beca they are organized into firms by entrepreneurs to produce goods and services to satisfy our needs and wants as consumers. Resources are inputs to productive activity and products (goods and services) are outputs from productive activity. However, because there are not enough resources to produce everything we need and want we must make choices. For example, if we choose to use up scarce resources in the production of cars those same resources carmot be used to produce food, This opportunity is foregone ‘Making a choice between alternative uses of scarce resources therefore always involves a cost in terms of what we have to give up in return, The benefit of the next best alternative foregone is the opportunity cost of that decision Scarcity of resources relative to human wants is the central problem in economics. The study of economics ind informing decisions resources in an attempt cds and wants as possible to therefore involves examin about how best to use scart to satisly as many of ou! maximize economic wellare.Unit 1.1 The basic economic problem By the end of this unit you should be able to: > define the nature of the economic problem (limited resources and unlimited wants) © appreciate that people’s wants for goods and services are unlimited define the factors of production (land, labour, capital and enterprise) © understand that the resources used to make goods and services are scarce define opportunity cost and analyse particular circumstances to illustrate this concept © explain why scarcity of resources leads to choice © understand how economies can be used to help increase choice demonstrate how production possibility curves can be used to illustrate choice and resource allocation evaluate the implications of particular courses of action in terms of their opportunity cost. 2% mc cconomicproiom:ctace and te aocaton otrsouce| section: What is the economic problem? Oil runs out. ‘Today the world’s oil supply 9 has dried up. A crisis meeting of world leaders took place in Washington last night, Yesterday the top oil-producing companies of the world declared that the world’s supply of oil was now exhausted. The last barrel of oil has been filled and the oil rigs will drill no more. The world now faces an energy crisis. No more oil will mean no more petrol for transport or machinery. There can be no more plastic for _ Energy ministers from around the world are meeting components in many household today in Switzerland to discuss the crisis and try t0 products like televisions, _ finda solution, Coal deposits are low and nuclear microwave ovens, cars and powerstationsare already overworked to meet the telephones. demand for electricity. ‘The newspaper article above paints a gloomy picture of what might happen in the future. Its hard to imagine a world without oil but even now there is only a limited amount of oil left in the ground. In other words, its searce and as, more and more is used up there will come a time when no oil remains. The world’s oil took many millions of years to form — we may use it all up in a few hundred years, However, itis not just oil that is scarce. Some forecasters suggest if we continue to consume goods and services in the future at the same rate as we do today many natural commodities, such as aluminium, copper, lead, tin, zinc, and Umber from the last remaining rainforests, will all be used up within the next 50 years. Even the clean air we breathe and the water we drink are limited and may eventually run out. If you imagine the world as a round ball then it is possible to see that only a limited amount of these resources can be squeezed from it. merascemmncponon QQA. Production Resources are used to produce goods and services This is because our wants for many different goods and services are growing all the time but there are just not enough resources in the world to satisfy them all. As you will discover in the next few pages, this Is the central problem in the study of economics. Factors of production Resources are important because they are used to make goods such as bread, televisions, cars, fruit and vegetables, and to provide services, including banking, insurance, transport, health care, policing and cleaning. Production therefore involves using resources to make and sell goods and services to satisly our wants, Resources are the inputs to productive activti and goods and services are the outputs. > 4.2. Any activity that fails to satisly a want is not a productive activity according to economists. So, for example, if resources are used to make clothes nobody wants to wear, televisions that fail to display moving images, clocks that cannot keep time or any other good or service that fails to satisfy a want then those resources have not been used productively. The people who make and sell goods and services are known as producers. They can be business owners, managers or employees. > 4-1 Scarce resources used up in the production of goods and services to satisty our wants ate known as factors of production. In addition to natural resources, such as timber, coal and many crops, they include the people who go to work or run business organizations and the buildings, machinery and equipment they use. All these resources or factors of production are scarce because the time people have to spend working, the different skills they have and the land on which factories, shops and homes are built are all limited in supply relative to our wants, Not convinced? Just take a look at some of these real newspaper headlines, jack | entrepreneurs © ows | Factory jobs return, | Ficaciel ‘and other skills ‘ gnortaee wutet but employers unable ded for success micron net com?! | f0fill them because of | ™” cma 0 auctio™ | skill shortages v { i _ Companies for, Equipment it shortage limits” shortage ‘ced to idle their heayy | eduipment due to impact of large tyre oil exploration 2 msc cconomic bien: sce andthe aocaton ot rsouces{Y Factors of production include natural resources, people, machinery and land How resources are classified Economists group together different factors of production under four main headings. Land The fertile soil vital to the growth of plants, minerals such as coal and oil, and animals for their meat and skins, are known as natural resources, but t0 simplify economists call all of these land, Land therefore includes the seas and rivers of the world, forests and deserts, all manner of minerals from the ground, chemicals and gases from the air and the earth’s crust. Labour Nothing can be produced without people. They provide the physical and mental effort to make goods and services. People who work with their hands and use their brains to help make goods and services provide human. resources, or what is termed labour, The basic soonomic potion (EBThe size and ability of an economy's labour force are very important in determining the quantity and quality of the goods and services that can be produced. The greater the number of workers, and the better educated and skilled they are, the more an economy can produce. Enterprise While most people have the ability to contribute to the production of goods and services, not everyone could be a successful business person and be able to employ and organize resources in a firm. firm is an organization that owns a factory or a number of factories, offices, or perhaps even shops, where goods and services are produced. Business know-how, or the ability to run a production process, is known as enterprise. The people who have enterprise and can control and manage firms are called entrepreneurs. They are the people who take the risks and decisions necessary to make firms run successfully. Capital ‘To make the task of production easier, man has invented many tools: pens to write with, computers to calculate, screwdrivers, spanners, hammers, rulers, and many more, On a grander scale, turbines drive engines, tractors plough the land, ships transport goods, lathes shape and refine metals and wood, and factories and offices have been built to house many man-made tools and machines. These man-made resources which help to produce many other goods and services are known as capital. Economists tend to talk of units of factors of production. For example, an economist might say that ‘a firm has employed 30 more units of capital’. This simply means that it has bought 30 new identical machines, Similarly if an economist talks of units of land, it could mean tonnes of coal, barrels of crude oil, of acres of land. Likewise, employees or the individual hours they work are units of labour for an economist. Classifying resource 1 Below is a list of many of the scarce resources that are used to produce cartons of orange juice. Draw three columns and label them natural resources, human. resources and man-made resources, and then in pairs decide in which column each item should go. Telephones oil Advertising people Lorries Cotton for clothing Printing machines Factory buildings Fertile soil Orange trees Insecticide sprays Squeezing machines Bank clerks Oranges Orange pickers Power stations Roads Package designers Coal ‘Accountants Calculators Warehouse workers Shop assistants Water Lorry drivers Wood 2 Now try to produce a list of resources you think are used to produce cars. ‘Compare your list with the rest of the class, and again sort them out into natural, human and man-made resources. msc cconomic rion: chee ana te alocatin ofrsouces