SUMMARIZED NOTES

ON THE THEORY SYLLABUS_First Edition

Edited By Kwak Sang In

IUM Tutoring & Consulting, Ha Noi
 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

1.The Basic Economic • Capital goods and semi-finished goods or

components are used up in production
Problem
Rewards for Factors of Production
• Land - Rent
• Labour - Wages
1.1.Economic Problem • Capital - Interest
• There are too few productive resources to • Enterprise - Profits
make all the goods and services that
Mobility of Factors
consumers need and want.
• Unlimited wants and limited resources • Refers to the degree of mobility while changing
• Scarcity of resources is the basic economic from one production line to another.
problem Geographical Occupational
Mobility Mobility
Types of goods Refers to the willingness Refers to the ease with
• Economic goods: A good or service that has and the ability of a which a person can
a degree of scarcity and therefore an person to relocate from change between jobs.
opportunity cost. one area to another due This would vary
to employment depending on the cost,
• Free goods: A good or service that is not
purposes. training period and the
scarce and is available in abundance. For educational professions
example, the air we breathe.
Reasons why many
workers are not willing to
relocate - Family Ties
1.2.Factors of Production and Related
Commitments, Cost of
• Consumers are people or firms who need Living
and want goods and services
• Resources or factors of production are used
to make goods and services Changes in the Quantity or the Quality
of Factors of Production
LLCE • Cost (Labour Costs, Raw materials costs)
• Land: natural resources used in production • Government Policies (Taxes, Subsidies)
(e.g. land) • New Technology
• Labour: human effort used in the production • Migration of Labour
of goods/services (e.g. workers) • Improved Education and Healthcare
• Capital: the man-made resources that are • Weather Conditions (Agricultural Products)
used to produce goods/services (e.g. tractor)
• Enterprise: the skills and willingness to take
the risks required to organize productive 1.3.Opportunity Cost
activities
• Entrepreneurs organize and combine • Opportunity cost is the cost of choosing
resources in firms to produce goods and between alternative uses of resources
services • Choosing one use will always mean giving up
• Durable consumer goods last a long while the opportunity to use resources in another way,
(e.g. furniture) & the loss of goods & services they might have
• non-durable consumer goods (e.g. food) produced instead
do not • Problem of resource allocation is choosing how

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

best to use limited resources to satisfy as

many needs and wants as possible and
maximize economic welfare
• Economics aims to find most efficient
resource allocation
• Example 1: A person invests $10,000 in a stock
• Could have earned interest by leaving $10,000
dollars in bank account instead
• Opportunity cost of decision to invest in stock is
the value of the potential interest
• Example 2: A city decides to build a hospital
on vacant land it owns
• Could have built school or sports centre
• Opportunity cost is the value of the benefits
forgone of the next best thing which could
have been done

1.4.Production Possibility Movement in PPC and Shift of PPC

Curves & Choice Movement in PPC Shift in PPC

• Opportunity cost can be shown using a The shift of PPC occurs

production possibility curve (PPC) when the PPC line is
• It shows the maximum combinations of Shift in PPC is when the moved. This may be
resources utilized are due to better
goods and services that can be produced
moved from one availability of resources
by an economy in each period of time with
product to another. For (due to the Discovery
its limited resources example, the Movement of new materials,
• A PPC shows all the combinations of from Point A to Point B in Better Technology and
possibilities, involving two goods or the above diagram. more) or decrement in
options resources (due to
• Each combination is a choice natural disasters, war
• An economy can use all its scarce resources and more).
to produce this combination Example is given below
• A point within the curve signifies like X,
represents inefficiency
• A point outside the curve like Y, represents
combinations that cannot be produced due
to the lack of resources

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

2.Allocation of Resources
Introduction to the Price mechanism

2.1.Microeconomics and • It aids the resource allocation decision

Macroeconomics making process. The decision is made at the
equilibrium point where supply and demand
Microeconomics
meet
• It is the study of particular markets, and
segments of the economy. It looks at Features of Price Mechanism
issues such as consumer behavior,
individual labour markets, and the • Private Economic Agents can allocate
theory of firms. resources without any intervention from the
government
• It involves supply and demand in individual
• Goods and Services are allocated based on
markets,
price (Higher Price means more supply and
• Individual consumer behavior, and lower price means more demand)
individual labour markets • Allocation of Factors of Production is based on
• Example - A consumer considering his financial returns
options while buying a production • Competition creates choices and opportunities
for firms, private individuals and consumers.

Macroeconomics
2.3.Demand
• Study of the whole economy. It looks at
• Demand refers to how much of a product or
‘aggregate’ variables, such as aggregate
service is desired by buyers
demand, national output and inflation.
• Involves decisions made by the government
regarding, for example, policies
• Example - Governments deciding on the tax
rates

2.2.The role of markets in allocating

resources

The Market System

• A market economy is an economic
system in which economic decisions and
the pricing of supply and demand - the
market mechanism
• Higher price of good = less people demand that
Key Resources Allocation Decisions good, hence, demand is inversely related to
price
The basic economic problem of scarcity
creates three key questions

• What to produce?
• How to produce?
• For whom to produce?

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

• Factors that affect demand

• Price
Shift of the Curve
• Advertising
• Government Policies Changes in Non-Price factors cause the
demand curve to shift. These factors include
• Demand
tastes, prices of substitute goods, consumer
• Consumer tastes/
incomes and many more.
preferences
• Consumer Income
• Prices of substitute/
complementary goods
• Interest rates (price of borrowing
money)
• Consumer population (population
increase = demand increase)
• Weather

• The individual demand is the demand of

one individual or firm
• The market demand represents the
aggregate of all individual demands
An increase in demand
Movement along the Curve causes the demand curve to shift rightwards
A Change in the price of the good or service and a
decrease in demand shifts the curve towards
will cause movement along the curve. The
the left.
movement can be either contraction or
extension.

2.4.Supply

• Supply represents how much the

market can offer

Contraction is caused when the demand falls

due to an increase in price, This causes the
point to go upwards.
Extension is caused when the demand • Higher price of good = higher quantity
increases because of a decrease in price,
This causes the point to go downwards supplied, hence quantity is directly
proportional to price

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

• Factors that affect supply • A change in demand

• Cost of factors of production Prices of
other goods/services Global factors Consequences of Price Changes
• Technology advances • An inward of the supply curve will increase
• Business optimism/expectations prices and vice versa
• The individual supply is the supply of an • An inward shift of the demand curve will
individual producer decrease prices and vice versa
• The market supply is the aggregate of the
supply of all firms in the market 2.5.Price Elasticity of Demand
Price Determination: • Definition: The responsiveness of demand
Market Equilibrium to a change in price

• When supply & demand are equal the

Inelastic Demand Elastic Demand
economy is said to be at equilibrium
PED lower than 1 PED greater than 1
The necessity of the The necessity of the
product is high – it is product is
either essential relatively low
or habitual

Inelastic Demand Elastic Demand

A change in price has little Demand would

effect on the change in respond quickly and more
demand drastically

• At this point, the allocation of goods is at its

most efficient because amount of goods being
supplied is the same as amount of goods being
demanded & everyone is satisfied

Market Disequilibrium

• When demand is price inelastic:

• An increase in price would raise revenue
• When demand is price elastic:
• A decrease in price would raise revenue
• Factors that affect PED:
• The number of substitutes The period of
time
Price Changes: • The proportion of income spent on the
Causes of Price Change commodity
• The necessity of the product
• A change in supply

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

Special Situation with PED • They produce a wide variety of goods and
services if it is profitable to do so but only
for those consumers that are willing and
Perfectly Price Perfectly Price Unitary Price
Inelastic Elastic Elastic able to pay for them
• Market failures can cause scarce
The
Changes in Any changes in
resources to be allocated to uses that
percentage
price do not the price will are wasteful, inefficient or even harmful
change in price
affect the lead to is proportional to people and the environment
quantity quantity to the ADVANTAGES DISADVANTAGES
demanded demanded percentage
being zero change in Wide variety of Serious market failure
quantity goods/services
Profit motive
encourages Only profitable goods
2.6.Price Elasticity of Supply development of new provided
and more efficient
• Definition: The responsiveness of quantity products & processes
supplied to a change in price Quick response to Firms will only
change in consumers supply products to
Inelastic Supply Elastic Supply tastes and demand consumers with the
It has a PES less than 1 It has a PES more than 1 ability to pay

A large price change will A large price change will No taxes on incomes Resources will only
have little effect on the have a large effect on and wealth or goods be provided if it is
amount the amount and services profitable to do so
supplied supplied Harmful goods may be
available to buy readily

2.8.Market Failure

• Market failure occurs when the market

mechanism fails to allocate scarce resources
efficiently, so social costs are greater than
social benefits
• Social Costs = Private Costs + External
• Factors that affect PES: Costs
• Time • Social Benefits = Private Benefits +
• Availability of resources External Benefits
• Supply available to meet demand • Private Costs are the production and
• Spare production capacity available consumption costs of a firm, individual or
• Factor substitution available the government
• Private Benefits are the benefits of the
production and consumption to the firm,
individual or government.
2.7.Market Economic System • External Costs are the negative side-
effect on third- parties for which the
• This system is run by private firms and consumer doesn’t pay for.
individuals • External Benefits are the positive side-

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

effects enjoyed by the third-parties. Government Intervention

Causes and Consequences of Markets • Produce merit goods such as education
Failure for the needy
• It can provide public goods such as street
• Only goods and services that are profitable lighting
to make will be produced • Public sector can employ people and
• Public goods and services such as street welfare benefits can be given to the needy
lighting won’t be provided as it is not possible • Laws to make goods illegal or high taxes
for the private sector to earn profits from to reduce consumption
them • Laws and regulations would protect
• Resources only employed if profitable – natural environment
people may be left unemployed without an • Monopolies can be broken up or regulated
income to keep prices low
• Harmful goods may be produced and sold • Educating consumers about the private
freely costs of consuming demerit goods
• Producers may ignore environmental impacts
• Monopolies dominate supply of products and Privatisation and Nationalisation
charge high prices
• Privatisation is the transfer of all assets
from the public to the private sector
• Nationalisation is the purchase of all
2.9.Mixed Economic System
assets by the government
• Has a private sector & a public sector
• A government can try to correct
market failures in a mixed economic
system
• It can allocate scarce resources to 3.Microeconomic
provide goods and services that people
need Decision Makers
• Can introduce laws and regulations to control 3.1. Money and Banking
harmful activities

Maximum Prices Function of money

• This is a price control method which • Medium of exchange: accepted as
involves the government setting the price means of payment
below the equilibrium point to make things • Unit of account: for placing a value on
more affordable goods/services
• Store of value: can save money since it
Minimum Prices keeps its value
• Government sets the price above the • Standard for deferred payment:
equilibrium to encourage the supply of borrowers are bale to borrow money and
certain goods. pay back later
• This involves National Minimum Wage
(NMW) as well. Characteristics of money
• Acceptability: Anything can be used as
money as long as it’s generally accepted

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

• Durability: Good money must be hard- 3.2.Households

wearing
Influences on Spending, Saving and
• Portability: Should be easy to carry around
Borrowing
• Divisibility: Must be able to divide it into
smaller values • Disposable income: amount of income left to
spend or save after direct taxes have been
• Scarcity: Should be limited in supply to
deducted
create value
• Spending: enables a person to buy goods/
Commercial Banks services to satisfy their needs/wants
• Saving: involves delaying consumption
• Accepting deposits of money and
• As interest rates rise, people may save
savings
more
• Helping customers make and receive
payments • Borrowing: allows a person to increase their
• Making personal and commercial loans spending; enabling them to buy goods they
• Buying and selling shares for customers cannot afford now
• Providing insurance • People with low disposable incomes may
• Operating pension funds spend less in total than people with high
• Providing financial and taw planning incomes
advice
• exchanging foreign currencies • But will tend to spend all or most of their
income meeting their basic needs

Commercial Banks
Increase in… Spen Savin Borro
• Printing notes & minting coins that are legal ding g wing

tender Real income ↑ ↑ ↑

Direct tax ↓ ↓ ↕
• Destroying torn notes & worn-out coins
Wealth ↑ ↓ ↑
• Setting interest rates
Interest rates ↓ ↑ ↓
• Lender of last resort: if a bank needs cash in a
Availability of saving ↓ ↑ ↓
hurry, they can borrow from central bank scheme
• Supervising monetary policy: heads of the
Availability of credit ↑ ↓ ↑
central bank hold meetings with officials from
other banks to determine interest rate and Consumer confidence ↑ ↓ ↑
quantity of money in economy
• Banker for banks & the government:
• Government accounts & spending are 3.3.Workers
carried out with central bank
• Helps government to borrow money • Entry: young employee will receive low
• Total amount government owes is earnings due to lack of work skills and
national debt experience; can become an apprentice or
• Manage international financial system: join a management training scheme to
governments of different nations lending each become more skilled
other money • Skilled workers: the more skilled a worker
is, the more opportunities he has for
increasing his earnings; bonuses will be
given and higher rate of overtime paid

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

• End-of-career employees: if workers Specialization

keep updating skills, they will continue • Division of labour: workers concentrate on
however stop this, their demand fall & a few tasks then exchange their product for
income would diminish, finally reaching a other goods/services
stop when retired. • Specialization: production process broken
up into a series of different tasks
Factors which influence the choice of
occupational Advantages for Disadvantages for
Individual Individual
• Level of Challenge
Employees can make Doing same job or
• Career Prospects best use of their repetitive tasks is
• Level of Danger involved particular talents/skills boring and stressful
• Length of training and can increase
• Level of education required them by repeating
• Recognition in the job tasks
Employees can Individuals must rely
• Personal satisfaction gained from the job produce more output on others to produce
• Level of experience required and reduce business goods and services
costs they want but cannot
Why firms change demand for labour produce themselves
• Changes in consumer demand for products Many repetitive tasks
• Changes in the productivity of labour More productive can now be done by
• Changes in price and productivity of capital employees can earn machines, leading to
• Changes in non-wage employment costs higher wages unemployment of low-
Why labour supply might change skilled workers
• Changes in net advantages of an occupation
• Changes in provision and quality of
education and training 3.4.Trade Unions
• Demographic changes
• An organization of workers formed to promote
Factors that Cause Occupational Wage & protect the interest of its members
Differentials concerning wages, benefits & working
• Different abilities and qualifications conditions
• ‘Dirty jobs’ and unsociable hours
• Job satisfaction Functions
• Lack of information about jobs and wages • Negotiating wages & benefits with employers
• Labour immobility
• Fringe benefits • Defending employee rights and jobs
Improving working conditions
Factors that cause wage differentials in the • Improving pay and other benefits, including
same job holiday entitlement, sick pay and pensions
• Regional differences in supply and demand • Encouraging firms to increase worker
of labour participation in business decision-making
• Length of service
• Developing skills of union members, by
• Local pay agreements
providing training and education courses
• Non-monetary agreements
• Discrimination • Supporting members taking industrial action

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

Types of Trade Unions Possible Advantages Possible

• General Unions: represent workers across Disadvantages
many different occupations Could help to bring Might cause lack of
about minimum working flexibility in working
• Industrial Unions: represent workers of the standards practices
same industry
Could help keep pay Could be major
• Craft Unions: represent workers with the higher problem as fashions
same skill across different industries change very quickly

• Non-manual unions/ professional unions:

Could help maintain Could lead to some
represent workers in non-industrial and
Employment/enhanced firms going out of
professional occupations
job security business
Could lead to Workers made
Collective Bargaining improvement in redundant
• Process of negotiating wages and other health and safety
working conditions between trade unions Workers will need to
and employers pay union membership
fees
• A trade union will be in a strong bargaining
position to negotiate higher wages and better
conditions if:
• It represents most or all of the workers in 3.5.Firms
a firm
• Union members provide goods/services Classification of Firms
that consumers need which have few • Primary Sector - Extracting raw materials
alternatives from the earth (fishing, mining, farming and
more)
Industrial Action • Secondary Sector - Manufacturing
• Industrial action is taken when collective Goods (Construction, Refining and
bargaining fails to result in an agreement more)
• Tertiary Sector - Service Sector
• Taking industrial action can help a union force (Retail Shops, Lawyers and more)
employers to agree to their demands
• Industrial actions: Public and Private Sector
• Overtime ban: workers refuse to work • Private Sector firms are owned and run by
more than their normal hours private individuals and owners. The main
• Work to rule: workers deliberately slow objective of this sector is to earn profit.
down production by complying with rule & • Public Sector firms are owned by the
regulation government and their main aim is to provide
services.
• Go slow: workers deliberately work
slowly
• Strike: workers protest outside their Size of Firms
workplace to stop deliveries/non-
• Number of employees: less than 50 are as
unionized workers from entering
small
• Amount of capital employed: large firms
invest a lot in fixed assets such as
machinery & equipment

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

• Market share: relative size of firms Risk-bearing: ability to

compared by percentage share of total spread risk over many
market supply/revenue investors & reduce
market risks by selling
• Organization: large firms may be divided range of products in
into many departments & be spread over different
many locations locations
Purchasing: when raw
materials are bought in
Small Firms bulk, suppliers may
provide bulk discounts,
Advantages Disadvantages lowering per unit
cost of production
Markets cannot raise
Size of market is small enough capital to
expand their business Integration
Consumers like tailored • Growth often involves integration with
goods/services other firms
Governments provide • Takeover: a company acquires
help
ownership & control of another company
by purchasing its shares
Economies of Scale and • Merger: two or more firms agree to form an
Diseconomies of Scale entirely new company & issue new shares
Economy of Scale Diseconomy of
Scale Types of Integration
Cost savings due to Rising costs because a
increased scale of firm has become too large • Horizontal integration: occurs between
production firms at the same stage of production
Management: larger producing similar products
firms must manage so
Financial: larger firms • Vertical integration: occurs between
many different
often have access to departments in different firms at different stages of production
cheaper sources of locations, making
finance • Forward: taking over firm at later
communication/
decision- making
stage of production
difficult • Backward: integration is the
Marketing/Selling: fixed
costs such as advertising Labour: demotivated opposite
and transportation are workers lead to decrease
• Lateral integration or conglomerate
spread across a larger in productivity due to
number of products, boring, repetitive tasks
merger: occurs with firms at same
lowering per unit cost stage of production but different
Excess Agglomeration: products
company takes over or
Technical: larger firms merges with too many
invest in specialized other firms producing
production equipment, different products, 3.6.Firms and production
highly skilled workers; making it hard for
develop new products business owners and Demand for “Factors of Production”
managers to co-ordinate
all • Demand for goods & services by
consumers: higher demand = more labour/
capital firms will need
• Price of labour & capital: higher cost = less
labour & capital demanded

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

• Firms may also decide to substitute • Total revenue: the total receipts a seller can
labour for more capital and vice versa obtain from selling goods or services to
• Productivity of labour capital: more output/ buyers
revenue labour & capital help to produce, more • Average revenue: the revenue generated
profit they will over & above cost of employing per unit of output sold
them
• Capital-intensive Production: requires Average Fixed Cost = FixedCosts/ Output Average
heavy capital investment to buy assets Variable Cost = Variable Costs/ Output
relative to sales or profits that assets can
generate Total Variable Cost = Variable Costs × Output

• Labour-intensive Production: main Total Cost.

cost is labour; cost is high compared to = Total Variable Cost + Total Fixed Cost
sales or value added by additional
Average cost = (Total Cost)/ Output
manpower
Total Revenue
• Labour-intensive: production method
= P rice P er Unit × Quantity Sold
primarily involves labour, whereas, capital-
intensive methods primarily involve Pro it or Loss = Total Revenue − Total Cost
machinery

Productivity & Production

Productivity: the ration of output to input
Labour Productivity:
Total Output
Output per Labour =
Number of Labour

Capital Productivity:
Total Output Value
Value per Capital =.
Value of Capital

• Productivity refers to the efficiency of a

business whereas production refers to output
only

3.7.Firms’ Costs, Revenue

and Objectives
Objectives of Firms
• Fixed costs: don’t vary with level of output
e.g. interest on loans • Survival
• Variable cost: vary directly with level of • Social welfare
output e.g.electricity
• Profit maximization
• Breakeven: where total revenue
= total cost • Growth

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

3.8.Market Structure quality products than if they had to compete

with other firms
Competitive Markets • May have higher production costs because
they are poorly managed
• Businesses will charge same price, a
• Restrict competition using barriers to entry
minimum price they can charge without
going out of business
• Price will be equivalent to the lowest average Barries to entry
cost of producing goods
Natural Artificial
• Average cost of production would be same as
average revenue for selling Cost savings from large Predatory pricing
scale production strategies to force
• No firm would risk charging more than smaller firms out
market price
Lots of capital Preventing suppliers
• A business would be a price taker; the equipment that other from selling materials &
market price firms can’t afford components to other
firms by threatening to
switch to rival suppliers
Monopoly Markets Large customer base Forcing retailers to
built up over years stock & sell only their
• Firms with monopolistic powers control at product
least 25% of the market share
Developed advanced
• Able to influence price; price makers products or processes
• Can restrict competition with artificial barriers that are protected by
patents
to entry & other pricing strategies
• One firm controls entire market supply
• May use predatory pricing to force
competing firms out
• Other firms deterred from competing due to
lack of capital

Advantages of Monopolies

• Avoids duplication & wastage of resources

• Economics of scale; benefits can be passed
to consumers
• High profits can be used for research &
development
• Monopolies may use price discrimination
which benefits the economically weaker
sections of the society
• Monopolies can afford to invest in latest
technology & machinery to be efficient &
avoid competition

Disadvantages of Monopolies

• May supply less & charge higher prices

• May offer less consumer choice and lower

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

4.Government & The • To achieve improvements in the supply-side

of the macro-economy, like providing
Macroeconomy subsidies

4.1.Role of Government Reasons to Tax

• To finance public expenditure; building
• Local Role - Fund local services
schools and infrastructure
(Garbage Collection, Street Lighting,
Schools, Hospitals and more) • To discourage certain activities; e.g. taxes
• National Role - Achieve on cigarette
macroeconomic goals (Economic • To discourage import of goods; tariffs are
Growth, Low Inflation, Stable Prices import taxes and can be levied as a % of
and more) value of imports or a set tax on each item
• International Role - Trading of goods
• To redistribute income from the rich to the
and services
poor
• To achieve other macro-economic objectives

4.2.The Macroeconomic Aims of The Types of Description Examples

Taxation
Govt.
Progressive Tax rate rises
• Economic Growth Tax with income; Income tax

• Low Unemployment higher income =

higher tax
• Low Inflation/Stable Prices
• Balance of Payment Stability Regressive Tax rate falls with VAT
Tax income;
• Redistribution of Income higher income =
lower tax

Conflicts between the Macroeconomic Aims Proportional Everyone Corporate

Tax pays same income tax
• Full Employment vs Stable Prices effective tax rate

• Economic Growth vs Balance of Direct Tax Levied on Capital

Payment Stability individuals gains tax

• Full Employment vs Balance of Indirect Tax Added to price Tariffs

Payment Stability of commodities

• Economic Growth vs Stable Prices

Principles of Tax
4.3. Fiscal Policy • Equitable
• Economic
• Budget: It is an estimate made by the govt.,
of income and expenditure for a future period • Transparent
• Convenient
Reasons for Government Spending
• To supply goods and services that are not
supplied by the private sector, such as
defense; merit goods such as education

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

Fiscal Policy macroeconomic aims

• It is the use of taxation and government • Expansionary monetary policy can reduce
spending to influence aggregate demand unemployment
Policy About
• Expansionary monetary policy can increase
Reducing taxes and increasing economic growth
govt. spending to boost
Expansionary demand, so employment and • Contractionary monetary policy can reduce
Fiscal Policy output rises. May be used to
high inflation
reduce recession.

Increasing taxes and reducing

govt. spending to reduce
Contractionary demand. May be used to 4.4.Supply-Side Policies
Fiscal Policy
reduce price inflation.
• Supply-side policies aim to increase
economic growth by raising productive
Effects of fiscal policy on govt.
macroeconomic aims potential of economy
• An increase in the total supply of goods &
• Expansionary fiscal policy can reduce services will require more labour &other
unemployment resources to be employed It will reduce
market prices & provide more goods &
• Expansionary fiscal policy can increase
services to expor
economic growth
Instrume Effect on macroeconomic aims
• Contractionary fiscal policy can reduce high nt
inflation
Reducing taxes on profits and small
firms can encourage enterprise. It
Monetary Policy Tax can also encourage investments in
Incentives
new equipment.
• It is the use of interest rates, direct control
of the money supply and the exchange rate To reduce production costs and
Subsidies help firms fund research and
to influence aggregate demand /Grants development of new technologies.
Effects of monetary policy on govt.
Teaching new/existing workers
Education new skills to make them more
Policy About and productive.
Training
May be used to reduce
price inflation by Include minimum wage laws to
Contractionary increasing interest Labour encourage more people into work,
Monetary Policy rates charged by the Market and legislation to restrict
Regulatio
central bank. This ns the power of trade unions.
means commercial
banks will also raise Regulations that outlaw unfair
Competiti trading practices by monopolies
interest
on Policy and other large, powerful firms.
to encourage more
savings.
Free Removing barriers to
Expansionary May be used during a Trade international trade allow countries
Monetary Policy Agreeme to trade their goods and services
recession & to
nts
increase employment more freely and cheaply
by cutting interest rates
Removing old, unnecessary and
Deregulat costly rules and regulations on
ion business activities

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

4.5.Economic Growth government tax revenue. This can increase

govt. spending without increasing tax rates
• Economic growth is when there is an However, it can increase pollution, lead
increase in real output over time, i.e. increased to depletion of non-renewable resources
GDP & national income and damage the natural environment

• Important as it increases the standard of

Policies to Promote Economic
living
Growth
• Expansionary fiscal policy
Measurement of Economic Growth
• Expansionary monetary policy
• Gross Domestic Product (GDP) is the main
measure of total value all the goods and • Supply-side policies
services produced in a given period of time
• An increase in prices will increase nominal Employment and Unemployment
GDP but this is measured in current dollars thus
includes inflations INDICATOR RECENT
TRENDS
Labour force Risen as world
population has
grown
Participation Rate: Risen in many
Recession labour force as a countries especially
proportion of total among females as
• It is a significant decline in economic population of working it is now socially
activity spread across the economy, age acceptable
lasting more than a few months, normally Poverty and rising
visible in real GDP growth, real personal living costs in
income, employment, industrial developing
production, & wholesale-retail sales countries has forced
many women to
• A recession would cause the economy to work
produce at a point that is within the PPC
Employment by Employment in
Industry: Number of services has been
Causes of Economic Growth people employed in growing while
• Discovery of more natural resources different industrial employment in
sectors agriculture and other
• Investment in new capital and infrastructure primary sector
• Technical progress industries has fallen

• Increasing the amount and quality of human Employment Status: Most employees
resources Number of full- work full- time
timers, part-timers
• Reallocating resources or with temporary
contracts
Consequence of Economic Growth Part-time employees
have grown rapidly,
• An increase in output can improve living especially among
standards of people female employees
• Higher output and incomes increase

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

Unemployment: Tends to rise during Consequences of Unemployment

Number of people economic recessions Personal Economical
registered as being
without work Loss of income and Unemployment is
reduced ability to buy wasteful of human
Almost half the goods & services resources
unemployed are
young unskilled Unemployed people de- Fewer goods &
workers skill if long out of work services produced
Unemployment Rate: Relatively stable in Unemployed people Total output & income
Unemployment as a the recent years but may become in
proportion of labour did increase in 2008 depresses & ill
force during a global
financial crisis Strain family relationships Government tax
& health services revenues also lower
People in work may
Types of Unemployment have to pay more taxes
Government spending
• Cyclical Unemployment: occurs during on welfare may rise
recession due to falling consumer demand &
incomes
• Firms reduce output & lay off workers Policies to Reduce Unemployment
Structural Unemployment: caused by • Expansionary monetary policy
changes in industrial structure of an
• Expansionary fiscal policy
economy
• Entire industries close due to a • Increase in quality and quantity of education
permanent fall in demand for their and training
goods/services
• Frictional Unemployment: refers to short-
Inflation and deflation
lived unemployment; e.g. moving to different
job • Inflation: general & sustained increase in
• Seasonal Unemployment: occurs because the of prices of goods/services an
consumer demand for goods/services economy over a period of time
changes with seasons; e.g. no job for ski • Deflation: decrease in general price level of
instructor when/where there is no ice goods and services and occurs when the
inflation rate falls below 0%

Measurement of Unemployment Measurement

• Base year: first year with which the prices of
• Taking claimant count
subsequent years are compared
• Labour force survey
• Inflation rate: percentage change in annual
CPI
Unemployment Rate = Number of
Unemployed Persons/ Labour Force

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

Causes of Inflation 5. Economic Development

• Demand-pull Inflation: caused by total
demand rising faster than total output, 5.1 Living Standards
causing market prices to rise
Real Gross Domestic Product (GDP) Per
• Cost-push Inflation: cost of production
Capital
increases, so firms try to pass cost to
consumers through higher prices • GDP is the main measure of total value of all
the goods and services produced in a given
period of time
Causes of Deflation
• An increase in prices will increase nominal
• Fall in the money supply GDP but this is measured in current dollars
• Decline in confidence thus includes inflations

• Lower production costs

• Technological advances
• Increase in unemployment
• Increase in the real value of debt
• If economy has an extremely rich person &
everyone else is poor, it brings up the Real
Policies to Inflation & Deflation GDP per capita Human Development
• Contractionary fiscal and monetary policy for Index (HDI)
inflation • Used by the United Nations to make
• Expansionary fiscal and monetary policy for comparisons of human & economic
deflation development in different countries

• Supply-side policy can increase aggregate • Combines three different measures for each
supply and thus control both inflation and country
deflation • Standard of living, measured by
average incomes
• Being educated, measured by adult
literacy rate
• Living a long healthy life, measured by
life expectancy
• Single index with a value between 0 and 1
• Greater than 0.8 = high human
development. Less than 0.5 = low human
development

• Reasons For Low/Varying Economic

Development
• Over-dependence on agriculture
• Domination on international trade by
developed nations

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

• Lack of capital Alleviating Poverty

• Insufficient investment in education, skills & • Governments will use policies to help
healthcare alleviate poverty in their country, or in
• Low levels of investment in infrastructure another country:

• Lack of efficient production and distribution Policy Why is it What are the
systems needed? problems?
• High population growth Poor farming Free food
Food aid methods supplies can
• Other factors like a corrupt govt. or war
produce force farmers
insufficient out of business
5.2 Poverty food
LEDCs lack
Absolute Relative
capital to Loans have to be
poverty poverty
Financial invest in an repaid
Number of people aid sometimes with
industrial base,
living below a certain Measures extent to interest
modern
income threshold or which a household’s
machinery
number of financial resources
and
households unable to falls below an average infrastructure
afford certain basic income level.
LEDCs lack Most people
goods & services
access to lack skill to use
Occurs when people modern modern
Occurs when people Tech aid
are poor relative to machinery, technology;
do not have access to other people in the equipment and instead of using
basic food, clothing country; unable to knowledge of machinery, more
and shelter participate fully in modern jobs are needed
normal activities of production to employ
society they live in methods people
Relieving May encourage
Causes of Poverty LEDCs of debt LEDCs to
Debt will allow them borrow more
• Unemployment relief
to use money money or
• Low wages for economic money may be
development misused by
• Illness instead corrupt
• Age governments

• Poor Healthcare Removing LEDCs may

overseas have natural MEDCs will
• Low literacy rates trade supplies, can force down
• High population growth barriers be exported for their price
money
• Poor infrastructure
Governments in Advice not
• Low FDI (Foreign Direct Investment) Economic LEDCs lack enough;
Advice economic LEDCs need
• High public debt
knowledge more capital &
• Reliance on primary sector output stability
• Corruption and Instability

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

5.3. Population Population Structure

Factors that affect population growth

• Birth rate
• Death rate
• Net migration
• Immigration & emigration

Dependency Ratio
• Comparison of people in employment
with the number of people who are not in
the labour force.

Reasons for different population

growth rates Varying Birth Rates
• LEDCs have:
• Large families to help produce food • The Demographic Transition Model:
& work for money • This shows that population growth occurs
• High infant mortality rate in stages

• Low supply of contraceptives/ • Population Pyramid: a type of graph that

forbidden to use them shows the age and sex structure of the
country
• In MEDCs, people marry later in life so
birth rates fall

Varying Death Rates

• MEDCs have:
• Better food, housing, hygiene
&high life expectancy
• Stage 1: high birth rate; high death rates;
• Fatty foods, smoking and lack of short life expectancy; less dependency
exercise has increased rates of (since there are few old people and
diabetes, cancer & heart disease children must work anyway)
• Improved medicine & healthcare; • Stage 2: high birth rate; fall in death rate;
prevents many diseases & slightly longer life expectancy; more
increased life expectancy dependency due to more elderly
• LEDCS have: • Stage 3: declining birth rate; declining g
• Widespread diseases which lower death rate; longer life expectancy; more
life expectancy dependency
• Natural disasters, famines, wars • Stage 4: low birth rate; low death rate;
highest dependency ratio; longest life
expectancy

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

6. International Trade & Globalization, Free Trade and

Protection
Globalization
• Globalization: The process by which
6.1. International Specialisation businesses or other organizations
develop international influence or start
operating on an international scale.
Specialization at a National Level
• Countries specialize in production of
those goods and services in which
they have an absolute advantage or Multinationals
comparative advantage over other
• Operates in more than one country
regions or countries
• Some of the largest companies in the
• A country has an absolute advantage if
world
it can produce a given amount of a
good or service with far less resources • Governments often compete to attract
and therefore at an absolute cost multinationals
advantage over any country • Can provide jobs, incomes, business
• A country has a comparative knowledge, skills and technologies
advantage in the production of a good which can help other firms
or service if it can produce it at a lower • Pay taxes on their profits to boost
opportunity cost relative to other government revenue
countries

• Headquarters are based in one country

Advantages of Specialisation
Advantages Disadvantages
• Efficiency Gains
Can reach many Can switch profits to
• Labour Productivity
more consumers other countries to
• Increased Productive Capacity globally & sell far avoid paying taxes on
more than other profits
• Economics of Scale
types of businesses
• Improved Competitiveness
Can minimize
transport costs by Can force smaller
locating plants in local firms out of
Disadvantages of Specialisation different countries to business
• Overspecialization be near raw
materials or big
• Lack of variety for consumers markets
• High labour turnover Minimize wage costs May exploit workers
by locating in countries in low wage
• Low labour mobility
with low wages economies
• Higher labour costs Can enjoy low average May use their power to
production costs get generous subsidies
& tax advantages from
the government

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

Benefits of Free Trade Protection

For To To Arguments For Possible

Consumers Producers Governments Consequences

Cheaper Larger Exports Protection of a young Other countries will

products markets increase jobs, industry retaliate with trade
GDP, incomes barriers

Better Economies of But imports To prevent It protects inefficient

unemployment domestic firms
products scale take them away
The loss of domestic jobs
Workers more More
To prevent dumping from overseas
productive produced, competitions will only be
lower average temporary
per unit cost
Because other Trade barriers have
International countries use barriers increased the gap
International trade increases to trade between rich and poor.
Trade Countries
number of
products you
make

Increased 6.2. Foreign Exchange Rates

competition
from • Exchange rate is the price of a country’s
international currency in terms of another country’s
companies
currency
Lower Prices
– Better • Most countries have a floating exchange
Qualities rate, which means no set value for their
currency compared with any other
currency
Trade Protection • Currency is a commodity thus the value of
• Tariffs: tax on imports to raise its price a currency is totally dependent on
and make them more expensive than demand and supply of that currency in the
local goods to stop people buying them foreign exchange market.
• Subsidies: grant given to an industry by • An appreciation in the value of currency
government so industry will lower its means its exchange rate against other
prices encouraging consumers to stop countries has risen
buying foreign imports by making home- • A depreciation in the value of currency
produced goods cheaper means its exchange rate against other
• Quota: limit on number of imports allowed countries has fallen
into country per year, reducing quantity of
imports without their prices
Exchange Rate Fluctuations
• Embargo: complete ban on imports of
certain goods. An embargo may be used • Demand for a currency comes from
to stop imports of drugs foreign money flowing into the country. If
demand rises, the currency’s value will
• Excessive quality standards and
rise in relation to the other currency
bureaucracy
• Supply of the currency comes from
domestic money flowing out of the
country. If supply rises, the currency’s
value will fall

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

A currency might A currency might demand

depreciate because: appreciate because:
• Managed floating exchange rate: it is
Demand for other There is a balance of influenced by state intervention
currencies rises as payments surplus
• Fixed exchange rate: it is set by the
domestic consumers
government and maintained by the
buy more imports
central bank buying and selling the
There is a balance of Demand for the currency and changing interest rates
payments deficit currency rises as
overseas consumers
buy more exports
Floating Exchange Rate
Interest rates fall Interest rates rise
relative to other relative to other ADVANTAGES DISADVANTAGES
countries countries
Automatic stabiliser Uncertainty
People move their This attracts savings
savings to from Frees internal policy Lack of investment
bank accounts overseas residents Management Speculation
overseas
Flexibility Lack of investment
Inflation rises relative to Inflation is lower than in
other countries. This other countries so Can avoid inflation
makes exports more exports will be cheaper
Lower reserves
expensive and demand and overseas demand
for them, and the for them, and the
currency needed to currency required to
buy them, falls pay for them, will rise Fixed Exchange Rate
People speculate that People speculate
ADVANTAGES DISADVANTAGES
the currency will fall in that the currency will
value and they sell rise in value and they Elimination of Foreign exchange
their holdings of the buy more of the uncertainty and reserves
currency currency risks needed
Speculation deterred Internal objectives
sacrificed

Consequences of Exchange Rate Prevents currency Restricts international

depreciation competition
Fluctuations
Attracts foreign direct
• An appreciation of the currency will make
investment
exports more expensive and imports will
be cheaper, vice versa
• If PED<1 for exports, an exchange rate
appreciation will improve a current 6.3. Current Account Balance of
account deficit Payments
• If PED<1 for imports, an exchange rate
depreciation will worsen a current account
deficit Structure
• Visible trade account: the difference
between the export revenue and import
Types of Exchange Rate spending on physical goods, e.g. cars,
• Floating exchange rate: it is determined washing machines
by the forces of market supply and • Invisible trade account: measures the

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

difference between export revenue from production and exports which can correct
and import spending on services, e.g. a current account deficit
banking, insurance and tourism • Expansionary fiscal policy, by reducing
• Income flows: e.g. interest, profit and taxes and increasing government
dividends flowing in and out of the country expenditure can increase total demand
• Current transfers: e.g. grants for for imports to fix current account surplus,
overseas aid. vice versa

• Secondary Income - Income transfers • Contractionary monetary policy can

between residents and non-residents of a correct a current account deficit, vice
country. versa.

Balance of Payments Balance of Payments

Deficit Surplus
Money flowing out Money flowing in
greater than in. greater than out.
Current + Capital + Current + Capital +
Financial is negative Financial is Positive

Trade Deficit
• Means people are buying more imports
and may be spending less on products
made by domestic firms
• Deficit may be a symptom of a declining
industrial base
• Foreign exchange for the national
currency is likely to fall
• Increases prices of imports and cause
imported inflation

Trade Surplus
• Means people are buying less imports
and may be spending more on products
made by domestic firms
• Surplus may the result of economic
growth
• Foreign exchange for the national
currency is likely to rise Increases prices
of exports

Policies to achieve balance of

payments stability
• Supply-side policy will increase domestic

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 IGCSE ECONOMICS SUMMARIZED NOTES ON THE THEORY SYLLABUS for Final Exam. 2024

Copyleft 2024 by Maximus, IUM

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