CAIE IGCSE ECONOMICS (0455) SUMMARIZED NOTES 2023. The Basic Economic
Problem
1.1. Economic Problem
There are too few productive resources to make all the
goods and services that consumers need and want.
Unlimited wants and limited resources
Scarcity of resources is the basic economic problem...
CAIE IGCSE ECONOMICS (0455) SUMMARIZED NOTES 2023 1. The Basic Economic
Problem
1.1. Economic Problem
There are too few productive resources to make all the
goods and services that consumers need and want.
Unlimited wants and limited resources
Scarcity of resources is the basic economic problem Types of goods
Economic goods: A good or service that has a degree of
scarcity and therefore an opportunity cost.
Free goods: A good or service that is not scarce and is
available in abundance. For example, the air we breathe.
1.2. Factors of Production
Consumers are people or rms who need and want goods
and services
Resources or factors of production are used to make
goods and services
LLCE
Land: natural resources used in production (e.g. land)
Labour: human e ort used in production of
goods/services (e.g. workers)
Capital: the man-made resources that are used to
produce goods/services (e.g. tractor)
Enterprise: the skills and willingness to take the risks
required to organize productive activities
Entrepreneurs organize and combine resources in rms
to produce goods and services
Durable consumer goods last long while (e.g. furniture)
non-durable consumer goods (e.g. food) do not
Capital goods and semi- nished goods or components
are used up in production
1.3. Opportunity Cost
Opportunity cost is the cost of choosing between
alternative uses of resources
Choosing one use will always mean giving up the
opportunity to use resources in another way, & the loss of
goods & services they might have produced instead
Problem of resource allocation is choosing how best to
use limited resources to satisfy as many needs and wants
as possible and maximize economic welfare
Economics aims to nd most ecient resource allocation
Example 1: A person invests $10,000 in a stockCould 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 bene ts forgone of
the next best thing which could have been done
1.4. Production Possibility Curves&
Choice
Opportunity cost can be shown using a production
possibility curve (PPFC)
It shows the maximum combinations of goods and
services that can be produced by an economy in each
period of time with its limited resources
A PPC shows all the combinations of possibilities, involving
two goods or options
Each combination is a choice
An economy can use all its scarce resources to produce
this combination
A point within the curve signi es like X, represents
ineciency
A point outside the curve like Y, represents combinations
that cannot be produced due to the lack of resources
2. Allocation of Resources
2.1. Microeconomics and
Macroeconomics
Microeconomics
It is the study of particular markets, and segments of the
economy. It looks at issues such as consumer behaviour,
individual labour markets, and the theory of rms.CAIE IGCSE ECONOMICS (0455)
WWW.ZNOTES.ORG It involves supply and demand in individual markets,
Individual consumer behaviour, and individual labour
markets Macroeconomics
Study of the whole economy. It looks at ‘aggregate’
variables, such as aggregate demand, national output and
in ation.
Involves decisions made by the government regarding, for
example, policies
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 goods and services
are guided by the interactions of supply and demand- the
market mechanism Key Resources Allocation Decisions
The basic economic problem of scarcity creates three key
questions
What to produce?
How to produce?
For whom to produce? Introduction to the Price mechanism
It aids the resource allocation decision making process.
The decision is made at the equilibrium point where
supply and demand meet
2.3. Demand
Demand refers to how much of a product or service is
desired by buyersHigher price of good = less people demand that good, hence,
demand is inversely related to price
Factors that a ect demand
Price
Consumer tastes/preferences
Consumer Income
Prices of substitute/ complementary goods
Interest rates (price of borrowing money)
Consumer population (population increase = demand
increase)
The individual demand is the demand of one individual or
rm
The market demand represents the aggregate of all
individual demands
2.4. Supply
Supply represents how much the market can o er
Higher price of good = higher quantity supplied, hence
quantity is directly proportional to price
Factors that a ect supply
Cost of factors of productionPrice ∝ Demand
1
Price ∝ Quantity suppliedCAIE IGCSE ECONOMICS (0455)
WWW.ZNOTES.ORG
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