, Cambridge
IGCSE® and O Level
Economics
Second edition
Paul Hoang
Margaret Ducie
421271_IGCSE_Economics_2e_FM.indd 1 14/02/18 8:37 AM
, The authors would like to dedicate this book to their children:
Salvador, Gino and Isidora Boon
Jake and Luke Hoang
The authors would like to thank their spouses, Derek Boon and Kin Hoang,
for their patience, understanding and support.
The questions, example answers, marks awarded and/or comments that appear in this book were written by the
authors. In examination, the way marks would be awarded to answers like these may be different.
Every effort has been made to trace all copyright holders, but if any have been inadvertently overlooked, the
Publishers will be pleased to make the necessary arrangements at the first opportunity.
Although every effort has been made to ensure that website addresses are correct at time of going to press, Hodder
Education cannot be held responsible for the content of any website mentioned in this book. It is sometimes possible
to find a relocated web page by typing the address of the home page for a website in the URL window of your
browser.
Hachette UK’s policy is to use papers that are natural, renewable and recyclable products and made from wood grown
in sustainable forests. The logging and manufacturing processes are expected to conform to the environmental
regulations of the country of origin.
Orders: please contact Bookpoint Ltd, 130 Park Drive, Milton Park, Abingdon, Oxon OX14 4SE. Telephone: (44) 01235 827720.
Fax: (44) 01235 400401. Email education@bookpoint.co.uk Lines are open from 9 a.m. to 5 p.m., Monday to Saturday,
with a 24-hour message answering service. You can also order through our website: www.hoddereducation.com
ISBN: 978 1 5104 2127 1
® IGCSE is a registered trademark
© Paul Hoang and Margaret Ducie 2018
First published in 2013 by
Hodder Education,
An Hachette UK Company
Carmelite House
50 Victoria Embankment
London EC4Y 0DZ
This second edition published 2018
Impression number 10 9 8 7 6 5 4 3 2 1
Year 2022 2021 2020 2019 2018
All rights reserved. Apart from any use permitted under UK copyright law, no part of this publication may be
reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and
recording, or held within any information storage and retrieval system, without permission in writing from the
publisher or under licence from the Copyright Licensing Agency Limited. Further details of such licences (for
reprographic reproduction) may be obtained from the Copyright Licensing Agency Limited, www.cla.co.uk
Cover photo © Shutterstock/Jianghaistudio
Typeset in India
Printed in Slovenia
A catalogue record for this title is available from the British Library.
421271_IGCSE_Economics_2e_FM.indd 2 08/02/18 1:41 PM
, Contents
Introduction iv
How to use this book iv
Exam preparation and technique vi
SECTION 1 The basic economic problem
1 The nature of the economic problem 2
2 The factors of production 6
3 Opportunity cost 11
4 Production possibility curve 14
SECTION 2 The allocation of resources
5 Microeconomics and macroeconomics 20
6 The role of markets in allocating resources 24
7 Demand 28
8 Supply 34
9 Price determination 39
10 Price changes 42
11 Price elasticity of demand 46
12 Price elasticity of supply 57
13 Market economic system 63
14 Market failure 67
15 Mixed economic system 73
SECTION 3 Microeconomic decision makers
16 Money and banking 86
17 Households 96
18 Workers 108
19 Trade unions 123
20 Firms 130
21 Firms and production 145
22 Firms’ costs, revenue and objectives 155
23 Market structure 162
SECTION 4 Government and the macro economy
24 The role of government 170
25 The macroeconomic aims of government 173
26 Fiscal policy 178
27 Monetary policy 189
28 Supply-side policy 193
29 Economic growth 198
30 Employment and unemployment 206
31 Inflation and deflation 216
SECTION 5 Economic development
32 Living standards 230
33 Poverty 235
34 Population 243
35 Differences in economic development between countries 254
SECTION 6 International trade and globalisation
36 International specialisation 262
37 Globalisation, free trade and protection 267
38 Foreign exchange rates 276
39 Current account of balance of payments 284
Additional exam-style questions 293
Glossary 297
Acknowledgements 302
Index 303
421271_IGCSE_Economics_2e_FM.indd 3 24/01/18 1:40 PM
,
Introduction
This book has been written for all students of Cambridge IGCSE® and O Level
Economics. It carefully and precisely follows the syllabus from Cambridge
Assessment International Education. It provides the detail and guidance that
are needed to support you throughout the course and help you prepare for your
examinations. It will also be of great use to anyone who wants to learn more
about the key concepts of economics.
This book will be valuable to students of economics whether you are:
» studying the subject for the first time at school or college and need a
comprehensive and clearly written textbook
» revising the subject before your examinations and need a study guide to help
you with key definitions, techniques and examination advice
» studying the subject on your own through distance or open learning and need
a complete programme of supportive questions and activities with suggested
answers.
Building on the successful formula of the previous edition, this second edition
updates all existing chapters. Material that is no longer covered by the syllabus
has been removed and new subject material has been added, with additional
chapters and new features.
This book has been written with the international student in mind. It explains
economic theory using real-life examples and case studies from around the world.
How to use this book
To make your study of economics as rewarding and successful as possible, this
Cambridge-endorsed textbook offers the following important features:
Learning objectives
Each chapter starts with an outline of the subject material to be covered and
ends with a checklist to confirm what you should have learned and understood.
Organisation
The content is in the same order as the syllabus: chapter titles and chapter
section headings match those of the Cambridge IGCSE® and O Level Economics
syllabuses.
Approach
The subject material is written in an informative yet lively way that allows
complete understanding of each topic to be gained.
iv
421271_IGCSE_Economics_2e_FM.indd 4 24/01/18 1:40 PM
, Influences on household borrowing
Definitions
Chapter review questions Definitions of the key term to help
you develop your use of economics
1 What are the main factors that affect the level of consumer spending in an economy?
2 How will the spending, borrowing and saving patterns of a young family with two
Revision checklist
children under the age of 5 compare with those of an old-aged pensioner?
3 How do spending and saving patterns of low income earners differ from those of high
terminology.
income earners?
4 How does wealth affect a person’s level of spending, saving and borrowing?
5 How do changes in interest rates influence consumer spending, saving and
borrowing?
This checklist lists the key concepts and
6 What are the main determinants of the level of savings in an economy?
7 What factors affect the level of borrowing in an economy?
8 Why might one person save more of their income than another?
topics you have covered in the chapter
and the key points you need to know for
Revision checklist
✔ The amount of money that individuals spend on goods and services is
largely dependent upon their level of disposable income.
3 Opportunity co
st
examinations.
✔ Disposable income is the amount of income a person has available
to spend on goods and services after compulsory deductions such as
income tax.
✔ Direct taxation reduces the amount of disposable income and therefore By the end of
this chapter,
the amount of spending and saving in the economy. students shou
★ define and provi ld be able to:
✔ Current expenditure is money spent on goods and services consumed de examples
★ understand the of opportunity
within the current year. Capital expenditure is money spent on fixed influence of oppo cost
assets. rtunity cost on
decis
The wealth of an individual is measured by the amount of assets they Opportunity cos ion making.
✔
own minus their liabilities (the amount they owe). A positive wealth effect Definition
Opportunity cost t
is
causes people to spend more. Opportunity cost
is the cost Opportunity cost a very important concept in
the study of econo
when making econois the cost of the next best
of the next best
Apart from levels of income, other determinants of the level of spending opportunity
opportunity forgo mics.
✔
forgone when mic decisions.
include: interest rates, confidence levels, inflation, age and the size of making a because in most Every choice made ne (give
has an opportunityn up)
decision. cases there is
households. Some examples an alternative. cost
Saving occurs when a person puts away part of their current income for of opportunity
✔ cost are as follow
» The opportunity s:
future spending. cost of choosing
Determinants of saving include: the level of disposable income, age, subject you could to study IGCSE
✔
» The opportunity be study ing instead. Econo mics is another IGCSE
attitudes towards saving, confidence levels and interest rates. cost of visiting
money you would the cinema on
Borrowing occurs when an individual, firm or the government takes out Saturday night
going to the cinemhave earned from babysitting
✔
could
a loan, paying it back to the financial lender over a period of time, with
» The opportunity a. for your neighbour be the
interest payments. cost of building instead of
same governmen an additional airpo
Factors that affect the level of borrowing in an economy include: the level
» The opportunity t funds to build public housi rt terminal
✔
of disposable income, interest rates, confidence levels, the availability of cost of a schoo ng for low-incom is using the
might be the scien l purchasing 100 e families.
funds (money supply), credit (including store cards) and wealth. » The opportunity ce equipment that could laptops for use
not be bought in classrooms
cost
income that would of going to university to as a result.
have been earne study for
to work instea
d. d if the undergradu a degree is the loss in
ate student had
chosen
Case study: US
According to the
federal government spen
spending of almos
Federal Minist
ry of Finance, ding
t $329 billion the
in its 2017 budge US federal government annou
Study tips
• 42.2% on labou t on the follow nced
• 11.1% on nationr and social affairs ing:
107 • 8.2% on transp al defence
• 6.1% on federa ort and digital infras
tructure
• 5.3% on educa l debts
• 4.6% on healthtion and research
care
Study tips encourage critical thinking
The governmen
t raises a finite
of the budget amount of taxati
to allocate to on revenue and
cost attached each
to the decisions area of public spending. must decide
Exam-style questions
decreased spend made as increa There is an oppor how much
and emphasise that you need to be
ing in another. sed spending tunity
in one area may
lead to
Activity
able to present and justify an opinion, Investigate the
major compo
These exam-style questions are designed
of your choice nents of gover
. Be prepared nment spend
to share your ing in your count
findings with ry, or a count
underpinned by economic principles
others in the ry
class.
to show you the types of question you
and theories.
may get in examinations. Note that the 11
questions within the chapters are only
part questions, as they are intended to Activity
consolidate understanding of the specific
chapter being reviewed. Some complete Activities appear throughout the book
» It generates
Government interv
ention to addre
ss market failure
questions are given in the section and encourage you to investigate
real-life applications of economics
tax revenue for
important goods the governmen
t which can be
‘Additional exam-style questions’ at the
and services. used to fund
The disadvanta
ges of imposing
an indirect tax
as a dynamic subject in your local
» The demand on a good or servic
for cigarettes, e are as follows:
end of the book.
inelastic, which alcohol and petro
mean l (gas
consumption level s that the increase in price for a car) tends to be price
of many may have
environment as well as globally.
cigarettes make people. In the little impact on
s smoking highl case of cigarettes, the
the higher price, y addictive and the nicotine in
» The indirect so consumptio therefore most
tax will be regre n will change only slightly. smok ers will pay
impact on low ssive (see Chapt
income earners er 26), so will
than high incom have a greater
e earners.
Exam-style que
stio
Traffic congestion ns
congestion charg in central London has fallen me
e for driving into since stribute inco
(approximately the central busin the introduction of a rty and redi
$15) each day ess district. It alleviate pove
(between 7 a.m. to drive into the costs £11.50 Policies to
and 6 p.m. on restricted area
(around $85) and weekdays). There during peak hours to
£195 ($250) for
late
is a penalty of
between £65 ation can help
a Explain, using paym ent of the charg ision of educ everyone, it narrows
an example, an e. rnment prov for
b Analyse the exter nal cost of drivin on — gove education l of
person’s leve e 18.3).
advan ng educati improving access to t cases, a
two different staketages and disadvantages of the g a car. [2] Labour-intensive and capital-intensive production » Improvi erty. By poor. In mos ntial (see
Tabl
c Discuss wheth holders. congestion charg
e for alleviate pov een the rich and the ings and earning pote education in the
er you think the betw r earn ity of city of
congestion charg the gap ct thei and qual
short-term soluti
on to the probl e [6] n tends to affe ease the quantity prod uctive capa ilarly,
em of traffic congeis a long-term or educ atio
policies to
incr an capital
and
poverty. Sim
Subsidies
stion in Londo
n. Exam-style questions Over time, help to imp
rove the humc growth and lowering
omi ices, such
as
[8]
economy will thereby creating econ essential serv
Study the hypothetical data below for two firms and answer the questions that ss to other
Governments often follow. The figures show the amount of money spent by each industry on factors the country, of and increased acce . prov ision of
help ent
and services. For provide subsidies to encourage the prov ision , will also governm d and
example, public the consumptio of production. and housing s state benefits — enable the unemploye ts
from using privat transport might n healthcare erou
be subsidised to of certain goods to
Study tip men
e cars. Figure 15.5 g more gen assistance of such pay rly, and
shows the impac discou » Providin efits gives financial c needs. Examples
t of a subsidy on rage people
The level of a Firm Labour costs ($) Capital costs ($) Other costs ($)
subsidy is the elde
measured by the marke welfare ben t their basi e pension funds for redistribute
the vertical public transport.
The bus and railwa t for
A 20,000 10,000 10,000 ed to mee stat ts help to
distance betwe
en the two S1
receive a sum of disadvantag mployment benefit, ). State benefi en has access to basi
c
supply curves money from the y firms B 40,000 40,000 20,000
include: une child pov erty y citiz ent
t (to reduce erty by ensuring ever reducing unemploym of
. The producer subsidy S2 government which
child benefi
receives payme
nt from the P1 lower a Define labour-intensive production. [2] or cause
s their produ alleviate pov at
transport ($)
government and costs and cause
s the supply curve ction cies aimed ent is a maj to attract
Price of
income and Macroeconomic poli
public
passes b Use the data above to explain why Firm A might be considered to be more
some of this incom from S1 (before to
subsidy) to S (after shift . unemploym ntives
consumers in e to
P2 subsidy). Price labour intensive than Firm B, despite the latter spending twice as much on necessities 30) also help, because government ince tion and
the form of 2 are ed job crea
lower prices (show falls
quantity demanded from P1 to P2 and the labour costs. [4] (see Chapter inequality. Examples
n by the ernment-fund reduce
distance betwe
en P1 and P Q2. An increase increases from poverty and investment and gov Chapter 26)
in Figure 15.5) 2 D in the use of publicQ1 to foreign dire
ct systems (see e
ressive tax country. Higher-incom eeds
and keeps
schemes.
O transport shoul
the remainder. Q1 Q2 d lower congestion, Capital-intensive production retraining tion — prog of a tax proc
Quantity of public reduce the amou and ressive taxa poor members mes in tax, with the those
▲ Figure 15.5
transport nt
driving cars. There of pollution caused by Definition Capital-intensive production takes place if a firm spends more on capital » Using prog een the rich and thei r inco ps or
The effects of fore, the subsid costs than on any other factor of production. This includes expenditure on the gap betw higher percentage of r-income grou erty and
a producer subsid reduc
es external costs y In capital-intensive a support lowe used to alleviate pov
y
created by drivin capital equipment such as tools, equipment, machinery and vehicles. Therefore, groups pay rnment to
Case g. industries, the use and by the gove mon method
study: Flu vacc cost of capital is more firms operating capital-intensive production need a lot of money to fund their being used income. This is a com ety. — the intro (see
duction
The Hong Kong ines in Hong Kong activities. This can act as a barrier to entry since it proves expensive for new firms without any wealth in soci l minimum wage
m wage rate
prominent than that of any
government subsid income and ona
and the elderl
y to ises the cost other factor of production, to enter such industries. Examples are aircraft and motor vehicle manufacturers, redistribute (or increasing) a nati osing a higher minimu me households.
is to reduce the encourage people in high-r of annual flu vaccines for cing imp inco
m wage, or dard of living for low- omy.
e.g. car manufacturing.
that fewer people
amount of flu
in the
isk age group
s to get vaccin
the very young soft drinks production and oil extraction. » Introdu l min imu
positive spillov need to be hospit wider community by target
alised for the
ated. The aim
ing these age of a nationa can improve the stan e poverty in the econ
er effects for
healthcare servic the rest of the treatment of
economy and flu. Vaccinations
groups, so Chapter 18), policies help to alleviat
es. result in less create
pressure on Hence, such
of a
in the life’
led ‘A day
Activity of 500–750
e of writing choice.
words entit
n your writi
ng.
a short piec re you begi ng
77
a Produce living in a LEDC of
your mation befo ally mentioni
data and infor without actu
421271_IGCSE_E
conomics_2e_Sec teenager er the necessary onomic indicators,
-02.indd 77 to gath roec r.
b You need must reflect the mac azine artic
le or lette
work y entr y, mag
c Your s by name. essay, diar tes.
the indicator the format of an and classma
d This can
be in your teacher
findings with
24/01/18 1:37
PM
to share your
Be prepared
ns
iew questio rty in the
Chapter rev what are the
signs that
there is pove
poverty and
meant by rty?
1 What is relative pove me
economy? rty differ from of low-inco
absolute pove the growth
2 How does the main causes of
poverty? or outp ut hinder
primary sect tribute
Case study
3 What are an overreliance on rty and redis
4 Why does ? alleviate pove
be used to
countries polic ies that can
the main 241
5 What are the economy?
▲ There are significant entry barriers into the car and aircraft manufacturing industries income in
Case studies based on a range of
Despite the initially high costs of capital-intensive production, there are
potentially huge cost savings in the form of technological economies of scale
in the long run (see Chapter 20). Firms that become more capital intensive
international businesses/examples put
149
concepts into a real-world context to Chapter review questions
help you understand and think about
These questions, which correspond
how they work in practice.
with the chronological order of the text,
encourage you to read, reflect and write
your own answers.
Answers
Answers to the exam-style and chapter review questions are available in
the accompanying online Teacher Guide.
v
421271_IGCSE_Economics_2e_FM.indd 5 24/01/18 1:40 PM
,
Exam preparation and technique
Revision
You should be able to perform to the best of your ability if you:
» ensure that you have worked through all the activities and examination-style
questions in this book
» revise thoroughly before your examination — allow plenty of time for this and
avoid leaving it until the last minute.
You can also help yourself greatly if you take the following steps.
» Obtain a copy of the syllabus. You should also be able to obtain past
examination papers and mark schemes. It is important that you check the
progress of your learning and revision by ticking off each topic against the
syllabus content.
» Make sure that you know the number and length of each of the papers you will
have to sit. The style and nature of the questions often differ between papers,
so you must be clear about the types of question that are likely to appear on
each paper.
For Cambridge IGCSE® and O Level Economics the examination papers are:
Length Type of paper Type of questions
Paper 1 45 min Data response 30 multiple-choice questions
Paper 2 2 hours 15 min Structured Students answer one compulsory
questions questions and three questions from a
choice of four
Make sure you check the instructions on the question paper, the length of the
paper and the number of questions you have to answer.
Allocate your time sensibly between each question. Every year, good students
let themselves down by spending too long on some questions and too little time
(or no time at all) on others. You will be expected to spend longer writing an
answer to a question worth 12 marks than you would when writing an answer
worth 8 marks.
Remember that the most common command words are ‘identify’, ‘explain’,
‘consider’ and ‘justify’. The following guide should help you.
Key command words you need to know
Analyse — examine in detail to show meaning, identify elements and the
relationship between them.
Calculate — work out from given facts, figures or information.
Define — give precise meaning.
Describe — state the points of a topic/give characteristics and main features.
Discuss — write about issue(s) or topic(s) in depth in a structured way.
Explain — set out purposes or reasons / make the relationships between things
evident / provide why and/or how and support with relevant evidence.
vi
421271_IGCSE_Economics_2e_FM.indd 6 24/01/18 1:40 PM
, Give — produce an answer from a given source or recall/memory.
Identify — name/select/recognise.
State — express in clear terms.
Finally...
Economics can help to explain real-world events, issues and problems, such
as why:
» the most expensive can of Coca-Cola, made for astronauts, is $1250 per can
» one of the world’s fastest cars, the Bugatti Veyron, is priced at a cool
$1.7 million (before taxes)
» the price of a bus fare is relatively low
» the average doctor, lawyer, pilot and dentist have high earnings
» private sector firms do not supply street lighting and public roads
» diamonds (a non-essential product) are expensive, whereas water (a vital good)
is not
» farm workers (who harvest products essential for life) are paid low wages
whereas bankers (who produce nothing of real substance) are paid high salaries
Economics helps to explain everyday issues that occur in a constantly changing
global environment. It is a ‘live’ subject and you are encouraged to watch the
news and read newspapers to refresh the case studies you learn in class.
Enjoy the course and using this book!
Paul Hoang and Margaret Ducie
vii
421271_IGCSE_Economics_2e_FM.indd 7 24/01/18 1:40 PM
,This page intentionally left blank
, SECTION 1
The basic
economic
problem
Chapters
1 The nature of the economic problem
2 The factors of production
3 Opportunity cost
4 Production possibility curve
This section of the syllabus introduces students to the
fundamental economic problem: scarce resources
but infinite wants (desires). You will learn about the
introductory concepts that underpin the study of
economics including the basic economic problem,
scarcity, choice, factors of production, economic
goods and free goods, opportunity cost and production
possibilities.
1
421271_IGCSE_Economics_2e_Sec-01.indd 1 24/01/18 9:54 AM
