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IGCSE Economics Syllabus Overview

This study guide covers the fundamentals of economics based on the IGCSE 0455
syllabus, focusing on the basic economic problem.

What is Economics?
According to Wikipedia, economics is:

The social science that describes the factors that determine the
production, distribution, and consumption of goods and services.

Economics addresses how societies manage limited resources to satisfy unlimited

wants and needs. Humans always desire more, but resources are finite, leading to
the core economic problem.

Nature of the Economic Problem

The economic problem arises from the basic conflict between unlimited wants and
limited resources.

Human Nature and Wants

Humans always want more and better.
Example: Owning a Ferrari, then desiring a Bugatti.
Example: Upgrading from a gold watch to a diamond watch, then to a
tanzanite watch.
This desire extends to basic needs as well (bigger house, better car).

Resources and Production

Resources are inputs required for the production of goods and services (wood,
metal, glass for a house).
These resources are finite (limited wood due to deforestation, limited
availability of diamonds).

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Scarcity: The Core Issue

Scarcity is the lack of something; a state where resources are not infinite
but finite.

The fundamental economic problem is that there is scarcity of resources to satisfy

human wants and needs.

Finite Resources: Limited amounts of resources.

Unlimited Wants: Never-ending human desires.

The Economic Problem Defined

The economic problem in one sentence:

There are limited resources, but the wants from humans are unlimited.

The Economic Problem

The economic problem arises from the fundamental conflict between limited
resources and unlimited wants. Economics seeks to address this problem by
examining concepts such as price, supply, and demand.

The economic problem varies depending on the context:

For consumers, scarcity might manifest in the form of luxury goods like
diamonds being unaffordable.
For producers, the economic problem involves managing finite resources
needed to create products.

A simplified way to describe the economic problem is: wanting to create 100
diamond watches with only 50 diamonds.

One way to control this problem is to increase the price of the scarce good,
limiting its accessibility to those who can afford it.

Economic Goods vs. Free Goods

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Economic Goods
Economic goods are those which are scarce in supply and so can only be
produced with an economic cost or consumed with a price.

In essence, economic goods are made from limited resources. They also have an
opportunity cost.

Free Goods
Free goods are unlimited and abundant. Examples include sunlight and air.

Feature Economic Goods Free Goods

Supply Scarce Abundant/Unlimited

Resource Type Limited Unlimited
Opportunity Cost Yes No
Examples Diamond watch, Ferrari Air, Sunlight

Needs vs. Wants

It's important to distinguish between needs and wants:

Needs: These are necessities required for survival, such as food and shelter.
Wants: These are luxuries that one can live without, such as a fancy car or an
elaborate kitchen.

In simple terms:

A need is a necessity.
A want is a luxury.

Factors of Production
Factors of Production
Factors of production are resources used to produce goods and services. There are
four factors of production, which can be remembered using the mnemonic CELL:

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Capital
Enterprise
Land
Labor

Land
Land refers to all natural resources within an economy, including the surface of the
Earth, lakes, rivers, and forests. These are resources obtained from the Earth, such as
diamonds and gold.

Land: All natural resources in an economy

Reward for Land

The reward for land is rent.

Supply of Land
The amount of land in existence is considered fixed, meaning its supply doesn't
increase.

Quality of Land
The quality of land depends on factors like:

Fertility
Soil type
Weather

Mobility of Land
Mobility refers to how easily the use of land can be changed. There are two types of
mobility:

Geographical immobility: Land cannot be moved from one place to another.

Occupational mobility: Land can be used for various economic activities like
farming, building, or mining.

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Land is geographically immobile because it cannot be moved. However, land is

occupationally mobile because it can be used for a variety of economic activities,
such as:

Farming
Civilization
Building
Mining## Land: Natural Resources

Land encompasses all natural resources within an economy.

The reward for utilizing land is rent.

Key characteristics of land:

Geographically immobile: Land cannot be moved or changed in location.

Occupationally mobile: Land has different uses.

‍ 동 Labor: Human Resources

Labor consists of all human resources available in an economy. It involves the:

Mental and physical efforts and skills of workers.

Labor is a resource because humans provide skills.

The reward for labor is wages and salaries.

Supply of Labor
The supply of labor depends on the:

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Number of workers.

Influenced by:
Population size
Years of schooling
Retirement age
Age structure

Number of hours they work.

Influenced by:
Number of holidays
Length of sick leaves
Full-time vs. part-time employment

Quality of Labor
The quality of labor depends on the skills and education of the workforce.

Mobility of Labor
Occupational Mobility: The ability to change jobs.

Depends on having the right skills and improving those skills over time.

Geographical Mobility: The ability to change the location of work.

Depends on factors such as:

Family ties
Costs
Visa requirements
Laws and regulations on travel and work

Capital: Man-Made Resources

Capital includes all man-made resources available in the economy.

These are man-made goods, such as machinery.

Capital goods help make more capital goods or help produce other goods.

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Capital
Capital simplifies the production of other goods. The reward for capital is interest.
The supply of capital depends on the demand for goods.

The quality of capital depends on how many good-quality products can be produced
using a given capital. Better technology and machinery lead to better quality goods.

Capital Mobility
Capital mobility depends on the nature and use of capital.

Geographically immobile: An office building is geographically immobile

because it can't be moved from one location to another.
Occupationally mobile: An office building is occupationally mobile because it
can be used for many purposes.

Enterprise
Enterprise is the ability to take risks and run a business venture. A person who runs
an enterprise is called an entrepreneur.

Enterprise is the ability to take risks, start a business

Entrepreneurs organize all the factors of production, take risks, make decisions, and
run the firm. The reward of enterprise is profit generated from the business.

The supply of enterprise depends on the entrepreneurial skills, creativity, risk-taking

ability, education, and taxes. The quality of enterprise depends on how the
entrepreneur is able to satisfy and expand the demand in the economy in the most
innovative ways.

Enterprise is usually highly mobile, both geographically and occupationally.

Geographical Mobility: The ability to relocate.

Occupational Mobility: The use of capital for many purposes.

Factors of Production
When discussing factors of production, it's important to know the following:

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Definition
Rewards
Supply
Quality
Mobility

All factors of production are scarce because of limited time, skills, and resources.
Land and labor are scarce.

Opportunity Cost
Opportunity cost is the next best alternative that is sacrificed in order to
satisfy another.

For example, imagine you have to decide whether to stay up and study or go to bed
and not study:

Option A: Stay up and study

Option B: Go to bed and not study

Opportunity Cost
When making a choice, the opportunity cost is the value of the next best alternative
that is foregone.

For example, if you choose to study (option A) instead of sleeping (option B), the
sleep you missed out on is the opportunity cost. Conversely, if you choose to sleep
(option B), the knowledge you could have gained from studying (option A) is the
opportunity cost.

The need for opportunity cost arises due to scarcity of resources, which forces
individuals, governments, and producers to make decisions about which goods or
services to prioritize.

Production Possibility Curve (PPC)

The Production Possibility Curve (PPC) is a diagram that represents the maximum
combination of two goods an economy can produce with its available resources.

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A production possibility curve diagram shows the maximum combination

of two goods that can be produced by an economy within the available
resources

The PPC helps illustrate opportunity cost and aids in decision-making.

Understanding Points on the PPC

Imagine a graph with Good X on one axis and Good Y on the other. The PPC is a
curve plotted on this graph.

Attainable vs. Unattainable:

A point outside the PPC is considered unattainable, indicating that there
aren't enough resources to produce that combination of goods.
A point inside the PPC is inefficient, meaning resources are not being
fully utilized.

Shifts in the PPC

The PPC can shift, indicating changes in production possibilities.

Outward Shift: An outward shift indicates economic growth and higher

production possibilities. It can occur due to:

Discovery of more raw materials

New technology improving efficiency and productivity
Increase in the labor force

Inward Shift: An inward shift signifies a decrease in production possibilities. It

can occur due to:

Natural disasters depleting resources

Low investment in technologies
Running out of resources like oil or water

PPC and Opportunity Cost

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Governments, businesses, producers, and consumers can use the PPC to calculate
opportunity costs. For example, if a point on the PPC shows more production of Good
X than Good Y, the opportunity cost of producing Good Y is higher. By comparing
different points on the curve, decision-makers can assess trade-offs and determine
the most valuable option.

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