Prof.

Aarati C Patil 1

IGCSE NOTES –
ECONOMICS

Welcome on board

Key Concepts to remember for Economics :-

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Chapter 1 _The nature of the economic problem

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

The Nature of the Economic Problem

Resources: are the inputs required for the production of goods and services.

Scarcity: a lack of resources to satisfy everyone’s wants

The fundamental economic problem is that there is a scarcity of resources to
satisfy all human wants and needs. There are finite resources and unlimited
wants. This is applicable to consumers, producers, workers and the
government, in how they manage their resources.

Scarcity continues to exist.More goods and services are produced today than
ever before but the growth in wants exceeds the growth of economic
resources.

Time is in limited supply. Hence we decide either to watch a movie or play

with friends.

Economic goods are those which are scarce in supply and so can only be
produced with an economic cost and/or consumed with a price. In other
words, an economic good is a good with an opportunity cost. All the goods we
buy are economic goods, from bottled water to clothes.
Free goods/Non Economic Goods are those which are abundant in supply,
usually referring to natural sources such as air and sunlight.

Chapter 2_The Factors of Production

Resources are also called ‘factors of production’ (especially in Business).

They are:

Land: all natural resources in an economy. This includes the surface of the
earth, lakes, rivers, forests, mineral deposits, climate etc.
The reward for land is the rent it receives.
Since, the amount of land in existence stays the same, its supply is said to be
fixed. But in relation to a country or business, when it takes over or expands to a
new area, you can say that the supply of land has increased, but the supply is not
depended on its price, i.e. rent.
The quality of land depends upon the soil type, fertility, weather and so on.
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Since land can’t be moved around, it is geographically immobile but since it

can be used for a variety of economic activities it is occupationally mobile.

Labour: all the human resources available in an economy. That is, the mental
and physical efforts and skills of workers/labourers.

The reward for work is wages/salaries.

The supply of labour depends upon the number of workers available (which is in
turn influenced by population size, no. of years of schooling, retirement age, age
structure of the population, attitude towards women working etc.) and the number
of hours they work (which is influenced by number of hours to work in a single
day/week, number of holidays, length of sick leaves, maternity/paternity leaves,
whether the job is part-time or full-time etc.).

The quality of labour will depend upon the skills, education and qualification of
labour.

Labour mobility can depend up on various factors. Labour can achieve high
occupational mobility (ability to change jobs) if they have the right skills and
qualifications. It can achieve geographical mobility (ability to move to a place for a
job) depending on transport facilities and costs, housing facilities and costs,
family and personal priorities, regional or national laws and regulations on travel
and work etc.

Capital: all the man-made resources available in an economy. All man-made

goods (which help to produce other goods – capital goods) from a simple spade
to a complex car assembly plant are included in this. Capital is usually denoted in
monetary terms as the total value of all the capital goods needed in production.

The reward for capital is the interest it receives.

The supply of capital depends upon the demand for goods and services, how well
businesses are doing, and savings in the economy (since capital for investment is
financed by loans from banks which are sourced from savings).

The quality of capital depends on how many good quality products can be
produced using the given capital. For example, the capital is said to be of much
more quality in a car manufacturing plant that uses mechanisation and
technology to produce cars rather than one in which manual labour does the
work.

Capital mobility can depend upon the nature and use of the capital. For
example, an office building is geographically immobile but occupationally mobile.
On the other hand, a pen is geographically and occupationally mobile.

Enterprise: the ability to take risks and run a business venture or a firm is
called enterprise. A person who has enterprise is called an entrepreneur. In short,
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they are the people who start a business. Entrepreneurs organize all the other
factors of production and take the risks and decisions necessary to make a firm
run successfully.

The reward to enterprise is the profit generated from the business.

The supply of enterprise is dependent on entrepreneurial skills (risk-taking,

innovation, effective communication etc.), education, corporate taxes (if taxes on
profits are too high, nobody will want to start a business), regulations in doing
business and so on.

The quality of enterprise will depend on how well it is able to satisfy and expand
demand in the economy in cost-effective and innovative ways.

Enterprise is usually highly mobile, both geographically and occupationally.

All the above factors of productions are scarce because the time people have
to spend working, the different skills they have, the land on which firms
operate, the natural resources they use etc. are all in limited in supply; which
brings us to the topic of opportunity cost.

The causes of geographical immobility Labour ) include:

• Differences in the price and availability of housing in different areas

and countries.
Workers who lose their jobs in poor areas may not be able to take up jobs in
rich areas
because they cannot afford or find housing there.
•
Family ties. People may be reluctant to leave the country they are currently
living in
because they do not want to move away from friends and relatives.

• Differences in educational systems in different areas and countries.

People may not
be willing to move to a job elsewhere if it disrupts their children’s education.
•
Lack of information. People without jobs, or those in poorly paid jobs, may
stay where
they are because they are unaware of job opportunities elsewhere.
•
Restrictions on the movement of workers. It is oft en necessary to obtain a
work visa to
work in another country and these can be limited in supply.
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Chapter 3 _Opportunity Cost

The scarcity of resources means that there are not sufficient goods and
services to satisfy all our needs and wants; we are forced to choose some
over the others. Choice is necessary because these resources have
alternative uses- they can be used to produce many things. But since there
are only a finite number of resources, we have to choose.

When we choose something over the other, the choice that was given up is
called the opportunity cost.

Opportunity cost, by definition, is the next best alternative that is

sacrificed/forgone in order to satisfy the other.

Example 1: the government has a certain amount of money and it has two
options: to build a school or a hospital, with that money. The govt. decides to
build the hospital. The school, then, becomes the opportunity cost as it was
given up. In a wider perspective, the opportunity cost is the education the
children could have received, as it is the actual cost to the economy of giving
up the school.
Example 2: you have to decide whether to stay up and study or go to bed and
not study. If you chose to go to bed, the knowledge and preparation you could
have gained by choosing to stay up and study is the opportunity cost.

Chapter 3 _Production Possibility Curve

Diagrams (PPC)
Because resources are scarce and have alternative uses, a decision to
devote more resources to producing one product means fewer resources are
available to produce other goods. A Production Possibility Curve diagram
shows this, that is, the maximum combination of two goods that can be
produced by an economy with all the available resources.
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The PPC diagram above shows the production capacities of two goods- X and
Y- against each other. When 500 units of good X are produced, 1000 units of
good Y can be produced. But when the units of good X increases to 1000,
only 500 units good Y can be produced.

Let’s look at the PPC named A. At point X and Y it can produce certain
combinations of good X and good Y. These are points on the curve- they are
attainable, given the resources. Th economy can move between points on a
PPC simply by reallocating resources between the two goods.

If the economy were producing at point Z, which is inside/below the PPC, the
economy is said to be inefficient, because it is producing less than what it
can.

Point W, outside/above the PPC, is unattainable because it is beyond the

scope of the economy’s existing resources. In order to produce at point W, the
economy would need to see a shift in the PPC towards the right.

For an outward shift to occur, an economy would need to:

discover or develop new raw materials. Example: discover new oil fields
employ new technology and production methods to increase productivity
increase labour force by encouraging birth and immigration, increasing retirement
age etc.

An outward shift in PPC, that is higher production possibility, will lead to

economic growth.

In the same way, an inward shift can occur in the PPC due to:

natural disasters, that erode infrastructure and kill the population

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very low investment in new technologies will cause productivity to fall over time
running out of resources, especially non-renewable ones like oil or waterAn
inward shift in the PPC will lead to the economy shrinking.

How is opportunity cost linked to PPC?

Individuals, businessmen and the government can calculate the opportunity
cost from PPC diagrams. In the above example, if the firm decided to
increase production of good Y from 500 to 750, it can calculate the
opportunity cost of the decision to be 250 units of good X (as production of
good X falls from 1000 to 750). They are able to compare the opportunity cost
for different decisions.