IGCSE

ECONOMICS
2025
MR B TARWIREYI
INTRODUCTION TO ECONOMICS

• What is economics?
Economics is a social science which studies how scarce resources are allocated towards
competing ends.
Economics is the study of how individuals, businesses, governments and societies allocate
limited resources to satisfy unlimited wants and needs
Economics is divided into two broad categories which are Microeconomics and
Macroeconomics
 MICROECONOMICS & MACROECONOMICS

• Microeconomics is the study of particular markets and sections of the economy rather than the economy as a whole
TOPICS COVERED IN MICROECONOMICS
• Factors of production
• Demand
• Supply
• Price elasticity of demand
• Economies and diseconomies of scale
• Firms’ costs, revenues and objectives
• Market structure
• Microeconomics attempts to explain what is likely to happen if certain economic factors change.
• Microeconomics tends to use theory rather than empirical evidence to explain changes in
individual markets and industries.
• For example, if there is a bumper harvest of maize its price will fall because the supply of maize
has increased

NB**Microeconomics is concerned with decision making by individuals, households and firms

 MACROECONOMICS

• Macroeconomics is the study of economic behaviour and decision making in the whole economy, rather than individual markets.

TOPICS COVERED IN MACROECONOMICS

• The role of government

• Redistribution of income
• Fiscal policy
• Monetary policy
• Supply side policies
• Economic growth

• Employment and unemployment

• Inflation and deflation

• Macroeconomics attempts to explain what is likely to happen to the economy as a whole
if certain economic factors change.
• Macroeconomics places greater emphasis on using empirical data as evidence to explain
changes in the economy.
• For example, government decisions about protectionism such as the use of tariffs, quotas
and embargoes

NB**Macroeconomics is concerned with decision making for the economy as a whole

 THE NATURE OF THE ECONOMIC PROBLEM

• The basic economic problem is scarcity

• The basic economic problem is concerned with how best to allocate scarce resources in order to satisfy
peoples unlimited needs and wants
• SCARCITY means not enough resources (factors of production) to satisfy the unlimited human needs
and wants
• Scarcity affects all the economic agents in the economy that is:
(i) Individuals or households
(ii) Firms
(iii) Governments
• Economic agents are individuals, groups, or entities that make decisions about how to allocate scarce
resources.
• They are participants in an economy who influence production, consumption, and distribution of goods
and services.
• As a result of scarcity, choices have to be made.
• CHOICE – is an alternative taken from available options, for example Lampie has P10 and he needs
apples and bananas, but his money can only allow him to get one fruit. If Lampie decides to get bananas,
then bananas becomes the choice.

• NB** People always chooses the best as it enables them to maximise satisfaction
OPPORTUNITY COST

• Opportunity cost is the next best alternative foregone.

• In Lampies example above, the next best option are apples
FORMULA
• Opportunity cost = Foregone / chosen
THE INFLUENCE OF OPPORTUNITY COST ON DECISION MAKING
• Opportunity cost plays a crucial role in decision-making by highlighting the trade-offs involved in
choosing one option over another.
• Understanding opportunity cost helps individuals, businesses, and governments make more informed
decisions by considering the true cost of their choices.
BASIC ECONOMIC QUESTIONS

• As the resources are limited and the needs and wants are unlimited the economic agents
have to address the three basic economic questions which are:
• What to produce? – It refers to the combination of goods and services to be produce,
for example should we produce more necessities or luxuries
• How to produce? – It refers to the production method to be utilized, for example,
should we be capital intensive or labour intensive
• For whom to produce? – It refers to the consumers of the goods and services, for
example should we produce for the rich or the poor
• NB** Goods are physical (tangible) items such as cars and shoes while services are non
physical (intangible) items such as internet access and healthcare
• Goods and services are provided by either the private sector or the public sector
• PRIVATE SECTOR – refers to the economic activity that is run and controlled by
private individuals. The main objective of the private sector is to maximise profits

• PUBLIC SECTOR – refers to the economic activity that is run and controlled by the
government. The main objective of the public sector is to cater for the welfare of the
society
NEEDS AND WANTS

• Needs – are goods and services that are essential for survival for example food, water,
shelter, clothing, access to health care

• Wants – are goods and services that are not necessary for survival but are desired as
they make life easier
ECONOMIC GOODS & FREE GOODS

• Economic goods are goods that are scarce in supply relative to demand and require
resources to produce. They have an opportunity cost and a price.
• Examples include, bread, shoes, chairs
• Free goods are goods that are abundant in supply and available without any cost. They
are not scarce relative to demand and do not require production.
• Examples include, air and sunlight
FACTORS OF PRODUCTION

FACTOR REWARD DEFINITION

LAND RENT Natural resources, eg, wood, metal ores

LABOUR SALARIES / Human resources, that is the physical and mental effort
WAGES
CAPITAL INTEREST Refers to the manmade resources, eg machinery

ENTERPRISE PROFIT The skills and ability to take risk and combine the other
factors of production
 MOBILITY OF THE FACTORS OF
PRODUCTION
• The mobility of the factors of production refers to the extent to which resources can be changed for
one another in the production process
• The mobility of the factors of production can be:
(i) Geographical mobility – refers to the extent to which a factor of production is willing and able to move
to different locations for employment purposes.
• Geographical mobility is affected by family ties and related commitments as well as costs of living
• (ii) Occupational mobility – refers to the ease with which a factor is able to move from one use to the
other
• (i) Occupational mobility depends on the cost and length of training required to change profession
 NB** More often than not labour mobility is discussed although factor mobility can apply
to any factor of production, e.g
(i) Land might be used for various competing purposes, e.g the land used for agricultural
purposes can be used to construct a mall
(ii) Capital equipment might be used for different purposes too. e.g the same machinery
used to produce bread can be used to produce a croissant
(iii) Entrepreneurs can also be mobile, Marang who owns a logistics company can also
own a retail business
CAUSES OF CHANGES IN THE QUANTITY AND
QUALITY OF FACTORS OF PRODUCTION
• Changes in the costs of factors of production
• Government policies can affect the costs of production such as taxes and subsidies
• New technologies allow firms to produce more output
• Net migration of labour will affect the quantity of labour in the economy
• Improvements in education and healthcare will improve the quality of labour as workers
become more valuable to firms
• Unfavourable weather conditions will reduce the supply of agricultural products
PRODUCTION POSSIBILITY CURVE

• A Production Possibility Curve (PPC) (also called a Production Possibility

Frontier, PPF) is a graphical representation that shows the maximum possible output
combinations of two goods or services an economy can produce, given its resources and
technology.
• A PPC shows the productive capacity of an economy
 ASSUMPTIONS MADE WHEN DRAWING A PPC

• When drawing a Production Possibility Curve (PPC), economists make several assumptions to
simplify the model. These assumptions include:
(i) Only Two Goods Are Produced – The economy is assumed to produce only two types of goods
or services for simplicity, though in reality, economies produce many goods.
(ii) Fixed Resources – The quantity of available resources (land, labor, capital, and enterprise) is fixed
during the period considered.
(iii) Full and Efficient Use of Resources – The economy is assumed to be operating at full
employment and full efficiency, meaning there is no waste of resources.
(iv) Resource transferability – Resources can be easily moved from the production of one commodity
to the other with ease
SIGNIFICANCE OF THE LOCATION OF THE POINTS

• Point A — all resources are dedicated to the production of wooden furniture.

• Point B — all resources are dedicated to the production of olive oil.
• Point C — W1 tonnes of wooden furniture are produced along with O1 litres of olive oil.
• Point D — W2 tonnes of wooden furniture and O2 litres of olive oil are produced.
• Point E — this point is beyond the production possibility curve and lies outside the productive
capacity of the economy, so it is currently unattainable.
• Point F — this point is within the productive capacity of the economy, so the production of both
olive oil and wooden furniture can increase without any opportunity cost as some factors of
production are currently not being used.
CAUSES & CONSEQUENCIES OF MOVEMENTS
ALONG THE PPC
 A movement along the PPC occurs when an economy changes the
combination of two goods being produced, but the total resources
and technology remain the same.
CAUSES OF MOVEMENTS ALONG THE PPC:
• Change in consumer demand – If people demand more of one good, resources are
reallocated to produce more of that good and less of the other.
• Change in production choices – A country may shift resources from producing one good
(e.g., capital goods) to another (e.g., consumer goods).
CONSEQUENCES OF MOVEMENTS ALONG THE PPC:
• Opportunity cost – Increasing production of one good leads to a reduction in the other.
• Efficient resource allocation – If the economy operates at any point on the PPC, resources
are fully utilized.
SHIFTS OF THE CURVE
A shift of the ppc occurs when there is a change in the economy’s ability to
produce goods and services due to changes in resources, technology, or
external factors.
CAUSES OF PPC SHIFTS:

• Outward Shift (Economic Growth)

(i) Increase in resources – More land, labor, or capital (e.g., discovery of new natural resources).
(ii) Improved technology – Advances in production techniques increase efficiency.
(iii) Better education & training – A skilled workforce produces more with the same resources.
(iv) Investment in capital goods – More factories, machinery, and infrastructure boost productivity.
(v) Good governance & policies – Stable economies encourage business growth and efficiency.
• INWARD SHIFT (ECONOMIC DECLINE)
(i) Natural disasters or war – Destruction of resources reduces production capacity.
(ii) Depletion of resources – Exhaustion of natural resources (e.g., oil, minerals).
(iii) Declining workforce – Aging population, pandemics, or emigration of skilled workers.
(iv) Economic recessions – Poor investment and unemployment reduce efficiency.
Consequences of PPC Shifts:
• Outward Shift → More production potential, higher economic growth, improved living
standards.
• Inward Shift → Lower production potential, economic decline, and possible unemployment.
PRACTICE QUESTIONS

There is a range of factors that influence the supply of economic goods, including natural
disasters. Recently a series of earthquakes in one country destroyed buildings, including
factories and offices. One factory that survived has since increased its scale of production.
This firm has employed more factors of production and has experienced a fall in its average
cost of production.
• (a) Define economic good. [2]
• (b) Explain two influences on what factors of production a firm uses. [4]
• (c) Analyse, using a production possibility curve diagram (PPC), the effect of the
destruction of some of its resources on an economy.