REVISED IGCSE ECONOMICS 0455 Last Minute Study Guide

Complete set of standard Q&A flashcards covering all chapters of the IGCSE Economics 0455 syllabus study guide.

What is a need in economics?

A need is something we must have in order to live, such as food, shelter, and clothing.

What is a want in economics?

A want is something we would like to have in order to make our lives more enjoyable, such as a holiday or a mobile phone.

What is the root cause of the economic problem faced by countries?

Countries do not have enough income or resources to satisfy all unlimited wants, which leads to a situation of scarcity.

How is scarcity defined in the study guide?

Scarcity is a situation where resources are insufficient to satisfy unlimited wants.

What are resources in the context of production?

Resources are inputs and factors used for the production of goods and services.

What is choice in economic terms?

Choice is the selection between two or more commodities.

What is opportunity cost?

Opportunity cost is the next best alternative foregone when making a choice.

What is a free good?

A free good is a good where no resources are required for production, provided by nature, and where no opportunity cost is involved.

What are three examples of free goods given in the text?

Sunlight, water in a river, and fresh air.

What is an economic good?

An economic good is a good where resources such as land, labour, capital, and enterprise are required to produce it, involving an opportunity cost.

What are three examples of economic goods given in the text?

TV, chair, and phone.

What are the four factors of production?

Land, labour, capital, and enterprise.

How is land defined as a factor of production, and what is its reward?

Land consists of natural resources used for production, including physical land, minerals beneath it like oil or coal, and natural occurrences on it. Its reward is rent.

How is labour defined as a factor of production, and what is its reward?

Labour consists of human effort of all types, including physical, mental, skilled, and unskilled effort. Its reward is wages or salary.

How is capital defined as a factor of production, and what is its reward?

Capital consists of man-made resources used for the production of other goods, such as vehicles and furniture. Its reward is interest.

How is enterprise defined as a factor of production, and what is its reward?

Enterprise involves risk bearing and key decision making in a business, carried out by an entrepreneur. Its reward is profit.

What is occupational mobility?

Occupational mobility is the ability to change from one occupation to another occupation.

What is geographical mobility?

Geographical mobility is the ability to move from one place to another.

What is the geographical mobility characteristic of land?

Land is geographically immobile, although a piece of land can be used to support various activities such as a factory or an office block.

Why might labour be occupationally immobile?

Labour may be occupationally immobile due to a lack of skills, personal reasons, or family reasons.

Why is enterprise considered very geographically and occupationally mobile?

Entrepreneurs possess the skills needed to organize different types of businesses in almost any location anywhere in the world.

What does the quantity of factors of production refer to?

Quantity refers to the volume of resources available through an economy's factors of production.

What does the quality of factors of production refer to?

Quality refers to how useful or productive an economy's factors of production are.

What determines the quality of an economy's labour force?

Education, training, experience, and health of the labour force.

What affects the quality of capital resources?

Technological advances which produce higher quality outputs.

What is the opportunity cost for an O'level graduate who chooses to continue higher studies?

Getting a job during that period.

If a consumer spends MVR $10$ on Coke instead of Fanta, what is the opportunity cost?

The Fanta that the consumer did not buy.

What is the opportunity cost for an unemployed worker choosing a new job?

The free time lost if he was unemployed before.

What is the opportunity cost for a firm that allocates resources to produce Laptops instead of Smart Phones?

The Smart Phones which are not produced.

What is the opportunity cost for a government spending tax revenue on education instead of healthcare?

Not spending that money on healthcare.

What is a Production Possibility Curve (PPC)?

A curve showing the maximum output of two types of goods and the combination of those goods that can be produced with existing resources and technology.

What does a movement along a PPC indicate?

A movement along a PPC shows how existing resources can be reallocated between two types of goods.

In the PPC example, what is the opportunity cost of moving from point A to B if $60\text{ million}$ units of capital goods are lost?

The $60\text{ million}$ lost units of capital goods.

What does a point inside the PPC (such as point C) explain?

Unemployment or inefficient use of resources.

What causes an outward shift of a PPC to the right?

An increase in the quantity or quality of resources available to the economy.

What is microeconomics?

The study of the behavior and decisions of households and firms, and the performance of individual markets.

What is macroeconomics?

The study of the whole economy.

What are economic agents?

Decision makers in micro and macroeconomics (such as individuals, firms, and government) who undertake economic activities and make economic decisions.

What are the three fundamental economic questions?

What to produce, how to produce, and for whom to produce?

What is an economic system?

The institutions, organizations, and mechanisms that influence economic behavior and determine how resources are allocated.

What is the price mechanism?

The system by which the market forces of demand and supply determine the price.

What is market equilibrium?

A situation where demand and supply are equal at the current price.

What is market disequilibrium?

A situation where demand and supply are not equal at the current price.

What is effective demand?

Effective demand means individuals are willing and able to afford a product, and a firm is prepared to sell it to them.

What is the Law of Demand?

Demand and prices are inversely related; other things remaining constant, more goods and services will be demanded at lower prices than higher prices.

What is market demand?

The total demand for a product by the aggregation of the demand of all potential consumers.

What causes an extension of demand?

A rise in the quantity demanded caused by a fall in the price of the product itself.

What causes a contraction of demand?

A fall in quantity demanded caused by a rise in the price of the product itself.

What are six factors that cause a shift in the demand curve?

Income level, expectations, taste and fashion, price of substitutes and complements, advertising, and population.

What is a substitute good?

A product that can be used in place of another, such as Tea and Coffee.

What is a complement good?

A product that is used together with another product, such as DVD and DVD player.

What is a normal good?

A product whose demand increases when income increases and decreases when income decreases, such as luxury products.

What is an inferior good?

A product whose demand falls when income increases and increases when income falls, such as match boxes.

What is the Law of Supply?

Supply and prices are directly related; other things remaining constant, more goods and services will be supplied at higher prices than lower prices.

What causes an extension of supply?

A rise in the quantity supplied caused by a rise in the price of the product itself.

What causes a contraction of supply?

A fall in the quantity supplied caused by a fall in the price of the product itself.

What are six factors that cause a shift in the supply curve?

Costs of production, technology, taxes, weather conditions, subsidies, and price of other goods.

What is a minimum price (price floor)?

A price floor where the government sets a minimum legal limit on the price of a particular good or service above equilibrium.

What is a maximum price (price ceiling)?

A price ceiling where the government sets a maximum legal limit on the price of a particular good or service below equilibrium.

What is the effect of an increase in demand on market price and quantity?

Price increases and quantity increases.

What is the effect of an increase in supply on market price and quantity?

Price decreases and quantity increases.

What is the formula for Price Elasticity of Demand (PED)?

$PED = \frac{\text{\% change in Quantity demanded}}{\text{\% change in price}}$ or $PED = \frac{\text{Change in Quantity}}{\text{Change in Price}} \times \frac{\text{Original price}}{\text{Original quantity}}$

If rice price increases from MVR $5$ to MVR $7$ per kg and quantity demanded decreases from $250\,kg$ to $230\,kg$, what is the PED?

$PED = -0.2$ (expressed as $0.2$ ignoring the negative sign).

Why is the value of price elasticity of demand always mathematically negative?

Because the law of demand states that increasing price decreases quantity demanded and vice versa.

What defines elastic demand ($PED > 1$)?

Percentage change in quantity demanded is greater than the percentage change in price.

How does a price fall affect total revenue when demand is price elastic?

Firm's total revenue will increase.

What defines inelastic demand ($PED < 1$)?

Percentage change in quantity demanded is less than the percentage change in price.

How does a price increase affect total revenue when demand is price inelastic?

Firm's total revenue will increase.

What is perfectly elastic demand ($PED = \infty$)?

At a specific price, consumers buy all they can obtain, and setting a price above this level causes demand to drop to zero; the curve is parallel to the X-axis.

What is perfectly inelastic demand ($PED = 0$)?

Quantity demanded does not respond at all to any change in price; the curve is parallel to the Y-axis.

What is unitary elastic demand ($PED = 1$)?

Percentage change in quantity demanded equals percentage change in price; total spending remains constant and the curve is a rectangular hyperbola.

What are five key determinants of PED?

Availability of substitutes, proportion of income spent on the good, whether it is a necessity or luxury, whether purchase can be postponed, and addictiveness.

What is the formula for Price Elasticity of Supply (PES)?

$$PES = \frac{\text{\% change in quantity supplied}}{\text{\% change in price}}$$

When is supply considered elastic ($PES > 1$)?

When the percentage change in quantity supplied is greater than the percentage change in price.

When is supply considered inelastic ($PES < 1$)?

When the percentage change in quantity supplied is less than the percentage change in price.

What is perfectly inelastic supply ($PES = 0$)?

A situation where a change in price has no effect on the quantity supplied.

What are four determinants of PES?

Stock availability, cost of changing supply, spare capacity, and time taken to produce the product.

What is a market economic system?

An economic system where most resources are owned and controlled by individuals in the private sector and allocated through market forces.

What is market failure?

Market failure occurs when the market mechanism results in a misallocation of resources.

What are merit goods?

Products which the government considers consumers do not fully appreciate the benefits of, resulting in under-consumption if left to market forces.

What are demerit goods?

Products which the government considers harmful to consumers, resulting in over-consumption if left to market forces.

What are public goods?

Goods that are non-rival and non-excludable, needing financing through taxation.

What does non-excludable mean?

Non-payers cannot be excluded from enjoying the benefits of the good.

What does non-rival mean?

Consumption of the good by one person does not reduce the amount available for consumption by others.

What are private costs?

Costs borne directly by those consuming or producing a product.

What are external costs?

Costs imposed on third parties who are not directly involved in consumption or production.

What is the formula for social costs?

$$\text{Social Costs} = \text{Private Costs} + \text{External Costs}$$

What is the formula for social benefits?

$$\text{Social Benefits} = \text{Private Benefits} + \text{External Benefits}$$

What is a mixed economic system?

An economic system in which both the private and public sectors play an important role in allocating resources.

What is a subsidy?

A payment by a government to encourage the production or consumption of a good or service.

What is an indirect tax?

A tax imposed on goods and services.

What is privatization?

The sale of public sector assets to the private sector.

What is nationalization?

The transfer or sale of private sector assets to the public sector.

What are the four functions of money?

Medium of exchange, store of value, unit of account (measure of value), and standard of deferred payment.

What are six characteristics of money?

Limited in supply, acceptable as payment, durable, portable, divisible, and easily recognized.

What is a commercial bank?

A financial institution that aims to make a profit by providing banking services such as accepting deposits and lending money to households and firms.

What is a central bank?

A government-owned bank that acts as banker to the government and commercial banks, manages national debt, issues currency, and operates monetary policy.

What is disposable income?

Income remaining after income tax has been deducted and state benefits received.

What is the saving ratio?

The proportion of household disposable income that is saved.

What is a wage rate?

The basic payment an employer contracts to pay a worker per unit of time or per unit of output.