Edexcel IGCSE Economics — Revision Pack

What examiners are looking for

A 6-mark question uses the command word Analyse. It asks you to expand and explore an economic issue in the context of the extract.

Build a chain of analysis

Develop each point as a linked chain:

Cause → effect → consequence → outcomebecause → this leads to → as a result → therefore

Aim for one or two well-developed applied chains, not five short bullets. Weave in the extract’s numbers or names as you go.

Worked example — Paper 1 (micro / business)

The extract and figures below are invented for practice, in the style of a Paper 1 data question. They are not from a live exam paper.

Question: Analyse the impact of the advertising campaign on CityRide and the e-scooter market. Refer to the data in Extract A. (6 marks)

The weak answer names several effects but does not use the $240 / $280 or $1.20m / $1.79m figures, and does not link cause to outcome. The strong answer does both, in one chain, and stays one-sided.

Worked example — Paper 2 (macro / global)

Again, the extract is invented for practice, not taken from a live paper.

Question: Analyse the impact of the depreciation of Country A’s currency on its current account. Refer to the data in Extract B. (6 marks)

The weak answer is generic: it could be about any country and never uses 9%, 12%, or 4.1% / 2.6% of GDP. The strong answer builds one chain from the depreciation through to the narrower deficit, using those figures.

The economic problem

• Scarcity: unlimited wants but finite (limited) resources, so choices must be made.
• Opportunity cost: the next-best alternative given up when a choice is made. It affects consumers, producers and government. Example: government spending more on hospitals may mean less spending on roads.

The production possibility curve (PPC / PPF)

A PPC shows the maximum combinations of two goods an economy can produce with its current resources and technology.

Economic assumptions

The usual starting assumptions are:

• consumers aim to maximise their benefit (get the most satisfaction from their spending);
• businesses aim to maximise their profit.

Why consumers may not maximise benefit

• They are not always good at calculating their benefits.
• They have habits that are hard to give up.
• They sometimes copy others’ behaviour.

Why producers may not maximise profit

• Managers may aim to maximise revenue or sales instead of profit.
• Producers may prioritise caring for customers.
• Producers may complete charitable work.

Demand, supply and market equilibrium

Demand

Demand is the quantity of a good or service consumers are willing and able to buy at a given price in a given period.

• A change in the good’s own price causes a movement along the demand curve (extension if price falls, contraction if price rises).
• A change in any other demand factor causes a shift of the whole curve (right = increase in demand, left = decrease).

Factors that can shift demand include: advertising, income, fashion and tastes, the price of substitutes, the price of complements, and demographic changes.

Supply

Supply is the quantity of a good or service producers are willing and able to sell at a given price in a given period.

• A change in the good’s own price causes a movement along the supply curve.
• Other factors shift supply, including: costs of production, changes in technology, indirect taxes, subsidies, and natural factors (natural disasters and weather).

Market equilibrium

Equilibrium price and quantity are where demand equals supply. There is no shortage or surplus, so there is no pressure for price to change.

• Excess demand (shortage): price is below equilibrium, so Qd > Qs. Buyers compete; price is bid up until the shortage is removed.
• Excess supply (surplus): price is above equilibrium, so Qs > Qd. Firms cut price to sell the unsold stock until the surplus is removed.
• You should be able to define, calculate and draw excess demand and excess supply (the horizontal gap between Qd and Qs at that price).
• A shift in demand or supply changes the equilibrium price and quantity. Always say which curve shifts, which way, and what happens to Pe and Qe.

Elasticity

Elasticity measures how much quantity responds to a change in price or income. In calculations, use percentage changes. For PED and PES, exams usually work with the absolute value (ignore the minus sign on PED).

Percentage change% change = (new − original) ÷ original × 100

Price elasticity of demand (PED)

PED measures the responsiveness of quantity demanded to a change in price.

PEDPED = % change in quantity demanded ÷ % change in price

Factors influencing PED: number of substitutes (more substitutes → more elastic); degree of necessity (necessities tend to be inelastic); percentage of income spent on the good (a large share → more elastic); time (demand is often more elastic in the long run).

PED and total revenue

Total revenueTR = price × quantity

• If demand is price inelastic, a price rise increases total revenue (quantity falls by a smaller percentage than price rises).
• If demand is price elastic, a price rise decreases total revenue.
• You can use the revenue test the other way: if a price change and TR move in the same direction, demand is inelastic; if they move in opposite directions, demand is elastic.

Price elasticity of supply (PES)

PES measures the responsiveness of quantity supplied to a change in price.

PESPES = % change in quantity supplied ÷ % change in price

Interpret numerical values in the same way as PED (perfectly inelastic 0, inelastic between 0 and 1, unitary 1, elastic greater than 1, perfectly elastic infinity). Elastic supply is relatively flat; inelastic supply is relatively steep.

Factors influencing PES: factors of production (can they be obtained quickly?); availability of stocks; spare capacity; time (supply is usually more elastic in the long run).

Manufactured goods often have more elastic supply than primary products, because factories can hold stocks or use spare capacity, whereas farm output and mined commodities are harder to increase quickly.

Income elasticity of demand (YED)

YEDYED = % change in quantity demanded ÷ % change in income

The mixed economy

A mixed economy has both a private sector and a public sector.

The basic economic questions — what to produce, how to produce, and for whom to produce — are answered by a mix of price signals in markets and government decisions (tax, spending and regulation). The relative size of the two sectors differs between countries.

• Market failure: resources are allocated inefficiently. This is a key reason governments intervene.
• Public goods are non-excludable (people cannot easily be stopped from using them) and non-rival (one person’s use does not reduce availability for others). This causes the free-rider problem: people can benefit without paying, so the private sector under-provides them (e.g. national defence, street lighting). The public sector often provides them instead.

Privatisation

Privatisation is the transfer of ownership from the public sector to the private sector. Possible effects include:

• Consumers: more choice or efficiency — or higher prices if a private monopoly is created.
• Workers: possible job losses if the firm cuts costs, or different pay and conditions.
• Businesses: more incentive to cut costs and innovate, plus access to private finance.
• Government: a one-off sale revenue and less day-to-day responsibility, but it loses future public-sector profits and may still need to regulate the firm.

Externalities

An externality is an effect on a third party who is not part of the market transaction. Markets that ignore externalities can fail.

• External costs of production (negative externalities) include pollution, congestion and environmental damage. If producers only consider their private costs, the good tends to be over-produced / over-consumed.
• External benefits of consumption (positive externalities) include education, healthcare and vaccinations. If consumers only consider their private benefits, the good tends to be under-consumed.

Social cost and social benefitSocial costs = private costs + external costs
Social benefits = private benefits + external benefits

Self-check: the market system

Try these yourself first. Answers are in the expandable box.

1. Define scarcity and opportunity cost. Give one government example of opportunity cost.
2. What does a point inside a PPC show, and what would cause the PPC to shift outwards?
3. Give two reasons why a consumer may not maximise their benefit.
4. Explain the difference between a movement along a demand curve and a shift of demand.
5. Price rises from £4 to £5 and quantity demanded falls from 200 to 160. Calculate PED and state whether demand is elastic or inelastic.
6. If demand is price inelastic, what happens to total revenue when price rises? Why?
7. Why may public goods be under-provided in a market economy?
8. Write the formula for social costs. Why can negative externalities of production lead to over-production?

Production

Factors of production

Sectors of the economy

• Primary: extraction of raw materials (farming, fishing, mining).
• Secondary: manufacturing and construction — turning materials into goods.
• Tertiary: services (retail, education, banking, tourism, healthcare).

Over time, developed economies usually see a falling share of employment and output in the primary and often the secondary sector, and a rising share in the tertiary sector. Developing economies often still have a larger primary sector, with secondary and tertiary growing as they industrialise.

Productivity and division of labour

Productivity is output per unit of input — often measured as output per worker (or per hour worked).

Division of labour is specialisation: breaking production into separate tasks, with workers focusing on one (or a few) of those tasks.

Business costs, revenues and profit

Key formulae — learn these for calculations Total revenue (TR) = price × quantity
Total costs (TC) = total fixed costs (TFC) + total variable costs (TVC)
Average (total) cost (AC) = TC ÷ quantity
Profit = TR − TC

• Fixed costs do not change with output in the short run (e.g. rent, salaried staff).
• Variable costs do change with output (e.g. raw materials, piece-rate labour).
• If TR > TC the firm makes a profit; if TR < TC it makes a loss.

Economies and diseconomies of scale

Economies of scale: as a firm grows, average cost falls. Internal economies of scale arise from the firm’s own growth:

• Purchasing (bulk buying): larger orders mean lower input prices.
• Marketing: advertising costs spread over more units.
• Technical: can afford more efficient machinery.
• Financial: often borrow at lower interest rates.
• Managerial: can hire specialist managers.
• Risk-bearing: can spread risk across more products or markets.

External economies of scale arise when the industry or area grows: a pool of skilled labour, better infrastructure, easier access to suppliers, and similar businesses nearby.

Diseconomies of scale: as a firm becomes very large, average cost rises. Types include bureaucracy, communication problems, lack of control, and distance between top management and workers at the bottom of the organisation.

Business competition

Competitive markets

Competition can affect firms, consumers and the economy through efficiency, choice, quality, innovation and price.

Factors influencing the growth of firms: government regulation, access to finance, economies of scale, the desire to spread risk, and the desire to take over competitors.

Reasons firms stay small: size of the market; nature of the market (niche); lack of finance; aims of the entrepreneur (some owners do not want to grow).

Monopoly

A monopoly is a market where one business dominates. Main features:

• one business dominates the market;
• unique product;
• the firm is a price-maker;
• barriers to entry, including legal barriers, patents, marketing budgets, technology, and high start-up costs.

Advantages and disadvantages should be discussed in terms of efficiency, choice, quality, innovation, price and economies of scale. A monopolist may enjoy lower average costs and fund innovation from high profits, but it may also charge higher prices, offer less choice, and become inefficient without competitive pressure.

Oligopoly

An oligopoly is a market dominated by a few large firms. Main features: few firms; large firms dominate; differentiated products; barriers to entry; the possibility of collusion; non-price competition (branding, quality, advertising); and sometimes price competition.

Advantages can include choice, quality and innovation (firms compete on branding and product development). Disadvantages include collusion and cartels fixing high prices, and disruptive price wars between oligopolies.

The labour market

Wages and employment are determined where the demand for labour equals the supply of labour.

• Both the quantity and quality of labour matter to a business.
• Education and training raise human capital and the quality of labour, which can raise productivity and wages.
• A rise in demand for labour (or a fall in supply) tends to raise the equilibrium wage and can change employment. Show this with a labour-market diagram (wage on the vertical axis, quantity of labour on the horizontal axis).

Trade unions can try to improve working conditions and increase wages. Higher bargained wages may raise pay for members, but if wages are pushed above equilibrium there is a risk of lower employment, depending on how easily firms can substitute capital or reduce output.

Government intervention

Policies to deal with externalities

Regulation of competition

Governments may regulate competition in order to: promote competition; limit monopoly power; protect consumer interests; and control mergers and takeovers.

Intervention in the labour market — the minimum wage

A minimum wage is a legal floor on pay. Reasons include reducing poverty, protecting low-paid workers, and raising living standards.

• Advantages: higher pay for some workers; may reduce in-work poverty; can raise motivation or reduce labour turnover.
• Disadvantages: if set above the equilibrium wage, there can be excess supply of labour (unemployment), especially for low-skilled workers; firms face higher costs, which may be passed on as higher prices.

You should be able to draw the impact of introducing a minimum wage and of raising an existing one: a horizontal wage floor above equilibrium, with labour supplied greater than labour demanded.

Self-check: business economics

Try these yourself first. Answers are in the expandable box.

1. Name the four factors of production and the three sectors of the economy.
2. State two ways to raise labour productivity and one advantage of the division of labour to a business.
3. A firm has TFC of £2 000, TVC of £3 500, and sells 250 units at £30 each. Calculate TC, TR and profit.
4. Give two types of internal economy of scale and two types of diseconomy of scale.
5. State two features of a monopoly and two features of an oligopoly.
6. Why is the demand for labour described as derived demand?
7. Give one advantage and one disadvantage of a national minimum wage set above the equilibrium wage.

Macroeconomic objectives

Governments typically aim for: economic growth; low and stable inflation; low unemployment; a surplus or balance on the current account of the balance of payments; redistribution of income; and protection of the environment.

Economic growth

• Economic growth is an increase in the output of an economy, measured by increases in gross domestic product (GDP).
• Limitations of GDP as a measure of growth include: it may ignore inequality, the informal economy, unpaid work, and environmental damage; it does not automatically show whether living standards have improved for everyone.

The economic cycle has four stages you should be able to annotate: boom, downturn, recession and recovery. In a boom, growth and often inflation are high and unemployment is low. In a recession, output falls, unemployment rises and inflationary pressure usually eases.

Impact of economic growth can include: more employment; higher standards of living; less poverty; a higher productive potential; upward pressure on inflation; and possible environmental damage.

Low and stable inflation

• Inflation: a sustained rise in the general price level.
• Deflation: a sustained fall in the general price level.
• Measured using the consumer price index (CPI).
• Demand-pull inflation: too much demand chasing existing output.
• Cost-push inflation: rising production costs (wages, imported materials, energy) passed on as higher prices.

There is a close link between inflation and interest rates: a central bank may raise interest rates to cool demand-pull inflation, or cut them if inflation is too low.

Impacts of inflation can include: higher prices; pressure for higher wages; less competitive exports if inflation is higher than abroad; effects on unemployment; menu costs (the cost of changing prices); shoe-leather costs (time and effort spent managing money when prices are changing quickly); uncertainty; weaker business and consumer confidence; and lower investment.

Low unemployment

Unemployment is measured using the International Labour Organization (ILO) measure (people without a job who are available to work and have been seeking work).

Impacts of unemployment can include: lower output; wasted scarce resources; more poverty; higher government spending on benefits; lower tax revenue; weaker consumer and business confidence; and wider social costs.

The current account of the balance of payments

The current account records trade in goods (visibles) and services (invisibles), plus other current transfers/income items. A surplus means inflows exceed outflows; a deficit means the opposite. Governments often aim for a surplus or a balance.

Reasons for deficits or surpluses include the quality and price of domestic and foreign goods, and exchange rates between countries. A stronger currency can make exports dearer and imports cheaper, which can worsen the current account; a weaker currency can do the opposite (see Exchange rates).

Possible impacts of a current account deficit: a leakage of spending from the economy; it can be inflationary if prices rise abroad; low demand for the country’s exports; and problems finding foreign reserves to fund the deficit.

Protection of the environment

Business activity can damage the environment through visual pollution (including litter), noise pollution, air pollution and water pollution. Government tools include taxation, subsidy, regulation, fines, pollution permits, and government provision of parks.

Redistribution of income

• Income inequality: income is spread unevenly across households.
• Absolute poverty: income is too low to meet basic needs.
• Relative poverty: income is well below the typical standard of living in that society.

Reasons to reduce poverty and inequality include meeting basic needs, raising standards of living, and ethical reasons. Policies include progressive taxation (a higher tax rate on higher incomes), redistribution through benefit payments, and investment in education and healthcare.

Government policies

Fiscal policy

Fiscal policy is the use of government revenue and government expenditure to influence the economy.

• Revenue: direct taxes (on income or profit, e.g. income tax, corporation tax) and indirect taxes (on spending, e.g. VAT or excise duties).
• Expenditure: main areas typically include health, education, welfare, defence and infrastructure.
• A fiscal deficit is when government spending is greater than revenue; a fiscal surplus is when revenue is greater than spending.

An expansionary fiscal stance (higher spending or lower taxes) can boost demand, growth and employment, but may widen the fiscal deficit and add to inflation. A tighter stance can do the reverse. Always link the policy change to the macroeconomic objective in the question.

Monetary policy

Monetary policy in this specification is focused on interest rate changes. The central bank sets interest rates. You should also be aware of asset purchasing used by central banks.

Interest rates are the cost of borrowing and the reward for saving. Mechanism:

• A rise in interest rates makes borrowing more expensive and saving more attractive. Consumers tend to spend less and firms tend to invest less. Demand in the economy falls, which can reduce inflation but may also slow growth and raise unemployment. A stronger currency (hot money inflows) can also worsen the current account.
• A cut in interest rates works in the opposite direction.

Supply-side policy

Supply-side policies aim to raise productivity and total output (the economy’s productive potential). They can support growth and help keep inflation lower in the longer run. Examples in the specification:

• privatisation;
• deregulation;
• education and training;
• policies to boost regions with high unemployment;
• infrastructure spending;
• lower business taxes to stimulate investment;
• lower income tax rates to encourage working.

These often take longer to work than a change in interest rates or a tax cut aimed at demand, but they can shift the PPC / productive potential outwards.

Government controls

Know advantages and disadvantages of regulation, legislation, fines and pollution permits — the same tools appear when discussing environmental protection.

Relationships between objectives and policies

Policies often improve one objective but put pressure on another. Learn these trade-offs and be ready to apply them to data:

Self-check: government and the economy

Try these yourself first. Answers are in the expandable box.

1. List the main macroeconomic objectives on the specification.
2. Give two limitations of GDP as a measure of growth, and name the four stages of the economic cycle.
3. Distinguish demand-pull inflation from cost-push inflation.
4. Name four types of unemployment and give one impact of unemployment on the government.
5. Explain, in a short chain, how a rise in interest rates can reduce inflation.
6. Give two examples of supply-side policy and state what they aim to raise.
7. Explain the trade-off between economic growth and environmental protection.

Globalisation

Globalisation is the increased integration and interdependence of economies.

Reasons for globalisation: fewer tariffs and quotas; reduced cost of transport; reduced cost of communication; and the increased significance of multinational corporations (MNCs).

Impacts of globalisation and global companies on countries, governments, producers, consumers, workers and the environment can include: rising living standards; greater choice; lower prices; reduced costs of communication; the closing of traditional industries; and environmental impact.

MNCs and foreign direct investment (FDI)

A multinational corporation (MNC) is a firm that operates in more than one country. Foreign direct investment (FDI) is investment by a firm in production or operations in another country.

Reasons for the emergence of MNCs / FDI: to benefit from economies of scale; to access natural resources or cheap materials; lower transport and communication costs; and to access customers in different regions.

International trade

Free trade

Advantages of free trade include lower prices and increased choice for consumers, lower input costs, and wider markets for businesses. Disadvantages include foreign competition harming domestic businesses and increasing unemployment.

Protection

Reasons for protection: prevent dumping; protect employment; protect infant industries; gain tariff revenue; protect consumers from unsafe products; reduce current account deficits; and retaliation.

You should be able to draw supply and demand diagrams for tariffs, quotas and subsidies.

Trading blocs and the WTO

• Trading blocs are groups of countries that agree to reduce trade barriers between members (examples include the EU, USMCA and ASEAN). Members often gain easier access to each other’s markets; non-members may find it harder to sell into the bloc (trade diversion).
• The World Trade Organization (WTO) promotes freer trade, provides a forum for trade agreements, and can act in disputes between members to reduce unfair barriers.
• Know that trade patterns differ between developed and developing countries (for example, the mix of goods and services exported, and the importance of primary products versus manufactures and services).

Exchange rates

An exchange rate is the price of one currency in terms of another. It is determined by the demand for and supply of the currency.

Factors affecting the supply and demand of currencies: interest rates; currency speculators; and imports and exports of goods and services.

Self-check: the global economy

Try these yourself first. Answers are in the expandable box.

1. Define globalisation and give two reasons for it.
2. Give two possible advantages and two possible disadvantages of MNCs / FDI for a host country.
3. State two advantages and two disadvantages of free trade.
4. Give three reasons for protection and name the three methods on the specification.
5. What is a trading bloc, and what is one role of the WTO?
6. State two factors that can affect the demand for a currency.
7. Analyse briefly (one chain) how an appreciation of the currency can affect the current account.