Cambridge IGCSE® and O Level Economics Textbook PDF

 Cambridge IGCSE® and O Level Economics Second edition Paul Hoang...

 Cambridge IGCSE® and O Level Economics Second edition Paul Hoang Margaret Ducie 421271_IGCSE_Economics_2e_FM.indd 1 14/02/18 8:37 AM  The authors would like to dedicate this book to their children: Salvador, Gino and Isidora Boon Jake and Luke Hoang The authors would like to thank their spouses, Derek Boon and Kin Hoang, for their patience, understanding and support. The questions, example answers, marks awarded and/or comments that appear in this book were written by the authors. In examination, the way marks would be awarded to answers like these may be different. Every effort has been made to trace all copyright holders, but if any have been inadvertently overlooked, the Publishers will be pleased to make the necessary arrangements at the first opportunity. Although every effort has been made to ensure that website addresses are correct at time of going to press, Hodder Education cannot be held responsible for the content of any website mentioned in this book. It is sometimes possible to find a relocated web page by typing the address of the home page for a website in the URL window of your browser. Hachette UK’s policy is to use papers that are natural, renewable and recyclable products and made from wood grown in sustainable forests. The logging and manufacturing processes are expected to conform to the environmental regulations of the country of origin. Orders: please contact Bookpoint Ltd, 130 Park Drive, Milton Park, Abingdon, Oxon OX14 4SE. Telephone: (44) 01235 827720. Fax: (44) 01235 400401. Email [email protected] Lines are open from 9 a.m. to 5 p.m., Monday to Saturday, with a 24-hour message answering service. You can also order through our website: www.hoddereducation.com ISBN: 978 1 5104 2127 1 ® IGCSE is a registered trademark © Paul Hoang and Margaret Ducie 2018 First published in 2013 by Hodder Education, An Hachette UK Company Carmelite House 50 Victoria Embankment London EC4Y 0DZ This second edition published 2018 Impression number 10 9 8 7 6 5 4 3 2 1 Year 2022 2021 2020 2019 2018 All rights reserved. Apart from any use permitted under UK copyright law, no part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or held within any information storage and retrieval system, without permission in writing from the publisher or under licence from the Copyright Licensing Agency Limited. Further details of such licences (for reprographic reproduction) may be obtained from the Copyright Licensing Agency Limited, www.cla.co.uk Cover photo © Shutterstock/Jianghaistudio Typeset in India Printed in Slovenia A catalogue record for this title is available from the British Library. 421271_IGCSE_Economics_2e_FM.indd 2 08/02/18 1:41 PM  Contents Introduction iv How to use this book iv Exam preparation and technique vi SECTION 1 The basic economic problem 1 The nature of the economic problem 2 2 The factors of production 6 3 Opportunity cost 11 4 Production possibility curve 14 SECTION 2 The allocation of resources 5 Microeconomics and macroeconomics 20 6 The role of markets in allocating resources 24 7 Demand 28 8 Supply 34 9 Price determination 39 10 Price changes 42 11 Price elasticity of demand 46 12 Price elasticity of supply 57 13 Market economic system 63 14 Market failure 67 15 Mixed economic system 73 SECTION 3 Microeconomic decision makers 16 Money and banking 86 17 Households 96 18 Workers 108 19 Trade unions 123 20 Firms 130 21 Firms and production 145 22 Firms’ costs, revenue and objectives 155 23 Market structure 162 SECTION 4 Government and the macro economy 24 The role of government 170 25 The macroeconomic aims of government 173 26 Fiscal policy 178 27 Monetary policy 189 28 Supply-side policy 193 29 Economic growth 198 30 Employment and unemployment 206 31 Inflation and deflation 216 SECTION 5 Economic development 32 Living standards 230 33 Poverty 235 34 Population 243 35 Differences in economic development between countries 254 SECTION 6 International trade and globalisation 36 International specialisation 262 37 Globalisation, free trade and protection 267 38 Foreign exchange rates 276 39 Current account of balance of payments 284 Additional exam-style questions 293 Glossary 297 Acknowledgements 302 Index 303 421271_IGCSE_Economics_2e_FM.indd 3 24/01/18 1:40 PM   Introduction This book has been written for all students of Cambridge IGCSE® and O Level Economics. It carefully and precisely follows the syllabus from Cambridge Assessment International Education. It provides the detail and guidance that are needed to support you throughout the course and help you prepare for your examinations. It will also be of great use to anyone who wants to learn more about the key concepts of economics. This book will be valuable to students of economics whether you are: » studying the subject for the first time at school or college and need a comprehensive and clearly written textbook » revising the subject before your examinations and need a study guide to help you with key definitions, techniques and examination advice » studying the subject on your own through distance or open learning and need a complete programme of supportive questions and activities with suggested answers. Building on the successful formula of the previous edition, this second edition updates all existing chapters. Material that is no longer covered by the syllabus has been removed and new subject material has been added, with additional chapters and new features. This book has been written with the international student in mind. It explains economic theory using real-life examples and case studies from around the world. How to use this book To make your study of economics as rewarding and successful as possible, this Cambridge-endorsed textbook offers the following important features: Learning objectives Each chapter starts with an outline of the subject material to be covered and ends with a checklist to confirm what you should have learned and understood. Organisation The content is in the same order as the syllabus: chapter titles and chapter section headings match those of the Cambridge IGCSE® and O Level Economics syllabuses. Approach The subject material is written in an informative yet lively way that allows complete understanding of each topic to be gained. iv 421271_IGCSE_Economics_2e_FM.indd 4 24/01/18 1:40 PM  Influences on household borrowing Definitions Chapter review questions Definitions of the key term to help you develop your use of economics 1 What are the main factors that affect the level of consumer spending in an economy? 2 How will the spending, borrowing and saving patterns of a young family with two Revision checklist children under the age of 5 compare with those of an old-aged pensioner? 3 How do spending and saving patterns of low income earners differ from those of high terminology. income earners? 4 How does wealth affect a person’s level of spending, saving and borrowing? 5 How do changes in interest rates influence consumer spending, saving and borrowing? This checklist lists the key concepts and 6 What are the main determinants of the level of savings in an economy? 7 What factors affect the level of borrowing in an economy? 8 Why might one person save more of their income than another? topics you have covered in the chapter and the key points you need to know for Revision checklist ✔ The amount of money that individuals spend on goods and services is largely dependent upon their level of disposable income. 3 Opportunity co st examinations. ✔ Disposable income is the amount of income a person has available to spend on goods and services after compulsory deductions such as income tax. ✔ Direct taxation reduces the amount of disposable income and therefore By the end of this chapter, the amount of spending and saving in the economy. students shou ★ define and provi ld be able to: ✔ Current expenditure is money spent on goods and services consumed de examples ★ understand the of opportunity within the current year. Capital expenditure is money spent on fixed influence of oppo cost assets. rtunity cost on decis The wealth of an individual is measured by the amount of assets they Opportunity cos ion making. ✔ own minus their liabilities (the amount they owe). A positive wealth effect Definition Opportunity cost t is causes people to spend more. Opportunity cost is the cost Opportunity cost a very important concept in the study of econo when making econois the cost of the next best of the next best Apart from levels of income, other determinants of the level of spending opportunity opportunity forgo mics. ✔ forgone when mic decisions. include: interest rates, confidence levels, inflation, age and the size of making a because in most Every choice made ne (give has an opportunityn up) decision. cases there is households. Some examples an alternative. cost Saving occurs when a person puts away part of their current income for of opportunity ✔ cost are as follow » The opportunity s: future spending. cost of choosing Determinants of saving include: the level of disposable income, age, subject you could to study IGCSE ✔ » The opportunity be study ing instead. Econo mics is another IGCSE attitudes towards saving, confidence levels and interest rates. cost of visiting money you would the cinema on Borrowing occurs when an individual, firm or the government takes out Saturday night going to the cinemhave earned from babysitting ✔ could a loan, paying it back to the financial lender over a period of time, with » The opportunity a. for your neighbour be the interest payments. cost of building instead of same governmen an additional airpo Factors that affect the level of borrowing in an economy include: the level » The opportunity t funds to build public housi rt terminal is using ✔ of disposable income, interest rates, confidence levels, the availability of cost ng for the might be the scien of a school purchasing 100 low-income families. funds (money supply), credit (including store cards) and wealth. » The opportunity ce equipment that could laptops for use not be bought in classrooms cost income that would of going to university to as a result. have been earne study for to work instea d. d if the undergradu a degree is the loss in ate student had chosen Case study: US According to the federal gove rnment spending Federal Minist spending of almos ry of Finance, t $329 billion the in its 2017 budge US federal government annou Study tips 42.2% on labou t on the follow nced 11.1% on nationr and social affairs ing: 107 8.2% on transp al defence 6.1% on federa ort and digital infrastructu re 5.3% on educa l debts 4.6% on healthtion and research care Study tips encourage critical thinking The governmen t raises a finite of the budget amount of taxati to allocate to on revenue and cost attached each to the decisions area of public spending. must decide Exam-style questions decreased spend made as increa There is an oppor how much and emphasise that you need to be ing in another. sed spending tunity in one area may lead to Activity able to present and justify an opinion, Investigate the major compo These exam-style questions are designed of your choice nents of gover. Be prepared nment spend to share your ing in your count findings with ry, or a count underpinned by economic principles others in the ry class. to show you the types of question you and theories. may get in examinations. Note that the 11 questions within the chapters are only part questions, as they are intended to Activity consolidate understanding of the specific chapter being reviewed. Some complete Activities appear throughout the book » It generates Government interv ention to addre ss market failure questions are given in the section and encourage you to investigate real-life applications of economics tax revenue for important goods the governmen t which can be ‘Additional exam-style questions’ at the and services. used to fund The disadvanta ges of imposing an indirect tax as a dynamic subject in your local » The demand on a good or servic for cigarettes, e are as follows: end of the book. inelastic, which alcohol and petro means that the l (gas consumption level increase in price for a car) tends to be price of many may have environment as well as globally. cigarettes make people. In the little impact on s smoking highl case of cigarettes, the the higher price, y addictive and the nicotine in » The indirect so consumptio therefore most tax will be regre n will change only slightly. smok ers will pay impact on low ssive (see Chapt income earners er 26), so will than high incom have a greater e earners. Exam-style que Traffic congestion stions congestion charg in central London has fallen me e for driving into since stribute inco (approximately the central busin the introduction of a rty and redi $15) each day ess district. It alleviate pove (between 7 a.m. to drive into the costs £11.50 Policies to and 6 p.m. on restricted area (around $85) and weekdays). There during peak hours to £195 ($250) for late is a penalty of between £65 ation can help a Explain, using paym ent of the charge. ision of educ everyone, it narrows an example, an rnment prov for b Analyse the exter nal on — gove education l of person’s leve e 18.3). advan cost of drivin ng educati improving access to t cases, a two different staketages and disadvantages of the g a car. Labour-intensive and capital-intensive production » Improvi erty. By poor. In mos ntial (see Tabl c Discuss wheth holders. congestion charg e for alleviate pov een the rich and the ings and earning pote education in the er you think the betw r earn ity of short-term soluti congestion charg the gap ct thei tends to affe ease the quantity and qual capacity of y, on to the probl e education productive em of traffic congeis a long-term or policies to incr an capi tal and poverty Sim. ilarl Subsidies stion in Londo n. Exam-style questions Over time, help to imp rove the humc growth and lowering omi ices, such as economy will thereby creating econ essential serv Study the hypothetical data below for two firms and answer the questions that ss to other Governments often follow. The figures show the amount of money spent by each industry on factors the country, of and increased acce. provision of help ent and services. For provide subsidies to encourage the prov ision , will also gov ernm d and example, public the consumptio of production. and housing s state benefits — enable the unemploye ts from using privat transport might n healthcare erou be subsidised to of certain goods to Study tip men e cars. Figure 15.5 g more gen assistance of such pay rly, and shows the impac discou » Providin efits gives financial c needs. Examples t of a subsidy on rage people The level of a Firm Labour costs ($) Capital costs ($) Other costs ($) subsidy is the elde measured by the marke welfare ben t their basi e pension funds for to redistrib c ute the vertical public transport. The bus and railwa t for A 20,000 10,000 10,000 ed to mee stat efits help distance betwe en the two S1 receive a sum of disadvantag mployment benefit, ). State ben en has access to basi supply curves money from the y firms B 40,000 40,000 20,000 include : une chil d pov erty y citiz ent t (to reduce erty by ensuring ever reducing unemploym of. The producer subsidy S2 government which child benefi receives payme costs and cause lowers their production P1 nt from the a Define labour-intensive production. alleviate pov at or cause transport ($) government and cies aimed ent is a maj to attract Price of income and Macroeconomic poli public some of this incom passes s the supply curve b Use the data above to explain why Firm A might be considered to be more mpl oym from S1 (before to une ntives consumers in e to subsidy) to S (after shift labour intensive than Firm B, despite the latter spending twice as much on. necessities 30) also help, because government ince the form of P2 subsidy). Price are tion and ed job crea 2 lower prices (show falls quantity demanded from P1 to P2 and the labour costs. (see Chapter inequality. Examples n by the ernment-fund ce distance betwe en P1 and P Q2. An increase increases from poverty and investment and gov pter 26) redu in Figure 15.5) in the use of publicQ1 to foreign dire ct ems (see Cha ive tax syst try. Higher-income 2 D and keeps schemes. O transport shoul the remainder. Q1 Q2 d lower congestion, Capital-intensive production retraining taxa tion — progress of a coun tax proceeds Quantity of public reduce the amou nt and ressive » Using prog een the rich and poor members mes in tax, with the those driving cars. There of pollution caused by Capital-intensive production takes place if a firm spends more on capital transport ▲ Figure 15.5 Definition thei r inco ps or The effects of fore, the subsid costs than on any other factor of production. This includes expenditure on the gap betw higher percentage of r-income grou erty and a producer subsid reduc es external costs y In capital-intensive a support lowe used to alleviate pov y created by drivin capital equipment such as tools, equipment, machinery and vehicles. Therefore, groups pay rnment to Case g. industries, the use and by the gove mon method study: Flu vacc cost of capital is more firms operating capital-intensive production need a lot of money to fund their being used income. This is a com ety. duction — the intro (see The Hong Kong ines in Hong Kong activities. This can act as a barrier to entry since it proves expensive for new firms without any wealth in soci l minimum wage m wage rate prominent than that of any government subsid income and ona and the elderl y to ises the cost other factor of production, to enter such industries. Examples are aircraft and motor vehicle manufacturers, redistribute (or increasing) a nati osing a higher minimu me households. is to reduce the encourage people in high-r of annual flu vaccines for e.g. car manufacturing. cing or imp low-inco that fewer people amount of flu in the isk age group