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Cambridge IGCSE and O Level French as a Foreign Language Workbook Susan Grant Cambridge IGCSE® and O Level Economics Coursebook Second edition ✓ ✓ ✓ ✓ Copyright Material - Review Copyright Material - Review  Susan Grant Cambridge IGCSE® and O Level Economics Coursebook University Printing House, Cambridge CB2 8BS, United Kingdom One Liberty Plaza, 20th Floor, New York, NY 10006, USA 477 Williamstown Road, Port Melbourne, VIC 3207, Australia 314–321, 3rd Floor, Plot 3, Splendor Forum, Jasola District Centre, New Delhi – 110025, India 79 Anson Road, #06–04/06, Singapore 079906 Cambridge University Press is part of the University of Cambridge. It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning and research at the highest international levels of excellence. Information on this title: www.cambridge.org/ 9781108440387 © Cambridge University Press 2018 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2018 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Printed in Dubai by Oriental Press A catalogue record for this publication is available from the British Library ISBN 978-1-108-44038-7 Paperback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. Information regarding prices, travel timetables, and other factual information given in this work is correct at the time of first printing but Cambridge University Press does not guarantee the accuracy of such information thereafter. IGCSE® is the registered trademark of Cambridge Assessment International Education All examination-style questions, sample mark schemes, solutions and/or comments that appear in this book were written by the author. In examination, the way marks would be awarded to answers like these may be different. NOTICE TO TEACHERS IN THE UK It is illegal to reproduce any part of this work in material form (including photocopying and electronic storage) except under the following circumstances: (i) where you are abiding by a licence granted to your school or institution by the Copyright Licensing Agency; (ii) where no such licence exists, or where you wish to exceed the terms of a licence, and you have gained the written permission of Cambridge University Press; (iii) where you are allowed to reproduce without permission under the provisions of Chapter 3 of the Copyright, Designs and Patents Act 1988, which covers, for example, the reproduction of short passages within certain types of educational anthology and reproduction for the purposes of setting examination questions. Contents Introduction iv Section 4: Government and How to use this book vii the macroeconomy 213 Section 1: The basic economic Chapter 24 The role of government 214 problem 1 Chapter 25 The macroeconomic aims of government 219 Chapter 1 The nature of the economic problem 2 Chapter 26 Fiscal policy 227 Chapter 2 Factors of production 6 Chapter 27 Monetary policy 237 Chapter 3 Opportunity cost 16 Chapter 28 Supply-side policies 243 Chapter 4 Production possibility curves 20 Chapter 29 Economic growth 250 Exam-style questions 28 Chapter 30 Employment and unemployment 260 Chapter 31 Inflation and deflation 272 Section 2: The allocation Exam-style questions 284 of resources 33 Section 5: Economic Chapter 5 Microeconomics and macroeconomics 34 Chapter 6 The role of markets in allocating resources 38 development 289 Chapter 7 Demand 43 Chapter 32 Living standards 290 iii Chapter 8 Supply 53 Chapter 33 Poverty 298 Chapter 9 Price determination 61 Chapter 34 Population 304 Chapter 10 Price changes 67 Chapter 35 Differences in economic Chapter 11 Price elasticity of demand 73 development between countries 315 Chapter 12 Price elasticity of supply 83 Exam-style questions 325 Chapter 13 Market economic system 91 Chapter 14 Market failure 101 Section 6: International Chapter 15 Mixed economic system 111 trade and globalisation 331 Exam-style questions 122 Chapter 36 International specialisation 332 Section 3: Microeconomic Chapter 37 Free trade and protection 340 Chapter 38 Foreign exchange rates 348 decision makers 127 Chapter 39 Current account of balance Chapter 16 Money and banking 128 of payments 358 Chapter 17 Households 135 Exam-style questions 368 Chapter 18 Workers 144 Chapter 19 Trade unions 162 Index 373 Chapter 20 Firms 169 Acknowledgements 383 Chapter 21 Firms and production 181 Chapter 22 Firms, costs, revenue and objectives 188 Chapter 23 Market structure 201 Exam-style questions 207  Introduction This book is designed to introduce you to the study of economics and to help you progress through your IGCSE or O Level course. The book follows the structure of the IGCSE and O Level course closely. The Coursebook is divided into 39 chapters. Each of these chapters explores a key economic topic and is based on a section of the syllabus. Each one has activities, multiple choice questions and four-part questions to assess your understanding of the topic. In the first six chapters, the four-part questions actually contain fewer than four parts. This is because economics is a subject where concepts build on each other. As more concepts are covered and depth is built up, the four-part questions in the remaining chapters do have the full four parts. Each chapter contains one or more tips. This may remind you of a key point, warn you about a common confusion, give you advice on how to approach a question or recommend an activity which will enhance your understanding. At the end, there is a summary of the main points covered in the chapter. Throughout the book, there are links to parts of other chapters where concepts can help you understand the topic. The chapters have been arranged into six sections. At the end of each section, there are ten multiple choice questions, data questions and four-part questions covering the whole section. iv Introduction to Economics Economics is an important, well-respected and exciting subject. Economists play a key role in the world. They give advice to firms and governments to improve their performance and also comment on their success or failure. The work of economists can make a significant difference to people’s lives. For instance, the policies they recommend to governments may reduce poverty and improve the quality of the environment. Whilst some of the people who study economics go on to become economists, others enter a range of professions including accountancy, banking, education, journalism and the law. Economists enjoy a lot of respect in universities and professional organisations. They regard it as a rigorous subject that develops logical thinking and analytical and mathematical ability. There are certain concepts – such as opportunity cost and price elasticity of demand – and certain topics – including price determination, unemployment and inflation – that are central to economics. The subject, however, is ever changing as new theories develop, new institutions are created and new problems are encountered. This makes it an interesting and challenging subject. The skills of an economist To be a good economist, you need to be informed of the developments in your economy and other economies. You need to be able to think and write clearly and apply relevant economic terms and concepts. You need to be confident in handling figures. This involves being able to add, divide, subtract, multiply, calculate percentage changes and understand index  Introduction numbers. You also need to be able to draw relevant, well-labelled and accurate diagrams. This Coursebook is designed to help you develop these skills. Preparing for your examination Revision is a continuous process. After every lesson, check your work and if necessary, add extra notes. As an examination approaches, you will need to do intensive revision. Try to engage in active revision. This involves, not just reading notes, but also using the information. There are a number of ways in which you can do this. They include testing other members of your group, and getting them to test you, drawing spider diagrams and producing tables and revision cards. Examination technique It is not sufficient to have a sound knowledge and good skills in the subject. You also have to demonstrate these under examination conditions. So, it is essential to develop examination techniques. Before an examination, check out the duration of the examination and the number of questions you have to answer. Read the instructions on the examination paper carefully. Do not rush into writing your answers. In answering multiple choice papers, consider every option in a question carefully. If you are uncertain of an answer to a particular question, move on to the next one and return to the question you were unsure of when you have answered the other questions. At the end, check that you have answered all the questions. Never leave a question unanswered, even if you v have to guess. In answering four-part questions read the questions very carefully, paying particular attention to the command (instruction) words. A question which asks you to identify or state something will only require a brief answer, consisting of a few words. In contrast, a question which asks you to explain, analyse or discuss something will require a longer answer, written in sentences and paragraphs. Unless specifically asked for, you should avoid writing a list. The marks allocated to a question or part of a question should give you a clear indication of the extent of detail required. It is often useful to include a diagram (or diagrams) in your answers. These should be clear, accurate, well-labelled and backed up by an explanation in the text. Stretch content As well as covering all of the topics on your course, in places, the book goes beyond the syllabus to include concepts that stretch your understanding and provide you with possible new ways to approach particular topics and strengthen the depth of your answers. These are marked in the book with a blue line next to them in the margin, and also listed in the table below for your reference.  Cambridge IGCSE Economics Topic Where found in Coursebook Allocative, productive and dynamic Chapter 13.4 Allocative efficiency, Chapter 13.5 Productive efficiency efficiency and Chapter 13.6 Dynamic efficiency Cost benefit analysis Chapter 15.3 Government measures to address market failure (Effectiveness of government intervention) Average propensity to consume Chapter 17.1 Spending (Income and consumption) Average propensity to save Chapter 17.2 Saving (Income and saving) Aggregate demand and aggregate Chapter 25.1 Government’s macroeconomic aims supply analysis (Economic growth) Purchasing power parity Chapter 32.1 Indicators of living standards (Comparing living standards between countries) Genuine Progress Indicator, Gender Chapter 32.1 Indicators of living standards Inequality Index. Happy Life Index and Gross National Happiness Multidimensional Poverty Index Chapter 33 The Multidimensional Poverty Index Foreign aid Chapter 35.3 The impacts of differences in economic development between countries (Measures to promote economic development) Absolute and comparative advantage Chapter 36.2 Advantages and disadvantages of specialisation at a national level (The advantages and disadvantages for the economy) vi Acknowledgement I would like to thank the team at CUP, particularly Susan Ross, Neil O’Regan and David Crosby, for their help and support. Susan Grant How to use this book This book is designed as a practical guide to help build your knowledge and understanding of economic terms, principles and processes and assumes no prior knowledge of the subject. Carefully aligned to the syllabus, it will help you to obtain the key skills required of an economist so that you can become confident in applying these to reach reasoned conclusions about economic issues. Each chapter focuses on a particular topic, and you will find a range of easy-to-follow pedagogical features to guide you through it. Key terms are highlighted and there are regular opportunities for you to reflect on your progress, check your understanding and practice the economic skills you have developed. Learning objectives Each chapter begins by outlining the key economic concepts that you will learn. This will help you to navigate your way through the book and remind you what is important about each topic. Introducing the topic These concise sections at the beginning of chapters open up an accessible entry point into vii the topic you are about to learn. This could be a question that gets you thinking about an issue relevant to that topic, or additional context which helps you to understand how the topic fits within real life scenarios. KEY TERMS Changes in demand: TIP Find out what has happened to the size of your country’s labour force in the last ten years and why curve. it has changed. Increase in demand: a rise in demand Tip at any given price, Tip boxes provide reminders about key economic concepts, help on avoiding common causing the demand errors and tips to help you tackle trickier topics. right. INDIVIDUAL ACTIVITY 1 Decide, in each case, whether the following are likely to be an aim of a government, Key terms households or firms: These definitions will help you to identify and understand a A shorter working week b important terminology and concepts within economics. c d Higher tax revenue Link LINK Links show you where you can find Individual Activity additional information elsewhere in A series of questions and exercises designed to help Chapter 4.3 Movements along a PPC the book about related topics. you check your progress and put your knowledge of a particular topic into practice.  Cambridge IGCSE Economics Group Activity GROUP ACTIVITY 1 Group activities encourage you to engage with your peers, Decide whether each of the following is a substitute or a complement to a Volkswagen car: working in pairs or groups to share ideas and exchange a public transport b petrol viewpoints on a particular economic issue. c a Ford car. Summary Summary You should know: Short sections at the end of each Price is determined by the interaction of demand and supply. chapter provide a useful summary of At the equilibrium price, demand is equal to supply. If a market is in disequilibrium initially, market forces will move it towards equilibrium. the key learning points covered in that If price is below the equilibrium price, there will be excess demand. chapter. If price is above the equilibrium price, there will be excess supply. Multiple Choice Questions At the end of each chapter you will find a series of multiple choice Multiple choice questions 1 In which case is market failure occurring? questions which relate to the topic you have just covered in the A Consumers determining what is produced chapter. Practising these will help you to check your progress at B Firms producing above the lowest possible cost C Price falling as a result of a decrease in demand regular intervals through the book. D Price rising as a result of an increase in costs of production 2 A merit good is one which: A has an absence of external benefits Four-Part Questions B has higher private benefits than consumers realise At the end of each chapter, there will be an opportunity for you to C imposes costs on those who are not involved in its production directly D is both non-excludable and non-rival practice answering ‘four-part questions’. At the start of the book, you will learn how to answer the first two parts, and gradually, as 3 viii you progress through the book you will be faced with full, four-part- A Basic necessities B Capital goods questions to complete. C Demerit goods D Public goods Four-part question Exam-style questions a (2) Multiple Choice Questions b Explain why consumers are said to be sovereign in a market economic system. (4) 1 ‘Money enables people to borrow and lend’. Which function of money does this describe? c Analyse the role of profit in a market economic system. (6) A measure of value B medium of exchange d Discuss whether or not prices will be low in a market economic system. (8) C standard for deferred payment D store of value 2 What is a function of a commercial bank? A to control the money supply Exam-Style Questions B to decide on the amount spent by the government C to lend to individuals and firms Exam-style questions, can be found at the end of each section D to manage the national debt within the book. These are designed to help you to practise 3 answering the sort of questions you are likely to see in an exam. A Low income groups save more, in percentage terms, than high income groups B Low income groups find it easier to borrow than high income groups C High income groups spend less, in percentage terms, than low income groups D High income groups do not borrow money Stretch content A blue line in the margin has been added to identify areas of 4 More people throughout the world visit the cinema. What impact is this likely to have on the demand for actors and their wages? content that go beyond the syllabus. You will not be expected to Demand for actors Wages of actors A decreases decrease know and learn these for your course, but you may want to use B decreases increase C increases increase them to challenge yourself further, and in some cases they may D increases decrease help you better understand a concept you are learning. 5 Which combination of events would increase a trade union’s ability to negotiate a wage rise for its members? Labour productivity Unemployment A decreases decreases There are, nevertheless, risks attached even to a mixed economic system and there is no B decreases increases guarantee that it will perform better than the other two types of systems. Market failure can C increases increases occur and government intervention may make the situation worse. D increases decreases  SECTION 1 The basic economic problem 1  Chapter 1 2 The nature of the economic problem Learning objectives By the end of this chapter you will be able to: define and give examples of the economic problem explain the difference between economic goods and free goods Introducing the topic Do you have everything you would like to have? Some unfortunate people clearly need more goods and services. These are the people who lack the goods and services needed for survival. If our needs for sufficient food, clothing and housing are met, we will still want KEY TERM other products. Indeed, our wants are unlimited. The richer we get, the more, and the better, quality products we would like. Many of us would like, for instance, more foreign Wants: desires for holidays and a new laptop. This chapter will look at why we cannot have everything we goods and services. would like.  Chapter 1: The nature of the economic problem 1.1 Finite resources and unlimited wants What stops people enjoying all the products they would like to have is a lack of resources to KEY TERMS produce them. Resources, including workers and machinery, are scarce. This means that they are limited in supply. The economic problem of not being able to satisfy everyone’s wants Resources: factors arises because of this scarcity. used to produce goods and services. There is no limit to people’s wants – they are infinite. For instance, people want more and The economic better clothing, healthcare and improved transport infrastructure. The number of workers, problem: unlimited machines, offices, factories, raw materials and land used to produce these goods and wants exceeding finite services, however, is finite. At any given time, for example, there are only a limited number resources. of workers and they can produce only a specified amount. This mismatch, between what Scarcity: a situation people want and the maximum that can be produced, gives rise to the economic problem. where there is not Choices have to be made about how resources are to be used. enough to satisfy everyone’s wants. The continuing nature of the economic problem Scarcity continues to exist. More goods and services are being produced today than ever before, but the growth in wants is exceeding the growth of economic resources. People still want more products than the resources available can produce. Over a period of time, wants continue to grow and change. The economic problem in different contexts The fact that people have to choose which products to buy, which subjects to study, what jobs to do and which products to produce shows that there are insufficient resources. As consumers, we cannot have everything we want. We have limited incomes. Students have to select which 3 courses to study. It is not possible to study economics and chemistry at the same time. Workers have to make choices about what jobs they do. Some teachers may carry out other work in the evening, but when they are teaching they are not working as writers! Time is in limited supply. Producers have to decide what to make. Farmers cannot grow rice and wheat on the same land. They have to select one crop as land is scarce. The government has to decide how to spend tax revenue. Deciding to build a new hospital may mean that it cannot build a new school. TIP It is very important to learn definitions. The more you apply a term such as scarcity in your work, the more you will become familiar with it. You may also want to compile your own economics dictionary by writing down terms in alphabetical order, as you come across them. GROUP ACTIVITY 1 In your group, discuss and decide which of the following are scarce: a vacancies for university degree courses b foreign holidays c healthcare. 1.2 Economic goods and free goods The vast majority of goods and services are economic goods. This means that it takes resources to produce them and so they are limited in supply. For example, a carpet is an economic good. The material and labour used to produce it could have been used to make  Cambridge IGCSE Economics another good (or goods). It is easy to find examples of economic goods. Almost every good LINK and service you can think of is an economic good. Your education is an economic good, Chapter 3.2 Influence since your teachers and the other resources used to provide it could have been employed for of opportunity cost making other products. on decision making (Economic goods and Free goods are much rarer. When most people talk about free goods, they mean products free goods) they do not have to pay for. These are not usually free goods in the economic sense since resources have been used to produce them. Economists define a free good as one that takes no resources to make it. It is hard to think of examples of free goods. Sunshine is one such example, so is water in a river. However, as soon as this water is processed for drinking, or TIP used for irrigation of fields, it becomes an economic good. Remember that in economics what determines whether a product is a free good is not whether people have to pay for it, but whether it takes resources to produce it. KEY TERMS Economic good: a product which requires resources 4 to produce it and therefore has an opportunity cost. Free good: a product which does not require any resources to make it and so does not have an opportunity cost. Water in a river is a free good  Chapter 1: The nature of the economic problem GROUP ACTIVITY 2 In your group, discuss and decide whether each of the following is an economic or a free good: a air b education c newspapers d public libraries e state education. Summary You should know: People’s wants continue to grow. Resources such as workers, machines and land are limited in supply. The economic problem is that unlimited wants exceed finite resources. Economic goods take resources to produce them. Free goods exist without the use of resources. Multiple choice questions 5 1 Why does scarcity exist? A Each year workers tend to produce less than previously B Machines wear out with time C There are not sufficient resources to produce all the products people want D There is a limit to people’s wants 2 Why will scarcity continue to be a problem in the future? A Prices will rise B The quantity of resources will decline C Wants will continue to increase D World population will fall 3 Which of the following is a free good? A Inoculation provided without charge by the state B Products given away by a supermarket to attract customers C Recycled paper D Wind coming in from the sea Four-part question a What is meant by the economic problem? (2) b Explain why a car is an economic good. (4)  Chapter 2 6 Factors of production Learning objectives By the end of this chapter you will be able to: define and give examples of land, labour, capital and enterprise explain the nature of each factor of production analyse the influences on the mobility of factors of production discuss the causes of changes in the quantity and quality of the factors of production identify the payments to the factors of production Introducing the topic We are living longer. In 1960 the average life expectancy in Bangladesh was 46 years. By 2015 it had risen to 72 years. The increase in Malaysia was even more dramatic – from 37 years to 77 years and the Japanese could expect to live until 83 in 2015. Figure 2.1 shows how the global average life expectancy has increased over the same period.  Chapter 2: Factors of production 80 70 Average life expectancy 60 50 Age in years 40 30 20 10 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Fig. 2.1: Global average life expectancy, 1960–2015. Why can we expect to enjoy a longer lifespan? 2.1 The importance of factors of production People are living longer because healthcare, education, housing, sanitation and nutrition have improved. This, in turn, is because of increases in the quantity and quality of factors of production. Factors of production is another term for economic resources. Chapter 1 explained that economic resources are used to produce goods and services, and that they are in limited supply. Most economists identify four factors of production: 7 land labour capital KEY TERMS enterprise. Some economists, however, claim that there are really only three factors of production and Factors of production: the that enterprise is a special form of labour. economic resources of land, labour, capital Land and enterprise. Land: gifts of Land in general terms includes the earth in which crops are grown, and on which offices and nature available for factories are built, but in economics it has a wider meaning. It covers any natural resource production. which is used in production. So besides the land itself, it also includes what is beneath the land, such as coal, what occurs naturally on the land, for example rainforests, and the sea, oceans and rivers and what is found in them, for example fish. To attract foreign tourists, for example, a travel company will make use of water in its swimming pools, good climate and beaches in the holidays it provides. Similarly, the land used by a safari park includes not only the grass on which some of the animals graze, but also the animals themselves.  Cambridge IGCSE Economics Labour Labour covers all human effort. This includes both the mental and the physical effort, involved in producing goods and services. A road sweeper, a steel worker and a bank manager all contribute their labour. Confusingly, we sometimes also refer to human capital. This means the education, training and experience that workers have gained. The more human capital workers have, the more they should be capable of producing. Capital KEY TERMS Capital would have to be used in the diversion of the course of a river. Capital is any human- made (manufactured) good used to produce other goods and services. It includes, for Labour: human effort example, offices, factories, machinery, railways and tools. used in producing goods and services. Capital is also referred to as capital goods and producer goods. Economists distinguish Capital/capital between capital and consumer goods. Capital goods are not wanted for their own sake, goods: human- but for what they can produce. In contrast consumer goods, such as food, clothing and made goods used in entertainment, are wanted for the satisfaction they provide to their owners. production. Consumer goods: In deciding whether a good is a capital or a consumer good, it is necessary to consider who goods and services the user is and the purpose of its use. A computer, for example, will be a capital good if it purchased by is used by an insurance company to process insurance claims – it is producing a service. If, households for their however, it is used by a person to play games, it is a consumer good. own satisfaction. Enterprise: risk 8 bearing and key GROUP ACTIVITY 1 decision making in business. In your group, discuss and decide which of the following are capital goods and which are consumer goods: a a chocolate bar b a car c a child’s toy d a farm tractor e a dentist’s drill f a courtroom. Enterprise Enterprise is the willingness and ability to bear uncertain risks and to make decisions in a business. Entrepreneurs are the people who organise the other factors of production and who crucially bear the risk of losing their money if their business fails. Entrepreneurs decide what to produce by taking into account consumer demand and how to produce it. Some of the risks faced by any business can be insured against, for example fire, flood and theft. Other risks, however, have to be borne by entrepreneurs. This is because some events are not anticipated, based on past events, and so cannot be insured against. These include the uninsurable risks of other firms bringing out rival products and the rising costs of production.  Chapter 2: Factors of production The two key tasks of an entrepreneur can be carried out by different people. In large companies, it is the shareholders who run the risk of losing their money if the companies go out of business, whilst the managing director takes production decisions and organises the factors of production. 2.2 Mobility of the factors of production The mobility of land Most land is occupationally mobile. This means that it can be used for a number of purposes. Land which is currently being used for farming may be used instead to build houses. Trees can be used to make tables or sleepers for railway lines. Land, in its traditional sense, is geographically immobile. It is not possible to move a LINK section of land from Sri Lanka to India, for example. Some forms of land, in its wider meaning, Chapter 14.8 Immobility can be moved to a certain extent. For example, the course of rivers can be diverted and of resources wildlife can be moved. INDIVIDUAL ACTIVITY 1 Identify two forms of land that are used by a paper mill. The mobility of labour KEY TERMS The mobility of labour varies. Some workers may find it difficult to move from one area of the country to another, or from one country to another (geographical immobility), and some 9 Occupationally may find it difficult to switch from one type of job to another type (occupational immobility). mobile: capable of The causes of geographical immobility include: changing use. Geographically Differences in the price and availability of housing in different areas and countries. immobile: incapable Workers who lose their jobs in poor areas may not be able to take up jobs in rich areas of moving from one because they cannot afford or find housing there. location to another Family ties. People may be reluctant to leave the country they are currently living in location. because they do not want to move away from friends and relatives. Mobility of labour: the ability of labour Differences in educational systems in different areas and countries. People may not to change where it be willing to move to a job elsewhere if it disrupts their children’s education. works or in which Lack of information. People without jobs, or those in poorly paid jobs, may stay where occupation. they are because they are unaware of job opportunities elsewhere. Mobility of capital: the ability to change Restrictions on the movement of workers. It is often necessary to obtain a work visa to where capital is work in another country and these can be limited in supply. used or in which There are also a number of causes of occupational immobility. Again there may be a lack occupation. of information about vacancies in other types of jobs. The main cause, however, is a lack of appropriate skills and qualifications. A shortage of doctors cannot be solved by hiring bus drivers! The mobility of capital The geographical and occupational mobility of capital varies according to the type of capital goods. Some types of capital goods can be transferred from one part of the country to another. A photocopier used by a bank in one area of a country can be sold to, and then used by, a bank in another area. A coal mine and a dock, however, are fixed in position and  Cambridge IGCSE Economics so are geographically immobile. They are also occupationally immobile since their use cannot be changed, as they have been made for a specific purpose. In contrast, a delivery van used originally by a book publisher may be bought and employed by a toy manufacturer to distribute its products. Similarly, an office block may be used for a variety of purposes. It may house a call centre or an accountancy firm. GROUP ACTIVITY 2 In your group, identify three capital goods used in your school that are geographically mobile. KEY TERMS The mobility of enterprise Mobility of enterprise: the ability Enterprise moves when the people who carry out the functions move. These people to change where are called entrepreneurs. The mobility of enterprise depends on the mobility of enterprise is used or in entrepreneurs. which occupation. Enterprise is the most mobile factor of production. The skills involved in being an Entrepreneur: a entrepreneur can be applied in every industry. Someone who has borne uncertain risks person who bears the risks and makes and organised factors of production in the car industry should be able to do this in, for the key decisions in a example, the textile industry too. Apart from being occupationally mobile, enterprise is also business. geographically mobile. Someone who has been successful in starting up and running a business in one country is likely to be successful in another country also. 10 TIP Immobility is the opposite of mobility, so if you know the causes of an increase in immobility of a factor of production, it is easy to work out the causes of an increase in mobility of that factor. For example, if a reduction in training will cause an increase in occupational immobility of labour, an increase in training will increase the mobility of labour. INDIVIDUAL ACTIVITY 2 The following is a list of economic resources. In each case, decide whether the resource is an example of land, labour, capital or enterprise: a chemical fertiliser b a school c a lake d the work of a nurse e the initiative needed to set up and run a bicycle repair shop. 2.3 Quantity and quality of the factors of production The quantity of land The amount of physical land in existence does not change much with time. There is a certain degree of soil erosion which reduces the supply of agricultural land, but also a certain amount of land reclamation which increases its supply. Other natural resources, however, can change quite significantly. Rainforests are currently declining at a rapid rate.  Chapter 2: Factors of production Some natural resources are renewable whilst others are non-renewable. Renewable resources, for example wind power, are replaced by nature and can be used again and again. In contrast, non-renewable resources, for example gold and oil, are reduced by use. There is a risk that renewable resources can be turned into non-renewable resources if they are over- exploited, that is used at a faster rate than they are replenished. Over-fishing and the hunting of wildlife can diminish numbers to a point where they cannot be restored. The quality of land There are a number of reasons why the quality of natural resources may increase. Fertilisers can be applied to fields to increase the fertility of the land. The purity of rivers, and so the health of fish in the rivers, can be improved by stopping firms polluting the rivers. Providing good drainage can increase the yield from fruit trees. The quantity of labour The quantity of labour is influenced by two key factors. One is the number of workers available and the second is the number of hours for which they work. The number of available workers is determined by: The size of the population. The larger the population, the more workers there are likely to be. The age structure of the population. A country with a high proportion of people of working age will have more workers than a country with the same population size, but a higher proportion of people who would be too young or too elderly to work. 11 The retirement age. The higher the retirement age, the more potential workers there will be. The school leaving age. Raising the school leaving age would reduce the number of workers. Attitude to working women. Countries where it is acceptable for women to work have more workers to draw on. Those people who are working and those seeking work form the labour force. This is also known as the workforce or working population. Those of working age are people between the school leaving age and the retirement age. In Singapore, this covers people aged between 16 and 62. In the UK, this covers people aged between 16 and 66. Not all of these people, however, are in the labour force. Some may be in full-time education, some may have retired and some may be sick or disabled. KEY TERMS The number of hours which people work is influenced by (among other factors): Labour force: people the length of the average working day, for example full-time workers in the USA tend to in work and those work for longer hours than those in European Union countries actively seeking work. whether they work full or part-time, for example more people in the UK work part-time Productivity: the output per factor of than those in France production in an hour. the duration of overtime Labour productivity: the length of holidays taken by workers output per worker hour. the amount of time lost through sickness and illness. Output: goods and As with all the factors of production, it is not just the quantity of labour which is important, services produced but also the quality. More can be produced with the same number of workers if the workers by the factors of become more skilled. An increase in productivity, including labour productivity, is a production. major cause of an increase in a country’s output.  Cambridge IGCSE Economics TIP Find out what has happened to the size of your country’s labour force in the last ten years and why it has changed. The quality of labour The quality of labour can be improved as a result of better education, better training, more experience and better healthcare. A better educated, better trained and more experienced labour force will be able to carry out more difficult tasks, work with more complex machinery and equipment, and produce more and better quality products. A healthier labour force will be able to concentrate more, be stronger for any manual tasks and will have fewer days off sick. INDIVIDUAL ACTIVITY 3 Decide which of the following would raise labour productivity: a improved education and training KEY TERMS b better equipment c worse working conditions. Investment: spending on capital goods. 12 Gross investment: The quantity of capital total spending on capital goods. The quantity of capital is influenced by investment and tends to increase with time. Every Depreciation year some capital goods physically wear out and some become outdated, for example a (capital farm barn may fall down and some machinery may be replaced by newer, more efficient consumption): the machinery. value of capital goods that have worn out or New capital goods, however, usually take the place of those goods, which firms are unable become obsolete. (or choose not) to use any more. The total value of the output of capital goods produced Net investment: is referred to as gross investment. Some of the capital goods being produced will be gross investment replacing those which have worn out or become obsolete. The value of replacement capital minus depreciation. is called depreciation or capital consumption. Negative net investment: a Net investment is the value of the extra capital goods made. It is equal to gross investment reduction in the minus depreciation. For example, if a country produces $200 million capital goods one year number of capital and there is depreciation of $70 million, net investment is $130 million. The country will have goods caused by some more capital goods. These additional capital goods will allow it to produce more goods and obsolete and worn services. out capital goods not being replaced. Occasionally, gross investment may be lower than depreciation. This means that some of the capital goods taken out of use, are not replaced. This is said to be negative net investment. TIP Be careful not to confuse money and capital. Remember: when economists refer to capital, they mean human-made goods, such as machinery and office buildings, that are used to produce other products.  Chapter 2: Factors of production The quality of capital Advances in technology enable capital goods to produce a higher output and a better quality output. The development of robotics in car production, for example, has increased significantly the number of cars that a car factory can produce. 13 Automation in car manufacturing INDIVIDUAL ACTIVITY 4 A firm is currently using 12 machines. Each machine is capable of producing 100 units of output. It anticipates that by the end of the year, 3 of its machines will wear out. a If it expects to sell 1600 units next year, how many machines will it buy? b Why in the future may fewer machines be needed to produce the same output? GROUP ACTIVITY 3 In your group, discuss how advances in technology have changed: a students’ learning experience b people’s medical care c food production. The quantity of enterprise The quantity of enterprise will increase if there are more entrepreneurs. A good education system, including university degree courses in economics and business studies, may help to develop entrepreneurs in an economy. Lower taxes on firms’ profits (corporate taxes) and a reduction in government regulations may encourage more people to set up their own businesses. Sometimes, a disproportionate number of immigrants become entrepreneurs. These are people who have had the drive to leave their home country in search of a better life and this drive often leads them to become entrepreneurs in the new country.  Cambridge IGCSE Economics The quality of enterprise The quality of enterprise can be improved if entrepreneurs receive better education, better training, better healthcare and gain more experience. More experience can be particularly significant in the case of entrepreneurs. Very successful entrepreneurs have often set up businesses in the past, some of which may have failed. The knowledge and understanding they have gained of, for example, the products people like to buy and the best sources of raw materials, can help them make a success of a new business. GROUP ACTIVITY 4 In your group: a Research, in each case, which entrepreneur founded the following firm and whether s/he has a university degree: i LimeRoad, an online women’s fashion firm ii Lenovo, a computer firm iii The Silverbird Group, a property, media and entertainment firm iv Sofizar, an internet marketing firm. b Find an example of a successful entrepreneur who does not have a degree. 2.4 Payments for factors of production Payments are made for the use of factors of production. Firms pay wages for the services 14 of the workers. For bearing uncertain risks and organising the other factors of production, entrepreneurs earn profit. Land receives rent and interest is a payment for capital. Summary You should know: The four factors of production are land, labour, capital and enterprise. Land is a term covering all natural resources. Some natural resources are renewable whereas others are non-renewable. Whilst most land is occupationally mobile, land in its traditional meaning is geographically immobile. Labour involves the mental and physical effort workers put into producing goods and services. The quantity of labour is influenced by the number of workers and the number of hours for which they work. The size of the labour force is influenced by the size and age structure of the population, the school leaving age, the retirement age and attitudes to women working. The quality and occupational mobility of labour can be increased by better education and training. The geographical immobility of labour may be caused by lack of housing and information about job vacancies, family ties and the need to gain a visa to work in a different area. Capital goods are used to make other goods and services. Net investment increases a country’s stock of capital goods. Enterprise involves taking risks and making production decisions. Improved education, lower taxes and less regulation can encourage enterprise. Successful entrepreneurs tend to be occupationally and geographically mobile.  Chapter 2: Factors of production Multiple choice questions 1 Which factor of production’s function is to make decisions and take risks? A Capital B Enterprise C Labour D Land 2 Which type of factor of production is a road? A Capital B Enterprise C Labour D Land 3 A country produces 3000 new capital goods in a week. 500 of these replace worn out capital goods. What is the net investment made? A 500 B 2500 C 3000 D 3500 15 4 Which factor of production is the most mobile? A Capital B Enterprise C Labour D Land Four-part question a Identify two non-human factors of production. (2) b Explain two causes of an increase in the quantity of labour. (4) c Analyse why the mobility of labour may increase over time. (6)  Chapter 3 16 Opportunity cost Learning objectives By the end of this chapter you will be able to: define opportunity cost give examples of opportunity cost in different contexts explain the influence of opportunity cost on the decision making of consumers, workers, producers and governments Introducing the topic There are many subjects that schools could teach. For example, Cambridge International Examinations offers more than 70 subjects at IGCSE. Each school offers only a proportion of the subjects on offer. Why is this? It is because schools do not have enough classrooms, teachers and equipment to teach all subjects, for example a classroom can be used to teach English or economics in the same room, but not at the same time. There are not enough economic resources to produce all the goods and services we would desire, as we saw in Chapter 1. Land, labour, capital and enterprise are scarce and so decisions have to be made about the method and purpose of their use. In deciding what to use the classroom for, and in making other decisions, the concept of opportunity cost is important.  Chapter 3: Opportunity cost 3.1 The meaning of opportunity cost When we decide to do one thing, we are deciding not to do something else. To ensure that we make the right decisions, it is important that we consider the alternatives, particularly the best alternative. Opportunity cost is the cost of a decision in terms of the best alternative given KEY TERM up to achieve it, for example there are a variety of things you could do tomorrow between Opportunity cost: 5 pm and 6 pm. These may be to go shopping, to read a chapter of an economics book, to do the best alternative some paid work or to visit a friend. You may narrow those choices down to reading the chapter forgone. or visiting a friend. You will have to consider very carefully which one will give you the best return. If you choose to read the chapter, you will not be able to visit your friend and vice versa. LINK Chapter 4.3 Movements along a PPC TIP In explaining opportunity cost, it is always useful to give an example. 17 Reading has an opportunity cost 3.2 Influence of opportunity cost on decision making Opportunity cost and consumers Consumers are buyers and users of goods and services. We are all consumers. The vast majority of us cannot buy everything we like. You may, for example, have to choose which economics dictionary to buy. You will probably consider a number of different ones, taking into account their prices. The choice will then tend to settle on two of them. You are likely to select the one with the widest and the most accurate informative coverage. The closer the two dictionaries are in quality and price, the harder the choice will be. Opportunity cost and workers Undertaking one job involves an opportunity cost. People employed as teachers might also be able to work as civil servants. They need to carefully consider their preference for the jobs available. This would be influenced by a number of factors, including the wage paid, chances of promotion and the job satisfaction to be gained from each job. If the pay of civil servants or their working conditions improve, the opportunity cost of being a teacher will increase. It may even increase to the point where some teachers resign and become civil servants instead.  Cambridge IGCSE Economics GROUP ACTIVITY 1 In your group, discuss why the opportunity cost of working as an accountant is likely to be higher than that of working as a window cleaner. Opportunity cost and producers Producers have to decide what to make. If a farmer uses a field to grow sugar beet, he cannot keep cattle on that field. If a car producer uses some of his factory space and workers to produce one model of a car, he cannot use the same space and workers to make another model of the car at the same time. In deciding what to produce, private sector firms will tend to choose the option which will give them the maximum profit. They will also take into account the demand for different products and the cost of producing those products. Opportunity cost and the government LINK Government has to carefully consider its expenditure of tax revenue on various things. If it decides to spend more on education, the opportunity cost involved may be a Chapter 4.3 Movements reduced expenditure on healthcare. It could, of course, raise tax revenue in order to spend along a PPC more on education. In this case, the opportunity cost would be put on the taxpayers. To pay higher taxes, people may have to give up the opportunity to buy certain products or to save. 18 TIP Opportunity cost is one of the most important concepts in economics. You will find that you can use it in answers to a relatively wide range of structured questions. INDIVIDUAL ACTIVITY 1 In each of the following cases, consider what might be the opportunity cost. a A person wanting to buy fruit, decides to buy apples. b A person decides to study economics at a university. c A factory is built on farm land. d A woman has a television set which cost her $800 two years ago. A new set would cost her $1000 and she could sell her television set for $450. What is the opportunity cost of keeping the old television? LINK Economic goods and free goods As resources are used to produce economic goods, their production involves an opportunity Chapter 1.2 Economic goods and free goods cost. In contrast, no resources are used to produce free goods and so they do not involve an opportunity cost.  Chapter 3: Opportunity cost Summary You should know: Opportunity cost is an important concept as it emphasises that people have to consider what they are sacrificing when they decide what to buy, what job to do and what to produce, and when governments are deciding what to spend their tax revenue on. Economic goods have an opportunity cost whereas free goods do not. Multiple choice questions 1 What is meant by ‘opportunity cost’? A The best alternative forgone B The cost of the item selected C The cost of exploring business opportunities D The labour used in producing the product 2 A person decides to go to the university for three years, to study economics. If he had not gone, he could have taken up a job which would have paid him $15 000 a year. After he graduates he expects to find a job paying him $40 000 a year. What is the opportunity cost of going to the university for him? A $15 000 B $40 000 19 C $45 000 D $120 000 3 What are the characteristics of a free good? A Has an opportunity cost Takes resources to produce it B Has an opportunity cost Takes no resources to produce it C Has no opportunity cost Takes no resources to produce it D Has no opportunity cost Takes resources to produce it 4 On his birthday, Kamran receives $200 from his aunt, $50 of which he decides to save. He is taken out by his father for lunch. His father pays the bill. Kamran spends the afternoon playing football. Which of these activities involves an opportunity cost? Eating the free lunch Playing football Saving A No No No B No No Yes C No Yes Yes D Yes Yes Yes Four-part question a Define opportunity cost. (2) b Explain why opportunity cost is an important concept for producers. (4) c Analyse what effect the building of an airport may have on the decision of how to use an area of land nearby. (6)  Chapter 4 20 Production possibility curves Learning objectives By the end of this chapter you will be able to: define a production possibility curve draw a production possibility curve interpret points under, on and beyond a production possibility curve analyse movements along a production possibility curve analyse the causes and consequences of shifts in a production possibility curve Introducing the topic The USA produces many more goods and services than Mauritius. In 2015, the output of the USA was valued at $18 trillion whereas it was only $25 billion in Mauritius. You should not be surprised at this difference. The USA has a much larger economy with a much larger labour force, more capital equipment, more entrepreneurs and more natural resources. The productive potential of an individual, firm or a country can be shown on a production possibility curve (PPC) diagram. Such a diagram can also illustrate opportunity cost and efficiency.  Chapter 4: Production possibility curves 4.1 A production possibility curve A production possibility curve is also known as a production possibility frontier or a KEY TERM production possibility boundary. It shows the maximum output of two types of products, Production and combinations of those products that can be produced with the existing quantity and possibility curve: a quality of resources and technology. curve that shows the maximum output of Figure 4.1 shows that a country can produce either 200 capital goods or 300 consumer goods two types of products or a range of combinations of these two types of goods. and combination of those products that Capital goods can be produced with 200 existing resources and technology. TIP Make sure you draw a Consumer 0 300 PPC to each axis – do not leave a gap. Fig. 4.1: A production possibility curve 4.2 Production points While a PPC shows what is the maximum amount that can currently be produced, a 21 production point shows what is being produced or what may be produced in the future. Any point inside the curve means there is not full use of resources. Point X on Figure 4.2 shows output is being produced where there are unemployed resources. Good A Z Y X Good B 0 Fig. 4.2: A production possibility curve and production points  Cambridge IGCSE Economics LINK A point anywhere on the curve, such as point Y, means that maximum use is being made of Chapter 29.2 resources. This is an efficient output. There are not enough resources to produce outside the Recession (causes and limit set by the PPC. So a point such as Z is not currently attainable. consequences) INDIVIDUAL ACTIVITY 1 Look at the graph and answer the questions. Capital goods TIP Be careful with labelling a PPC. 150 The labels should show two types of products. 60 Y 50 X Consumer 0 200 300 380 goods Fig. 4.3: A country’s PPC 1 If a country is producing at point X, what is its output of capital goods and consumer goods? 2 If a country’s output moves from point X to point Y, how many more capital goods and how many more consumer goods will it produce? 22 3 What is the maximum number of capital goods that can be produced if all resources are devoted to capital goods? 4.3 Movements along a PPC A movement along a PPC shows that resources are being reallocated. It also shows the opportunity cost of that decision. Figure 4.4 shows a country initially deciding to produce 80 units of manufactured goods and 75 units of agricultural goods. If it then decides to produce 100 units of agricultural goods, it will have to switch resources away from producing manufactured goods. The diagram shows the reduction of output of manufactured goods to 60 units. In this case, the opportunity cost of producing 25 extra units of agricultural goods is 20 units of manufactured goods. Manufactured goods 100 80 60 LINK Chapter 3.2 Influence Agricultural of opportunity cost on 0 75 100 150 goods decision making Fig. 4.4: A movement along the PPC  Chapter 4: Production possibility curves INDIVIDUAL ACTIVITY 2 Using Figure 4.5. 1 State the maximum number of capital goods the country can produce if it devotes all of its resources to making capital goods. 2 Calculate the opportunity cost of increasing the output of consumer goods from 80 to 90 units. Capital goods 50 35 30 Consumer goods 0 80 90 120 Fig. 4.5: A country’s PPC The shape of the PPC PPCs are usually bowed outwards as shown in Figures 4.1–4.5. This is because the best resources are used first to produce a particular type of product. It was noted that in Figure 4.4 the opportunity cost of increasing the output of manufactured goods from 60 to 80 was 25 23 agricultural goods. To increase the output of manufactured goods by a further 20 to 100 would involve a higher opportunity cost of 75. The last resources switched from producing agricultural goods would have been the least suited to producing manufactured goods. In the less common situation where resources are equally suited to producing both types of products, the opportunity cost remains constant. In this case, the PPC is shown as a straight line as shown in Figure 4.6. Pairs of socks 45 Ties 0 90 Fig. 4.6: A straight line PPC The opportunity cost of producing 1 more pair of socks remains at 2 ties as the output of socks changes.  Cambridge IGCSE Economics 4.4 Shifts in a PPC Causes of shifts in the PPC The PPC will shift to the right, as shown in Figure 4.7, if there is an increase in the quantity or quality of resources. For example, if there is an increase in the size of the labour force, the maximum output that a country can produce will increase. Capital goods B A Consumer 0 A B goods Fig. 4.7: A shift in a PPC A shift to the left of the PPC will be caused by a reduction in the quantity or quality of resources. GROUP ACTIVITY 1 24 In your group, discuss and decide whether the following will cause a shift of a country’s PPC to the left or the right: a advances in technology b a rise in the retirement age c improved education d widespread floods e worn out capital goods not being replaced.  Chapter 4: Production possibility curves Consequences of a shift in the PPC A shift to the right of the PPC increases a country’s productive potential. It will be capable of producing more. This is referred to as potential economic growth. To take advantage of this increased capacity, the extra or better quality resources have to be employed. Figure 4.8 shows both the PPC and the production point moving to the right. Output increases. A rise in a country’s output is actual economic growth. Agricultural goods B A 75 Y 60 X LINK Manufactured 0 60 70 A B goods Chapter 29.3 Economic growth (causes) Fig. 4.8: Economic growth Summary 25 You should know: A PPC can be used to illustrate opportunity cost. It shows what can be produced with existing resources and current technology. A point inside a curve indicates unemployed resources, a point on the curve shows full use of resources and a point to the right of the curve is currently unattainable. A movement along a PPC shows a reallocation of resources and the opportunity cost involved. A bowed outwards PPC shows an increasing opportunity cost whereas a straight line PPC shows a constant opportunity cost. An increase in the quantity or quality of resources will cause a shift of the PPC to the right and an increase in productive potential.  Cambridge IGCSE Economics Multiple choice questions 1 A country experiences a fall in unemployment. How would this be shown on a PPC diagram? A A movement of the production point away from the curve B A movement of the production point towards the curve C A shift of the PPC to the left D A shift of the PPC to the right 2 Which points in the diagram are attainable? Capital goods T V W S R U Consumer 0 goods A R and S B V and W C R, S, T and U 26 D T, U, V and W 3 The diagram shows a country’s PPC. What can be concluded from the shape of the PPC? Films 50 TV programmes 0 200 A All resources are equally good at producing films and TV programmes B Resources cannot be switched between producing films and TV programmes C The country is able to produce 50 films and 200 TV programmes D TV programmes take more resources to produce them than films  Chapter 4: Production possibility curves 4 Using the diagram, determine the opportunity cost of increasing the output of luxury goods from 25 to 35. Luxury goods 85 35 25 Basic goods 0 92 100 120 A 8 basic goods B 10 luxury goods C 25 luxury goods D 92 basic goods Four-part question a What is the difference between a point inside and a point on a PPC? (2) b Explain two causes of a shift in a PPC. (4) c Analyse how a PPC illustrates scarcity, opportunity cost and efficiency. (6) 27  Cambridge IGCSE Economics Exam-style questions Multiple choice questions 1 What gives rise to the problem of scarcity? A a lack of money B an uneven distribution of income C capital equipment being greater than labour D wants exceeding resources 2 As an economy becomes richer, what happens to resources and wants? Resources Wants A decrease decrease B decrease increase C increase decrease D increase increase 3 Which of the following is an example of the factor of production ‘capital’? A the money a farmer has borrowed to buy livestock B the money a farmer has saved in the bank C a farm worker 28 D a tractor 4 Which type of factor of production can be described as a ‘natural resource’? A capital B entrepreneur C labour D land 5 A woman owns a TV which she bought for $300. She is considering buying a better model for $450. Her neighbour offers her $200 for her TV. What is the opportunity cost of her rejecting this offer? A $100 B $200 C $300 D $450 6 A man presently works as a builder. His previous jobs included working as a farm labourer and a street trader. His next best-paid job is that of a carpenter, but he would rather choose to work as a gardener, if he was not a builder. What will be the opportunity cost of him working as a builder? Working as: A a carpenter B a farm labourer  Chapter 4: Production possibility curves C a gardener D a street trader 7 What does a production possibility curve show? A the amount of capital and labour in a country B the output of two products that can be produced with given resources C the popularity of the two products D the price of the two products that are produced with given resources 8 What could have caused the change in the shape of the production possibility curve (PPC) shown below? Food Clothing 0 29 A advances in technology in the clothing industry B an increase in the size of a country’s labour force C a change in consumer preferences towards clothing D more resources being devoted to producing clothing 9 What is the change in the opportunity cost of increasing the output of capital goods from 20 to 30 when the PPC shifts to the right the diagram below? Capital goods 80 30 20 Consumer goods 0 70 100 140 150 200 A a reduction of 10 consumer goods B a reduction of 20 consumer goods C a reduction of 30 consumer goods D a reduction of 40 consumer goods  Cambridge IGCSE Economics 10 The diagram below shows a country producing at point X. What is the opportunity cost of moving production to point Y? Luxury goods 40 23 Y 20 X Basic goods 0 50 62 96 A 34 basic goods B 17 luxury goods C 12 basic goods and 3 luxury goods D zero goods Data response question Study the source material carefully and then answer Question 1. Source material: Agricultural output in Africa 30 The output of more fertilisers and better irrigation have contributed to higher agricultural output for each unit of land in Africa in recent years. More significant, however, has been the increase in the quantity of land used to grow crops. For example, in 1975 12% of land was used for agriculture. By 2015 this had increased to 25%. In Mauritania, agricultural expansion is particularly high at 7% per year. Despite the rise in agricultural output, the quantity of high quality food that people would like to consume is not keeping pace with the rise in popu