IGCSE ECONOMICS NOTES

Opportunity cost and the basic economic problem

Definition
Opportunity cost: The cost of any activity measured in terms of the value of the
next best alternative forgone (that is not chosen)
Production: The act of creating output, a good or service which has value
contributes to the utility of others
Producer: People who make and sell goods/services
Consumption: The final purchase of goods and services by individuals
Consumer: Individuals who purchase the good/services to satisfy their wants and
needs
Consumption Expenditure: Spending of consumers
Exchange: A marketplace in which securities, commodities, derivatives and other
financial instruments are traded
Trade: An economic activity that involves multiple parties participating in the
voluntary negotiation and then the exchange of one's goods and services for
desired goods and services that someone else possesses.
Entrepreneurs: Individuals who, rather than working as an employee, runs a small
business and assumes all the risk and reward of a given business venture, idea,
goods or service offered for sale.
Human resources: The company department charged with finding, screening,
recruiting and training job applicants, as well as administering employee-benefit
programs. Also known as Labor.
.
Natural resources: Resources occurring in nature that can be used to create
wealth. Also known as Land. Examples include; seas and rivers.
Factors of Production

Definition: Inputs that are used in the production of goods or services in the
attempt to make an economic profit. The factors of production include land, labor,
capital and entrepreneurship.
Land: Land refers to the resources available including the seas and rivers, forests
and deserts all manner of minerals from the ground; chemicals from the air and
earths crust.
Labor: Labor refers to the physical and mental effort produced by people to make
goods/services. The size and ability of an economys labor force are very important
in determining the quantity and quality of the goods/services produced. The greater
the number of workers the better educated and skilled they are, the more an
economy can produce.
Enterprise: Enterprise refers to the ability to run a production process, employ and
organize resources in a firm (an organization that owns a factory or a number
of factories and even shops, where goods/services are produced).
Capital: Capital refers to already-produced durable goods that are used
in production of goods or services. It is not wanted for itself but for its ability to help
in producing other goods. It is also known as man-made resources.
Division of labor/Specialization Definition: A system whereby workers
concentrate on performing a few tasks (instead of finishing the entire product by
themselves) and then exchange their production for other goods/services
Advantages of specialization:
More goods/services can be produced
When workers become specialists in the jobs they do, repetition of the same
operation increases the skill and speed of the worker and as a result more is
produced.
Full use is made of everyones abilities
With the division of labor there is greater chance that people will be able to do
those things at which they are best and which interest them the most.
Time is saved
Time is wasted when a worker has to switch from one task to another. Time can
also be saved when training people. It would take many years to train someone to
be able to build a car, for example, but a person can be trained quickly to fulfill one
operation in the production process.
It allows the use of machinery

As labor is divided up into specialist tasks, it becomes worthwhile to use machinery

which allows a further saving in time and effort. For example, cars are painted by
machines instead of by hand. This, in turn, allows machinery to take over peoples
jobs leaving many unemployed.
Disadvantages
Work may become boring
A worker who performs the same operation every day is likely to be unsatisfied/low
morale. To combat this, many firms play music to their labor forces, or allow them to
have a rest during part of each hour. Longer rest hours and annual holidays may
also be introduced although this will shorten the working week.
People become too dependent on each other
Specialization and division of labour means that people come to rely on others for
the provision of goods/services. For example, people who produce food rely on the
provision of tractors, fertilizers, etc.
Workers may feel alienated
Workers may feel unimportant because they can no longer see the final result
of their efforts. Some firms are trying to reverse this by introducing workers to
a greater variety of tasks.
Standardization of goods
Goods produced under a system of specialization are usually turned out in vast
numbers and share the same design. Whether this is a disadvantage depends
on peoples opinion. For example, there is probably variation in the color and design
in clothes to please most people. However, it is not possible to please everyone
because in most factories it would be difficult and expensive to change the
production process to suit one persons wants since most factories practice mass
production in order to produce the greatest number of goods in the lowest cost
possible.
What is economics?
Economics is the social science that analyzes the production, distribution, and
consumption of goods and services. It studies how individuals, governments, firms
and nations make choices on allocating scarce resources to satisfy their unlimited
wants. Economics can generally be broken down into: macroeconomics, which
concentrates on the behavior of the aggregate economy; and microeconomics,
which focuses on individual consumers.
Market Systems

Definitions
Market: One of many varieties of systems, institutions, procedures, social relations
and infrastructures whereby parties engage in exchange. It consists of all those
people or firms who wish to exchange a given good or service.
Market system: Any systematic process enabling many market players to bid and
helping bidders and sellers interact and make deals. It is not just the price
mechanism but the entire system of regulation, qualification, credentials,
reputations and clearing that surrounds that mechanism and makes it operate in
a social context.
Price mechanism: Refers to the consumers and producers who negotiate prices
of goods or services depending on demand and supply. This is also known as
market forces.
Types of market systems
Free economy: An economy in which decisions regarding investment, production
and distribution are based on supply and demand and the prices of goods
and services are determined in a free price system. Examples include; USA, Japan,
Brazil.
Mixed economy: An economy in which both the state and private sector direct the
economy, reflecting characteristics of both market economies and planned
economies. Examples include; Canada, Geramny, UK
Planned economy: An economy in which decisions regarding production and
investment are embodied in a plan formulated by a central authority, usually by a
government agency.
Advantages of a free economy:
Capital return. Capital flows to where it will get the greatest return, expanding the
total size of the economy to its maximum level.
Supply and Demand. Supply and demand are closely linked: Someone who has a
good idea or product can quickly put it into the market so that it is available to
those who want it. Conversely, when a certain type of product is desired by enough
people, it is a simple matter for someone to provide it.
Economic freedom. In a market economy, it is easier for someone with initiative
and virtue to create a better life for themselves and their family; economic freedom
makes it easier to transform hard work and perseverance into material wealth.
Advantages of a mixed economy:

Provides fair competition. The presence of private enterprise ensures that there
is fair competition in the market and the quality of products and services are not
compromised.
Well regulated. Market prices are well regulated. The government with its
regulatory bodies ensure that the market price do not go beyond its actual price.
Efficient use of resources. Optimum utilization of national resources. In a mixed
economy, the resources are utilized efficiently as both government and private
enterprises are utilizing them.
It does not allow monopoly at all. Barring a few sectors, a mixed economy does
not allow any monopoly as both government and private enterprises enter every
sector for business.
Advantages of a planed economy:
Stability. Long-term infrastructure investment can be made without fear of a
market down turn leading to abandonment of a project.
Meeting collective objectives. Planned economies may be intended to serve
collective rather than individual needs. The government can harness FOP to serve
the economic objectives of the state.
Advantages over free economy. It is not subject to major pitfalls of market
economies and marked-oriented mixed economies. A planned economy does not
suffer from business cycles, does not experience crises of overproduction. It does
not result in asset bubbles-massive misallocations of resources.
Too competitive. A competitive environment creates an atmosphere of survival of
the fittest. This causes many businesses to disregard the safety of the general
public to increase the bottom line.
Disadvantages of free economy:
Unequal wealth distribution. A small percentage of society has the wealth while
the majority lives in poverty.
No economic stability. Greed and overproduction cause the economy to have wild
swings ranging from times of robust growth to cataclysmic recessions.
Disadvantages of mixed economy:
Inefficient. Its efficiency property reduces in progressively higher degree, the
more its mixed nature embraces more and more of government / state intervention
and State planning and reduces the reliance on competitive market economy
management mechanisms.

Less reliance on competition. Mixed economy system has a natural tendency to

move further and further away from reliance on competitive market mechanism to
greater and greater bureaucratic controls and interventions.
Encourage state monopolies. Mixed economy systems tend to encourage more
state monopolies, higher and higher tax to GDP ratio and dominant public finances,
making the government a large economic player as compared to corporate or
individual entities.
Disadvantages of planned economy:
Inefficient resource distribution. Planners cannot detect consumer preferences,
shortages, and surpluses with sufficient accuracy and therefore cannot efficiently
co-ordinate production.
Suppression of economic democracy and self-management. Without
economic democracy there can be troubles with the flow of knowledge as is shown
with the initiative for backyard furnaces and other efforts in the Great Leap Forward.