Cambridge IGCSE Economics: Demand for factors, production and productivity, and market structure (0455) – Revision Notes

These notes condense sections 3.6 (Firms and production) and 3.8 (Market structure) of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2. The subject is not tiered. Fuller explanations are in the study guide, and you can test yourself with the practice questions. Other links: the Cambridge IGCSE Economics hub, the printable checklist, the microeconomic decision makers overview and the free diagnostics. All figures are invented.

Key terms

Term	Meaning
Derived demand	Demand for a factor that comes from demand for the product it helps to make
Labour-intensive	Production that uses a lot of labour compared with capital
Capital-intensive	Production that uses a lot of machinery and equipment compared with labour
Production	Total output of goods and services
Productivity	Output per unit of input, such as output per worker
Competitive market	A market with a high number of firms selling similar products
Monopoly	A market with one firm, or one firm with a very large share, protected by barriers to entry

3.6.1 Demand for factors: four influences

1. Demand for the product. More sales mean more factors needed.
2. Prices of different factors. Firms shift towards the cheaper factor.
3. Availability. A scarce factor is harder and dearer to hire.
4. Productivity. A more productive factor gives more output for its cost.

Chain for any answer: change in the product market or the factor market, then change in the factor’s cost or usefulness, then how many units of the factor the firm demands.

Method: choosing between two mixes of factors

1. Cost each mix: workers × wage + machines × machine cost.
2. Choose the cheaper one for the same output.
3. Change one price and cost both again.

Reminder: Mix A is 6 workers and 2 machines. Mix B is 2 workers and 5 machines. A worker costs 50 and a machine 80. A costs 300 + 160 = 460. B costs 100 + 400 = 500. A is cheaper. If the wage rises to 90, A costs 540 + 160 = 700 and B costs 180 + 400 = 580. B is now cheaper.

3.6.2 Labour-intensive and capital-intensive production

	Labour-intensive	Capital-intensive
Typical products	Personal services, craft goods, small or varied orders	Standard goods in large quantities
Reasons for choosing	Cheap and plentiful labour; low start-up cost; need for flexibility or a personal touch	Dear labour; large steady demand; need for speed or exact repeatability; finance available
Advantages	Flexible; can change task quickly; low set-up cost; creates jobs	Fast; consistent quality; low cost per unit at high output; less affected by wage rises
Disadvantages	Costs rise with output; slower; quality varies; absence and skill gaps matter	Expensive to buy and maintain; high fixed costs if sales fall; needs skilled operators; may remove jobs

Cost share test: wages ÷ total cost × 100. A wage bill of 36,000 in total costs of 48,000 is 75%, so the firm is labour-intensive. A share of 15% would point to capital-intensive production.

Worked reminder: Method L has a fixed cost of 2,000 and costs 3 per unit. Method C has a fixed cost of 8,000 and costs 1 per unit. Set them equal: 2,000 + 3q = 8,000 + 1q, so 2q = 6,000 and q = 3,000. At 3,000 units both cost 11,000. At 5,000 units L costs 17,000 and C costs 13,000, so C is cheaper above 3,000 units.

Output rule: a capital-intensive method has high fixed cost and low cost per extra unit. It wins at high output and loses at low output. A labour-intensive method is the reverse.

3.6.3 Production and productivity

	Production	Productivity
What it measures	Total output	Output per input
Formula	Units made	Output ÷ number of workers (or machines)
Rises when	More inputs, or better use of inputs	Each input produces more
Example	A factory makes 3,600 units	3,600 ÷ 30 workers = 120 per worker

If the same factory makes 4,000 units with 25 workers, productivity is 4,000 ÷ 25 = 160 per worker. The change is (160 − 120) ÷ 120 × 100 = 33.3%.

Influences on productivity: training and education; better machinery and technology; better organisation of tasks; motivation, pay and working conditions; health of workers; quality of materials.

Link to cost: labour cost per unit = wage per hour ÷ output per hour. Higher output per hour lowers cost per unit unless pay rises by more. That can allow lower prices, higher profit or better pay.

Warning: production can rise while productivity falls. Always compute output per worker before you state what happened.

3.8.1 Competitive markets (many firms)

Variable	Effect of a high number of firms
Price	Lower: firms compete for customers, and customers can switch
Quality	Higher or well maintained, because firms try to attract buyers
Choice	Wider: many suppliers and varieties
Profit	Lower: competition holds prices down, and high profit draws in new firms

Evaluation: low prices can push firms to cut corners; small firms may miss economies of scale; weak firms may leave the market. The theory of perfect and imperfect competition and diagrams are not required.

3.8.2 Monopoly

Characteristics: one firm or a very large market share; barriers to entry (high start-up cost, patents, legal protection, control of resources); few or no close substitutes; price-setting power; potential for long-lasting high profit.

Market share = firm sales ÷ market sales × 100. A firm selling 4,200 units in a market of 6,000 has 4,200 ÷ 6,000 × 100 = 70%.

Advantages	Disadvantages
Economies of scale lower cost per unit	Higher price, lower output
Profit can pay for research and development	Less choice; less pressure to improve quality
Can compete abroad	Less pressure to cut costs
Natural monopoly can be efficient (one network instead of several)	Barriers keep out rivals; may use power over suppliers and workers

Evaluation checklist: are cost savings passed on to buyers? Is the position protected by law or by high start-up cost? Is it regulated? Are there substitutes? Diagrams are not required for this topic.

Building an answer

• State or define: one precise sentence, no example needed unless asked.
• Calculate: write the formula, substitute, give the answer with units.
• Explain: make a point, then link it to a consequence with because or so.
• Evaluate: give both sides in context, then a reasoned judgement. Say what the result depends on, such as the size of the firm, the product or the time period.

Must-know distinctions

• Production is a total; productivity is a ratio.
• Labour-intensive means a large share of labour in costs. It does not mean low output.
• Many firms means competition among sellers. A monopoly can still have lots of buyers.
• A derived demand starts in the product market and moves to the factor market.

Quick self-test

1. Define derived demand.
2. Demand for a firm’s product rises by 40%. Productivity stays the same. The firm employs 20 workers. How many does it need?
3. A firm makes 900 units with 15 workers. Calculate labour productivity.
4. A firm has a wage bill of 36,000 and total costs of 48,000. Is it labour-intensive? Support your answer with a calculation.
5. In the reminder above, which mix is cheaper if the worker costs 90 and the machine 80? State the cost of each.
6. Output per hour rises from 10 units to 12. Calculate the percentage change in productivity.
7. State two influences on productivity.
8. A firm sells 4,200 units in a market of 6,000. Calculate its market share.
9. State two effects of having many firms in a market.
10. Give one advantage and one disadvantage of monopoly.

Answers

1. Demand for a factor that comes from the demand for the product it makes.
2. 20 × 1.40 = 28 workers.
3. 900 ÷ 15 = 60 units per worker.
4. 36,000 ÷ 48,000 × 100 = 75%, so wages are most of costs and it is labour-intensive.
5. Mix A costs 6 × 90 + 2 × 80 = 700. Mix B costs 2 × 90 + 5 × 80 = 580. B is cheaper.
6. (12 − 10) ÷ 10 × 100 = 20%.
7. Any two of: training, technology and machinery, organisation, motivation, health, quality of materials.
8. 4,200 ÷ 6,000 × 100 = 70%.
9. Any two of: lower prices, better quality, wider choice, lower profit.
10. Advantage: economies of scale. Disadvantage: higher prices or less choice.

Where marks are usually lost

• Giving the definition of productivity as “how much a firm makes”. Say output per worker or per input.
• Stating a result without calculating it. Show the working.
• Mixing up percentage change in output and percentage change in productivity.
• Explaining demand for labour without linking it to demand for the product.
• Writing that labour-intensive firms always have lower costs. Say when this holds.
• Listing monopoly effects with no development, such as “high price” and nothing more.
• Giving only the disadvantages of monopoly in a question that asks for both sides.
• Writing “more competition means more profit”. The effect is the opposite.
• Skipping a judgement in an evaluation question. State which side is stronger and why.

Official syllabus

Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2, published by Cambridge University Press & Assessment: sections 3.6 Firms and production and 3.8 Market structure.