Cambridge IGCSE Economics: Micro and macro, markets and the price mechanism (0455) – Revision Notes

These notes condense sections 2.1 and 2.2 of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026. For full explanations and worked examples, read the study guide. Then test yourself with the practice questions. Other links: the Cambridge IGCSE Economics hub, the printable checklist and the free diagnostics. All data below are invented and illustrative.

Key definitions

Term	Definition
Microeconomics	The study of choices made by single households, workers and firms, and of single markets
Macroeconomics	The study of the whole economy: output, employment, the general price level and trade
Market	Any set-up in which buyers and sellers meet to trade
Buyers	Those willing and able to pay for a good or service
Sellers	Those who supply goods or services to earn revenue and profit
Market equilibrium	The price at which quantity demanded equals quantity supplied
Excess demand (shortage)	Quantity demanded is greater than quantity supplied at the current price
Excess supply (surplus)	Quantity supplied is greater than quantity demanded at the current price
Price mechanism	The way changes in price, from demand and supply, coordinate decisions and allocate resources

Micro versus macro: must-know distinctions

	Micro	Macro
Looks at	One household, worker, firm or market	The whole economy
Decision makers	Households, workers, firms	Government, central bank
Example	A bakery sets its price	The country’s unemployment rate

• Government can act at both levels. Taxing a single product is micro. Changing taxes to influence total output is macro.
• Macro measures are totals or rates: for example growth and unemployment.

Method: growth and unemployment rates

growth rate (%) = (new output - old output) / old output x 100
unemployment rate (%) = unemployed / labour force x 100

Example (Country Y, illustrative): output rises from 640 to 672. Growth = 32 / 640 x 100 = 5.0%. If 600 of a labour force of 8,000 are unemployed, the rate is 600 / 8,000 x 100 = 7.5%.

Decision makers at a glance

Decision maker	Level	A typical decision
Household (consumer)	Micro	Which goods to buy, how much to save or borrow
Worker	Micro	Whether to work, and in which job
Firm	Micro	What to produce, which method to use, what price to charge
Government	Both	Taxing one product (micro); setting taxes and spending to influence national output (macro)
Central bank	Macro	Policy on interest rates and money for the whole economy

Sorting practice

Classify each point as micro or macro: the wage of nurses in one town (micro); the general price level in a country (macro); a farm choosing between two crops (micro); the total output of an economy (macro); a shop deciding to open late (micro).

How a market system works

1. Buyers show demand by being willing and able to pay.
2. Sellers show supply by being willing to sell for a profit.
3. Their interaction sets a price and a quantity.
4. Resources move towards products with a profitable price and away from the others.

Worked reminder: second-hand bicycles (illustrative)

Price	Quantity demanded	Quantity supplied	Demand minus supply
40	140	20	+120
60	110	50	+60
80	80	80	0
100	50	110	-60
120	20	140	-120

• Equilibrium: price 80, quantity 80. Revenue = 80 x 80 = 6,400.
• At 60: shortage of 60. Only 50 are traded (the smaller quantity).
• At 100: surplus of 60. Only 50 are traded.
• Price change from 60 to 80 is (80 - 60) / 60 x 100 = 33.3%.

Method: adjustment to equilibrium

Surplus at 100:

1. Unsold bicycles pile up.
2. Sellers cut price.
3. A lower price raises the amount buyers want and cuts the amount sellers offer.
4. The surplus falls to zero at 80.

Shortage at 60:

1. Buyers compete for limited stock.
2. Sellers raise price.
3. A higher price lowers the amount buyers want and raises the amount sellers offer.
4. The shortage falls to zero at 80.

A change in the market (brief)

Suppose demand rises by 30 at every price in the table. At 80, quantity demanded is now 110 but supply is still 80, a shortage of 30. Price rises until quantities match again.

With demand as Qd = 200 - 1.5P and supply as Qs = 1.5P - 40, the new demand is Qd = 230 - 1.5P. Setting 230 - 1.5P = 1.5P - 40 gives 3P = 270, so P = 90 and Q = 230 - 135 = 95.

• Price rises from 80 to 90: (90 - 80) / 80 x 100 = 12.5%.
• Quantity rises from 80 to 95: 15 / 80 x 100 = 18.75%.

Causes of shifts in demand and supply have their own sections. For this section, you need to describe the response of price and quantity, not the full list of causes.

The three allocation questions

Question	Scarcity link	Price mechanism answer
What to produce	Resources used for one good cannot make another	Goods with high prices and profits are produced more; loss-making goods are cut back
How to produce	Different methods use different resources	Firms choose the lowest-cost method given input prices
For whom to produce	Not everyone can have everything they want	Output goes to those willing and able to pay

Remember: every answer has an opportunity cost.

Worked reminder: choice of method (illustrative)

A small workshop needs 100 units a day. Method 1 costs 5w + 20 (w is the daily wage). Method 2 costs 2w + 110.

• At w = 20: Method 1 = 120 and Method 2 = 150, so Method 1 is cheaper.
• At w = 40: Method 1 = 220 and Method 2 = 190, so Method 2 is cheaper.
• Equal when 5w + 20 = 2w + 110, so 3w = 90 and w = 30.

Higher wages push firms towards capital-intensive methods.

The three jobs of the price mechanism

Job	What it does	Example chain
Signalling	Tells producers what buyers want	Price of a product rises, so producers see more demand
Incentive	Rewards producers and changes buyers’ behaviour	Higher profit encourages more supply; higher price discourages some buying
Rationing	Shares scarce goods among buyers	Price rises until only those willing and able to pay can buy

Evaluating the price mechanism

Strength	Limitation
Quick response to changes in wants	Output goes to those with money, not always need
Rewards efficient, low-cost production	Some goods with no profitable price may be under-provided
No central planner needed	Adjustment takes time, so shortages and surpluses can last

Judge which point matters most in the context given.

Command words for this section

The syllabus lists the command words used in assessment. Here is how they apply to this section.

Command word	What it asks for	Example
Define	Give the precise meaning	Define market equilibrium
State	Express in clear terms	State the three allocation questions
Explain	Make the relationship clear: say why or how, with evidence	Explain how a surplus leads to a lower price
Calculate	Work out from the given figures	Calculate the growth rate
Analyse	Show the elements and how they relate	Analyse how the price mechanism answers “what to produce”
Discuss	Write in depth in a structured way, covering more than one view	Discuss whether the price mechanism is a fair way to decide “for whom”

For “explain” answers, use a chain: cause, effect on buyers or sellers, effect on price, final result.

Quick self-test

1. State the difference between microeconomics and macroeconomics.
2. Is a bakery’s choice of price micro or macro?
3. Is a rise in a country’s unemployment rate micro or macro?
4. Define market equilibrium.
5. A price is below equilibrium. Is there a shortage or a surplus?
6. In the bicycle table, how many are traded at a price of 100?
7. Calculate growth if output rises from 500 to 525.
8. Name the three allocation questions.
9. Name the price mechanism’s three jobs.
10. In the workshop example, at what wage are the two methods equal in cost?

Answers

1. Micro studies individual decision makers and markets. Macro studies the economy as a whole.
2. Micro.
3. Macro.
4. The price at which quantity demanded equals quantity supplied.
5. A shortage (excess demand).
6. 50, the smaller of 50 demanded and 110 supplied.
7. (525 - 500) / 500 x 100 = 5.0%.
8. What to produce, how to produce, for whom to produce.
9. Signalling, incentive and rationing.
10. w = 30.

Building an explain answer

A reliable order for questions on markets:

1. Name the starting position: shortage or surplus, with the figures.
2. Say what sellers or buyers do in response.
3. Say what happens to the price.
4. Say how quantity demanded and quantity supplied react.
5. End at the new equilibrium, giving price and quantity.

Use the same order for “what, how, for whom” answers: state the question, say what the price mechanism does, then give the result for resources.

Where marks are usually lost

• Describing micro and macro by size alone, without saying what is studied.
• Naming a decision maker without saying what it decides.
• Giving a price rise as the response to a surplus. A surplus leads to a price fall.
• Stating that price is “set by the government” in a market system.
• Using the larger quantity to find revenue at a disequilibrium price.
• Leaving out the word “quantity” and writing that “demand equals supply”.
• Answering “for whom” with need rather than ability and willingness to pay.
• Giving a list of strengths with no limitation, or the reverse, in an evaluation.
• Leaving out units, or leaving percentage answers with no working.

Official syllabus

The Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2, published by Cambridge University Press & Assessment (Cambridge International Education), sections 2.1 and 2.2.