Cambridge IGCSE Economics: Scarcity, free and economic goods, and the factors of production (0455) – Revision Notes

These notes summarise sections 1.1 and 1.2 of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026. For full explanations read the study guide, then test yourself with the practice questions. Related: the Cambridge IGCSE Economics hub, the printable checklist, the wider basic problem revision notes and the free diagnostics. All numbers below are invented for practice.

1.1.1 The economic problem

Definition to learn: the economic problem is that resources are finite while wants are unlimited, so choices must be made.

Who	Finite	Wants	Typical choice
Consumer	Income, time	Many goods and services	What to buy
Worker	Hours, energy	Pay and leisure	How long to work, which job
Producer	Inputs and finance	Output and profit	What and how to produce
Government	Tax revenue, borrowing	Services, defence, transport	How to share the budget

Method in steps for a “government faces the economic problem” answer

1. State the finite resource (budget).
2. State the competing wants (health, schools, roads).
3. Show a choice is forced, with a number if you have one.
4. Say what is given up.

Worked reminder. Country A (invented) has 90 to spend but wants 50 + 40 + 30 = 120. Shortfall = 120 − 90 = 30.

1.1.2 Economic goods and free goods

Economic good	Free good
Scarce	Not scarce
Uses resources to produce or supply	Needs no resources to obtain
Has an opportunity cost	No opportunity cost
Normally has a price (possibly paid by someone else)	No price

Must-know distinctions

• A good with a zero price to the user is not necessarily free: free school meals still use resources.
• The same item can be free in one setting and economic in another: stream water for a village, piped water for a city.
• Very few goods are truly free. Say “in this setting” when you give an example.

1.2.1 The four factors, their nature and rewards

Factor	Definition	Examples	Reward
Land	Natural resources	Soil, forest, oil, fish, minerals, water	Rent
Labour	Human physical and mental effort	Skilled or unskilled, manual or office	Wages
Capital	Goods people have made to help make more goods	Machines, tools, factories, vans	Interest
Enterprise	Combining the other factors and bearing risk	Business owner, innovator	Profit

Nature of each factor, in one line each

• Land: a gift of nature, mostly fixed in total, may be renewable or non-renewable.
• Labour: people, so it has preferences and cannot be separated from the worker.
• Capital: produced by earlier production, wears out, needs saving or investment to build.
• Enterprise: decision making under uncertainty; the only factor whose reward can be negative.

Method in steps: income split. Add the three costs, subtract from revenue, the remainder is profit.

Worked reminder (a small bakery, invented): revenue 120,000; wages 54,000; rent 18,000; interest on an 80,000 loan at 7.5% is 6,000. Profit = 120,000 − (54,000 + 18,000 + 6,000) = 42,000, which is 35.0% of revenue.

Capital is not money. Money buys capital; it does not itself produce.

1.2.2 Mobility of the factors

• Geographical mobility: movement between places.
• Occupational mobility: movement between jobs or uses.

Factor	Higher mobility when	Lower mobility when
Land	Soil and planning rules allow another use	Fixed in place; zoning or poor soil blocks change
Labour	Skills are general, jobs are well advertised, housing is cheap, retraining is funded	Strong family ties, high moving cost, specialised skills, licences needed, age
Capital	General purpose (vans, computers), low transport and installation cost	Specialised, bolted down, costly to adapt
Enterprise	Knowledge of other markets, easy finance, simple registration	Local knowledge only, heavy regulation

Worked reminder. Net gain from moving = 4,000 − 1,500 = 2,500 a year. Payback = 6,000 ÷ 2,500 = 2.4 years.

Chain to use: low labour mobility → vacancies and unemployed workers in the same economy → lost output → policy to raise mobility (retraining, help with moving costs, better job information).

1.2.3 Quantity and quality of the factors

Factor	Raises quantity	Lowers quantity	Raises quality	Lowers quality
Land	Discovery, reclamation	Erosion, exhaustion, building over	Fertiliser, irrigation	Pollution, over-farming
Labour	Population growth, immigration, higher participation	Emigration, ageing	Education, training, health	Ill health, outdated skills
Capital	Net investment	Unreplaced depreciation	New technology	Poor maintenance, age
Enterprise	More start-ups, easier finance, rewarding tax system	Heavy regulation, tax on profit	Business training, experience	Weak information

Capital stock formula. Closing stock = opening stock + gross investment − depreciation. Net investment = gross investment − depreciation. Worked reminder: 500 + 60 − (500 × 0.08) = 500 + 60 − 40 = 520.

Productivity. Output per worker = total output ÷ number of workers. Example: 455 ÷ 7.0 = 65, up from 390 ÷ 6.5 = 60, a rise of 8.3%.

Participation rate. Labour force ÷ working-age population × 100. Example: 7.0 ÷ 10.0 × 100 = 70%. If the labour force becomes 7.56 and working-age population 10.5, the rate is 72%.

Evaluation lines

• Quantity can change fast; quality is slow and costly.
• More workers with no extra capital means less capital per worker.
• Non-renewable land resources fall in quantity as they are used.

Linking the sections

• Scarcity (1.1.1) is why the factors (1.2) matter: they are the finite resources, and their quantity and quality set how much can be produced.
• Economic goods (1.1.2) are the output of the factors. A free good needs none of them.
• Mobility (1.2.2) decides how quickly factors can move to where wants are greatest. Changes in quantity and quality (1.2.3) decide how much the economy can supply at all.

Example chain: a new factory opens (invented). A factory raises demand for labour in a town. Workers with the right skills and low moving costs arrive quickly (high mobility). Others need retraining (occupational mobility). Land is needed for the site, which cannot move and may be taken from farming, so the quantity of farmland falls. The firm borrows to buy machinery and pays interest. If it sells more than its costs, the owner earns profit; if not, a loss.

Command words. Define: give precise meaning. Explain: set out reasons or make the relationships between things clear, and say why and/or how. Calculate: work out from given facts, figures or information, and show your working. Discuss: write about the issue in depth in a structured way, and finish with a judgement that depends on stated conditions.

Quick self-test

1. Define the economic problem.
2. Give one example of the economic problem for a worker.
3. State two features of an economic good.
4. Is bottled water sold in a shop a free good? Explain.
5. State the reward to land and to capital.
6. A firm earns 90,000, pays wages 40,000, rent 12,000 and interest 3,000. Calculate profit.
7. Name one influence on the geographical mobility of labour and one on occupational mobility.
8. A farm has 200 hectares. Erosion removes 2% and 3 hectares are reclaimed. Find the new area.
9. A factory has 300 machines, depreciation of 10% and gross investment of 24. Find closing stock.
10. Name one cause of a rise in the quality of labour and one of a fall in the quantity of land.
11. Why can enterprise earn a negative reward?

Answers

1. Resources are finite and wants are unlimited, so choices must be made.
2. For example, a worker has a limited number of hours and must choose between overtime pay and leisure time.
3. Scarce; uses resources to supply; has an opportunity cost; has a price (any two).
4. No. It uses resources to collect, treat, bottle and transport, so it is scarce and has an opportunity cost.
5. Rent for land; interest for capital.
6. 90,000 − (40,000 + 12,000 + 3,000) = 90,000 − 55,000 = 35,000.
7. Any one each. Geographical: cost of moving, family ties, house prices. Occupational: lack of skills, no retraining, licensing rules.
8. Erosion = 200 × 0.02 = 4. New area = 200 − 4 + 3 = 199 hectares.
9. Depreciation = 300 × 0.10 = 30. Closing = 300 + 24 − 30 = 294.
10. Education or training (or better health care); erosion, exhaustion of a mineral or building on farmland.
11. Profit is a residual. If revenue is less than the payments to other factors, the entrepreneur makes a loss.

Where marks are usually lost

• Defining scarcity as “not enough of something” without saying resources are limited relative to wants.
• Calling a good with a zero price free. Check whether resources were used.
• Giving the wrong reward, such as wages for enterprise or profit for capital.
• Treating money as capital.
• Describing mobility in general, with no named factor and no named kind.
• Listing causes of change with no direction (does it raise or lower the quantity or quality?).
• Stating the effect on output without linking it to the factor that changed.
• Confusing quantity (how many) with quality (how productive).
• Leaving out units or the working in a calculation.

Official syllabus

Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2, published by Cambridge University Press & Assessment: sections 1.1 The nature of the economic problem and 1.2 The factors of production.