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

This guide teaches sections 1.1 and 1.2 of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026: the nature of the economic problem (1.1.1 and 1.1.2) and the factors of production (1.2.1 to 1.2.3). Economics 0455 is not tiered, so everyone studies all of it. All figures and places in the worked examples are invented for practice and are not real statistics.

Related pages: revision notes for this unit, practice questions for this unit, the wider basic economic problem study guide, the Cambridge IGCSE Economics hub, the printable checklist and the free diagnostics.

Outcomes this guide teaches

Section	Outcome
1.1.1	Define the economic problem (finite resources, unlimited wants) and give examples for consumers, workers, producers and governments
1.1.2	Explain the difference between economic goods and free goods
1.2.1	Define land, labour, capital and enterprise; give examples of the nature of each; state each reward
1.2.2	Explain the influences on the mobility of each factor
1.2.3	Explain the causes of changes in the quantity and quality of each factor

1.1.1 The economic problem

Resources are finite and wants are unlimited. The economic problem is that there are never enough resources to satisfy every want, so choices must be made. This is scarcity. Scarcity is not the same as poverty or shortage: rich countries face it too, because wants keep growing as incomes rise.

Each decision maker meets the problem in a different form.

Decision maker	Limited resource	Unlimited wants	Choice forced
Consumer	Income and time	Clothes, travel, entertainment	Which items to buy, which to go without
Worker	Hours in the week	Higher pay, leisure, rest	How many hours to work, which job to take
Producer	Finance, workers, machinery, land	Higher output and profit	What to produce, which inputs to use
Government	Tax revenue and borrowing capacity	Hospitals, schools, defence, roads	Where to spend and where to cut back

Worked example: a government choice. The government of Country A (an invented country) expects 90 units of tax revenue next year. It wants to spend 50 on health, 40 on schools and 30 on roads. The total wanted is 50 + 40 + 30 = 120. Resources are 90, so the shortfall is 120 − 90 = 30. Something must be reduced or dropped. Finite resources, unlimited wants and the need to choose are all visible in this one small case.

Evaluation point. Governments can borrow to close a gap, but borrowing is also limited, and repayment uses future resources. Scarcity moves into the future; it does not disappear.

1.1.2 Economic goods and free goods

An economic good is scarce: producing it uses resources, so it has an opportunity cost and normally a price. A free good is not scarce: it is available in unlimited quantity, so no resources need to be given up to obtain it and no price is charged. The test is about resources, not about the label on a till.

Worked example: is water a free good?

1. A family in a remote village collects rainwater from a stream. Nobody else is deprived by their use and no resources are used. In this case it behaves like a free good.
2. A city dweller receives piped water. Reservoirs, pipes, treatment plants and workers are needed, so resources are used up. It is an economic good, and it has a price.
3. Conclusion: one substance can be free in a remote village but economic in a city. Always say where and how it is supplied.

Be careful with a second trap. A good that is given away is not automatically free. A charity may hand out food at no charge to the user, but the food still used resources, so it remains an economic good with a cost to someone.

Very few goods are truly free. Sunshine on a beach is the usual example, but the service of safe access, cleaning and lifeguards around it is an economic good.

1.2.1 Land, labour, capital and enterprise

The resources used to make goods and services are called factors of production. Money is not a factor: it buys factors.

Factor	Definition	Examples of its nature	Reward
Land	All natural resources, including what is on, in and above the earth	Farmland, forests, fish stocks, oil, minerals, water, sun and wind	Rent
Labour	The physical and mental effort of people in production	Skilled and unskilled, manual and office work, full-time and part-time	Wages (and salaries)
Capital	Goods that people have made and that are used in making further goods and services	Machines, tools, factories, delivery vehicles, computer systems	Interest
Enterprise	Bringing the other factors together and carrying the risk of production	The business owner who sets up, decides and bears losses	Profit

Nature of each factor. Land is a gift of nature and is mostly fixed in total supply, though some can be improved. Labour is human, so it cannot be separated from the worker, who has feelings, needs and a preferred place to live. Capital is made by earlier production and wears out, so it must be replaced. Enterprise involves decisions under uncertainty; the entrepreneur may earn nothing or make a loss.

Worked example: sharing out the income of a small bakery. The bakery (invented) sells 120,000 of goods in a year. It pays 54,000 in wages and 18,000 to rent the premises. It borrowed 80,000 for ovens at 7.5% interest, so interest is 80,000 × 0.075 = 6,000. Profit is what remains.

Revenue                120,000
Wages (labour)          54,000   = 45.0% of revenue
Rent (land)             18,000   = 15.0%
Interest (capital)       6,000   =  5.0%
Profit (enterprise)     42,000   = 35.0%   (120,000 - 78,000)
Check: 54,000 + 18,000 + 6,000 + 42,000 = 120,000

Profit is a residual: it is what is left after the other factors are paid. If revenue fell to 70,000, profit would be 70,000 − 78,000 = −8,000, a loss borne by the owner. That is why enterprise is the risk-taking factor.

1.2.2 Mobility of the factors

Mobility is how easily a factor can be moved between uses. There are two kinds. Geographical mobility is moving from one place to another. Occupational mobility is changing from one job or use to another.

Factor	Main influences on mobility
Land	Geographically immobile (a field cannot move). Occupationally mobile only if the soil, planning rules and cost of conversion allow, for example farmland to housing
Labour	Family ties, house prices and rents, cost of moving, information about jobs, language, skills and qualifications, retraining available, age, licensing rules
Capital	Specific machines are hard to move or adapt, but general-purpose items (vans, computers) are mobile; transport cost, installation cost, age of equipment
Enterprise	Fairly mobile: an entrepreneur can start in another place or industry, but is limited by knowledge of the market, capital needed and local rules

Worked example: should a worker move? A worker in Town P could earn 4,000 a year more in Town Q. Housing in Q costs 1,500 more a year, and the move costs 6,000 once.

1. Net annual gain = 4,000 − 1,500 = 2,500.
2. Years to recover the moving cost = 6,000 ÷ 2,500 = 2.4 years.
3. If the worker expects to stay longer than 2.4 years and values the gain above family ties, moving makes sense. Where the gap is smaller or the move costs more, the worker stays: labour is then immobile.

Chain of reasoning. Low mobility of labour means vacancies and unemployment can exist together. If unemployed bakers in one region cannot take electrician vacancies elsewhere because they lack skills (occupational) or cannot afford to move (geographical), output is lost. Policies such as retraining grants and help with moving costs work by raising mobility.

1.2.3 Changes in the quantity and quality of the factors

Quantity is how much of a factor there is. Quality is how productive each unit is. Both can rise or fall, and either one shifts what an economy can produce.

Factor	Quantity rises	Quantity falls	Quality rises	Quality falls
Land	Discovery of resources, reclamation from sea	Erosion, exhaustion of non-renewable resources, building on farmland	Fertilisers, irrigation, drainage	Over-farming, pollution, deforestation
Labour	Population growth, immigration, higher participation, later retirement	Emigration, ageing, fewer people of working age	Education, training, health care, experience	Poor health, skills becoming out of date
Capital	Net investment in new machines and buildings	Wear and tear (depreciation) not replaced, war damage	New technology, better design	Ageing equipment, poor maintenance
Enterprise	More start-ups, encouraged by finance, low regulation, taxes that reward risk	Higher tax on profit, heavy regulation, difficulty borrowing	Business education, mentoring, experience	Weak business information, fear of failure

Worked example: capital stock. Country A starts the year with 500 machines. They wear out at 8% a year, and firms buy 60 new ones.

• Depreciation = 500 × 0.08 = 40
• Net investment = 60 − 40 = 20
• Closing stock = 500 + 20 = 520, a rise of 20 ÷ 500 = 4.0%

The quantity of capital rose only because gross investment (60) exceeded depreciation (40). If firms bought only 30, the stock would fall to 490.

Worked example: quality of labour. In Country A the labour force of 7.0 million is made up of 6.5 million employed workers producing 390 (in billions) of output, so output per worker is 390 ÷ 6.5 = 60 thousand. After a training programme, 7.0 million workers produce 455. Output per worker is now 455 ÷ 7.0 = 65 thousand, a rise of 8.3%. Output rose by 16.7% (455 ÷ 390 = 1.1667), partly from 7.7% more workers and partly from higher productivity.

Worked example: quality of land. Country A has 8,000 hectares of farmland. Erosion removes 1.5% a year (8,000 × 0.015 = 120 hectares), while 200 hectares are reclaimed. Net change = +80, closing area 8,080. Fertiliser then raises yield from 3.0 to 3.6 tonnes per hectare, a rise of 20%. Both quantity and quality improved, so output rose from 8,000 × 3.0 = 24,000 tonnes to 8,080 × 3.6 = 29,088 tonnes.

Evaluation. Quantity can rise quickly (open the borders, build a factory) but quality takes years (education, experience). Gains in one factor may be cancelled by falls in another. Greater population adds labour, but without matching capital and land, each worker has less to work with.

Common errors

• Writing that scarcity means a product is “rare”. It means resources are limited relative to wants.
• Calling money capital. Money is a means of buying capital.
• Saying a free good is one with a zero price. A good supplied at no charge by a charity still uses resources.
• Giving “profit” as the reward for all factors. Each factor has its own reward.
• Mixing up the quantity and quality of labour. More workers is quantity; better-trained workers is quality.
• Describing mobility without saying which kind, or which factor.

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.