IGCSE Business: Economic issues (Cambridge 0264) – Revision Notes

These notes condense section 6.1, Economic issues, of the Cambridge IGCSE Business 0264 syllabus for examination in 2027, 2028 and 2029 (points 6.1.1 Business cycle and 6.1.2 Effects of government policy). For full explanations and worked examples, read the study guide first, then test yourself with the practice questions. Use the course hub, the printable checklist and the free diagnostics to find weak spots. All businesses and figures below are invented, and money is in dollars.

Key definitions

Term	Meaning
Business cycle	The repeating pattern of growth, boom, recession and slump in the economy
Economic growth	An increase in the output of the whole economy over time
Inflation	A general rise in prices over time, shown as a percentage a year
Tax on profit	Tax paid by a business on the profit it makes
Tax on income	Tax taken from what people earn
Disposable income	Income left after tax, available to spend or save
Interest rate	The yearly price of borrowing, as a percentage of the sum borrowed; savers earn it as a return
Government spending	Money the government spends on services, projects and support

The four stages

Stage	Output and jobs	Business effect
Growth	Output rising, unemployment falling	Sales up; invest and hire
Boom	Output and spending at peak; jobs easy to find	Demand very high; costs and prices rise; capacity stretched
Recession	Output falling, unemployment rising	Sales down; cut costs; delay investment
Slump	Output low for a long time; high unemployment	Closures likely; survival and cash flow come first

Order to remember: growth, boom, recession, slump, then back to growth.

Employment, inflation and growth

• Higher employment: more income, more demand; harder to recruit; wages may rise.
• Higher unemployment: less demand; easier to recruit; less pressure on wages.
• Inflation: costs rise; margins fall unless prices rise; customers cut back or switch to cheaper brands; planning is harder.
• Economic growth: rising incomes, more demand (especially for non-essentials), room to expand.
• Slow or negative growth: weaker sales and more price cutting.

Taxes

Change	Effect on the business
Tax on profit rises	Less profit after tax; fewer funds to invest or pay owners
Tax on profit falls	More profit after tax; more funds to invest or pay owners
Tax on income rises	Lower disposable income; lower demand, mainly for non-essentials
Tax on income falls	Higher disposable income; higher demand

Method: profit after tax.

1. Tax = profit before tax × rate.
2. Profit after tax = profit before tax − tax.
3. For a change, work out both figures and subtract.

Reminder: profit before tax 150,000 at 20% gives tax of 30,000 and profit after tax of 120,000. At 25% it gives 37,500 and 112,500. The business keeps 7,500 less.

Method: income after tax. Net income = gross income × (1 − rate). Gross 3,000 at 20% leaves 2,400; at 25% it leaves 2,250.

Government spending

Change	Effect
Spending rises	More contracts for firms such as builders; more jobs and income; more demand nearby
Spending falls	Lost contracts; fewer jobs; lower incomes; lower demand

Chain to write: spending changes, then incomes and orders change, then the firm’s sales and plans change.

Interest rates

Rate rises	Rate falls
Interest on loans costs more	Interest on loans costs less
New borrowing dearer; projects dropped	Borrowing for growth cheaper
Customers borrow and spend less; saving more attractive	Customers borrow and spend more

Method: interest cost. Interest = loan × rate. A loan of 200,000 at 5% costs 10,000; at 7% it costs 14,000. That is 4,000 more, or 40% more, from a rise of 2 percentage points.

Responses

Change	Possible response
Profit tax up	Cut costs; raise prices; delay investment
Profit tax down	Invest; reward owners; cut prices
Income tax up	Promote cheaper lines; discount
Income tax down	Promote higher-value lines
Interest up	Repay loans; use retained profit; delay expansion
Interest down	Borrow to expand or replace equipment

A response needs a reason that fits the case: can the business pass on costs, or are customers price sensitive?

Must-know distinctions

• Tax on profit is paid by the business. Tax on income is paid by individuals and changes their spending power.
• Recession is a fall in output. Slump is a long, deep low point after it.
• Inflation is a rise in the price level. A fall in the rate of inflation still means prices are rising, just more slowly.
• Percentage point change (5% to 7% is 2 points) differs from percentage change (interest up 40%).
• Effect on the business differs from effect on its customers. Interest rates act on both.

Business cycle: what to do at each stage

Stage	Sensible business actions	Risk to watch
Growth	Build stock, recruit, invest in capacity	Expanding faster than demand lasts
Boom	Raise prices carefully; train and keep staff; plan for supply delays	Rising wages and material costs; overstretch
Recession	Cut waste, run promotions, add lower-priced lines, protect cash	Cutting so deeply that quality or service suffers
Slump	Focus on cash flow and loyal customers; delay big spending	Closure if costs cannot be covered

Which businesses feel changes most

• Sellers of non-essentials (holidays, restaurants, furniture) see demand move most when incomes, taxes or interest rates change.
• Sellers of basic goods (bread, rice, soap) see smaller swings.
• Firms with large loans feel interest rate changes in their own costs.
• Firms that depend on public contracts feel changes in government spending most.
• Firms selling big purchases on credit, such as cars or kitchens, feel interest rate changes through their customers.

Case-study method for economic issues

1. Identify the change: which tax, rate or stage is mentioned, and in which direction.
2. Apply it: name the product, the customers and the cost the case describes.
3. Analyse the chain: change, then customers’ or the firm’s money, then sales or costs, then profit or decisions.
4. Evaluate: say how large the effect is for this firm, over what time, and what the firm could do.
5. Conclude: give a clear judgement, such as “the cost rise is manageable because margins are wide”.

Worked reminder: Lowrie Mills has a loan of 80,000 dollars. The rate rises from 6% to 9%. Extra interest is 80,000 × 0.03 = 2,400 dollars a year. If annual profit before interest is 20,000 dollars, profit after interest falls from 15,200 to 12,800. That is a fall of 2,400, or about 15.8% of 15,200. The effect is noticeable but not fatal, so the firm might repay part of the loan rather than cut jobs.

Quick self-test

1. Name the four main stages of the business cycle in order.
2. State one effect of a boom on a business.
3. A basket of goods costs 400 dollars last year and 424 this year. Calculate the rate of inflation.
4. Explain one way that rising unemployment can help a business.
5. A business has profit before tax of 90,000 dollars and a tax rate of 20%. Calculate profit after tax.
6. The tax rate in question 5 rises to 24%. By how much does profit after tax fall?
7. An employee earns 2,000 dollars a month and tax rises from 20% to 25%. Calculate the change in monthly income after tax.
8. Give one way a cut in government spending on roads could affect a haulage firm.
9. A loan of 60,000 dollars carries interest of 5%. The rate rises to 8%. Calculate the extra annual interest.
10. Suggest one response to higher interest rates for a firm with a large loan.

Answers

1. Growth, boom, recession, slump.
2. Demand is high, so sales rise; or costs and wages rise; or capacity is stretched.
3. (424 − 400) / 400 × 100 = 6%.
4. More people look for work, so recruitment is easier and wage pressure is lower.
5. Tax = 90,000 × 0.20 = 18,000. Profit after tax = 72,000 dollars.
6. Tax = 90,000 × 0.24 = 21,600. Profit after tax = 68,400. It falls by 3,600 dollars.
7. At 20% the employee keeps 1,600. At 25% they keep 1,500. Income after tax falls by 100 dollars.
8. Fewer road projects mean less demand for transporting materials, so the haulage firm may lose orders and revenue.
9. Interest at 5% = 3,000. Interest at 8% = 4,800. Extra interest = 1,800 dollars a year.
10. Use retained profit to repay part of the loan; delay expansion; or cut costs to protect profit.

Where marks are usually lost

• Naming a stage of the cycle but not saying what it does to this business.
• Writing that “everyone will spend less” without linking it to the product sold.
• Confusing tax on profit with tax on income.
• Stating a tax effect without a figure when the case provides numbers to calculate with.
• Confusing a percentage point change with a percentage change.
• Forgetting that higher interest rates reduce customer demand as well as raising loan costs.
• Giving a response (such as raising prices) without checking whether customers would accept it.
• Stopping at one effect when the question asks you to analyse or evaluate, with no judgement at the end.

Frequently asked questions

What are the four stages of the business cycle? The four stages are growth, boom, recession and slump, after which the economy returns to growth.

What is the difference between a tax on profit and a tax on income? A tax on profit is paid by a business on the profit it makes. A tax on income is paid by individuals on what they earn, which reduces their disposable income and so their spending.

What is the difference between a percentage point change and a percentage change? A rise in the interest rate from 5% to 7% is a 2 percentage point change, but it raises the interest bill by 40%. Mixing up the two is a common error.

Which businesses are most affected by economic changes? Sellers of non-essentials such as holidays, restaurants and furniture see demand move most, while sellers of basic goods see smaller swings. Firms with large loans, firms that depend on public contracts and firms selling big purchases on credit are also strongly affected.

Official syllabus

These notes follow the Cambridge IGCSE Business 0264 syllabus for examination in 2027, 2028 and 2029, published by Cambridge University Press & Assessment (Cambridge International), section 6.1 Economic issues.