IGCSE Economics: The Allocation of Resources — Revision Notes

Condensed for quick recall of Topic 2’s eleven sub-topics. For the full explanation of each, use the Topic 2 study guide.

Movement vs shift — the distinction examiners test most

	Caused by	What happens to the curve
Movement along demand or supply	A change in the good’s own price	Same curve, different point on it (extension or contraction)
Shift of demand	A change in a non-price condition: income, tastes, price of substitutes/complements, population, advertising	Whole curve moves left (decrease) or right (increase)
Shift of supply	A change in: costs of production, technology, number of sellers, government tax/subsidy, weather (for some goods)	Whole curve moves left (decrease) or right (increase)

Rule of thumb: if the question changes the good’s own price, it is a movement; if it changes anything else, it is a shift.

Price determination and disequilibrium

• Equilibrium: quantity demanded = quantity supplied; price and quantity settle where the demand and supply curves cross.
• Shortage (excess demand): price is below equilibrium; quantity demanded > quantity supplied; price tends to rise.
• Surplus (excess supply): price is above equilibrium; quantity supplied > quantity demanded; price tends to fall.

Price elasticity — formulas and meaning

	Formula	Elastic	Inelastic
PED	% change in quantity demanded ÷ % change in price	|PED| > 1	|PED| < 1
PES	% change in quantity supplied ÷ % change in price	PES > 1	PES < 1

Revenue rule (the single most-examined PED link):

Demand is…	Price rises → revenue…	Price falls → revenue…
Elastic	Falls	Rises
Inelastic	Rises	Falls

PED determinants to cite in an explanation: number and closeness of substitutes, whether the good is a necessity or luxury, proportion of income spent on the good, time period (demand is more elastic over a longer time).

PES determinants: spare capacity, ease of storing stock, time period, ease of switching production between goods.

Market failure — key terms at a glance

Term	Meaning	Worked example
Public good	Non-excludable and non-rival; the free market under-provides it	Street lighting, national defence
Merit good	Under-consumed if left to the market; has positive externalities	Healthcare, education
Demerit good	Over-consumed if left to the market; has negative externalities	Cigarettes, alcohol
External cost	A cost of production/consumption borne by a third party, not reflected in market price	A factory’s pollution affecting nearby residents
External benefit	A benefit to a third party not reflected in market price	A vaccinated person reducing disease spread for others

Causes of market failure (limited list per the syllabus): public goods, merit and demerit goods, external costs and benefits, abuse of monopoly power, factor immobility.

Consequences: over-consumption of demerit goods and goods with external costs; under-consumption of merit goods and goods with external benefits. No demand/supply diagram is required for market failure itself.

Market economic system vs mixed economic system

	Market economic system	Mixed economic system
Who allocates resources	Price mechanism only	Price mechanism + government intervention
Typical tools	None — prices alone	Maximum/minimum prices, indirect taxes, subsidies, regulation, privatisation, nationalisation, direct provision
Main weakness addressed	N/A (this system doesn’t correct its own failures)	Corrects specific market failures and equity concerns

When answering a question comparing the two, always name which market failure or equity problem a specific tool addresses (e.g. a subsidy for merit goods corrects under-consumption; an indirect tax on demerit goods corrects over-consumption) rather than listing policy tools without linking them to a cause.

Aggregation: from individual to market

• Market demand is the horizontal sum of all individual demand curves in a market — add together the quantity each individual demands at each price.
• Market supply is the horizontal sum of all individual firms’ supply curves in the same way.
• This is why a change affecting many individuals or firms at once (a general fall in income; a new tax on all producers) shifts the whole market curve, not just one individual’s curve.

Common exam traps in this topic

• Writing “demand increases” when the diagram actually shows a movement along the curve caused by the good’s own price falling — the correct phrase is “quantity demanded extends.”
• Confusing a merit good with a public good: a merit good (e.g. education) can still be excludable and rival — its problem is under-consumption relative to the socially optimal amount, not non-excludability.
• Quoting a PED or PES value without a sign or magnitude context: a PED of -0.5 is inelastic (magnitude below 1) even though the negative sign is expected for demand; PES is not usually given a negative sign because supply curves normally slope upward.
• Naming a government intervention (e.g. “subsidy”) without stating which market failure it is correcting — full marks in evaluation questions require the causal link, not just the policy name.

Quick self-check

Before an exam, you should be able to, from memory and without notes: draw a demand and a supply curve and correctly label a shift versus a movement on each; calculate PED and PES from given percentage changes; state whether a good with a given PED value would see revenue rise or fall after a price change; explain how market demand and market supply are built from individual curves; and name, with one worked example each, a public good, a merit good, a demerit good, an external cost and an external benefit.

Official syllabus

Cambridge IGCSE Economics 0455 syllabus for 2026 (Version 2, December 2025) — cambridgeinternational.org. Verified 2026-09-02.