IGCSE Economics: The Allocation of Resources (Cambridge 0455)

This guide covers Topic 2 The allocation of resources, for Cambridge IGCSE Economics 0455, 2026 series (Version 2 — no significant changes affecting teaching from the prior version). Economics at 0455 is not tiered: all candidates study the same content.

Where this fits in 0455

The allocation of resources is the second of six topics in 0455, and it is the largest single topic in the syllabus at eleven sub-topics. Topic 1 established scarcity and opportunity cost as the underlying economic problem; Topic 2 answers the question that problem creates — how does a market economy actually decide what gets produced, how, and for whom? The demand and supply framework built here is the analytical tool the rest of the syllabus keeps returning to: Topic 3’s microeconomic decision makers are analysed using demand and supply in specific markets (labour, for instance), and Topic 4’s government policies are frequently evaluated in terms of how they shift a demand or supply curve. A candidate who has not internalised this topic’s diagrams will struggle with diagram-based questions almost everywhere else in the paper.

Syllabus coverage

CAMBRIDGE IGCSE ECONOMICS 0455 — TOPIC 2 THE ALLOCATION OF RESOURCES

• 2.1 Microeconomics and macroeconomics — the difference between microeconomics and macroeconomics and the decision makers involved in each.
• 2.2 The role of markets in allocating resources — how a market system works, including buyers, sellers, allocation of scarce resources, market equilibrium and disequilibrium; establishing that the economic problem creates three key allocation questions (what to produce, how, and for whom); how the price mechanism answers those questions.
• 2.3 Demand — defining, drawing and interpreting a demand curve, including movements along it (extensions and contractions); the link between individual and market demand through aggregation; the causes of shifts in demand (increases and decreases).
• 2.4 Supply — defining, drawing and interpreting a supply curve, including movements along it (extensions and contractions); the link between individual and market supply through aggregation; the causes of shifts in supply.
• 2.5 Price determination — drawing and interpreting demand and supply diagrams to establish market equilibrium price and quantity; drawing and interpreting disequilibrium diagrams showing shortages (demand exceeding supply) and surpluses (supply exceeding demand).
• 2.6 Price changes — changing market conditions as causes of price changes, and using demand and supply diagrams to illustrate these changes and their consequences for equilibrium price and quantity.
• 2.7 Price elasticity of demand (PED) — defining and calculating PED; drawing demand diagrams to show different degrees of elasticity; the determinants of PED; the relationship between PED and total spending on a product/revenue; the implications for consumers, producers and government decision-making.
• 2.8 Price elasticity of supply (PES) — defining and calculating PES; drawing supply diagrams to show different degrees of elasticity; the determinants of PES; the implications for decision-making.
• 2.9 Market economic system — defining the market economic system and its advantages and disadvantages, with examples of how it operates in different countries.
• 2.10 Market failure — key terms (public good, merit good, demerit good, social/external/private benefits and costs); causes of market failure limited to public goods, merit and demerit goods, external costs and benefits, abuse of monopoly power and factor immobility; the consequences, including over-consumption of demerit goods and goods with external costs and under-consumption of merit goods and goods with external benefits. Demand and supply diagrams for market failure itself are not required.
• 2.11 Mixed economic system — defining the mixed economic system; government intervention to address market failure, including maximum and minimum prices, indirect taxation and subsidies, plus the implications of regulation, privatisation, nationalisation and direct provision of goods; evaluating the effectiveness of government intervention.

How to approach it

Because this topic is diagram-heavy, the single best use of revision time is redrawing the demand and supply diagram from a blank page, repeatedly, until axis labels, curve direction and the vocabulary of “movement along” versus “shift of” a curve are automatic — a shift in demand or supply is a change in one of the non-price conditions (income, tastes, the price of related goods, for demand; costs of production, technology, the number of sellers, for supply), while a movement along either curve is caused only by a change in the good’s own price. Candidates commonly lose marks by describing a shift when the diagram actually shows a movement, or vice versa, so practise identifying which one a written scenario implies before attempting to draw it. Price elasticity in 2.7 and 2.8 is tested both as a calculation (percentage change in quantity divided by percentage change in price) and as an interpretation exercise, and the two must not be treated separately: after calculating a PED value, be ready to say what it means for a firm’s total revenue if it raises or lowers price — revenue rises when price falls on elastic demand, and falls when price rises on elastic demand, with the reverse holding for inelastic demand. This revenue/elasticity link is one of the most heavily examined ideas in the whole topic. Market failure in 2.10 is a common weak point because it introduces several similarly worded terms (merit vs demerit goods, private vs social vs external costs and benefits) in quick succession; build one consistent worked example for each category — healthcare as a merit good, cigarettes as a demerit good, a factory’s pollution as an external cost on third parties — rather than trying to hold the definitions in the abstract, and remember that the syllabus explicitly does not require demand and supply diagrams for market failure itself, so effort is better spent on explaining causes and consequences in words. Finally, when comparing the market economic system (2.9) with the mixed economic system (2.11), keep the comparison anchored in what problem government intervention is actually solving — maximum and minimum prices, indirect taxes and subsidies each correct a specific type of market failure or equity concern, and an answer that names the policy without linking it back to the market failure it addresses typically only earns partial credit.

Official syllabus

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