Cambridge IGCSE · 0455

Economics

Economic principles — Paper 1

Name: ____________________Date: October 14, 2026

1.
A country's consumer price index rises from 125 to 130. Which is the approximate inflation rate? A 4.0% B 5.0% C 25.0% D 30.0%
[1 mark]
Marking points
- Selects A: 4.0%, calculated as (130 − 125) ÷ 125 × 100.
Examiner tip: Percentage change is measured from the original index, not as a difference in index points alone.
2.
Which change is most likely to increase the supply of locally produced solar panels? A higher wage costs; B a subsidy to producers; C a rise in the product's price causing movement along supply; D a tax on imported components.
[1 mark] · no calculator
Marking points
- Selects B: a producer subsidy lowers costs and shifts supply to the right.
Examiner tip: Distinguish a shift of supply from a movement along the existing curve.
3.
A student can spend an evening either revising for an exam or working a part-time shift that pays $40. If she chooses to revise, what is her opportunity cost? A The time spent revising B The $40 she could have earned C Her exam grade D Nothing, revising has no cost
[1 mark] · no calculator
Marking points
- Selects B: the $40 she gives up is the next best alternative forgone.
Examiner tip: Opportunity cost is the value of the next best alternative given up, not the activity chosen itself.
4.
A farmer combines soil, a tractor, hired labourers and his own organisational skill to grow wheat. Which factor of production does 'hired labourers' represent? A Land B Labour C Capital D Enterprise
[1 mark] · no calculator
Marking points
- Selects B: labour is the human effort, physical or mental, used in production.
Examiner tip: The tractor is capital, the soil is land, and the farmer's own organising skill is enterprise.
5.
A country's production possibility curve shows combinations of food and machinery it can produce. A point inside the curve indicates: A full and efficient use of resources B unemployed or underused resources C an impossible combination D economic growth
[1 mark] · no calculator
Marking points
- Selects B: a point inside the curve shows resources are not being fully or efficiently used.
Examiner tip: Only points on the curve itself show full, efficient use of all available resources.
6.
Explain one benefit and one drawback to a worker of a high degree of specialisation in a single task.
[2 marks] · no calculator
Marking points
- States a benefit such as higher productivity or skill gained from repeated practice at one task.
- States a drawback such as monotonous, less varied work, or vulnerability if that specific skill becomes less needed.
Examiner tip: Specialisation raises output per worker but narrows the range of skills and tasks a worker can fall back on.
7.
In a planned (command) economy, who primarily decides what goods and services are produced? A Private firms responding to consumer demand B The government C Individual consumers directly D Foreign investors
[1 mark] · no calculator
Marking points
- Selects B: the government owns resources and makes the central production decisions.
Examiner tip: Contrast this with a market economy, where price signals and private firms decide what is produced.
8.
The price of a good rises from $10 to $12, and the quantity demanded falls from 200 to 180 units. Calculate the price elasticity of demand (ignoring the sign) and state whether demand is price elastic or inelastic.
[4 marks]
Marking points
- Calculates the percentage change in quantity demanded as −10%.
- Calculates the percentage change in price as 20%.
- Divides to find PED = 0.5 (ignoring the negative sign).
- States that demand is price inelastic because the value is less than 1.
Examiner tip: Price elasticity of demand = percentage change in quantity demanded ÷ percentage change in price.
9.
An economic system in which both the government and private individuals make production decisions is called: A A market economy B A planned economy C A mixed economy D A subsistence economy
[1 mark] · no calculator
Marking points
- Selects C: a mixed economy combines market forces and government decision-making.
Examiner tip: Most real-world economies are mixed, blending private enterprise with some government ownership or regulation.
10.
A sudden increase in consumer income shifts the demand curve for a normal good to the right, with supply unchanged. Explain the effect on the equilibrium price and quantity.
[3 marks] · no calculator
Marking points
- Explains that at the old equilibrium price, quantity demanded now exceeds quantity supplied, creating a shortage.
- Explains that this shortage pushes the price upward until a new, higher equilibrium price is reached.
- States that the equilibrium quantity also rises, shown by movement along the supply curve to the new price.
Examiner tip: A rightward shift in demand, with supply unchanged, always raises both the equilibrium price and quantity.
11.
Distinguish between a positive economic statement and a normative economic statement, using an example of each.
[2 marks] · no calculator
Marking points
- Explains that a positive statement is a factual claim that can be tested and proven true or false (e.g. ‘inflation was 4% last year’).
- Explains that a normative statement expresses an opinion or value judgement about what should happen (e.g. ‘the government should raise the minimum wage’).
Examiner tip: A positive statement can in principle be checked against data; a normative statement depends on values and cannot be simply proven true or false.
12.
Explain what is meant by economic growth, and how it is usually measured.
[2 marks] · no calculator
Marking points
- Explains that economic growth is an increase in the total output (goods and services) produced by an economy over time.
- States that it is usually measured as the percentage change in real GDP (gross domestic product) from one period to the next.
Examiner tip: ‘Real’ GDP adjusts for inflation, so growth reflects a genuine increase in output, not just higher prices.
13.
Distinguish between demand-pull inflation and cost-push inflation, using one possible cause of each.
[2 marks] · no calculator
Marking points
- Explains that demand-pull inflation occurs when total demand in the economy rises faster than output can increase, pulling prices up; for example, a rise in consumer spending.
- Explains that cost-push inflation occurs when rising production costs push firms to raise prices; for example, a rise in the price of imported raw materials.
Examiner tip: Demand-pull inflation is pulled by too much spending; cost-push inflation is pushed by rising costs of production.
14.
Explain what is meant by cyclical unemployment, and when it is most likely to occur.
[2 marks] · no calculator
Marking points
- Explains that cyclical unemployment is caused by a fall in overall demand in the economy, leading firms to reduce output and lay off workers.
- States that it is most likely to occur during a recession or economic downturn.
Examiner tip: Cyclical unemployment rises and falls with the economic cycle, unlike structural unemployment, which is caused by permanent changes in industry.
15.
Explain one function that money performs in an economy.
[2 marks] · no calculator
Marking points
- Identifies a valid function, such as acting as a medium of exchange, a store of value, or a unit of account.
- Explains this function with a brief example, such as money allowing goods to be exchanged without needing to barter directly.
Examiner tip: Without money as a medium of exchange, trade would rely on barter, which requires both parties to want exactly what the other offers.
16.
Explain the difference between a free good and an economic good.
[2 marks] · no calculator
Marking points
- Explains that a free good is available in unlimited supply at a zero price, such as sunlight or air, so no choice about its use is required.
- Explains that an economic good is scarce relative to demand, so producing or obtaining it involves an opportunity cost.
Examiner tip: Scarcity is what makes a good an 'economic' good — if something is unlimited, there is no need to choose between competing uses for it.
17.
Coffee and sugar are often bought and used together. Explain, using this example, what is meant by complementary goods.
[2 marks] · no calculator
Marking points
- Explains that complementary goods are consumed together, so a change in the price of one affects demand for the other.
- Applies this to the example: if the price of coffee rises sharply, demand for sugar is likely to fall too, since less coffee is bought.
Examiner tip: For complements, a rise in one good's price reduces demand for the other (its demand curve shifts left); for substitutes, it increases demand for the other (shifts right).
18.
Tea and coffee are often seen as alternatives to each other. Explain, using this example, what is meant by substitute goods.
[2 marks] · no calculator
Marking points
- Explains that substitute goods can be used in place of one another to satisfy a similar need.
- Applies this to the example: if the price of coffee rises, some consumers are likely to switch to tea instead, raising demand for tea.
Examiner tip: When the price of one substitute rises, demand for the other substitute typically rises as consumers switch.
19.
Explain what is meant by derived demand, using the demand for steel as an example.
[2 marks] · no calculator
Marking points
- Explains that derived demand is demand for a good or resource that arises from the demand for another good it is used to produce.
- Applies this to the example: demand for steel rises and falls with demand for products made from it, such as cars or buildings.
Examiner tip: Demand for labour is also a classic example of derived demand — it depends on demand for the goods or services that labour produces.
20.
Explain how the division of labour, where workers specialise in small, repeated tasks on a production line, can increase a factory's total output.
[2 marks] · no calculator
Marking points
- Explains that workers become faster and more skilled at a single repeated task than they would be performing many different tasks.
- Explains that this reduces time lost switching between tasks, so output per worker, and therefore total factory output, rises.
Examiner tip: Division of labour raises productivity through practice and reduced task-switching, but can make work repetitive for individual workers.
21.
A farmer keeps adding workers to a fixed amount of land. Explain what the law of diminishing returns predicts will eventually happen to the extra output produced by each additional worker.
[2 marks] · no calculator
Marking points
- Explains that as more workers are added to the fixed land, the extra output produced by each additional worker will eventually start to fall.
- Explains that this happens because each worker has less of the fixed resource (land) to work with as more workers are added.
Examiner tip: Diminishing returns applies in the short run, when at least one factor of production (here, land) is fixed and cannot be increased.
22.
When the price of a good rises by 10%, the quantity supplied rises by 25%. Calculate the price elasticity of supply, and state whether supply is elastic or inelastic.
[3 marks]
Marking points
- Uses the formula: price elasticity of supply = percentage change in quantity supplied ÷ percentage change in price.
- Calculates 25 ÷ 10 = 2.5.
- States that supply is elastic because the value is greater than 1.
Examiner tip: A supply elasticity greater than 1 means quantity supplied responds more than proportionally to a price change.
23.
When consumer income rises by 10%, demand for a particular good rises by 15%. Calculate the income elasticity of demand, and state what this tells us about the type of good.
[3 marks]
Marking points
- Uses the formula: income elasticity of demand = percentage change in quantity demanded ÷ percentage change in income.
- Calculates 15 ÷ 10 = 1.5.
- States that this is a normal good (and a luxury, since the value is greater than 1), since demand rises as income rises.
Examiner tip: A positive income elasticity means a normal good; a value above 1 specifically suggests a luxury good.
24.
Explain what cross elasticity of demand measures, using the relationship between butter and margarine as an example.
[2 marks] · no calculator
Marking points
- Explains that cross elasticity of demand measures how responsive demand for one good is to a change in the price of another good.
- Applies this to the example: since butter and margarine are substitutes, a rise in the price of butter is likely to increase demand for margarine, giving a positive cross elasticity.
Examiner tip: A positive cross elasticity indicates substitutes; a negative cross elasticity indicates complements.