Is this saying Cairo (upper case) can't install because 'cairo' (lower case) can't be found?
That's correct - 'cairo' (lower case) is the C library that needs to be found.
does it want me to create the .pc file
No - the .pc file will be created when 'cairo' is installed. If it's just a problem of pkg-config not knowing where this .pc file is located, set the PKG_CONFIG_PATH environment variable to its location.