Chapter 1: Basic Economic Problem

Question 1

Define a resource [1]

Answer 1

Resources are the inputs required to produce a good or a service

Question 2

Define the basic economic problem [1]

Answer 2

There are finite resources and infinite wants

Question 3

What does the basic economic problem lead to? [1]

Answer 3

Scarcity

Question 4

Compare an economic and free good with an example [4]

Answer 4

1. A free good is one that doesn’t require scarce resources for its production and are abundant in supply. Free goods don’t have an opportunity cost.
   For example: sunlight
2. An economic good is one that requires scarce goods for its production and is hence limited in supply. Economic goods have an opportunity cost.
   For example: paper

Question 5

Describe the flowchart of the basic economic problem [3]

Answer 5

Basic economic problem –> scarcity –> choice –> opportunity cost (only when the other choice holds value is there an opportunity cost/loss)

Question 6

Define opportunity cost [1]

Answer 6

Opportunity cost is the value of the next best alterative forgone

Question 7

Which choice do all economies chose? [1]

Answer 7

All individuals, firms and macroeconomies choose the choice with the least opportunity cost

Question 8

What are the factors of production [4]

Answer 8

1. Land (any natural resource)
2. Labor (a workforce)
3. Capital (any man-made resource)
4. Enterprise

Question 9

What is meant by land as a factor of production? [1]

Answer 9

Any natural resource is called land. For example: crude oil, trees, ores

Question 10

What is meant by labor as a factor of production? [1]

Answer 10

The physical and mental effort which goes into the production of a good or service

Question 11

What is meant by capital as a factor of production? [1]

Answer 11

Any man-made resource is known as capital

Question 12

What is meant by enterprise as a factor of production? [1]

Answer 12

The factor of production which takes the risk of employing other factors of production to produce a good or service

Question 13

What is the reward for each factor of production? [4]

Answer 13

Land: rent
Labor: wages
Capital: interest
Enterprise: profit

Question 14

What is meant by a producer? [1]

Answer 14

The people and organizations that make and sell goods and services are known as producers

Question 15

What is meant by consumption? [1]

Answer 15

The using up of goods and services to satisfy human needs and wants.

Question 16

Define consumer expenditure [1]

Answer 16

The total amount a consumer spends each period on economic goods

Question 17

Compare consumer and capital goods with examples [6]

Answer 17

1. Consumer goods are economic goods that satisfies an immediate consumers need or want. There are two types: durable and non-durable. Durable goods can be used repeatedly over many months or years to satisfy a want before they eventually wear out. For example: cars, computers, televisions. Non durable goods are perishable or used up quickly. For example: food, drink, petrol.
2. Capital goods are human made resources used in the production of other goods and services. The purchase of capital goods is known as an investment. Investments in capital goods like factories and machines increase the capacity of organization to produce goods and services. For example: drills, tractors, power stations and factory buildings.

Question 18

Define factor mobility [1]

Answer 18

Factor mobility is the ease with which resources or factors of production can be moved from one productive activity to another without incurring significant costs or loss of output.

Question 19

Define the two types of mobility of factors of production [2+2]

Answer 19

1. Geographical: refers to the willingness and ability of a person to relocate from one area to another due to employment purposes (in context of labor)
2. Occupational: easy with which a person can change between jobs (in context of labor)

Question 20

Factors which affect geographical and occupational mobility [4]

Answer 20

1. Geographical: family ties, related communities, cost of living
2. Occupational: cost, training period, educational profession (if their skill base is transferable between different occupations, their occupational mobility is high)

Question 21

Why does unemployment happen?
What is structural unemployment? [2]

Answer 21

1. When the skills of an individual are outdated or unrequired by an economy
2. When many workers are not able to easily transfer between occupations in an economy

Question 22

What are factor rewards? [1]

Answer 22

The payment different factors of production require and receive in order to participate in productive activity

Question 23

Why do some consumers, workers, producers and governments have more choices available to them than others? [2]

Answer 23

1. Scarce resources are unevenly distributed between and within countries
2. Some countries have more resources than others / relative lack of resources in poorer countries

Question 24

What is the impact of good factor mobility on the total production? [2]

Answer 24

1. Increases production - better efficiency
2. Factors can be used for more / other productive tasks

Question 25

Why is factor mobility important? [3]

Answer 25

1. In case of change in consumers demand 2. To produce different goods 3. Producers can switch between different productive tasks

Question 26

What is the PPC (production possibility curve)? [2]

Answer 26

It is the graphical representation of all the possible combinations of two goods that can be produced by the optimum utilization of available resources.

Question 27

Why is the PPC concave? [1]

Answer 27

Due to the law of increasing opportunity cost

Question 28

Describe the occupational and geographical mobility of each factor of production [8]

Answer 28

Land: geographically is immobile, but can be party occupationally mobile (least mobile factor of production) Labor: mostly geographically and occupationally immobile (varies) Capital: mostly geographically and occupationally immobile (varies) Enterprise: most mobile factor of production (both geographically and occupationally as the same business is likely to do well in a different country, and the skill sets required can be used in many industries)

Question 29

Where would points x,y,z be located on a PPC assuming they were inefficient, efficient and unattainable? [3]

Answer 29

X - inside the curve Y - on the curve Z - Outside the curve

Question 30

What are the 4 key assumptions while drawing a PPC? [4]

Answer 30

1. Only 2 goods/services can be produced 2. Full employment of resources 3. Fixed resources 4. Fixed technology

Question 31

What causes an outward shift in the PPC? [2]

Answer 31

1. Increase in quantity of resources (more resources so more output potential increases) 2. Increase in quality of resources (better allocation of resources due to better quality so output potential increases)

Question 32

How would mass unemployment affect a PPC? [1]

Answer 32

It wouldn't move the curve as the quantity of resources available remains the same, it will just move inside the curve signifying inefficient use of resources.

Question 33

What would cause an inward shift in the PPC? [1]

Answer 33

1. Depletion/reduction in quantity of resources

Question 34

How does the PPC represent scarcity and opportunity cost? [3]

Answer 34

1. The PPC itself represents scarcity as the curve shows the maximum possible/potential a firm/economy can output given a FIXED set of resources 2. Point X (labeled outside the PPC) is unattainable due to the lack of resources which also represents scarcity 3. Movement along the PPC shows opportunity cost, as an economy/firm is choosing to allocate more resources to a good, forgoing the opportunity to produce more of the other good (It is a PPC question: other 3 marks will be gotten from diagram)

Question 35

What causes changes in the quantity/quality of factors of production? (affects the PPC) [6]

Answer 35

1. Cost (labor costs, raw materials) 2. Government policies (taxes, subsidies) 3. New technology 4. Migration of labor 5. Improved education and healthcare 6. Weather conditions (for agricultural products)

Question 36

What causes a shift along a PPC?

Answer 36

Reallocation of resources from one productive use to another

Question 37

How can factor quantity of land, labor, capital and enterprise be increased? [2+2+2+2]

Answer 37

1. Land: increase in rent may persuade more landowners to release their land into productive uses, new discoveries of natural resources, making use of previously unused natural resources, planting more trees/plants, recycling/reusing 2. Labor: increase in wages may persuade more people to supply their labor to firms, an increase in the working population, improvements in healthcare 3. Capital: a decision by producers to produce more capital goods, an increase in interest payments 4. Enterprise: increase in the prices consumers are willing to pay for products may increase profits and encourage more people to start firms, fall in the number of paid jobs and rise in unemployment

Question 38

How can factor quality of land, labor, capital and enterprise be increased? [4]

Answer 38

1. Land: fertilizers and better land management, new technology, reducing use of chemicals in farming which can cause pollution, using organic and humane animal farming methods 2. Labor: training and education can improve workforce skills 3. Capital: advances in technology 4. Enterprise: More higher quality training courses and better business advice/support for aspiring entrepreneurs