YEW CHUNG INTERNATIONAL SECONDARY SCHOOL 2015 - 2016

YEAR 12 ECONOMIICS:

INTRODUCTION

The Basic Economic Problem: Choice and the allocation of resources

COMMAND TERMS: You must know what these terms mean: they are telling you what you
are required to do.
1. DEFINE
write a definition and give an example
2. DESCRIBE write a definition and give an example
3. DEMONSTRATE show, e.g. by drawing a fully labeled graph and explaining
what your graph shows.
4. EXPLAIN define the key concepts; use a fully labeled economic model (and
example) to explain the concept. Refer to your model in your explanation.
5. ANALYSE

write a detailed explanation of how a particular situation explains

an economic concept.
6. EVALUATE
-

identify the stakeholders (i.e. groups/individuals/sectors/resources that will

be affected), and

describe how they will be affected, including the benefits (advantages) and
costs (disadvantages)

describe the short-term and the long term affects

make relevant, explained suggestions of actions that could be taken

give reasons why the economic theory may not accurately apply to, or
explain, the given situation

IMPLICATIONS: these are the likely effects of a certain action /event; things that are likely to happen
as a result of an event or action

DEFINITIONS OF KEY CONCEPTS

KEY
CONCEPT
ECONOMICS

DEFINITION
Economics is the study of how groups of individuals make decisions about the allocation of resources. It is
the study of how individuals, or groups of individuals, optimize the satisfaction of their unlimited using their
limited resources.
Economics uses concepts, ideas, theories and models to explain economic decisions and their implications.

ASSUMPTIONS
( ) MADE
IN
ECONOMICS

With economic theories and models assumptions are made. These assumptions limit the accuracies of these
theories and models in applying them to an actual situation.
Assumptions include:
- each consumer/firm has freedom of choice
- each consumer/firm has makes rational decisions
- each consumer aims to maximize utility (satisfaction/ benefit to oneself)
- each firm has aims to maximize profits
- each consumer/firm makes the best decision/choice
- Ceteris paribus holds i.e. all factors are held constant (do not change)
We need to be aware of the limitations of economic theories and models.
Definition: Resources are things used in the production of goods/services.

RESOURCES
(FACTORS OF
PRODUCTION)

Resources are the inputs to, or factors of production.

There are FOUR categories of resources:

LAND

LABOUR

CAPITAL

ENTERPRISE

KEY ECONOMIC IDEA: Resources have alternative uses the same resources can be used to produce
different goods.
KEY ECONOMIC IDEA: Resources are relatively scarce: there are not enough resources to satisfy all our
wants.
ECONOMIC
SCARCITY
:

BECAUSE
- our wants are unlimited relative to our resources, AND
- resources have alternative uses. each economy must make economic decisions of:

THE BASIC
ECONOMIC

PROBLEM

ALLOCATION

OF
RESOURCES

WHAT TO PRODUCE with the scarce resources available; which output combination will be
produced?
HOW TO PRODUCE THESE GOODS - what resource combination will be used. E.g. what
methods of production are going to be used?
WHO will benefit from these goods? Which sectors of the economy will receive these goods?

This is referred to as the ALLOCATION OF RESOURCES, i.e. which use scarce resources will be put to.
Producers allocate resources according to market (price) signals, producing goods that are relatively
more profitable.
The BASIC ECONOMIC PROBLEM is WHAT, HOW and FOR WHOM?

ALLOCATION
OF
RESOURCES
and CONSUMER
SOVEREIGNTY
( )
ECONOMIC
SCARCITY,

Evaluation:
What
the implications
reallocation
of This
resources?
The
decisions of
whatare
output
combinationofisato
be produced
and
how
resources
arewith
to benew
allocated/used
is
graph
shows that
or
decided by consumers and buyers, i.e. by consumer sovereignty.
improved resources and/or technology the
The
economy
produces
point
More FB will in this industry will rise, and employment in the
toberone
industry
willatfall.
FBW, i.e.
Changes in consumers choices are indicated to producers through
changes
in price
signals.
Goods
relatively
more
capital
than consumer
producers revenue and profitability will rise.
3 Producers reactgoods.
By going resources
without consumer
consumers desire are relatively more profitable.
by channeling
into the production
of goods consumers desire, in the quantity consumers desire. goods now the economy in the future
will be able to produce more of both
capital
and
consumer
goods: the PPC
As
Opportunity
resources are
costrelatively scarce economic
made on
resource
allocation.
W decisions must be will
shift
outwards.
8
18 decision is made, other choices/options are given up.
Every time an economic

QUESTION ONE:
1. World wheat prices have increased. On graph 1 show the effect of increasing wheat prices on
pastoral land use in the world. Clearly label the opportunity cost of this changing land use.
2. Identify the economic concept this relates to : opportunity cost
Graph 1:
Wheat

Opportunity cost

Other agricultural products

3. Explain how the increasing wheat price would

cause this change in resource allocation.

(Because the price of the wheat is

getting expensive, people have less
demand in wheat, demand for other
agricultural products would increase.
Firms would transfer the resources to other agricultural products production.) When the price of
wheat increase, this signals to farmers that wheat production is relatively more profitable. Farmers
will take resources out of the production of other crops and reallocate them to the production of
wheat.
4. Label as point F on Graph 1 an output combination that is currently unattainable.
5. Explain why this output combination is unattainable, using the concept of economic scarcity.
(Firms cant produce at any point beyond the PPC, there are not enough resources for them to produce.)
This output combination is not possible as there are not enough resources available, given the current state
of technology, i.e. resources are relatively scarce.

QUESTION TWO:
Graph 2:

Timber

C
Opportunity

coast

Wind turbines
The economy is producing the output combination
represented by the point C.
1. On Graph2, illustrate the effect of an
increase in the price of electricity. Use
labels, dotted lines and arrows.

2. Explain how the increasing electricity prices would cause this change.
Less forestry production will occur: this may lead to unemployment in this industry. Forestry firms
lose revenue

3. Evaluate the effects of this change in resource allocation.

More sales and revenue,
More profitable,
More employment.

QUESTION THREE:
In 2012 the demand for smart phones in Asia increased considerably leading to an increase in the price of smart phones.
Graph 3:
Smart phones

Clothing
1. On Graph3, point A represent e the
2012 position of the Asian economy.

Labe a new point, B, to illustrate the effects of an increase in the price of smart phones. Use
labels, dotted lines and arrows.
2. Explain how the increasing smart phone prices would act as a price signal to determine the
allocation of resources.
The production of smart phone will increase with no opportunity cost because at output A the
resource under-utilized.

3. Describe how point A could illustrate an increase in production with no opportunity cost.
Because the working efficiency and the using of resources is not maximum, the point A is not on the product
possibility curve. So increase in production of A is means to increase the workers efficiency and the using of
resources instead of increasing the whole resources. So there is not opportunity cost which is give up one goods
to produce the other in this increase in production,

QUESTION FOUR:
Graph 4:

Milk (units)

10

Opportunity cost
5

10
20
30
40
Mountain bikes (units)
The above graph shows an economy that is productively efficient.
1. On Graph 4, show the effect of increasing mountain bike production from 10 to 30 units. Use labels, dotted lines and arrows.
2.

On graph 4, show the effect of an increase in the number of milk-producing cows.

3.

4.

Describe how the production possibility curve illustrates scarcity.

If the economy is producing at an output combination that is productively efficient, it can only increase the output of one
good (e.g. mountain bikes) by giving up some output of the other good (e.g. milk). There is an opportunity cost involved, as
there arent enough resources to maintain the production of milk, i.e. there is economic scarcity.
If consumer demand for mountain bikes increased, describe why some producers might exit the market for milk and enter the
market for mountain bikes. Describe the implications of this change.

QUESTION FIVE:
Graph 5:

Consumer goods

Capital goods

1. Label a point A on Graph 5 above

to illustrate productive inefficiency.
2. Use the above production
possibility curve to explain the
economic concept of choice.

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3. Use the above production possibility curve to explain the concept of economic savings.

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HOMEWORK:
1. The choice between military products and provision of healthcare faces several countries
in the world today, and illustrates the concept of opportunity cost. Explain the nature of
this concept using a production possibility curve.
2. Use production possibility curve to explain the difference between actual economic growth
and potential economic growth.
3. Syria has been in civil war for at least the last two years. Explain, using a production
possibility curve, what is likely to have happened to Syrias economic growth.
4. The choice between military products and the provision of healthcare faces several
countries in the world today. A. Explain the concept of economic development, using a
production possibility curve and the choice of producing military products or the provision
of healthcare.
B. What are the implications of Syria producing relatively more weapons than other goods.
Ideas to consider: What will this mean for e.g. stock of resources (future output
capacity); resource use; firms (revenue/sales; costs of production; business confidence
and investment expenditure) households (employment; incomes; expenditure; savings;
economic confidence); government (revenue/expenditure)

5. List the 10 most important things about a country that you would take into account if you
were choosing to live in another country. Identify how these could be measured so that
you could more accurately compare countries..
6.