1 The basic economic problem

1.1 The nature of the economic problem

1. What is meant by the economic problem? (2) TB
The economic problem is that we cannot have everything we want. This shortage arises because
while there are unlimited wants, there are finite resources.

2. Explain how the economic problem results in consumers having to make choices. [4]
The economic problem is unlimited / infinite wants (1) exceeding limited / finite / scare resources
(1) resulting in scarcity (1).

Consumers have limited incomes (1) and so cannot buy everything they want (1).
Buying one product involves an opportunity cost (1) in the form of another product sacrificed /
example (1).

3. Explain two examples of the economic problem. (4) TB

The economic problem is unfilled wants due to a shortage of resources. The source material
mentions that the quantity of good quality food produced is not keeping pace with the growth of
resources. There is also evidence of the economic problem in connection with housing, where
people’s wants are unlimited whereas there is only a given quantity of resources available.

4. Explain the economic problem and why it is always likely to exist. [4]
The economic problem is finite / limited resources (1) and infinite / unlimited wants / wants exceed
resources (1) scarcity (1).

It is always likely to exist as wants grow faster than resources / wants are increasing (1) there will
never be enough resources to produce all the products people would like to have (1). People are
living longer / population is increasing (1) more resources are needed / some resources are being
depleted (1).

5. Explain why a car is an economic good. (4) TB

A car is an economic good as it takes resources to produce it. Among the resources that are used to
produce cars are, for example, machines and workers. The amount of cars produced depends on
the quantity and quality of resources that are used. These resources could be used to produce
other goods and services.

6. Explain why sunshine is a free good. (2) TB

Sunshine is a free good as it occurs without needing the use of resources. It has no opportunity
cost.

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7. Explain the difference between a free good and an economic good. (4) TB
A free good, such as air, does not take any resources to produce it. Such a good exists naturally
without limit and has no opportunity cost. In contrast, an economic good, such as healthcare, takes
resources to produce it. This means that it has an opportunity cost. The resources that are used to
produce it could be used to make other economic goods. Economic goods are scarce as there are
not enough resources to produce all of these goods we would like.

1.2 The factors of production

1. Identify two non-human factors of production. (2) TB
Land and capital.

2. Define an entrepreneur. (2) TB

An entrepreneur is one of the four factors of production. She or he makes business decisions,
including which other factors of production to employ, and bears the risks of the business in the
hope of making a profit.

3. Describe the main role of an entrepreneur. [2] N2005/Q.1

It is the role of co-ordination of other factors of production, taking risks or making profits.

4. Giving an example of each, define the four factors of production. [4] N2010/Q.2
Land: natural resources, e.g. minerals, the sea (1).
Labour: human resources, e.g. workers (1).
Capital: man-made aids to production, e.g. machinery and equipment (1).
Enterprise or entrepreneurship: the ability to combine factors of production and to take risks (1).

A list of the four factors, with no examples, will gain just 1 mark.
A list of the four factors, with examples, will gain 2 marks.

5. Explain one reason why the quantity of land may increase and one reason why the quality of
land may increase. [4]

6. Identify two reasons why the productivity of land has increased in Africa. (2) TB
Greater use of fertilisers and better irrigation.

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7. Explain three factors of production that are involved in the operation of an airport. [6]
J2010/Q.3

8. Discuss which factor of production might be most significant in the operation of a luxury
hotel. [4] N2005/Q.7
The hotel is a luxury hotel so is likely to require reasonable amount of capital expenditure even if
the hotel itself is not very big. Hotels are usually labour intensive. Luxury hotels often, though not
always, are set in well-kept grounds.

9. Explain two causes of an increase in the quantity of labour. (4) TB

An increase in the retirement age would increase the quantity of labour. More people would be in
the labour force if they have to work to, for example, up to the age of 70 rather than 65 is
disfigured. The working age range would be expanded.

There might also be an increase in the number of people within the existing working age group. This
could be because of a rise in the birth rate that occurred 16 or more years earlier, more people of
working age coming to live in the country than working age people leaving to live in other countries
or a fall in the death rate.

10. Discuss whether or not the quantity of labour in the UK is likely to increase in the future. (8)
The quantity of labour may increase in the UK in the future. This is because the size of the
population is increasing. This is partly due to more people being born than dying but more
significantly due to more people of working age coming from countries such as India and Poland to
live and work in the UK. The retirement age has also been increased and is likely to rise again in the
future. More women now enter the labour force. All of these changes have resulted in an increase
in the number of workers in the UK and may continue to do so in the future. The labour force has
also become healthier and this has resulted in fewer working days being lost through sickness.

There are, however, reasons to think that the quantity of labour may decrease in the future. The
school leaving age may be raised in a bid to increase the quality of the labour force by increasing
workers’ skills. A higher school leaving age will reduce the working age range. It is also possible that
in the future, more workers may leave the UK to live and work elsewhere and the UK may
experience a net loss of workers to other countries. The quantity of labour, in terms of the number
of hours that people work, may be reduced if workers have longer holidays or shorter working
hours.

There are a number of influences on the quantity of labour that any country has. It is difficult to
forecast exactly what will happen to the UK’s labour force but the likely continuing growth in its
population for at least the next decade or so and further increases in the retirement age mean it is
likely to continue to grow.

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11. Explain two differences between capital and labour. [4]
 Capital is a human-made resource / factor of production / machines (1) labour is a human
resource / factor of production / workers / type of worker (1)
 Capital is increased by investment (1) labour is increased by e.g. rises in population (1)
 The quality of capital is improved by advances in technology (1) the quality of labour is
improved by e.g. better education (1)
 Capital is paid interest (1) labour is paid wages (1).
 Capital can be a fixed cost (1) whereas labour can be a variable cost (1).
 Capital can be a one-off investment (1) wages are paid regularly (1).
 Labour tends to be mobile (1) capital tends to be immobile (1).
 Capital can work for 24 hours (1) workers have breaks / work for less than 24 hours (1).

12. Explain whether land is mobile. [4]

Most land is geographically immobile (1) fixed in one place / cannot move from one place to
another place (1).
Some forms of land e.g. wildlife can be moved from one place to another (1).
Land is occupationally mobile (1) capable of changing its use / e.g. land can be used for farming or
housing (1).

13. Explain two reasons why labour mobility may increase in Guyana in the future. [4]
14. Analyse the influences on the mobility of workers. [6]
15. Explain two influences on the mobility of labour. [4]
 Good transport links (1) such as public transport / highways (1) ease of workers moving from
one place to another to take up a job (1).
 Cheap cost of living / relocation (1) such as good access to affordable homes in different places (1).
 Similar culture (1) such as similar languages / work culture (1).
 Ease of workers moving from one job to another job (1) lots of re-training opportunities (1)
good quality education (1) skills/qualification needed between different jobs are similar (1).

16. Analyse the influences on the mobility of two factors of production. [6]
 Availability of proper infrastructure (1) to move from place to place (1) e.g. trains / roads (1)
whether it is affordable or not (1).
 Cost of living differences (1) whether workers can afford to move to another place (1) e.g.
housing costs, cost of education (1).
 Availability of information (1) on jobs elsewhere (1).
 Tax rate changes (1) lower tax rates could encourage workers to move to another country to
take advantage of lower taxes (1) / entrepreneurs could be encouraged to move to a lower tax
economy (1).
 Regulation changes (1) could limit movement of labour or capital (1).
 Level of education (1) could make labour more occupationally mobile (1).

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17. Discuss whether or not skilled workers are likely to be more occupationally and
geographically mobile than unskilled workers. (6) TB
Skilled workers are likely to be more occupationally mobile than unskilled workers. This is because
they have more capability, and possibly the qualifications, to undertake a number of occupations.
They may also be more geographically mobile. This is because they are likely to be better paid and
so more likely to be able to afford housing in other areas of the country. They are also more likely
to be in demand in other countries and so more likely to receive work visas in other countries.
However, workers with very specific skills may find it difficult to get jobs in other occupations. A top
footballer may, for instance, struggle to find another occupation and certainly to find another
occupation that pays as well. Some skilled workers may also not be geographically mobile because
of family ties.

18. Explain how an increase in a worker’s income can affect their mobility of labour. [4]
 An increase in income will enable a worker to spend more on their education (1) increasing
occupational mobility (1).
 Higher income will make housing more affordable (1) increasing geographical mobility (1).
 Higher income will make high-tech products more affordable (1) enabling a worker to be better
informed (1) increasing both occupational and geographical mobility (1).
 Higher incomes may discourage a worker from changing jobs / may be content with current job
(1) may be satisfied with income level (1) reducing geographical and occupational mobility (1).
 Higher incomes make it easier to afford car / use public transport (1) increases geographical
mobility (1).

19. Analyse why the mobility of labour may increase over time. (6) TB
The occupational mobility of labour may increase over time due to better education, appropriate
training and the provision of information about job vacancies. If workers are better educated, they
will gain more qualifications and skills. This will enable them to apply for a greater range of jobs and
will make them more attractive to employers. Unemployed agricultural workers, for example, could
be trained in the skills needed to work in the tourism industry if there are vacancies in the tourism
industry, enabling labour to move from a declining to an expanding industry.
Providing information about job vacancies can make workers aware of job opportunities more
suited to their skills and offering them better pay and working conditions. This may encourage
workers to move from one occupation to another occupation.

20. Explain how an increase in the mobility of Philippine workers would be likely to affect
unemployment in the Philippines. [4]
21. Explain two advantages of an increase in the occupational mobility of labour. [4]
 Lower unemployment / increase employment (1) workers losing one job will find another job
more quickly / find another job more easily / maybe more skilled / reduce frictional
unemployment / reduce structural unemployment (1).
 Higher output / higher GDP / economic growth (1) firms experiencing higher demand will be
able to expand more quickly / more elastic supply / quicker adjustment to changes in market
conditions / workers may be able to multitask / change roles / may be more skilled / fewer unfilled
vacancies / greater use of resources / fewer idle resources (1).
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22. Discuss whether or not enterprise is likely to have increased in New Zealand after 2019. [6]

23. Discuss whether or not the supply of enterprise is likely to increase in the Philippines. [6]
Up to 4 marks for why it might:
• economy is growing / rising incomes / higher consumer spending (1) so likely to earn higher profit (1)
• well-educated population (1) ability to employ skilled labour (1) attracts MNCs (1)
• greater skills (1) encourage workers to set up own businesses (1)
• population is growing (1) so more potential entrepreneurs (1) larger markets (1)
• deregulation (1) so there may be more market opportunities / less barriers to entry (1)
• the reduction of traffic congestion (i) will increase productivity of workers (1) raising opportunity
to make profits (1)

Up to 4 marks for why it might not:

• some entrepreneurs may emigrate (1)
• high taxes (1) which may reduce the reward to entrepreneurs (1)
• traffic congestion (1) can increase costs of production (1) MNCs may be discouraged from
entering the country / reducing the supply of foreign entrepreneurs (1)
• may not want to take the risk/stress of running own business (1) prefer to stay as employee (1)
• growth rate is falling (1) less opportunities for investment / new businesses (1)

1.3 Opportunity cost

1. Define opportunity cost. (2) TB
Opportunity cost is the best alternative forgone.

2. Explain two possible opportunity costs for firms if they invest in the latest technology. [4]
3. Explain the possible opportunity cost to India of exporting more textiles. [4]
4. Explain the opportunity cost of working on a farm. (2) TB
Opportunity cost is the best alternative forgone. Some people who choose to work on a farm
are giving up this opportunity in order to work as a builder.

5. Explain what is meant by the economic problem and why opportunity cost is relevant to the
allocation of resources. [6] N2012/Q.2
 The economic problem, i.e. limited/finite resources and unlimited/infinite wants (1) giving rise
to a condition of scarcity/insufficient resources (1).
 Opportunity cost, i.e. the benefit obtained from the (next) best alternative (1) foregone (1).
 The condition of scarcity gives rise to the need to make a choice (1) opportunity cost indicates if
resources are used for one purpose they cannot be used for another purpose/ consideration of
opportunity cost can result in an efficient allocation of resources (1).
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6. Define opportunity cost and explain why it is an important concept for economists. [4]
7. Explain opportunity cost and how it can influence a farmer’s decision to grow apples. [4]
Opportunity cost is the (next) best alternative / choice / option (1) sacrificed / forgone / given up
(1).
A farmer could grow another crop (1) size of opportunity cost / choice made is influenced by
revenue / cost / profit / resources available / weather (1).

8. Explain why opportunity cost is an important concept for producers. (4) TB

Opportunity cost is an important concept for producers because they have to decide how to use
the resources they employ. For instance, a soft drinks manufacturer may produce lemonade or
cola. In the short run, if it decides to produce more lemonade, it will have to switch some workers,
machinery and ingredients away from producing cola. In the long run, if the firm employs more
resources and devotes the extra resources to producing more lemonade, it will be giving up the
opportunity to produce more cola.

9. Explain, using an example, the influence of opportunity cost on government decision-making.

[4]
 Opportunity cost is the (next) best alternative (1) forgone / given up / sacrificed (1)
 Governments (always) consider opportunity cost when making a decision on spending money
(1) to maximise the welfare of society (1).
 Governments have to make a choice as they have a limited income/budget (1).
 For example, if the government spends on building a new hospital (1) the opportunity cost may
be a new school (1) as the government thinks that the opportunity cost of building a new a new
hospital is lower than building a new school (1).

10. Explain the influence of opportunity cost on consumers’ decisions. [4]

 Opportunity cost is the (next) best alternative (1) forgone / sacrificed (1).
 Consumers have limited income / time (1) have to make choices (1) cannot have everything
they want (1) if buy more of one product may have to buy less of another / example of what
product may be given up to buy another product (1).

11. Analyse what effect the building of an airport may have on the decision of how to use an area
of land nearby. (6)
The area near where an airport is being built may currently be farms or houses. The prospect of the
construction of the airport may reduce the value of the farmland and the houses due to the
expected noise and air pollution. At the same time, it may make the area more valuable to, for
example, firms wanting to operate hotels, firms producing goods for export and for the air travel
and freight industry. If it decides, for example, to demolish the farms or houses and build a hotel on
the site, the opportunity cost may now be using the site for a factory producing airline meals.

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12. Discuss whether or not an increase in the output of food will reduce the output of other
products. (6)
An increase in the output of food would be possible if not all resources are being used now.
Unemployed workers, land, capital and enterprise could be used to produce more food. In the
diagram below, employing more resources could move the production point from X to Y, resulting
in a rise in the output of food and other products.

The output of food could also increase without

reducing the output of other products if there
is an increase in the quantity or quality of
resources. Such a change would shift the PPC to
the
right. Indeed, the output of food has increased
over time due to, for example, more advanced
capital equipment and more pest-resistant crops.

If, however, at any one time, full use is being

made of resources, it will not be possible to
increase the output of food without incurring an opportunity cost. In the diagram, if the
production point moves from Z to Y, more food would be produced but at the cost of a lower
output of other products.

13. Explain how opportunity cost is different for economic goods and free goods. [4]
 Economic goods have an opportunity cost (1) resources are used to produce them / resources
have alternative uses / if resources are used to produce one economic good, they cannot be used
to produce another good / in limited supply (1).
 Free goods do not have an opportunity cost (1) resources are not used to produce them / there
is no restriction on their supply (1).

1.4 Production possibility curve (PPC) diagrams

1. Explain the difference between a point inside a PPC and a point outside a PPC. [4]
2. Explain the significance of a production point inside a PPC and a production point on its PPC.[4]
3. What is the difference between a point inside and a point on a PPC? (2) TB
A point inside a PPC shows that there are unemployed resources. It is not an efficient point.
A point on a PPC shows that full use is being made of resources. It is an efficient point.

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4. Analyse, using a production possibility curve (PPC) diagram, the effect of an increase in
unemployment on an economy. [6]

Unemployment means resources are unused.

With unemployed resources, a country will be
producing further inside of the PPC.

5. Analyse, using a production possibility curve (PPC), the opportunity cost to an economy of
producing more consumer goods. [6]
6. Analyse how a PPC illustrates scarcity, opportunity cost and efficiency. (6) TB

A PPC shows scarcity as it indicates that there is a

limit to what can be produced with given resources.
People would like a combination of the products far
to the right of the curve but there are not enough
resources to produce the combination.

A PPC can illustrate opportunity cost as it shows

how much of one product has to be given up in
order to produce more of another product. The
diagram below shows that the opportunity cost of
producing 20 more units of Product A is 30 units of
Product B.

A PPC illustrates efficiency by the relationship

between production points and the curve. Any point inside the curve is inefficient. Potential output
is being lost as existing resources are capable of producing more. Any point on the curve is efficient
as maximum use is being made of the resources and the maximum output is being produced.

7. Explain two causes of a shift in a PPC. (4) TB

A PPC may change its position if there is a change in the quantity of resources. It may shift to the
right due to an increase in the labour force resulting from more workers coming into the country to
live and work.
A PPC may also shift to the right if there is an increase in the quality of resources. Labour may be of
a higher quality if it has been better trained. This would enable it to produce more goods and
services.

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8. Analyse, using a production possibility curve (PPC) diagram, the effect of a decrease in
population size on an economy. [6]
9. Analyse, using a production possibility curve (PPC) diagram, the effects of a decrease in the
quantity of capital goods in an economy. [6]
10. Analyse, using a PPC, the effect on an economy of a flood. (4) TB

A flood may damage factories, offices and

agricultural land. Workers may also be injured or
killed. A reduction in resources will reduce an
economy’s productive potential. The maximum
output that the country will be able to produce
will fall and the PPC will shift to the left as shown
in the diagram below.

11. Analyse, using a production possibility curve (PPC), the effect of an increase in the quality of its
resources on an economy. [6]
12. Analyse, using a production possibility curve diagram (PPC), the effect of increased investment
in both education and the health sector. [6]
13. Analyse, using a production possibility curve (PPC) diagram, the effect of advances in technology
on an economy. [6]
14. Analyse, using a production possibility curve (PPC) diagram, the effect of an increase in
enterprise on an economy. [6]
15. Analyse, using a production possibility curve
(PPC) diagram, the impact of higher labour
productivity on an economy. [6]
16. Analyse, using a PPC, the effect on an economy
of an increase in the supply of labour. (6) TB

An increase in the supply of labour will result in a

rise in the quantity of resources. This will cause an
increase in productive potential and will shift the
PPC to the right as shown in the diagram, where it
has moved from AA to BB.

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