1

Basic economic
ideas and
resource allocation

Ideas for answers to Progress

Questions
1

Air can be regarded as a free good because no price can be attached to it.
However, fresh air is more of a problem because it might be possible to think
of examples where a price could be charged for fresh air.

A production possibility curve is usually drawn as a curved line rather

than a straight line because this shows that there can be increasing, rather
than constant, opportunity costs. This means that resources are not perfect
substitutes for each other. For example, some land may be less useful as
agricultural land compared with other land in an economy.

The extent to which a country will be able to shift its production possibility
curve to the right will depend on a number of possible factors. For example, the
ease with which it is possible for labour to migrate into an economy, increasing
the quantity of labour. Also, how easy it is to improve the quality of labour,
such as through improvements in the capital equipment used or through an
improvement in the quality of education and training in an economy.

To some extent, the answer to this question is no in that it is impossible to study

human behaviour in a laboratory. The general view, however, is that the answer
is yes, because it is possible to develop theories, laws and models of economic
behaviour. The concept of ceteris paribus helps a great deal in this because it
means that an assumption can be made that certain variables are fixed.

In terms of an individual worker, an advantage is that they will be able to

increase their productivity, but a disadvantage is that they may become
bored repeating the same task.

In terms of an individual firm, an advantage is that it should be able to

increase output and profit, but a disadvantage is that it may not be wise to
specialise in just one line of business; it may be better to diversify.

In terms of the whole economy, an advantage is that if more is produced

there will be an increase in the standard of living, but a disadvantage is
that some of the workers may become alienated from the economy
and demotivated.

There have been numerous examples of financial support for firms since
the financial crisis of 20072008. The main argument in favour of this
intervention is to prevent firms going out of business, leading to an increase in
the level of unemployment in an economy. The main argument against such
intervention is that this may encourage inefficient firms to stay in business
and there will be an opportunity cost involved, i.e. the money used to support
such a firm could have been spent in other areas of the economy.

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Table 1.7 shows the proportion of the workforce that works in the different
sectors of an economy whereas Table 1.6 shows the contribution of each
sector to the output of an economy. If the percentages for an economy in
Table 1.7 are lower than in Table 1.6, this will indicate more capital-intensive
production. For example, only 1 per cent of the workforce in Argentina works
in the primary sector and yet they produce 8 per cent of the total output.
Bangladesh, on the other hand, has 19 per cent of output from the primary
sector, but it needs 52 per cent of the workforce to produce this output.

Barter relies on what is called a double coincidence of wants, i.e. you have
to need something that somebody else is willing to exchange and they need
to have something that you are willing to exchange. Such a coincidence will
not always occur, and even if it does, there is still the issue of agreement on a
satisfactory means of exchange.
Money is much more effective as a means of exchange because it eliminates
the need for a double coincidence of wants.

A private good has the characteristics of being rival and excludable. This is
why it is possible to charge a price for such a good.
A public good has the characteristics of being non-rival and non-excludable.
This creates a free rider problem, which is why it is not possible to charge a
price for such a good.

10

A demerit good is one that is likely to be over-produced and over-consumed

in a market economy. Examples of such goods include goods that can be
damaging to the health of people, such as tobacco or alcohol.

Ideas for answers to Case Study

Questions
Opportunity cost
1

The decisions faced by governments indicate the concept of opportunity cost

because of the basic situation of scarcity. There are not enough resources to
satisfy all the needs and wants in an economy, so choices have to be made. A
government will receive only a limited amount of funds, and decisions have
to be made about how those funds are spent. This is where the concept of
opportunity cost is applied.

The UK government is planning to spend a lot of money on a high-speed rail

link between Birmingham and London, but this will have implications for
other possible areas of public expenditure, i.e. there will be an opportunity
cost involved. A government only receives a certain amount of revenue each
year and so if a lot of money is spent on improving the rail service, there will
be less money available to spend on such things as education or health care.

The entrepreneur
1

There is not a specific answer to this question. It will depend on the research
carried out.

Amtrak
1

Advantages could include the fact that a railway line could be kept open, even if
it is not making a profit, and this would maintain employment in the industry.

Disadvantages could include the fact that a government might not be able to
run the service as efficiently as a private sector enterprise, largely because there

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is not a profit motive to encourage a firm to be as efficient as possible. Also, if

it is run as a state monopoly, there will not be any competition.

Change in Eastern Europe and China

1

Possible advantages include the fact that with a market economy, the price
mechanism would have more of a role in the allocation of scarce resources in
an economy, leading to greater efficiency.

Possible disadvantages include the fact that some businesses might not be able
to survive in a market economy, leading to an increase in unemployment. Also,
because prices would no longer be determined by a government, it could lead
to higher rates of inflation.

Nairobi National Park

1

The characteristics of a private good that need to be described are rivalry and
excludability. The characteristics of a public good that need to be described
are non-rivalry and non-excludability.

It is important to define what a quasi-public good is. It is somewhere between

a private good and a public good. A national park could be regarded as a
private good, i.e. it is rival and excludable and an admission fee is charged. It
could also be regarded as a public good, i.e. it is non-rival and non-excludable
and no admission fee is charged. Given that there are good arguments on both
sides, it could perhaps be regarded as an example of a quasi-public good.

Education in Mauritius
1

The government in Mauritius has clearly recognised the link between

education and development. A better-educated workforce is likely to be a
more productive workforce and this will contribute to an increase in the
productive potential of the economy, leading to higher living standards. An
improvement in the quality of a labour force could be shown by a rightward
shift of its production possibility curve.

Public libraries in the Maldives

1

A merit good can be defined as something that will benefit both individuals
and the wider economy. If it is provided through the market mechanism,
consumption may be less than would otherwise be the case. This is why
certain facilities, such as public libraries, can be regarded as examples of a
merit good. Entrance is free and people are encouraged to visit them. In this
particular case study, it is stressed how important they can be in a democracy.

Health care in Brunei

1

A healthy work force in an economy is likely to be a more productive

workforce and this will contribute to the growth of a countrys gross domestic
product. This is why a country such as Brunei sees health care as a merit
good, i.e. something that should be made accessible to all.

Answers to Activities
Positive or normative
1

Normative

Positive

Normative

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Normative

Positive

Normative

Normative

Positive

Ideas for answers to Exam-Style

Questions
1

The answer should:

uuExplain the role of enterprise in combining, organising and co-ordinating

the other factors of production (land, labour and capital) to enable

production to take place in an economy

uuExplain that the role involves the taking of a risk

uuExplain that the reward for this risk-taking is profit
uuState that the person taking this risk is called an entrepreneur
uuContain examples, such as Richard Branson and Lakshmi Mittal
uuExplain that the importance of the factor enterprise in a modern economy

is that entrepreneurs can start up enterprises, contributing to the growth

of an economy and an increase in employment.
2 Issues include:
uuInflation
uuIndustrial unrest
uuInternational trade
uuEmployment
uuOutput
uuReduction in welfare services
uuMarkets.
3

The essay should include:

uuThe price system
uuThe concept of market equilibrium (equilibrium price and equilibrium

quantity)

uuAn appropriate diagram

uuThe idea of price as a signal (Adam Smiths concept of an invisible hand)
uuChanges in the diagram to show shifts of demand and supply.
4

The characteristics:
uuAcceptability
uuDivisibility
uuPortability
uuDurability
4

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uuScarcity
uuStability of supply
uuRecognisability
uuUniformity
uuStability of value.

The functions:
uuA medium of exchange
uuA measure of value or unit of account
uuA standard for deferred payment
uuA store of value or wealth.
5

The answer should include:

uuAn explanation of the economic problem
uuFeatures/characteristics of a market economy
uuFeatures/characteristics of a command/planned economy
uuThe concept of effectiveness
uuFeatures/characteristics of a mixed economy in combining the advantages

of both a market economy and a planned economy.

The answer should include:

uuAdvantages of a command/planned economy
uuDisadvantages of a planned/command economy
uuAdvantages of a market economy
uuDisadvantages of a market economy
uuExplanation of the role of a mixed economy in combining the advantages

of both and reducing the disadvantages of both.

The answer is C. An improvement in the level of technology would cause an

outward shift of a production possibility curve.

The answer is C. The rate of inflation is measured through a prices index is

an example of a positive statement.

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