MR MOYO – ECONOMICS REVISION

Basic economic problem, Resource Allocating, PPC, Money, citrusperibus, Assignment 1 As

1. The diagram shows an economy’s production possibility curve.

Why does the curve slope downwards?

A Agriculture and industry are subject to decreasing returns to scale.
B Agriculture and industry are subject to increasing returns to scale.
C Resources are shared equally between industrial and agricultural
production.
D Total resources available to the economy are limited.

2. The diagram shows a country’s production possibility curve.

What could allow the economy to move from M to N?

A an increase in consumer spending
B an increase in demand for exports
C an increase in government spending on pensions
D an increase in investment

3. Given a rate of interest of 10% per year, what is the opportunity cost to an individual of saving an additional
$100 in year 1?
A an increase in consumption of $110 in year 2 B an increase in consumption of $10 in year 2
C consumption of $100 in year 1 D consumption of $110 in year 1
4. . In the diagram LM is the production possibility curve of a country that has a comparative
advantage in the production of good Y.

What might enable the country to consume the quantities of X and Y indicated by point R?
A increased specialisation in the production of good X B international trade
C a reduction in unemployment D increased specialisation in the production of good Y

5.

6. A student decides to stay in her room to do some work rather than going to the cinema.
What is the opportunity cost of her decision?
A the enjoyment she would have derived from a visit to the cinema
B the improvement in the mark she obtains for her assignment
C the cost of the extra electricity she uses D the money she would have spent in the cinema

7. The diagram shows a production possibility curve LM.

What might cause the curve to shift to NP?

A technological progress B unemployment of resources
C the depletion of natural resources
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D a reallocation of resources
8. The diagram shows shifts in an economy’s production possibility curve.

Which change could have come about as a result of an improvement in

technology?

A S to Y B T to S C W to T D W to Y

9 What is the most abundant form of money (measured by value) in a developed economy?
A bank deposits B cash
C cheques D credit cards

10. The diagram shows a production possibility curve for an economy which produces only two goods, X and Y. The
economy produces 400 of good Y and produces on its production possibility curve. Which quantity of good X is given
up?

A 600 B 800
C 1200 D 1600

11. The diagram shows two production possibility curves (EF and GH), before and after technological
progress has taken place.

After technological progress has taken place, what is the opportunity cost in
capital goods of producing OX consumer goods?

A MH B OH C OM D YF

12. The diagram illustrates the production possibility curves for an economy in Year 1 (X 1, Y1) and
Year 2 (X2, Y2)

What can be deduced from the diagram?

A The cost of production was lower in Year 2 than in Year 1.

B The full employment level of output was lower in Year 2 than in Year 1.
C The opportunity cost was lower in Year 2 than in Year 1.
D Unemployment rose between Year 1 and Year 2.

1d, 2d, 3c, 4c, 5d, 6a, 7c, 8a, 9a, 10b, 11a,
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Basic economic problem, Resource Allocating, Money, citrusperibus, Assignment 2 As

1 The steel required for the construction of a new car-assembly plant in a fully employed economy
is obtained by increasing the output of the domestic steel industry. What is the opportunity cost of producing the steel?
A the alternative benefits forgone by diverting additional resources to steel manufacture
B the alternative benefits forgone by increasing the capacity of the car industry
C the alternative benefits that would have been obtained by putting the steel to other uses
D zero, since there is no reduction in the steel supplied to other steel users

2 What would prevent a firm gaining the maximum benefit from the division of labour?
A a high interest rate B a small market
C high production costs D low productivity

3 What is meant by the ceteris paribus assumption?

A an assumption that is not supported by the facts B an assumption that consumers act rationally
C an assumption that two factors are in equilibrium D an assumption that other factors are held constant

4 What is the outcome for consumers and workers as a result of increased division of labour?

5. What is the opportunity cost to a fully employed economy of increasing capital investment?
A a fall in consumption B a fall in income
C a rise in saving D a rise in the rate of interest

6. Which group may be disadvantaged by the introduction of division of labour?

A consumers who prefer standardised goods
B companies where the production process has many sub-divisions
C the government, if the product is taxed
D workers who prefer a variety of tasks

7 What is an advantage of using the market mechanism to allocate resources between alternative uses?
A It ensures that resources will be allocated efficiently.
B It ensures that resources are allocated in accordance with need.
C It minimises the time required to make decisions.
D It gives all consumers an equal voice in deciding how resources should be allocated.

8. In a market economy, what is the basis for determining the allocation of factors of production?
A the market share of companies B the needs of the country
C the pattern of consumers’ spending D the wealth of entrepreneurs

9. What is meant by ‘ceteris paribus’ in economic analysis?

A A normative approach is being adopted.
B The effect of a change of one variable is being considered in isolation.
C One good has to be sacrificed to obtain more of another.
D One factor of production is fixed.

10 Doctors should be paid highly because they have to undertake a long period of training.
What can be concluded about this statement?
 MR MOYO – ECONOMICS REVISION
A It is a normative statement because high pay does not always result from lengthy training.
B It is a normative statement because it expresses an opinion.
C It is a positive statement because doctors do have to train for a long period.
D It is a positive statement because greater skill results in higher pay. 1a, 2b, 3d, 4c, 5a, 6d, 7c, 8c, 9b, 10b

Basic economic problem, Resource Allocating, Money, citrusperibus, Assignment 3 As

1. What is the main economic problem facing all societies?

A how to reduce unemployment
B how to reduce poverty
C how to allocate scarce resources
D how to control inflation

2 What is the opportunity cost to an unemployed worker who becomes employed?

A the leisure they would otherwise have had
B the value of the goods and services they produce
C the wages they are paid
D zero

3. Which of the following statements about trade unions is normative?

A Since trade unions exist to safeguard the interests of their members, they deserve the legal protection of
the state.
B In countries where trade unions are strong, income distribution is more equal.
C Uneven trade union membership has resulted in a widening of the wage gap between different industries.
D In industries where trade unions are powerful, technical progress tends to be much slower.

4. Which is a normative economic statement?

A Money is the least liquid form of wealth.
B Some firms are subsidised by the government.
C Some workers earn more than others.
D Taxes are the best way to discourage smoking.

5. What is an essential feature of a pure market economy?

A Buyers and sellers have perfect knowledge.
B External costs are taxed.
C Prices respond to the demands of consumers.
D The government provides public goods.

6. What is an example of the factor of production capital?

A a bank account held by a small firm to be used for future purchases
B a forest of hardwood trees ideal for furniture making
C the market value of a company’s shares
D word processing software used by a writer to complete her new book

7 The workers in a factory currently earn $240 for a 40-hour week. The management offers them a
choice between either a 10 per cent wage increase or an increase in the weekly wage to $260
along with a reduction from 40 to 39 hours.
Disregarding the value of leisure time, what is the opportunity cost to each worker of opting for
the 39-hour week?
A $4 B $6 C $20 D $24

8. The table shows the levels of demand for silver in millions of ounces for different uses between
1999 and 2001.
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1c, 2a, 3a, 4d, 5c, 6d, 7a,

 MR MOYO – ECONOMICS REVISION
Basic economic problem with marking scheme As

Discuss the desirability of the worldwide movement towards the market economy and away
from the planned economy. [12]
Markscheme
The market economy has limited government intervention and relies on the profit motive and consumer sovereignty. It
has proved more successful in raising living standards, economic growth and economic efficiency. Consumers benefit
from more choice and lower prices. Planned economies were state-run with economic plans and large scale government
intervention. The result was low living standards although
employment was usually available and a basic quality of life resulted. The move to market economies brought
beneficiaries and casualties. Russia illustrates the increase in millionaires while unemployment and poverty grew. Some
East European economies are making fast progress while some former USSR republics are struggling.
Candidates may consider the case of China.
Understanding of the features of economic systems (4)
Discussion of the benefits of the transition (4)
Discussion of the harm of the transition (4) [12]

(a) Explain the differences in the features of a market economy and a planned economy. [8]
Markscheme
Individual actions and consumer sovereignty dominate in the market economy. Motivation is self interest. Private
ownership, the profit motive and the operation of market forces are central features. In a planned
economy there are government ownership, planning bodies and the state direction of resources. Motivation is public
interest. Decisions by the government dominate economic activity.
Explanation of the features of a market economy up to 4 marks
Explanation of features of a planned economy up to 4 marks

2 (a) An economy is faced by the exhaustion of an important natural resource at a time when it is introducing
improved technology.
Explain how these events will affect the economy’s production possibility curve. [8]
Markscheme
Improved technology gives greater efficiency and rising productivity(output per worker per time period) so should move
the production possibility curve outwards, depending upon where the improvement impacts. The exhaustion of a
resource should reduce an input and the resulting output and move the ppc inwards. The overall effect will depend on
their relative strengths but results from the change in available inputs and their effect on production possibilities. These
changes can be shown by diagrams.
Understanding of the ppc concept up to 2 marks
Awareness of the outcomes up to 4 marks
Balance of the effects/differentiated impact up to 2 marks
(b) Discuss whether the operation of a market economy always produces a desirable outcome. [12]
Markscheme
A properly functioning market economy should provide choice, quality and competition. It should make economic use
of resources and avoid waste. It is an efficient system of resource allocation and has outperformed planned economies.
However, it has drawbacks such as the production of externalities and demerit goods and the failure to provide public
and merit goods.
Knowledge of the nature of the market system up to 4 marks
Justification of desirable outcome up to 6 marks
Discussion of the failings of the market economy up to 6 marks, subject to maximum of 8 in
total for this and the previous line
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(a) Explain how production possibility curves might be used in assessing a country's economic performance. [8]
Markscheme
A ppc shows the possible combinations of two goods which can be produced by an economy when it uses all of its
resources fully and efficiently. A ppc slopes down to the right and is usually drawn concave to the origin. Points within
show unemployment and inefficiency, points without are unattainable. Shifts in the curve show growth or loss of
productive potential. The larger the contained area the greater the level of production potential.
For knowledge of a ppc up to 2 marks
For explanation of static position up to 3 marks
For explanation of move in curve up to 3 marks
(b) Discuss whether a mixed economy is the best way for a country to deal with the basic
economic problem. [12]
Markscheme
The basic economic problem concerns limited resources, unlimited wants and scarcity. A mixed economy combines
features of market and planned systems. Private ownership, profit motive and markets operate as well as government
ownership, service provision and market intervention. The balance between the two varies between time and place. A
mixed system should benefit from the advantages of the two systems. The market system should provide incentive and
efficiency while equity and market failure should be dealt with by the government. However a mixed economy may
suffer from the disadvantages of both alternatives producing inequality, inefficiency and low levels of welfare.
For understanding the mixed economy and economic problem up to 5 marks
For discussion of the mixed economy's benefits up to 5 marks ] max
For discussion of the mixed economy's drawbacks up to 5 marks

(a) An economy can produce agricultural and industrial goods. Explain the possible
effects on its production possibility curve if there is an increase in the productivity of
its agricultural workers. [8]
A ppc shows an economy’s maximum output of two goods when using all of its resources. Productivity is the measure
of output per worker. Assuming the production of agricultural goods and industrial goods, the ppc would be expected to
pivot outwards, as workers produce more, indicating greater quantities of agricultural goods. Further possibilities
include greater production of industrial goods as well because better food supplies increase overall productivity or as
restriction on agricultural total output shifts resources to industrial
production, which in turn expands.
For knowledge of ppc and productivity up to 2 marks
For understanding of pivot with more agricultural output up to 4 marks
For explanation of alternative outcomes up to 2 marks

(b) Discuss whether a market economy can solve the problem of scarcity more effectively
than a command economy. [12]
A market economy involves minimal government intervention and relies on private motives and ownership. A command
economy is directed by the government with public motivation. Scarcity occurs when there is insufficient output to meet
peoples’ wants at zero price. Scarcity arises because of limited resources and unlimited wants and is shown by the area
outside of a ppc. The market economy may appear to reduce the extent of scarcity more by operating efficiently and
improving the supply of goods and services, however the wants of consumers expand as more basic needs are satisfied
so scarcity remains. The command economy has achieved lower living standards but with a more even distribution.
Economic systems are unlikely ever to remove the problem of scarcity, although its nature may differ under different
systems.
For understanding of the economic systems and scarcity up to 4 marks
For analysis of the ability of each to reduce scarcity up to 6 marks
For discussion of the meaning and solution of scarcity up to 6 marks
MR MOYO – ECONOMICS REVISION
 MR MOYO – ECONOMICS REVISION
Basic economic problem TEST As
1. What is the central problem for an economy?
A to achieve maximum growth in production B to allocate resources between alternative uses
C to ensure all resources are fully exploited D to overcome inequalities in income distribution

2 What are most likely to be disadvantages found in a market economy?

A economic growth and state-owned companies B merit goods and free competition
C public goods and economic specialisation D unemployment and external costs

3 The diagram shows the production possibility curve of an economy.

Which statement explains the shape of this curve?

A More efficient workers are drawn away from the production of consumer goods.
B Resources cannot be switched between producing capital and consumer goods.
C The economy is more efficient at producing capital than consumer goods.
D The opportunity cost of producing capital goods increases the more capital goods are
made.

4. What is a correct statement about money?

A Its functions mean the characteristics that it possesses. B Its liquidity means its
use as legal tender.
C Its supply means the total value of banknotes in circulation.
D Its value means its purchasing power.

5. The diagrams show the change in a country’s production possibility curve between Year 1 and Year 2.

What can be deduced from the diagrams?

A Future growth prospects have been harmed. B The level of unemployment has fallen.
C The opportunity cost of consumer goods has risen.
D The proportionate growth in production is greater in consumer goods.

6. What is likely to be greater in a planned economy than a market economy?

A efficiency B flexibility C innovation D stability
7. The diagram shows the production possibility curves of two economies, X and Y.

Which statement about the two economies is correct?

A Both economies always have the identical opportunity costs.
B Both economies have the same future growth prospects.
C The opportunity costs are constant in both economies.
D The two economies can never produce the same combination of products.

8. The price of good X rises by 10 %. As a result, the demand for a complementary good Y changes
by 20 %. What is the cross elasticity of demand for good Y with respect to good X?

A +2 B +0.5 C –0.5 D –2
9. A good has unitary price elasticity of demand and at a price of $25 it sells 100 000 units.
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Which price must the firm charge if it wants to sell 125 000 units of the good?
A $22 B $20 C $18 D $15

10. Which of the following statements must be true if the use of resources involves an opportunity cost?
A. Not all wants can be satisfied B. Firms are below optimum size
C. Opportunity cost ratios are constant D. The economy is operating below its
production possibility frontier
11. Which statement about income elasticity of demand over the range of income shown is
true?
A For cola it is less than 1. B For cola it is greater than 1.
C For nuts it is greater than 1. D For nuts it is zero.

12. In which of the circumstances will consumer surplus be zero?

A. Demand is perfectly inelastic B. Demand is perfectly elastic
C. Elasticity of demand is 1 D. Supply is perfectly elastic
13. The price elasticity of demand for commodity is 0.5. The price of the commodity is initially $5 and the
initial quantity sold is 100. By how much would the price have to reduce to increase sales by 20 units?
A. $0.5 B. $1.00 C. $2.00 D. $3.00

14. The price elasticity of demand for a good is unity. What will increase as result of reduction in the price?
A. expenditure on the good B. expenditure on the substitute. C. quantity demanded D. marginal revenue.

15. What is most likely to make the demand for Good X inelastic?
A Good X is a luxury good. B Good X is habit-forming.
C The proportion of income spent on Good X is very high.
D There are a large number of substitutes for Good X.

Economic Aspects of Cigarette Smoking

Smoking cigarettes is a controversial matter that illustrates a number of economic issues. As with
most products, the key influence on the level of consumption is the product’s price. United States
Fig. 1 US cigarette consumption and cigarette prices 1970–2006

A study of cigarette smoking in Malaysia estimated the short-run and long-run price elasticity of
demand (PED) and the income elasticity of demand (YED) for cigarettes between 1990 and 2004.
The results are shown in Table 1.
Table 1: Demand elasticities for cigarettes in Malaysia

In Europe, taxation of cigarettes is particularly heavy. In 2006 it was 76.4% of the final selling price in
Germany, 77.1% in the UK and 80.4% in France. European countries are increasingly banning smoking in
enclosed public areas and workplaces. Some anti-smoking campaigners are calling for the smoking of
cigarettes anywhere to be made illegal.
 MR MOYO – ECONOMICS REVISION
(a) How far does the data in Fig. 1 confirm that the normal demand curve relationship exists between the
price and the quantity demanded of cigarettes? [3]
(b) (i) What do the three elasticity values in Table 1 tell us about the elasticity of demand for cigarettes? [3]
(ii) What might explain these different elasticity values? [4]
c) Discuss whether a market economy can solve the problem of scarcity more effectively
than a command economy. [12]

2 Explain how a country’s production possibility curve depends upon its factors of production. [8]
3 With the help of examples, explain why different economic decision makers face the problem
of scarcity. [8]
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Transition occurred in the centrally-planned economies mainly as a result of overwhelming international

economic pressures. However, the process of transition itself was either triggered by internal policy shifts or
public upheavals, or was kept under the tight control of the centrally-planned state (e.g. China). In the former
situation, the speed towards reform was politically motivated, but relied heavily on the frustrated protests of
the collective workers who were demoralized by years of secure, but less stimulating, working environments.
In some countries, the major objective was mainly to demolish the old structure without planning for
alternative measures. This led to disruptions in basic community structures and increased the suffering of the
rural poor. Smallholder families were forced to trade their animals for food and other consumables. With
advances in the barter system, the value of livestock as a means of saving and the accumulation of wealth
increased, and the ownership of productive animals shifted in favour of the emerging community of wealthy
herders.

Although the change under the tight control of the centrally-planned countries such as China was also
triggered by external factors (e.g. international trade, the need for hard currency and improved technologies)
as well as by internal factors (e.g. ecological and climatic factors, social changes), the transition has been
smooth and well organized. The new livestock owners are not left to struggle for survival on their own.
Services are gradually being privatized, starting with a progressive recovery of service costs. Rural financing
has been developed under a well-organized banking and unsubsidized credit system. Transition under this
model has been gradual and more effective and has provided donors such as IFAD with opportunities to
support and improve smallholder livestock systems without measures that require drastic changes in the social
structure of the village communities.

Indeed, and in spite of the abruptness of the transition, each country has had its own identity and features. For
example, in some centrally-planned countries such as Laos, the chain of command was weak to start with
because of the lack of resources and the poor infrastructure and poor communication between the central
committee and rural communities. Under such conditions, the day-to-day management of the rural production
systems (cooperatives or otherwise) was kept at the grass-roots level. Because the influence of the state was
minimal, the problems during transition were primarily those with which the livestock producers were faced
during the command economy period. In the case of Laos, the major constraint continues to be the lack of the
capital needed for restocking the animals lost during the war or because of natural calamities, poor soil
fertility, feed deficit, poor animal health services, poor technical skills and losses due to landmines.

The situation in Kyrgyzstan is an example of a violent transition that has demolished the social and economic
fabric of a whole society in a merciless way. Five years after the collapse of the command economy, over 70%
of the population was classified as poor. The former state-supported social and economic privileges (see Box
1) were not replaced by better alternatives under the command of either the private or the public sector; nor
were there alternative community self-help activities. Typically, the poor lack money to buy food and other
essentials. They are unable to produce what they could once produce or unable to sell what they produce.

On the other hand, the transfer of wealth and power to a small portion of society is moving in different ways,
indicating the magnitude of diversity in the transition in this country and others in Central Asia. According to
the six-month University of Wisconsin Land Tenure Study in Kyrgyzstan in 1995, groups of small farms were
established around a large farm, and there was a symbiotic relationship for certain services. Also, some small
private farms have developed close relationships with the former Solkhozes and Kolkhozes they have recently
left. For example, one private farm has a long-term contract to raise heifers for a former collective farm, while
another private farm mills grain and dips animals at cost for another Kolkhoz. According to the team of
researchers for the USAID Collaborative Research Support Programme who visited Kyrgyzstan early 1997
some of the state and collective farms operate as modern businesses, while others have become subsistence
farms and pay members with produce and barter with nearby enterprises. Some seemingly successful
cooperative farms have been purchased by the 'Kolkhoz manager' and a few foreign partners.

The transition to the market economy did not accomplish most of its objectives, and countries remain in
urgent need of support from the international community. Except under the controlled transition in China, the
physical and institutional infrastructure as well as community institutions collapsed, leaving a vacuum at all
 MR MOYO – ECONOMICS REVISION
levels. Social workers, researchers and professionals (veterinarians, animal production officers) became - in
practice - jobless, while waiting for the evolution of new alternatives. The physical structure eroded, and
productivity declined as a result of the collapse of irrigation systems, the unavailability of inputs and the
collapse of the service delivery mechanism.

The problems of transition economies include:

Rising unemployment

Many transition economies experienced rising unemployment as newly privatised firms tried to become more
efficient. Under communism, state owned industries tended to employ more people than was strictly needed,
and as private entrepreneurs entered the market, labour costs were cut back in an attempt to improve
efficiency. As the newly established private firms became subject to greater competition some were driven out
of the market, which created job losses. In addition, a reduction in the size of the state bureaucracy also meant
that many employees of the state also lost their jobs.

Rising inflation
Many transition economies also experienced price inflation as a result of the removal of price controls
imposed by governments. When this happened, the newly privatised firms began to charge prices that
reflected the true costs of production. In addition, some entrepreneurs exploited their position and raised
prices in an attempt to profit from the situation.

Lack of entrepreneurship and skills

Many transition economies suffered from a lack of entrepreneurs and entrepreneurship, which make it more
difficult to reform their economies and promote market capitalism. In addition, there was also a skills gap with
few workers having the necessary skills required by employers in the newly privatised firms.

Corruption

It is alleged that corruption was widespread during the early years of transition in many former communist
countries, and this inhibited the effective introduction of market reforms. Many products were poorly made
and sold in unregulated and illegal markets, and many have claimed that criminal gangs and widespread
racketeering filled the vacuum left by the deposed communist regimes.

Inequality

Economic transition also led to rapidly increasing inequality as some exploited their position
as entrepreneurs and traders in commodities, while others suffered from unemployment
and rising inflation.

Lack of infrastructure

The transition economies also suffered from a lack of real capital, such as new technology, which is required
to produce efficiently. This was partly because of the limited development of financial markets, and because
there was little inward investment from foreign investors. Clearly, this has changed as the transition
economies have reformed, and joined the global market, which has encouraged inward investment (Foreign
Direct Investment – FDI) from around the world.

Lack of a sophisticated legal system

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Under communism, the state owned all the key productive assets, and there was little incentive to develop a
sophisticated legal system that protected the rights of consumers, and regulated the activities of producers.
Market-driven economies will only develop when citizens are granted extensive property rights, and can
protect these rights through the legal process. This was large absent in the former communist transition
economies. 

Moral hazard

The problem of moral hazard implies that inferior performance can arise when the risks associated with poor
performance are insured against. For example, if individuals insure the contents of their house against theft,
they are more likely to leave their windows open. In the context of transition economies, under communism
people felt that the state would insure them against the risks associated with global competition, including the
risk of losing their jobs. The consequence is that many workers remained inefficient and unproductive,
knowing that employment prospects would not be reduced.