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Frequently Asked Questions - Basic Economic Problem

FAQs - Basic Economic Problem

Three points to be covered:

Explanation could include: 

  1. there are limited/finite resources and unlimited wants.
  2. limited resources are used to satisfy unlimited wants.
  3. in the process choices have to be made which leads to an opportunity cost.

 

 

Definition must include the following:

the (next) best alternative foregone/not taken as a result of taking a decision/making a choice.

Because it is a 3 marks question – appropriate example of choice must be given.

Factors of production: 

  1. Land: natural resources available for production, e.g. oil, coal, forests, fish, farming. 
  2. Labour: human effort available for production/human capital, e.g. skilled/unskilled. 
  3. Capital: man-made physical goods used in production, e.g. machines, tools, factories (Do NOT accept money). 
  4. Enterprise: the role of the entrepreneur in terms of organising the other factors of production and in taking a risk in doing so. 

 

Examples for each factor must be given to fetch full marks.

Build a two sided discussion and consider the pros and cons of using natural resources. You answer could include:

if Conservation of natural resources is done:

  • this will avoid too rapid a depletion of resources
  • this is more sustainable as it takes into account the needs of future generations
  • a better long-term strategy

On the other hand use of natural resources:

  • will raise output
  • will raise income and employment
  • but resources will be depleted/exhausted more quickly
  • more of a short-term strategy

A one-sided answer, which focuses on the conservation or use of resources only, can gain no more than 5 marks.

Explanation should include the definition of LAND and examples

It refers to all those natural resources used in production.

Examples could include: Coal, oil, gold, fish, forests and the land itself 

The answer must include the following concept explanation 

  • scarcity due to limited resources  and unlimited wants of consumers 
  • this leads to choices being made and opportunity cost when a choice is
  • Therefore, proper decision must be made to utilise the resources in the optimal manner in terms of what to produce, how to produce and for whom to produce 

The answer must include the following:

Definition of opportunity cost: the (next) best alternative foregone as a result of making a decision 

Diagram of production possibility curve – axes correctly labelled and curve correct shape (bowed out or straight downward sloping)

Explanation – idea of moving along one axis has the effect of a reverse movement along the other axis 

PPC curve

This is a 4 marks questions. Therefore, the answer should go beyond just the definition and should include atleast two comparisons.

  1. Labour is human/effort/workers’ services, whilst enterprise is the ability and willingness to bear uncertain risks/organise other factors of production.
  2. The reward for labour is wages whereas the reward for enterprise is profit 
  3. Enterprise tends to be more geographically or occupationally mobile than labour

 

This answer should inclulde :

a PPC (production possibility curve) diagram (properly labeled) showing a shift of PPC to the left. An explanation of the diagram and its movement will fetch full marks.

 

The explanation should state that  fewer resources reduces the ability of an economy to produce both products/reduces productive potential/reduces GDP which results in the shift of PPC to the level

 

TAGS: PPF, PPC

You are expected to:

Define an oligopoly and characteristics of an oligopoly market structure

Distinction between a collusive and non-collusive oligopoly

Explanation of prices may not change due to interdependence among firms.

Support your explanation with the help of an kinked demand curve 

Explain the diagram

Explain that there might be non-price competition in this kind of market structure such as advertising.

However, despite their relative stability, prices may change in a non-collusive oligopoly:

– price change operated by market leaders

– long-run changes leading to economies of scale and lower LRACs.

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