Introduction to Economics - Revision Questions

Question 1

"Economics is primarily concerned with the allocation of scarce resources which have alternative uses." Use a production possibility curve to help you explain this statement.

An explanation of the economic problem of unlimited wants, limited resources, scarcity, choice and opportunity cost

Relate to a two good model of the economy, using a PPC.

Draw a PPC diagram to expalin the concept

Question 2

Explain how the three basic economic questions would be answered in a free market economy and in a centrally-planned economy.

Explain free market economy and a centrally-planned economy

Differentiate between these two systems keeping in view the three questions.

While explaining -what to produce?

Free market economy, decided by consumer sovereignty/demand – in a centrally-planned economy, decided by the central planners, based upon their view of what is appropriate

How to produce?

Free market economy, decided by cost of production and attempts to minimize unit costs of production/maximizing profit – in a centrally-planned economy, decided by the central planners based upon desired production targets

Whom to produce?

Free market economy, decided by income/ability to pay – in a centrally-planned economy, determined by perceived needs in the view of the central planners.

Question 3

Explain what is meant by a production possibility curve and use a production possibility curve diagram to explain the concepts of scarcity, choice and opportunity cost

You would be expected to

Explain a production possibility curve: the boundary between attainable and unattainable levels of production given current resources and technology

Draw a Production possibility curve diagram

Related scarcity and the production possibility curve: scarcity of resources determines the position of the production possibility curve and identifies the maximum that can be produced with available resources of land, labour and capital (quantity and quality)

Relate choice and the production possibility curve: better to choose a point on the production possibility curve than a point inside the curve, but points outside the curve cannot be chosen

Relate opportunity cost and the production possibility curve: making a choice of where to produce on the production possibility curve involves an opportunity cost; definition of opportunity cost and explanation. Making a choice to move from a point inside the production possibility curve to the production possibility curve involves no opportunity cost.

Question 4

With reference to the concept of economic growth, explain the difference between a movement along an existing production possibility curve (PPC) and an outward shift in a production possibility curve (PPC).

You will be expected to

Draw a diagram of a production possibility curve (PPC) indicating two alternative types of output (most likely "capital goods/consumer goods")

Define PPC – distinction between potential and actual output

Explain economic growth in terms of a shift outwards in the PPC and that a movement along the PPC  represents reallocation of resources and opportunity cost

Also explain that substitution of capital goods for consumption goods (opportunity cost) along the PPC in the short-term leads to a shift outwards in the PPC i.e. economic growth.