Economics
IGCSE: 0455
O Level: 2281
Paper Pattern:
Paper 1: 1 Hour
This is a compulsory paper consisting of 40
multiple-choice questions.
Questions are based on all the subject
content.
Candidates answer all questions.
The questions may require candidates to
make calculations and analyse
diagrams.
Calculators may be used in the examination.
The paper assesses the following
assessment objectives:
AO1 Knowledge and understanding
AO2 Analysis
Total Marks: 40
Paper 2: 2 Hours
Candidates answer one compulsory question
in Section A. In Section B, candidates answer
three questions from a choice of four.
Calculators may be used in both sections of
the examination.
Question 1 (20 marks) is the only question in
Section A(case study) and it is compulsory.
Candidates respond to previously
unseen information about a real economic
situation.
Section B:
Candidates answer three questions in Section
B from a choice of four: Questions 2, 3, 4, 5.
Each question is worth 20 marks and has four
parts: (a), (b), (c) and (d).
The paper assesses the following assessment
objectives:
AO1 Knowledge and understanding
AO2 Analysis
AO3 Evaluation
Total Marks: 80
Learning Objectives
Understand Scarcity
Understand Types of Goods
Understand Factors of Production
Understand Opportunity Cost
Understand Production Possibility Curve
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Basic Economic Problem
Unit 1
Basic Economic Problem
Topics:
1.1 Scarcity
1.2 Types of goods
1.3 Factors of production
1.4 Opportunity cost
1.5 Production possibility
curve (PPC)
1.6 Past paper practice
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Basic Economic Problem
Unit – 1 Basic Economic Problem
1.1 scarcity
Economics: It is a social study that deals with organization of productive resources for the
satisfaction of human needs and wants. It can be defined as a social science that studies how to
allocate scarce resources in a way that satisfies as many wants as possible.
Scarcity
Limited /Finite Wants are
Resources unlimited
FOPs are scarce
Key point 1: Needs are limited. Needs are the basic essentials of life, without which one cannot survive.
These are few, e.g. water, food, clothing etc. Wants are non-essentials, which keep on increasing as previous
wants are satisfied.
Resource allocation: to use the resource in the best possible way to fulfill as many wants as Possible.
1.2 Types of goods
Free goods: these are goods which we may need or want that are without limit. Hence, as they are
unlimited, their opportunity cost is zero e.g. Sunlight, air, etc.
Economic goods are goods that are scarce in supply and hence these goods have some opportunity costs.
1. Consumer good: goods that satisfy consumer wants.
Durable consumer goods: can be used multiple times, e.g. chair, cars.
Nondurable: goods that diminish after one use, e.g. food, drinks
2. Capital goods: goods that are used to produce other goods and services: e.g. tools,
Tractor
3. Public goods: these are goods that are only provided by the govt and no one is willing to
pay for them and hence they are not profitable for the private sector, e.g. streetlights,
roads etc.
Public goods are not profitable due to the characteristics of non-excludability (no one can
be stopped from consuming them) and non-rivalry (no one’s benefit falls when other
people start consuming them, as well), which leads to the free rider problem
4. Merit good: these are goods that are highly beneficial for the general public but people
do not know their actual benefits and hence they undervalue these goods (known as
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Basic Economic Problem
information failure). Hence the private sector only produces these goods for those who
can afford them, while the govt provides for those who are poor, e.g. education and health
care.
5. De-merit good: these are goods that are highly harmful for the society but people do not
know their actual dangers and hence they overvalue these goods (also known as
information failure). Hence the private sector overproduces these goods as they are
profitable, which is why the govt intervenes by imposing bans or taxes, eg cigarettes and
drugs
1.3 factors of Production
1. Land: Natural resources to produce goods & services e.g. oil, land, gas. Reward: RENT
2. Labor: Physical effort and mental efforts to produce goods & services. Reward: WAGES
3. Capital: Manmade resources used to produce goods & services e.g. money, tools,
machine. Reward: INTEREST
4. Enterprise: risk-taking and decision-making ability, Reward: PROFIT
REWARD means the payments different FoPs are required to be given in order for them to participate in
productive activity.
Factor Mobility: How easily a resource can be moved from one productive activity to another
Geographic Mobility: refers to the ease with which a resource can be moved from one place to another.
Occupational Mobility: refers to the ease with which a resource can be used for alternative jobs or
purposes.
Why are some FoPs more mobile than others?
Many workers and capital are occupationally immobile due to certain characteristics, e.g. specialization
in certain skills/jobs. However, capital is geographically mobile as it can be moved from one place to
another. Workers are geographically immobile as well, as family ties and residence in a city discourage
workers to move to other places. Land is also geographically immobile, though it is occupationally mobile.
FoP How can FoP’s quantity How can FoP’s quality
increase? Increase?
Land − increase in rents leads to − fertilizers and better land
increased willingness to supply management to improve soil
land − using organic farming methods
− new discoveries of natural to improve quality of corps, dairy
resources goods etc
− afforestation
Labour − increase in wage will increase − training and education
supply of labor − healthcare
− increase in population
− improved healthcare
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Basic Economic Problem
Capital − increased production of capital − advances in technology
goods − modern equipment
− increase in interest payments
which increases willingness to
supply
Enterprise − increase in price so that profits − better training courses for
increase would-be entrepreneurs
− fall in cost of production − more and better business
advice and support for
entrepreneurs
1.4 Opportunity cost
Opportunity cost: next best alternative forgone
It is the cost of a decision in terms of next best alternatives forgone to achieve it.
Link between scarcity, choice and OC
Scarcity (limited resources and unlimited wants) means that people cannot produce or purchase all goods
and services in the world, which causes people to choose from which goods and services to
produce/consume, and that means they have to forgo other goods/services, which causes opportunity
cost.
Opportunity cost can be for consumers, producers or govt. In case of a consumer, if the consumer is
planning on watching a movie, he forgoes the chance of watching a cricket match, which is opportunity
cost of the movie.
Conservation or Exploitation
Conservation refers to saving of resources of an economy for future use.
Exploitation (commercialization) refers to the using up of resources to produce goods and services.
There needs to be a balance between these two. If we conserve too much, the present generation will be
worse off as they won’t have enough output which lowers consumer choice and, of course, income. But
if there is too much commercialization, then all the resources will be exploited today, which will make
future generations worse off, while also leading to environment degradation. A balanced approach is
known as sustainable growth.
1.5 Production Possibility Curve (PPC)
Economy is an area in which economic activities of production, exchange and consumption take place.
PPC is a curve that shows the maximum output of 2 types of products and combination of those
products that can be produced in an economy with the existing resources.
Use of PPC to depict resource allocation and Opportunity Cost
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Basic Economic Problem
Economy reallocates resources away from
manufactured goods to agricultural goods (from
A to B), and hence the opportunity cost of
producing 100 extra agricultural goods is 30
manufactured goods forgone
Use of PPC to depict efficiency/full employment and unemployment
Point A: unemployment
Point B: full employment
Movement from A to B shows an economy’s
unemployment is falling, and there is an
increase in actual output or real GDP in the
economy (actual growth)
Shifts in PPC (types and reasons)
Outward shift in PPC due to increase in quantity or quality of
factors of production which increases the economy’s
productive capacity, eg discovery of natural resources,
increase in no. of graduates, increase in technology, tertiary
sector advancements etc
Inward shift in PPC due to decrease in quantity or quality of
resources, eg natural disasters, wars, increase in death rates,
fall in tertiary sector etc
Reallocation from consumer to capital goods or primary to tertiary sector
1: When an economy decides to reallocate resources away
from consumer goods to capital goods, there is a movement
on PPC from A to B immediately
2: However, in the long run, as more capital goods are being
produced, which means that more FoPs are available, the
economy’s productive capacity increases, and PPC shifts
outwards
The same is the case when resources are reallocated away
from primary towards tertiary sector
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Capital
Goods
Consumer Goods .
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Basic Economic Problem
1.6 Past paper practice questions (M2016-N2018 topical questions)
1. explain using a PPC, what happens to the economy when the number of graduates
increase. [6]
2. Explain using a PPC, what happens to the economy when an economy recovers from
recession. [6]
3. Explain using a PPC, the concept of opportunity cost. [6]
4. Discuss whether or not a government should subsidies bus transport. [8]
5. Analyse, using a production possibility curve (PPC) diagram, the effects of high
unemployment in a country. [6]
6. Explain two economic concepts shown by a production possibility curve diagram. [4]
7. Explain the connection between opportunity cost and the purchase of shares. [4]
8. Discuss whether an increase in spending on capital goods will help to achieve the aims
of government policies. [8]
9. Explain two factors that would increase the supply of entrepreneurs in an economy. [4]
10. Analyse, using a production possibility curve diagram, how an increase in labour
productivity will affect an economy. [6]
11. Discuss whether spending on health care is the best use of scarce resources by a govt.
[8]
Q12. Analyse, using a production possibility curve diagram, the effect of moving
factors of production from producing cigarettes to producing other products. (6)
M
Q13. Analyse, using a production possibility curve (PPC) diagram, the effect of
reallocating resources from kerosene to LPG? (6)
Q14. Analyse, using a production possibility curve (PPC), the opportunity cost to
an economy of producing more consumer goods. (6)
Q15. Analyse, using a production possibility curve (PPC) diagram, the effect of
advances in technology on an economy. (6)
Q16. Analyse, using a production possibility curve (PPC) diagram, the effects of a
decrease in the quantity of capital goods in an economy. (6)
Q17. Analyse, using a production possibility curve diagram, what effect net immigration
is likely to have on an economy. (6) V
Q18. Using a production possibility curve diagram, analyse the impact of an
increase in resources on an economy. (6).
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