Chapter 4
Economics in context
1. Most countries have more resources than they did five years ago. Capital goods
may have increased, the size of a country’s labour force and enterprise may also
have increased. It is, however, possible that labour and enterprise may have
declined if there was net emigration. Some countries may also have experienced a
decrease in physical land if soil erosion occurs.
2. Student’s own response. There are a variety of possibilities. Students may think
that class sizes should be smaller which would be possible if there were more
teachers. More capital could mean new classrooms or, for example, a new sports
hall, more science equipment.
Activity 4.1
1. 50 capital goods and 200 consumer goods.
2. 10 more capital goods and 100 more consumer goods.
3. 150
Activity 4.2
1. 50
2. 5 capital goods are given up. To increase the output of consumer goods from 80
to 90, the output of capital goods has to fall from 35 to 30.
Activity 4.3
1, 2 and 3 would all cause the PPC to shift to the right as they would increase
productive potential. 1 would increase the quality of capital, 2 would increase the
quantity of labour and 3 would increase the quality of labour. 4 and 5 would cause
the PPC to shift to the left as they would reduce a country’s ability to produce
goods and services. 4 would decrease the quantity and quality of all the factors of
production and 5 would decrease the quantity of capital.
Economics in action
1. A change in resource allocation is shown by a movement from one production
point to another production point. In contrast, a change in the quantity of resources
is shown by a shift in the PPC.
2 Failure to make full use of advances in technology would be shown by a shift to
the right of the PPC with the production point being to the left of the PPC.
Practice questions
1. B A fall in unemployment would mean that a country is making more use of its
existing resources. This would enable it to produce more goods and services.
2. C A country can produce at any point inside or on its PPC.
3. A The straight-line PPC indicates a constant opportunity cost. The first
resources that might be switched from producing movies to TV programmes would
make an extra four TV programmes. This would also be true of the last resources
used. So each resource can produce either 1 movie or 4 TV programmes.
4. A To produce 10 more luxury goods, the output of basic goods has to fall from
100 to 92. The opportunity to make eight basic goods has been given up.
5. A The change in the PPC shows that the maximum amount of clothing that can
be produced has increased while the maximum output of food that can be produced
is unchanged. This must mean that something has changed that affects only the
output of clothing.
Advances in technology that are only affecting the clothing industry are one
possible cause.
6. a. A point inside a PPC shows that there are unemployed resources. It is not an
efficient point. A point on a PPC shows that full use is being made of resources. It
is an efficient point.
b. A PPC may change its position if there is a change in the quantity of
resources. It may shift to the right due to an increase in the labour force resulting
from more workers coming into the country to live and work.
A PPC may also shift to the right if there is an increase in the quality of resources.
Labour may be of a higher quality if it has been better trained.
This would enable it to produce more goods and services.
c. A PPC shows scarcity as it indicates that there is a limit to what can be
produced with given resources. People would like a combination of the products far
to the right of the curve but there are not enough resources to produce the
combination.
A PPC can illustrate opportunity cost as it shows how much of one product has to
be given up to produce more of another product. The diagram below shows that the
opportunity cost of producing 20 more units of Product A is 30 units of Product B.
A PPC illustrates efficiency by the relationship between production points and the
curve. Any point inside the curve is inefficient. Potential output is being lost as
existing resources are capable of producing more. Any point on the curve is
efficient as maximum use is being made of the resources and the maximum output
is being produced.