1 Basic economic ideas

1 Basic economic ideas

Core
Self-assessment task 1.1 (page 16)
1 Summarise the projected changes in the population of Barbados from 2000 to 2025.
The population pyramids show that the population of Barbados is expected to increase by a small
percentage. The more significant projected change is the change in the age structure of the population.
It is predicted that as birth rates fall and people live longer there will be an ageing population. There
will be a smaller proportion of the population under 45 and a higher proportion of the population
aged over 50.

2 Discuss the likely effects of these changes on decisions concerning:

a what to produce
• A rise in the average age of the population, with more older people and fewer younger people will
alter the types of products being produced. It is likely, for instance, that more resources will be
devoted to providing health and residential care for elderly people and there will be more focus
on providing forms of entertainment for the over-50s. It is also possible that fewer resources will
be used for making products such as children’s toys and for building affordable housing.

b how to produce
• Because there will be more retired people and proportionately fewer workers, capital-intensive
methods of production will increasingly be used. In other words, more machines and other
capital goods may be used relative to labour. In addition, the Barbadian government may
decide to raise the retirement age or provide tax incentives for workers to continue working
past the retirement age.

c for whom to produce.

• In the light of an ageing population the Barbadian government may try to influence who
receives these products. To ensure that the growing number and percentage of elderly people
receive an adequate supply of products, the government may increase the taxes levied on the
comparatively smaller proportion of workers and spend more on pensions. Such actions would
transfer some purchasing power from the labour force to the retired.

3 Comment on ‘ethical problems over the use of scarce resources’ facing the government of Barbados in meeting
the needs of its changing population.
Providing for a slightly larger population with fewer workers may mean that Barbados will be faced
with a number of ethical problems over the use of its scarce resources. National output would be
increased by requiring workers to work longer hours but such a change could increase stress and
reduce the quality of workers’ lives. Output may also be increased, at least initially, by for instance
building hotels in areas of natural beauty and areas rich in wildlife. These hotels may attract more
tourists, but such an approach would have to be considered carefully. Such building might damage
the environment and endanger wildlife and might even make the area less attractive for tourists.
The arrival of more tourists into the country may also pose ethical issues, such as overuse of natural
resources like water. The native culture could also be threatened.

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 1 Basic economic ideas

Self-assessment task 1.2 (page 20)

The article expresses the view that, through economic growth, people may actually be worse off.

1 What other examples can you think of which might support the views of these economists?
Other examples include:
• People owning and driving more cars has led to congestion in many cities throughout the world
which, in turn, has increased stress and reduced the quality of people’s lives.
• Eating more convenience food and being driven to school instead of walking or cycling has
increased obesity levels among children.
• Industrialisation in many countries has damaged the environment.

2 Do you see any conflict between these views and your understanding of the ‘economic problem’?
The views may at first appear to conflict with our understanding of the economic problem. This is
because it might be thought that as more of our wants are met, the economic problem may become
less of an issue. Closer examination of the article, however, indicates that the economic problem
continues because our wants continue to grow and continue to outstrip our resources.

Self-assessment task 1.3 (page 24)

1 Sketch a production possibility curve (PPC) to show the choices that are now facing Caribbean
sugar farmers.

%
100

90

80
Sugar cane for food and rum

70

60

50

40

30

20

10

0
10 20 30 40 50 60 70 80 90 100 S
Sugar cane for ethanol

2 On your diagram show how a reduction in sugar cane production for food and rum products from 80% to 50%
of total production affects the amount that is going to produce ethanol. Use the concept of opportunity cost to
explain this trade-off.
The above diagram shows that a decision to reduce the sugar cane production for food and rum from
80% to 50% would increase the proportion devoted to producing ethanol from 20% to 50%. What the
economy would be doing in this case would be to trade off sugar cane production for food and rum
for that for ethanol. The opportunity cost of raising the proportion of sugar cane grown for ethanol by
30% points is 30% points of output grown for food and rum.

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 1 Basic economic ideas

3 Modify your diagram to show how the PPC changes due to:
• better cultivation methods that result in more sugar cane being produced
• the damaging effects of a tornado that result in less sugar cane being produced.
Note: for clarity, this is drawn as a separate diagram.

Sugar cane for food and rum

PP
F
w
ith
be
tte

O
rc

rig
PP
ul

in
F
tiv

al
af
at

te

PP ado
io

rt

F
n

or
n

0
Sugar cane for ethanol

4 On your diagram, show and explain points where production is efficient and inefficient.
Note: for clarity, this is drawn as a separate diagram.

%
100 A
Sugar cane for food and rum

F
D
G

E
0 100 %
Sugar cane for ethanol

Any point on the PPC is an efficient production point as it means that resources are being fully used
and it is not possible to produce any more. On the above diagram, points A, B, C, D and E are all
productively efficient points. In contrast, production points F and G are inefficient, with G being the
more inefficient point. Any point inside the curve is inefficient as it means that there are unemployed
resources or ineffective use of resources and output is lower than possible.

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 1 Basic economic ideas

Self-assessment task 1.4 (page 26)

Explain the choices facing decision-makers in the developing economy shown in Figure 1.7. Discuss the
difficulties they face and suggest possible solutions to their problems.
Figure 1.7 shows that the developing country is facing a difficult choice. If it produces a amount of
capital goods it will replace those capital goods which have worn out in the productive process. This
would keep the capital stock unchanged. It would, however, mean that the output of consumer goods
would be below the level needed to keep the population alive.
If, on the other hand, production point b is selected then, whilst sufficient consumer products will
be made for the subsistence of the population, there will be a reduction in the capital stock. Having
fewer capital goods will shift the production possibility curve to the left.

50
b
Consumer goods
Subsistence

0 a 20 Capital goods
Capital consumption

Figure 1.7 Capital consumption in a developing economy

Self-assessment task 1.5 (page 27)

1 Using the information in Table 1.3 compare the economic structure of Pakistan with that of India.
In both Pakistan and India, more workers are employed in the primary sector than in either the
secondary or tertiary sector. The percentage of the labour force employed in the primary sector
is greater in India than in Pakistan. More than half of all Indian workers work, or seek work, in
agriculture whereas it is just under half of all Pakistani workers. The smallest proportion of workers in
both countries work in the secondary sector. Pakistan has a higher proportion of workers than India in
both the secondary and tertiary sectors.

2 In which country:
a is agriculture more efficient?
Agriculture is more efficient in Pakistan than in India.
b are services more efficient?
The services (tertiary) sector is more efficient in India than in Pakistan.

3 Explain how you have arrived at your answers.

• Agriculture is more efficient in Pakistan than in India because a smaller proportion of Pakistan’s
labour force accounts for a larger proportion of the country’s output than in India.
• The services (tertiary) sector is more efficient in India than in Pakistan. A smaller proportion of
India’s labour force than Pakistan’s produces a similar proportion of the country’s output.

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 1 Basic economic ideas

4 Discuss whether countries such as Pakistan and India might be concerned if a large proportion of the labour
force got new employment in industry or in the service sector (such as call centres).
If under-employed agricultural workers move into the industrial, or the service, sector where there is a
labour shortage, there will be a rise in output and incomes.
There is the possibility, however, that if a large number of workers move out of agriculture quickly,
agricultural output may fall significantly. Such a fall could lead to a shortage of foodstuffs, a rise in
their price and an increase in the imports of foodstuffs. A large number of workers, shifting from
the primary to the secondary and tertiary sectors, would also be likely to be accompanied by rural to
urban migration. This, in turn, may result in pressure on education, health and housing facilities in
cities and may result in slums developing.

Self-assessment task 1.6 (page 31)

1 Think carefully about the ways in which your own economy allocates resources. Make a few notes on the ways
in which:
• the government
• the market mechanism
are responsible for decision making.

Sample answers based on the UK

• The UK government, through its spending, determines how many of the country’s resources are
devoted to state education, health care and defence among other areas. It also influences how
resources are allocated between basic necessities and luxuries through taxation and the provision
of state benefits.
• In the UK the market mechanism determines the allocation of a range of resources. Consumers
indicate their preferences for particular brands of clothing, models of cars and different forms
of entertainment in different ways, such as through the price mechanism. The profit motive
encourages producers to respond to what consumers are willing and able to buy.

2 Use the above information to insert your own economy into the scale shown in Figure 1.10. How has its relative
position changed in recent years?

UK Singapore USA

Former
Soviet Union
before 1986
North Hungary Pakistan France
Korea Albania

Command Market
economy economy

Weak Market as a means Strong

of allocating resources

Strong Government control Weak

over the allocation
of resources

Figure 1.10 Mixed economic systems

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 1 Basic economic ideas

The UK economy comes relatively close to being a market economy although the state still plays a
noticeable role in the economy.
In the last two decades, the UK has been moving closer to a market economy with most state enterprises
having been privatised. There was, however, a slight reversal of this trend in 2008 with the effective
nationalisation of a number of banks – although this measure was expected to be only temporary.

3 What information might an economist use to quantify the relative importance of the government and the
market mechanism within an economy?
There is a range of information an economist might use to quantify the relative importance of the
government and the market mechanism within an economy. These include the proportion of workers
employed by the state in comparison to the proportion employed by the private sector, government
spending expressed as a percentage of total spending and what proportion of industries are state owned.

Self-assessment task 1.7 (page 31)

1 Assume that an economy undergoes the process of reform shown in Figure 1.11.

Large flow of funds for

investment and losses
Government

Public sector
FROM Private
GOVERNMENT Utilities Financial sector
CONTROL … system Agriculture
Public
enterprises

Savings 5–10% GDP

Subsidies
Consumers Marketing boards

DOMINANT WEAK DISCOURAGING

PUBLIC FINANCIAL BUSINESS
SECTOR SYSTEM ENVIRONMENT

Public expenditure
Government

Public Privatisation
sector receipts Private
… TO sector
Utilities Financial Utilities
COMPETITIVE
MARKETS Remaining system Manufacturing
public Services
enterprises Agriculture

Infrastructure Savings 20–30% GDP

Education
Health Consumers
Environment

REFORMED STRONG ATTRACTIVE

PUBLIC FINANCIAL BUSINESS
SECTOR SYSTEM ENVIRONMENT

Figure 1.11 The broad process of economic reform

Source: World Bank, 1995 (adapted)

a Give an example of an organisation which will disappear with a move to competitive markets.
Public enterprise
b Give an additional source of revenue for the government.
Privatisation receipts

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 1 Basic economic ideas

c Give a source of expenditure for the government which is no longer appropriate.

Government investment in public enterprises.

2 Briefly describe how the roles of government and the private sector will change after the implementation of
economic reforms.
After the economic reforms, the government will no longer be concerned with running public
enterprises but may regulate them in the private sector. Its role in the economy will decline. The
private sector will operate more industries and will play a larger role in the economy.

3 Discuss the extent to which it is appropriate for your country to adopt the market-based system shown in the
lower part of the diagram.
An increase in savings as a percentage of GDP will provide more finance which firms can borrow to
finance investment. Higher investment can increase actual and potential economic growth.
There are a range of factors which will influence whether it is appropriate for a country to adopt
a market-based system. These include how developed the financial system currently is, whether the
public enterprises are efficient or not, whether they are natural monopolies, whether the private sector
would be interested in buying the public enterprises and how effective state regulation of the private
sector would be.

Practice questions (page 34)

1 a Define the following terms:
i scarcity [2]
Scarcity in economics means a lack of resources to produce everything that people want.
The problem of scarcity arises because wants are infinite (unlimited) whereas resources are
finite (limited).
ii opportunity cost. [2]
Opportunity cost is the best alternative foregone. For instance, the opportunity cost of a
hospital treating road accident victims might be carrying out non-emergency operations.

b Draw a ‘production possibility frontier’ diagram to illustrate increasing opportunity cost. [2]

80

70
Capital goods

60

50
40

30

20

10

0 10 20 30 40 50 60 70 80 90
Consumer goods

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 1 Basic economic ideas

The opportunity cost of increasing the output of capital goods from 30 to 40 is 9 consumer goods.
The opportunity cost of making an extra 10 capital goods increases to 16 consumer goods when
the output of capital goods rises from 70 to 80.

2 a Copy the production possibility frontier diagram below [see Coursebook, page 34] and indicate
the following:
• an inefficient production point [2]
• a production point that is unattainable. [2]

A = an inefficient point

6
B = an unattainable
prodution point
Shirts (’000s per year)

4
B

3
A
2

0 1 2 3 4
Bananas (’000s per year)

b What is the additional cost, in shirts, of increasing the production of bananas from 1000
pounds per year to 2000 pounds per year? [2]
The additional cost of increasing the production of bananas from 1000 per year to 2000 per
year is 750 shirts.

6
Shirts (’000s per year)

0 1 2 3 4

Bananas (’000s pounds per year)

3 a State one reason why it is necessary to make economic choices. [1]

It is necessary to make economic choices as there are not enough resources to produce
everything we want.

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 1 Basic economic ideas

b State three major questions that must be asked when deciding what goods and services should be
produced. [3]
When deciding what goods and services should be produced, it is necessary to answer the
following questions:
• what products to make
• how to produce the products
• who will get the products.

c Susan uses the two hours available to her to answer her emails rather than study for her
Economics examination. What is the cost to her of choosing to read her emails rather than
study for her Economics examination? Briefly explain your answer. [2]
The opportunity cost to Susan of reading her emails is studying for her Economics examination.
She is missing out on the opportunity to work towards a good grade. In the longer term, if she
regularly spends time answering emails rather than studying, the cost may be a
university place and a good career.

4 a Use the information in the following table to construct a production possibility frontier (PPF). [3]

Pineapples Mangoes
0 500
200 450
350 350
425 275
475 125
500 0

b Mark the point (300, 300) on your diagram. [1]

a and b

500

400
Pineapples

300
Production
point
200

100

0 100 200 300 400 500

Mangoes

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 1 Basic economic ideas

c State why this point does not represent an efficient use of resources. [1]
This point does not represent an efficient use of resources because the point is inside
the PPC (PPF) and so represents unemployed resources and/or failure to use the most efficient
methods of production possible.

d What does the shape of the PPF you have drawn say about the opportunity costs of producing one
more unit of pineapples or mangoes? [1]
The shape of the PPF indicates that as the production of mangoes increases, the opportunity cost
in terms of loss of production of pineapples increases. Similarly, as the production of pineapples
increases, the opportunity cost of producing one more pineapple increases. For instance, whilst
the opportunity cost of increasing the output of pineapples from 200 to 300 is only approximately
50 mangoes, a higher number, nearly 100, have to be relinquished to raise output from 300 to 400.
The reason why opportunity cost rises with output is because the best resources are used first to
produce the product. As more is made, resources less suitable to the production of a product will
have to be used.

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 1 Basic economic ideas

KEY TERMS

Definitions of key terms can be found in the glossary.

barter market system
capital measure of value
capital consumption medium of exchange
cheque needs
choice normative economics
coincidence of wants planned economy
command economy positive economics
consumption primary sector
developing economy production
division of labour production frontier
economic goods production possibility curve
economic growth product transformation curve
economic problem resources
enterprise reallocation of resources
entrepreneur risk
factor endowment scale of preference
factor mobility scarcity
free goods secondary sector
inefficiency Smith, Adam
interest specialisation
investment standard deferred payment
labour store of wealth
land tertiary sector
liquidity Tiger economics
macroeconomics unit of account
markets value judgement
market economy wants

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