NSS Exploring Economics 1

Consolidation Worksheets

Chapter 2 The three basic economic problems

Test Yourself

2.1 ‘There is only one basic problem in economics, not three. That is scarcity.’ Do
you agree? Give reasons to support your answer.

Answers:
Yes, the three basic economic problems arise because of scarcity. Because of
_____________, we cannot produce all the goods we want and we need to
decide ___________. Because resources are scarce, we need to decide
___________ and choose the least costly method to produce. Because the goods
and services produced are scarce, we need to decide how to distribute the scarce
goods and services among different users, i.e. the problem of ___________.

2.2 ‘If we use the market mechanism to allocate food, then only rich people will get
the food.’ Do you agree? Explain.

Answers:
No. When market mechanism is used, those who are able and willing to pay the
___________ will get the goods or resources they want. Although the rich are
more ___________ than the poor to pay the market prices of food, they may not
be ___________ to pay the market prices for certain types of food. For example,
billionaires in Hong Kong may not be willing to buy food which serves as the
diet of poor people, though they are certainly able to afford it.

2.3 Can you name other industries in Hong Kong which the government regulates or
intervenes in?

Answers:
The following are some examples:
 The government spends money on promoting ___________ industry and
film industry.
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  The government provides ___________ to manufacturing industries at
(higher / lower) land prices.
 The government regulates the ___________ and ___________ of electric
power and bus companies.

2.4 Does a school principal have private property rights to his or her office and the
school hall? Why?

Answers:
A principal (has / does not have) private property rights to his/her office and the
school hall. Although the principal has the exclusive right to ___________ the
office and the school hall, he or she has no right to ___________ the office and
the school hall nor the exclusive right to ___________ from their use.

2.5 In light of property rights, explain why the price of flats under the ‘Home
Ownership Scheme’ is much lower than similar flats in the private sector.

Answers:
There are restrictions in the ___________ right of many Home Ownership
Scheme flats (sold before 2003). These restrictions (raise / lower) the market
price of the flats.

2.6 Who are likely to be the winners if resources are allocated by the following
methods?
a. Price mechanism
b. First-come, first-served
c. Result in a basketball match
d. Result in an examination

Answers:
a. The winners are those who are able and willing to ___________.
b. The winners are those who are willing to spend the ___________ to wait,
e.g. unemployed people who have (high / low) opportunity cost of spending
the time on waiting.
c. The winners are those who can ___________.
d. The winners are those who can perform well in an ___________ — people
who have better academic ability and memory, or better skills in an
___________.
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2.7 Decide if the following statements are positive or normative statements. State
your reasons by filling in the blanks.
a. b.
The 12-year free The government
education policy should put more
increases the resources into
income of Hong education.
Kong people.

Mary John

Answers:
a. Mary’s statement is a ___________ statement because
______________________________.
b. John’s statement is a ___________ statement because
______________________________.

2.8 Which of the following statements are positive? Which are normative?
a. The maximum load for this lift is 800 kg.
b. A lift should not carry dogs.
c. An increase in government spending will reduce the unemployment rate.
d. Unemployment is a more serious social problem than inflation.

Answers:
a. (Normative / Positive).
b. (Normative / Positive).
c. (Normative / Positive).
d. (Normative / Positive)

Short Questions
1. Study the following information about Country X:

Types of housing Eligibility

A People whose monthly income is less than $5,000
B The eldest son of each family in the village

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 C People who can pay the market price

Identify the methods of resource allocation used in Country X for each type of
housing. Explain your answer. (6 marks)

Answers:
A: By ______________________, i.e. income limit set by the (government /
private sector).
B: By ______________________, i.e. the status of a person in a family.
C: By ______________________, i.e. the price a person pays.

2. ‘All economies are mixed economies.’ Do you agree? Explain your answer.
(3 marks)
Answers:
(Yes / No). In reality, all economies are ______________________. Some rely
more on customs and traditions; others rely more on ______________________
or ______________________ in resource allocation.

3. Explain how the problem of scarcity gives rise to the three basic economic
problems. (6 marks)

Answers:
Because of ___________, we cannot produce all the goods we want and we
need to decide ___________. Because resources are scarce, we need to decide
___________ and choose the (most / least) costly method. Because the
___________ produced are scarce, we need to decide how to ___________ the
scarce goods and services (i.e. for whom to produce).

4. In what ways does the allocation of resources by market mechanism differ from
that by government command? (4 marks)

Answers:
Under market mechanism, resources are allocated by ___________. Those who
are ___________ and willing to pay the market prices can obtain the goods and
services they want. Under government command, resources are allocated by
government ______________________. People have to follow government
______________________ in production and consumption.

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5. a. What are the possible consequences if your personal belongings can be used
or taken away by others without your permission? Explain. (3 marks)
b. ‘A clear definition of private property rights is necessary for market
exchange.’ Evaluate this statement. (3 marks)

Answers:
a. If we do not have ______________________ over our personal belongings,
we are (willing / not willing) to pay market prices to obtain the goods and
services we want. We may just take away the property of other people.
b. If private property rights to a good or a resource do not exist, then everyone
can use it (and it becomes a (private property / common property)). Since
everyone can use it, no one will be willing to pay for the use of it. As a
result, exchange (will / will not) take place.

6. ‘Hong Kong people’s productivity is higher than before.’

‘Hong Kong’s income distribution is unfair.’
Identify which of the above statements is positive and which is normative.
Explain. (4 marks)

Answers:
The first statement is (normative / positive) as it (is refutable by facts / involves
value judgement).
The second statement is (normative / positive) as it (involves / does not involve)
value judgement and disagreements of this type (can / cannot) be settled by
appealing to facts.

7. China has a large farming population, yet it also imports food from other
countries. Many farmers have changed their occupation to become factory
workers. They produce manufactured products for export.
Use the concepts of opportunity cost, exchange and specialisation to explain the
above phenomenon. (6 marks)

Answers:
To simplify, we assume there are only two goods: food and manufactured goods.
To have food, a person or a firm can produce or import it. In producing food, the
option of using the resources to produce manufactured products is given up.
Therefore, the cost of producing food is the ___________ forgone in the
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Consolidation Worksheets (Chapter 2)
 production of food.
On the other hand, a person or a firm can produce manufactured products to
exchange for food produced in other countries (i.e. to import). Therefore, the
___________ of importing food is the manufactured products forgone in
exchange for the imported food.
For some people or firms in China, the cost of producing food is (higher / lower)
than that of importing it from other countries, so they will specialise in
producing (food / manufactured products) in exchange for (food / manufactured
products) produced in other countries.

8. Explain how market mechanism can be used in

a. the allocation of scarce resources; and (3 marks)
b. the distribution of goods and services (or income) among individuals in an
economy. (3 marks)

Answers:
a. The market mechanism allocates the scarce resources to those who are
___________ and ___________ to pay the market ___________.
b. When market mechanism is used, goods and services are distributed to
those who are ___________ and ___________ to pay market ___________.

Structured Questions
Traffic congestion is a serious problem in Central. The following are three proposed
solutions for tackling the problem:

 introducing an electronic road pricing system

 encouraging people to work at home
 banning all private cars from entering Central

a. Is traffic congestion about what to produce? How to produce? For whom to

produce? (2 marks)
b. Which of the three solutions is a solution
i. by customs and traditions,
ii. by market mechanism, and
iii. by government command? (3 marks)
c. Give ONE advantage and ONE disadvantage for each of the three proposed
solutions. (6 marks)
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Answers:
a. It is a problem of for ‘______________________’. Since the road space is not
sufficient to meet the demand (i.e. road space is (plentiful / scarce)), traffic
congestion arises. Different methods are proposed to (sell / distribute) the
limited road space among users.
b. i. _________________________________ is a solution by customs and
traditions. The method tries to change people’s work habits
ii. ____________________________ ____ is a solution by market mechanism.
Those who are able and willing to pay the price under the system can use the
roads in Central.
iii. ____________________________ ____ is a solution by government
command. Road users have to follow the government command, otherwise
they will be penalised.

c.
Customs and Market mechanism Government
traditions command
The method can save The roads are used by The method (can /
on the ___________ those who are the cannot) take effect
Advantage of installing an most willing and able immediately.
electronic road to ___________ the
pricing system. price.
People may not be There are costs of Some private car
willing to change installing and users who are willing
their (work / driving) ___________ the and (able / not able)
habits. electronic road to pay the price
Disadvantage
pricing system cannot use the roads
(i.e. excluding in the Central.
non-payers from
using the roads).

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Consolidation Worksheets (Chapter 2)
 Suggested answers

Test yourself

2.1 Yes, the three basic economic problems arise because of scarcity. Because of
scarcity, we cannot produce all the goods we want and we need to decide what
to produce. Because resources are scarce, we need to decide how to produce
and choose the least costly method to produce. Because the goods and services
produced are scarce, we need to decide how to distribute the scarce goods and
services among different users, i.e. the problem of for whom to produce.

2.2 No. When market mechanism is used, those who are able and willing to pay the
market prices will get the goods or resources they want. Although the rich are
more able than the poor to pay the market prices of food, they may not be
willing to pay the market prices for certain types of food. For example,
billionaires in Hong Kong may not be willing to buy food which serves as the
diet of poor people, though they are certainly able to afford it.

2.3 The following are some examples:

 The government spends money on promoting tourism industry and film
industry.
 The government provides industrial estates to manufacturing industries at
lower land prices.
 The government regulates the prices and profits of electric power and bus
companies.

2.4 A principal does not have private property rights to his/her office and the school
hall. Although the principal has the exclusive right to use the office and the
school hall, he or she has no right to transfer the office and the school hall nor
the exclusive right to derive income from their use.

2.5 There are restrictions in the transfer right of many Home Ownership Scheme
flats (sold before 2003). These restrictions lower the market price of the flats.

2.6 a. The winners are those who are able and willing to pay the price.
b. The winners are those who are willing to spend the time to wait, e.g.
unemployed people who have low opportunity cost of spending the time on
waiting.
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 c. The winners are those who can play basketball well.
d. The winners are those who can perform well in an examination — people
who have better academic ability and memory, or better skills in an
examination.

2.7 a. Mary’s statement is a positive statement because it can be tested by facts.

b. John’s statement is a normative statement because it involves value
judgement.

2.8 a. Positive.
b. Normative.
c. Positive.
d. Normative

Short Questions
1. A: By government command, i.e. income limit set by the government.
B: By customs and traditions, i.e. the status of a person in a family.
C: By market mechanism, i.e. the price a person pays.

2. Yes. In reality, all economies are mixed economies. Some rely more on customs
and traditions; others rely more on market mechanism or government
command in resource allocation.

3. Because of scarcity, we cannot produce all the goods we want and we need to
decide what to produce. Because resources are scarce, we need to decide how
to produce and choose the least costly method. Because the goods and services
produced are scarce, we need to decide how to distribute the scarce goods and
services (i.e. for whom to produce).

4. Under market mechanism, resources are allocated by market prices. Those who
are able and willing to pay the market prices can obtain the goods and services
they want. Under government command, resources are allocated by government
plans and commands. People have to follow government plans and
commands in production and consumption.

5. a. If we do not have private property rights over our personal belongings, we

are not willing to pay market prices to obtain the goods and services we
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Consolidation Worksheets (Chapter 2)
 want. We may just take away the property of other people.
b. If private property rights to a good or a resource do not exist, then everyone
can use it (and it becomes a common property). Since everyone can use it,
no one will be willing to pay for the use of it. As a result, exchange will not
take place.

6. The first statement is positive as it is refutable by facts.

The second statement is normative as it involves value judgement and
disagreements of this type cannot be settled by appealing to facts.

7. To simplify, we assume there are only two goods: food and manufactured goods.
To have food, a person or a firm can produce or import it. In producing food, the
option of using the resources to produce manufactured products is given up.
Therefore, the cost of producing food is the manufactured products forgone in
the production of food.
On the other hand, a person or a firm can produce manufactured products to
exchange for food produced in other countries (i.e. to import). Therefore, the
cost of importing food is the manufactured products forgone in exchange for the
imported food.
For some people or firms in China, the cost of producing food is higher than
that of importing it from other countries, so they will specialise in producing
manufactured products in exchange for food produced in other countries.

8. a. The market mechanism allocates the scarce resources to those who are able
and willing to pay the market prices.
b. When market mechanism is used, goods and services are distributed to
those who are able and willing to pay market prices.

Structured Questions
a. It is a problem of ‘for whom to produce’. Since the road space is not sufficient
to meet the demand (i.e. road space is scarce), traffic congestion arises.
Different methods are proposed to distribute the limited road space among
users.
b. i. Encouraging people to work at home is a solution by customs and
traditions. The method tries to change people’s work habits.
ii. Introducing an electronic road pricing system is a solution by market
mechanism. Those who are able and willing to pay the price under the
system can use the roads in Central.
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Consolidation Worksheets (Chapter 2)
 iii. Banning all private cars from entering the Central is a solution by
government command. Road users have to follow the government command,
otherwise they will be penalised.

c.
Customs and Market mechanism Government
traditions command
The method can save The roads are used by The method can take
on the cost of those who are the effect immediately.
Advantage installing an most willing and able
electronic road to pay the price.
pricing system.
People may not be There are costs of Some private car
willing to change installing and users who are willing
their work habits. enforcing the and able to pay the
electronic road price cannot use the
Disadvantage
pricing system roads in the Central.
(i.e. excluding
non-payers from
using the roads).

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Consolidation Worksheets (Chapter 2)