Part 1 The basic economic problem
Part 1 The basic economic problem
Assessment: Model answers
1 (a) The opportunity cost of a decision or action
is the benefit of the next best alternative
foregone. For example, an area of land
can be used to grow corn or cabbages. The
opportunity cost of using the land to grow
corn will therefore be the foregone benefit
that would have been gained from growing
cabbages instead.
(b) The economic problem can never be
solved because human wants for goods
and services will always exceed the
natural resources available to produce
them. Resources are finite while
human wants are without limit and will
continue to grow as the global population
expands. Even if more resources become
available, for example, through the
discovery or production of more natural
resources or from an increase in the
global working population, there will still
not be enough to produce everything
we want.
(c) 
The economy in the diagram below can
use its scarce resources to produce any
combination of consumer goods and
capital goods along or below its production
possibility curve (PPC1). At any point on
its PPC1, the economy will be producing
as much total output as it possibly can by
using its resources as fully and efficiently as
possible.
PPC1
PPC2
Consumer goods
0
Capital goods
However, the productive capacity of the
economy and therefore its total output will
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fall if there is a reduction in the amount
of resources it has available, for example,
due to the destruction of its factories, roads
and other infrastructure or the depletion of
its non-renewable natural resources. This
is shown by the inward movement of its
PPC closer towards the origin, from PPC1
to PPC2.
(d) Emigration involves a loss of population as
people move to other countries. This will
reduce the labour force of the country if
they are of working age. This represents
a loss of productive resources and as
a result the capacity of the country to
produce goods and services will be reduced,
especially if the loss is highly skilled labour
because it is generally more productive than
unskilled labour. A loss of skilled labour
may also deter multinational companies
from investing in the country. Existing
ones may also relocate their operations to
other countries if they cannot hire enough
workers with the right skills in the country.

The loss of labour will also mean there
will be fewer people remaining in work
in the country to support those who are
unable to work including children,
old-age pensioners and the long-term sick
or disabled. These people will depend on
those in work to produce the goods and
services they need and want, and to pay
taxes to the government that can be used
to finance schools, public healthcare and
state pensions. Therefore, as the working
population of a country falls, the burden on
those remaining in work to help support
those not in work will increase.

A loss of entrepreneurs to other countries
will also reduce the productive capacity
of the country because it is likely to result
in the closure of some firms and fewer
firms being created in future. Not only
will this reduce the quantity and variety
of goods and services being produced but
it is also likely to result in an increase in
unemployment and falling living standards.

However, it is possible that emigration
may benefit the country. For example,
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 Part 1 The basic economic problem

if the country is overpopulated then a on involves giving up the opportunity to

loss of population can reduce problems use it to grow fruit instead. The opportunity
of overcrowding and improve the living cost of a decision to use resources one way
standards for the remaining population. is therefore the benefit we forego or give up
The emigration of dependents such as from the next best use of those resources.
old-age pensioners will also help to reduce
(c) 
An increase in education could improve
the burden on the working population
both the quantity and quality of labour in
and the cost of state pensions. This would
an economy. More people may be able to
allow the government to increase public
attend schools and colleges to learn the
spending on other groups in society or
basic skills and knowledge they need to get
other sectors of the economy.
a job if more places and more teachers are

If unemployed workers move to other made available. If the quality of education
countries to find jobs, then unemployment also improves it will also help people to
in the country will fall and this will also develop additional and higher-level skills
help to reduce government spending and knowledge.
on unemployment benefits or welfare

An increase in the total number of people
payments. If those same workers send back
willing and able to work will increase the
some of their wages to their families in the
capacity of the economy to produce goods
country, then this can improve their living
and services. If the quality of labour is also
standards. If they also learn valuable skills
improved, each worker will also be capable
while they are working elsewhere, those
of producing more, further enhancing
skills will be available to the country if and
the potential of the economy to produce
when those emigrants return. This will
goods and services. Both effects will shift
help to improve the future mobility and
its production possibility curve to the right
productivity of its labour force.
(from PPC1 to PPC2 in the diagram below).

There are clear problems associated with a
loss of skilled labour from a country. It will
reduce its productive capacity and living
standards are also likely to fall. However,
a loss of unemployed labour or the
Consumer goods

emigration of people who have retired from PPC2

work could prove beneficial.
2 (a) Enterprise is a factor of production. It involves
organizing the production of other goods and
services. To do so requires combining and
directing other factors of production – land,
labour and capital – into firms to carry out
productive activities. If done successfully, the
reward for enterprise is profit.
(b) 
The true cost of something is what we
have to give up to get it. This is because we
cannot satisfy all our wants. Human wants
for different goods and services are without
limit. In contrast, the natural, human and
other resources needed to produce goods and
services are finite or limited in supply. This
means every economy must choose which
goods and services to produce with their
limited or scarce resources and, therefore,
which human wants they will satisfy and
which ones they will not. For example, a
decision to use an area of land to build houses
PPC1
0
Capital goods

However, an increase in education may
reduce the total supply of labour in the
economy in the short run if it involves
young people now spending more years in
education and therefore joining the labour
force when they are older. Further, the
resources used to provide more education
may be wasted if the skilled workers it
produces move to other countries to find
work because of a lack of suitable jobs in
the economy. This would have the effect of
shifting the PPC inwards towards the origin.

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(d) Building roads provides vital infrastructure
in an economy. They can increase both
the mobility and productivity of factors
of production, thereby expanding the
potential of the economy to produce a
greater volume and variety of goods and
services. This is because roads will improve
connections and travel times between
different areas of the economy and
potentially also neighbouring countries,
allowing people and goods to move
between them faster and more efficiently.
Firms located in one area of the economy
can therefore trade more easily and with a
greater number of different suppliers and
consumers located in other areas. Firms will
also benefit from an increase in a supply of
labour; they are able to attract labour from
further away as it becomes quicker and
cheaper for workers to travel.

The construction and future maintenance
of new roads will create jobs and help
to reduce unemployment. This in turn
will raise incomes and living standards.
Government spending on unemployment
benefits can be reduced, allowing taxes to
be cut or public spending on other projects
or areas to increase.

Building new roads can also reduce traffic
congestion and pollution on existing ones.
A reduction in travel times frees up time
© Brian Titley 2018: this may be reproduced for class use solely for the purchaser’s institute
Part 1 The basic economic problem
that can be used more productively. For
example, trucks can make more deliveries
in the same time if they spend less time
stuck in traffic jams. It will also help to
reduce transport costs, that in turn could
help to reduce prices.

However, a decision to use resources to
build more roads involves an opportunity
cost. For example, the same resources could
have been used to build more schools or
other vital capital infrastructure such as a
new airport; both of which may be more
beneficial to the economy in the long run,
especially if the economy already has an
extensive road network and additional
roads would be under-used.

However, in many economies more roads
may simply create more noise and pollution
because they expand the demand for road
travel by enabling more cars and other
vehicles to travel, faster and further than
before. They may also cause some people
and firms to switch from rail services to
road travel.

A decision to build more roads in an
economy therefore needs to be based on a
proper assessment of their likely costs and
benefits compared to other uses of the same
resources.
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