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Table of
Contents
01 Basic Economic Ideas And Resource Allocation

02 Production Possibility Curves

03 Classification Of Goods And Services

04 The Price System And The Micro Economy

05 Price Elasticity

06 The Macro Economy

07 International Trade

08 Protectionism

09 Exchange Rates

10 Government Macro Intervention

 TOPIC 1

Basic Economic
Ideas And Resource
Allocation
• Scarcity, Choice And
Opportunity Cost
• Factors of production
• Positive and normative
statements.

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1. A firm is considering whether to buy a 4 Which question does not directly
piece of capital equipment which will refer to the basic economic problem? Are these official statements correct
7 . In 2014 , the Hong Kong Housing or incorrect?
cost $2000 . It estimates that the equip ­ A What goods and services should Authority said the waiting time for
ment will last for two years . The alter ­ a firm produce? public sector housing had increased and
1 . D If the firm lends $
first statement second statement 5. C By definition.
native is to lend the money to a fi­ nance B What price should a firm charge? it would only complete 8900 flats of the
company at a compound rate of interest 2000 at compound rate of A correct 6. C In Russia production
C What production methods should 15 000 planned for the year. The reasons correct
of 5%. interest of 5% for two years B exceeds consumption , so
a firm use? were the shortage of workers because correct incorrect
it earns. there should not be a
What is the minimum increase in rev­ they were needed in other public sector C incorrect
D Who should receive the goods 2,205 = 2000 (l+ 5/100)^2. correct shortage . Oil is a scarce
enue the firm must expect to make it Thus if the minimum in­ projects , the difficulty of finding land ,
and services that a firm produces? Di incorrect incorrect
resource there ­ fore it has
worthwhile buying the equipment? crease in revenue is and government regula­ tions. an opportunity cost , hence
[N15/P1/Q1] more than 2,205 it is
A $101 B $206 Which economic concepts are [JJ7/P1/Q]]] option A is invalid . Japan
worth­ while buying
does not produce oil at all,
C $2001 D $2206 5. What term is used by economists for the the equipment. illustrated in this information?
therefore B is incorrect . US
income received by the factor of 8. To overcome the problem of scarcity ,
[N14/P1/Q2] 2 . D Fish as a natural A a market economy and a lack of can import oil in order to
production enterprise? countries with few natural resources make up for a shortfall ;
resource is classified as resources
2. Arfan and his brother Ben own and run a need to concentrate on the quality of there ­ fore D is not
A capital B interest land while employment of
fishing business together . They have B economic planning and the price human resources. necessarily true.
Cephas and Dipak indi ­
C profit D revenue mechanism
one boat and on the days when they fish cates labour . Boat is an Which set of policies would be most
7 . C Labour needed in
they employ Cephas and Dipak . They [N15/P1/Q4] example of capital good . C opportunity cost of labour and appropriate?
other projects implies both
sell the fish to the owner of a local shop. Arfan & his brother own the excess demand
the opportunity cost and
Which row correctly identifies the fac­ 6. In 2007 there was a worldwide short­ age boat and make the
D production possibility and natural resources human resources shortage of labour.
of oil . The diagram shows the decision to employ labour , budget deficit policy
tors of production involved? policy
consumption and production of oil ( therefore they act as en ­
[N16/P1/Q2] A develop renewable
billion tonnes ) in 2007 for selected terprise. improve education
energy supplies and training
land labour capital enterprise countries. 3. D Higher opportu ­ nity B plan the allocation
cost implies that the discourage
A shop Arfan and money paid shop owner of resources automation
benefits from the next
Ben for the fish C protect land protect jobs in
B shop Cephas and boat Arfan resources
best alternative are manufacturing
Dipak
higher than those of build­ D restrict imports of
C the fish Ben money paid shop owner restrict influx of
ing the rail link. All other raw materials skilled migrants |
for the fish options refer to the pro­
D the fish Cephas and boat Arfan and cess of decision making. [N17/P1/Q1]
Dipak Ben
4. B Basic economic 8 . A Developing re ­
[N14/P1/Q4] problem refers to three 9. A government decides to subsidise newable energy resources
basic questions , what , farms producing milk in its country. would increase the overall
3. In 2013 , there was much criticism of a how & for whom to pro­ Which question about this decision is
availability of resources
government project to build a new high- duce. It, therefore rules
a normative question rather than a
while education & training
speed rail link between two cit­ ies. out options A,C & D. would improve productivity
positive question?
of workers . Both would
What is the most likely reason for result in higher output and
A How much will milk production
abandoning such a project? increase? therefore will help address
What can be concluded from the scarcity more effectively .
A The construction cost is greater B How should essential products, Option D will further inten ­
than the running cost. diagram? such as milk, be produced? sify the problem while B & C
B The external cost is greater than A In Britain, oil had zero opportu­ C How will employment in the milk will have no impact.
the external benefit. nity cost. industry change?
9 . B Option B involves
C The future costs are difficult to B In Japan, there was self suffi­ D How will milk prices change? choices, therefore, refers to
calculate. ciency in oil. value judgment . Options A,
[N17/P1/Q2]
D The opportunity cost is too high. C In Russia, there was no shortage C & D can be verified with
of oil. reference to facts , so they
[J15/P1/Q1]
are classified as positive
D In the United States, rationing statements.
was the only solution to oil short­
age.
[J16/P1/Q1]
10. The statements refer to the proposal to
build another runway at London ’s
Heathrow airport.
Which statement is normative?
A Heathrow is the UK’s busiest air­ port
and has more flights than any other
European airport.
B The airport is highly competitive but there is
spare capacity.
C The potential net benefit of ex­
pansion is around £5 billion
over 70 years.
D We should concentrate on im­
proving the use of existing capac
­ ity not build another runway.
[J18/P1/Q1]
10. D “Should concentrate "
suggests preference i.e.
value judgment , a key
feature of normative
statements . All other
statements can be verified
by facts as true or false ;
hence they are positive
statements.
11 . B The phrase ’ethical
standards ’ indicates value
judgment . It there ­ fore ,
makes the statement
normative . All the others
are positive statements
because they can be
verified against facts as
true or false.

11. Which statement by a company

is normative?
A In the past three years we have carried
out the biggest merger ac­ quisition
in the group’s history.
B The business has fallen behind
competitors and needs to improve
its ethical standards.
C The growth of the business has
been in retail and financial
services.
D The structure of the business
has been simplified.
[NI8/P1/Q1]
 TOPIC 2

Production
Possibility Curves

Economics multiple-choice
questions + Answers explained

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Production Possibility Curves.

What can be concluded from the dia­

1. A country was at point P on its pro ­
duction possibility curve. Following (he
1. B Firstly, prepara­ tion for
threat of invasion it prepared for war .
war implies more military
The war then reduced the country ’s
goods , therefore causes a
infrastructure.
movement from P to Q .
Secondly , the war reducing
infrastructure implies an
inward shift in PPC leading
to a shift from point Q to S.
2. B Movement from point
M Io N implies less capital
goods and a rise in
consumer goods . Loss
What are the most likely changes on production of capital goods
could shift the PPC in ward.
the production possibility curve dia­
gram that arc consistent with these 3. C A straight line PPC
events? suggests constant
opportunity cost. Thus it
A P to Q followed by Q toR rules out option D. Also a
B P to Q followed by Q toS PPC does not indicate
demand therefore options
C P to R followed by R toQ
A & B are irrelevant.
D P to R followed by R toS
[J14/P1/Q2]
2. The diagram shows the production
possibility curve XX of an economy
that produces both consumer goods
and capital goods.
grams?
C Fishing and coconut growing
are equally efficient. A Future growth prospects have
been harmed.
D The opportunity cost of fish falls as
more time is devoted to fish­ ing.
[J15/P1/Q3]
B The level of unemployment has
fallen.
4 . The diagram shows the change in an
economy’s production possibility curve C The opportunity cost of con­
as it grows in the long run. sumer goods has risen.
D The proportionate growth in pro­
Which movement from point X is most
duction is greater in consumer
likely to show the highest potential for goods.
growth?
[N15/P1/Q3]
6. The change from WX to YZ in a country’s
production possibility curve is shown.
5. The diagrams show the change in a
country 's production possibility curve A an increase in employment among
between Year 1 and Year 2. the existing labour force
B an increase in the rate of interest
C the closing of an inefficient
factory
4. C Potential growth
implies an outward shift in
PPC this rules out option D.
Highest potential for growth
is achieved with the
maximum pro ­ duction of
capital goods.
5. C
Opportunity cost ratio
Year
consumer capital
goods goods
11 1 0.5
2 1 0.533
The graphs do not indi­
cate either the production
of capital goods to assess
future growth or the level
of unemployment there­
fore options A or B are
incorrect . Option D is
clearly incorrect.
6. D Increase in natu­
ral resources can increase
the potential as indicated
by an outward shift in the
PPC. All other options
suggest factors that do
not shift a country's PPC.

3 . The diagram shows the production D the discovery of a new resource

possibility curve of a desert island [J16/P1/Q3]
economy where the inhabitants live off
just two commodities , coconuts and 18. The diagram shows a production pos­
fish. sibility curve for an economy that
produces only two goods, X and Y.

If the economy moves from point M services

to point N. which diagram represents
the most likely position of the produc­
tion possibility curve YY in the
future?

What explains the shape of the

production possibility curve?
A Coconuts and fish are in joint
demand.
B Coconuts and fish are perfect
substitutes when consumed.

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 01
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Topics
1. Introducing economics
2. The economic problem
3. Basic economic Ideas
4. Economic systems
5. Demand and supply The fundamental economic problem
6. Elasticity
The fundamental economic problem is:
7. Money
‘scarce resources in relation to unlimited wants'.
8. Production cost and Specialisation
9. Firm's cost structure Scarcity: The excess of human wants over what can actually be produced to fulfil these wants

10. Market structures Resources: inputs available for the production of goods and services.

11. Behavioural economics Wants: needs that are not always realised.

12. Types of goods

13. Costs and benefits Choice

14. Market failure Choice underpins the concept that resources are scarce so choices have to be made by consumers,
firms, and governments.

15. Microeconomic policies

16. Population Sacrifice

17. Aggregate demand and supply Choice involves sacrifice. The more food you choose to buy, the less money you will have to spend on
other goods.
18. Inflation and deflation
19. Policies to correct inflation and Opportunity cost

deflation In other words, the production or consumption of one thing involves the sacrifice of alternatives. This

20. Unemployment sacrifice of alternatives in the production (or consumption) of a good is known as its opportunity cost.

21. Macroeconomic policies Opportunity cost is the cost expressed in terms of the best alternative that is forgone.

22. International Trade

23. Exchange rates
24. Balance of payments
25. Policies to correct Balance of
payments Disequilibrium
 02
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03
Economics Data Questions.
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data question?

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BY-STEP guide to tackling data response questions.

Model Answers included.

For A level, AS level, GCSEs and O level.

In the sixteen months to April 2019 thirteen airlines ceased trading in

STEPS TO ANSWER A
Europe. This reflected a global trend where small airlines found it
increasingly difficult to compete against large airlines, which have
continued to grow.

SKIM THE DATA

Large airlines charge a price for a flight that includes meals and
entertainment for passengers. Smaller airlines charge a price for the
flight only and passengers need to pay extra for other services such as
meals.

Start by skimming the data.

DATA RESPONSE QUESTION

Large airlines benefit from economies of scale. Without these cost-
reductions some smaller airlines have gone bankrupt.

The reduction in the number of airlines has not reduced the

overcapacity in the market because the aircrew and aircraft of the
bankrupt airlines were acquired by the remaining companies, which
Read the text quickly to get
have developed into super-airlines. This has left passengers with fewer
airlines to choose from and more expensive fares. It was predicted
that this would lead to an increase in the market share for the top five
a general idea of meaning.
European airlines from 50% of the European market in 2019 to match
the top five United States (US) airlines, which control 77% of the US
market.

The development of super-airlines took place at the same time as

increasing regulation of the airline market. For example, the European
Union (EU) will only grant operating licences for flights between EU
countries to an EU airline. This has prevented non-EU airlines from
competing on EU routes.

For the super-airlines, large scale is the easy way to avoid the stresses
and strains of open competition. For passengers this will lead to higher
prices and poorer service. STEP First reading: Skim the data
01
Sources: adapted from Financial Times, 6 October 2017 and The
Economist, 27 April 2019

SKIM THE DATA Look at the questions and

STEP
requirements
LOOK AT THE TITLE 02
COMPETITION IN THE Look at the title as it may give
STEP Second reading: Spot
SKIES OVER EUROPE some clues about its content.
the keywords
03
ANALYSE FACTS, STEP
FIGURES AND
It was predicted that this would
TABLES
Write the answer 04
lead to an increase in the market
share for the top five European
airlines from 50% of the Analyse facts, figures tables
European market in 2019 to and diagrams. See if you know
match the top five United States
what they mean. Pick out any
(US) airlines, which control 77%
of the US market. notable features of a chart or
diagram.

(d) Explain two reasons why a government may privatise an industry. [4]

STRUCTURE
Read the Requirements There are several reasons why a government may
privatise an industry, such as air travel.
CLEAR
HEADINGS
Always read the requirement first as this enables you to focus on
the detail of the question with the specific task in mind. Reason 1: Privatising an industry may lead to an increase
in government revenue.
What is the point in reading a scenario if you don't know what you
are looking for? If you don't read and understand the requirements
carefully, then you will find that you are not actually answering the The government may earn more tax revenue if it
question. If you are not answering the question, then you are not privatises a state-owned industry. This is because a PARAGRAPHS
earning marks.
privately owned industry has to pay corporation tax. A
Pay attention to (1) The content and (2) The instructions corporation tax is a tax levied on companies profits.

Explain what is meant by a contestable market and The sale of a state-owned enterprise to the private
discuss how making the airline market more contestable sector will also raise money for the government. REFERENCE TO
could benefit passengers.
THE DATA
In the data, it was mentioned that a successful sale of
THE CONTENT Air India to the private sector would have raised money
... contestable
When you read each part of
the requirement, highlight the for the Indian government.
'content'. This is simply what
market...benefit the question is about.
This helps you to focus your
mind on answering the actual
More tax revenue will enable the government to increase SIMPLE ENGLISH
question rather than
answering what you thought
its spending on education, healthcare or
the question was going to ask
you.
infrastructure. This will help to promote development
in the country.
THE INSTRUCTIONS

This instruction could be a whole

Explain variety of verbs ranging from
numerical requirements such as
Reason 2: The government may privatise an industry
Explain what is meant by calculate and apply; or more because the industry is making a loss.
a contestable market and wordy requirements such as
discuss how making the describe, interpret, outline or
compare.The verb used has
airline market more
contestable could benefit been carefully thought about by The need to use tax revenue to finance the loss-making
the examiner, taking into
passengers.
account any restrictions industry will be reduced. The private sector may also
imposed by the syllabus.
manage the industry with greater efficiency and turn
the loss into a profit. This is because the private sector,
motivated to make a profit, will increase productivity
and reduce costs.
 04

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Topic O level
Scarcity, Choice and Opportunity Cost
topics
Multiple Choice Questions

1. B The basic eco

C Reaching a market equilibrium
­
1. Which terms summarise the nature nomic problem is that
of the economic problem? may take a long time. human wants are unlimited

A finite resources and limited wants D Scarce economic resources are while the resources

B finite resources and unlimited distributed equally. available to satisfy these

wants are Smiled (finite).
wants [N10/P1/Q31]

Questions
2. C If this decision
C infinite resources and limited
A government isf aced with thech oiceof was not taken, resources
wants would have remained in

Answers and
D infinite resources and unlimited sp ending oneithere duc ationor investment causing in
wants healthcare.
­
vestment to increase. So
IJ10/P2Q2] Of what is this an example? the next best alternative

Explanations
(opportunity cost) of this
A conservation of resources
2. The government of a country with a decision is the reduction
B monetary policy in investment
rapidly increasing population decides C opportunity cost
to switch resources from investment 3. A The problem of
to increased subsidies to farmers. D substitution of factors scarcity arises due to lim
­
What is the opportunity cost of this [N10IP1IQ5J ited resources to satisfy
unlimited wants Option A
decision? 5.
A firmd ecidesto stop manufacturin g would decrease the exist
A the profit earned by farmers
­
­
ovensand t o producewashing machines ing limited resources
B the rent of the land on which food instead. while all other options
is grown would increase lhe limited
What is the opportunity cost to the firm? resources
C the reduction in investment
A the additional washing machines
D the wages of the farm workers 4. B Since limited
produced resources have many
IJ10IP1IQ4]
B the cost of producing ovens alternative uses, it
becomes important to
3. Which economic change would C the cost of producing washing
machines choose one and forgo
increase the problem of scarcity? al other possible uses
D the loss of the production of
A a decrease in fish stocks ovens
5. C Making a choce
involves giving up alterna
B a discovery of a new oil field {J11IP1IQ2!
­
Paper and year
tives which results in an
C an increase in labour productivity What is meant by the economic opportunity cost i.e the
D a reduction in waste 6. problem?
cost of the next best al
­
[J 10/ Pl / Q5J ternative forgone
Ah ow toachi eveefficie ncyw ith 6. D Opportunity
4. What makes choice an important theexist enc eoffixe dresou rces cost is defined as the next
limi ted wantsand test alternative foregone
element in the basic economic prob
lem? B how to allocate resources be In this example you give
­
­
tween public and private sectors up the production of ovens
A Increased demand leads to C how to balance unlimited wants to produce washing ma
­
higher market prices. against finite resources chines Hence the loss of
production of ovens is the
B Limited resources have many al D how to decide which methods to opportunity cost
­
ternative uses. use to exploit all resources

AS level topics
A level
topics