Economic Systems and Production Possibility Curves: Economics 9708 (Cambridge International AS & A Level)

An economy produces only two goods, timber and furniture, using all of the factors of production currently available to it and the most efficient technology it currently has. A newspaper report claims that, next year, without any new resources or new technology becoming available, this economy could produce more timber without producing any less furniture than it does now.

Which position on the economy's production possibility curve (PPC) for timber and furniture is most consistent with this claim?

An economy produces only two goods: food (measured in tonnes) and machinery (measured in units). The table below shows five combinations, P to T, that lie on the economy's production possibility curve (PPC), assuming all resources are fully and efficiently employed.

(a) Calculate the opportunity cost, in units of machinery, of increasing food output from 20 tonnes (combination R) to 30 tonnes (combination S). [2]

(b) Calculate the opportunity cost, in units of machinery, of increasing food output from 30 tonnes (combination S) to 40 tonnes (combination T). Using your answers to part (a) and this part, explain what these two values show about the shape of this economy's PPC. [3]

(c) The economy is currently producing 15 tonnes of food and 60 units of machinery. With reference to the table, explain whether this combination lies on, inside, or beyond the economy's PPC. [2]

(d) The economy's farmers adopt a new irrigation technology that significantly increases the amount of food that can be grown from the same area of land, with no effect on machinery production. Explain the effect of this development on the position of the economy's PPC. [2]

Every economic system, whether it relies mainly on markets, on central planning, or on a mix of the two, has to find a way of answering the same basic questions about how to use scarce resources.

(a) State the three fundamental economic questions that any economic system must answer, briefly explaining what each one refers to. [3]

(b) The world price of coffee beans rises sharply after a poor harvest in several producing countries. Explain, using the price mechanism, how this rise in the world price is likely to affect the incentive for coffee farmers in a market economy to grow more coffee. [4]

(c) National defence is an example of a good that is non-excludable and non-rival in consumption. Explain why these two characteristics mean that national defence is unlikely to be supplied by the private sector on its own, and why it is instead normally provided by the public sector. [4]

In Country Novaria, the government owns almost all of the land, factories and firms. A central planning committee decides in advance what quantities of steel, wheat and clothing will be produced each year, which factories will produce them, and how the output will be shared out among consumers. Prices are set by the government rather than being determined by the interaction of buyers and sellers, and production decisions are not driven by a profit motive.

Which of the following best describes a key characteristic of the type of economic system operating in Country Novaria?

A small furniture-making business currently employs six workers, each of whom makes an entire wooden chair from start to finish: cutting the timber, assembling the frame, sanding the surfaces and applying varnish. The owner is considering reorganising production so that each worker specialises in only one stage of this process (a division of labour), with each chair passing from one worker to the next along a small production line.

(a) Explain two advantages to the business of introducing this division of labour. [4]

(b) Explain one disadvantage to the workers themselves of this change in how production is organised. [3]

(c) Discuss the extent to which the benefits of introducing division of labour in this business depend on the size of the market for the chairs it produces. [5]

Which of the following correctly pairs a factor of production with the reward earned by whoever supplies it?

A coastal town council is reviewing four items connected with the local economy: a public footpath along the seafront, which anyone can walk along and where one person's use does not stop anyone else using it at the same time; a loaf of bread sold in the town's bakery; a vaccination against a contagious disease, which is heavily subsidised by the government; and cigarettes sold in a corner shop.

(a) State the two characteristics economists use to define a public good, and explain, using the seafront footpath and the loaf of bread as your examples, why the footpath is classified as a public good while the loaf of bread is classified as a private good. [4]

(b) Explain why the vaccination is classified by economists as a merit good, and why cigarettes are classified as a demerit good. [4]

(c) Assuming there was no government subsidy, explain why a merit good like the vaccination is likely to be under-consumed, and a demerit good like cigarettes is likely to be over-consumed, if left entirely to a free market. [3]

An economy produces only two goods: rice (measured in tonnes) and solar panels (measured in units). Three combinations, M, N and O, lie on the economy's production possibility curve (PPC), assuming all resources are fully and efficiently employed.

(a) Calculate the opportunity cost, in solar panels, of increasing rice output from combination M to combination N. Using this and the fact that the same opportunity cost applies between combinations N and O, explain what this shows about the shape of this economy's PPC. [4]

(b) A severe flood destroys a significant proportion of the economy's farmland used to grow rice, with no direct effect on the resources used to produce solar panels. Describe, in words, the effect of this event on the economy's PPC, and state whether it represents a movement along the curve or a shift of the curve. [4]

(c) Over the two years following the flood, the economy's actual output of both rice and solar panels rises compared with immediately after the flood, but total output of both goods remains below what it was before the flood. Distinguish between actual economic growth and potential economic growth, and explain which of the two this recovery represents. [3]

Which of the following is most likely to be identified as an advantage of a market economic system, when compared with a planned (command) economic system?

Amara is a self-employed potter who runs a small pottery workshop. She rents a workshop unit from a local landlord; she uses $5,000 of her own savings together with a bank loan to buy a pottery kiln; and she personally makes all the decisions about what to produce, organises the workshop, and bears the risk that the business could make a loss if her pots do not sell.

(a) Identify the factor of production represented by the workshop unit that Amara rents, and state the reward earned by whoever supplies this factor. [2]

(b) Identify the factor of production represented by the kiln and the finance used to buy it, and state the reward earned by whoever supplies this factor. [2]

(c) Explain how Amara's own role in organising the workshop and bearing the risk of a possible loss represents a different factor of production from land, labour and capital, and state the reward she earns for taking on this role. [3]