Factors of Production and the PPC Diagram: Economics 0455 (Cambridge O Level / IGCSE)

Amara runs a small candle-making workshop. She uses $15,000 of her own savings to fund an expansion, taking on the risk that it might fail if sales do not increase. She organises the day-to-day running of the business, deciding what candles to make and how to combine her staff, equipment and materials to make them.

What is the correct term for the reward Amara receives for performing this role in the workshop?

Priya runs a small tailoring business that makes and alters clothing to sell at a local market. To expand, she uses $20,000 of her own savings to fund the project, accepting that she may lose this money if the expansion does not succeed. She rents a larger unit on a plot of land at the edge of town, buys a new industrial sewing machine and a fabric-cutting machine, and hires two more tailors to work alongside her.

(a) Identify, from the passage, one example of each of the four factors of production used by Priya's business: land, labour, capital and enterprise. [4]

(b) State the reward earned by (i) the land factor and (ii) the capital factor used by the business. [2]

(c) Explain why Priya's own role in this expansion is best classified as enterprise rather than labour. [2]

The small island economy of Palmares uses all of its workers and equipment to produce just two goods: fish (measured in tonnes per year) and solar panels. A production possibility curve (PPC) for Palmares shows the maximum combinations of fish and solar panels it can produce in a year when all of its resources are fully and efficiently employed.

Three possible combinations of output for Palmares are:

• Point P: exactly on the curve, 800 tonnes of fish and 300 solar panels.
• Point Q: inside the curve, 500 tonnes of fish and 200 solar panels.
• Point R: outside the curve, 800 tonnes of fish and 400 solar panels.

(a) Explain what point Q shows about the way Palmares is currently using its resources. [2]

(b) Explain why point R is not currently attainable for Palmares. [2]

(c) Palmares is initially producing at point P. It then reallocates resources along the same PPC to produce 350 solar panels instead of 300, and as a result fish output falls from 800 tonnes to 770 tonnes. Calculate the opportunity cost of one extra solar panel, in tonnes of fish forgone, and explain what your answer shows about the reallocation. [3]

Some years after the situation described above, Palmares experiences two separate events.

Event 1: An economy-wide training scheme improves the general skills of Palmares' entire workforce, including both those who catch fish and those who manufacture solar panels, and improved shipping links let the island import better tools and machinery used in producing both goods.

Event 2: A fire severely damages Palmares' main solar-panel factory, destroying most of the specialised equipment used only in manufacturing solar panels, while the size and skill of the fishing workforce, and the boats used to catch fish, are unaffected.

(a) Explain the effect of Event 1 on Palmares' production possibility curve. [4]

(b) Explain the effect of Event 2 on Palmares' production possibility curve, and explain why this effect is different from a uniform inward shift of the whole curve. [4]

The diagram (described here in words) shows a country's production possibility curve (PPC) for producing bicycles and tents. The country is currently producing at a point on the curve. It then moves along the same, unchanged PPC to produce more bicycles and fewer tents, with the total quantity and quality of its resources unchanged.

What does this movement show?

Mr. Okafor owns a plot of grazing land on the outskirts of town. He does not farm the land himself. Instead, he allows a local dairy farmer, Beatrice, to graze her cattle on it, and she pays him a fixed amount every month in return.

What is the correct term for the payment that Mr. Okafor receives for allowing Beatrice to use his land?

Daniel and his cousin Michael both repair bicycles. Daniel works fixed hours at CityCycle Repairs, a shop owned by someone else, and is paid a set hourly amount by the shop owner no matter how many bicycles he repairs that day. Michael is self-employed: he repairs bicycles from a stall he rents in the market, keeps all of the money customers pay him, but must cover his own costs (the stall rental and spare parts) out of that money. In a quiet week with few customers, Michael sometimes earns very little once his costs are paid.

(a) Identify the factor of production that Daniel supplies to CityCycle Repairs, and state the reward he receives for it. [2]

(b) Explain why Michael's income is classified as profit rather than wages, even though he is also carrying out physical repair work like Daniel. [3]

(c) State and explain one reason why Michael's weekly income is likely to vary more than Daniel's weekly income. [2]

The economy of Meridia produces only two goods, rice (measured in tonnes per year) and furniture (measured in units per year). The table below shows three combinations of output, W, X and Y, that all lie on Meridia's production possibility curve (PPC), each representing full and efficient use of Meridia's resources.

(a) Calculate the opportunity cost, in units of furniture given up per tonne of rice gained, of moving from point W to point X. [2]

(b) Calculate the opportunity cost, in units of furniture given up per tonne of rice gained, of moving from point X to point Y. [2]

(c) Using your answers to (a) and (b), explain what happens to the opportunity cost of producing extra rice as Meridia produces more and more of it, and suggest why this pattern might occur. [3]

Kite & Co. is a small furniture workshop. It currently employs 6 carpenters, each equipped with a set of basic hand tools, and each carpenter produces 12 chairs per week. The workshop's current total output is therefore 72 chairs per week. The owner is considering two separate ways of increasing this output, and asks for your help comparing them.

Change A: The owner hires 2 additional carpenters, giving each of them the same basic hand tools already used by the existing staff. None of the 6 original carpenters receives any extra training or new equipment, and every carpenter, old and new, continues to work in exactly the same way as before, producing 12 chairs per week each.

Change B: Instead of hiring anyone new, the owner keeps the same 6 carpenters but sends all of them on a specialist joinery training course and replaces their basic hand tools with modern power tools. As a result, each of the 6 carpenters is now able to produce 20 chairs per week.

(a) Calculate the workshop's total weekly output after Change A, and state what happens to output per carpenter as a result of Change A. [3]

(b) Calculate the workshop's total weekly output after Change B, and state the new output per carpenter. [3]

(c) Using your answers to (a) and (b), explain the key economic difference between Change A and Change B, in terms of what each change does to output per carpenter. [2]

Farah says, "My capital is the $8,000 I have saved in my bank account, which I am going to use to start a juice-bar business." She has not yet spent any of this money.

Which of the following best explains how an economist would view Farah's $8,000 of savings, before she spends it on her business?