Cambridge IGCSE and O Level Economics
Section 1: The basic economic
problem
Part 1 Definitions
1 i
2 d
3 g
4 a
5 h
6 c
7 b
8 j
9 e
10 f
11 o
12 n
13 k
14 l
15 m
Part 2 Missing words
1 scarcity, wants
2 choices
3 occupationally, immobile
4 net
5 wage, profit
6 raising, lowering
7 production, productivity
8 uninsurable or uncertain
9 opportunity
10 two, technology
Part 3 Calculations
1 The firms’ total wage cost is 26 × US$75 = US$1 950.
2 Net investment is gross investment minus depreciation. In this case this is
US$900 m − US$620 m = US$280 m.
Part 4 Interpreting diagrams
a 10 m capital goods.
b 110 m consumer goods.
Part 5 Drawing diagrams
An increase in the quantity of resources will mean that more can be produced of both capital and
consumer goods and so the PPC will shift to the right as shown in Figure 1.
Capital
goods
(million)
0
Figure 1
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Consumer
goods (million)
1
Cambridge IGCSE and O Level Economics
Part 6 Multiple choice questions
1 A
Scarcity arises because wants are unlimited whereas resources are finite. A reduction in
resources would widen the gap between the two. In contrast, B, C and D have the potential to
reduce but not eliminate the problem of scarcity.
2 C
Investment in human capital involves the improvement in the quality of labour that arises as
a result of the experience workers gain and the education and training they receive. A would
increase the supply of the labour force, B may raise labour productivity and D is investment in
capital goods.
3 C
A tractor is a capital good. It is a factor of production as it is used to produce a product which
in this case is food. A is the product. B is a non-monetary advantage the farmer gains and D is a
payment to a factor of production.
4 B
An economic good takes resources to produce it. Air from an air conditioning system has been
processed. In contrast, A, C and D are free goods – they exist without any resources being needed
to make them.
5 D
Land is a natural resource. Water is an example of a natural resource. A and B are capital goods
and C is labour.
6 D
The next best use of the bus may be transporting a group of retired people on a day out. A is a
change in revenue and B and C are financial costs.
7 B
Labour is human effort used in producing products. A is defining only part of labour as it does not
cover mental effort or physical and mental effort used in other sectors. C is a definition of land
and D is a definition of enterprise.
8 A
A production possibility curve shows the different combinations of two products that can
be produced with existing resources and technology. A production point would indicate the
combination the country is producing. This may reflect what people want to be produced. A PPC
does not provide any information about prices or profitability.
9 D
A PPC illustrates opportunity cost as it shows how much of one product has to be given up
to gain some more units of the other product. It shows scarcity as it indicates that because
resources are limited, there is a restriction on the amount that can be produced.
10 A
A point outside a PPC is currently unattainable as there are not enough resources, and
technology is unchanged. B and D would be shown by a point inside the curve and C by a point
on the curve.
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Cambridge IGCSE and O Level Economics
11 C
64
In the case of Firm Y, producing 1 unit of perfume would involve giving up 4 units of soap ( ). The
16
60
50
opportunity cost of producing one unit of perfume in Firms W and X is 5 ( and ) and it is 4.5 in
10
12
90
the case of Firm Z ( ).
20
12 A
A football stadium is a human-made resource that is used to provide a service in the form of
entertainment. The owner of a football club bears the risk of the football club going out of
business.
Part 7 Similarities and differences
Similarities
1 Both are examples of labour, one is involved in physical work and one in mental work.
2 Both are human resources.
3 Both are examples of land.
4 Both are free goods.
5 They are two different names for a diagram showing the maximum output of two products that
can be made with existing resources and technology.
6 Both are attainable with existing resources and technology.
7 They are different names for factors of production that are restricted in number.
8 They are both examples of land.
9 They are both payments to factors of production.
10 A movement along a PPC represents a reallocation of resources. In contrast, a shift in a PPC
occurs when there are more or better quality resources.
Differences
1 Capital goods are used to produce other goods and services whereas consumer goods are used
by people for their own satisfaction.
2 Economic goods take resources to produce them and so involve an opportunity cost. In contrast,
free goods do not take resources to produce them and so have no opportunity cost.
3 Capital is a human-made resource whereas land is a natural resource.
4 Geographical immobility occurs when resources find it difficult to change their location whereas
occupational immobility occurs when resources encounter difficulties changing their use.
5 Opportunity cost is cost in terms of the best alternative forgone whereas financial cost is cost in
terms of money.
6 An increase in the quantity of an economy’s factors of production means there are more factors
of production. For instance, there may be more workers and more machines. An increase in the
quality of an economy’s factors of production means that the factors of production are more
productive. For instance, workers may be capable of producing more products per hour because
they are more skilled.
7 Consumers buy goods and services while producers make and sell goods and services.
8 Sunshine is a free good whereas a solar panel is an economic good. Sunshine does not take
resources to produce it whereas a solar panel does.
9 A production point on a PPC is attainable whereas a point to the right of a PPC is unattainable.
10 Capital is a human-made resource and labour is a human resource.
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Cambridge IGCSE and O Level Economics
Part 8 Data response questions
1 a Car designers.
24 200
).
2 200
c The source material mentions that $1 000 could buy a new Nano or a second-hand 1993 Land
Rover. By choosing to buy a new Nano, a person may have given up the opportunity to buy a
second-hand Land Rover. So, the opportunity cost may be the second-hand Land Rover.
b 11 (
d The economic problem is that wants exceed resources. The source material mentions that
many millions of people would like to buy a car but cannot afford one. Their wants exceed the
income they have available to buy a car. The source material also suggests that to produce
more of other cars, fewer Nanos should be made. People would like more cars but there are
not enough resources to make all of the cars they would like.
e The source material mentions that car production is becoming more automated. This means
that more capital equipment is being used. Machines, in the form of robots, are replacing
workers. This will be because the robots can undertake complex tasks quicker and more
cheaply than workers. So, the number of workers employed may have fallen because they
have been substituted by more productive capital.
f
Tata Motors was not using all of its resources. At its Sanand factory, it could produce 250 000
Nanos but only made 24 000 in 2015 and the source material mentions that most of its
factories were working with spare capacity. This means that Tata Motors was producing inside
its production possibility curve. Point X in Figure 2 illustrates such an output level. The firm
could produce more with existing resources and technology.
Nano
cars
4
X
0
Other cars
Figure 2
g A car could be a capital good. Some cars are used by sales people to visit potential clients.
Cars may be employed by doctors to visit their patients. They may also be purchased by
taxi firms to carry passengers. In all of these cases, the cars are being used as part of the
production process. In the first case, the cars are being used to sell products and in the last
two cases, they are being used to provide a service. So, in these examples, cars are a humanmade good used to produce other goods and services.
A car could, however, also be bought for immediate satisfaction. People buy cars because
they want to use them to, for instance, go to work, go shopping and go out to leisure
attractions. Travelling by car may be more comfortable and more convenient than travelling
by other forms of transport.
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Cambridge IGCSE and O Level Economics
It is possible that the same car may be a capital good for part of the time and a consumer
good for the rest of the time. For instance, a taxi driver may use his or her car both to carry
passengers and to take his or her family to the zoo for a day out.
So, whether a car is a capital or a consumer good depends on what they are used for. It is
also influenced by who buys it. Cars bought and used by firms are capital goods whereas cars
bought and used by households are consumer goods.
h There are some possible reasons why the quality of Tata car workers may decline in the future.
They may become less productive if they become demotivated. This may occur if their wages
are cut due to a decline in sales. If the firm is not expanding its output, it may find it more
difficult to attract skilled workers who are more likely to want to work for firms that provide
greater job security and more opportunities for promotion.
The quality of workers, however, tends to increase over time. This is because of improvements
in education and advances in technology. If the standard of Indian education improves, new
young workers are likely to be more productive. For instance, universities and colleges may
put on more or better engineering and designing courses. The source material mentions
that the production process is becoming more automated. Machines are increasingly
eliminating routine, unskilled tasks while working with more and more advanced technology
requires many workers to be more skilled. This may encourage Tata to increase its spending
on training its workers to ensure that it is getting the best return from both its workers
and capital equipment. The source material also mentions that cars are ‘becoming more
sophisticated, and the manufacturing process becoming more complex’. This suggests that,
for instance, car designers and maintenance staff are increasing their skills.
It appears likely that while the quantity of car workers may decline in the future, their quality is
likely to increase.
2 a Sunshine.
$2 162
).
b $308.86 (2dp) (
7
c The source material mentions that not all families are able to go on holiday and that most
people do not have as many holiday breaks as they would like. This suggests that people’s
desire for holidays exceeds the resources available to produce those holidays.
d Sandy beaches are involved in providing holidays in the Maldives. These are a form of land as
they are a natural resource. Hotels host the tourists who come to the Maldives. Hotels are an
example of capital. They are a human-made resource.
e A travel firm in deciding how to use its resources of, for instance, workers and premises, will
take into account opportunity cost. In deciding whether to offer a new holiday, the firm will
have to consider whether the profit it will gain from this holiday offer will be higher than the
profit it would gain from what it considers to be its next most rewarding holiday offer. It will
have to keep the position under review as profitability can change over time as demand for
holiday destinations and their costs change. In this case, the opportunity cost of the German
firm offering a holiday in the Maldives, is offering a holiday in Italy.
f
It would be expected that countries with the largest populations would have the most
visitors to Mauritius. They would have more people who could visit the country. Table 1 in the
Coursebook largely supports this expected relationship. China has the largest share of world
population and the most visitors. The countries are in the same order in terms of population
size and visitors with the exception of India. This country has a share of world population that
is only slightly below that of China but it accounted for a much smaller percentage of visitors.
Other things being equal, it would have been expected that India would have had the second
largest share of visitors to the Maldives. Other things are, however, not equal. The number of
visitors from a country is also influenced by, for instance, incomes in the country and the price
of flights between the country and the Maldives.
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Cambridge IGCSE and O Level Economics
g Hotels are geographically immobile. They cannot move from one geographical location to
another. Hotel chefs are clearly more geographically mobile than hotels. Some hotel chefs
may be able to get jobs in other parts of the country and, indeed, in other countries. The most
skilled hotel chefs will find it easiest to get jobs in other hotels and the ones who are likely to
be the most willing to move may be those without family commitments and who are living in
rented accommodation.
It is more debatable whether hotels or hotel chefs are more occupationally mobile. Hotels
may be used for a variety of purposes. As well, as hosting guests, a hotel could be used for
offices or housing. Hotel chefs may be able to undertake a number of other jobs. For instance,
they may be able to get jobs as chefs in a restaurant or a university canteen. They may also
be able to gain employment in other jobs in hotels or in other occupations. The qualifications
of hotel chefs, however, varies. Some may have few qualifications and a number may
have qualifications that are restricted to their current occupation. The ones with the most
transferable skills and qualifications will be the most mobile.
h The Maldives may be able to increase its output of both tourism and fish in the short run if
initially it is not using all of its resources. Figure 3 shows the output of both products increasing
as the country’s production point moves from A to B. In this case, there is no opportunity cost
involved. More can be produced by employing unemployed hotel workers and fishermen, for
instance, and making use of previously unoccupied hotel rooms and fishing boats.
Tourism
B
6
A
0
Fish
Figure 3
In the long run, the Maldives may be able to increase its output of both products if there are
more or better quality goods and services. Immigration of workers and improvements in
education are two of the reasons why a country’s production possibility curve (PPC) could
shift to the right. Figure 4 shows that the increase in productive capacity enables more
tourists to be catered for and more fish to be caught.
Tourism
0
Figure 4
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Fish
Cambridge IGCSE and O Level Economics
If, however, the Maldives is currently making full use of its resources, it will not be possible to
increase the output of both tourism and fish. If the country wants to catch more fish, it will
have to switch some resources away from tourism. The effect of this is shown in Figure 5.
Tourism
Y
Y1
0
X
X1
Fish
Figure 5
There is also a risk that if there is overfishing now, the potential to catch fish will decline in the
future. Figure 6 shows how the depletion of fish stocks lowers the output of fish.
Tourism
7
0
X1
X
Fish
Figure 6
Part 9 Four-part questions
1 aThe basic economic problem is that while wants are unlimited, resources are not. This results
in wants being greater than resources.
b A worker in deciding whether to accept a new job would have to consider carefully the
opportunity cost. This is what he or she is giving up in terms of his or her current job. This
may include, for example, having a shorter distance to travel to work and good promotion
chances. The production of economic goods involves the use of resources. This means that
they involve an opportunity cost. For instance, the factors of production that are employed in
the production of TV programmes cannot be used to educate university students.
c An increase in the occupational mobility of labour would mean that workers would find it
easier to change from one occupation to another occupation. Improved education would
mean that future workers would be qualified to undertake more types of jobs. This would
increase the ability of people to switch from one job to another.
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Cambridge IGCSE and O Level Economics
More and higher quality training would also make it easier for people to change jobs. For
example, training unemployed steel workers in ICT (information and communications
technology) may enable them to move from a declining to an expanding industry.
In addition, greater availability and greater accuracy of information should mean that workers
move with greater ease and greater speed between different types of jobs.
d An economy will be able to increase its output of consumer goods if it is currently not making
full use of its resources. Figure 7 shows an economy raising its output of consumer goods
from X to X1 as a result of employing previously unemployed resources. By moving from inside
to on the PPC, the economy is also able to increase its output of capital goods from Y to Y1.
Capital
goods
Y1
Y
0
X
Consumer goods
X1
Figure 7
An increase in the quantity or quality of resources will also enable an economy to produce
more consumer goods and more capital goods. A rise in the retirement age, for instance,
would increase the size of the labour force and advances in technology would increase the
productivity of capital goods. If the economy uses the rise in the size of the labour force and
takes advantage of the advances in technology, output will rise. Figure 8 shows the resulting
shift to the right of the PPC and the rise in the output of consumer goods and capital goods.
Capital
goods
Y1
Y
B
A
0
X
X1
Consumer goods
Figure 8
If, however, the economy is currently producing at full capacity, it will only be possible to
produce more consumer goods at the cost of fewer capital goods. Resources will have to be
moved from producing capital goods to producing consumer goods. Figure 9 shows that the
opportunity cost of producing 20 m more consumer goods is 5 m capital goods.
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Cambridge IGCSE and O Level Economics
Capital
goods
(millions)
50
45
0
80
100 Consumer
goods (millions)
Figure 9
Switching resources from capital goods to consumer goods may reduce an economy’s ability
to produce consumer goods in the future. This is because producing fewer capital goods may
result in a decrease in an economy’s resources. Such a decline would shift the PPC to the left
and so may lower the output of both consumer goods and capital goods in the future.
2 aAn economic resource is a factor of production used to produce goods and services. The four
economic resources are land, labour, capital and enterprise.
b The mobility of economic resources comes in two forms. One is geographical mobility. This
refers to the ability of economic resources to change their geographical location. Most land
is geographically immobile. Some types of capital goods can be moved from one part of the
country to another, or indeed from one country to another country. For instance, delivery
vans and computers can be moved from one area to another. In contrast, office buildings and
airports are geographically immobile. The extent to which labour is geographically mobile
depends on a number of factors including the cost and availability of housing in different
parts of the country and family ties. Entrepreneurs tend to be both occupationally and
geographically mobile.
c Firms producing cotton garments may increase the number of machines they use if the
machines become cheaper. A fall in the price of machines will increase firms’ ability to buy
the machines. They may also be prepared to buy and use more machines if the machines
improve in quality or if their workers become more productive. More advanced machinery
may be able to undertake more tasks and to work more efficiently. This may enable the firms
to produce more cotton garments and the machines may be less inclined to break down. If
the firms’ workers become more skilled, they may be better able to work with more advanced
machinery.
d It is possible that the supply of labour in Pakistan may decline in the future. A decrease in the
supply of labour in a country means that there are fewer people available for work. Children
may leave school at a later age and a higher proportion of school leavers may go on to
university. While having a higher proportion of the population in education would reduce the
supply of labour, it would improve its quality.
The size of the labour force may also decline if more people of working age leave the country
in search of better job prospects and living standards in other countries.
In practice, the supply of labour is likely to increase in most countries. The size of most
countries’ populations is still increasing. In a number of countries, the retirement age is being
raised. This means that people will keep working for longer and so more workers will be
available.
The supply of labour may also be increased by more women entering the labour force. More
women may seek employment due to changes in social attitudes to women working and so
more employment opportunities and better pay becoming available to them.
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