CIE A Level Economics 1 Basic Economic Ideas and Resource Allocation Exam Questions

About CIE A Level Economics 1 Basic Economic Ideas and Resource Allocation

Topic 1 is the opening section of the Cambridge 9708 AS Level content and sets out the toolkit used in every later topic. You study the basic economic problem of scarcity and choice, how economists use positive and normative statements and ceteris paribus, the four factors of production and their rewards, and how market, planned and mixed economies allocate resources. Production possibility curves are used to show opportunity cost, efficiency and growth, and goods are classified as free, private, public, merit and demerit goods. These ideas return in market failure (topics 3 and 7) and growth (topics 4 and 9). Examiners often test PPC shifts and the difference between positive and normative statements.

What you need to know

• 1.1 Scarcity, choice and opportunity cost The basic economic problem is unlimited wants and finite resources, so every choice has an opportunity cost: the next best alternative forgone. Economic agents (consumers, firms, governments) all face this trade-off.
• 1.2 Economic methodology Economics is a social science that uses models and the ceteris paribus assumption. Positive statements can be tested against evidence; normative statements contain value judgements. Distinguish the short run, long run and very long run, and decisions made at the margin.
• 1.3 Factors of production Land (reward rent), labour (wages), capital (interest) and enterprise (profit). Know the division of labour and specialisation, and the role of the entrepreneur in organising the other factors and taking risk.
• 1.4 Economic systems Market economies allocate by the price mechanism, planned economies by state direction, and mixed economies use both. Each answers what, how and for whom to produce, with different strengths in efficiency and equity.
• 1.5 Production possibility curves A PPC shows the maximum combinations of two goods with given resources and technology. Points inside show unemployed or inefficiently used resources; a curve concave to the origin reflects increasing opportunity cost; an outward shift shows economic growth.
• 1.6 Classification of goods Free goods have zero opportunity cost. Private goods are excludable and rival. Public goods are non-excludable and non-rival, causing the free rider problem. Merit goods are under-consumed and demerit goods over-consumed, partly because of information failure.

Common mistakes in 1 Basic Economic Ideas and Resource Allocation

• Defining opportunity cost as the money price of a good. It is the value of the next best alternative given up.
• Calling any statement with a number in it positive. A statement is normative if it contains a value judgement such as should or ought, whatever data it includes.
• Showing a movement along a PPC as economic growth. Growth in productive capacity is an outward shift of the whole curve; moving from inside to on the curve is using spare capacity.
• Describing public goods as goods provided by the government. A public good is defined by non-excludability and non-rivalry, not by who supplies it.
• Confusing merit goods with public goods. Merit goods such as education are excludable and rival but would be under-consumed in a free market.

Try three 1 Basic Economic Ideas and Resource Allocation exam-style questions