IGCSE

ECONOMICS
Question Bank

Book No: 6000

The Basic Economic Problem

Name:……………………………….

School:………………………………

Date:………………………………...
 MULTIPLE CHOICE QUESTIONS

1. The basic economic problem is

A) how to allocate resources to satisfy unlimited needs and wants.
B) how to satisfy limited wants and needs with unlimited resources.
C) meeting increased demand for goods and services with limited resources.
D) the interaction of market forces to satisfy unlimited needs and wants.

2. An example of a free good is

A) housing.
B) public domain web pages.
C) running shoes.
D) tennis rackets.

3. An olive farm in northern Italy produces organic olive oil which it sells on its website to specialist
shops around the world. An example of tertiary industry activity is
A) bottling the olive oil.
B) crushing the olives to extract the oil.
C) growing olive trees.
D) selling the oil over the internet.

4. Which is not one of the three basic economic questions addressed by an economy?
A) For whom should production take place?
B) How should production take place?
C) What production should take place?
D) When should production take place?

5. Which term is used to describe non-physical items, such as haircuts, bus journeys and internet access?
A) Factors of production
B) Goods
C) Opportunity costs
D) Services
6. Production of any good or service requires resources known as
A) factors of production.
B) land.
C) production facilities.
D) raw materials.

7. What is the generic name for the natural resources required in the production process?
A) Capital
B) Enterprise
C) Labour
D) Land

8. What is the name of the reward for use of enterprise in the production process?
A) Income
B) Profit
C) Rent
D) Salaries and wages

9. Which refers to the willingness and ability of a person to relocate from one area to another for
employment purposes?
A) Geographical mobility
B) Incentives to work
C) Occupational mobility
D) Regional unemployment

10. What is the name given to manufactured resources required in the production process?
A) Capital
B) Enterprise
C) Labour
D) Land

11. Why does every economic choice made have an opportunity cost?
A) In most cases, there is an alternative option.
B) In most cases, there is no alternative option.
C) People have infinite wants.
D) Resources are not allocated efficiently.
12. Which is least likely to be an opportunity cost of studying economics at university?
A) Other things the money could be spent on instead of going to university
B) The difference in earning potential by attending university
C) The option to study geography at university
D) The option to work

13. From the data below, what is the opportunity cost of 1kg of potatoes in terms of kg of carrots?
Carrots (kg) Potatoes (kg)
65 plus 25
55 plus 30
A) 1kg
B) 2kg
C) 5kg
D) 10kg

14. From the table below, what is the opportunity cost of producing 1 extra unit of producer goods?

Producer goods (units) Consumer goods (units)

30 52
33 43
36 34
39 25

A) 1 unit of consumer goods

B) 3units of consumer goods
C) 6 units of consumer goods
D) 9 units of consumer goods

15. Yann bought a new bicycle for $350 but has never used it. The second hand value of the bicycle is
$250. What is the opportunity cost to Yann of keeping the bicycle?
A) $0
B) $100
C) $250
D) $350
16. Which does not shift the production possibility curve outwards?
A) Higher prices
B) Higher productivity levels
C) Improved education and healthcare
D) Technological advances

17. What do most economies strive to increase?

A) Consumer goods
B) Opportunity cost
C) Productive capacity
D) Unemployment

18. Which is most likely to cause an outward shift of an economy’s PPC?

A) A fall in the quality of the factors of production
B) A fall in the quantity of the factors of production
C) An increase in the quantity of the factors of production
D) Higher levels of unemployment

Study the production possibility frontier diagram for Country X, which produces only two
goods, wheat and oil. Use this diagram to answer Questions 19 and 20.

A
E
C
W1
Wheat (Tonnes)

D
W2

O1 O2 B

Oil (Number of Barrels)

19. If country X wishes to increase the production of wheat from W2 to W1, the opportunity cost in terms
of oil is
A) a decrease in oil production from O2 to O1.
B) an increase in oil production from O1 to O2.
C) an outward shift of the PPF curve to point E.
D) C to D.

20. At which point is there spare capacity in the economy?

A) C
B) D
C) E
D) F

21. What would cause an increase in the problem of scarcity?

A) A reduction in resources
B) A reduction in wants
C) A rise in productivity
D) A rise in the mobility of resources

22. What is meant by investment in human capital?

A) Encouraging immigration of people of working age
B) Paying bonuses to workers to encourage them to increase their output
C) Spending money and time on educating and training workers
D) Upgrading the machines labour works with

23. Which item is a factor of production?

A) The food a farmer produces
B) The satisfaction a farmer gains from his work
C) The tractor a farmer drives
D) The wages a farmer pays his workers

24. Which form of air is an economic good?

A) Air at ground level
B) Air from an air-conditioning system
C) Air above an ocean
D) Air in a tropical rainforest
25. Which item used in the production of textiles by a firm would an economist classify as land?
A) Sewing Machines
B) The factory
C) Untrained workers
D) Water taken from a river

26. What might be the opportunity cost of using a bus to transport children to school?
A) Increasing the earnings of the bus company
B) Paying the wages to the driver
C) Paying for the cost of petrol used
D) Transporting a group of retired people on a day out

27. What is meant by ‘labour’ in economics?

A) Hard physical work used to produce manufactured goods
B) Human mental and physical effort used in producing goods and services
C) Natural resources used in the production process
D) Risk taking and organising the factors of production

28. What does a PPC show?

A) The maximum combination of two types of products that can be produced with given resources
B) The prices of two types of goods being produced
C) The quantity of capital and consumer goods that people would like to be produced
D) The relative profitability of capital and consumer goods

29. Which combination of economic concepts is illustrated by a PPC?

A) Cost and price
B) Demand and price
C) Economic goods and free goods
D) Opportunity cost and scarcity

30. What does a point outside the PPC represent?

A) A currently unattainable position
B) An inefficient position
C) The maximum use of resources
D) Unused resources
31. The diagram shows a production possibility curve for digital televisions and CD players.

Which movement shows an increase in the use of existing resources to increase production for both
digital televisions and CD players?
A) X to W
B) X to Z
C) Z to W
D) Z to Y
 STRUCTURED QUESTIONS

1. Boeing ramps up production of its Dreamliner

US aircraft maker, Boeing is ramping up production rates for two of its most popular planes, the 737
and the 787 Dreamliner. The Boeing Vice President of product development said that increasing
automation has been key to achieving higher production rates including retraining its workforce to
operate more advanced machinery and industrial robots.
During the first three quarters of this year, Boeing delivered 101 Dreamliners, a 29 percent
increase over the same period last year. Boeing in the third quarter also delivered 126 model 737s,
compared to 120 in the third quarter of last year. In contrast, production of its 767, 747 and 777 plane
models has been reduced.
The recent announcement by Boeing’s Chief Executive that the company plans to open a 737
completion plant in China, could boost production rates for the model further in the future. The planned
facility would install seats, in-flight entertainment systems, and some galleys and lavatories, as well
as complete the custom paint job for each airline. However, engineers and machinists in Boeing’s US
factories fear the move could mean some of their jobs being transferred to Chinese workers.

a) Give an example of opportunity cost from the extract. [2 marks]

b) Using examples from the extract, identify three factors of production used to make and supply
aircrafts. [6 marks]
c) Using a PPC, analyse how Boeing may allocate resources between its 787 Dreamliner and other
aircraft models. [6 marks]

2. All economic decisions involve an opportunity cost.

a) Define ‘opportunity cost’. [2 marks]
b) Explain why economic decisions will involve an opportunity cost. [4 marks]
c) Using a PPC diagram, analyse how it can demonstrate the concept of opportunity cost. [6 marks]
d) Discuss the extent to which the concept of opportunity cost is relevant only to government spending
decisions. [8 marks]

3. All countries face the economic problem and must choose how to allocate their factors of production.
a) Define ‘the economic problem’. [2 marks]
b) Using appropriate examples, explain the four factors of production. [4 marks]
c) Analyse how a PPC can be used to show the consequences of a change in the allocation of resources
between the production of two goods. [6 marks]
d) Discuss whether more factors of production should be used to build roads. [8 marks]
4. A new Indian Car
On 11 January 2008, Tata, an Indian producer, launched a new model. the Nano. On this day it became
the cheapest car available, selling for half the price of the next cheapest car. For the price of 100,000
rupees, a brand new NANO could be bought or, for instance, a second hand 1993 Land Rover.
The car is intended initially for the home market. It is thought that millions could be sold in India. The
firm also plans to export the car to Latin America, South-east Asia and Africa.
Although selling the car at such a low price will make car ownership more affordable for more people,
there are still many millions of people who would like a car but do not have the income to buy one.

a) Using examples, identify three factors of production used in making cars. [6 marks]
b) Give an example of opportunity cost from the passage. [2 marks]
c) What evidence is there of the economic problem from the passage? [2 marks]
d) Tata produces a range of cars. Use a PPC to illustrate the effect of Tata devoting more of its resources
to producing Nano cars. [4 marks]

5. Using relevant examples, explain the difference between needs and wants. [4 marks]

6. Explain the difference between economic goods and free goods. [4 marks]

7. Explain how poverty in the real world is an example of the basic economic problem. [4 marks]

8. Explain two causes of changes in the quality and quantity of factors of production. [4 marks]

9. Define the term ‘opportunity cost’ and explain the opportunity cost to society of constructing a new
airport. [6 marks]

10. Colleen earns $10.50 an hour, but has chosen to take 2 hours off work in order to attend a school trip
with her son to a theatre show. Her ticket costs $15. Calculate the opportunity cost of Colleen attending
this school trip. [2 marks]

11. Define the term ‘productive capacity’. [2 marks]

12. Explain the two conditions that must hold for an economy to be operating on its PPC. [4 marks]

13. With the use of an appropriate diagram, discuss the consequences of an outwards shift of the PPC for
an economy. [8 marks]
14. Pakistan is a major producer of cotton garments, knitwear and rice. To increase its output of a range
of products, the Pakistani government is seeking to improve the quality and mobility of its economic
resources.

a) What is an ‘economic resource’? [2 marks]

b) Explain what is meant by the mobility of economic resources. [6 marks]
c) Analyse three causes of an increase in the quality of economic resources. [6 marks]
d) Discuss a possible opportunity cost of Pakistan devoting more of its resources to producing cotton
garments. [4 marks]
 MULTIPLE CHOICE QUESTIONS (Mark Scheme)

1 A 17 C
2 B 18 C
3 D 19 A
4 D 20 D
5 D 21 A
6 A 22 C
7 D 23 C
8 B 24 B
9 A 25 D
10 A 26 D
11 C 27 B
12 B 28 A
13 B 29 D
14 B 30 A
15 C 31 B
16 A
 STRUCTURED QUESTIONS (Mark Scheme)

1. a) The loss of 767, 747 and 777 aircraft. This is because some of the resources once used to produce
them at Boeing, are now being used instead to increase the output of 737 and 787 models.

b) The extract refers to labour, capital and enterprise. Labour includes the engineers and machinists at
Boeing’s US factories. Advanced machinery, industrial robots and the factory buildings in which
Boeing makes its aircrafts are all examples of capital. The business know-how of the Chief Executive
in charge of Boeing and responsible for taking major decisions about aircraft production and the future
of the company, is an example of enterprise.

c) The production possibility curve (PPC) in the diagram below shows all possible combinations of
787 aircraft and all other aircraft models Boeing could make with its current resources and level of
technology. All combinations of output along the curve are attainable if Boeing uses all its available
resources efficiently.

The diagram shows that Boeing could choose to allocate all its labour, capital and other resources to
the production of 787s and produce X of these each year. However, if it did all this it would be unable
to produce any other aircraft.
By reallocating some of its resources to the production of other aircrafts, it would continue to produce
some 787s as well as all other models, for example, at point Y on its PPC.

2. a) The opportunity cost of a particular decision, activity or use of resources is the benefit of the next
best alternative or option that is given up.

b) All economic decisions involve an opportunity cost because human wants for different goods and
services are without limit. In contrast, the resources required to make them are limited in supply, so if
they are used to make one type of product, they cannot be used to produce others. This means every
economy must choose which goods and services to produce with their limited resources and, therefore,
which human wants they will satisfy and which ones they will not.

c) The diagram below shows a production possibility curve (PPC) for an economy producing consumer
goods and capital goods. It can produce any combination of outputs along the curve with its limited
resources, if they are fully employed and used efficiently. The curve shows that more consumer goods
could be produced but only if resources are diverted away from the production of capital goods. The
resulting reduction in capital goods will be the opportunity cost of this decision.

d) Governments have to determine how best to spend the revenue they take from taxes. For example,
the more they spend on healthcare the less they have to spend on schools and law enforcement. If a
government wants to spend more, it will have to raise taxes, but that will involve an opportunity cost
for taxpayers. They will have less to spend or save. Raising taxes payable by business may also result
in some closing down or relocating overseas to countries with lower taxes. As a result, jobs and output
will be lost.
However, opportunity cost matters to all people and organisations because productive resources are
scarce compared to their needs and wants. This means they will all have to make choices about how
best to use the limited resources they have available.
For example, private firms must decide what to produce. For example, a vehicle manufacturer may
decide to produce more coaches but this will reduce the resources it has available to produce cars. If
cars are more profitable to make and sell, then it would not be a good decision. Similarly, consumers
have limited incomes. They must decide what to spend their money on. Spending more on holidays
will give them more satisfaction but will leave them with less income to spend on food and other
necessities.
Workers will also have to decide what jobs they will do and how many hours they will work each
week. A job nearer to home may involve less travel time but may pay less in wages than one further
away. Further, choosing to work more hours each week means giving up more leisure time.
3. a) The central problem in economics is the scarcity of resources needed to make goods and services to
satisfy human needs and wants, i.e. unlimited wants and limited resources. It is impossible to satisfy
them all because they are without limit.

b) Land refers to all natural resources used up in the production of other goods and services, including
wood, minerals and farmland.
Labour is the physical and human effort supplied to firms by workers and it includes engineers,
machine operators and teachers.
Capital includes productive resources such as computers, machines, vehicles and tools produced by
firms to be used by other firms to produce goods and services.
Production using land, labour and capital is organised by entrepreneurs. They are people who are
willing to take the risks and decisions necessary to set up and run businesses. This is called enterprise.

c) In the diagram below, a firm is using its factors of production to produce hats and shoes. The firm
can produce any combination of these two products along its PPC if it uses all its resources efficiently.

However, to produce more hats the firm will need to use more of its limited resources. Fewer resources
will be available to produce shoes. The consequence will be a reduction in the number of shoes
produced each period. Alternatively, the opportunity costs of reallocating resources from hat
production to shoe production will be a reduction in the volume of hats produced.

d) A decision to build more roads will result in fewer productive resources being available to produce
other goods and services. For example, land available for farming may be reduced by the decision to
build more roads. Land and capital used in road construction could have been used to build more
houses instead. The government that paid for the new roads to be built could have used tax revenue to
spend more on education and healthcare instead.
However, roads can provide significant benefits to many people and firms in an economy. For example,
their construction will provide work and incomes. Roads can also improve access and journey times
to different areas of a country and to other countries. This can help to improve trade. It may also allow
people to relocate further away from their places of work to areas where houses are cheaper. If these
 benefits exceed the benefits of providing other goods and services instead, then building more roads
will be good for an economy.
Roads can also provide an alternative means of travel that may be cheaper than rail or air travel.
However, increased car travel and traffic congestion can increase pollution and reduce air quality.
These in turn can cause health problems for people who live near roads.

4. a) Three factors of production used in the making of cars are capital, enterprise and labour. Robotic
machinery is used to produce cars and this is an example of capital. Enterprise is provided by the
managers and the shareholders of Tata. Car designers are one of the forms of labour being employed
in car production.

b) The passage mention that 100,000 rupees can buy a new Nano or a second hand 1993 Land Rover.
So, if someone buys a new Nano, the opportunity cost may be the second hand Land Rover.

c) The economic problem is that wants exceed resources. The passage mentions that many millions of
people would like to buy a car but cannot afford one.

d)

5. Needs are goods and services that are essential for human survival (1), e.g. nutritional food, clean
water, shelter, protection, clothing and access to healthcare and education (1). Wants are human desires
but not necessary for human survival (1), i.e. things people would like to have, e.g. smartwatches,
holidays, cars and jewellery. (1) Needs are largely the same for an economy, whereas wants are a
matter of personal choice and unlimited due to human nature. (1)

6. Economic goods are those that are limited in supply (1), so human effort is required to obtain these,
such as oil, wheat, cotton, housing and cars (1). Free goods are goods that are unlimited in supply (1),
such as air or seawater (1). Hence, there is no opportunity cost in terms of their output (1).
7. The basic economic problem is concerned with how best to allocate scarce resources (1) in order to
satisfy people’s unlimited needs and wants (1). Poverty can be defined as people being unable to meet
their basic economic needs (1). For example, many people around the world have to live on less than
$1.25 a day (1), so they suffer from extreme poverty. These people cannot meet their basic human
needs, such as food, water, shelter, clothing, healthcare and education. (1)

8. The quality and quantity of factors of production will change if there is a change in the demand for
and/or supply of land, labour, capital or enterprise.
Possible reasons include:
 New technologies allow firms to produce more output by increasing the quality of physical
capital. Higher productivity also enables firms to cut their average costs of production.
 Net migration of labour will affect the quantity of labour in the economy. If more people
migrate to a country than emigrate to other countries, the quantity of labour will increase,
ceteris paribus.
 Improvements in education and healthcare will improve the quality of labour as workers
become more valuable to firms. This helps to boost production.
 Government policies can affect the costs of production, such as through the use of taxes and
subsidies. For example, lower income taxes can help to create incentives to work, thus
increasing quantity of labour resources. By contrast, subsidies help to reduce production costs,
thereby increasing output of goods and services.

9. Opportunity cost refers to the value of the next best alternative foregone.
Due to scarcity and unlimited wants, every resource use will have opportunity costs associated with it.
In the case of an airport:
 Land- Land as the venue for airport could be used for other purposes such as farming. The
opportunity cost of building the airport could also be the natural scenery that could have been
enjoyed by others.
 Finances- If the airport is built using government funds, those funds could have been used to
improve education and healthcare in the economy, which would have improved labour
productivity and thus, boosted economic growth.
Instead of spending money on building an airport, the money could also have been used to
increase the public transport within the economy, or to build a shipyard if the country relied
on maritime services.
 Labour- The labour involved could have been used to manufacture capital goods which would
have improved the level of physical capital and hence, the productive capacity of the economy.

Any other relevant opportunity cost, concerning the resources used to build airports.
10. The opportunity cost for Colleen of attending the school trip would be 2 hours of work, as well as the
cost of the movie. Therefore, her opportunity cost is ($10.50 x 2) + $15 = $36

11. Productive capacity refers to the maximum possible output an economy can produce from its current
level of resources (Factors of production).

12. For a country to be on its PPC, two conditions have to be met:

 All resources are used i.e. there is no unemployment of the factors of production.
 There is efficiency in the use of resources i.e. factors of production are allocated to their best
use/purpose.

13.
Capital Goods

Consumer Goods

For a country to shift its PPC outwards as shown in the figure, there must be economic growth. This
can come about in the following ways:
 An increase in the quality of the factors of production, such as more highly skilled labour
achieved through investments in education, research and training. Increased productivity can
also be caused by technological advances and improved production techniques.
 An increase in the quantity of factors of production, such as the discovery of new resources,
the reclamation of land, or net migration of labour into a country.
Advantages of PPC shifting outwards:
 Increase in the output level of the economy, leading to an increase in the GDP. Hence, there is
economic growth.
 Increase in living standards due to greater production and consumption.
 Trade with other countries could possibly increase due to an increase in the quantity and quality
of domestic goods.
 Disadvantages:
 Pollution resulting from excess production.
 Unsustainable use of resources, which could possibly lead to resource depletion.
 Living standards may not rise (depends on the type of goods produced, e.g. demerit good
production will not raise the standard of living).

14. a) An 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 occupational mobility. This refers
to economic resources’ ability to change their use. For instance, a farm worker may leave his job and
become a factory worker and an office building’s use may switch from providing insurance to
producing TV programmes. If demand for housing is increasing, an area of land that has been used for
farming might be built on. An entrepreneur who has been running a car company may take up a new
position running an IT company.
The second type of mobility 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 fax machines 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) One cause of an increase in the quality of labour is education. A more educated labour force will be
able to undertake more tasks and will perform tasks more efficiently. A more educated labour force
will be a more productive labour force.
An increase in training should raise the quality of the labour force. Training workers to, for instance,
use new capital equipment or work more efficiently in teams should again raise labour productivity.
The quality of capital goods is regularly increased by advances in technology. Today’s computer can
perform tasks more efficiently and can undertake far more tasks than the computers of ten years ago.

d) If more resources are devoted to producing cotton garments in Pakistan, the opportunity cost may
be knitwear. Some of the workers, capital goods, land and enterprise used in producing knitwear may
be switched to producing cotton garments. The output of knitwear, however, would not have to fall if
the cotton garments industry makes use of resources that had previously been unemployed or if the
country experiences an increase in the quantity and quality of resources.