The nature of economics
50 marks: 12 multiple choice questions, a data response and an essay. Answers are at the end.
WJEC / Eduqas: Questions 1, 2, 3, 4, 5 and 13 (b) use the lesson "Positive and normative economics", which is not on your specification. You can still attempt them, and using the idea in an essay still earns credit.
AQA: Question 14 would be a 25-mark question on your papers.
Edexcel: Question 14 would be a 25-mark question on your papers.
OCR: Question 14 would be a 25-mark question on your papers.
Multiple choice online
The test
1The basic economic problem exists because:
- A resources are scarce relative to unlimited wants
- B incomes are unequally distributed
- C some resources are non-renewable
- D governments tax and spend too much
2A student with a free Saturday could work a shift paying £70, revise for an exam, or go to a festival with a £45 ticket. She ranks the festival first and revision second. The opportunity cost of going to the festival is:
- A £70 plus £45
- B the shift she gives up, worth £70
- C £45
- D the revision she gives up
3Which one of the following is a normative statement?
- A Higher spending on flood defences will reduce insurance premiums
- B The government ought to spend more on flood defences
- C Spending on flood defences rose by 8% last year
- D Flood defences are paid for mainly out of general taxation
4Which one of the following is an example of the factor of production capital?
- A the flour used in the bread
- B a £50,000 bank loan to the bakery
- C a bakery's ovens
- D the bakery's shares, held by its founder
5Which one of the following is a free good?
- A a public park
- B tap water
- C free school meals
- D sunlight on a beach
6An economy is producing at a point inside its production possibility frontier. It can be concluded that:
- A some resources are unemployed or used inefficiently
- B the economy has experienced economic growth
- C the economy is producing too many capital goods
- D the combination is unattainable with current resources
7Which one of the following would shift an economy's production possibility frontier outwards?
- A a rise in consumer spending
- B a switch from producing consumer goods to producing capital goods
- C net inward migration of working-age people
- D a fall in unemployment
8An earthquake destroys a large part of a country's factories and roads. On a PPF diagram for consumer and capital goods this is best shown by:
- A an outward shift of the frontier as rebuilding begins
- B an inward shift of the whole frontier
- C a movement from the frontier to a point inside it
- D a movement along the frontier towards capital goods
9A furniture factory reorganises so that each worker performs one task instead of building a whole chair. The most likely result is:
- A a wider range of skills for each worker
- B higher output per worker and lower average cost
- C lower output per worker, as workers become bored
- D less use of specialised machinery
10Specialisation in a modern economy depends on money because money:
- A removes the need for trade between countries
- B is issued by the central bank
- C is a store of value, so workers can save
- D acts as a medium of exchange, so specialists do not need a double coincidence of wants
Use the information below for questions 11 to 12.
The table shows the maximum combinations of two goods an economy can produce with its resources fully employed.
| Combination | A | B | C | D | E |
|---|---|---|---|---|---|
| Capital goods (million) | 0 | 10 | 20 | 30 | 40 |
| Consumer goods (million) | 100 | 95 | 85 | 65 | 0 |
11The opportunity cost of moving from combination C to combination D is:
- A 65 million consumer goods
- B 10 million capital goods
- C 20 million consumer goods
- D 2 consumer goods per capital good
12The opportunity cost of capital goods rises as more are produced because:
- A resources are not equally suited to producing both goods
- B the economy is operating inside its frontier
- C there is unemployment in the capital goods industry
- D consumer goods become less valuable
13Output per hour worked in the UK grew by about 2% a year in the decade before the 2008 financial crisis but by well under 1% a year since. Economists blame low investment in machinery, software and infrastructure, and a shortage of skilled workers in some industries. The government has set out plans to raise public investment and to train more workers in construction and engineering. Table 1 shows the production possibilities of an illustrative economy that can produce capital goods (machines, buildings, infrastructure) or consumer goods.
| Combination | A | B | C | D | E | F |
|---|---|---|---|---|---|---|
| Capital goods | 0 | 20 | 40 | 60 | 80 | 100 |
| Consumer goods | 300 | 290 | 270 | 240 | 180 | 0 |
(a)Using Table 1, calculate the opportunity cost of each extra unit of capital goods when the economy moves from combination D to combination E. [2]
(b)The passage contains both positive and normative statements. Identify one of each and explain the difference. [4]
(c)With the aid of a production possibility diagram, explain how producing more capital goods now could raise living standards in the future, and what the cost is in the present. [6]
(d)Explain two reasons why training more workers in construction and engineering could raise output per hour in the UK. [6]
14Evaluate the view that greater specialisation and division of labour always benefit an economy. [20]
Answers
Show the answers
AO1 knowledge, AO2 application, AO3 analysis, AO4 evaluation.
| Answer | Why | |
|---|---|---|
| 1 | A | Scarcity relative to wants forces choices about what, how and for whom to produce; the other options are consequences or opinions, not the root problem. |
| 2 | D | Opportunity cost is the next best alternative forgone, which is whatever she ranked second: the revision, not the money. |
| 3 | B | 'Ought' signals a value judgement that cannot be tested against evidence; the others are claims of fact or testable predictions, true or false. |
| 4 | C | Capital is a produced good used to make other goods; money and shares are claims to resources, and flour is a raw material used up in production. |
| 5 | D | A free good has no opportunity cost: no scarce resources are used to provide it. Parks, school meals and tap water are free at the point of use but use resources. |
| 6 | A | Points inside the frontier are attainable but wasteful: more of both goods could be produced with the same resources. |
| 7 | C | More labour raises productive capacity. Lower unemployment and higher spending move the economy towards the frontier; switching output moves it along it (though more capital goods shift it out later). |
| 8 | B | The stock of capital, a factor of production, has fallen, so the maximum output of both goods is lower: the frontier itself moves in. |
| 9 | B | Division of labour raises productivity: workers get faster at one task, less time is lost switching between tasks and machines can be designed for each task. |
| 10 | D | A worker who makes only car doors cannot barter them for food and housing; money lets them sell their labour and buy whatever they need. |
| 11 | C | Consumer goods fall from 85 to 65 million to gain 10 million capital goods: 20 million consumer goods in total, or 2 per capital good, but the question asks for the total. |
| 12 | A | Each extra 10 million capital goods costs 5, then 10, then 20, then 65 million consumer goods: resources best suited to consumer goods are switched last and give up most. |
13 (a) Using Table 1, calculate the opportunity cost of each extra unit of capital goods when the economy moves from combination D to combination E. [2: AO2 2]
- AO2 (1) Consumer goods fall from 240 to 180 billion, a loss of 60 billion, to gain 20 billion capital goods
- AO2 (1) Opportunity cost = 60 ÷ 20 = 3 consumer goods per capital good
13 (b) The passage contains both positive and normative statements. Identify one of each and explain the difference. [4: AO1 2, AO2 2]
- AO2 (1) Positive: output per hour grew by about 2% a year before 2008 and under 1% since (a claim about facts that can be checked against data)
- AO2 (1) Normative: the government should raise public investment or train more workers (the plans rest on a judgement that faster growth is worth the cost); or 'economists blame low investment' reported as their view
- AO1 (1) A positive statement is objective and testable: evidence can show it to be true or false
- AO1 (1) A normative statement contains a value judgement about what ought to be, so evidence cannot settle it; words such as should, ought, too much, fair signal one
13 (c) With the aid of a production possibility diagram, explain how producing more capital goods now could raise living standards in the future, and what the cost is in the present. [6: AO1 2, AO2 1, AO3 3]
- AO1 (2) Diagram: a concave PPF with capital goods on one axis and consumer goods on the other; a movement along it from X to Y (more capital goods, fewer consumer goods); a second frontier further out, reached later, with a point Z offering more of both
- AO3 (1) Capital goods are not consumed but add to the stock of machines, buildings and infrastructure, so the economy's productive capacity grows: the frontier shifts outwards over time
- AO3 (1) With a larger frontier the economy can produce more consumer goods in future than it could have on the old frontier, raising real incomes and living standards; faster productivity growth is the result
- AO3 (1) The cost is the consumer goods given up now: along a concave frontier the opportunity cost rises as more resources are switched, since the resources moved last are least suited to making capital goods
- AO2 (1) Application: in Table 1 moving from D to E costs 3 consumer goods per capital good, against 1 per capital good from B to C; the government's plans accept lower consumption or higher taxes now for faster growth later
Levels: 1 to 2 for a description with a partly correct diagram; 3 to 4 for a correct diagram with the outward shift explained; 5 to 6 for the trade-off and rising opportunity cost explained and applied to the data.
13 (d) Explain two reasons why training more workers in construction and engineering could raise output per hour in the UK. [6: AO1 2, AO2 2, AO3 2]
- AO1+AO2+AO3 (3) Specialisation and division of labour: trained workers can concentrate on tasks they are skilled at, becoming faster and more accurate, and projects can be split into specialist stages, so the same hours produce more output; a shortage of skilled trades has held back house building and infrastructure projects
- AO1+AO2+AO3 (3) Better use of capital: skilled workers can operate more advanced machinery and methods (modular construction, digital design), raising the output each machine and each hour produces; more engineers also means more investment projects can be carried out, which shifts the PPF outwards
- AO1+AO2+AO3 (3) Or: training raises the quality of labour as a factor of production (human capital); it also reduces dependence on migrant labour and the wage premium paid for scarce skills, lowering costs
Maximum 6: two reasons, each explained as a cause of higher output per hour and applied to construction or engineering.
14 Evaluate the view that greater specialisation and division of labour always benefit an economy. [20: AO1 6, AO3 6, AO4 8]
Knowledge and analysis (AO1 to AO3)
- Define specialisation (concentrating on a narrow range of tasks, products or industries) and division of labour (breaking production into separate tasks for different workers), with Adam Smith's pin factory as the classic example.
- Gains for firms: workers become skilled at one task, no time is lost switching between tasks, tasks can be mechanised and training is shorter; output per worker rises and average cost falls, as on a car assembly line or in a modern warehouse.
- Gains for the economy: higher productivity raises real wages and output, shifting the PPF outwards; specialisation by comparative advantage and trade lets an economy consume outside its own PPF (diagram: produce at S, trade to consume at C).
- Costs for workers: repetitive tasks bring boredom, lower motivation, absenteeism and turnover; narrow skills leave workers exposed when their task is automated or their industry declines (structural unemployment in former coal and steel towns).
- Costs for the economy: dependence on one industry or export (Madagascar's vanilla, oil producers) exposes it to price swings and shocks; long supply chains broke down in 2020 to 2021, with shortages of medical goods and semiconductors; lost self-sufficiency in food or energy can become a strategic problem.
- Specialisation needs an efficient medium of exchange and open trade; trade barriers, poor infrastructure or an unstable currency limit the gains.
Evaluation (AO4)
- 'Always' is too strong: the gains are large and well evidenced for firms, but for a whole economy they depend on the degree of specialisation, how diversified the rest of the economy is, and access to trade.
- It depends on the time horizon: in the short run productivity gains dominate; in the long run the risks of narrow skills and dependence on one sector appear, and economies that specialised in declining industries paid heavily.
- It depends on the industry: in manufacturing and logistics division of labour is still raising output; in services and creative work over-specialisation can lower quality and flexibility, so many firms use job rotation and multi-skilling.
- Governments can offset the costs with retraining, regional policy and strategic reserves, so the question is partly whether the costs are managed rather than whether they exist.
- UK productivity growth has been weak despite high specialisation: specialisation is necessary but not sufficient, and investment and skills matter too.
Judgement
A supported judgement might conclude that specialisation and division of labour almost always benefit an economy in aggregate, because they are the main source of rising productivity and living standards, but that the view fails on 'always': the benefits fall unevenly, a narrowly specialised economy is more fragile, and beyond a point the costs to workers and the risks of dependence can outweigh further gains, so the degree of specialisation and the policies around it decide the outcome.
Marking
Bands, out of 20 (AO1 knowledge 6, AO3 analysis 6, AO4 evaluation 8, as WJEC marks a 20-mark question). Top band (16 to 20): a range of points developed in full chains of reasoning, supported by an accurate diagram and real examples, with evaluation that weighs the arguments and reaches a judgement that depends on stated conditions. Middle band (9 to 15): some developed chains, a relevant diagram, evaluation present but one-sided or asserted. Bottom band (1 to 8): points listed or described, little use of theory or examples, judgement missing or unsupported.