A Level Economics: Basic Economic Ideas and Resource Allocation — Practice Questions

These are original questions written for Marlbridge, in the style and at the standard of the examination. They are not reproduced past-paper questions — examination boards hold copyright in their own papers. Use these alongside the official past papers available free from your board.

Related: Basic Economic Ideas revision notes

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Section A

1. Define opportunity cost and give one example from a government’s perspective. [2]

2. Explain why a production possibility curve is concave to the origin. [3]

3. Distinguish between a positive and a normative statement, giving one example of each. [4]

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Section B

4. Street lighting is provided by the government rather than by private firms.

(a) State the two defining characteristics of a public good. [2]

(b) Explain, using the free-rider problem, why the market fails to provide street lighting. [4]

(c) Explain why healthcare is a merit good rather than a public good. [3]

5. A government imposes an indirect tax on cigarettes. Demand for cigarettes is price inelastic (PED = 0.4).

(a) Explain who bears most of the tax burden and why. [3]

(b) Explain why the tax raises substantial revenue. [2]

(c) Evaluate whether this tax is an effective way of reducing smoking. [6]

6. Explain the three functions of the price mechanism. [6]

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Section C

7. Every economic system must decide how to allocate scarce resources.

(a) State the three fundamental questions every economic system must answer. [3]

(b) State one strength and one weakness of a market economy, and one strength and one weakness of a planned economy. [4]

(c) Explain why most real-world economies are mixed rather than purely market or purely planned. [2]

8. Production requires combining different resources, and can create costs or benefits beyond the immediate buyer and seller.

(a) Name the four factors of production and the reward earned by each. [4]

(b) Distinguish between a negative externality and a positive externality, giving one example of each. [4]

9. A production possibility curve shows the maximum combinations of two goods an economy can produce.

(a) State what a point on, inside, and outside the curve represents. [3]

(b) Government intervention to correct market failure can itself go wrong. Give three causes of government failure. [3]

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Answers

1. The value of the next best alternative forgone [1]. Example: spending on a new hospital means a new school is forgone [1]. “Everything given up” is not the definition — it is the single best alternative.

2. Resources are not perfectly substitutable between uses [1]. As more of one good is produced, increasingly unsuitable resources must be transferred [1], so the opportunity cost rises — meaning ever more of the other good is sacrificed for each additional unit [1].

3. A positive statement is factual and can be tested against evidence [1] — e.g. “unemployment rose to 8%” [1]. A normative statement contains a value judgement and cannot be tested [1] — e.g. “the government should reduce unemployment” [1].

4. (a) Non-excludable [1] and non-rival [1].

(b) Because it is non-excludable, non-payers cannot be prevented from consuming it [1]. Consumers therefore have an incentive to free ride — to consume without paying [1]. No private firm can generate enough revenue to cover costs [1], so the market provides none at all [1].

(c) Healthcare is excludable — people can be prevented from receiving it if they do not pay [1] — and it is rival, since one person’s treatment uses resources unavailable to another [1]. It is under-consumed because individuals underestimate its private benefits and it generates positive externalities [1].

5. (a) Consumers bear most of it [1]. Because demand is inelastic, quantity demanded falls proportionally less than the price rises [1], so producers can pass most of the tax on without losing much volume [1].

(b) Consumption falls only slightly [1], so the tax is collected on almost the same quantity as before [1].

(c) For: it internalises the negative externality of smoking [1]; it raises revenue that can fund healthcare or education campaigns [1]. Against: demand is inelastic, so consumption changes little — the policy is poor at its stated aim [1]; the tax is regressive, taking a larger share of the income of poorer smokers [1]; it may encourage smuggling and a black market, which is a form of government failure [1]. Judgement: it is highly effective at raising revenue but weak at changing behaviour; combining it with education, which shifts demand left and makes it more elastic over time, addresses the underlying information failure [1].

6. Signalling [1] — prices convey information about relative scarcity to buyers and sellers [1]. Incentive [1] — a higher price encourages producers to supply more and consumers to buy less [1]. Rationing [1] — a higher price allocates scarce goods to those willing and able to pay [1].

7. (a) What to produce [1], how to produce it [1], and for whom to produce it [1].

(b) Market economy — strength: efficiency, choice and innovation [1]; weakness: inequality and market failure, including no provision of public goods [1]. Planned economy — strength: greater equity and provision of merit/public goods [1]; weakness: inefficiency from the lack of a profit incentive and poor information [1].

(c) Because a purely market or purely planned economy each carry significant weaknesses [1], most real economies combine both to balance efficiency against equity — the practical question is usually the degree of intervention, not a binary choice [1].

8. (a) Land — rent [1]. Labour — wages [1]. Capital — interest [1]. Enterprise — profit [1].

(b) A negative externality is a cost imposed on a third party not reflected in the market price — e.g. pollution from a factory — causing the good to be over-produced [2]. A positive externality is a benefit to a third party — e.g. herd immunity from vaccination — causing the good to be under-produced [2].

9. (a) A point on the curve is productively efficient, with resources fully and efficiently employed [1]. A point inside the curve represents unemployment or inefficiency [1]. A point outside the curve is currently unattainable given existing resources and technology [1].

(b) Any three of: information gaps facing policymakers, the administrative cost of intervention, unintended consequences such as black markets, and regulatory capture [3].

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Where marks are usually lost

• Defining opportunity cost without “next best”.
• Giving only one property of a public good.
• Confusing merit goods with public goods.
• Concluding an evaluation without a judgement, or without saying what it depends on.
• Omitting government failure from a discussion of intervention.
• Explaining the concave PPC as “diminishing returns” rather than imperfect resource substitutability.
• Naming only one or two factors of production instead of all four with their correct reward.