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

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs — 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 when a production possibility curve is concave to the origin, and what shape it takes otherwise. [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 a free market does not 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) and supply is relatively price elastic (PES = 1.2).

(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]

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Section C

6. 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]

7. Production requires combining different resources, and the resulting output can be shown on a production possibility curve.

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

(b) Using the production possibility curve, distinguish between a movement along the curve and a shift of the curve, including what causes each. [4]

8. 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) State three possible causes of an outward shift of a production possibility curve. [3]

9. Explain why a production possibility curve (PPC) is usually drawn concave to the origin, and state what a straight-line PPC would show. [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. Under increasing opportunity cost, resources are not perfectly substitutable between uses [1]. As more of one good is produced, increasingly unsuitable resources must be transferred, so the opportunity cost rises, giving a curve that is concave to the origin [1]. Under constant opportunity cost, resources are perfectly substitutable between uses, and the curve is a straight line instead [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, due to imperfect information, individuals underestimate its private benefits [1].

5. (a) Consumers bear most of it [1]. The incidence of an indirect tax depends on the relative price elasticities of demand and supply: the side of the market that is relatively more inelastic bears the larger share of the tax [1]. Since demand (|PED| = 0.4) is more inelastic than supply (PES = 1.2), consumers bear the larger share [1].

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

(c) For: it discourages over-consumption of a demerit good by raising its price [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 [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, more directly addresses consumers’ underestimation of the harm [1].

6. (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, or the non-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].

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

(b) A movement along the curve is a reallocation of existing resources between the two goods, incurring an opportunity cost, and is caused by a choice to produce more of one good and less of the other [2]. A shift of the whole curve represents a change in the economy’s productive capacity — an outward shift is caused by more or better resources or improved technology, and is what economic growth means [2].

8. (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: an increase in the quantity of factors of production (e.g. population growth, new resource discoveries) [1], an increase in the quality of factors of production (e.g. improved education and training, investment in capital) [1], and improved technology, allowing more output from the same resources [1].

9. Resources are not equally suited to producing both goods [1], so as more of one good is produced, increasing amounts of the other must be given up: the opportunity cost rises [1]. A straight-line PPC shows a constant opportunity cost [1].

Examiner insight (June 2025): most candidates could draw a PPC, but some labelled the axes “price” and “quantity” instead of the two goods, and some did not link a curved PPC to increasing opportunity cost. Try the real question next: Cambridge International AS & A Level Economics 9708, June 2025, Paper 21, Question 2.

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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.
• Confusing a movement along the PPC with a shift of the whole curve.
• 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.