OCR GCSE Economics: Introduction to Economics — 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: Introduction to Economics revision notes

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Section A

1. Distinguish between microeconomics and macroeconomics, giving an example of each. [4]

2. State the four functions of money. [4]

Section B

3. Explain the differences between a market economy, a planned economy and a mixed economy. [6]

4. Explain the three functions of the price mechanism in a market economy. [6]

5. Explain three advantages and two disadvantages of specialisation and the division of labour. [10]

6. Explain why a market economy may fail to provide public goods, using street lighting as an example. [5]

7. Explain the basic economic problem, and use the concept of opportunity cost to explain a choice facing a government deciding between spending on healthcare and defence. [4]

8. State the four factors of production and the reward each earns. Explain why “capital”, as an economist uses the term, is often confused with money. [5]

9. A country can produce 80 units of food or 40 units of machinery, or any combination between, using all its resources.

(a) Calculate the opportunity cost, in food, of producing one extra unit of machinery. [2] (b) The country currently produces 50 units of food and 15 units of machinery. State whether this point is on, inside or outside the production possibility curve, showing your working, and explain what this means. [3]

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Answers

1. Microeconomics studies the behaviour of individual consumers, firms and markets, e.g. why the price of coffee rose [1] [1]. Macroeconomics studies the economy as a whole, e.g. what causes national unemployment or inflation [1] [1].

2. A medium of exchange [1]; a store of value [1]; a unit of account (measure of value) [1]; a standard for deferred payment [1].

3. In a market economy resources are allocated by the price mechanism through the interaction of supply and demand, with private ownership and profit as the motive [1] [1]. In a planned (command) economy the state owns the resources and decides what is produced and at what price [1] [1]. A mixed economy contains both a private sector operating through markets and a public sector providing goods the market would underprovide, such as healthcare and defence [1] [1].

4. Signalling — prices convey information to buyers and sellers about relative scarcity; a rising price signals a shortage [1] [1]. Incentive — a higher price encourages producers to supply more because it is more profitable, and encourages consumers to economise [1] [1]. Rationing — when a good is scarce, the rising price allocates it to those willing and able to pay most, so demand is brought into line with the available supply [1] [1].

5. Advantages: workers become more skilled at a single task through repetition, so output per worker rises [1] [1]. Less time is wasted moving between tasks and fetching different tools, raising efficiency [1] [1]. Specialisation makes it worthwhile to use specialised machinery, which raises productivity and lowers unit costs, allowing lower prices [1] [1]. Disadvantages: repeating one task becomes monotonous, reducing motivation and raising absenteeism and staff turnover, which can offset the productivity gain [1] [1]. Workers become dependent on one narrow skill, so if that job disappears they face structural unemployment and are hard to re-employ [1] [1]. (Also accept: the whole production line halts if one stage fails.)

6. Public goods are non-excludable — once street lighting is provided, nobody can be prevented from benefiting whether or not they paid [1] [1]. They are also non-rival — one person’s use does not reduce the amount available to others [1]. This creates the free rider problem: everyone has an incentive to let others pay [1], so no private firm can collect enough revenue to make provision profitable, and the good is not supplied at all unless the government provides it from taxation [1].

7. The basic economic problem is that resources are scarce while human wants are unlimited, so choices must be made [1]. Opportunity cost is the value of the next best alternative given up when a choice is made [1]. A government choosing to increase healthcare spending must give up the defence spending that money could otherwise have funded [1] — the opportunity cost of more healthcare is the defence provision sacrificed [1].

8. Land — natural resources — earns rent [1]; labour — human effort — earns wages [1]; capital — man-made aids to production such as machinery and factories — earns interest [1]; enterprise — risk-taking and organising the other three — earns profit [1]. Capital is confused with money because both are needed to acquire machinery, but in economics capital refers to the productive equipment itself, not the money used to buy it — money is a means of exchange, not a factor of production [1].

9. (a) Giving up all 80 food gains 40 machinery, so 2 food = 1 machinery: the opportunity cost of 1 extra machinery is 2 food [1] [1]. (b) At 50 food, the curve allows (80 − 50) ÷ 2 = 15 machinery [1]. The economy produces exactly 15, so it is on the curve [1], meaning it is productively efficient — all resources are fully and efficiently employed, and more of one good can only be produced by giving up some of the other [1].

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Where marks are usually lost

• Giving inflation as a microeconomic example.
• Listing the price mechanism’s functions without explaining each.
• Giving advantages of specialisation without linking them to productivity.
• Confusing non-excludability with non-rivalry.
• Confusing economic capital (productive equipment) with money — money is only a means of exchange, not a factor of production itself.
• Not showing the opportunity-cost ratio explicitly when checking whether a production point lies on, inside or outside the PPC.