OxfordAQA International AS and A-level Economics: The economic problem and method (9640) – Revision Notes

These notes condense section 3.1.1 (the economic problem and methodology) of the OxfordAQA International AS and A-level Economics (9640) specification, first teaching September 2020. Section 3.1 is International AS content. For full explanations use the study guide, then test yourself with the practice questions. See also the course hub, the printable checklist, the operation of markets and the free diagnostics. All figures are invented.

3.1.1.1 Purpose of economic activity

• Economic activity exists to produce goods and services people need and want.
• Three decisions: what to produce, how to produce, who benefits.
• Welfare depends on distribution as well as total output. Same mean income can hide very different outcomes.

Quantity	Country Green	Country Orange
Incomes (5 people)	120 each	400, 50, 50, 50, 50
Total	600	600
Mean	120	120
Median	120	50
Richest share	20%	66.7%

Method in steps: choosing how to produce

1. Cost each method: workers × wage + machines × machine cost.
2. Compare totals (or cost per unit).
3. Find the switch point by setting the two costs equal.
4. State what happens when relative resource prices change.

Reminder: Method A (8 workers, 1 machine at 60) and Method B (3 workers, 3 machines) cost the same at a wage of 24. Above 24, B is cheaper. Below 24, A is cheaper.

3.1.1.2 Economic resources

Factor	Meaning	Not to be confused with
Land	All natural resources	Only farmland
Labour	Human effort	Employment or wages
Capital	Man-made goods that make other goods	Money or finance
Enterprise	Organising and risk-taking	Management salary alone

• Renewable: regenerates (fish, timber, solar energy). It is only renewable if use is no faster than regrowth.
• Non-renewable: fixed stock (coal, oil, ores).
• The environment is a scarce resource: it supplies inputs and absorbs waste, so production and consumption can damage it.
• A woodland growing 300 tonnes a year and losing 450 tonnes to felling shrinks by 150 tonnes a year, so it is being used as if non-renewable.

3.1.1.3 Scarcity, choice and allocation

• Scarcity = limited resources, unlimited wants. It is the fundamental economic problem and affects rich and poor countries.
• Scarcity means choices must be made between competing uses.
• Opportunity cost = the benefit of the best option rejected.

Method in steps: opportunity cost from time data

1. Find the maximum output of each good if all time goes on it.
2. Divide one maximum by the other, or divide the time per unit.
3. Express the answer in the forgone good.

Reminder: chair 4 hours, table 10 hours. One table costs 10 ÷ 4 = 2.5 chairs.

System	Allocation by	Strength	Weakness
Free market	Prices and profit	Responsive, rewards efficiency	Inequality, public goods, spillovers, monopoly
Centrally planned	State decisions	Direct social aims	Information, incentives, shortages, limited choice
Mixed	Markets plus government	Corrects failures	Government failure, balance contested

• Price mechanism chain: demand rises, price rises, profit rises, firms expand, resources move in.
• Governments alter allocation by tax, subsidy, regulation and provision.
• Evaluate by degree of intervention, not by “market versus plan”.

3.1.1.4 Production possibility diagrams

Feature	What it shows
Point on boundary	Full, efficient use of resources
Slope	Opportunity cost and trade-off
Bowed outwards	Rising opportunity cost (some resources suit one good better)
Straight line	Same opportunity cost at every point
Point inside	Unemployed or inefficiently used resources
Point outside	Unattainable at present
Outward shift	Economic growth
Inward shift	Loss of capacity

Reminder table (Country A). Points (K, C): a (0, 100), b (10, 96), c (20, 88), d (30, 72), e (40, 40).

• Opportunity cost per extra K: 0.4, 0.8, 1.6, 3.2 consumer goods.
• (K = 20, C = 60) is inside: 60 ÷ 88 = 68.2% of the possible C.
• 20% growth in all outputs: the C intercept goes from 100 to 120 and point e from (40, 40) to (48, 48).

Productive versus allocative efficiency

• Every boundary point is productively efficient.
• Allocatively efficient = the mix society values most. This needs information on preferences. The diagram alone cannot show it.
• Rule: keep moving towards a good while society’s valuation of an extra unit exceeds its opportunity cost. If an extra K is valued at 2.5 C, d is the best point (costs 1.6 up to d, 3.2 beyond).

3.1.1.5 Economic methodology

• Social science: studies human behaviour using models, hypotheses and data.
• Similar to natural science: theory, testing, evidence.
• Different: few controlled experiments; people react to being studied; many variables change at once; values affect questions and conclusions.
• Model: a simplification to isolate key relationships.
• Ceteris paribus: other things equal. Price effect of about -6% with an income effect of about +7% gives about +1% observed.

	Positive	Normative
About	What is, was, will be	What ought to be
Settled by	Evidence	Value judgement
Can be false?	Yes	Disagreed with, not proved false
Clues	Rises, causes, will	Should, fair, best, unacceptable

• Disagreement over policy comes from different evidence or different values.
• Good evaluation separates the positive consequences from the value judgements.

Must-know distinctions

Pair	Difference
Movement along versus shift of the boundary	A movement changes the mix of goods. A shift changes productive capacity.
Inside versus outside the boundary	Inside is possible but wastes resources. Outside is unattainable with current resources and technology.
Productive versus allocative efficiency	Productive: no waste, on the boundary. Allocative: the mix society values most.
Scarcity versus shortage	Scarcity is permanent and universal. A shortage is a market imbalance at a particular price.
Positive error versus value judgement	A wrong positive claim is refuted by evidence. A value judgement is accepted or rejected on principle.
Renewable versus sustainable	Renewable describes a resource. Sustainable describes how fast it is used.

Worked reminders

Opportunity cost from a choice. A bakery owner has 50,000 and three options: an oven (extra profit 6,000), a deposit at 4% (2,000) or extra staff (4,500). The oven is chosen. The opportunity cost is 4,500, the next best option only.

Growth on the diagram. If every output on Country A’s boundary rises by 20%, the C intercept moves from 100 to 120 and point e from (40, 40) to (48, 48). Output was already below the boundary at (K = 20, C = 60), so unemployment falls first, then growth shifts the boundary.

Ceteris paribus. An effect of about -6% from a price rise, with an income effect of about +7% at the same time, leaves about +1%. The demand relationship is intact.

Evaluation checklist for system questions

1. Name the objective being judged (efficiency, fairness, choice, stability).
2. Give one strength and one weakness of each system against it.
3. Say which factors decide the outcome, such as information, incentives and the size of spillovers.
4. Reach a supported judgement, noting that real economies are mixed.

Quick self-test

1. State the three key economic decisions.
2. Name the four factors of production.
3. Define opportunity cost.
4. A potter has 30 hours. A bowl takes 2 hours and a jug takes 5 hours. What is the opportunity cost of one jug in bowls?
5. Why is a bank loan not capital?
6. A fishery stock regrows 400 tonnes a year. Catch is 500 tonnes. What happens to stock each year?
7. In Country A, what is the opportunity cost per K of moving from d to e?
8. Why does a bowed-out frontier show rising opportunity cost?
9. Is “the government should cut tax” positive or normative? Why?
10. Give one reason economics differs from physics as a science.
11. Why can a point on the boundary be allocatively inefficient?

Answers

1. What to produce, how to produce, who benefits.
2. Land, labour, capital, enterprise.
3. The benefit of the best option rejected.
4. 5 ÷ 2 = 2.5 bowls.
5. It is finance; capital is man-made goods used in production, such as machines.
6. It falls by 500 - 400 = 100 tonnes a year.
7. (72 - 40) ÷ 10 = 3.2 consumer goods.
8. Some resources suit one good better, so expanding that good draws in resources that are less suited to it.
9. Normative: “should” expresses a value judgement that evidence cannot settle.
10. It cannot usually run controlled experiments, and people change behaviour or values shape the question.
11. The mix may not match what society values; efficiency needs the preferred mix.

Where marks are usually lost

• Writing “money” instead of the best option rejected.
• Counting all alternatives instead of the next best one.
• Calling money or a loan “capital”.
• Describing scarcity as poverty or a shortage of goods.
• Saying points inside the boundary are impossible instead of inefficient.
• Claiming every boundary point is allocatively efficient.
• Labelling a statement normative just because it is an opinion, when it is a testable (possibly wrong) prediction.
• Giving a list of market and planned system features without evaluating them.
• Forgetting to name axes, curves and the point on a diagram described in words.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), section 3.1.1 (the economic problem and methodology), published by OxfordAQA. First teaching September 2020, first AS exams May/June 2021, first A-level exams May/June 2022.