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AS Economics Answers
Multiple choice questions, page 3
Introduction
1 Answer B
A value judgement is an assessment of something based on
people’s own views and priorities. The statement that the
government must increase its spending on education is a matter
of opinion. Not everyone would agree. A, C and D are all positive
statements which can be tested. For example, it could be observed
what happens to household spending when income tax is reduced.
2 Answer A
A normative economic statement is one based on an opinion.
Some people would argue that free nursery education should be
available at a younger age and others that economic resources
could be used more effectively on other projects. B, C and D are
all positive statements.
3 Answer D
Economics is the study of how scarce resources are allocated to
meet people’s desire for goods and services. At any time there is a
limited quantity of resources, whereas people’s wants are always
increasing. Economics is not the study of personal finances. It
includes the study of government expenditure and taxation as
well as the domestic economy and the international economy.
4 Answer A
Positive statements are factual statements. Normative statements
(which may include optimistic or pessimistic views) include
opinions and value judgements.
5 Answer D
The statement is an expression of opinion. Many people would
agree with it, but as it stands it cannot be assessed by reference
to facts. It is a subjective view. ‘Doctors are paid more than
footballers’ would be a positive statement because it could be
assessed by examining real world data.
6 Answer B
The relationship between the price of beer and demand for beer
can be examined by reference to what happened before when the
price rose. A, C and D are all normative statements.
Activity 1, page vii
a 36 x 100 = 18%
200
b £600 – £500 = £100
£100 x 100 = 20%
£500
c £20 + £14 + £52 + £26 + £18 = £130
£130 = £26
5
1 The economic problem
1 Positive and normative statements
Activity 1, page 1
a Positive. Figures published by the examination boards include
the number of students who take AS level and other national
examinations. More students sit English AS level than Maths
AS level.
b Positive. Official figures can be examined to compare income
levels in different countries. The average US citizen is richer
than the average Indian citizen.
c Normative. People can disagree about what is too high a rate of
income tax. The statement, as it stands, cannot be proved to be
right or wrong.
d Normative. People disagree about who is the best actor. It is a
matter of opinion.
e Positive. Athletes’ times can be compared to assess who is the
fastest.
f Normative. There are different views as to whether the
government should spend more money and, if so, on what.
Activity 2, page 1
a In TV, radio or newspaper reports or The Economist’s data
section.
b The relative performance of females and males at AS level could
be calculated from figures produced by the examination boards.
These are published in newspapers on results day and are
available from the boards.
c The best source of information is the AS specification of your
examination board. It is also useful to look at specimen and
past examination papers.
d This information can be obtained from a number of sources,
including the EU’s website and up-to-date editions of Economics
textbooks. Such research will reveal that Switzerland is not a
member of the EU.
Data response questions, page 4
a The statement is normative because it is expressing an opinion.
The view that ‘transforming secondary education is the critical
challenge of the next decade’ is a value judgement. Some
people would argue that an alternative objective should be
the government’s top priority.
b The extract contains a number of positive statements,
particularly in the second paragraph and at the end of the last
paragraph. For example, ‘20,000 schools are now connected to
the internet’ is a positive statement. It can be proved right or
wrong.
c i Standards may have risen in terms of examination passes per
student. They could also have risen in other ways, including
better retention rates, lower truancy rates and a higher
proportion of students progressing to higher education.
ii All the above could be checked by assessing the records kept
by examination boards, schools and local authorities.
d There are a number of possibilities, including health care,
defence, reducing unemployment and reducing poverty.
e That the skills of future workers will be improved. Better
educated workers are able to undertake more tasks, carry them
out more efficiently and are more flexible in adapting to new
technology and new tasks. An improvement in the skills of
workers will lead to an increase in output.
Activity 3, page 2
a The UK government believes that reading is a beneficial
pastime that educates and informs people, making them better
workers and citizens.
b They believe that reading such material is harmful and should
be discouraged.
c A government would find it difficult to decide what are
acceptable levels of violence and/or pornography and which
books and magazines contain them. It would also be difficult
to monitor.
1
company are all economic goods because they need resources to
make them. The resources could be used for other purposes and
so A, B and C all have an opportunity cost.
2 Answer A
The factory worker is giving up her current earnings so that she
can take a university degree course. The books she has to buy and
the tuition fees are the financial cost of her course. As a result of
undertaking the degree course her future earnings are likely to
be higher.
3 Answer B
Opportunity cost is the true cost of a decision. For example, the
opportunity cost of a farmer planting a field with wheat may be
the barley he could have grown.
4 Answer A
People have to make choices because resources are not sufficient
to produce all the goods and services they want. In practice, wants
usually grow more rapidly than resources so answer B can be
rejected. C and D are incorrect: wants are unlimited whereas
resources and most products are scarce.
5 Answer C
An economic good requires resources to produce it. As these
resources could be used to make other products, an economic
good has an opportunity cost.
6 Answer B
By owning the car, the man is giving up the opportunity to receive
£4,000. B is the opportunity cost of repairing the car and D
represents the opportunity cost of buying the car in the first place.
C is the difference between the amount the man would have to
pay for a new car and the price he would get from selling his
current car.
2 Choice, scarcity and opportunity cost
Activity 1, page 5
The possible options are:
1 pair of Redsided Electus and 2 pairs of African Greys
1 pair of Blue and Gold Macaws and 1 pair of African Greys
1 pair of Green Wing Macaws and 1 Cuban Amazon
1 Leadbeaters Cockatoo
= 1,950
20 Conures
= 1,950
1 Green Wing Macaw and 7 Conures
1 Redsided Eclectus and 10 Conures
1 pair of African Greys and 15 Conures
1 Cuban Amazon and 13 Conures
Activity 2, page 5
Among the limiting factors are:
a the skills of the teaching staff
b the number of teaching rooms
c the number of students wanting to study different AS levels
Activity 3, page 5
a It states that the resource of teachers was insufficient to meet
the demand.
b These countries do not have enough resources to provide even
basic education to some children, so the resources are
insufficient to meet the people’s basic needs for education, let
alone the level of education they would like to receive.
c In the sense that more UK citizens would like to own luxury cars
than can afford them. Even if people had more money the
country would not have sufficient resources to make enough
cars and other products people would like to have.
Data response questions, page 8
a Increasing government spending on another item. This may
be, for example, education or pensions. Another possible
opportunity cost is lower taxes.
b i Men with prostrate cancer will not receive early treatment
for their illness. This may increase their discomfort and pain
and may reduce their life expectancy.
ii If men are not screened for prostrate cancer, more NHS
resources are likely to be used in the long run to treat
sufferers. In this case, the opportunity cost may be other
NHS treatments. For example, fewer beds, doctors, nurses
and medicines may be available for treating people with
bowel cancer or heart disease.
c Because demand for treatment exceeds the resources devoted
to health care. The passage refers to the existence of waiting
lists and mentions that the chairman of the British Medical
Association had expressed concern that the growth of demand
would continue to outstrip NHS resources.
d Although most NHS treatment is provided free to patients,
it is an economic good because it takes resources, including
hospitals, doctor’s surgeries, ambulances, medicines, doctors,
nurses, physiotherapists and administrators, to produce NHS
services.
Activity 4, page 6
Among the possible opportunity costs are:
a studying a different AS level, devoting more time to fewer AS
levels, pursing a different qualification, undertaking paid
employment
b buying another book, buying CDs, spending the money on
entertainment, saving the money
c working on other homework, visiting friends, undertaking paid
employment, eating
d working for another supermarket, undertaking a different form
of employment, studying, shopping, playing sport, resting.
Activity 5, page 6
Among the possible resources are:
a a teacher or teachers
b a room or rooms
c textbooks
d IT facilities
e paper
f overhead projector
g videos
Activity 6, page 6
3 Economic resources
a Because resources are needed to produce them which involves
an opportunity cost, as indicated in the passage.
b The production of alternative educational resources, including
books and school visits, as well as government spending on
alternative goods and services, such as health care.
Activity 1, page 10
a The one in which the smallest number of workers is employed,
i.e. the primary sector.
b i Estate agents, shopworkers and many other people doing
different jobs in the service sector.
ii Examples are cobblers and shipbuilders.
c Examples are if net immigration falls, the school leaving age is
raised and there is a fall in the retirement age.
Multiple choice questions, page 8
1 Answer D
Wind is a free good as it does not require resources to produce it
and so has no opportunity cost. In contrast, dental treatment for
children, state education and a promotional gift given away by a
2
Activity 2, page 10
Data response questions, page 14
a Because he not only set up a business, he also runs it and
bears the risks. He has shown he has the innovative and
organisational skills and the drive and determination to be
a successful entrepreneur.
b Examples are a competitor bringing out an improved product,
raw material costs rising, the government reducing people’s
spending power by raising income tax rates and tastes changing.
a His accountancy job.
b i The rise of new competitors. The passage says that in the
1980s and 1990s a range of different concerns started to
offer photo-processing and that in the late 1990s Snappy
Snaps was threatened by the development of digital cameras.
ii Other non-insurable risks, such as tastes changing and costs
rising. If people decide to take fewer photographs, Snappy
Snaps and other outlets will suffer a fall in demand. The
business may also experience a rise in its costs if, for
example, rents on its shop increase or the government
increases the tax on company profits (corporation tax).
c By being adaptable. In the face of increasing competition from
new outlets and new technology, the company introduced a
new range of services. It was this willingness to innovate which
had enabled Snappy Snaps to thrive.
d The opportunity to earn high profits should their business be
successful, and the desire to be in charge and make decisions or
to put into practice their ideas or introduce new products.
Activity 3, page 11
a Because they are used to provide a service, i.e. the transport of
goods for other companies.
b i consumer: it is bought for the couple’s own immediate
satisfaction
ii capital: is being used for the purpose of selling the
company’s products
iii capital: it helps the television critic provide his service of
producing articles on TV programmes
iv capital: it contributes towards the service the library provides
v capital: it is used in washing customers’ hair and so
contributes towards the services the hairdresser provides
vi consumer: it will be used by the woman’s partner for his own
satisfaction
c Examples are garages, fuel containers, car jacks and offices.
4 Production possibility curves
Activity 1, page 15
Figure 17
Activity 4, page 12
a Rainfall, land itself (soil), air and sunshine.
b Land itself is geographically immobile but it is occupationally
mobile. The use of land can be changed, e.g. agriculture,
forestry, housing, industry and recreation.
capital goods (millions)
50
48
Multiple choice questions, page 14
1 Answer D
Factors of production is another term for economic resources
and these include man-made (capital), human (labour and the
entrepreneur) and natural resources (land).
2 Answer D
A capital good is a man-made resource which produces a good
or a service. A luxury liner provides a service in the form of a
holiday. A and B are forms of financial capital and C is a consumer
good.
3 Answer C
An entrepreneur is someone who bears risks and organises the
other resources. A self-employed window cleaner will lose his or
her own money if the business fails. He or she will also have to
organise the capital equipment for the job and possibly even
premises. Police officers, sales assistants and government tax
officers are employees who do not bear the financial risks of the
concerns they work for and do not organise the other factors of
production.
4 Answer C
Land itself cannot move from one location to another. It is,
however, occupationally mobile. Capital is man-made and all
economic resources are limited in supply.
5 Answer C
Human capital is the education, training and experience which
raises the quality of labour. A is a form of financial capital, B is
a form of social capital which will contribute to human capital
and D will later contribute to the supply of labour.
6 Answer C
An entrepreneur has to bear uncertain risks that cannot be passed
on to others. A, B and D can all be insured against.
40
30
20
10
0
10
30
20
40
50
60
70 76 80
consumer goods (millions)
a approximately 48m capital goods
b approximately 76m consumer goods
Activity 2, page 16
Figure 18
agrilcultural goods (millions)
70
A
60
B
50
C
40
D
30
20
E
10
0
10
20
30
40 45 50
F
60 65 70 72 80
manufactured goods (millions)
a
b
c
d
e
f
3
unattainable
attainable
attainable
unattainable
attainable
attainable
Activity 3, page 17
Activity 7, page 19
Figure 21 shows that the improvement in the quality of training
that cotton workers receive, increases the country’s ability to
produce cotton goods. It has no effect on the country’s ability to
produce wheat.
Figure 19
50
capital goods (millions)
42
40
39
Figure 21
B
cotton goods
30
20
12.5
10
7
0
10
20 25 30
40
50
60 65 70
A
A
0
wheat
consumer goods (millions)
OR
a approximately 3m capital goods
b approximately 5.5m capital goods
A
wheat
Activity 4, page 17
A is productively efficient
B is currently unattainable
C is currently unattainable
D is productively efficient
E is productively inefficient
F is productively inefficient
G is productively efficient
A
0
Activity 5, page 18
B
cotton goods
Multiple choice questions, page 20
a Right. More capital goods will increase a country’s productive
potential.
b Right. The supply of labour will increase, so the country will be
capable of producing more goods and services.
c Left. Major floods are likely to destroy some buildings, damage
agricultural land and may injury and kill some workers. For a
period of time, this will reduce the country’s productive
capacity.
d Right. Net immigration means more people are entering a
country than leaving it. Most migrants are of working age, so net
immigration will increase a country’s labour force and ability to
produce goods and services.
1 Answer D
A production possibility curve shows the maximum output of a
combination of two types of products with existing technology and
resources. For example, Figure 22 shows that if 90m basic goods
and services are produced, the maximum number of luxury goods
and services that can be made is 25m.
Figure 22
90
luxury goods and services (millions)
80
Activity 6, page 19
a The Egyptian government hopes to reclaim a large area of land.
If successful, this will increase the country’s ability to produce
both agricultural and manufactured products (see Figure 20).
b Examples are a change in investment, in the quality of
education and training, in the size of the labour force and in
technology.
Figure 20
70
60
50
40
30
25
20
10
agricultural products
Z
0
Y
0
10
20
30
40
50
60
70
80
90
100 110
basic goods and services (millions)
Y
A is not correct because a production possibility curve shows what
the existing economic resources can produce, not the actual
quantity of resources. Production possibility curves show potential
output but, of themselves, give no indication of people’s
preferences so answer B can be rejected. A production point on or
inside a production possibility curve shows the relationship
Z
manufactured products
4
between the resources devoted to the production of two types of
products. A production possibility curve on its own does not show
this so C is not correct.
2 Answer A
A production point inside a production possibility curve indicates
unemployed resources. The economy is not producing what it
could do with the full employment of its resources. Full utilisation
of resources (B) and a productively efficient output (C) would be
illustrated by a production point on the production possibility
curve. An impossible position at which to produce with existing
resources and technology (D) would be shown by a production
point to the right of the production possibility curve.
3 Answer B
An increase in the number of capital goods would increase an
economy’s ability to produce both luxury products and basic
necessities. Greater use of existing resources (A) and a more
efficient allocation of resources (D) would be illustrated by a move
of a production point from inside towards the production
possibility curve. Greater concentration on the production of basic
necessities (C) would mean a shift of a production point.
4 Answer C
A straight line production possibility curve means that as more of
one type of product is produced the opportunity cost in terms of
the other product remains the same. Figure 23 shows that the
opportunity cost of producing TVs remains constant in terms of CD
players as more TVs are produced. This means that resources must
be equally good at producing both products.
capital goods
Figure 24
Z
A1
A
0
Y
B
B1
consumer goods
c It would increase the country’s productive capacity. This is
illustrated by a shift to the right of the production possibility
curve (see Figure 25).
Figure 25
B
capital goods
A
Figure 23
TVs (thousands)
0
A
B
d The main factor is advances in technology. New machines,
equipment and buildings may incorporate technological
developments which increase the output they can produce.
e A country will experience a reduction in its productive potential.
This is illustrated by shift in the country’s production possibility
curve to the left (see Figure 26). The curve moves from AA to BB.
20
10
0
consumer goods
10
20
30
40
50
Figure 26
60
CD players (thousands)
5 Answer B
When the economy produces 80m consumer goods it can produce
a maximum of 30m capital goods. If it did not make any consumer
goods, it could produce 70m capital goods. So the decision to
make 80m consumer goods involves giving up the opportunity to
produce 40m capital goods.
6 Answer A
Figure 16 shows that the economy’s capacity to produce cars
has increased while the capacity to produce clothing has remained
unchanged. This could have been the result of improved
technology in the car industry. B would have increased the
economy’s capacity to produce clothing but not cars. C would
have moved the production possibility curve out to the right,
increasing the economy’s ability to produce both clothing and
cars. D would involve a move from one production point to
another production point.
A
capital goods
B
0
consumer goods
B
A
5 Specialisation and division of labour
Activity 1, page 21
a Producing weapons. Country X is capable of producing X1
amount of science products but only makes A amount. In
contrast, it produces close to its maximum potential output of
weapons.
b No, because the extra output is produced by making use of
previously unemployed resources. So no resources have to be
switched from making science products and therefore the
output of science products does not have to be reduced.
Data response questions, page 21
a It would move a country closer to its production possibility
curve. This is illustrated in Figure 24 with the economy’s
production point moving from Y to Z. This increases the output
of capital goods from A to A1 and of consumer goods from B
to B1.
b The entrepreneur and land.
5
b Some staff may have accepted employment in the expectation
that they would be working with a particular species. They may
have a particular interest in and expertise with that species.
They may not enjoy working with another species and/or feel
that their skills and knowledge are being wasted. As a result
they may become demotivated and some may leave.
Figure 2
B
A
weapons
Y1
Y
0
Multiple choice questions, page 26
X
science products
1 Answer C
The main benefit of specialisation and trade is increased output.
When firms and workers concentrate on what they are best at
producing they should be able to produce more. Trade enables
them to exchange some of what they produce for other goods
and services.
2 Answer C
Money makes it easy for people to exchange goods and services
and so encourages trade. People can sell their products for money
and then use it to buy what they want. In the absence of money,
a person would have to find someone who not only wants what he
of she has to exchange but also has something to offer in return
that the person wants.
3 Answer B
The main benefit of division of labour is claimed to be an increase
in output per worker. If output per worker rises, the average cost
of production will fall. Division of labour makes it easier to use
machinery and reduces the amount of training that workers need.
It may also reduce the job satisfaction workers experience.
4 Answer D
A, B and C would all increase the benefits a country’s farmers
would experience as a result of specialising in corn production.
A would make the country’s corn more price competitive, B would
increase demand for the country’s corn and C would reduce
competition for the country’s corn. In contrast D, would mean that
the country’s farmers would suffer a loss in revenue.
5 Answer B
Division of labour involves workers specialising in particular tasks.
So their skills become more specific and less wide ranging.
Mechanisation tends to increase while the quantity of equipment
per worker and the number of tasks a worker carries out tend to
decline.
6 Answer B
A firm may move away from division of labour to encourage
workers to stay with them for longer. Some workers find
concentrating on a limited range of tasks boring. Moving away
from division of labour will tend to increase the training given to
workers, increase labour flexibility and reduce the specialisation
of workers.
X1
Activity 2, page 22
a International. Germany is exporting to the Netherlands.
b International. Although the computer is made from parts sold
by firms in Singapore, it is processed and finished in China and
so is a Chinese export to Singapore.
c Internal. Trade is taking place within Nigeria.
d Internal. Again trade is taking place within a country. The UK is
treated as one country in terms of trade figures.
Activity 3, page 22
a To increase their sales.
b It will have to research the market, may have to advertise in
different languages and have higher postage costs. It may also
experience costs in changing currencies.
Activity 4, page 23
a Lower costs as money would not have to be spent on chemical
fertilisers, and the environment would not be damaged.
b New techniques are often developed in countries with experience
in producing a product because there are a number of producers
whose knowledge and ideas can be drawn on. The knowledge and
ideas will be built up over time, through trial and error.
Activity 5, page 23
a Bad weather conditions, a disease affecting the tobacco plant,
a shortage of seeds or farm workers.
b People becoming more health conscious and buying fewer
tobacco products.
Activity 6, page 24
a Receiving specialist, expert advice. For example, a person with
heart disease will be able to see a doctor with an in depth
knowledge and interest in heart disease.
b Seeing a doctor who has a general knowledge of many ailments,
diseases and health problems facing people of different ages.
People may think they have a particular complaint but a GP
with a wide knowledge may find that they are suffering from
some other medical problem.
Data response questions, page 26
a The existence of major oil fields in the country.
b There are two major risks. One is that a pipeline can be
damaged. The other is that Russia could increase charges for the
use of the pipelines.
c It sells most of its oil to Russia, so a fall in economic activity in
Russia will have an adverse effect on its sales. Russian firms,
producing fewer goods and services, will buy less oil.
The world price of oil may fall. If the product becomes cheaper
and other countries do not buy much more oil, oil revenue will fall.
A rise in the cost of extracting oil and the discovery of oil in
other countries. If it becomes more expensive to extract, for
example because of an increase in the cost of drilling
equipment, profits will fall. The discovery of oil in other
countries may mean that Kazakhstan will lose some of its
customers.
Activity 7, page 24
a The risks relate to the industry being in decline. Workers may
lose their job, or have their pay reduced or promotion prospects
limited.
b That most workers in Northampton have been able to transfer
their skills from shoemaking to service industries.
Activity 8, page 25
a It is likely to increase the flexibility of its staff and may increase
their motivation and discover some unexpected skills. If workers
are trained in more than one area they can cover for colleagues
who are off sick or being trained or cope with changes in the
popularity of different species. Workers may enjoy working with
and find that their skills are more suited to working with another
species.
6
4 Answer D
A long run average cost curve falls when economies of scale
are experienced and rises when diseconomies of scale are
encountered.
5 Answer D
An external economy of scale is a benefit open to firms in an
industry resulting from the industry growing in size, for example
specialised courses put on by FE colleges and universities. A and B
are examples of internal economies of scale – marketing and
research and development. C is an example of internal
diseconomies of scale.
6 Answer B
A shift down in the long run average cost curve means that average
costs have fallen for a reason other than a rise in the firm’s
production. A and C would cause a movement along the average
cost curve and A would cause the curve the move upwards.
d By enabling workers to concentrate on specific tasks, making
mechanisation easier and saving on training and equipment.
Some workers may concentrate on searching for oil, some on
drilling and some on selling oil. The extraction and processing of
oil is a highly mechanised process. Training a worker to perform
one task in the process is much quicker than training him or her
to undertake all the tasks involved. Similarly, he or she will not
have to be given the full range of equipment used.
6 Economies of scale
Activity 1, page 27
Output (units)
Total cost ($)
Average cost ($)
100
600
6
200
1,100
5.5
300
1,500
5
400
1,800
4.5
500
2,500
5
600
3,300
5.5
Average cost is minimised when 400 units are produced.
Data response questions, page 32
a The main industry in Silicon Valley is information technology,
in Hollywood it is film and in Wall Street it is finance.
b i The benefits firms in an industry can gain as a result of their
industry growing in size.
ii Improved infrastructure. If an industry grows large enough
road and rail links may be improved and airports and ports
may be built. Improved infrastructure lowers firms’ transport
costs and enables them to get their products to their
customers more quickly.
c If a number of firms are concentrated in one area, customers
can easily make comparisons between the suppliers. They will
have less distance to travel to make this comparison. The
concentration of firms may also result in increased competition
between the firms, which can raise quality and lower prices for
consumers.
d It will be in a town which already attracts many customers.
As well as being able to access this established market, it can
benefit by participating in the annual Hay festival. This event
attracts more customers to Hay and allows the bookshops to sell
even more books. It may also be able to take advantage of
specialist services provided by packaging and transport firms.
Activity 2, page 28
a Because its costs are low. Operating on such a large scale
enables Wal-Mart to take advantage of a range of economies
of scale.
b Marketing, risk bearing and financial economies. For example, it
buys the products it sells in bulk from farmers, food manufacturers
and other producers. It is such a significant buyer that it can
negotiate large discounts from its suppliers. Its large size also
means that it can stock a wide range of products and finds it
relatively easy to obtain loans and sell its shares.
Activity 3, page 29
a Communication may be quicker and easier and it may be easier
to control, research and develop a narrow range of products.
b The firm will be spreading its risks. A decline in the popularity of
one of its products is unlikely to have too much of an impact.
Activity 4, page 29
a Specialised services in the form of an institute being set up
which will provide courses for the industry.
b A good reputation. By operating in a prestigious area for high
technology, a firm may attract customers who are impressed
by its address.
7 The role of markets
Activity 1, page 33
a The auction house market and the internet.
b Advertisements in newspapers.
Multiple choice questions, page 31
1 Answer A
Economies of scale refer to the fall in average costs experienced by
a firm or an industry as a result of it growing in size. In the case of
C, average costs are likely to rise if an increase in resources is
adding less to output, and in the case of D, average costs are likely
to remain unchanged.
2 Answer C
Financial economies refer to the greater ease and lower cost of
borrowing and selling shares. There is no special term for the
economies of scale experienced by financial institutions. B is a
general description of economies of scale and marketing
economies of scale should cover C.
3 Answer C
External economies of scale are the benefits firms gain from the
industry growing in size. These benefits, for example specialised
courses run in colleges, are likely to arise if the firms are located
in the same area. External economies of scale can be referred to as
economies of concentration. A is a general description of internal
economies of scale, B describes internal risk-bearing economies
and D describes technical economies of scale.
Activity 2, page 33
a It is a world market.
b That tastes throughout the world are similar although the
ingredients in the burgers do differ slightly in different
countries.
Activity 3, page 33
a i increased
ii decreased
iii decreased
iv increased
b CDs replacing cassettes.
Activity 4, page 34
a Because if he or she did so many of their customers are likely to
switch to rival traders. Apples sold by different traders are
similar and so customers will not be too concerned who they
buy from.
b i Because they want to sell their apples when they are fresh.
They might get an even lower price the next day.
7
c BA’s profits would have dropped. The passage mentions that the
firm experienced a 32% drop in passengers. This would have
reduced the firm’s revenue. The firm did cut its capacity but this
would have taken some time to implement. So in the weeks
after the terrorist attacks, its revenue fell while its costs
remained largely unchanged.
d It reduced the factors of production employed in the airline
industry. Some pilots, cabin crew and maintenance staff lost
their jobs, some planes were taken out of commission and it
was planned not to replace some as they became out of date.
e i Passenger flights and foreign holidays are complements.
When people buy foreign holidays they also pay to get there.
ii Passenger flights and rail travel may be substitutes or
complements. People can travel from Birmingham to
Glasgow by plane or train. They can also go on holiday to
Bordeaux, flying to Paris and then travelling south by train.
ii Because more people are likely to visit the market on a
Saturday. The competition between an increased number
of customers will drive up price.
Activity 5, page 34
a Oil-producing firms, firms operating oil tankers and garages
which buy oil.
b Car drivers because they would have to pay a higher price for
petrol.
c Environmentalists because of the potential threat to natural
habitats and the wildlife which lives there.
Activity 6, page 35
a It was hoping to attract more consumers.
b From increased information about the prices charged in different
supermarkets, which would have made it easier for them to
determine where products can be purchased most cheaply. They
would also have experienced lower prices for a while.
c It enables supermarkets to take greater advantage of economies
of scale, for instance marketing economies. This enables them
to reduce their average costs.
8 The importance of money
and exchange
Activity 1, page 39
Activity 7, page 36
a Examples include the problem of the double coincidence of
wants and the problem of giving change. If I have a book to
exchange and want a CD for it, I have to find someone who not
only wants my book but also has a CD they want to swap. If I do
find someone, the person may think my book is only worth 21/2
CDs but obviously I cannot take 3 CDs and give back half a CD.
b Firms and countries are more likely to specialise in the products
they are best at producing. This will increase output.
a i It is likely to reduce demand for board games as the two
are substitutes.
ii Sales are likely to rise as computer games and games
consoles are used together.
b The computer game is cheaper, more challenging, more visually
attractive or has been advertised more effectively.
Multiple choice questions, page 37
Activity 2, page 39
1 Answer B
As there are not enough resources to make all the products which
people want, choices have to made. Not all goods are economic
goods – a few are free goods. Resources can increase. More
machines can be made and the workforce can rise because, for
example, of net immigration and more married women seeking
employment. If a country is producing inside its production
possibility curve, it means that it is possible to increase output.
2 Answer B
Lamb and wool are produced together. A, C and D include
products which are used or, in the first case, eaten together.
3 Answer B
A rise in demand will push up the price and encourage more firms to
produce and sell the product. So more resources will be devoted to
the product and profits earned by firms in the market will increase.
4 Answer A
A competitive market contains many buyers and sellers. Firms
have little market power, there is a quick response to changes in
consumer demand and it is easy for firms to enter and leave
the industry.
5 Answer D
Most firms’ main objective is to maximise profits.
6 Answer B
If a product rises in price, some consumers are likely to switch
to a substitute. This will increase demand for the substitute.
In contrast, a product which is bought to use with the now more
expensive product will fall in demand.
a The most important function of money: to act as a medium of
exchange.
b Hyperinflation is likely to result in money ceasing to act as a
medium of exchange. This happened in Germany, where people
stopped using marks and instead used other items including
cigarettes.
c During hyperinflation, money is also likely to stop being used as
a store of value. This is because any money saved would quickly
lose its value. Instead people are likely to save by buying and
keeping anything that maintains or increases its value, such as
gold, antiques, rare stamps.
Activity 3, page 40
a They were not sufficiently divisible. There were no low
denomination coins.
b By keeping chickens or exchanging other goods for them.
Activity 4, page 40
a It is perishable and so cannot carry out the function of store
of value. Even more significantly, it is unlikely to be generally
acceptable. Some people may not be willing to accept in
settlement of a debt. This is why it does not usually act as a
medium of exchange.
b They are portable and durable.
Multiple choice questions, page 42
1 Answer B
If an item is not generally acceptable it cannot carry out the
essential function of medium of exchange and so cannot act as
money. It also needs to be divisible and limited in supply. It does
not have to possess intrinsic value.
2 Answer A
It is the function of medium of exchange that enables people to
sell products and then use the money received to buy other
products. B enables people to borrow and lend, C to save and D
to place a value on products.
Data response questions, page 37
a The airlines, aerospace firms and travel agents.
b It may increase an airline’s average costs. This is because the
airline would not be able to take such great advantage of
economies of scale. For instance, if an airline has to operate
with its planes half full, the average cost of carrying each
passenger would rise.
8
demand for UK university places and increased demand for
other products including tourism (Chinese parents visiting their
children, former Chinese students holidaying in the UK).
3 Answer A
The greatest value of transactions is made by moving money from
one bank account to another bank account. Cheques are not
themselves money, just instructions to transfer money from bank
accounts.
4 Answer C
If money retains its value and remains generally acceptable it can
be saved for future use.
5 Answer A
Money can be used to buy products and is acceptable in return for
the sale of products. This means that a person can sell a product
to one person and then use the money received to buy
a product from a different person.
6 Answer A
Money must last for some time so that people accepting it now
know that it can be used to buy products in the future, can be
saved and can be used for borrowing and lending.
Multiple choice questions, page 46
1 Answer A
Increasing the size of the market means that firms can take
greater advantage of economies of scale. B, C and D would
increase firms’ costs. In the case of D, firms have to pay more
commission to change currencies. The average cost of commission
is higher the smaller the value of currencies charged. It is cheaper
per unit to change a large value of one currency.
2 Answer B
International trade enables countries to specialise in producing
products they are best at making. It reduces diversification,
increases the opportunity to exploit economies of scale and
increases competition for domestic firms.
3 Answer A
Comparative advantage can be discerned by examining countries’
opportunity cost ratios. Absolute advantage occurs when a country
can produce a greater quantity, with the same number of resources,
than another country.
4 Answer D
Country X has the absolute advantage in producing corn as it can
make more corn per worker than Country Y. It will concentrate on
producing corn and will export corn and import cars. Country Y
has the absolute advantage in producing cars. It will make and
export cars and import corn.
Data response questions, page 42
a Bank accounts.
b The passage mentions one possible opportunity cost: that the
metal contained in the coins could have been used to build
24 Eiffel towers. The metal could also have been used in the
production of cars.
c Any form of money which, by law, has to be accepted in
settlement of a debt.
d By using notes of seven denominations, the European Central
Bank was seeking to ensure that the euro was divisible.
Spending money on the euro’s launch was designed to increase
the recognisability of the new currency and its general
acceptability.
e It acts as a medium of exchange, which means it is used to buy
and sell products. It can carry out this function because it is
generally acceptable. It acts as a store of value. Its general
acceptability and durability means that it can be stored. It acts
as a unit of account. This function is also known as a measure
of value. Money enables a value to be placed on goods and
services.
5 Answer D
Trade is beneficial to both countries even if one country has an
absolute advantage in both products provided there is a difference
in comparative advantage.
6 Answer B
Most international trade is based on comparative advantage.
It still benefits a country which has an absolute advantage in two
or more products to trade with a less efficient country. This is
because international trade enables it to concentrate on the
product it is even better at producing and to import the other
product or products.
9 Advantages of international trade
Data response questions, page 46
Activity 1, page 43
a Because it can produce these products at a low average cost.
This has been achieved by increased spending on training,
mainly by multinational companies, increased investment and
the use of more advanced technology in its new plants. It has a
particular advantage in the production of catalytic converters.
This is because of its large deposits of platinum and palladium,
which are used in the production process.
b It is likely to fall as the output of cars increases because the car
companies will be able to take greater advantage of economies
of scale. The companies will be able to buy components in bulk,
employ specialist staff, operate a research and development
department and borrow more easily and cheaply.
c The main advantage is that people should have a higher living
standard, being able to enjoy more goods and services, because
international trade allows countries to specialise in those
products they are best at producing. They should have a wider
choice of products with a greater range and variety of products
on offer. The increased competition that results from
international trade should lower prices and so increase
consumer surplus.
d i It was producing inside its production possibility curve. This
can be discerned because the passage mentions that in 2001
the country had a 40% unemployment rate. With its existing
resources, it was capable of producing more.
a Textiles, toys and shoes as it produces these at a low average
cost.
b Agriculture and car production. In both cases China’s average
costs are high, especially compared with the USA and EU.
c Because the factories are too small and inefficient. They are not
achieving economies of scale. Labour productivity may also be
low, contributing to high average costs.
Activity 2, page 44
a The costs of production change. As educational standards are
improving, more advanced technology is being adopted and
greater capital investment is being undertaken in some
developing countries, cost advantages in the production of a
number of products including steel and cars are changing.
b It would be concentrating more on products it is best at
producing. This would enable other countries which have a cost
advantage in producing cars to concentrate on car production.
Such specialisation would mean that the UK, and other
countries, would enjoy more goods and services.
Activity 3, page 45
a If they consider that the standard of education is higher and/or
more prestigious than that on offer in China.
b The benefits include higher income for UK schools, higher
9
at the lowest average cost. Poor people have less spending power
and so less influence than rich people over what is produced.
5 Answer C
The less competition there is between firms, the more power
moves from consumers to producers. In a market where there is
only one firm, consumer sovereignty is likely to be replaced by
producer sovereignty. The producer will decide what to produce –
consumers will have no choice.
6 Answer D
A key motive for moving from a planned to a market economy is
to achieve greater efficiency. The idea is that competitive forces
will reward efficient firms and punish inefficient firms. Such a
change in economic system is likely to result in a more uneven
distribution of income, reduced government intervention and an
increase in consumer sovereignty.
ii An increase in capital goods and training in the car and
components industry would increase the industry’s and the
country’s productive capacity. This would shift the country’s
production possibility curve to the right.
10 Market systems
Activity 1, page 47
Who receives the products produced. By taxing and providing
services, the government redistributes some income from rich
people to poor people.
Activity 2, page 48
a It comes closest to a planned economy. The firms are stateowned and wages and prices are fixed by the government.
b It comes closest to a market economy. Most firms are privately
owned and the price mechanism plays a key role.
Data response questions, page 53
a It is in the process of moving from a planned to a market
economy.
b In a planned economy the government decides what is to be
produced, whereas in a market economy consumers decide.
In a planned economy the government owns most resources,
but in a market economy private individuals own most
resources.
c It has experienced problems in privatising its industries because
many of them have been loss making and because of the way
they have been offered for sale. Buyers have faced red tape and
corruption, and farms have been offered as non-viable small
holdings. Another is a significant rise in prices, partly because
of the high wages given to some public-sector workers and
partly because government-set prices on some products have
been lifted.
d It has experienced an increase in output, which should have
raised the living standards of its inhabitants. Making the
transition should also mean that consumers have more power
to influence what is produced.
e i Operating a different economic system, for example a
planned economy.
ii Large farms can buy seed and fertilisers in bulk and so at
reduced prices.
iii Higher living standards if the trade is based on comparative
advantage.
Activity 3, page 48
a It may have believed that this would increase efficiency by
rewarding those who produce what consumers want at low
cost and punishing those who do not.
b Because there may be more competition in the market. In 2000
there were only two state run firms and these were operating
inefficiently.
Activity 4, page 50
a If competitive pressures mean that they produce high quality
medication at a low cost.
b If there is a lack of competition, because the firms may be
able to charge a high price and may not produce good quality
products.
Activity 5, page 50
a They had a greater variety of products to choose from.
b They experienced high prices as a result of the transition.
In a planned economy prices, particularly of basic necessities,
are kept below market levels.
Activity 6, page 51
a It has become more unevenly distributed. While the country
is importing more luxuries, life expectancy has fallen and a
significant proportion of the population is living in poverty.
b It suggests that the move has not yet achieved success. The most
significant piece of evidence is that life expectancy has fallen.
Other problems include a fall in output, an increase in
corruption and a high level of poverty.
Multiple choice questions, page 52
1 Answer D
D describes the most fundamental questions all economic systems
have to face. These must be answered before any other issues can
be tackled.
2 Answer A
Private ownership is a key feature of a market economy. B, C and
D are all features of a planned economy.
3 Answer C
It means that consumers determine what is produced through
their purchases. Prices of products in higher demand will rise in
prices of products in lower demand will fall. This will cause a
reallocation of resources in response to the change in consumer
demand.
4 Answer D
Greater profits will be made by making the products that
consumers demand. This should encourage resources to move
from products in declining demand tow those in increasing
demand. Competitive forces should mean that output is produced
10