Chapter 1: Answers to questions for review
Chapter 1: Answers to questions
for review
1.2 [15 marks] Assuming that a simple hypothetical
economy produces two goods, use appropriate
diagrams to answer the following:
(a) How likely is it that the economy’s actual
output will be located at some point on its
production possibilities curve? Explain.
(b) If the economy produces at a point
inside the curve, what must it do if it
wants to increase its actual production
of both goods? (Use the concepts of full
employment and productive efficiency in
your answer.)
(c) What is the opportunity cost of moving
from a point inside the PPC to a point
closer to the PPC?
(d) What is the opportunity cost of moving
from one point on the PPC to another
point on the PPC?
(e) Explain why your answers to questions (c)
and (d) are different.
(f) Can the economy produce at a point
outside its PPC? Why or why not?
(a) How likely is it that the economy’s actual
output will be located at some point on its
production possibilities curve? Explain.
l Draw a correctly labelled diagram
showing the production possibilities
model, with a production possibilities
curve (PPC), as in Figure 1.2.
l Define the PPC as showing maximum
output that can be produced if there
is full employment and productive
efficiency.
l Explain why full employment and
productive efficiency are important if the
economy is to make the best possible use
of its resources.
l Define actual output, and show it in your
diagram by drawing a point inside the
PPC; label it as actual output.
l Countries have some unemployment
of resources and some productive
inefficiency; therefore actual output is
most unlikely to be located on the PPC.
(b) If the economy produces at a point
inside the curve, what must it do if it
© Cambridge University Press, 2009
wants to increase its actual production
of both goods? (Use the concepts of full
employment and productive efficiency in
your answer.)
l If the economy is at a point inside the
PPC, it can increase actual output of both
goods by moving to a new point closer to
the PPC.
l Draw a new point closer to the PPC and
label it; you may draw an arrow from the
first point to the new point.
l The economy can move to the new point
by reducing unemployment of resources
or by increasing productive efficiency.
(c) What is the opportunity cost of moving
from a point inside the PPC to a point
closer to the PPC?
l Define opportunity cost.
l The opportunity cost is zero, because
the increase in output involved in such
a move is made possible by the use of
resources that were sitting idle or were
being used inefficiently; therefore it
is possible to increase the quantities
produced of both goods without
sacrificing any output.
(d) What is the opportunity cost of moving
from one point on the PPC to another
point on the PPC?
l Draw two points on the PPC and label
them (for example, points A and B) .
l The opportunity cost of moving from
one point to another (say from A to B)
is the quantity of one good that must be
sacrificed in order to produce more of the
other good.
(e) Explain why your answers to questions (c)
and (d) are different.
l All points on the PPC make full use of
all resources (no unemployment) and
best use of all resources (productive
efficiency), so the maximum is produced.
Therefore it is impossible to produce
more of one good without producing less
of the other good, so that any move on
the PPC involves an opportunity cost.
Economics for the IB Diploma   1

l Moving from a point inside the PPC to a
point closer to the PPC involves making
more or better use of resources; therefore
there is no opportunity cost, as nothing
has to be sacrificed.
(f) Can the economy produce at a point
outside its PPC? Why or why not?
l It cannot produce outside its PPC because
of resource scarcity; the PPC defines
the maximum it can produce with the
quantity and quality of its resources
and its technology. On the other hand,
if any of these were to change (increase
in resource quantity, improvement in
resource quality or improvement in
technology), the PPC would shift outward
and the economy would be able to
produce outside the old PPC.
1.3 [10 marks] Define opportunity cost, and use the
production possibilities model to explain how it
is related to the concepts of scarcity and choice.
l Define opportunity cost.
l Define resource scarcity.
l Explain why resource scarcity is a problem;
you may refer to the fundamental problem of
economics (scarcity of resources in relation to
unlimited human needs and wants).
l Explain that resource scarcity forces people
and societies to make choices; you may
provide examples.
l Draw a diagram showing the production
possibilities model, correctly labelling the
axes to represent two different goods, and
drawing the PPC.
l Explain that the PPC shows maximum
possibilities of production.
l Explain how opportunity cost relates to the
PPC; draw two points on the PPC and indicate
that moving from one point on the curve
to the other point shows that an increase in
the quantity produced of one good can only
happen by sacrificing some of the other good
produced (the sacrifice is the opportunity
cost).
l The scarcity of resources forces economies to
make a choice of where on the PPC they wish
to be, or how much of each good they will
produce;
l In the real world they are unlikely to be at a
point on the PPC, but if they want to make
good use of their scarce resources (avoid
unemployment and productive inefficiency)
they must try to choose a point of production
as close as possible to the PPC.
© Cambridge University Press, 2009
Chapter 1: Answers to questions for review
1.5 [10 marks] A hypothetical country discovers
oil within its territory. (a) Show the impact
of this discovery diagrammatically using the
production possibilities model. (b) Using your
diagram of part (a), show the possible choices
that can be made between (i) growth without
economic development, (ii) growth with
economic development.
(a) Show the impact of this discovery
diagrammatically using the production
possibilities model.
l Define economic growth.
l Define economic development.
l Draw a correctly labelled diagram such as
Figure 1.5.
l Explain that merit goods include items
like education, health care services,
supplies of clean water, sanitation.
l The economy is initially producing at a
point like A on PPC1.
l Oil is a natural resource (falling under
the factor of production ‘land’), and
so the increase in the quantity of a
resource causes the PPC to shift outward,
indicating an increase in production
possibilities; therefore following the
discovery of oil the PPC shifts from PPC1
to PPC2.
(b) Using your diagram of part (a), show the
possible choices that can be made between
(i) growth without economic development,
(ii) growth with economic development.
l The country can choose to move to a
point like B or point C on PPC2 (if it
is assumed that the economy has full
employment of resources and productive
efficiency). Both moves indicate that
economic growth has occurred, because
a larger quantity of output is being
produced.
l If point B is chosen, this indicates growth
without development, because most of
the increase in output involves industrial
goods production, and almost no
additional (new) merit goods production.
l If point C is chosen, this indicates growth
with development, because a large part
of the increase in productive capacity is
used to increase merit goods production.
l The PPC model is limited in illustrating
economic development because it only
shows increased merit goods production;
it cannot show other important aspects
of economic development (such as
reduction of poverty, improved income
distribution, improved employment
opportunities, etc.).
Economics for the IB Diploma   2
 Chapter 1: Answers to questions for review

1.6 [10 marks] A number of countries (such as

the former Soviet Union and India) during
the 1950s and 1960s directed a relatively
large proportion of their resources to heavy
industries involved in capital goods production,
while they tended to neglect consumer goods
production. Explain the reasoning behind their
choice by use of the production possibilities
model.

l Define capital goods; explain that an increase

in their quantity leads to an outward shift
in the PPC, indicating increased production
possibilities and the possibility of achieving
economic growth.
l Define economic growth.
l Draw two diagrams as in Figure 1.7 (a) and
(b), indicating two countries that initially
(in the present) have identical resources and
technologies, and therefore identical PPCs.
Suppose that panel (b) represents countries
like the Soviet Union and India, and panel (a)
represents ‘other countries’.
l Label one axis consumer goods (explain that
these are for consumption in the present) and
the other axis capital goods.
l The two countries must make a choice about
what quantities of consumer goods and
capital goods to produce in the present.
l The Soviet Union and India choose a point
like Y, involving a relatively large quantity of
capital goods and a relatively small quantity
of consumer goods, compared to ‘other
countries’, which choose the opposite, shown
by point X.
l The reasoning behind the Soviet Union’s
and India’s strong emphasis on capital
goods production was that they expected to
experience higher economic growth in the
future, to come about through a larger shift in
their PPC in the future than ‘other countries’.
You may show a large PPC shift for the Soviet
Union and India, and smaller PPC shift for
the ‘other countries’ (as in Figure 1.7).
l The new future PPC only indicates
possibilities for future growth, it does not
indicate actual growth, which may in fact be
less than expected.

© Cambridge University Press, 2009 Economics for the IB Diploma   3