Introducing economics - exercises

1. Andrew has just started his AS courses, and has chosen to take economics, mathematics, geography and French. Although he was certain about first three, it was a close call between French and English. What is Andrew's opportunity cost of choosing French?

Andrew's opportunity cost of choosing French is English.


2. Classify each of the following as human, natural (renewable or non-renewable) or produced resources:

a   timber
b   services of a window cleaner
c   natural gas
d   solar energy
e   a combine harvester
f    a computer programmer who sets up a company to market his software
g   a computer

human: services of a window cleaner, a computer programmer who sets up a company to market his software
natural: timber (renewable), natural gas (non-renewable), solar energy (renewable)
produced: a combine harvester, a computer


3. With which of Samuelson's (the US economist Paul Samuelson, who won the Nobel Prize for Economic Sciences in 1970) three questions (what, how, for whom) would you associate the following?

a  A firm chooses to switch from producing CD players in order to increase its output of DVD recorders.
b  The government reduces the highest rate of income tax.
c   Faced with increased labour costs, a firm introduces labour-saving machinery.
d  There is an increase in social security benefits.
e   The owner of a fish-and-chip shop decides to close down and take a job in local factory.

Three key questions that economics sets out to investigate:

1 What? What goods and services should be produced in a society from its scarce resources? In other words, how should resources be allocated among producing DVD players, potatoes, banking services and so on?
2  How? How should the productive resources of the economy be used to produce these various goods and services?
3  For whom? Having produced a range of goods and services, how should these be allocated among the population for consumption?

1 : a e
2 : b c 
3 : d 


4. Beverly has been cast away on a desert island, and has to survive by spending her time either fishing of climbing trees to get coconuts. The PPC shows the maximum combinations of fish and coconuts that she can gather during a day. Which of the points A to E represent each of the following?

a  a situation where Beverly spends all her time fishing
b  an unreachable position
c  a day when Beverly goes for a balanced diet - a mixture of coconuts and fish
d  a day when Beverly does not fancy fish, and spends all day collecting coconuts
e  a day when Beverly spends some of the time trying to attract the attention of a passing ship

A  d
B  c
C  a
D  e
E  b


5. Think about the following and see whether you think each represents a macroeconomic or microeconomic phenomenon:

a  The overall level of prices in an economy
b  The price of ice cream
c  The overall rate of unemployment in the UK
d  The unemployment rate among catering workers in Aberdeen
e  The average wage paid to construction workers in Southampton

macroeconomic : a c d
microeconomic : b d

Introduction to Economics

Economics is a social science, which wants to answer the question about allocation of scarce resources in the most effective way. It analyzes the production, distribution and consumption. Economics can be studied at different levels and we can consider two fields of it - microeconomics and macroeconomics. Microeconomics are for example the decisions made by individuals, households and firms, economics on a small scale. Macroeconomics is the study of issues that affects influences economies as a whole.


The basic economic problem is that resources are scarce and wants are unlimited. The resources are known as factors of production, which are available in an economy for the production of goods and services. These are divided into four main types. 
Land, which is a natural resource and includes everything connected with it - coal, sand, sea, sun etc.
Labour - human resource, which quality and quantity are important for economic progress.
Capital are the man- made aids to production, it covers a wide range of items such as factories and infrastructure.
Entrepreneur - human capital; someone who takes risks of the business and organizes production of goods and services. 


There are three fundamental economic concepts: scarcity, choice and opportunity cost.
Scarcity is a situation where there are not enough resources to meet all wants. Opportunity cost is the cost of the next best alternative.


To show how resources are allocated we can use a production possibility curve. This economic model points the maximum quantities of different combinations of output of two products. If the productive potential changes it is called economic growth.

As showed on the diagram above, points A, B and C represent the points at which production of Good A and Good B is most efficient. Point X is the point at which resources are not being used efficiently in the production of both goods; point Y demonstrates an output that is not attainable with the given inputs.

Opportunity Cost Video