The choice between military products and the provision of health care illustrates the

problem of “opportunity cost”. Explain the nature of this problem, using a production
possibility curve to help you.

Opportunity costs are the alternatives foregone by making an economic decision. A production
possibility curve shows the maximum combination of goods or services that can be produced by an
economy in a given time period, if all the resources in the economy are being used fully and
efficiently. Because people have unlimited wants but limited resources (FOP), the country has to
make economic decisions. A country can produce anywhere on the curve (except inside which means
they are inefficient or outside meaning they need increase in resources) so in terms of choosing to
use resources between military products and the provision of health care, the government has to
choose how much of each good should be produced. If produced at A, the government is using
resources to make 100 units worth of provision of health care while having an output of 1180 units
military products. On the other hand, the government can also use the same amount of output to
make 1200 units of provision of health care with 80 units of military products. Choosing to produce
at A makes an opportunity cost of emphasizing on health care therefore less healthy people (costs
1100 units of health care); choosing to produce at B makes an opportunity cost of 1100 units of
military products.

Depending on the current economic decisions, the specific government has to make that choice. The
pros of producing at A is these military products would protect the country and can bring in capital if
the products are sold overseas. The revenue from the products would increase government revenue
to be used for other goods and services. The cons is that it may not help the country’s development,
one of its macroeconomic goals. This leads into the pros of producing at B which is the improvement
of the Human Development Index (HDI); thus improving economic development. For example,
Ghana has a life expectancy of about 59 years old for males and 60 for females. Instead of using
resources of military equipment, the resources used to improve health care for the people would
improve the HDI. In terms of stakeholders, the government would benefit from producing at A but
the consumers, or the poor who need health care, would improve from producing at B. Another
economic goal is employment, which would improve with production of military equipment because
of the increase of jobs. Overall, for developing countries such as Ghana, provision of health care may
be a better decision since the opportunity cost is less.
2b. To what extent does the production possibilities curve model accurately represent the
scarcity faced by less developed countries in the world today?
The opportunity cost is what must be given up in order to undertake any activity or economic
exchange. Opportunity costs are not necessarily monetary; rather, when you buy something, the
opportunity cost is what you could have done with the money you spent on that thing. Even non-
monetary exchanges involve opportunity costs, as you might have chosen to do something different
in your time. In this case, it is a monetary exchange and there is a choice to make between both
options, in which one will be the opportunity cost. The government has to decide whether to invest
more into military products, for the safety of the country or into healthcare, for the health of the
people. This is a huge decision to make because both are extremely important and many people
have different priorities and opinions to where the money should be put in. Obviously, people
working in the military will want that money from the government, but on the other hand, people
working in medicine will also want that money. The general people of the country will also all argue
different things. Some might say that curing the people is more important than causing more
damage with dangerous weapons. Some might argue that military products that protect the nation as
a whole is more important than medical care for each individual. Since both require huge sums of
money, the government cannot help out both parties to the same extent.

Above is a production possibility curve model. Please refer to the graph and not the labels. Let’s say
the x-axis demonstrates healthcare and the y-axis demonstrates military products. Now the M point
shows that the government has allocated X1 amount of resources to healthcare and Y2 amount of
resources to military products. Therefore the government has invested more in military products than
healthcare. However, point N shows something different. Point N shows that the government has
allocated X2 amount of resources to healthcare and Y1 amount of resources to the military. This
means that healthcare was more of a priority.
This curve seems pretty balanced because even though not a maximum and equal amount of
resources can be allocated to both options, both options do still get some resources. In less
developed countries, the curve would not be as balanced. With a smaller amount of resources, there
is already less to allocate to each option. Also less developed countries such as some in Africa have
corrupt governments spending more on military products, causing more harm but then it doesn’t
even balance out because they don’t have any resources left for healthcare. People might also be
less educated in less developed countries, therefore less labor available for healthcare, such as
doctors, nurses and surgeons. An option could be getting people from the outside to come work but
that would cost even more and that would cost the less developed countries something that they
don’t have. Opportunity costs are a problem everywhere however they are less of a problem in
developed countries because they have more resources to balance out. Whereas less developed
countries don’t have enough resources and might not be able to manage the so little they have.
 20 Practice Question
2a. The choice between military products and the provision of healthcare illustrates the problem of
‘opportunity cost’. Explain the nature of this problem, using a production possibility curve to help you.
First of all, opportunity is the opportunity lost when making a decision of how to use our scarce
resources, whether it’s time, money, labour, land or capital. If a country chooses to produce more
military products, its opportunity cost is the provision of healthcare. If the country decided to focus on
the provision of health care, it shows an opposite result. I will explain this by using guns as a military
product and butter as food, which is a type of healthcare.

For example, if the country decides to produce 180 Guns and 100 lbs of Butter because it had a weak
military, its choice maximizes our utility from a need of a strong military. However the opportunity
cost for producing more guns are the benefits it could have gained from producing butter instead such
as time, land, labour and capital. The opportunity cost on time was the time we could have spent on
producing butter we used it on building military goods instead. Also, the field that could have been
used to breed cows will be gone as well as the farmers and butter creators. In addition, the decrease
in butter supply would lead to a decline to the provision of health care because citizens would not be
able to cook a meal without enough butter provided. Without food, they will die.

On the other hand, if the country chooses to produce 900 lbs of Butters and 20 guns because of
poverty, the citizens’ health care will rise up, however the opportunity cost is the time the country
could have spent on building a stronger military. The opportunity cost in capital is the steel that could
have been used to create guns. The country lose time to create enough guns to use in a sudden
battle.

2b.) To what extent does the production possibilities curve model accurately represent the scarcity
faced by less developed countries in the world today?
The production possibilities curve can represent scarcity when the point is outside the curve. Also, it
can show the total amount of scarcity that both military products and healthcare is facing. However,
that is the extent that PPC can do, therefore we cannot tell which product is scarce, and the specific
amount of scarcity in guns and butter. As a result, the government can identify that there is scarcity
going on by looking at the PPC curve, however they cannot decide how to solve scarcity.
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ECONOMICS: PRACTICE QUESTIONS CHAPTER 1
&2
September 4, 2012 · by 14chohir · in IB: HL1 Economics. ·

Chapter 1
1a) Economics is primarily concerned with the allocation of scarce resources which have alternatives uses’. Use a
production possibility curve to explain this statement.

Lets’s say that the x-axis stands for guns and the y-axis stands for bread. This is the typical form of a PPC showing
weather a country uses more money of power or health care. Point A states that more bread is produced than gun in a
certain country. Point B states the opposite. Point C shows the inefficiency in the country, causing them to not be able to
produce the amount of goods they can. Point D is a situation that is not real but can happen in the future. They may be able
to produce more of the goods by growth of economics. Since both resources are scarce (there is a limit) countries will have
to make a decision in allocating that resource. Health care and power are both two alternatives a country can choose from,
and the PPC shows how a certain country will allocate their resources for the two alternatives in this case. Japan tends to
use their labor force more towards health care, because they are not allowed to build a strong military. The United States
on the other hand, spends a lot of money and human resource into military to increase the power of the country. As you
can see, since resources are scarce, people must make decisions on how to allocate such resources to produce different
alternatives. PPCs are a model that show such allocation of resources, and the efficiency in which a country is doing this.

1b) Discuss the view that the government is more effective in the allocation of scarce resources than the free
market.
Some say that the government is more effective in the allocation of scarce resources than the free market. This view point
comes from evidence that in free markets, some times goods are over produced and resources are wasted. Resources are
limited but our needs and wants are unlimited, creating scarcity. The whole system of economic developed from this idea
of scarcity and the allocation of scare resources. In socialist governments, they believe that a country will be better off for
them to allocate the resources equally to the people. In the past, there have been politicians such as Mao Zedong from
China, Joseph Stalin from the Soviet Union and Fidel Castro whom embraced socialism/communism to create equality in
the country. But soon, they realised that socialism does not function well to build a strong economy, and moved towards
free market. Cuba is still a socialist nation, but is gradually moving towards a free market economy. Although Cuba
provides free education and health care and heavily subsidises housing, transportation and basic foods, people only get
paid $20 a month in average. Other flaws include inefficiency and limited competition, resulting in no erge for workers to
work beyond the expectations. But this does not mean that government control over the economy is completely negative.
The opposite of socialism is the classical laissezs-faire view of economy. Laissezs-faire is a French term meaning “let it
be” and this type of economy believes that free market is the most efficient and beneficial form of economy.
Government criticises that free market is inefficient in allocating resources and have over production in some goods and
too less production for others. Other criticisms include inequality and unemployment during economic slumps. Therefore,
critics believe that government intervention is needed to some extent, in order for a country to function economically. John
Maynard Keynes, an economic theorist of the 20th century was one of the figures who believed in this idea. His study and
theories still have an important role of the study in economics today. Government intervention is needed to some extent,
but the market still reacts faster, and usually meets the needs of the people/consumers better. Therefore, I believe that there
the market should have more control than the government.

2a) The choice between military products and the provision of healthcare illustrates the problem of ‘opportunity
cost’. Explain the nature of this problem, using a PPC to help you.
The idea of a country spending money on either military or healthcare always comes with problems involving opportunity
cost. When a country chooses to spend more money on military, they are giving up the money they could have spent on
health care at the same time. An example of such a country is the United States on America. Japan on the other hand
spends more money on healthcare and is giving up money on military. This decision making is always hard because it is
weighing the importance of security for the country’s citizens or health care for the citizens. Having a strong military will
indicate a powerful nation, and their is more safety assured in case of war. Healthcare is as equally as important
contributing to the human development index (HDI). MEDCs like the U.S.A and Japan allocates their money well enough,
but for poor countries which have to make decisions, it becomes a very hard choice to make because both factors are
equally as important in the development of the country. The PPC below shows the money distribution of military and
healthcare in U.S.A and Japan.

2b) To what extent does the Production Possibilities Curve model accurately represent the scarcity faced by less
developed countries in the world today?
The PPC can measure how well a country is allocating its resources. When the point is on the curve, this indicates that the
productions is at full efficiency. When the point is inside the curve, this indicates that the country is not allocating their
resources efficiently. As you can see, a PPC can measure how well resources are allocated, but not detailed enough to
show the scarcity of a country with all the information. Scarcity does not only involve two factors, but several factors, and
these cannot be all explained in a PPC. Therefore, PPCs are a easy and fast way to show allocation and scarcity of
resources, but not as detailed enough.

Chapter 2
1) Explain the difference between a movement along the demand curve and a shift in the demand curve.
A movement along a demand curve is simply influenced by the change in the price of a good. For example, if a cup of tea
originally costs $1.50 and increases to $2.50, the quantity demanded will decrease from 15 cups per week to 5 cups per
week. Therefore, we can say that the relation is inversely proportional within one line (curve). On the other hand, a shift
in a demand curve is different in the sense that the entire line (curve) shifts. This is because not only one price is
influenced, but the entire price is influenced. For example, if a consumer has a increase in salary, his purchasing power
will increase as well, allowing him to purchase more of that good. If the quantity demanded of a cup of tea before the
change in the determinants of demand was 15, it can increase to 20. The other quantities demanded at various price will
shift up as well. Thus, the graph it self will shift either to the right or left depending on increase or decrease of quantity
demanded.

2) Using an appropriate diagram and your knowledge of the determinants of demand, explain why the demand for
meat might increase.
Several situations can cause the demand of meat to increase. Consumer taste and preferences tends to be the easiest to
explain. For example, a popular TV show might introduce the importance of the intake of protein, in order for people to be
healthy. Soon, people will begin to consider this more, and choose to buy meet in order to obtain protein. Another reason
can be income. Your father might get a increase in salary, so therefore your mother might choose to buy meat even though
it is slightly expensive. Related goods can also have an impact of increasing the demand of meat. If barbecue sets start to
get popular, people will consume more meat because meat is essential in a barbecue. The diagram below shows a shift in
demand caused by a determinant of demand. The shift to the right indicates an increase.

3) Explain the difference between a movement along the supply curve and a shift in the supply curve.
A change in movement along the supply curve is cause d by a change in price. A shift of the supply curve is caused by
determinants of supply including: cost production, productivity, government intervention, price of related goods and
supply shocks. When a movement along the curve occurs, the price increases or decreases, causing the quantity supplied to
increase or decrease. In a shift, the entire supply curve shifts to the right or left, indicating a increase or decrease. The
diagram below shows the difference between a movement and shift of a supply curve.
4) Using an appropriate diagram and your knowledge of the determinants of supply, explain why the supply of rice
might decrease.
Determinants of supply include: cost production, productivity, government intervention, price of related goods and supply
shocks. One reason the supply of rice can decrease is the government providing less subsidies for farmers. Farmers usually
make money off of government subsidies so that they can produce rice and make a living at the same time. For example,
the government might tax the rice and use a part of the money earned by that tax to pay the farmers. But if such taxes
decreases, farmers will make less of rices because they will not be able make as much money as before. Another reason
may be the popularity of a related good increasing. Bread, for instance is a substitute good for rice and can become more
popular. If bread becomes more popular, less people will demand rice, and therefore, the supply of rice will decrease as
well. A shift in supply is shown in the diagram below. The supply decreases so the curve shifts to the left.